HCBK (MM)

 

 

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, 2009

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		(I.R.S. Employer
incorporation or organization)		Identification No.)
West 80 Century Road
Paramus, New Jersey		07652
(Address of Principal Executive Offices)		(Zip Code)

(201) 967-1900

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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, 2009, the registrant had 525,312,983 shares of common stock, $0.01 par value, outstanding.

 

 

Table of Contents

		Page Number
PART I — FINANCIAL INFORMATION
Item 1. — Financial Statements
Consolidated Statements of Financial Condition – September 30, 2009 (Unaudited) and December 31, 2008			4
Consolidated Statements of Income (Unaudited) – For the three and nine months ended September 30, 2009 and 2008			5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – For the nine months ended September 30, 2009 and 2008			6
Consolidated Statements of Cash Flows (Unaudited) – For the nine months ended September 30, 2009 and 2008			7
Notes to Unaudited Consolidated Financial Statements			8
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. — Quantitative and Qualitative Disclosures About Market Risk			47
Item 4. — Controls and Procedures			51
PART II — OTHER INFORMATION
Item 1. — Legal Proceedings			52
Item 1A. — Risk Factors			52
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. — Defaults Upon Senior Securities			53
Item 4. — Submission of Matters to a Vote of Security Holders			53
Item 5. — Other Information			53
Item 6. — Exhibits			53
SIGNATURES			55
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

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;
	•		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, 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 that may adversely affect our business;
	•		applicable technological changes that may be more difficult or expensive than we anticipate;
	•		success or consummation of new business initiatives that may be more difficult or expensive than we anticipate;
	•		litigation or matters before regulatory agencies, whether currently existing or commencing in the future, that may delay the occurrence or non-occurrence of events longer than we anticipate;
	•		the risks associated with continued diversification of assets and adverse changes to credit quality;
	•		difficulties associated with achieving expected future financial results; and
	•		the risk of an 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.

PART I — FINANCIAL INFORMATION

Item 1. — Financial Statements

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

		September 30,				December 31,
		2009				2008
(In thousands, except share and per share amounts)		(unaudited)
Assets:
Cash and due from banks		$	217,461			$	184,915
Federal funds sold and other overnight deposits			453,017				76,896
Total cash and cash equivalents			670,478				261,811
Securities available for sale:
Mortgage-backed securities			9,550,806				9,915,554
Investment securities			2,117,664				3,413,633
Securities held to maturity:
Mortgage-backed securities (fair value of $11,170,719 at September 30, 2009 and $9,695,445 at December 31, 2008)			10,751,866				9,572,257
Investment securities (fair value of $3,217,143 at September 30, 2009 and $50,512 at December 31, 2008)			3,238,044				50,086
Total securities			25,658,380				22,951,530
Loans			31,122,330				29,418,888
Net deferred loan costs			80,649				71,670
Allowance for loan losses			(114,833	)			(49,797	)
Net loans			31,088,146				29,440,761
Federal Home Loan Bank of New York stock			877,017				865,570
Foreclosed real estate, net			12,777				15,532
Accrued interest receivable			310,520				299,045
Banking premises and equipment, net			71,110				73,502
Goodwill			152,109				152,109
Other assets			43,998				85,468
Total Assets		$	58,884,535			$	54,145,328
Liabilities and Shareholders’ Equity:
Deposits:
Interest-bearing		$	22,523,737			$	17,949,846
Noninterest-bearing			590,212				514,196
Total deposits			23,113,949				18,464,042
Repurchase agreements			15,100,000				15,100,000
Federal Home Loan Bank of New York advances			14,925,000				15,125,000
Total borrowed funds			30,025,000				30,225,000
Due to brokers			200,000				239,100
Accrued expenses and other liabilities			275,405				278,390
Total liabilities			53,614,354				49,206,532
Common stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555 shares issued; 524,889,925 shares outstanding at September 30, 2009 and 523,770,617 shares outstanding at December 31, 2008			7,415				7,415
Additional paid-in capital			4,670,808				4,641,571
Retained earnings			2,347,827				2,196,235
Treasury stock, at cost; 216,576,630 shares at September 30, 2009 and 217,695,938 shares at December 31, 2008			(1,740,467	)			(1,737,838	)
Unallocated common stock held by the employee stock ownership plan			(211,738	)			(216,244	)
Accumulated other comprehensive income, net of tax			196,336				47,657
Total shareholders’ equity			5,270,181				4,938,796
Total Liabilities and Shareholders’ Equity		$	58,884,535			$	54,145,328

See accompanying notes to unaudited consolidated financial statements

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,
		2009				2008				2009				2008
		(In thousands, except per share data)
Interest and Dividend Income:
First mortgage loans		$	424,521			$	394,748			$	1,252,011			$	1,110,121
Consumer and other loans			5,212				6,245				16,629				19,978
Mortgage-backed securities held to maturity			128,996				123,890				368,212				372,354
Mortgage-backed securities available for sale			114,821				101,410				374,995				259,872
Investment securities held to maturity			30,835				874				44,920				12,764
Investment securities available for sale			27,155				40,825				107,074				121,354
Dividends on Federal Home Loan Bank of New York stock			12,281				12,510				30,698				40,729
Federal funds sold and other overnight deposits			344				815				707				4,093
Total interest and dividend income			744,165				681,317				2,195,246				1,941,265
Interest Expense:
Deposits			112,925				133,983				375,003				433,398
Borrowed funds			305,783				292,256				908,558				826,342
Total interest expense			418,708				426,239				1,283,561				1,259,740
Net interest income			325,457				255,078				911,685				681,525
Provision for Loan Losses			40,000				5,000				92,500				10,500
Net interest income after provision for loan losses			285,457				250,078				819,185				671,025
Non-Interest Income:
Service charges and other income			2,513				2,181				7,207				6,490
Gain on securities transactions, net			—				—				24,185				—
Total non-interest income			2,513				2,181				31,392				6,490
Non-Interest Expense:
Compensation and employee benefits			34,043				32,052				103,166				94,896
Net occupancy expense			7,965				7,633				24,260				22,437
Federal deposit insurance assessment			10,930				945				23,294				1,784
FDIC special assessment			—				—				21,098				—
Other expense			9,982				8,793				30,843				26,695
Total non-interest expense			62,920				49,423				202,661				145,812
Income before income tax expense			225,050				202,836				647,916				531,703
Income tax expense			89,964				80,928				257,248				210,423
Net income		$	135,086			$	121,908			$	390,668			$	321,280
Basic earnings per share		$	0.28			$	0.25			$	0.80			$	0.66
Diluted earnings per share		$	0.27			$	0.25			$	0.80			$	0.65
Weighted Average Number of Common Shares Outstanding:
Basic			489,545,739				484,759,567				488,048,312				483,915,018
Diluted			491,992,378				495,715,998				491,356,241				495,298,081

See accompanying notes to unaudited consolidated financial statements

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited )

		For the Nine Months
		Ended September 30,
		2009				2008
		(In thousands, except per share data)
Common Stock		$	7,415			$	7,415
Additional paid-in capital:
Balance at beginning of year			4,641,571				4,578,578
Stock option plan expense			9,901				11,338
Tax benefit from stock plans			18,003				14,066
Allocation of ESOP stock			4,633				8,006
RRP stock granted			(6,771	)			—
Vesting of RRP stock			3,471				1,030
Balance at end of period			4,670,808				4,613,018
Retained Earnings:
Balance at beginning of year			2,196,235				2,002,049
Net Income			390,668				321,280
Dividends paid on common stock ($0.44 and $0.32 per share, respectively)			(214,926	)			(154,809	)
Exercise of stock options			(24,150	)			(11,871	)
Balance at end of period			2,347,827				2,156,649
Treasury Stock:
Balance at beginning of year			(1,737,838	)			(1,771,106	)
Purchase of common stock			(43,477	)			(3,600	)
Exercise of stock options			34,077				20,018
RRP stock granted			6,771				—
Balance at end of period			(1,740,467	)			(1,754,688	)
Unallocated common stock held by the ESOP:
Balance at beginning of year			(216,244	)			(222,251	)
Allocation of ESOP stock			4,506				4,506
Balance at end of period			(211,738	)			(217,745	)
Accumulated other comprehensive income(loss):
Balance at beginning of year			47,657				16,622
Net unrealized holding gains (losses) on securities available for sale arising during period, net of tax expense (benefit) of $112,963 and ($24,160) in 2009 and 2008, respectively			163,568				(34,983	)
Reclassification adjustment for realized gains in net income, net of tax expense of $9,880 and $0 in 2009 and 2008, respectively			(14,305	)			—
Pension and other postretirement benefits adjustment, net of tax benefit of $403 and $108 for 2009 and 2008, respectively			(584	)			(156	)
Other comprehensive income(loss), net of tax			148,679				(35,139	)
Balance at end of period			196,336				(18,517	)
Total Shareholders’ Equity		$	5,270,181			$	4,786,132
Summary of comprehensive income
Net income		$	390,668			$	321,280
Other comprehensive income(loss), net of tax			148,679				(35,139	)
Total comprehensive income		$	539,347			$	286,141

See accompanying notes to unaudited consolidated financial statements.

Hudson City Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

		For the Nine Months
		Ended September 30,
		2009				2008
		(In thousands)
Cash Flows from Operating Activities:
Net income		$	390,668			$	321,280
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, accretion and amortization expense			48,690				20,061
Provision for loan losses			92,500				10,500
Net gain on sale of securities			(24,185	)			—
Share-based compensation, including committed ESOP shares			22,511				24,880
Deferred tax benefit			(29,580	)			(15,757	)
Increase in accrued interest receivable			(11,475	)			(36,457	)
Increase in other assets			(11,166	)			(7,590	)
(Decrease) increase in accrued expenses and other liabilities			(25,868	)			30,937
Net Cash Provided by Operating Activities			452,095				347,854
Cash Flows from Investing Activities:
Originations of loans			(4,656,065	)			(4,008,755	)
Purchases of loans			(2,451,388	)			(2,553,897	)
Principal payments on loans			5,340,970				2,218,412
Principal collection of mortgage-backed securities held to maturity			1,827,195				1,076,247
Purchases of mortgage-backed securities held to maturity			(3,017,731	)			(1,185,106	)
Principal collection of mortgage-backed securities available for sale			1,604,549				750,785
Purchases of mortgage-backed securities available for sale			(1,992,789	)			(4,279,939	)
Proceeds from sales of mortgage backed securities available for sale			785,594				—
Proceeds from maturities and calls of investment securities held to maturity			50,000				1,358,485
Purchases of investment securities held to maturity			(3,040,329	)			—
Proceeds from maturities and calls of investment securities available for sale			2,622,225				1,349,902
Proceeds from sales of investment securities available for sale			317				—
Purchases of investment securities available for sale			(1,331,300	)			(1,900,000	)
Purchases of Federal Home Loan Bank of New York stock			(78,272	)			(137,189	)
Redemption of Federal Home Loan Bank of New York stock			66,825				720
Purchases of premises and equipment, net			(4,881	)			(6,546	)
Net proceeds from sale of foreclosed real estate			12,218				4,570
Net Cash Used in Investment Activities			(4,262,862	)			(7,312,311	)
Cash Flows from Financing Activities:
Net increase in deposits			4,649,907				2,134,081
Proceeds from borrowed funds			750,000				5,500,000
Principal payments on borrowed funds			(950,000	)			(366,000	)
Dividends paid			(214,926	)			(154,809	)
Purchases of treasury stock			(43,477	)			(3,600	)
Exercise of stock options			9,927				8,147
Tax benefit from stock plans			18,003				14,066
Net Cash Provided by Financing Activities			4,219,434				7,131,885
Net Increase in Cash and Cash Equivalents			408,667				167,428
Cash and Cash Equivalents at Beginning of Year			261,811				217,544
Cash and Cash Equivalents at End of Period		$	670,478			$	384,972
Supplemental Disclosures:
Interest paid		$	1,282,653			$	1,242,876
Loans transferred to foreclosed real estate		$	14,998			$	11,129
Income tax payments		$	279,347			$	208,741

See accompanying notes to unaudited consolidated financial statements.

Hudson City Bancorp, Inc.

Notes to Unaudited Consolidated Financial Statements

1. Organization

Hudson City Bancorp, Inc. (“Hudson City Bancorp” or the “Company”) is a Delaware corporation organized in March 1999 by Hudson City Savings Bank (“Hudson City Savings”) in connection with the conversion and reorganization of Hudson City Savings from a New Jersey mutual savings bank into a two-tiered mutual savings bank holding company structure. Prior to June 7, 2005, a majority of Hudson City Bancorp’s common stock was owned by Hudson City, MHC, a mutual holding company. On June 7, 2005, Hudson City Bancorp, Hudson City Savings and Hudson City, MHC reorganized from a two-tier mutual holding company structure to a stock holding company structure, and Hudson City MHC was merged into Hudson City Bancorp.

2. Basis of Presentation

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, 2009 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2009. 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 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 December 31, 2008 Annual Report on Form 10-K.

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

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,
		2009												2008
										Per												Per
						Average				Share								Average				Share
		Income				Shares				Amount				Income				Shares				Amount
						(In thousands, except per share data)
Net income		$	135,086											$	121,908
Basic earnings per share:
Income available to common stockholders		$	135,086				489,546			$	0.28			$	121,908				484,760			$	0.25
Effect of dilutive common stock equivalents			—				2,446								—				10,956
Diluted earnings per share:
Income available to common stockholders		$	135,086				491,992			$	0.27			$	121,908				495,716			$	0.25

		For the Nine Months Ended September 30,
		2009												2008
										Per												Per
						Average				Share								Average				Share
		Income				Shares				Amount				Income				Shares				Amount
						(In thousands, except per share data)
Net income		$	390,668											$	321,280
Basic earnings per share:
Income available to common stockholders		$	390,668				488,048			$	0.80			$	321,280				483,915			$	0.66
Effect of dilutive common stock equivalents			—				3,308								—				11,383
Diluted earnings per share:
Income available to common stockholders		$	390,668				491,356			$	0.80			$	321,280				495,298			$	0.65

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

4. Fair Value and Unrealized Losses of Securities

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, 2009 and December 31, 2008.

		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, 2009
Held to maturity:
Investment securities		$	2,271,003			$	(27,639	)		$	—			$	—			$	2,271,003			$	(27,639	)
Mortgage-backed securities			283,509				(2,521	)			62,836				(174	)			346,345				(2,695	)
Total temporarily impaired securities held to maturity			2,554,512				(30,160	)			62,836				(174	)			2,617,348				(30,334	)
Available for sale:
Investment securities			367,807				(6,890	)			—				—				367,807				(6,890	)
Mortgage-backed securities			169,051				(1,448	)			40,111				(85	)			209,162				(1,533	)
Total temporarily impaired securities available for sale			536,858				(8,338	)			40,111				(85	)			576,969				(8,423	)
Total		$	3,091,370			$	(38,498	)		$	102,947			$	(259	)		$	3,194,317			$	(38,757	)
December 31, 2008
Held to maturity:
Mortgage-backed securities		$	241,669			$	(1,873	)		$	628,203			$	(6,200	)		$	869,872			$	(8,073	)
Total temporarily impaired securities held to maturity			241,669				(1,873	)			628,203				(6,200	)			869,872				(8,073	)
Available for sale:
Investment securities			594,907				(5,093	)			—				—				594,907				(5,093	)
Mortgage-backed securities			408,040				(6,766	)			467,660				(18,109	)			875,700				(24,875	)
Total temporarily impaired securities available for sale			1,002,947				(11,859	)			467,660				(18,109	)			1,470,607				(29,968	)
Total		$	1,244,616			$	(13,732	)		$	1,095,863			$	(24,309	)		$	2,340,479			$	(38,041	)

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 do not consider these investments to be other-than-temporarily impaired at September 30, 2009 and December 31, 2008 since the decline in market value is attributable to changes in interest rates and not credit quality and 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.

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. During the nine months ended September 30, 2009, we purchased 4.0 million shares of our

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

common stock at an aggregate cost of $43.5 million. As of September 30, 2009, 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 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, 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 820-10-35-01, 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

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

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 $7.2 million for which fair values are obtained from quoted market prices in active markets and, as such, are classified as Level 1.

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, 2009.

						Fair Value Measurements at September 30, 2009
						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:
Mortgage-backed securities		$	9,550,806			$	—			$	9,550,806			$	—
Investment securities			2,117,664				7,178				2,110,486				—
Total available for sale		$	11,668,470			$	7,178			$	11,661,292			$	—

Assets that were measured at fair value on a non-recurring basis at September 30, 2009 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 FASB guidance amounted to $10.8 million at September 30, 2009. Based on this evaluation, we established an allowance for loan losses of $2.1 million for such impaired loans. The provision for loan losses related to these loans amounted to $1.3 million for the first nine months of 2009. 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, 2009 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.

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, 2009 amounted to $12.8 million. During the first nine months of 2009 and 2008, charge-offs to the allowance for loan losses related to loans that were transferred to foreclosed real estate amounted to $2.9 million and $1.2 million, respectively. Write downs and net loss on sale related to foreclosed real estate that were charged to non-interest expense amounted to $2.0 million and $852,000 for those same respective periods.

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

The following table provides the level of valuation assumptions used to determine the carrying value of our assets measured at fair value on a non-recurring basis at September 30, 2009.

Fair Value Measurements at September 30, 2009

Quoted Prices in Active

Significant Other

Significant

Markets for Identical

Observable Inputs

Unobservable Inputs

Description

Assets (Level 1)

(Level 2)

(Level 3)

(In thousands)

Impaired loans

$

—

$

—

$

10,787

Foreclosed real estate

—

—

12,777

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.

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.

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

The estimated fair value of Hudson City Bancorp’s financial instruments are summarized as follows:

		September 30, 2009								December 31, 2008
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
						(In thousands)
Assets:
Cash and due from banks		$	217,461			$	217,461			$	184,915			$	184,915
Federal funds sold			453,017				453,017				76,896				76,896
Investment securities held to maturity			3,238,044				3,217,143				50,086				50,512
Investment securities available for sale			2,117,664				2,117,664				3,413,633				3,413,633
Federal Home Loan Bank of New York stock			877,017				877,017				865,570				865,570
Mortgage-backed securities held to maturity			10,751,866				11,170,719				9,572,257				9,695,445
Mortgage-backed securities available for sale			9,550,806				9,550,806				9,915,554				9,915,554
Loans			31,088,146				32,781,765				29,440,761				29,743,919
Liabilities:
Deposits			23,113,949				23,438,557				18,464,042				18,486,681
Borrowed funds			30,025,000				33,181,508				30,225,000				34,156,052

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.

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

The components of the net periodic expense for the plans were as follows:

		For the Three Months Ended September 30,
		Retirement Plans								Other Benefits
		2009				2008				2009				2008
						(In thousands)
Service cost		$	1,003			$	881			$	234			$	253
Interest cost			1,863				1,682				529				544
Expected return on assets			(1,939	)			(2,135	)			—				—
Amortization of:
Net loss			824				81				128				141
Unrecognized prior service cost			85				82				(391	)			(391	)
Net periodic benefit cost		$	1,836			$	591			$	500			$	547

		For the Nine Months Ended September 30,
		Retirement Plans								Other Benefits
		2009				2008				2009				2008
						(In thousands)
Service cost		$	3,009			$	2,643			$	702			$	759
Interest cost			5,589				5,046				1,587				1,632
Expected return on assets			(5,817	)			(6,405	)			—				—
Amortization of:
Net loss			2,472				243				384				423
Unrecognized prior service cost			255				246				(1,173	)			(1,173	)
Net periodic benefit cost		$	5,508			$	1,773			$	1,500			$	1,641

During the nine months ended September 30, 2009 and 2008, we made contributions of $35.0 million and $3.2 million, respectively, to the pension plans.

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

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,
		2009								2008
		Number of				Weighted				Number of				Weighted
		Stock				Average				Stock				Average
		Options				Exercise Price				Options				Exercise Price
Outstanding at beginning of period			26,728,119			$	10.35				29,080,114			$	7.91
Granted			3,375,000				12.11				4,025,000				15.96
Exercised			(4,240,913	)			2.33				(2,516,951	)			3.26
Forfeited			—				—				(48,784	)			13.21
Outstanding at end of period			25,862,206			$	11.89				30,539,379			$	9.35

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 were made in 2006, 2007 and 2008 pursuant to the SIP Plan for 7,960,000, 3,527,500 and 4,025,000 options, respectively, 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, 5,035,000 have vesting periods ranging from one to five years and an expiration period of ten years. The remaining 10,477,500 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 the 2006, 2007 and 2008 grants.

During 2009, the Committee authorized stock option grants (the “2009 grants”) pursuant to the SIP Plan for 3,375,000 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, 2,875,000 will vest in January 2012 if certain financial performance measures are met and employment continues through the vesting date. The remaining 500,000 options will vest between January 2010 and April 2010. The 2009 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 2009 grants.

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

The fair value of the 2009 grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. As a result of low employee turnover, the assumption regarding the forfeiture rate of option grants had no effect on the fair value estimate. The per share weighted-average fair value of the options granted during the nine months ended September 30, 2009 was $1.94.

		2009
Expected dividend yield		4.80%
Expected volatility		29.72%
Risk-free interest rate		1.68%
Expected option life		5.3 years

Compensation expense related to our outstanding stock options amounted to $3.0 million and $3.8 million for the three months ended September 30, 2009 and 2008, respectively, and $9.9 million and $11.3 million, for the nine months ended September 30, 2009 and 2008, respectively.

Stock Awards

During 2009, the Committee authorized performance-based stock awards (the “2009 stock awards”) pursuant to the SIP Plan for 847,750 shares of our common stock. These shares were issued from treasury stock and will vest in annual installments over a three-year period if certain performance measures are met and employment continues through the vesting date. None of these shares may be sold or transferred before the January 2012 vesting date. We have determined that it is probable these performance measures will be met and have therefore recorded compensation expense for the 2009 stock awards. 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, we have 56,157 shares of unvested stock awards that were granted in prior years. Total compensation expense for stock awards amounted to $1.2 million and $330,000 for each of the three months ended September 30, 2009 and 2008, respectively, and $3.5 million and $1.0 million, for each of the nine months ended September 30, 2009 and 2008, respectively.

9. Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued amendments to the accounting and disclosure requirements for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company is currently assessing the impact on its consolidated financial position and results of operations.

In June 2009, the FASB Codification (the “Codification”) was issued. The Codification is the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of the Codification did not have an impact on our consolidated financial condition and results of operations.

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities. The guidance affects the overall consolidation analysis and requires enhanced disclosure on involvement with variable interest entities. The guidance is effective for fiscal years beginning after November 15, 2009. We do not expect that the guidance will have a material impact on our financial condition, results of operations or financial statement disclosures.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. The guidance defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the transfer does not meet those conditions, a transferor should account for the transfer as a sale only if it transfers an entire financial asset or a group of entire financial assets and surrenders control over the entire transferred asset(s). The guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. We do not expect that the guidance will have a material impact on our financial condition, results of operations or financial statement disclosures.

In May 2009, the FASB issued new guidance on subsequent events. The guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance sets forth (a) the period after the balance sheet date during which an entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The guidance does not result in significant changes in the subsequent events an entity reports, either through recognition or disclosure, in the financial statements. The guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The guidance was effective for interim and annual periods after June 15, 2009. The guidance did not have any effect on our financial condition, results of operations or financial statement disclosures.

In April 2009, the FASB issued a staff position that provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. The staff position notes that a reporting entity should evaluate various factors to determine whether there has been a significant decrease in the volume and activity for the asset or liability when compared with normal activity for the asset or liability. These factors include, but are not limited to: few recent transactions (based on volume and level of activity in the market), price quotations are not based on current information, price quotations vary substantially over time or among market makers, indexes that previously were highly correlated with the fair values of the asset are demonstrably uncorrelated with recent fair values, abnormal liquidity risk premiums or implied yields for quoted prices when compared with reasonable estimates of credit and other non-performance risk for the asset class, abnormally wide bid-ask spread or significant increases in the bid-ask spread, and little information is released publicly. If the reporting entity concludes there has been a significant decrease in the volume or activity for the asset or liability in relation to normal market activity, then further analysis of the transactions or quoted prices is needed. This would include a change in valuation technique or the use of multiple valuation techniques to assist in the determination of a fair value of the asset or liability. The staff position was effective for interim and annual periods ending after June 15, 2009 and was to be applied prospectively. Our adoption of the staff position effective April

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

1, 2009, did not have a material impact on our financial condition, results of operations or financial statement disclosures.

In April 2009, the FASB issued a staff position requiring disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This staff position requires an entity to disclose in the body or in the accompanying notes of its interim financial statements and its annual financial statements the fair value of all financial instruments, whether recognized or not recognized in the statements of financial position. Fair value information disclosed in the interim period notes will be presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the statements of financial position. An entity will also disclose the methods and significant assumptions used to estimate the fair value of financial instruments. This staff position was effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the staff position in the second quarter of 2009 and have provided the required interim period disclosures.

In April 2009, the FASB issued a staff position which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recognized in earnings. This staff position requires that an entity assess whether an impairment of a debt security is other-than-temporary and, as part of that assessment, determine its intent and ability to hold the security. If the entity 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. Other-than-temporary impairments that are attributable to credit losses are to be recognized in income with the remaining decline in the fair value of a security recognized in other comprehensive income. This staff position was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after (but not before) March 15, 2009. We adopted the staff position effective April 1, 2009 which did not have a material impact on our financial condition, results of operations or financial statement disclosures.

In September 2008, FASB issued guidance which addresses whether share-based payments are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method. The guidance concluded that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. Our restricted stock awards are considered participating securities. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. All prior-period EPS data presented shall be adjusted retrospectively. The guidance did not have a material impact on our computation of EPS.

In December 2007, the FASB issued new guidance on non-controlling interests which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The guidance requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. A parent deconsolidates a subsidiary as of the date the parent ceases to have a controlling financial interest in the subsidiary. If a parent retains a non-controlling equity investment in the former subsidiary, that investment is measured at its fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of the non-controlling equity investment. The guidance requires

Hudson City Bancorp, Inc.
Notes to Unaudited Consolidated Financial Statements

expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the controlling (parent) and the non-controlling owners of a subsidiary. This includes a reconciliation of the beginning and ending balances of the equity attributable to the parent and the non-controlling owners and a schedule showing the effects of changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of the guidance did not have a material impact on our financial condition or results of operations.

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 and funding this loan production with deposit growth and borrowings. During 2009, we were able to fund our loan production 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 Federal Reserve Bank (the “FOMC”) noted that economic activity and conditions within the financial markets have improved in recent months. However, the national unemployment rate increased to 9.8% in September 2009 as compared to 9.5% in June 2009 and 7.2% in December 2008. The S&P/Case-Shiller Home Price Index for the New York metropolitan area, where most of our lending activity occurs, declined by approximately 5.3% in the first nine months of 2009 and by 9.15% in 2008. The S&P/Case-Shiller U.S. National Home Price Index decreased by 4.8% in the first half of 2009 and by 18.2% in 2008. Lower household wealth and tight credit conditions in addition to the increase in the national unemployment rate has resulted in the FOMC maintaining the overnight lending rate at zero to 0.25% during the third quarter of 2009. As a result, short-term market interest rates have remained at low levels during the third quarter of 2009. This allowed us to continue to re-price our short-term deposits thereby reducing our cost of funds. While longer-term market interest rates increased during the third quarter of 2009, rates on mortgage-related assets have declined slightly, although to a lesser extent than the decline in our cost of funds. As a result, our net interest rate spread and net interest margin increased from the second quarter of 2009 as well as from the third quarter of 2008.

Net income increased 10.8% for the third quarter of 2009 to $135.1 million as compared to $121.9 million for the third quarter of 2008. Net income increased 21.6% for the first nine months of 2009 to $390.7 million as compared to $321.3 million for the first nine months of 2008. These increases occurred in the face of significantly higher deposit insurance fees, including an across the industry special assessment imposed in the second quarter of 2009 by the Federal Deposit Insurance Corporation (the “FDIC”), as well as a significantly higher provision for loan losses.

Net interest income increased $70.4 million, or 27.6%, to $325.5 million for the third quarter 2009 as compared to $255.1 million for the third quarter of 2008. During the third quarter of 2009, our net interest rate spread increased 32 basis points to 2.02% and our net interest margin increased 22 basis points to 2.30% as compared to 2.08% for the third quarter in 2008. Net interest income increased $230.2

million, or 33.8%, to $911.7 million for the first nine months of 2009 as compared to $681.5 million for the same period in 2008. During the first nine months of 2009, our net interest rate spread increased 36 basis points to 1.88% and our net interest margin increased 25 basis points to 2.18% as compared to 1.93% for the same period in 2008. The increases in our net interest rate spread and net interest margin were due to a steeper yield curve which allowed us to reduce deposit costs at a faster pace than the decrease in our mortgage yields.

The provision for loan losses amounted to $40.0 million for the third quarter of 2009 and $92.5 million for the nine months ended September 30, 2009 as compared to $5.0 million and $10.5 million for the same respective periods in 2008. The increase in the provision for loan losses reflects the risks inherent in our loan portfolio due to decreases in real estate values in our lending markets, the increase in non-performing loans, the increase in loan charge-offs, the continued weakened economic conditions and rising levels of unemployment during the first nine months of 2009. Non-performing loans amounted to $517.6 million or 1.66% of total loans at September 30, 2009 as compared to $217.6 million or 0.74% of total loans at December 31, 2008. Net charge-offs amounted to $13.2 million for the third quarter of 2009 and $27.5 million for the nine months ended September 30, 2009 as compared to $1.4 million and $2.6 million for the same respective periods in 2008. The increase in non-performing loans reflects the current weakened economic conditions coupled with the continued deterioration of the housing market. The conditions in the housing market are evidenced by declining house prices, reduced levels of home sales, increasing inventories of houses on the market, and an increase in the length of time houses remain on the market.

Total non-interest income was $31.4 million for the first nine months of 2009 as compared to $6.5 million for the comparable period in 2008. Included in non-interest income were net gains on securities transactions, $24.0 million of which resulted from the sale of $761.6 million of mortgage-backed securities available-for-sale. Proceeds from the securities sale were primarily used to fund the purchase of first mortgage loans during the second quarter of 2009. In addition, service charges and other income increased slightly for both the three and nine months ended September 30, 2009 compared to the comparable periods in 2008.

Total non-interest expense increased $13.5 million, or 27.3%, to $62.9 million for the third quarter of 2009 from $49.4 million for the third quarter of 2008. The increase is primarily due to increases of $10.0 million in Federal deposit insurance expense, $2.0 million in compensation and employee benefits expense, and $1.2 million in other non-interest expense. Total non-interest expense increased $56.9 million, or 39.0%, to $202.7 million for the first nine months of 2009 from $145.8 million for the same period in 2008. The increase is primarily due to the FDIC special assessment of $21.1 million and increases of $21.5 million in Federal deposit insurance expense, $8.3 million in compensation and employee benefits expense, and $4.1 million in other non-interest expense.

We grew our assets by 8.7% to $58.88 billion at September 30, 2009 from $54.15 billion at December 31, 2008. We grew our assets by 21.9% during 2008. We slowed our growth rate in 2009 as mortgage refinancing activity caused an increase in loan repayments and available reinvestment yields on securities decreased. We may continue to grow at a slower rate than in the past until market conditions provide for more profitable growth.

Loans increased $1.65 billion to $31.09 billion at September 30, 2009 from $29.44 billion at December 31, 2008. While the residential real estate markets have weakened considerably during the past year, low market interest rates and an increase in mortgage refinancing caused by market interest rates that are at

near-historic lows have resulted in increased loan originations. The increase in refinancing activity has also resulted in an increase in principal repayments.

Total securities increased $2.71 billion to $25.66 billion at September 30, 2009 from $22.95 billion at December 31, 2008. The increase in securities was primarily due to purchases (including purchases recorded in the third quarter of 2009 with settlement dates after September 30, 2009) of mortgage-backed and investment securities of $5.01 billion and $4.57 billion, respectively, partially offset by principal collections on mortgage-backed securities of $3.43 billion and sales of mortgage-backed securities of $761.6 million and calls of investment securities of $2.67 billion.

The increase in our total assets during the first nine months of 2009 was funded primarily by an increase in customer deposits. Deposits increased $4.65 billion to $23.11 billion at September 30, 2009 from $18.46 billion at December 31, 2008. The increase in deposits was attributable to growth in our time deposits and money market accounts. Borrowed funds decreased $200.0 million to $30.03 billion at September 30, 2009 from $30.23 billion at December 31, 2008.

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

Total assets increased $4.73 billion, or 8.7%, to $58.88 billion at September 30, 2009 from $54.15 billion at December 31, 2008.

Loans increased $1.65 billion, or 5.6%, to $31.09 billion at September 30, 2009 from $29.44 billion at December 31, 2008 due primarily to the origination of residential first mortgage loans in New Jersey, New York and Connecticut as well as our continued loan purchase activity. For the first nine months of 2009, we originated $4.66 billion and purchased $2.45 billion of loans, compared to originations of $4.01 billion and purchases of $2.55 billion for the comparable period in 2008. The origination and purchases of loans were partially offset by principal repayments of $5.34 billion in the first nine months of 2009 as compared to $2.22 billion for the first nine months of 2008. Loan originations have increased primarily due to our competitive rates and an increase in mortgage refinancing caused by market interest rates that are at near-historic lows. The increase in refinancing activity occurring in the marketplace has also caused an increase in principal repayments during the first nine months of 2009.

Our first mortgage loan originations and purchases during the first nine months of 2009 were substantially all in one-to four-family mortgage loans. Approximately 45.0% of mortgage loan originations for the first nine months of 2009 were variable-rate loans as compared to approximately 58.0% for the comparable period in 2008. Approximately 46.0% of mortgage loans purchased during the nine months ended September 30, 2009 were fixed-rate mortgage loans. Fixed-rate mortgage loans accounted for 74.4% of our first mortgage loan portfolio at September 30, 2009 and 75.7% at December 31, 2008.

Non-performing loans amounted to $517.6 million or 1.66% of total loans at September 30, 2009 as compared to $217.6 million or 0.74% of total loans at December 31, 2008.

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, 2009								At December 31, 2008
		Total loans				Non-performing loans				Total loans				Non-performing loans
New Jersey			43.6	%			44.6	%			44.8	%			40.4	%
New York			17.6	%			18.7	%			15.6	%			22.6	%
Connecticut			11.8	%			4.4	%			9.3	%			2.3	%
Total New York metropolitan area			73.0	%			67.7	%			69.7	%			65.3	%
Virginia			4.8	%			4.9	%			5.5	%			4.2	%
Illinois			3.8	%			5.1	%			4.3	%			3.5	%
Maryland			3.7	%			5.2	%			4.2	%			5.4	%
Massachusetts			2.7	%			2.1	%			3.0	%			2.7	%
Minnesota			1.6	%			2.6	%			1.8	%			3.8	%
Michigan			1.4	%			4.1	%			1.7	%			3.7	%
Pennsylvania			1.8	%			1.8	%			1.5	%			1.5	%
All others			7.2	%			6.5	%			8.3	%			9.9	%
			27.0	%			32.3	%			30.3	%			34.7	%
			100.0	%			100.0	%			100.0	%			100.0	%

Total mortgage-backed securities increased $814.9 million to $20.30 billion at September 30, 2009 from $19.49 billion at December 31, 2008. This increase in total mortgage-backed securities resulted from the purchase of $5.01 billion of mortgage-backed securities, primarily collateralized mortgage obligations, all of which were issued by GSEs. The increase was partially offset by repayments of $3.43 billion and sales of $761.6 million. At September 30, 2009, variable-rate mortgage-backed securities accounted for 69.1% of our portfolio compared with 83.5% at December 31, 2008. 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 increased $1.90 billion to $5.36 billion at September 30, 2009 as compared to $3.46 billion at December 31, 2008. The increase in investment securities is primarily due to purchases of $4.57 billion. The increase was partially offset by calls of investment securities of $2.67 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.

Total cash and cash equivalents increased $408.7 million to $670.5 million at September 30, 2009 as compared to $261.8 million at December 31, 2008. This increase is due to liquidity being provided by strong deposit growth and increased repayments on mortgage-related assets. In addition, we have maintained a higher level of Federal funds sold since other types of short- and medium-term investments are currently providing relatively low yields. Other assets decreased $41.5 million, primarily due to a decrease in deferred tax assets of $50.9 million.

Total liabilities increased $4.40 billion, or 8.9%, to $53.61 billion at September 30, 2009 from $49.21 billion at December 31, 2008. The increase in total liabilities primarily reflected a $4.65 billion increase in deposits, partially offset by a $200.0 million decrease in borrowed funds.

Total deposits increased $4.65 billion, or 25.2%, to $23.11 billion at September 30, 2009 as compared to $18.46 billion at December 31, 2008. The increase in total deposits included a $2.39 billion increase in our time deposits, a $1.84 billion increase in our money market checking accounts and a $337.6 million increase in our interest-bearing transaction accounts and savings accounts. The increases in our deposits reflect our strategy to expand our branch network and to grow deposits in our existing branches by offering competitive rates. At September 30, 2009 we had 131 branches as compared to 127 at December 31, 2008 and 125 at September 30, 2008. We also began accepting deposits through our internet banking service in December 2008, which had $183.9 million in deposits at September 30, 2009.

Borrowings amounted to $30.03 billion at September 30, 2009 as compared to $30.23 billion at December 31, 2008. The decrease in borrowed funds was the result of repayments of $950.0 million with a weighted average rate of 1.63%, largely offset by $750.0 million of new borrowings at a weighted-average rate of 1.69%. During the first nine months of 2009, we modified $650.0 million of borrowings to extend the call dates of the borrowings by between two and four years. Borrowed funds at September 30, 2009 were comprised of $14.93 billion of FHLB advances and $15.10 billion of securities sold under agreements to repurchase.

Substantially all of our borrowed funds are callable at the discretion of the lender after an initial non-call period. As a result, if interest rates were to decrease, or remain consistent with current rates, 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, these borrowings would likely be called at their next call date and our cost to replace these borrowings would increase. These call features are generally quarterly, after an initial non-call period of one to five years from the date of borrowing.

Our callable borrowings typically have a final maturity of ten years and may not be called for an initial period of one to five years. We have used this type of borrowing primarily to fund our loan 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. However, during the first nine months of 2009, we have been able to fund our asset growth with deposit inflows. We anticipate that we will be able to continue to use deposit growth to fund our asset growth, however, we may use borrowings as a supplemental funding source if deposit growth decreases. In order to fund our growth and provide for our liquidity we may borrow a combination of short-term borrowings with maturities of three to six months and longer term fixed-maturity borrowings with terms of two to five years. Our new borrowings during the first nine months of 2009 consisted of non-callable borrowings of $400.0 million with maturities of one to three months and $350.0 million of non-callable borrowings with maturities of two to three years.

The Company has two collateralized borrowings in the form of repurchase agreements totaling $100.0 million with Lehman Brothers, Inc. Lehman Brothers, Inc. is currently in liquidation under the Securities Industry Protection Act. Mortgage-backed securities with an amortized cost of approximately $114.5 million are pledged as collateral for these borrowings. 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.

Due to brokers amounted to $200.0 million at September 30, 2009 as compared to $239.1 million at December 31, 2008. Due to brokers at September 30, 2009 represents securities purchased in the third quarter of 2009 with settlement dates in the fourth quarter of 2009.

Total shareholders’ equity increased $331.4 million to $5.27 billion at September 30, 2009 from $4.94 billion at December 31, 2008. The increase was primarily due to net income of $390.7 million for the nine months ended September 30, 2009 and a $148.6 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 $214.9 million and repurchases of our common stock of $43.5 million.

As of September 30, 2009, there remained 50,123,550 shares that may be purchased under our existing stock repurchase programs. During the first nine months of 2009, we repurchased 4.0 million shares of our outstanding common stock at a total cost of $43.5 million. The average price of shares repurchased in the first nine months was $10.95. Our capital ratios remain in excess of the regulatory requirements for a well-capitalized bank. See “Liquidity and Capital Resources”.

The accumulated other comprehensive income of $196.3 million at September 30, 2009 includes a $223.9 million after-tax net unrealized gain on securities available-for-sale ($378.5 million pre-tax) partially offset by a $27.6 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.

At September 30, 2009, our shareholders’ equity to asset ratio was 8.95% compared with 9.12% at December 31, 2008. For the first nine months of 2009, the ratio of average shareholders’ equity to average assets was 9.05% compared with 9.94% for the same period in 2008. The lower equity-to-assets ratios reflect our strategy to grow assets and pay dividends. 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 $10.75 at September 30, 2009 and $10.10 at December 31, 2008. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders’ equity, was $10.43 as of September 30, 2009 and $9.77 at December 31, 2008.

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2009 and 2008

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, 2009 and 2008. 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,
		2009												2008
										Average												Average
		Average								Yield/				Average								Yield/
		Balance				Interest				Cost				Balance				Interest				Cost
		(Dollars in thousands)
Assets:
Interest-earnings assets:
First mortgage loans, net (1)		$	30,445,939			$	424,521				5.58	%		$	27,431,258			$	394,748				5.76	%
Consumer and other loans			369,556				5,212				5.64				418,760				6,245				5.97
Federal funds sold and other overnight deposits			475,094				344				0.29				181,122				815				1.79
Mortgage-backed securities at amortized cost			19,943,911				243,817				4.89				17,288,478				225,300				5.21
Federal Home Loan Bank stock			878,827				12,281				5.59				827,393				12,510				6.05
Investment securities, at amortized cost			4,996,795				57,990				4.64				3,373,018				41,699				4.95
Total interest-earning assets			57,110,122				744,165				5.21				49,520,029				681,317				5.50
Noninterest-earnings assets			1,068,045												769,038
Total Assets		$	58,178,167											$	50,289,067
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Savings accounts		$	759,757				1,437				0.75			$	727,060				1,378				0.75
Interest-bearing transaction accounts			1,831,426				7,351				1.59				1,609,380				12,248				3.03
Money market accounts			4,109,583				17,606				1.70				2,484,464				20,112				3.22
Time deposits			15,311,050				86,531				2.24				11,435,317				100,245				3.49
Total interest-bearing deposits			22,011,816				112,925				2.04				16,256,221				133,983				3.28
Repurchase agreements			15,100,000				154,175				4.05				14,046,628				144,769				4.10
Federal Home Loan Bank of New York advances			14,965,217				151,608				4.02				14,326,630				147,487				4.10
Total borrowed funds			30,065,217				305,783				4.04				28,373,258				292,256				4.10
Total interest-bearing liabilities			52,077,033				418,708				3.19				44,629,479				426,239				3.80
Noninterest-bearing liabilities:
Noninterest-bearing deposits			542,273												587,553
Other noninterest-bearing liabilities			330,793												284,512
Total noninterest-bearing liabilities			873,066												872,065
Total liabilities			52,950,099												45,501,544
Shareholders’ equity			5,228,068												4,787,523
Total Liabilities and Shareholders’ Equity		$	58,178,167											$	50,289,067
Net interest income/net interest rate spread (2)						$	325,457				2.02							$	255,078				1.70
Net interest-earning assets/net interest margin (3)		$	5,033,089								2.30	%		$	4,890,550								2.08	%
Ratio of interest-earning assets to interest-bearing liabilities											1.10	x											1.11	x