Executive Summary

During the first six months of 2012, we continued to focus on our traditional consumer-oriented business model through the origination of one- to four-family mortgage loans. We have traditionally funded this loan production with customer deposits and borrowings. Market interest rates remained at historically low levels during 2011 and during the first half of 2012 and, as a result, we continued to reduce the size of our balance sheet. We intend to restrain any future growth until the yields available on mortgage-related assets increase and make growth more profitable.

The extraordinarily low market interest rates combined with the GSEs participation in the mortgage market make it difficult for us to profitably grow our business in the same manner as we have in the past. Accordingly, we have been developing a variety of strategies to help us adapt to the new environment in which we operate. One of those strategies is to extend our core mortgage lending business by diversifying our loan production channels and revenue sources. We have been a residential mortgage lender since our inception in 1868. Historically, we have kept all of our loans on our balance sheet. While we will continue to offer loans to keep in our portfolio, we will also begin to offer residential mortgage loans that are eligible for sale in the secondary market. We may either retain or release servicing on these loans. We believe this will enable us to offer rates that are typically lower than we can offer for a portfolio product and capture more customer relationships.

Another strategy is to add commercial mortgage loans to our balance sheet. These mortgages will be on properties in our existing market. Initially, we intend to participate in syndicated commercial real estate and multi-family mortgage loans as we build the capacity to grow organically in this market through originations. These types of loans are typically shorter-term than our residential mortgages and therefore help to balance our interest rate and liquidity risk profile. In addition, we can offer commercial real estate customers deposit products that we believe will strengthen relationships and increase the amount and types of deposit accounts on our balance sheet.

These initiatives are a natural extension of our business and we expect to implement such initiatives in 2013. They will require the addition of staff, including business unit leaders, as well as the enhancement of existing systems. However, we do not expect that these costs will have a material impact on our results of operations in 2012.

The FRB recently issued notices of proposed rulemaking that will subject all savings and loan holding companies, including Hudson City Bancorp, to consolidated capital requirements. These proposed rules also revise the quantity and quality of required minimum risk-based and leverage capital requirements, consistent with the Reform Act and the Basel III capital standards, and revise the FRB's rules for calculating risk-weighted assets to enhance their risk sensitivity. The proposed rules provide for various phase-in periods over the next several years. We are continuing to review the impact the Reform Act, Basel III and the related proposed rule-making will have on our business, financial condition and results of operations.

Our results of operations depend primarily on net interest income, which in part, is a direct result of the market interest rate environment. Net interest income is the difference between the interest income we earn on our interest-earning assets, primarily mortgage loans, mortgage-backed securities and investment securities, and the interest we pay on our interest-bearing liabilities, primarily time deposits, interest-bearing transaction accounts and borrowed funds. Net interest income is affected by the shape of the market yield curve, the timing of the placement and repricing of interest-earning assets and interest-bearing liabilities on our balance sheet, the prepayment rate on our mortgage-related assets and the puts of our borrowings. Our results of operations may also be affected significantly by national and local economic and competitive conditions, particularly those with respect to changes in market interest rates, credit quality, government policies and actions of regulatory authorities. Our results are also affected by the market price of our stock, as the expense of our employee stock ownership plan is related to the current price of our common stock.

During the first quarter of 2011, the Bank completed a restructuring of its balance sheet (referred to as the "Restructuring Transaction") which involved the extinguishment of $12.5 billion of structured putable borrowings with an average cost of 3.56%. The extinguishment of the borrowings was funded by the sale of $8.66 billion of securities with an average yield of 3.20% and $5.00 billion of new short-term fixed-maturity borrowings with an average cost of 0.66%. Interest rates continued to decline in 2011 which resulted in increased prepayments on our mortgage-related assets and calls of our investment securities. During the fourth quarter of 2011, the Bank used the excess liquidity provided by the prepayments of mortgage-related assets and calls of investment securities to extinguish $4.3 billion of structured putable borrowings with a weighted average cost of 4.21%. The Restructuring Transaction and the extinguishment of debt during the fourth quarter of 2011, (collectively referred to as the "Transactions"), reduced after-tax earnings by $1.07 billion in 2011.

The Transactions were part of our ongoing strategy to reduce interest rate risk and realign our funding mix and should improve our net interest margin from the levels we would have otherwise experienced. We decided to complete the Transactions because of the effect that recent market events, including the unprecedented involvement of the U.S. government and the GSEs in the mortgage market and the protracted period of historically low market interest rates had on our balance sheet. The extended low interest rate environment caused accelerated prepayment speeds on our mortgage-related assets and calls of our investment securities resulting in the reinvestment of these funds at the current low market interest rates. These lower-yielding assets and higher-cost borrowings, which did not reprice during this extended low rate environment, caused margin compression and heightened interest rate risk concerns for us.

The Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the "FOMC") noted that the economy has been expanding moderately during the first six months of 2012. However, growth in employment has slowed in recent months, and the unemployment rate remains at elevated levels. The FOMC noted that business fixed investment has continued to expand and household spending appears to be rising at a slower pace than earlier in the year while the housing sector remains depressed. The national unemployment rate was 8.2% during June 2012 representing a slight decline from 8.5% in December 2011. The FOMC decided to maintain the overnight lending rate at zero to 0.25% during the second quarter of 2012. As a result, market interest rates have remained at low levels, and consequently, the yields on our mortgage-related assets have decreased during the first six months of 2012.

In addition, the Federal Reserve program "Operation Twist", which was set to expire at the end of June, has been extended until the end of the year. This program consists of the purchase of Treasury securities with remaining maturities of 6 to 30 years funded by the sale of an equal amount of Treasury securities with remaining maturities of 3 years or less. The extension of this program will continue to put downward pressure on longer-term interest rates.

Net interest income decreased $48.6 million, or 17.8%, to $224.3 million for the second quarter of 2012 as compared to $272.9 million for the second quarter of 2011. Our interest rate spread decreased slightly to 1.91% for the second quarter of 2012 as compared to 1.95% for the first quarter of 2012 and 1.94% for the second quarter of 2011. Our net interest margin was 2.12% for the second quarter of 2012 as compared to 2.15% for the linked first quarter of 2012 and 2.14% for the second quarter of 2011. The decrease in net interest income also reflects the overall decrease in interest-earning assets and interest-bearing liabilities as a result of the Transactions.

Net interest income decreased $70.9 million, or 13.4%, to $458.4 million for the first six months of 2012 as compared to $529.3 million for the first six months of 2011. Our interest rate spread increased 23 basis points to 1.94% for the six months ended June 30, 2012 as compared to 1.71% for the six months ended June 30, 2011. Our net interest margin increased 21 basis points to 2.13% as compared to 1.92% for the those same respective periods. The increase in our interest rate spread and net interest margin for the first six months of 2012 is primarily due to the effects of the Transactions.

Market interest rates on mortgage-related assets remained at near-historic lows primarily due to the FRB's program to purchase mortgage-backed securities to keep mortgage rates low and provide stimulus to the housing markets. In addition, over the past few years, we have faced increased competition for mortgage loans due to unprecedented involvement of the GSEs in the mortgage market as a result of the economic crisis. The GSEs involvement is also an attempt to provide stimulus to the housing markets and has caused the interest rates for the thirty year fixed rate mortgage loans that conform to the GSEs' guidelines for purchase to remain low. We originate such conforming loans and retain them in our portfolio. Further, the FOMC has decided to maintain the overnight lending rate at the current level of zero to 0.25% through late 2014 if recent economic conditions continue. We expect this adverse environment for portfolio lending to continue, with the likely result that we will continue to experience compression of our net interest margin. We expect that this compression in net interest margin, along with the reduction in the size of our balance sheet from the Transactions, will result in a reduction of net interest income for the remainder of 2012.

The provision for loan losses amounted to $25.0 million and $50.0 million for the three and six month periods ended June 30, 2012 as compared to $30.0 million and $70.0 million for the three and six month periods ended June 30, 2011. The decrease in our provision for loan losses during the second quarter of 2012 as compared to the same period in 2011 was due primarily to the overall declining trends in net charge-offs since September 30, 2010 and in the size of the loan portfolio since June 30, 2010. Non-performing loans, defined as non-accruing loans and accruing loans delinquent 90 days or more, amounted to $1.09 billion at June 30, 2012 compared with $1.02 billion at December 31, 2011. The ratio of non-performing loans to total loans was 3.88% at June 30, 2012 compared with 3.48% at December 31, 2011. The highly publicized foreclosure issues that have affected the nation's largest mortgage loan servicers have resulted in greater bank regulatory, court and state attorney general scrutiny. As a result, our foreclosure process and the time to complete a foreclosure have been delayed. We are now experiencing a time frame to repayment or foreclosure ranging from 30 to 36 months from the initial non-performing period. This protracted foreclosure process delays our ability to resolve non-performing loans through the sale of the underlying collateral and our ability to maximize any recoveries.

Total non-interest income was $2.9 million for the second quarter of 2012 as compared to $2.7 million for the same quarter in 2011. Non-interest income for the second quarter of 2012 is primarily made up of service fees and charges on deposit and loan accounts.

Total non-interest income was $5.7 million for the first six months of 2012 as compared to $107.9 million for the same period in 2011. Included in non-interest income for the first six months of 2011 were net gains on securities transactions of $102.5 million which resulted from the sale of $9.04 billion of securities available-for-sale. Substantially all of the proceeds from the sale of securities were used to pay off borrowings in the Restructuring Transaction. There were no securities sales for the six months ended June 30, 2012.

Total non-interest expense amounted to $83.6 million for the second quarter of 2012 as compared to $85.8 million for the second quarter of 2011. This decrease was due primarily to a $5.5 million decrease in Federal deposit insurance expense partially offset by increases of $512,000 in compensation and employee benefit costs, $513,000 in occupancy expense, and $2.2 million increase in other expense.

Total non-interest expense amounted to $175.2 million for the six months ended June 30, 2012 as compared to $1.33 billion for the six months ended June 30, 2011. Included in total non-interest expense for the first six months of 2011 was a $1.17 billion loss on the extinguishment of debt related to the Restructuring Transaction.

Net loans amounted to $27.98 billion at June 30, 2012 as compared to $29.14 billion at December 31, 2011. During the first six months of 2012, our loan production amounted to $2.53 billion as compared to $2.99 billion for the six months ended June 30, 2011. Loan production was offset by principal repayments of $3.59 billion in the first six months of 2012, as compared to principal repayments of $3.46 billion for the first six months of 2011.

Total mortgage-backed securities decreased $419.1 million to $12.87 billion at June 30, 2012 from $13.29 billion at December 31, 2011. The decrease in mortgage-backed securities reflected repayments of $1.74 billion, partially offset by purchases of $1.32 billion of mortgage-backed securities issued by GSEs.

Investment securities decreased $89.8 million to $456.6 million at June 30, 2012 from $546.4 million at December 31, 2011 due to calls of $500.0 million during the six months ended June 30, 2012. The proceeds from these calls were used to purchase $407.8 million of corporate bonds.

Total deposits amounted to $24.64 billion at June 30, 2012 as compared to $25.51 billion at December 31, 2011. The decrease in deposits was due to planned reductions in our deposit rates to curtail deposit growth at this time of excess liquidity and limited investment opportunities.

Borrowings amounted to $13.43 billion at June 30, 2012 as compared to $15.08 billion at December 31, 2011. The decrease in borrowings was due to the maturity of short-term borrowings utilized as part of the Restructuring Transaction.

The Bank is currently subject to the Bank MOU. In accordance with the Bank MOU, the Bank has adopted and has implemented enhanced operating policies and procedures, that will enable us to continue to (a) reduce our level of interest rate risk, (b) reduce our funding concentration, (c) diversify our funding sources, (d) enhance our liquidity position, (e) monitor and manage loan modifications and (f) maintain our capital position in accordance with our existing capital plan. In addition, we agreed to develop a written strategic plan for the Bank which establishes various objectives, including, but not limited to, objectives for the Bank's overall risk profile, earnings performance, growth and balance sheet mix and to enhance our enterprise risk management program.

The Company is currently subject to the Company MOU. In accordance with the Company MOU, the Company must, among other things support the Bank's compliance with the Bank MOU. The Company MOU also requires the Company to: (a) obtain approval from the FRB prior to receiving a capital distribution from the Bank or declaring a dividend to shareholders, (b) obtain approval from the FRB prior to repurchasing or redeeming any Company stock or incurring any debt with a maturity of greater than one year and (c) submit a comprehensive Capital Plan and a comprehensive Earnings Plan to the FRB. These agreements will remain in effect until modified or terminated by the OCC (with respect to the Bank MOU) and the FRB (with respect to the Company MOU).

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Total assets decreased $1.77 billion, or 3.9%, to $43.59 billion at June 30, 2012 from $45.36 billion at December 31, 2011. The decrease in total assets reflected a $1.16 billion decrease in net loans, a $419.1 million decrease in total mortgage-backed securities, a $97.8 million decrease in FHLB stock and an $89.8 million decrease in investment securities.

Net loans amounted to $27.98 billion at June 30, 2012 as compared to $29.14 billion at December 31, 2011. During the first six months of 2012, our loan production amounted to $2.53 billion as compared to $2.99 billion for the same period in 2011. For the first six months of 2012, loan production was offset by principal repayments of $3.59 billion, as compared to principal repayments of $3.46 billion for the first six months of 2011.

Loan production declined during the first six months of 2012 due to a decline in loan originations which reflects our low appetite for adding long-term fixed rate loans to our portfolio in the current low market interest rate environment. The decrease in net loans was also due to continued elevated levels of refinancing activity caused by low market interest rates.

Our first mortgage loan production during the first six months of 2012 was substantially all in one- to four-family mortgage loans. Approximately 58.9% of mortgage loan originations for the first six months of 2012 were variable-rate loans as compared to approximately 41.0% for the corresponding period in 2011. Fixed-rate mortgage loans accounted for 64.3% of our first mortgage loan portfolio at June 30, 2012 as compared to 66.8% at December 31, 2011.

Our ALL amounted to $287.9 million at June 30, 2012 and $273.8 million at December 31, 2011. Non-performing loans amounted to $1.09 billion, or 3.88%, of total loans at June 30, 2012 as compared to $1.02 billion, or 3.48% of total loans at December 31, 2011.

Total mortgage-backed securities decreased $419.1 million to $12.87 billion at June 30, 2012 from $13.29 billion at December 31, 2011. The decrease in mortgage-backed securities reflected repayments of $1.74 billion, partially offset by purchases of $1.32 billion of mortgage-backed securities issued by GSEs. At June 30, 2012, variable-rate mortgage-backed securities accounted for 85.2% of our portfolio compared with 84.1% at December 31, 2011.

Total investment securities decreased $89.8 million, or 16.4%, to $456.6 million at June 30, 2012 as compared to $546.4 million at December 31, 2011. The decrease in investment securities is primarily due to calls of $500.0 million of investment securities partially offset by the purchase of corporate bonds in the amount of $407.8 million.

Federal Home Loan Bank of New York ("FHLB") stock decreased $97.9 million to $412.7 million at June 30, 2012 as compared to $510.6 million at December 31, 2011. The decrease in the balance of FHLB stock was primarily due to mandatory redemptions of stock due to a decrease in the amount of borrowings outstanding with the FHLB.

Total cash and cash equivalents increased $51.3 million to $805.4 million at June 30, 2012 as compared to $754.1 million at December 31, 2011. Other assets decreased $40.0 million to $689.2 million at June 30, 2012 from $729.2 million at December 31, 2011. The decrease in other assets is due to a decrease in current and deferred taxes of $40.9 million primarily due to accrued tax expense related to earnings during the first six months of 2012.

Total liabilities decreased $1.87 billion, or 4.6%, to $38.93 billion at June 30, 2012 from $40.80 billion at December 31, 2011. The decrease in total liabilities primarily reflected a $1.65 billion decrease in borrowed funds and a decrease in total deposits of $863.2 million.

Total deposits decreased $863.2 million, or 3.4%, to $24.64 billion at June 30, 2012 from $25.51 billion at December 31, 2011. The decrease in total deposits reflected a $932.7 million decrease in our money market accounts and a decrease of $239.0 million in our time deposits, partially offset by an increase in interest-bearing transaction and savings accounts of $250.6 million and $45.0 million, respectively. The decrease in our money market and time deposit accounts is primarily due to planned reductions in our deposit rates to curtail deposit growth at this time of excess liquidity and limited investment opportunities. We had 135 branches at both June 30, 2012 and December 31, 2011.

Borrowings decreased $1.65 billion, or 10.9%, to $13.43 billion at June 30, 2012 as compared to $15.08 billion at December 31, 2011. The decrease in borrowings was due to the maturity of short-term borrowings utilized as part of the Restructuring Transaction.

At June 30, 2012 and December 31, 2011 borrowings consisted of the following:

                                                 June 30, 2012                      December 31, 2011
                                                             Weighted                             Weighted
                                                             Average                              Average
                                          Principal            Rate            Principal            Rate
                                                                (Dollars in thousands)

Structured borrowings:
Quarterly put option                     $  3,325,000             4.40 %      $  3,325,000             4.40 %
One-time put option                         4,600,000             4.52           4,600,000             4.52

                                            7,925,000             4.47           7,925,000             4.47

Fixed-rate/fixed-maturity borrowings        5,500,000             3.92           7,150,000             3.21

Total borrowed funds                     $ 13,425,000             4.24 %      $ 15,075,000             3.87 %

At June 30, 2012, we had $2.68 billion of borrowed funds with put dates within one year. If interest rates were to decrease, or remain consistent with current rates, we believe these borrowings would probably not be put back and our average cost of existing borrowings would not decrease even as market interest rates decrease. Conversely, if interest rates increase above the market interest rate for similar borrowings, we believe these borrowings would likely be put back at their next put date and our cost to replace these borrowings would increase. However, we believe, given current market conditions, that the likelihood that a significant portion of these borrowings would be put back will not increase substantially unless interest rates were to increase by at least 300 basis points.

The Company had 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 ("SIPA"). Mortgage-backed securities with an amortized cost of approximately $114.1 million were pledged as collateral for these borrowings and we demanded the return of this collateral. The trustee for the SIPA liquidation of Lehman Brothers Inc. (the "Trustee") notified the Company in the fourth quarter of 2011 that it no longer holds these securities and considers our claim to be approximately $13.9 million representing the excess of the market value of the collateral over the $100

million repurchase price. While we dispute the Trustee's calculation of the claim, as a result of the Trustee's position, in the fourth quarter of 2011 we removed the mortgage-backed securities and the borrowings from our balance sheet and recorded the net amount as a receivable included in other assets (the "Net Claim"). While we intend to pursue full recovery of our Net Claim, during the fourth quarter of 2011 we established a reserve of $3.9 million against the receivable balance. There can be no assurances as to the amount of the final settlement of this transaction.

Due to brokers was $629.1 million at June 30, 2012 as compared to $0 at December 31, 2011. This increase represents securities purchased in the second quarter of 2012 with settlement dates in the third quarter of 2012.

Other liabilities increased $15.4 million to $228.1 million at June 30, 2012 from $212.7 million at December 31, 2011 due primarily to an increase in accrued FDIC assessments.

Total shareholders' equity increased $104.0 million to $4.66 billion at June 30, 2012 from $4.56 billion at December 31, 2011. The increase was primarily due to net income of $145.3 million for the six months ended June 30, 2012 and an increase in accumulated other comprehensive income of $26.6 million. The increase was partially offset by cash dividends paid to common shareholders of $79.4 million.

Accumulated other comprehensive income amounted to $66.3 million at June 30, 2012 and included a $114.2 million after-tax net unrealized gain on securities available for sale ($193.1 million pre-tax), partially offset by a $47.9 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans. The accumulated other comprehensive income of $39.7 million at December 31, 2011 included an $89.3 million after-tax net unrealized gain on securities available for sale ($150.9 million pre-tax), partially offset by a $49.6 million after-tax accumulated other comprehensive loss related to the funded status of our employee benefit plans.

As of June 30, 2012, there remained 50,123,550 shares that may be purchased under our existing stock repurchase programs. We did not repurchase any shares of our common stock during the first six months of 2012 pursuant to our repurchase programs. Pursuant to the Company MOU, any future share repurchases must be approved by the FRB. During the first six months of 2012, 62,579 shares were surrendered by employees for withholding taxes related to vesting stock awards. At June 30, 2012, our capital ratios were in excess of the applicable regulatory requirements to be considered well-capitalized. See "Liquidity and Capital Resources."

At June 30, 2012, our shareholders' equity to asset ratio was 10.70% compared with 10.05% at December 31, 2011. The ratio of average shareholders' equity to average assets was 10.49% for the six months ended June 30, 2012 as compared to 9.09% for the six months ended June 30, 2011. 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 $9.39 at June 30, 2012 and $9.20 at December 31, 2011. Our tangible book value per share, calculated by deducting goodwill and the core deposit intangible from shareholders' equity, was $9.08 as of June 30, 2012 and $8.89 at December 31, 2011.