UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2004

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.

(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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No o

As of November 2, 2004, the registrant had 186,022,481 shares of common stock, $0.01 par value, outstanding. Of such shares outstanding, 122,576,600 shares were held by Hudson City, MHC, the registrant’s mutual holding company, and 63,445,881 shares were held by the public and directors, officers and employees of the registrant.

Hudson City Bancorp, Inc.
Form 10-Q

Contents of Report

Explanatory Note: This Form 10-Q contains 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 “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” 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. that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include: changes in general, economic and market conditions, legislative and regulatory conditions, or the development of an interest rate environment that adversely affects Hudson City Bancorp’s interest rate spread or other income anticipated from operations and investments. As used in this Form 10-Q, “we” and “us” and “our” refer to Hudson City Bancorp, Inc. and its consolidated subsidiary Hudson City Savings Bank, depending on the context.

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PART I — FINANCIAL INFORMATION

Item 1. — Financial Statements

Hudson City Bancorp, Inc. and Subsidiary

See accompanying notes to consolidated financial statements.

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Hudson City Bancorp, Inc. and Subsidiary

See accompanying notes to consolidated financial statements.

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Hudson City Bancorp, Inc. and Subsidiary

See accompanying notes to consolidated financial statements.

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Hudson City Bancorp, Inc. and Subsidiary

1. – Basis of Presentation

Hudson City Bancorp, Inc. is a Delaware corporation organized in 1999 by Hudson City Savings Bank in connection with the conversion and reorganization of Hudson City Savings from a mutual savings bank into a two-tiered mutual savings bank holding company structure.

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, 2004 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2004.

Certain information and note disclosures usually included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission 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, 2003 Annual Report on Form 10-K.

Statements of Cash Flow. For the purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and federal funds sold. Transfers of loans to foreclosed real estate of $2,255,000 and $2,994,000 for the nine month periods ended September 30, 2004 and 2003, respectively, did not result in cash receipts or cash payments.

Stock Option Plans’ Fair Value Disclosure. The Hudson City stock option plans and the recognition and retention plans (“RRP”) are accounted for in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related Interpretations. Accordingly, no compensation expense has been recognized for the stock option plans. Expense for the RRP in the amount of the fair value of the common stock at the date of grant is recognized ratably over the vesting period.

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Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements

Had expense for Hudson City’s stock option plans been determined based on the fair value at the grant date for our stock options consistent with the method of SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts that follow.

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Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements

The fair value of the option grants, for those grants issued during the following periods, was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

2. — Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes unrealized holding gains and losses on securities available for sale, net of tax. Total comprehensive income during the periods indicated is as follows.

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Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements

3. — Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.

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Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements

4. — Fair Value and Unrealized Losses of Securities

The following table summarizes the fair value and unrealized losses of those investment and mortgage-backed securities that reported an unrealized loss at September 30, 2004 and whether the unrealized loss position was continuous for the twelve months prior to September 30, 2004.

The unrealized losses are primarily due to the changes in interest rates during the life of the security. We have not classified these items as impaired as the coupon payments for the investment securities and the principal and interest payments for the mortgage-backed securities have been made in accordance with the terms of the agreements. We anticipate collecting the entire principal balance on these securities as scheduled.

5. — Stockholders’ Equity

Under our stock repurchase programs, shares of Hudson City Bancorp common stock may be purchased in the open market and through other privately negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate use. During the nine-month period ended September 30, 2004, we purchased 4,565,200 shares of our common stock at an aggregate cost of $160.7 million. At September 30, 2004, there were 3,101,221 shares remaining to be repurchased under the existing stock repurchase program.

In the first quarter of 2004, Hudson City, MHC applied for and was granted approval from the Office of Thrift Supervision (“OTS”) to waive receipt of dividends declared by Hudson City Bancorp during 2004. This dividend waiver provides additional operating capital and liquidity at Hudson City Bancorp. The $29.8 million cash dividend paid to common stockholders in the first nine months of 2004 decreased $41.2 million from the $71.0 million cash dividend paid in the first nine months of 2003 primarily due to the approximately $62.5 million dividend waived by Hudson City, MHC.

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Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements

6. — Net Periodic Benefit Plans Expenses

Non-contributory retirement and post-retirement plans are maintained to cover all employees, 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 executive officers, is unfunded.

Net periodic benefit cost included the following components:

Due to the funded status of our qualified retirement plan, we do not plan to make a contribution to the plan for 2004.

Effective July 1, 2004, we adopted FASB Staff Position 106-2, which requires companies to recognize the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Act”). The effect of the Medicare Act reduced the accumulated postretirement benefit obligation by $5,399,000 as of January 1, 2004. In addition, the Medicare Act reduced the net periodic benefit cost by $513,000 for the nine-month period ended September 30, 2004, which included reductions in service cost, interest cost and amortization of net gain of $244,000, $253,000 and $16,000, respectively.

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Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements

7. — Subsequent Event

On October 28, 2004, the Board of Directors of Hudson City Bancorp declared a quarterly cash dividend of nineteen cents ($0.19) per common share outstanding. The dividend is payable on December 1, 2004 to stockholders of record at the close of business on November 5, 2004. The Board of Directors of Hudson City, MHC has waived receipt of this dividend consistent with OTS approval.

8. — Recent Accounting Pronouncements

On September 30, 2004, the FASB issued Staff Position No. EITF Issue 03-01-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which delays the effective date for the measurement and recognition guidance contained in EITF Issue No. 03-01. EITF Issue No. 03-01 provides guidance for evaluating whether an investment is other-than-temporarily impaired and was originally effective for other-than-temporarily impairment evaluations made in reporting periods beginning after June 15, 2004. The delay in the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of EITF Issue No. 03-01 does not suspend the requirement to recognize other-than-temporarily impairments as required by existing authoritative literature. The disclosure guidance in paragraphs 21 and 22 of EITF Issue 03-01 remains effective. The delay will be superseded concurrent with the final issuance of Staff Position No. EITF 03-01a, which is expected to provide implementation guidance on matters such as impairment evaluations for declines in value caused by increases in interest rates and/or sector spreads. We do not expect the final issuance of the Staff Position No. EITF 03-01a to have a material impact on our financial condition or results of operations.

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Hudson City Bancorp, Inc.
Form 10-Q

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Our results of operations depend primarily on net interest income, which is a direct result of the 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 demand deposits and borrowed funds. Net interest income is directly impacted by the spread between long-term interest rates and short-term interest rates, as our interest-earning assets, particularly those with initial terms to maturity or repricing greater than one year, generally price off long-term rates while our interest-bearing liabilities generally price off short-term interest rates.

Our net interest income is also impacted by the shape of the market yield curve. A steep yield curve, where the difference in interest rates between time periods is greater in the long-term time periods, could be beneficial to our net interest income as the interest rate spread between our additional interest-earning assets and interest-bearing liabilities would be larger. Conversely, a flat yield curve, where the difference in rates is lesser in the long-term periods or is shrinking over time, could have an adverse impact on our net interest income, as our net interest rate spread would decrease.

The impact on our interest income due to changes in interest rates is generally felt in later periods than the impact on our interest expense due to the timing of the recording on the balance sheet of our interest-earning assets and interest-bearing liabilities. The recording of interest-earning assets on the balance sheet generally lags the current market rate due to commitment periods of up to three months, while the recording of interest-bearing liabilities on the balance sheet generally times the current market. This timing difference could have an adverse impact on our net interest income in a rising interest rate environment.

Also impacting our net interest income and net interest rate spread is the level of prepayment activity on our mortgage-related 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 where the mortgage loan or the underlying mortgages of the mortgage-backed security were originated, seasonal factors and demographic variables. However, the major factors affecting prepayment rates are the prevailing market 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 market interest rate. Prepayment rates are generally inversely related to the prevailing market interest rate, thus, as market interest rates increase, prepayment rates tend to decrease.

Our results of operations may also be affected significantly by general and local economic and competitive conditions, particularly those with respect to changes in market interest rates, government policies and actions of regulatory authorities. Our results are also affected by the price of our stock, as the expense of certain of our employee stock compensation plans is related to the current price of our common stock.

Short-term market interest rates generally increased during the second and third quarters of 2004 following a period of general stability in short-term interest rates during 2003 and the first quarter of

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Form 10-Q

2004. The Federal Open Market Committee (“FOMC”) increased the overnight lending rate 25 basis points at each of the three regularly scheduled meetings in June, August and September of 2004. It is anticipated the FOMC will continue to increase the overnight lending rate at the remaining scheduled meetings in 2004, thus further increasing the short-term market interest rates. Overall, during 2004, long-term market interest rates generally decreased. During the first and third quarters of 2004, long-term market rates decreased, while during the second quarter, long-term rates increased. This general decrease in long-term interest rates, in conjunction with the increasing short-term interest rates, has flattened the market yield curve. Long-term market interest rates are expected to increase in the future, but not as fast as short-term interest rates, which will further flatten the market yield curve. If this occurs, the resulting interest rate environment is likely to have a negative impact on our results of operations as our interest-bearing liabilities generally price off short-term interest rates, while our interest-earning assets generally price off long-term interest rates and the spread between the rates we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities will decrease. If both short- and long-term interest rates increase by the same amount, and the shape of the yield curve does not change, the resulting environment is also likely to have a negative impact on our results of operations, as our interest-bearing liabilities will reset to the current market interest rate faster than our interest-earning assets.

The prepayment activity decreased on our mortgage-related assets during the first nine months of 2004 when compared to the prepayment activity experienced during the first nine months of 2003. This decrease in prepayment activity was due to the stabilization of long-term interest rates during the second half of 2003, notwithstanding the decreases in long-term interest rates during 2004. The decrease is also due to the large volume of refinancing and modification activity that occurred during the declining interest rate environment of 2003. The mortgage-related assets resulting from this prepayment activity will not tend to prepay as fast, as their contractual interest rate is relatively low. The slowing of the prepayment activity in turn decreased the amount of related premium amortized on these assets during the first nine months of 2004. The decrease in the prepayment activity and the slowing of the premium amortization generally had a positive impact on our net interest income, net interest rate spread and net interest margin for the periods reported in 2004 when compared to the periods reported in 2003.

The low interest rate environment of 2004 afforded us the opportunity to realize gains on certain of our mortgage-backed securities prior to interest rate changes, such as the long-term interest rate increase seen in the second quarter of 2004, which would have adversely affected their fair market value. The low market interest rates caused increases in the fair market value of the fixed-rate mortgage-backed securities sold. The larger volume of sales and larger gain reported for 2003, when compared with the gain reported for 2004, resulted from the enhanced opportunities to realize gains on sales due to the declining interest rate environment experienced during 2003. The overall decrease in long-term interest rates during 2004 has increased the overall unrealized gain on our available for sale securities. We may continue to realize gains on the sale of securities if given the opportunity to sell these assets in a favorable interest rate environment and reinvest the proceeds at an equivalent yield.

During the first nine months of 2004, we continued to grow our balance sheet consistent with our traditional thrift business model and the growth initiatives we have employed during recent periods. Our balance sheet growth, primarily due to increases in residential first mortgage loans and callable government-sponsored agency securities classified as held to maturity, was funded principally by customer deposits and borrowed funds. The growth in our core investment of residential first mortgage loans was due to our continued strong levels of loan purchases. The growth in customer deposits was primarily due to the continued success of our interest-bearing High Value Checking account. Borrowed funds were increased to meet the goals of our growth initiatives and to take advantage of the still

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Hudson City Bancorp, Inc.
Form 10-Q

historically low interest rate environment. Our ability to grow our business with relatively low cost interest-bearing liabilities resulted in the increase in our net interest income during the three- and nine-month periods ended September 30, 2004.

We expect to continue to grow our assets primarily through the origination and purchase of mortgage loans, while purchasing investment and mortgage-backed securities as a supplement to our mortgage loans. The primary funding for our asset growth is expected to come from customer deposits, using borrowed funds to supplement our deposit initiatives as a means to extend the maturity of our liabilities. We intend to grow customer deposits by continuing to offer desirable products at competitive rates and by opening new branch offices. We have opened three additional branch offices in New Jersey and our first branch in Suffolk County, NY during 2004. We have plans to open an additional two branch offices in New Jersey and four additional branch offices in Suffolk County. We also plan to expand our branch network, on a de novo basis, into Staten Island, NY in the first half of 2005. We will continue to explore branch expansion opportunities in market areas that present significant opportunities for our traditional thrift business model. Although new branching activity results in additional expenses, overall we continue to maintain a low level of operating expenses.

Comparison of Financial Condition at September 30, 2004 and December 31, 2003

During the first nine months of 2004, our total assets increased $2.29 billion, or 13.4%, to $19.32 billion at September 30, 2004 from $17.03 billion at December 31, 2003. Loans increased $1.96 billion, or 22.3%, to $10.76 billion at September 30, 2004 from $8.80 billion at December 31, 2003. The increase in loans reflected an increase in our loan purchase activity as well as our continued focus on the origination of one- to four-family first mortgage loans. For the first nine months of 2004, we purchased first mortgage loans of $2.36 billion and originated first mortgage loans of $1.11 billion, compared with purchases of $1.79 billion and originations of $1.77 billion for the first nine months of 2003. The larger volume of purchased mortgage loans in the first nine months 2004, coupled with the significant decline in loan prepayment activity during the period, allowed us to grow and geographically diversify our mortgage loan portfolio at a relatively low overhead cost while maintaining our traditional thrift business model. We will continue to purchase mortgage loans to grow and diversify our portfolio, as opportunities and funding are available. The lower volume of origination activity was primarily due to a decline in refinancing activity.

These first mortgage loan originations and purchases were exclusively in one-to four-family mortgage loans and were primarily fixed-rate loans. At September 30, 2004, fixed-rate mortgage loans accounted for 92.5% of our first mortgage loan portfolio compared with 90.9% at December 31, 2003. This percentage of fixed-rate loans to total loans may have an adverse impact on our earnings in a rising rate environment as the interest rate on these loans would not reprice, while our interest-bearing deposits and callable borrowed funds would reprice, from time to time, to the higher market interest rates.

During the first nine months of 2004, $120.7 million of our loan originations were the result of refinancing of our existing mortgage loans compared with $419.3 million during the first nine months of 2003. The dollar amount of refinancing of existing mortgage loans was included in total loan originations. We allow certain customers to modify, for a fee, their existing mortgage loans with the intent of maintaining customer relationships in periods of extensive refinancing due to low long-term interest rates. In general, all terms and conditions of the existing mortgage loan remain the same except the adjustment of the interest rate to the currently offered fixed-rate product with a similar term to maturity or to a

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Form 10-Q

reduced term at the request of the borrower. Modifications of our existing mortgage loans during the first nine months of 2004 were approximately $200.5 million compared with $1.43 billion during the first nine months of 2003. These loan modifications were not reflected in loan origination totals. We feel loan refinancing and modification activity are inversely related to the level of interest rates. The decrease in the refinancing and modification activity, when comparing the 2004 activity to the 2003 activity, was due to the stabilization of long-term interest rates. If long-term rates increase or remain relatively stable, we expect the amount of loan refinancings and modifications to remain at the 2004 levels or decrease.

The loan purchases were made pursuant to our wholesale loan purchase program established to supplement our retail loan originations. The purchasing agreements, as established with each seller/servicer, contain parameters as to the loans that can be included in each package. These parameters, such as maximum loan size and maximum loan-to-value ratio, conform to parameters generally utilized by us to originate mortgage loans. Purchased loan packages are subject to internal due diligence procedures that may include review of individual loan files. This review subjects the purchased loan file to substantially the same underwriting standards used in our own loan origination process. Loan packages purchased include mortgage loans secured by properties located primarily in the east coast corridor states between Massachusetts and North Carolina, and in Michigan and Illinois.

Investment securities held to maturity increased to $1.17 billion at September 30, 2004 from $1.4 million at December 31, 2003. During 2004, we began to classify certain of our government-sponsored agency security purchases as held to maturity. This increase in investment securities held to maturity reflected in part the reinvestment of the cash flows from the decrease of $518.2 million of investment securities available for sale during the low interest rate environment of the first nine months of 2004. The increase also represented a strategy to shorten the overall final maturity of our interest-earning assets, while continuing to grow our balance sheet, by investing a portion of the cash flows from our mortgage-related assets into investment securities. Of the agency securities purchased and classified as held to maturity, $546.6 million have step-up features, where the interest rate is increased on scheduled future dates. These securities have call options that are generally effective prior to the initial rate increase but after an initial non-call period of three months to one year. The initial rate for the securities purchased was higher than interest rates on similar agency securities offered at the time of purchase without the step-up feature. The rate increases are at least one percent per adjustment and are fixed over the life of the security.

Overall, the aggregate balance of the mortgage-backed securities portfolio remained relatively stable at $5.22 billion at September 30, 2004 compared with $5.42 billion at December 31, 2003. Payments received on mortgage-backed securities were primarily reinvested into fixed-rate mortgage-backed securities at the prevailing market interest rates. Accrued interest receivable increased $15.5 million, primarily due to increased balances in loans and investments.

Total liabilities increased $2.27 billion, or 14.5%, to $17.97 billion at September 30, 2004 compared with $15.70 billion at December 31, 2003. Total deposits increased $741.9 million, or 7.1%, to $11.20 billion at September 30, 2004 from $10.45 billion at December 31, 2003. The increase in total deposits was primarily used to fund our growth initiatives. Interest-bearing deposits increased $722.2 million primarily due to an increase of $1.10 billion in our interest-bearing High Value Checking account product, partially offset by a $321.0 million decrease in time deposits. We believe the increase in interest-bearing deposits was due primarily to our consistent offering of competitive rates on our interest-bearing High Value Checking account product. The balance in the High Value Checking account at September 30, 2004 was $3.81 billion compared with $2.71 billion at December 31, 2003.

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Form 10-Q

Borrowed funds increased $1.50 billion, or 29.1%, to $6.65 billion at September 30, 2004 from $5.15 billion at December 31, 2003. The additional borrowed funds were primarily used to fund our asset growth. Borrowed funds were comprised of $4.80 billion of securities sold under agreements to repurchase and $1.85 billion of FHLB advances. The $3.05 billion in new borrowings, which had initial call dates of predominately two to four years from the date of borrowing, were partially offset by calls and maturities of borrowed funds in an aggregate amount of $1.55 billion.

Total stockholders’ equity increased $26.7 million, or 2.0%, to $1.36 billion at September 30, 2004 from $1.33 billion at December 31, 2003. The increase in stockholders’ equity was primarily due to net income of $176.7 million for the first nine months of 2004, a $5.3 million increase due to the exercise of 741,884 stock options, a $20.3 million permanent tax benefit due to the exercise of stock options and the vesting of employee stock benefit plans, and a $14.7 million increase due to the commitment of shares for our employee stock benefit plans. The increase in stockholders equity also reflected a $7.6 million increase in accumulated other comprehensive income, primarily due to an increase in the fair market value of our fixed-rate available for sale investment portfolio, reflecting decreases in longer term interest rates during the third quarter of 2004.

These increases to stockholders equity were partially offset by repurchases of 4,565,200 shares of our common stock at an aggregate cost of $160.7 million, purchases of 200,000 shares of common stock for our recognition and retention plan at an aggregate cost of $7.3 million and cash dividends declared and paid to common stockholders of $29.8 million. As of September 30, 2004 there remained 3,101,221 shares authorized to be purchased under our current stock repurchase program. The amount of the cash dividend paid to common stockholders reflected the waiver of receipt of the dividend by Hudson City, MHC, the majority stockholder of Hudson City Bancorp.

At September 30, 2004, the ratio of total stockholders’ equity to total assets was 7.02% compared with 7.80% at December 31, 2003. For the nine-month period ended September 30, 2004, the ratio of average stockholders’ equity to average assets was 7.37% compared with 8.73% for the year ended December 31, 2003. The decrease in these ratios was primarily due to our capital management strategy of planned asset growth, and a slower percentage growth in stockholders’ equity as compared to the percentage growth in assets, due to payment of cash dividends and stock repurchases. Stockholders’ equity per common share was $7.61 at September 30, 2004 compared with $7.33 at December 31, 2003.

Average Balance Sheets for the Three and Nine Months Ended September 30, 2004 and 2003

The tables on the following pages present certain information regarding Hudson City Bancorp’s financial condition and net interest income for the three- and nine-month periods ended September 30, 2004 and 2003. The tables present 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 adjustments to yields. Yields on tax-exempt obligations were not computed on a tax equivalent basis.

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Comparison of Operating Results for the Three Months Ended September 30, 2004 and 2003

General. Net income was $62.0 million for the three months ended September 30, 2004, an increase of $11.7 million, or 23.3%, compared with net income of $50.3 million for the three months ended September 30, 2003. Basic and diluted earnings per common share were $0.35 and $0.34 for the third quarter of 2004 compared with basic and diluted earnings per share of $0.28 and $0.27, respectively, for the third quarter of 2003. For the third quarter of 2004 our return on average stockholders’ equity was 18.98% compared with 14.74% for the third quarter of 2003. The increase in the return on average stockholders’ equity was primarily due to the growth of our net income and a lower percentage growth in stockholders’ equity due to payment of cash dividends and stock repurchases. Our return on average assets for the three-month period ended September 30, 2004 was 1.31% compared with 1.28% for the three-month period ended September 30, 2003. The increase in the return on average assets was primarily due to our increase in net income for the third quarter of 2004 compared to the third quarter of 2003.

Interest and Dividend Income. Total interest and dividend income increased $47.6 million, or 25.5%, to $234.3 million for the quarter ended September 30, 2004 compared with $186.7 million for the quarter ended September 30, 2003. The increase in total interest and dividend income was primarily due to a $3.29 billion, or 21.4%, increase in the average balance of total interest-earning assets to $18.65 billion for the third quarter of 2004 compared with $15.36 billion for the third quarter of 2003. The growth in the average balance of total interest-earning assets was consistent with the growth initiatives employed by us during recent periods. The increase in interest and dividend income was also the result of a 16 basis point increase in the annualized average yield on total interest-earning assets to 5.02% for the third quarter of 2004 from 4.86% for the third quarter of 2003, primarily reflecting yield increases in mortgage-backed securities and investment securities.

The $41.4 million increase in interest and fee income on first mortgage loans was primarily due to a $3.31 billion increase in the average balance of first mortgage loans, which reflected our continued emphasis on our core investment in first mortgage loans, primarily through purchases, at a time when prepayments outpaced origination activity. The increase in mortgage loan income due to the increase in the average balance was partially offset by a 25 basis point decrease in the annualized average yield, which reflected the large volume of loan origination and purchase activity during the low long-term interest rate environment of 2003 and the first nine months of 2004.

The $10.1 million increase in interest and dividends on total investment securities was primarily due to an increase in the average balance of investment securities of $839.3 million, which reflected the investment of certain of the cash flows from the high level of prepayment activity on our mortgage-related assets in 2003 and 2004 into investment securities, and the decision to shorten the overall weighted-average life of our assets by investing in callable securities with initial call dates of three months to one year and final maturity dates of five to seven years. The increase in income on total investment securities was also due to a 12 basis point increase in the annualized average yield on our investment securities, due to the purchase of agency step-up bonds, which have higher interest rates than similar agency securities.

The $4.5 million decrease in interest income on total mortgage-backed securities was due to a $747.3 million decrease in the average balance of total mortgage-backed securities, which reflected the high volume of prepayment activity, the sales of mortgage-backed securities, and the subsequent investment of certain of the cash flows into investment securities. The impact on mortgage-backed securities income due to the decline of the average balance was partially offset by the slowing of the premium amortization,

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due to the decline in prepayment activity, which resulted in a 26 basis point increase in the annualized average yield on our mortgage-backed securities.

Interest Expense. Total interest expense, comprised of interest on deposits and interest on borrowed funds, increased $18.3 million, or 19.9%, to $110.3 million for the quarter ended September 30, 2004 from $92.0 million for the quarter ended September 30, 2003. This increase was primarily due to a $3.27 billion, or 23.7%, increase in the average balance of total interest-bearing liabilities to $17.08 billion for the third quarter of 2004 compared with $13.81 billion for the third quarter of 2003. The impact of the increase in the average balance of total interest-bearing liabilities was offset, in part, by a 7 basis point decrease in the annualized average cost of total interest-bearing liabilities to 2.57% for the three-month period ended September 30, 2004 from 2.64% for the corresponding period in 2003.

Interest expense on borrowed funds increased $14.4 million primarily due to a $2.24 billion increase in the average balance of borrowed funds, the impact of which was partially offset by a 49 basis point decrease in the annualized average cost of borrowed funds. The increase in the average balance of borrowed funds was used to fund asset growth. The decrease in the average cost of borrowed funds reflected the continued growth of our borrowed funds in the relatively low interest rate environment that existed during 2003 and overall during 2004.

Interest expense on interest-bearing deposits increased $3.9 million primarily due to an increase in the average balance of interest-bearing deposits of $1.04 billion, the impact of which was partially offset by a 6 basis point decrease in the annualized average cost to 2.01%. The decrease in the annualized average cost of interest-bearing deposits primarily reflected an 18 basis point decrease in the annualized average cost of our time deposits, due to the relatively low interest rate environment experienced during 2003 and overall during 2004. The 12 basis point increase in the annualized average cost of interest-bearing demand deposits reflected the short-term interest rate increase during 2004.

The increase in the average balance of interest-bearing deposits, primarily used to fund asset growth, reflected a $1.59 billion increase in the average balance of interest-bearing demand accounts due to the growth in our High Value Checking account product. We believe the increase in the average balance of interest-bearing deposits was primarily due to our consistent offering of competitive rates on our High Value Checking account product. Although we believe our time deposit rates are competitive, we believe the $524.4 million decrease in the average balance of time deposits was due in part to transfers to our High Value Checking account. We intend to continue to fund future asset growth using customer deposits as our primary source of funds, by continuing to pay competitive rates and by opening new branch offices, while supplementing the deposit growth with borrowed funds.

Net Interest Income. Net interest income increased $29.3 million, or 30.9%, to $124.0 million for the quarter ended September 30, 2004 compared with $94.7 million for the quarter ended September 30, 2003. This increase primarily reflected our growth initiatives that resulted in increases in the average balance of both interest-earning assets and interest-bearing liabilities, and the net interest rate spread earned on this growth. Our net interest rate spread, the difference between the annualized average yield on total interest-earning assets and the annualized average cost of total interest-bearing liabilities, increased 23 basis points to 2.45% for the third quarter of 2004 from 2.22% for the corresponding period in 2003. Our net interest margin, determined by dividing the annualized net interest income by average total interest-earning assets, increased 18 basis points to 2.67% for the three-month period ended September 30, 2004 from 2.49% for the three-month period ended September 30, 2003.

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Hudson City Bancorp, Inc.
Form 10-Q

The increases in these ratios primarily reflected the increase in the annualized yield on total interest-earning assets, primarily due to the decrease in the amortization of the net premium on our mortgage-related assets, due to the decline in prepayment activity on these assets. The increases in these ratios also reflected the decrease in the annualized cost of total interest-bearing liabilities, primarily due to the growth of our total interest-bearing liabilities in the low interest rate environment of 2003 and overall during 2004. The lesser increase in the net interest margin, when compared to the increase in the net interest rate spread, was due to the use of funds to purchase treasury stock, which otherwise could have been invested in interest-earning assets.

It is anticipated that overall market interest rates will increase in future periods, and that the short-term interest rates may increase faster than the long-term interest rates, thus flattening the yield curve, as was experienced in the third quarter of 2004. If this continues to occur, the resulting interest rate environment is likely to have a negative impact on our net interest income, net interest rate spread and net interest margin, as our interest-bearing liabilities generally price off short-term interest rates, while our interest-earning assets generally price off long-term interest rates and the spread between the rates we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities will decrease.

Provision for Loan Losses. Our provision for loan losses for the quarters ended September 30, 2004 and 2003 was $225,000. Net charge-offs during the first nine months of 2004 were $12,000 compared with net charges-offs of $77,000 during the first nine months of 2003. The allowance for loan losses increased $663,000 to $27.2 million at September 30, 2004 from $26.5 million at December 31, 2003. The increase in the allowance for loan losses, through the provision for loan losses, reflected the overall growth of the loan portfolio, increases in non-performing loans and low levels of charge-offs.

Non-performing loans, defined as non-accruing loans and accruing loans delinquent 90 days or more, increased $3.0 million to $23.3 million at September 30, 2004 from $20.3 million at December 31, 2003, reflecting increases in our non-performing purchased loan portfolio. The ratio of non-performing loans to total loans was 0.22% at September 30, 2004 compared with 0.23% at December 31, 2003. The ratio of the allowance for loan losses to non-performing loans was 116.62% at September 30, 2004 compared with 131.09% at December 31, 2003. The ratio of the allowance for loan losses to total loans was 0.25% at September 30, 2004 compared with 0.30% at December 31, 2003.

Although we believe that we have established and maintained the allowance for loan losses at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Although we use the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. See “Critical Accounting Policies.”

Non-Interest Income. Total non-interest income decreased $4.5 million to $4.9 million for the quarter ended September 30, 2004 from $9.4 million for the quarter ended September 30, 2003. The decrease in non-interest income primarily reflected a $4.3 million decrease in gains on securities transactions, net to $3.5 million for the third quarter of 2004 from $7.8 million for the third quarter of 2003 primarily due to decreases in sales of mortgage-backed securities. The $3.5 million gain on securities transactions during the third quarter of 2004 resulted from an opportunity to realize gains from the sale of certain available for sale mortgage-backed securities. The historically low interest rate environment enabled us to realize these gains on the sales of securities, as the lower rates increased the fair value of the fixed-rate securities sold. The higher amount of gains in 2003 resulted from the enhanced opportunities to realize gains due to a declining rate environment. The total cash flow from the sales of these securities was $154.3 million.

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Hudson City Bancorp, Inc.
Form 10-Q

Non-Interest Expense. Total non-interest expense increased $3.3 million, or 12.9%, to $28.9 million for the quarter ended September 30, 2004 from $25.6 million for the quarter ended September 30, 2003. The increase was primarily due to an increase of $2.3 million in compensation and employee benefits reflecting routine salary increases and staff increases due to our overall growth and branch expansion.

Our efficiency ratio, determined by dividing total non-interest expense by the sum of net interest income and non-interest income was 22.42% for the third quarter of 2004 compared with 24.60% for the third quarter of 2003. Our ratio of annualized non-interest expense to average total assets for the third quarter of 2004 was 0.61% compared with 0.65% for the third quarter of 2003. The decrease in these ratios reflected our efforts to control costs, notwithstanding the actual increase in non-interest expense, as our average assets grew in excess of 20.0% when comparing the third quarter of 2004 to the same period in 2003.

Income Taxes. Income tax expense increased $9.7 million, or 34.6%, to $37.7 million for the quarter ended September 30, 2004 from $28.0 million for the quarter ended September 30, 2003, primarily due to the 27.5% increase in income before income tax expense. Our effective tax rate increased for the third quarter of 2004 to 37.83% from 35.79% for the third quarter of 2003, primarily due to the expense of the employee stock ownership plan, which is not fully deductible for income tax purposes.

Comparison of Operating Results for the Nine Months Ended September 30, 2004 and 2003

General. Net income was $176.7 million for the nine months ended September 30, 2004, an increase of $21.7 million, or 14.0%, compared with net income of $155.0 million for the nine months ended September 30, 2003. Basic and diluted earnings per common share were $0.98 and $0.95, respectively, for the first nine months of 2004 compared with basic and diluted earnings per share of $0.85 and $0.83, respectively, for the first nine months of 2003. For the nine months ended September 30, 2004 our return on average stockholders’ equity was 17.55% compared with 15.34% for the corresponding period of 2003. The increase in the return on average stockholders’ equity was primarily due to the growth of our net income and a decline in stockholders’ equity due to payment of cash dividends and stock repurchases. Our return on average assets for the nine-month period ended September 30, 2004 was 1.29% compared with 1.37% for the nine-month period ended September 30, 2003. The decrease in the return on average assets was primarily due to our overall balance sheet growth in the low interest rate environment of 2003 and the first nine months of 2004.

Interest and Dividend Income. Total interest and dividend income increased $90.2 million, or 15.6%, to $668.1 million for the nine-month period ended September 30, 2004 compared with $577.9 million for the nine-month period ended September 30, 2003. The increase in total interest and dividend income was primarily due to a $3.08 billion, or 20.8%, increase in the average balance of total interest-earning assets to $17.88 billion for the first nine months of 2004 compared with $14.80 billion for the first nine months of 2003. The growth in the average balance of total interest-earning assets was consistent with the growth initiatives employed by us during recent periods. The impact on interest and dividend income from the increase in the average balance of our total interest-earning assets was partially off-set by a 23 basis point decrease in the annualized average yield on total interest-earning assets to 4.98% for the nine-month period ended September 30, 2004 from 5.21% for the nine-month period ended September 30, 2003, primarily reflecting the growth of our interest-earning assets during the low interest rate environment of 2003 and the first nine months of 2004.

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Hudson City Bancorp, Inc.
Form 10-Q

The $84.9 million increase in interest and fee income on first mortgage loans was primarily due to a $2.71 billion increase in the average balance of first mortgage loans, which reflected our continued emphasis on our core investment in first mortgage loans, primarily through purchases, at a time when prepayments outpaced origination activity. The increase in mortgage loan income due to the increase in the average balance was partially offset by a 54 basis point decrease in the annualized average yield, which reflected the large volume of loan origination and purchase activity during the low long-term interest rate environment of 2003 and the first nine months of 2004.

The $31.7 million increase in interest and dividends on total investment securities was primarily due to an increase in the average balance of investment securities of $1.04 billion, which reflected the investment of certain of the cash flows from the high level of prepayment activity on our mortgage-related assets in 2003 and 2004 into investment securities, and the decision to shorten the overall weighted-average life of our assets by investing in callable securities with initial call dates of three months to one year and final maturity dates of five to seven years. The increase in income on total investment securities due to the increase in the average balance was partially offset by a 25 basis point decrease in the annualized average yield on our investment securities, which reflected the large volume of purchases made during the low interest rate environment of 2003 and the first nine months of 2004.

The $23.6 million decrease in interest income on total mortgage-backed securities was primarily due to a $607.2 million decrease in the average balance of total mortgage-backed securities, which reflected the high volume of prepayment activity, the sales of mortgage-backed securities, and the subsequent investment of certain of the cash flows into investment securities. The decrease in interest income on total mortgage-backed securities also reflected an 8 basis point decrease in the annualized average yield on mortgage-backed securities, due to the reinvestment of certain of the proceeds back into mortgage-backed securities in the low interest rate environment. The impact on mortgage-backed securities income due to the decline in the average balance and annualized weighted average yield was partially offset by the slowing of the premium amortization due to the decline in prepayment activity.

Interest Expense. Total interest expense, comprised of interest on deposits and interest on borrowed funds, increased $27.1 million, or 9.6%, to $309.6 million for the nine-month period ended September 30, 2004 from $282.5 million for the nine-month period ended September 30, 2003. This increase was primarily due to a $3.07 billion, or 23.2%, increase in the average balance of total interest-bearing liabilities to $16.33 billion for the first nine months of 2004 compared with $13.26 billion for the first nine months of 2003. The impact of the increase in the average balance of total interest-bearing liabilities was offset, in part, by a 32 basis point decrease in the annualized average cost of total interest-bearing liabilities to 2.53% for the nine-month period ended September 30, 2004 from 2.85% for the corresponding period in 2003.