**Exhibit13.0**

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**StatenIsland Bancorp, Inc.**

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**MeetingToday’s Challenges and Tomorrow’s Goals**

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OUR MISSION

 

SI Bank & Trust is a strong financial services company committed toimproving shareholder value and delivering the highest quality products andservices responsive to the changing needs of our consumer and business markets.As we grow, we will consistently strive to give extraordinary service to ourcustomers by providing our employees with the means and opportunities to makefull use of their skills and capabilities. These commitments to ourshareholders, customers and employees will enable the Company to maintain alevel of profitability necessary to remain independent for the benefit of thecommunities we serve.

 

CORPORATE PROFILE

 

Staten Island Bancorp, Inc. was organized in 1997 and is the holdingcompany for SI Bank & Trust. SI Bank & Trust was chartered in 1864 andcurrently operates 17 full service branches and a trust department on StatenIsland, New York, 3 full service branches in Brooklyn, New York and 15 fullservice branches in New Jersey. SI Bank & Trust also operates SIB MortgageCorp., a wholly owned subsidiary of SI Bank & Trust, which conductsbusiness under the name of Ivy Mortgage in 42 states.

 

The principal business of the Bank consists of attracting deposits fromconsumers and businesses in its market area and originating consumer,residential, multi-family and commercial real estate loans, as well as otherbusiness loans.

 

Staten Island Bancorp, Inc.’s common stock is publicly traded on theNew York Stock Exchange under the symbol “SIB.”

 
| ****              |   |
|-------------------|--------|
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| PROUDLY SERVING   |
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| OUR COMMUNITIES   |
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| Staten Island, NY | 17     |  |
| Brooklyn, NY      | 3      |
| Union, NJ         | 4      |
| Middlesex, NJ     | 3      |
| Monmouth, NJ      | 2      |
| Ocean, NJ         | 6      |

 

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FINANCIAL HIGHLIGHTS

 
|                         |   |                                              |   | **At or For  the Years Ended December 31,** |          |
|------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------|---------------|
|                         |   | **(dollars in thousands, except per share data)** |   | **2002**                                    |          | **2001** |   | **2000** |   |
| *Operations  Data*           |   | Net interest income                               |   | **$**                                       | **208,518**   | ** ** | $ | 162,405 |   | $ | 140,684 |   |
|                         |   | Provision for  loan losses                        |   | **8,854**                                   | ** **    | 8,757 |   | 652 |   |
|                         |   | Total other  income                               |   | **273,107**                                 | ** **    | 113,218 |   | 43,562 |   |
|                         |   | Total other  expenses                             |   | **310,348**                                 | ** **    | 197,167 |   | 96,760 |   |
|                         |   | Income before  provision for income taxes         |   | **162,423**                                 | ** **    | 69,699 |   | 86,834 |   |
|                         |   | Provision for  income taxes                       |   | **66,776**                                  | ** **    | 23,966 |   | 32,908 |   |
|                         |   | Net income                                        |   | **100,378**                                 | ** **    | 45,733 |   | 53,926 |   |
| *Financial  Condition Data*  |   | Total assets                                      |   | **$**                                       | **6,935,095** | ** ** | $ | 6,005,053 |   | $ | 5,240,864 |   |
|                         |   | Loans  receivable, net                            |   | **3,422,492**                               | ** **    | 2,806,619 |   | 2,847,660 |   |
|                         |   | Loans held for  sale                              |   | **1,729,890**                               | ** **    | 1,185,593 |   | 116,163 |   |
|                         |   | Securities  available for sale                    |   | **911,432**                                 | ** **    | 1,425,739 |   | 1,808,396 |   |
|                         |   | Deposits                                          |   | **3,464,134**                               | ** **    | 2,901,328 |   | 2,345,213 |   |
|                         |   | Borrowed funds                                    |   | **2,756,927**                               | ** **    | 2,451,762 |   | 2,241,011 |   |
|                         |   | Stockholders’  equity                        |   | **614,268**                                 | ** **    | 563,803 |   | 585,532 |   |
|                         |   | Non-accruing  assets                              |   | **27,038**                                  | ** **    | 16,320 |   | 10,669 |   |
|                         |   | Net loan charge-offs                              |   | **6,122**                                   | ** **    | 3,354 |   | 1,132 |   |
|                         |   | Allowance for  loan losses                        |   | **22,773**                                  | ** **    | 20,041 |   | 14,638 |   |
| *Selected  Financial Ratios* |   | Stockholders’ equity to total assets         |   | **8.86**                                    | **%**         | 9.39 | % | 11.17 | % |
|                         |   | Tangible equity  to assets                        |   | **7.93**                                    | ** **    | 8.28 |   | 10.09 |   |
|                         |   | Total risk-based  capital                         |   | **14.92**                                   | ** **    | 14.41 |   | 18.77 |   |
|                         |   | Net interest  margin                              |   | **3.45**                                    | ** **    | 3.10 |   | 2.99 |   |
|                         |   | Interest rate  spread                             |   | **3.07**                                    | ** **    | 2.50 |   | 2.22 |   |
|                         |   | Return on  average assets                         |   | **1.53**                                    | ** **    | 0.81 |   | 1.09 |   |
|                         |   | Return on  average equity                         |   | **17.13**                                   | ** **    | 7.92 |   | 9.61 |   |
|                         |   | Efficiency ratio                                  |   | **64.23**                                   | ** **    | 66.05 |   | 49.41 |   |
|                         |   | Non-accruing  assets to total assets              |   | **0.39**                                    | ** **    | 0.27 |   | 0.20 |   |
| *Per  Share Data*            |   | Basic earnings                                    |   | **$**                                       | **1.80**      | ** ** | $ | 0.76 |   | $ | 0.80 |   |
|                         |   | Diluted earnings                                  |   | **1.72**                                    | ** **    | 0.75 |   | 0.80 |   |
|                         |   | Tangible book  value                              |   | **9.23**                                    | ** **    | 8.08 |   | 7.49 |   |
|                         |   | Market value at  year end                         |   | **20.14**                                   | ** **    | 16.31 |   | 10.69 |   |
|                         |   | Cash dividends  paid per share                    |   | **0.46**                                    | ** **    | 0.32 |   | 0.26 |   |

 

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|-------------------------|
|                    |
| Total Assets            | Total Loans | Total Deposits |
| *(dollars in billions)* | *(dollars in billions)* | *(dollars in billions)* |

 

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**17% return of average equity**

 

MESSAGE TO SHAREHOLDERS

 

Staten Island Bancorp, Inc., entered the year 2002 with justifiableoptimism. We had just concluded the most successful year of business growth inthe Company’s four-year history as a public company, supported by record growthof SI Bank & Trust, the Company’s wholly owned subsidiary, as well as SIBMortgage Corp., a subsidiary of SI Bank & Trust. However, we also enteredthe year 2002 with guarded optimism. We were operating in an uncertain economyresulting from a recession, which officially began in the spring of 2001, andwe were faced with the prospect of a rising interest rate environment, whichnever materialized.

 

Despite the uncertainty and challenges that faced us at the beginningof the year, we were confident that we had positioned both the 136-year-oldcommunity bank and the mortgage company for continued growth. Once again we arepleased to report that the operating results of both the community bank and themortgage company continued to reach record levels in 2002. Among the highlightswere the growth in assets to $6.9 billion and the attainment of stellarfinancial performance ratios such as a return on average assets of 1.53% and areturn on average equity of 17.13%.

 

The Company’s earnings in 2002 were $100.4 million or $1.72 per fullydiluted share, significant increases over the earnings of 2001. These resultsinclude restatements of the Company’s financial statements for 2001 and thefirst half of 2002, primarily due to a change in the methodology used for theaccounting of stock options. Details of the restatements are provided in theManagement’s Discussion and Analysis section (MD&A) later in this report.

 

**Expansion of the Community BankFranchise**

 

SI Bank & Trust continued to achieve record deposit growth—nearly20% for the second year in a row.

 

De novo branch openings, increased promotion of products and services,continued emphasis on competitive pricing and excellent customer service areamong the factors responsible for this significant growth. We also benefitedfrom the ongoing shift of investors from the stock market to the insured andguaranteed returns of banking institutions.

 

We opened four new branches in 2002, continuing our strategy to enternew markets through de novo branching. Specifically, we improved our coveragein Middlesex and Union Counties, New Jersey with the opening of three offices,and expanded our service area south to Toms River, New Jersey, with the openingof one branch.

 

We are extremely pleased with the progress we have made since January2000, when we first entered the State of New Jersey with the acquisition of sixbranches in two counties with approximately $315 million in deposits. Ourbranch network in New Jersey has expanded to fifteen (15) locations in fourcounties, with total deposits in this market exceeding $863 million. In 2002,deposits in our branch network in New Jersey increased by $282 million, or 48%.

 

*2002 ANNUAL REPORT HIGHLIGHTS*

 
| •   *Record Loan Originations of $9.8 Billion*         | •    *19.4% Deposit Growth*                      |
|-----------------------------------------------------------------------|----------------------------------------------------------------------|
| •   *Return on Average Equity 17.13%*                  | •    *Opened Four New Branch Offices*            |
| •   *Return on Average Assets 1.53%*                   | •    *Implemented Retail Investment Program*     |
| •    *Total Assets Increased 15% to $6.9 Billion* | •    *Completed Eighth 6% Stock Repurchase Plan* |

 

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| ****                                     |
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|                                     |
| **Harry  P. Doherty**                    |
| *Chairman  and Chief Executive Officer*  |
|                                     |
| **James  R. Coyle**                      |
| *President  and Chief Operating Officer* |

 

Deposit growth in Brooklyn, New York, has also been very strong, withan increase in 2002 of approximately $52 million, or 35% at our two locations.As a result of our success in growing deposits in Brooklyn, we are planning toopen at least two new branches in Brooklyn by year-end 2003.

 

Deposits in New Jersey and Brooklyn represented over 30% of our totalbase as of December 31, 2002. The growth has been driven by the promotion of amoney market account linked to a non-interest bearing checking account. Thisproduct (*THE bank*Edge)also provides customers access to on-line banking, bank-by-phone and a VisaCheck Card.

 

The growth in market share is not exclusive to our efforts in NewJersey and Brooklyn. We are also pleased with deposit growth of 12% in StatenIsland, New York, resulting in an increase in our leading market share inStaten Island to 32.3%. Our solid growth in new households and related balancesis due to the “flight to safety” of many investors, as well as the shift inbank deposits resulting from the acquisition of local banks by largerinstitutions.

 

Our efforts to retain our customers are reflected in our ongoingimplementation and modification of the products and services we offer, as wellas our commitment to outstanding service. For example, state-of-the-artservices such as internet banking and bank-by-phone, each with bill paymentcapabilities, debit cards and many other services that enable customers toaccess their accounts 24/7 are available and updated as more features becomeavailable. These electronic services augment the outstanding personal servicedelivered by our well-trained staff. Our commitment to service quality isdemonstrated and monitored through the use of third-party customer satisfactionsurveys conducted year-round. We are pleased to report that the percentage ofcustomers who indicate in our surveys that they would recommend the Bankremains consistently high from year-to-year.

 

We recognize that this deposit growth presents opportunities to expandrelationships with both new and current customers. Among other initiatives, wehave taken advantage of these opportunities by introducing a retail investmentprogram (SIB Financial Services), in partnership with Essex Corporation, anationally recognized broker-dealer and third party marketing firm. Thisprogram enables brokers located in our branches to offer non-bank investment productssuch as annuities, mutual funds, stocks and bonds to our customer base. Theseproducts have expanded the menu of financial services available to the 97,000households served by SI Bank & Trust. We are positioned to generate feeincome as investors regain confidence in the financial markets and return tonon-bank investments for a portion of their portfolio.

 

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Sisters and medical partners Tomasine (L) and Maria (R) Fodera,founders of New York Surgeon Associates, started banking at SI Bank & Trustas children and continue to maintain their personal as well as businessaccounts at the *Bank.*

 

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**19% Deposit Growth**

 

**Solid Low-Cost Deposit Growth**

 

We have been able to achieve this record growth in deposits whilelowering our weighted average cost of deposits to 1.83% by year-end (includingbrokered deposits), compared to a weighted average cost of deposits of 2.58% atDecember 31, 2001. Core deposits (savings, money market, checking and NOWaccounts) have increased to 68.1% of our total deposits, with non-interestbearing checking accounts amounting to nearly 16% of our total deposit base.The significant balances in non-interest bearing checking accounts are due tothe impressive penetration of business checking accounts in Staten Island, aswell as the progress we are making in servicing the commercial and smallbusiness segment in our new markets. Deposit services such as daily phone callson overdrafts and daily reviews of uncollected deposit items are valuableservices to this segment.

 

**Record Growth Includes LoanOriginations**

 

In many ways, 2002 has been a watershed year for the mortgage industry.As a result of the low interest rate environment extending through the entireyear, refinance activity remained strong and loan originations for both SI Bank& Trust and SIB Mortgage Corp. reached record levels in 2002. In total, theCompany closed $9.8 billion in loans during the year—$1.2 billion at the Bank and$8.6 billion at the Mortgage Company. This represents a 100% increase inactivity over the prior year. In 2002, we continued our program of sellinglong-term fixed rate mortgages in order to reduce the interest rate riskassociated with keeping these relatively low yielding loans in our portfolio.Loans held in portfolio equaled $5.1 billion at year-end.

 

SI Bank & Trust’s originations included over $870 million insingle-family residential loans, representing 73% of the Bank’s activity forthe year. Once again, our Priority Access Program for mortgage brokers was theprimary source of the residential loans processed through the Bank. Of course,flexible products and competitive pricing are important in our ability toattract borrowers. However, our commitment to customer service is alsoreflected in this area as the personal service and professionalism of our staffcontinues to receive high marks in the surveys we send to brokers. As we enter2003 we intend to expand the broker program into New Jersey.

 

We also remain pleased with the steady progress we have made andcontinue to make in increasing the size of our commercial loan portfolio. In2002 this portfolio grew by 17.2%, to $641 million. This business segmentremains a good source of higher yielding loans and also generates non-interestbearing deposits and other fee related services. We continue to explore ways inwhich we can expand this portfolio in new markets.

 

In addition, the early results of new programs designed to increase ourhome equity loan portfolio in New Jersey have been encouraging and we plan toexpand these efforts in 2003.

 

INCREASING OUR PRESENCE

 

We opened four new branches in 2002, continuing our strategy to enternew markets through de novo branching.

 
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| Toms River, NJ |

 

 
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| Clark, NJ |

 

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**100% increase in loan production**

 

**SIB Mortgage Corp. Expands Nationwide**

 

The growth and expansion of our mortgage company, SIB Mortgage Corp.,has been truly remarkable. The Mortgage Company’s primary business is tooriginate residential mortgage loans and sell the loans in the secondarymortgage market. As a result of a strategic expansion plan launched in late2000, the Mortgage Company has achieved a reputation as a national lender, withloan originations more than doubling in 2002, from $4 billion to $8.6 billion.This has been accomplished through the continued expansion of sales officesinto 42 states nationwide, as well as the increase in loan volume fromestablished offices. Most of the Mortgage Company’s production is sold tothird-party investors although the Bank periodically purchases adjustable rateloans from the Mortgage Company for the Bank’s portfolio.

 

The successful implementation of this expansion plan has resulted innet income for the Mortgage Company of nearly $42 million for the year 2002.This growth and profitability has been achieved through the execution of thebasic fundamentals of business—service and quality. SIB Mortgage obtains loanproduct through a multiple of channels, offers a broad product line to itscustomers, and maintains an excellent working environment for its employees.

 

Continued growth must be supported by efficient technology and in 2003new initiatives to upgrade processing systems are expected to be implemented.Software which can minimize risks associated with fraud and monitors thedelinquency performance of loans produced throughout our various deliverychannels will be utilized. Quality control and secondary market risk trackingsystems are also being upgraded to accommodate the increased volumes. Atransaction oriented website is being installed (sibware) so that brokers canbe directed to appropriate loan products based on the loan criteria submittedfor particular clients.

 

**Loan Quality**

 

In conjunction with the increase in loan volume, we have continued toemphasize loan quality. In addition to sound underwriting practices that aremonitored on a regular basis, we are diligent in maintaining an active creditquality program. Non-accruing loans as a percentage of total assets was 0.25%for both year-end 2001 and 2002. The provision for loan losses for 2002 was$8.9 million compared to $8.8 million for 2001. In addition, the coverage ratiofor loan losses remained virtually unchanged from the prior year, at 131.2%.

 

**Balance Sheet Management ProducingPositive Results**

 

The Company’s significant loan growth has been funded through thedeposit growth mentioned earlier as well as the use of wholesale borrowings andthe amortization and restructuring of our securities portfolio. Securitiesavailable for sale have been reduced from $1.5 billion at December 31, 2001 to$1.0 billion at December 31, 2002. Total borrowings have increased by $305.2million, however, the ratio of borrowings-to-total assets remained atapproximately 40% by year end 2001 and 2002.

 
| In total, the Company closed $9.8 billion in loans  during the year |
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| Prompt Mailers : A  nationwide full-service direct mail, data processing  and fulfillment company, Relies on SI Bank & Trust's commercial loan  and deposit services to support their expanding business. |
|                                                                                                                                                                                                          |
| *L to  R: Andrew Masucci, CEO, Richard Masucci, President  & Dennis Lacognata, Sr. Vice President*                                                                                                        |

 

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Net interest rate spread and margin have improved to 3.07% and 3.45%,respectively, at December 31, 2002 from 2.50% and 3.10%, respectively, atDecember 31, 2001. The improvement in the spread and margin were due to thecost of interest bearing liabilities decreasing by 1.11%, while the yield oninterest earning assets declined by only 0.54%. This was accomplished in part,by the successful growth in core deposits and the shift from securitiesinvestments to higher yielding loans.

 

The Company has also been able to improve the efficiency ratio to64.23% at year-end 2002, from 66.05% at year-end 2001. Most notably, this hasbeen accomplished despite incurring the costs of rapid growth before thereturns from this expansion are fully realized.

 

**Ongoing Commitment to Shareholders,Employees and Community**

 

We would also like to report that the Company has implemented a“Balanced Scorecard” as a tool to measure the overall performance of theCompany. This approach focuses on the multitude of components and valuecreating activities that contribute to the Company’s growth and profitability.These components measure quality as well as financial performance. For example,we believe a satisfied workforce is critical to a satisfied customer base.Therefore, we regularly monitor employees’ attitudes towards training, rewardsand recognition and other elements that affect their productivity. The BalancedScorecard also measures the effectiveness of our investments in technology andmonitors our responsiveness to market and competitive changes.

 

As we continue to expand our franchise, we remain committed tosupporting the communities in which we live and work. The Bank is wellrepresented by all levels of staff at the many fundraising and communitysupport events that take place throughout the year. Our employees regularlycontribute their time, talent and financial resources to civic, cultural,housing, healthcare and educational programs within our service area. Theseactivities are further supported by significant financial contributions of SIBank & Trust Foundation, which was formed when the Company went public in1997.

 

In closing, we would like to assure you that our focus on improvingshareholder value has never wavered. Our expansion strategy has been provensuccessful and, although market conditions remain uncertain, we enter 2003 wellpositioned to pursue our long-term strategy. The Bank will open additionalbranches in our new markets and both the Bank and the Mortgage Company are seekingevery opportunity to grow the franchise and maximize the returns to ourshareholders. We would like to thank our officers and staff for their ongoingcontributions to the growth of our Company and we would like to thank ourshareholders for their continued support and confidence.

 
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| Our expansion strategy has been proven successful  and, though market conditions remain uncertain, we enter 2003 well positioned  to pursue our long-term strategy. |
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| ****                                                                                                                                                                |   | **** |
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| **James  R. Coyle**                                                                                                                                                 |   | **Harry P. Doherly** |
| *President  and Chief Operating Officer*                                                                                                                            |   | *Chairman and Chief Executive  Officer* |

 

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Staten Island Bancorp, Inc. & Susidiary

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following selected historical financial data is derived in partfrom the audited financial statements of Staten Island Bancorp, Inc., (the“Company”). The selected historical financial data set forth below should beread in conjunction with the historical financial statements of the Company,including the related notes, included elsewhere herein. All per share amountshave been adjusted for the two-for-one stock split in the year 2001.

 
|                                   |   | **December  31,**                            |          |
|----------------------------------------|--------|----------------------------------------------|---------------|
| **Selected Financial Condition Data:** |   | **2002**                                     |          | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                   |   | **(000’s  omitted, except share data)** |          |
| Total assets                           |   | **$**                                        | **6,935,095** | ** ** | $ | 6,005,053 |   | $ | 5,240,864 |   | $ | 4,489,314 |   | $ | 3,776,947 |   |
| Securities  available for sale         |   | **911,432**                                  | ** **    | 1,425,739 |   | 1,808,396 |   | 1,903,804 |   | 1,999,351 |   |
| Loans, net                             |   | **3,422,492**                                | ** **    | 2,806,619 |   | 2,847,660 |   | 2,150,039 |   | 1,457,058 |   |
| Loans held for  sale                   |   | **1,729,890**                                | ** **    | 1,185,593 |   | 116,163 |   | 46,588 |   | 77,943 |   |
| Intangible  assets(1)                  |   | **57,881**                                   | ** **    | 58,871 |   | 62,447 |   | 15,432 |   | 17,701 |   |
| Deposits                               |   | **3,464,134**                                | ** **    | 2,901,328 |   | 2,345,213 |   | 1,820,233 |   | 1,729,061 |   |
| Borrowings                             |   | **2,756,927**                                | ** **    | 2,451,762 |   | 2,241,011 |   | 2,049,411 |   | 1,344,517 |   |
| Stockholders’  equity             |   | **614,268**                                  | ** **    | 563,803 |   | 585,532 |   | 571,377 |   | 669,042 |   |
| Tangible book  value per share         |   | **9.23**                                     | ** **    | 8.08 |   | 7.49 |   | 7.19 |   | 7.45 |   |
| Common shares  outstanding             |   | **60,269,397**                               | ** **    | 62,487,286 |   | 69,841,974 |   | 77,387,246 |   | 87,409,624 |   |
|                                        |        |                                              |               |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                 |   | **For the  Year Ended December 31,**         | ** **  |
|--------------------------------------|--------|----------------------------------------------|-------------|
| **Selected Operating Data:**         |   | **2002**                                     | ** **  | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** |
|                                 |   | **(000’s  omitted, except share data)** |        |
| Net interest  income                 |   | **$**                                        | **208,518** | ** ** | $ | 162,405 |   | $ | 140,684 |   | $ | 138,409 |   | $ | 121,072 |   |
| Provision  (benefit) for loan losses |   | **8,854**                                    | ** **  | 8,757 |   | 652 |   | (1,843 | ) | 1,594 |   |
| Other income                         |   | **273,107**                                  | ** **  | 113,218 |   | 43,562 |   | 30,853 |   | 10,380 |   |
| Other expenses                       |   | **310,348**                                  | ** **  | 197,167 |   | 96,760 |   | 82,971 |   | 55,918 |   |
| Income tax  expense                  |   | **66,776**                                   | ** **  | 23,966 |   | 32,908 |   | 35,259 |   | 29,678 |   |
| Net income                           |   | **100,378**                                  | ** **  | 45,733 |   | 53,926 |   | 52,875 |   | 44,262 |   |
| Earnings per  share fully diluted    |   | **$**                                        | **1.72**    | ** ** | $ | 0.75 |   | $ | 0.80 |   | $ | 0.70 |   | $ | 0.53 |   |
| Cash dividends  paid per share       |   | **$**                                        | **0.46**    | ** ** | $ | 0.32 |   | $ | 0.26 |   | $ | 0.21 |   | $ | 0.12 |   |

 
|                                                                                      |   | **At or For  the Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
| **Key Operating Ratios:**                                                                 |   | **2002**                                   | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** |
| Performance  Ratios:(2)                                                                   |   |                                       | ** ** |   |   |   |   |   |   |   |   |
| Return on  average assets                                                                 |   | **1.53**                                   | **%**      | 0.81 | % | 1.09 | % | 1.28 | % | 1.45 | % |
| Return on  average equity                                                                 |   | **17.13**                                  | **%**      | 7.92 | % | 9.61 | % | 8.44 | % | 6.39 | % |
| Average  interest-earning assets to average interest-bearing liabilities                  |   | **112.19**                                 | **%**      | 114.92 | % | 117.83 | % | 125.65 | % | 139.98 | % |
| Interest rate  spread(3)                                                                  |   | **3.07**                                   | **%**      | 2.50 | % | 2.22 | % | 2.60 | % | 2.93 | % |
| Net interest  margin(3)                                                                   |   | **3.45**                                   | **%**      | 3.10 | % | 2.99 | % | 3.50 | % | 4.13 | % |
| Non-interest  expenses, exclusive of amortization of intangible assets, to average assets |   | **4.72**                                   | **%**      | 3.39 | % | 1.85 | % | 1.93 | % | 1.76 | % |
| Asset Quality  Ratios:                                                                    |   |                                       | ** ** |   |   |   |   |   |   |   |   |
| Non-accruing  assets to total assets at end of period(4)                                  |   | **0.39**                                   | **%**      | 0.27 | % | 0.20 | % | 0.30 | % | 0.45 | % |
| Allowance for  loan losses to non-accruing loans at end of period                         |   | **131.20**                                 | **%**      | 132.78 | % | 149.74 | % | 114.40 | % | 102.37 | % |
| Allowance for  loan losses to total loans at end of period(5)                             |   | **0.44**                                   | **%**      | 0.50 | % | 0.49 | % | 0.65 | % | 1.07 | % |
| Capital Ratios:                                                                           |   |                                       | ** ** |   |   |   |   |   |   |   |   |
| Average equity  to average assets                                                         |   | **8.92**                                   | **%**      | 10.21 | % | 11.35 | % | 15.17 | % | 22.64 | % |
| Tangible equity  to assets at end of period                                               |   | **7.93**                                   | **%**      | 8.28 | % | 10.09 | % | 13.01 | % | 16.84 | % |
| Total capital to  risk-weighted assets                                                    |   | **14.92**                                  | **%**      | 14.41 | % | 18.77 | % | 25.58 | % | 35.93 | % |

 

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*(1)**  Consists of excess of cost overfair value of net assets acquired (“goodwill”), core deposit intangibles andloan servicing assets which amounted to $53.1 million, $1.9 million and $2.9million, respectively, at December 31, 2002.*

*(2)**  With the exception of end ofperiod ratios, all ratios are based on average daily balances during the respectiveperiods.*

*(3)**  Interest rate spread representsthe difference between the weighted average yield on interest-earning assetsand the weighted average cost of interest-bearing liabilities; net interestmargin represents net interest income as a percentage of averageinterest-earning assets.*

*(4)**  Non-accruing assets consist ofnon-accrual loans and real estate acquired through foreclosure or bydeed-in-lieu thereof.*

*(5)**  Calculated on the basis of totalloans including loans held for sale.*

 

9

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Staten Island Bancorp, Inc. & Susidiary

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

The following discussion is intended to assist in understanding thefinancial condition and results of operations of Staten Island Bancorp, Inc.The information contained in this section should be read in conjunction withthe Consolidated Financial Statements and the accompanying Notes toConsolidated Financial Statements and the other sections contained in thisAnnual Report.

 

The Company is a unitary savings and loan holding company. TheCompany’s financial condition and results of operations are dependent primarilyon the operations of its wholly owned Federally chartered savings banksubsidiary, SI Bank & Trust (the “Bank”) and the Bank’s wholly ownedmortgage bank subsidiary, SIB Mortgage Corp. (the “Mortgage Company”).

 

The Company’s results of operations depend primarily on its netinterest income, which is the difference between interest income oninterest-earning assets and interest expense on interest-bearing liabilities.The Company’s results of operations also are affected by the provision orbenefit for loan losses, the level of its non-interest income, the largestportion of which is composed of gains on the sales of loans by the MortgageCompany and expenses and income tax expense.

 

**FORWARD-LOOKING STATEMENTS**

 

In addition to historical information, the Annual Report includescertain “forward-looking statements” based on current management expectations.The Company’s actual results could differ materially, as defined in theSecurities Act of 1933 and the Securities Exchange Act of 1934, from thosemanagement expectations. Such forward-looking statements include statementsregarding our intentions, beliefs or current expectations as well as theassumptions on which such statements are based. Stockholders and potentialstockholders are cautioned that any such forward-looking statements are notguarantees of future performance and involve risks and uncertainties, and thatactual results may differ materially from those contemplated by suchforward-looking statements. Factors that could cause future results to varyfrom current management expectations include, but are not limited to, general economicconditions, legislative and regulatory changes, monetary and fiscal policies ofthe federal government, changes in tax policies, rates and regulations offederal, state and local tax authorities, changes in interest rates, depositflows, the cost of funds, demand for loan products, demand for financialservices, competition, changes in the quality or composition of the Company’sloan and investment portfolios, changes in accounting principles, policies orguidelines and other economic, competitive, governmental and technologicalfactors affecting the Company’s operations, markets, products, services andfees.

 

The Company undertakes no obligation to update or revise anyforward-looking statements to reflect changed assumptions, the occurrence ofunanticipated events or changes to future operating results over time.

 

**Asset and Liability Management.**The principal goal of the Company’s interest rate risk management is tominimize the potential of adverse effects of material and prolonged increasesor decreases in interest rates on the Company’s results of operations. TheCompany evaluates the inherent interest rate risk in certain balance sheetaccounts in an effort to determine the acceptable level of interest rate riskexposure based on the Company’s business plan, operating environment, capital,liquidity requirements and performance objectives. The Board of Directors setslimits for earnings at risk and the net portfolio value (“NPV”) ratio in orderto reduce the potential vulnerability of the Company’s operations to changes ininterest rates. The Company’s Asset and Liability Management Committee (“ALCO”)is comprised of members of the Company’s management under the direction of theBoard of Directors. The purpose of the ALCO is to coordinate asset and liabilitymanagement consistent with the Company’s business plan and Board-approvedpolicies and limits. The ALCO establishes and monitors the volume and mix ofassets and funding sources, taking into account relative costs and spreads,interest rate sensitivity and liquidity needs. The objectives are to manageassets and funding sources to produce results that are consistent withliquidity, capital adequacy, growth, risk and profitability goals. The ALCOgenerally meets on a monthly basis to review, among other things, economicconditions and interest rate outlook, current and projected liquidity needs andcapital positions, anticipated changes in the volume and mix of assets andliabilities and interest rate risk exposure limits compared to current projectionspursuant to “gap analysis” and income simulations. At each meeting, the ALCOrecommends appropriate strategy changes based on such reviews, which are thenreported to the Board of Directors.

 

**Market Risk.** TheCompany’s primary market risk is interest rate volatility due to the potentialimpact on net interest income and gains on sales of mortgage loans or mortgagebanking results and the market value of all interest-earning assets andinterest-bearing liabilities. The Company is not subject to foreign exchange orcommodity price risk, and the Company does not own any trading assets. The realestate loan portfolio of the Company is concentrated primarily within the NewYork metropolitan area, making it subject to the risks associated with thelocal economy.

 

10

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**Interest Rate Sensitivity.**Interest rate sensitivity is a measure of the difference between amounts ofinterest-earning assets and interest-bearing liabilities which either repriceor mature within a given period of time. The difference, or the interest raterepricing “gap,” provides an indication of the extent by which an institution’sinterest rate spread will be affected by changes in interest rates. A gap isconsidered positive when the amount of interest-rate sensitive assets exceedsthe amount of interest-rate sensitive liabilities and is considered negativewhen the amount of interest-rate sensitive liabilities exceeds the amount ofinterest-rate sensitive assets. Generally, during a period of rising interestrates, a negative gap within shorter maturities would adversely affect netinterest income, while a positive gap within shorter maturities would result inan increase in net interest income. During a period of falling interest rates,a negative gap within shorter maturities would result in an increase in netinterest income while a positive gap within shorter maturities would have theopposite effect. As of December 31, 2002, the ratio of the Company’s one-yearinterest rate gap to total assets was a positive 13.7% and its ratio ofinterest-earning assets to interest-bearing liabilities maturing or repricingwithin one year was 135.0%. The one-year interest rate gap was a positive 10.7%and the ratio of interest-earning assets to interest-bearing liabilitiesmaturing or repricing in one year was 130.9% at December 31, 2001.

 

The static gap analysis alone is not a complete representation ofinterest rate risk since it fails to account for changes in prepayment speedson the Company’s loan and investment portfolios in different rate environmentsand does not address the extent to which rates on assets or liabilities maychange or reprice. The behavior of deposit balances will also vary with changesin the customer mix, management’s pricing strategies and changes in the generallevel of interest rates. The level of loan originations will also vary due tointerest rate changes. Thus, gap analysis does not provide a comprehensivepresentation of the possible risks to income embedded in the balance sheet,customer structure and various management strategies.

 

To measure earnings at risk, the Company makes extensive use of anearnings simulation model in the formation of its interest rate risk managementstrategies. The model uses management assumptions concerning the repricing ofassets and liabilities as well as business volumes projected under a variety ofinterest rate scenarios. These scenarios incorporate interest rate increases of200 basis points and decreases of 100 basis points over a twelve-month period.

 

Management’s assumptions for prepayments in the loan portfolio andpricing of the Company’s deposit products are based on management’s review ofpast behavior of the Company’s depositors and borrowers in response to changesin both general market interest rates and rates offered by the Bank. Theseassumptions represent management’s estimates and do not necessarily reflectactual results.

 

At December 31, 2002, based on this model, the Company’s potentialearnings at risk due to a gradual 200 basis point rise or a gradual 100 basispoint decline in market interest rates over the next twelve months was a 14.5%decrease in projected net income for the year 2003 in a rising rateenvironment, and a 55.6% increase in projected net income for the year 2003 ina declining rate environment. The change in earnings in the different rateenvironments is primarily due to the projected change in the level of loanoriginations at SIB Mortgage Corp. and the change in spreads on loan sales inthe different rate environments.

 

Management has included all financial instruments and assumptions whichare expected to have a material effect in calculating the Company’s potentialnet income. These measures of risk represent the Company’s exposure to interestrate movements at a particular point in time. The ALCO monitors the Company’srisk profile on a quarterly basis, or as needed, to monitor the potentialeffects of movements in interest rates and other issues which may impact theCompany’s liquidity or earnings.

 

11

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The following table summarizes the anticipated maturities or repricingof the Company’s interest-earning assets and interest-bearing liabilities as ofDecember 31, 2002, based on the information and assumptions set forth in thenotes below.

 
|                                                                                                                    |   | **Within  Three  Months** |      | **More than  Three Months to  Twelve Months** |   | **More than  One Year to  Three Years** |   | **More than  Three Years to  Five Years** |    | **Over Five  Years** |   | **Total** |    |
|-------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|-----------|-----------------------------------------------|--------|-----------------------------------------|--------|-------------------------------------------|---------|----------------------|--------|-----------|---------|
|                                                                                                                    |   | **(000’s  omitted)** |      |
| Interest-earning  assets:                                                                                               |   |                      |      |                                          |   |                                    |   |                                      |    |                 |   |      |    |
| Loans  receivable:(1)(2)                                                                                                |   |                      |      |                                          |   |                                    |   |                                      |    |                 |   |      |    |
| Mortgage loans:                                                                                                         |   |                      |      |                                          |   |                                    |   |                                      |    |                 |   |      |    |
| Fixed rate                                                                                                              |   | $                         | 187,241   |                                          | $      | 419,407                                 |   | $                                         | 530,345 |                 | $      | 191,825   |    | $ | 199,652 |   | $ | 1,528,470 |   |
| Adjustable rate                                                                                                         |   | 1,920,909                 |      | 435,581                                       |   | 635,706                                 |   | 267,944                                   |    | 205,309              |   | 3,465,449 |    |
| Other loans                                                                                                             |   | 11,142                    |      | 29,611                                        |   | 25,504                                  |   | 13,363                                    |    | 23,217               |   | 102,837   |    |
| Securities                                                                                                              |   |                      |      |                                          |   |                                    |   |                                      |    |                 |   |      |    |
| Non-mortgage(3)                                                                                                         |   | 66,115                    |      | 1,888                                         |   | 24,941                                  |   | 23,381                                    |    | 167,456              |   | 283,781   |    |
| Mortgage-backed  fixed rate (4)                                                                                         |   | 113,766                   |      | 179,701                                       |   | 200,221                                 |   | 49,371                                    |    | 22,038               |   | 565,097   |    |
| Mortgage-backed  adjustable rate(4)                                                                                     |   | 20,550                    |      | 46,776                                        |   | 54,834                                  |   | 27,238                                    |    | 5,191                |   | 154,589   |    |
| Other  interest-earning assets                                                                                          |   | 237,000                   |      | —                                        |   | —                                  |   | —                                    |    | —               |   | 237,000   |    |
| Total  interest-earning assets                                                                                          |   | 2,556,723                 |      | 1,112,964                                     |   | 1,471,551                               |   | 573,122                                   |    | 622,863              |   | 6,337,223 |    |
| Interest-bearing  liabilities:                                                                                          |   |                      |      |                                          |   |                                    |   |                                      |    |                 |   |      |    |
| Deposits                                                                                                                |   |                      |      |                                          |   |                                    |   |                                      |    |                 |   |      |    |
| NOW/escrow  accounts(5)                                                                                                 |   | 31,202                    |      | 87,287                                        |   | 39,498                                  |   | —                                    |    | —               |   | 157,987   |    |
| Savings  accounts(5)                                                                                                    |   | 96,733                    |      | 290,200                                       |   | 355,561                                 |   | 94,120                                    |    | 209,153              |   | 1,045,767 |    |
| Money market deposit  accounts(5)                                                                                       |   | 126,213                   |      | 378,638                                       |   | 134,186                                 |   | —                                    |    | —               |   | 639,037   |    |
| Certificates of  deposit                                                                                                |   | 319,976                   |      | 391,168                                       |   | 237,988                                 |   | 154,848                                   |    | 1,390                |   | 1,105,370 |    |
| Borrowings                                                                                                              |   | 109,227                   |      | 887,610                                       |   | 981,260                                 |   | 235,800                                   |    | 543,030              |   | 2,756,927 |    |
| Total  interest-bearing liabilities                                                                                     |   | 683,351                   |      | 2,034,903                                     |   | 1,748,493                               |   | 484,768                                   |    | 753,573              |   | 5,705,088 |    |
| Excess  (deficiency) of interest-earning assets over interest-bearing liabilities                                       |   | 1,873,372                 |      | (921,939                                      | )      | (276,942                                | )      | 88,354                                    |    | (130,710             | )      | $         | 632,135 |   |
| Cumulative  excess (deficiency) of interest-earning assets over interest-bearing  liabilities                           |   | $                         | 1,873,372 |                                          | $      | 951,433                                 |   | $                                         | 674,491 |                 | $      | 762,845   |    | $ | 632,135 |   |   |   |
| Cumulative  excess (deficiency) of interest-earning assets over interest-bearing  liabilities as a percentage of assets |   | 27.01                     | %         | 13.72                                         | %      | 9.73                                    | %      | 11.00                                     | %       | 9.12                 | %      |      |    |

 

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*(1)**       Adjustable-rate loans areincluded in the period in which interest rates are next scheduled to adjustrather than in the period in which they are due. Fixed-rate loans are includedin the periods in which they are scheduled to be repaid, based on scheduledamortization, as adjusted to take into account estimated prepayments in thecurrent rate environment. Loans held for sale are included in the time periodthey are expected to be sold.*

*(2)**       Balances have been reducedfor non-accruing loans, which amounted to $17.4 million at December 31, 2002.*

*(3)**       Based on contractualmaturities.*

*(4)**       Reflects estimatedprepayments in the current interest rate environment.*

*(5)**       Although the Company’s NOWaccounts, passbook savings accounts and money market deposit accounts aresubject to immediate withdrawal, management considers a substantial amount ofsuch accounts to be core deposits having significantly longer effectivematurities. The decay rates used on these accounts are based on management’sestimates based on experience and should not be regarded as indicative of theactual withdrawals that may be experienced by the Company. If all of theCompany’s NOW accounts, passbook savings accounts and money market depositaccounts had been assumed to be subject to repricing within one year,interest-earning assets which were estimated to mature or reprice within oneyear would have exceeded interest-bearing liabilities with comparablecharacteristics by $118.9 million or 1.71% of total assets.*

 

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Certain assumptions are contained in the previous table which affectthe presentation therein. Although certain assets and liabilities may havesimilar maturities or periods of repricing, they may react in different degreesto changes in market interest rates. The interest rates on certain types ofassets and liabilities may fluctuate in advance of changes in market interestrates, while interest rates of other types of assets and liabilities lag behindchanges in market interest rates. Certain assets, such as adjustable-ratemortgage loans, have features which restrict changes in interest rates on ashort-term basis and over the life of the asset. In the event of a change ininterest rates, prepayment and early withdrawal levels would likely deviatesignificantly from those assumed in calculating the table.

 

**CRITICAL ACCOUNTING POLICIES**

 

**Accounting for Possible Loan Losses.**The Company calculates its allowance for loan losses in accordance with Statementof Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS5”). This accounting standard is used to determine the allowance associatedwith large groups of smaller balance homogeneous loans that are collectivelyevaluated for probable estimated losses. The allowance for loan lossesrepresents management’s estimate of probable but unconfirmed losses in the loanportfolio as of the date of the financial statements.

 

SFAS 114, “Accounting by Creditors for Impairment of a Loan,” providesguidelines for determining and measuring impairment in loans. For each loanthat we determine to be impaired, impairment is measured as the amount by whichthe carrying balance of the loan, including all accrued interest and negativeescrow balances, exceeds the estimate of fair value. A specific reserve isestablished on all impaired loans within the allowance for loan losses.Generally, we consider non-accrual loans to be impaired loans.

 

In determining the adequacy of the allowance for loan losses for theCompany’s loan portfolio, management completes a general valuation allowance(“GVA”) analysis prior to the end of each quarterly reporting period. The GVAanalysis stratifies the Company’s commercial and consumer loan portfolios. Eachcategory is further segregated into various risk rating categories.Percentages, which consider chargeoffs over the past twenty-four months, areapplied to the resulting risk-rated categories.

 

All other loans that do not have specific reserves assigned also havereserves assigned based on historical loss percentages and the resultingrisk-rated categories within each loan portfolio. Management combines theresults of the GVA analysis with judgments concerning macroeconomic conditionsand portfolio concentrations to determine the appropriate level of theallowance for loan losses.

 

Due to inherent limitations in using modeling techniques and GVApercentages, the Company also maintains an unallocated reserve. This reserveaddresses short-term changes in the Company’s loan products and portfoliogrowth in addition to changes in the macroeconomic environment and otherfactors affecting the portfolio as a whole. At the end of each quarter,management determines the adequacy of the unallocated reserve to address theserisks. The allowance for loan losses is reviewed and approved by the Company’sBoard of Directors on a quarterly basis.

 

**Investment Securities.**The Company has investments in both private issuers and government-sponsoredagencies. The Company’s investments are primarily mortgage-backed securitiesand debt issues. The Company’s investments are carried at fair value based onquoted market prices with changes in fair value recorded through the “othercomprehensive income” component of stockholders’ equity.

 

Declines in the fair value of securities available for sale arereviewed to determine if they are other than temporary in nature. Declines invalue that are judged other than temporary in nature are recognized in theconsolidated statements of income. The Company’s policy is to treat a declinein the investment’s quoted market price exceeding 20% that has lasted for morethan six months as an other than temporary decline in value and reflect thedecline in value in current earnings.

 

**Derivative Financial Instruments.**On January 1, 2001, the Company adopted SFAS 133, “Accounting for DerivativeInstruments and Hedging Activities,” (“SFAS 133”) which defines forward salecommitments as derivative financial instruments. In accordance with SFAS 133,derivative financial instruments are recognized in the consolidated statementof financial condition at fair value while changes in the fair value arerecognized in the consolidated statement of income.

 

Prior to June 30, 2002, the Mortgage Company accounted forinterest-rate locked mortgage loan commitments as off-balance sheet financialinstruments. On March 13, 2002, the FASB cleared Implementation Issue C13(“Issue C13”), which offers clear guidance on the circumstances in which a loancommitment must be included in the scope of SFAS 133 and thus be accounted foras a derivative instrument. Upon the issuance of Issue C13 by the FASB, theCompany identified certain commitments that should be accounted for asderivative instruments in accordance with SFAS 133. The fair value of loancommitments and forward sale commitments are determined based upon availablemarket information. The effective date of the implementation guidance in IssueC13 for the Company was July 1, 2002, when the effects of initially complyingwith the guidance was reported as a change of accounting principle. Thecumulative effect, net of tax, of the Company’s adoption of Issue C13 was a$4.7 million increase in net income in the year ended December 31, 2002. Seealso Note 7 of the Notes to Consolidated Financial Statements includedelsewhere herein.

 

13

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**CHANGES IN FINANCIAL CONDITION**

** **

**General.** TheCompany had total assets of $6.9 billion at December 31, 2002, and $6.0 billionat December 31, 2001. The asset growth of $930.0 million, or 15.5%, in 2002 wasdriven by a record level of new originations of residential single-familymortgage loans. Loans, net, in the Bank’s portfolio increased $615.9 millionfrom $2.8 billion at December 31, 2001, to $3.4 billion at December 31, 2002.Loans held for sale increased by $544.3 million from $1.2 billion at December31, 2001, to $1.7 billion at December 31, 2002. Federal funds sold alsoincreased $199.0 million to $237.0 million at December 31, 2002, from $38.0million at December 31, 2001. These increases were partially offset by a $514.3million reduction in securities available for sale, which helped fund the loangrowth. Additional funding sources for the Company’s asset growth during 2002included a $562.8 million increase in deposits and a $305.2 million increase inborrowed funds.

 

**Cash and Cash Equivalents.**Cash and cash equivalents, which consists of cash and due from banks, moneymarket accounts, other interest-bearing deposits and federal funds sold,amounted to an aggregate of $374.1 million at December 31, 2002 compared to$154.8 million at December 31, 2001. The primary cause of this overall increasewas a $199.0 million increase in federal funds sold from $38.0 million atDecember 31, 2001 to $237.0 million at December 31, 2002. The increase infederal funds sold was due to the increased cash flow requirements of theMortgage Company, which were necessary to support the record level of new loanoriginations.

 

**Loans.** TheCompany’s net loan portfolio increased by $615.9 million during the year endedDecember 31, 2002. The increase was due to record loan originations of $9.8billion, of which $8.6 billion were originations by the Mortgage Company. Theoriginations were partially offset by loan sales of $7.9 billion, of which $7.7billion were loan sales at the Mortgage Company. The Bank also had loan salesof $203.4 million during 2002, which consisted primarily of new loanoriginations with longer terms and fixed rates of interest. During 2002, theBank also retained for its own portfolio $669.8 million in relatively higheryielding adjustable-rate mortgage loans originated by the Mortgage Company.Similarly, loans held for sale increased by $544.3 million during 2002. Loandemand continued to be primarily for one-to-four family residential loans;however, the Bank also had $256.6 million in commercial real estate,multi-family residential and construction loan originations in 2002. The recordgrowth in loan originations was driven by the continuing low interest rate environmentresulting in a record number of refinance transactions and, to a lesser extent,the geographic expansion of the Mortgage Company into 15 additional states in2001 and the opening of 19 new offices in 2002. During 2002 and 2001, the Bankcontinued its business development efforts designed to increase residentialloan originations by working closely with local mortgage brokers, expanding itsproduct mix and providing excellent customer service. The Company alsocontinued to increase the level of its commercial lending efforts in the Stateof New Jersey as well as the Bank’s market area in Staten Island and Brooklyn.

 

**Securities.** TheCompany’s securities, including the Bank’s investment in Federal Home Loan Bank(“FHLB”) of New York stock, amounted to an aggregate of $1.0 billion, or 14.8%of assets, at December 31, 2002 compared to $1.5 billion, or 25.5% of assets,at December 31, 2001. The decrease of $505.1 million, or 33.0%, during 2002 wasdue to amortization, prepayments and maturities of $692.8 million andsecurities sales of $362.0 million. This decrease was partially offset bysecurities purchases of $551.8 million during the year ended December 31, 2002,of which $409.5 million were mortgage-backed securities and collateralizedmortgage obligations (“CMOs”) issued by U.S. government agencies. The netdecrease in the securities portfolio was due to increased paydowns onamortizing securities due to the current interest rate environment andsecurities sales, which were designed in part to restructure the Company’sportfolio to reduce exposure to prepayment risk, to generate funding for loanoriginations and to improve the overall credit quality of the Company’sinvestment portfolio. Other than its investment in FHLB stock, all of theCompany’s securities were classified as available for sale at both December 31,2002 and 2001.

 

**Deposits.** Depositsincreased $562.8 million or 19.4% to $3.5 billion at December 31, 2002 comparedto $2.9 billion at December 31, 2001. The increase was due to an increase of $288.5million in money market accounts, an increase of $177.7 million in savingsaccounts, an increase of $56.0 million in demand deposits, an increase of $21.5million in retail certificates of deposit and an increase of $19.1 million inNOW accounts. The increase in deposits during 2002 was due to growth in ourmarkets of New Jersey and Brooklyn, New York as well as the movement of fundsfrom the equity markets into federally insured bank deposits. The growth ofdeposits also was driven by the promotion of a money market account linked to anon-interest checking account and the opening of four de novo branches in theState of New Jersey during 2002. These branches had aggregate deposit balancesof $79.2 million at December 31, 2002. Deposits in our original market ofStaten Island grew by 12% in 2002, which we attribute primarily to an increasein customers seeking locally based financial institutions upon the acquisitionof certain local banks by larger institutions as well as the previouslymentioned movement of funds out of the equity markets.

 

Core deposits, which consist of savings, money market, NOW and demanddeposits, totaled $2.4 billion, or 68.1% of deposits at December 31, 2002,compared to $1.8 billion, or 62.6% of total deposits at December 31, 2001. TheCompany continued to expand its business development efforts in 2002 in orderto continue to attract commercial business relationships. The Company believesthat its business development efforts, along with quality customer service,will enable the Bank to maintain its high ratio of demand deposits and strongcore deposit base.

 

**Borrowed Funds.** TheCompany’s borrowings at December 31, 2002, were $2.8 billion or 39.8% ofassets, compared to $2.5 billion or 40.8% of assets, at December 31, 2001, whichrepresents an increase of $305.2 million, or 12.4%. The Company utilizedborrowings in 2002 primarily to fund the growth of higher yielding loans heldfor sale at the Mortgage Company. The borrowings consist of repurchaseagreements with the FHLB and nationally recognized brokerage firms, advancesfrom the FHLB, which are

 

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secured by the one-to-four family residential loans, overnight lines ofcredit with two national banks and a secured line of credit with aninternational bank. Presently, the Company intends to reduce the utilization ofborrowings to fund long-term asset growth and to increase its emphasis ontraditional sources of funding such as deposit growth.

 

**Stockholders’ Equity.**Stockholders’ equity amounted to $614.3 million at December 31, 2002 comparedto $563.8 million at December 31, 2001, or 8.9% and 9.4% of total assets atsuch respective dates. The increase of $50.5 million in stockholders’ equityduring 2002 was due to net income of $100.4 million, an allocation of ESOP andRecognition and Retention Plan (“RRP”) shares resulting in an increase of $17.8million, the exercise of 902,438 stock options resulting in an increase of$10.2 million, an increase of $6.2 million due to variable plan accounting forthe Company’s stock option plan and an increase of $1.8 million in theunrealized appreciation on securities available for sale, net of taxes. Theseincreases were partially offset by the repurchase of 3.1 million shares of theCompany’s common stock at an aggregate cost of $60.2 million, or $19.28 pershare, as the Company continued its stock repurchase program which has resultedin a total of 31.2 million shares of common stock for treasury at an aggregatecost of $352.8 million and aggregate cash dividend payments of $25.8 millionduring the year ended December 31, 2002. The tangible book value per share was$9.23 at December 31, 2002, compared to $8.08 at December 31, 2001.

 

**AVERAGE BALANCES, NET INTERESTINCOME, YIELDS EARNED AND RATES PAID**

 

The following table sets forth, for the periods indicated, informationregarding (i) the total dollar amount of interest income from interest-earningassets and the resulting average yields; (ii) the total dollar amount ofinterest expense on interest-bearing liabilities and the resulting averagerate; (iii) net interest income; (iv) interest rate spread; and (v) netinterest margin. Information is based on average daily balances during theindicated periods.

 
|                                                                              |   | **For the  Year Ended December 31,** |          |
|-----------------------------------------------------------------------------------|--------|--------------------------------------|---------------|
|                                                                              |   | **2002**                             |          | **2001** |   | **2000** |   |
|                                                                              |   | **Average  Balance**                 |          | **Interest** |   | **Average  Yield/Cost** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/Cost** |   | **Average  Balance** |   | **Average  Interest** |   | **Average  Yield/Cost** |   |
|                                                                              |   | **(000’s  omitted)**            |          |
| Interest-earning assets:                                                          |   |                                 |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                               |   |                                 |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate loans                                                                 |   | **$**                                | **4,394,114** | ** ** | **$** | **302,936** | ** ** | **6.89** | **%** | $ | 3,366,083 |   | $ | 248,875 |   | 7.39 | % | $ | 2,540,580 |   | $ | 194,128 |   | 7.64 | % |
| Other loans                                                                       |   | **106,781**                          | ** **    | **8,699** | ** ** | **8.15** | ** ** | 115,454 |   | 10,537 |   | 9.13 |   | 107,699 |   | 10,426 |   | 9.68 |   |
| Total loans                                                                       |   | **4,500,895**                        | ** **    | **311,635** | ** ** | **6.92** | ** ** | 3,481,537 |   | 259,412 |   | 7.45 |   | 2,648,279 |   | 204,554 |   | 7.72 |   |
| Securities(2)                                                                     |   | **1,450,722**                        | ** **    | **84,059** | ** ** | **5.79** | ** ** | 1,722,506 |   | 112,466 |   | 6.53 |   | 2,025,188 |   | 137,848 |   | 6.81 |   |
| Other interest-earning assets(3)                                                  |   | **96,362**                           | ** **    | **1,438** | ** ** | **1.49** | ** ** | 43,065 |   | 1,105 |   | 2.57 |   | 25,743 |   | 1,402 |   | 5.44 |   |
| Total interest-earning assets                                                     |   | **6,047,979**                        | ** **    | **397,132** | ** ** | **6.57** | ** ** | 5,247,108 |   | 372,983 |   | 7.11 |   | 4,699,210 |   | 343,804 |   | 7.32 |   |
| Non-interest-earning assets                                                       |   | **519,271**                          | ** **    |   |   |   | ** ** | 406,711 |   |   |   |   |   | 244,255 |   |   |   |   |   |
| Total assets                                                                      |   | **$**                                | **6,567,250** | ** ** |   | ** ** |   | ** ** | $ | 5,653,819 |   |   |   |   |   | $ | 4,943,465 |   |   |   |   |   |
| Interest-bearing liabilities:                                                     |   |                                 | ** **    |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                         |   |                                 | ** **    |   | ** ** |   | ** ** |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW and money market accounts                                                     |   | **$**                                | **644,567**   | ** ** | **16,280** | ** ** | **2.53** | **%** | $ | 330,278 |   | 10,309 |   | 3.12 | % | $ | 219,087 |   | 5,960 |   | 2.72 | % |
| Savings and escrow accounts                                                       |   | **1,000,455**                        | ** **    | **17,437** | ** ** | **1.74** | ** ** | 817,890 |   | 17,811 |   | 2.18 |   | 793,908 |   | 19,488 |   | 2.45 |   |
| Certificates of deposit                                                           |   | **1,116,366**                        | ** **    | **39,008** | ** ** | **3.49** | ** ** | 1,017,634 |   | 53,071 |   | 5.22 |   | 827,504 |   | 44,781 |   | 5.41 |   |
| Total                                                                             |   | **2,761,388**                        | ** **    | **72,725** | ** ** | **2.63** | ** ** | 2,165,802 |   | 81,191 |   | 3.75 |   | 1,840,499 |   | 70,229 |   | 3.82 |   |
| Total borrowings                                                                  |   | **2,629,271**                        | ** **    | **115,889** | ** ** | **4.41** | ** ** | 2,399,963 |   | 129,387 |   | 5.39 |   | 2,147,718 |   | 132,891 |   | 6.19 |   |
| Total interest-bearing liabilities                                                |   | **5,390,659**                        | ** **    | **188,614** | ** ** | **3.50** | ** ** | 4,565,765 |   | 210,578 |   | 4.61 |   | 3,988,217 |   | 203,120 |   | 5.09 |   |
| Non-interest-bearing liabilities(4)                                               |   | **590,589**                          | ** **    |   | ** ** |   | ** ** | 510,692 |   |   |   |   |   | 394,180 |   |   |   |   |   |
| Total liabilities                                                                 |   | **5,981,248**                        | ** **    |   | ** ** |   | ** ** | 5,076,457 |   |   |   |   |   | 4,382,397 |   |   |   |   |   |
| Stockholders’ equity                                                         |   | **586,002**                          | ** **    |   | ** ** |   | ** ** | 577,362 |   |   |   |   |   | 561,068 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |   | **$**                                | **6,567,250** | ** ** |   | ** ** |   | ** ** | $ | 5,653,819 |   |   |   |   |   | $ | 4,943,465 |   |   |   |   |   |
| Net interest-earning assets                                                       |   | **$**                                | **657,320**   | ** ** |   | ** ** |   | ** ** | $ | 681,343 |   |   |   |   |   | $ | 710,993 |   |   |   |   |   |
| Net interest income/interest rate spread                                          |   |                                 |          | **$** | **208,518** | ** ** | **3.07** | **%** |   |   | $ | 162,405 |   | 2.50 | % |   |   | $ | 140,684 |   | 2.22 | % |
| Net interest margin                                                               |   |                                 |          |   |   | **3.45** | **%** |   |   |   |   | 3.10 | % |   |   |   |   | 2.99 | % |
| Ratio of average interest-earning assets to average interest-bearing  liabilities |   |                                 |          |   |   | **112.19** | **%** |   |   |   |   | 114.92 | % |   |   |   |   | 117.83 | % |

 

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*(1)**       The average balance ofloans receivable includes non-accruing loans, interest on which is recognizedon a cash basis, and loans held for sale.*

*(2)**       Securities include theBank’s investment in FHLB of New York stock.*

*(3)**       Includes money marketaccounts, federal funds sold and interest-earning bank deposits.*

*(4)**       Consists primarily ofdemand deposit accounts.*

 

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**RATE/VOLUME ANALYSIS**

 

The following table sets forth the effects of changing rates andvolumes on net interest income of the Company. Information is provided withrespect to (i) effects on interest income attributable to changes in volume(changes in volume multiplied by prior rate) and (ii) effects on interestincome attributable to changes in rate (changes in rate multiplied by priorvolume). The change in interest due to both volume and rate has been allocatedproportionately between volume and rate based on the absolute dollar amounts ofthe change in each.

 
|                                |   | **2002  Compared to 2001** |        | **2001  Compared to 2000** |       |
|-------------------------------------|--------|----------------------------|-------------|----------------------------|------------|
|                                |   | **Change Due  to**         |        | **Change Due  to**         |       |
|                                |   | **Rate**                   |        | **Volume**                 |       | **Total** |   | **Rate** |   | **Volume** |   | **Total** |   |
|                                |   | **(000’s  omitted)**  |        |
| Interest-Earning  Assets:           |   |                       |        |                       |       |   |   |   |   |   |   |   |   |
| Loans  Receivable:                  |   |                       |        |                       |       |   |   |   |   |   |   |   |   |
| Real estate  loans                  |   | **$**                      | **(17,743** | **)**                      | **$**      | **71,804** | ** ** | **$** | **54,061** | ** ** | $ | (6,473 | ) | $ | 61,220 |   | $ | 54,747 |   |
| Other loans                         |   | **(1,081**                 | **)**       | **(757**                   | **)**      | **(1,838** | **)** | (616 | ) | 727 |   | 111 |   |
| Total loans                         |   | **(18,824**                | **)**       | **71,047**                 | ** ** | **52,223** | ** ** | (7,089 | ) | 61,947 |   | 54,858 |   |
| Securities                          |   | **(11,828**                | **)**       | **(16,579**                | **)**      | **(28,407** | **)** | (5,439 | ) | (19,943 | ) | (25,382 | ) |
| Other  interest-earning assets      |   | **(608**                   | **)**       | **941**                    | ** ** | **333** | ** ** | (961 | ) | 664 |   | (297 | ) |
| Total  interest-earning assets      |   | **(31,260**                | **)**       | **55,409**                 | ** ** | **24,149** | ** ** | (13,489 | ) | 42,668 |   | 29,179 |   |
| Interest-Bearing  Liabilities:      |   |                       | ** **  |                       | ** ** |   | ** ** |   |   |   |   |   |   |
| Deposits:                           |   |                       | ** **  |                       | ** ** |   | ** ** |   |   |   |   |   |   |
| NOW and money  market accounts      |   | **(2,280**                 | **)**       | **8,251**                  | ** ** | **5,971** | ** ** | 979 |   | 3,370 |   | 4,349 |   |
| Savings and  escrow accounts        |   | **(3,930**                 | **)**       | **3,556**                  | ** ** | **(374** | **)** | (2,252 | ) | 575 |   | (1,677 | ) |
| Certificates of  deposit            |   | **(18,826**                | **)**       | **4,763**                  | ** ** | **(14,063** | **)** | (1,676 | ) | 9,966 |   | 8,290 |   |
| Total                               |   | **(25,036**                | **)**       | **16,570**                 | ** ** | **(8,466** | **)** | (2,949 | ) | 13,911 |   | 10,962 |   |
| Borrowings                          |   | **(25,086**                | **)**       | **11,588**                 | ** ** | **(13,498** | **)** | (18,153 | ) | 14,649 |   | (3,504 | ) |
| Total  interest-bearing liabilities |   | **(50,122**                | **)**       | **28,158**                 | ** ** | **(21,964** | **)** | (21,102 | ) | 28,560 |   | 7,458 |   |
| Net Change in  Net Interest Income  |   | **$**                      | **18,862**  | ** **                 | **$**      | **27,251** | ** ** | **$** | **46,113** | ** ** | $ | 7,613 |   | $ | 14,108 |   | $ | 21,721 |   |

 

**COMPARISON OF RESULTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001**

 

**General.** TheCompany reported net income of $100.4 million or $1.72, on a diluted per sharebasis for the year ended December 31, 2002, compared to net income of $45.7million, or $0.75, on a diluted per share basis for the year ended December 31,2001. Included in net income for the year ended December 31, 2002, was the $4.7million cumulative effect of the change in accounting for loan commitments, netof taxes. Also included in the Company’s 2002 net income was $7.3 million, netof income taxes, reflecting the increase in the fair value of loan commitments,net of forward sales, and an expense of $3.4 million, net of income taxes,related to the variable plan accounting for the stock option plan for the firstthree quarters of 2002.

 

The $54.6 million increase in net income for the year ended December31, 2002, compared to the year ended December 31, 2001, was primarily due to a$46.1 million increase in net interest income and $159.9 million increase inother income, primarily due to increased gain on loan sales by the MortgageCompany. These increases were partially offset by a $113.2 million increase inother expenses, primarily due to increased commissions at the Mortgage Company,and a $42.8 million increase in the provision for income taxes.

 

The return on average equity and average assets for the year endedDecember 31, 2002, was 17.13% and 1.53%, respectively, compared to 7.92% and0.81% for the year ended December 31, 2001.

 

**Interest Income.**Interest income increased $24.1 million for the year ended December 31, 2002,compared to the year ended December 31, 2001, due to an increase of $52.2million in interest income from loans, which was partially offset by a $28.4million decrease in interest income from securities. The increase in interestincome on loans was primarily due to a $1.0 billion, or 29.3%, increase in theaverage balance of outstanding loans, including loans held for sale. Theincrease in the average balance of loans was due to the record level oforiginations by both the Mortgage Company and the Bank during the year. Thiswas the result of the significant increase in mortgage refinancings, thegeographic expansion of the Mortgage Company, the Bank’s continued businessdevelopment efforts in its market areas and the continued success of itsmortgage broker program. The decrease in interest income on securities wasprimarily due to a $271.8 million decline in the average balance of thesecurities portfolio due to management’s strategy to reinvest a majority of thecash flows generated by the securities portfolio into higher yielding loanoriginations. The lower interest rate environment in 2002 resulted in a declineof 53 basis points in the average yield received on loans to 6.92% for the yearended December 31, 2002, while the average yield on the securities portfoliodeclined 74 basis points to 5.79% for the year ended December 31, 2002,compared to 2001. To mitigate the declining rate environment to some extent, theCompany continues to retain certain higher yielding loans for its own portfoliothat were originated by the Mortgage Company.

 

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**Interest Expense.**The Company recorded interest expense of $188.6 million for the year endedDecember 31, 2002, compared to $210.6 million for the year ended December 31,2001, a decrease of $22.0 million, or 10.4%. The reasons for the decrease werea $14.1 million decrease in interest expense on certificates of deposit and a $13.5million decrease in interest expense on borrowed funds. These decreases werepartially offset by a $6.0 million increase in interest expense on money marketand NOW accounts. The decrease in interest expense on certificates of depositwas due to a 173 basis point decline in the average cost of certificates ofdeposit to 3.49% for 2002. The average balance of certificates of depositincreased $98.7 million in 2002 compared to 2001 primarily due to the growth ofthe Bank’s operations in New Jersey. The decline in the average cost ofcertificates of deposit in 2002 was reflective of the declining interest rateenvironment during the year. The decline in interest expense on borrowed fundswas due to a 98 basis point decline in the average cost of borrowed funds to4.41% for 2002, partially offset by an increase of $229.3 million in theaverage balance of borrowed funds. The decline in the average cost ofborrowings primarily reflects the rollover of borrowings to lower rates due tothe declining interest rate environment in 2002; however, management did takethe opportunity to extend the maturities of certain borrowings in order tomoderate the effects of potential increases in interest charged on borrowingsin the future. The increase in the average balance of borrowed funds was due tothe use of borrowings to fund originations of loans at the Mortgage Company.The increase in interest expense for money market and NOW accounts was due to a$314.3 million, or 95.2%, increase in the average balance of money market andNOW accounts, partly offset by a 59 basis point decrease in the average cost ofmoney market and NOW accounts to 2.53% for the year ended December 31, 2002.The increase in the average balance of money market and NOW accounts in 2002compared to 2001 was due to the continued promotion by the Bank of a new moneymarket product introduced in 2001. In 2003, the Bank plans to continue itsbusiness development efforts and quality service levels in its efforts tomaintain current depositors and also to obtain new deposits. The plannedopening of three new branches in 2003 is also expected to moderate, to acertain extent, the Company’s utilization of borrowed funds.

 

**Net Interest Income.**Net interest income for 2002 was $208.5 million compared to $162.4 million for2001. The increase of $46.1 million, or 28.4%, was due to an increase of $24.1million in interest income and a $22.0 million decrease in interest expense.The increase in interest income was due to an increase of $800.9 million in theaverage balance of interest-earning assets, which was partially offset by a 54basis point decline in the average yield on interest-earning assets to 6.57%for 2002 compared to 7.11% for 2001. The decrease in interest expense was dueto a 111 basis point decline in the average rate of interest-bearingliabilities to 3.50% for 2002 from 4.61% for 2001. The average balance ofinterest-bearing liabilities increased by $824.9 million in 2002 compared to2001, which partially offset the impact of the reduction of the average rate.The net interest rate spread and margin increased to 3.07% and 3.45%,respectively, for the year ended December 31, 2002, from 2.50% and 3.10%,respectively, for the year ended December 31, 2001. Such increases were due tothe rollover of the Company’s interest-bearing liabilities to lower ratesfaster than the repricing of the Company’s assets to lower yields. During 2003,the Company expects to continue to rely on the Mortgage Company to originaterelatively higher yielding loans for retention in the Company’s portfolio as aprimary part of our efforts to maintain the yield on interest-earning assets.In addition, we also plan to closely monitor the repricing of ourinterest-bearing liabilities in our efforts to maintain or reduce the averagecost of interest-bearing liabilities.

 

**Provision for Loan Losses.**The provision for loan losses was $8.9 million for the year ended December 31,2002, compared to a provision of $8.8 million for the year ended December 31,2001. The level of the provision for loan losses in 2002 was due to theincrease in net chargeoffs, increased loan originations resulting in net growthof the loan portfolio at both the Bank and the Mortgage Company and currenteconomic conditions. The $2.8 million net increase in chargeoffs was due to$1.7 million in chargeoffs on loans subsequently transferred to other realestate (“ORE”) owned and $3.2 million in chargeoffs related to mortgage bankingactivities. These activities primarily represent the impairment chargesreflected on loans in non-accrual status prior to their sale at below-marketprices.

 

Non-accruing assets at December 31, 2002, totaled $27.0 million andconsisted of $17.3 million of non-accruing loans and $9.7 million of ORE. AtDecember 31, 2001, non-accruing assets totaled $16.3 million and consisted of$15.1 million of non-accruing loans and $1.2 million of ORE. The Company has acontract with a projected second quarter closing date in place to sell one ofits ORE properties with a carrying value of $4.6 million at no significantloss.

 

The Company’s allowance for loan losses was $22.8 million at December31, 2002, or 131.2% of non-accrual loans at such date, compared to $20.0million at December 31, 2001, or 132.8% of non-accrual loans at such date.While the level of non-accruing loans increased during the year, managementbelieves that the Company’s credit quality remains strong, primarily due to theconcentration of one-to-four family residential mortgage loans in theportfolio, sound credit underwriting standards for new loan originations andproactive procedures in addressing problem and non-accruing loans.

 

**Other Income.** Otherincome increased by $159.9 million, from $113.2 million in 2001 to $273.1million for 2002. The increase was due to a $115.6 million increase in netgains on loan sales, a $14.2 million decrease in net securities losses, a $12.6million increase in loan fees, a $11.6 million increase in the fair marketvalue of loan commitments, net of the fair market value of the forward sales, a$2.6 million increase in service and fee income and a $3.3 million increase inother income.

 

The increase in net gains on loan sales is primarily due to thesignificant increase in loans sold by the Mortgage Company. For the year endedDecember 31, 2002, the volume of loans sold increased to $7.7 billion comparedto $2.9 billion during 2001.

 

The increase in loan fees, which consists primarily of application,appraisal and other fees received in connection with processing loans, was dueto the increased loan origination volumes at both the Bank and the MortgageCompany.

 

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Other income includes $12.5 million related to the increase in fairmarket value (“FMV”) of the Mortgage Company’s rate locked loan commitments,net of the hedging provided by forward sales commitments. The increase in thefair market value of loan commitments, net of hedging activity, reflects thefavorable impact on the FMV of loan commitments at the Mortgage Company during2002 as well as the significant increase in loan origination volume during theyear. See Note 7, “Derivative Financial Instruments” and Note 17, “SegmentReporting,” in the Notes to Consolidated Financial Statements.

 

The increase in service and fee income in 2002 compared to 2001 wasprimarily due to an increase in deposit transaction fees reflecting theincrease in the overall deposit base and the introduction of new products.

 

The increase in other income in 2002 compared to 2001 reflects thereceipt of a one-time liquidating dividend from an investment in the Company’sformer data processing provider.

 

**Other Expenses.**Total other expenses for the year ended December 31, 2002, were $310.3 million,representing an increase of $113.1 million, or 57.4%, compared to total otherexpenses of $197.2 million for the year ended December 31, 2001. In the thirdquarter of 2002, the Company determined that the settlement of certain stockoption exercises triggered the recognition of compensation expense for certainoptions under the Stock Option Plan resulting in compensation expense, which isincluded in personnel costs, of $6.2 million and $27.2 million, respectively,in the years ended December 31, 2002 and 2001. In the third quarter of 2002,the Company discontinued the settlement procedure which required therecognition of compensation expense for the Stock Option Plan. (See Note 23 inthe Notes to Consolidated Financial Statements.) Including the expense forstock options, total other expenses for the year ended December 31, 2002, were$310.3 million compared to $197.2 million for the year ended December 31, 2001.The increase of $113.2 million, or 57.4%, was due to a $6.2 million increase inpersonnel expense, a $77.6 million increase in commission expense, a $3.6million increase in occupancy and equipment expense, an $8.3 million increasein professional fees and an $18.6 million increase in other expenses.Amortization of intangible assets decreased $4.8 million as goodwill was testedand was not considered to be impaired and therefore, was not amortized in 2002.See Note 3 regarding SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

The increase in personnel expense in 2002 compared to 2001 was due toincreased loan origination volumes and expansion at the Mortgage Companyresulting in an increase of $20.9 million, a $3.0 million increase in thenon-cash expense for the ESOP primarily due to the increased market value ofthe Company’s stock and a $1.8 million increase in salaries at the Bank due toexpansion and normal merit increases, which were partially offset by a $21.0million decrease in stock option expense. The increase in commission expensewas due to the increased volumes at the Mortgage Company. The $3.6 millionincrease in occupancy and equipment expense in 2002 was due to expansion at theBank and Mortgage Company resulting in increases of $733,000 and $2.9 million,respectively. The increase in professional fees was primarily due to the use ofcontract employees at the Mortgage Company to handle the increased volumes resultingin an increase of $7.0 million and, to a lesser extent, the increased audit andlegal fees due to the Company’s previously disclosed restatement of earningsfor 2001 and the first three quarters of 2002. The increase in other expensesis primarily due to the increased volumes and expansion at the Mortgage Companyresulting in an increase of $17.5 million and, to a lesser extent, theexpansion at the Bank.

 

**Provision for Income Taxes.**The provision for income taxes was $66.8 million for the year ended December31, 2002, compared to $24.0 million for the year ended December 31, 2001. Theincrease of $42.8 million in the provision for income taxes was due to a $92.7million increase in net income before taxes and an increase in the effectivetax rate from 34.4% for 2001 to 41.1% for 2002. The increase in the effectivetax rate was primarily due to a change in the Company’s mix of businessincluding the volumes of loan originations in states with higher corporate taxrates.

 

**Cumulative Effect of Change in AccountingPrinciple.** In 2002, the cumulative effect, net of tax, of thechange in accounting principle related to treatment of certain rate locked loancommitments issued by the Mortgage Company as derivatives increased net incomeby $4.7 million. See Note 7 of the Notes to the Consolidated FinancialStatements.

 

**COMPARISON OF RESULTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000**

 

**General.** TheCompany reported net income of $45.7 million, or $0.75 on a diluted per sharebasis, for the year ended December 31, 2001, compared to net income of $53.9million, or $0.80 on a diluted per share basis for the year ended December 31,2000.

 

The $8.2 million decrease in net income for the year ended December 31,2001, compared to the year ended December 31, 2000, was primarily due to a$100.4 million increase in other expenses and a $8.1 million increase in theprovision for loan losses. This decrease was partially offset by a $69.7million increase in other income, a $21.7 million increase in net interest incomeand an $8.9 million decrease in the provision for income taxes.

 

**Interest Income.**Interest income increased $29.2 million for the year ended December 31, 2001,compared to the year ended December 31, 2000, due to an increase of $54.9million in interest income from loans partially offset by a $25.4 milliondecrease in interest income from securities. The increase in interest income onloans was due primarily to an $833.3 million, or 31.5%, increase in the averagebalance of loans including loans held for sale. The increase in the averagebalance of loans in 2001 compared to 2000 was due to the increased level oforiginations by both the Mortgage Company and the Bank during the year. Thedecrease in interest income on securities was primarily due to a $302.7 milliondecline in the average balance of the securities portfolio due to management’sstrategy to reinvest a majority of the cash flows generated by the portfoliointo new loan originations. The lower interest rate environment in 2001compared to 2000 resulted in a

 

18

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decline of 27 basis points in the average yield on loans to 7.45% for2001 while the average yield on the securities portfolio declined 28 basispoints to 6.53% for the same time period.

 

**Interest Expense.**The Company recorded interest expense of $210.6 million for the year endedDecember 31, 2001, compared to $203.1 million, for the year ended December 31,2000, an increase of $7.5 million or 3.7%. The reasons for the increase were an$8.3 million increase in interest expense on certificates of deposit and a $4.3million increase in interest expense on money market and NOW accounts. Theseincreases were partially offset by a $3.5 million decrease in interest expenseon borrowed funds and a $1.7 million decrease in interest expense on savingsaccounts. The increase in interest expense on certificates of deposit was dueto a $190.1 million increase in the average balance of certificates of depositpartially offset by a 19 basis point decline in the average cost ofcertificates of deposit to 5.22% for 2001. The increase in the average balanceof certificates of deposit was primarily due to the growth in the Bank’s newmarket areas and, to a lesser extent, the $60.0 million increase in brokeredCDs in the fourth quarter of 2001. The decline in the average cost wasreflective of the declining interest rate environment during the year 2001. Theincrease in interest expense for money market and NOW accounts was due to a$111.2 million increase in the average balance of money market and NOW accountsand a 40 basis point increase in the average cost of money market and NOWaccounts to 3.12% for the year ended December 31, 2001. These increases weredue to the introduction of a new money market product to develop bankingrelationships in new market areas. The decline in interest expense on savingsaccounts in 2001 was due to a 27 basis point decline in the average cost to2.18% for the year ended December 31, 2001, primarily due to a reduction of thesavings account rate. The decline in interest expense on borrowed funds was dueto an 80 basis point decline in the average cost of borrowed funds to 5.39% forthe year 2001 partially offset by an increase of $252.2 million in the averagebalance of borrowed funds. The decline in the average cost of borrowingsprimarily reflects the rollover of borrowings to lower rates due to thedeclining rate environment in 2001. The increase in the average balance ofborrowed funds was due to the use of borrowings to fund originations of newloans by the Mortgage Company.

 

**Net Interest Income.**Net interest income for 2001 was $162.4 million compared to $140.7 million for2000. The increase of $21.7 million, or 15.4%, was due to an increase of $29.2million in interest income which was offset by a $7.5 million increase ininterest expense. The increase in interest income was due to an increase of$547.9 million in the average balance of interest-earning assets which waspartially offset by a 21 basis point decline in the average yield oninterest-earning assets to 7.11% for 2001 from 7.32% for 2000. The increase ininterest expense was due to a $577.5 million increase in the average balance ofinterest-bearing liabilities partially offset by a 48 basis point decline inthe average cost of interest-bearing liabilities to 4.61% for 2001 from 5.09%for 2000. The net interest rate spread and margin increased to 2.50% and 3.10%,respectively, for the year ended December 31, 2001, from 2.22% and 2.99%,respectively, for the year ended December 31, 2000. Such increases were due tothe rollover of the Company’s interest-bearing liabilities to lower ratesfaster than the repricing of the Company’s assets to lower rates.

 

**Provision for Loan Losses.**The provision for loan losses was $8.8 million for the year ended December 31,2001, compared to a provision of $652,000 for the year ended December 31, 2000.Due to economic conditions, an increase in non-accruing loans, the volumes ofloan originations and current events in the Company’s primary market area,management deemed an $8.8 million provision for loan losses during the yearended December 31, 2001, to be prudent.

 

During 2001, the level of the Company’s non-accruing loans increased$5.3 million, or 54.4%, to $15.1 million at December 31, 2001. The Company’snet loan chargeoffs were $3.4 million for the year ended December 31, 2001compared to $1.1 million for the year ended December 31, 2000. The Company’sallowance for loan losses was $20.0 million at December 31, 2001, or 132.8% of non-accrualloans at such date, compared to $14.6 million at December 31, 2000, or 149.7%of non-accrual loans at such date.

 

**Other Income.**During 2001, other income increased by $69.7 million from $43.5 million in 2000to $113.2 million for 2001. The increase was primarily due to a $70.6 millionincrease in net gains on loan sales, a $10.6 million increase in loan fees, anda $2.5 million increase in service and fee income, which increases werepartially offset by a $14.0 million increase in net losses on securitiestransactions. The increase in gains on loan sales and loan fees was due toincreased loan originations at the Mortgage Company resulting in net gains onloan sales of $91.8 million in the year ended December 31, 2001. The increasein service and fee income was primarily due to an increase in deposit-relatedfees due to increased volumes and an increase in certain fee charges.

 

Net securities losses for the year ended December 31, 2001, were $14.6million compared to net securities losses of $569,000 for the year endedDecember 31, 2000. The net securities losses in 2001 were primarily due to theCompany recording an impairment charge on four corporate bonds, three of whichwere collateralized bond obligations. In the fourth quarter of 2001, due tosignificant deterioration in the collateral value supporting the collateralizedbond obligations and the resultant negative impact on anticipated cash flows,the Company recorded a $9.7 million impairment charge, in accordance withgenerally accepted accounting principles, reducing the carrying value of thesethree securities to $5.3 million at December 31, 2001. With respect to thefourth bond, which was corporate debt, the Company reduced its carrying valueto $4.7 million by recording a $4.8 million impairment charge in the fourthquarter of 2001 due to an extended period of market value depreciation anddeclining credit quality of the issuer.

 

19

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**Other Expenses.**Other expenses for the year ended December 31, 2001, were $197.2 million or103.8% more than other expenses of $96.8 million for the year ended December31, 2000. The increase in other expenses in 2001 was attributable to a $45.6million increase in personnel expense, a $39.7 million increase in commissionspaid, a $3.0 million increase in occupancy and equipment expense and an $8.8million increase in other expenses. The increase in personnel expense wasattributable to the $27.2 million non-cash compensation expense relating to theStock Option Plan as well as increased staff levels and normal merit payincreases. Management determined that certain stock options were exercisedunder a net cash settlement method, whereby the Company, in effect, repurchasedthe option shares under the Company’s ongoing stock repurchase programs andremitted the excess of the fair market value of the shares over the exerciseprice to the employee. Under existing accounting standards, the existence ofthese transactions conducted in this manner required that compensation expensebe recorded from the inception of the plan on all exercised or vested andgranted options equal to the difference between the option exercise price andthe fair market value of the stock at the exercise date or financial reportingdate, whichever is earlier. The increase in staff levels was primarily due tothe expansion of the Mortgage Company resulting in increases in staff for loanoriginations and loan servicing. The increase in commission expense was due tothe increase in volumes and the mix of loans originated by the MortgageCompany. The increase in occupancy and equipment expense was primarily due tothe geographic expansion of the Mortgage Company into 15 additional states andadditional property and equipment expense due to business growth and expansionat the Bank. The increase in other expenses was due primarily to the geographicexpansion of the Mortgage Company and the increased volume of loan originationsin 2001 compared to 2000.

 

**Provision for Income Taxes.**The provision for income taxes was $24.0 million for the year ended December31, 2001, compared to $32.9 million for the year ended December 31, 2000. Thedecrease of $8.9 million in the provision for income taxes was primarily due toa $17.1 million decrease in net income before taxes and the decrease in theeffective tax rate from 37.9% for 2000 to 34.4% for 2001.

 

**Liquidity**

 

The Company’s liquidity, represented by the Company’s ability togenerate cash and cash equivalents, is a product of its operating, investingand financing activities. The Company’s primary sources of funds are deposits,repayments, prepayments and maturities of outstanding loans and mortgage-backedsecurities, maturities of investment securities and other short-terminvestments and funds provided from operations. While scheduled payments fromthe repayment of loans and mortgage-backed securities and maturing investmentsecurities and short-term investments are relatively predictable sources offunds, deposit flows and loan prepayments are greatly influenced by generalinterest rates, economic conditions and competition. In addition, the Companyinvests excess funds in federal funds sold and other short-terminterest-earning assets which provide liquidity to meet lending requirements.

 

Liquidity management is both a daily and long-term function of businessmanagement. Excess liquidity is generally invested in short-term investmentssuch as federal funds. The Company uses its sources of funds primarily to meetits ongoing commitments, to pay maturing certificates of deposit and savingswithdrawals, fund loan commitments and maintain a portfolio of mortgage-backedand mortgage-related securities and investment securities. At December 31,2002, the total approved loan commitments outstanding amounted to $1.3 billionand the Mortgage Company had forward commitments of $2.7 billion to sell loansto third- party investors. At the same date, the undisbursed portion ofconstruction loans totaled $32.0 million and unused credit lines equaled $88.2million. Certificates of deposit scheduled to mature in one year or less atDecember 31, 2002, totaled $711.1 million. Investment securities scheduled tomature in one year or less at December 31, 2002, totaled $1.0 million andamortization from investments and loans is projected at $1.5 billion over thenext 12 months. Based on historical experience, the Bank’s current pricingstrategy and the Bank’s strong core deposit base, management believes that asignificant portion of maturing deposits will remain with the Bank. The Companyanticipates that it will continue to have sufficient funds, together with loansales and securities sales, to meet its current commitments. In the event thefunds required exceed the funds generated by the Bank and Mortgage Company,additional sources of funds such as repurchase agreements, FHLB advances,overnight lines of credit and brokered certificates of deposit are available tothe Company.

 

**CAPITAL**

 

At December 31, 2002 the Bank’s capital ratios exceeded all theregulatory requirements. Under OTS regulations, the Bank is required to complywith each of three separate capital adequacy standards. At such date, the Bankhad tangible capital of $475.7 million, or 6.98%, of adjusted assets comparedto a requirement of $102.2 million, or 1.50%, of adjusted assets, core capitalof $477.6 million, or 7.01%, of adjusted assets compared to a requirement of$272.7 million, or 4%, of adjusted assets and risk-based capital of $497.6million, or 13.28%, of risk-weighed assets compared to a requirement of $300.0million, or 8%, of risk-weighted assets.

 

**IMPACT OF INFLATION AND CHANGINGPRICES**

 

The consolidated financial data presented herein have been prepared inaccordance with generally accepted accounting principles, which require themeasurement of financial position and operating results in terms of historicaldollars without considering changes in relative purchasing power over time dueto inflation. Unlike most industrial companies, virtually all of the Company’sassets and liabilities are monetary in nature. As a result, interest ratesgenerally have a more significant impact on the Company’s performance than doesthe effect of inflation.

 

20

----

 

Staten Island Bancorp, Inc. & Subsidiary

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 
|                                                                                                                                                                                                              |   | **December  31,**                             |          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------------|
|                                                                                                                                                                                                              |   | **2002**                                      |          | **2001** |   |
|                                                                                                                                                                                                              |   | **(000’s  omitted,  except share data)** |          |
|                                                                                                                                                                                                              |   |                                          |
| ASSETS                                                                                                                                                                                                            |   |                                          |          |   |   |
| **Assets:**                                                                                                                                                                                                       |   |                                          |          |   |   |
| Cash and due  from banks                                                                                                                                                                                          |   | **$**                                         | **137,085**   | ** ** | $ | 116,846 |   |
| Federal funds  sold                                                                                                                                                                                               |   | **237,000**                                   | ** **    | 38,000 |   |
| Securities  available for sale                                                                                                                                                                                    |   | **911,432**                                   | ** **    | 1,425,739 |   |
| Federal Home  Loan Bank of NY capital stock                                                                                                                                                                       |   | **112,150**                                   | ** **    | 102,900 |   |
| Loans, net of  allowance for loan losses of $22.8 million and $20.0 million at December 31,  2002 and 2001, respectively                                                                                          |   | **3,422,492**                                 | ** **    | 2,806,619 |   |
| Loans held for  sale                                                                                                                                                                                              |   | **1,729,890**                                 | ** **    | 1,185,593 |   |
| Accrued interest  receivable                                                                                                                                                                                      |   | **23,976**                                    | ** **    | 28,601 |   |
| Premises and  equipment, net                                                                                                                                                                                      |   | **47,545**                                    | ** **    | 38,939 |   |
| Intangible  assets, net                                                                                                                                                                                           |   | **57,881**                                    | ** **    | 58,871 |   |
| Other assets                                                                                                                                                                                                      |   | **255,644**                                   | ** **    | 202,945 |   |
| Total assets                                                                                                                                                                                                      |   | **$**                                         | **6,935,095** | ** ** | $ | 6,005,053 |   |
|                                                                                                                                                                                                              |   |                                          |          |   |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                                                                                                                                        |   |                                          | ** **    |   |   |
| **Liabilities:**                                                                                                                                                                                                  |   |                                          | ** **    |   |   |
| Deposits                                                                                                                                                                                                          |   |                                          | ** **    |   |   |
| Savings                                                                                                                                                                                                           |   | **$**                                         | **1,045,767** | ** ** | $ | 868,028 |   |
| Certificates of  deposit                                                                                                                                                                                          |   | **1,105,370**                                 | ** **    | 1,083,900 |   |
| Money market                                                                                                                                                                                                      |   | **639,037**                                   | ** **    | 350,558 |   |
| NOW accounts                                                                                                                                                                                                      |   | **134,450**                                   | ** **    | 115,349 |   |
| Demand deposits                                                                                                                                                                                                   |   | **539,510**                                   | ** **    | 483,493 |   |
| Total deposits                                                                                                                                                                                                    |   | **3,464,134**                                 | ** **    | 2,901,328 |   |
| Borrowed funds                                                                                                                                                                                                    |   | **2,756,927**                                 | ** **    | 2,451,762 |   |
| Advances from  borrowers for taxes and insurance                                                                                                                                                                  |   | **23,537**                                    | ** **    | 17,495 |   |
| Accrued interest  and other liabilities                                                                                                                                                                           |   | **76,229**                                    | ** **    | 70,665 |   |
| Total  liabilities                                                                                                                                                                                                |   | **6,320,827**                                 | ** **    | 5,441,250 |   |
|                                                                                                                                                                                                              |   |                                          |          |   |   |
| Commitments and  Contingencies (Note 18)                                                                                                                                                                          |   |                                          | ** **    |   |   |
| **Stockholders’  Equity:**                                                                                                                                                                                   |   |                                          | ** **    |   |   |
| Common stock,  par value $.01 per share, 100,000,000 shares authorized, 90,260,624 issued  and 60,269,397 outstanding at December 31, 2002 and 90,260,624 issued and  62,487,286 outstanding at December 31, 2001 |   | **903**                                       | ** **    | 903 |   |
| Additional  paid-in capital                                                                                                                                                                                       |   | **586,405**                                   | ** **    | 569,959 |   |
| Retained  earnings                                                                                                                                                                                                |   | **391,739**                                   | ** **    | 317,208 |   |
| Unallocated  common stock held by ESOP                                                                                                                                                                            |   | **(27,468**                                   | **)**         | (30,215 | ) |
| Unearned common  stock held by RRP                                                                                                                                                                                |   | **(8,894**                                    | **)**         | (14,333 | ) |
| Less—Treasury  stock (29,991,227 and 27,773,338 shares at December 31, 2002 and 2001,  respectively), at cost                                                                                                |   | **(339,982**                                  | **)**         | (289,469 | ) |
|                                                                                                                                                                                                              |   | **602,703**                                   |          | 554,053 |   |
| Accumulated  other comprehensive income, net of taxes                                                                                                                                                             |   | **11,565**                                    | ** **    | 9,750 |   |
| Total  stockholders’ equity                                                                                                                                                                                  |   | **614,268**                                   | ** **    | 563,803 |   |
| Total  liabilities and stockholders’ equity                                                                                                                                                                  |   | **$**                                         | **6,935,095** | ** ** | $ | 6,005,053 |   |

 

The accompanying notes are an integral part of these statements.

 

21

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Staten Island Bancorp, Inc. & Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 
|                                                                  |   | **For the  Years Ended December 31,**            |        |
|-----------------------------------------------------------------------|--------|--------------------------------------------------|-------------|
|                                                                  |   | **2002**                                         |        | **2001** |   | **2000** |   |
|                                                                  |   | **(000’s  omitted, except per share data)** |        |
| **Interest  Income:**                                                 |   |                                             |        |   |   |   |   |
| Loans                                                                 |   | **$**                                            | **311,635** |   | $ | 259,412 |   | $ | 204,554 |   |
| Securities  available for sale                                        |   | **84,059**                                       |        | 112,466 |   | 137,848 |   |
| Other earning  assets                                                 |   | **1,438**                                        |        | 1,105 |   | 1,402 |   |
| Total interest  income                                                |   | **397,132**                                      |        | 372,983 |   | 343,804 |   |
|                                                                  |   |                                             |        |   |   |   |   |
| **Interest  Expense:**                                                |   |                                             |        |   |   |   |   |
| Borrowed funds                                                        |   | **115,889**                                      |        | 129,387 |   | 132,891 |   |
| Certificates of  deposit                                              |   | **39,008**                                       |        | 53,071 |   | 44,781 |   |
| Savings and  escrow                                                   |   | **17,437**                                       |        | 17,811 |   | 19,488 |   |
| Money market and  NOW                                                 |   | **16,280**                                       |        | 10,309 |   | 5,960 |   |
| Total interest  expense                                               |   | **188,614**                                      |        | 210,578 |   | 203,120 |   |
| Net interest  income                                                  |   | **208,518**                                      |        | 162,405 |   | 140,684 |   |
| **Provision  for Loan Losses**                                        |   | **8,854**                                        |        | 8,757 |   | 652 |   |
| Net interest  income after provision for loan losses                  |   | **199,664**                                      |        | 153,648 |   | 140,032 |   |
|                                                                  |   |                                             |        |   |   |   |   |
| **Other  Income (Loss):**                                             |   |                                             |        |   |   |   |   |
| Service and fee  income                                               |   | **14,774**                                       |        | 12,128 |   | 10,054 |   |
| Net gain on loan  sales                                               |   | **206,400**                                      |        | 90,809 |   | 21,218 |   |
| Unrealized gain  on derivative transactions                           |   | **12,587**                                       |        | 1,020 |   | — |   |
| Loan fees                                                             |   | **29,187**                                       |        | 16,660 |   | 6,035 |   |
| Other income                                                          |   | **10,554**                                       |        | 7,214 |   | 6,824 |   |
| Securities  transactions                                              |   | **(395**                                         | **)**       | (14,613 | ) | (569 | ) |
| Total other  income                                                   |   | **273,107**                                      |        | 113,218 |   | 43,562 |   |
|                                                                  |   |                                             |        |   |   |   |   |
| **Other  Expenses:**                                                  |   |                                             |        |   |   |   |   |
| Personnel                                                             |   | **96,260**                                       |        | 90,108 |   | 44,500 |   |
| Commissions                                                           |   | **129,327**                                      |        | 51,687 |   | 11,954 |   |
| Occupancy and  equipment                                              |   | **16,462**                                       |        | 12,819 |   | 9,827 |   |
| Data processing                                                       |   | **6,690**                                        |        | 6,015 |   | 5,352 |   |
| Amortization of  intangible assets                                    |   | **581**                                          |        | 5,343 |   | 5,179 |   |
| Professional  fees                                                    |   | **12,520**                                       |        | 4,255 |   | 2,566 |   |
| Marketing                                                             |   | **5,497**                                        |        | 2,504 |   | 1,769 |   |
| Other                                                                 |   | **43,011**                                       |        | 24,436 |   | 15,613 |   |
| Total other  expenses                                                 |   | **310,348**                                      |        | 197,167 |   | 96,760 |   |
| Income before  provision for income taxes                             |   | **162,423**                                      |        | 69,699 |   | 86,834 |   |
| **Provision  for Income Taxes**                                       |   | **66,776**                                       |        | 23,966 |   | 32,908 |   |
| Income before  cumulative effect of accounting change                 |   | **95,647**                                       |        | 45,733 |   | 53,926 |   |
| Cumulative  effect of change in accounting principle net of tax       |   | **4,731**                                        |        | — |   | — |   |
| Net income                                                            |   | **$**                                            | **100,378** |   | $ | 45,733 |   | $ | 53,926 |   |
| **Earnings  per Share before Cumulative Effect of Accounting Change** |   |                                             |        |   |   |   |   |
| Basic                                                                 |   | **$**                                            | **1.71**    |   | $ | 0.76 |   | $ | 0.80 |   |
| Diluted                                                               |   | **1.64**                                         |        | 0.75 |   | 0.80 |   |
| **Earnings  per Share after Cumulative Effect of Accounting Change**  |   |                                             |        |   |   |   |   |
| Basic                                                                 |   | **$**                                            | **1.80**    |   | $ | 0.76 |   | $ | 0.80 |   |
| Diluted                                                               |   | **1.72**                                         |        | 0.75 |   | 0.80 |   |

 

The accompanying notes are an integral part of these statements.

 

22

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Staten Island Bancorp, Inc. & Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 
|                                                                                                               |   | **For the  Years Ended December 31, 2002, 2001 and 2000** |    |
|--------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|---------|
|                                                                                                               |   |                                                      |    |   |   |   |   |   |   |   |   |   |   |   |   | **Accumulated** |   |   |   |
|                                                                                                               |   |                                                      |    |   |   | **Unallocated** |   | **Unearned** |   |   |   |   |   |   |   | **Other** |   |   |   |
|                                                                                                               |   |                                                      |    | **Additional** |   | **Common** |   | **Common** |   |   |   |   |   |   |   | **Comprehensive** |   |   |   |
|                                                                                                               |   | **Common**                                                |    | **Paid-in** |   | **Stock Held** |   | **Stock Held** |   | **Treasury** |   | **Comprehensive** |   | **Retained** |   | **Income  (Loss)** |   |   |   |
|                                                                                                               |   | **Stock**                                                 |    | **Capital** |   | **by ESOP** |   | **by RRP** |   | **Stock** |   | **Income** |   | **Earnings** |   | **Net of Tax** |   | **Total** |   |
|                                                                                                               |   | **(000’s  omitted, except share data)**              |    |
| Balance, January 1, 2000                                                                                           |   | $                                                         | 451     |   | $ | 536,539 |   | $ | (35,709 | ) | $ | (25,439 | ) | $ | (121,149 | ) | $ | — |   | $ | 251,315 |   | $ | (34,631 | ) | $ | 571,377 |   |
| Allocation of 457,808 ESOP shares                                                                                  |   | —                                                    |    | 1,360 |   | 2,747 |   | — |   | — |   | — |   | — |   | — |   | 4,107 |   |
| Earned RRP shares                                                                                                  |   | —                                                    |    | (155 | ) | — |   | 5,655 |   | — |   | — |   | — |   | — |   | 5,500 |   |
| Treasury stock purchases (7,545,272 shares), at cost                                                               |   | —                                                    |    | — |   | — |   | — |   | (67,172 | ) | — |   | — |   | — |   | (67,172 | ) |
| Cash dividends paid ($0.26 per share)                                                                              |   | —                                                    |    | — |   | — |   | — |   | — |   | — |   | (18,764 | ) | — |   | (18,764 | ) |
| Change in unrealized appreciation (depreciation) on securities, net  of tax                                        |   | —                                                    |    | — |   | — |   | — |   | — |   | 31,690 |   | — |   | 31,690 |   | 31,690 |   |
| Valuation adjustment for deferred tax benefit                                                                      |   | —                                                    |    | — |   | — |   | — |   | — |   | — |   | 4,868 |   | — |   | 4,868 |   |
| Net income                                                                                                         |   | —                                                    |    | — |   | — |   | — |   | — |   | 53,926 |   | 53,926 |   | — |   | 53,926 |   |
| Comprehensive income                                                                                               |   |                                                      |    |   |   |   |   |   |   |   |   | $ | 85,616 |   |   |   |   |   |   |   |
| Balance, December 31, 2000                                                                                         |   | 451                                                       |    | 537,744 |   | (32,962 | ) | (19,784 | ) | (188,321 | ) | — |   | 291,345 |   | (2,941 | ) | 585,532 |   |
| Allocation of 457,808 ESOP shares                                                                                  |   | —                                                    |    | 2,378 |   | 2,747 |   | — |   | — |   | — |   | — |   | — |   | 5,125 |   |
| Earned RRP shares                                                                                                  |   | —                                                    |    | 2,163 |   | — |   | 5,451 |   | — |   | — |   | — |   | — |   | 7,614 |   |
| Treasury stock purchases (7,679,546), at cost                                                                      |   | —                                                    |    | — |   | — |   | — |   | (104,362 | ) | — |   | — |   | — |   | (104,362 | ) |
| Cash dividends paid ($0.32 per share)                                                                              |   | —                                                    |    | — |   | — |   | — |   | — |   | — |   | (19,418 | ) | — |   | (19,418 | ) |
| Exercise of 324,858 stock options                                                                                  |   | —                                                    |    | 440 |   | — |   | — |   | 3,214 |   | — |   | — |   | — |   | 3,654 |   |
| Compensation expense from variable award plan                                                                      |   | —                                                    |    | 27,234 |   | — |   | — |   | — |   | — |   | — |   | — |   | 27,234 |   |
| Change in unrealized appreciation (depreciation) on securities, net  of reclassification adjustment and tax effect |   | —                                                    |    | — |   | — |   | — |   | — |   | 12,691 |   | — |   | 12,691 |   | 12,691 |   |
| Stock dividends (45,130,312 shares)                                                                                |   | 452                                                       |    | — |   | — |   | — |   | — |   | — |   | (452 | ) | — |   | — |   |
| Net income                                                                                                         |   | —                                                    |    | — |   | — |   | — |   | — |   | 45,733 |   | 45,733 |   | — |   | 45,733 |   |
| Comprehensive income                                                                                               |   |                                                      |    |   |   |   |   |   |   |   |   | $ | 58,424 |   |   |   |   |   |   |   |
| Balance, December 31, 2001                                                                                         |   | 903                                                       |    | 569,959 |   | (30,215 | ) | (14,333 | ) | (289,469 | ) |   |   | 317,208 |   | 9,750 |   | 563,803 |   |
| Allocation of 457,808 ESOP shares                                                                                  |   | —                                                    |    | 6,858 |   | 2,747 |   | — |   | — |   | — |   | — |   | — |   | 9,605 |   |
| Earned RRP shares                                                                                                  |   | —                                                    |    | 2,745 |   | — |   | 5,439 |   | — |   | — |   | — |   | — |   | 8,184 |   |
| Treasury stock purchases (3,120,327 shares), at cost                                                               |   | —                                                    |    | — |   | — |   | — |   | (60,163 | ) | — |   | — |   | — |   | (60,163 | ) |
| Cash dividends paid ($0.46)                                                                                        |   | —                                                    |    | — |   | — |   | — |   | — |   | — |   | (25,847 | ) | — |   | (25,847 | ) |
| Exercise of 902,438 stock options                                                                                  |   | —                                                    |    | 594 |   | — |   | — |   | 9,650 |   |   |   | — |   | — |   | 10,244 |   |
| Compensation expense from variable award plan                                                                      |   | —                                                    |    | 6,249 |   | — |   | — |   | — |   | — |   | — |   | — |   | 6,249 |   |
| Change in unrealized appreciation (depreciation) on securities, net  of reclassification adjustment and tax effect |   | —                                                    |    | — |   | — |   | — |   | — |   | 1,815 |   | — |   | 1,815 |   | 1,815 |   |
| Net income                                                                                                         |   | —                                                    |    | — |   | — |   | — |   | — |   | 100,378 |   | 100,378 |   | — |   | 100,378 |   |
| Comprehensive income                                                                                               |   |                                                      |    |   |   |   |   |   |   |   |   | $ | 102,193 |   |   |   |   |   |   |   |
| Balance, December 31, 2002                                                                                         |   | **$**                                                     | **903** | ** ** | **$** | **586,405** | ** ** | **$** | **(27,468** | **)** | **$** | **(8,894** | **)** | **$** | **(339,982** | **)** |   | ** ** | **$** | **391,739** | ** ** | **$** | **11,565** | ** ** | **$** | **614,268** |   |

 

The accompanying notes are an integral part of these statements.

 

23

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Staten Island Bancorp, Inc. & Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                                         |   | **For the  Year Ended December 31,** |        |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                                                         |   | **2002**                             |        | **2001** |   | **2000** |   |
|                                                                                         |   | **(000’s  omitted)**            |        |
| **Cash  Flows from Operating Activities:**                                                   |   |                                 |        |   |   |   |   |
| Net income                                                                                   |   | **$**                                | **100,378** | ** ** | $ | 45,733 |   | $ | 53,926 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |   |                                 | ** **  |   |   |   |   |
| Depreciation and  software amortization                                                      |   | **6,246**                            | ** **  | 5,020 |   | 4,169 |   |
| (Accretion) and  amortization of bond and mortgage premiums                                  |   | **1,798**                            | ** **  | (606 | ) | (1,246 | ) |
| Amortization of  intangible assets                                                           |   | **581**                              | ** **  | 5,343 |   | 5,179 |   |
| Securities  impairment charges                                                               |   | **2,691**                            | ** **  | 14,506 |   | — |   |
| Realized (gain)  loss on sale of available-for-sale securities                               |   | **(2,296**                           | **)**       | 107 |   | 569 |   |
| Expense charge  relating to allocation and earned portions of employee benefit plans         |   | **24,038**                           | ** **  | 39,973 |   | 9,607 |   |
| Provision for  loan losses                                                                   |   | **8,854**                            | ** **  | 8,757 |   | 652 |   |
| Increase in cash  surrender value of BOLI                                                    |   | **(7,554**                           | **)**       | (7,214 | ) | (6,824 | ) |
| Gain on sale of  loans held for sale                                                         |   | **(206,400**                         | **)**       | (94,240 | ) | (21,169 | ) |
| Unrealized  (gain) loss on loans held for sale                                               |   | **15,041**                           | ** **  | (1,020 | ) | — |   |
| Origination of  loans held for sale                                                          |   | **(7,885,954**                       | **)**       | (3,804,338 | ) | (731,762 | ) |
| Purchase of  loans held for sale                                                             |   | **(535,349**                         | **)**       | (118,812 | ) | (17,857 | ) |
| Proceeds from  sale of loans held for sale                                                   |   | **7,907,873**                        | ** **  | 2,957,830 |   | 524,274 |   |
| Repayment of  loans held for sale                                                            |   | **407,152**                          | ** **  | 228,303 |   | 38,279 |   |
| Decrease in  deferred loan fees                                                              |   | **(13,417**                          | **)**       | (8,545 | ) | (5,086 | ) |
| (Increase)  decrease in accrued interest receivable                                          |   | **4,625**                            | ** **  | 2,304 |   | (3,085 | ) |
| Increase in  other assets                                                                    |   | **(42,614**                          | **)**       | (34,450 | ) | (22,046 | ) |
| Increase  (decrease) in accrued interest and other liabilities                               |   | **(18,972**                          | **)**       | 19,052 |   | 17,775 |   |
| (Increase)  decrease in deferred income taxes                                                |   | **9,349**                            | ** **  | (14,080 | ) | 6,590 |   |
| Net cash used in  operating activities                                                       |   | **(223,930**                         | **)**       | (756,377 | ) | (148,055 | ) |
| **Cash  Flows from Investing Activities:**                                                   |   |                                 | ** **  |   |   |   |   |
| Maturities and  amortization of Mortgaged-back securities and CMO’s                     |   | **636,807**                          | ** **  | 380,076 |   | 200,244 |   |
| Maturities and  amortization of all other available-for-sale securities                      |   | **56,039**                           | ** **  | 114,265 |   | 8,343 |   |
| Sales of  mortgaged-back securities and CMO’s                                           |   | **175,522**                          | ** **  | 75,410 |   | 26,720 |   |
| Sales of all  other available-for-sale securities                                            |   | **188,817**                          | ** **  | 136,846 |   | 283,502 |   |
| Purchases of  mortgage-back securities and CMO’s                                        |   | **(429,719**                         | **)**       | (207,705 | ) | (74,539 | ) |
| Purchases of all  other available-for-sale securities, net                                   |   | **(122,099**                         | **)**       | (129,323 | ) | (84,934 | ) |
| Principal  collected on loans                                                                |   | **1,105,771**                        | ** **  | 957,400 |   | 351,086 |   |
| Loans made to  customers                                                                     |   | **(1,920,519**                       | **)**       | (1,117,709 | ) | (980,695 | ) |
| Purchase of  loans                                                                           |   | **(229,194**                         | **)**       | (353,368 | ) | (56,688 | ) |
| Sales of loans                                                                               |   | **203,352**                          | ** **  | 315,650 |   | 227,401 |   |
| Capital  expenditures                                                                        |   | **(13,813**                          | **)**       | (11,162 | ) | (5,396 | ) |
| Acquisition of  First State Bank, net of cash acquired                                       |   | **—**                           | ** **  | — |   | (46,688 | ) |
| Net cash  provided by (used in) investing activities                                         |   | **(349,036**                         | **)**       | 160,380 |   | (151,644 | ) |
| **Cash  Flows from Financing Activities:**                                                   |   |                                 | ** **  |   |   |   |   |
| Net increase in  deposit accounts                                                            |   | **562,806**                          | ** **  | 556,115 |   | 196,740 |   |
| Increase in  borrowings                                                                      |   | **305,165**                          | ** **  | 210,751 |   | 191,600 |   |
| Cash dividends  paid                                                                         |   | **(25,847**                          | **)**       | (19,418 | ) | (18,764 | ) |
| Purchase of  treasury stock                                                                  |   | **(60,163**                          | **)**       | (104,362 | ) | (67,172 | ) |
| Exercise of  stock options                                                                   |   | **10,244**                           | ** **  | 3,654 |   | — |   |
| Net cash  provided by financing activities                                                   |   | **792,205**                          | ** **  | 646,740 |   | 302,404 |   |
| Net increase  (decrease) in cash and cash equivalents                                        |   | **219,239**                          | ** **  | 50,743 |   | 2,705 |   |
| **Cash  and Cash Equivalents,** beginning of year                                            |   | **154,846**                          | ** **  | 104,103 |   | 101,398 |   |
| **Cash  and Cash Equivalents,** end of year                                                  |   | **$**                                | **374,085** | ** ** | $ | 154,846 |   | $ | 104,103 |   |
| **Supplemental  Disclosure of Cash Flow Information:**                                       |   |                                 | ** **  |   |   |   |   |
| Cash paid for—                                                                          |   |                                 | ** **  |   |   |   |   |
| Interest                                                                                     |   | **$**                                | **188,529** | ** ** | $ | 222,735 |   | $ | 197,141 |   |
| Income taxes                                                                                 |   | **78,632**                           | ** **  | 17,599 |   | 25,109 |   |
| Acquisition of  First State Bank—                                                       |   |                                 | ** **  |   |   |   |   |
| Fair value of  assets acquired                                                               |   | **—**                           | ** **  | — |   | 370,579 |   |
| Fair value of  liabilities assumed                                                           |   | **—**                           | ** **  | — |   | 331,280 |   |
| Stock dividends                                                                              |   | **—**                           | ** **  | 452 |   | — |   |
| Transferred to  ORE                                                                          |   | **12,952**                           | ** **  | 279 |   | 903 |   |

 

The accompanying notes are an integral part of these statements.

 

24

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Staten Island Bancorp, Inc. & Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**1.  Organization/Form of Ownership**

 

Staten Island Bancorp, Inc. (the “Company”), is the holding company forits wholly owned savings bank subsidiary, SI Bank & Trust (the “Bank”). TheBank was originally founded as a New York State chartered savings bank in 1864.In 1997, the Bank converted to a federally chartered stock savings bank withthe concurrent formation of a holding company and an initial public offering(“IPO”) of common stock.

 

The Company, a Delaware corporation, was organized by the Bank for thepurpose of acquiring all of the capital stock of the Bank pursuant to theconversion of the Bank from a federally chartered mutual savings bank to afederally chartered stock savings bank. In addition to generally acceptedaccounting principles, the Company is subject to the financial reportingrequirements of the Securities Exchange Act of 1934, as amended, and theregulations of the U.S. Securities and Exchange Commission thereunder.

 

The Bank is a community savings bank providing a complete line ofretail and commercial banking services along with trust services and lifeinsurance sales. Through its subsidiary, SIB Mortgage Corp., the Bankoriginates residential mortgage loans in 42 states and sells them into thesecondary market. Individual customer deposits are insured up to $100,000 bythe Federal Deposit Insurance Corporation (“FDIC”). The Bank’s primaryregulator is the Office of Thrift Supervision (“OTS”).

 

**2.  Summary of Significant Accounting Policies**

 

The accounting and reporting policies of the Company and subsidiaryconform to generally accepted accounting principles and to general practicewithin the banking industry.

 

Certain reclassifications have been made to the prior-year amounts toconform with current-year presentation.

 

The following is a description of the more significant policies whichthe Company follows in preparing and presenting its consolidated financialstatements.

 

**Basis of Presentation.**The accompanying consolidated financial statements include the accounts of theCompany and the Bank. The Bank’s wholly owned subsidiaries are SIB Mortgage Corp.(the “Mortgage Company”), SIB Investment Corporation (“SIBIC”), Staten IslandFunding Corporation (“SIFC”) and SIB Financial Services Corporation (“SIBFSC”).

 

The Mortgage Company was established to acquire the operations of IvyMortgage. SIFC was established as a real estate investment trust, SIBIC wasestablished to hold certain Bank investments and SIBFSC was formed as alicensed life insurance agency to sell the products of the SBLI USA Mutual LifeInsurance Co.

 

All significant intercompany transactions and balances are eliminatedin consolidation.

 

In preparing the consolidated financial statements, management isrequired to make estimates and assumptions that affect the reported assets,liabilities, revenues and expenses as of the dates of the financial statements.Actual results could differ significantly from those estimates.

 

**Cash and Cash Equivalents.**For purposes of reporting cash flows, cash and cash equivalents include cashand due from banks, money market deposits, interest-bearing certificates ofdeposit and federal funds sold for the years ended December 31, 2002, 2001 and2000.

 

**Securities Available for Sale.**In accordance with Statement of Financial Accounting Standards (“SFAS”) No.115, “Accounting for Certain Investments in Debt and Equity Securities,” debtand equity securities used as part of the Company’s asset/liability managementthat may be sold in response to changes in interest rates are reported at fairvalue, with unrealized gains and losses excluded from earnings and reported onan after-tax basis as a separate component of stockholders’ equity. Gains andlosses on the disposition of securities are recognized on the specificidentification method in the period during which they occur. Premiums anddiscounts on mortgage-backed securities are amortized over the average life ofthe security using a method which approximates the level yield method.

 

Declines in the fair value of securities available for sale arereviewed to determine if they are other than temporary in nature. Declines invalue that are judged other than temporary in nature are recognized in theconsolidated statements of income. The Company’s policy is to treat a declinein the investment’s quoted market price exceeding 20% that has lasted for morethan six months as an other than temporary decline in value and reflect thedecline in value in current earnings.

 

**Loans.** Loansare stated at the principal amount outstanding, net of unearned income, loanorigination fees and costs and an allowance for loan losses. Loan originationfees and costs are recognized in interest income as an adjustment to yield overthe life of the loan or at the time of the sale of the loan for loans held inthe portfolio and loans held for sale. Premiums and discounts on purchasedmortgage loans are amortized over the average life of the loan using a methodwhich approximates the level yield method.

 

Loans are placed on non-accrual status when the interest or principalpayments are 90 days or more than 90 days past due unless, in the opinion of management,collection is deemed probable. When interest accruals are discontinued, therecognition of interest income ceases and previously accrued interest remainingunpaid is reversed against income. Any cash payments received thereafter areapplied to principal, and interest income is recognized when managementdetermines that the financial condition and payment record of the borrowerwarrant the recognition of income. The Company has defined its impaired loansas its non-accrual loans under the guidance of SFAS No. 114, entitled“Accounting by Creditors for Impairment of a Loan.” Pursuant to this accountingguidance, a valuation allowance is recorded on impaired loans to reflect thedifference, if any, between the loan face value and the present value ofprojected cash flows, observable fair value or collateral value. This valuationallowance is reported within the overall allowance for loan losses.

 

25

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**Loans Held for Sale.**Mortgage loans held for sale are collateralized residential real estate loanswhich are carried at the lower of cost or fair value on an aggregate basis.Fair value is based on contractually established commitments from investors orby current investor yield requirements. These loans are stated at the principalbalance outstanding, including deferred origination costs and loan basisadjustment. In addition, the Company originates or repurchases loans thatcannot be sold through normal investor channels. Loans held for sale generallyare sold to third-party investors or are transferred to the Company’s loanportfolio within 90 days.

 

Gains or losses on the sale of mortgage loans are recognized at thetime of settlement based upon the difference between the sales proceeds and theallocated basis of loans sold, adjusted for net deferred origination fees andcosts, mortgage servicing rights, and the cost of issuing securities. TheCompany accrues interest on conforming mortgage loans held for sale, providedsuch loans are not more than 90 days delinquent. The Mortgage Companyestablishes a representation and warranty reserve for loan losses to cover lossexposure. See “Representation and Warranty Reserve” discussion below.

 

**Allowance for Loan Losses.**The allowance for loan losses is established by management through provisionsfor loan losses charged against income. Amounts deemed to be uncollectible arecharged against the allowance for loan losses and subsequent recoveries, ifany, are credited to the allowance.

 

The amount of the allowance for loan losses is inherently subjective,as it requires making material estimates which may vary from actual results.These estimates are evaluated periodically and, as adjustments becomenecessary, they are reflected in operations during the periods in which theybecome known. Considerations in this evaluation include past and anticipatedloss experience, current portfolio composition and evaluation of real estatecollateral, as well as current and anticipated economic conditions. In theopinion of management, the allowance, when taken as a whole, is adequate toabsorb estimated loan losses inherent in the Company’s entire loan portfolio.

 

During 2002, the Mortgage Company established a representation andwarranty reserve which is intended to provide for the losses with residentialloans sold, or awaiting sale, in the normal course of business.

 

**Premises and Equipment.**Premises and equipment are carried at cost, less allowance for depreciation andamortization applied on a straight-line basis over the estimated useful livesof 10 to 50 years for buildings and improvements and 3 to 10 years forfurniture, fixtures and equipment.

 

**Investments in Real Estate.**Investments in real estate consist of real estate acquired through foreclosureor by deed in lieu of foreclosure and repossessed assets (owned real estate, or“ORE”). ORE properties are carried at the lower of cost or fair value at thedate of foreclosure (new cost basis) and at the lower of the new cost basis orfair value less estimated selling costs thereafter.

 

**Goodwill and Other Intangibles.**Goodwill, representing the excess of purchase price over the fair value of netassets acquired using the purchase method of accounting, was amortized usingthe straight-line method over periods not exceeding 20 years through 2001. SeeNote 3, “New Accounting Pronouncements,” for new accounting guidance forbusiness combinations and goodwill.

 

**Bank Owned Life Insurance (“BOLI”).**In August 1999, the Bank invested in BOLI policies to fund certain futureemployee benefit costs. The Bank’s investment totaled approximately $100million and the Bank is the primary beneficiary of these policies. The cashsurrender value of the BOLI policies as of December 31, 2002 and 2001 were$124.2 million and $116.7 million, respectively, which is recorded in theCompany’s consolidated statements of financial condition as other assets.Changes in the cash surrender value of BOLI is recorded as other income in theconsolidated statements of income.

 

**Segment Reporting.**For internal management purposes, the Company has identified two businesssegments: Community Banking and Mortgage Banking. Further information regardingthese business segments is set forth in Note 17 of the Notes to ConsolidatedFinancial Statements.

 

**Demand Deposits, Cash ReserveRequirements.** Each of the Bank’s commercial and personaldemand (checking) accounts and NOW accounts has a related interest-bearingmoney market sweep account. The sole purpose of the sweep accounts is to reducethe non-interest-bearing reserve balances that the Bank is required to maintainwith the Federal Reserve Bank and thereby increase funds available forinvestment. Although the sweep accounts are classified as money market accountsfor regulatory purposes, they are included in demand deposits and NOW accountsin the accompanying consolidated statements of financial condition. Therequired reserve at the Federal Reserve Bank of New York under the FederalReserve Act and Regulation D was $23.2 million and $20.3 million at December31, 2002 and 2001, respectively. As of December 31, 2002 and 2001, the requiredreserves for deposit liabilities was fulfilled by the cash held in the Bank’svault except for the $7.0 million compensating balance required to be held atthe Federal Reserve Bank.

 

**Representation & WarrantyReserve.** During 2002, the Mortgage Company established aRepresentation & Warranty Reserve (“R&WR”). The R&WR is intended toprovide for the liabilities associated with residential loans sold, or awaitingsale, in the normal course of business. The R&WR differs from thetraditional allowance for loan losses in as much as the allowance for loanlosses provides for losses associated with loans held for investment and theR&WR provides for losses on loans sold or held for sale.

 

Losses that flow through the R&WR include premium recapture, lossesassociated with the sale of impaired loans to the extent that the loans soldwere “held for sale” loans, re-bids/down-bids, indemnifications and anyassociated costs or fees associated with loans held for sale.

 

26

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The R&WR is reflected on the Company’s balance sheet within otherliabilities. Provisions to the R&WR are reflected by a reduction in netgains on loan sales.

 

**Derivative Financial Instruments.**The Company currently utilizes certain derivative instruments, primarilyforward delivery sale commitments, in its efforts to manage interest-rate riskassociated with its mortgage loan interest-rate locked commitments and mortgageloans held for sale. On January 1, 2001, the Company adopted SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”)which defines forward sale commitments as derivative financial instruments.Derivative financial instruments are recognized in the consolidated statementof financial condition at fair value while changes in the fair value arerecognized in the consolidated statement of income for years ending afterDecember 31, 2000.

 

Prior to June 30, 2002, the Company accounted for interest-rate lockedcommitments as off-balance sheet financial instruments. On March 13, 2002 theFASB Derivatives Implementation Group cleared Implementation Issue C13 (“IssueC13”), which offers guidance on the circumstances in which a loan commitmentmust be included in the scope of SFAS 133 and thus be accounted for as aderivative instrument. Upon the clearance of C13, the Company identifiedcertain commitments that should be accounted for as derivative instruments. Atthe date the associated loan is closed, the fair value of the loan commitmentson that date becomes part of the loan basis.

 

The effective date of implementation guidance in Issue C13 for theCompany was July 1, 2002, when the effects of initially complying with theguidance was reported as a change of accounting principle. As a result ofadoption of this principle, the Company recorded a gain of $4.7 million, net oftaxes of $3.4 million, resulting from the mark-to-market of certain loancommitments as of June 30, 2002. This gain is reflected within the consolidatedstatement of income for December 31, 2002.

 

**Comprehensive Income.**Comprehensive income includes net income and all other changes in stockholders’equity during a period, except those resulting from investments by stockholdersand dividends to stockholders. Other comprehensive income includes revenues,expenses, gains and losses that, under generally accepted accountingprinciples, are included in comprehensive income but excluded from net income.

 

Comprehensive income and accumulated other comprehensive income arereported, net of related income taxes. Accumulated other comprehensive incomeconsists solely of unrealized holding gains and losses on available-for-salesecurities. Additional information on the components of comprehensive income isset forth in Note 15 of the Notes to Consolidated Financial Statements.

 

**Income Taxes.**Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to the differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases (“temporary differences”). Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which temporary differences are expected to be recovered or settled.No valuation allowance is provided for deferred tax assets due to the fact thatmanagement believes that the results of future operations will generatesufficient taxable income to realize the deferred tax assets. The effect ofchanges in tax laws or rates on deferred tax assets and liabilities isrecognized in the period that includes the enactment date.

 

**Treasury Stock.**Repurchases of common stock are recorded as treasury stock at cost.

 

**Common Stock.** OnNovember 19, 2001, the Company paid a stock dividend of one share for eachshare of stock held (two-for-one stock split) to shareholders of record onNovember 5, 2001. At December 31, 2002, the amount of shares outstanding were60,269,397. All share amounts and earnings per share amounts have been adjustedto reflect the stock split.

 

**Earnings per Share.**Earnings per share (“EPS”) are computed by dividing net income by the weightedaverage number of shares of common stock and potential common sharesoutstanding, adjusted for the unallocated or unearned portion of shares held bythe Company’s Employee Stock Ownership Plan (“ESOP”) and Recognition andRetention Plan (“RRP”).

 

**Stock-Based Compensation.**For the years 1998 through September 2002, the Company accounted for itsamended and restated 1998 Stock Option Plan (the “Stock Option Plan”) as avariable award plan using the intrinsic value method prescribed in AccountingPrinciples Board Opinion (“APB”) No. 25 and recorded compensation expense onall granted options equal to the difference between the option exercise priceand the fair market value of the Company’s common stock at the exercise date orat the financial reporting date, whichever is earlier. Under this method, tothe extent that the market value of the underlying stock exceeds the stockoption exercise price, increases or decreases in the value of stock options arereflected as additional charges or credits to compensation expense. EffectiveSeptember 24, 2002, management rescinded the method of cashless exercise underthe Stock Option Plan that had required the recognition of compensation expenseand reestablished the Stock Option Plan as a fixed award plan under APB No. 25.Therefore, no additional compensation expense has been recognized under theStock Option Plan since September 24, 2002.

 

27

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SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages butdoes not require companies to record compensation cost for stock-based employeecompensation plans at fair value rather than the intrinsic value-based method.The following table compares reported net income and earnings per share on apro forma basis, assuming that the Company accounted for stock-basedcompensation under SFAS No. 123. The effects of applying SFAS No. 123 in thispro forma disclosure are not indicative of future amounts. For the years 2001,2000 and the period ended September 24, 2002, the Company accounted for thestock option plan as a variable plan and recorded compensation expense based onthe difference between the option exercise price and the market value of theCompany’s common stock.

 
|                                                                                                                                          |   | **Year Ended  December 31,**                     |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|-------------|
|                                                                                                                                          |   | **2002**                                         |        | **2001** |   | **2000** |   |
|                                                                                                                                          |   | **(000’s  omitted, except per share data)** |        |
| Net income as  reported                                                                                                                       |   | **$**                                            | **100,378** |   | $ | 45,733 |   | $ | 53,926 |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                                  |   | **3,375**                                        |        | 14,706 |   | — |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |   | **4,556**                                        |        | 14,706 |   | — |   |
| Pro forma net  income                                                                                                                         |   | **$**                                            | **99,197**  |   | $ | 45,733 |   | $ | 53,926 |   |
| Earnings per  share                                                                                                                           |   |                                             |        |   |   |   |   |
| Basic as  reported                                                                                                                            |   | **$**                                            | **1.80**    |   | $ | 0.76 |   | $ | 0.80 |   |
| Basic pro forma                                                                                                                               |   | **1.78**                                         |        | 0.76 |   | 0.80 |   |
| Diluted as  reported                                                                                                                          |   | **1.72**                                         |        | 0.75 |   | 0.80 |   |
| Diluted pro  forma                                                                                                                            |   | **1.70**                                         |        | 0.75 |   | 0.80 |   |

 

**3.  New Accounting Pronouncements**

 

In July 2001, the FASB issued SFAS No. 141, “Business Combinations,”(“SFAS 141”) which requires that the purchase method of accounting be used forall business combinations completed after June 30, 2001. SFAS 141 specifiesthat certain intangible assets acquired in a business combination be recognizedas assets separately from goodwill. With the exception of the immediaterequirement to use the purchase method of accounting for all future businesscombinations completed after June 30, 2001, the Company adopted the provisionsof SFAS 141 on January 1, 2002, as required, without material impact to itsfinancial position.

 

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other IntangibleAssets,” (“SFAS 142”) which requires that goodwill no longer be amortized butinstead be tested for impairment at least annually. During the year, theCompany conducted an impairment test of the goodwill and determined that thegoodwill was not impaired. The pro forma net income of the Company, if SFAS 142was effective in the year 2001, would have been $47.9 million of $0.79 perdiluted share compared to the reported net income of $45.7 per diluted share.

 

On March 13, 2002, the FASB issued guidance on DerivativeImplementation Group Issue C13, “When a Loan Commitment is Included in theScope of Statement 133” (“Issue C13”). Issue C13 provides guidance as to when ainterest rate locked mortgage loan commitment must be accounted for as aderivative instrument. Based upon this guidance, the Company identified certainloan commitments as derivative instruments. The impact of adopting the guidancewith respect to Issue C13 on July 1, 2002 was a net after-tax credit of $4.7million which is reflected in the cumulative effect of accounting change in theCompany’s consolidated statement of income for the year ended December 31,2002.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities,” (“SFAS 146”). This statementrequires that a liability for a cost associated with an exit or disposal of anactivity be recognized when the liability is incurred. The provisions of thestatement are effective for exit or disposal activities initiated afterDecember 31, 2002. The Company does not expect the adoption of this statementto have a material effect.

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” (“FIN 45”). The interpretation requiresa guarantor to recognize liabilities for the fair value of its obligationsunder a guarantee upon the guarantee’s issuance. The interpretation does notaddress the subsequent measurement of the guarantor’s recognized liability overthe term of the guarantee. FIN 45 also requires certain financial statementdisclosures regarding guarantees including the nature and terms of theguarantee, and the carrying amount of the liability, if applicable, for theguarantor’s obligations under the guarantee. The initial recognition andinitial measurement provisions of FIN 45 are applicable on a prospective basisto guarantees issued or modified after December 31, 2002, irrespective of theguarantor’s year-end. The disclosure requirements are effective for financialstatements of interim or annual periods ending after December 15, 2002. TheCompany does not expect the adoption of this statement to have a materialeffect.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure—and Amendment for SFAS No.123.” This statement amends SFAS No. 123, “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. Thisstatement shall be effective for financial statements for fiscal years endingafter December 15, 2002. The adoption of SFAS No. 148 is not expected to have amaterial effect.

 

28

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In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities,” (“FIN 46”). FIN 46 addresses consolidation bybusiness enterprises of “variable interest entities.” FIN 46 requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries if the entities do not effectively disperse risk among partiesinvolved. The primary beneficiary of a variable interest entity is the partythat absorbs a majority of the entity’s expected losses, receives a majority ofits expected residual returns, or both, as a result of holding variableinterests, which are the ownership, contractual or other interests in anentity. Among the scope exceptions of FIN 46 are transfers to qualifiedspecial-purpose entities and “grandfathered” qualifying special-purposeentities subject to the reporting requirements of SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments ofLiabilities,” (“SFAS 140”) who do not consolidate those entities. FIN 46applies immediately to variable interest entities created after January 31,2003, and to variable interest entities in which an enterprise obtains aninterest after that date. It applies in the first fiscal year or interim periodbeginning after June 15, 2003, to variable interest entities in which anenterprise holds a variable interest that it acquired before February 1, 2003.The Company does not expect the adoption of this statement to have a materialeffect.

 

**4.  Investment Securities—Securities Availablefor Sale**

 

The amortized cost and approximate market value of the Company’ssecurities available for sale and Federal Home Loan Bank of New York stock aresummarized as follows:

 
|                                                      |   | **December  31, 2002**    |          |
|-----------------------------------------------------------|--------|---------------------------|---------------|
|                                                      |   | **Amortized  Cost**       |          | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Market  Value** |   |
|                                                      |   | **(000’s  omitted)** |          |
| Debt securities:                                          |   |                      |          |   |   |   |   |   |   |
| U.S. Government  and agencies                             |   | **$**                     | **20,914**    | ** ** | **$** | **1,424** | ** ** | **$** | **—** | ** ** | **$** | **22,338** |   |
| GNMA, FNMA and  FHLMC mortgage participation certificates |   | **556,679**               | ** **    | **23,138** | ** ** | **—** | ** ** | **579,817** |   |
| Agency CMOs                                               |   | **84,911**                | ** **    | **1,074** | ** ** | **(40** | **)** | **85,945** |   |
| Privately issued  CMOs                                    |   | **78,096**                | ** **    | **524** | ** ** | **(10** | **)** | **78,610** |   |
| Other                                                     |   | **118,410**               | ** **    | **1,379** | ** ** | **(6,447** | **)** | **113,342** |   |
|                                                      |   | **859,010**               |          | **27,539** | ** ** | **(6,497** | **)** | **880,052** |   |
| Marketable  equity securities:                            |   |                      | ** **    |   | ** ** |   | ** ** |   |   |
| Common stocks                                             |   | **100**                   | ** **    | **1** | ** ** | **—** | ** ** | **101** |   |
| FHLB stock                                                |   | **112,150**               | ** **    | **—** | ** ** | **—** | ** ** | **112,150** |   |
| Preferred stocks                                          |   | **6,598**                 | ** **    | **110** | ** ** | **(124** | **)** | **6,584** |   |
| IIMF capital  appreciation fund                           |   | **25,609**                | ** **    | **6** | ** ** | **(920** | **)** | **24,695** |   |
|                                                      |   | **144,457**               |          | **117** | ** ** | **(1,044** | **)** | **143,530** |   |
| Total securities  available for sale                      |   | **$**                     | **1,003,467** | ** ** | **$** | **27,656** | ** ** | **$** | **(7,541** | **)** | **$** | **1,023,582** |   |

 
|                                                      |   | **December  31, 2001**    |      |
|-----------------------------------------------------------|--------|---------------------------|-----------|
|                                                      |   | **Amortized  Cost**       |      | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Market  Value** |   |
|                                                      |   | **(000’s  omitted)** |      |
| Debt securities:                                          |   |                      |      |   |   |   |   |   |   |
| U.S. Government  and agencies                             |   | $                         | 56,511    |   | $ | 1,041 |   | $ | — |   | $ | 57,552 |   |
| GNMA, FNMA and  FHLMC mortgage participation certificates |   | 632,706                   |      | 10,355 |   | (453 | ) | 642,608 |   |
| Agency CMOs                                               |   | 128,564                   |      | 1,888 |   | (336 | ) | 130,116 |   |
| Privately issued  CMOs                                    |   | 337,272                   |      | 5,929 |   | — |   | 343,201 |   |
| Other                                                     |   | 185,214                   |      | 2,260 |   | (9,147 | ) | 178,327 |   |
|                                                      |   | 1,340,267                 |      | 21,473 |   | (9,936 | ) | 1,351,804 |   |
| Marketable  equity securities:                            |   |                      |      |   |   |   |   |   |   |
| Common stocks                                             |   | 16,279                    |      | 4,461 |   | (996 | ) | 19,744 |   |
| FHLB stock                                                |   | 102,900                   |      | — |   | — |   | 102,900 |   |
| Preferred stocks                                          |   | 20,352                    |      | 224 |   | (734 | ) | 19,842 |   |
| IIMF capital  appreciation fund                           |   | 31,229                    |      | 4,205 |   | (1,085 | ) | 34,349 |   |
|                                                      |   | 170,760                   |      | 8,890 |   | (2,815 | ) | 176,835 |   |
| Total securities  available for sale                      |   | $                         | 1,511,027 |   | $ | 30,363 |   | $ | (12,751 | ) | $ | 1,528,639 |   |

 

The Bank as a savings bank member of the Federal Home Loan Bank of NewYork (“FHLBNY”) is required to purchase shares of the FHLBNY stock at $100 parvalue. The amount of shares required to be purchased is based on the asset sizeof the Bank or level of advances from the FHLBNY at certain times that exceedthe required amount to be purchased resulting from changes in the Bank’s assetsize or level of borrowings. At December 31, 2002 and 2001, the Bank held1,121,500 and 1,029,000 shares of FHLBNY capital stock, respectively.

 

The amortized cost and market value of debt securities available forsale at December 31, 2002 and 2001, by contractual maturity, are shown below.Expected maturities will differ from contractual maturities because borrowersmay have the right to call or prepay obligations with or without call orprepayment penalties.

 
|                                                          |   | **December  31, 2002**    |        | **December  31, 2001** |       |
|---------------------------------------------------------------|--------|---------------------------|-------------|------------------------|------------|
|                                                          |   | **Amortized  Cost**       |        | **Market  Value**      |       | **Amortized  Cost** |   | **Market  Value** |   |
|                                                          |   | **(000’s  omitted)** |        |
| Due in one year  or less                                      |   | **$**                     | **—**  | ** **             | **$**      | **—** |   | $ | 1,060 |   | $ | 1,107 |   |
| Due after one  year through five years                        |   | **16,777**                | ** **  | **17,914**             |       | 23,158 |   | 23,872 |   |
| Due after five  years through ten years                       |   | **10,177**                | ** **  | **10,890**             |       | 83,612 |   | 84,390 |   |
| Due after ten  years                                          |   | **112,370**               | ** **  | **106,876**            |       | 133,895 |   | 126,510 |   |
|                                                          |   | **139,324**               |        | **135,680**            | ** ** | 241,725 |   | 235,879 |   |
| GNMA, FNMA, FHLMC and CMO mortgage participation certificates |   | **719,686**               | ** **  | **744,372**            |       | 1,098,542 |   | 1,115,925 |   |
|                                                          |   | **$**                     | **859,010** |                   | **$**      | **880,052** | ** ** | $ | 1,340,267 |   | $ | 1,351,804 |   |

 

29

----

 

Proceeds from sales and calls of securities available for sale during2002, 2001 and 2000, were $420,167,000, $322,540,000 and $309,972,000, withrealized gross gains of $24,659,000, $6,386,00 and $8,140,000 and realizedgross losses of $25,054,000, $20,999,000 and $8,709,000, respectively. Grosslosses in 2002 and 2001 include write-downs of approximately $2,691,000 and$14,506,000, respectively, on securities whose decline in value was deemed tobe other than temporary.

 

**5.  Loans**

 

A significant portion of the Bank’s loans are to borrowers who aredomiciled in New York City. The income of many of those customers is dependenton the economy of New York City and surrounding areas. In addition, asignificant portion of the loans to borrowers domiciled in New York City arereal estate loans with mortgages on Staten Island properties, which is aborough of New York City.

 

While management uses available information to provide for losses ofvalue on loans and foreclosed properties, future loss provisions may benecessary based on changes in economic conditions. In addition, the Bank’sfederal banking regulators, as an integral part of their examination process,periodically review the valuation of the Bank’s loans and foreclosedproperties. Such regulators may require the Bank to recognize write-downs basedon judgments different from those of management.

 

Loans, net, held in the portfolio consist of the following at December31, 2002 and 2001:

 
|                                                 |   | **December  31,**         |          |
|------------------------------------------------------|--------|---------------------------|---------------|
|                                                 |   | **2002**                  |          | **2001** |   |
|                                                 |   | **(000’s  omitted)** |          |
| Loans secured by  mortgages on real estate:          |   |                      |          |   |   |
| 1–4 family  residential                         |   | **$**                     | **2,671,041** |   | $ | 2,062,897 |   |
| Multi-family  properties                             |   | **56,545**                |          | 48,783 |   |
| Commercial  properties                               |   | **418,708**               |          | 335,260 |   |
| Home equity                                          |   | **19,032**                |          | 12,815 |   |
| Construction and  land                               |   | **153,144**               |          | 245,515 |   |
| Deferred  origination costs and unearned income, net |   | **17,736**                |          | 10,371 |   |
| Net loans  secured by mortgages on real estate       |   | **3,336,206**             |          | 2,715,641 |   |
| Other loans:                                         |   |                      |          |   |   |
| Student                                              |   | **228**                   |          | 288 |   |
| Passbook                                             |   | **8,692**                 |          | 7,477 |   |
| Commercial  business                                 |   | **62,777**                |          | 60,899 |   |
| Other consumer                                       |   | **37,362**                |          | 42,355 |   |
| Total other  loans                                   |   | **109,059**               |          | 111,019 |   |
| Net loans before  the allowance for loan losses      |   | **3,445,265**             |          | 2,826,660 |   |
| Allowance for  loan losses                           |   | **(22,773**               | **)**         | (20,041 | ) |
| Net loans                                            |   | **$**                     | **3,422,492** |   | $ | 2,806,619 |   |

 

A summary of activity in the Company’s allowance for loan losses forthe years ended December 31, 2002, 2001 and 2000, is as follows:

 
|                                                                    |   | **Year Ended  December 31,** |       |
|-------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                    |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                                    |   | **(000’s  omitted)**    |       |
| Allowance at  beginning of period                                       |   | **$**                        | **20,041** | ** ** | $ | 14,638 |   | $ | 14,271 |   |
| Provisions                                                              |   | **8,854**                    | ** ** | 8,757 |   | 652 |   |
| Increase as a  result of acquisition                                    |   | **—**                   | ** ** | — |   | 847 |   |
| Charge-offs:                                                            |   |                         | ** ** |   |   |   |   |
| Mortgage loans:                                                         |   |                         | ** ** |   |   |   |   |
| Single-family  residential                                              |   | **4,898**                    | ** ** | 1,854 |   | 120 |   |
| Multi-family  residential                                               |   | **—**                   | ** ** | — |   | — |   |
| Commercial real  estate                                                 |   | **—**                   | ** ** | — |   | 134 |   |
| Construction and  land                                                  |   | **—**                   | ** ** | — |   | 6 |   |
| Other loans                                                             |   | **2,174**                    | ** ** | 2,411 |   | 1,926 |   |
| Total  charge-offs                                                      |   | **7,072**                    | ** ** | 4,265 |   | 2,186 |   |
| Recoveries:                                                             |   |                         | ** ** |   |   |   |   |
| Mortgage loans:                                                         |   |                         | ** ** |   |   |   |   |
| Single-family  residential                                              |   | **10**                       | ** ** | 131 |   | 19 |   |
| Multi-family  residential                                               |   | **—**                   | ** ** | — |   | — |   |
| Commercial real  estate                                                 |   | **—**                   | ** ** | — |   | 27 |   |
| Construction and  land                                                  |   | **15**                       | ** ** | — |   | — |   |
| Other loans                                                             |   | **925**                      | ** ** | 780 |   | 1,008 |   |
| Total recoveries                                                        |   | **950**                      | ** ** | 911 |   | 1,054 |   |
| Allowance at end  of period                                             |   | **$**                        | **22,773** | ** ** | $ | 20,041 |   | $ | 14,638 |   |
| Allowance for  loan losses to total non-accruing loans at end of period |   | **131.20**                   | **%**      | 132.78 | % | 149.73 | % |
| Allowance for  loan losses to total loans at end of period              |   | **0.44**                     | **%**      | 0.50 | % | 0.49 | % |

 

Non-accrual loans of $17,357,000, $15,093,000 and $9,766,000 atDecember 31, 2002, 2001 and 2000, respectively, represent the Company’srecorded investment in loans for which impairment has been recognized inaccordance with SFAS 114 and SFAS No. 118. The loss of interest incomeassociated with loans on non-accrual status was approximately $1,026,000,$935,000 and $728,000 for the years ended December 31, 2002, 2001 and 2000,respectively. The actual amount of interest recorded as income (on a cashbasis) on such loans amounted to $1,401,000, $46,000 and $109,000 for the yearsended December 31, 2002, 2001 and 2000, respectively.

 

At December 31, 2002 and 2001, the valuation allowance related to allimpaired loans totaled $8,525,000 and $11,475,000, respectively, and suchamounts are included in the allowance for loan losses shown in the consolidatedstatements of financial condition. The average recorded investment in impairedloans for the years ended December 31, 2002 and 2001, was approximately$18,918,000 and $13,042,000, respectively.

 

At December 31, 2002 and 2001, the Company had ORE totaling $9,681,000and $1,227,000, respectively, classified in other assets.

 

At December 31, 2002 and 2001, the Company was servicing mortgages forothers totaling $432,569,000 and $342,897,000, respectively.

 

**6.  Loans Held for Sale**

 

Mortgage loans held for sale consist of mortgage loans collateralizedby one-to-four family residential real estate. The loans are 

 

30

----

 

originated to borrowers domiciled throughout the United States and thusthe Mortgage Company is not dependent on the economy of any one area of thecountry. As of December 31, 2002, mortgage loans held for sale had an unpaidprincipal balance of $1.7 billion and a weighted average coupon of 6.56%.Mortgage loans held for sale are carried at the lower of cost or market valueon an aggregate basis and are stated net of deferred loan origination costs andfees of $20.5 million and $15.5 million for the mark-to-market for loan basisadjustment at December 31, 2002.

 

The following table outlines the unpaid principal balance of mortgageloans held for sale by product type as of December 31, 2002 and 2001.

 
|                                   |   | **December  31,**         |          |
|----------------------------------------|--------|---------------------------|---------------|
|                                   |   | **2002**                  |          | **2001** |   |
|                                   |   | **(000’s  omitted)** |          |
| Conforming                             |   | **$**                     | **800,444**   |   | $ | 509,054 |   |
| Government                             |   | **206,973**               |          | 195,723 |   |
| Non-conforming  residential—Jumbo |   | **197,764**               |          | 253,059 |   |
| Non-conforming  residential—ALT-A |   | **383,642**               |          | 203,763 |   |
| Sub-prime                              |   | **105,040**               |          | 9,556 |   |
|                                   |   | **1,693,863**             |          | 1,171,155 |   |
| Net deferred  loan costs               |   | **20,490**                |          | 14,438 |   |
| Loan basis  adjustment                 |   | **15,537**                |          | — |   |
| Total                                  |   | **$**                     | **1,729,890** |   | $ | 1,185,593 |   |

 

The Mortgage Company sells its one-to-four unit mortgage loan inventoryto a variety of investors. Conforming fixed rate and adjustable rate mortgagesare primarily sold as agency (Fannie Mae, Freddie Mac or Ginnie Mac)mortgage-backed securities with non-conforming fixed and adjustable ratemortgages being marketed as whole loans to private investors. The Company sellsits second mortgages as whole loans to private investors.

 

**7.  Derivative Financial Instruments**

 

The Company currently utilizes certain derivative instruments,primarily forward delivery sale commitments, in its efforts to manageinterest-rate risk associated with its mortgage loan interest-rate lockedcommitments and mortgage loans held for sale. On January 1, 2001, the Companyadopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”(“SFAS 133”) which defines forward sale commitments as derivative financialinstruments. In accordance with SFAS 133, derivative financial instruments arerecognized in the statement of financial condition at fair value while changesin the fair value are recognized in the statement of income for years endingafter December 31, 2000.

 

Prior to June 30, 2002, the Company accounted for interest-rate lockedcommitments as off-balance sheet financial instruments. On March 13, 2002, theFASB cleared Implementation Issue C13, which offers clear guidance on thecircumstances in which a loan commitment must be included in the scope of SFAS133 and thus be accounted for as a derivative instrument. Upon the clearance ofC13 by FASB the Company identified certain commitments that should be accountedfor as derivative instruments in accordance with SFAS 133.

 

The effective date of the implementation guidance in Issue C13 for theCompany was July 1, 2002, when the effects of initially complying with theguidance was reported as a change of accounting principle. The outcome was thatthe Company recorded a net gain of $8.1 million ($4.7 million net of tax)resulting from the mark-to-market of certain loan commitments as of June 30,2002. This gain is reflected within the consolidated statement of income forDecember 31, 2002.

 

**8.  Premises and Equipment**

 

Premises and equipment at December 31, 2002 and 2001, are summarized asfollows:

 
|                                                 |   | **December  31,**         |       |
|------------------------------------------------------|--------|---------------------------|------------|
|                                                 |   | **2002**                  |       | **2001** |   |
|                                                 |   | **(000’s  omitted)** |       |
| Land                                                 |   | **$**                     | **6,861**  |   | $ | 5,078 |   |
| Building and  leasehold improvements                 |   | **34,776**                |       | 32,153 |   |
| Furniture,  fixtures and equipment                   |   | **30,589**                |       | 21,025 |   |
|                                                 |   | **72,226**                |       | 58,256 |   |
| Less—Accumulated  depreciation and amortization |   | **(24,681**               | **)**      | (19,317 | ) |
|                                                 |   | **$**                     | **47,545** |   | $ | 38,939 |   |

 

**9.  Due Depositors**

 

The following table provides deposits by type and the weighted averagerate at the periods indicated.

 
|                      |   | **December  31,**         |          |
|---------------------------|--------|---------------------------|---------------|
|                      |   | **2002**                  |          | **2001** |   |
|                      |   | **Balance**               |          | **Weighted  Average  Rate** |   | **Balance** |   | **Weighted  Average  Rate** |   |
|                      |   | **(000’s  omitted)** | ** **    |
| Savings accounts          |   | **$**                     | **1,045,767** | ** ** | **1.37** | **%** | $ | 868,028 |   | 2.02 | % |
| Certificates of  deposits |   | **980,879**               | ** **    | **2.95** | ** ** | 949,144 |   | 4.12 |   |
| Brokered  deposits        |   | **124,491**               | ** **    | **3.49** | ** ** | 134,756 |   | 4.05 |   |
| Money market  accounts    |   | **639,037**               | ** **    | **2.26** | ** ** | 350,558 |   | 3.12 |   |
| NOW accounts              |   | **134,450**               | ** **    | **1.19** | ** ** | 115,349 |   | 1.63 |   |
| Demand deposits           |   | **539,510**               | ** **    | **—** | ** ** | 483,493 |   | — |   |
| Total                     |   | **$**                     | **3,464,134** | ** ** | **1.84** | **%** | $ | 2,901,328 |   | 2.58 | % |

 

Scheduled maturities of certificates of deposit at December 31, 2002,are summarized as follows:

 
|                 |   | **Amount**                |      | **Weighted  Average  Rate** |   |
|----------------------|--------|---------------------------|-----------|-----------------------------|--------|
|                 |   | **(000’s  omitted)** |      |
| 2003                 |   | $                         | 711,144   |                        | 2.52   | % |
| 2004                 |   | 184,495                   |      | 3.38                        |   |
| 2005                 |   | 53,493                    |      | 3.32                        |   |
| 2006                 |   | 46,308                    |      | 4.82                        |   |
| 2007 and  thereafter |   | 109,930                   |      | 4.60                        |   |
|                 |   | $                         | 1,105,370 |                        | 3.01   | % |

 

31

----

 

The deposit accounts of each depositor are insured up to $100,000 bythe Bank Insurance Fund of the FDIC. The aggregate amounts of outstandingcertificates of deposit in denominations of $100,000 or more at December 31,2002 and 2001, were approximately $395,878,000 and $298,558,000, respectively.

 

At December 31, 2002 and 2001, the Bank had overdrawn demand depositaccounts which were reclassified as loans totaling $5,931,000 and $5,805,000,respectively. These unplanned overdrafts result primarily from the payment ofchecks clearing through the Federal Reserve Bank. A majority of the unplannedoverdrafts are paid off the following day by the customer or the checks paidare returned and the charge against the account reversed.

 

At December 31, 2002 and 2001, the Bank had pledged securitiesavailable for sale of $26.8 million and $4.1 million, respectively, ascollateral for municipal deposits and for deposits held by clients of theBank’s trust department.

 

The Bank charges a penalty for the early withdrawal of principal fromcertificates of deposit. These early withdrawal penalties totaled $163,000,$196,000 and $213,000, respectively, in the years ending December 31, 2002,2001 and 2000.

 

**10.  Borrowed Funds**

 

The Company was obligated for borrowings as follows (000’s omitted):

 
|                            |   | **December  31,** |          |
|---------------------------------|--------|-------------------|---------------|
|                            |   | **2002**          |          | **2001** |   |
|                            |   | **Amount**        |          | **Weighted  Average  Rate** |   | **Amount** |   | **Weighted  Average  Rate** |   |
| Repurchase  agreements Non-FHLB |   | **$**             | **269,260**   | ** ** | **5.08** | **%** | $ | 432,435 |   | 4.45 | % |
| Repurchase  agreements FHLB     |   | **200,000**       | ** **    | **5.39** | ** ** | 228,000 |   | 5.39 |   |
| FHLB advances                   |   | **1,813,000**     | ** **    | **4.41** | ** ** | 1,725,000 |   | 4.67 |   |
| Secured line of  credit         |   | **474,637**       | ** **    | **1.99** | ** ** | 66,293 |   | 2.47 |   |
| Mortgage payable                |   | **30**            | ** **    | **12.00** | ** ** | 34 |   | 12.00 |   |
|                            |   | **$**             | **2,756,927** |   | **4.13** | **%** | $ | 2,451,762 | ** ** | 4.64 | % |

 

The average balance of borrowings for the years ended December 31, 2002and 2001 was $2,629,271,000 and $2,399,963,000, respectively. The maximummonth-end balance of borrowings for the years ended December 31, 2002 and 2001was $2,923,828,000 and $2,535,392,000, respectively. The interest expense forborrowings for years ended December 31, 2002 and 2001, was $115,889,000 and129,387,000, respectively.

 

The Company’s borrowings at December 31, 2002, had contractualmaturities as follows (000’s omitted):

 
|                 |   | **Amount** |      | **Weighted  Average  Rate** |   |
|----------------------|--------|------------|-----------|-----------------------------|--------|
| 2003                 |   | $          | 996,837   |                        | 3.18   | % |
| 2004                 |   | 486,170    |      | 4.43                        |   |
| 2005                 |   | 495,090    |      | 4.84                        |   |
| 2006                 |   | 145,800    |      | 4.62                        |   |
| 2007 and  thereafter |   | 633,030    |      | 4.74                        |   |
|                 |   | $          | 2,756,927 |                        | 4.13   | % |

 

As of December 31, 2002, $487,453,000 of investment securities and$2,409,906,000 in mortgage loans were pledged as collateral for these borrowedfunds.

 

At December 31, 2002, the Bank had available a $100.0 million line ofcredit at the Federal Home Loan Bank of New York and two Federal Funds lines ofcredit for $25.0 million and $10.0 million at two commercial bankinginstitutions. These lines of credit were not in use at December 31, 2002. Inthe fourth quarter of 2001, the Mortgage Company entered into a mortgagerepurchase agreement with an international bank as an additional source offunding. The $150.0 million line of credit is collateralized by loans held forsale by the Mortgage Company. This line of credit expired December 15, 2002,and was not renewed. The Mortgage Company entered into additional lines ofcredit in February 2002 and November 2002 for $500 million and $400 million,respectively. The Bank guarantees the lines of credit by agreeing to, amongother things, repurchase loans that remain on the line for more than 60 days.The balance outstanding on the lines as of December 31, 2002 and 2001 was $475million and $66 million, respectively.

 

**11.  Employee Benefit Plans**

 

**Defined Benefit Plan.**Costs of the Company’s defined benefit plan are accounted for in accordancewith SFAS No. 87. The following table sets forth the change in benefitobligations, the change in the plan assets, the funded status of the plan andthe amounts recognized in the accompanying consolidated financial statements atDecember 31, 2002 and 2001, based upon the latest available actuarialmeasurement dates of December 31, 2002 and 2001.

 

The Company amended the defined benefit plan to freeze future benefitaccruals on December 31, 1999.

 
|                                             |   | **December  31,**         |       |
|--------------------------------------------------|--------|---------------------------|------------|
|                                             |   | **2002**                  |       | **2001** |   |
|                                             |   | **(000’s  omitted)** |       |
| Projected  benefit obligation, beginning of year |   | **$**                     | **20,016** | ** ** | $ | 19,675 |   |
| Interest cost                                    |   | **1,369**                 | ** ** | 1,363 |   |
| Benefits paid                                    |   | **(1,025**                | **)**      | (1,170 | ) |
| Actuarial loss                                   |   | **1,259**                 | ** ** | 148 |   |
| Projected benefit  obligation, end of year       |   | **$**                     | **21,619** | ** ** | $ | 20,016 |   |

 

The following table sets forth the plan’s change in plan assets:

 
|                                              |   | **December  31,**         |       |
|---------------------------------------------------|--------|---------------------------|------------|
|                                              |   | **2002**                  |       | **2001** |   |
|                                              |   | **(000’s  omitted)** |       |
| Fair value of  the plan assets, beginning of year |   | **$**                     | **25,052** | ** ** | $ | 28,187 |   |
| Actual return on  plan assets                     |   | **(4,050**                | **)**      | (1,965 | ) |
| Employer  contributions                           |   | **2,500**                 | ** ** | — |   |
| Benefits paid                                     |   | **(1,025**                | **)**      | (1,170 | ) |
| Fair value of  plan assets, end of year           |   | **$**                     | **22,477** | ** ** | $ | 25,052 |   |
| Funded status                                     |   | **$**                     | **6,945**  | ** ** | $ | 5,036 |   |
| Employer  contribution                            |   | **2,500**                 | ** ** | — |   |
| Unrecognized net  actuarial loss (gain)           |   | **841**                   | ** ** | 1,909 |   |
| Prepaid cost                                      |   | **$**                     | **10,286** | ** ** | $ | 6,945 |   |

 

32

----

 

The components of net pension expense are as follows:

 
|                                           |   | **Year Ended  December 31,** |       |
|------------------------------------------------|--------|------------------------------|------------|
|                                           |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                           |   | **(000’s  omitted)**    |       |
| Service  cost-benefits earned during the year  |   | **$**                        | **—** | ** ** | $ | — |   | $ | — |   |
| Interest cost on  projected benefit obligation |   | **1,368**                    | ** ** | 1,363 |   | 1,359 |   |
| Net amortization  and deferral                 |   | **—**                   | ** ** | — |   | — |   |
| Expected return  on plan assets                |   | **(2,209**                   | **)**      | (2,493 | ) | (2,498 | ) |
| Deferred investment  (gain)                    |   | **—**                   | ** ** | (29 | ) | (330 | ) |
| Net pension  (income)                          |   | **$**                        | **(841**   | **)** | $ | (1,159 | ) | $ | (1,469 | ) |
| Major  assumptions utilized:                   |   |                         | ** ** |   |   |   |   |
| Weighted average  discount rate                |   | **6.50**                     | **%**      | 7.00 | % | 7.25 | % |
| Expected  long-term rate of return on assets   |   | **9.00**                     | **%**      | 9.00 | % | 9.00 | % |

 

**Postretirement Benefits.**The Company provides postretirement benefits, including medical care and lifeinsurance, which cover substantially all active employees hired prior toDecember 31, 1999, upon their retirement.

 

The Company postretirement benefits are unfunded. The following tableshows the components of the plan’s accrued postretirement benefit cost includedin other liabilities in the consolidated statements of financial condition asof December 31, 2002 and 2001:

 
|                                             |   | **December  31,**        |       |
|--------------------------------------------------|--------|--------------------------|------------|
|                                             |   | **2002**                 |       | **2001** |   |
|                                             |   | **(000’s omitted)** |       |
| Accumulated  postretirement benefit obligations: |   |                     |       |   |   |
| Retirees                                         |   | **$**                    | **1,712**  | ** ** | $ | 1,354 |   |
| Other fully  eligible participants               |   | **3,559**                | ** ** | 2,816 |   |
| Unrecognized  gain (loss)                        |   | **(404**                 | **)**      | 345 |   |
| Unrecognized  past service liability             |   | **284**                  | ** ** | 359 |   |
| Accrued  postretirement benefit cost             |   | **$**                    | **5,151**  | ** ** | $ | 4,874 |   |

 

Net periodic postretirement benefit cost for 2002, 2001 and 2000included the following components:

 
|                                                            |   | **Year Ended  December 31,** |       |
|-----------------------------------------------------------------|--------|------------------------------|------------|
|                                                            |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                            |   | **(000’s  omitted)**    |       |
| Service  cost—benefits attributed to service during period |   | **$**                        | **240**    | ** ** | $ | 209 |   | $ | 210 |   |
| Interest cost on  accumulated postretirement benefit obligation |   | **295**                      | ** ** | 273 |   | 270 |   |
| Amortization of:                                                |   |                         | ** ** |   |   |   |   |
| Unrecognized  (gain) loss                                       |   | **—**                   | ** ** | (31 | ) | (3 | ) |
| Unrecognized  past service liability                            |   | **(75**                      | **)**      | (75 | ) | (75 | ) |
| Net periodic  postretirement benefit cost                       |   | **$**                        | **460**    | ** ** | $ | 376 |   | $ | 402 |   |

 

The average health care cost trend rate assumption significantlyaffects the amounts reported. For example, a 1% increase in this rate wouldincrease the accumulated benefit obligation by $344,000, $308,000 and $263,000at December 31, 2002, 2001 and 2000, respectively, and increase the netperiodic cost by $48,000, $45,000 and $37,000 for the years ended December 31,2002, 2001 and 2000, respectively. The postretirement benefit cost components for2002 were calculated assuming average health care cost trend rates ranging upto 9.0% and grading to 4.5% in 2008 and thereafter.

 

**401(k) Plan.** TheBank has a 401(k) plan (the “401(k) Plan”) covering substantially all full-timeemployees. The 401(k) Plan provides for employer matching contributions subjectto a specified maximum and also contains a profit-sharing feature whichprovides for contributions at the discretion of the Company. The 401(k) Planexpense in 2002, 2001 and 2000 was matched through stock contributions underthe ESOP at the Bank and through cash contributions at the Mortgage Company.The amounts matched for the years ended December 31, 2002, 2001 and 2000 wereapproximately $960,000, $686,000 and $581,000, respectively.

 

**Employee Stock Ownership Plan.**The Employee Stock Ownership Plan (“ESOP”) borrowed $41,262,000 from theCompany in 1997 and used the funds to purchase 6,877,000 shares of theCompany’s stock issued in the conversion. The loan has an interest rate of8.25% and is being repaid over a 15-year period. The loan was issued onDecember 19, 1997. Shares purchased are held in a suspense account forallocation among the participants as the loan is paid. Contributions to theESOP and shares released from the loan collateral are in an amount proportionalto repayment of the ESOP loan. Shares allocated are first used for the employermatching contribution for the 401(k) Plan, with the remaining shares allocatedto the participants based on compensation as described in the ESOP in the yearof allocation. The vesting schedule is the same as the Bank’s current 401(k)Plan. Forfeitures from the 401(k) matching contributions are used to reducefuture employer 401(k) matching contributions, while forfeitures from sharesallocated to the participants are allocated among the participants in the sameway as contributions. There were 457,808 shares allocated in the ESOP in eachof the years 2002, 2001 and 2000.

 

Compensation expense for the ESOP is recorded in accordance with SOP93-6, which requires the compensation expense to be recorded during the periodin which the shares become committed to be released to participants. Thecompensation expense is measured based upon the fair market value of the stockduring the period, and, to the extent that the fair market value of the sharescommitted to be released differs from the original cost of such share, thedifference is recorded as an adjustment to additional paid-in capital. TheCompany recorded compensation expense of $8,417,000, $5,437,000 and $1,773,000for the ESOP for the years ended December 31, 2002, 2001 and 2000,respectively.

 

**Recognition and Retention Plan.**The Company maintains the 1998 Recognition and Retention Plan (the “RRP”),which was implemented in July 1998 for the directors and officers of theCompany. The objective of the RRP is to enable the Company to provide officersand directors of the Company with a proprietary interest in the Company as anincentive to contribute to its success. During 1998, the RRP purchased3,438,500 shares of common stock of the Company, or 4% of the common stock sold

 

33

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in the Conversion on the open market. These purchases were funded bythe Company. Awards vest at a rate of 20% per year for directors and officers,commencing one year from the date of award. Awards become 100% vested uponretirement, termination of employment due to death or disability or upon changeof control. The Company recorded compensation expense of $5,872,000, $5,991,000and $6,313,000 for the RRP for the years ended December 31, 2002, 2001 and2000, respectively.

 

The following table sets forth the activity in the RRP:

 
|                        |   | **Year Ended  December 31,** |       |
|-----------------------------|--------|------------------------------|------------|
|                        |   | **2002**                     |       | **2001** |   | **2000** |   |
|                        |   | **Number  of  Shares**       |       | **Weighted  Average  Price** |   | **Number  of  Shares** |   | **Weighted  Average  Price** |   | **Number  of  Shares** |   | **Weighted  Average  Price** |   |
| Granted                     |   | —                       |       | $ | — |   | — |   | $ | — |   | 58,400 |   | $ | 8.93 |   |
| Vested                      |   | **595,710**                  | ** ** | **10.09** |   | 597,010 |   | 10.09 |   | 619,340 |   | 10.12 |   |
| Forfeited                   |   | **22,460**                   | ** ** | **10.13** |   | 13,690 |   | 10.03 |   | 4,740 |   | 10.13 |   |
| Shares available  for grant |   | **391,890**                  | ** ** |   |   | 369,430 |   |   |   | 355,740 |   |   |   |
|                             |        |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Stock Option Plan.**The Company maintains the Stock Option Plan. Pursuant to the Stock Option Plan,the Company has reserved 8,596,250 shares of common stock for future issuance,which is equal to 10% of the common stock sold in the Conversion. Under theStock Option Plan, stock options (which expire 10 years from the date of grant)have been granted to the directors, officers and certain employees of the Bankand the Mortgage Company. Each option entitles the holder to purchase one shareof the Company’s common stock at an exercise price equal to the fair marketvalue of the stock at the date of the grant. Options will be exercisable inwhole or in part over the vesting period. The options vest ratably over athree- to five-year period. However, all options become 100% exercisable in theevent the employee terminates his or her employment due to retirement, death ordisability or upon change of control.

 

The Company accounted for the Stock Option Plan as a variable awardplan using the intrinsic value method prescribed in APB No. 25 from planinception through September 24, 2002. Compensation expense was recorded on alloutstanding options equal to the difference between the option exercise priceand the fair market value of the Company’s common stock at the exercise date orat the financial reporting date, whichever is earlier. The resulting non-cashcharge to compensation expense for the years ended December 31, 2002 and 2001was $6,249,000 and $27,234,000, respectively. No compensation expense wasrecorded during the year ended December 31, 2000 as the market price of theCompany’s common stock was below the option exercise price. Effective September24, 2002, the Company reestablished the Stock Option Plan as a fixed plan underAPB No. 25.

 

**Stock Option Activity.**The following table sets forth activity in the Stock Option Plan and theweighted average fair value of the options granted:

 
|                                              |   | **Year Ended  December 31,** |       |
|---------------------------------------------------|--------|------------------------------|------------|
|                                              |   | **2002**                     |       |
|                                              |   | **Number  of Options**       |       | **Weighted  Average  Exercise Price** |   |
| Options  outstanding, beginning of year           |   | **7,246,262**                | ** ** | **$** | **11.95** |   |
| Options granted                                   |   | **923,983**                  | ** ** | **20.10** |   |
| Options  exercised                                |   | **(902,438**                 | **)**      | **11.35** |   |
| Options  forfeited                                |   | **(85,956**                  | **)**      | **12.23** |   |
| Options  outstanding, end of year                 |   | **7,181,851**                | ** ** | **13.07** |   |
| Remaining  options available for grant under plan |   | **187,103**                  | ** ** |   |   |
| Exercisable  options, end of year                 |   | **4,082,954**                | ** ** | **11.70** |   |
| Weighted average  fair value of options granted   |   | **$**                        | **6.13**   | ** ** |   |   |
|                                                   |        |                              |            |  |  |  |  |

 
|                                              |   | **Year Ended  December 31,** |   |
|---------------------------------------------------|--------|------------------------------|--------|
|                                              |   | **2001**                     |   |
|                                              |   | **Number  of Options**       |   | **Weighted  Average  Exercise Price** |   |
| Options  outstanding, beginning of year           |   | 6,155,600                    |   | $ | 11.34 |   |
| Options granted                                   |   | 1,484,920                    |   | 14.27 |   |
| Options  exercised                                |   | (324,858                     | )      | 11.25 |   |
| Options  forfeited                                |   | (69,400                      | )      | 11.28 |   |
| Options  outstanding, end of year                 |   | 7,246,262                    |   | 11.95 |   |
| Remaining  options available for grant under plan |   | 1,025,130                    |   |   |   |
| Exercisable  options, end of year                 |   | 3,391,542                    |   | 11.40 |   |
| Weighted average  fair value of options granted   |   | $                            | 3.89   |   |   |   |
|                                                   |        |                              |        |  |  |  |  |

 
|                                              |   | **Year Ended  December 31,** |   |
|---------------------------------------------------|--------|------------------------------|--------|
|                                              |   | **2000**                     |   |
|                                              |   | **Number  of Options**       |   | **Weighted  Average  Exercise Price** |   |
| Options  outstanding, beginning of year           |   | 6,092,000                    |   | $ | 11.37 |   |
| Options granted                                   |   | 90,000                       |   | 9.11 |   |
| Options  exercised                                |   | —                       |   | — |   |
| Options  forfeited                                |   | (26,400                      | )      | 11.44 |   |
| Options  outstanding, end of year                 |   | 6,155,600                    |   | 11.34 |   |
| Remaining  options available for grant under plan |   | 2,440,650                    |   |   |   |
| Exercisable  options, end of year                 |   | 2,516,800                    |   | 11.41 |   |
| Weighted average  fair value of options granted   |   | $                            | 3.42   |   |   |   |
|                                                   |        |                              |        |  |  |  |  |

 

The fair value of each option granted is estimated on the date of grantusing the Black-Scholes option-pricing model using the following weightedaverage assumptions:

 
|                     |   | **2002**  |       | **2001** |   | **2000** |   |
|--------------------------|--------|-----------|------------|----------|--------|----------|--------|
| Risk-free  interest rate |   | **3.43**  | **%**      | 4.50     | %      | 5.50     | %      |
| Expected  dividend yield |   | **2.70**  | ** ** | 2.70     |   | 2.70     |   |
| Volatility               |   | **36.41** | ** ** | 30.74    |   | 30.42    |   |
| Expected life in  years  |   | **6**     | ** ** | 6        |   | 6        |   |

 

34

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The following table shows stock options which were outstanding andstock options which were exercisable as of December 31, 2002.

 
|                          |   | **Options  Outstanding**           |   | **Options  Exercisable**                                       |   |
|-------------------------------|--------|------------------------------------|--------|----------------------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Outstanding  as of  12/31/2002** |   | **Weighted  Average  Remaining  Contractual Life  (in years)** |   | **Weighted  Average  Exercise Price** |   | **Exercisable  as of  12/31/2002** |   | **Weighted  Average  Exercise Price** |   |
|                          |   |                               |   |                                                           |   |   |   |   |   |   |   |
| $   8.040–$10.050   |   | 203,200                            |   | 7.1                                                            |   | $ | 9.268 |   | 80,400 |   | $ | 9.338 |   |
| $10.050–$12.060          |   | 4,597,504                          |   | 5.3                                                            |   | 11.438 |   | 3,576,104 |   | 11.438 |   |
| $12.060–$14.070          |   | 114,984                            |   | 8.7                                                            |   | 13.027 |   | 23,304 |   | 13.026 |   |
| $14.070–$16.080          |   | 1,342,180                          |   | 8.9                                                            |   | 14.380 |   | 403,146 |   | 14.380 |   |
| $18.090–$20.100          |   | 923,983                            |   | 9.9                                                            |   | 20.100 |   | — |   | — |   |
|                          |   | 7,181,851                          |   | 6.6                                                            |   | $ | 13.066 |   | 4,082,954 |   | $ | 11.696 |   |

 

**Supplemental Executive RetirementPlan.** In 1993, the Company adopted a Supplemental ExecutiveRetirement Plan (the “Executive Plan”) for certain senior officers thatprovides for payments upon retirement, death or disability. The Company amendedthe Executive Plan to freeze future benefit accruals on December 31, 1999. Theannual benefit is based upon annual salary (as defined) plus interest. Netperiodic pension expense for the Executive Plan for the years ended December31, 2002, 2001 and 2000 was approximately $145,000, $134,000 and $105,000,respectively.

 

**12. IncomeTaxes**

 

The provision for income taxes consists of the following:

 
|            |   | **Year Ended  December 31,** |       |
|-----------------|--------|------------------------------|------------|
|            |   | **2002**                     |       | **2001** |   | **2000** |   |
|            |   | **(000’s  omitted)**    |       |
| Current:        |   |                         |       |   |   |   |   |
| Federal         |   | **$**                        | **50,763** |   | $ | 33,613 |   | $ | 22,790 |   |
| State and local |   | **6,665**                    |       | 4,433 |   | 3,528 |   |
|            |   | **57,428**                   |       | 38,046 |   | 26,318 |   |
| Deferred        |   | **9,348**                    |       | (14,080 | ) | 6,590 |   |
|            |   | **$**                        | **66,776** |   | $ | 23,966 |   | $ | 32,908 |   |

 

The following tables reconcile the federal statutory rate to theCompany’s effective tax rate:

 
|                                                       |   | **Year Ended  December 31, 2002** |       |
|------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                       |   | **Amount**                        |       | **Percentage  of  Pre-tax Income** |   |
|                                                       |   | **(000’s  omitted)**         |       |
| Federal tax at  statutory rate                             |   | **$**                             | **56,848** | ** ** | **$** | **35.0** | **%** |
| State and local  income taxes (net of federal tax benefit) |   | **6,998**                         | ** ** | **4.3** | ** ** |
| Tax-exempt  dividend income                                |   | **(277**                          | **)**      | **(0.2** | **)** |
| Increase in cash  surrender value of BOLI                  |   | **(2,644**                        | **)**      | **(1.6** | **)** |
| Other                                                      |   | **5,851**                         | ** ** | **3.6** | ** ** |
| Income tax  provision                                      |   | **$**                             | **66,776** | ** ** | **41.1** | **%** |
|                                                            |        |                                   |            |  |  |  |  |

 
|                                                       |   | **Year Ended  December 31, 2001** |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                       |   | **Amount**                        |   | **Percentage  of  Pre-tax Income** |   |
|                                                       |   | **(000’s  omitted)**         |   |
| Federal tax at  statutory rate                             |   | $                                 | 24,395 |   | 35.0 | % |
| State and local  income taxes (net of federal tax benefit) |   | (601                              | )      | (0.9 | ) |
| Tax-exempt  dividend income                                |   | (895                              | )      | (1.3 | ) |
| Increase in cash  surrender value of BOLI                  |   | (2,525                            | )      | (3.6 | ) |
| Amortization of  goodwill                                  |   | 1,609                             |   | 2.3 |   |
| Other                                                      |   | 1,983                             |   | 2.9 |   |
| Income tax  provision                                      |   | $                                 | 23,966 |   | 34.4 | % |

 
|                                                       |   | **Year Ended  December 31, 2000** |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                       |   | **Amount**                        |   | **Percentage  of  Pre-tax Income** |   |
|                                                       |   | **(000’s  omitted)**         |   |
| Federal tax at  statutory rate                             |   | $                                 | 30,392 |   | 35.0 | % |
| State and local  income taxes (net of federal tax benefit) |   | 2,565                             |   | 3.0 |   |
| Tax-exempt  dividend income                                |   | (1,357                            | )      | (1.6 | ) |
| Increase in cash  surrender value of BOLI                  |   | (2,388                            | )      | (2.8 | ) |
| Amortization of  goodwill                                  |   | 1,738                             |   | 2.0 |   |
| Other                                                      |   | 1,958                             |   | 2.3 |   |
| Income tax  provision                                      |   | $                                 | 32,908 |   | 37.9 | % |

 

The components of the net deferred tax asset at December 31, 2002 and2001 are as follows:

 
|                                  |   | **December  31,**         |       |
|---------------------------------------|--------|---------------------------|------------|
|                                  |   | **2002**                  |       | **2001** |   |
|                                  |   | **(000’s  omitted)** |       |
| Assets:                               |   |                      |       |   |   |
| Contribution to  Foundation           |   | **$**                     | **—** |   | $ | 2,353 |   |
| Allowance for  loan losses            |   | **9,464**                 |       | 8,702 |   |
| Postretirement  benefit accrual       |   | **2,307**                 |       | 2,234 |   |
| Non-accrual  loans                    |   | **1,033**                 |       | 740 |   |
| Deferred  compensation                |   | **935**                   |       | 969 |   |
| ESOP shares                           |   | **2,307**                 |       | 1,983 |   |
| Deferred loss on  impaired securities |   | **3,345**                 |       | 6,515 |   |
| Deposit premium                       |   | **264**                   |       | 1,137 |   |
| Stock options                         |   | **11,474**                |       | 11,652 |   |
| Other                                 |   | **17,710**                |       | 10,824 |   |
| Total assets                          |   | **48,839**                |       | 47,109 |   |
|                                       |        |                           |            |  |  |  |  |

 

35

----

 
|                                  |   | **December  31,**         |       |
|---------------------------------------|--------|---------------------------|------------|
|                                  |   | **2002**                  |       | **2001** |   |
|                                  |   | **(000’s  omitted)** |       |
| Liabilities:                          |   |                      |       |   |   |
| Bad debt  recapture under Section 593 |   | **417**                   |       | 833 |   |
| Pension plan and  curtailment gain    |   | **3,502**                 |       | 2,818 |   |
| Fixed-asset tax  basis adjustment     |   | **708**                   |       | 708 |   |
| Bond discounts                        |   | **1,507**                 |       | 1,499 |   |
| Unrealized gain  on AFS securities    |   | **8,352**                 |       | 7,842 |   |
| Loan servicing  asset                 |   | **1,271**                 |       | 1,553 |   |
| Other                                 |   | **1,056**                 |       | 121 |   |
| Gross deferred  tax liability         |   | **16,813**                |       | 15,374 |   |
| Net deferred tax  asset               |   | **$**                     | **32,026** |   | $ | 31,735 |   |
|                                       |        |                           |            |  |  |  |  |

 

At December 31, 2002 and 2001, the deferred tax asset is included inother assets in the Company’s accompanying consolidated financial statements.

 

The net deferred tax asset at December 31, 2002 and 2001 represents theanticipated federal, state and local tax benefits that are expected to berealized in future years upon the utilization of the underlying tax attributescomprising this balance. Based upon current facts, management believes it ismore likely than not that the results of future operations will generatesufficient taxable income to realize the deferred tax assets. However, therecan be no assurance about the level of future earnings.

 

**Bad Debt Deduction**.Through January 1, 1996, under Section 593 of the Internal Revenue Code, thriftinstitutions such as the Bank, which met certain definitional tests primarilyrelating to their assets and the nature of their business, were permitted toestablish a tax reserve for bad debts and to make annual additions thereto,which additions may, within specified limitations, be deducted in arriving attheir taxable income. The Bank’s deduction with respect to “qualifying loans,”which are generally loans secured by certain interests in real property, wascomputed using an amount based on the Bank’s actual loss experience (the“Experience Method”) or a percentage equal to 8% of the Bank’s taxable income(the “PTI Method”), computed without regard to this deduction and withadditional modifications and reduced by the amount of any permitted addition tothe non-qualifying reserve. Similar deductions or additions to the Bank’s baddebt reserve are permitted under the New York State Bank Franchise Tax;however, for purposes of these taxes, the effective allowable percentage underthe PTI Method was approximately 32% rather than 8%.

 

Effective January 1, 1996, Section 593 was amended, and the Bank isunable to make additions to its federal tax bad debt reserve. However, the Bankis permitted to deduct bad debts only as they occur and is additionallyrequired to recapture (i.e., take into taxable income) over a six-year period,beginning with the Bank’s taxable year beginning on January 1, 1996, the excessof the balance of its bad debt reserves as of December 31, 1995 over thebalance of such reserves as of December 31, 1987, or over a lesser amount ifthe Bank’s loan portfolio has decreased since December 31, 1987. Such recapturerequirements have been deferred for taxable years through December 31, 1997 asthe Bank originated a minimum amount of certain residential loans based uponthe average of the principal amounts of such loans originated by the Bankduring its six taxable years preceding January 1, 1996. The recapturerequirement amount for the year 2002 was $1.2 million. In addition, in theevent of certain distributions or a complete liquidation, the Bank would berequired to recapture pre-1988 reserve method deductions of $11.6 million.Management has no intention of taking any such actions.

 

The New York State and New York City tax law has been amended toprevent a similar recapture of the Bank’s bad debt reserve and to permitcontinued future use of the bad debt reserve method for purposes of determiningthe Bank’s New York State and New York City tax liability. This change alsoprovides for an indefinite deferral of the recapture of the bad debt reservesgenerated for New York State and New York City purposes.

 

Should the Bank fail to meet certain statutory tests, includingmaintaining at least 60% of its assets in certain qualifying assets, the Bankwould be required to include into taxable income the amount that the State andCity tax bad debt reserves exceed the corresponding Federal reserve. As ofDecember 31, 2002 the Bank has not provided any tax liability for recognitionof the Bank’s excess State and City reserves of approximately $101 and $106million, respectively. In addition, the Bank’s qualifying asset percentageexceeded the 60% threshold at December 31, 2002.

 

**State, Local and Other Taxes**.The Company files state and local tax returns on a calendar-year basis. Stateand local taxes imposed on the Company primarily consist of New York StateFranchise tax, New York City Financial Corporation tax, Delaware Franchise taxand state taxes for an additional 40 states. These additional state taxes areattributable to the operation of SIB Mortgage Corp., which originates or doesbusiness in these additional locations. The Company’s annual liability for NewYork State and New York City purposes is the greater of a tax on income or analternative tax based on a specified formula. Liability for other state taxesare determined in accordance with the applicable local tax code.

 

**13. TreasuryStock**

 

The Company purchased 3.1 million and 7.7 million treasury shares at anaggregate cost of $60.2 million and $104.4 million during 2002 and 2001,respectively. During 2002 and 2001, 902,438 and 324,858 shares, respectively,were reissued for the exercise of stock options. As of December 31, 2002, therewere 30.0 million shares held as treasury stock. In July 2002, the Companyannounced its ninth stock repurchase program for 3.0 million shares of theCompany’s common stock, which represented 5% of the then outstanding commonstock. At December 31, 2002, 2.4 million shares remained to be repurchasedunder this program. The number of shares have been adjusted for the 2-for-1stock split in November 2001. See “Common Stock” in Note 2.

 

36

----

 

**14. EarningsPer Share Computation**

 

Earnings per share has been computed based on the following for theyears ended December 31, 2002, 2001 and 2000.

 
|                                                              |   | **Year Ended  December 31,**                         |        |
|-------------------------------------------------------------------|--------|------------------------------------------------------|-------------|
|                                                              |   | **2002**                                             |        | **2001** |   | **2000** |   |
|                                                              |   | **(000’s  omitted,  except per share amounts)** |        |
| Income before  cumulative effect of accounting change             |   | **$**                                                | **95,647**  |   | $ | 45,733 |   | $ | 53,926 |   |
| Cumulative  effect of accounting change, net of tax               |   | **4,731**                                            |        | — |   | — |   |
| Net income                                                        |   | **$**                                                | **100,378** |   | $ | 45,733 |   | $ | 53,926 |   |
| Divided by:                                                       |   |                                                 |        |   |   |   |   |
| Weighted average  common shares outstanding                       |   | **55,841**                                           |        | 60,180 |   | 67,021 |   |
| Weighted average  potential common shares                         |   | **2,424**                                            |        | 955 |   | — |   |
| Total weighted  average common shares and potential common shares |   | **58,265**                                           |        | 61,135 |   | 67,021 |   |
| Basic earnings  per share:                                        |   |                                                 |        |   |   |   |   |
| Income before  cumulative effect of accounting change             |   | **$**                                                | **1.71**    |   | $ | 0.76 |   | $ | 0.80 |   |
| Cumulative  effect of accounting change, net of tax               |   | **0.09**                                             |        | — |   | — |   |
| Net income                                                        |   | **$**                                                | **1.80**    |   | $ | 0.76 |   | $ | 0.80 |   |
| Diluted earnings  per share:                                      |   |                                                 |        |   |   |   |   |
| Income before  cumulative effect of accounting change             |   | **$**                                                | **1.64**    |   | $ | 0.75 |   | $ | 0.80 |   |
| Cumulative  effect of accounting change, net of tax               |   | **0.08**                                             |        | — |   | — |   |
| Net income                                                        |   | **$**                                                | **1.72**    |   | $ | 0.75 |   | $ | 0.80 |   |

 

The computation of diluted earnings per share includes weighted averagecommon shares outstanding and potential common shares.  Potential common shares that areantidilutive are not included in the computation of diluted earnings per share.

 

**15.Comprehensive Income**

 

Accounting principles generally require that recognized revenue,expenses, gains and losses be included in net income. Although certain changesin assets and liabilities, such as unrealized gains and losses onavailable-for-sale securities, are reported as a separate component of theequity section of the balance sheet, such items, along with net income, arecomponents of comprehensive income.

 

The components of other comprehensive income and related tax effectsare as follows:

 
|                                                       |   | **Year Ended  December 31,** |       |
|------------------------------------------------------------|--------|------------------------------|------------|
|                                                       |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                       |   | **(000’s  omitted)**    |       |
| Unrealized  holding gains on available-for-sale securities |   | **$**                        | **2,108**  | ** ** | $ | 8,656 |   | $ | 60,373 |   |
| Reclassification  adjustment for losses realized in income |   | **395**                      | ** ** | 14,613 |   | 569 |   |
| Net unrealized  gains                                      |   | **2,503**                    | ** ** | 23,269 |   | 60,942 |   |
| Tax effect                                                 |   | **(688**                     | **)**      | (10,578 | ) | (29,252 | ) |
| Net-of-tax  amount                                         |   | **$**                        | **1,815**  | ** ** | $ | 12,691 |   | $ | 31,690 |   |

 

**16. RelatedParty TransactionS**

 

In the ordinary course of business, the Bank has extended credit tovarious officers of the Company.

 

At December 31, 2002 and 2001, the Bank had balances outstanding fromvarious officers totaling $8,756,000 and $6,005,000 respectively. During 2002,there were loan originations of $3,068,000 and loan repayments of $317,000 onthe loans held by various officers of the Bank.

 

**17. Segment Reporting**

 

The Company manages its operations in a manner to focus on twostrategic goals: fulfilling its role as a banking institution for bothindividuals and businesses and as a national provider of single-familyresidential mortgage loan products. Accordingly, the Company aligns its variousbusiness objectives in support of these goals and manages the Company throughtwo segments: Community Banking and Mortgage Banking.

 

**Community Banking.**The Company’s Community Banking segment provides traditional banking servicesto commercial and retail customers generally located in areas in relativelyclose proximity to the Bank’s branch office locations in Staten Island andBrooklyn, New York, and New Jersey. The services include deposit accounts andrelated services, residential and commercial real estate lending, consumerlending, commercial lending, loan servicing, trust services, non-depositinvestment products and life insurance products. Products and services offeredby this business segment are delivered through a multichannel distributionnetwork, including online banking.

 

**Mortgage Banking.**The Company’s Mortgage Banking segment activities, which are conducted throughthe Mortgage Company, primarily include the origination of residential realestate loans either for sale into the secondary market or, to a lesser extent,for retention in the Bank’s portfolio. The loans are originated throughout anetwork in 42 states. Loans not retained for the Bank’s portfolio are sold toinvestors, including certain government-sponsored agencies. Applications forloans are accepted through various sources by the Mortgage Banking segment asindicated below.

 

The following table summarizes application volumes by source:

 
|            |   | **Year Ended  December 31,** |           |
|-----------------|--------|------------------------------|----------------|
|            |   | **2002**                     |           | **2001** |   |
|            |   | **(000’s  omitted)**    |           |
| Consumer direct |   | **$**                        | **1,731,317**  |   | $ | 597,035 |   |
| Retail          |   | **3,917,257**                |           | 3,027,742 |   |
| Wholesale       |   | **10,519,822**               |           | 3,204,085 |   |
| Bulk purchase   |   | **174,216**                  |           | — |   |
| Total all       |   | **$**                        | **16,342,612** |   | $ | 6,828,862 |   |

 

The Mortgage Banking segment’s net income for the year ended December31, 2002, was $41.7 million as compared to $13.0 million for the year endedDecember 31, 2001. Included in the December 31, 2002, net income is thepreviously described cumulative effect adjustment due to a change in accountingfor loan commitments of $4.7 million after taxes. The Mortgage Company’s loanoriginations were $8.6 billion and its loan sales amounted to $7.7 billion forthe year ended December 31, 2002,

 

37

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as compared to $4.0 billion in loan originations and $2.9 billion inloan sales for the year ended December 31, 2001.

 

The Mortgage Company sells whole mortgage loans and pools of mortgageloans, servicing released. Mortgage origination fees, net of direct loan costs,are deferred and included in mortgage loans held for sale until the loans aresold. Gain on sale of mortgage loans is the differential between the saleproceeds, including premium, if any, and the carrying amount of the mortgageloans.

 

Certain of the Mortgage Company’s expenses are variable based on thevolume of loan applications and originations. The primary expense associatedwith loan originations is commission expense paid to brokers and retail loanofficers to originate a loan. Declines in volume resulting in reduced feeincome will be partially offset by a decline in commission expense andreduction in back-office staff, primarily shipping, and the number of contractemployees. The Mortgage Company, in an effort to partially protect itself inthe event of declines in volumes resulting from interest rate movements, hasdeveloped contingency plans designed to reduce expenses to coincide withreductions in loan origination volumes.

 

With the exception of loans originated for the Bank’s portfolio, allloans originated by the Mortgage Company are originated for sale into thesecondary market and the Mortgage Company assumes limited repurchase risk. Inconnection with the sale of loans to mortgage loan investors, the MortgageCompany makes standard secondary market representations and warranties in thenormal course of business to facilitate loan sales. These representations andwarranties relate to, among other things, the Mortgage Company’s compliancewith laws, regulations, investor standards and the accuracy of informationsupplied by borrowers and verified by the Mortgage Company.

 

The Mortgage Company also represents and warrants that the borrowerswill make payments as agreed for a specified period of time after transfer ofownership of the loans to the investors. The time period ranges up to 90 daysafter the loan transfer. In the event of payment default within the warrantyperiod, the investor may require the Mortgage Company to repurchase the loan orthe Mortgage Company may mutually agree to extend the warranty period. Incertain cases where repurchase is required, an alternative settlement may bereached whereby the investor reprices the loan to market based on its thenimpaired status and accepts a cash payment of the difference between the priceoriginally paid by the investor and the repriced market value as fullsatisfaction of the Mortgage Company’s warranty for that loan.

 

During 2002, the Mortgage Company established a Representation &Warranty Reserve (“R&WR”). The R&WR is intended to provide for thepotential liabilities associated with residential loans sold, or awaiting sale,in the normal course of business. The R&WR differs from the traditionalallowance for loan losses which provides for losses associated with loans heldfor investment. The R&WR provides for losses on loans sold or held forsale.

 

The R&WR is included on the Company’s balance sheet within OtherLiabilities and, in contrast to the allowance for loan losses does not affectthe loan basis. Provisions to the R&WR reduce the reported amount of netgains on loan sales.

 

The segment operating revenue and operating earnings in the table belowincorporate certain intersegment transactions that the Company views asappropriate for purposes of reflecting the contribution of certain segments,which are eliminated in preparation of the Company’s consolidated financialstatements in accordance with generally accepted accounting principles.

 

**Segment Reporting Tables**

**For the Years Ended December 31,2002, 2001 and 2000**

 
|                                                             |   | **Year Ended December 31, 2002** |          |
|------------------------------------------------------------------|--------|----------------------------------|---------------|
|                                                             |   | **Mortgage  Banking**            |          | **Community  Banking** |   | **Elimination of****Intersegment  Items** |   | **Total** |   |
|                                                             |   | **(000’s  omitted)**        |          |
| Interest income                                                  |   | **$**                            | **101,012**   | ** ** | **$** | **358,511** | ** ** | **$** | **(62,391** | **)** | **$** | **397,132** | ** ** |
| Interest expense                                                 |   | **67,725**                       | ** **    | **183,280** | ** ** | **(62,391** | **)** | **188,614** | ** ** |
| Net interest  income                                             |   | **33,287**                       | ** **    | **175,231** | ** ** | **—** | ** ** | **208,518** | ** ** |
| Provision for  loan losses                                       |   | **4,724**                        | ** **    | **4,130** | ** ** | **—** | ** ** | **8,854** | ** ** |
| Other income  (loss):                                            |   |                             | ** **    |   | ** ** |   | ** ** |   | ** ** |
| Service and fee  income                                          |   | **—**                       | ** **    | **25,328** | ** ** | **—** | ** ** | **25,328** | ** ** |
| Net gains  (losses) on loan sales                                |   | **230,023**                      | ** **    | **677** | ** ** | **(11,713** | **)** | **218,987** | ** ** |
| Loan fees                                                        |   | **28,436**                       | ** **    | **751** | ** ** | **—** | ** ** | **29,187** | ** ** |
| Securities  transactions                                         |   | **—**                       | ** **    | **(395** | **)** | **—** | ** ** | **(395** | **)** |
| Total other  income (loss)                                       |   | **258,459**                      | ** **    | **26,361** | ** ** | **(11,713** | **)** | **273,107** | ** ** |
| Other expenses                                                   |   | **223,876**                      | ** **    | **86,472** | ** ** | **—** | ** ** | **310,348** | ** ** |
| Income before  provision for income taxes                        |   | **63,146**                       | ** **    | **110,990** | ** ** | **(11,713** | **)** | **162,423** | ** ** |
| Provision for  income taxes                                      |   | **26,206**                       | ** **    | **44,904** | ** ** | **(4,334** | **)** | **66,776** | ** ** |
| Income before  cumulative effect of accounting change            |   | **36,940**                       | ** **    | **66,086** | ** ** | **(7,379** | **)** | **95,647** | ** ** |
| Cumulative  effect of change in accounting principle, net of tax |   | **4,731**                        | ** **    | **—** | ** ** | **—** | ** ** | **4,731** | ** ** |
| Net income                                                       |   | **$**                            | **41,671**    | ** ** | **$** | **66,086** | ** ** | **$** | **(7,379** | **)** | **$** | **100,378** | ** ** |
| Balance sheet  data                                              |   | **$**                            | **1,964,603** | ** ** | **$** | **6,416,288** | ** ** | **$** | **(1,445,796** | **)** | **$** | **6,935,095** | ** ** |
| Total assets at  December 31, 2002                               |   |                             |          |   |   |   |   |   |   |   |   |   |   |
| Other financial  data (pre-tax)                                  |   |                             | ** **    |   | ** ** |   | ** ** |   | ** ** |
| Depreciation and  amortization                                   |   | **1,664**                        | ** **    | **5,163** | ** ** | **—** | ** ** | **6,827** | ** ** |

 

38

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|                                      |   | **Year Ended  December 31, 2001** |      |
|-------------------------------------------|--------|-----------------------------------|-----------|
|                                      |   | **Mortgage  Banking**             |      | **Community  Banking** |   | **Elimination  of  Intersegment  Items** |   | **Total** |   |
|                                      |   | **(000’s  omitted)**         |      |
| Interest income                           |   | $                                 | 63,219    |   | $ | 360,137 |   | $ | (50,373 | ) | $ | 372,983 |   |
| Interest expense                          |   | 51,556                            |      | 209,395 |   | (50,373 | ) | 210,578 |   |
| Net interest  income                      |   | 11,663                            |      | 150,742 |   | — |   | 162,405 |   |
| Provision for  loan losses                |   | 3,292                             |      | 5,465 |   | — |   | 8,757 |   |
| Other income  (loss):                     |   |                              |      |   |   |   |   |   |   |
| Service and fee  income                   |   | —                            |      | 19,342 |   | — |   | 19,342 |   |
| Net gains  (losses) on loan sales         |   | 93,480                            |      | (679 | ) | (972 | ) | 91,829 |   |
| Loan fees                                 |   | 15,929                            |      | 731 |   | — |   | 16,660 |   |
| Securities  transactions                  |   | —                            |      | (14,613 | ) | — |   | (14,613 | ) |
| Total other  income (loss)                |   | 109,409                           |      | 4,781 |   | (972 | ) | 113,218 |   |
| Other expenses                            |   | 95,522                            |      | 101,645 |   | — |   | 197,167 |   |
| Income before  provision for income taxes |   | 22,258                            |      | 48,413 |   | (972 | ) | 69,699 |   |
| Provision for  income taxes               |   | 9,241                             |      | 15,085 |   | (360 | ) | 23,966 |   |
| Net income                                |   | $                                 | 13,017    |   | $ | 33,328 |   | $ | (612 | ) | $ | 45,733 |   |
| Balance sheet  data                       |   |                              |      |   |   |   |   |   |   |
| Total assets at  December 31, 2001        |   | $                                 | 1,486,040 |   | $ | 5,935,523 |   | $ | (1,416,510 | ) | $ | 6,005,053 |   |
| Other financial  data (pre-tax)           |   |                              |      |   |   |   |   |   |   |
| Depreciation and  amortization            |   | 1,055                             |      | 9,308 |   | — |   | 10,363 |   |

 
|                                      |   | **Year Ended  December 31, 2000** |    |
|-------------------------------------------|--------|-----------------------------------|---------|
|                                      |   | **Mortgage  Banking**             |    | **Community  Banking** |   | **Elimination  of  Intersegment  Items** |   | **Total** |   |
|                                      |   | **(000’s  omitted)**         |    |
|                                      |   |                              |    |   |   |   |   |   |   |
| Interest income                           |   | $                                 | 10,498  |   | $ | 339,051 |   | $ | (5,745 | ) | $ | 343,804 |   |
| Interest expense                          |   | 8,180                             |    | 200,686 |   | (5,745 | ) | 203,121 |   |
| Net interest  income                      |   | 2,318                             |    | 138,365 |   | — |   | 140,683 |   |
| Provision for  loan losses                |   | 402                               |    | 250 |   | — |   | 652 |   |
| Other income  (loss):                     |   |                              |    |   |   |   |   |   |   |
| Service and fee  income                   |   | —                            |    | 16,878 |   | — |   | 16,878 |   |
| Net gains  (losses) on loan sales         |   | 21,169                            |    | 1,033 |   | (984 | ) | 21,218 |   |
| Loan fees                                 |   | 5,543                             |    | 492 |   | — |   | 6,035 |   |
| Securities  transactions                  |   | —                            |    | (568 | ) | — |   | (568 | ) |
| Total other  income (loss)                |   | 26,712                            |    | 17,835 |   | (984 | ) | 43,563 |   |
| Other expenses                            |   | 30,639                            |    | 66,121 |   | — |   | 96,760 |   |
| Income before  provision for income taxes |   | (2,011                            | )       | 89,829 |   | (984 | ) | 86,834 |   |
| Provision for  income taxes               |   | (720                              | )       | 33,992 |   | (364 | ) | 32,908 |   |
| Net income                                |   | $                                 | (1,291  | ) | $ | 55,837 |   | $ | (620 | ) | $ | 53,926 |   |
| Balance sheet data                        |   |                              |    |   |   |   |   |   |   |
| Total assets at  December 31, 2000        |   | $                                 | 310,923 |   | $ | 5,244,097 |   | $ | (314,156 | ) | $ | 5,240,864 |   |
| Other financial  data (pre-tax)           |   |                              |    |   |   |   |   |   |   |
| Depreciation and  amortization            |   | 722                               |    | 8,626 |   | — |   | 9,348 |   |

 

**18.Commitments and Contingencies**

 

In the normal course of business, there are various outstandingcommitments and contingent liabilities, such as standby letters of credit,which the Company considers to be guarantees under FIN 45 and certaincommitments to extend credit, which are not reflected in the accompanyingconsolidated financial statements. The Company uses the same policies in makingcommitments as it does for on-balance sheet instruments. No material losses areanticipated as a result of these transactions. The Company was contingently liableunder standby letters of credit in the amount of $6.4 million and $4.4 millionat December 31, 2002 and 2001, respectively.

 

In addition, at December 31, 2002 and 2001, mortgage loan commitmentsand unused balances under revolving credit lines approximated $1.5 billion and$1.0 billion, respectively. As of December 31, 2002 and 2001, the MortgageCompany had commitments to sell loans of $2.7 billion and $856.2 million,respectively.

 

Total operating rental commitments on branch offices and other facilities,which expire at various dates through September 2017, exclusive of renewaloptions, are as follows (000’s omitted):

 

| 2003                 |   | $      | 6,382  |   |
|----------------------|--------|--------|--------|--------|
| 2004                 |   | 5,885  |   |
| 2005                 |   | 4,133  |   |
| 2006                 |   | 3,625  |   |
| 2007 and  thereafter |   | 12,939 |   |
|                 |   | $      | 32,964 |   |

 

Rental expense included in the consolidated statements of income wasapproximately $5,323,000 $3,549,000 and $2,213,000 for the years ended December31, 2002, 2001 and 2000, respectively.

 

**19.Disclosures About Fair Value of Financial Instruments**

 

The following methods and assumptions were used to estimate the fairvalue of each class of financial instruments for which it is practicable toestimate that value:

 

**Cash and Due from Banks and FederalFunds Sold**. For these short-term instruments, the carryingamount is a reasonable estimate of fair value.

 

**Accrued Interest**.The carrying amount is a reasonable estimate of fair value.

 

**Securities Available for Sale.**Fair values for securities are based on quoted market prices or dealer quotes.If a quoted market price is not available, fair value is estimated using quotedmarket prices for similar securities.

 

**Loans**. For loans,fair value is based on the credit and interest rate characteristics ofindividual loans. These loans are stratified by type, maturity, interest rate,underlying collateral, where applicable, and credit quality ratings. Fair valueis estimated by discounting scheduled cash flows through estimated maturitiesusing discount rates which in management’s opinion best reflect current marketinterest rates that would be charged on loans with similar characteristics andcredit quality. Credit risk concerns are reflected by

 

39

----

 

adjusting cash flow forecasts, by adjusting the discount rate or byadjusting both.

 

**Mortgage Loans Held for Sale.**The fair values of these financial instruments were based upon the publishedmark-to-market pricing information available as of December 31, 2002 and 2001.The increase in fair value is partially offset by the change in value betweenthe locked and closed commitment, which is already reflected on the balancesheet.

 

**Deposit Liabilities.**The fair value of demand deposits, savings accounts and certain money marketdeposits is the amount payable on demand at the reporting date. The fair valueof fixed-maturity certificates of deposit is estimated using the ratescurrently offered for deposits of similar remaining maturities.

 

Demand deposits, savings accounts and certain money market deposits arevalued at their carrying value. In the Company’s opinion, these deposits couldbe sold at a premium based on management’s knowledge of the results of recentsales of financial institutions in the New York City area.

 

**Advances from Borrowers for Taxes andInsurance.** The carrying amount is a reasonable estimate offair value.

 

**Borrowed Funds.**Fair value is based on discounted contractual cash flows using rates whichapproximate the rates offered for borrowings of similar remaining maturities.

 

The estimated fair values of the Company’s derivative financial instrumentsas of December 31, 2002 and 2001, are as follows:

 
|                                                                |   | **December  31, 2002** |          |
|---------------------------------------------------------------------|--------|------------------------|---------------|
| **Derivatives related to:**                                         |   | **Notional**           |          | **Carrying  Amount** |   | **Fair  Value** |   |
|                                                                |   | **(000's  omitted)**   |          |
| Mortgage loans  held for sale and commitments to purchase/originate |   |                   |          |   |   |   |   |
| Forward delivery  commitments                                       |   | **$**                  | **1,465,000** | ** ** | **$** | **(16,061** | **)** | **$** | **(16,061** | **)** |
| Commitments to  purchase/originate mortgages                        |   | **1,766,783**          | ** **    | **20,971** | ** ** | **20,971** | ** ** |
|                                                                     |        |                        |               |  |  |  |  |  |  |  |

 
|                                                                |   | **December  31, 2001** |    |
|---------------------------------------------------------------------|--------|------------------------|---------|
| **Derivatives related to:**                                         |   | **Notional**           |    | **Carrying  Amount** |   | **Fair  Value** |   |
|                                                                |   | **(000's  omitted)**   |    |
| Mortgage loans  held for sale and commitments to purchase/originate |   |                   |    |   |   |   |   |
| Forward delivery  commitments                                       |   | $                      | 248,000 |   | $ | 1,020 |   | $ | 1,020 |   |
| Commitments to  purchase/originate mortgages                        |   | 422,519                |    | — |   | — |   |
|                                                                     |        |                        |         |  |  |  |  |  |  |  |

 

The Company’s derivative financial instruments illustrated above areheld for purposes other than trading. Fair value amounts were determined basedupon available market information.

 

**Mortgage Loans Held for Sale andCommitments to Purchase/ Originate Mortgages.** Prior to theclosing and funds disbursement on a single-family residential mortgage loan,the Company generally extends an interest rate locked commitment to theborrower. Such commitments obligate the Company to close the mortgage loan at aspecified rate of interest provided the conditions to closing are satisfied.However, a period of 15 to 90 days, or more, generally elapses between the timesuch commitments are issued and the time that the Company sells the closedmortgage loans into the secondary market. During such time, the Company issubject to risk that market rates of interest may change, since the price thatinvestors will pay for mortgage loans purchased from the Company is dependent,in part, on the difference between the interest rate on such loans and thethen-current rate. Rates are based on long-term (generally 10-year) U.S.Treasury bonds plus a margin (with any such difference referred to as thespread). If market rates of interest rise, the spread between locked loans andthe U.S. Treasury rate will widen and investors generally will pay less to purchasesuch loans resulting in a reduction in the amount of the Company’s gainrecognized on sale or, in some instances, a loss. In an effort to mitigate suchinterest rate risk, substantially at the same time the Company extends aninterest rate locked commitment to its borrower, it also enters into forwarddelivery sales commitments. Pursuant to the forward sales commitments, theCompany agrees to deliver whole mortgage loans to various investors or to issueFNMA and/or FHLMC mortgage-backed securities. Gains and losses resulting fromchanges in value of forward sale commitments are recognized in earnings in thecurrent period.

 

The estimated fair values of the Company’s financial instruments are asfollows (000’s omitted):

 
|                                             |   | **December  31, 2002** |        |
|--------------------------------------------------|--------|------------------------|-------------|
|                                             |   | **Carrying  Amount**   |        | **Fair  Value** |   |
| Financial  assets:                               |   |                   |        |   |   |
| Cash and due  from banks                         |   | **$**                  | **137,085** | ** ** | **$** | **137,085** | ** ** |
| Federal funds  sold                              |   | **237,000**            | ** **  | **237,000** | ** ** |
| Securities  available for sale                   |   | **1,023,582**          | ** **  | **1,023,582** | ** ** |
| Loans held in  portfolio                         |   | **3,445,265**          | ** **  | **3,568,297** | ** ** |
| Less—Allowance  for loan losses             |   | **(22,773**            | **)**       | **—** | ** ** |
| Loans held for  sale                             |   | **1,729,890**          | ** **  | **1,733,309** | ** ** |
| Accrued interest  receivable                     |   | **23,976**             | ** **  | **23,976** | ** ** |
| Financial  liabilities:                          |   |                   | ** **  |   | ** ** |
| Savings and  demand deposits                     |   | **2,358,764**          | ** **  | **2,358,764** | ** ** |
| Certificates of  deposit                         |   | **1,105,370**          | ** **  | **1,126,491** | ** ** |
| Borrowed funds                                   |   | **2,756,927**          | ** **  | **2,882,313** | ** ** |
| Advances from  borrowers for taxes and insurance |   | **23,537**             | ** **  | **23,537** | ** ** |
| Accrued interest  payable                        |   | **14,897**             | ** **  | **14,897** | ** ** |
|                                                  |        |                        |             |  |  |  |  |

 
|                                             |   | **December  31, 2001** |    |
|--------------------------------------------------|--------|------------------------|---------|
|                                             |   | **Carrying  Amount**   |    | **Fair  Value** |   |
| Financial  assets:                               |   |                   |    |   |   |
| Cash and due  from banks                         |   | $                      | 116,846 |   | $ | 116,846 |   |
| Federal funds  sold                              |   | 38,000                 |    | 38,000 |   |
| Securities  available for sale                   |   | 1,528,639              |    | 1,528,639 |   |
| Loans held in  portfolio                         |   | 2,826,660              |    | 2,847,143 |   |
| Less—Allowance  for loan losses             |   | (20,041                | )       | — |   |
| Loans held for  sale                             |   | 1,185,593              |    | 1,205,094 |   |
| Accrued interest  receivable                     |   | 28,601                 |    | 28,601 |   |
| Financial  liabilities:                          |   |                   |    |   |   |
| Savings and  demand deposits                     |   | 1,817,428              |    | 1,817,428 |   |
| Certificates of  deposit                         |   | 1,083,900              |    | 1,092,441 |   |
| Borrowed funds                                   |   | 2,451,762              |    | 2,561,196 |   |
| Advances from  borrowers for taxes and insurance |   | 17,495                 |    | 17,495 |   |
| Accrued interest  payable                        |   | 14,812                 |    | 14,812 |   |
|                                                  |        |                        |         |  |  |  |  |

 

40

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**20.Regulatory Matters**

 

The Federal Deposit Insurance Corporation Improvement Act of 1991(“FDICIA”) imposes a number of mandatory supervisory measures on banks andthrift institutions. One of the items FDICIA imposed was certain minimumcapital requirements or classifications. Such classifications are used by theFDIC and other bank regulatory agencies to determine matters ranging from eachinstitution’s semiannual FDIC deposit insurance premium assessments toapprovals of applications authorizing institutions to grow their asset size orotherwise expand business activities. Under OTS capital regulations, the Bankis required to comply with each of three separate capital adequacy standards.Set forth below is a summary of the Bank’s compliance with OTS capitalstandards as of December 31, 2002 and 2001 (000’s omitted):

 
|                      |   | **December  31, 2002** |        |
|---------------------------|--------|------------------------|-------------|
|                      |   | **Actual**             |        | **Percent** |   | **Required** |   | **Percent** |   |
| **SI  Bank & Trust:** |   |                   |        |   |   |   |   |   |   |
| Tangible capital          |   | **$**                  | **475,722** | ** ** | **6.98** | **%** | **$** | **102,224** | ** ** | **1.50** | **%** |
| Core capital              |   | **477,635**            | ** **  | **7.01** | **%** | **272,673** | ** ** | **4.00** | **%** |
| Risk-based  capital       |   | **497,591**            | ** **  | **13.28** | **%** | **299,653** | ** ** | **8.00** | **%** |
|                           |        |                        |             |  |  |  |  |  |  |  |  |

 
|                      |   | **December  31, 2001** |    |
|---------------------------|--------|------------------------|---------|
|                      |   | **Actual**             |    | **Percent** |   | **Required** |   | **Percent** |   |
| **SI  Bank & Trust:** |   |                   |    |   |   |   |   |   |   |
| Tangible capital          |   | $                      | 412,002 |   | 7.01 | % | $ | 88,123 |   | 1.50 | % |
| Core capital              |   | 414,397                |    | 7.05 | % | 235,089 |   | 4.00 | % |
| Risk-based  capital       |   | 431,612                |    | 13.35 | % | 258,734 |   | 8.00 | % |
|                           |        |                        |         |  |  |  |  |  |  |  |  |

 

As part of the IPO in December 1997, in accordance with therequirements of the OTS, the Bank established a liquidation account for$183,947,000, which was equal to its capital as of the date of the latestconsolidated statement of financial condition (September 30, 1997) appearing inthe IPO prospectus supplement. The liquidation account is reduced to the extentthat eligible account holders have reduced their qualifying deposits.Subsequent increases in deposits do not restore an eligible account holder’sinterest in the liquidation account. In the event of a complete liquidation ofthe Bank, each eligible account holder will be entitled to receive adistribution from the liquidation account in an amount proportionate to theadjusted qualifying balances for accounts then held. This account had a balanceof $30,020,000 at December 31, 2002.

 

In addition to the restriction described above, the Company may notdeclare or pay cash dividends on or repurchase any of its shares of commonstock if the effect thereof would cause stockholders’ equity to be reducedbelow applicable regulatory capital maintenance requirements or if suchdeclaration and payment would otherwise violate regulatory requirements.

 

**21. StatenIsland Bancorp, Inc.**

 

The following condensed statements of financial condition as of December31, 2002 and 2001, and condensed statements of income and cash flows for eachof the years in the three-year period ended December 31, 2002, represent theparent-company-only financial information and should be read in conjunctionwith the consolidated financial statements and the notes thereto.

 

**Condensed Statements of FinancialCondition**

 
|                                                                                                              |   | **December  31,**         |        |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------|-------------|
|                                                                                                              |   | **2002**                  |        | **2001** |   |
|                                                                                                              |   | **(000’s  omitted)** |        |
| Assets:                                                                                                           |   |                      |        |   |   |
| Cash                                                                                                              |   | **$**                     | **62**      | ** ** | $ | 11,580 |   |
| Securities  available for sale                                                                                    |   | **33,506**                | ** **  | 69,450 |   |
| Investment in  Bank                                                                                               |   | **547,222**               | ** **  | 479,760 |   |
| ESOP loan  receivable from Bank                                                                                   |   | **32,606**                | ** **  | 34,631 |   |
| Other assets                                                                                                      |   | **13,677**                | ** **  | 11,419 |   |
| Total assets                                                                                                      |   | **$**                     | **627,073** | ** ** | $ | 606,840 |   |
|                                                                                                              |   |                      |        |   |   |
| Liabilities:                                                                                                      |   |                      | ** **  |   |   |
| Loan payable to  Bank                                                                                             |   | **$**                     | **7,840**   | ** ** | $ | 40,062 |   |
| Accrued interest  and other liabilities                                                                           |   | **4,965**                 | ** **  | 2,975 |   |
| Total  liabilities                                                                                                |   | **12,805**                | ** **  | 43,037 |   |
|                                                                                                              |   |                      |        |   |   |
| Stockholders’  equity:                                                                                       |   |                      | ** **  |   |   |
| Common stock                                                                                                      |   | **903**                   | ** **  | 903 |   |
| Additional  paid-in capital                                                                                       |   | **586,405**               | ** **  | 569,959 |   |
| Retained  earnings                                                                                                |   | **391,739**               | ** **  | 317,208 |   |
| Unallocated ESOP  shares                                                                                          |   | **(27,468**               | **)**       | (30,215 | ) |
| Unearned RRP  shares                                                                                              |   | **(8,894**                | **)**       | (14,333 | ) |
| Less—Treasury  stock (29,991,227 and 27,773,338 shares at December 31, 2002 and 2001,  respectively) at cost |   | **(339,982**              | **)**       | (289,469 | ) |
| Accumulated  other comprehensive income, net of tax                                                               |   | **11,565**                | ** **  | 9,750 |   |
| Total stockholders’  equity                                                                                  |   | **614,268**               | ** **  | 563,803 |   |
| Total  liabilities and stockholders’ equity                                                                  |   | **$**                     | **627,073** | ** ** | $ | 606,840 |   |

 

**Condensed Statements of Income**

 
|                                                                                   |   | **Year Ended  December 31,** |        |
|----------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                                   |   | **2002**                     |        | **2001** |   | **2000** |   |
|                                                                                   |   | **(000’s  omitted)**    |        |
| Income:                                                                                |   |                         |        |   |   |   |   |
| Investment  income                                                                     |   | **$**                        | **2,153**   | ** ** | $ | 5,159 |   | $ | 9,395 |   |
| Other interest  income                                                                 |   | **34**                       | ** **  | 50 |   | 41 |   |
| Interest income  ESOP loan                                                             |   | **2,795**                    | ** **  | 2,954 |   | 3,101 |   |
| Other income                                                                           |   | **32**                       | ** **  | 600 |   | 386 |   |
| Loss on sale of  investments                                                           |   | **(1,442**                   | **)**       | (1,341 | ) | (590 | ) |
|                                                                                   |   | **3,572**                    |        | 7,422 |   | 12,333 |   |
| Expenses:                                                                              |   |                         | ** **  |   |   |   |   |
| Interest expense                                                                       |   | **2,245**                    | ** **  | 3,819 |   | 4,390 |   |
| Other expense                                                                          |   | **660**                      | ** **  | 423 |   | 348 |   |
| Income before  provision for income taxes and equity in undistributed earnings of Bank |   | **667**                      | ** **  | 3,180 |   | 7,595 |   |
| Provision for  income taxes                                                            |   | **2,052**                    | ** **  | 1,676 |   | 3,119 |   |
|                                                                                   |   |                         | ** **  |   |   |   |   |
| Income (loss) before  equity in undistributed earnings of Bank                         |   | **(1,385**                   | **)**       | 1,504 |   | 4,476 |   |
| Equity in  undistributed earnings of Bank                                              |   | **101,763**                  | ** **  | 44,229 |   | 49,450 |   |
| Net income                                                                             |   | **$**                        | **100,378** | ** ** | $ | 45,733 |   | $ | 53,926 |   |

 

41

----

 

**Condensed Statements of Cash Flows**

 
|                                                                               |   | **Year Ended  December 31,** |        |
|------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                               |   | **2002**                     |        | **2001** |   | **2000** |   |
|                                                                               |   | **(000’s  omitted)**    |        |
| Cash flows from  operating activities:                                             |   |                         |        |   |   |   |   |
| Net income                                                                         |   | **$**                        | **100,378** | ** ** | $ | 45,733 |   | $ | 53,926 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                         | ** **  |   |   |   |   |
| Undistributed  earnings of Bank                                                    |   | **(101,763**                 | **)**       | (44,229 | ) | (49,450 | ) |
| Amortization of  bond and mortgage premium                                         |   | **—**                   | ** **  | — |   | (2 | ) |
| Impairment loss  on available-for-sale securities                                  |   | **2,591**                    | ** **  | — |   | — |   |
| (Gain) loss on  sale of available-for-sale securities                              |   | **(1,149**                   | **)**       | 1,341 |   | 590 |   |
| Decrease in  accrued interest receivable                                           |   | **9**                        | ** **  | 278 |   | 87 |   |
| Decrease  (increase) in other assets                                               |   | **—**                   | ** **  | 1,493 |   | (689 | ) |
| (Decrease)  increase in other liabilities                                          |   | **1,990**                    | ** **  | 1,404 |   | 447 |   |
| Decrease  (increase) in deferred income taxes                                      |   | **(2,267**                   | **)**       | — |   | (1,676 | ) |
| Net cash (used  in) provided by operating activities                               |   | **(211**                     | **)**       | 6,020 |   | 3,233 |   |
| Cash flows from  investing activities:                                             |   |                         | ** **  |   |   |   |   |
| Decrease in  investment in Bank                                                    |   | **67,285**                   | ** **  | 56,346 |   | 20,000 |   |
| Sales of  available-for-sale securities                                            |   | **38,540**                   | ** **  | 75,072 |   | 52,828 |   |
| Purchases of  available-for-sale securities                                        |   | **(11,169**                  | **)**       | (24,449 | ) | (18,538 | ) |
| Principal  collected on ESOP loan                                                  |   | **2,025**                    | ** **  | 1,866 |   | 1,720 |   |
| Net cash  provided by investing activities                                         |   | **96,681**                   | ** **  | 108,835 |   | 56,010 |   |
| Cash flows from  financing activities:                                             |   |                         | ** **  |   |   |   |   |
| Increase in  borrowings                                                            |   | **(32,222**                  | **)**       | 6,871 |   | 33,191 |   |
| Exercise of  stock options                                                         |   | **10,244**                   | ** **  | 3,654 |   | — |   |
| Dividends paid                                                                     |   | **(25,847**                  | **)**       | (19,418 | ) | (18,764 | ) |
| Purchase of  treasury stock                                                        |   | **(60,163**                  | **)**       | (104,362 | ) | (67,172 | ) |
| Net cash used in  financing activities                                             |   | **(107,988**                 | **)**       | (113,255 | ) | (52,745 | ) |
| Net increase  (decrease) in cash and cash equivalents                              |   | **(11,518**                  | **)**       | 1,600 |   | 6,498 |   |
| Cash and cash  equivalents, beginning of year                                      |   | **11,580**                   | ** **  | 9,980 |   | 3,482 |   |
| Cash and cash  equivalents, end of year                                            |   | **$**                        | **62**      | ** ** | $ | 11,580 |   | $ | 9,980 |   |

 

**22.Acquisitions**

 

On January 14, 2000, the Company acquired First State Bancorp, theholding company for First State Bank, which operated six full-service branchesin the State of New Jersey. First State Bancorp, a bank holding company withassets over $370 million, was acquired for cash consideration totaling $84.5million, including transaction costs. The acquisition has been accounted forusing the purchase method of accounting, and accordingly, the purchase pricehas been allocated to the assets acquired and the liabilities assumed basedupon fair value at the date of acquisition. The excess of the purchase priceover the fair value of the net assets acquired was $45.5 million and has beenrecorded as goodwill and amortized on a straight-line basis over 15 years.Effective January 1, 2002, goodwill was evaluated for impairment under theguidance of SFAS 142, as discussed under “New Accounting Pronouncements” inNote 3 above.

 

**23.Restatement**

 

The Company previously announced in October 2002 and November 2002 thatit would restate its financial results for the year ended December 31, 2001,due to certain adjustments which are summarized below. The Company filed form10-K/A for the fiscal year ended December 31, 2001, on February 11, 2003, reflectingall the restatements.

 

During the third quarter of 2002, management determined that certainstock options issued under the Stock Option Plan were exercised under a netcash settlement method, whereby the Company, in effect, repurchased the optionshares under the Company’s ongoing stock repurchase programs and remitted theexcess of the fair market value of the shares over the exercise price to theemployee. Under existing accounting standards, the existence of thesetransactions conducted in this manner required that compensation expense berecorded from the inception date of the plan on all exercised or vested andunexercised options equal to the difference between the option exercise priceand the fair value of the stock at the exercise date (or at the financialreporting date, whichever is earlier). Increases or decreases in the value ofthe stock options are subsequently reflected as additional charges or creditsto compensation expense in the respective financial reporting period during thetime in which this exercise method was allowed. Primarily as a result ofvariable plan accounting on the Stock Option Plan, other expenses for the yearended December 31, 2001, increased by $28.6 million (pre-tax) from thepreviously reported amount. Effective September 24, 2002, the Companydiscontinued the practice which led to this accounting treatment; therefore,for quarterly reporting periods subsequent to September 30, 2002, no additionalcharges or credits to compensation expense will occur as a result of this planactivity.

 

Management also determined that certain securities (primarilycollateralized bond obligations “CBOs”) with a total carrying value of $24.5million were other than temporarily impaired at December 31, 2001, and,accordingly, impairment charges of $14.5 million (pre-tax) are reflected in theCompany’s restated financial statements at and for the year ended December 31,2001. This adjustment does not affect total stockholders’ equity at December31, 2001, as this charge was previously reflected as unrealized depreciation atDecember 31, 2001, which is shown as a component of stockholders’ equity. TheCompany previously took impairment charges of $500,000 (pre-tax) and $7.4million (pre-tax) for the three months ended March 31, 2002, and June 30, 2002,respectively, against these securities; these charges have been reversed in therespective quarters and quarterly pre-tax income increased by these sameamounts. During the quarter ended September 30, 2002, the Company sold all ofits remaining $14.3 million of CBOs as part of a securities portfoliorestructuring.

 

42

----

 

The Company had not previously reflected dividends paid on unallocatedshares in its ESOP as compensation expense. As a result, the Company hasrestated its financial statements to reflect additional compensation expense of$1.4 million (pre-tax) for the year ended December 31, 2001. The Company willrecord future dividends on unallocated shares as compensation expense.

 

The Company previously recognized revenues and expenses on loans whenloans were sold by its subsidiary, SIB Mortgage Corp., subject to take outcommitments. From the time a loan is shipped to the time payment is received bythe Mortgage Company, a period of five to 30 days typically elapses. TheCompany has now determined that gains on loans sold should be recognized at thetime payment is received rather than at the time loans are shipped. Due to thistiming difference, the Company’s restated financial results reflect a reductionof gain on loan sales of $2.8 million (pre-tax) for the year ended December 31,2001, compared to the previously reported amount.

 

Additionally, the Company has revised certain estimates related tocertain deferred loan origination costs and fees, and its restated financialstatements reflect an increase in net deferred costs of $1.1 million (pre-tax)compared to the previously reported amount for the year ended December 31,2001. Changes in net deferred costs are reflected in the income statement asincreases or decreases to gain on sale of mortgage loans.

 

The Company’s restated financial statements also reflect previouslyunrecorded market appreciation in unallocated forward sales commitments by theMortgage Company of $1.0 million (pre-tax) for the year ended December 31,2001.

 

Arthur Andersen LLP previously audited the Company’s financialstatements at December 31, 2001 and for the three years then ended. Aspreviously indicated, the Company has restated its financial statements at andfor the year ended December 31, 2001 and has revised the related Notes toFinancial Statements as appropriate. As previously disclosed, the Companychanged independent accountants on June 10, 2002. The Company’s financialstatements at and for the two years ended December 31, 2002 have been auditedby PricewaterhouseCoopers LLP whose report thereon is included in this AnnualReport. Arthur Andersen LLP has not reissued it previous report on theCompany’s financial statements, nor has it furnished an updated consent withrespect to the incorporation by reference of such financial statements into theCompany’s registration statements on Form S-8. Arthur Andersen LLP has notparticipated in the preparation or review of this Annual Report. On June 15,2002, Arthur Andersen LLP was convicted in Federal court of obstruction ofjustice. Arthur Andersen LLP has ceased practice before the Securities andExchange Commission. You may have no effective remedy against Arthur AndersenLLP in connection with any material misstatement or omission in the Company’sfinancial statements for the year ended December 31, 2000 included herein orrelated disclosure, particularly in the event that Arthur Andersen LLP ceasesto exist or becomes insolvent as a result of the conviction or otherproceedings against Arthur Andersen LLP.

 

**24.Quarterly Financial Data (Unaudited)**

 

Selected unaudited quarterly financial data for the years endedDecember 31, 2002 and 2001, is presented below. The Company has restated itsearnings for the first, second and third quarter of 2002 and will file theamended 10Qs. All per share amounts, including earnings per share, cashdividends declared per share and stock price amounts have been adjusted toreflect the stock dividend:

 
|                                                             |   | **Fourth  Quarter**                              |        | **Third  Quarter  (Restated)** |       | **Second  Quarter  (Restated)** |       | **First  Quarter  (Restated)** |       |
|------------------------------------------------------------------|--------|--------------------------------------------------|-------------|--------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
|                                                             |   | **(000’s  omitted, except per share data)** |        |
| **2002:**                                                        |   |                                             |        |                           |       |                            |       |                           |       |
| Interest income                                                  |   | **$**                                            | **102,320** | ** **                     | **$**      | **100,635**                     | ** ** | **$**                          | **99,960** | ** ** | **$** | **94,217** | ** ** |
| Interest expense                                                 |   | **46,829**                                       | ** **  | **48,366**                     | ** ** | **47,093**                      | ** ** | **46,326**                     | ** ** |
| Net interest  income                                             |   | **55,491**                                       | ** **  | **52,269**                     | ** ** | **52,867**                      | ** ** | **47,891**                     | ** ** |
| Provision for  loan losses                                       |   | **(985**                                         | **)**       | **3,349**                      | ** ** | **4,990**                       | ** ** | **1,500**                      | ** ** |
| Service and fee  income                                          |   | **3,955**                                        | ** **  | **3,948**                      | ** ** | **3,649**                       | ** ** | **3,222**                      | ** ** |
| Gain on loan  sales/fees                                         |   | **89,015**                                       | ** **  | **62,545**                     | ** ** | **40,117**                      | ** ** | **43,910**                     | ** ** |
| Unrealized gain  (loss) on derivative transactions               |   | **(426**                                         | **)**       | **14,033**                     | ** ** | **(160**                        | **)**      | **(860**                       | **)**      |
| Other income                                                     |   | **1,928**                                        | ** **  | **1,917**                      | ** ** | **4,879**                       | ** ** | **1,830**                      | ** ** |
| Securities  transactions                                         |   | **(2,506**                                       | **)**       | **1,512**                      | ** ** | **432**                         | ** ** | **167**                        | ** ** |
| Non-interest  expense                                            |   | **106,117**                                      | ** **  | **64,169**                     | ** ** | **62,282**                      | ** ** | **77,780**                     | ** ** |
| Income before  income taxes                                      |   | **42,325**                                       | ** **  | **68,706**                     | ** ** | **34,512**                      | ** ** | **16,880**                     | ** ** |
| Income taxes                                                     |   | **17,763**                                       | ** **  | **28,230**                     | ** ** | **13,927**                      | ** ** | **6,856**                      | ** ** |
| Cumulative  effect of change in accounting principle, net of tax |   | **—**                                       | ** **  | **4,731**                      | ** ** | **—**                      | ** ** | **—**                     | ** ** |
| Net income                                                       |   | **24,562**                                       | ** **  | **45,207**                     | ** ** | **20,585**                      | ** ** | **10,024**                     | ** ** |
|                                                             |   |                                             |        |                           |       |                            |       |                           |       |
| Earnings per  share—                                        |   |                                             | ** **  |                           | ** ** |                            | ** ** |                           | ** ** |
| Basic                                                            |   | **0.45**                                         | ** **  | **0.81**                       | ** ** | **0.36**                        | ** ** | **0.18**                       | ** ** |
| Diluted                                                          |   | **0.43**                                         | ** **  | **0.78**                       | ** ** | **0.35**                        | ** ** | **0.16**                       | ** ** |
| Dividends  declared per common share                             |   | **0.13**                                         | ** **  | **0.12**                       | ** ** | **0.11**                        | ** ** | **0.10**                       | ** ** |
|                                                             |   |                                             |        |                           |       |                            |       |                           |       |
| Original amounts  that were restated:                            |   |                                             | ** **  |                           | ** ** |                            | ** ** |                           | ** ** |
| Gain on loan  sales                                              |   | **N/A**                                          | ** **  | **N/A**                        | ** ** | **40,856**                      | ** ** | **41,635**                     | ** ** |
| Unrealized gain  (loss) on derivative transactions               |   | **N/A**                                          | ** **  | **N/A**                        | ** ** | **—**                      | ** ** | **—**                     | ** ** |
| Securities  transactions                                         |   | **N/A**                                          | ** **  | **N/A**                        | ** ** | **(6,818**                      | **)**      | **(333**                       | **)**      |
| Non-interest  expense                                            |   | **N/A**                                          | ** **  | **N/A**                        | ** ** | **61,890**                      | ** ** | **57,587**                     | ** ** |
| Income taxes                                                     |   | **N/A**                                          | ** **  | **26,430**                     | ** ** | **10,973**                      | ** ** | **13,175**                     | ** ** |
| Net income                                                       |   | **N/A**                                          | ** **  | **47,007**                     | ** ** | **17,580**                      | ** ** | **21,983**                     | ** ** |
| Earnings per  share                                              |   |                                             | ** **  |                           | ** ** |                            | ** ** |                           | ** ** |
| Basic                                                            |   | **N/A**                                          | ** **  | **$**                          | **0.76**   | *****                           | **$**      | **0.31**                       | ** ** | **$** | **0.39** | ** ** |
| Diluted                                                          |   | **N/A**                                          | ** **  | **0.73**                       | *****      | **0.31**                        | ** ** | **0.38**                       | ** ** |
| Stock price per  common share                                    |   |                                             | ** **  |                           | ** ** |                            | ** ** |                           | ** ** |
| High                                                             |   | **21.18**                                        | ** **  | **21.38**                      | ** ** | **22.72**                       | ** ** | **20.20**                      | ** ** |
| Low                                                              |   | **12.96**                                        | ** **  | **14.74**                      | ** ** | **18.00**                       | ** ** | **16.07**                      | ** ** |
| Close                                                            |   | **20.14**                                        | ** **  | **17.40**                      | ** ** | **19.20**                       | ** ** | **19.68**                      | ** ** |
|                                                                  |        |                                                  |             |                                |            |                                 |            |                                |            |  |  |  |  |

 

----

**Before cumulative effect ofaccounting change.*

 

43

----

 
|                                        |   | **Fourth  Quarter**                              |   | **Third  Quarter** |   | **Second  Quarter** |   | **First  Quarter** |   |
|---------------------------------------------|--------|--------------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|
|                                        |   | **(000’s  omitted, except per share data)** |   |
| 2001:                                       |   |                                             |   |               |   |                |   |               |   |
| Interest income                             |   | $                                                | 95,624 |               | $      | 93,977              |   | $                  | 92,704 |   | $ | 90,678 |   |
| Interest expense                            |   | 49,542                                           |   | 52,073             |   | 54,124              |   | 54,839             |   |
| Net interest  income                        |   | 46,082                                           |   | 41,904             |   | 38,580              |   | 35,839             |   |
| Provision  (benefit) for loan losses        |   | 4,957                                            |   | 2,600              |   | 600                 |   | 600                |   |
| Service and fee  income                     |   | 3,122                                            |   | 2,962              |   | 2,905               |   | 3,139              |   |
| Gain on loan  sales/fees                    |   | 44,712                                           |   | 30,162             |   | 20,953              |   | 11,642             |   |
| Other income                                |   | 1,836                                            |   | 1,831              |   | 1,796               |   | 1,751              |   |
| Unrealized gain  on derivative transactions |   | 1,020                                            |   | —             |   | —              |   | —             |   |
| Securities  transactions                    |   | (14,677                                          | )      | 61                 |   | 9                   |   | (6                 | )      |
| Non-interest  expense                       |   | 79,415                                           |   | 36,148             |   | 46,594              |   | 35,010             |   |
| Income before  income taxes                 |   | (2,277                                           | )      | 38,172             |   | 17,049              |   | 16,755             |   |
| Income taxes                                |   | (3,417                                           | )      | 15,557             |   | 6,124               |   | 5,702              |   |
| Net income                                  |   | 1,140                                            |   | 22,615             |   | 10,925              |   | 11,053             |   |
| Earnings per share–                    |   |                                             |   |               |   |                |   |               |   |
| Basic                                       |   | 0.02                                             |   | 0.37               |   | 0.18                |   | 0.18               |   |
| Diluted                                     |   | 0.02                                             |   | 0.37               |   | 0.17                |   | 0.18               |   |
| Dividends  declared per common share        |   | 0.09                                             |   | 0.08               |   | 0.08                |   | 0.07               |   |
| Stock price per  common share               |   |                                             |   |               |   |                |   |               |   |
| High                                        |   | 17.20                                            |   | 18.05              |   | 14.37               |   | 12.72              |   |
| Low                                         |   | 12.17                                            |   | 11.27              |   | 12.15               |   | 9.97               |   |
| Close                                       |   | 16.31                                            |   | 12.32              |   | 13.92               |   | 12.45              |   |
|                                             |        |                                                  |        |                    |        |                     |        |                    |        |  |  |  |  |

 

Staten Island Bancorp, Inc. & Subsidiary

REPORT OF INDEPENDENT ACCOUNTANTS

 

To the Board of Directors andStockholders of Staten Island Bancorp, Inc.

 

In our opinion, the accompanying consolidated statements of conditionand the related consolidated statements of income, of changes in stockholders’equity and of cash flows present fairly, in all material respects, thefinancial position of Staten Island Bancorp, Inc. and its subsidiary (the “Company”)at December 31, 2002 and 2001, and the results of its operations and its cashflows for each of the two years then ended in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. The Company’s financial statements for the year ended December31, 2000 were audited by other independent accountants who have ceasedoperations. Those independent accountants expressed an unqualified opinion onthose financial statements in their report dated January 22, 2001.

 

As discussed in Note 3, the Company adopted Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets” andchanged its method of accounting for certain loan commitments.

 
|                            |
|----------------------------|
|                       |
| PricewaterhouseCoopers LLP |
| New York, New York         |
| January 21, 2003           |

 

44

----

 

**CORPORATE INFORMATION**

** **

**STATEN ISLAND BANCORP, INC.**

** **

**Directors**

 

James R. Coyle

Harry P. Doherty

William G. Horn

Denis P. Kelleher

Julius Mehrberg

John R. Morris

William E. O’Mara

Lenore F. Puleo

Allan Weissglass

 

**Directors Emeriti**

 

Harold Banks

Charles J. Bartels

Pio Paul Goggi

Dennis E. Knudsen

Kenneth W. Nelson

Edward F. Norton, Jr.

Edward F. Vitt

Raymond A. Vomero

 

**Officers of Staten Island Bancorp,Inc.**

 

Harry P. Doherty

Chief Executive Officer

James R. Coyle

Chief Operating Officer

Edward Klingele

Chief Financial Officer

Patricia A. Smith

Corporate Secretary

 

**SI Bank & Trust—**

***A Staten IslandBancorp Company***

 

Harry P. Doherty

Chairman and Chief Executive Officer

James R. Coyle

President and Chief Operating Officer

John P. Brady

Executive Vice President

Ira Hoberman

Executive Vice President

Frank J. Besignano

Senior Vice President

Donald C. Fleming

Senior Vice President

Edward Klingele

Senior Vice President

Deborah Pagano

Senior Vice President

 

**OFFICERS OF SIB MORTGAGE CORPORATION**

***d/b/a IVY MORTGAGE***

 

Richard W. Payne

President and Chief Executive Officer

Ralph Picarillo

Executive Vice President, Treasurer and

Chief Financial Officer

 

**SIB INVESTMENT CORPORATION**

 

Bernard Durnin

President

 

**Corporate Office**

 

1535 Richmond Avenue

Staten Island, New York 10314

 

**Annual Meeting**

 

The annual meeting of stockholders will be held on May 15, 2003 at10:00 a.m. at the Excelsior Grand, 2380 Hylan Boulevard, Staten Island, NewYork, 10306. Notice of the meeting and a proxy form are included with thismailing to shareholders of record as of March 18, 2003.

 

**Investor Relations**

 

Shareholders, analysts and others interested in additional informationmay contact:

 

Donald C. Fleming

Senior Vice President

1535 Richmond Avenue

Staten Island, New York, 10314

(718) 697-2813

www.sibk.com

 

**Transfer Agent and Registrar**

 

Inquiries regarding stock transfer, lost certificates, or changes inname and/or address should be directed to the stock and transfer agent andregistrar:

 

Registrar and Transfer Company

Investor Relations

10 Commerce Drive

Cranford, New Jersey 07016

(800) 368-5948

 

**Stock Listing**

 

Staten Island Bancorp Inc.’s common stock is traded on the New YorkStock Exchange (NYSE) under the symbol SIB.

Shares outstanding as of January 1, 2003

60,269,397

Shareholders of record as of January 1, 2003

9,374

 

**Independent Certified PublicAccountants**

 

PricewaterhouseCoopers, LLP

1177 Avenue of the Americas

New York, New York 10036

 

**Counsel**

 

The Law Firm of Hall & Hall

57 Beach Street

Staten Island, New York 10304

 

Elias, Matz, Tiernan and Herrick, LLP

734 15th Street N.W., 12th Floor

Washington, D.C. 20005

 

**In Memoriam**

 

Elliott L. Chapin, his distinguished career at Staten Island SavingsBank began in 1937 and, with the exception of active duty in the military  between 1941 and 1945, he remained dedicatedto the growth and success of the Bank and his community throughout his life. Hewas elected executive vice president of Staten Island Savings Bank in 1973 andpresident in 1979, retiring in 1983. He served as director beginning in 1974and was elected director emeritus in 1992.

Mr. Chapin’s exceptional character and depth of knowledge will be remembered.

 

Designed by Curran &Connors, Inc. / www.curran-connors.com

 

 

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| 1535 RICHMOND AVENUE,  STATEN ISLAND, NY 10314 |
| Member FDIC  Equal Housing Lender         |
| www.sibk.com                                   |

 

 

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