HCBK (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended: December 31, 2007

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

For the transition period from                        to                       

Commission File Number: 0-26001

Hudson City Bancorp, Inc.

(Exact name of registrant as specified in its charter)

(201) 967-1900

(Registrant’s telephone number, including area code)

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

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  þ  No  o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Act.

Yes  o  No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ  No  o

Indicate by check mark 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 incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  o  No  þ

As of February 20, 2008, the registrant had 741,466,555 shares of common stock, $0.01 par value, issued and 518,369,602 shares outstanding. The aggregate market value of voting stock held by non-affiliates of the registrant as of June 29, 2007 was $5,854,213,000. This figure was based on the closing price by the NASDAQ Global Market for a share of the registrant’s common stock, which was $12.22 as reported by the NASDAQ Global Market on June 29, 2007.

Documents Incorporated by Reference: Portions of the definitive Proxy Statement to be used in connection with the Annual Meeting of Stockholders to be held on April 22, 2008 and any adjournment thereof and which is expected to be filed with the Securities and Exchange Commission no later than March 22, 2008, are incorporated by reference into Part III.

 

 

Hudson City Bancorp, Inc.
2007 Annual Report on Form 10-K
Table of Contents

						Page
				Forward-Looking Statements and Associated Risk Factors			1
PART I
		Item 1		Business			2
		Item 1A		Risk Factors			48
		Item 1B		Unresolved Staff Comments			51
		Item 2		Properties			51
		Item 3		Legal Proceedings			51
		Item 4		Submission of Matters to a Vote of Security Holders			51
PART II
		Item 5		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			52
		Item 6		Selected Financial Data			54
		Item 7		Management’s Discussion and Analysis of Financial Condition and Results Of Operations			56
		Item 7A		Quantitative and Qualitative Disclosures About Market Risk			76
		Item 8		Financial Statements and Supplementary Data			83
		Item 9		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			124
		Item 9A		Controls and Procedures			124
		Item 9B		Other Information			125
PART III
		Item 10		Directors, Executive Officers and Corporate Governance			126
		Item 11		Executive Compensation			126
		Item 12		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			126
		Item 13		Certain Relationships and Related Transactions, and Director Independence			126
		Item 14		Principal Accounting Fees and Services			127
PART IV
		Item 15		Exhibits, Financial Statement Schedules			128
SIGNATURES							131
EX-10.1: EMPLOYEE STOCK OWNERSHIP PLAN
EX-10.4: FORM OF TWO-YEAR CHANGE IN CONTROL AGREEMENT
EX-21.1: SUBSIDIARIES
EX-23.1: CONSENT OF KPMG LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

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 which may be identified by the use of such words as “may,” “believe,” “expect,” “anticipate,” “should,” “plan,” “estimate,” “predict,” “continue,” and “potential” or the negative of these terms or other comparable terminology. Examples of forward-looking statements include, but are not limited to estimates with respect to the financial condition, results of operations and business of Hudson City Bancorp, Inc. These factors include, but are not limited to:

•		the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control;
•		there may be increases in competitive pressure among the financial institutions or from non-financial institutions;
•		changes in the interest rate environment may reduce interest margins or affect the value of our investments;
•		changes in deposit flows, loan demand or real estate values may adversely affect our business;
•		changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently;
•		general economic conditions, either nationally or locally in some or all of the areas in which we do business, or conditions in the securities markets or the banking industry may be less favorable than we currently anticipate;
•		legislative or regulatory changes may adversely affect our business;
•		applicable technological changes may be more difficult or expensive than we anticipate;
•		success or consummation of new business initiatives may be more difficult or expensive than we anticipate;
•		litigation or matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than we anticipate;
•		the risks associated with continued diversification of assets and adverse changes to credit quality;
•		difficulties associated with achieving expected future financial results; and
•		the risk of an economic slowdown that would adversely affect credit quality and loan originations.

Our ability to predict results or the actual effects of our plans or strategies is inherently uncertain. As such, forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing. We do not intend to update any of the forward-looking statements after the date of this Form 10-K or to conform these statements to actual events.

As used in this Form 10-K, unless we specify otherwise, “Hudson City Bancorp,” “our company,” “we,” “us,” and “our” refer to Hudson City Bancorp, Inc., a Delaware corporation. “Hudson City Savings” refers to Hudson City Savings Bank, a federal stock savings bank and the wholly-owned subsidiary of Hudson City Bancorp. “Hudson City, MHC” refers to Hudson City, MHC, a New Jersey mutual holding company and former majority-owner of Hudson City Bancorp.

PART I

Available Information

Our periodic and current reports, proxy and information statements, and other information that we file with the Securities and Exchange Commission (the “SEC”), are available free of charge through our website, www.hcbk.com , as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. Unless specifically incorporated by reference, the information on our website is not part of this annual report. 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

Through our branch offices, we have operations in nine of the top 50 counties in the United States ranked by median household income. Operating in high median household income counties fits well with our jumbo mortgage loan and consumer deposit business model. We recently committed to open three branches in Fairfield County, Connecticut, three branches in New York in Suffolk County and Richmond County and two branches in New Jersey in Ocean County and Middlesex County. We expect to open these branches in 2008. We continually evaluate new locations in areas that present the greatest opportunity to promote our deposit and mortgage products. We also purchase first mortgage loans in states located in the Northeast quadrant of the country. We define the Northeast quadrant of the country generally as those states that are east of the Mississippi River and as far south as South Carolina. The wholesale loan purchase program complements our retail loan origination by enabling us to diversify our assets outside of our local market area.

The northern New Jersey market represents the greatest concentration of population, deposits and income in New Jersey. 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 represents a strong concentration of population and income, and is an increasingly popular resort and retirement market area, which provides healthy opportunities for deposit growth and residential lending. The southwestern New Jersey market consists of communities adjacent to the Philadelphia metropolitan area. The Suffolk County market area has similar demographic and economic characteristics to the northern New Jersey market area. As a result of the Acquisition, we entered the New York counties of Westchester, Rockland, and Putnam and Fairfield County, Connecticut, which have similar demographic and economic characteristics as the Northern New Jersey market. Entry into these counties allows us to continue to expand our retail operations and geographic footprint.

Our future growth opportunities will be influenced by the growth and stability of the regional economy, other demographic population trends and the competitive environment within and around the State of New Jersey and the New York metropolitan area. During 2007, there has been a decline in the national housing and real estate markets and the overall economy, which some reports indicate is bordering on recession. Housing market conditions in the Northeast quadrant of the United States, where most of our lending activity occurs, have deteriorated since 2006 as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market. Approximately 67% of our mortgage loans are located in the New York metropolitan area. The Office of Federal Housing Enterprises Oversight (“OFHEO”), an independent entity within the Department of Housing and Urban Development, publishes housing market data on a quarterly basis. According to the

data published by OFHEO for the third quarter of 2007, the most recent data available, house prices in New Jersey increased 0.86% over the third quarter of 2006. For New York and Connecticut, house prices increased 1.39% and 0.91%, respectively. While these statistics indicate appreciation in values, the rate of appreciation is markedly lower than in recent years and data exists indicating that prices actually declined in the latter part of 2007. Additionally, according to the OFHEO report, the states of Virginia, Illinois and Maryland experienced increases in house prices of 2.86%, 2.48% and 2.51%, respectively for those same periods. These three states account for 15% of our total mortgage portfolio. While the decline in economic and housing conditions in the New York metropolitan area has not been as severe as the rest of the country, we can give no assurance that the economic and housing market conditions will improve or will not worsen in the near future.

We expect to continue to grow 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 areas. We intend to fund our growth with customer deposits and borrowed funds. 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 in the market areas we serve. New Jersey and the New York metropolitan area have a high concentration of financial institutions, many of which are branches of large money center and regional banks. 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, insurance companies and brokerage and investment banking firms. Our most direct competition for deposits comes 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. More recently, we have experienced intense competition for deposits from some of our market competitors who have relied on gathering deposits at above market rates.

In response to the liquidity crisis caused in part by conditions in the sub-prime mortgage market, on February 13, 2008, President Bush signed H.R. 5140: Economic Stimulus Act, which temporarily raises the limit for conforming loans originated between July 1, 2007, and December 31, 2008, which may be sold to Federal National Mortgage Association (“FannieMae”) or the Federal Home Loan Mortgage Corporation (“FreddieMac”). Although such levels have not yet been increased, if they do, the liquidity provided by these two entities may permit other mortgage originators to begin to compete or more aggressively compete with us for jumbo mortgage loans. This may impact our ability to purchase and originate loans at the same levels to support our future growth.

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 multi-family and commercial mortgage loans, construction loans and consumer loans, which primarily consist of fixed-rate second mortgage loans and home equity credit lines.

At December 31, 2007, we had total loans of $24.19 billion, of which $23.79 billion, or 98.3%, were first mortgage loans. Of the first mortgage loans outstanding at that date, 80.5% were fixed-rate mortgage loans and 19.5% were adjustable-rate mortgage (“ARM”) loans. At December 31, 2007, multi-family and commercial mortgage loans totaled $58.9 million, or 0.2% of the loan portfolio, construction loans totaled $34.1 million, or 0.1% of total loans and consumer and other loans, primarily fixed-rate second mortgage loans and home equity credit lines, amounted to $404.7 million, or 1.7%, of total loans.

We do not originate or purchase sub-prime loans, negative amortization loans or option ARM loans. The market does not apply a uniform definition of what constitutes “sub-prime” lending. Our reference to sub-prime lending relies upon the “Statement on Subprime Mortgage Lending” issued by the OTS and the other federal bank regulatory agencies (the “Agencies”), on June 29, 2007, which further references the “Expanded Guidance for Sub-prime Lending Programs” (the “Expanded Guidance”), issued by the Agencies by press release dated January 31, 2001. In the Expanded Guidance, the Agencies indicated that sub-prime lending does not refer to individual sub-prime loans originated and managed, in the ordinary course of business, as exceptions to prime risk selection standards. The Agencies recognize that many prime loan portfolios will contain such loans. The Agencies also excluded prime loans that develop credit problems after acquisition and community development loans from the sub-prime arena. According to the Expanded Guidance, sub-prime loans are other loans to borrowers which display one or more characteristics of reduced payment capacity. Five specific criteria, which are not intended to be exhaustive and are not meant to define specific parameters for all sub-prime borrowers and may not match all markets or institutions’ specific sub-prime definitions, are set forth, including having a FICO score of 660 or below. Based upon the definition and exclusions described above, we are a prime lender. However, as we are a portfolio lender we review all data contained in borrower credit reports and do not base our underwriting decisions solely on FICO scores. We believe our loans, when made, were amply collateralized and otherwise conformed to our prime lending standards.

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 Federal Reserve Board (“FRB”), legislative tax policies and governmental budgetary matters.

The following table presents the composition of our loan portfolio in dollar amounts and in percentages of the total portfolio at the dates indicated.

Loan Maturity . The following table presents the contractual maturity of our loans at December 31, 2007. The table does not include the effect of prepayments or scheduled principal amortization. Prepayments and scheduled principal amortization on first mortgage loans totaled $2.10 billion for 2007, $1.68 billion for 2006 and $2.10 billion for 2005.

The following table presents, as of December 31, 2007, the dollar amount of all fixed-rate and adjustable-rate loans that are contractually due after December 31, 2008.

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. We originate and purchase substantially all of our one- to four-family first mortgage loans for retention in our portfolio. We specialize in residential mortgage loans with principal balances in excess of the current FannieMae, single-family limit of $417,000 (“non-conforming” or “jumbo” loans). We believe that our retention and servicing of the residential mortgage loans that we originate allows us to maintain higher levels of customer service and satisfaction than originators who sell loans to third parties.

Our wholesale loan purchase program is an important component of our strategy to grow our residential loan portfolio, and complements our retail loan origination production by enabling 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 have obtained assets at a relatively low overhead cost and have minimized related servicing costs. At December 31, 2007, $12.78 billion, or 53.8%, of our first mortgage loans were purchased loans. At December 31, 2007, approximately 67% of the mortgage loan portfolio was secured by real estate located in the states of New Jersey, New York and Connecticut.

Additionally, the states of Virginia, Illinois, and Maryland each accounted for approximately 6%, 5%, and 4%, respectively, of our total mortgage loan portfolio. The remainder of the loan portfolio is secured by real estate in 35 other states.

We have developed written standard operating guidelines relating to the purchase of these assets. These guidelines include an evaluation and approval process for the various sellers from whom we choose to buy whole loans, the types of whole loans, acceptable property locations and maximum interest rate variances. The purchase agreements, as established with each seller/servicer, contain parameters of the loan characteristics 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. All loans are reviewed for compliance with the agreed upon parameters. All purchased loan packages are subject to internal due diligence procedures including review of a sampling of individual loan files. We generally perform full credit reviews of 10% to 20% of the mortgage loans in each package purchased. Our due diligence procedures include a review of the legal documents, including the note, the mortgage and the title policy, review of the credit file, evaluating debt service ratios, review of the appraisal and verifying loan-to-value ratios and evaluating the completeness of the loan package. This review subjects the loan file to substantially the same underwriting standards used in our own loan origination process.

The loan purchase agreements recognize that the time frame to complete our due diligence reviews may not be sufficient prior to the completion of the purchase and afford us a limited period of time after closing to complete our review and return, or request substitution of, any loan for any legitimate underwriting concern. After the review period, we are still provided recourse against the seller for any breach of a representation or warranty with respect to the loans purchased. Among these representations and warranties are attestations of the legality and enforceability of the legal documentation, adequacy of insurance on the collateral real estate, compliance with regulations and certifications that all loans are current as to principal and interest at the time of purchase.

In general, the seller of a purchased loan continues to service the loan after we purchase it. The servicing of purchased loans is 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, such as contacting the servicers by phone or in writing to clarify or correct our concerns, taken as required. We also require that all servicers provide end-of-year financial statements to confirm the financial soundness of the servicer. These servicers must also deliver industry certifications substantiating that they have in place all appropriate controls to ensure their mode of administration is in accordance with standards set by the Mortgage Bankers Association of America. These operating guidelines provide a means of evaluating and monitoring the quality of mortgage loan purchases and the servicing abilities of the loan servicers. We typically purchase loans from eight to ten of the largest nationwide mortgage producers. We purchased first mortgage loans of $3.97 billion in 2007, $2.71 billion in 2006 and $3.68 billion in 2005 . The average size of our one-to four-family mortgage loans purchased during 2007 was approximately $522,000.

Most of our retail loan originations are from licensed mortgage bankers or brokers, existing or past customers, members of our local communities or referrals from local real estate agents, attorneys and builders. Our extensive branch network is a source of new loan generation. We also employ a 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.

We currently offer loans that generally conform to underwriting 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 of up to 40 years. The non-conforming loans generally follow FannieMae guidelines, except for the loan amount. FannieMae guidelines limit the principal amount of single-family loans to $417,000; our non-conforming loans generally exceed such limits. The average size of our one- to four-family mortgage loans originated in 2007 was approximately $499,000. The overall average size of our one- to four-family first mortgage loans was approximately $371,000 at December 31, 2007. We are an approved seller/servicer for FannieMae and an approved servicer for the FreddieMac. We generally hold loans for our portfolio but have, from time to time, sold loans in the secondary market. We sold no loans in 2007 and had no loans classified as held for sale at December 31, 2007.

Our originations of first mortgage loans amounted to $3.22 billion in 2007, $2.16 billion in 2006 and $2.07 billion in 2005. Included in these totals are refinancings of our existing first mortgage loans as follows:

We allow existing customers to modify their mortgage loans, for a fee, with the intent of maintaining our customer relationship in periods of extensive refinancing due to a low interest rate environment. The modification changes the existing interest rate to the market rate for a product currently offered by us with a similar or reduced term. To qualify for a modification, the loan must be current and our review of past payment performance must indicate that no payments were past due in any of the 12 preceding months. In general, all other terms and conditions of the existing mortgage remain the same. Modifications of existing mortgage loans were as follows:

		Mortgage Loans
		Modified
		(In thousands)
2007		$	15,272
2006			11,656
2005			39,254

We offer a variety of adjustable-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, as described below, loans on owner-occupied one- to four-family homes of up to $1,000,000 are generally subject to a maximum loan-to-value ratio of 80%. However, we make loans in amounts up to $500,000 with a maximum 95% loan-to-value ratio and loans in excess of $500,000 and less than $600,000 with a maximum 90% loan-to-value ratio, in each case if the borrower obtains private mortgage insurance where the loan-to-value ratio exceeds 80%. Under certain

circumstances we will originate a first and second mortgage, up to a combined loan amount of $600,000, 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. Loan-to-value ratios of 75% or less are generally required for one- to four-family loans in excess of $1.0 million and less than $1.5 million. Loans in excess of $1.5 million and less than $2.0 million are generally subject to a maximum loan-to-value ratio of 70%. Loans in excess of $2.0 million and up to $2.5 million are generally subject to a maximum loan-to-value ratio of 65%. Loans in excess of $2.5 million and up to $3.0 million are generally subject to a maximum loan-to-value ratio of 60%. We typically do not originate mortgage loans in excess of $3.0 million.

We also offer a variety of ARM loans secured by one- to four-family residential properties with a fixed rate for initial terms of three years, five years, seven years or ten years. After the initial adjustment period, ARM loans adjust on an annual basis. These loans are originated in amounts generally up to $3.0 million. The ARM loans that we currently originate have a maximum 40-year amortization period and are generally subject to the loan-to-value ratios 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 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. Generally, the ARM loans that we offer have initial interest rates below the fully indexed rate. As of December 31, 2007, the initial offered rate on these loans was 25.0 to 62.5 basis points below the current fully indexed rate. We originated $1.50 billion of one- to four-family ARM loans in 2007. At December 31, 2007, 19.5% of our one- to four-family mortgage loans consisted of ARM loans.

The origination and 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 by higher interest rates. 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 risk, we have not in the past, nor do we currently, originate ARM loans that provide for negative amortization of principal.

We also purchase and originate interest-only mortgage loans. These loans are designed for customers who desire flexible amortization schedules. These loans are originated as ARM loans with initial terms of five, seven or ten years with the interest-only portion of the payment based upon the initial loan term, or offered on a 30-year fixed-rate loan, with interest-only payments for the first 10 years of the obligation. At the end of the initial 5-, 7- or 10-year interest-only period the loan payment will adjust to include both principal and interest and will amortize over the remaining term so the loan will be repaid at the end of its original life. These loans are underwritten using fully amortizing payment amounts, more restrictive standards and generally are made with lower loan to value limitations imposed to help minimize any potential credit risk. These loans may involve higher risks compared to standard loan products since there is the potential for higher payments once the interest rate resets and the principal begins to amortize and they rely on a stable or rising housing market to maintain an acceptable loan-to-value ratio. However, we do not believe these programs will have a material adverse impact on our asset quality based on our historical experience, our underwriting criteria and the average loan-to-value ratios on the loans originated in this program. During 2007, we originated $1.08 billion of interest-only loans. The outstanding principal balance of interest-only loans in our portfolio was approximately $2.4 billion as of December 31, 2007. We have not in the past, nor do we currently, originate option ARM loans, where the borrower is given various payment options that could change payment flows to the Bank. For a description of recent guidance on high risk loans, See — “Regulation of Hudson City Savings Bank and Hudson City Bancorp.”

In addition to our full documentation loan program, we process loans to certain eligible borrowers as limited documentation loans. We have originated these types of loans for over 15 years. Loans eligible for limited documentation processing are ARM loans interest-only first mortgage loans and 10-, 15-, 20-, 30- and 40-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. Generally the maximum loan amount for limited documentation loans is $600,000. 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 review 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 that 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 also 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 generally limited to a maximum loan-to-value ratio of 65% on purchases and 60% on refinancing transactions.

Limited documentation and no verification loans may 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.

We offer 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 example, these programs currently provide for loans with up to 95% loan-to-value ratios and rates which are 25 to 50 basis points lower than our traditional mortgage loans. In 2007, we originated $21.9 million in mortgage loans under these programs .

Multi-family and Commercial Mortgage Loans. At December 31, 2007, $58.9 million, or 0.24%, of the total loan portfolio consisted of multi-family and commercial mortgage loans. Commercial mortgage loans are secured by office buildings, religious facilities and other commercial properties. We generally originate fixed-rate commercial mortgage loans with maximum terms of up to 25 years with balloon payment features. Substantially all of these loans were acquired in the Acquisition. Since our primary lending product is one-to four-family mortgage loans, we have not actively pursued the origination of commercial and multi-family mortgage loans. We originated $4.1 million of such loans in 2007. At December 31, 2007, the largest commercial mortgage loan had a principal balance of $5.7 million and was secured by a storage unit facility.

Multi-family mortgage loans generally are secured by multi-family rental properties (including mixed-use buildings and walk-up apartments). Multi-family mortgage loans generally are offered with both fixed and adjustable interest rates, although in the current interest rate environment we have not recently originated adjustable rate multi-family loans. Multi-family loans are originated for terms of up to 30 years.

In underwriting multi-family and commercial mortgage loans, we review a number of factors, such as the expected net operating income generated by the real estate to ensure that it is at least 125% of the amount of the monthly debt service; the age and condition of the collateral; the financial resources and income level of the borrower; and the borrower’s business experience. Personal guarantees are obtained in most cases from borrowers. The maximum loan to value ratio of multi-family and commercial mortgage loans is generally 75%.

Loans secured by multi-family and commercial real estate generally are larger than one-to-four family residential loans and involve a greater degree of risk. Commercial mortgage loans can involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on the results of operations and management of the properties or underlying businesses, and may be affected to a greater extent by adverse conditions in the real estate market or in the economy in general. Accordingly, the nature of commercial real estate loans makes them more difficult for us to monitor and evaluate.

Construction Lending . We originate construction loans to local builders, generally with whom we have an established relationship, and to individuals who have a contract with a builder for the construction of their residence. Our construction loans are disbursed as certain portions of the project are completed. Substantially all of these loans were acquired in the Acquisition. Since our primary lending product is one-to four-family mortgage loans, we have not actively pursued the origination of construction loans. We originated $8.6 million of construction loans in 2007. Our construction loans are secured by residential and commercial properties located in our market area. At December 31, 2007, we had 35 construction loans totaling $34.1 million, or 0.14% of total loans. Our largest construction loan is a participation loan for a 90 unit condominium project. Our outstanding portion of the loan amounted to $3.2 million at December 31, 2007.

Our construction loans to home builders generally have fixed interest rates, are typically for a term of up to 18 months and have a maximum loan to value ratio of 80%. Loans to builders are made on either a pre-sold or speculative (unsold) basis. We generally allow the borrower to extend the term of the loan if the project is not yet complete or, in the case of a speculative construction loan, if the borrower has not yet sold the property. To extend the maturity of the loan, the loan must be current and we assess if the project is being adequately managed. Construction loans to individuals are generally originated pursuant to the same policy guidelines regarding loan to value ratios and interest rates that are used in connection with loans secured by one-to four-family residential real estate. Construction loans to individuals who intend to occupy the completed dwelling may be converted to permanent financing after the construction phase is completed.

Construction loans are generally considered to involve a higher degree of risk than permanent mortgage loans because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. If the estimate of construction costs is inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion is inaccurate, the value of the property may be insufficient to assure full repayment. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct residential properties for which no purchaser has been identified carry more risk because the repayment of the loan depends on the builder’s ability to sell the property prior to the time that the construction loan is due. We attempt to minimize the foregoing risks by, among other things, generally requiring personal guarantees from the principals of its corporate borrowers.

Consumer Loans . At December 31, 2007, $404.7 million, or 1.7%, 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, relative to our mortgage portfolio, 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 generally in amounts up to $250,000 secured by owner-occupied one- to four-family residences located in the State of New Jersey, and the portions of New York and Connecticut served by our first mortgage loan products, for terms of up to 20 years. At December 31, 2007 these loans totaled $284.4 million, or 1.2% of total loans. 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, generally cannot exceed 80% of the appraised value of the property.

Our home equity credit line loans, which totaled $104.6 million or 0.4% of total loans at December 31, 2007, are adjustable-rate loans secured by a second mortgage on owner-occupied one- to four-family residences located in our market area. Current interest rates on home equity credit lines are based on the “prime rate” as published in 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 $250,000. The underwriting terms and procedures applicable to these loans are substantially the same as for our fixed-rate second mortgage loans.

Other loans totaled $15.7 million at December 31, 2007 and consisted of collateralized passbook loans, overdraft protection loans, automobile loans, unsecured personal loans, and secured and unsecured commercial lines of credit. We no longer originate unsecured personal loans and automobile loans.

Loan Approval Procedures and Authority . All first mortgage loans up to $600,000 must be approved by two officers in our Mortgage Origination Department. Loans in excess of $600,000 require one of the two officers approving the loan bear the title of either First Vice President-Mortgage Officer, Executive Vice President-Lending, Chief Executive Officer or Chief Operating Officer prior to the issuance of a commitment letter. The aggregate of all loans existing and/or committed by any one borrower in excess of $3,000,000 requires the review of the Board of Directors. 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 $250,000 maximum, are approved by an underwriter and either our Consumer Loan Officer, Executive Vice President-Lending, Chief Executive Officer or Chief Operating Officer.

Upon receipt of a completed loan application from a prospective borrower, we order a credit report and, except for loans originated as limited documentation, stated income, 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 most 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 our discretion, we will waive the real estate tax escrow for the borrower on New Jersey properties, subject to an interest rate somewhat higher than our regular offered rate. Presently, we do not escrow for real estate taxes on properties located in the States of New York and Connecticut.

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 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 and our maintenance of sound credit standards for new loan originations have resulted in relatively low levels of charge-offs. Charge-offs, net of recoveries, amounted to $684,000 in 2007 and $76,000 in 2006. This past year has been highlighted by significant disruptions and volatility in the financial and capital marketplaces. These disruptions have been exacerbated by the acceleration of the weakening of the real estate and housing markets. We closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. Sub-prime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market in which we participate. We continue to adhere to prudent underwriting standards.

Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties. Our loan growth was primarily concentrated in one- to four-family mortgage loans with loan-to-value ratios of less than 80%. As a result of our underwriting policies, our borrowers typically have a significant amount of equity, at the time of origination, in the underlying real estate that we use as collateral for our loans. It has been our experience that when a loan becomes delinquent, the borrower will usually sell the property to satisfy the loan rather than go to foreclosure or, if another bank holds a second mortgage on the property, they will repay our loan to protect their position . The value of the property used as collateral for our loans is dependent upon local market conditions. We monitor changes in the values of homes in each market using indices published by various organizations. Based on our analysis, we concluded that conditions in the housing markets in the Northeast quadrant of the country, where the properties underlying our mortgage loans are located, deteriorated throughout 2007. In addition, general economic conditions in the United States have also worsened as evidenced by slower economic growth. However, the New York metropolitan area and the surrounding regions have experienced more stable economic conditions as well as more stable real estate markets. Approximately 67% of our total loans are in the New York metropolitan area and 33% are located throughout the remaining states in the Northeast quadrant of the United States. With respect to our non-performing loans, approximately 63% are in the New York metropolitan area and 37% are located throughout the remaining states in the Northeast quadrant of the United States.

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 originated 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. 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. 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. The collection procedures for mortgage loans guaranteed by government agencies follow the collection guidelines outlined by those agencies.

We monitor delinquencies on our serviced loan portfolio from reports sent to us by the servicers. Once all past due reports are received, we examine the delinquencies and contact appropriate servicer personnel to determine the collectability of the loans. We also use these reports to prepare our own monthly reports for management review. These summaries break down, by servicer, total principal and interest due, length of delinquency, as well as accounts in foreclosure and bankruptcy. We monitor, on a case-by-case basis, all accounts in foreclosure to confirm that the servicer has taken all proper steps to foreclose promptly if there is no other recourse. We also monitor whether mortgagors who filed bankruptcy are meeting their obligation to pay the mortgage debt in accordance with the terms of the bankruptcy petition.

The collection procedures for other loans include 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 department review the delinquent loans and collection efforts 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. Charge-offs of consumer loans require the approval of our Consumer Loan Officer and either the Executive Vice President-Lending, our Chief Executive Officer or Chief Operating Officer.

Foreclosed real estate is property acquired through foreclosure or deed in lieu of foreclosure. Write-downs to fair value (net of estimated costs to sell) at the time of acquisition are charged to the allowance for loan losses. After acquisition, foreclosed properties are held for sale and carried at the lower of fair value minus estimated cost to sell, 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, the real property securing the loan is either sold at the foreclosure sale, or we or our servicer sells the property as soon thereafter as practicable.

Our policies require that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis. Our Asset Quality Committee is responsible for monitoring our loan portfolio, delinquencies and foreclosed real estate. This committee includes members of senior management from the loan origination, loan servicing and finance departments.

Loans delinquent 60 days to 89 days and 90 days or more were as follows as of the dates indicated:

Non-performing loans amounted to $79.4 million at December 31, 2007 as compared to $30.0 million at December 31, 2006. Non-performing loans at December 31, 2007 included $75.8 million of one- to four-family first mortgage loans as compared to $25.7 million at December 31, 2006. The ratio of non-performing loans to total loans was 0.33% at December 31, 2007 compared with 0.16% at December 31, 2006.

At December 31, 2007 and 2006 loans evaluated for impairment in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” amounted to $3.5 million and $3.1 million, respectively. Based on this evaluation, we established an allowance for loan losses of $268,000 for loans classified as impaired at December 31, 2007. We had no allowance for loan losses for such loans at December 31, 2006.

During 2007, there has been a decline in the housing and real estate markets and in the general economy, both nationally and locally with some reports indicating that the national economy is bordering on a recession. Housing market conditions in the northeast quadrant of the United States, where most of our lending activity occurs, have deteriorated during 2007 as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market.

The decline in the housing market has not resulted in significant charge-offs for us because of our underwriting standards and the geographical areas in which we lend. The average loan-to-value ratio of our first mortgage loans at December 31, 2007 was 61% based on the appraised value at time of origination. In addition, the average loan-to-value ratio of our non-performing loans was approximately 69% based on the appraised value at the time of origination. As a result, the amount of equity that borrowers have in the

underlying properties has helped to protect us from declining conditions in the housing market and the economy.

With the exception of first mortgage loans guaranteed by a federal agency 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 collectability of such interest or principal is doubtful. We reverse outstanding interest on non-accrual loans that we previously credited to income. We recognize income in the period that we collect it or when the ultimate collectability 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 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 acquisition, foreclosed properties held for sale are carried at the lower of fair value minus estimated cost to sell, or at cost. Subsequent provisions for losses, which may result from ongoing periodic valuation of these properties, are charged to income in the period in which they are identified. Fair market value is generally based on recent appraisals.

The following table presents information regarding non-performing assets as of the dates indicated.

The average loan-to-value ratio of our non-performing loans at December 31, 2007 was approximately 69% based on the appraised value at the time of origination. Non-accrual first mortgage loans at December 31, 2007 include $5.2 million of interest-only loans and $2.4 million of reduced documentation loans. The total amount of interest income received during the year on non-accrual loans outstanding and additional interest income on non-accrual loans that would have been recognized if interest on all such loans had been recorded based upon original contract terms is immaterial. We are not committed to lend additional funds to borrowers whose loans are in non-accrual status.

Allowance for Loan Losses . The following table presents the activity in our allowance for loan losses at or for the years indicated.

The allowance for loan losses has been determined in accordance with U.S. generally accepted accounting principles, which requires us 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.

The allowance for loan losses amounted to $34.7 million at December 31, 2007 as compared to $30.6 million at December 31, 2006. The ratio of the allowance for loan losses to non-performing loans was 43.75% at December 31, 2007 compared with 102.09% at December 31, 2006. The allowance for loan losses as a percent of total loans was 0.14% at December 31, 2007 compared with 0.16% at December 31, 2006. The ratio of non-performing loans to total loans was 0.33% at December 31, 2007 as compared to 0.16% at December 31, 2006. The provision for loan losses amounted to $4.8 million for 2007. We did not record a provision for loan losses during 2006. We recorded a provision for loan losses in 2007 based on our allowance for loan losses methodology that considers a number of quantitative and qualitative factors, including the amount of non-performing loans, which increased to $79.4 million at December 31, 2007 as compared to $30.0 million at December 31, 2006, as well as current real estate market conditions in the geographical areas where our loans are located, the current state of the local and national economy and loan portfolio growth.

Due to the homogenous nature of substantially all of the loans in our loan portfolio, our evaluation of the adequacy of our allowance for loan losses is performed primarily on a “pooled basis.” A component of our methodology includes assigning potential loss factors to the payment status of multiple residential loan categories with the objective of assessing the potential risk inherent in each loan type. We also consider growth in the loan portfolio in our determination of the allowance for loan losses. These factors are periodically reviewed for appropriateness giving consideration to charge-off history, delinquency trends, the results of our foreclosed property transactions and market conditions. We use this systematic methodology, as a tool, together with qualitative analysis performed by our Asset Quality Committee to estimate the allowance for loan losses. Other key factors we consider in this process are current real estate

market conditions in geographic areas where our loans are located, changes in the trend of non-performing loans, the current state of the local and national economy, changes in interest rates, the results of our foreclosed property transactions and loan portfolio growth. Any one or a combination of these events may adversely affect our loan portfolio resulting in increased delinquencies, loan losses and future levels of provisions.

As a result of our underwriting policies, our borrowers typically have a significant amount of equity, at the time of origination, in the underlying real estate that we use as collateral for our loans. It has been our experience that when a loan becomes delinquent, the borrower will usually sell the property to satisfy the loan rather than go to foreclosure. Since substantially all of our non-performing loans are secured by residential real estate with adequate collateral at the time of origination, we determined that the ratio of the allowance to non-performing loans was adequate. Net charge-offs amounted to $684,000 for 2007 as compared to net charge-offs of $76,000 for 2006. The increase in charge-offs was related to non-performing residential loans for which appraised values indicated declines in the value of the underlying collateral.

Our primary lending emphasis is the origination and purchase of one- to four-family first mortgage loans on residential properties and, to a lesser extent, second mortgage loans on one- to four-family residential properties. Our loan growth was primarily concentrated in one- to four-family mortgage loans with loan-to-value ratios of less than 80%. The value of the property used as collateral for our loans is dependent upon local market conditions. As part of our estimation of the allowance for loan losses, we monitor changes in the values of homes in each market using indices published by various organizations. Based on our analysis of the data for 2007, we concluded that home values in the Northeast quadrant of the United States, where most of our lending activity occurs, have deteriorated since 2006 as evidenced by reduced levels of sales, increasing inventories of houses on the market, declining house prices and an increase in the length of time houses remain on the market. In addition, general economic conditions in the United States have also worsened as evidenced by slower economic growth. However, the decline in the economic and housing conditions in the New York metropolitan area has not been as severe as the rest of the country. Approximately 67% of our total loans are in the New York metropolitan area and 33% are located throughout the remaining states in the Northeast quadrant of the United States. With respect to our non-performing loans, approximately 63% are in the New York metropolitan area and 37% are located throughout the remaining states in the Northeast quadrant of the United States. We considered these trends in market conditions in determining the provision for loan losses also taking into account the continued growth of our loan portfolio.

The second half of 2007 has been highlighted by significant disruption and volatility in the financial and capital marketplaces. This turbulence has been attributable to a variety of factors, including the fallout associated with the sub-prime mortgage market. One aspect of this fallout has been significant deterioration in the activity of the secondary residential mortgage market and the lack of available liquidity that previously existed through securitization transactions. The disruptions have been exacerbated by the acceleration of the decline of the real estate and housing market. We continue to closely monitor the local and national real estate markets and other factors related to risks inherent in our loan portfolio. Sub-prime mortgage lending, which has been the riskiest sector of the residential housing market, is not a market in which we participate. We continue to adhere to prudent underwriting standards. However, based on our evaluation of the foregoing factors, and in recognition of the recent increases in non-performing loans and net loan charge-offs, our 2007 analyses indicated that a provision for loan losses was warranted.

At December 31, 2007, first mortgage loans secured by one-to four family properties accounted for 97.9% of total loans. Fixed-rate mortgage loans represent 80.5% of our first mortgage loans. Fixed-rate loans possess less inherent credit risk since loan payments do not change in response to changes in interest rates.

In addition, we do not originate or purchase loans with payment options, negative amortization loans or sub-prime loans.

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.

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 the dates indicated.

Investment Activities

The Board of Directors reviews and approves our investment policy on an annual basis. The Chief Executive Officer, Chief Operating Officer and Chief Financial 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, federal agency securities, mortgage-backed securities, certain time deposits of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements, federal funds sold, and, subject to certain limits, corporate debt and equity securities, commercial paper and mutual funds.

We invest primarily in mortgage-backed securities issued by GinnieMae, FannieMae and FreddieMac, as well as U.S. government-sponsored enterprise securities. These securities account for substantially all of our securities. The Company does not purchase unrated or private label mortgage-backed securities or other higher risk securities such as those backed by sub-prime loans. There were no debt securities past due or securities for which the Company currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security.

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 these types of transactions. Our investment policy also provides that we will not engage in any practice that the Federal Financial Institutions Examination Council considers being an unsuitable investment practice. In addition, the policy provides that we shall maintain a primary liquidity ratio, 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 at least 4% of total deposits and short-term borrowings. At December 31, 2007, our primary liquidity ratio was 23.4%.

We classify investments 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 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.

Investment Securities . During 2007, we purchased $2.15 billion of investment securities compared with $1.25 billion during 2006. These securities were primarily U.S government-sponsored enterprise securities. Of the securities held as of December 31, 2007, $1.87 billion have step-up features where the interest rate is increased on scheduled future dates. These securities have call options that are generally effective prior to the initial rate increase but after an initial non-call period of three months to one year. Approximately $1.67 billion of these step-up notes will reset or mature within two years. Also included in investment securities as of December 31, 2007 were $666.7 million of securities with initial periods to maturity of less than two years. The aggregate $2.34 billion of step-up notes resetting and short-term securities maturing within two years assists in our management of interest rate risk. At December 31, 2007, investment securities with an amortized cost of $3.62 billion were used as collateral for securities sold under an agreement to repurchase. Also, at December 31, 2007, we had $695.4 million in FHLB-NY stock. See “- Regulation of Hudson City Savings Bank and Hudson City Bancorp.”

Mortgage-backed Securities . All of our mortgage-backed securities are issued by GinnieMae, FannieMae or FreddieMac. At December 31, 2007, mortgage-backed securities classified as held to maturity totaled $9.57 billion, or 21.5% of total assets, while $5.01 billion, or 11.3% of total assets, were classified as available for sale. At December 31, 2007, the mortgage-backed securities portfolio had a weighted-average rate of 5.38% and a market value of approximately $14.57 billion. Of the mortgage-backed securities we held at December 31, 2007, $12.0 billion, or 82.3% of total mortgage-backed securities, had adjustable rates and $2.58 billion, or 17.7% of total mortgage-backed securities, had fixed 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, 2007, we held $385.0 million of fixed-rate REMICs, which constituted 2.6% of our mortgage-backed securities portfolio. Mortgage-backed security purchases totaled $7.11 billion during 2007 compared with $3.93 billion during 2006. Of the mortgage-backed securities purchased during 2007, 98.9% were variable-rate instruments that were used as part of our interest rate risk management strategy. At December 31, 2007, mortgage-backed securities with an amortized cost of $9.3 billion were used as collateral for securities sold under an agreement to repurchase.

Mortgage-backed securities generally yield less than the underlying loans 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 may be used to collateralize certain borrowings. In general, mortgage-backed securities issued or guaranteed by GinnieMae, 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. At December 31, 2007, we did not own any principal-only, REMIC residuals, private label mortgage-backed securities or other higher risk securities such as those backed by sub-prime loans.

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

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

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,
		2007												2006												2005
						Percent												Percent												Percent
		Carrying				of				Fair				Carrying				of				Fair				Carrying				of				Fair
		Value				Total (1)				Value				Value				Total (1)				Value				Value				Total (1)				Value
														(Dollars in thousands)
Money market investments:
Federal funds sold		$	106,299				100.00	%		$	106,299			$	56,616				100.00	%		$	56,616			$	4,587				100.00	%		$	4,587
Investment securities:
Held to maturity:
United States government- sponsored enterprises		$	1,408,071				33.74	%		$	1,409,814			$	1,533,059				25.92	%		$	1,502,014			$	1,533,050				27.89	%		$	1,506,865
Municipal bonds			430				0.01				432				910				0.02				920				1,166				0.02				1,190
Total held to maturity			1,408,501				33.75				1,410,246				1,533,969				25.94				1,502,934				1,534,216				27.91				1,508,055
Available for sale:
United States government- sponsored enterprises			2,758,193				66.08				2,758,193				4,372,295				73.94				4,372,295				3,962,178				72.09				3,962,178
Corporate bonds			4				—				4				57				—				57				67				—				67
Equity securities			7,294				0.17				7,294				7,263				0.12				7,263				266				—				266
Total available for sale			2,765,491				66.25				2,765,491				4,379,615				74.06				4,379,615				3,962,511				72.09				3,962,511
Total investment securities		$	4,173,992				100.00	%		$	4,175,737			$	5,913,584				100.00	%		$	5,882,549			$	5,496,727				100.00	%		$	5,470,566
Mortgage-backed securities:
By issuer:
Held to maturity:
GNMA pass-through certificates		$	157,716				1.08	%		$	158,999			$	215,161				2.31	%		$	216,504			$	293,680				4.25	%		$	294,332
FNMA pass-through certificates			3,214,509				22.06				3,205,922				3,233,852				34.66				3,191,324				2,535,361				36.69				2,489,102
FHLMC pass-through certificates			5,808,288				39.86				5,849,744				3,069,884				32.90				3,019,995				1,108,195				16.04				1,082,564
FHLMC and FNMA REMICs			385,013				2.64				351,647				406,313				4.36				376,775				452,628				6.55				422,774
Total held to maturity			9,565,526				65.65				9,566,312				6,925,210				74.23				6,804,598				4,389,864				63.53				4,288,772
Available for sale:
GNMA pass-through certificates			1,257,893				8.62				1,257,893				1,696,715				18.18				1,696,715				1,700,132				24.60				1,700,132
FNMA pass-through certificates			1,098,072				7.54				1,098,072				575,293				6.17				575,293				666,485				9.64				666,485
FHLMC pass-through certificates			2,649,444				18.18				2,649,444				132,413				1.42				132,413				154,016				2.23				154,016
Total available for sale			5,005,409				34.35				5,005,409				2,404,421				25.77				2,404,421				2,520,633				36.47				2,520,633
Total mortgage-backed securities		$	14,570,935				100.00	%		$	14,571,721			$	9,329,631				100.00	%		$	9,209,019			$	6,910,497				100.00	%		$	6,809,405
By coupon type:
Adjustable-rate		$	11,995,377				82.32	%		$	12,055,525			$	6,495,769				69.63	%		$	6,457,465			$	3,704,146				53.60	%		$	3,683,965
Fixed-rate			2,575,558				17.68				2,516,196				2,833,862				30.37				2,751,554				3,206,351				46.40				3,125,440
Total mortgage-backed securities		$	14,570,935				100.00	%		$	14,571,721			$	9,329,631				100.00	%		$	9,209,019			$	6,910,497				100.00	%		$	6,809,405
Total investment portfolio		$	18,851,226							$	18,853,757			$	15,299,831							$	15,148,184			$	12,411,811							$	12,284,558

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, 2007. Mortgage-backed securities are presented by issuer and by coupon type. Equity securities have been excluded from this table.