SECURITIES AND EXCHANGE COMMISSION

Commission File Number: 0-26001

Hudson City Bancorp, Inc.

(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.

Table of Contents

Hudson City Bancorp, Inc.
2003 Annual Report on Form 10-K
Table of Contents

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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

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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.

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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.

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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.

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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.

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.

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The following table presents our loan originations, purchases, sales and principal payments for the periods indicated.

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.

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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:

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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:

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

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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

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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.

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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.

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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.

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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:

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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.

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

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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.

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.

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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.”

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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.

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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,

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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.

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The following table presents our investment securities activity for the periods indicated.

The following table presents our mortgage-backed securities activity for the periods indicated.

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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.