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, 2008

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

For the transition period from                                           to                                          

Commission File Number: 0-26001

Hudson City Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Delaware		22-3640393
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
West 80 Century Road
Paramus, New Jersey		07652
(Address of Principal Executive Offices)		(Zip Code)

(201) 967-1900

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 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 (Do not check if a smaller reporting company)		Smaller Reporting Company o

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 3, 2008, the registrant had 521,245,726 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, 2008 (Unaudited) and December 31, 2007			4
Consolidated Statements of Income (Unaudited) — For the three and nine months ended September 30, 2008 and 2007			5
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) — For the nine months ended September 30, 2008 and 2007			6
Consolidated Statements of Cash Flows (Unaudited) — For the nine months ended September 30, 2008 and 2007			7
Notes to Unaudited Consolidated Financial Statements			8
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. — Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. — Controls and Procedures			45
PART II — OTHER INFORMATION
Item 1. — Legal Proceedings			46
Item 1A. — Risk Factors			46
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3. — Defaults Upon Senior Securities			47
Item 4. — Submission of Matters to a Vote of Security Holders			47
Item 5. — Other Information			47
Item 6. — Exhibits			48
SIGNATURES			49
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

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 comparable 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 may adversely affect our business;
	•		applicable technological changes may be more difficult or expensive than we anticipate;
	•		success or consummation of new business initiatives may be more difficult or expensive than we anticipate;
	•		litigation or matters before regulatory agencies, whether currently existing or commencing in the future, may be determined adverse to us or 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,
		2008				2007
(In thousands, except share and per share amounts)		(unaudited)
Assets:
Cash and due from banks		$	166,614			$	111,245
Federal funds sold			218,358				106,299
Total cash and cash equivalents			384,972				217,544
Securities available for sale:
Mortgage-backed securities			8,404,667				5,005,409
Investment securities			3,258,594				2,765,491
Securities held to maturity:
Mortgage-backed securities (fair value of $9,695,571 at September 30, 2008 and $9,566,312 at December 31, 2007)			9,669,841				9,565,526
Investment securities (fair value of $50,278 at September 30, 2008 and $1,410,246 at December 31, 2007)			50,086				1,408,501
Total securities			21,383,188				18,744,927
Loans			28,498,201				24,192,281
Deferred loan costs			64,234				40,598
Allowance for loan losses			(42,628	)			(34,741	)
Net loans			28,519,807				24,198,138
Federal Home Loan Bank of New York stock			831,820				695,351
Foreclosed real estate, net			9,462				4,055
Accrued interest receivable			281,570				245,113
Banking premises and equipment, net			74,266				75,094
Goodwill			152,109				152,109
Other assets			137,524				91,640
Total Assets		$	51,774,718			$	44,423,971
Liabilities and Shareholders’ Equity:
Deposits:
Interest-bearing		$	16,728,732			$	14,635,412
Noninterest-bearing			558,731				517,970
Total deposits			17,287,463				15,153,382
Repurchase agreements			14,850,000				12,016,000
Federal Home Loan Bank of New York advances			14,425,000				12,125,000
Total borrowed funds			29,275,000				24,141,000
Due to brokers			158,601				281,853
Accrued expenses and other liabilities			267,522				236,429
Total liabilities			46,988,586				39,812,664
Common stock, $0.01 par value, 3,200,000,000 shares authorized; 741,466,555 shares issued; 520,862,291 and 518,569,602 shares outstanding at September 30, 2008 and December 31, 2007			7,415				7,415
Additional paid-in capital			4,613,018				4,578,578
Retained earnings			2,156,649				2,002,049
Treasury stock, at cost; 220,604,264 and 222,896,953 shares at September 30, 2008 and December 31, 2007			(1,754,688	)			(1,771,106	)
Unallocated common stock held by the employee stock ownership plan			(217,745	)			(222,251	)
Accumulated other comprehensive (loss) income, net of tax			(18,517	)			16,622
Total shareholders’ equity			4,786,132				4,611,307
Total Liabilities and Shareholders’ Equity		$	51,774,718			$	44,423,971

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,
		2008				2007				2008				2007
		(In thousands, except per share data)
Interest and Dividend Income:
First mortgage loans		$	394,748			$	313,943			$	1,110,121			$	873,397
Consumer and other loans			6,245				7,107				19,978				21,077
Mortgage-backed securities held to maturity			123,890				124,524				372,354				329,604
Mortgage-backed securities available for sale			101,410				26,620				259,872				81,716
Investment securities held to maturity			874				18,620				12,764				55,863
Investment securities available for sale			40,825				43,391				121,354				142,577
Dividends on Federal Home Loan Bank of New York stock			12,510				10,616				40,729				26,835
Federal funds sold			815				3,382				4,093				8,275
Total interest and dividend income			681,317				548,203				1,941,265				1,539,344
Interest Expense:
Deposits			133,983				155,055				433,398				443,450
Borrowed funds			292,256				230,932				826,342				619,566
Total interest expense			426,239				385,987				1,259,740				1,063,016
Net interest income			255,078				162,216				681,525				476,328
Provision for Loan Losses			5,000				2,000				10,500				2,800
Net interest income after provision for loan losses			250,078				160,216				671,025				473,528
Non-Interest Income:
Service charges and other income			2,181				2,049				6,490				5,422
Non-Interest Expense:
Compensation and employee benefits			32,052				26,554				94,896				78,114
Net occupancy expense			7,633				7,718				22,437				21,997
Federal deposit insurance assessment			945				405				1,784				1,293
Computer and related services			657				633				2,044				2,014
Other expense			8,136				5,878				24,651				19,734
Total non-interest expense			49,423				41,188				145,812				123,152
Income before income tax expense			202,836				121,077				531,703				355,798
Income Tax Expense			80,928				46,634				210,423				137,448
Net income		$	121,908			$	74,443			$	321,280			$	218,350
Basic Earnings Per Share		$	0.25			$	0.15			$	0.66			$	0.43
Diluted Earnings Per Share		$	0.25			$	0.15			$	0.65			$	0.42
Weighted Average Number of Common Shares Outstanding:
Basic			484,759,567				491,331,210				483,915,018				504,784,333
Diluted			495,715,998				500,861,222				495,298,081				514,734,542

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,
		2008				2007
		(In thousands, except per share data)
Common Stock		$	7,415			$	7,415
Additional paid-in capital:
Balance at beginning of year			4,578,578				4,553,614
Stock option plan expense			11,338				9,258
Tax benefit from stock plans			14,066				3,250
Commitment of ESOP stock to be allocated			8,006				5,183
Vesting of RRP stock			1,030				1,277
Balance at end of period			4,613,018				4,572,582
Retained Earnings:
Balance at beginning of year			2,002,049				1,877,840
Net Income			321,280				218,350
Dividends paid on common stock ($0.32 and $0.245 per share, respectively)			(154,809	)			(124,259	)
Exercise of stock options			(11,871	)			(5,764	)
Balance at end of period			2,156,649				1,966,167
Treasury Stock:
Balance at beginning of year			(1,771,106	)			(1,230,793	)
Purchase of common stock			(3,600	)			(491,275	)
Exercise of stock options			20,018				9,154
Balance at end of period			(1,754,688	)			(1,712,914	)
Unallocated common stock held by the ESOP:
Balance at beginning of year			(222,251	)			(228,257	)
Commitment of ESOP stock to be allocated			4,506				4,505
Balance at end of period			(217,745	)			(223,752	)
Accumulated other comprehensive (loss) income:
Balance at beginning of year			16,622				(49,563	)
Unrealized holding (losses) gains arising during period, net of tax (benefit) expense of $(24,160) and $20,598 in 2008 and 2007, respectively			(34,983	)			29,827
Pension and other postretirement benefits adjustment, net of tax benefit of $108 and $174 for 2008 and 2007, respectively			(156	)			(252	)
Balance at end of period			(18,517	)			(19,988	)
Total Shareholders’ Equity		$	4,786,132			$	4,589,510
Summary of comprehensive income
Net income		$	321,280			$	218,350
Other comprehensive (loss) income, net of tax			(35,139	)			29,575
Total comprehensive income		$	286,141			$	247,925

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,
		2008				2007
		(In thousands)
Cash Flows from Operating Activities:
Net income		$	321,280			$	218,350
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, accretion and amortization expense			20,061				17,600
Provision for loan losses			10,500				2,800
Share-based compensation, including committed ESOP shares			24,880				20,223
Deferred tax benefit			(15,757	)			(3,426	)
Increase in accrued interest receivable			(36,457	)			(58,970	)
(Increase) decrease in other assets			(7,590	)			9,966
Increase in accrued expenses and other liabilities			30,937				22,568
Net Cash Provided by Operating Activities			347,854				229,111
Cash Flows from Investing Activities:
Originations of loans			(4,008,755	)			(2,645,435	)
Purchases of loans			(2,553,897	)			(3,057,075	)
Principal payments on loans			2,218,412				1,734,448
Principal collection of mortgage-backed securities held to maturity			1,076,247				930,105
Purchases of mortgage-backed securities held to maturity			(1,185,106	)			(3,846,976	)
Principal collection of mortgage-backed securities available for sale			750,785				535,415
Purchases of mortgage-backed securities available for sale			(4,279,939	)			(803,352	)
Proceeds from maturities and calls of investment securities held to maturity			1,358,485				—
Proceeds from maturities and calls of investment securities available for sale			1,349,902				1,650,054
Purchases of investment securities available for sale			(1,900,000	)			(898,705	)
Purchases of Federal Home Loan Bank of New York stock			(137,189	)			(221,410	)
Redemption of Federal Home Loan Bank of New York stock			720				9,315
Purchases of premises and equipment, net			(6,546	)			(9,955	)
Net proceeds from sale of foreclosed real estate			4,570				3,320
Net Cash Used in Investment Activities			(7,312,311	)			(6,620,251	)
Cash Flows from Financing Activities:
Net increase in deposits			2,134,081				1,210,139
Proceeds from borrowed funds			5,500,000				9,025,000
Principal payments on borrowed funds			(366,000	)			(3,107,000	)
Dividends paid			(154,809	)			(124,259	)
Purchases of treasury stock			(3,600	)			(491,275	)
Exercise of stock options			8,147				3,390
Tax benefit from stock plans			14,066				3,250
Net Cash Provided by Financing Activities			7,131,885				6,519,245
Net Increase in Cash and Cash Equivalents			167,428				128,105
Cash and Cash Equivalents at Beginning of Year			217,544				182,246
Cash and Cash Equivalents at End of Period		$	384,972			$	310,351
Supplemental Disclosures:
Interest paid		$	1,242,876			$	1,032,914
Loans transferred to foreclosed real estate		$	11,129			$	3,667
Income tax payments		$	208,741			$	123,841

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, 2008 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2008. 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.

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 (the “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, 2007 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,
		2008												2007
										Per												Per
						Average				Share								Average				Share
		Income				Shares				Amount				Income				Shares				Amount
		(In thousands, except per share data)
Net income		$	121,908											$	74,443
Basic earnings per share:
Income available to common stockholders		$	121,908				484,760			$	0.25			$	74,443				491,331			$	0.15
Effect of dilutive common stock equivalents			—				10,956								—				9,530
Diluted earnings per share:
Income available to common stockholders		$	121,908				495,716			$	0.25			$	74,443				500,861			$	0.15

		For the Nine Months Ended September 30,
		2008												2007
										Per												Per
										Share												Share
		Income				Shares				Amount				Income				Shares				Amount
		(In thousands, except per share data)
Net income		$	321,280											$	218,350
Basic earnings per share:
Income available to common stockholders		$	321,280				483,915			$	0.66			$	218,350				504,784			$	0.43
Effect of dilutive common stock equivalents			—				11,383								—				9,951
Diluted earnings per share:
Income available to common stockholders		$	321,280				495,298			$	0.65			$	218,350				514,735			$	0.42

4. 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, 2008, we purchased 224,262 shares of our common stock at an aggregate cost of $3.6 million. As of September 30, 2008, there remained 54,973,550 shares that may be purchased under the existing stock repurchase programs.

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

5. Fair Value Measurements

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies only to fair value measurements already required or permitted by other accounting standards and does not impose requirements for additional fair value measures. SFAS No. 157 was issued to increase consistency and comparability in reporting fair values. Our adoption of SFAS No. 157 did not have a material impact on our financial condition or results of operations.

The following disclosures, which include certain disclosures which are generally not required in interim period financial statements, are included herein as a result of our adoption of SFAS No. 157.

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, 2008. 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, impaired loans and goodwill. These non-recurring fair value adjustments involve the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

In accordance with SFAS No. 157, 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. SFAS No. 157 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 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/loss in shareholders’ equity. Substantially all of our available-for-sale portfolio consists of mortgage-backed securities and investment securities issued by government-sponsored enterprises. The fair values of these securities are obtained from an independent nationally recognized pricing service. Our independent pricing service provides us with prices which are categorized as Level 2 since quoted prices in active markets for identical assets are generally not available

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

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, 2008.

						Fair Value Measurements at September 30, 2008
						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		$	8,404,667			$	—			$	8,404,667			$	—
Investment securities			3,258,594				7,227				3,251,367				—
Total available for sale		$	11,663,261			$	7,227			$	11,656,034			$	—

Assets that were measured at fair value on a non-recurring basis at September 30, 2008 were limited to commercial and construction loans that are collateral dependent and foreclosed real estate. 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, 2008 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 that are collateral dependent. Collateral dependent loans evaluated for impairment amounted to $6.7 million at September 30, 2008. Based on this evaluation, we established an allowance for loan losses of $585,000 for such impaired loans.

Foreclosed real estate represents real estate acquired as a result of foreclosure or by deed in lieu of foreclosure and is carried, net of an allowance for losses, 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, is classified as Level 3. Foreclosed real estate at September 30, 2008 amounted to $9.5 million. During the first nine months of 2008, charge-offs to the allowance for loan losses related to loans that were transferred to foreclosed real estate amounted to $1.2 million. Write downs related to foreclosed real estate that were charged to non-interest expense amounted to $852,000 for that same period.

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, 2008.

Fair Value Measurements at September 30, 2008

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

$

—

$

—

$

6,689

Foreclosed real estate

—

—

9,462

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

6. Post-retirement 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 in 2006, participation in the Sound Federal retirement plans and the accrual of benefits for such plans were frozen as of the acquisition date.

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

		For the Three Months Ended September 30,
		Retirement Plans								Other Benefits
		2008				2007				2008				2007
		(In thousands)
Service cost		$	881			$	810			$	253			$	268
Interest cost			1,682				1,569				544				525
Expected return on assets			(2,135	)			(2,034	)			—				—
Amortization of:
Net loss			81				37				141				144
Unrecognized prior service cost			82				69				(391	)			(391	)
Net periodic benefit cost		$	591			$	451			$	547			$	546

		For the Nine Months Ended September 30,
		Retirement Plans								Other Benefits
		2008				2007				2008				2007
		(In thousands)
Service cost		$	2,643			$	2,430			$	759			$	804
Interest cost			5,046				4,707				1,632				1,575
Expected return on assets			(6,405	)			(6,102	)			—				—
Amortization of:
Net loss			243				111				423				432
Unrecognized prior service cost			246				207				(1,173	)			(1,173	)
Net periodic benefit cost		$	1,773			$	1,353			$	1,641			$	1,638

During the nine months ended September 30, 2008 and 2007, we made contributions of $3.2 million and $2.1 million, respectively, to the pension plans.

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

7. Stock Option Plans

A summary of the changes in outstanding stock options is as follows:

		Nine Months Ended September 30,
		2008								2007
		Number of				Weighted				Number of				Weighted
		Stock				Average				Stock				Average
		Options				Exercise Price				Options				Exercise Price
Outstanding at beginning of period			29,080,114			$	7.91				26,979,989			$	6.89
Granted			4,025,000				15.96				3,527,500				13.74
Exercised			(2,516,951	)			3.26				(1,266,222	)			2.68
Forfeited			(48,784	)			13.21				(66,740	)			10.03
Outstanding at end of period			30,539,379				9.35				29,174,527				7.71

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, Inc. (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 and 2007 pursuant to the SIP Plan for 7,960,000 and 3,527,500 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, 4,535,000 have vesting periods ranging from one to five years and an expiration period of ten years. The remaining 6,952,500 shares have vesting periods ranging from two to three years if certain financial performance measures are met. We have determined it is probable these performance measures will be met and have therefore recorded compensation expense for the 2006 and 2007 grants.

During the nine months ended September 30, 2008, the Committee authorized stock option grants (the “2008 grants”) pursuant to the SIP Plan for 4,025,000 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, 3,525,000 will vest in January 2011 if certain financial performance measures are met. The remaining 500,000 options will vest between January and April 2009. The 2008 grants have an expiration period of ten years. We have determined it is probable these performance measures will be met and have therefore recorded compensation expense for the 2008 grants.

The fair value of the 2008 grants was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. The per share weighted-average fair value of the options granted during the nine months ended September 30, 2008 was $2.76.

		2008
Expected dividend yield			2.30	%
Expected volatility			20.61	%
Risk-free interest rate			2.82	%
Expected option life			5.3 years

Compensation expense related to our outstanding stock options amounted to $3.8 million and $3.0 million for the three months ended September 30, 2008 and 2007, respectively, and $11.3 million and $9.3 million, for the nine months ended September 30, 2008 and 2007, respectively.

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

8. Recent Accounting Pronouncements

The Emergency Economic Stabilization Act of 2008 (the “EESA”) reaffirmed the authority of the SEC to suspend the application of SFAS No. 157, which governs fair value (mark-to-market) accounting, for any issuer or with respect to any class or category of transaction if the SEC determines that it is necessary or appropriate in the public interest and is consistent with the protection of investors. However, it is unclear at this time whether the SEC will exercise such authority, as it previously expressed resistance to the suspension of fair value accounting. It is intended that this provision of the EESA will put additional pressure on the SEC to reconsider its prior position on this issue.

A suspension of fair value accounting would be beneficial to most financial institutions that are generally currently required to write down assets that are deemed other-than-temporarily impaired to the current market value of such assets. The market is currently illiquid for many of such assets, so sales are often at very low, distressed prices that may not accurately reflect the value of such assets. On October 10, 2008, the Financial Accounting Standards Board (the “FASB”) issued staff position, or FSP, No. 157-3, which clarifies the application of SFAS No. 157 in a market that is not active. FSP No. 157-3 states that in determining the fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available. SFAS No. 157 discusses a range of information and valuation techniques that a reporting entity might use to estimate fair value when relevant observable inputs are not available. Our application of the guidance in FSP No. 157-3 did not have a material impact on our financial condition or results of operations or our determination of the fair value of our financial assets.

The EESA also requires the SEC to conduct a study on mark-to-market accounting and to consider, at a minimum, the effects of mark-to-market accounting standards on a financial institution’s balance sheet, on bank failures in 2008, and on the quality of financial information to investors, the process used by the FASB in developing accounting standards and the advisability and feasibility of modifications or alternatives to the mark-to-market accounting standards provided in SFAS No. 157. The SEC must submit a report of this study to Congress within 90 days after the date of enactment of the EESA, so this report should be submitted prior to year end. It is unclear at this time what effects, if any, the results of this report will have on mark-to-market accounting standards in the near future.

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” which addresses whether such instruments 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 described in SFAS No. 128, “Earnings per Share.” The FSP 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. FSP No. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively to conform with the provisions of the FSP. Early application is not permitted. FSP No. EITF 03-6-1 is not expected to have a material impact on our computation of EPS.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to

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

AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect SFAS No. 162 will have a material impact on our financial condition, results of operations or financial statement disclosures.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”, which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No. 161 requires entities to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 also requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We do not expect SFAS No. 161 will have a material impact on our financial statement disclosures.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 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. SFAS No. 160 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. SFAS No. 160 requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interest of the parent’s owners and the interests of 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. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for Hudson City Bancorp). Earlier adoption is prohibited. SFAS No. 160 shall be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods. We do not expect SFAS No. 160 will have a material impact on our financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 141(R), (as amended), “Business Combinations.” SFAS No. 141(R) applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree), including those sometimes referred to as “true mergers” or “mergers of equals” and combinations achieved without the transfer of consideration, for example, by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations.” This Statement retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting (which SFAS No. 141 called the purchase method ) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. The scope of SFAS No.

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

141(R) is broader than that of SFAS No. 141, which applied only to business combinations in which control was obtained by transferring consideration.

SFAS No. 141(R) retains the guidance in SFAS No. 141 for identifying and recognizing intangible assets separately from goodwill. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces SFAS No. 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS No. 141’s guidance resulted in not recognizing some assets and liabilities at the acquisition date, and it also resulted in measuring some assets and liabilities at amounts other than their fair values at the acquisition date. For example, SFAS No. 141 required the acquirer to include the costs incurred to effect the acquisition (acquisition-related costs) in the cost of the acquisition that was allocated to the assets acquired and the liabilities assumed. SFAS No. 141(R) requires those costs to be recognized separately from the acquisition. In addition, in accordance with SFAS No. 141, restructuring costs that the acquirer expected but was not obligated to incur were recognized as if they were a liability assumed at the acquisition date. SFAS No. 141(R) requires the acquirer to recognize those costs separately from the business combination.

SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The effective date of SFAS No. 141(R) is the same as that of SFAS No. 160. SFAS No. 141(R) may have a significant impact on our accounting for any business combinations closing after the adoption date.

In June 2007 the Emerging Issues Task Force (“EITF”) reached a consensus in Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards”. EITF Issue No. 06-11 addresses a company’s recognition of an income tax benefit received on dividends that are (a) paid to employees holding equity-classified non-vested shares, equity-classified non-vested share units, or equity-classified outstanding share options and (b) charged to retained earnings under SFAS No. 123(R). The EITF reached a consensus that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. Unrealized income tax benefits from dividends on equity-classified employee share-based payment awards should be excluded from the pool of excess tax benefits available to absorb potential future tax deficiencies. The accounting treatment of the income tax benefits from these dividends would be applied on a prospective basis. EITF Issue No. 06-11 is effective for fiscal years beginning after September 15, 2007. We adopted EITF Issue No. 06-11 as of January 1, 2008 and its adoption did not have a material impact on our financial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 155”, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. At the effective date, an entity may elect the fair value option for eligible items that exist at that date and report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Subsequent to the effective date, unrealized gains and losses on items for which the fair value option has been elected are to be reported in

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

earnings. If the fair value option is elected for any available-for-sale or held-to-maturity securities at the effective date, cumulative unrealized gains and losses at that date are included in the cumulative-effect adjustment and those securities are to be reported as trading securities under SFAS No. 115, but the accounting for a transfer to the trading category under SFAS No. 115 does not apply. Electing the fair value option for an existing held-to-maturity security will not call into question the intent of an entity to hold other debt securities to maturity in the future. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value and does not eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We adopted SFAS No. 159 as of January 1, 2008. We did not elect the fair value option for eligible items that existed as of January 1, 2008 (the adoption date) or during the first nine months of 2008.

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

Executive Summary

We continue to focus on our traditional thrift business model by growing our franchise through the origination and purchase of one- to four-family mortgage loans and funding this loan production with borrowings and growth in deposit accounts.

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, and the prepayment rate on our mortgage-related assets. 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, 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.

During 2008, the national economy continued to falter with particular emphasis on the deterioration of the housing and real estate markets. The faltering economy has been marked by contractions in the availability of business and consumer credit, increases in borrowing rates, falling home prices, increasing home foreclosures and unemployment. In response, the Federal Open Market Committee of the Federal Reserve Bank (“FOMC”) decreased the overnight lending rate by 225 basis points during the first nine months of 2008 to 2.00%. This followed a 50 basis point reduction in the fourth quarter of 2007. In addition, the FOMC reduced the overnight lending rate in October 2008 by an additional 100 basis points to 1.00%. The large decrease in the overnight lending rate was in response to the continued liquidity crisis in the credit markets and recessionary concerns. As a result, short-term market interest rates decreased during the first nine months of 2008. Longer-term market interest rates also decreased during the first nine months of 2008, but at a slower pace than the short-term interest rates and, as a result, the yield curve continued to steepen. Notwithstanding the decrease in long-term market interest rates noted above, mortgage rates have maintained a wider credit spread relative to U.S. Treasury securities resulting in higher yields on our mortgage loans. In addition, the sharp decline of short-term interest rates during the first nine months of 2008 resulted in lower deposit and borrowing costs. As a result, our net interest rate spread and net interest margin increased from both the third quarter and first nine months of 2007.

The disruption and volatility in the financial and capital markets over the past year has recently reached a crisis level as national and global credit markets ceased to function effectively, if at all. Financial entities across the spectrum have been affected by the lack of liquidity and continued credit deterioration. The difficulties in the financial services market have been marked by the failure, near failure or sale at depressed valuations of some of the nation’s largest and most venerable institutions, such as Bear Stearns, Lehman Brothers, Merrill Lynch and Wachovia. Concern for the stability of the banking and financial systems reached a magnitude which has resulted in unprecedented government intervention on a global scale. At a domestic level, on October 3, 2008, the EESA was signed into law providing for, among other things, $700 billion in funding to the U.S. Treasury to purchase troubled assets from financial institutions. Then, on October 14, 2008, the Treasury, the Board of Governors of the Federal Reserve System (the “FRB”), and the Federal Deposit Insurance Corporation (the “FDIC”) issued a joint statement announcing additional steps aimed at stabilizing the financial markets. First, the Treasury announced a $250 billion

voluntary Capital Purchase Program (the “CPP”) that allows qualifying financial institutions to sell preferred shares to the Treasury. Second, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”), enabling the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and certain holding companies, as well as fully insure all deposits in non-interest bearing transaction accounts. Third, to further increase access to funding for businesses in all sectors of the economy, the FRB announced further details of its Commercial Paper Funding Facility program (the “CPFF”), which provides a broad backstop for the commercial paper market. These actions were intended to restore confidence in the banking system, ease liquidity concerns and stabilize the rapidly deteriorating economy. Eligible institutions are covered under the TLGP at no cost for the first 30 days. Institutions that do not want to continue to participate in one or both parts of the TLGP must notify the FDIC of their election to opt out on or before December 5, 2008. Institutions that do not opt out will be subject to a fee, after the first 30 days, of 75 basis points per annum based on the amount of senior unsecured debt issued and a 10 basis point surcharge (annualized) will be added to the institution’s current insurance assessment for balances in non-interest bearing transaction accounts that exceed the existing deposit insurance limit of $250,000.

The EESA also authorizes the Treasury to establish the Troubled Asset Relief Program (the “TARP”) to purchase certain troubled assets from financial institutions, including banks and thrifts. Under TARP, the Treasury may purchase residential and commercial mortgages, and securities, obligations or other instruments based on such mortgages, originated or issued on or before March 14, 2008 that the Secretary of the Treasury determines promotes market stability, as well as any other financial instrument that the Treasury, after consultation with the Chairman of the FRB, determines the purchase of which is necessary to promote market stability. In the case of a publicly-traded financial institution that sells troubled assets into the TARP, the Treasury must receive a warrant giving the Treasury the right to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which the Treasury agrees not to exercise voting power, subject to certain de minimis exceptions. In addition, all financial institutions that sell troubled assets to the TARP and meet certain conditions will also be subject to certain executive compensation restrictions, which differ depending on how the troubled assets are acquired under the TARP.

We are currently well capitalized and continue to lend in our markets. To date, we have not participated in any of the new programs above.

Net income amounted to $121.9 million for the third quarter of 2008, as compared to $74.4 million for the third quarter of 2007. For the nine months ended September 30, 2008, net income amounted to $321.3 million as compared to $218.4 million for the 2007 period. For the three months ended September 30, 2008, our annualized return on average assets and average stockholders’ equity were 0.97% and 10.19%, respectively compared with 0.73% and 6.41% for the third quarter of 2007. For the nine months ended September 30, 2008, our annualized return on average assets and average stockholders’ equity were 0.90% and 9.03%, respectively as compared to 0.75% and 6.09% for the first nine months of 2007. The increases in our annualized returns on average equity and average assets are due primarily to the increase in our net income during the third quarter and first nine months of 2008 as compared to the third quarter and first nine months of 2007. The increases in our annualized returns on average equity were also due to decreases in average shareholders’ equity due to significant stock repurchases during 2007.

Net interest income increased $92.9 million, or 57.3%, to $255.1 million for the third quarter of 2008 as compared to $162.2 million for the third quarter of 2007. Net interest income increased $205.2 million, or 43.1%, to $681.5 million for the nine months ended September 30, 2008 compared to $476.3 million for the corresponding period in 2007. During the third quarter of 2008, our net interest rate spread increased 56 basis points to 1.70% and our net interest margin increased 43 basis points to 2.08% as

compared to the third quarter of 2007. During the first nine months of 2008, our net interest rate spread increased 41 basis points to 1.52% and our net interest margin increased 27 basis points to 1.93% as compared to the same period in 2007. 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 while mortgage yields generally increased slightly.

The provision for loan losses amounted to $5.0 million for the third quarter of 2008 and $10.5 million for the nine months ended September 30, 2008 as compared to $2.0 million and $2.8 million for the same respective periods in 2007. 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 and the overall growth of our loan portfolio. The ratio of non-performing loans to total loans was 0.50% at September 30, 2008 as compared to 0.33% at December 31, 2007. The increase in non-performing loans reflects the weakening of the overall economy 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 expense increased $8.2 million, or 19.9%, to $49.4 million for the third quarter of 2008 from $41.2 million for the third quarter of 2007. The increase is primarily due to a $5.5 million increase in compensation and employee benefits expense, a $2.2 million increase in other non-interest expense and a $540,000 increase in Federal deposit insurance expense. Total non-interest expense increased $22.6 million, or 18.3%, to $145.8 million for the first nine months of 2008 from $123.2 million for the first nine months of 2007. The increase is primarily due to a $16.8 million increase in compensation and employee benefits expense and a $4.9 million increase in other non-interest expense. The increases in non-interest expenses were due primarily to various operating expenses related to the growth of our branch network and our increased retail loan production. At September 30, 2008 we had 125 branches as compared to 118 at September 30, 2007.

We have been able to grow our assets by 16.5% to $51.77 billion at September 30, 2008 from $44.42 billion at December 31, 2007, by originating and purchasing mortgage loans and purchasing mortgage-backed securities. Loans increased $4.32 billion to $28.52 billion at September 30, 2008 from $24.20 billion at December 31, 2007. While conditions in the housing markets deteriorated further during 2008, our competitive rates and the decreased lending competition have resulted in increased origination activity.

Total securities increased $2.64 billion to $21.38 billion at September 30, 2008 from $18.74 billion at December 31, 2007. The increase in securities was primarily due to purchases of mortgage-backed and investment securities of $5.47 billion and $1.90 billion, respectively, partially offset by principal collections on mortgage-backed securities of $1.83 billion and calls of investment securities of $2.71 billion.

The increase in our total assets was funded primarily by borrowings and customer deposits. Borrowed funds increased $5.14 billion to $29.28 billion at September 30, 2008 from $24.14 billion at December 31, 2007. Deposits increased $2.14 billion to $17.29 billion at September 30, 2008 from $15.15 billion at December 31, 2007. The additional borrowed funds were used primarily to fund our asset growth. The increase in deposits was attributable to growth in our time deposits and money market accounts. The increase in these accounts was a result of our competitive pricing strategies that focused on attracting these types of deposits as well as customer preferences for time deposits rather than other types of deposit accounts. In addition, we believe the turmoil in the credit and equity markets has made deposit products in strong financial institutions desirable for many customers.

Comparison of Financial Condition at September 30, 2008 and December 31, 2007

During the first nine months of 2008, our total assets increased $7.35 billion, or 16.5%, to $51.77 billion at September 30, 2008 from $44.42 billion at December 31, 2007.

Loans increased $4.32 billion, or 17.9%, to $28.52 billion at September 30, 2008 from $24.20 billion at December 31, 2007 due primarily to the origination of one-to four- family first mortgage loans in New Jersey, New York and Connecticut and our continued loan purchase activity. For the first nine months of 2008, we originated $4.01 billion and purchased $2.55 billion of loans, compared to originations of $2.65 billion and purchases of $3.06 billion for the comparable period in 2007. The origination and purchases of loans were partially offset by principal repayments of $2.22 billion in the first nine months of 2008 as compared to $1.73 billion for the first nine months of 2007. While the residential real estate markets have deteriorated during the past year, our competitive rates and the decreased mortgage lending competition have resulted in increased retail origination activity for the first nine months of 2008. The overall decrease in the purchase of mortgage loans was due primarily to the continued reduction of activity in the secondary residential mortgage market as a result of the disruption and volatility in the financial and capital marketplaces.

Our first mortgage loan originations and purchases were substantially in one-to four-family mortgage loans for the first nine months of 2008. Approximately 58.0% of mortgage loan originations for the first nine months of 2008 were variable-rate loans as compared to approximately 44.0% for the comparable period in 2007. Substantially all purchased mortgage loans during the nine months ended September 30, 2008 were fixed-rate loans since variable-rate loans available for purchase are typically outside of our defined geographic parameters and include features, such as option ARM’s, that do not meet our underwriting standards. Fixed-rate mortgage loans accounted for 76.6% of our first mortgage loan portfolio at September 30, 2008 and 80.5% at December 31, 2007.

Total mortgage-backed securities increased $3.50 billion to $18.07 billion at September 30, 2008 from $14.57 billion at December 31, 2007. This increase in total mortgage-backed securities resulted from $5.47 billion in purchases, all of which were issued by U.S. government-sponsored enterprises. The increase was partially offset by repayments of $1.83 billion. At September 30, 2008, variable-rate mortgage-backed securities accounted for 82.2% of our portfolio compared with 82.3% at December 31, 2007. The purchase of variable-rate mortgage-backed securities is a component of our interest rate risk management strategy. Since our primary lending activities are the origination and purchase of fixed-rate mortgage loans, the purchase of variable-rate mortgage-backed securities provides us with an asset that reduces our exposure to interest rate fluctuations.

Total investment securities decreased $865.3 million to $3.31 billion at September 30, 2008 as compared to $4.17 billion at December 31, 2007. Investment securities held to maturity decreased $1.36 billion partially offset by a $493.1 million increase in investment securities available for sale. The decrease in total investment securities was the result of calls of held to maturity and available for sale investment securities of $1.36 billion and $1.35 billion, respectively. The calls were partially offset by purchases of investment securities available for sale of $1.90 billion for the first nine months of 2008.

Total cash and cash equivalents increased $167.5 million to $385.0 million at September 30, 2008 as compared to $217.5 million at December 31, 2007. Accrued interest receivable increased $36.5 million, primarily due to increased balances in loans and investments. Other assets increased by $45.9 million primarily due to an increase in deferred tax assets reflecting the tax effect of the change in net unrealized gains and losses on securities available for sale.

Total liabilities increased $7.18 billion, or 18.0%, to $46.99 billion at September 30, 2008 from $39.81 billion at December 31, 2007. The increase in total liabilities primarily reflected a $5.14 billion increase in borrowed funds and a $2.14 billion increase in deposits.

Total deposits amounted to $17.29 billion at September 30, 2008 as compared to $15.15 billion at December 31, 2007. The increase in total deposits reflected a $1.17 billion increase in our time deposits, a $957.6 million increase in our money market checking accounts and a $40.8 million increase in our demand accounts. The increase in our time deposits and money market checking accounts reflects our competitive pricing, our branch expansion and customer preference for these types of deposits. At September 30, 2008 we had 125 branches as compared to 118 at September 30, 2007. In addition, we believe that the turmoil in the credit and equity markets has made deposit products in strong financial institutions desirable for many customers.

Borrowings amounted to $29.28 billion at September 30, 2008 as compared to $24.14 billion at December 31, 2007. The increase in borrowed funds was the result of $5.50 billion of new borrowings at a weighted-average rate of 3.12%, partially offset by repayments of $366.0 million with a weighted average rate of 3.93%. The new borrowings have final maturities of ten years and initial reprice dates of one to three years. The additional borrowed funds were used primarily to fund our asset growth. Borrowed funds at September 30, 2008 were comprised of $14.43 billion of Federal Home Loan Bank (“FHLB”) advances and $14.85 billion of securities sold under agreements to repurchase.

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 a carrying value of approximately $114.4 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 agreement. If full recovery of the collateral does not occur, we will be pursuing a customer claim against the Lehman Brothers, Inc. estate for the $14.4 million difference between the carrying value of the securities and the amount of the underlying borrowings. 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.

Due to brokers amounted to $158.6 million at September 30, 2008 as compared to $281.9 million at December 31, 2007. Due to brokers at September 30, 2008 represents securities purchased in the third quarter of 2008 with settlement dates in the fourth quarter of 2008. Other liabilities increased to $267.5 million at September 30, 2008 as compared to $236.4 million at December 31, 2007. The increase is primarily the result of an increase in accrued interest payable on borrowings of $18.6 million.

Total shareholders’ equity increased $174.8 million to $4.79 billion at September 30, 2008 from $4.61 billion at December 31, 2007. The increase was primarily due to net income of $321.3 million for the nine months ended September 30, 2008, partially offset by cash dividends paid to common shareholders of $154.8 million.

As of September 30, 2008, 54,973,550 shares were available for repurchase under our existing stock repurchase program. During the first nine months of 2008, we repurchased 224,262 shares of our outstanding common stock at a total cost of $3.6 million as compared to 36.7 million shares repurchased during the same period in 2007 at a total cost of $491.3 million. We repurchased fewer shares in the first nine months of 2008 because we were able to leverage our capital more effectively by growing our balance sheet as the yield curve became steeper.

The accumulated other comprehensive loss of $18.5 million at September 30, 2008 includes a $15.3 million after-tax net unrealized loss on securities available for sale ($25.9 million pre-tax). We invest primarily in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, as well as other securities issued by U.S. government–sponsored enterprises. We do not purchase unrated or private label mortgage-backed securities or other higher risk securities such as those backed by sub-prime loans. In addition, we do not own any common or preferred stock issued by Fannie Mae or Freddie Mac. The unrealized loss in the available for sale portfolio at September 30, 2008 was caused by increases in market yields subsequent to purchase and is not attributable to credit quality concerns. 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. Because the Company has the intent and the ability to hold securities with unrealized losses until a market price recovery (which, for debt securities may be until maturity), the Company did not consider these securities to be other-than-temporarily impaired at September 30, 2008.

At September 30, 2008, our shareholders’ equity to asset ratio was 9.24%. 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 $9.85 at September 30, 2008 as compared to $9.55 at December 31, 2007. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders’ equity, was $9.52 as of September 30, 2008 and $9.22 at December 31, 2007.

Comparison of Operating Results for the Three Months Ended September 30, 2008 and 2007

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, 2008 and 2007. 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 accreted or amortized to interest income.

		For the Three Months Ended September 30,
		2008												2007
										Average												Average
		Average								Yield/				Average								Yield/
		Balance				Interest				Cost				Balance				Interest				Cost
		(Dollars in thousands)
Assets:
Interest-earnings assets:
First mortgage loans, net (1)		$	27,431,258			$	394,748				5.76	%		$	21,990,493			$	313,943				5.71	%
Consumer and other loans			418,760				6,245				5.97				432,061				7,107				6.58
Federal funds sold			181,122				815				1.79				271,404				3,382				4.94
Mortgage-backed securities at amortized cost			17,288,478				225,300				5.21				11,617,722				151,144				5.20
Federal Home Loan Bank stock			827,393				12,510				6.05				623,693				10,616				6.81
Investment securities, at amortized cost			3,373,018				41,699				4.95				5,179,482				62,011				4.79
Total interest-earning assets			49,520,029				681,317				5.50				40,114,855				548,203				5.47
Noninterest-earnings assets			769,038												617,794
Total Assets		$	50,289,067											$	40,732,649
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Savings accounts		$	727,060				1,378				0.75			$	766,928				1,457				0.75
Interest-bearing transaction accounts			1,609,380				12,248				3.03				1,715,934				14,538				3.36
Money market accounts			2,484,464				20,112				3.22				1,264,556				13,436				4.22
Time deposits			11,435,317				100,245				3.49				10,099,706				125,624				4.93
Total interest-bearing deposits			16,256,221				133,983				3.28				13,847,124				155,055				4.44
Repurchase agreements			14,046,628				144,769				4.10				10,948,609				116,888				4.24
Federal Home Loan Bank of New York advances			14,326,630				147,487				4.10				10,547,826				114,044				4.29
Total borrowed funds			28,373,258				292,256				4.10				21,496,435				230,932				4.26
Total interest-bearing liabilities			44,629,479				426,239				3.80				35,343,559				385,987				4.33
Noninterest-bearing liabilities:
Noninterest-bearing deposits			587,553												529,775
Other noninterest-bearing liabilities			284,512												214,543
Total noninterest-bearing liabilities			872,065												744,318
Total liabilities			45,501,544												36,087,877
Shareholders’ equity			4,787,523												4,644,772
Total Liabilities and Shareholders’ Equity		$	50,289,067											$	40,732,649
Net interest income/net interest rate spread (2)						$	255,078				1.70							$	162,216				1.14
Net interest-earning assets/net interest margin (3)		$	4,890,550								2.08	%		$	4,771,296								1.65	%
Ratio of interest-earning assets to interest-bearing liabilities											1.11	x											1.13	x

General. Net income was $121.9 million for the third quarter of 2008, an increase of $47.5 million, or 63.8%, compared with net income of $74.4 million for the third quarter of 2007. Basic and diluted earnings per common share were both $0.25 for the third quarter of 2008 as compared to $0.15 for both basic and diluted earnings per share for the third quarter of 2007. For the three months ended September 30, 2008, our annualized return on average shareholders’ equity was 10.19%, compared with 6.41% for the comparable period in 2007. Our annualized return on average assets for the third quarter of 2008 was 0.97% as compared to 0.73% for the third quarter of 2007. The increase in the annualized return on average equity and assets is primarily due to the increase in net income during the third quarter of 2008.

Interest and Dividend Income. Total interest and dividend income for the third quarter of 2008 increased $133.1 million, or 24.3%, to $681.3 million as compared to $548.2 million for the third quarter of 2007. The increase in total interest and dividend income was primarily due to a $9.41 billion, or 23.5%, increase in the average balance of total interest-earning assets to $49.52 billion for the third quarter of 2008 as compared to $40.11 billion for the third quarter of 2007. The increase in interest and dividend income was also partially due to an increase of 3 basis points in the annualized weighted-average yield on total interest-earning assets to 5.50% for the quarter ended September 30, 2008 from 5.47% for the comparable period in 2007.

Interest on first mortgage loans increased $80.8 million to $394.7 million for the third quarter of 2008 as compared to $313.9 million for the same period in 2007. This was primarily due to a $5.44 billion increase in the average balance of first mortgage loans to $27.43 billion for the third quarter of 2008 as compared to $21.99 billion for the third quarter of 2007. This increase reflects our continued emphasis on the growth of our mortgage loan portfolio. The increase in first mortgage loan income was also due to a 5 basis point increase in the weighted-average yield to 5.76%. Notwithstanding the decrease in long-term market interest rates noted above, competitive mortgage rates have remained at a wider spread relative to U.S. Treasury securities resulting in higher yields on mortgage loans.

Interest on consumer and other loans decreased to $6.2 million for the third quarter of 2008 from $7.1 million for the third quarter of 2007. The average balance of consumer and other loans decreased $13.3 million to $418.8 million for the third quarter of 2008 as compared to $432.1 million for the third quarter of 2007 and the average yield earned decreased 61 basis points to 5.97% as compared to 6.58% for the same respective periods.

Interest on mortgage-backed securities increased $74.2 million to $225.3 million for the third quarter of 2008 as compared to $151.1 million for the third quarter of 2007. This increase was due primarily to a $5.67 billion increase in the average balance of mortgage-backed securities to $17.29 billion during the third quarter of 2008 as compared to $11.62 billion during the third quarter of 2007. The weighted-average yield on mortgage-backed securities increased slightly to 5.21% for the quarter ended September 30, 2008 as compared to 5.20% for the same quarter in 2007.

The increases in the average balances of mortgage-backed securities were due to purchases of variable-rate mortgage-backed securities as part of our interest rate risk management strategy. Since our primary lending activities are the origination and purchase 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 while providing a source of cash flow from monthly principal and interest payments. The increase in the weighted average yields on mortgage-backed securities is a result of the purchase of new securities when market interest rates were higher than the yield earned on the existing portfolio.

Interest on investment securities decreased $20.3 million to $41.7 million during the third quarter of 2008 as compared to $62.0 million for the third quarter of 2007. This decrease was due primarily to a $1.81

billion decrease in the average balance of investment securities to $3.37 billion. The decrease in the average balance of investment securities was due to increased call activity as a result of the decrease in shorter-term market interest rates during the second half of 2007 and first nine months of 2008. The average yield on investment securities increased 16 basis points to 4.95%.

Dividends on FHLB stock increased $1.9 million or 17.9% to $12.5 million for the third quarter of 2008 as compared to $10.6 million for the third quarter of 2007. This increase was due to a $203.7 million increase in the average balance to $827.4 million for the third quarter of 2008 as compared to $623.7 million for the same quarter in 2007. The increase was partially offset by a 76 basis point decrease in the average yield to 6.05% as compared to 6.81% for the same period last year.

In October 2008, the FHLB declared a regular quarterly dividend of 3.50% as compared to a 6.50% dividend in the third quarter of 2008. As a result of the reduced dividend yield, we recorded dividend income on FHLB stock of $7.3 million in the fourth quarter of 2008 as compared to $12.5 million in the third quarter of 2008. At the present time, we can not determine the future amount of dividends that the FHLB will pay or the timing of any changes in the dividend yield.

Interest Expense. Total interest expense for the quarter ended September 30, 2008 increased $40.2 million, or 10.4%, to $426.2 million as compared to $386.0 million for the quarter ended September 30, 2007. This increase was primarily due to a $9.29 billion, or 26.3%, increase in the average balance of total interest-bearing liabilities to $44.63 billion for the quarter ended September 30, 2008 compared with $35.34 billion for the third quarter of 2007. This increase in interest-bearing liabilities was used to fund asset growth. The increase in the average balance of total interest-bearing liabilities was partially offset by a 53 basis point decrease in the weighted-average cost of total interest-bearing liabilities to 3.80% for the quarter ended September 30, 2008 compared with 4.33% for the quarter ended September 30, 2007.

Interest expense on our time deposit accounts decreased $25.4 million to $100.2 million for the third quarter of 2008 as compared to $125.6 million for the third quarter of 2007. This decrease was due to a decrease in the annualized weighted-average cost of 144 basis points to 3.49% for the third quarter of 2008 as compared to 4.93% for the third quarter of 2007. This decrease was partially offset by a $1.34 billion increase in the average balance of time deposit accounts to $11.44 billion from $10.10 billion for the third quarter of 2007. Interest expense on money market accounts increased $6.7 million to $20.1 million for the third quarter of 2008 as compared to $13.4 million for the same quarter in 2007. This increase was due to a $1.22 billion increase in the average balance to $2.48 billion for the third quarter of 2008 as compared to $1.26 billion for the third quarter of 2007. This increase was partially offset by a 100 basis point decrease in the annualized weighted-average cost to 3.22% for the third quarter of 2008. The increase in our time deposits and money market checking accounts reflects our competitive pricing, our branch expansion and customer preference for short-term deposit products. In addition, we believe the turmoil in the credit and equity markets has made deposit products in strong financial institutions desirable for many customers.

Interest expense on our interest-bearing transaction accounts decreased $2.3 million to $12.2 million for the third quarter of 2008 as compared to $14.5 million for the third quarter of 2007. This decrease was primarily due to a $106.6 million decrease in the average balance to $1.61 billion, and a 33 basis point decrease in the annualized weighted average cost to 3.03%. The decrease in our interest-bearing transaction accounts reflected customer preferences for higher-yielding time and money market deposit products.

Interest expense on borrowed funds increased $61.4 million to $292.3 million for the third quarter of 2008 as compared to $230.9 million for the third quarter of 2007 primarily due to a $6.88 billion increase in the

average balance of borrowed funds to $28.37 billion. This increase was partially offset by a decrease of 16 basis points in the weighted average cost of borrowed funds to 4.10% for the third quarter of 2008 as compared to 4.26% for the third quarter of 2007.

Borrowed funds were used to fund a significant portion of the growth in interest-earning assets. The decrease in the average cost of borrowings for the third quarter of 2008 reflected new borrowings in 2008, when market interest rates were lower than existing borrowings, and borrowings that were called. Substantially all of our borrowings are callable quarterly at the discretion of the lender after an initial non-call period of one to five years with a final maturity of ten years. At September 30, 2008, we had $19.43 billion of borrowed funds with a weighted-average rate of 4.25% and call dates within one year. We anticipate that none of the borrowings will be called assuming current market interest rates remain stable.

Net Interest Income. Net interest income increased $92.9 million, or 57.3%, to $255.1 million for the third quarter of 2008 compared with $162.2 million for the third quarter of 2007. Our net interest rate spread increased 56 basis points to 1.70% for the third quarter of 2008 from 1.14% for the comparable period in 2007. Our net interest margin increased 43 basis points to 2.08% for the third quarter of 2008 from 1.65% for the comparable period in 2007.

The increase in our net interest margin and net interest rate spread was primarily due to the 53 basis point decrease in the weighted-average cost of interest-bearing liabilities compared with the weighted-average yield of interest-earning assets which increased by 3 basis points for the quarter ended September 30, 2008. The decreases in market interest rates during the second half of 2007 and the first nine months of 2008 allowed us to lower the cost of our interest-bearing liabilities, primarily our deposits, while mortgage yields remained stable. As a result, our net interest rate margin and net interest rate spread increased during the third quarter of 2008.

Provision for Loan Losses. The provision for loan losses amounted to $5.0 million for the quarter ended September 30, 2008 as compared to $2.0 million for the quarter ended September 30, 2007. The allowance for loan losses amounted to $42.6 million and $34.7 million at September 30, 2008 and December 31, 2007, respectively. We recorded our provision for loan losses during the first nine months of 2008 based on our allowance for loan losses methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, which increased to $142.1 million at September 30, 2008 as compared to $79.4 million at December 31, 2007. The higher provision for loan losses in the third quarter of 2008 reflects the risks inherent in our loan portfolio due to weakening real estate markets, the increases in non-performing loans and net charge-offs and the overall growth in the loan portfolio. See “Critical Accounting Policies – Allowance for Loan Losses.”

Due to the homogeneous nature of our loan portfolio, our evaluation of the adequacy of our allowance for loan losses is performed substantially on a pooled basis. A component of our methodology includes assigning potential loss factors to the payment status of multiple residential loan categories with the objective of assessing the potential risk inherent in each loan type. We also consider growth in the loan portfolio in our determination of the allowance for loan losses. These factors are periodically reviewed for appropriateness giving consideration to charge-off history, delinquency trends, the results of our foreclosed property transactions and market conditions. We use this systematic methodology as a tool, together with qualitative analysis performed by our Asset Quality Committee to estimate the allowance for loan losses. Other key factors we consider in this process are current real estate market conditions in geographic areas where our loans are located, changes in the trend of non-performing loans, the current state of the local and national economy, changes in interest rates, the results of our foreclosed property transactions and loan portfolio growth. Any one or a combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of provisions.

Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties. Our loan growth was primarily concentrated in one- to four-family mortgage loans with loan-to-value ratios of less than 80%. The average loan-to-value ratio of our 2008 originations was 60%. The value of the property used as collateral for our loans is dependent upon local market conditions. As part of our estimation of the allowance for loan losses, we monitor changes in the values of homes in each market using indices published by various organizations. Based on our analysis of the data for the first nine months of 2008, we concluded that home values in the Northeast quadrant of the United States, where most of our lending activity occurs, deteriorated during 2007 and the first nine months of 2008 as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market. In addition, general economic conditions in the United States have also worsened as evidenced by slower economic growth. We considered these trends in economic and market conditions in determining the provision for loan losses also taking into account the continued growth of our loan portfolio.

We define the Northeast quadrant of the country generally as those states that are east of the Mississippi River and as far south as South Carolina. At September 30, 2008, approximately 69% of our total loans are in the New York metropolitan area. Additionally, the states of Virginia, Illinois, Maryland, Massachusetts and Michigan accounted for 6%, 4%, 4%, 3% and 2%, respectively of total loans. The remaining 12% of the loan portfolio is secured by real estate primarily in the remainder of the Northeast quadrant of the United States. With respect to our non-performing loans, approximately 64% are in the New York metropolitan area and 4%, 4%, 4%, 2% and 6% are located in the states of Virginia, Illinois, Maryland, Massachusetts and Michigan, respectively. The remaining 16% of our non-performing loans are secured by real estate primarily in the remainder of the Northeast quadrant of the United States.

The last 12 months have been highlighted by disruption and volatility in the financial and capital marketplaces and a significant weakening of economic conditions. The financial, capital and credit markets are experiencing significant adverse conditions. These conditions are attributable to a variety of factors, including the fallout associated with the sub-prime mortgage market. One aspect of this fallout has been significant deterioration in the activity of the secondary residential mortgage market and the lack of available liquidity. The disruptions have been exacerbated by the acceleration of the decline of the real estate and housing market. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. We do not participate in sub-prime mortgage lending which has been the riskiest sector of the residential housing market. We determined the provision for loan losses for the third quarter of 2008 based on our evaluation of the foregoing factors, the growth of the loan portfolio and the recent increases in non-performing loans and net loan charge-offs. As always, we continue to adhere to prudent underwriting standards.

At September 30, 2008, first mortgage loans secured by one-to four-family properties accounted for 98.3% of total loans. Fixed-rate mortgage loans represent 76.6% of our first mortgage loans. Compared to adjustable-rate loans, fixed-rate loans possess less inherent credit risk since loan payments do not change in response to changes in interest rates. In addition, we do not originate or purchase loans with payment options, negative amortization loans or sub-prime loans.

Non-performing loans amounted to $142.1 million at September 30, 2008 as compared to $79.4 million at December 31, 2007. Non-performing loans at September 30, 2008 included $134.8 million of one- to four-family first mortgage loans as compared to $75.8 million at December 31, 2007. The ratio of non-performing loans to total loans was 0.50% at September 30, 2008 compared with 0.33% at December 31, 2007. The allowance for loan losses as a percent of total loans and non-performing loans was 0.15% and

29.99%, respectively at September 30, 2008 as compared to 0.14% and 43.75%, respectively at December 31, 2007. Loans delinquent 60 to 89 days amounted to $57.5 million at September 30, 2008 as compared to $40.6 million at December 31, 2007. Foreclosed real estate amounted to $9.5 million at September 30, 2008 as compared to $4.1 million at December 31, 2007. As a result of our underwriting policies, our borrowers typically have a significant amount of equity, at the time of origination, in the underlying real estate that we use as collateral for our loans. At September 30, 2008, our non-performing mortgage loans had an average loan-to-value ratio of approximately 66% based on the appraised value at the time of origination. Net charge-offs amounted to $1.4 million for the third quarter of 2008 as compared to net charge-offs of $606,000 for the comparable period in 2007. The increase in charge-offs was related to non-performing residential loans for which current appraised values indicated declines in the value of the underlying collateral.

At September 30, 2008 and December 31, 2007, commercial and construction loans evaluated for impairment in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” amounted to $6.7 million and $3.5 million, respectively. Based on this evaluation, we established an allowance for loan losses of $585,000 for loans classified as impaired at September 30, 2008 compared to $268,000 at December 31, 2007.

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. However, the markets in which we lend have experienced significant declines in real estate values which we have taken into account in evaluating our allowance for loan losses. No assurance can be given in any particular case that our loan-to-value ratios will provide full protection in the event of borrower default. 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 was $2.2 million for the third quarter of 2008 compared with $2.0 million for the third quarter of 2007. The increase in non-interest income is primarily due to an increase in service charges on deposits as a result of deposit account growth.

Non-Interest Expense. Total non-interest expense increased $8.2 million, or 19.9%, to $49.4 million for the third quarter of 2008 from $41.2 million for the third quarter of 2007. The increase is primarily due to a $5.5 million increase in compensation and employee benefits expense, a $2.3 million increase in other non-interest expense and a $540,000 increase in Federal deposit insurance expense. The increase in compensation and employee benefits expense reflected a $1.9 million increase in expense related to our employee stock ownership plan primarily as a result of increases in our stock price, a $1.9 million increase in compensation costs, due primarily to normal increases in salary and additional full time employees primarily for our new branches, and a $792,000 increase in stock option plan expense. At September 30, 2008, we had 1,406 full-time equivalent employees as compared to 1,321 at September 30, 2007. The increase in stock option plan expense is due to the grant of options during the first nine months of 2008. The increase in other non-interest expense was due primarily to the growth of our branch network and incremental costs related to our increased retail loan production during 2008. Included in other non-interest expense for the third quarter of 2008 were write-downs and net losses on the sale of foreclosed real estate of $516,000 compared with net gains on the sale of foreclosed real estate of $31,000 for the comparable period in 2007.

As a result of the recent failures of a number of banks and thrifts, there have been significant losses incurred by the Deposit Insurance Fund (the “DIF”) of the FDIC, resulting in a decline in the DIF reserve ratio to 1.01% of estimated insured deposits as of June 30, 2008, which is significantly below the minimum reserve ratio of 1.15%. In response, on October 7, 2008, the FDIC adopted a restoration plan and issued a notice of proposed rulemaking and request for comment which would raise the assessment rate schedule across all four risk categories into which the FDIC assigns insured institutions by seven basis points (annualized) of insured deposits beginning on January 1, 2009. For Hudson City Savings, the

2009 initial base assessment rate would be twelve basis points. Beginning with the second quarter of 2009, the initial base assessment rates will range from 10 to 45 basis points depending on an institution’s risk category, with adjustments resulting in increased assessment rates for institutions with a significant reliance on secured liabilities and brokered deposits. For Hudson City Savings, the total assessment rate would be 18 basis points. For a further discussion of the FDIC restoration plan and proposal, see Part II, “Item 1A — Risk Factors.”

Our efficiency ratio was 19.21% for the three months ended September 30, 2008 as compared to 25.07% for the three months ended September 30, 2007. Our annualized ratio of non-interest expense to average total assets for the third quarter of 2008 was 0.39% as compared to 0.40% for the third quarter of 2007.

Income Taxes. Income tax expense amounted to $80.9 million for the three months ended September 30, 2008 compared with $46.6 million for the corresponding period in 2007. Our effective tax rate for the third quarter of 2008 was 39.90% compared with 38.52% for the third quarter of 2007.

Comparison of Operating Results for the Nine Months Ended September 30, 2008 and 2007

Average Balance Sheet. The following table presents the average balance sheets, average yields and costs and certain other information for the nine months ended September 30, 2008 and 2007. 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 accreted or amortized to interest income.

		For the Nine Months Ended September 30,
		2008												2007
										Average												Average
		Average								Yield/				Average								Yield/
		Balance				Interest				Cost				Balance				Interest				Cost
		(Dollars in thousands)
Assets:
Interest-earnings assets:
First mortgage loans, net (1)		$	25,742,402			$	1,110,121				5.75	%		$	20,492,465			$	873,397				5.68	%
Consumer and other loans			426,864				19,978				6.24				428,054				21,077				6.57
Federal funds sold			236,479				4,093				2.31				215,706				8,275				5.13
Mortgage-backed securities at amortized cost			16,105,296				632,226				5.23				10,704,116				411,320				5.12
Federal Home Loan Bank stock			774,729				40,729				7.01				555,343				26,835				6.44
Investment securities, at amortized cost			3,681,122				134,118				4.86				5,567,410				198,440				4.75
Total interest-earning assets			46,966,892				1,941,265				5.51				37,963,094				1,539,344				5.41
Noninterest-earnings assets			775,956												603,535
Total Assets		$	47,742,848											$	38,566,629
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Savings accounts		$	731,732				4,132				0.75			$	785,015				4,925				0.84
Interest-bearing transaction accounts			1,590,125				36,937				3.10				1,868,032				47,054				3.37
Money market accounts			2,107,569				52,577				3.33				1,074,245				31,428				3.91
Time deposits			11,270,239				339,752				4.03				9,758,275				360,043				4.93
Total interest-bearing deposits			15,699,665				433,398				3.69				13,485,567				443,450				4.40
Repurchase agreements			12,986,768				407,630				4.19				9,758,275				304,505				4.17
Federal Home Loan Bank of New York advances			13,468,861				418,712				4.15				9,811,172				315,061				4.29
Total borrowed funds			26,455,629				826,342				4.17				19,569,447				619,566				4.23
Total interest-bearing liabilities			42,155,294				1,259,740				3.99				33,055,014				1,063,016				4.30
Noninterest-bearing liabilities:
Noninterest-bearing deposits			562,141												514,903
Other noninterest-bearing liabilities			281,212												213,546
Total noninterest-bearing liabilities			843,353												728,449
Total liabilities			42,998,647												33,783,463
Shareholders’ equity			4,744,201												4,783,166
Total Liabilities and Shareholders’ Equity		$	47,742,848											$	38,566,629
Net interest income/net interest rate spread (2)						$	681,525				1.52							$	476,328				1.11
Net interest-earning assets/net interest margin (3)		$	4,811,598								1.93	%		$	4,908,080								1.66	%
Ratio of interest-earning assets to interest-bearing liabilities											1.11	x											1.15	x