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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Registrant's telephone number, including area code:    (518)  828-4600

                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.         x YES     o NO

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b - 2 of the Act).         x YES     o NO

                As of August 2, 2004 there were issued and outstanding 30,443,380 shares of the Registrant's Common Stock.

HUDSON RIVER BANCORP, INC.

FORM 10-Q

INDEX

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NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.  The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation have been included.  The accompanying unaudited consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K as of and for the year ended March 31, 2004.  Operating results for the three month period ended June 30, 200 4 are not necessarily indicative of the results that may be expected for a full year or other interim periods.

2.  Comprehensive income includes the reported net income of a company adjusted for certain items that are currently accounted for as direct entries to equity, such as the mark to market adjustment on securities available for sale, foreign currency items and minimum pension liability adjustments.  At the Company, comprehensive income represents net income plus other comprehensive income or loss, which consists of the net change in unrealized gains or losses on securities available for sale for the period, net of tax.  Accumulated other comprehensive income or loss represents the net unrealized gains or losses on securities available for sale, net of tax, as of the balance sheet dates.  Comprehensive loss for the thre e month periods ended June 30, 2004 was $1.3 million and comprehensive income for the three months ended June 30, 2003 was $8.3 million.  

                3.  In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.”  The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements.  A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur.  FIN No. 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holder s.  FIN No. 46 was effective for all VIEs created after January 31, 2003.  For VIEs created prior to February 1, 2003, FIN No. 46 was to be effective July 1, 2003.  However, the FASB postponed that effective date to December 31, 2003.  In December 2003, the FASB issued a revised FIN No. 46 (FIN No. 46R) which further delayed the effective date until March 31, 2004 for VIEs created prior to February 1, 2003, except for special purpose entities which must adopt either FIN No. 46 or FIN No. 46R as of December 31, 2003.  As of June 30, 2004, the Company has no special purpose entities or other VIEs for which FIN No. 46 or FIN No. 46R must be applied.  These requirements are not expected to have a material impact on the Company’s consolidated financial position, results of operations or liquidity in future periods.

                4. The Company has a stock option plan for officers and directors and has adopted the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”.  The Company applies APB Opinion No. 25 and related Interpretations in accounting for its Stock Option Plan.  For fixed stock option awards, compensation expense is not recognized for awards to employees and directors since the exercise price of the option is equal to the fair value of the underlying stock at the grant date.  SFAS No. 123 requires companies not using a fair value based method of accounting f or stock options or similar plans, to provide pro forma disclosure of net income and earnings per share as if that method of accounting had been applied.  The pro forma effects of stock-based compensation arrangements are based on the estimated grant date fair value of stock options that are expected to vest, calculated pursuant to the provisions of SFAS No. 123.  Pro forma compensation expense, net of applicable income tax effect, is recognized over the vesting period.

                The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the three months ended June 30, 2003: dividend yield of 2.16%; expected volatility of 30.07%; risk-free interest rate of 2.19%; and expected life of 3 years.  The weighted-average fair value at the grant date for the options granted during the three months ended June 30, 2003 was $2.32.  There were no option grants during the three months ended June 30, 2004.

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                Pro forma disclosures for the Company for the three months ended June 30, 2004 and 2003 utilizing the estimated fair value of all options granted since plan inception and an assumed 5% forfeiture rate (adjusted for actual forfeitures) are as follows:

                Because the Company’s stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing model, in management’s opinion, does not necessarily provide a reliable single measure of the fair value of its stock options.  In addition, the pro forma effect on reported net income and earnings per share for the three months ended June 30, 2004 and 2003 may not be representative of the pro forma effects on reported net income or earnings per share for future periods.

5. The following table sets forth certain information regarding the calculation of basic and diluted earnings per share for the three month periods ended June 30, 2004 and 2003.  Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period.  Shares of restricted stock are not considered outstanding for the calculation of basic earnings per share until they become fully vested.  Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potential ly dilutive common shares (such as stock options and unvested restricted stock) were issued during the reporting period using the treasury stock method.  Unallocated common shares held by the Company’s Employee Stock Ownership Plan are not included in the weighted-average number of common shares outstanding for either the basic or diluted earnings per share calculations.

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6. FASB Interpretation No. 45 (“FIN No. 45”) “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34”, requires certain disclosures and liability recognition for the fair value at issuance of guarantees that fall within its scope.  Under FIN No. 45, the Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.

                The Company has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party.  Standby letters of credit generally arise in connection with lending relationships.  The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under the standby letters of credit totaled $22.0 million at June 30, 2004 and $23.1 million at March 31, 2004 and represent the maximum potential future payments the Company could be required to make.  Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.   Each customer is e valuated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments.  Company policies governing loan collateral apply to standby letters of credit at the time of credit extension.  Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD’s.  The fair value of the Company’s standby letters of credit at June 30, 2004 and March 31, 2004 was insignificant.

7.  The Company maintains a qualified, noncontributory, defined benefit pension plan covering substantially all employees meeting certain eligibility requirements.  Benefits paid from the plan are based on age, years of service, compensation and social security benefits, and are determined in accordance with defined formulas. The Company's policy is to fund the pension plan in accordance with ERISA standards. The Company does not plan to contribute to the defined benefit pension plan in its 2005 fiscal year.  In addition, the Company provides certain postretirement benefits to employees and retirees meeting certain age and time of service requirements.  The medical portion of the plan is contributory, with retiree contributions based on years of service and their retirement date. The funding policy of the plan is to pay claims and/or insurance premiums as they come due.

The components of net periodic pension cost and postretirement benefit income are set forth below:

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ITEM 2:                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

                The financial review which follows focuses on the factors affecting the consolidated financial condition and results of operations of Hudson River Bancorp, Inc. and its subsidiaries, Hudson River Bank & Trust Company (the “Bank”) and C. W. Bostwick, Inc. (“Bostwick”) (combined, the “Company”), during the three months ended June 30, 2004, with comparisons to 2003 as applicable.  The unaudited consolidated interim financial statements and related notes, as well as the 2004 Annual Report on Form 10-K, should be read in conjunction with this review.  Amounts in prior periods’ consolidated financial statements are reclassified whenever necessary to conform to the current period’s presentation.

                The Company’s primary market area, with 49 full-service branches as of June 30, 2004, is the Capital District region of New York State.  The Company has been, and, subject to the pending merger noted below, intends to continue to be, a community-oriented financial institution offering a variety of financial services.  The Company’s principal business is attracting deposits from customers within its market area and investing those funds in primarily loans, and, to a lesser extent, in marketable securities.  The financial condition and operating results of the Company are dependent on its net interest income, which is the difference between the interest income earned on its assets and the interest expense paid on its liabilities, primarily consisting of deposits and borrowings.  Net income of the Compa ny is also affected by provisions for loan losses and other operating income, such as fees on deposit related services and insurance commissions; it is also impacted by other operating expenses, such as compensation and benefits, occupancy and equipment expenses, and federal and state income taxes.

                The Company’s results of operations are significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies.  Future changes in applicable laws, regulations or government policies may have a material impact on the Company.  Lending activities are substantially influenced by the demand for and supply of housing, competition among lenders, the level of interest rates, and the availability of funds.  The ability to gather deposits and the cost of funds are influenced by prevailing market interest rates, fees and terms on deposit products, as well as the availability of alternative investments including mutual funds and stocks.