Hudson City Bancorp in Paramus, N.J., reported lower quarterly profit as its balance sheet continues to shrink.

The $37.2 billion-asset company's earnings fell 13% from a year earlier, to $37.1 million. Earnings per share of 7 cents beat the average estimate of analysts polled by Bloomberg by a penny.

Hudson City's third-quarter decline comes amid ongoing delays for its sale to the $90 billion-asset M&T in Buffalo. The August 2012 deal has been stalled by regulators as M&T works to strengthen its anti-money laundering controls.

Net interest income plunged from a year earlier, falling 25%, to $105 million. The company's loan portfolio shrunk by 10%, to $22.3 billion. Deposits fell by 9.5%, to $20 billion. The net interest margin compressed by 30 basis points, to 1.18%.

Hudson City said in a press release Wednesday that lending fell, in part, because the company had a "limited appetite for adding long-term, fixed-rate mortgage loans." The company added that new qualified-mortgage regulations also played into the lower lending.

Earnings were aided, in part, by a spike in fee-based income. Noninterest income jumped 78%, to $23.9 million, mostly from securities gains.

Hudson City also recorded a $2.4 million partial payment in the third-quarter on its claim against Lehman Brothers, the investment bank that collapsed during the financial crisis. The claim has been delayed due to legal battles surrounding Hudson City's' designation by Lehman's trustee as a "non-customer," meaning the bank's claim has a lower payment priority.

At Sept. 30, Hudson City's reserve against the remaining portion of the Lehman claim was $4.5 million.

Operating expenses fell 11%, to $70 million.

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