##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K
 ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 (Mark One)x
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended: December 31, 2003o
    

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934For the transition period from __________________________ to _________________
  Commission File Number: 0-26001 Hudson City Bancorp, Inc. 
  Delaware
    
    22-3640393(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)West 80 Century RoadParamus, New Jersey
    
    07652(Address of Principal Executive Offices)
    
    (Zip Code)
 (201)967-1900 
  Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value 
  Indicate by check mark whether the registrant (1) has filed all
reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
           
No o Indicate by check mark if disclosure of delinquent filers pursuant to
Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements or any amendment to this Form 10-K. Yes o            
No x As of February 26, 2004, the registrant had 231,276,600 shares of
common
stock, $0.01 par value, issued and 189,607,711 shares outstanding. Of such
shares outstanding, 122,576,600 shares were held by Hudson City, MHC, the
registrants mutual holding company, and 67,031,111 shares were held by the
public and directors, officers and employees of the registrant. The aggregate
market value of voting stock held by non-affiliates of the registrant as of
June 30, 2003 was $1,382,445,000. This figure was based on the closing price
by the Nasdaq National Market for a share of the registrants common stock,
which was $25.50 as reported in the Wall Street Journal on July 1, 2003. Documents Incorporated by Reference: Portions of the definitive Proxy
Statement dated April 21, 2004 in connection with the Annual Meeting of
Stockholders to be held on May 21, 2004 and any adjournment thereof and which
is expected to be filed with the Securities and Exchange Commission on or about
April 21, 2004, are incorporated by reference into Part III.




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity and Related Stockholder MattersItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7a. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresItem 9A. Controls and ProceduresPART IIIItem 10. Directors and Executive Officers of the CompanyItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPART IVItem 15. Exhibits, Financial Statement Schedules and Reports on Form 8-KSIGNATURESSTATEMENT RE: COMPUTATION OF PER SHARE EARNINGSSUBSIDIARIESCONSENT OF KPMG LLPCERTIFICATION OF DISCLOSURE OF RONALD E HERMANCECERTIFICATION OF DISCLOSURE OF DENIS J. SALAMONESTATEMENT FURNISHED PURSUANT TO SECTION 906    Table of Contents  Hudson City Bancorp, Inc.
2003 Annual Report on Form 10-K
Table of Contents PagePART IItem 1
    
    Business
    
    
    2Item 2
    
    Properties
    
    
    42Item 3
    
    Legal Proceedings
    
    
    42Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    42PART IIItem 5
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    43Item 6
    
    Selected Financial Data
    
    
    45Item 7
    
    Managements Discussion and Analysis of Financial Condition
and Results Of Operations
    
    
    47Item 7a
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    75Item 8
    
    Financial Statements and Supplementary Data
    
    
    76Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    112Item 9a
    
    Controls and Procedures
    
    
    112PART IIIItem 10
    
    Directors and Executive Officers of the Company
    
    
    113Item 11
    
    Executive Compensation
    
    
    113Item 12
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    113Item 13
    
    Certain Relationships and Related Transactions
    
    
    114Item 14
    
    Principal Accounting Fees and Services
    
    
    114PART IVItem 15
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    115SIGNATURES
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Annual Report on Form 10-K contains certain
forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, and
may be identified by the use of such words as believe, expect,
anticipate, should, planned, estimated and potential. Examples of
forward looking statements include, but are not limited to, estimates with
respect to the financial condition, results of operations and business of
Hudson City Bancorp, Inc. that are subject to various factors which could cause
actual results to differ materially from these estimates. These factors
include: changes in economic and market conditions, changes in legislative and
regulatory conditions, or the development of an interest rate environment that
adversely affects Hudson City Bancorps interest rate spread or other income
anticipated from operations and investments. As used in this Form 10-K, we
and us and our refer to Hudson City Bancorp, Inc. and its consolidated
subsidiary, Hudson City Savings Bank, depending on the context. 
 PART I 
 Item 1. Business. Hudson City Bancorp is a Delaware corporation
organized in 1999 and serves as
the holding company of its only subsidiary, Hudson City Savings. A majority of
the outstanding shares of Hudson City Bancorps common stock are owned by
Hudson City, MHC. Hudson City Bancorps executive offices are located at West
80 Century Road, Paramus, New Jersey 07652 and our telephone number is (201)
967-1900. In 1999, Hudson City Savings converted and
reorganized from a New Jersey
chartered mutual savings bank into a two-tiered mutual savings bank holding
company structure and became a wholly-owned subsidiary of Hudson City Bancorp.
Hudson City Bancorp sold 47% of the then outstanding shares of its common stock
to the public at $10.00 per share and received net proceeds of $527.6 million.
Hudson City Bancorp contributed 50% of the net proceeds from the initial public
offering to Hudson City Savings. Hudson City Bancorp issued 53% of the then
outstanding shares of its common stock to Hudson City, MHC. At December 31,
2003, as a result of stock repurchases, Hudson City, MHC owned 64.57% of Hudson
City Bancorp. As part of our reorganization in structure, Hudson
City Savings organized
Hudson City, MHC as a bank holding company whose principal assets are the
shares of common stock of Hudson City Bancorp it received in the reorganization
and the cash dividends it receives on the shares of Hudson City Bancorp common
stock it owns. Hudson City, MHC does not engage in any business activity other
than its investment in a majority of the common stock of Hudson City Bancorp
and the management of any cash dividends received from Hudson City Bancorp.
Federal and state law and regulations require that as long as Hudson City, MHC
is in existence it must own a majority of Hudson City Bancorps common stock. In the fourth quarter of 2003, Hudson City Savings
applied for and was granted
approval to convert from a New Jersey chartered savings bank to a federally
chartered savings bank. The conversion to a federal charter was effective
January 1, 2004. Under this new charter, Hudson City Savings, Hudson City
Bancorp and Hudson City, MHC will be subject to supervision and examination by
the Office of Thrift Supervision (OTS.) Our deposits are insured by the
Federal Deposit Insurance Corporation (FDIC.) Hudson City Savings is a federally chartered stock
savings bank, which has
served the customers of New Jersey since 1868. We are a community and
customer-oriented retail savings bank offering traditional deposit products,
residential real estate mortgage loans and consumer loans. In addition, we
purchase Page 2




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mortgages, mortgage-backed securities, securities
issued by the U.S. government
and agencies and other investments permitted by applicable laws and
regulations. Except for community-related investments, we have not recently
originated or invested in commercial real estate loans, loans secured by
multi-family residences or commercial/industrial business loans, although we
have the legal authority to make such loans. We retain substantially all of the
loans we originate. Hudson City Savings revenues are derived
principally from interest on our
mortgage loans and mortgage-backed securities and interest and dividends on our
investment securities. Our primary sources of funds are deposits, borrowings,
scheduled amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of investment securities and funds provided by
operations. We are the largest savings bank by asset size headquartered in New
Jersey. Available Information Hudson City Bancorp, Inc.s periodic and
current reports, and any amendments
thereto, are made available free of charge on our website, www.hcbk.com,as
soon as reasonably practicable after such reports are electronically filed
with, or furnished to, the Securities and Exchange Commission, or SEC. Such
reports are also available on the SECs website at www.sec.gov, or at the SECs
Public Reference Room at 450 Fifth Street, NW, Washington, DC, 20549.
Information may be obtained on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Market Area We conduct our operations out of our executive
office in Paramus, Bergen
County, New Jersey, and 81 branches located in 14 counties throughout the State
of New Jersey: Atlantic, Bergen, Burlington, Camden, Essex, Gloucester,
Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Union and Warren. We
operate in three primary markets: northern New Jersey, the New Jersey shore,
and southwestern New Jersey in the suburbs of Philadelphia. Overall, the
counties in which we operate reflect approximately 80% of the entire population
of New Jersey, providing us with access to a large base of potential customers.
We intend to increase market area by opening new branch offices, and have
filed for and received regulatory approval for the opening of four offices,
including one office in Suffolk County, New York, which area has similar
demographic and economic characteristics to the markets we currently serve.
The conversion to a federal charter gives us greater flexibility to expand our
branch network into markets outside New Jersey. Our market areas provide distinct differences in
demographics and economic
characteristics. The northern New Jersey market (including Bergen, Essex,
Hudson, Middlesex, Morris, Passaic, Union and Warren Counties) represents the
greatest concentration of population, deposits and income in the State. The
combination of these counties represents more than half of the entire New
Jersey population and more than half of New Jersey households. The northern New
Jersey market also represents the greatest concentration of Hudson City Savings
retail operations  both lending and deposit gathering  and based on its high
level of economic activity, we believe that the northern New Jersey market
provides significant opportunities for future growth. The New Jersey shore
market (including Atlantic, Monmouth and Ocean counties) represents a strong
concentration of population and income, and is an increasingly popular resort
and retirement economy  providing healthy opportunities for deposit growth and
residential lending. The southwestern New Jersey market (including Burlington,
Camden and Gloucester counties) consists of communities adjacent to the
Philadelphia metropolitan area and represents the smallest concentration of
deposits for Hudson City Savings. Page 3




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Our future growth opportunities will be influenced
by the growth and stability
of the statewide and regional economies, other demographic population trends
and the competitive environment within and around the State of New Jersey. We
expect to continue to grow through internal expansion primarily through the
origination and purchase of mortgage loans, while purchasing mortgage-backed
securities and investment securities as a supplement to our mortgage loans. We
believe that we have developed lending products and marketing strategies to
address the diverse credit-related needs of the residents in our market area.
We intend the primary funding for our growth to be customer deposits, using
borrowed funds to supplement our deposit initiatives as a funding source. We
intend to grow customer deposits by continuing to offer desirable products at
competitive rates and by opening new branch offices. Competition We face intense competition both in making loans
and attracting deposits. New
Jersey has a high concentration of financial institutions, many of which are
branches of large money center and regional banks which have resulted from the
consolidation of the banking industry in New Jersey and surrounding states.
Some of these competitors have greater resources than we do and may offer
services that we do not provide such as trust services or investment services.
Customers who seek one stop shopping may be drawn to these institutions. Our competition for loans comes principally from
commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms. Our most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions. We face
additional competition for deposits from short-term money market funds and
other corporate and government securities funds and from brokerage firms and
insurance companies. Lending Activities Loan Portfolio Composition.Our loan
portfolio primarily consists of one-
to four-family residential first mortgage loans. To a lesser degree, the loan
portfolio includes consumer and other loans, which primarily consist of
fixed-rate second mortgage loans and home equity credit lines. We have not
originated commercial real estate loans or loans secured by multi-family
residences since the early 1980s and we do not originate construction loans.
We stopped originating commercial/industrial business loans in 1993, although
we have the legal authority to make such loans. From time to time, we purchase
participation interests in multi-family and commercial first mortgage loans,
and commercial loans through community-based organizations. These loans
amounted to $2.8 million at December 31, 2003. At December 31, 2003, we had total loans of
$8.80 billion, of which $8.67
billion, or 98.5%, were first mortgage loans. Of residential mortgage loans
outstanding at that date, 90.9% were fixed-rate mortgage loans and 9.1% were
variable-rate, or ARM, loans. At December 31, 2003, consumer and other loans,
primarily fixed-rate second mortgage loans and home equity credit lines,
amounted to $134.3 million, or 1.5%, of total loans. We also offer guaranteed
student loans through the Student Loan Marketing Association, commonly known as
SallieMae, Loan Referral Program. Our loans are subject to federal and state laws and
regulations. The interest
rates we charge on loans are affected principally by the demand for loans, the
supply of money available for lending purposes and the interest rates offered
by our competitors. These factors are, in turn, affected by general and local
economic conditions, monetary policies of the federal government, including the
FRB, legislative tax policies and governmental budgetary matters. Page 4




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The following table presents the composition of our
loan portfolio in dollar
amounts and in percentages of the total portfolio at the dates indicated. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    PercentAmount
    
    of Total
    
    Amount
    
    of Total
    
    Amount
    
    of Total
    
    Amount
    
    of Total
    
    Amount
    
    of Total(Dollars in thousands)First mortgage loans:One- to four-family
    
    $
    8,567,442
    
    
    
    97.32
    %
    
    $
    6,708,806
    
    
    
    96.25
    %
    
    $
    5,664,973
    
    
    
    94.93
    %
    
    $
    4,607,891
    
    
    
    94.56
    %
    
    $
    4,126,153
    
    
    
    95.82
    %FHA/VA
    
    
    98,502
    
    
    
    1.12
    
    
    
    131,209
    
    
    
    1.88
    
    
    
    151,203
    
    
    
    2.53
    
    
    
    112,937
    
    
    
    2.32
    
    
    
    66,150
    
    
    
    1.54Multi-family and
commercial
    
    
    2,843
    
    
    
    0.03
    
    
    
    2,668
    
    
    
    0.04
    
    
    
    2,548
    
    
    
    0.04
    
    
    
    2,380
    
    
    
    0.05
    
    
    
    2,131
    
    
    
    0.05Total first mortgage
loans
    
    
    8,668,787
    
    
    
    98.47
    
    
    
    6,842,683
    
    
    
    98.17
    
    
    
    5,818,724
    
    
    
    97.50
    
    
    
    4,723,208
    
    
    
    96.93
    
    
    
    4,194,434
    
    
    
    97.41Consumer and other loans:Fixed-rate second
mortgages
    
    
    105,361
    
    
    
    1.20
    
    
    
    93,691
    
    
    
    1.34
    
    
    
    115,244
    
    
    
    1.93
    
    
    
    118,319
    
    
    
    2.43
    
    
    
    82,913
    
    
    
    1.93Home equity credit
lines
    
    
    28,217
    
    
    
    0.32
    
    
    
    33,543
    
    
    
    0.48
    
    
    
    32,715
    
    
    
    0.55
    
    
    
    29,119
    
    
    
    0.60
    
    
    
    26,321
    
    
    
    0.61Other
    
    
    701
    
    
    
    0.01
    
    
    
    983
    
    
    
    0.01
    
    
    
    1,488
    
    
    
    0.02
    
    
    
    2,094
    
    
    
    0.04
    
    
    
    2,207
    
    
    
    0.05Total consumer and
other loans
    
    
    134,279
    
    
    
    1.53
    
    
    
    128,217
    

    
    
    1.83
    
    
    
    149,447
    
    
    
    2.50
    
    
    
    149,532
    
    
    
    3.07
    
    
    
    111,441
    
    
    
    2.59Total loans
    
    
    8,803,066
    
    
    
    100.00
    %
    
    
    6,970,900
    
    
    
    100.00
    %
    
    
    5,968,171
    
    
    
    100.00
    %
    
    
    4,872,740
    
    
    
    100.00
    %
    
    
    4,305,875
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    10,255
    
    
    
    
    
    
    
    13,508
    
    
    
    
    
    
    
    12,060
    
    
    
    
    
    
    
    9,555
    
    
    
    
    
    
    
    10,631Allowance for loan
losses
    
    
    26,547
    
    
    
    
    
    
    
    25,501
    
    
    
    
    
    
    
    24,010
    
    
    
    
    
    
    
    22,144
    
    
    
    
    
    
    
    20,010Net loans
    
    $
    8,766,264
    
    
    
    
    
    
    $
    6,931,891
    
    
    
    
    
    
    $
    5,932,101
    
    
    
    
    
    
    $
    4,841,041
    
    
    
    
    
    
    $
    4,275,234
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Loan Maturity.The following
table presents the contractual maturity of our
loans at December 31, 2003. The table does not include the effect of
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on first mortgage loans totaled $3.53 billion for 2003,
$2.53 billion for 2002 and $1.28 billion for 2001. At December 31, 2003First
    
    ConsumerMortgage
    
    andLoans
    
    Other Loans
    
    Total(In thousands)Amounts Due:One year or less
    
    $
    366
    
    
    $
    690
    
    
    $
    1,056After one year:One to three years
    
    
    4,817
    
    
    
    3,731
    
    
    
    8,548Three to five years
    
    
    69,028
    
    
    
    16,275
    
    
    
    85,303Five to ten years
    
    
    258,608
    
    
    
    35,145
    
    
    
    293,753Ten to twenty years
    
    
    2,055,311
    
    
    
    78,438
    
    
    
    2,133,749Over twenty years
    
    
    6,280,657
    
    
    
    
    
    
    
    6,280,657Total due after one year
    
    
    8,668,421
    
    
    
    133,589
    
    
    
    8,802,010Total loans
    
    $
    8,668,787
    
    
    $
    134,279
    
    
    
    8,803,066Less:Deferred loan fees
    
    
    
    
    
    
    
    
    
    
    10,255Allowance for loan losses
    
    
    
    
    
    
    
    
    
    
    26,547Net loans
    
    
    
    
    
    
    
    
    
    $
    8,766,264
 The following table presents, as of
December 31, 2003, the dollar amount of all
loans due after December 31, 2004, and whether these loans have fixed interest
rates or adjustable interest rates. Due After December 31, 2004Fixed
    
    Adjustable
    
    Total(In thousands)First mortgage loans
    
    $
    7,882,044
    
    
    $
    786,377
    
    
    $
    8,668,421Consumer and other loans
    
    
    105,048
    
    
    
    28,541
    
    
    
    133,589Total loans due
after one year
    
    $
    7,987,092
    
    
    $
    814,918
    
    
    $
    8,802,010
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The following table presents our loan originations,
purchases, sales and
principal payments for the periods indicated. For the Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Total loans:Balance outstanding at beginning of period
    
    $
    6,970,900
    
    
    $
    5,968,171
    
    
    $
    4,872,740Originations:First mortgage
loans
    
    
    2,168,148
    
    
    
    1,840,857
    
    
    
    1,523,192Consumer and other loans
    
    
    103,000
    
    
    
    66,441
    
    
    
    64,238Total originations
    
    
    2,271,148
    
    
    
    1,907,298
    
    
    
    1,587,430Purchases:One- to four-family first mortgage loans
    
    
    3,168,892
    
    
    
    1,684,368
    
    
    
    794,881FHA/VA first mortgage loans
    
    
    36,064
    
    
    
    32,819
    
    
    
    62,356Other first mortgage loans
    
    
    293
    
    
    
    219
    
    
    
    401Total purchases
    
    
    3,205,249
    
    
    
    1,717,406
    
    
    
    857,638Less:Principal payments:First mortgage loans
    
    
    3,530,205
    
    
    
    2,531,976
    
    
    
    1,282,290Consumer and other loans
    
    
    96,938
    
    
    
    87,671
    
    
    
    64,323Total principal payments
    
    
    3,627,143
    
    
    
    2,619,647
    
    
    
    1,346,613Premium amortization and discount accretion, net
    
    
    14,094
    
    
    
    1,071
    
    
    
    (301
    )Transfers to foreclosed real estate
    
    
    2,994
    
    
    
    1,257
    
    
    
    747Loan sales
    
    
    
    
    
    
    
    
    
    
    2,578Balance outstanding at end of period
    
    $
    8,803,066
    
    
    $
    6,970,900
    
    
    $
    5,968,171
 Residential Mortgage Lending.Our primary lending emphasis is the
origination and purchase of first mortgage loans secured by one- to four-family
properties that serve as the primary or secondary residence of the owner. We
do not offer loans secured by cooperative apartment units or interests therein.
Since the early 1980s, we have originated and purchased substantially all of
our one- to four-family first mortgage loans for retention in our portfolio. Our wholesale loan purchase program is designed
principally to supplement our
retail loan origination production, which is currently being done solely within
the state of New Jersey. The purchase of whole loans enables us to diversify
assets outside our local market area, thus providing a safeguard against
economic trends that might affect one particular area of the nation. Through
this program, we expect to obtain assets with a relatively low overhead cost,
minimize related servicing costs, and supplement loan demand in our local
lending areas. We have developed written standard operating guidelines
relating to the purchasing of these assets. These guidelines include the
evaluation and approval process of the various sellers, primarily large
national mortgage loan seller/servicers, from whom we choose to buy whole
loans, the types of whole loans, acceptable property locations and maximum
interest rate variances. Page 7




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The purchasing agreements, as established with each
servicer/seller, contain
parameters as to the loans that can be included in each package. These
parameters, such as maximum loan size and maximum loan-to-value ratio,
generally conform to parameters utilized by us to originate mortgage loans.
Purchased loan packages are subject to internal due diligence procedures, which
may include review of individual loan files. This review subjects the
purchased loan file to substantially the same underwriting standards used in
our own loan origination process. Loan packages purchased include mortgage
loans secured by properties located primarily in the east coast corridor states
between Massachusetts and North Carolina, and in Michigan and Illinois. The servicing of purchased loans are governed by
the servicing agreement
entered into with each servicer. Oversight of the servicer is maintained by us
through review of all reports, remittances and non-performing loan ratios with
appropriate further action taken as required. These operating guidelines
should provide a means of evaluating and monitoring the quality of mortgage
loan purchases and the servicing abilities of the loan servicers. We purchased
first mortgage loans of $3.21 billion in 2003, $1.72 billion in 2002 and $857.6
million in 2001.The average size of our one-to-four family mortgage loans
purchased during 2003 was approximately $440,000. Most of our loan originations are from existing or
past customers, members of
our local communities or referrals from local real estate agents, attorneys and
builders. We believe that our extensive branch network is a significant source
of new loan generation. We also employ a small staff of representatives who
call on real estate professionals to disseminate information regarding our loan
programs and take applications directly from their clients. These
representatives are paid for each origination. In addition, we use the services
of licensed mortgage bankers and brokers for mortgage loan originations. We currently offer loans that conform to
underwriting standards that are based
on standards specified by FannieMae (conforming loans), non-conforming loans,
loans processed as limited documentation loans and, to a limited extent, no
income or asset verification loans, as described below. These loans may be
fixed-rate one- to four-family mortgage loans or adjustable-rate one- to
four-family mortgage loans with maturities up to 30 years. The non-conforming
loans generally follow FannieMae guidelines, except for the loan amount.
FannieMae guidelines limit loans to $333,700; our non-conforming loans
generally exceed such limits. The average size of our one- to four-family
mortgage loans originated in 2003 was approximately $286,000. The overall
average size of our one- to four-family first mortgage loans was approximately
$257,000 at December 31, 2003. We are an approved seller/servicer for FannieMae
and an approved servicer for FreddieMac. We generally hold loans for our
portfolio but have, from time to time, sold loans in the secondary market. Our originations of first mortgage loans amounted
to $2.17 billion in 2003,
$1.84 billion in 2002 and $1.52 billion in 2001. During these years, a
significant number of our first mortgage loan originations were the result of
refinancing of existing loans due to the relatively low interest rate levels.
Total refinancing of our existing first mortgage loans were as follows: Percent ofFirst MortgageAmount
    
    Loan Originations(In thousands)2003
    
    $
    530,408
    
    
    
    24.5
    %2002
    
    
    496,772
    
    
    
    27.02001
    
    
    272,382
    
    
    
    17.9
 Page 8




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In 2001, we began to allow certain customers to
modify their existing mortgage
loans with the intent of maintaining customer relationships in periods of
extensive refinancing due to a low interest rate environment. The modification
allows adjustment of the existing interest rate to the currently offered fixed
interest rate product with a similar or reduced term, for a fee, after past
payment performance is reviewed. In general, all other terms and conditions of
the existing mortgage remain the same. Modifications of existing mortgage
loans were as follows: Mortgage LoansModified(In thousands)2003
    
    $
    1,458,8362002
    
    
    866,2982001
    
    
    169,457
 We offer a variety of variable-rate and fixed-rate
one- to four-family mortgage
loans with maximum loan-to-value ratios that depend on the type of property and
the size of loan involved. The loan-to-value ratio is the loan amount divided
by the appraised value of the property. The loan-to-value ratio is a measure
commonly used by financial institutions to determine exposure to risk. Except
for loans to low- and moderate-income home mortgage applicants, described
below, loans on owner-occupied one- to four-family homes of up to $750,000 are
subject to a maximum loan-to-value ratio of 80%. However, we make loans in
amounts up to $400,000 with a 95% loan-to-value ratio and loans in excess of
$400,000 and less than $500,000 with a 90% loan-to-value ratio if the borrower
obtains private mortgage insurance. Under certain circumstances, where the
Bank deems appropriate, we will originate a first and second mortgage, up to a
combined loan amount of $500,000, where the combined loan-to-value ratio is
90%. Under these circumstances, we will waive the private mortgage insurance
requirements and receive a higher interest rate on the second mortgage loan
than we would receive on a regular second mortgage loan. Loans in excess of
$750,000 and up to $1,000,000 are subject to a maximum 70% loan-to-value ratio.
Loan-to-value ratios of 60% or less are required for one- to four-family loans
in excess of $1,000,000 and less than $1,500,000. We currently offer fixed-rate mortgage loans in
amounts generally up to $1.5
million with a maximum term of 30 years secured by one- to four-family
residences. We price our interest rates on fixed-rate loans to be competitive
in light of market conditions. We currently offer a variety of ARM loans secured
by one- to four-family
residential properties that initially adjust after five years or ten years, in
amounts generally up to $1.5 million. After the initial adjustment period, ARM
loans adjust on an annual basis. The ARM loans that we currently originate have
a maximum 30-year amortization period and are subject to the same loan-to-value
ratios applicable to fixed-rate mortgage loans described above. The interest
rates on ARM loans fluctuate based upon a fixed spread above the monthly
average yield on United States treasury securities, adjusted to a constant
maturity of one year (constant treasury maturity index) and generally are
subject to a maximum increase of 2% per adjustment period and a limitation on
the aggregate adjustment of 5% over the life of the loan. In the current rate
environment, where the yield curve is relatively steep, the ARM loans we offer
have initial interest rates above the fully indexed rate. The loans originated
with initial interest rates above the fully indexed rate may reprice down at
their initial interest reset date, which could adversely affect our net
interest income. As of December 31, 2003, the initial offered rate on these
loans was 88 to 138 basis points above the current fully indexed rate. We
originated $356.8 million of one- to four-family ARM Page 9




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loans in 2003. At December 31, 2003, 9.1% of
our one- to four-family mortgage
loans consisted of ARM loans. The retention of ARM loans helps reduce exposure to
increases in interest
rates. However, ARM loans can pose credit risks different from the risks
inherent in fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrower may rise, which increases the potential for
default. The marketability of the underlying property also may be adversely
affected. In order to minimize risks, we evaluate borrowers of ARM loans based
on their ability to repay the loans at the higher of the initial interest rate
or the fully indexed rate. In an effort to further reduce interest rate risk,
we have not in the past, nor do we currently, originate ARM loans which provide
for negative amortization of principal. In addition to our full documentation loan program,
we process some loans as
limited documentation loans. We have originated these types of loans for over
10 years. Loans eligible for limited documentation processing are ARM loans
and 10-, 15-, 20- and 30-year fixed-rate loans to owner-occupied primary and
second home applicants. These loans are available in amounts up to 75% of the
lower of the appraised value or purchase price of the property. The maximum
loan amount for limited documentation loans is $500,000. We do not charge
borrowers additional fees for limited documentation loans. We require
applicants for limited documentation loans to complete a FreddieMac/FannieMae
loan application and request income, assets and credit history information from
the borrower. Additionally, we obtain credit reports from outside vendors on
all borrowers. We also look at other information to ascertain the credit
history of the borrower. Applicants with delinquent credit histories usually do
not qualify for the limited documentation processing, although relatively minor
delinquencies which are adequately explained will not prohibit processing as a
limited documentation loan. We reserve the right to verify income, asset
information and other information where we believe circumstances warrant. We
recently began to allow certain borrowers to obtain mortgage loans without
verification of income or assets. These loans are subject to somewhat higher
interest rates than our regular products, and are limited to a maximum
loan-to-value ratio of 65%. Limited documentation and no verification loans
involve higher risks compared
to loans with full documentation, as there is a greater opportunity for
borrowers to falsify their income and ability to service their debt. We believe
these programs have not had a material adverse effect on our asset quality. See
 Asset Quality. Unseasoned limited documentation and no verification loans
are not readily salable in the secondary market as whole loans. In addition,
these loans may not readily be pooled or securitized. We do not believe that an
inability to sell such loans will have a material adverse impact on our
liquidity needs, because internally generated sources of liquidity are expected
to be sufficient to meet our liquidity needs. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Liquidity and
Capital Resources and  Sources of Funds. In addition to our standard mortgage and consumer
credit products, since 1992,
we have developed mortgage programs designed to address the credit needs of
low- and moderate-income home mortgage applicants, first-time home buyers and
low- and moderate-income home improvement loan applicants. We define low- and
moderate-income applicants as borrowers residing in low- and moderate-income
census tracts or households with income not greater than 80% of the median
income of the Metropolitan Statistical Area in the county where the subject
property is located. Our low- and moderate-income home improvement loans are
discussed under  Consumer Loans. Among the features of the low- and
moderate-income home mortgage and first-time home buyers programs are reduced
rates, lower down payments, reduced fees and closing costs, and generally less
restrictive requirements for qualification compared with our traditional one-
to four-family mortgage loans. For instance, certain of these programs
currently provide for loans with up to 95% loan-to-value ratios and rates which
are 25 to 50 basis points Page 10




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lower than our traditional mortgage loans. In 2003,
we provided $59.0 million
in mortgage loans to homebuyers under these programs. Consumer Loans.At
December 31, 2003, $134.3 million, or 1.5%, of our total
loans consisted of consumer and other loans, primarily fixed-rate second
mortgage loans and home equity credit lines. Consumer loans generally have
shorter terms to maturity, which reduces our exposure to changes in interest
rates. Consumer loans generally carry higher rates of interest than do one- to
four-family residential mortgage loans. In addition, we believe that offering
consumer loan products helps to expand and create stronger ties to our existing
customer base by increasing the number of customer relationships and providing
cross-marketing opportunities. We offer fixed-rate second mortgage loans in
amounts up to $200,000 secured by
owner-occupied one- to four-family residences located in the state of New
Jersey for terms of up to 20 years. At December 31, 2003 these loans totaled
$105.4 million, or 1.2% of total loans. Interest rates on fixed-rate second
mortgage loans are periodically set by our Consumer Loan Department based on
market conditions. The underwriting standards applicable to these loans
generally are the same as one- to four-family first mortgage loans, except that
the combined loan-to-value ratio, including the balance of the first mortgage,
cannot exceed 80% of the appraised value of the property. We also offer fixed-rate second mortgage loans to
low- and moderate-income
borrowers in amounts up to $20,000. The borrower must use a portion of the loan
proceeds for home improvements or the satisfaction of an existing obligation.
The underwriting standards under this program are similar to those for standard
second mortgage loans, except that the combined maximum loan-to-value ratio is
90%. Our home equity credit line loans, which totaled
$28.2 million, or 0.3% of
total loans at December 31, 2003, are adjustable-rate loans secured by a second
mortgage on owner-occupied one- to four-family residences located in the State
of New Jersey. Current interest rates on home equity credit lines are based on
the prime rate as published in the Money Rates section of The Wall Street
Journal (the Index) subject to certain interest rate limitations. Interest
rates on home equity credit lines are adjusted monthly based upon changes in
the Index. Minimum monthly principal payments on currently offered home equity
lines of credit are based on 1/240th of the outstanding principal balance or
$100 whichever is greater. The maximum credit line available is $200,000. The
underwriting terms and procedures applicable to these loans are substantially
the same as for our fixed-rate second mortgage loans. Other loans totaled $701,000 at December 31,
2003 and consisted of
collateralized passbook loans, overdraft protection loans, automobile loans,
unsecured personal loans and commercial loans made to community-based
organizations. We no longer originate student loans, but offer guaranteed
student loans through the SallieMae Loan Referral Program. Loan Approval Procedures and
Authority.Our lending policies provide that
loans up to $500,000 can be approved by two officers of the Mortgage
Origination Department, one of whom must have the title of at least Vice
President. Loans in excess of $500,000 require the approval of two officers,
one of whom must have the title of at least Vice President, as well as our
Senior Vice President-Lending, Chief Executive Officer or Chief Operating
Officer. Home equity credit lines and fixed-rate second mortgage loans in
principal amounts of $25,000 or less are approved by one of our designated loan
underwriters. Home equity loans in excess of $25,000, up to the $200,000
maximum, are approved by an underwriter and either our Consumer Loan Officer,
Senior Vice President-Lending, Chief Executive Officer or Chief Operating
Officer. Page 11




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The following describes our current lending
procedures. Upon receipt of a
completed loan application from a prospective borrower, we order a credit
report and, except for loans originated as limited documentation or no
income/no asset verification loans, we verify certain other information. If
necessary, we obtain additional financial or credit-related information. We
require an appraisal for all mortgage loans, except for some loans made to
refinance existing mortgage loans. Appraisals may be performed by our in-house
Appraisal Department or by licensed or certified third-party appraisal firms.
Currently most appraisals are performed by third-party appraisers and are
reviewed by our in-house Appraisal Department. We require title insurance on
all mortgage loans, except for home equity credit lines and fixed-rate second
mortgage loans. For these loans, we require a property search detailing the
current chain of title. We require borrowers to obtain hazard insurance and we
may require borrowers to obtain flood insurance prior to closing. We require
borrowers to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which we make
disbursements for items such as real estate taxes, flood insurance and private
mortgage insurance premiums, if required. In a limited number of instances, at
the discretion of the Bank, we will waive the real estate tax escrow for the
borrower, subject to an interest rate somewhat higher than our regular offered
rate. Asset Quality One of our key operating objectives has been, and
continues to be, to maintain
a high level of asset quality. Through a variety of strategies, including, but
not limited to, borrower workout arrangements and aggressive marketing of owned
properties, we have been proactive in addressing problem and non-performing
assets. These strategies, as well as our concentration on one- to four-family
mortgage lending, our maintenance of sound credit standards for new loan
originations and the relatively favorable real estate market conditions have
resulted in relatively low delinquency ratios. These factors have helped
strengthen our financial condition. Delinquent Loans and Foreclosed
Assets.When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower
to cure the delinquency and restore the loan to a current status. In the case
of mortgage loans, our mortgage servicing department is responsible for
collection procedures from the 15th day up to the 90th day of delinquency.
Specific procedures include a late charge notice being sent at the time a
payment is over 15 days past due. Telephone contact is attempted on
approximately the 20th day of the month to avoid a 30 day delinquency. A
second written notice is sent at the time the payment becomes 30 days past due.
We send additional letters if no contact is established by approximately the
45th day of delinquency. On the 60th day of delinquency, we send another letter
followed by continued telephone contact. Between the 30th and the 60th day of
delinquency, if telephone contact has not been established, an independent
contractor makes a physical inspection of the property. When contact is made
with the borrower at any time prior to foreclosure, we attempt to obtain full
payment or work out a repayment schedule with the borrower in order to avoid
foreclosure. It has been our experience that most loan delinquencies are cured
within 90 days and no legal action is taken. We send foreclosure notices when a loan is
90 days delinquent and we transfer
the loan to the foreclosure/bankruptcy section for referral to legal counsel.
We commence foreclosure proceedings if the loan is not brought current between
the 90th and 120th day of delinquency unless specific limited circumstances
warrant an exception. We hold property foreclosed upon as foreclosed real
estate. We carry foreclosed real estate at the lower of fair market value less
estimated selling costs, or at cost. If a foreclosure action is commenced and
the loan is not brought current, paid in full or refinanced before the
foreclosure sale, we either sell the real property securing the loan by a
foreclosure sale, or sell the property as soon thereafter as practicable. The
collection procedures for Federal Housing Administration (FHA) and Veterans
Administration (VA) one- to four-family mortgage loans follow the collection
guidelines outlined by those agencies. Page 12




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We monitor delinquencies on our serviced loan
portfolio, in aggregate, from
reports sent to us by the servicers. Accounts in foreclosure or bankruptcy are
individually monitored by direct contact with the appropriate servicer. The collection procedures for consumer and other
loans include our sending
periodic late notices to a borrower once a loan is past due. We attempt to make
direct contact with a borrower once a loan becomes 30 days past due.
Supervisory personnel in our Consumer Loan Collection Department review loans
60 days or more delinquent on a regular basis. If collection activity is
unsuccessful after 90 days, we may refer the matter to our legal counsel for
further collection effort or charge-off the loan. Loans we deem to be
uncollectible are proposed for charge-off by our Collection Department.
Charge-offs of consumer loans require the approval of our Consumer Loan Officer
and either the Senior Vice President-Lending, our Chief Executive Officer or
Chief Operating Officer. Our policies require that management continuously
monitor the status of the
loan portfolio and report to the Board of Directors on a monthly basis. These
reports include information on delinquent loans and foreclosed real estate. Page 13




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At December 31, 2003, 2002 and 2001, loans
delinquent 60 days to 89 days and 90
days or more were as follows: 2003
    
    2002
    
    200160-89 Days
    
    90 Days or More
    
    60-89 Days
    
    90 Days or More
    
    60-89 Days
    
    90 Days or MorePrincipal
    
    
    
    
    
    Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    Principal
    
    
    
    
    
    PrincipalNo. of
    
    Balance
    
    No. of
    
    Balance
    
    No. of
    
    Balance
    
    No. of
    
    Balance
    
    No. of
    
    Balance
    
    No. of
    
    BalanceLoans
    
    of Loans
    
    Loans
    
    of Loans
    
    Loans
    
    of Loans
    
    Loans
    
    of Loans
    
    Loans
    
    of Loans
    
    Loans
    
    of Loans(Dollars in thousands)One- to four-family
first mortgages
    
    
    52
    
    
    $
    8,974
    
    
    
    58
    
    
    $
    9,690
    
    
    
    46
    
    
    $
    6,701
    
    
    
    62
    
    
    $
    10,670
    
    
    
    58
    
    
    $
    7,289
    
    
    
    72
    
    
    $
    10,556FHA/VA first mortgages
    
    
    15
    
    
    
    1,493
    
    
    
    85
    
    
    
    10,459
    
    
    
    27
    
    
    
    2,591
    
    
    
    77
    
    
    
    9,506
    
    
    
    36
    
    
    
    2,402
    
    
    
    55
    
    
    
    5,007Consumer and other loans
    
    
    1
    
    
    
    4
    
    
    
    3
    
    
    
    102
    
    
    
    3
    
    
    
    10
    
    
    
    2
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    85Total delinquent loans
(60 days and over)
    
    
    68
    
    
    $
    10,471
    
    
    
    146
    
    
    $
    20,251
    
    
    
    76
    
    
    $
    9,302
    
    
    
    141
    
    
    $
    20,195
    
    
    
    94
    
    
    $
    9,691
    
    
    
    130
    
    
    $
    15,648Delinquent loans (60 days
and over) to total loans
    
    
    
    
    
    
    0.12
    %
    
    
    
    
    
    
    0.23
    %
    
    
    
    
    
    
    0.13
    %
    
    
    
    
    
    
    0.29
    %
    
    
    
    
    
    
    0.16
    %
    
    
    
    
    
    
    0.26
    %
 Page 14




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Non-performing assets, which include foreclosed
real estate, net, non-accrual
loans and accruing loans delinquent 90 days or more, were $21.3 million at
December 31, 2003 compared with $21.5 million at December 31, 2002. Our $20.3
million in loans delinquent 90 days or more at December 31, 2003 were comprised
primarily of 143 one- to four-family first mortgage loans (including FHA/VA
first mortgage loans). At December 31, 2003, our largest loan delinquent 90
days or more had a balance of $486,000. With the exception of first mortgage loans insured
or guaranteed by the FHA or
VA or for which the borrower has obtained private mortgage insurance, we stop
accruing income on loans when interest or principal payments are 90 days in
arrears or earlier when the timely collectibility of such interest or principal
is doubtful. We designate loans on which we stop accruing income as non-accrual
loans and we reverse outstanding interest that we previously credited to
income. We may recognize income in the period that we collect it when the
ultimate collectibility of principal is no longer in doubt. We return a
non-accrual loan to accrual status when factors indicating doubtful collection
no longer exist. The accrual of income on FHA/VA loans is generally not
discontinued as they are guaranteed by a federal agency. Foreclosed real estate consists of property we
acquired through foreclosure or
deed in lieu of foreclosure. After foreclosure, foreclosed properties held for
sale are carried at the lower of fair value minus estimated cost to sell, or at
cost. A valuation allowance account is established through provisions charged
to income, which results from the ongoing periodic valuations of foreclosed
real estate properties. Fair market value is generally based on recent
appraisals. The following table presents information regarding
non-accrual mortgage and
consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Non-accrual first mortgage
loans
    
    $
    4,401
    
    
    $
    6,053
    
    
    $
    8,177
    
    
    $
    10,422
    
    
    $
    11,301Non-accrual consumer and other
loans
    
    
    102
    
    
    
    19
    
    
    
    85
    
    
    
    30
    
    
    
    2Accruing loans delinquent 90 days
or more
    
    
    15,748
    
    
    
    14,123
    
    
    
    7,386
    
    
    
    2,523
    
    
    
    2,724Total non-performing loans
    
    
    20,251
    
    
    
    20,195
    
    
    
    15,648
    
    
    
    12,975
    
    
    
    14,027Foreclosed real estate, net
    
    
    1,002
    
    
    
    1,276
    
    
    
    250
    
    
    
    438
    
    
    
    367Total non-performing assets
    
    $
    21,253
    
    
    $
    21,471
    
    
    $
    15,898
    
    
    $
    13,413
    
    
    $
    14,394Non-performing loans to total
loans
    
    
    0.23
    %
    
    
    0.29
    %
    
    
    0.26
    %
    
    
    0.27
    %
    
    
    0.33
    %Non-performing assets to total
assets
    
    
    0.12
    
    
    
    0.15
    
    
    
    0.14
    
    
    
    0.14
    
    
    
    0.17
 The total amount of interest income received during
the year on non-accrual
loans outstanding at December 31, 2003, 2002 and 2001 amounted to $107,000,
$109,000 and $154,000, respectively. Additional interest income totaling
$186,000, $319,000 and $483,000 on non-accrual loans would have been recognized
in 2003, 2002 and 2001, respectively, if interest on all such loans had been
recorded based upon original contract terms. We are not committed to lend
additional funds to borrowers on non-accrual status. We define the population of impaired loans to be
all non-accrual commercial

real estate and multi-family loans. Impaired loans are individually assessed to
determine whether a loans carrying value is not in excess of the fair value of
the collateral or the present value of the loans cash flows. Smaller balance Page 15




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homogeneous loans that are collectively evaluated
for impairment, such as
residential mortgage loans and consumer loans, are specifically excluded from
the impaired loan portfolio. We had no loans classified as impaired at December
31, 2003 and 2002. In addition, at December 31, 2003 and 2002, we had no loans
classified as troubled debt restructurings, as defined in SFAS No. 15. Allowance for Loan Losses.The
following table presents the activity in our
allowance for loan losses at or for the periods indicated. At or for the Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Balance at beginning of period
    
    $
    25,501
    
    
    $
    24,010
    
    
    $
    22,144
    
    
    $
    20,010
    
    
    $
    17,712Provision for loan losses
    
    
    900
    
    
    
    1,500
    
    
    
    1,875
    
    
    
    2,130
    
    
    
    2,350Charge-offs:First mortgage loans
    
    
    (92
    )
    
    
    (3
    )
    
    
    (6
    )
    
    
    (18
    )
    
    
    (64
    )Consumer and other loans
    
    
    (4
    )
    
    
    (10
    )
    
    
    (14
    )
    
    
    
    
    
    
    (9
    )Total charge-offs
    
    
    (96
    )
    
    
    (13
    )
    
    
    (20
    )
    
    
    (18
    )
    
    
    (73
    )Recoveries
    
    
    242
    
    
    
    4
    
    
    
    11
    
    
    
    22
    
    
    
    21Net recoveries (charge-offs)
    
    
    146
    
    
    
    (9
    )
    
    
    (9
    )
    
    
    4
    
    
    
    (52
    )Balance at end of period
    
    $
    26,547
    
    
    $
    25,501
    
    
    $
    24,010
    
    
    $
    22,144
    
    
    $
    20,010Net charge-offs to average loans
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    0.001
    %Allowance for loan losses to
total loans
    
    
    0.30
    
    
    
    0.37
    
    
    
    0.40
    
    
    
    0.45
    
    
    
    0.46Allowance for loan losses to
non-performing loans
    
    
    131.09
    
    
    
    126.27
    
    
    
    153.44
    
    
    
    170.67
    
    
    
    142.65
 The allowance for loan losses has been determined
in accordance with accounting
principles generally accepted in the United States of America, under which we
are required to maintain adequate allowances for loan losses. We are
responsible for the timely and periodic determination of the amount of the
allowance required. We believe that our allowance for loan losses is adequate
to cover specifically identifiable loan losses, as well as estimated losses
inherent in our portfolio for which certain losses are probable but not
specifically identifiable. As part of our evaluation of the adequacy of our
allowance for loan losses,
each month we prepare a worksheet. This worksheet categorizes the entire loan
portfolio by certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.) and payment status (i.e., current or number of
days delinquent). Loans with known potential losses are categorized separately.
We assign potential loss factors to the payment status categories on the basis
of our assessment of the potential risk inherent in each loan type. We use this
worksheet, together with loan portfolio balances and delinquency reports, to
evaluate the adequacy of the allowance for loan losses. Other key factors we
consider in this process are current real estate market conditions, changes in
the trend of non-performing loans, the current state of the local and national
economy and loan portfolio growth. Page 16




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We maintain the allowance for loan losses through
provisions for loan losses
that we charge to income. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely. We
establish the provision for loan losses after considering the results of our
review of delinquency and charge-off trends, the allowance for loan loss
worksheet, the amount of the allowance for loan losses in relation to the total
loan balance, loan portfolio growth, accounting principles generally accepted
in the United States of America and regulatory guidance. We have applied this
process consistently and we have made minimal changes in the estimation methods
and assumptions that we have used. Our primary lending emphasis is the origination 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. As a result of
our lending emphasis, we had a loan concentration in residential first mortgage
loans at December 31, 2003, the majority of which are secured by real property
located in New Jersey. Of residential first mortgage loans outstanding at
December 31, 2003, 9.1%, or $786.4 million, were adjustable-rate mortgages. The
ability of borrowers to make payments on their adjustable-rate mortgages may
decrease if interest rates rise. Based on the composition of our loan portfolio and
the growth in our loan
portfolio, we believe the primary risks inherent in our portfolio are possible
increases in interest rates, a decline in the economy, generally, and a decline
in real estate market values. Any one or a combination of these events may
adversely affect our loan portfolio resulting in increased delinquencies and
loan losses and future levels of provisions. Accordingly, we have maintained
our provision for loan losses at the current level to primarily address the
actual growth in our loan portfolio. We consider it important to maintain the
ratio of our allowance for loan losses to total loans at an acceptable level
given current economic conditions, interest rates and the composition of our
portfolio. At December 31, 2003, the allowance for loan losses as a percentage
of total loans was 0.30%. Because of the primary emphasis of our lending
practices and the current market conditions, we consider 0.30% to be at an
acceptable level. Furthermore, the increase in the allowance for loan losses
each year reflected the continued growth in the loan portfolio, the relatively
low levels of loan charge-offs, the stability in the real estate market during
those years and the resulting stability in our overall loan quality. Although we believe that we have established and
maintained the allowance for
loan losses at adequate levels, additions may be necessary if future economic
and other conditions differ substantially from the current operating
environment. Although management uses the best information available, the
level of the allowance for loan losses remains an estimate that is subject to
significant judgement and short-term change. See Managements Discussion and Analysis
of Financial Condition and Results of
Operations  Comparison of Operating Results for the Years Ended December 31,
2003 and 2002 Provision for Loan Losses. Page 17




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##### Table of Contents



The following table presents our allocation of the
allowance for loan losses by
loan category and the percentage of loans in each category to total loans at
December 31, 2003, 2002, 2001, 2000, and 1999. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Percentage
    
    
    
    
    
    Percentage
    
    
    
    
    
    Percentage
    
    
    
    
    
    Percentage
    
    
    
    
    
    Percentageof Loans in
    
    
    
    
    
    of Loans in
    
    
    
    
    
    of Loans in
    
    
    
    
    
    of Loans in
    
    
    
    
    
    of Loans inCategory
    
    
    
    
    
    Category
    
    
    
    
    
    Category
    
    
    
    
    
    Category
    
    
    
    
    
    Categoryto Total
    
    
    
    
    
    to Total
    
    
    
    
    
    to Total
    
    
    
    
    
    to Total
    
    
    
    
    
    to TotalAmount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans
    
    Amount
    
    Loans(Dollars in thousands)First mortgage loans:One- to four-family
conventional
    
    $
    24,690
    
    
    
    97.32
    %
    
    $
    23,040
    
    
    
    96.25
    %
    
    $
    18,114
    
    
    
    94.93
    %
    
    $
    13,628
    
    
    
    94.56
    %
    
    $
    12,340
    
    
    
    95.82
    %Other first mortgages
    
    
    28
    
    
    
    1.15
    
    
    
    26
    
    
    
    1.92
    
    
    
    28
    
    
    
    2.57
    
    
    
    24
    
    
    
    2.37
    
    
    
    21
    
    
    
    1.59Total first mortgage
loans
    
    
    24,718
    
    
    
    98.47
    
    
    
    23,066
    
    
    
    98.17
    
    
    
    18,142
    
    
    
    97.50
    
    
    
    13,652
    
    
    
    96.93
    
    
    
    12,361
    
    
    
    97.41Consumer and other loans
    
    
    1,152
    
    
    
    1.53
    
    
    
    1,097
    
    
    
    1.83
    
    
    
    1,247
    
    
    
    2.50
    
    
    
    1,233
    
    
    
    3.07
    
    
    
    957
    
    
    
    2.59Unallocated
    
    
    677
    
    
    
    
    
    
    
    1,338
    
    

    
    
    
    
    
    4,621
    
    
    
    
    
    
    
    7,259
    
    
    
    
    
    
    
    6,692
    
    
    
    Total allowance for
loan losses
    
    $
    26,547
    
    
    
    100.00
    %
    
    $
    25,501
    
    
    
    100.00
    %
    
    $
    24,010
    
    
    
    100.00
    %
    
    $
    22,144
    
    
    
    100.00
    %
    
    $
    20,010
    
    
    
    100.00
    %
 Page 18




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##### Table of Contents



Investment Activities Investment Securities.The
Board of Directors reviews and approves our
investment policy on an annual basis. The Chief Executive Officer, Chief
Operating Officer and Investment Officer, as authorized by the Board of
Directors, implement this policy. The Board of Directors reviews our investment
activity on a monthly basis. Our investment policy is designed primarily to
manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our
lending activities and to provide and maintain liquidity within established
guidelines. In establishing our investment strategies, we consider our interest
rate sensitivity position, the types of securities to be held, liquidity and
other factors. We have authority to invest in various types of assets,
including U.S. Treasury obligations, securities of various federal agencies,
mortgage-backed securities, certain time deposits of insured banks and savings
institutions, certain bankers acceptances, repurchase agreements, loans of
federal funds, and, subject to certain limits, corporate debt and equity
securities, commercial paper and mutual funds. During 2003 we purchased $3.09
billion of investment securities compared with $598.5 million during 2002. The
increase reflected the investment of part of the cash flow from the high levels
of prepayment activity on our mortgage-related assets into investment
securities, and growth initiatives funded by customer deposits and borrowed
funds. The purchases were callable government-sponsored agency securities and
were classified as available for sale. Our investment policy currently does not authorize
participation in hedging
programs, options or futures transactions or interest rate swaps and also
prohibits the purchase of non-investment grade bonds. In the future we may
amend our policy to allow us to engage in hedging transactions. Our investment
policy also provides that we will not engage in any practice that the Federal
Financial Institutions Examination Council (FFIEC) considers to be an
unsuitable investment practice. In addition, the policy provides that we shall
maintain primary liquidity, which consists of investments in cash, cash in
banks, Federal funds sold, securities with remaining maturities of less than
five years and adjustable-rate mortgage-backed securities repricing within one
year, in an amount equal to 4% of total deposits and short-term borrowings. At
December 31, 2003, our primary liquidity ratio was 12.4%. For information
regarding the carrying values, yields and maturities of our investment
securities and mortgage-backed securities, see  Carrying Values, Yields and
Maturities. We classify securities as held to maturity or
available for sale at the date of
purchase. Held to maturity securities are reported at cost, adjusted for
amortization of premium and accretion of discount. We have both the ability and
positive intent to hold these securities to maturity. Available for sale
securities are reported at fair market value. We currently have no securities
classified as trading. Mortgage-backed Securities.All of our mortgage-backed securities are
directly or indirectly insured or guaranteed by GNMA, FannieMae or FreddieMac.
We classify mortgage-backed securities as held to maturity or available for
sale at the date of purchase based on our assessment of our internal liquidity
requirements. Held to maturity mortgage-backed securities are reported at
cost, adjusted for amortization of premium and accretion of discount. We have
both the ability and positive intent to hold these investments to maturity.
Available for sale mortgage-backed securities are reported at fair market
value. We currently have no mortgage-backed securities classified as trading. At December 31, 2003, mortgage-backed
securities classified as held to maturity
totaled $4.29 billion, or 25.2% of total assets, while $1.13 billion, or 6.6%
of total assets, were classified as available for sale. At December 31, 2003,
the mortgage-backed securities portfolio had a weighted average rate of 4.96%
and a market value of approximately $5.38 billion. Of the mortgage-backed
securities we held at December 31, Page 19




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##### Table of Contents



2003, $4.46 billion, or 82.3% of total
mortgage-backed securities, had fixed
rates and $959.4 million, or 17.7% of total mortgage-backed securities, had
adjustable-rates. Our mortgage-backed securities portfolio includes real
estate mortgage investment conduits (REMICs), which are securities derived by
reallocating cash flows from mortgage pass-through securities or from pools of
mortgage loans held by a trust. REMICs are a form of, and are often referred to
as, collateralized mortgage obligations (CMOs). At December 31, 2003, we
held $1.59 billion of REMICs, which constituted 29.2% of our mortgage-backed
securities portfolio. These REMICs had an approximate market value of $1.54
billion at December 31, 2003. The REMICs have fixed coupon rates ranging from
4.50% to 6.50%, a weighted-average rate of 4.92%, and an expected average life of
3.56 years. All REMICs owned received principal and interest payments from the
date of purchase. The volume of our mortgage-backed security
purchases increased to $4.53 billion
during 2003 from $3.57 billion during 2002, due to the lower interest rate
environment in 2003, which caused an increase in prepayment activity. Of the
mortgage-backed securities purchased in 2003, $1.58 billion were
REMICs. The REMIC purchases in 2003 had fixed
interest rates and generally had shorter average lives compared with alternate
mortgage-backed security investments available at the time of purchase.
Purchases of mortgage-backed securities may decline in the future to offset any
significant increase in demand for one- to four-family mortgage loans. Mortgage-backed securities generally yield less
than the loans that underlie
such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-backed securities are
more liquid than individual mortgage loans and are used to collateralize
certain borrowings. In general, mortgage-backed securities issued or guaranteed
by GNMA, FannieMae and FreddieMac are weighted at no more than 20% for
risk-based capital purposes, compared to the 50% risk-weighting assigned to
most non-securitized residential mortgage loans. While mortgage-backed securities carry a reduced
credit risk as compared to
whole loans, they remain subject to the risk of a fluctuating interest rate
environment. Along with other factors, such as the geographic distribution of
the underlying mortgage loans, changes in interest rates may alter the
prepayment rate of those mortgage loans and affect both the prepayment rates
and value of mortgage-backed securities. Page 20




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##### Table of Contents



The following table presents our investment
securities activity for the periods
indicated. For the Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Investment securities:Carrying value at beginning of period
    
    $
    562,338
    
    
    $
    168,868
    
    
    $
    878,148Purchases:Available for sale
    
    
    3,089,474
    
    
    
    598,358
    
    
    
    130,430Equity securities
    
    
    
    
    
    
    189
    
    
    
    10,000Calls:Held to maturity
    
    
    (40
    )
    
    
    (35
    )
    
    
    (40
    )Available for sale
    
    
    (1,332,072
    )
    
    
    (202,687
    )
    
    
    (855,614
    )Maturities:Available for sale
    
    
    (150
    )
    
    
    (651
    )
    
    
    Sales:Available for sale
    
    
    (50,000
    )
    
    
    (9,919
    )
    
    
    Equity securities
    
    
    (20
    )
    
    
    
    
    
    
    Premium amortization and discount
accretion, net
    
    
    (2,047
    )
    
    
    (346
    )
    
    
    Change in unrealized gain or
loss
    
    
    (22,305
    )
    
    
    8,561
    
    
    
    5,944Net increase (decrease) in
investment securities
    
    
    1,682,840
    
    
    
    393,470
    
    
    
    (709,280
    )Carrying value at end of
period
    
    $
    2,245,178
    
    
    $
    562,338
    
    
    $
    168,868
 The following table presents our mortgage-backed
securities activity for the
periods indicated. For the Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Mortgage-backed securities:Carrying value at beginning of period
    
    $
    6,126,161
    
    
    $
    5,009,178
    
    
    $
    3,262,035Purchases:Held to maturity
    
    
    3,038,153
    
    
    
    2,400,445
    
    
    
    2,804,215Available for sale
    
    
    1,489,154
    
    
    
    1,168,106
    
    
    
    560,228Principal payments:Held to maturity
    
    
    (3,387,605
    )
    
    
    (2,133,902
    )
    
    
    (1,584,372
    )Available for sale
    
    
    (410,316
    )
    
    
    (250,244
    )
    
    
    (35,996
    )Sales:Held to maturity
    
    
    (64,590
    )
    
    
    
    
    
    
    Available for sale
    
    
    (1,310,004
    )
    
    
    (76,683
    )
    
    
    Premium amortization and discount accretion, net
    
    
    (31,307
    )
    
    
    (13,542
    )
    
    
    (3,797
    )Change in unrealized gain or loss
    
    
    (26,945
    )
    
    
    22,803
    
    
    
    6,865Net (decrease)increase in
mortgage-backed securities
    
    
    (703,460
    )
    
    
    1,116,983
    
    
    
    1,747,143Carrying value at end of period
    
    $
    5,422,701
    
    
    $
    6,126,161
    
    
    $
    5,009,178
 Page 21




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##### Table of Contents



The following table presents the composition of our
money market investments,
investment securities and mortgage-backed securities portfolios in dollar
amount and in percentage of each investment type at the dates indicated. It
also presents the coupon type for the mortgage-backed securities portfolio. At December 31,2003
    
    2002
    
    2001Carrying
    
    Percent of
    
    Fair
    
    Carrying
    
    Percent of
    
    Fair
    
    Carrying
    
    Percent of
    
    FairValue
    
    Total (1)
    
    Value
    
    Value
    
    Total (1)
    
    Value
    
    Value
    
    Total (1)
    
    Value(Dollars in thousands)Money market investments:Federal funds sold
    
    $
    63,600
    
    
    
    100.00
    %
    
    $
    63,600
    
    
    $
    87,700
    
    
    
    100.00
    %
    
    $
    87,700
    
    
    $
    17,600
    
    
    
    100.00
    %
    
    $
    17,600Investment securities:Held to maturity:Municipal bonds
    
    $
    1,366
    
    
    
    0.06
    %
    
    $
    1,443
    
    
    $
    1,406
    
    
    
    0.25
    %
    
    $
    1,497
    
    
    $
    1,441
    
    
    
    0.85
    %
    
    $
    1,474Available for sale:United States government agencies
    
    
    2,233,035
    
    
    
    99.46
    
    
    
    2,233,035
    
    
    
    549,505
    
    
    
    97.72
    
    
    
    549,505
    
    
    
    156,408
    
    
    
    92.62
    
    
    
    156,408Corporate bonds
    
    
    81
    
    
    
    
    
    
    
    81
    
    
    
    334
    
    
    
    0.06
    
    
    
    334
    
    
    
    1,044
    
    
    
    0.62
    
    
    
    1,044Equity securities
    
    
    10,696
    
    
    
    0.48
    
    
    
    10,696
    
    
    
    11,093
    
    
    
    1.97
    
    
    
    11,093
    
    
    
    9,975
    
    
    
    5.91
    
    
    
    9,975Total available for sale
    
    
    2,243,812
    
    
    
    99.94
    
    
    
    2,243,812
    
    
    
    560,932
    
    
    
    99.75
    
    
    
    560,932
    
    
    
    167,427
    
    
    
    99.15
    
    
    
    167,427Total investment securities
    
    $
    2,245,178
    
    
    
    100.00
    %
    
    $
    2,245,255
    
    
    $
    562,338
    
    
    
    100.00
    %
    
    $
    562,429
    
    
    $
    168,868
    
    
    
    100.00
    %
    
    $
    168,901Mortgage-backed securities:By issuer:Held to maturity:GNMA pass-through certificates
    
    $
    616,618
    
    
    
    11.37
    %
    
    $
    626,239
    
    
    $
    1,059,848
    
    
    
    17.30
    %
    
    $
    1,088,541
    
    
    $
    1,704,584
    
    
    
    34.03
    %
    
    $
    1,730,296FNMA pass-through certificates
    
    
    1,650,544
    
    
    
    30.44
    
    
    
    1,652,854
    
    
    
    1,186,247
    
    
    
    19.36
    
    
    
    1,221,835
    
    
    
    642,457
    
    
    
    12.83
    
    
    
    656,063FHLMC pass-through certificates
    
    
    439,793
    
    
    
    8.11
    
    
    
    433,097
    
    
    
    213,686
    
    
    
    3.49
    
    
    
    219,564
    
    
    
    139,149
    
    
    
    2.78
    
    
    
    142,856FHLMC, FNMA and GNMA REMICs
    
    
    1,585,489
    
    
    
    29.24
    
    
    
    1,538,498
    
    
    
    2,274,485
    
    
    
    37.13
    
    
    
    2,298,999
    
    
    
    1,992,298
    
    
    
    39.77
    
    
    
    2,001,477Total held to maturity
    
    
    4,292,444
    
    
    
    79.16
    
    
    
    4,250,688
    
    
    
    4,734,266
    
    
    
    77.28
    
    
    
    4,828,939
    
    
    
    4,478,488
    
    
    
    89.41
    
    
    
    4,530,692Available for sale:GNMA pass-through certificates
    
    
    336,458
    
    
    
    6.20
    
    
    
    336,458
    
    
    
    1,391,895
    
    
    
    22.72
    
    
    
    1,391,895
    
    
    
    530,690
    
    
    
    10.59
    
    
    
    530,690FNMA pass-through certificates
    
    
    493,383
    
    
    
    9.10
    
    
    
    493,383
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FHLMC pass-through certificates
    
    
    300,416
    
    
    
    5.54
    
    
    
    300,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for sale
    
    
    1,130,257
    
    
    
    20.84
    
    
    
    1,130,257
    
    
    
    1,391,895
    
    
    
    22.72
    
    
    
    1,391,895
    
    
    
    530,690
    
    
    
    10.59
    
    
    
    530,690Total mortgage-backed securities
    
    $
    5,422,701
    
    
    
    100.00
    %
    
    $
    5,380,945
    
    
    $
    6,126,161
    
    
    
    100.00
    %
    
    $
    6,220,834
    
    
    $
    5,009,178
    
    
    
    100.00
    %
    
    $
    5,061,382By coupon type:Adjustable-rate
    
    $
    959,445
    
    
    
    17.69
    %
    
    $
    967,477
    
    
    $
    2,409,746
    
    
    
    39.34
    %
    
    $
    2,433,191
    
    
    $
    2,131,492
    
    
    
    42.55
    %
    
    $
    2,151,018Fixed-rate
    
    
    4,463,256
    
    
    
    82.31
    
    
    
    4,413,468
    
    
    
    3,716,415
    
    
    
    60.66
    
    
    
    3,787,643
    
    
    
    2,877,686
    
    
    
    57.45
    
    
    
    2,910,364Total mortgage-backed securities
    
    $
    5,422,701
    
    
    
    100.00
    %
    
    $
    5,380,945
    
    
    $
    6,126,161
    
    
    
    100.00
    %
    
    $
    6,220,834
    
    
    $
    5,009,178
    
    
    
    100.00
    %
    
    $
    5,061,382Total investment portfolio
    
    $
    7,731,479
    
    
    
    
    
    
    $
    7,689,800
    
    
    $
    6,776,199
    
    
    
    
    
    
    $
    6,870,963
    
    
    $
    5,195,646
    
    
    
    
    
    
    $
    5,247,883
   (1)
    
    Based on carrying value for each investment type. Page 22




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##### Table of Contents



Carrying Values, Rates and
Maturities.The table below presents information
regarding the carrying values, weighted average rates and contractual
maturities of our money market investments, investment securities and
mortgage-backed securities at December 31, 2003. Mortgage-backed securities are
presented by issuer and by coupon type. Equity securities have been excluded
from this table. At December 31, 2003More Than One Year
    
    More Than Five YearsOne Year or Less
    
    to Five Years
    
    to Ten Years
    
    More Than Ten Years
    
    TotalWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedCarrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    Average
    
    Carrying
    
    AverageValue
    
    Rate
    
    Value
    
    Rate
    
    Value
    
    Rate
    
    Value
    
    Rate
    
    Value
    
    Rate(Dollars in thousands)Money market investments:Federal funds sold
    
    $
    63,600
    
    
    
    1.00
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    63,600
    
    
    
    1.00
    %Investment securities:Held to maturity:Municipal bonds
    
    $
    100
    
    
    
    5.20
    
    
    $
    110
    
    
    
    6.50
    
    
    $
    905
    
    
    
    6.43
    
    
    $
    251
    
    
    
    6.02
    
    
    $
    1,366
    
    
    
    6.27Available for sale:United States government agencies
    
    
    
    
    
    
    
    
    
    
    71,599
    
    
    
    3.50
    
    
    
    2,086,423
    
    
    
    4.36
    
    
    
    75,013
    
    
    
    6.10
    
    
    
    2,233,035
    
    
    
    4.39Corporate bonds
    
    
    
    
    
    
    
    
    
    
    81
    
    
    
    5.54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81
    
    
    
    5.54Total available for sale
    
    
    
    
    
    
    
    
    
    
    71,680
    
    
    
    3.50
    
    
    
    2,086,423
    
    
    
    4.36
    
    
    
    75,013
    
    
    
    6.10
    
    
    
    2,233,116
    
    
    
    4.39Total investment securities
    
    $
    100
    
    
    
    5.20
    
    
    $
    71,790
    
    
    
    3.50
    
    
    $
    2,087,328
    
    
    
    4.36
    
    
    $
    75,264
    
    
    
    6.10
    
    
    $
    2,234,482
    
    
    
    4.39Mortgage-backed securities:By issuer:Held to maturity:GNMA pass-through certificates
    
    $
    
    
    
    
    
    
    
    $
    4,173
    
    
    
    8.20
    
    
    $
    1,830
    
    
    
    9.84
    
    
    $
    610,615
    
    
    
    4.43
    
    
    $
    616,618
    
    
    
    4.47FNMA pass-through certificates
    
    
    
    
    
    
    
    
    
    
    17,175
    
    
    
    6.68
    
    
    
    8,204
    
    
    
    6.71
    
    
    
    1,625,165
    
    
    
    5.30
    
    
    
    1,650,544
    
    
    
    5.32FHLMC pass-through certificates
    
    
    108
    
    
    
    9.42
    
    
    
    1,236
    
    
    
    9.09
    
    
    
    8,025
    
    
    
    7.34
    
    
    
    430,424
    
    
    
    4.78
    
    
    
    439,793
    
    
    
    4.84FHLMC, FNMA and GNMA REMICs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,585,489
    
    
    
    4.92
    
    
    
    1,585,489
    
    
    
    4.92Total held to maturity
    
    
    108
    
    
    
    9.42
    
    
    
    22,584
    
    
    
    7.09
    
    
    
    18,059
    
    
    
    7.31
    
    
    
    4,251,693
    
    
    
    4.98
    
    
    
    4,292,444
    
    
    
    5.00Available for sale:GNMA pass-through certificates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336,458
    
    
    
    3.91
    
    
    
    336,458
    
    
    
    3.91FNMA pass-through certificates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    493,383
    
    
    
    5.00
    
    
    
    493,383
    
    
    
    5.00FHLMC pass-through certificates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,416
    
    
    
    5.34
    
    
    
    300,416
    
    
    
    5.34Total available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,130,257
    
    
    
    4.77
    
    
    
    1,130,257
    
    
    
    4.77Total mortgage-backed securities
    
    $
    108
    
    
    
    9.42
    
    
    $
    22,584
    
    
    
    7.09
    
    
    $
    18,059
    
    
    
    7.31
    
    
    $
    5,381,950
    
    
    
    4.94
    
    
    $
    5,422,701
    
    
    
    4.96By coupon type:Adjustable-rate
    
    $
    
    
    
    
    
    
    
    $
    54
    
    
    
    4.91
    
    
    $
    
    
    
    
    
    
    
    $
    959,391
    
    
    
    4.18
    
    
    $
    959,445
    
    
    
    4.18Fixed-rate
    
    
    108
    
    
    
    9.42
    
    
    
    22,530
    
    
    
    7.10
    
    
    
    18,059
    
    
    
    7.31
    
    
    
    4,422,559
    
    
    
    5.10
    
    
    
    4,463,256
    
    
    
    5.12Total mortgage-backed securities
    
    $
    108
    
    
    
    9.42
    
    
    $
    22,584
    
    
    
    7.09
    
    
    $
    18,059
    
    
    
    7.31
    
    
    $
    5,381,950
    
    
    
    4.94
    
    
    $
    5,422,701
    
    
    
    4.96Total investment portfolio
    
    $
    63,808
    
    
    
    1.02
    
    
    $
    94,374
    
    
    
    4.36
    
    
    $
    2,105,387
    
    
    
    4.39
    
    
    $
    5,457,214
    
    
    
    4.96
    
    
    $
    7,720,783
    
    
    
    4.76
 Page 23




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##### Table of Contents



Sources of Funds General.Deposits, borrowings,
scheduled amortization and prepayments of
loan principal and mortgage-backed securities, maturities and calls of
investment securities and funds provided by operations are our primary sources
of funds for use in lending, investing and for other general purposes. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources. Deposits.We offer a variety
of deposit accounts having a range of interest
rates and terms. We currently offer passbook and statement savings accounts,
NOW accounts, checking accounts, money market accounts and time deposits. We
also offer IRA accounts and qualified retirement plans. We view our interest-bearing High Value Checking
account as an attractive
alternative to cash management accounts offered by brokerage firms. This
account offers unlimited checking, no charge on-line banking, no charge bill
payment and debit card availability as part of the product, and pays an
interest rate generally above competitive market rates. The balance in the
High Value Checking account at December 31, 2003 was $2.71 billion compared
with $943.2 million at December 31, 2002. Deposit flows are influenced significantly by
general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from market areas surrounding
our offices. We rely primarily on paying competitive rates, providing strong
customer service and maintaining long-standing relationships with customers to
attract and retain these deposits. We do not use brokers to obtain deposits.
We believe the increase in the interest-bearing deposits in 2003 was due
primarily to our consistent offering of competitive rates on our deposit
products and the continued success of our interest-bearing High Value Checking
account. When we determine our deposit rates, we consider
local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as regular savings deposits, money market accounts and
noninterest-bearing transaction accounts) represented 18.8% of total deposits
on December 31, 2003. At December 31, 2003, time deposits with remaining terms
to maturity of less than one year amounted to $4.61 billion. See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Analysis of Net Interest Income for information relating to the average
balances and costs of our deposit accounts for the years ended December 31,
2003, 2002 and 2001. Page 24




---



##### Table of Contents



The following table presents our deposit activity
for the periods indicated: For the Year Ended December 31,2003
    
    2002
    
    2001(Dollars in thousands)Total deposits at beginning
of period
    
    $
    9,138,629
    
    
    $
    7,912,762
    
    
    $
    6,604,121Net increase in
deposits
    
    
    1,105,812
    
    
    
    970,092
    
    
    
    1,001,634Interest credited, net
penalties
    
    
    209,339
    
    
    
    255,775
    
    
    
    307,007Total deposits at end of
period
    
    $
    10,453,780
    
    
    $
    9,138,629
    
    
    $
    7,912,762Net increase
    
    $
    1,315,151
    
    
    $
    1,225,867
    
    
    $
    1,308,641Percent increase
    
    
    14.39
    %
    
    
    15.49
    %
    
    
    19.82
    %
 At December 31, 2003, we had
$914.6 million in time deposits with balances of
$100,000 and over maturing as follows: Maturity Period
    
    Amount(In thousands)Three months or less
    
    $
    299,561Over three months through six months
    
    
    214,272Over six months through 12 months
    
    
    219,623Over 12 months
    
    
    181,183Total
    
    $
    914,639
 Page 25




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##### Table of Contents



The following table presents the distribution of
our deposit accounts at the
dates indicated by dollar amount and percent of portfolio, and the weighted
average nominal interest rate on each category of deposits. At December 31,2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    WeightedPercent
    
    average
    
    
    
    
    
    Percent
    
    average
    
    
    
    
    
    Percent
    
    averageof total
    
    nominal
    
    
    
    
    
    of total
    
    nominal
    
    
    
    
    
    of total
    
    nominalAmount
    
    deposits
    
    rate
    
    Amount
    
    deposits
    
    rate
    
    Amount
    
    deposits
    
    rate(Dollars in thousands)Savings
    
    $
    945,595
    
    
    
    9.05
    %
    
    
    0.98
    %
    
    $
    892,678
    
    
    
    9.77
    %
    
    
    1.61
    %
    
    $
    814,367
    
    
    
    10.29
    %
    
    
    2.05
    %Interest-bearing demand
    
    
    2,808,901
    
    
    
    26.87
    
    
    
    2.09
    
    
    
    1,040,614
    
    
    
    11.39
    
    
    
    2.80
    
    
    
    102,185
    
    
    
    1.29
    
    
    
    1.24Money market
    
    
    623,811
    
    
    
    5.97
    
    
    
    0.96
    
    
    
    629,042
    
    
    
    6.88
    
    
    
    1.56
    
    
    
    516,700
    
    
    
    6.53
    
    
    
    2.12Noninterest-bearing demand
    
    
    396,495
    
    
    
    3.79
    
    
    
    
    
    
    
    388,465
    
    
    
    4.25
    
    
    
    
    
    
    
    375,659
    
    
    
    4.75
    
    
    
    Total
    
    
    4,774,802
    
    
    
    45.68
    
    
    
    1.55
    
    
    
    2,950,799
    
    
    
    32.29
    
    
    
    1.81
    
    
    
    1,808,911
    
    
    
    22.86
    
    
    
    1.60Time deposits:Time deposits $100,000 and over
    
    
    914,639
    
    
    
    8.75
    
    
    
    2.19
    
    
    
    967,983
    
    
    
    10.59
    
    
    
    2.83
    
    
    
    923,830
    
    
    
    11.68
    
    
    
    4.07Time deposits less than
$100,000 with original
maturities of:Three months or less
    
    
    483,460
    
    
    
    4.62
    
    
    
    1.37
    
    
    
    619,953
    
    
    
    6.78
    
    
    
    2.10
    
    
    
    709,409
    
    
    
    8.97
    
    
    
    3.33Over three months to twelve months
    
    
    1,166,713
    
    
    
    11.16
    
    
    
    1.52
    
    
    
    1,668,926
    
    
    
    18.26
    
    
    
    2.54
    
    
    
    2,114,885
    
    
    
    26.73
    
    
    
    4.03Over twelve months to
twenty-four months
    
    
    1,634,702
    
    
    
    15.64
    
    
    
    2.18
    
    
    
    1,723,400
    
    
    
    18.86
    
    
    
    3.03
    
    
    
    1,382,543
    
    
    
    17.47
    
    
    
    4.37Over twenty-four months
to thirty-six months
    
    
    562,678
    
    
    
    5.38
    
    
    
    2.94
    
    
    
    456,832
    
    
    
    5.00
    
    
    
    3.79
    
    
    
    324,533
    
    
    
    4.10
    
    
    
    5.22Over thirty-six months to
forty-eight months
    
    
    149,801
    
    
    
    1.43
    
    
    
    3.48
    
    
    
    73,431
    
    
    
    0.80
    
    
    
    4.16
    
    
    
    56,831
    
    
    
    0.72
    
    
    
    5.04Over forty-eight months
to sixty months
    
    
    27,594
    
    
    
    0.26
    
    
    
    3.70
    
    
    
    15,419
    
    
    
    0.17
    
    
    
    4.19
    
    
    
    8,878
    
    
    
    0.11
    
    
    
    4.60Over sixty months
    
    
    70,850
    
    
    
    0.68
    
    
    
    3.79
    
    
    
    37,018
    
    
    
    0.41
    
    
    
    4.33
    
    
    
    15,891
    
    
    
    0.20
    
    
    
    4.88IRA and Keogh accounts
    
    
    668,541
    
    
    
    6.40
    
    
    
    2.57
    
    
    
    624,868
    
    
    
    6.84
    
    
    
    3.28
    
    
    
    567,051
    
    
    
    7.16
    
    
    
    4.59Total time deposits
    
    
    5,678,978
    
    
    
    54.32
    
    
    
    2.16
    
    
    
    6,187,830
    
    
    
    67.71
    
    
    
    2.88
    
    
    
    6,103,851
    
    
    
    77.14
    
    
    
    4.16Total deposits
    
    $
    10,453,780
    
    
    
    100.00
    %
    
    
    1.88
    
    
    $
    9,138,629
    
    
    
    100.00
    %
    
    
    2.53
    
    
    $
    7,912,762
    
    
    
    100.00
    %
    
    
    3.57
 Page 26




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##### Table of Contents



The following table presents, by rate category, the
amount of our time deposit
accounts outstanding at December 31, 2003, 2002 and 2001. At December 31,2003
    
    2002
    
    2001(In thousands)Time deposit accounts:1.50% or less
    
    $
    1,917,721
    
    
    $
    
    
    
    $
    1.51% to 2.00%
    
    
    1,107,584
    
    
    
    205,817
    
    
    
    2.01% to 2.50%
    
    
    968,757
    
    
    
    1,767,200
    
    
    
    1,4412.51% to 3.00%
    
    
    813,199
    
    
    
    2,185,898
    
    
    
    3.01% to 3.50%
    
    
    501,926
    
    
    
    1,236,782
    
    
    
    1,670,805Over 3.50%
    
    
    369,791
    
    
    
    792,133
    
    
    
    4,431,605Total
    
    $
    5,678,978
    
    
    $
    6,187,830
    
    
    $
    6,103,851
 The following table presents, by rate category, the
remaining period to
maturity of time deposit accounts outstanding as of December 31, 2003. Period to Maturity from December 31, 2003Within
    
    Over three
    
    Over six
    
    Over one
    
    Over two
    
    Overthree
    
    to six
    
    months to
    
    to two
    
    to three
    
    threemonths
    
    months
    
    one year
    
    years
    
    years
    
    years
    
    Total(In thousands)Time deposit accounts:1.50% or less
    
    $
    1,109,083
    
    
    $
    701,863
    
    
    $
    106,775
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,917,7211.51% to 2.00%
    
    
    215,303
    
    
    
    217,978
    
    
    
    507,395
    
    
    
    166,739
    
    
    
    
    
    
    
    169
    
    
    
    1,107,5842.01% to 2.50%
    
    
    215,229
    
    
    
    115,581
    
    
    
    332,843
    
    
    
    303,130
    
    
    
    1,888
    
    
    
    86
    
    
    
    968,7572.51% to 3.00%
    
    
    132,397
    
    
    
    248,746
    
    
    
    169,672
    
    
    
    184,502
    
    
    
    77,484
    
    
    
    398
    
    
    
    813,1993.01% to 3.50%
    
    
    89,997
    
    
    
    29,586
    
    
    
    209,007
    
    
    
    49,886
    
    
    
    35,266
    
    
    
    88,184
    
    
    
    501,926Over 3.50%
    
    
    69,944
    
    
    
    67,403
    
    
    
    72,371
    
    
    
    40,820
    
    
    
    22,466
    
    
    
    96,787
    
    
    
    369,791Total
    
    $
    1,831,953
    
    
    $
    1,381,157
    
    
    $
    1,398,063
    
    
    $
    745,077
    
    
    $
    137,104
    
    
    $
    185,624
    
    
    $
    5,678,978
 Borrowings.Hudson City enters into
sales of securities under agreements to
repurchase with selected brokers and the Federal Home Loan Bank of New York
(FHLB). These agreements are recorded as financing transactions as Hudson
City maintains effective control over the transferred securities. The dollar
amount of the securities underlying the agreements continues to be carried in
Hudson Citys securities portfolio. The obligations to repurchase the
securities are reported as a liability in the consolidated statements of
financial condition. The securities underlying the agreements are
delivered to the party with whom
each transaction is executed. They agree to resell to Hudson City the same
securities at the maturity or call of the agreement. Hudson City retains the
right of substitution of the underlying securities throughout the terms of the
agreements. Page 27




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##### Table of Contents



Hudson City has also obtained advances from the
FHLB, which are generally
secured by a blanket lien against our mortgage portfolio. Borrowings with the
FHLB are generally limited to twenty times the amount of FHLB stock owned. Borrowed funds at December 31 are summarized
as follows: 2003
    
    2002Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AveragePrincipal
    
    Rate
    
    Principal
    
    Rate(Dollars in thousands)Securities sold under agreements to repurchase:FHLB
    
    $
    1,250,000
    
    
    
    4.00
    %
    
    $
    1,000,000
    
    
    
    4.90
    %Other brokers
    
    
    1,950,000
    
    
    
    3.14
    
    
    
    850,000
    
    
    
    5.05Total securities sold under
agreements to repurchase
    
    
    3,200,000
    
    
    
    3.48
    
    
    
    1,850,000
    
    
    
    4.97Advances from the FHLB
    
    
    1,950,000
    
    
    
    3.69
    
    
    
    1,750,000
    
    
    
    3.92Total borrowed funds
    
    $
    5,150,000
    
    
    
    3.56
    
    
    $
    3,600,000
    
    
    
    4.46
 At December 31, 2003, borrowed funds had
scheduled maturities and potential
call dates as indicated below. Substantially all of our borrowed funds are
callable at the discretion of the issuer. These call features are generally
quarterly, after an initial non-call period of three months to five years from
the date of borrowing. Borrowings by Scheduled
    
    Borrowings by NextMaturity Date
    
    Potential Call DateWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageYear
    
    Principal
    
    Rate
    
    Principal
    
    Rate(Dollars in thousands)2004
    
    $
    50,000
    
    
    
    5.00
    %
    
    $
    1,400,000
    
    
    
    2.93
    %2005
    
    
    
    
    
    
    
    
    
    
    1,625,000
    
    
    
    3.642006
    
    
    650,000
    
    
    
    1.12
    
    
    
    1,275,000
    
    
    
    3.742007
    
    
    
    
    
    
    
    
    
    
    800,000
    
    
    
    4.092008
    
    
    100,000
    
    
    
    1.13
    
    
    
    
    
    
    
    2010
    
    
    300,000
    
    
    
    5.68
    
    
    
    50,000
    
    
    
    5.272011
    
    
    1,000,000
    
    
    
    4.66
    
    
    
    
    
    
    
    2012
    
    
    1,500,000
    
    
    
    4.06
    
    
    
    
    
    
    
    2013
    
    
    1,550,000
    
    
    
    3.08
    
    
    
    
    
    
    
    Total
    
    $
    5,150,000
    
    
    
    3.56
    
    
    $
    5,150,000
    
    
    
    3.56
 Page 28




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##### Table of Contents



The amortized cost and fair value of the underlying
securities used as
collateral for securities sold under agreements to repurchase, the average
balances and the maximum outstanding at any month-end at or for the years ended
December 31, 2003 and 2002 are as follows: At or for the year endedDecember 31,2003
    
    2002(In thousands)Amortized cost of collateral:United States government agency securities
    
    $
    615,806
    
    
    $
    108,245Mortgage-backed securities
    
    
    2,369,058
    
    
    
    1,071,529REMICs
    
    
    495,074
    
    
    
    730,353Total amortized cost of collateral
    
    $
    3,479,938
    
    
    $
    1,910,127Fair value of collateral:United States government agency securities
    
    $
    604,397
    
    
    $
    110,471Mortgage-backed securities
    
    
    2,387,457
    
    
    
    1,101,884REMICs
    
    
    478,192
    
    
    
    747,425Total fair value of collateral
    
    $
    3,470,046
    
    
    $
    1,959,780Average balance of outstanding repurchase
agreements during the year
    
    $
    2,253,025
    
    
    $
    1,734,384Maximum balance of outstanding repurchase
agreements at any month-end during the year
    
    $
    3,200,000
    
    
    $
    1,850,000
 The average balance of our advances from the FHLB
during 2003 was $1.84 billion
and the maximum FHLB advances outstanding during 2003 was $2.05 billion. Subsidiaries Hudson City Savings has one wholly owned and
consolidated subsidiary: HudCiti
Service Corporation. HudCiti Service Corporation, which qualifies as a New
Jersey investment company, has one wholly owned and consolidated subsidiary:
Hudson City Preferred Funding Corp. Hudson City Preferred Funding qualifies as
a real estate investment trust, pursuant to the Internal Revenue Code of 1986,
as amended, and had $5.83 billion of mortgage loans outstanding at December 31,
2003. In 2003, Hudson City Savings received regulatory
approval to form an insurance
subsidiary, HC Value Broker Services, Inc., whose primary operating activity
will be the referral of insurance applications for savings bank life insurance.
As of December 31, 2003, this insurance subsidiary was not yet in operation.
Operations are expected to commence in the second quarter of 2004. Personnel As of December 31, 2003, we had 981 full-time
employees and 99 part-time
employees. The employees are not represented by a collective bargaining unit
and we consider our relationship with our employees to be good. Page 29




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REGULATION OF HUDSON CITY SAVINGS BANK AND HUDSON CITY BANCORP General Hudson City Savings converted from a New Jersey
chartered savings bank to a
federally chartered savings bank effective January 1, 2004. Its deposit
accounts continue to be insured up to applicable limits by the Federal Deposit
Insurance Corporation (FDIC) under the Bank Insurance Fund (BIF). Under
its new charter, Hudson City Savings is subject to extensive regulation,
examination and supervision by the Office of Thrift Supervision (the OTS) as
its chartering agency, and by the FDIC as the deposit insurer. Hudson City,
MHC and Hudson City Bancorp became unitary savings and loan holding companies
as result of Hudson City Savings charter conversion, and, therefore, Hudson
City, MHC and Hudson City Bancorp are now regulated, examined and supervised by
the OTS. Hudson City, MHC, as a New Jersey chartered mutual holding company,
is also regulated by the New Jersey Department of Banking and Insurance (the
Department) and is subject to the provisions of the New Jersey Banking Act of
1948 (the New Jersey Banking Act) and the regulations of the Department under
the New Jersey Banking Act applicable to mutual holding companies. Each of
Hudson City, MHC, Hudson City Bancorp and Hudson City Savings must file reports
with the OTS concerning its activities and financial condition, and must obtain
regulatory approval from the OTS prior to entering into certain transactions,
such as mergers with, or acquisitions of, other depository institutions. The
OTS will conduct periodic examinations to assess Hudson City, MHC, Hudson City
Bancorp and Hudson City Savings Banks compliance with various regulatory
requirements. The OTS has primary enforcement responsibility over federally
chartered savings banks and has substantial discretion to impose enforcement
action on an institution that fails to comply with applicable regulatory
requirements, particularly with respect to its capital requirements. In
addition, the FDIC has the authority to recommend to the Director of the OTS
that enforcement action be taken with respect to a particular federally
chartered savings bank and, if action is not taken by the Director, the FDIC
has authority to take such action under certain circumstances. This regulation and supervision establishes a
comprehensive framework of
activities in which a federal savings bank can engage and is intended primarily
for the protection of the deposit insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such laws and regulations, whether by the OTS, the FDIC or through
legislation, could have a material adverse impact on Hudson City, MHC, Hudson
City Bancorp and Hudson City Savings and their operations and stockholders. Federally Chartered Savings Bank Regulation Activity Powers.Hudson City
Savings derives its lending, investment and
other activity powers primarily from the Home Owners Loan Act, as amended,
commonly referred to as HOLA, and the regulations of the OTS thereunder. Under
these laws and regulations, federal savings banks, including Hudson City
Savings, generally may invest in:   ̈
    
    real estate mortgages; ̈
    
    consumer and commercial loans; ̈
    
    certain types of debt securities; and ̈
    
    certain other assets. Page 30




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Hudson City Savings may also establish service
corporations that may engage in
activities not otherwise permissible for Hudson City Savings, including certain
real estate equity investments and securities and insurance brokerage
activities. These investment powers are subject to various limitations,
including (1) a prohibition against the acquisition of any corporate debt
security that is not rated in one of the four highest rating categories, (2) a
limit of 400% of an associations capital on the aggregate amount of loans
secured by non-residential real estate property, (3) a limit of 20% of an
associations assets on commercial loans, with the amount of commercial loans
in excess of 10% of assets being limited to small business loans, (4) a limit
of 35% of an associations assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities, (5) a limit of 5% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA), and
(6) a limit of the greater of 5% of assets or an associations capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property. Capital Requirements.The OTS capital
regulations require federally
chartered savings banks to meet three minimum capital ratios: a 1.5% tangible
capital ratio, a 4% leverage (core capital) ratio and an 8% total risk-based
capital ratio. In assessing an institutions capital adequacy, the OTS takes
into consideration not only these numeric factors but also qualitative factors
as well, and has the authority to establish higher capital requirements for
individual institutions where necessary. Hudson City Savings, as a matter of
prudent management, targets as its goal the maintenance of capital ratios which
exceed these minimum requirements and that are consistent with Hudson City
Savings risk profile. Had these requirements been applicable to Hudson City
Savings at December 31, 2003, Hudson City Savings would have exceeded each of
its capital requirements as shown in the following table: Office of Thrift Supervision RequirementsMinimum Capital
    
    For Classification asBank Actual
    
    Adequacy
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)December 31, 2003Tangible capital
    
    $
    1,234,212
    
    
    
    7.24
    %
    
    $
    255,588
    
    
    
    1.50
    %
    
    
    n/a
    
    
    
    n/aCore capital
    
    
    1,234,212
    
    
    
    7.24
    
    
    
    681,569
    
    
    
    4.00
    
    
    $
    851,961
    
    
    
    5.00
    %Total risk-based capital
    
    
    1,260,759
    
    
    
    20.89
    
    
    
    482,877
    
    
    
    8.00
    
    
    
    603,597
    
    
    
    10.00
 The Federal Deposit Insurance Corporation
Improvement Act, or FDICIA, requires
that the OTS and other federal banking agencies revise their risk-based capital
standards, with appropriate transition rules, to ensure that they take into
account interest rate risk, or IRR, concentration of risk and the risks of
non-traditional activities. The OTS adopted regulations, effective January 1,
1994, that set forth the methodology for calculating an IRR component to be
incorporated into the OTS risk-based capital regulations. On May 10, 2002, the
OTS adopted an amendment to its capital regulations which eliminated the IRR
component of the risk-based capital requirement. Pursuant to the amendment,
the OTS will continue to monitor the IRR of individual institutions through the
OTS requirements for IRR management, the ability of the OTS to impose
individual minimum capital requirements on institutions that exhibit a high
degree of IRR, and the requirements of Thrift Bulletin 13a, which provides
guidance on the management of IRR and the responsibility of boards of directors
in that area. The OTS continues to monitor the IRR of individual
institutions through
analysis of the change in net portfolio value, or NPV. NPV is defined as the
net present value of the expected future cash flows of an entitys assets and
liabilities and, therefore, hypothetically represents the value of an
institutions net worth. The OTS has also used this NPV analysis as part of
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notices submitted by thrift institutions. The OTS,
through its general
oversight of the safety and soundness of savings associations, retains the
right to impose minimum capital requirements on individual institutions to the
extent the institution is not in compliance with certain written guidelines
established by the OTS regarding NPV analysis. The OTS has not imposed any
such requirements on Hudson City Savings. Safety and Soundness Standards.Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the OTS, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder. In addition, the OTS adopted regulations to require
a savings bank that is
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the OTS. If, after being so
notified, a savings bank fails to submit an acceptable compliance plan or fails
in any material respect to implement an accepted compliance plan, the OTS may
issue an order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the prompt
corrective action provisions of FDICIA. If a savings bank fails to comply
with such an order, the OTS may seek to enforce such an order in judicial
proceedings and to impose civil monetary penalties. Prompt Corrective Action.FDICIA also
established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the bank regulators are required to take certain, and
authorized to take other, supervisory actions against undercapitalized
institutions, based upon five categories of capitalization which FDICIA
created: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically capitalized. The severity of
the action authorized or required to be taken under the prompt corrective
action regulations increases as a banks capital decreases within the three
undercapitalized categories. All banks are prohibited from paying dividends or
other capital distributions or paying management fees to any controlling person
if, following such distribution, the bank would be undercapitalized. The OTS
is required to monitor closely the condition of an undercapitalized bank and to
restrict the growth of its assets. An undercapitalized bank is required to
file a capital restoration plan within 45 days of the date the bank receives
notices that it is within any of the three undercapitalized categories, and the
plan must be guaranteed by any parent holding company. The aggregate liability
of a parent holding company is limited to the lesser of:  (1)
    
    an amount equal to five percent of the banks total assets at
the time it became undercapitalized; and(2)
    
    the amount that is necessary (or would have been necessary) to
bring the bank into compliance with all capital standards applicable
with respect to such bank as of the time it fails to comply with the
plan. If a bank fails to submit an acceptable plan, it is
treated as if it were
significantly undercapitalized. Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions. Under the OTS regulations, generally, a federally chartered
savings bank is treated as well capitalized if its total risk-based capital
ratio is 10% or greater, its Tier 1 risk-based capital Page 32




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ratio is 6% or greater, and its leverage ratio is
5% or greater, and it is not
subject to any order or directive by the OTS to meet a specific capital level.
As of December 31, 2003, Hudson City Savings would have been considered well
capitalized by the OTS if its charter conversion had been effective at that
time. Insurance Activities.Hudson City
Savings is generally permitted to engage
in certain activities through its subsidiaries. However, the federal banking
agencies have adopted regulations prohibiting depository institutions from
conditioning the extension of credit to individuals upon either the purchase of
an insurance product or annuity or an agreement by the consumer not to purchase
an insurance product or annuity from an entity that is not affiliated with the
depository institution. The regulations also require prior disclosure of this
prohibition to potential insurance product or annuity customers. Deposit Insurance.Pursuant to
FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank of
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institutions financial information as of
its most recent quarterly financial report filed with the applicable bank
regulatory agency prior to the commencement of the assessment period. The
three capital categories are (1) well-capitalized, (2) adequately capitalized
and (3) undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. The FDIC also assigns an
institution to a supervisory subgroup based on a supervisory evaluation
provided to the FDIC by the institutions primary federal regulator and
information that the FDIC determines to be relevant to the institutions
financial condition and the risk posed to the deposit insurance funds. An institutions assessment rate depends on
the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and
may not be disclosed. The assessment rates for our BIF assessable deposits are
zero basis points. If the FDIC determines that assessment rates should be
increased, institutions in all risk categories could be affected. The FDIC has
exercised this authority several times in the past and could raise insurance
assessment rates in the future. Under the Deposit Insurance Funds Act of 1996
(Funds Act), the assessment
base for the payments on the bonds (FICO bonds) issued in the late 1980s by
the Financing Corporation to recapitalize the now defunct Federal Savings and
Loan Insurance Corporation was expanded to include, beginning January 1, 1997,
the deposits of BIF-insured institutions, such as Hudson City Savings. Our
total expense in 2003 for the assessment for deposit insurance and the FICO
payments was $1.6 million. Under the FDIA, the FDIC may terminate the
insurance of an institutions
deposits upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by
the FDIC. The management of Hudson City Savings does not know of any practice,
condition or violation that might lead to termination of deposit insurance. Transactions with Affiliates of Hudson City
Savings.Hudson City Savings is
subject to the affiliate and insider transaction rules set forth in Sections
23A, 23B, 22(g) and 22(h) of the Federal Reserve Act (FRA), as well as
additional limitations as may be adopted by the Director of the OTS. These
provisions, among other things, prohibit or limit a savings bank from extending
credit to, or entering into certain transactions with, its affiliates (which
for Hudson City Savings would include Hudson City Page 33




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Bancorp and Hudson City, MHC) and principal
stockholders, directors and
executive officers of Hudson City Savings. Effective April 1, 2003, the Federal Reserve
Board (FRB), rescinded its
interpretations of Sections 23A and 23B of the FRA and replaced these
interpretations with Regulation W. Regulation W made various changes to
certain interpretations regarding Sections 23A and 23B, including expanding the
definition of what constitutes an affiliate subject to Sections 23A and 23B and
exempting certain subsidiaries of state-chartered banks from the restrictions
of Sections 23A and 23B. The OTS issued a final rule effective as of
October 6, 2003, which conforms the
OTSs regulations on transactions with affiliates to Regulation W. In
addition, the rule implements additional restrictions imposed on savings banks
under Section 11 of HOLA, including provisions prohibiting a savings bank from
making a loan to an affiliate that is engaged in non-bank holding company
activities and provisions prohibiting a savings association from purchasing or
investing in securities issued by an affiliate that is not a subsidiary. The
final rule also includes certain specific exemptions from these prohibitions.
The FRB and the OTS expect each depository institution that is subject to
Sections 23A and 23B to implement policies and procedures to ensure compliance
with Regulation W and the final OTS rule. Compliance with Regulation W and the
OTS is not expected to have a material adverse effect on our business. Section 402 of the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley) prohibits the
extension of personal loans to directors and executive officers of issuers (as
defined in Sarbanes-Oxley). The prohibition, however, does not apply to
mortgages advanced by an insured depository institution, such as Hudson City
Savings, that are subject to the insider lending restrictions of Section 22(h)
of the FRA. Privacy Standards.Hudson City
Savings is subject to OTS regulations
implementing the privacy protection provisions of Gramm-Leach. These
regulations require Hudson City Savings to disclose its privacy policy,
including identifying with whom it shares non-public personal information, to
customers at the time of establishing the customer relationship and annually
thereafter. The regulations also require Hudson City Savings to
provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, Hudson City Savings is required to provide its
customers with the ability to opt-out of having Hudson City Savings share
their non-public personal information with unaffiliated third parties before
they can disclose such information, subject to certain exceptions. The
implementation of these regulations did not have a material adverse effect on
Hudson City Savings. Hudson City Savings is subject to regulatory
guidelines establishing standards
for safeguarding customer information. These regulations implement certain
provisions of Gramm-Leach. The guidelines describe the agencies expectations
for the creation, implementation and maintenance of an information security
program, which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are
intended to insure the security and confidentiality of customer records and
information, protect against any anticipated threats or hazards to the security
or integrity of such records and protect against unauthorized access to or use
of such records or information that could result in substantial harm or
inconvenience to any customer. Community Reinvestment Act.Under the
Community Reinvestment Act (CRA), as
implemented by the OTS regulations, any federally chartered savings bank,
including Hudson City Savings, has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not Page 34




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establish specific lending requirements or programs
for financial institutions
nor does it limit an institutions discretion to develop the types of products
and services that it believes are best suited to its particular community. The
CRA requires the OTS, in connection with its examination of a federally
chartered savings bank, to assess the depository institutions record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. Current CRA regulations rate an institution based
on its actual performance in
meeting community needs. In particular, the evaluation system focuses on three
tests:   ̈
    
    a lending test, to evaluate the institutions record of making loans
in its service areas; ̈
    
    an investment test, to evaluate the institutions record of investing
in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and ̈
    
    a service test, to evaluate the institutions delivery of services
through its branches, ATMs and other offices. The CRA also requires all institutions to make
public disclosure of their CRA
ratings. Hudson City Savings has received a satisfactory rating in its most
recent CRA examination. The federal banking agencies adopted regulations
implementing the requirements under the Gramm-Leach that insured depository
institutions publicly disclose certain agreements that are in fulfillment of
the CRA. Hudson City Savings has no such agreements in place at this time. Loans to One Borrower.Under the
HOLA, savings banks are generally subject to
the national bank limits on loans to one borrower. Generally, savings banks
may not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of the institutions unimpaired capital and surplus.
Additional amounts may be loaned, not in excess of 10% of unimpaired capital
and surplus, if such loans or extensions of credit are secured by
readily-marketable collateral. Hudson City Savings is in compliance with
applicable loans to one borrower limitations. At December 31, 2003, Hudson
City Savings largest aggregate amount of loans to one borrower totaled $2.4
million. All of the loans for the largest borrower were performing in
accordance with their terms and the borrower had no affiliation with Hudson
City Savings. Qualified Thrift Lender (QTL)
Test.The HOLA requires federal savings
banks to meet a QTL test. Under the QTL test, a savings bank is required to
maintain at least 65% of its portfolio assets (total assets less (1)
specified liquid assets up to 20% of total assets, (2) intangibles, including
goodwill, and (3) the value of property used to conduct business) in certain
qualified thrift investments (primarily residential mortgages and related
investments, including certain mortgage-backed securities, credit card loans,
student loans, and small business loans) on a monthly basis during at least 9
out of every 12 months. As of December 31, 2003, Hudson City Savings
maintained in excess of 90% of its portfolio assets in qualified thrift
investments and had more than 65% of its portfolio assets in qualified thrift
investments for each of the 12 months ending December 31, 2003. Therefore,
Hudson City Savings qualified under the QTL test. A savings bank that fails the QTL test and does not
convert to a bank charter
generally will be prohibited from: (1) engaging in any new activity not
permissible for a national bank, (2) paying dividends not permissible under
national bank regulations, and (3) establishing any new branch office in a
location not permissible for a national bank in the institutions home state.
In addition, if the institution does not requalify under the QTL test within
three years after failing the test, the institution would be prohibited Page 35




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from engaging in any activity not permissible for a
national bank and would
have to repay any outstanding advances from the FHLB as promptly as possible. Limitation on Capital Distributions.The OTS regulations impose limitations
upon certain capital distributions by federal savings banks, such as certain
cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another institution in a cash out merger and other
distributions charged against capital. The OTS regulates all capital distributions by
Hudson City Savings directly or
indirectly to Hudson City Bancorp, including dividend payments. As the
subsidiary of a savings and loan holding company, Hudson City Savings currently
must file a notice with the OTS at least 30 days prior to each capital
distribution. However, if the total amount of all capital distributions
(including each proposed capital distribution) for the applicable calendar year
exceeds net income for that year to date plus the retained net income for the
preceding two years, then Hudson City Savings must file an application to
receive the approval of the OTS for a proposed capital distribution. Hudson City Savings may not pay dividends to Hudson
City Bancorp if, after
paying those dividends, it would fail to meet the required minimum levels under

risk-based capital guidelines and the minimum leverage and tangible capital
ratio requirements or the OTS notified Hudson City Savings Bank that it was in
need of more than normal supervision. Under the Federal Deposit Insurance Act,
or FDIA, an insured depository institution such as Hudson City Savings is
prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institution would become
undercapitalized (as such term is used in the FDIA). Payment of dividends by
Hudson City Savings also may be restricted at any time at the discretion of the
appropriate regulator if it deems the payment to constitute an unsafe and
unsound banking practice. In addition, Hudson City Savings may not declare or
pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof would cause
stockholders equity to be reduced below the amounts required for the
liquidation account which was established as a result of Hudson City Savings
conversion to mutual holding company form. Liquidity.Hudson City Savings
maintains sufficient liquidity to ensure its
safe and sound operation, in accordance with OTS regulations. Assessments.The OTS charges
assessments to recover the cost of examining
federal savings banks and their affiliates. These assessments are based on
three components: the size of the institution, on which the basic assessment is
based; the institutions supervisory condition, which results in an additional
assessment based on a percentage of the basic assessment for any savings
institution with a composite rating of 3, 4 or 5 in its most recent safety and
soundness examination; and the complexity of the institutions operations,
which results in an additional assessment based on a percentage of the basic
assessment for any savings institution that managed over $1.00 billion in trust
assets, serviced for others loans aggregating more than $1.00 billion, or had
certain off-balance sheet assets aggregating more than $1.00 billion. Hudson
City Savings conversion to a federal savings bank was effective January 1,
2004, and, therefore, Hudson City Savings did not pay any assessments in 2003. Branching.The OTS regulations
authorize federally chartered savings banks
to branch nationwide to the extent allowed by federal statute. This permits
federal savings and loan associations with interstate networks to more easily
diversify their loan portfolios and lines of business geographically. OTS
authority preempts any state law purporting to regulate branching by federal
savings associations. Page 36




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Anti-Money Laundering and Customer
Identification Hudson City Savings is subject to OTS regulations
implementing the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act. The USA PATRIOT Act
gives the federal government powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. By way
of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer
agents and parties registered under the Commodity Exchange Act. Title III of the USA PATRIOT Act and the related
OTS regulations impose the
following requirements with respect to financial institutions:   ̈
    
    Establishment of anti-money laundering programs. ̈
    
    Establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new accounts,
including verifying the identity of customers within a reasonable period
of time. ̈
    
    Establishment of enhanced due diligence policies, procedures and
controls designed to detect and report money-laundering. ̈
    
    Prohibitions on correspondent accounts for foreign shelled banks and
compliance with record keeping obligations with respect to correspondent
accounts of foreign banks. The OTS adopted interim final rules implementing
the USA PATRIOT Act in 2002
and adopted final rules implementing the customer identification requirements
on May 9, 2003. The final rule became effective June 9, 2003, however,
financial institutions had until October 1, 2003 to come into compliance with
such final rule. Compliance with the regulations adopted under the USA PATRIOT
Act did not have a material adverse impact on the financial condition or
results of operations of Hudson City Bancorp or Hudson City Savings. Federal Home Loan Bank System Hudson City Savings is a member of the FHLB system,
which consists of twelve
regional FHLBs, each subject to supervision and regulation by the Federal
Housing Finance Board, or FHFB. The FHLB provides a central credit facility
primarily for member thrift institutions as well as other entities involved in
home mortgage lending. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLBs. It makes loans to members
(i.e., advances) in accordance with policies and procedures, including
collateral requirements, established by the respective boards of directors of
the FHLBs. These policies and procedures are subject to the regulation and
oversight of the FHFB. All long-term advances are required to provide funds
for residential home financing. The FHFB has also established standards of
community or investment service that members must meet to maintain access to
such long-term advances. Hudson City Savings, as a member of the FHLB of New
York, is currently required to purchase and hold shares of capital stock in the
FHLB of New York in an amount at least equal to the greater of (i) 1% of the
aggregate principal amount of its unpaid mortgage loans, home purchase
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(or such greater fraction as established by the
FHLB) of its outstanding advances from the
FHLB. Hudson City Savings is in compliance with these
requirements. Pursuant to regulations promulgated by the FHFB, as required by
Gramm-Leach, the FHLB of New York has adopted a capital plan that will change
the foregoing minimum stock ownership requirements for FHLB of New York stock.
Under the new capital plan, each member of the FHLB of New York must maintain a
minimum investment in FHLB of New York stock in an amount equal to the sum of
(i) the greater of $1,000 or 0.20% of the members mortgage-related assets and
(ii) 4.50% of the dollar amount of any outstanding advances under such members
Advances, Collateral Pledge and Security Agreement with the FHLB of New York.
The FHLB of New York, however, has postponed the implementation of the new
capital plan, and the new implementation date has not yet been determined. Federal Reserve System FRB regulations require federally chartered savings
banks to maintain
non-interest-earning cash reserves against their transaction accounts
(primarily NOW and demand deposit accounts). A reserve of 3% is to be
maintained against aggregate transaction accounts between $6.6 million and
$45.4 million (subject to adjustment by the FRB) plus a reserve of 10% (subject
to adjustment by the FRB between 8% and 14%) against that portion of total
transaction accounts in excess of $45.4 million. The first $6.6 million of
otherwise reservable balances (subject to adjustment by the FRB) is exempt from
the reserve requirements. Hudson City Savings is in compliance with the
foregoing requirements. Because required reserves must be maintained in the
form of either vault cash, a non-interest-bearing account at a Federal Reserve
Bank or a pass-through account as defined by the FRB, the effect of this
reserve requirement is to reduce Hudson City Savings interest-earning assets.
FHLB system members are also authorized to borrow from the Federal Reserve
discount window, but FRB regulations require institutions to exhaust all FHLB
sources before borrowing from a Federal Reserve Bank. Federal Bank Holding Company Regulation Hudson City, MHC and Hudson City Bancorp are
unitary savings and loan holding
companies within the meaning of the HOLA. As such, Hudson City, MHC and Hudson
City Bancorp are registered with the OTS and are subject to the OTS
regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over Hudson City, MHC, Hudson City
Bancorp and their savings bank subsidiary. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings bank. Gramm-Leach also restricts the powers of new
unitary savings and loan holding
companies. Under Gramm-Leach, all unitary savings and loan holding companies
formed after May 4, 1999, such as Hudson City, MHC and Hudson City Bancorp, are
limited to financially related activities permissible for bank holding
companies, as defined under Gramm-Leach. Accordingly, the powers of Hudson
City, MHC and Hudson City Bancorp were not affected by the charter conversion
of Hudson City Savings. The HOLA prohibits a savings and loan holding
company (directly or indirectly,
or through one or more subsidiaries) from acquiring another savings association
or holding company thereof without prior written approval of the OTS; acquiring
or retaining, with certain exceptions, more than 5% of a non-subsidiary savings
association, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by the HOLA; or acquiring or
retaining control of a depository institution that is not federally insured.
In evaluating applications by holding companies to acquire savings
associations, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of
the community and competitive factors. Page 38




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##### Table of Contents



New Jersey Holding Company Regulation General.Under the New Jersey Banking
Act, Hudson City, MHC is regulated as
a mutual savings bank holding company. Mutual savings bank holding companies
that are not also bank holding companies, such as Hudson City, MHC, are not
subject to the reporting and examination requirements of the New Jersey Banking
Act and the regulations of the Department promulgated thereunder. However,
Hudson City, MHC is subject to the provisions of the New Jersey Banking Act and
the regulations thereunder that apply specifically to mutual savings bank
holding companies. These provisions include the requirement for mutual savings
bank holding companies to obtain the approval of the Department to merge with
or into another holding company, to incorporate a new subsidiary savings bank,
to convert itself into a capital stock savings bank holding company, or to
acquire or be acquired by another bank or holding company. In addition, Hudson
City, MHC is subject to the corporate governance provisions of the New Jersey
Banking Act. Federal Securities Law Hudson City Bancorps securities are
registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
Exchange Act). As such, Hudson City Bancorp is subject to the information,
proxy solicitation, insider trading, and other requirements and restrictions of
the Exchange Act. Delaware Corporation Law Hudson City Bancorp is incorporated under the laws
of the State of Delaware,
and is therefore subject to regulation by the State of Delaware. In addition,
the rights of Hudson City Bancorps shareholders are governed by the Delaware
General Corporation Law. Page 39




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##### Table of Contents



TAXATION Federal General.The following discussion is
intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to
Hudson City Savings, Hudson City, MHC or Hudson City Bancorp. For federal
income tax purposes, Hudson City Savings reports its income on the basis of a
taxable year ending December 31, using the accrual method of accounting, and is
generally subject to federal income taxation in the same manner as other
corporations. Because Hudson City Savings and Hudson City Bancorp constitute
an affiliated group of corporations, they are eligible to report their income
on a consolidated basis. However, because Hudson City, MHC owns less than 80%
of the common stock of Hudson City Bancorp, it will not be a member of such
affiliated group and will report its income on a separate return. Hudson City
Savings is not currently under audit by the Internal Revenue Service and has
not been audited by the IRS during the past five years. Bad Debt Reserves.Pursuant to the
Small Business Job Protection Act of
1996, Hudson City Savings is no longer permitted to use the reserve method of
accounting for bad debts, and is now recapturing (taking into income) over a
multi-year period a portion of the balance of its tax bad debt reserve as of
December 31, 1995. Since Hudson City Savings has already provided a deferred
tax liability equal to the amount of such recapture, the recapture will not
adversely impact Hudson City Savings financial condition or results of
operations. Distributions.To the extent that
Hudson City Savings makes non-dividend
distributions to stockholders, such distributions will be considered to result
in distributions from Hudson City Savings unrecaptured tax bad debt reserve
base year reserve, i.e., its reserve as of December 31, 1987, to the extent
thereof and then from its supplemental reserve for losses on loans, and an
amount based on the amount distributed will be included in Hudson City Savings
taxable income. Non-dividend distributions include distributions in excess of
Hudson City Savings current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of Hudson City Savings current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not constitute non-dividend distributions and, therefore, will
not be included in Hudson City Savings income. The amount of additional taxable income created
from a non-dividend
distribution is equal to the lesser of Hudson City Savings base year reserve
and supplemental reserve for losses on loans or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations, approximately one and one-half times the
non-dividend distribution would be included in gross income for federal income
tax purposes, assuming a 35% federal corporate income tax rate. Hudson City
Savings does not intend to pay dividends that would result in the recapture of
any portion of its bad debt reserve. Corporate Alternative Minimum Tax.The Internal Revenue Code of 1986, as
amended, imposes a tax (AMT) on alternative minimum taxable income (AMTI)
at a rate of 20%. Only 90% of AMTI can be offset by net operating loss
carryovers of which Hudson City Savings currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of
those items. Thus, Hudson City Savings AMTI is increased by an amount equal
to 75% of the amount by which Hudson City Savings adjusted current earnings
exceeds its AMTI (determined without regard to this adjustment and prior to
reduction for net operating losses.) Page 40




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##### Table of Contents



Elimination of Dividends; Dividends Received Deduction.Hudson City
Bancorp may exclude from its income 100% of dividends received from Hudson City
Savings as a member of the same affiliated group of corporations. Because
Hudson City, MHC will not be a member of such affiliated group, it will not
qualify for such 100% dividends exclusion, but will be entitled to deduct 80%
of the dividends it receives from Hudson City Bancorp so long as it owns more
than 20% of the common stock. State New Jersey State Taxation.Hudson City Savings files New Jersey Corporate
Business income tax returns. Generally, the income of savings institutions in
New Jersey, which is calculated based on federal taxable income, subject to
certain adjustments, is subject to New Jersey tax. In July of 2002, the State
of New Jersey enacted legislation retroactive to January 1,
2002, which impacted
Hudson City Savings as the tax rate was increased from 3% to 9%. The State
also introduced a new tax, the Alternative Minimum Assessment (AMA), which
for Hudson City Savings is based on New Jersey gross receipts. Hudson City
Savings, under the new legislation, must calculate its corporate business tax
and the AMA, then pay the higher amount. In future years, if the corporate
business tax is greater than the AMA paid in prior years, Hudson City Savings
may apply the prepaid AMA against its corporate business taxes (up to 50% of
the corporate business tax, subject to certain limitations). Hudson City
Savings is not currently under audit with respect to its New Jersey income tax
returns and Hudson City Savings state tax returns have not been audited for
the past five years. Hudson City Bancorp is required to file a New Jersey income tax return and will
generally be subject to a state income tax at a 9% rate. However, if Hudson
City Bancorp meets certain requirements, it may be eligible to elect to be
taxed as a New Jersey Investment Company, which would allow it to be taxed at a
rate of 3.6%. The new tax legislation increased the income tax rate for
qualifying New Jersey investment companies from 2.25% to 3.6%. Further,
investment companies are not subject to the AMA. If Hudson City Bancorp does
not qualify as an investment company, it would be subject to taxation at the
higher of the 9% corporate business rate on taxable income or the AMA. Delaware State Taxation.As a Delaware holding company not earning income
in Delaware, Hudson City Bancorp is exempt from Delaware corporate income tax
but is required to file annual returns and pay annual fees and a franchise tax
to the State of Delaware. Page 41




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##### Table of Contents



Item 2. Properties. During 2003, we conducted our business through our executive office, located in
Paramus, NJ, our operations center, located in Glen Rock, NJ, and 81 branch
offices. At December 31, 2003, we owned 29 of our locations and leased the
remaining 54. Our lease arrangements are typically long-term arrangements with
third-parties that generally contain several options to renew at the expiration
date of the lease. For additional information regarding our lease obligations, see Note 7 of Notes
to Consolidated Financial Statements in Item 8 Financial Statements and
Supplementary Data. 
 Item 3. Legal Proceedings. We are not involved in any pending legal proceedings other than routine legal
proceedings occurring in the ordinary course of business. We believe that
these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation. 
 Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the quarter ended December 31, 2003 to a vote of
security holders of Hudson City Bancorp through the solicitation of proxies or
otherwise. Page 42




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters. On July 13, 1999, Hudson City Bancorp, Inc. common stock commenced trading on
the Nasdaq National Market under the symbol HCBK. The table below shows the
reported high and low sales prices of the common stock during the periods
indicated. Certain share, per share and dividend information reflects the 100%
stock dividend that was effective June 17, 2002. Sales Price
    
    Dividend InformationAmountHigh
    
    Low
    
    Per Share
    
    Date of Payment2002First quarter
    
    $
    16.30
    
    
    $
    12.95
    
    
    $
    0.075
    
    
    March 1, 2002Second quarter
    
    
    21.50
    
    
    
    15.70
    
    
    
    0.08
    
    
    June 3, 2002Third quarter
    
    
    19.75
    
    
    
    13.34
    
    
    
    0.09
    
    
    September 3, 2002Fourth quarter
    
    
    20.00
    
    
    
    15.67
    
    
    
    0.10
    
    
    December 2, 20022003First quarter
    
    
    20.45
    
    
    
    18.55
    
    
    
    0.11
    
    
    March 3, 2003Second quarter
    
    
    26.45
    
    
    
    20.05
    
    
    
    0.12
    
    
    June 2, 2003Third quarter
    
    
    30.96
    
    
    
    25.36
    
    
    
    0.14
    
    
    September 2, 2003Fourth quarter
    
    
    38.48
    
    
    
    30.68
    
    
    
    0.15
    
    
    December 1, 2003
 On January 22, 2004, the Board of Directors of Hudson City Bancorp declared a
quarterly cash dividend of sixteen cents ($0.16) per common share outstanding
that was paid on March 1, 2004 to stockholders of record as of the close of
business on February 6, 2004. The Board of Directors intends to review the
payment of dividends quarterly and plans to continue to maintain a regular
quarterly dividend in the future, dependent upon our earnings, financial
condition and other relevant factors. Hudson City Bancorp is subject to the requirements of Delaware law that
generally limits dividends to an amount equal to the difference between the
amount by which total assets exceed total liabilities and the amount equal to
the aggregate par value of the outstanding shares of capital stock. If there
is no difference between these amounts, dividends are limited to net income for
the current and/or immediately preceding year. As the principal asset of Hudson City Bancorp, Hudson City Savings will provide
the principal source of funds for the payment of dividends by Hudson City
Bancorp. Hudson City Savings is subject to certain restrictions that may limit
its ability to pay us dividends. Hudson City Savings may not pay dividends to
Hudson City Bancorp if paying such dividends would cause it to fail to meet
capital requirements or cause its stockholders equity to be reduced below the
amounts required for its liquidation account. See Note 2 of Notes to
Consolidated Financial Statements in Item 8 of this report for a further
discussion of the liquidation account. As of February 26, 2004, there were approximately 17,069 holders of record of
Hudson City Bancorp common stock. Page 43




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##### Table of Contents



The following table reports information regarding repurchases of our common
stock during the fourth quarter of 2003 and the stock repurchase plans approved
by our Board of Directors. MaximumTotal Number of
    
    Number of SharesTotal
    
    
    
    
    
    Shares Purchased
    
    that May Yet BeNumber of
    
    Average
    
    as Part of Publicly
    
    Purchased UnderShares
    
    Price Paid
    
    Announced Plans
    
    the Plans orPeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    Programs (1) (2)October 1, 2003  October 31, 2003
    
    
    438,425
    
    
    $
    32.23
    
    
    
    438,425
    
    
    
    8,803,971November 1, 2003-November 30, 2003
    
    
    177,550
    
    
    
    34.37
    
    
    
    177,550
    
    
    
    8,626,421December 1, 2003-December 31,2003
    
    
    960,000
    
    
    
    35.82
    
    
    
    960,000
    
    
    
    7,666,421Total
    
    
    1,575,975
    
    
    
    34.66
    
    
    
    1,575,975
   (1)
    
    On March 20, 2003, Hudson City Bancorp announced the adoption of its fifth Stock Repurchase Program, which authorized the purchase
of up to
9,525,000 shares of common stock. This program has no expiration date and has 7,666,421 shares yet to be purchased as of December
31, 2003.  (2)
    
    No repurchase plan or program has expired or been terminated during the quarter. Page 44




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##### Table of Contents



Item 6. Selected Financial Data The summary information presented below under Selected Financial Condition
Data, Selected Operating Data and Selected Financial Ratios and Other Data
at or for each of the years presented is derived in part from the audited
consolidated financial statements of Hudson City Bancorp and Hudson City
Savings. The following information is only a summary and you should read it in
conjunction with our audited consolidated financial statements in Item 8 of
this document. Certain share, per share and dividend information reflects the
100% stock dividend that was effective June 17, 2002. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Selected Financial Condition Data:Total assets
    
    $
    17,033,360
    
    
    $
    14,144,604
    
    
    $
    11,426,768
    
    
    $
    9,380,373
    
    
    $
    8,518,865Loans
    
    
    8,803,066
    
    
    
    6,970,900
    
    
    
    5,968,171
    
    
    
    4,872,740
    
    
    
    4,305,875Federal Home Loan Bank of New York stock
    
    
    164,850
    
    
    
    137,500
    
    
    
    81,149
    
    
    
    73,629
    
    
    
    Investment securities available for sale
    
    
    2,243,812
    
    
    
    560,932
    
    
    
    167,427
    
    
    
    876,667
    
    
    
    812,058Mortgage-backed securities held to maturity
    
    
    4,292,444
    
    
    
    4,734,266
    
    
    
    4,478,488
    
    
    
    3,262,035
    
    
    
    3,097,072Mortgage-backed securities available for sale
    
    
    1,130,257
    
    
    
    1,391,895
    
    
    
    530,690
    
    
    
    
    
    
    
    Total cash and cash equivalents
    
    
    254,584
    
    
    
    240,796
    
    
    
    101,814
    
    
    
    187,111
    
    
    
    200,839Foreclosed real estate, net
    
    
    1,002
    
    
    
    1,276
    
    
    
    250
    
    
    
    438
    
    
    
    367Total deposits
    
    
    10,453,780
    
    
    
    9,138,629
    
    
    
    7,912,762
    
    
    
    6,604,121
    
    
    
    6,688,044Total borrowed funds
    
    
    5,150,000
    
    
    
    3,600,000
    
    
    
    2,150,000
    
    
    
    1,250,000
    
    
    
    300,000Total stockholders equity
    
    
    1,329,366
    
    
    
    1,316,083
    
    
    
    1,288,736
    
    
    
    1,464,569
    
    
    
    1,479,040
 For the Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands, except per share data)Selected Operating Data:Total interest and dividend income
    
    $
    777,328
    
    
    $
    784,217
    
    
    $
    690,498
    
    
    $
    614,041
    
    
    $
    536,081Total interest expense
    
    
    376,354
    
    
    
    395,774
    
    
    
    403,427
    
    
    
    360,039
    
    
    
    298,832Net interest income
    
    
    400,974
    
    
    
    388,443
    
    
    
    287,071
    
    
    
    254,002
    
    
    
    237,249Provision for loan losses
    
    
    900
    
    
    
    1,500
    
    
    
    1,875
    
    
    
    2,130
    
    
    
    2,350Net interest income after provision
for loan losses
    
    
    400,074
    
    
    
    386,943
    
    
    
    285,196
    
    
    
    251,872
    
    
    
    234,899Non-interest income:Service charges and other
income
    
    
    5,338
    
    
    
    5,947
    
    
    
    4,694
    
    
    
    4,541
    
    
    
    4,752Gains (losses) on securities transactions, net
    
    
    24,326
    
    
    
    2,066
    
    
    
    
    
    
    
    
    
    
    
    (7
    )Total non-interest income
    
    
    29,664
    
    
    
    8,013
    
    
    
    4,694
    
    
    
    4,541
    
    
    
    4,745Total non-interest expense
    
    
    102,527
    
    
    
    93,541
    
    
    
    81,824
    
    
    
    78,997
    
    
    
    68,408Income before income tax expense
    
    
    327,211
    
    
    
    301,415
    
    
    
    208,066
    
    
    
    177,416
    
    
    
    171,236Income tax expense
    
    
    119,801
    
    
    
    109,382
    
    
    
    73,517
    
    
    
    62,590
    
    
    
    63,850Net income
    
    $
    207,410
    
    
    $
    192,033
    
    
    $
    134,549
    
    
    $
    114,826
    
    
    $
    107,386Basic earnings per share (1)
    
    $
    1.14
    
    
    $
    1.04
    
    
    $
    0.69
    
    
    $
    0.52
    
    
    $
    0.24Diluted earnings per share (1)
    
    $
    1.11
    
    
    $
    1.01
    
    
    $
    0.68
    
    
    $
    0.52
    
    
    $
    0.24
   (1)
    
    The 1999 earnings per share data is from the date of reorganization (July 13, 1999). Page 45




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At or for the Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Selected Financial Ratios and Other Data:Performance Ratios:Return on average assets
    
    
    1.34
    %
    
    
    1.50
    %
    
    
    1.32
    %
    
    
    1.29
    %
    
    
    1.32
    %Return on average stockholders equity
    
    
    15.38
    
    
    
    14.84
    
    
    
    10.09
    
    
    
    7.87
    
    
    
    9.05Net interest rate spread (1)
    
    
    2.37
    
    
    
    2.66
    
    
    
    2.12
    
    
    
    1.91
    
    
    
    2.18Net interest margin (2)
    
    
    2.65
    
    
    
    3.10
    
    
    
    2.87
    
    
    
    2.90
    
    
    
    2.98Non-interest expense to average assets
    
    
    0.66
    
    
    
    0.73
    
    
    
    0.80
    
    
    
    0.89
    
    
    
    0.84Efficiency ratio (3)
    
    
    23.81
    
    
    
    23.59
    
    
    
    28.04
    
    
    
    30.55
    
    
    
    28.27Dividend pay-out ratio (4)
    
    
    45.61
    
    
    
    33.17
    
    
    
    34.06
    
    
    
    27.88
    
    
    
    10.42Cash dividends paid per common share (4)
    
    $
    0.52
    
    
    $
    0.345
    
    
    $
    0.235
    
    
    $
    0.145
    
    
    $
    0.025Average interest-earning assets to
average interest-bearing
liabilities
    
    
    1.11
    x
    
    
    1.14
    x
    
    
    1.19
    x
    
    
    1.24
    x
    
    
    1.21
    xCapital Ratios:Average stockholders equity to average assets
    
    
    8.73
    %
    
    
    10.12
    %
    
    
    13.05
    %
    
    
    16.35
    %
    
    
    14.60
    %Stockholders equity to assets
    
    
    7.80
    
    
    
    9.30
    
    
    
    11.28
    
    
    
    15.61
    
    
    
    17.36Stockholders equity per common share
    
    $
    7.33
    
    
    $
    7.22
    
    
    $
    6.87
    
    
    $
    6.89
    
    
    $
    6.50Regulatory Capital Ratios (5):Bank:Leverage capital
    
    
    7.52
    %
    
    
    8.85
    %
    
    
    10.64
    %
    
    
    14.16
    %
    
    
    15.27
    %Total risk-based capital
    
    
    20.89
    
    
    
    26.81
    
    
    
    31.96
    
    
    
    43.06
    
    
    
    47.16Bancorp:Leverage capital
    
    
    8.14
    %
    
    
    9.48
    %
    
    
    11.55
    %
    
    
    16.45
    %
    
    
    18.54
    %Total risk-based capital
    
    
    22.56
    
    
    
    28.67
    
    
    
    34.66
    
    
    
    49.90
    
    
    
    57.06Asset Quality Ratios:Non-performing loans to total loans
    
    
    0.23
    %
    
    
    0.29
    %
    
    
    0.26
    %
    
    
    0.27
    %
    
    
    0.33
    %Non-performing assets to total assets
    
    
    0.12
    
    
    
    0.15
    
    
    
    0.14
    
    
    
    0.14
    
    
    
    0.17Allowance for loan losses to non-performing loans
    
    
    131.09
    
    
    
    126.27
    
    
    
    153.44
    
    
    
    170.67
    
    
    
    142.65Allowance for loan losses to total loans
    
    
    0.30
    
    
    
    0.37
    
    
    
    0.40
    
    
    
    0.45
    
    
    
    0.46Other Data:Weighted average number of common
shares outstanding:basic
    
    
    182,568,936
    
    
    
    184,928,344
    
    
    
    195,862,296
    
    
    
    219,014,380
    
    
    
    229,534,662diluted
    
    
    187,673,653
    
    
    
    190,005,378
    
    
    
    198,987,520
    
    
    
    219,937,552
    
    
    
    229,534,662Number of deposit accounts
    
    
    491,293
    
    
    
    503,998
    
    
    
    495,871
    
    
    
    463,369
    
    
    
    470,815Branches
    
    
    81
    
    
    
    81
    
    
    
    80
    
    
    
    79
    
    
    
    75
   (1)
    
    Determined by subtracting the weighted average cost of average total interest-bearing liabilities from the weighted average yield
on average total interest-earning assets.  (2)
    
    Determined by dividing net interest income by average total interest-earning assets.  (3)
    
    Determined by dividing total non-interest expense by the sum of net interest income and total non-interest income.  (4)
    
    The 1999 data is from the date of reorganization (July 13, 1999).  (5)
    
    Ratios determined pursuant to FDIC regulations. As a converted institution, Hudson City Savings is subject to the capital requirements
under OTS regulations. Hudson City Bancorp, as a savings and loan holding company, is no longer subject to regulatory capital requirements. Page 46




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis should be read in conjunction with Hudson City
Bancorps Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements in Item 8, and the other statistical data
provided elsewhere in this document. Executive Summary Our results of operations depend primarily on net interest income. Net
interest income is the difference between the interest income we earn on our
interest-earning assets, primarily mortgage loans, mortgage-backed securities
and investment securities, and the interest we pay on our interest-bearing
liabilities, primarily time deposits, interest-bearing demand deposits and
borrowed funds. Our results of operations may also be affected significantly
by general and local economic and competitive conditions, particularly those
with respect to changes in market interest rates, government policies and
actions of regulatory authorities. Our results are also affected by the price
of our stock, as the expense of certain of our employee stock compensation
plans are related to the current price of our common stock. We experienced a historically low interest rate environment during 2003.
Market interest rates, which began to decline in 2001, continued to decrease
during the first six months of 2003. In particular, long-term interest rates
decreased while short-term interest rates remained relatively stable. This
environment had an adverse impact on our earnings as the rates on our
interest-earning assets are generally based upon long-term interest rates while
the rates paid on our interest-bearing liabilities are generally based upon
short-term rates. During the third quarter of 2003 there was a modest increase in long-term
interest rates, which, combined with the subsequent positive economic news,
stabilized the interest rate environment, though we did
experience a modest decrease in long-term rates during January 2004. This
stabilized rate environment and increase in long-term interest rates helped
improve our net interest rate margin and net interest rate spread in the fourth
quarter of 2003 when compared to the prior quarters reported in 2003. If rates
remain stable or long-term interest rates increase, we believe the resulting
situation could have a positive impact on our earnings, net interest margin and
net interest spread in 2004. The low long-term interest rate environment caused an acceleration of
prepayment activity on our mortgage-backed securities, and caused an
acceleration of prepayment, refinancing and modification activity on our
mortgage loans during the first nine months of 2003. The higher level of
prepayment activity subsequently caused an acceleration of the amortization of
the net premium on these mortgage-related assets, which had an adverse impact
on our net interest income. The reinvestment of the proceeds from the
accelerated prepayment activity at the prevailing lower interest rates and the
decreased interest rates on our mortgage loans that were refinanced or modified
contributed to the narrowing of our interest rate spread and net interest
margin, and a reduction in the growth of our net interest income. The modest
increase in long-term interest rates during the third quarter of 2003 caused a
slowing of the prepayment, refinancing and modification activity on these
assets during the fourth quarter of 2003. If the prepayment, refinancing and
modification activity remains stable or continues to decline in 2004, and the
amortization of the net premium on our mortgage-related assets also declines,
we believe the resulting situation could have a positive impact on our
earnings, net interest margin and net interest spread in 2004 This same low interest rate environment also afforded us the opportunity to
realize gains on certain of our mortgage-backed and investment securities prior
to interest rate changes, such as the long-term rate increase seen in July
2003, which would have adversely affected their fair market value. The low
market interest rates caused increases in the fair market value of the
variable-rate portion of our mortgage-backed Page 47




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securities portfolio, as these variable-rate securities had annual rate change
limits. The cash flows from the sales of these securities were reinvested in
fixed-rate securities. During 2003, we continued to grow our balance sheet consistent with the capital
management and growth strategies we employed during recent periods. Our
balance sheet growth, primarily due to increases in fixed-rate callable
government-sponsored agency securities and first mortgage loans, was funded
principally by customer deposits and borrowed funds. The growth in our core
investment of residential first mortgage loans was due to our continued strong
levels of loan originations and loan purchases, despite their high level of
prepayment activity. The growth in customer deposits was primarily due to the
continued success of our interest-bearing High Value Checking account.
Borrowed funds were increased to meet the goals of our growth strategies and to
take advantage of the current low interest rate environment. During 2003,
these initiatives helped us to increase our core investments in mortgage loans
by 26.3%, increase our customer deposits by 14.3% and grow our total assets by
20.4%, or $2.89 billion. It was because of our ability to grow our business
with low cost interest-bearing liabilities that we were able to increase our
net interest income during 2003. We expect to continue to grow through internal expansion primarily through the
origination and purchase of mortgage loans, while purchasing mortgage-backed
securities and investment securities as a supplement to our mortgage loans.
The primary funding for our growth is expected to come from customer deposits,
using borrowed funds to supplement our deposit initiatives as a funding source.
We intend to grow customer deposits by continuing to offer desirable products
at competitive rates and by opening new branch offices. We have currently
received approval for the opening of four new offices, including one in Suffolk
County, New York, and intend to file for regulatory approval for at least five
more during 2004. The conversion to a federal charter gives us greater
flexibility to expand our branch network into markets outside New Jersey. In the fourth quarter of 2003, Hudson City Savings applied for and was granted
approval to convert from a New Jersey chartered savings bank to a federally
chartered savings bank. The conversion to a federal charter was effective
January 1, 2004. Under this new charter, Hudson City Savings, Hudson City
Bancorp and Hudson City, MHC will be subject to supervision and examination by
the Office of Thrift Supervision, or OTS. In the first quarter of 2004, we
applied for and were granted approval to waive dividends payments to Hudson
City, MHC, the holding company of Hudson City Bancorp. This dividend waiver
will provide additional operating capital at Hudson City Bancorp. Management of Interest Rate Risk As a financial institution, our primary component of market risk is interest
rate volatility. Net interest income is the primary component of our net
income, and fluctuations in interest rates will ultimately impact the level of
both income and expense recorded on a large portion of our assets and
liabilities. Fluctuations in interest rates will also affect the market value
of all interest-earning assets, other than those that possess a short term to
maturity. The interest rate environment experienced during 2003, where long-term rates
decreased and short-term rates remained relatively stable, had an adverse
impact on our net interest income as our interest-earning assets, particularly
those with initial terms to maturity or repricing greater than one year,
generally price off long-term rates while our interest-bearing liabilities
generally price off short-term rates. The rate changes experienced during 2003
generally flattened the yield curve, though the yield curve did remain
relatively steep. The flattening yield curve, where the spread between
long-term interest rates and short-term interest rates decreases, had an
adverse impact on our net interest income, as the interest rate spread Page 48




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between our interest-earning assets and interest-bearing liabilities decreased.
Additionally, the impact on our interest income due to interest rate changes
is generally felt in later periods than the impact on our interest expense due
to the timing of the recording on the balance sheet of our interest-earning
assets and interest-bearing liabilities. The recording of interest-earning
assets on the balance sheet generally lags the current market rate due to
commitment periods of up to three months, while the recording of
interest-bearing liabilities on the balance sheet generally times the current
market. A steep yield curve, where the difference in interest rates is greater
in the long-term time periods, could be beneficial to our net interest income
as the interest rate spread between our originated interest-earning assets and
interest-bearing liabilities would be larger. Also impacting our net interest income and net interest rate spread is the
level of prepayment activity on our mortgage-related assets. The actual amount
of time before mortgage loans and mortgage-backed securities are repaid can be
significantly impacted by changes in market interest rates and mortgage
prepayment rates. Mortgage prepayment rates will vary due to a number of
factors, including the regional economy in the area where the underlying
mortgages were originated, seasonal factors, demographic variables and the
assumability of the underlying mortgages. However, the major factors affecting
prepayment rates are prevailing interest rates, related mortgage refinancing
opportunities and competition. The historically low market interest rates
experienced during 2003 increased the prepayment activity on our
mortgage-related assets, which had an adverse impact on our net interest
income, interest rate spread and net interest margin. The rate increase
experienced in the second half of 2003 slowed the prepayment activity on our
mortgage-related assets. If the activity continues to decline or stabilizes,
the resulting situation could have a positive impact on our net interest income
in 2004. The primary objectives of our interest rate risk management strategy are to:  
    
    evaluate the interest rate risk inherent in certain balance
sheet accounts;
    
    determine the appropriate level of interest rate risk given our
business plan, the current business environment and our capital and
liquidity requirements; and
    
    manage interest rate risk in a manner consistent with the
approved guidelines and policies set by our Board of Directors. We seek to coordinate asset and liability decisions so that, under changing
interest rate scenarios, earnings will remain within an acceptable range. To achieve the objectives of managing interest rate risk, our Asset/Liability
Committee meets weekly to discuss and monitor the market interest rate
environment compared to interest rates that are offered on our products. This
committee consists of the Chief Executive Officer, the Chief Operating Officer
and the Investment Officer. The Asset/Liability Committee presents periodic
reports to the Board of Directors at its regular meetings, as well as a
comprehensive quarterly report to the Asset Management Committee of the Board
of Directors. The quarterly reports address the results of activities and
strategies and the effect that changes in interest rates will have on our
results of operations and the present value of our equity. Historically, our lending activities have emphasized one- to four-family first
and second mortgage loans. We believe that the frequent repricing of
adjustable-rate mortgage loans and adjustable-rate securities, which reduces
the exposure to interest rate fluctuations, would benefit our long-term
profitability. However, the prevailing interest rate environment has resulted
in increased demand for fixed-rate first Page 49




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mortgage loans. The result has been an increase in the proportion of fixed-rate
loans in our portfolio. This may have an adverse impact on our net interest
income, particularly in a rising interest rate environment. The purchase of real estate mortgage investment conduits (REMIC) to
supplement our purchases of adjustable-rate mortgage-backed securities has
given us additional interest rate risk protection. At their date of purchase,
these REMIC securities generally had shorter weighted-average lives than
traditional mortgage-backed security purchases due to their prepayment
schedules. However, since the REMIC purchases have fixed interest rates, the
weighted-average life will vary with changes in market interest rates. Our primary source of funds has been deposits, consisting primarily of time
deposits and the interest-bearing High Value Checking demand account, which
have substantially shorter terms to maturity than the loan portfolio. We use
securities sold under agreements to repurchase and FHLB advances as additional
sources of funds. These borrowings are generally long-term to maturity, in an
effort to offset our short-term deposit liabilities and assist in managing our
interest rate risk. Certain of these borrowings have call options that could
shorten their maturities in a changing interest rate environment. Due to the nature of our operations, we are not subject to foreign currency
exchange or commodity price risk. Instead, our real estate loan portfolio, the
majority of which is located in New Jersey, is subject to risks associated with
the local economy. We do not own any trading assets. We did not engage in any
hedging transactions that use derivative instruments (such as interest rate
swaps and caps) during 2003 and did not have any such hedging transactions in
place at December 31, 2003. In the future, we may, with approval of our Board
of Directors, engage in hedging transactions utilizing derivative instruments. Gap Analysis.The matching of the repricing characteristics of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are interest rate-sensitive and by monitoring a financial
institutions interest rate sensitivity gap. An asset or liability is said to
be interest rate-sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined
as the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest-earning assets
maturing or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that same time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within that same
period. During a period of rising interest rates, a financial institution with
a negative gap position would be expected, absent the effects of other factors,
to experience a greater increase in the costs of its liabilities relative to
the yields of its assets and thus a decrease in the institutions net interest
income. An institution with a positive gap position would be expected, absent
the effect of other factors, to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to reduce
net interest income. The following table, referred to as the gap table, presents the amounts of our
interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2003, which we anticipate to reprice or mature in each of the
future time periods shown. Except as stated below, we determined the amounts
of assets and liabilities shown which reprice or mature during a particular
period in accordance with the earlier of the term to repricing or the
contractual maturity of the asset or liability. The information presented in
the gap table is also based on the following assumptions: Page 50




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
    
    we assumed an annual prepayment rate of 30.0% for mortgage
loans repricing or maturing after one year;
    
    we assumed an annual prepayment rate of 30.0% for
mortgage-backed securities repricing or maturing after one year;
    
    we reported savings accounts that had no stated maturity using
decay rates of: 2.5% in less than six months, 2.5% in six months to
one year, 5% in one year to two years, 5% in two years to three
years, 10% in three years to five years, and 75% in over five years;
    
    we reported interest-bearing demand accounts that had no stated
maturity using decay rates of : 2.5% in less than six months, 2.5%
in six months to one year, 10% in one to two years, 10% in two to
three years, 20% in three years to five years, and 55% in over five
years;
    
    we reported money market accounts that had no stated maturity
using decay rates of: 2.5% in less than six months, 2.5% in six
months to one year, 10% in one to two years, 10% in two to three
years, 20% in three years to five years, and 55% in over five years;
    
    we assumed $50.0 million of callable federal agency securities,
which are reported at maturity date, will be called in less than six
months. In 2002, the prepayment assumptions for both mortgage loans and mortgage-backed
securities were 30.0%. We have maintained this level of prepayment assumptions
on our mortgage-related assets, notwithstanding the slowing of prepayment
activity in the fourth quarter of 2003, as market interest rates are still at
historical low levels. We also believe the 30% prepayment assumption is
supported by the fact that a significant portion of our portfolio is in the
active New Jersey real estate market and is primarily over the conforming
amount. We believe these loans will tend to prepay at higher levels than other
types of loans. Our determination of deposit decay rates is based on regulatory guidance, as
modified by our historical experience. The change in decay rates from our 2002
gap analysis reflected the recent growth experience in our non-maturity
deposits and the one-year experience of our portfolio. Had these decay rate
assumptions used in the 2003 gap analysis been applied to the 2002 analysis,
and all other assumptions remained the same, the cumulative one-year interest
rate sensitivity gap as a percent of total assets would have been positive
2.95%. Deposit decay rates, prepayment rates and anticipated calls of investment
securities or borrowed funds can have a significant impact on the estimated
interest sensitivity gap. While we believe that our assumptions are
reasonable, they may not be indicative of actual future deposit decay activity,
mortgage and mortgage-backed securities prepayments, and the actual timing of
calls of federal agency bonds. We have excluded non-accrual mortgage loans
totaling $4,401,000 and non-accrual other loans totaling $102,000 from the
table. As indicated in the gap table at December 31, 2003, our interest-bearing assets
maturing or repricing within one year exceeded our interest-earning liabilities
maturing or repricing within the same period by $434.3 million compared with
our interest-bearing liabilities exceeding our interest-earning assets by $15.4
million at December 31, 2002. This represented a cumulative one-year interest
rate sensitivity gap as a percent of total assets of positive 2.6% at December
31, 2003 compared with negative 0.1% at Page 51




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December 31, 2002. The ratio of interest-earning assets maturing or repricing
within one year to interest-bearing liabilities maturing or repricing within
one year was 108.9% at December 31, 2003 compared with 99.7% at December 31,
2002. The change in these ratios, year-to-year, was partially due to the lengthening
of the decay rate assumptions on our non-maturity deposits. The change also
reflected the growth of borrowed funds in the current year with maturities in
excess of one year, the shift of time deposit maturities to over one year due
to pricing strategies, and the growth of our High Value Checking account, which
we have estimated to have a decay rate in excess of one year of 95%. Page 52




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At December 31, 2003More than
    
    More thanMore than
    
    More than
    
    two years
    
    three yearsSix months
    
    six months
    
    one year to
    
    to three
    
    to five
    
    More thanor less
    
    to one year
    
    two years
    
    years
    
    years
    
    five years
    
    Total(Dollars in thousands)Interest-earning assets:First mortgage loans
    
    $
    1,343,426
    
    
    $
    1,355,747
    
    
    $
    1,799,108
    
    
    $
    1,263,598
    
    
    $
    1,104,432
    
    
    $
    1,798,075
    
    
    $
    8,664,386Consumer and other loans
    
    
    28,291
    
    
    
    560
    
    
    
    1,380
    
    
    
    2,244
    
    
    
    16,332
    
    
    
    85,370
    
    
    
    134,177Federal funds sold
    
    
    63,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,600Mortgage-backed securities
    
    
    1,150,167
    
    
    
    1,148,744
    
    
    
    937,539
    
    
    
    656,431
    
    
    
    473,790
    
    
    
    1,056,030
    
    
    
    5,422,701FHLB stock
    
    
    164,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164,850Investment securities
    
    
    60,813
    
    
    
    100
    
    
    
    95
    
    
    
    12
    
    
    
    71,683
    
    
    
    2,112,475
    
    
    
    2,245,178Total interest-earning assets
    
    
    2,811,147
    
    
    
    2,505,151
    
    
    
    2,738,122
    
    
    
    1,922,285
    
    
    
    1,666,237
    
    
    
    5,051,950
    
    
    
    16,694,892Interest-bearing liabilities:Savings accounts
    
    
    24,306
    
    
    
    24,920
    
    
    
    47,177
    
    
    
    47,177
    
    
    
    94,355
    
    
    
    707,660
    
    
    
    945,595Interest-bearing demand accounts
    
    
    70,223
    
    
    
    70,223
    
    
    
    280,890
    
    
    
    280,890
    
    
    
    561,780
    
    
    
    1,544,895
    
    
    
    2,808,901Money market accounts
    
    
    15,595
    
    
    
    15,595
    
    
    
    62,382
    
    
    
    62,382
    
    
    
    124,762
    
    
    
    343,095
    
    
    
    623,811Time deposits
    
    
    3,213,110
    
    
    
    1,398,063
    
    
    
    745,077
    
    
    
    137,104
    
    
    
    185,624
    
    
    
    
    
    
    
    5,678,978Borrowed funds
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    650,000
    
    
    
    100,000
    
    
    
    4,350,000
    
    
    
    5,150,000Total interest-bearing liabilities
    
    
    3,373,234
    
    
    
    1,508,801
    
    
    
    1,135,526
    
    
    
    1,177,553
    
    
    
    1,066,521
    
    
    
    6,945,650
    
    
    
    15,207,285Interest rate sensitivity gap
    
    $
    (562,087
    )
    
    $
    996,350
    
    
    $
    1,602,596
    
    
    $
    744,732
    
    
    $
    599,716
    
    
    $
    (1,893,700
    )
    
    $
    1,487,607Cumulative interest rate sensitivity
gap
    
    $
    (562,087
    )
    
    $
    434,263
    
    
    $
    2,036,859
    
    
    $
    2,781,591
    
    
    $
    3,381,307
    
    
    $
    1,487,607Cumulative interest rate sensitivity gap
as a percent of total assets
    
    
    (3.30
    )%
    
    
    2.55
    %
    
    
    11.96
    %
    
    
    16.33
    %
    
    
    19.85
    %
    
    
    8.73
    %Cumulative interest-earning assets
as a percent of interest-bearing
liabilities
    
    
    83.34
    %
    
    
    108.90
    %
    
    
    133.85
    %
    
    
    138.66
    %
    
    
    140.93
    %
    
    
    109.78
    %
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The methods used in the gap table are inherently imprecise. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Certain assets, such as
adjustable-rate loans and mortgage-backed securities, have features that limit
changes in interest rates on a short-term basis and over the life of the loan.
If interest rates change, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of borrowers to make payments on their adjustable-rate loans may
decrease if interest rates increase. Present Value of Equity.In addition to the gap analysis, we also use a
simulation model to monitor interest rate risk. This model reports the present
value of equity in different interest rate environments, assuming an
instantaneous and permanent interest rate shock to all interest rate-sensitive
assets and liabilities. The present value of equity is the difference between
the estimated fair value of interest rate-sensitive assets and liabilities. The
changes in market value of assets and liabilities due to changes in interest
rates reflect the interest sensitivity of those assets and liabilities as their
values are derived from the characteristics of the asset or liability (i.e.,
fixed-rate, adjustable-rate, caps, floors) relative to the current interest
rate environment. For example, in a rising interest rate environment the fair
market value of a fixed-rate asset will decline, whereas the fair market value
of an adjustable-rate asset, depending on its repricing characteristics, may
not decline. Increases in the market value of assets will increase the present
value of equity whereas decreases in the market value of assets will decrease
the present value of equity. Conversely, increases in the market value of
liabilities will decrease the present value of equity whereas decreases in the
market value of liabilities will increase the present value of equity. The following table presents the estimated present value of equity over a range
of interest rate change scenarios at December 31, 2003. The present value ratio
shown in the table is the present value of equity as a percent of the present
value of total assets in each of the different rate environments. For purposes
of this table, we have made assumptions such as prepayment rates and decay
rates similar to those used for the gap analysis table. Our current policy
sets a maximum percentage change in the present value of equity of 55% from the
current, or zero basis point, present value of equity, given an instantaneous
and parallel increase or decrease of 200 basis points. We feel this percent
change is acceptable given the high equity ratios we currently report. Present Value of EquityAs Percent of PresentPresent Value of Equity
    
    Value of AssetsChange in
    
    Dollar
    
    Dollar
    
    Percent
    
    Present
    
    PercentInterest Rates
    
    Amount
    
    Change
    
    Change
    
    Value Ratio
    
    Change(Basis points)
    
    (Dollars in thousands)200
    
    $
    1,408,411
    
    
    $
    (756,816
    )
    
    
    (34.95
    )%
    
    
    8.98
    %
    
    
    (28.90
    )%150
    
    
    1,631,805
    
    
    
    (533,422
    )
    
    
    (24.64
    )
    
    
    10.16
    
    
    
    (19.56
    )100
    
    
    1,828,672
    
    
    
    (336,555
    )
    
    
    (15.54
    )
    
    
    11.14
    
    
    
    (11.80
    )50
    
    
    2,048,743
    
    
    
    (116,484
    )
    
    
    (5.38
    )
    
    
    12.19
    
    
    
    (3.48
    )0
    
    
    2,165,227
    
    
    
    
    
    
    
    
    
    
    
    12.63
    
    
    
    (50)
    
    
    2,113,798
    
    
    
    (51,429
    )
    
    
    (2.38
    )
    
    
    12.20
    
    
    
    (3.40
    )(100)
    
    
    1,986,291
    
    
    
    (178,936
    )
    
    
    (8.26
    )
    
    
    11.40
    
    
    
    (9.74
    )
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At December 31, 2002, the percent change in the present value of equity in the
200 basis point increase scenario was negative 20.93% and in the 100 basis
point decrease scenario it was negative 12.64% compared with the table above.
The decreases in the present value of equity and the percent change in the
present value of equity in the increasing rate scenarios in the December 31,
2003 analysis were primarily due to the high percentage of fixed-rate mortgage
loans and mortgage-backed securities in our portfolio. Generally, these assets
will not reprice in a rising rate environment. The decreases in the present
value of equity and the percent change in the present value of equity in the
decreasing rate scenarios in the December 31, 2003 analysis were primarily due
to the growth of our fixed-rate borrowed funds and the growth in our
interest-bearing High Value Checking account in this low interest rate
environment. Fixed-rate borrowed funds, even those with call options,
generally do not reprice in a decreasing rate environment. We believe the 150
and 200 basis point decrease scenarios may not be meaningful given the
prevailing low market interest rate environment and are not presented in the
table. As in the case of the gap table, the methods we used in the previous table are
also inherently imprecise. This type of modeling requires that we make
assumptions that may not reflect the manner in which actual yields and costs
respond to changes in market interest rates. For example, we assume the
composition of the interest rate-sensitive assets and liabilities will remain
constant over the period being measured and that all interest rate shocks will
be uniformly reflected across the yield curve, regardless of the duration to
maturity or repricing. The table assumes that we will take no action in
response to the changes in interest rates. In addition, prepayment estimates
and other assumptions within the model are subjective in nature, involve
uncertainties, and, therefore, cannot be determined with precision.
Accordingly, although the present value of equity model may provide an estimate
of our interest rate risk at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in interest rates on our present value of equity. Analysis of Net Interest Income Net interest income represents the difference between the interest income we
earn on our interest-earning assets, such as mortgage loans, mortgage-backed
securities and investment securities, and the expense we pay on
interest-bearing liabilities, such as time deposits and borrowed funds. Net
interest income depends on our volume of interest-earning assets and
interest-bearing liabilities and the interest rates we earned or paid on them. Average Balance Sheet.The following table presents certain information
regarding our financial condition and net interest income for 2003, 2002 and
2001. The table presents the average yield on interest-earning assets and the
average cost of interest-bearing liabilities for the periods indicated. We
derived the yields and costs by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown. We derived average balances from daily
balances over the periods indicated. Interest income includes fees that we
considered adjustments to yields. Yields on tax-exempt obligations were not
computed on a tax equivalent basis. Page 55




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For the Year Ended December 31,2003
    
    2002Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars in thousands)Assets:Interest-earnings assets:First mortgage loans, net (1)
    
    $
    6,989,907
    
    
    $
    414,417
    
    
    
    5.93
    %
    
    $
    6,352,764
    
    
    $
    440,073
    
    
    
    6.93
    %Consumer and other loans
    
    
    129,087
    
    
    
    8,379
    
    
    
    6.49
    
    
    
    139,432
    
    
    
    10,027
    
    
    
    7.19Federal funds sold
    
    
    170,302
    
    
    
    1,794
    
    
    
    1.05
    
    
    
    153,773
    
    
    
    2,427
    
    
    
    1.58Mortgage-backed securities,
at amortized cost
    
    
    5,948,336
    
    
    
    268,235
    
    
    
    4.51
    
    
    
    5,461,673
    
    
    
    307,743
    
    
    
    5.63Federal Home Loan Bank stock
    
    
    156,721
    
    
    
    4,424
    
    
    
    2.82
    
    
    
    101,591
    
    
    
    5,002
    
    
    
    4.92Investment securities at amortized cost
    
    
    1,733,236
    
    
    
    80,079
    
    
    
    4.62
    
    
    
    315,153
    
    
    
    18,945
    
    
    
    6.01Total interest-earning assets
    
    
    15,127,589
    
    
    
    777,328
    
    
    
    5.14
    
    
    
    12,524,386
    
    
    
    784,217
    
    
    
    6.26Noninterest-earning assets
    
    
    325,230
    
    
    
    
    
    
    
    
    
    
    
    263,718Total assets
    
    $
    15,452,819
    
    
    
    
    
    
    
    
    
    
    $
    12,788,104Liabilities and stockholders equity:Interest-bearing liabilities:Savings accounts
    
    $
    927,191
    
    
    
    10,680
    
    
    
    1.15
    
    
    $
    869,823
    
    
    
    17,212
    
    
    
    1.98Interest-bearing demand accounts
    
    
    1,971,581
    
    
    
    43,516
    
    
    
    2.21
    
    
    
    370,843
    
    
    
    9,450
    
    
    
    2.55Money market accounts
    
    
    623,442
    
    
    
    6,889
    
    
    
    1.10
    
    
    
    593,021
    
    
    
    11,697
    
    
    
    1.97Time deposits
    
    
    5,970,416
    
    
    
    148,254
    
    
    
    2.48
    
    
    
    6,311,562
    
    
    
    217,416
    
    
    
    3.44Total deposits
    
    
    9,492,630
    
    
    
    209,339
    
    
    
    2.21
    
    
    
    8,145,249
    
    
    
    255,775
    
    
    
    3.14Borrowed funds
    
    
    4,090,459
    
    
    
    167,015
    
    
    
    4.08
    
    
    
    2,854,658
    
    
    
    139,999
    
    
    
    4.90Total interest-bearing liabilities
    
    
    13,583,089
    
    
    
    376,354
    
    
    
    2.77
    
    
    
    10,999,907
    
    
    
    395,774
    
    
    
    3.60Noninterest-bearing liabilities:Noninterest-bearing deposits
    
    
    409,220
    
    
    
    
    
    
    
    
    
    
    
    391,865Other noninterest-bearing liabilities
    
    
    111,706
    
    
    
    
    
    
    
    
    
    
    
    102,001Total noninterest-bearing liabilities
    
    
    520,926
    
    
    
    
    
    
    
    
    
    
    
    493,866Total liabilities
    
    
    14,104,015
    
    
    
    
    
    
    
    
    
    
    
    11,493,773Stockholders equity
    
    
    1,348,804
    
    
    
    
    
    
    
    
    
    
    
    1,294,331Total liabilities and
stockholders equity
    
    $
    15,452,819
    
    
    
    
    
    
    
    
    
    
    $
    12,788,104Net interest income
    
    
    
    
    
    $
    400,974
    
    
    
    
    
    
    
    
    
    
    $
    388,443Net interest rate spread (2)
    
    
    
    
    
    
    
    
    
    
    2.37
    %
    
    
    
    
    
    
    
    
    
    
    2.66
    %Net interest-earning assets
    
    $
    1,544,500
    
    
    
    
    
    
    
    
    
    
    $
    1,524,479Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    2.65
    %
    
    
    
    
    
    
    
    
    
    
    3.10
    %Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    1.11
    x
    
    
    
    
    
    
    
    
    
    
    1.14
    x
    [Continued from above table, first column(s) repeated] For the Year Ended December 31,2001AverageAverage
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost(Dollars in thousands)Assets:Interest-earnings assets:First mortgage loans, net (1)
    
    $
    5,204,953
    
    
    $
    381,135
    
    
    
    7.32
    %Consumer and other loans
    
    
    153,978
    
    
    
    11,959
    
    
    
    7.77Federal funds sold
    
    
    153,495
    
    
    
    5,436
    
    
    
    3.54Mortgage-backed securities,
at amortized cost
    
    
    4,036,100
    
    
    
    262,914
    
    
    
    6.51Federal Home Loan Bank stock
    
    
    79,418
    
    
    
    4,536
    
    
    
    5.71Investment securities at amortized cost
    
    
    389,472
    
    
    
    24,518
    
    
    
    6.30Total interest-earning assets
    
    
    10,017,416
    
    
    
    690,498
    
    
    
    6.89Noninterest-earning assets
    
    
    203,567Total assets
    
    $
    10,220,983Liabilities and stockholders equity:Interest-bearing liabilities:Savings accounts
    
    $
    776,388
    
    
    
    17,497
    
    
    
    2.25Interest-bearing demand accounts
    
    
    94,197
    
    
    
    1,486
    
    
    
    1.58Money market accounts
    
    
    465,021
    
    
    
    10,731
    
    
    
    2.31Time deposits
    
    
    5,381,517
    
    
    
    277,293
    
    
    
    5.15Total deposits
    
    
    6,717,123
    
    
    
    307,007
    
    
    
    4.57Borrowed funds
    
    
    1,731,918
    
    
    
    96,420
    
    
    
    5.57Total interest-bearing liabilities
    
    
    8,449,041
    
    
    
    403,427
    
    
    
    4.77Noninterest-bearing liabilities:Noninterest-bearing deposits
    
    
    351,970Other noninterest-bearing liabilities
    
    
    86,494Total noninterest-bearing liabilities
    
    
    438,464Total liabilities
    
    
    8,887,505Stockholders equity
    
    
    1,333,478Total liabilities and
stockholders equity
    
    $
    10,220,983Net interest income
    
    
    
    
    
    $
    287,071Net interest rate spread (2)
    
    
    
    
    
    
    
    
    
    
    2.12
    %Net interest-earning assets
    
    $
    1,568,375Net interest margin (3)
    
    
    
    
    
    
    
    
    
    
    2.87
    %Ratio of interest-earning assets to
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    1.19
    x
   (1)     Amount is net of deferred loan fees and allowance for loan losses and includes non-performing loans.(2)     Determined by subtracting the weighted average cost of average total interest-bearing liabilities from
the weighted average yield on average total interest-earning assets.(3)     Determined by dividing net interest income by average total interest-earning assets. Page 56




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Rate/Volume Analysis.The following table presents the extent to which the
changes in interest rates and the changes in volume of our interest-earning
assets and interest-bearing liabilities have affected our interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to:  
    
    changes attributable to changes in volume (changes in volume multiplied by prior rate);
    
    changes attributable to changes in rate (changes in rate multiplied by prior volume); and
    
    the net change. The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate. 2003 Compared to 2002
    
    2002 Compared to 2001Increase (Decrease) Due To
    
    Increase (Decrease) Due ToVolume
    
    Rate
    
    Net
    
    Volume
    
    Rate
    
    Net(In thousands)Interest-earning assets:First mortgage loans, net
    
    $
    41,578
    
    
    $
    (67,234
    )
    
    $
    (25,656
    )
    
    $
    80,168
    
    
    $
    (21,230
    )
    
    $
    58,938Consumer and other loans
    
    
    (713
    )
    
    
    (935
    )
    
    
    (1,648
    )
    
    
    (1,079
    )
    
    
    (853
    )
    
    
    (1,932
    )Federal funds sold
    
    
    242
    
    
    
    (875
    )
    
    
    (633
    )
    
    
    10
    
    
    
    (3,019
    )
    
    
    (3,009
    )Mortgage-backed securities
    
    
    25,625
    
    
    
    (65,133
    )
    
    
    (39,508
    )
    
    
    83,795
    
    
    
    (38,966
    )
    
    
    44,829Federal Home Loan Bank stock
    
    
    2,064
    
    
    
    (2,642
    )
    
    
    (578
    )
    
    
    1,150
    
    
    
    (684
    )
    
    
    466Investment securities
    
    
    66,479
    
    
    
    (5,345
    )
    
    
    61,134
    
    
    
    (4,490
    )
    
    
    (1,083
    )
    
    
    (5,573
    )Total
    
    
    135,275
    
    
    
    (142,164
    )
    
    
    (6,889
    )
    
    
    159,554
    
    
    
    (65,835
    )
    
    
    93,719Interest-bearing liabilities:Savings accounts
    
    
    1,075
    
    
    
    (7,607
    )
    
    
    (6,532
    )
    
    
    1,956
    
    
    
    (2,241
    )
    
    
    (285
    )Interest-bearing demand accounts
    
    
    35,492
    
    
    
    (1,426
    )
    
    
    34,066
    
    
    
    6,587
    
    
    
    1,377
    
    
    
    7,964Money market accounts
    
    
    573
    
    
    
    (5,381
    )
    
    
    (4,808
    )
    
    
    2,690
    
    
    
    (1,724
    )
    
    
    966Time deposits
    
    
    (11,222
    )
    
    
    (57,940
    )
    
    
    (69,162
    )
    
    
    42,506
    
    
    
    (102,383
    )
    
    
    (59,877
    )Borrowed funds
    
    
    53,248
    
    
    
    (26,232
    )
    
    
    27,016
    
    
    
    56,334
    
    
    
    (12,755
    )
    
    
    43,579Total
    
    
    79,166
    
    
    
    (98,586
    )
    
    
    (19,420
    )
    
    
    110,073
    
    
    
    (117,726
    )
    
    
    (7,653
    )Net change in net interest income
    
    $
    56,109
    
    
    $
    (43,578
    )
    
    $
    12,531
    
    
    $
    49,481
    
    
    $
    51,891
    
    
    $
    101,372
 Comparison of Financial Condition at December 31, 2003 and December 31, 2002 During 2003, our total assets increased $2.89 billion, or 20.4%, to $17.03
billion at December 31, 2003 from $14.14 billion at December 31, 2002. Loans
increased $1.83 billion, or 26.3%, to $8.80 billion at December 31, 2003 from
$6.97 billion at December 31, 2002. The increase in loans reflected a
significant increase in our loan purchase activity as well as our continued
focus on the origination of one- to four-family first mortgage loans,
consistent with our growth strategies. For 2003, we originated first mortgage
loans of $2.17 billion and purchased first mortgage loans of $3.21 billion,
compared with originations of $1.84 billion and purchases of $1.72 billion for
2002. Loan purchases exceeded originations due to their availability in the
high prepayment activity environment experienced during 2003 Page 57




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and the
growth initiatives employed by us in recent periods. These first mortgage loan
originations and purchases were exclusively in one-to four-family mortgage
loans and were primarily fixed-rate loans. At December 31, 2003, fixed-rate
mortgage loans accounted for 90.9% of our first mortgage loan portfolio
compared with 86.5% at December 31, 2002. This percentage of fixed-rate loans
to total loans may have an adverse impact on our earnings in a rising rate
environment as the interest rate on these loans would not reprice as would
adjustable-rate loans. The strong levels of loan originations and purchases
during 2003 reflected the continuation of the impact of the low interest rate
environment. During 2003, due to the low long-term interest rate environment, $530.4 million
of our loan originations were the result of refinancing of our existing
mortgage loans. The dollar amount of refinancing of existing mortgage loans
was included in total loan originations. We allow certain customers to modify,
for a fee, their existing mortgage loans with the intent of maintaining
customer relationships in periods of extensive refinancing due to low long-term
interest rates. In general, all terms and conditions of the existing mortgage
loan remain the same except the adjustment of the interest rate to the
currently offered fixed-rate product with a similar term to maturity or to a
reduced term at the request of the borrower. Modifications of our existing
mortgage loans during the 2003 were approximately $1.46 billion. These loan
modifications were not reflected in loan origination totals. We feel loan
refinancing and modification activity are directly tied to the level of
interest rates. As rates have increased in the second half of 2003 and have
remained relatively stable since, we feel these amounts may not be as high in
2004. The loan purchases were made pursuant to our wholesale loan purchase program
established to supplement our retail loan originations. The purchasing
agreements, as established with each seller/servicer, contain parameters as to
the loans that can be included in each package. These parameters, such as
maximum loan size and maximum loan-to-value ratio, conform to parameters
generally utilized by us to originate mortgage loans. Purchased loan packages
are subject to internal due diligence procedures that may include review of
individual loan files. This review subjects the purchased loan file to
substantially the same underwriting standards used in our own loan origination
process. Loan packages purchased include mortgage loans secured by properties
located primarily in the east coast corridor states between Massachusetts and
North Carolina, and in Michigan and Illinois. Investment securities available for sale increased $1.68 billion to $2.24
billion at December 31, 2003 from $560.9 million at December 31, 2002. The
increase in investment securities available for sale primarily reflected the
investment of part of the cash flow from the high levels of prepayment activity
on our mortgage-related assets into investment securities. The increase in
investment securities also reflected our decision to shorten the overall
weighted-average life of our assets by investing in callable
government-sponsored agency securities with initial call dates of three months
to one year and terms to maturity of generally under ten years.
Mortgage-backed securities decreased $703.5 million, or 11.5%, to $5.42 billion
at December 31, 2003 from $6.13 billion at December 31, 2002. This decrease
was primarily due to the high level of prepayment activity and sales of
approximately $1.37 billion of our mortgage-backed securities during 2003. The $27.4 million increase in Federal Home Loan Bank (FHLB) stock to $164.9
million at December 31, 2003, was due to the amount of stock we were required
by the FHLB to hold. The $24.5 million increase in other assets was primarily
due to an increase in our deferred tax asset calculations as required by
generally accepted accounting principles. Total liabilities increased $2.87 billion, or 22.4%, to $15.70 billion at
December 31, 2003 compared with $12.83 billion at December 31, 2002. Total
deposits increased $1.31 billion, or 14.3%, to $10.45 billion at December 31,
2003 from $9.14 billion at December 31, 2002. The increase in total deposits
was primarily used to fund our growth initiatives. Interest-bearing deposits
increased $1.31 billion primarily Page 58




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due to an increase of $1.77 billion in our interest-bearing High Value Checking
account product. We believe the increase in interest-bearing deposits was due
primarily to our consistent offering of competitive rates on our deposit
products, primarily on our interest-bearing High Value Checking account
product. We view our interest-bearing High Value Checking account as an
attractive alternative to cash management accounts offered by brokerage firms.
This account offers unlimited checking, no charge on-line banking, no charge
bill payment and debit card availability as part of the product, and pays an
interest rate generally above competitive market rates. The balance in the
High Value Checking account at December 31, 2003 was $2.71 billion compared
with $943.2 million at December 31, 2002. This growth in interest-bearing
deposits was partially offset by a $508.9 million decrease in time deposits.
Although our time deposit rates are competitive, we believe the decrease in
time deposits was due, in part, to transfers to our High Value Checking
account. Borrowed funds increased $1.55 billion, or 43.1%, to $5.15 billion at December
31, 2003 from $3.60 billion at December 31, 2002. The additional borrowed
funds were primarily used to fund asset growth consistent with our capital
management strategy. Borrowed funds were comprised of $3.20 billion of
securities sold under agreements to repurchase and $1.95 billion of FHLB
advances. Securities pledged as collateral against our securities sold under
agreements to repurchase had a market value at December 31, 2003 of
approximately $3.47 billion. Advances from the FHLB utilize our mortgage
portfolio as collateral. The $2.03 billion in new borrowings had initial call
dates of three months to three years from the date of borrowing. These short-
and intermediate-term borrowed funds complement the $3.60 billion of previously
existing long-term borrowings. During 2003 we also restructured certain of our
borrowed funds, which resulted in the extension of the weighted-average
maturity and lowered the contract interest rate. Total stockholders equity increased $13.3 million, or 1.0%, to $1.33 billion
at December 31, 2003 from $1.32 billion at December 31, 2002. The increase was
primarily the result of net income for 2003 of $207.4 million, an increase of
$11.0 million due to the exercise of approximately 1.5 million stock options,
and an increase of $14.2 million due to the commitment of shares for our
stock-related employee benefit plans. Partially offsetting these increases in
stockholders equity were repurchases of approximately 3.7 million shares of
our common stock at an aggregate cost of $101.1 million, cash dividends
declared and paid to common stockholders of $95.6 million and a $30.2 million
decrease in accumulated other comprehensive income due to the decrease in the
overall market value of our investment and mortgage-backed securities available
for sale, reflecting a generally lower interest rate environment. At December 31, 2003, the ratio of total stockholders equity to total assets
was 7.80% compared with 9.30% at December 31, 2002. For the year ended
December 31, 2003, the ratio of average stockholders equity to average assets
was 8.73% compared with 10.12% for the year ended December 31, 2002. The
decrease in these ratios was primarily due to our capital management strategy
of planned asset growth, and a slower percentage growth in stockholders equity
as compared to the percentage growth in assets, due to payment of cash
dividends and stock repurchases. Stockholders equity per common share was
$7.33 at December 31, 2003 compared with $7.22 at December 31, 2002. Comparison of Operating Results for the Years Ended December 31, 2003 and 2002 General.Net income was $207.4 million for the year ended December 31,
2003, an increase of $15.4 million, or 8.0%, compared with net income of $192.0
million for the year ended December 31, 2002. Basic and diluted earnings per
common share were $1.14 and $1.11, respectively, for 2003 compared with basic
and diluted earnings per share of $1.04 and $1.01, respectively, for 2002. For
the year ended December 31, 2003 our return on average stockholders equity was
15.38% compared with 14.84% for Page 59




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2002. The increase in the return on average stockholders equity was primarily
due to the growth of our net income and a slower percentage growth in
stockholders equity as compared to the percentage growth in assets due to
payment of cash dividends and stock repurchases. Our return on average assets
for 2003 was 1.34% compared with 1.50% for 2002. The decrease in the return on
average assets was primarily due to the lower net interest margin due to the
low interest rate environment. The decline in the return on average assets
also reflected our overall balance sheet growth. Interest and Dividend Income.Total interest and dividend income decreased
$6.9 million, or 0.9%, to $777.3 million for the year ended December 31, 2003
compared with $784.2 million for the year ended December 31, 2002. The
decrease in total interest and dividend income was primarily due to a 112 basis
point decrease in the average yield on interest-earning assets to 5.14% for
2003 from 6.26% for 2002, reflecting yield declines to varying degrees in all
asset categories. The impact on interest and dividend income from the decrease
in the weighted-average yield on our interest-earning assets was partially
off-set by an increase in the average balance of total interest-earning assets
of $2.61 billion, or 20.8%, to $15.13 billion for the year ended December 31,
2003 compared with $12.52 billion for the year ended December 31, 2002. The $25.7 million decrease in interest and fee income on first mortgage loans
was primarily due to a 100 basis point decrease in the average yield, which
reflected the large volume of loan origination and purchase activity during the
low long-term interest rate environment of 2003 and the acceleration of the
amortization of the net premium on these assets due to the high levels of
modification and refinancing activity. The decrease in mortgage loan income
due to the decreases in yields was partially off-set by a $637.1 million
increase in the average balance of first mortgage loans, which reflected
internal growth that was consistent with our capital management strategy and
growth initiatives. The $39.5 million decrease in interest income on mortgage-backed securities was
primarily due to a 112 basis point decrease in the average yield on
mortgage-backed securities, which reflected the significant turnover in the
portfolio, the downward repricing of our adjustable-rate securities during the
low interest rate environment of 2003 and the acceleration of the net premium
on these assets. The decrease in income on mortgage-backed securities due to
the decrease in yield was partially off-set by the impact of a $486.7 million
increase in the average balance of mortgage-backed securities, which reflected
our internal growth initiatives. If short-term market interest rates remain
low, the yield on our mortgage-backed securities may continue to adjust
downward due to annual rate change limits that are part of the terms of the
securities, which have limited the extent our adjustable-rate securities may
have adjusted in prior periods. The $61.1 million growth in interest and dividends on investment securities
available for sale was primarily due to an increase in the average balance of
$1.42 billion, which reflected the investment of certain of the cash flows from
the high level of prepayment activity on our mortgage-related assets into
investment securities, and the decision to shorten the overall weighted-average
life of our assets by investing in callable securities with initial call dates
of three months to one year. The increase in income on investment securities
due to the increase in the average balance was partially off-set by a 139 basis
point decrease in the average yield on our investment securities, which
reflected the large volume of purchases made during the low interest rate
environment of 2003. We expect to continue to grow our assets by originating
and purchasing first mortgage loans as our primary growth strategy, while
purchasing mortgage-backed and investment securities to supplement our loan
growth, and assist in the management of interest rate risk. If the interest
rate environment remains stable, and the prepayment activity continues to
decline, we believe the resulting situation would have a positive impact on our
interest income in 2004. Page 60




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Interest Expense.Total interest expense, comprised of interest on deposits
and interest on borrowed funds, decreased $19.4 million, or 4.9%, to $376.4
million for the year ended December 31, 2003 from $395.8 million for the year
ended December 31, 2002. This decrease was primarily due to a decrease in the
average cost of interest-bearing liabilities of 83 basis points to 2.77% for
2003 from 3.60% for 2002. The impact of the decline in the average cost of
interest-bearing liabilities was offset, in part, by an increase in the average
balance of total interest-bearing liabilities of $2.58 billion, or 23.5%, to
$13.58 billion for 2003 from $11.00 billion for 2002. Interest expense on borrowed funds increased $27.0 million primarily due to an
increase in the average balance of $1.24 billion, the impact of which was
partially off-set by a decrease in the average cost of borrowed funds of 82
basis points. The increase in the average balance of borrowed funds was used
to fund asset growth consistent with our capital management and growth
strategies. The decrease in the average cost of borrowed funds reflected the
continued growth of our borrowed funds in the low interest rate environment
that existed during 2003. The decrease in the average cost of borrowed funds
also reflected the restructuring of certain of our borrowed funds during 2003,
which resulted in the extension of the weighted-average maturity and lowered
the contract rates. Interest expense on deposits decreased $46.5 million primarily due to a
decrease in the average cost of 93 basis points, the impact of which was
partially off-set by an increase in the average balance of deposits of $1.34
billion. The decrease in the average cost of interest-bearing deposits
reflected a 96 basis point decrease in the average cost of our time deposits,
an 83 basis point decrease in the average cost of savings accounts, an 87 basis
point decrease in the average cost of money market deposits, and a 34 basis
point decrease in the average cost of interest-bearing demand deposits. These
decreases in the average cost of interest-bearing deposits reflected the low
interest rate environment experienced during 2003 and the growth of our High
Value Checking account product, the rate for which was lower than our average
cost of total deposits during 2003. The impact on the average cost of
interest-bearing liabilities due to possible further decreases in market
interest rates may not be as favorable in future periods as short-term market
rates are currently at historically low levels. The increase in the average balance of deposits, primarily used to fund asset
growth, reflected a $1.60 billion increase in the average balance of
interest-bearing demand accounts due to the growth in our High Value Checking
account product, and an increase of $57.4 million in the average balance of our
regular savings account. We believe the increase in the average balance of
deposits was primarily due to our consistent offering of competitive rates on
desirable customer deposit products. Although our time deposit rates are
competitive, we believe the decrease of $341.1 million in the average balance
of time deposits was primarily due to transfers to our High Value Checking
account. We intend to continue to fund future asset growth using customer
deposits as our primary source of funds, by continuing to pay attractive above
market rates, while supplementing the deposit growth with long-term borrowed
funds. Net Interest Income.Net interest income increased $12.6 million, or 3.2%,
to $401.0 million for the year ended December 31, 2003 compared with $388.4
million for the year ended December 31, 2002. This increase primarily
reflected our growth initiatives, which resulted in increases in the average
balance of both interest-earning assets and interest-bearing liabilities, and
the net interest rate spread earned on this growth. Our net interest rate
spread, the difference between the average yield on total interest-earning
assets and the average cost of total interest-bearing liabilities, decreased 29
basis points to 2.37% for 2003 from 2.66% for 2002. Our net interest margin,
represented by net interest income divided by average total interest-earning
assets, decreased 45 basis points to 2.65% for 2003 from 3.10% for 2002. These decreases reflected the larger decrease in the yield on interest-earning
assets compared with the decrease in the cost of interest-bearing liabilities
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rates during the first six months of 2003 and the timing of the impact on
earnings of the market rate changes. The decrease also reflected the increased
amortization of the net premium on our mortgage loans and mortgage-backed
securities due to the high level of prepayment activity on these
mortgage-related assets. However, the stabilized rate environment and steeper
yield curve which occurred in the second half of 2003 improved our net interest
rate margin and net interest rate spread in the fourth quarter of 2003 when
compared to the prior quarters reported in 2003. If rates remain stable, we
believe this environment could have a positive impact on our earnings, net
interest margin and net interest spread in 2004. Provision for Loan Losses.Our provision for loan losses for the year ended
December 31, 2003 was $900,000, a decrease of $600,000, compared with $1.5
million for the year ended December 31, 2002. Net recoveries were $146,000 for
the year ended December 31, 2003 compared with net charge-offs of $9,000 for
2002. The decrease in the provision reflected our recent low charge-off
history given the relative stability of the housing market. The allowance for
loan losses increased $1.0 million, or 3.9%, to $26.5 million at December 31,
2003 from $25.5 million at December 31, 2002. The increase in the allowance
for loan losses, through the provision for loan losses, reflected the overall
growth of the loan portfolio and the level of delinquent and non-performing
loans. Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, increased $100,000 to $20.3 million at December 31,
2003 from $20.2 million at December 31, 2002. The ratio of non-performing
loans to total loans was 0.23% at December 31, 2003 compared with 0.29% at
December 31, 2002. The ratio of the allowance for loan losses to
non-performing loans was 131.09% at December 31, 2003 compared with 126.27% at
December 31, 2002. The ratio of the allowance for loan losses to total loans
was 0.30% at December 31, 2003 compared with 0.37% at December 31, 2002. Although we believe that we have established and maintained the allowance for
loan losses at adequate levels, additions may be necessary if future economic
and other conditions differ substantially from the current operating
environment. Although we use the best information available, the level of the
allowance for loan losses remains an estimate that is subject to significant
judgment and short-term change. See Critical Accounting Policies. Non-Interest Income.Total non-interest income increased $21.7 million to
$29.7 million for the year ended December 31, 2003 from $8.0 million for the
year ended December 31, 2002, primarily reflecting gains on securities
transactions, net. Service charges and other income, which generally consist
of service charges and fees on deposit accounts, decreased $600,000 to $5.3
million for 2003 compared with $5.9 million for 2002, due to a gain on the sale
of a commercial property in 2002. The $24.3 million gain on securities transactions, net, during 2003, resulted
from an opportunity to realize gains from the sale of certain available for
sale mortgage-backed and investment securities prior to an interest rate change
which would have had an adverse impact on their fair market value. The gain
also reflected the disposition of certain of our held to maturity
mortgage-backed securities whose amortized principal was less than fifteen
percent of the purchased principal, as allowed under SFAS No. 115. The cash
flow of $1.45 billion from the sale of the securities was reinvested into
fixed-rate securities. We may continue to take gains on the sale of investment
securities in 2004 if given the opportunity to sell these assets in a favorable
interest rate environment where we can invest the proceeds in an
interest-bearing asset with an equivalent rate. Non-Interest Expense.Total non-interest expense increased $9.0 million, or
9.6%, to $102.5 million for the year ended December 31, 2003 from $93.5 million
for the year ended December 31, 2002. The increase was primarily due to an
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reflecting routine salary increases, increases in stock-related compensation
expense and increases in pension expense. Stock-related compensation expense
increased $4.5 million primarily due to increases in the current average market
price of our common stock. Our efficiency ratio, determined by dividing total non-interest expense by the
sum of net interest income and non-interest income was 23.81% for 2003 compared
with 23.59% for 2002. Our ratio of non-interest expense to average total
assets for 2003 was 0.66% compared with 0.73% for 2002. The relative stability
of these ratios reflected our efforts to control costs, notwithstanding the
actual increase in non-interest expense, as our assets grew in excess of 20%. Income Taxes.Income tax expense increased $10.4 million, or 9.5%, to
$119.8 million for the year ended December 31, 2003 from $109.4 million for the
year ended December 31, 2002, primarily due to the 8.6% increase in income
before income tax expense. Our effective tax rate for the 2003 was 36.61%
compared with 36.29% for 2002. Comparison of Financial Condition at December 31, 2002 and December 31, 2001 During the year ended December 31, 2002, we continued to grow our operating
subsidiary, Hudson City Savings Bank, primarily through our core investments of
residential mortgage loans and mortgage-backed securities. Customer deposits
and long-term borrowings funded the growth. As a result, our total assets
increased $2.72 billion, or 23.8%, to $14.14 billion at December 31, 2002 from
$11.42 billion at December 31, 2001. Loans increased $1.00 billion, or 16.8%, to $6.97 billion at December 31, 2002
from $5.97 billion at December 31, 2001. For the year ended December 31, 2002,
we originated first mortgage loans of $1.84 billion and purchased first
mortgage loans of $1.72 billion, compared with $1.52 billion and $857.6
million, respectively, for the corresponding 2001 period. These first mortgage
loan originations and purchases were exclusively in one-to four-family mortgage
loans and were primarily fixed-rate loans. At December 31, 2002, fixed-rate
mortgage loans accounted for 86.5% of our first mortgage loan portfolio
compared with 72.2% at December 31, 2001. This percentage of fixed-rate loans
to total loans may have an adverse impact on our earnings in a rising rate
environment as the interest rate on these loans would not reprice as would
adjustable-rate loans. The increase in loan originations and purchases
reflected the low long-term market interest rate environment experienced in
2002, which caused increases in loan prepayments and refinancings. The
increase in mortgage loan purchases also reflected our internal growth
strategy. The loan purchases were made pursuant to our wholesale loan purchase program
established to supplement our retail loan originations. The purchasing
agreements, as established with each seller/servicer, contain parameters as to
the loans that can be included in each package. These parameters, such as
maximum loan size and maximum loan-to-value ratio, conform to parameters
utilized by us to originate mortgage loans. Purchased loan packages are
subject to internal due diligence procedures that may include review of
individual loan files. This review subjects the purchased loan file to
substantially the same underwriting standards used in our own loan origination
process. Loan packages purchased include mortgage loans secured by properties
located primarily in the east coast corridor states between Boston and
Washington D.C., and in Michigan and Illinois. In 2002, due to the low long-term interest rate environment, approximately
$496.8 million of our loan originations were the result of refinancing of our
existing mortgage loans. These refinancings of existing loans are included in
total loan originations. Last year we began to allow certain customers to
modify, for a fee, their existing mortgage loans with the intent of maintaining
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extensive refinancing due to lower interest rates. In general, all terms and
conditions of the existing mortgage loan remain the same except the adjustment
of the interest rate to the currently offered fixed-rate product with a similar
term to maturity or to a reduced term at the request of the borrower.
Approximately $866.3 million of existing mortgage loans were modified during
the year ended December 31, 2002. This total is not included in total loan
originations. Mortgage-backed securities increased $1.12 billion, or 22.4%, to $6.13 billion
at December 31, 2002 from $5.01 billion at December 31, 2001. This increase
includes a $861.2 million increase in mortgage-backed securities available for
sale. In addition to purchases of mortgage-backed securities as part of our
internal growth strategy, purchases also increased due to the low market
interest rate environment experienced during 2002, which caused increased
prepayment activity. Investment securities available for sale increased $393.5
million to $560.9 million at December 31, 2002 from $167.4 million at December
31, 2001. The increase in investment securities primarily reflected the
investment of part of the excess cash flows from mortgage-related prepayment
activity. These increases in interest-earning assets reflected our continued
emphasis on the origination and purchase of one-to four-family mortgage loans
as our primary growth strategy, supplemented by the purchase of mortgage-backed
securities and investment securities to help manage interest rate risk. Cash and due from banks increased $68.9 million to $153.1 million at December
31, 2002 from $84.2 million at December 31, 2001. Of the cash and due from
banks balance at December 31, 2002, $54.5 million was held at the Federal Home
Loan Bank. This balance receives interest credits equivalent to the current
federal funds overnight borrowing rate. Federal funds sold increased $70.1
million to $87.7 million at December 31, 2002 from $17.6 million at December
31, 2001. These increases in cash and cash equivalents were primarily due to
the overall growth in assets, increased levels of cash flows due to
mortgage-related prepayment activity and excess liquidity received late in the
period having been temporarily invested in federal funds sold. FHLB stock
increased $56.4 million, or 69.5%, to $137.5 million at December 31, 2002,
which was the amount of stock we were required by the FHLB to hold. The growth
in accrued interest receivable of $7.4 million to $69.2 million at December 31,
2002 was primarily due to the growth of our interest-earning assets. At December 31, 2002, total liabilities were $12.83 billion, an increase of
26.5%, or $2.69 billion, compared with $10.14 billion at December 31, 2001.
Borrowed funds increased $1.45 billion, or 67.4%, to $3.60 billion at December
31, 2002 from $2.15 billion at December 31, 2001. The additional borrowed
funds were primarily used to fund asset growth consistent with our capital
management strategy. Funding asset growth with borrowed funds generated
additional earnings through a positive interest rate spread. Borrowed funds
were comprised of $1.85 billion of securities sold under agreements to
repurchase and $1.75 billion of Federal Home Loan Bank advances. Securities
pledged as collateral against our securities sold under agreements to
repurchase had a market value at December 31, 2002 of approximately $1.96
billion. Advances from the FHLB utilize our mortgage portfolio as collateral.
Our increase in borrowed funds consisted primarily of 10-year terms to maturity
with call options starting from 3 to 5 years from the borrowing date. The use
of long-term borrowed funds has allowed us to better manage our interest rate
risk by matching our long-term assets with long-term liabilities. Borrowing
long-term in this low interest rate environment should also allow us to better
manage interest expense in future periods. Total deposits increased $1.23 billion, or 15.5%, to $9.14 billion at December
31, 2002 from $7.91 billion at December 31, 2001. Interest-bearing deposits
increased $1.21 billion, or 16.0%, to $8.75 billion at December 31, 2002 from
$7.54 billion at December 31, 2001. The increase in interest-bearing deposits
was primarily due to growth in interest-bearing demand accounts of $938.4
million due to the introduction of our interest-bearing High Value Checking
account. The balance in the High Value Checking account at December 31, 2002
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bearing High Value Checking account, which we view as an attractive alternative
to cash management accounts offered by brokerage firms. This account offers
unlimited checking, on-line banking and debit card availability as part of the
product, and pays an interest rate generally above market competitive rates. The growth in interest-bearing deposits was also due to a $112.3 million, or
21.7% increase in money market deposits to $629.0 million, an $84.0 million, or
1.4%, increase in time deposits to $6.19 billion, and a $78.3 million, or 9.6%,
increase in regular savings deposits to $892.7 million at December 31, 2002.
Non-interest bearing deposits increased $12.8 million, or 3.4%, to $388.5
million at December 31, 2002 from $375.7 million at December 31, 2001. The
increase in total deposits was primarily used to fund our planned asset growth.
We believe the increase in interest-bearing deposits was due primarily to our
consistent offering of competitive rates on our deposit products, the
introduction of our interest-bearing High Value Checking account and an overall
decrease in investor confidence in the equity markets. Accrued expenses and other liabilities increased $14.6 million, or 19.4%, to
$89.9 million at December 31, 2002 from $75.3 million at December 31, 2001
primarily due to an increase in accrued interest payable because of the growth
in our borrowed funds and an increase in our accrued income tax payable due to
timing of tax payments. Total stockholders equity increased $27.3 million, or 2.1%, to $1.32 billion
at December 31, 2002 from $1.29 billion at December 31, 2001. The increase was
primarily the result of net income of $192.0 million, an increase of $19.4
million in accumulated other comprehensive income, net of tax, an increase of
$9.9 million due to the exercise of 1,410,330 stock options, and an increase of
$12.5 million due to the allocation of stock-related employee benefit plans.
The increase in accumulated other comprehensive income was primarily due to the
growth in our portfolio of mortgage-backed securities available for sale and
increases in the value of our investment securities available for sale.
Partially offsetting these increases in stockholders equity were repurchases
of 7,754,472 shares of our common stock at an aggregate cost of $140.2 million
and cash dividends declared and paid to common stockholders of $64.5 million.
As of December 31, 2002, there remained 1,808,796 shares authorized to be
purchased under our current stock repurchase program. At December 31, 2002, the ratio of total stockholders equity to total assets
was 9.30% compared with 11.28% at December 31, 2001. For the year ended
December 31, 2002, the ratio of average stockholders equity to average assets
was 10.12% compared with 13.05% for the year ended December 31, 2001. The
decrease in these ratios was primarily due to our capital management strategy
of planned internal asset growth, and a slower percentage growth in
stockholders equity as compared to the percentage growth in assets due to
payment of cash dividends and stock repurchases. Stockholders equity per
common share was $7.22 and $6.87 at December 31, 2002 and December 31, 2001,
respectively. Comparison of Operating Results for the Years Ended December 31, 2002 and 2001 General.Net income was $192.0 million for the year ended December 31,
2002, an increase of $57.5 million, or 42.8%, compared with net income of
$134.5 million for the year ended December 31, 2001. Basic and diluted earnings
per common share were $1.04 and $1.01, respectively, for the year ended
December 31, 2002 compared with basic and diluted earnings per share of $0.69
and $0.68, respectively, for the year ended December 31, 2001. For the year
ended December 31, 2002 our return on average stockholders equity was 14.84%
compared with 10.09% for the year ended December 31, 2001. Our return on
average assets for the year ended December 31, 2002 was 1.50% compared with
1.32% for the year ended December 31, 2001. These increases reflected our
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interest rate spreads that we experienced in the low interest rate environment
and our ability to grow our business with low cost interest-bearing
liabilities. Interest and Dividend Income.Total interest and dividend income increased
$93.7 million, or 13.6%, to $784.2 million for the year ended December 31, 2002
compared with $690.5 million for the year ended December 31, 2001. The
increase in total interest income was primarily due to the average balance of
total interest-earning assets increasing $2.50 billion, or 25.0%, to $12.52
billion for the year ended December 31, 2002 compared with $10.02 billion for
the year ended December 31, 2001. This increase was due in part to a $1.15
billion, or 22.1%, increase in the average balance of first mortgage loans, net
to $6.35 billion for the year ended December 31, 2002 compared with $5.20
billion for 2001. The average balance of mortgage-backed securities increased
$1.42 billion, or 35.1%, to $5.46 billion for the year ended December 31, 2002
compared with $4.04 billion for 2001. These increases were slightly offset by a
decrease in the average balance of investment securities for the year ended
December 31, 2002 of $74.3 million, or 19.1%, to $315.2 million from $389.5
million for 2001. The increase in the average balance of FHLB stock of $22.2
million reflected the increase in the amount of FHLB stock required to be held
by us. The above increases in the average balances of first mortgage loans and
mortgage-backed securities reflected internal growth that was consistent with
our capital management strategy to originate and purchase first mortgage loans
as our primary growth strategy, while purchasing mortgage-backed securities to
supplement loan originations and purchases, and assist in the management of
interest rate risk. The growth in the average balance of mortgage-backed
securities also reflected the investment of excess cash flows, due to the
increased prepayment activity on our mortgage-related assets, into
mortgage-backed securities. Although the increase in the average balance of
loans was somewhat less than the increase in the average balance of
mortgage-backed securities, the impact of the loan growth was more significant
in terms of interest income because our first mortgage loans are generally
higher yielding assets than our mortgage-backed securities. The impact on interest income due to the growth in the average balance of
interest-earning assets, was partially offset by a 63 basis point decrease in
the average yield on interest-earning assets to 6.26% for the year ended
December 31, 2002 from 6.89% for the year ended December 31, 2001. The average
yield on first mortgage loans, net decreased 39 basis points to 6.93% for the
year ended December 31, 2002 from 7.32% for 2001. The average yield on
mortgage-backed securities decreased 88 basis points to 5.63% for the year
ended December 31, 2002 from 6.51% for 2001. The decrease in the average yield on first mortgage loans reflected the large
volume of loan originations, purchases and modifications during the low
interest rate environment of 2001 and 2002. The decrease in the average yield
on mortgage-backed securities reflected the large volume of purchases and the
downward repricing of our adjustable-rate securities during the low interest
rate environment of 2001 and 2002. The larger decrease in the average yield on
mortgage-backed securities compared with mortgage loans was due to the larger
increase in the average balance of mortgage-backed securities in this low rate
environment and the greater percentage of adjustable-rate securities in the
mortgage-backed security portfolio as compared to our mortgage loan portfolio. Interest Expense.Total interest expense, comprised of interest on deposits
and interest on borrowed funds, decreased $7.6 million, or 1.9%, to $395.8
million for the year ended December 31, 2002 from $403.4 million for the year
ended December 31, 2001, notwithstanding an overall increase in
interest-bearing liabilities. Interest expense on borrowed funds increased
$43.6 million, or 45.2%, to $140.0 million for the year ended December 31, 2002
from $96.4 million for 2001. Interest expense on deposits decreased $51.2
million, or 16.7%, to $255.8 million for the year ended December 31, 2002 from
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million for 2001. The decrease in total interest expense reflected the impact
of a 117 basis point decrease in the average cost of interest-bearing
liabilities to 3.60% for the year ended December 31, 2002 from 4.77% for 2001.
The decrease in interest expense was offset, in part, by an increase in the
average balance of interest-bearing liabilities of $2.55 billion, or 30.2%, to
$11.00 billion for the year ended December 31, 2002 from $8.45 billion for the
year ended December 31, 2001. The increase in interest expense on borrowed funds was primarily due to a $1.12
billion, or 64.7%, increase in the average balance of borrowed funds to $2.85
billion for the year ended December 31, 2002 from $1.73 billion for 2001. The
impact on interest expense on borrowed funds due to the increase in the average
balance of borrowed funds was offset, in part, by a 67 basis point decrease in
the average cost of borrowed funds to 4.90% for the year ended December 31,
2002 from 5.57% for 2001. The growth of borrowed funds has been used to fund internal asset growth
consistent with our capital management and growth strategies. The funds
borrowed during 2002 had 10-year terms to maturity with call options starting 3
to 5 years from the borrowing date. Although these borrowings generally had
higher costs than short-term borrowings, the use of long-term borrowed funds
has allowed us to better manage our interest rate risk by matching long-term
assets with long-term liabilities. Borrowing long-term in the prevailing
interest rate environment should also allow us to better manage interest
expense in future periods. The decrease in the average cost of borrowed funds
reflected the continued growth of our borrowed funds in the low interest rate
environment that existed during 2001 and 2002 and the restructuring of certain
of our borrowed funds to obtain lower interest rates. The $51.2 million decrease in interest expense on deposits was primarily due to
a 143 basis point decrease in the average cost of interest-bearing deposits to
3.14% for the year ended December 31, 2002 from 4.57% for 2001. The decrease
in the average cost of interest-bearing deposits was primarily due to a 171
basis point decrease in the average cost of our time deposits to 3.44% for 2002
from 5.15% for 2001. The average cost of regular savings accounts decreased 27
basis points to 1.98% for 2002 and the average cost of money market deposits
decreased 34 basis points to 1.97% for 2002. Partially offsetting these
decreases, the average cost of interest-bearing demand accounts increased 97
basis points to 2.55% for 2002 from 1.58% for 2001 due to the introduction
during the second quarter of 2002 of our High Value Checking account. The
decrease in the annualized average cost of interest-bearing deposits reflected
the low interest rate environment experienced during 2001 and 2002. The impact
on the average cost of interest-bearing liabilities due to possible further
decreases in market interest rates may not be as favorable in future periods as
short-term market rates are currently at historically low levels. The impact on interest expense on deposits due to the decrease in the average
cost of interest-bearing deposits was offset, in part, by a $1.43 billion, or
21.3%, increase in the average balance of interest-bearing deposits to $8.15
billion for the year ended December 31, 2002 from $6.72 billion for 2001. The
average balance of time deposits increased $930.0 million, or 17.3%, to $6.31
billion for 2002 from $5.38 billion for 2001. The average balance of
interest-bearing demand accounts increased $276.6 million to $370.8 million for
2002 from $94.2 million for 2001 due to the introduction of our High Value
Checking account in the second quarter of 2002. The average balance of money
market accounts increased $128.0 million to $593.0 million for 2002 from $465.0
million for 2001 and the average balance of regular savings accounts increased
$93.4 million to $869.8 million for 2002 from $776.4 million for 2001. We
believe the increase in the interest-bearing deposits was due primarily to our
consistent offering of competitive rates on our deposit products, the
introduction of our interest-bearing High Value Checking account and an overall
decrease in investor confidence in the equity markets. Net Interest Income.Net interest income increased $101.3 million, or
35.3%, to $388.4 million for the year ended December 31, 2002 compared with
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This increase primarily reflected our planned balance sheet growth, which
resulted in increases in the average balance of both interest-earning assets
and interest-bearing liabilities, and the improved net interest rate spread
earned on this growth. Our net interest rate spread, the difference between
the average yield on total interest-earning assets and the average cost of
total interest-bearing liabilities, increased 54 basis points to 2.66% for the
year ended December 31, 2002 from 2.12% for 2001. Our net interest margin,
represented by net interest income divided by average total interest-earning
assets, increased 23 basis points to 3.10% for the year December 31, 2002 from
2.87% for 2001. These increases reflected our improved profitability due to the declining
interest rate environment experienced during 2001 and 2002, the fact that our
interest-bearing liabilities repriced faster than our interest-earning assets
in the declining interest rate environment and our ability to grow our business
with low cost interest-bearing liabilities during this period. The larger
increase in our net interest spread compared with the increase in our net
interest margin reflected the use of investable funds to purchase treasury
stock. However, during 2002, long-term interest rates generally declined,
while short-term interest rates remained relatively stable, thus narrowing the
yield curve. Provision for Loan Losses.Our provision for loan losses for the year
December 31, 2002 was $1.5 million, a decrease of $0.4 million, or 21.1%,
compared with $1.9 million for the year ended December 31, 2001. Net
charge-offs for the year ended December 31, 2002 were $9,000 compared with net
charge-offs of $9,000 for 2001. The decrease in the provision reflected our
recent low charge-off history given the relative stability of the housing
market. The allowance for loan losses increased $1.5 million, or 6.3%, to
$25.5 million at December 31, 2002 from $24.0 million at December 31, 2001.
The increase in the allowance for loan losses, through the provision for loan
losses, reflected the overall growth of the loan portfolio and the level of
delinquent and non-performing loans. Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, increased $4.6 million, or 29.5%, to $20.2 million
at December 31, 2002 from $15.6 million at December 31, 2001. The increase in
the dollar amount of our non-performing loans, which was primarily due to an
increase of our non-performing purchased FHA/VA loan portfolio of $4.5 million,
was due to the slow economic conditions during 2002, characterized by higher
unemployment. The ratio of non-performing loans to total loans was 0.29% at
December 31, 2002 compared with 0.26% at December 31, 2001. The ratio of the
allowance for loan losses to non-performing loans was 126.27% at December 31,
2002 compared with 153.44% at December 31, 2001. The ratio of the allowance
for loan losses to total loans was 0.37% at December 31, 2002 compared with
0.40% at December 31, 2001. Non-Interest Income.Total non-interest income, consisting generally of
service charges and fees on customer accounts, was $8.0 million and $4.7
million, respectively, for the years ended December 31, 2002 and 2001. The
increase in service fees and other income of $1.2 million was primarily due to
a $760,000 gain on the sale of a commercial property not deemed to be a
strategic part of our business plan. The $2.1 million gain on securities transactions, net, which occurred in the
fourth quarter of 2002, resulted from an opportunity to restructure certain
assets and liabilities to allow us to be better positioned for future changes
in interest rates. The cash flow of $88.7 million from the sale of the
securities was reinvested in higher yielding securities at a slightly longer
duration. To match this duration extension, we restructured certain of our
borrowed funds to extend their maturity and lower the contract rate. Non-Interest Expense.Total non-interest expense increased $11.7 million,
or 14.3%, to $93.5 million for the year ended December 31, 2002 from $81.8
million for the year ended December 31, 2001. The increase was primarily due
to an increase in salaries and employee benefits of $8.4 million, or 16.1%, to
$60.7 million for the year ended December 31, 2002 from $52.3 million for 2001.
The increase in salaries Page 68




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and employee benefits reflected routine salary increases, senior level
promotions, increases in stock-related compensation expense and increases in
pension expense. The expense of certain of the stock-related plans is based on
the average market price of our common stock in accordance with the provisions
of Statement of Position 93-6, Employer Accounting for Employee Stock
Ownership Plans. The increase in our stock price has resulted in a $3.7
million increase in stock-related compensation expense. Other expenses
increased $3.2 million, or 24.4%, to $16.3 million for the year ended December
31, 2002 compared with $13.1 million for 2001. This increase was due, in part,
to expenses related to new marketing initiatives and accelerated recognition of
stock-related expense due to the passing of one of our directors. Our efficiency ratio, determined by dividing non-interest expense by the sum of
net interest income and non-interest income, was 23.59% for the year ended December 31, 2002 compared with
28.04% for the year ended December 31, 2001. Our ratio of non-interest
expense to average assets for the year ended December 31, 2002 was 0.73%
compared with 0.80% for the year ended December 31, 2001. Income Taxes.Income tax expense increased $35.9 million, or 48.8%, to
$109.4 million for the year ended December 31, 2002 from $73.5 million for the
year ended December 31, 2001. This increase was primarily due to the $93.3
million, or 44.8% increase in income before income tax expense and changes to
the New Jersey corporate business tax code. In July 2002, the New Jersey State
Legislature passed the Business Tax Reform Act. This new legislation, which
was retroactive to January 1, 2002, has increased our annual effective tax rate
to approximately 36.5%. The overall change in income tax expense, due to the
new state tax structure, was approximately $2.9 million. Our effective tax
rate for 2002 was 36.29% compared with 35.33% for 2001. Liquidity and Capital Resources The term liquidity refers to our ability to generate adequate amounts of cash
to fund loan originations, loan purchases, deposit withdrawals and operating
expenses. Our primary sources of funds are scheduled amortization and
prepayments of loan principal and mortgage-backed securities, deposits,
borrowed funds, maturities and calls of investment securities and funds
provided by our operations. Our membership in the FHLB provides us access to
additional sources of borrowed funds, which is generally limited to twenty
times the amount of FHLB stock owned. Deposit flows, calls of investment securities and borrowed funds, and
prepayments of loans and mortgage-backed securities are strongly influenced by
interest rates, general and local economic conditions and competition in the
marketplace. These factors reduce the predictability of the timing of these
sources of funds. As mortgage interest rates decline, customer-prepayment
activity tends to accelerate causing an increase in cash flow from both our
mortgage loan and mortgage-backed security portfolios. If our pricing is
competitive, the demand for mortgage originations also accelerates. When
mortgage rates increase, the opposite effect tends to occur and our loan
origination and purchase activity becomes increasingly dependent on the
strength of our residential real estate market, home purchases and new
construction activity. Principal repayments on loans were $3.63 billion during the year ended December
31, 2003 compared with $2.63 billion for the year ended December 31, 2002.
Principal payments received on mortgage-backed securities totaled $3.80 billion
during 2003 compared to $2.38 billion during 2002. The increase in payments on
loans and mortgage-backed securities reflected the low market interest rate
environment during 2003, which caused an increase in prepayment activity.
Maturities and calls of investment securities totaled $1.33 billion during 2003
compared with maturities and calls of $203.4 million during Page 69




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2002. The higher amount of calls during 2003 was due to the continuing
declining interest rate environment experienced during 2003 and the larger
balance of callable investment securities held during 2003 compared with the
amount of callable investment securities held during 2002. Total deposits increased $1.32 billion during the year ended December 31, 2003
compared with an increase of $1.23 billion during the year ended December 31,
2002. Deposit flows are affected by the level of market interest rates, the
interest rates and products offered by competitors, the volatility of equity
markets, and other factors. We believe the increase in interest-bearing
deposits was due primarily to our consistent offering of competitive rates on
our deposit products, primarily on our interest-bearing High Value Checking
account. Time deposit accounts scheduled to mature within one year were $4.61
billion at December 31, 2003. Based on our deposit retention experience and
current pricing strategy, we anticipate that a significant portion of these
time deposits will remain with us. We are committed to maintaining a strong
liquidity position; therefore we monitor our liquidity position on a daily
basis. We anticipate that we will have sufficient resources to meet this
current funding commitment. For the year ended December 31, 2003 we borrowed $2.03 billion compared with
new borrowings of $1.45 billion for the year ended December 31, 2002.
Principal payments on borrowed funds during 2003 were $475.0 million. There
were no principal payments on borrowed funds during 2002. The funds borrowed
during 2003 had initial call dates of three months to three years from the date
of borrowing. These short- and intermediate-term borrowed funds complement the
$3.60 billion of previously existing long-term borrowings. At December 31,
2003, there were $50.0 million of borrowed funds scheduled to mature within one
year, and $1.40 billion of borrowed funds with the potential to be called
within one year. We anticipate we will have sufficient resources to meet
either funding commitment by borrowing new funds at the prevailing market
interest rate, or paying-off the borrowed funds, as they mature or are called,
from our usual cash flow sources. Our primary investing activities are the origination and purchase of one-to
four-family real estate loans and consumer and other loans, the purchase of
mortgage-backed securities, and the purchase of investment securities. We
originated total loans of $2.27 billion during the year ended December 31, 2003
compared with $1.91 billion during the year ended December 31, 2002. We
purchased total loans of $3.21 billion during 2003 compared with $1.72 billion
during 2002. The increase in loan originations and purchases reflected the
investment of the proceeds from the accelerated prepayment activity during
2003. The increase also reflected the growth strategies we have employed
during recent periods, using customer deposits and borrowed funds as our
funding sources. Purchases of mortgage-backed securities during the year ended December 31, 2003
were $4.53 billion compared with $3.57 billion during the year ended December
31, 2002. Of the mortgage-backed securities purchased in 2003, $1.58 billion
were real estate mortgage investment conduits (REMIC). The REMIC purchases
in 2003 had fixed interest rates and generally had shorter average lives
compared with alternate mortgage-backed security investments available at the
time of purchase. Of the mortgage-backed securities purchased in 2003, $1.49
billion were classified as available for sale. Of these available for sale
purchases, $1.37 billion had fixed interest rates. The increase in purchases
of mortgage-backed securities was related to the increase in prepayment
activity due to the low market interest rate environment experienced during
2003. During the year ended December 31, 2003, we purchased $3.09 billion of
investment securities available for sale compared with purchases of $598.5
million during the year ended December 31, 2002. The increase in purchases of
investment securities available for sale primarily reflected the investment of
part of the cash flow from the high levels of prepayment activity on our
mortgage-related assets into investment securities. The increase in investment
securities also reflected our decision to shorten the Page 70




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overall weighted-average life of our assets by investing in callable
government-sponsored agency securities with initial call dates of three months
to one year and terms to maturity of generally under ten years. As part of the
membership requirements of the FHLB, we are required to hold a certain dollar
amount of FHLB common stock. During 2003, we purchased $27.4 million of FHLB
common stock compared with purchases of $56.4 million during 2002. The
purchases made during 2003 brought our total investment in FHLB stock to $164.9
million, the amount we are currently required to hold. Under our stock repurchase programs, shares of Hudson City Bancorp common stock
may be purchased in the open market and through other privately negotiated
transactions, from time-to-time, depending on market conditions. The
repurchased shares are held as treasury stock for general corporate use.
During the year ended December 31, 2003, we purchased 3,667,375 shares of our
common stock at an aggregate cost of $101.1 million. During the first quarter
of 2003, the Board of Directors approved our fifth stock repurchase program.
This program authorized the repurchase of up to 9,525,000 shares of common
stock. At December 31, 2003, there were 7,666,421 shares remaining to be
repurchased under the existing stock repurchase program. Cash dividends declared and paid during 2003 were $95.6 million compared with
$64.5 million during 2002. The dividend pay-out ratio for 2003 was 45.61%
compared with 33.17% for 2002. On January 22, 2004, the Board of Directors
declared a quarterly cash dividend of sixteen cents ($0.16) per common share.
The dividend was paid on March 1, 2004 to stockholders of record at the close
of business on February 6, 2004. At December 31, 2003, Hudson City Bancorp and Hudson City Savings exceeded all
regulatory capital requirements. Hudson City Bancorps leverage capital ratio,
tier 1 risk-based capital ratio and total risk-based capital ratio were 8.14%,
22.12% and 22.56%, respectively. Hudson City Savings leverage capital ratio,
tier 1 risk-based capital ratio and total risk-based capital ratio were 7.52%,
20.45% and 20.89%, respectively. The primary source of liquidity for Hudson City Bancorp, the holding company of
Hudson City Savings, is capital distributions from the banking subsidiary.
During 2003, Hudson City Bancorp received $199.2 million in dividend payments
from Hudson City Savings, which amounted to 97.3% of Hudson City Savings net
income for that year. The primary use of these funds is the payment of
dividends to our shareholders and the repurchase of our common stock. Hudson
City Bancorps ability to continue these activities is solely dependent upon
capital distributions from Hudson City Savings. Applicable federal law may
limit the amount of capital distributions Hudson City Savings may make. In the
first quarter of 2004, we applied for and were granted approval to waive
dividends payments to Hudson City, MHC, the holding company of Hudson City
Bancorp. This dividend waiver will provide additional operating capital at Hudson City
Bancorp. Off-Balance Sheet Arrangements and Contractual Obligations Hudson City is a party to certain off-balance sheet arrangements, which occur
in the normal course of our business, to meet the credit needs of our customers
and the growth initiatives of the Bank. These arrangements are primarily
commitments to originate and purchase mortgage loans, and to purchase
mortgage-backed securities. We did not engage in any hedging transactions that
use derivative instruments (such as interest rate swaps and caps) during 2003
and did not have any such hedging transactions in place at December 31, 2003,
which would create other off-balance sheet arrangements. Page 71




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The following table reports the amounts of contractual obligations for Hudson
City as of December 31, 2003. Payments Due By PeriodLess Than
    
    1 Year to
    
    3 Years to
    
    More ThanContractual Obligation
    
    Total
    
    1 Year
    
    3 Years
    
    5 Years
    
    5 Years(In thousands)First mortgage
loans
    
    $
    112,554
    
    
    $
    112,554
    
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage loan
purchases
    
    
    274,549
    
    
    
    274,549
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed
security purchases
    
    
    300,000
    
    
    
    300,000
    
    
    
    
    
    
    
    
    
    
    
    Operating
leases
    
    
    19,446
    
    
    
    3,460
    
    
    
    5,966
    
    
    
    4,816
    
    
    
    5,204Total
    
    $
    706,549
    
    
    $
    690,563
    
    
    $
    5,966
    
    
    $
    4,816
    
    
    $
    5,204
 Commitments to extend credit are agreements to lend money to a customer as long
as there is no violation of any condition established in the contract.
Commitments to fund first mortgage loans generally have fixed expiration dates
of approximately 90 days and other termination clauses. Since some commitments
are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Hudson City Savings
evaluates each customers credit-worthiness on a case-by-case basis.
Additionally, we have available home equity and overdraft lines of credit,
which do not have fixed expiration dates, of approximately $86.0 million. We
are not obligated to advance further amounts on credit lines if the customer is
delinquent, or otherwise in violation of the agreement. The commitments to
purchase first mortgage loans and mortgage-backed securities had a normal
period from trade date to settlement date of approximately 60 days. Recent Accounting Pronouncements In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirement of Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 addresses disclosures to be made
by a guarantor in its financial statements about its obligations under
guarantees. The interpretation also requires the recognition, at estimated
fair value, of a liability by the guarantor at the inception of certain
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 were effective for financial statements of interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions are applicable prospectively to guarantees issued or modified after
December 31, 2002. The adoption of this interpretation did not have a material
impact on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 was generally effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003, and should generally be applied prospectively.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June
15, 2003, should continue to be applied in accordance with their respective
effective dates. In addition, the provisions of SFAS No. 149 which relate to
forward purchases or sales of when-issued securities or other securities that
do not yet exist, were applied to both existing contracts and new contracts
entered into after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on our financial condition or results of operations. Page 72




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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
requires issuers of certain financial instruments, falling within the scope of
SFAS No. 150, with characteristics of both liabilities and equity to be
classified and measured as liabilities. SFAS No. 150 was effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. For financial instruments created before the issuance
date of SFAS No. 150 and still existing at the beginning of the interim period
of adoption, SFAS No. 150 was to be implemented by reporting the cumulative
effect of a change in an accounting principle. Restatement is not permitted.
The adoption of SFAS No. 150 did not have a material impact on our financial
condition or results of operations. FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), was issued in January 2003 and was reissued as FASB Interpretation No. 46
(revised December 2003) (FIN 46R). For public entities, FIN 46R is
applicable no later than the end of the first reporting period ending after
December 15, 2003 to all special-purpose entities (SPEs) in which the entity
holds a variable interest. FIN 46R may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
FIN 46 and FIN 46R provides guidance on the identification of entities
controlled through means other than voting rights. FIN 46 and FIN 46R
specifies how a business enterprise should evaluate its interest in a variable
interest entity to determine whether to consolidate that entity. A variable
interest entity must be consolidated by its primary beneficiary if the entity
does not effectively disperse risks among the parties involved. We adopted FIN
46R as of December 31, 2003. The adoption of FIN 46 did not have
a material impact on our consolidated financial statements. In December 2003, the FASB issued SFAS No. 132 (revised), Employers
Disclosures about Pension and Other Postretirement Benefits. SFAS No. 132
(revised) prescribes employers disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. SFAS No. 132 (revised) retains and revises the disclosure
requirements contained in the original SFAS No. 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The Statement generally is effective for fiscal years ending
after December 15, 2003. Our disclosures in Note 10 of the Consolidated Financial
Statements in Item 8 of this report incorporate the
requirements of SFAS No. 132 (revised). On January 12, 2004, The FASB issued Staff Position No. 106-1 Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, which allows companies to recognize or defer
recognizing the effects of the Medicare Prescription Drug Improvement and
Modernization Act of 2003, or Medicare Act, for annual financial statements of
fiscal years ending after December 7, 2003. The Medicare Act introduced both a
Medicare prescription-drug benefit and a federal subsidy to sponsors
of retiree
health-care plans that provide a benefit at least actuarially equivalent to
the Medicare benefit. These provisions of the Medicare Act will affect
accounting measurements. We have elected to defer accounting for the effects
of the Medicare Act. The specific authoritative guidance on accounting for the
federal subsidy is pending and the issued guidance could require us to change
previously reported information. As a result, we have not yet determined the
impact of the Medicare Act on our financial condition or results of
operations. Page 73




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Impact of Inflation and Changing Prices The Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements of Hudson City Bancorp have been prepared in accordance
with accounting principles generally accepted in the United States of America,
commonly referred as GAAP. GAAP generally requires the measurement of financial
position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost
of our operations. Unlike industrial companies, our assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates
have a greater impact on performance than do the effects of inflation. Critical Accounting Policies Note 1 to our Audited Consolidated Financial Statements in Item 8 of this
report contains a summary of our significant accounting policies. We believe
our policies with respect to the methodology for our determination of the
allowance for loan losses and asset impairment judgments, including other than
temporary declines in the value of our securities, involve a higher degree of
complexity and require management to make difficult and subjective judgments
which often require assumptions or estimates about highly uncertain matters.
Changes in these judgments, assumptions or estimates could cause reported
results to differ materially. These critical policies and their application
are periodically reviewed with the Audit Committee and our Board of Directors. Allowance for Loan Losses.The allowance for loan losses has been
determined in accordance with accounting principles generally accepted in the
United States of America, under which we are required to maintain adequate
allowances for loan losses. We are responsible for the timely and periodic
determination of the amount of the allowance required. We believe that our
allowance for loan losses is adequate to cover specifically identifiable loan
losses, as well as estimated losses inherent in our portfolio for which certain
losses are probable but not specifically identifiable. As part of our evaluation of the adequacy of our allowance for loan losses,
each month we prepare a worksheet. This worksheet categorizes the entire loan
portfolio by certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.) and payment status (i.e., current or number of
days delinquent). Loans with known potential losses are categorized separately.
We assign potential loss factors to the payment status categories on the basis
of our assessment of the potential risk inherent in each loan type. We use this
worksheet, together with loan portfolio balances and delinquency reports, to
evaluate the adequacy of the allowance for loan losses. Other key factors we
consider in this process are current real estate market conditions, changes in
the trend of non-performing loans, the current state of the local and national
economy and loan portfolio growth. We maintain the allowance for loan losses through provisions for loan losses
that we charge to income. We charge losses on loans against the allowance for
loan losses when we believe the collection of loan principal is unlikely. We
establish the provision for loan losses after considering the results of our
review of delinquency and charge-off trends, the allowance for loan loss
worksheet, the amount of the allowance for loan losses in relation to the total
loan balance, loan portfolio growth, accounting principles generally accepted
in the United States of America and regulatory guidance. We have applied this
process consistently and we have made minimal changes in the estimation methods
and assumptions that we have used. 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 Page 74




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properties. As a result of our lending emphasis, we had a loan concentration
in residential first mortgage loans at December 31, 2003, the majority of which
are secured by real property located in New Jersey. Based on the composition of our loan portfolio and the growth in our loan
portfolio, we believe the primary risks inherent in our portfolio are possible
increases in interest rates, a decline in the economy, generally, and a decline
in real estate market values. 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. Accordingly, we have maintained our
provision for loan losses at the current level to primarily address the actual
growth in our loan portfolio. We consider it important to maintain the ratio of
our allowance for loan losses to total loans at an acceptable level given
current economic conditions, interest rates and the composition of our
portfolio. At December 31, 2003, the allowance for loan losses as a percentage
of total loans was 0.30%. Because of the primary emphasis of our lending
practices and the current market conditions, we consider 0.30% to be at an
acceptable level. Furthermore, the increase in the allowance for loan losses
each year reflected the continued growth in the loan portfolio, the relatively
low levels of loan charge-offs, the stability in the real estate market during
those years and the resulting stability in our overall loan quality. Although we believe that we have established and maintained the allowance for
loan losses at adequate levels, additions may be necessary if future economic
and other conditions differ substantially from the current operating
environment. Although management uses 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. Asset Impairment Judgments.Certain of our assets are carried in our
consolidated statements of financial condition at fair value or at the lower of
cost or fair value. Valuation allowances are established when necessary to
recognize impairment of such assets. We periodically perform analyses to test
for impairment of various assets. In addition to our impairment analyses
related to loans discussed above, another significant impairment analysis
relates to the value of other than temporary declines in the value of our
securities. 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 in stockholders equity. The securities which we have the
positive intent and ability to hold to maturity are classified as held to
maturity and are carried at amortized cost. We conduct a periodic review and
evaluation of the securities portfolio to determine if the value of any
security has declined below its carrying value and whether such decline is
other than temporary. If such decline is deemed other than temporary, we would
adjust the carrying amount of the security by writing down the security to fair
market value through a charge to current period operations. The market values
of our securities are significantly affected by changes in interest rates. In
general, as interest rates rise, the market value of fixed-rate securities will
decrease; as interest rates fall, the market value of fixed-rate securities
will increase. With significant changes in interest rates, we evaluate our intent and
ability to hold the security to maturity or for a sufficient time to recover
the recorded principal balance. Estimated fair values for securities are based
on published or securities dealers market values. 
 Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Information regarding quantitative and qualitative disclosures about market
risk appear under
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations  Management of Interest Rate Risk. Page 75




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Item 8. Financial Statements and Supplementary Data. INDEPENDENT AUDITORS REPORT To The Board of Directors and Stockholders of
Hudson City Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition
of Hudson City Bancorp, Inc. and subsidiary as of December 31, 2003 and 2002,
and the related consolidated statements of income, changes in stockholders
equity, and cash flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hudson City
Bancorp, Inc. and subsidiary as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. (KPMG LOGO) February 20, 2004
Short Hills, New Jersey Page 76




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Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition December 31,
    
    December 31,2003
    
    2002(In thousands)Assets:Cash and due from banks (note 3)
    
    $
    190,984
    
    
    $
    153,096Federal funds sold
    
    
    63,600
    
    
    
    87,700Total cash and cash equivalents
    
    
    254,584
    
    
    
    240,796Investment securities held to maturity, market value of $1,443 at
December 31, 2003 and $1,497 at December 31, 2002 (notes 4 and 9)
    
    
    1,366
    
    
    
    1,406Investment securities available for sale, at market value (notes 4 and 9)
    
    
    2,243,812
    
    
    
    560,932Federal Home Loan Bank of New York stock
    
    
    164,850
    
    
    
    137,500Mortgage-backed securities held to maturity, market value of $4,250,688
at December 31, 2003 and $4,828,939 at December 31, 2002
(notes 5 and 9)
    
    
    4,292,444
    
    
    
    4,734,266Mortgage-backed securities available for sale, at market value
(notes 5 and 9)
    
    
    1,130,257
    
    
    
    1,391,895Loans (note 6)
    
    
    8,803,066
    
    
    
    6,970,900Less:Deferred loan fees
    
    
    10,255
    
    
    
    13,508Allowance for loan losses (note 6)
    
    
    26,547
    
    
    
    25,501Net loans
    
    
    8,766,264
    
    
    
    6,931,891Foreclosed real estate, net
    
    
    1,002
    
    
    
    1,276Accrued interest receivable
    
    
    80,220
    
    
    
    69,248Banking premises and equipment, net (note 7)
    
    
    31,354
    
    
    
    32,732Other assets (notes 10 and 11)
    
    
    67,207
    
    
    
    42,662Total Assets
    
    $
    17,033,360
    
    
    $
    14,144,604Liabilities and Stockholders Equity:Deposits (note 8):Interest-bearing
    
    $
    10,057,285
    
    
    $
    8,750,164Noninterest-bearing
    
    
    396,495
    
    
    
    388,465Total deposits
    
    
    10,453,780
    
    
    
    9,138,629Borrowed funds (note 9)
    
    
    5,150,000
    
    
    
    3,600,000Accrued expenses and other liabilities (notes 10 and 11)
    
    
    100,214
    
    
    
    89,892Total liabilities
    
    
    15,703,994
    
    
    
    12,828,521Common stock, $0.01 par value, 800,000,000 shares authorized; 231,276,600
shares issued, 189,835,997 shares outstanding at December 31, 2003,
191,973,258 shares outstanding at December 31, 2002
    
    
    2,313
    
    
    
    2,313Additional paid-in capital
    
    
    543,589
    
    
    
    530,496Retained earnings (notes 2, 11 and 13)
    
    
    1,396,257
    
    
    
    1,291,960Treasury stock, at cost; 41,440,603 shares at December 31, 2003 and
39,303,342 shares at December 31, 2002
    
    
    (547,859
    )
    
    
    (465,249
    )Unallocated common stock held by the employee stock
ownership plan (note 10)
    
    
    (49,513
    )
    
    
    (51,474
    )Unearned common stock held by the recognition and
retention plan (note 10)
    
    
    (9,463
    )
    
    
    (16,253
    )Accumulated other comprehensive (loss)income, net of tax
    
    
    (5,958
    )
    
    
    24,290Total stockholders equity
    
    
    1,329,366
    
    
    
    1,316,083Commitments and contingencies (notes 7 and 14)Total Liabilities and Stockholders Equity
    
    $
    17,033,360
    
    
    $
    14,144,604
 See accompanying notes to consolidated financial statements. Page 77




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##### Table of Contents



Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income Year Ended December 31,2003
    
    2002
    
    2001(In thousands, except per share data)Interest and Dividend Income:Interest and fees on first mortgage loans (note 6)
    
    $
    414,417
    
    
    $
    440,073
    
    
    $
    381,135Interest and fees on consumer and other loans
    
    
    8,379
    
    
    
    10,027
    
    
    
    11,959Interest on mortgage-backed securities held to maturity
    
    
    217,962
    
    
    
    265,144
    
    
    
    254,610Interest on mortgage-backed securities available for sale
    
    
    50,273
    
    
    
    42,599
    
    
    
    8,304Interest on investment securities held to maturity (note 4):Taxable
    
    
    62
    
    
    
    68
    
    
    
    68Exempt from federal taxes
    
    
    25
    
    
    
    21
    
    
    
    23Interest and dividends on investment securities
available for sale  taxable (note 4)
    
    
    79,992
    
    
    
    18,856
    
    
    
    24,427Dividends on Federal Home Loan Bank of New York stock
    
    
    4,424
    
    
    
    5,002
    
    
    
    4,536Interest on federal funds sold
    
    
    1,794
    
    
    
    2,427
    
    
    
    5,436Total interest and dividend income
    
    
    777,328
    
    
    
    784,217
    
    
    
    690,498Interest Expense:Interest on deposits (note 8)
    
    
    209,339
    
    
    
    255,775
    
    
    
    307,007Interest on borrowed funds (note 9)
    
    
    167,015
    
    
    
    139,999
    
    
    
    96,420Total interest expense
    
    
    376,354
    
    
    
    395,774
    
    
    
    403,427Net interest income
    
    
    400,974
    
    
    
    388,443
    
    
    
    287,071Provision for Loan Losses (note 6)
    
    
    900
    
    
    
    1,500
    
    
    
    1,875Net interest income after provision for loan losses
    
    
    400,074
    
    
    
    386,943
    
    
    
    285,196Non-interest Income:Service charges and other income
    
    
    5,338
    
    
    
    5,947
    
    
    
    4,694Gains on securities transactions, net (notes 4 and 5)
    
    
    24,326
    
    
    
    2,066
    
    
    
    Total non-interest income
    
    
    29,664
    
    
    
    8,013
    
    
    
    4,694Non-interest Expense:Salaries and employee benefits (note 10)
    
    
    68,776
    
    
    
    60,731
    
    
    
    52,307Net occupancy expense (note 7)
    
    
    14,981
    
    
    
    13,888
    
    
    
    14,088Federal deposit insurance assessment
    
    
    1,564
    
    
    
    1,415
    
    
    
    1,292Computer and related services
    
    
    1,714
    
    
    
    1,213
    
    
    
    1,055Other expense
    
    
    15,492
    
    
    
    16,294
    
    
    
    13,082Total non-interest expense
    
    
    102,527
    
    
    
    93,541
    
    
    
    81,824Income before income tax expense
    
    
    327,211
    
    
    
    301,415
    
    
    
    208,066Income Tax Expense (note 11)
    
    
    119,801
    
    
    
    109,382
    
    
    
    73,517Net income
    
    $
    207,410
    
    
    $
    192,033
    
    
    $
    134,549Basic earnings per share (note 17)
    
    $
    1.14
    
    
    $
    1.04
    
    
    $
    0.69Diluted earnings per share (note 17)
    
    $
    1.11
    
    
    $
    1.01
    
    
    $
    0.68
 See accompanying notes to consolidated financial statements. Page 78




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##### Table of Contents



Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders Equity UnallocatedAdditional
    
    
    
    
    
    CommonCommon
    
    Paid-In
    
    Retained
    
    Stock HeldStock
    
    Capital
    
    Earnings
    
    by the ESOP(In
thousand)Balance at December 31, 2000
    
    $
    2,313
    
    
    $
    526,815
    
    
    $
    1,082,903
    
    
    $
    (55,396
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    134,549
    
    
    
    Other comprehensive income:Unrealized holding gains arising
during
period (net of tax of $4,868)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDeclaration of dividends ($0.235 per share)
    
    
    
    
    
    
    
    
    
    
    (46,542
    )
    
    
    Allocation of ESOP stock
    
    
    
    
    
    
    1,277
    
    
    
    
    
    
    
    1,961Purchase of RRP stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vesting of RRP stock
    
    
    
    
    
    
    (368
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (772
    )
    
    
    Balance at December 31, 2001
    
    
    2,313
    
    
    
    527,724
    
    
    
    1,170,138
    
    
    
    (53,435
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    192,033
    
    
    
    Other comprehensive income :Unrealized holding gains arising
during
period (net of tax of $11,918)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDeclaration of dividends ($0.345 per share)
    
    
    
    
    
    
    
    
    
    
    (64,504
    )
    
    
    Allocation of ESOP stock
    
    
    
    
    
    
    3,144
    
    
    
    
    
    
    
    1,961Purchase of RRP stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vesting of RRP stock
    
    
    
    
    
    
    (372
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (5,707
    )
    
    
    Balance at December 31, 2002
    
    
    2,313
    
    
    
    530,496
    
    
    
    1,291,960
    
    
    
    (51,474
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    207,410
    
    
    
    Other comprehensive income :Unrealized holding losses arising
during
period (net of tax of $9,065)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reclassification adjustment for
gains in
net income (net of tax of $9,937)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total comprehensive incomeDeclaration of dividends ($0.52 per share)
    
    
    
    
    
    
    
    
    
    
    (95,627
    )
    
    
    Tax benefit from stock plans
    
    
    
    
    
    
    7,686
    
    
    
    
    
    
    
    Allocation of ESOP stock
    
    
    
    
    
    
    5,724
    
    
    
    
    
    
    
    1,961Vesting of RRP stock
    
    
    
    
    
    
    (317
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (7,486
    )
    
    
    Balance at December 31, 2003
    
    $
    2,313
    
    
    $
    543,589
    
    
    $
    1,396,257
    
    
    $
    (49,513
    )
    [Continued from above table, first column(s) repeated] Unearned
    
    
    
    
    
    AccumulatedCommon
    
    
    
    
    
    Other
    
    TotalStock Held
    
    Treasury
    
    Comprehensive
    
    Stockholdersby the RRP
    
    Stock
    
    Income (Loss)
    
    Equity(In
thousand)Balance at December 31, 2000

    
    $
    (23,958
    )
    
    $
    (65,011
    )
    
    $
    (3,097
    )
    
    $
    1,464,569Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,549Other comprehensive income:Unrealized holding gains
arising during
period (net of tax of $4,868)
    
    
    
    
    
    
    
    
    
    
    7,941
    
    
    
    7,941Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,490Declaration of dividends ($0.235 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46,542
    )Allocation of ESOP stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,238Purchase of RRP stock
    
    
    (4,184
    )
    
    
    
    
    
    
    
    
    
    
    (4,184
    )Vesting of RRP stock
    
    
    6,010
    
    
    
    
    
    
    
    
    
    
    
    5,642Purchase of treasury stock
    
    
    
    
    
    
    (278,458
    )
    
    
    
    
    
    
    (278,458
    )Exercise of stock options
    
    
    
    
    
    
    2,753
    
    
    
    
    
    
    
    1,981Balance at December 31, 2001
    
    
    (22,132
    )
    
    
    (340,716
    )
    
    
    4,844
    
    
    
    1,288,736Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,033Other comprehensive income :Unrealized holding gains arising
during period (net of tax of $11,918)
    
    
    
    
    
    
    
    
    
    
    19,446
    
    
    
    19,446Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211,479Declaration of dividends ($0.345 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,504
    )Allocation of ESOP stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,105Purchase of RRP stock
    
    
    (1,854
    )
    
    
    
    
    
    
    
    
    
    
    (1,854
    )Vesting of RRP stock
    
    
    7,733
    
    
    
    
    
    
    
    
    
    
    
    7,361Purchase of treasury stock
    
    
    
    
    
    
    (140,173
    )
    
    
    
    
    
    
    (140,173
    )Exercise of stock options
    
    
    
    
    
    
    15,640
    
    
    
    
    
    
    
    9,933Balance at December 31, 2002
    
    
    (16,253
    )
    
    
    (465,249
    )
    
    
    24,290
    
    
    
    1,316,083Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,410Other comprehensive income :Unrealized holding losses arising
during
period (net of tax of $9,065)
    
    
    
    
    
    
    
    
    
    
    (15,859
    )
    
    
    (15,859
    )Reclassification adjustment
for gains in
net income (net of tax of $9,937)
    
    
    
    
    
    
    
    
    
    
    (14,389
    )
    
    
    (14,389
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,162Declaration of dividends ($0.52 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (95,627
    )Tax benefit from stock plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,686Allocation of ESOP stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,685Vesting of RRP stock
    
    
    6,790
    
    
    
    
    
    
    
    
    
    
    
    6,473Purchase of treasury stock
    
    
    
    
    
    
    (101,057
    )
    
    
    
    
    
    
    (101,057
    )Exercise of stock options
    
    
    
    
    
    
    18,447
    
    
    
    
    
    
    
    10,961Balance at December 31, 2003
    
    $
    (9,463
    )
    
    $
    (547,859
    )
    
    $
    (5,958
    )
    
    $
    1,329,366
 See accompanying notes to consolidated financial statements. Page 79




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##### Table of Contents



Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Cash Flows from Operating Activities:Net income
    
    $
    207,410
    
    
    $
    192,033
    
    
    $
    134,549Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation, accretion and amortization expense
    
    
    44,497
    
    
    
    14,269
    
    
    
    5,167Provision for loan losses
    
    
    900
    
    
    
    1,500
    
    
    
    1,875Gains on net securities transactions
    
    
    (24,326
    )
    
    
    (2,066
    )
    
    
    Allocation of stock for employee benefit plans
    
    
    14,158
    
    
    
    12,466
    
    
    
    8,880Deferred tax benefit
    
    
    (6,392
    )
    
    
    (4,756
    )
    
    
    (2,857
    )Net proceeds from sale of foreclosed real estate
    
    
    3,144
    
    
    
    231
    
    
    
    940(Increase) decrease in accrued interest receivable
    
    
    (10,972
    )
    
    
    (7,440
    )
    
    
    452Decrease (increase) in other assets
    
    
    2,606
    
    
    
    (9,587
    )
    
    
    2,154Increase in accrued expenses and other liabilities
    
    
    16,251
    
    
    
    14,622
    
    
    
    13,587Net Cash Provided by Operating Activities
    
    
    247,276
    
    
    
    211,272
    
    
    
    164,747Cash Flows from Investing Activities:Originations of loans
    
    
    (2,271,148
    )
    
    
    (1,907,298
    )
    
    
    (1,587,430
    )Purchases of loans
    
    
    (3,205,249
    )
    
    
    (1,717,406
    )
    
    
    (857,638
    )Payments on loans
    
    
    3,630,638
    
    
    
    2,625,551
    
    
    
    1,353,923Principal collection of mortgage-backed securities held to maturity
    
    
    3,387,605
    
    
    
    2,133,902
    
    
    
    1,584,372Proceeds from sales of mortgage-backed securities held to maturity
    
    
    68,652
    
    
    
    
    
    
    
    Purchases of mortgage-backed securities held to maturity
    
    
    (3,038,153
    )
    
    
    (2,400,445
    )
    
    
    (2,804,215
    )Principal collection of mortgage-backed securities available for sale
    
    
    410,316
    
    
    
    250,244
    
    
    
    35,996Proceeds from sales of mortgage-backed securities available for sale
    
    
    1,329,731
    
    
    
    78,164
    
    
    
    Purchases of mortgage-backed securities available for sale
    
    
    (1,489,154
    )
    
    
    (1,168,106
    )
    
    
    (560,228
    )Proceeds from maturities and calls of investment securities held to maturity
    
    
    40
    
    
    
    35
    
    
    
    40Proceeds from maturities and calls of investment securities available for sale
    
    
    1,332,222
    
    
    
    203,338
    
    
    
    855,614Proceeds from sales of investment securities available for sale
    
    
    50,557
    
    
    
    10,504
    
    
    
    Purchases of investment securities available for sale
    
    
    (3,089,474
    )
    
    
    (598,547
    )
    
    
    (140,430
    )Purchases of Federal Home Loan Bank of New York stock
    
    
    (27,350
    )
    
    
    (56,351
    )
    
    
    (7,520
    )Purchases of premises and equipment, net
    
    
    (2,149
    )
    
    
    (5,144
    )
    
    
    (3,966
    )Net Cash Used in Investment Activities
    
    
    (2,912,916
    )
    
    
    (2,551,559
    )
    
    
    (2,131,482
    )Cash Flows from Financing Activities:Net increase in deposits
    
    
    1,315,151
    
    
    
    1,225,867
    
    
    
    1,308,641Proceeds from borrowed funds
    
    
    2,025,000
    
    
    
    1,450,000
    
    
    
    1,550,000Principal payments on borrowed funds
    
    
    (475,000
    )
    
    
    
    
    
    
    (650,000
    )Dividends paid
    
    
    (95,627
    )
    
    
    (64,504
    )
    
    
    (46,542
    )Purchases of stock by the RRP
    
    
    
    
    
    
    (1,854
    )
    
    
    (4,184
    )Purchases of treasury stock
    
    
    (101,057
    )
    
    
    (140,173
    )
    
    
    (278,458
    )Exercise of stock options
    
    
    10,961
    
    
    
    9,933
    
    
    
    1,981Net Cash Provided by Financing Activities
    
    
    2,679,428
    
    
    
    2,479,269
    
    
    
    1,881,438Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    13,788
    
    
    
    138,982
    
    
    
    (85,297
    )Cash and Cash Equivalents at Beginning of Period
    
    
    240,796
    
    
    
    101,814
    
    
    
    187,111Cash and Cash Equivalents at End of Period
    
    $
    254,584
    
    
    $
    240,796
    
    
    $
    101,814Supplemental Disclosures:Interest paid
    
    $
    373,234
    
    
    $
    390,038
    
    
    $
    399,401Income taxes paid
    
    $
    122,535
    
    
    $
    111,219
    
    
    $
    70,205
 See accompanying notes to consolidated financial statements. Page 80




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##### Table of Contents



Notes to Consolidated
Financial Statements 1. Summary of Significant Accounting Policies a)Basis of Presentation The following are the significant accounting and reporting policies applied by
Hudson City Bancorp, Inc. (Hudson City Bancorp) and its wholly-owned
subsidiary, Hudson City Savings Bank (Hudson City Savings), in the
preparation of the accompanying consolidated financial statements. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All
significant intercompany transactions and balances have been eliminated in
consolidation. As used in these consolidated financial statements, Hudson
City refers to Hudson City Bancorp, Inc. and its consolidated subsidiary,
depending on the context. Hudson City Bancorp is a Delaware corporation organized in March 1999 by 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, referred to as the Reorganization. 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 income
for the period. Actual results could differ from these estimates. b)Comprehensive Income Comprehensive income is comprised of net income and other comprehensive income.
Other comprehensive income includes items such as unrealized gains and losses
on securities available for sale, net of tax. Comprehensive income is
presented in the consolidated statements of changes in stockholders equity. c)Statements of Cash Flows For purposes of reporting cash flows, cash and cash equivalents includes cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods. Transfers of loans to foreclosed real estate of $2,994,000, $1,257,000 and
$747,000 for the years ended December 31, 2003, 2002 and 2001, respectively,
did not result in cash receipts or cash payments. d)Investment Securities Investment securities are classified as either held to maturity or available
for sale. Investment securities classified as held to maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts, which
are recognized as adjustments to interest income, using a method that
approximates level yield. Hudson City has both the ability and the positive
intent to hold these investment securities to maturity. Securities available
for sale are carried at fair value, with unrealized gains and losses, net of
tax, reported as a component of other comprehensive income, which is included
in stockholders equity. Realized gains and losses are recognized when securities are sold or called
using the specific identification method. The estimated fair market value of
all investment securities is determined by use of quoted market prices. Page 81




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##### Table of Contents



Notes to Consolidated Financial Statements We periodically perform analyses to test for impairment of various assets. A
significant impairment analysis relates to the other than temporary declines in
the value of our securities. We conduct periodic reviews and evaluations of
our securities portfolios to determine if the value of any security has
declined below its carrying value and whether such decline is other than
temporary. If such decline is deemed other than temporary, we would adjust the
amount of the security by writing it down to fair market value through a charge
to current period operations. e)Mortgage-Backed Securities Mortgage-backed securities include pass-through certificates, which represent
participating interests in pools of long-term first mortgage loans originated
and serviced by third-party issuers of the securities, and real estate mortgage
investment conduits (REMICs), which are debt securities that are secured by
mortgage loans or other mortgage-backed securities. Mortgage-backed securities are classified as either held to maturity or
available for sale. Mortgage-backed securities classified as held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income, using a
method that approximates level yield. Hudson City has both the ability and the
positive intent to hold these investment securities to maturity.
Mortgage-backed securities available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported as a component of other
comprehensive income, which is included in stockholders equity. Realized gains
and losses are recognized when securities are sold using the specific
identification method. The estimated fair market value of these securities is
determined by use of quoted market prices. f)Loans Loans are stated at their principal amounts outstanding. Interest income on
loans is accrued and credited to income as earned. Net loan origination fees
and broker costs are deferred and amortized to interest income over the life of
the loan as an adjustment to the loans yield, using the level yield method.
Purchased loans are stated at their principal amounts outstanding, adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income, using a method that approximates level yield. The accrual of income on loans that do not carry private mortgage insurance or
are not guaranteed by a federal agency is generally discontinued when interest
or principal payments are 90-days in arrears or when the timely collection of
such income is doubtful. Loans on which the accrual of income has been
discontinued are designated as non-accrual loans and outstanding interest
previously credited is reversed. It is recognized subsequently in the period
collected only when the ultimate collection of principal is no longer in doubt.
A non-accrual loan is returned to accrual status when factors indicating
doubtful collection no longer exist. Hudson City defines the population of impaired loans to be all non-accrual
commercial real estate and multi-family loans. Impaired loans are individually
assessed to determine that the loans carrying value is not in excess of the
fair value of the collateral or the present value of the loans expected future
cash flows. Smaller balance homogeneous loans that are collectively evaluated
for impairment, such as residential mortgage loans and consumer loans, are
specifically excluded from the impaired loan portfolio. There were no loans
classified as impaired at December 31, 2003 and 2002. Page 82




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Notes to Consolidated Financial Statements g)Allowance for Loan Losses The allowance for loan losses is a valuation account established through a
provision for loan losses charged to income. Losses on loans are charged
against the allowance when management believes the collection of the principal
is unlikely. Subsequent recoveries, if any, are generally credited to the
allowance. The determination of the amount of the allowance, and the related
provision for loan losses, is based on such factors as loan loss experience,
known and inherent risks in the loan portfolio, the estimated value of
underlying collateral, current economic and real estate market trends, loan
portfolio growth and other factors which may warrant recognition. Hudson Citys objective is to maintain an allowance at a level sufficient to
cover specifically identifiable loan losses, as well as estimated losses
inherent in the loan portfolio which are probable but not specifically
identifiable. Although management uses the best information available, the
level of the allowance for loan losses remains an estimate which is subject to
significant judgement and short-term change. h)Foreclosed Real Estate Foreclosed real estate is property acquired through foreclosure and deed in
lieu of foreclosure. After foreclosure, foreclosed properties held for sale
are carried at the lower of fair value minus estimated cost to sell, or at
cost. Fair market value is generally based on recent appraisals. Subsequent
provisions, which may result from the ongoing periodic valuations of these
properties, are charged to income in the period in which they are identified
and credited to a valuation allowance account. Foreclosed real estate is
reported net of the valuation allowance. Carrying costs, such as maintenance
and taxes, are charged to operating expenses as incurred. i)Banking Premises and Equipment Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation and
leasehold amortization. Buildings are depreciated over their estimated useful
lives using the straight-line method. Furniture, fixtures and equipment are
depreciated over their estimated useful lives using the double-declining
balance method. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases. The costs for
major improvements and renovations are capitalized, while maintenance, repairs
and minor improvements are charged to operating expenses as incurred. Gains
and losses on dispositions are reflected currently as other non-interest income
or expense. j)Income Taxes We utilize the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Page 83




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Notes to Consolidated
Financial Statements k)Employee Benefit Plans Hudson City maintains certain noncontributory benefit plans which cover all
employees who have met the eligibility requirements of the plans. Certain
health care and life insurance benefits are provided for retired employees.
The expected cost of benefits provided for retired employees is actuarially
determined and accrued ratably from the date of hire to the date the employee
is fully eligible to receive the benefits. The employee stock ownership plan (ESOP) is accounted for in accordance with
the provisions of Statement of Position 93-6, Employer Accounting for Employee
Stock Ownership Plans. The funds borrowed by the ESOP from Hudson City
Bancorp to purchase Hudson City Bancorp common stock are being repaid from
Hudson City Savings contributions and dividends paid on unallocated ESOP
shares over a period of up to 30 years. Hudson City common stock not allocated
to participants is recorded as a reduction of stockholders equity at cost.
Compensation expense for the ESOP is based on the average price of our stock
during each quarter. The Hudson City stock option plans and the recognition and retention plans
(RRP) are accounted for in accordance with the provisions of APB Opinion No.
25, Accounting for Stock Issued to Employees (APB 25), and related
Interpretations. Accordingly, no compensation expense has been recognized for
the stock option plans. The fair value pro forma disclosures required by
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, are presented below. Expense for the RRP in the amount of the fair value of
the common stock at the date of grant is recognized ratably over the vesting
period. Unvested and unallocated RRP shares are recorded as a reduction of
stockholders equity at cost. Had expense for Hudson Citys stock option plans been determined based on the
fair value at the grant date for our stock options consistent with the method
of SFAS No. 123, our net income and earnings per share for all expenses related
to stock options and stocks granted in our recognition and retention plans
would have been reduced to the pro forma amounts that follow: 2003
    
    2002
    
    2001(In thousands, except per share data)Net income, as
reported
    
    $
    207,410
    
    
    $
    192,033
    
    
    $
    134,549Add: expense recognized for the recognition and
retention plans, net of related tax
effect
    
    
    4,103
    
    
    
    4,690
    
    
    
    3,648Less: total stock option and recognition and
retention plans expense, determined under the
fair value method, net of related tax effect
    
    
    6,529
    
    
    
    7,038
    
    
    
    5,845Pro forma
net income
    
    $
    204,984
    
    
    $
    189,685
    
    
    $
    132,352Basic
earnings per share:    As reported
    
    $
    1.14
    
    
    $
    1.04
    
    
    $
    0.69Pro forma
    
    
    1.12
    
    
    
    1.03
    
    
    
    0.68Diluted earnings per share: As reported
    
    $
    1.11
    
    
    $
    1.01
    
    
    $
    0.68Pro forma
    
    
    1.09
    
    
    
    1.00
    
    
    
    0.67
 Page 84




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Notes to Consolidated Financial Statements The fair value of the option grants was estimated on the date of grant using
the Black-Sholes option-pricing model with the following weighted average
assumptions: For the Year Ended December 31,2003
    
    2002
    
    2001Expected dividend
yield
    
    
    2.24
    %
    
    
    1.34
    %
    
    
    2.39
    %Expected
volatility
    
    
    24.71
    
    
    
    17.94
    
    
    
    21.35Risk-free interest
rate
    
    
    2.98
    
    
    
    4.40
    
    
    
    3.96Expected option
life
    
    5 years
    
    5 years
    
    5 years
 l)Borrowed Funds Hudson City enters into sales of securities under agreements to repurchase with
selected brokers and the Federal Home Loan Bank (FHLB.) These agreements are
recorded as financing transactions as Hudson City maintains effective control
over the transferred securities. The dollar amount of the securities
underlying the agreements continue to be carried in Hudson Citys securities
portfolio. The obligations to repurchase the securities are reported as a
liability in the consolidated statements of financial condition. The securities underlying the agreements are delivered to the party with whom
each transaction is executed. They agree to resell to Hudson City the same
securities at the maturity or call of the agreement. Hudson City retains the
right of substitution of the underlying securities throughout the terms of the
agreements. Hudson City has also obtained advances from the FHLB, which are generally
secured by a blanket lien against our mortgage portfolio. Total borrowings
with the FHLB are generally limited to twenty times the amount of FHLB stock
owned or the fair value of our mortgage portfolio, whichever is greater. m)Earnings Per Share Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares
would then be included in the weighted average number of shares outstanding for
the period using the treasury stock method. Shares issued and shares
reacquired during any period are weighted for the portion of the period that
they were outstanding. In computing both basic and diluted earnings per share, the weighted average
number of common shares outstanding includes all 122,576,600 shares issued to
Hudson City, MHC. Also included are the ESOP shares previously allocated to
participants and shares committed to be released for allocation to participants
and the RRP shares which have vested or have been allocated to participants.
ESOP and RRP shares that have been purchased but have not been committed to be
released have not been considered in computing basic and diluted earnings per
share. Page 85




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Notes to Consolidated Financial Statements 2. Stockholders Equity Upon completion of the Reorganization, a liquidation account was established
in an amount equal to the total equity of Hudson City Savings as of the latest
practicable date prior to the Reorganization. The liquidation account was
established to provide a limited priority claim to the assets of Hudson City
Savings to eligible account holders and supplemental eligible account
holders, as defined, who continue to maintain deposits in Hudson City Savings
after the Reorganization. In the unlikely event of a complete liquidation of
Hudson City Savings, and only in such event, each eligible account holder and
supplemental eligible account holder would receive a liquidation distribution,
prior to any payment to the holder of the Banks common stock. This
distribution would be based upon each eligible account holders and
supplemental account holders proportionate share of the then total remaining
qualifying deposits. Hudson City Savings is not permitted to declare or pay dividends on its capital
stock or repurchase any of its outstanding stock if it would cause Hudson City
Savings stockholders equity to be reduced below the amounts required for the
liquidation accounts or applicable regulatory capital requirements. Under our stock repurchase programs, shares of Hudson City Bancorp common stock
may be purchased in the open market and through other privately negotiated
transactions, from time-to-time, depending on market conditions. The
repurchased shares are held as treasury stock for general corporate use.
During the year ended December 31, 2003, we purchased 3,667,375 shares of our
common stock at an aggregate cost of $101.1 million. During the first quarter
of 2003, the Board of Directors approved our fifth stock repurchase program.
This program authorized the repurchase of up to 9,525,000 shares of common
stock. At December 31, 2003, there were 7,666,421 shares remaining to be
repurchased under the existing stock repurchase program. 3. Restrictions on Cash and Due From Banks Cash reserves are required to be maintained on deposit with the Federal Reserve
Bank based on deposits. The average amount of the reserves on deposit for the
years ended December 31, 2003 and 2002 was approximately $18,642,000 and
$8,456,000, respectively. Page 86




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Notes to Consolidated Financial Statements 4. Investment Securities The amortized cost and estimated fair market value of investment securities at
December 31 are as follows: Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    Fair MarketCost
    
    Gains
    
    Losses
    
    Value(In thousands)2003Held to Maturity:Municipal
bonds
    
    $
    1,366
    
    
    $
    77
    
    
    $
    
    
    
    $
    1,443Available for Sale:United States government
agencies
    
    $
    2,246,358
    
    
    $
    3,074
    
    
    $
    (16,397
    )
    
    $
    2,233,035Corporate
bonds
    
    
    82
    
    
    
    
    
    
    
    (1
    )
    
    
    81Equity
securities
    
    
    10,168
    
    
    
    528
    
    
    
    
    
    
    
    10,696Total available for
sale
    
    $
    2,256,608
    
    
    $
    3,602
    
    
    $
    (16,398
    )
    
    $
    2,243,8122002Held to Maturity:Municipal
bonds
    
    $
    1,406
    
    
    $
    91
    
    
    $
    
    
    
    $
    1,497Available for Sale:United States government
agencies
    
    $
    540,893
    
    
    $
    8,612
    
    
    $
    
    
    
    $
    549,505Corporate
bonds
    
    
    341
    
    
    
    
    
    
    
    (7
    )
    
    
    334Equity
securities
    
    
    10,189
    
    
    
    904
    
    
    
    
    
    
    
    11,093Total available for
sale
    
    $
    551,423
    
    
    $
    9,516
    
    
    $
    (7
    )
    
    $
    560,932
 The following table summarizes the fair value and unrealized losses of those
investment securities which reported an unrealized loss at December 31, 2003
and if the unrealized loss position was continuous for the twelve months prior
to December 31, 2003. Less Than 12 Months
    
    12 Months or Longer
    
    TotalFair Value
    
    Unrealized Losses
    
    Fair Value
    
    Unrealized Losses
    
    Fair Value
    
    Unrealized Losses(In thousands)United States
government
and
agencies
    
    $
    1,237,930
    
    
    $
    16,397
    
    
    $
    
    
    
    $
    
    
    
    $
    1,237,930
    
    
    $
    16,397Corporate
bonds
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    1
    
    
    
    49
    
    
    
    1Total
    
    $
    1,237,930
    
    
    $
    16,397
    
    
    $
    49
    
    
    $
    1
    
    
    $
    1,237,979
    
    
    $
    16,398
 The unrealized losses are primarily due to the changes in interest rates during
2003. We have not classified these items as impaired as the scheduled coupon
payments have been made and we anticipate collecting the entire principal
balance as scheduled. Page 87




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Notes to Consolidated Financial Statements The amortized cost and estimated fair market value of investment securities
held to maturity and investment securities available for sale at December 31,
2003, by contractual maturity, are shown below. The expected maturity may
differ from the contractual maturity because issuers may have the right to call
or prepay obligations. Equity securities have been excluded from this table. EstimatedAmortized
    
    Fair MarketCost
    
    Value(In thousands)Held to MaturityDue in one year or less
    
    $
    100
    
    
    $
    100Due after one year through five years
    
    
    110
    
    
    
    116Due after five years through ten years
    
    
    905
    
    
    
    969Due after ten years
    
    
    251
    
    
    
    258Total held to
maturity
    
    $
    1,366
    
    
    $
    1,443Available for SaleDue after one year through five years
    
    $
    72,412
    
    
    $
    71,680Due after five years through ten years
    
    
    2,099,012
    
    
    
    2,086,423Due after ten years
    
    
    75,016
    
    
    
    75,013Total available for
sale
    
    $
    2,246,440
    
    
    $
    2,233,116
 Interest and dividend income for the years ended December 31, 2003, 2002 and
2001 consists of the following: 2003
    
    2002
    
    2001(In thousands)United States government
agencies
    
    $
    79,411
    
    
    $
    18,258
    
    
    $
    24,252Municipal
bonds
    
    
    87
    
    
    
    89
    
    
    
    91Corporate
bonds
    
    
    7
    
    
    
    30
    
    
    
    78Equity
securities
    
    
    574
    
    
    
    568
    
    
    
    97Total interest and
dividend
income
    
    $
    80,079
    
    
    $
    18,945
    
    
    $
    24,518
 Gross realized gains on sales of investment securities available for sale
during 2003 and 2002 were $537,000 and $585,000, respectively. There were no
gains or losses from investment securities transactions during 2001. The carrying value of securities pledged as required security for deposits and
for other purposes required by law amounted to $10,838,000 and $10,966,000 at
December 31, 2003 and 2002, respectively. Page 88




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Notes to Consolidated Financial Statements 5. Mortgage-Backed Securities The amortized cost and estimated fair market value of mortgage-backed
securities at December 31 are as follows: Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    Fair MarketCost
    
    Gains
    
    Losses
    
    Value(In thousands)2003Held to Maturity:GNMA pass-through certificates
    
    $
    616,618
    
    
    $
    11,270
    
    
    $
    (1,649
    )
    
    $
    626,239FNMA pass-through certificates
    
    
    1,650,544
    
    
    
    7,206
    
    
    
    (4,896
    )
    
    
    1,652,854FHLMC pass-through certificates
    
    
    439,793
    
    
    
    3,764
    
    
    
    (10,460
    )
    
    
    433,097FHLMC, FNMA and GNMA-REMICs
    
    
    1,585,489
    
    
    
    3,744
    
    
    
    (50,735
    )
    
    
    1,538,498Total held to
maturity
    
    $
    4,292,444
    
    
    $
    25,984
    
    
    $
    (67,740
    )
    
    $
    4,250,688Available for Sale:GNMA pass-through certificates
    
    
    $336,364
    
    
    
    $126
    
    
    
    $(32
    )
    
    
    $336,458FNMA pass-through certificates
    
    
    493,870
    
    
    
    
    
    
    
    (487
    )
    
    
    493,383FHLMC pass-through certificates
    
    
    297,300
    
    
    
    3,277
    
    
    
    (161
    )
    
    
    300,416Total available for sale
    
    $
    1,127,534
    
    
    $
    3,403
    
    
    $
    (680
    )
    
    $
    1,130,2572002Held to Maturity:GNMA pass-through certificates
    
    $
    1,059,848
    
    
    $
    28,693
    
    
    $
    
    
    
    $
    1,088,541FNMA pass-through certificates
    
    
    1,186,247
    
    
    
    35,588
    
    
    
    
    
    
    
    1,221,835FHLMC pass-through certificates
    
    
    213,686
    
    
    
    5,887
    
    
    
    (9
    )
    
    
    219,564FHLMC, FNMA and GNMA  REMICs
    
    
    2,274,485
    
    
    
    24,707
    
    
    
    (193
    )
    
    
    2,298,999Total held to
maturity
    
    $
    4,734,266
    
    
    $
    94,875
    
    
    $
    (202
    )
    
    $
    4,828,939Available for Sale:GNMA pass-through certificates
    
    $
    1,362,227
    
    
    $
    29,668
    
    
    $
    
    
    
    $
    1,391,895
 The following table summarizes the fair value and unrealized losses of those
mortgage-backed securities which reported an unrealized loss at December 31,
2003 and if the unrealized loss position was continuous for the twelve months
prior to December 31, 2003. Less Than 12 Months
    
    12 Months or Longer
    
    TotalFair Value
    
    Unrealized
Losses
    
    Fair Value
    
    Unrealized
Losses
    
    Fair Value
    
    Unrealized
Losses(In thousands)GNMA pass-through certificates
    
    $
    43,881
    
    
    $
    1,681
    
    
    $
    
    
    
    $
    
    
    
    $
    43,881
    
    
    $
    1,681FNMA pass-through certificates
    
    
    226,747
    
    
    
    5,383
    
    
    
    
    
    
    
    
    
    
    
    226,747
    
    
    
    5,383FHLMC pass-through certificates
    
    
    267,997
    
    
    
    10,621
    
    
    
    
    
    
    
    
    
    
    
    267,997
    
    
    
    10,621FHLMC, FNMA and GNMA - REMICs
    
    
    992,887
    
    
    
    50,735
    
    
    
    
    
    
    
    
    
    
    
    992,887
    
    
    
    50,735Total
    
    $
    1,531,512
    
    
    $
    68,420
    
    
    $
    
    
    
    $
    
    
    
    $
    1,531,512
    
    
    $
    68,420
 The unrealized losses are primarily due to the changes in interest rates during
2003. We have not classified these items as impaired as the scheduled
principal and interest payments have been made and we anticipate collecting the
entire principal balance as scheduled. Page 89




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Notes to Consolidated Financial Statements Gross realized gains on sales of mortgage-backed securities available for sale
and mortgage-backed securities held to maturity during 2003 were $19,727,000
and $4,062,000, respectively. Gross realized gains on sales of mortgage-backed
securities available for sale during 2002 were $1,481,000 . There were no
gains or losses from mortgage-backed securities transactions during 2001. 6. Loans and Allowance for Loan Losses Loans at December 31 are summarized as follows: 2003
    
    2002(In thousands)First mortgage loans:One- to four-family
    
    $
    8,567,442
    
    
    $
    6,708,806FHA/VA
    
    
    98,502
    
    
    
    131,209Multi-family and commercial
    
    
    2,843
    
    
    
    2,668Total first mortgage
loans
    
    
    8,668,787
    
    
    
    6,842,683Consumer and other loans:Fixed  rate second mortgages
    
    
    105,361
    
    
    
    93,691Home equity credit lines
    
    
    28,217
    
    
    
    33,543Other
    
    
    701
    
    
    
    983Total consumer and other loans
    
    
    134,279
    
    
    
    128,217Total
loans
    
    $
    8,803,066
    
    
    $
    6,970,900
 Substantially all of Hudson Citys loans are secured by first or second liens
on real estate property, the majority of which are located in the State of New
Jersey. The ultimate ability to collect the loan portfolio and realize the
carrying value of real estate is subject to changes in the real estate market
and future economic conditions. The following is a comparative summary of loans on which the accrual of income
has been discontinued and loans that are contractually past due 90 days or more
but have not been classified non- accrual at December 31: 2003
    
    2002(In thousands)Non-accrual loans
    
    $
    4,503
    
    
    $
    6,072Accruing loans delinquent 90 days or more
    
    
    15,748
    
    
    
    14,123Total non-performing
loans
    
    $
    20,251
    
    
    $
    20,195
 The total amount of interest income received during the year on non-accrual
loans outstanding at December 31, 2003, 2002 and 2001 amounted to $107,000,
$109,000 and $154,000, respectively. Additional interest income totaling
$186,000, $319,000, and $483,000 on non-accrual loans would have been
recognized in 2003,2002 and 2001, respectively, if interest on all such loans
had been recorded based upon original contract terms. Hudson City is not
committed to lend additional funds to borrowers on non-accrual status. Page 90




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Notes to Consolidated Financial Statements An analysis of the allowance for loan losses at December 31 follows: 2003
    
    2002
    
    2001(In thousands)Balance at beginning of year
    
    $
    25,501
    
    
    $
    24,010
    
    
    $
    22,144Charge-offs
    
    
    (96
    )
    
    
    (13
    )
    
    
    (20
    )Recoveries
    
    
    242
    
    
    
    4
    
    
    
    11Net recoveries (charge-offs)
    
    
    146
    
    
    
    (9
    )
    
    
    (9
    )Provision for loan losses
    
    
    900
    
    
    
    1,500
    
    
    
    1,875Balance at end of
year
    
    $
    26,547
    
    
    $
    25,501
    
    
    $
    24,010
 7. Banking Premises and Equipment, net A summary of the net carrying value of banking premises and equipment at
December 31 is as follows: 2003
    
    2002(In thousands)Land
    
    $
    5,215
    
    
    $
    5,353Buildings
    
    
    30,334
    
    
    
    33,972Leasehold
improvements
    
    
    12,776
    
    
    
    12,507Furniture, fixtures and
equipment
    
    
    40,693
    
    
    
    36,851Total acquisition
value
    
    
    89,018
    
    
    
    88,683Accumulated depreciation and
amortization
    
    
    (57,664
    )
    
    
    (55,951
    )Total banking premises and
equipment, net
    
    $
    31,354
    
    
    $
    32,732
 Amounts charged to net occupancy expense for depreciation and amortization of
banking premises and equipment amounted to $3,520,000, $3,775,000 and
$3,912,000 in 2003, 2002 and 2001, respectively. Hudson City has entered into non-cancelable operating lease agreements with
respect to banking premises and equipment. It is expected that many agreements
will be renewed at expiration in the normal course of business. Future minimum
rental commitments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year are as follows: Year
    
    Amount(In thousands)2004
    
    $
    3,4602005
    
    
    3,1892006
    
    
    2,7772007
    
    
    2,5192008
    
    
    2,297Thereafter
    
    
    5,204Total
    
    $
    19,446
 Page 91




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Notes to Consolidated Financial Statements Net occupancy expense included gross rental expense for certain bank premises
of $3,810,000 in 2003, $3,531,000 in 2002 and $3,459,000 in 2001, and rental
income of $603,000, $861,000 and $620,000 for the respective years. 8. Deposits Deposits at December 31 are summarized as follows: 2003
    
    2002Balance
    
    Percent
    
    Balance
    
    Percent(Dollars in thousands)Savings
    
    $
    945,595
    
    
    
    9.05
    %
    
    $
    892,678
    
    
    
    9.77
    %Noninterest-bearing demand
    
    
    396,495
    
    
    
    3.79
    
    
    
    388,465
    
    
    
    4.25Interest-bearing demand
    
    
    2,808,901
    
    
    
    26.87
    
    
    
    1,040,614
    
    
    
    11.39Money market
    
    
    623,811
    
    
    
    5.97
    
    
    
    629,042
    
    
    
    6.88Time deposits
    
    
    5,678,978
    
    
    
    54.32
    
    
    
    6,187,830
    
    
    
    67.71Total deposits
    
    $
    10,453,780
    
    
    
    100.00
    %
    
    $
    9,138,629
    
    
    
    100.00
    %
 Time deposits of $100,000 and over amounted to $914,639,000 and $967,983,000 at
December 31, 2003 and 2002, respectively. Interest expense on time deposits of
$100,000 and over for the years ended December 31, 2003, 2002 and 2001 was
$20,078,000, $27,399,000 and $34,202,000, respectively. Included in
noninterest-bearing demand accounts are mortgage escrow deposits of $49,756,000
and $47,730,000 at December 31, 2003 and 2002, respectively. Scheduled maturities of time deposits are as follows: Year
    
    Amount(In thousands)2004
    
    $
    4,611,1732005
    
    
    745,0772006
    
    
    137,1042007
    
    
    79,9842008
    
    
    105,640Total
    
    $
    5,678,978
 Page 92




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Notes to Consolidated Financial Statements 9. Borrowed Funds Borrowed funds at December 31 are summarized as follows: 2003
    
    2002Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AveragePrincipal
    
    Rate
    
    Principal
    
    Rate(Dollars in thousands)Securities sold under agreements to repurchase:FHLB
    
    $
    1,250,000
    
    
    
    4.00
    %
    
    $
    1,000,000
    
    
    
    4.90
    %Other brokers
    
    
    1,950,000
    
    
    
    3.14
    
    
    
    850,000
    
    
    
    5.05Total securities sold under
agreements to repurchase
    
    
    3,200,000
    
    
    
    3.48
    
    
    
    1,850,000
    
    
    
    4.97Advances from the FHLB
    
    
    1,950,000
    
    
    
    3.69
    
    
    
    1,750,000
    
    
    
    3.92Total borrowed funds
    
    $
    5,150,000
    
    
    
    3.56
    
    
    $
    3,600,000
    
    
    
    4.46
 At December 31, 2003, borrowed funds had scheduled maturities and potential
call dates as follows: Borrowings by Scheduled
    
    Borrowings by NextMaturity Date
    
    Potential Call DateWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageYear
    
    Principal
    
    Rate
    
    Principal
    
    Rate(Dollars in thousands)2004
    
    $
    50,000
    
    
    
    5.00
    %
    
    $
    1,400,000
    
    
    
    2.93
    %2005
    
    
    
    
    
    
    
    
    
    
    1,625,000
    
    
    
    3.642006
    
    
    650,000
    
    
    
    1.12
    
    
    
    1,275,000
    
    
    
    3.742007
    
    
    
    
    
    
    
    
    
    
    800,000
    
    
    
    4.092008
    
    
    100,000
    
    
    
    1.13
    
    
    
    
    
    
    
    2010
    
    
    300,000
    
    
    
    5.68
    
    
    
    50,000
    
    
    
    5.272011
    
    
    1,000,000
    
    
    
    4.66
    
    
    
    
    
    
    
    2012
    
    
    1,500,000
    
    
    
    4.06
    
    
    
    
    
    
    
    2013
    
    
    1,550,000
    
    
    
    3.08
    
    
    
    
    
    
    
    Total
    
    $
    5,150,000
    
    
    
    3.56
    
    
    $
    5,150,000
    
    
    
    3.56
 Page 93




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Notes to Consolidated Financial Statements The amortized cost and fair value of the underlying securities used as
collateral for securities sold under agreements to repurchase, the average
balances and the maximum outstanding at any month-end at or for the years ended
December 31, 2003 and 2002 are as follows: 2003
    
    2002(In thousands)Amortized cost of collateral:United States government agency securities
    
    $
    615,806
    
    
    $
    108,245Mortgage-backed securities
    
    
    2,369,058
    
    
    
    1,071,529REMICs
    
    
    495,074
    
    
    
    730,353Total amortized cost of collateral
    
    $
    3,479,938
    
    
    $
    1,910,127Fair value of collateral:United States government agency securities
    
    $
    604,397
    
    
    $
    110,471Mortgage-backed securities
    
    
    2,387,457
    
    
    
    1,101,884REMICs
    
    
    478,192
    
    
    
    747,425Total fair value of collateral
    
    $
    3,470,046
    
    
    $
    1,959,780Average balance of outstanding repurchase
agreements during the year
    
    $
    2,253,025
    
    
    $
    1,734,384Maximum balance of outstanding repurchase
agreements at any month-end during the year
    
    $
    3,200,000
    
    
    $
    1,850,000
 The average balance of our advances from the FHLB during 2003 was $1.84 billion
and the maximum FHLB advances outstanding during 2003 was $2.05 billion. 10. Employee Benefit Plans a) Retirement and Other Postretirement Benefits Non-contributory retirement and postretirement plans are maintained to cover
all employees, including retired employees, who have met the eligibility
requirements of the plans. Benefits under the qualified and non-qualified
defined benefit retirement plans are based primarily on years of service and
compensation. Funding of the qualified retirement plan is actuarially
determined on an annual basis. It is our policy to fund the qualified
retirement plan sufficiently to meet the minimum requirements set forth in the
Employee Retirement Income Security Act of 1974. The non-qualified retirement
plan, for certain executive officers, is unfunded and had a benefit obligation
of $5,373,000 at December 31, 2003 and $4,713,000 at December 31, 2002.
Certain health care and life insurance benefits are provided to eligible
retired employees (other benefits). Participants generally become eligible
for retiree health care and life insurance benefits after ten years of service.
The measurement date for year-end disclosure information is December 31 and
the measurement date for net periodic benefit cost is January 1. Page 94




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Notes to Consolidated Financial Statements The following table shows the change in benefit obligation, the change in plan
assets, and the funded status for the retirement plans and other benefits at
December 31: Retirement Plans
    
    Other Benefits2003
    
    2002
    
    2003
    
    2002(In thousands)Change in Benefit Obligation:Benefit obligation at beginning of
year
    
    $
    67,134
    
    
    $
    58,749
    
    
    $
    30,035
    
    
    $
    29,788Service
cost
    
    
    2,709
    
    
    
    2,351
    
    
    
    1,643
    
    
    
    1,393Interest
cost
    
    
    4,270
    
    
    
    4,187
    
    
    
    1,958
    
    
    
    1,883Participant
contributions
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    21Actuarial loss
(gain)
    
    
    1,535
    
    
    
    3,547
    
    
    
    8,807
    
    
    
    (2,412
    )Benefits
paid
    
    
    (1,895
    )
    
    
    (1,700
    )
    
    
    (999
    )
    
    
    (638
    )Benefit obligation at end of
year
    
    
    73,753
    
    
    
    67,134
    
    
    
    41,464
    
    
    
    30,035Change in Plan Assets:Fair value of plan assets at
beginning of year
    
    
    59,102
    
    
    
    67,148
    
    
    
    
    
    
    
    Actual return (loss) on plan
assets
    
    
    12,856
    
    
    
    (6,349
    )
    
    
    
    
    
    
    Employer
contribution
    
    
    6,003
    
    
    
    3
    
    
    
    979
    
    
    
    617Participant
contributions
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    21Benefits
paid
    
    
    (1,895
    )
    
    
    (1,700
    )
    
    
    (999
    )
    
    
    (638
    )Fair value of plan assets at end of
year
    
    
    76,066
    
    
    
    59,102
    
    
    
    
    
    
    
    Funded
Status
    
    
    2,313
    
    
    
    (8,032
    )
    
    
    (41,464
    )
    
    
    (30,035
    )Unrecognized prior service
cost
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    Unrecognized net actuarial loss
(gain)
    
    
    7,414
    
    
    
    13,978
    
    
    
    (825
    )
    
    
    (9,999
    )Prepaid (accrued)
benefit
cost
    
    $
    9,727
    
    
    $
    5,930
    
    
    $
    (42,289
    )
    
    $
    (40,034
    )
 Amounts recognized in the consolidated statements of financial condition
consist of: Retirement Plans
    
    Other Benefits2003
    
    2002
    
    2003
    
    2002(In thousands)Prepaid benefit
cost
    
    $
    14,189
    
    
    $
    9,909
    
    
    $
    
    
    
    $
    Accrued benefit
cost
    
    
    (4,462
    )
    
    
    (3,979
    )
    
    
    (42,289
    )
    
    
    (40,034
    )Net amount
recognized
    
    $
    9,727
    
    
    $
    5,930
    
    
    $
    (42,289
    )
    
    $
    (40,034
    )
 The accumulated benefit obligation for all defined benefit retirement plans was
$61,558,000 and $55,086,000 at December 31, 2003 and 2002, respectively. Page 95




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Notes to Consolidated Financial Statements Net periodic benefit cost (income) for the year ended December 31 included the following
components: Retirement Plans
    
    Other Benefits2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001(In thousands)Service
cost
    
    $
    2,709
    
    
    $
    2,351
    
    
    $
    2,135
    
    
    $
    1,643
    
    
    $
    1,393
    
    
    $
    1,409Interest
cost
    
    
    4,270
    
    
    
    4,187
    
    
    
    4,007
    
    
    
    1,958
    
    
    
    1,883
    
    
    
    1,929Expected return on assets
    
    
    (5,286
    )
    
    
    (5,950
    )
    
    
    (6,307
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of:Net loss
(gain)
    
    
    528
    
    
    
    33
    
    
    
    (239
    )
    
    
    (368
    )
    
    
    (499
    )
    
    
    (359
    )Unrecognized prior service
cost
    
    
    (16
    )
    
    
    (16
    )
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    Unrecognized remaining net
assets
    
    
    
    
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    
    
    
    
    Net periodic
benefit cost
(income)
    
    $
    2,205
    
    
    $
    605
    
    
    $
    (790
    )
    
    $
    3,233
    
    
    $
    2,777
    
    
    $
    2,979
 The following are the weighted average assumptions used to determine net
periodic benefit cost at December 31: Retirement Plans
    
    Other Benefits2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Discount rate
    
    
    6.50
    %
    
    
    7.25
    %
    
    
    7.50
    %
    
    
    6.50
    %
    
    
    7.25
    %
    
    
    7.50
    %Expected return on assets
    
    
    8.75
    
    
    
    9.00
    
    
    
    9.00
    
    
    
    
    
    
    
    
    
    
    
    Rate of compensation increase
    
    
    5.00
    
    
    
    6.00
    
    
    
    6.25
    
    
    
    
    
    
    
    
    
    
    
    
 The following are the weighted-average assumptions used to determine benefit
obligations at December 31: Retirement Plans
    
    Other Benefits2003
    
    2002
    
    2003
    
    2002Discount
rate
    
    
    6.25
    %
    
    
    6.50
    %
    
    
    6.25
    %
    
    
    6.50
    %Rate of compensation
increase
    
    
    4.75
    
    
    
    5.00
    
    
    
    
    
    
    
    
 The overall expected return on assets assumption is based on the historical
performance of the pension fund. The average return over the past ten years
was determined for the market value of assets, which is the value used in the
calculation of annual net periodic benefit cost. The assumed health care cost trend rate used to measure the expected cost of
other benefits for 2003 was 9.00%. The rate was assumed to decrease gradually
to 4.75% for 2008 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A 1% change in the assumed health care cost
trend rate would have the following effects on other benefits: 1% Increase
    
    1% Decrease(In thousands)Effect on total service cost and interest
cost
    
    $
    773
    
    
    $
    (627
    )Effect on other benefit
obligations
    
    
    7,590
    
    
    
    (6,350
    )
 Page 96




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Notes to Consolidated Financial Statements The retirement plans weighted-average asset allocations at December 31, 2003
and 2002, by asset category were as follows: Plan Assetsat December 31,Asset Category
    
    2003
    
    2002Equity securities
    
    
    63.0
    %
    
    
    55.0
    %Fixed Income
    
    
    34.0
    
    
    
    37.0Cash
    
    
    3.0
    
    
    
    8.0Total
    
    
    100.0
    %
    
    
    100.0
    %
 Equity securities include Hudson City Bancorp, Inc. common stock in the amount
of $8.4 million (11.0% of total plan assets) at December 31, 2003. Equity
securities at December 31, 2002 did not include Hudson City Bancorp, Inc.
common stock. Funds in Hudson Citys qualified retirement plan are invested in a commingled
asset allocation fund (the Fund) of a well-established asset management
company and in Hudson City Bancorp, Inc. common stock. The purpose of the Fund
is to provide a diversified portfolio of equities, fixed income instruments and
cash. Its trustee, in the trustees absolute discretion, manages the Fund. The Fund is maintained with the objective of providing investment results that
outperform a static mix of 55% equity, 35% bond and 10% cash, as well as the
median manager of balanced funds. In order to achieve the Funds return
objective, the Fund will combine fundamental analysis and a quantitative
proprietary model to allocate and reallocate assets among the three broad
investment categories of equities, money market instruments and other fixed
income obligations. As market and economic conditions change, these ratios
will be adjusted in moderate increments of about five percentage points. It is
intended that the equity portion will represent approximately 40% to 70%, the
bond portion approximately 25% to 55% and the money market portion 0% to 25%.
Performance results are reviewed at least annually with the asset management
company of the Fund. During 2003, the Retirement Committee of the Board of Directors determined that
it was appropriate to establish a segregated asset account whereby funds
transferred or contributed into the account would be for the purchase of Hudson
City Bancorp, Inc. common stock. In July 2003, approximately $6.0 million was
contributed into the segregated asset account of the defined benefit retirement
plan. At that time, the funds contributed were invested in Hudson City
Bancorp, Inc. common stock. In 2004, Hudson City expects to fund its qualified
retirement plan with the minimum contribution, which has not yet been
determined. Page 97




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Notes to Consolidated Financial Statements The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid: Retirement
    
    OtherPlans
    
    Benefits(In thousands)2004
    
    $
    3,007
    
    
    $
    1,2972005
    
    
    3,318
    
    
    
    1,4362006
    
    
    3,425
    
    
    
    1,5712007
    
    
    3,596
    
    
    
    1,7382008
    
    
    3,780
    
    
    
    1,8962009 through 2013
    
    
    22,106
    
    
    
    12,301
 On December 8, 2003, President Bush signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. Following the guidance of the
Financial Accounting Standards Board, Hudson City has elected to defer
recognition of this Act at this time. The accumulated postretirement benefit
obligation and net periodic postretirement benefit cost do not reflect the
effect of the Act. Specific authoritative guidance on the accounting for the
federal subsidy is pending and guidance, when issued, could require a change to
previously reported information. b) Employee Stock Ownership Plan The ESOP is a tax-qualified plan designed to invest primarily in Hudson City
common stock that provides employees with the opportunity to receive a Hudson
City-funded retirement benefit based primarily on the value of Hudson City
common stock. The ESOP was authorized to purchase, and did purchase, 8,696,000
shares of Hudson City common stock at an average price of $6.74 per share with
a loan from Hudson City Bancorp. The outstanding loan principal at December
31, 2003 was $53.4 million. Those shares were pledged as collateral for the
loan and are released from the pledge for allocation to participants as loan
payments are made. At December 31, 2003, shares allocated to participants were 1,304,398. For the
plan year ending December 31, 2003, there are 289,867 shares that are committed
to be released and will be allocated to participants at the end of the plan
year. Unallocated ESOP shares held in suspense totaled 7,391,602 at December
31, 2003 and had a fair market value of $282.2 million. ESOP compensation
expense for the years ended December 31, 2003, 2002 and 2001 was $7,685,000,
$5,105,000 and $3,238,000, respectively. The ESOP restoration plan is a non-qualified plan that provides supplemental
benefits to certain executives who are prevented from receiving the full
benefits contemplated by the employee stock ownership plans benefit formula.
The supplemental payments consist of payments representing shares that cannot
be allocated to participants under the ESOP due to the legal limitations
imposed on tax-qualified plans and, in the case of participants who retire
before the repayment in full of the ESOPs loan, payments representing the
shares that would have been allocated if employment had continued through the
full term of the loan. Compensation expense related to this plan amounted to
$5,018,000 in 2003, $2,250,000 in 2002 and $1,406,000 in 2001. Page 98




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##### Table of Contents



Notes to Consolidated Financial Statements c) Recognition and Retention Plans The purpose of the RRP is to promote the growth and profitability of Hudson
City Bancorp by providing directors, officers and employees with an equity
interest in Hudson City Bancorp as an incentive to achieve corporate goals.
The RRP have invested money primarily in shares of Hudson City common stock
that were used to make restricted stock awards. The RRP were authorized, in
the aggregate, to purchase not more than 4,548,000 shares of common stock, and
have purchased 4,407,616 shares on the open market at an average price of $7.87
per share. As a general rule, restricted stock grants are held in escrow for the benefit
of the award recipient until vested. Awards outstanding generally vest in five
annual installments commencing one year from the date of the award. As of
December 31, 2003, common stock that had not been awarded totaled 189,200
shares. Expense attributable to the RRP amounted to $6,473,000 for the year
2003, $7,362,000 for 2002 and $5,641,000 for 2001. A summary of the status of the granted, but unvested shares under the RRP as of
December 31, and changes during those years, is presented below: Restricted Stock Awards2003
    
    2002
    
    2001Outstanding at beginning of year
    
    
    2,561,520
    
    
    
    3,341,560
    
    
    
    3,903,200Granted
    
    
    16,500
    
    
    
    167,900
    
    
    
    242,200Vested
    
    
    (830,900
    )
    
    
    (947,940
    )
    
    
    (803,840
    )Outstanding at end of year
    
    
    1,747,120
    
    
    
    2,561,520
    
    
    
    3,341,560
 d) Stock Option Plans Each stock option granted entitles the holder to purchase one share of Hudson
Citys common stock at an exercise price not less than the fair market value of
a share of common stock at the date of grant. Options granted generally vest
over a five year period from the date of grant and will expire no later than 10
years following the grant date. Under the Hudson City stock option plans,
11,190,000 shares of Hudson City Bancorp, Inc. common stock have been reserved
for issuance. Directors and employees have been granted 10,200,000 stock
options. Page 99




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##### Table of Contents



Notes to Consolidated Financial Statements A summary of the status of the granted, but unexercised stock options as of
December 31, and changes during those years, is presented below: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Average
    
    Number of
    
    Average
    
    Number of
    
    AverageStock Options
    
    Exercise Price
    
    Stock Options
    
    Exercise Price
    
    Stock Options
    
    Exercise PriceOutstanding at beginning
of year
    
    
    8,230,070
    
    
    $
    7.685
    
    
    
    9,214,400
    
    
    $
    7.208
    
    
    
    8,908,000
    
    
    $
    6.938Granted
    
    
    174,000
    
    
    
    19.694
    
    
    
    426,000
    
    
    
    15.887
    
    
    
    606,000
    
    
    
    11.051Exercised
    
    
    (1,530,114
    )
    
    
    7.164
    
    
    
    (1,410,330
    )
    
    
    7.043
    
    
    
    (285,600
    )
    
    
    6.938Forfeited
    
    
    (8,800
    )
    
    
    9.787
    
    
    
    
    
    
    
    
    
    
    
    (14,000
    )
    
    
    6.938Outstanding at end of year
    
    
    6,865,156
    
    
    
    8.103
    
    
    
    8,230,070
    
    
    
    7.685
    
    
    
    9,214,400
    
    
    
    7.208
 The following table summarizes information about our stock options outstanding
at December 31, 2003: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise
    
    of Options
    
    Contractual
    
    Exercise
    
    Of Options
    
    ExercisePrice
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$6.938
    
    
    5,778,756
    
    
    6 years
    
    $
    6.938
    
    
    
    2,412,356
    
    
    $
    6.9389.938
    
    
    100,200
    
    
    7 years
    
    
    9.938
    
    
    
    33,600
    
    
    
    9.93810.925
    
    
    137,600
    
    
    7 years
    
    
    10.925
    
    
    
    34,400
    
    
    
    10.92511.515
    
    
    256,000
    
    
    7 years
    
    
    11.515
    
    
    
    64,000
    
    
    
    11.51513.495
    
    
    178,600
    
    
    8 years
    
    
    13.495
    
    
    
    32,200
    
    
    
    13.49517.740
    
    
    240,000
    
    
    8 years
    
    
    17.740
    
    
    
    80,000
    
    
    
    17.74019.110
    
    
    94,000
    
    
    9 years
    
    
    19.110
    
    
    
    
    
    
    
    20.380
    
    
    80,000
    
    
    9 years
    
    
    20.380
    
    
    
    
    
    
    
    8.103
    
    
    6,865,156
    
    
    
    
    
    
    
    8.103
    
    
    
    2,656,556
    
    
    
    7.542
 e) Incentive Plans A tax-deferred profit incentive bonus savings plan is maintained based on
Hudson Citys profitability. All employees are eligible after one year of
employment and the attainment of age 21. The expense was $1,320,000,
$1,230,000 and $1,145,000 in 2003, 2002 and 2001, respectively. Certain incentive plans are maintained to recognize key executives who are able
to make substantial contributions to the long-term success and financial
strength of Hudson City. At the end of each performance period, the value of
the award is determined in accordance with established criteria. Participants
can elect cash payment or elect to defer the award until retirement. The
expense related to these plans was $2,482,000 in 2003, $2,462,000 in 2002 and
$2,489,000 in 2001. Page 100




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Notes to Consolidated Financial Statements 11. Income Taxes Income tax expense (benefit) for each of the years in the three-year period
ended December 31, 2003 is summarized as follows: 2003
    
    2002
    
    2001(In thousands)Federal:Current
    
    $
    120,498
    
    
    $
    108,916
    
    
    $
    76,264Deferred
    
    
    (4,564
    )
    
    
    (3,007
    )
    
    
    (2,857
    )Total federal
    
    
    115,934
    
    
    
    105,909
    
    
    
    73,407State:Current
    
    
    5,695
    
    
    
    5,222
    
    
    
    110Deferred
    
    
    (1,828
    )
    
    
    (1,749
    )
    
    
    Total state
    
    
    3,867
    
    
    
    3,473
    
    
    
    110Total income tax expense
    
    $
    119,801
    
    
    $
    109,382
    
    
    $
    73,517
 Not included in the above table is deferred income tax benefit of $19,002,000
for 2003 and deferred income tax expense of $11,918,000 and $4,868,000 for
2002 and 2001, respectively, which represents the deferred income tax
(benefit)expense on the net unrealized (losses)gains of securities available
for sale. The amounts reported as income tax expense vary from the amounts that would be
reported by applying the statutory federal income tax rate to income before
income taxes due to the following: 2003
    
    2002
    
    2001(Dollars in thousands)Income before income tax
expense
    
    $
    327,211
    
    
    $
    301,415
    
    
    $
    208,066Statutory income tax
rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %Computed expected income tax
expense
    
    
    114,524
    
    
    
    105,495
    
    
    
    72,823State income taxes, net of federal
income tax benefit
    
    
    2,514
    
    
    
    2,257
    
    
    
    72Tax-exempt
interest
    
    
    (84
    )
    
    
    (106
    )
    
    
    (111
    )ESOP fair market value
adjustment
    
    
    2,003
    
    
    
    1,100
    
    
    
    447Other,
net
    
    
    844
    
    
    
    636
    
    
    
    286Income tax
expense
    
    $
    119,801
    
    
    $
    109,382
    
    
    $
    73,517
 Page 101




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Notes to Consolidated Financial Statements The net deferred tax asset at December 31 consists of the following: 2003
    
    2002(In thousands)Deferred tax asset:Discount
accretion
    
    $
    92
    
    
    $
    55Deferred loan origination
fees
    
    
    
    
    
    
    304Postretirement
benefits
    
    
    17,413
    
    
    
    16,353Book loan loss
reserve
    
    
    9,829
    
    
    
    9,426Mortgage premium
amortization
    
    
    5,207
    
    
    
    5,898Non-accrual interest
income
    
    
    46
    
    
    
    210Non-qualified benefit
plans
    
    
    7,436
    
    
    
    5,294Net unrealized loss on securities
available for sale
    
    
    4,115
    
    
    
    Other
    
    
    8,969
    
    
    
    5,30153,107
    
    
    
    42,841Deferred tax liability:Tax bad debt reserve
    
    
    
    
    
    
    2,236Net unrealized gain on securities available for sale
    
    
    
    
    
    
    14,887Retirement plan
    
    
    5,796
    
    
    
    4,048Deferred REIT dividend
    
    
    
    
    
    
    1,133Deferred loan origination fees
    
    
    1,282
    
    
    
    Other
    
    
    2,347
    
    
    
    2,2499,425
    
    
    
    24,553Net deferred tax
asset
    
    $
    43,682
    
    
    $
    18,288
 The net deferred tax asset represents the anticipated federal and state tax
benefits expected to be realized in future years upon the utilization of the
underlying tax attributes comprising this balance. In managements opinion, in
view of Hudson Citys previous, current and projected future earnings trends,
such net deferred tax asset will more likely than not be fully realized.
Accordingly, no valuation allowance was deemed to be required at December 31,
2003 and 2002. Retained earnings at December 31, 2003 included approximately $49,000,000 for
which no deferred income taxes have been provided. This amount represents the
base year allocation of income to bad debt deduction for tax purposes. Under
SFAS No. 109, this amount is treated as a permanent difference and deferred
taxes are not recognized unless it appears that it will be reduced and result
in taxable income in the foreseeable future. Events that would result in
taxation of these reserves include failure to qualify as a bank for tax
purposes or distributions in complete or partial liquidation. 12. Fair Value of Financial Instruments The fair value of financial instruments represents the estimated amounts at
which the asset or liability could be exchanged in a current transaction
between willing parties, other than in a forced liquidation sale. These
estimates are subjective in nature, involve uncertainties and matters of
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Further, certain tax
implications related to the realization of the unrealized gains and losses
could have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates. Page 102




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Notes to Consolidated Financial Statements Carrying amounts of cash, due from banks and federal funds sold are considered
to approximate fair value. The fair value of one- to four-family mortgages and
home equity loans are generally estimated using the present value of expected
future cash flows. For time deposits and borrowed funds, the fair value is
estimated by discounting estimated future cash flows using currently offered
rates. For deposit liabilities payable on demand, the fair value is the carrying value at the reporting date. There is no material
difference between the fair value and the committed amounts of our off-balance
commitments. Other important elements which are not deemed to be financial assets or
liabilities and therefore, not considered in these estimates include the value
of Hudson Citys retail branch delivery system, its existing core deposit base
and banking premises and equipment. The estimated fair value of Hudson Citys financial instruments at December 31
are summarized as follows: 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair Value(In thousands)Assets:Cash and due from
banks
    
    $
    190,984
    
    
    $
    190,984
    
    
    $
    153,096
    
    
    $
    153,096Federal funds
sold
    
    
    63,600
    
    
    
    63,600
    
    
    
    87,700
    
    
    
    87,700Investment
securities held to
maturity
    
    
    1,366
    
    
    
    1,443
    
    
    
    1,406
    
    
    
    1,497Investment
securities
available for
sale
    
    
    2,243,812
    
    
    
    2,243,812
    
    
    
    560,932
    
    
    
    560,932Federal Home Loan
Bank of New York
stock
    
    
    164,850
    
    
    
    164,850
    
    
    
    137,500
    
    
    
    137,500Mortgage-backed
securities held to
maturity
    
    
    4,292,444
    
    
    
    4,250,688
    
    
    
    4,734,266
    
    
    
    4,828,939Mortgage-backed
securities
available for
sale
    
    
    1,130,257
    
    
    
    1,130,257
    
    
    
    1,391,895
    
    
    
    1,391,895Loans,
net
    
    
    8,766,264
    
    
    
    8,943,991
    
    
    
    6,931,891
    
    
    
    7,131,594Liabilities:10,453,780
    
    
    
    10,474,126
    
    
    
    9,138,629
    
    
    
    9,169,2825,150,000
    
    
    
    5,326,182
    
    
    
    3,600,000
    
    
    
    3,952,900
 13. Regulatory Capital Deposits at Hudson City Savings are insured up to standard limits of coverage
provided by the Bank Insurance Fund (BIF) of the Federal Deposit Insurance
Corporation (FDIC). During 2003, Hudson City Savings was a New Jersey
state-chartered savings bank and was subject to comprehensive regulation,
supervision and periodic examinations by the FDIC and by the New Jersey State
Department of Banking . FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 2003, Hudson City
Savings was required to maintain (a) a minimum leverage ratio of Tier 1 capital
to total adjusted average assets of 4.0%, and (b) minimum ratios of Tier 1 and
total capital to risk-weighted assets of 4.0% and 8.0 %, respectively. Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institutions financial statements. The
regulations establish a framework for the classification of savings
institutions into five categories: well-capitalized, adequately-capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Page 103




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Notes to Consolidated Financial Statements Generally, an institution is considered well-capitalized if it has a leverage
(Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio of
at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk-weightings and other factors. Management believes that, as of December 31, 2003, Hudson City Savings meets
all capital adequacy requirements to which it is subject. Further, the most
recent FDIC notification categorized Hudson City Savings as a well-capitalized
institution under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes have
changed Hudson City Savings capital classification. The following is a summary of Hudson City Savings actual capital amounts and
ratios as of December 31, 2003 and 2002, compared to the FDIC minimum capital
adequacy requirements and the FDIC requirements for classification as a
well-capitalized institution: FDIC
RequirementsMinimum Capital
    
    For Classification asBank Actual
    
    Adequacy
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)December 31, 2003Leverage (Tier 1) capital
    
    $
    1,234,212
    
    
    
    7.52
    %
    
    $
    656,192
    
    
    
    4.00
    %
    
    $
    820,240
    
    
    
    5.00
    %Risk-based capital:Tier 1
    
    
    1,234,212
    
    
    
    20.45
    
    
    
    241,439
    
    
    
    4.00
    
    
    
    362,158
    
    
    
    6.00Total
    
    
    1,260,759
    
    
    
    20.89
    
    
    
    482,877
    
    
    
    8.00
    
    
    
    603,597
    
    
    
    10.00December 31, 2002Leverage (Tier 1) capital
    
    $
    1,206,754
    
    
    
    8.85
    %
    
    $
    545,340
    
    
    
    4.00
    %
    
    $
    681,675
    
    
    
    5.00
    %Risk-based capital:Tier 1
    
    
    1,206,754
    
    
    
    26.26
    
    
    
    183,816
    
    
    
    4.00
    
    
    
    275,724
    
    
    
    6.00Total
    
    
    1,232,255
    
    
    
    26.81
    
    
    
    367,632
    
    
    
    8.00
    
    
    
    459,540
    
    
    
    10.00
 During 2003, the Federal Reserve Bank imposed certain capital requirements on
Hudson City Bancorp under the Bank Holding Company Act of 1956, including a
minimum leverage ratio and a minimum ratio of qualifying capital to
risk-weighted assets. These minimum requirements were substantially the same
as Hudson City Savings minimum capital requirements described above. Subject
to its capital requirements and certain other restrictions, Hudson City Bancorp
was able to borrow money to make a capital contribution to Hudson City Savings,
and such loans could have been repaid from dividends paid from Hudson City
Savings to Hudson City Bancorp. Hudson City Bancorp was also able to raise
capital for contribution to Hudson City Savings by issuing securities without
having to receive regulatory approval, subject to compliance with federal and
state securities laws. Page 104




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Notes to Consolidated Financial Statements The following table shows Hudson City Bancorps leverage capital ratio, its
Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31, 2003 and 2002: Federal Reserve Bank RequirementsMinimum Capital
    
    For Classification asBancorp Actual
    
    Adequacy
    
    Well-CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)December 31, 2003Leverage (Tier 1) capital
    
    $
    1,335,441
    
    
    
    8.14
    %
    
    $
    656,233
    
    
    
    4.00
    %
    
    $
    820,292
    
    
    
    5.00
    %Risk-based capital:Tier 1
    
    
    1,335,441
    
    
    
    22.12
    
    
    
    241,442
    
    
    
    4.00
    
    
    
    362,164
    
    
    
    6.00Total
    
    
    1,361,988
    
    
    
    22.56
    
    
    
    482,885
    
    
    
    8.00
    
    
    
    603,606
    
    
    
    10.00December 31, 2002Leverage (Tier 1) capital
    
    $
    1,291,910
    
    
    
    9.48
    %
    
    $
    545,367
    
    
    
    4.00
    %
    
    $
    681,709
    
    
    
    5.00
    %Risk-based capital:Tier 1
    
    
    1,291,910
    
    
    
    28.11
    
    
    
    183,819
    
    
    
    4.00
    
    
    
    275,728
    
    
    
    6.00Total
    
    
    1,317,411
    
    
    
    28.67
    
    
    
    367,637
    
    
    
    8.00
    
    
    
    459,546
    
    
    
    10.00
 Effective January 1, 2004, Hudson City Savings converted from a New Jersey
state-chartered savings bank to a federally chartered savings bank and is now
subject to regulation, supervision and examination by the OTS. OTS regulations
require banks to maintain the following minimum levels of regulatory capital:
(a) a 1.50% tangible capital ratio, (b) a 4.00% leverage (core) capital ratio
and (c) an 8.00% total risk-based capital ratio. Hudson City Savings was in
compliance with these requirements at December 31, 2003, although they did not
become applicable until the effective date of the charter conversion. As a result of Hudson City Savings charter conversion, Hudson City Bancorp and
Hudson City, MHC are now regulated, supervised and examined by the OTS as
savings and loan holding companies and, as such, are no longer subject to
regulatory capital requirements. 14. Off-Balance Sheet Risk and Contingencies Hudson City Savings is a party to commitments to extend credit in the normal
course of business to meet the financial needs of its customers and commitments
to purchase loans and mortgage-backed securities to meet our growth
initiatives. Commitments to extend credit are agreements to lend money to a
customer as long as there is no violation of any condition established in the
contract. Commitments to fund first mortgage loans generally have fixed
expiration dates or other termination clauses, whereas home equity lines of
credit have no expiration date. Since some commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Hudson City Savings evaluates each
customers credit-worthiness on a case-by-case basis. At December 31, 2003, Hudson City Savings had fixed- and variable-rate first
mortgage loan commitments to extend credit of approximately $96,019,000 and
$16,535,000, respectively, commitments to purchase loans of $274,549,000,
commitments to purchase mortgage-backed securities of $300,000,000 and unused
home equity and overdraft lines of credit of approximately $85,983,000. No
commitments are included in the accompanying financial statements. There is no
exposure to credit loss in the event the other party to commitments to extend
credit does not exercise its rights to borrow under the commitment. Page 105




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Notes to Consolidated Financial Statements In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the consolidated financial
statements of Hudson City will not be materially affected as a result of such
legal proceedings. 15. Parent Company Only Financial Statements The following condensed financial statements for Hudson City Bancorp, Inc.
(parent company only) reflect Hudson City Bancorps investment in its
wholly-owned subsidiary, Hudson City Savings Bank, using the equity method of
accounting. Statements of Financial Condition December 31,
    
    December 31,2003
    
    2002(In thousands)Assets:Cash and due from
bank
    
    $
    47,723
    
    
    $
    31,037Investment in
subsidiary
    
    
    1,228,137
    
    
    
    1,230,927ESOP loan
receivable
    
    
    53,441
    
    
    
    54,115Other
assets
    
    
    95
    
    
    
    62Total
Assets
    
    $
    1,329,396
    
    
    $
    1,316,141Liabilities and Stockholders Equity:Accrued
expenses
    
    $
    30
    
    
    $
    58Total stockholders
equity
    
    
    1,329,366
    
    
    
    1,316,083Total Liabilities
and Stockholders
Equity
    
    $
    1,329,396
    
    
    $
    1,316,141
 Page 106




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Notes to Consolidated Financial Statements Statements of Income Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001(In thousands)Income:Dividends received from subsidiary
    
    $
    203,149
    
    
    $
    178,223
    
    
    $
    219,846Interest on ESOP loan receivable
    
    
    4,180
    
    
    
    4,230
    
    
    
    4,276Interest on deposit with subsidiary
    
    
    721
    
    
    
    657
    
    
    
    1,059Total
income
    
    
    208,050
    
    
    
    183,110
    
    
    
    225,181Expenses
    
    
    749
    
    
    
    844
    
    
    
    613Income before income tax expense
and equity in undistributed
earnings/ (excess of
distribution over earnings) of
subsidiary
    
    
    207,301
    
    
    
    182,266
    
    
    
    224,568Income tax expense
    
    
    1,555
    
    
    
    1,524
    
    
    
    1,712Income before equity in undistributed
earnings/ (excess of distribution
over earnings) of
subsidiary
    
    
    205,746
    
    
    
    180,742
    
    
    
    222,856Equity in undistributed earnings/
(excess of distribution over earnings)
of subsidiary
    
    
    1,664
    
    
    
    11,291
    
    
    
    (88,307
    )Net Income
    
    $
    207,410
    
    
    $
    192,033
    
    
    $
    134,549
 Page 107




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Notes to Consolidated Financial Statements Statements of Cash Flows Year Ended
    
    Year Ended
    
    Year EndedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001(In thousands)Cash Flows from Operating Activities:Net
income
    
    $
    207,410
    
    
    $
    192,033
    
    
    $
    134,549Adjustments to reconcile net income
to cash provided by operating activities:(Equity in undistributed earnings)/ excess of
distribution over earnings of
subsidiary
    
    
    (1,664
    )
    
    
    (11,291
    )
    
    
    88,307(Increase) decrease in other
assets
    
    
    (5
    )
    
    
    (28
    )
    
    
    67(Decrease) increase in accrued
expenses
    
    
    (28
    )
    
    
    30
    
    
    
    (45
    )Net Cash Provided by Operating
Activities
    
    
    205,713
    
    
    
    180,744
    
    
    
    222,878Cash Flows from Investing Activities:Principal collected on ESOP
loan
    
    
    674
    
    
    
    626
    
    
    
    580Net Cash Provided by Investing
Activities
    
    
    674
    
    
    
    626
    
    
    
    580Cash Flows from Financing Activities:Purchase of treasury
stock
    
    
    (101,057
    )
    
    
    (140,173
    )
    
    
    (278,458
    )Exercise of stock
options
    
    
    10,961
    
    
    
    9,933
    
    
    
    1,981Cash dividends paid to unallocated ESOP
shares
    
    
    (3,978
    )
    
    
    (2,741
    )
    
    
    (1,921
    )Cash dividends
paid
    
    
    (95,627
    )
    
    
    (64,504
    )
    
    
    (46,542
    )Net Cash Used by Financing
Activities
    
    
    (189,701
    )
    
    
    (197,485
    )
    
    
    (324,940
    )Net Increase (Decrease) in Cash Due from
Bank
    
    
    16,686
    
    
    
    (16,115
    )
    
    
    (101,482
    )Cash Due from Bank at Beginning of
Year
    
    
    31,037
    
    
    
    47,152
    
    
    
    148,634Cash Due from Bank at End of
Year
    
    $
    47,723
    
    
    $
    31,037
    
    
    $
    47,152
 Page 108




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Notes to Consolidated Financial Statements 16. Selected Quarterly Financial Data (Unaudited) The following tables are a summary of certain quarterly financial data for the
years ended December 31, 2003 and 2002. 2003 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In thousands, except per share data)Interest income
    
    $
    198,536
    
    
    $
    192,656
    
    
    $
    186,685
    
    
    $
    199,451Interest expense
    
    
    95,954
    
    
    
    94,592
    
    
    
    91,996
    
    
    
    93,812Net interest income
    
    
    102,582
    
    
    
    98,064
    
    
    
    94,689
    
    
    
    105,639Provision for loan losses
    
    
    225
    
    
    
    225
    
    
    
    225
    
    
    
    225Net interest income after
provision for loan losses
    
    
    102,357
    
    
    
    97,839
    
    
    
    94,464
    
    
    
    105,414Non-interest income
    
    
    5,473
    
    
    
    9,937
    
    
    
    9,431
    
    
    
    4,823Non-interest expense
    
    
    25,522
    
    
    
    24,912
    
    
    
    25,611
    
    
    
    26,482Income before income
tax expense
    
    
    82,308
    
    
    
    82,864
    
    
    
    78,284
    
    
    
    83,755Income tax expense
    
    
    30,107
    
    
    
    30,318
    
    
    
    28,021
    
    
    
    31,355Net income
    
    $
    52,201
    
    
    $
    52,546
    
    
    $
    50,263
    
    
    $
    52,400Basic earnings per share
    
    $
    0.29
    
    
    $
    0.29
    
    
    $
    0.28
    
    
    $
    0.29Diluted earnings per share
    
    $
    0.28
    
    
    $
    0.28
    
    
    $
    0.27
    
    
    $
    0.28
 2002 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In thousands, except per share data)Interest income
    
    $
    188,589
    
    
    $
    196,487
    
    
    $
    200,338
    
    
    $
    198,803Interest expense
    
    
    97,198
    
    
    
    99,115
    
    
    
    100,434
    
    
    
    99,027Net interest income
    
    
    91,391
    
    
    
    97,372
    
    
    
    99,904
    
    
    
    99,776Provision for loan losses
    
    
    525
    
    
    
    525
    
    
    
    225
    
    
    
    225Net interest income after
provision for loan losses
    
    
    90,866
    
    
    
    96,847
    
    
    
    99,679
    
    
    
    99,551Non-interest income
    
    
    1,172
    
    
    
    1,256
    
    
    
    1,366
    
    
    
    4,219Non-interest expense
    
    
    24,169
    
    
    
    23,069
    
    
    
    22,963
    
    
    
    23,340Income before income
tax expense
    
    
    67,869
    
    
    
    75,034
    
    
    
    78,082
    
    
    
    80,430Income tax expense
    
    
    24,283
    
    
    
    26,860
    
    
    
    28,464
    
    
    
    29,775Net income
    
    $
    43,586
    
    
    $
    48,174
    
    
    $
    49,618
    
    
    $
    50,655Basic earnings per share
    
    $
    0.23
    
    
    $
    0.26
    
    
    $
    0.27
    
    
    $
    0.28Diluted earnings per share
    
    $
    0.23
    
    
    $
    0.25
    
    
    $
    0.26
    
    
    $
    0.27
 Page 109




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Notes to Consolidated Financial Statements 17. Earnings Per Share The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations. For the Year Ended December 31,2003
    
    2002
    
    2001Per
    
    
    
    
    
    
    
    
    
    Per
    
    
    
    
    
    
    
    
    
    PerShare
    
    
    
    
    
    
    
    
    
    Share
    
    
    
    
    
    
    
    
    
    ShareIncome
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    Amount(In thousands, except per share data)Net income
    
    $
    207,410
    
    
    
    
    
    
    
    
    
    
    $
    192,033
    
    
    
    
    
    
    
    
    
    
    $
    134,549Basic earnings per share:Income available to
common stockholders
    
    $
    207,410
    
    
    
    182,569
    
    
    $
    1.14
    
    
    $
    192,033
    
    
    
    184,928
    
    
    $
    1.04
    
    
    $
    134,549
    
    
    
    195,862
    
    
    $
    0.69Effect of dilutive common
stock equivalents
    
    
    
    
    
    
    5,105
    
    
    
    
    
    
    
    
    
    
    
    5,077
    
    
    
    
    
    
    
    
    
    
    
    3,126Diluted earnings per share:Income available to
common stockholders
    
    $
    207,410
    
    
    
    187,674
    
    
    $
    1.11
    
    
    $
    192,033
    
    
    
    190,005
    
    
    $
    1.01
    
    
    $
    134,549
    
    
    
    198,988
    
    
    $
    0.68
 18. Recent Accounting Pronouncements In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirement of Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 addresses disclosures to be made
by a guarantor in its financial statements about its obligations under
guarantees. The interpretation also requires the recognition, at estimated
fair value, of a liability by the guarantor at the inception of certain
guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN 45 were effective for financial statements of interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions are applicable prospectively to guarantees issued or modified after
December 31, 2002. The adoption of this interpretation did not have a material
impact on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 was generally effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003, and should generally be applied prospectively.
The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June
15, 2003, should continue to be applied in accordance with their respective
effective dates. In addition, the provisions of SFAS No. 149 which relate to
forward purchases or sales of when-issued securities or other securities that
do not yet exist, were applied to both existing contracts and new contracts
entered into after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on our financial condition or results of operations. Page 110




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Notes to Consolidated Financial Statements In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
requires issuers of certain financial instruments, falling within the scope of
SFAS No. 150, with characteristics of both liabilities and equity to be
classified and measured as liabilities. SFAS No. 150 was effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. For financial instruments created before the issuance
date of SFAS No. 150 and still existing at the beginning of the interim period
of adoption, SFAS No. 150 was to be implemented by reporting the cumulative
effect of a change in an accounting principle. Restatement is not permitted.
The adoption of SFAS No. 150 did not have a material impact on our financial
condition or results of operations. FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46), was issued in January 2003 and was reissued as FASB Interpretation No. 46
(revised December 2003) (FIN 46R). For public entities, FIN 46R is
applicable no later than the end of the first reporting period ending after
December 15, 2003 to all special-purpose entities (SPEs) in which the entity
holds a variable interest. FIN 46R may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
FIN 46 and FIN 46R provides guidance on the identification of entities
controlled through means other than voting rights. FIN 46 and FIN 46R
specifies how a business enterprise should evaluate its interest in a variable
interest entity to determine whether to consolidate that entity. A variable
interest entity must be consolidated by its primary beneficiary if the entity
does not effectively disperse risks among the parties involved. We
adopted FIN 46R as of December 31, 2003. The adoption of
FIN 46 did not have a material impact on our consolidated financial statements. In December 2003, the FASB issued SFAS No. 132 (revised), Employers
Disclosures about Pension and Other Postretirement Benefits. SFAS No. 132
(revised) prescribes employers disclosures about pension plans and other
postretirement benefit plans; it does not change the measurement or recognition
of those plans. SFAS No. 132 (revised) retains and revises the disclosure
requirements contained in the original SFAS No. 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The Statement generally is effective for fiscal years ending
after December 15, 2003. Our disclosures in Note 10 of the
Consolidated Financial Statements in Item 8 of this report incorporate the
requirements of SFAS No. 132 (revised). On January 12, 2004, The FASB issued Staff Position No. 106-1 Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, which allows companies to recognize or defer
recognizing the effects of the Medicare Prescription Drug Improvement and
Modernization Act of 2003, or Medicare Act, for annual financial statements of
fiscal years ending after December 7, 2003. The Medicare Act introduced both a
Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree
health-care plans that provide a benefit at least actuarially equivalent to
the Medicare benefit. These provisions of the Medicare Act will affect
accounting measurements. We have elected to defer accounting for the effects
of the Medicare Act. The specific authoritative guidance on accounting for the
federal subsidy is pending and the issued guidance could require us to change
previously reported information. As a result, we have not yet determined the
impact of the Medicare Act on our financial condition or results of
operations. Page 111




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. None. 
 Item 9A. Controls and Procedures. Ronald E. Hermance, Jr., our President and Chief Executive Officer, and Denis
J. Salamone, our Senior Executive Vice President and Chief Operating Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended) as of December 31, 2003. Based upon their evaluation, they
each found that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file and
submit under the Exchange Act is recorded, processed, summarized and reported
as and when required and that such information is accumulated and communicated
to our management as appropriate to allow timely decisions regarding required
disclosures. There were no changes in our internal controls over financial reporting that
occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financing reporting and we identified no significant deficiencies or
material weaknesses requiring corrective action with respect to those controls. Page 112




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PART III 
 Item 10. Directors and Executive Officers of the Company. Information regarding directors and executive officers of the Company is
presented under the headings Proposal 1 - Election of Directors-General,
-Who Our Directors Are, -Our Directors Backgrounds, -Nominees for Election
as Directors, -Continuing Directors, -Meetings of the Board of Directors
and Its Committees, -Executive Officers, -Director Compensation,
-Executive Officer Compensation, and Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys definitive Proxy Statement for the 2004
Annual Meeting of Stockholders to be held on May 21, 2004, which will be filed
with the SEC on or about April 21, 2004, and is incorporated herein by
reference. Audit Committee Financial Expert Information regarding the audit committee of the Companys Board of Directors,
including information regarding audit committee financial experts serving on
the audit committee, is presented under the heading Corporate Governance -
Meetings of the Board of Directors and its Committees in the Companys
definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be
held on May 21, 2004, which will be filed with the SEC on or about April 21,
2004, and is incorporated herein by reference. Code of Ethics We have adopted a written code of ethics that applies to our principal
executive officer and senior financial officers, which is available free of
charge by contacting Louis Beierle, our Investor Relations Officer, at
(201)967-8290. 
 Item 11. Executive Compensation. Information regarding executive compensation is presented under the headings
Election of Directors-Director Compensation,   Executive Officer
Compensation, -Summary Compensation Table, Employment Agreements, Change
of Control Agreements, and Benefit Plans in the Companys definitive Proxy
Statement for the 2004 Annual Meeting of Stockholders to be held on May 21,
2004, which will be filed with the SEC on or about April 21, 2004, and is
incorporated herein by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and
management is presented under the heading Security Ownership of Certain
Beneficial Owners and Management in the Companys definitive Proxy Statement
for the 2004 Annual Meeting of Stockholders to be held on May 21, 2004, which
will be filed with the SEC on or about April 21, 2004, and is incorporated
herein by reference. Page 113




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The following table presents equity compensation plan information as of
December 31, 2003. Equity Compensation Plan Information Number of securities remainingavailable for future issuanceNumber of securities to be issued
    
    Weighted-average exercise price
    
    under equity compensation plansupon exercise of outstanding
    
    of outstanding options, warrants
    
    (excluding securities reflectedoptions, warrants and rights
    
    and rights
    
    in column (a))Plan category
    
    (a)
    
    (b)
    
    (c) (1)Equity compensation plan
approved by security holders
    
    
    6,545,156
    
    
    $
    7.936
    
    
    
    1,238,000Equity compensation plan not
approved by security holders
    
    
    320,000
    
    
    
    11.515
    
    
    
    Total
    
    
    6,865,156
    
    
    
    8.103
    
    
    
    1,238,000
   (1)
    
    Of such 1,238,000 shares, 189,200 remain available for future restricted stock awards under Hudson City Bancorps 2000 Recognition and
Retention Plan. Hudson Citys practice is to purchase outstanding common stock to satisfy its obligations for restricted stock awards. The Hudson City Bancorp, Inc. Denis J. Salamone Restricted Stock Award Plan and
the Hudson City Bancorp, Inc. Denis J. Salamone Stock Option Plan were adopted
in fiscal year 2001. Pursuant to the Denis J. Salamone Restricted Stock Award
Plan, Mr. Salamone was granted a restrictive stock award of 200,000 shares,
which vest at the rate of 40,000 shares per year beginning April 20, 2002, with
accelerated vesting in cases of death, disability, retirement or change of
control in Hudson City Bancorp. Pursuant to the Denis J. Salamone Stock Option
Plan, Mr. Salamone was granted an option to purchase 320,000 shares, which
become exercisable at the rate of 64,000 shares per year beginning January 13,
2002. These awards were granted as a recruitment incentive to induce Mr.
Salamone to leave his prior position and join Hudson City. In 2001, Hudson
City purchased outstanding common stock to meet its obligations under Mr.
Salamones restricted stock award. 
 Item 13. Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions is
presented under the heading Certain Transactions with Members of our Board of
Directors and Executive Officers in the Companys definitive Proxy Statement
for the 2004 Annual Meeting of Stockholders to be held on May 21, 2004, which
will be filed with the SEC on or about April 21, 2004, and is incorporated
herein by reference. 
 Item 14. Principal Accounting Fees and Services. Information regarding principal accounting fees and services is presented under
the heading Proposal 2  Ratification of Appointment of Independent Auditors
in Hudson City Bancorps definitive Proxy Statement for the 2004 Annual Meeting
of Stockholders to be held on May 21, 2004, which will be filed with the SEC on
or about April 21, 2004 and is incorporated herein by reference. Page 114




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PART IV 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K  (a)
    
    List of Documents Filed as Part of this Annual Report on Form
10-K  (1)
    
    The following consolidated financial statements are
in Item 8 of this annual report:  Consolidated Financial Statements as of December 31, 2003, 2002 and 2001  
    
    Independent Auditors Report
    
    Consolidated Statements of Financial Condition as of December 31,
2003 and 2002
    
    Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001
    
    Consolidated Statements of Changes in Stockholders Equity for the
years ended December 31, 2003, 2002 and 2001
    
    Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
    
    Notes to Consolidated Financial Statements  (2)
    
    Financial Statement Schedules have been omitted
because they are not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto
in Item 8 of this annual report.  (b)
    
    Reports on Form 8-K. Hudson City Bancorp, Inc. filed two
Current Reports on Form 8-K during the quarter ended December 31,
2003 detailed as follows.On October 16, 2003, Hudson City Bancorp, Inc. (the Company), the
holding company for Hudson City Savings Bank, issued a press release
announcing third quarter financial results for the period ended
September 30, 2003. A copy of the press release was attached as an
exhibit to the report. Also, the Board of Directors of Hudson City
Savings Bank, the banking subsidiary of Hudson City Bancorp, Inc.,
authorized the filing of an application with the Office of Thrift
Supervision to convert to a federally chartered savings bank. A
copy of the press release was attached as an exhibit to the report.On December 8, 2003, Ronald E. Hermance, Jr., President and Chief
Executive Officer of Hudson City Bancorp, Inc. (the Company), made
a financial presentation regarding the Company at the Themes & Top
Picks in Mortgage/Specialty Finance Eighth Annual Conference
sponsored by Lehman Brothers. The text of the Power Point slides
used during this presentation was attached as an exhibit to the
report.(c)
    
    Exhibits Required by Item 601 of Regulation S-K Page 115




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EXHIBIT
    
    DESCRIPTION2.1
    
    Amended and Restated Plan of Reorganization and Stock Issuance of Hudson City Savings Bank (1)3.1
    
    Certificate of Incorporation of Hudson City Bancorp, Inc. (1)3.2
    
    Amended and Restated Bylaws of Hudson City Bancorp, Inc. (2)4.1
    
    Certificate of Incorporation of Hudson City Bancorp, Inc. (See Exhibit 3.1)4.2
    
    Amended and Restated Bylaws of Hudson City Bancorp, Inc. (See Exhibit 3.2)4.3
    
    Form of Stock Certificate of Hudson City Bancorp, Inc. (1)10.1
    
    Employee Stock Ownership Plan of Hudson City Savings Bank (1)10.2
    
    Profit Incentive Bonus Plan of Hudson City Savings Bank (1)10.3
    
    Supplementary Savings Plan of Hudson City Savings Bank (1)10.4
    
    Form of ESOP Loan Commitment Letter and ESOP Loan Documents (1)10.5
    
    Form of Employment Agreement by and among Hudson City Savings Bank and Hudson City Bancorp,
Inc. and certain officers (1)10.6
    
    Form of One-Year Change in Control Agreement by and among Hudson City Savings Bank and Hudson
City Bancorp, Inc. and certain officers (1)10.7
    
    Form of Two-Year Change in Control Agreement by and among Hudson City Savings Bank and Hudson
City Bancorp, Inc. and certain officers (1)10.8
    
    Severance Pay Plan of Hudson City Savings Bank (1)10.9
    
    ESOP Restoration Plan of Hudson City Savings Bank (1)10.10
    
    Hudson City Savings Bank Outside Directors Consultation Plan (1)10.11
    
    Hudson City Savings Bank Supplemental Executive Retirement Plan (1)10.12
    
    Hudson City Savings Bank Annual Incentive Plan (1)10.13
    
    Hudson City Savings Bank Long-Term Incentive Plan (1)10.14
    
    Form of Postretirement Death Benefit for Senior Officers (1)10.15
    
    Hudson City Bancorp, Inc. 2000 Stock Option Plan (3)10.16
    
    Hudson City Bancorp, Inc. 2000 Recognition and Retention Plan (3)10.17
    
    Amendment No. 1 to the Employee Stock Ownership Plan of Hudson City Savings Bank (4)10.18
    
    Amendment No. 1 to the Profit Incentive Bonus Plan of Hudson City Savings Bank (4)10.19
    
    Amendment No. 2 to the Profit Incentive Bonus Plan of Hudson City Savings Bank (4)10.20
    
    Employment Agreement by and among Hudson City Savings Bank, Hudson City Bancorp, Inc.
and Leonard S. Gudelski (5)10.21
    
    Employment Agreement by and among Hudson City Savings Bank, Hudson City Bancorp, Inc.
and Denis J. Salamone (5)10.22
    
    Hudson City Bancorp, Inc. Denis J. Salamone Restricted Stock Award Plan (5)10.23
    
    Hudson City Bancorp, Inc. Denis J. Salamone Stock Option Plan (5)11.1
    
    Statement Re: Computation of Per Share Earnings21.1
    
    Subsidiaries of Hudson City Bancorp, Inc.23.1
    
    Consent of KPMG LLP (6)31.1
    
    Certification of Disclosure of Ronald E. Hermance, Jr.31.2
    
    Certification of Disclosure of Denis J. Salamone32.1
    
    Statement Furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
   (1) Incorporated herein by reference to the Exhibits to the Registrants Registration Statement No. 333-74383 on Form S-1,
filed with the Securities and Exchange Commission on March 15, 1999, as amended. (2) Incorporated herein by reference to the Exhibits to the Registrants Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 27, 2003. (3) Incorporated herein by reference to the Exhibits to the Registrants Registration Statement No. 333-95193 on Form S-8,
filed with the Securities and Exchange Commission on January 21, 2000. (4) Incorporated herein by reference to the Exhibits to the Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 filed with the Securities and Exchange Commission on March 29, 2000. (5) Incorporated herein by reference to the Exhibits to the Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 filed with the Securities and Exchange Commission on March 28, 2002. (6) Submitted only with filing in electronic format. Page 116




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Paramus, New Jersey,
on March 10, 2004.  Hudson City Bancorp, Inc.By:
    /s/ Ronald E. Hermance, Jr.

Ronald E. Hermance, Jr.
President and Chief Executive Officer
(principal executive officer)




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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. NAME
    
    TITLE
    
    DATE/s/ Leonard S. Gudelski
Leonard S. Gudelski
    
    Director, Chairman of the Board
    
    March 10, 2004/s/ Ronald E. Hermance, Jr.
Ronald E. Hermance, Jr.
    
    Director, President and Chief Executive Officer
(principal executive officer)
    
    March 10, 2004/s/ Denis J. Salamone
Denis J. Salamone
    
    Director, Senior Executive Vice President and
Chief Operating Officer (principal financial and accounting officer)
    
    March 10, 2004/s/ Verne S. Atwater
Verne S. Atwater
    
    Director
    
    March 10, 2004/s/ Michael W. Azzara
Michael W. Azzara
    
    Director
    
    March 10, 2004/s/ William G. Bardel
William G. Bardel
    
    Director
    
    March 10, 2004/s/ Scott A. Belair
Scott A. Belair
    
    Director
    
    March 10, 2004/s/ John D. Birchby
John D. Birchby
    
    Director
    
    March 10, 2004/s/ Kenneth L. Birchby
Kenneth L. Birchby
    
    Director
    
    March 10, 2004/s/ Victoria H. Bruni
Victoria H. Bruni
    
    Director
    
    March 10, 2004/s/ William J. Cosgrove
William J. Cosgrove
    
    Director
    
    March 10, 2004/s/ Andrew J. Egner, Jr.
Andrew J. Egner, Jr.
    
    Director
    
    March 10, 2004/s/ John W. Klie
John W. Klie
    
    Director
    
    March 10, 2004/s/ Donald O. Quest
Donald O. Quest
    
    Director
    
    March 10, 2004/s/ Joseph G. Sponholz
Joseph G. Sponholz
    
    Director
    
    March 10, 2004