**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **ý****ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                                                                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                           |   |   |
| **For the fiscal year ended December 31, 2002**                                                                                                                                                                                |
|                                                                                                                                                                                                                           |   |   |
| **OR**                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                           |   |   |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]**                                                                                                         |
|                                                                                                                                                                                                                           |   |   |
| **For the transition period from                   to                 ** |
| **Commission File No.: 1-13503**                                                                                                                                                                                               |

** **

| **Staten Island Bancorp, Inc.**                                                |
|--------------------------------------------------------------------------------|
| (Exact name of registrant as  specified in its charter)                        |
|                                                                           |   |   |
| **Delaware**                                                                   |   | **13-3958850** |
| (State or  other jurisdiction of  incorporation or organization)               |   | (I.R.S. Employer   Identification Number) |
|                                                                           |   |   |
| **1535 Richmond Avenue  Staten Island, New York**                              |   | **10314** |
| (Address)                                                                      |   | (Zip Code) |
|                                                                           |   |   |
| Registrant’s telephone number, including area code: **(718) 447-8880**    |
|                                                                           |   |   |
| Securities registered pursuant to Section 12(g) of the Act: **Not Applicable** |

 

| Securities  registered pursuant to Section 12(b) of the Act: **Common Stock (par value $.01 per share)** |
|----------------------------------------------------------------------------------------------------------|
| (Title of Class)                                                                                         |

 

Indicate bycheck mark whether the Registrant (1) has filed all reports required by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý   No o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

 

 

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Indicate bycheck mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2)

 

Yes  ý                   No  o

 

Based upon the$19.20 closing price of the Registrant’s common stock as of June 28, 2002, theaggregate market value of the 53,212,887 shares of the Registrant’s commonstock deemed to be held by non-affiliates of the Registrant was $1.0 billion.Although directors and executive officers of the Registrant and certain of itsemployee benefit plans were assumed to be “affiliates” of the Registrant forpurposes of this calculation, the classification is not to be interpreted as anadmission of such status.

 

Number ofshares of Common Stock outstanding as of March 28, 2003: 59,752,432

 

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portionsof the Company’s Annual Report to Stockholders for the year ended December 31,2002 are incorporated in Parts II and IV of this Form 10-K.

 

(2) Portionsof the definitive proxy statement for the 2003 Annual Meeting of Stockholdersare incorporated into Parts II and III of this Form 10-K.

 

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**TABLE OF CONTENTS**

 
|     | **PART I**                                                                                  |         |
|----------|---------------------------------------------------------------------------------------------|--------------|
|     |                                                                                        | **Page No.** |
| ITEM  1. | Business                                                                                    | 1            |
|     |                                                                                        |         |
| ITEM 2.  | Properties                                                                                  | 43           |
|     |                                                                                        |         |
| ITEM 3.  | Legal Proceedings                                                                           | 44           |
|     |                                                                                        |         |
| ITEM 4.  | Submission of Matters to a Vote Of Security  Holders                                        | 44           |
|     |                                                                                        |         |
|     | **PART II**                                                                                 |         |
|     |                                                                                        |         |
| ITEM 5.  | Market for Registrant’s Common Equity and  Related Stockholder Matters                 | 45           |
|     |                                                                                        |         |
| ITEM 6.  | Selected Financial Data                                                                     | 45           |
|     |                                                                                        |         |
| ITEM 7.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 45           |
|     |                                                                                        |         |
| ITEM 7A. | Quantitative and Qualitative Disclosure  about Market Risk                                  | 45           |
|     |                                                                                        |         |
| ITEM 8.  | Financial Statements and Supplementary Data                                                 | 45           |
|     |                                                                                        |         |
| ITEM 9.  | Changes In and Disagreements with  Accountants on Accounting and Financial Disclosure       | 45           |

 

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|     | **PART  III**                                                     |   |
|----------|-------------------------------------------------------------------|--------|
|     |                                                              |   |
| ITEM 10. | Directors and Executive Officers of the  Registrant               | 45     |
|     |                                                              |   |
| ITEM 11. | Executive Compensation                                            | 45     |
|     |                                                              |   |
| ITEM 12. | Security Ownership of Certain Beneficial  Owners and Management   | 46     |
|     |                                                              |   |
| ITEM 13. | Certain Relationship and Related  Transactions                    | 46     |
|     |                                                              |   |
| ITEM 14. | Controls and Procedures                                           | 46     |
|     |                                                              |   |
|     | **Part  IV**                                                      |   |
|     |                                                              |   |
| ITEM 15. | Exhibits, Financial Statement Schedules,  and Reports on Form 8-K | 47     |

 

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In addition to historical information, this Annual Report on Form 10-Kincludes certain “forward-looking statements,” as defined in the Securities Actof 1933 and the Securities Exchange Act of 1934, based on current managementexpectations.  The Company’s actualresults could differ materially from those management expectations.  Such forward-looking statements includestatements regarding the Company’s intentions, beliefs or current expectationsas well as the assumptions on which such statements are based.  Stockholders and potential stockholders arecautioned that any such forward-looking statements are not guarantees of futureperformance and involve risks and uncertainties, and that actual results maydiffer materially from those contemplated by such forward-looking statements.  Factors that could cause future results tovary from current management expectations include, but are not limited to,general economic conditions, legislative and regulatory changes, monetaryfiscal policies of the federal government, changes in tax policies, rates andregulations of federal, state and local tax authorities, changes in interestrates, deposit flows, cost of funds, demand for loan products, demand forfinancial services, competition, changes in the quality or composition of theCompany’s loan and investment portfolios, changes in accounting principles,policies or guidelines and other economic, competitive, governmental andtechnological factors affecting the Company’s operations, markets, productsservices and fees.  The Company undertakesno obligation to update or revise any forward-looking statements to reflectchanged assumptions, the occurrence of unanticipated events or changes tofuture operating results over time.

 

**PART I**

**Item 1.  Business**

 

Staten IslandBancorp, Inc. is a Delaware corporation organized in July 1997 by SI Bank &Trust (the “Bank” or “SIBT”), formerly Staten Island Savings Bank, for thepurpose of becoming a unitary holding company of the Bank. The Bank’sconversion from the mutual to stock form and the concurrent offer and sale ofthe Company’s common stock was consummated on December 22, 1997. The onlysignificant assets of the Company are the capital stock of the Bank, theCompany’s loan to its Employee Stock Ownership Plan (“ESOP”) and investmentsecurities.

 

The businessand management of the Company consists primarily of the business and managementof the Bank. The Company neither owns nor leases any property, but instead usesthe premises and equipment of the Bank. At the present time, the Company doesnot intend to employ any persons other than officers of the Bank and theCompany utilizes the support staff of the Bank from time to time. Additionalemployees will be hired as appropriate to the extent the Company expands orchanges its business in the future.

 

The Companymanages its operations to focus on two strategic goals: fulfilling its role asa banking institution for both individuals and businesses and as nationalprovider of single-family mortgage loan products. Accordingly, the Company ismanaged through two segments: Community Banking and Mortgage Banking.

 

The Company’sexecutive office is located at the executive office of the Bank at 1535Richmond Avenue, Staten Island, New York 10314, and its telephone number is(718) 447-8880.

 

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**SI Bank & Trust. **The Bank wasoriginally founded as a New York State chartered savings bank in 1864. The Bankmaintains a network of 17 full-service branch offices located in Staten Island,New York, two branch offices located in Brooklyn, New York, three limitedservice branch offices in Staten Island and 15 full service branch offices inOcean, Monmouth, Union and Middlesex counties of New Jersey. During 2002, theBank opened four full service branch offices in the State of New Jersey. TheBank also maintains a lending center and Trust Department on Staten Islandalong with a commercial lending office in Brooklyn.

 

The Bank hasserved the communities and residents of Staten Island for over 136 years and,more recently, the borough of Brooklyn and certain counties in the State of NewJersey. As of June 30, 2002 (the latest available data), the Bank had thelargest market share of any depository institution on Staten Island with over32.0% of the total deposits. Historically, the Bank also has been among theleaders in terms of the number and amount of residential mortgage loanoriginations in Staten Island. SIBT’s operating strategy emphasizes customerservice and convenience and, in a large part, the Bank attributes its commitmentto maintaining customer satisfaction for its market share position. The Bankattempts to differentiate itself from its competitors by providing the type ofpersonalized customer service not generally available from larger banks, whileoffering a greater variety of products and services than is typically availablefrom smaller local depository institutions. The Bank has an experiencedmanagement team directing its operations. The Bank’s Chairman and ChiefExecutive Officer and President and Chief Operating Officer have 37 years and33 years, respectively, of service with the Bank while the other executiveofficers of the Bank have an average of 15 years of service with SIBT.

 

On September5, 2000 the Bank changed its name to SI Bank & Trust to reflect theexpansion into new product lines and new geographic markets which has takenplace over the past five years. Over the past five years, the Bank hastransformed itself into a full service community bank and its new name,reflects its geographic and product diversity. The Bank expects to continue itsgrowth and geographic expansion through acquisitions and de-novo branching. OnJanuary 14, 2000, the Company acquired First State Bancorp, the holding companyfor First State Bank, Howell, New Jersey. The branch system of First StateBank, which was merged with and into SI Bank & Trust, consisted of fourbranches in Ocean County and two in Monmouth County, New Jersey. In December2000, the Bank opened a new branch in Jackson, New Jersey. Four new brancheswere opened in 2002 in New Jersey. At the time of its acquisition, First StateBancorp had $374.0 million in assets and $319.0 million in deposits.

 

In August2000, the Bank opened a new branch in Brooklyn, New York. During 2002, thedeposits at the two Brooklyn locations grew by 35% and totaled $200.0 millionin the aggregate at December 31, 2002.

 

On December 8,2000, the Company purchased four additional branches in New Jersey. Three ofthese branches are located in Union County and one is in Middlesex County, NewJersey. The deposits acquired in this transaction were $41.0 million. TheBank’s deposits in the State of New Jersey grew by 48% in  2002 and totaled $863.2 million at December31, 2002.

 

The Bank issubject to examination and comprehensive regulation by the Office of Thrift

 

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Supervision(“OTS”), which is the Bank’s chartering authority and primary federalregulator. The Bank is also regulated by the Federal Deposit InsuranceCorporation (“FDIC”), which is the administrator of the Bank Insurance Fund(“BIF”). In addition, the Bank is subject to certain reserve requirementsestablished by the Board of Governors of the Federal Reserve System (“FRB”) andis a member of the Federal Home Loan Bank (“FHLB”) of New York, which is one ofthe 12 regional banks comprising the FHLB System.

 

SI Bank &Trust’s executive office is located at 1535 Richmond Avenue, Staten Island, NewYork 10314, and its telephone number is (718) 447-8880.

 

**SIB Mortgage Corp. **SIB Mortgage Corp. (“SIBMC” or the“Mortgage Company”), a wholly owned subsidiary of the Bank, originatesresidential mortgage loans in 42 states. SIB Mortgage Corp. was incorporated in1998 in the State of New Jersey to acquire the residential lending operationsand substantially all of the assets of Ivy Mortgage Corp. enabling the Bank toenter the mortgage banking business and become a national originator of singlefamily residential loans. The Mortgage Company originates loans and sells theminto the secondary market generating fee income for the Bank. The Bank alsoretains for its portfolio certain higher yielding loans originated by theMortgage Company. The nation-wide mortgage banking operation has reduced theBank’s traditional dependence on the economy of Staten Island and, to a largerextent, New York City.

 

In 1999, theBank formed American Construction Lending Services, Inc. (“ACLS”) whichoperated as a wholly owned subsidiary, headquartered in Wallingford,Connecticut, until March 2001 when the operation of ACLS was merged with andinto SIBMC to operate as the ACLS Division of SIBMC. ACLS was formed in 1999 toprovide construction lending in various states, however, in 2001 the Bankdetermined to discontinue a majority of the construction lending through ACLSand merge it into SIBMC and primarily do construction lending through the Bank.The Bank anticipates that the loans in the ACLS Division will payoff over thenext 12 to 18 months.

 

SIBMC, whichoperates as a separate business segment (Mortgage Banking), had $8.6 billion inloan originations and loan sales of $8.4 billion for the twelve months ended December 31, 2002. SIBMC hadearnings for the year 2002 of $41.7 million including after tax earnings of$4.7 million resulting from a change in accounting principle. At December 31,2002 the total assets of SIBMC were $2.0 billion.

 

SIBMC’sexecutive office is located at 3040 Route 22 West, Branchburg, NJ 08876 and itstelephone number is 908-243-2600.

 

**Available Information**

 

Staten Island Bancorp, Inc. is a public company and files annual,quarterly and special reports, proxy statements and other information with theSecurities and Exchange Commission.  TheCompany’s filings are available to the public at the SEC’s web site athttp://www.sec.gov.  Members of thepublic may also read and copy any document the Company files at the SEC’sPublic Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  You can request

 

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copies of these documents by writing to the SEC and paying a fee forthe copying cost.  Please call the SECat 1-800-SEC-0330 for more information about the operation of the publicreference room.  In addition to theforegoing, the Company maintains a web site at www.sibk.com.  The Company makes available on its Internetweb site copies of its Annual Reports on Form 10-K, Quarterly Reports on Form10-Q, Current Reports on Form 8-K and any amendments to such documents as soonas reasonably practicable after we electronically file such material with, orfurnish such documents to, the SEC.

 

**Market Area andCompetition**

 

The Companyfaces significant competition both in making loans and in attracting deposits.There are a significant number of financial institutions located within theCompany’s market area, many of which have greater financial resources than theCompany. The Company’s competition for loans comes principally from commercialbanks, other savings banks, savings associations and mortgage-bankingcompanies. The Company’s most direct competition for deposits has historicallycome from savings associations, other savings banks, commercial banks andcredit unions. The Company faces additional competition for deposits fromshort-term money market funds and other corporate and government securitiesfunds and from other non-depository financial institutions such as brokeragefirms and insurance companies.

 

**Lending Activities**

 

**General.**  At December 31, 2002, the Company’s totalnet loans held for investment amounted to $3.4 billion or 49.4% of theCompany’s total assets at such date. In the Community Banking segment of theCompany, the Bank’s primary emphasis has been, and continues to be, theorigination of loans secured by first liens on single-family residences (whichincludes one-to-four-family residences) located primarily in Staten Island and,to a lesser extent, other areas in New York City. At December 31, 2002, $2.7billion or 78.0% of the Company’s net loan portfolio were secured bysingle-family residences of which $785.0 million were located on Staten Islandand an additional $721.0 million were located in other areas of New York City.Since the acquisition of Ivy Mortgage, the Bank has retained for its portfolio$994.3 million of higher yielding one-to four-family residential loansoriginated by the Mortgage Company to lessen its dependence on the New YorkCity economy and increase the yield on its loan portfolio.

 

In addition toloans secured by single-family residential real estate, the Company’s mortgageloan portfolio includes loans secured by commercial real estate, which amountedto $418.7 million or 12.2% of the net loan portfolio at December 31, 2002,construction and land loans, which totaled $153.1 million or 4.5% of the netloan portfolio at December 31, 2002, home equity loans, which totaled $19.0million or 0.6% of the net loan portfolio at December 31, 2002, and loanssecured by multi-family (over four units) residential properties, whichamounted to $56.5 million or 1.7% of the net loan portfolio at December 31,2002. In addition to mortgage loans, the Company originates various other loansincluding commercial business loans and consumer loans. At December 31, 2002,the Company’s total other loans amounted to $109.1 million or 3.2% of the netloan portfolio.

 

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The types ofloans that the Company may originate are subject to federal and state law andregulations. Interest rates charged by the Company on loans are affectedprincipally by the demand for such loans, the supply of money available forlending purposes and the rates offered by its competitors. These factors are,in turn, affected by general and economic conditions, the monetary policy ofthe federal government, including the Federal Reserve Board, legislative taxpolicies and governmental budgetary matters.

 

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**LoanPortfolio Composition.**  The following table sets forth thecomposition of the Bank’s loans held for investment portfolio at the datesindicated.

 
|                                   |   | **At December  31,**        |      |
|----------------------------------------|--------|-----------------------------|-----------|
|                                   |   | **2002**                    |      | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                   |   | **Amount**                  |      | **Percent of  Total** |   | **Amount** |   | **Percent of  Total** |   | **Amount** |   | **Percent of  Total** |   | **Amount** |   | **Percent of  Total** |   | **Amount** |   | **Percent of  Total** |   |
|                                   |   | **(Dollars  in Thousands)** |      |
| Mortgage loans:                        |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family residential              |   | $                           | 2,671,041 |   | 78.04 | % | $ | 2,062,897 |   | 73.50 | % | $ | 2,206,972 |   | 77.50 | % | $ | 1,737,913 |   | 80.83 | % | $ | 1,187,212 |   | 81.48 | % |
| Multi-family residential               |   | 56,545                      |      | 1.65 | % | 48,783 |   | 1.74 | % | 49,034 |   | 1.72 | % | 42,501 |   | 1.98 | % | 33,328 |   | 2.29 | % |
| Commercial real estate                 |   | 418,708                     |      | 12.23 | % | 335,260 |   | 11.95 | % | 307,407 |   | 10.80 | % | 223,809 |   | 10.41 | % | 137,720 |   | 9.45 | % |
| Construction and land                  |   | 153,144                     |      | 4.48 | % | 245,515 |   | 8.75 | % | 152,956 |   | 5.37 | % | 60,105 |   | 2.80 | % | 42,420 |   | 2.91 | % |
| Home equity                            |   | 19,032                      |      | 0.56 | % | 12,815 |   | 0.46 | % | 10,699 |   | 0.38 | % | 5,390 |   | 0.25 | % | 6,121 |   | 0.42 | % |
| Total mortgage loans                   |   | 3,318,470                   |      | 96.96 | % | 2,705,270 |   | 96.39 | % | 2,727,068 |   | 95.77 | % | 2,069,718 |   | 96.27 | % | 1,406,801 |   | 96.55 | % |
|                                   |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other loans:                           |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Student loans                          |   | 228                         |      | 0.01 | % | 288 |   | 0.01 | % | 333 |   | 0.01 | % | 657 |   | 0.03 | % | 940 |   | 0.06 | % |
| Passbook loans                         |   | 8,692                       |      | 0.26 | % | 7,477 |   | 0.26 | % | 6,237 |   | 0.22 | % | 5,357 |   | 0.25 | % | 5,989 |   | 0.41 | % |
| Commercial business loans              |   | 62,777                      |      | 1.83 | % | 60,898 |   | 2.17 | % | 52,980 |   | 1.86 | % | 33,646 |   | 1.56 | % | 36,592 |   | 2.51 | % |
| Other consumer loans                   |   | 37,362                      |      | 1.09 | % | 42,356 |   | 1.51 | % | 63,984 |   | 2.25 | % | 49,395 |   | 2.30 | % | 24,070 |   | 1.65 | % |
| Total other loans                      |   | 109,059                     |      | 3.19 | % | 111,019 |   | 3.95 | % | 123,534 |   | 4.34 | % | 89,055 |   | 4.14 | % | 67,591 |   | 4.63 | % |
|                                   |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans receivable                 |   | 3,427,529                   |      | 100.15 | % | 2,816,289 |   | 100.34 | % | 2,850,602 |   | 100.11 | % | 2,158,773 |   | 100.41 | % | 1,474,392 |   | 101.19 | % |
| Less:                                  |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Premium (discount) on loans purchased. |   | 3,941                       |      | 0.12 | % | 5,135 |   | 0.18 | % | 5,713 |   | 0.20 | % | 4,640 |   | 0.22 | % | 1,194 |   | 0.08 | % |
| Allowance for loan losses              |   | (22,773                     | )         | (0.67 | )% | (20,041 | ) | (0.71 | )% | (14,638 | ) | (0.51 | )% | (14,271 | ) | (0.66 | )% | (16,617 | ) | (1.14 | )% |
| Deferred loan costs, (fees) net        |   | 13,795                      |      | 0.40 | % | 5,236 |   | 0.19 | % | 5,983 |   | 0.20 | % | 897 |   | 0.03 | % | (1,910 | ) | (0.13 | )% |
| Loans receivable, net                  |   | $                           | 3,422,492 |   | 100.00 | % | $ | 2,806,619 |   | 100.00 | % | $ | 2,847,660 |   | 100.00 | % | $ | 2,150,039 |   | 100.00 | % | $ | 1,457,059 |   | 100.00 | % |

 

Theabove table does not include any information with respect to the Company’sloans held for sale.

 

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**Loan Activity:**  The following table sets forththe Company’s activity in its loan portfolio, including loans held for sale.

 
|                                    |   | **Year  Ended December 31,** |      |
|-----------------------------------------|--------|------------------------------|-----------|
|                                    |   | **2002**                     |      | **2001** |   | **2000** |   |
|                                    |   | **(Dollars  in Thousands)**  |      |
| Total loans held at beginning of period |   | $                            | 3,987,445 |   | $ | 2,962,197 |   | $ | 2,203,302 |   |
| Originations of loans:                  |   |                         |      |   |   |   |   |
| Mortgage loans:                         |   |                         |      |   |   |   |   |
| Single-family residential               |   | 9,428,155                    |      | 4,408,052 |   | 1,395,115 |   |
| Multi-family residential                |   | 18,899                       |      | 5,069 |   | 9,907 |   |
| Commercial real estate                  |   | 158,916                      |      | 77,044 |   | 70,665 |   |
| Construction and land                   |   | 115,371                      |      | 344,955 |   | 147,212 |   |
| Home equity                             |   | 17,990                       |      | 11,291 |   | 7,359 |   |
| Other loans:                            |   |                         |      |   |   |   |   |
| Student loans                           |   | 517                          |      | 638 |   | 871 |   |
| Passbook loans                          |   | 10,035                       |      | 9,865 |   | 8,873 |   |
| Commercial Business loans               |   | 54,855                       |      | 59,442 |   | 62,774 |   |
| Other consumer loans                    |   | 1,735                        |      | 5,691 |   | 9,681 |   |
| Total originations                      |   | 9,806,473                    |      | 4,922,047 |   | 1,712,457 |   |
|                                    |   |                         |      |   |   |   |   |
| Purchases of loans: (1)                 |   |                         |      |   |   |   |   |
| Mortgage loans:                         |   |                         |      |   |   |   |   |
| Single-family residential               |   | 586,351                      |      | 382,243 |   | 55,549 |   |
| Multi-family residential                |   | —                       |      | — |   | 3,020 |   |
| Commercial real estate                  |   | —                       |      | — |   | 49,358 |   |
| Construction and land                   |   | 178,192                      |      | 87,818 |   | 35,155 |   |
| Home equity                             |   | —                       |      | — |   | 3,566 |   |
| Other loans:                            |   |                         |      |   |   |   |   |
| Passbook loans                          |   | —                       |      | — |   | 3,608 |   |
| Commercial Business loans               |   | —                       |      | — |   | 5,235 |   |
| Other consumer loans                    |   | —                       |      | 2,119 |   | 12,866 |   |
| Total purchases                         |   | 764,543                      |      | 472,180 |   | 168,357 |   |
| Total originations and purchases        |   | 10,571,016                   |      | 5,394,227 |   | 1,880,814 |   |
|                                    |   |                         |      |   |   |   |   |
| Loans sold:                             |   |                         |      |   |   |   |   |
| Mortgage loans:                         |   |                         |      |   |   |   |   |
| Single-family residential               |   | 7,904,825                    |      | 3,179,238 |   | 730,506 |   |
| Total loans sold                        |   | 7,904,825                    |      | 3,179,238 |   | 730,506 |   |
|                                    |   |                         |      |   |   |   |   |
| Transfers to real estate owned          |   | 12,952                       |      | 279 |   | 930 |   |
| Transfers to repossessed assets         |   | 246                          |      | 404 |   | 244 |   |
| Charge-offs                             |   | 7,072                        |      | 4,265 |   | 1,928 |   |
| Repayments                              |   | 1,511,973                    |      | 1,184,793 |   | 388,311 |   |
| Net activity in loans                   |   | 1,133,948                    |      | 1,025,248 |   | 758,895 |   |
| Gross loans held at end of period       |   | $                            | 5,121,393 |   | $ | 3,987,445 |   | $ | 2,962,197 |   |

 

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(1)  The year 2000 includes the following amounts acquired from FirstState Bank, single family residential $19.5 million, multi-familyresidential $3.0 million, commercial real estate $49.4 million, constructionand land $7.4 million, commercial loans $5.2 million,passbook loans $3.6 million and consumer loans$2.1 million.

 

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The lendingactivities of SIBT are subject to written underwriting standards and loanorigination procedures established by management and approved by the Bank’sBoard of Directors.

 

The Bank’sprimary source of loan applications for residential mortgages are independentmortgage brokers throughout the tri-state area of Connecticut, New Jersey andNew York, a group of whom are authorized to accept and process applications onthe Bank’s behalf. Applications for mortgages and other loans are also taken atall of the Bank’s branch offices. In addition, the Bank’s business developmentofficers, loan officers and branch managers call on individuals in the Bank’smarket area in order to solicit new loan originations as well as other bankingrelationships. All loan applications are forwarded to the Bank’s loanorigination center for underwriting and approval. The Bank’s employees at theloan origination center supervise the process of obtaining credit reports,appraisals and other documentation involved with a loan. The Bank requires thata property appraisal be obtained in connection with all new mortgage loans.Property appraisals are performed by an independent appraiser, licensed in thestate the property is located. SIBT requires that title insurance and hazardinsurance be maintained on all collateral properties (except for home equityloans and home secured loans) and that flood insurance be maintained if theproperty is within a designated flood plain.

 

Certainofficers of the Bank have been authorized by the Board of Directors to approveloans up to certain designated amounts. The loan review committee of the Boardof Directors must approve all loans over $2 million and all loans where new moniesadvanced would increase the borrowers or guarantors total outstanding creditwith the Bank above $5 million, up to 5% of the Bank’s unimpaired capital andsurplus. Loans in excess of $10 million and all loans where new monies advancedwould increase the borrowers or guarantors to the outstanding credit with theBank above 5% of the Bank’s unimpaired capital and surplus must be approved bythe full Board of Directors of the Bank.

 

A federalsavings association generally may not make loans to one borrower and relatedentities in an amount which exceeds 15% of its unimpaired capital and surplus,although loans in an amount equal to an additional 10% of unimpaired capitaland surplus may be made to a borrower if the loans are fully secured by readilymarketable securities. However, the Bank maintains a more restrictive limit ofloans to any one borrower and related entities of 5% of the Bank’s unimpairedcapital and surplus, or $25.0 million at December 31, 2002. As of December 31,2002, the Bank’s largest concentration of loans to any one borrower and relatedentities (excluding intra-company loans) was $16.3 million ($10.0 millionoutstanding and $6.3 million unfunded) and these loans were performing inaccordance with their terms.

 

**Single-Family Residential Loans.**  Substantially all of the Company’ssingle-family residential mortgage loans consist of conventional loans.Conventional loans are loans that are neither insured by the Federal HousingAdministration (“FHA”) or partially guaranteed by the Department of VeteransAffairs (“VA”). Approximately 29% of the Company’s single-family residentialmortgage loans retained in the portfolio are secured by properties located inStaten Island and an additional 27% are secured by properties in other areas ofNew York City. As of December 31, 2002, $2.7 billion, or 78.0%, of theCompany’s net loans consisted of single - family residential mortgage loans.The Bank originated $872.4 million of single-family residential mortgage loansduring the year ended December 31, 2002 compared to $659.4 million and $635.0million in 2001 and 2000, respectively.

 

During theyear 2002, the Bank sold $203.4 million of single family residential loans,primarily fixed rate loans, to maintain and improve the Bank’s level ofinterest rate risk. To a lesser extent, the sales were used as a source offunds for the origination of higher yielding adjustable rate loans. The

 

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Bank anticipates that a significant portionof its future new loan originations will continue to be single-familyresidential mortgage loans and that certain fixed-rate loan originations willbe sold into the secondary market rather than being held in portfolio.

 

The Bank’sresidential mortgage loans have either fixed-rates of interest or interestrates which adjust periodically during the term of the loan. Fixed-rate loansgenerally have maturities ranging from 10 to 30 years and are fully amortizingwith monthly or bi-weekly loan payments sufficient to repay the total amount ofthe loan with interest by the end of the loan term. The Bank’s fixed-rate loansgenerally are originated under terms, conditions and documentation which permitthem to be sold to U.S. Government-sponsored agencies, such as the Federal HomeLoan Mortgage Corporation (“FHLMC”), and other investors in the secondarymarket for mortgages. At December 31, 2002, $1.3 billion, or 48.2%, of theBank’s single-family residential mortgage loans were fixed-rate loans.Substantially all of the Bank’s single-family residential mortgage loanscontain due-on-sale clauses, which permit the Bank to declare the unpaidbalance to be due and payable upon the sale or transfer of any interest in theproperty securing the loan. The Bank enforces such due-on-sale clauses.

 

The adjustablerate single family residential mortgage loans currently offered by the Bankinclude 1/1,5/1 and 7/1 ARMS. At December 31, 2002, the Bank’s five-year andten-year ARM loans amounted to $827.9 million and $295.0 million, respectively.The Bank’s adjustable-rate single-family residential real estate loansgenerally have a cap of 2% to 5% on any increase or decrease in the interestrate at any adjustment date, and include a specified cap on the maximuminterest rate over the life of the loan, which cap is generally 5% or 6% abovethe initial rate. The Bank may offer ARM loans with initial rates which arebelow the fully indexed rate. The Bank’s adjustable-rate loans require that anypayment adjustment resulting from a change in the interest rate of anadjustable-rate loan be sufficient to result in full amortization of the loanby the end of the loan term and, thus, do not permit any of the increasedpayment to be added to the principal amount of the loan, or so-called negativeamortization. At December 31, 2002, $1.4 billion or 51.8% of the Bank’ssingle-family residential mortgage loans were adjustable-rate loans compared to$959.7 million or 46.1% at December 31, 2001.

 

Adjustable-rateloans decrease the risks associated with changes in interest rates but involveother risks, primarily because as interest rates increase, the loan payment bythe borrower increases to the extent permitted by the terms of the loan,thereby increasing the potential for default. Moreover, as with fixed-rateloans, as interest rates increase, the marketability of the underlyingcollateral property may be adversely affected by higher interest rates. TheBank believes that these risks, which have not had a material adverse effect onthe Bank to date, generally, are less than the risks associated with holdingfixed-rate loans in a rising interest rate environment.

 

The volume andtypes of ARMs originated by the Bank have been affected by such market factorsas the level of interest rates, competition, consumer preferences and availabilityof funds. Accordingly, although the Bank will continue to offer single-familyARMs, there can be no assurance that in the future the Bank will be able tooriginate a sufficient volume of single-family ARMs to increase or maintain theproportion that these loans bear to total loans.

 

The Bank’ssingle-family residential mortgage loans generally do not exceed $1.0 million.In addition, the maximum loan-to-value (“LTV”) ratio for the Bank’ssingle-family residential mortgage loans, generally, is 95% of the appraisedvalue of the secured property, provided, however, that private mortgageinsurance is obtained on the portion of the principal amount that exceeds 80%of the appraised value. Loans purchased by the Bank from SIBMC are underwrittenon substantially similar terms as

 

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loansoriginated directly by the Bank.

 

At December31, 2002, the Company’s home equity loans amounted to $19.0 million or 0.6% ofthe Company’s net loans. The Bank offers floating and fixed-rate home equitylines of credit. Home equity loans, like single-family residential mortgageloans, are secured by the underlying equity in the borrower’s residence.However, the Bank generally obtains a second mortgage position to secure homeequity loans. The Bank’s home equity loans generally require LTV ratios of 80%or less after taking into consideration any first mortgage loan.

 

**Commercial Real Estate Loans and Multi-FamilyResidential Loans.** At December 31, 2002, the Company’scommercial real estate loans and multi-family residential mortgage loansamounted to $418.7 million and $56.5 million, respectively, or 12.2% and 1.7%,respectively, of the Company’s net loan portfolio. Commercial real estate andmulti-family residential real estate loans often have adjustable interestrates, shorter terms to maturity and higher yields than the Bank’ssingle-family residential real estate loans. Because of such factors, in recentyears the Bank has increased its efforts in originating commercial real estateloans and multi-family residential loans.

 

The Bank’scommercial real estate loans generally are secured by small office buildings,retail and industrial use buildings, strip shopping centers and othercommercial uses located in the Bank’s market area. The Bank’s commercial realestate loans seldom exceed $2.5 million and as of December 31, 2002, theaverage size of the Bank’s commercial real estate loans was approximately$367,000. The Bank originated $158.9 million of commercial real estate loansduring the year ended December 31, 2002 compared to $77.0 million and $70.7million of commercial real estate loan originations in 2001 and 2000,respectively.

 

The Bank’smulti-family residential real estate loans are concentrated in Brooklyn and, toa lesser extent, Staten Island. The Bank originated $18.9 million ofmulti-family residential real estate loans during the year ended December 31,2002 compared to $5.1 million and $9.9 million of originations in 2001 and2000, respectively. The Bank generally has not been a substantial originator ofmulti-family residential real estate loans due to, among other factors, therelatively limited amount of apartment and other multi-family properties onStaten Island.

 

The Bank’scommercial real estate and multi-family residential loans generally are five-or ten-year adjustable-rate loans indexed to the five-year U.S. Treasuryobligation adjusted to a CMT, plus a margin. Generally, fees of between 0.50%and 1.50% of the principal loan balance are charged to the borrower uponclosing. The Bank generally charges prepayment penalties on commercial realestate and multi-family residential mortgage loans. Although terms formulti-family residential and commercial real estate loans may vary, the Bank’sunderwriting standards generally provide for terms of up to 25 years withamortization of principal over the term of the loan and LTV ratios of not morethan 75%. Generally, the Bank obtains personal guarantees of the principals asadditional security for commercial real estate and multi-family residentialloans.

 

The Bankevaluates various aspects of commercial and multi-family residential realestate loan transactions in an effort to mitigate risk to the extent possible.In underwriting these loans, consideration is given to the stability of theproperty’s cash flow history, future operating projections, current andprojected occupancy, position in the market, location and physical condition.The Bank has also generally imposed a debt coverage ratio (the ratio of net cashfrom operations before payment of debt service to debt service) of not lessthan 1.25%. The underwriting analysis also includes credit checks and

 

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a review ofthe financial condition of the borrower and guarantor, if applicable. Anappraisal report is prepared by an independent appraiser commissioned by theBank to substantiate property values for every commercial real estate andmulti-family loan transaction. All appraisal reports are reviewed by the Bankprior to the closing of the loan.

 

Commercialreal estate and multi-family residential lending entails substantiallydifferent risks when compared to single-family residential lending because suchloans often involve large loan balances to single borrowers and because thepayment experience on such loans is typically dependent on the successfuloperation of the project or the borrower’s business. These risks can also besignificantly affected by supply and demand conditions in the local market forapartments, offices, warehouses, or other commercial space. The Bank attemptsto minimize its risk exposure by limiting such lending to proven businesses,only considering properties with existing operating performance which can beanalyzed, requiring conservative debt coverage ratios and periodicallymonitoring the operation and physical condition of the collateral.

 

As of December31, 2002, $2.7 million or 0.6% of the Bank’s commercial real estate loans andnone of its multi-family residential real estate loans were on non-accrualstatus.

 

**Construction and Land Loans.**  In 1999, the Bank formed AmericanConstruction Lending Services, Inc. (ACLS) which operated as a wholly ownedsubsidiary of the Bank, until March 2001 when the operations of ACLS weremerged with and into SIBMC. ACLS is now operated as a division of SIBMC and isknown as the “ACLS Division” which basically manages the existing constructionloan and land development loan portfolio and unfunded commitments. In 2002, thelevel of originations was driven by outstanding construction loan commitmentsand unfunded balances from previously originated construction loans. Thecurrent portfolio of the ACLS Division, which totaled $83.9 million at December31, 2002 consists primarily of residential construction loans to builders andindividuals along with four warehouse funding agreements for residentialconstruction loans totaling $41.1 million. The loans in the warehouse fundingagreements are serviced by the company that originates the loan and are paidoff when they are sold as permanent loans. In the year 2001, SIBMC informedthese borrowers that they are discontinuing this type of lending and, as aresult, the Company expects these loans to be paid off over the next 12 months.Construction loans in the ACLS Division portfolio have been underwritten andare serviced under the same guidelines used by the Bank.

 

The Companyoriginates and services its construction and land loans through the ACLSdivision of SIBMC and the Bank. The construction loans originated by the SIBMCand the Bank are primarily residential construction loans to real estatebuilders and, to a lesser extent, residential construction loans to individualswho have a contract with a builder for the construction of their residence. TheBank will also originate construction loans for multi-family projects andnon-residential property. While the terms of the construction and land loansoffered by the Bank and SIBMC are substantially similar, the Bank restricts itslending to the New York metropolitan area while SIBMC will lend in any areathat SIBMC does business. At December 31, 2002, the Company’s construction andland loan portfolio, inclusive of the previously mentioned ACLS divisionportfolio, amounted to $153.1 million or 4.5% of the Company’s net loanportfolio, of which $60.1 million consisted of residential construction loans,$1.7 million of multi-family construction loans, $35.8 million ofnon-residential construction loans and $55.5 million of land loans. Inaddition, at such date the Company had $32.0 million of undisbursed funds forconstruction loans in process. The Bank and ACLS disbursed $115.3 million ofconstruction and land loans during the year ended December 31, 2002 compared to$345.0 million and $147.2 million of construction loans in 2001 and 2000,respectively.

 

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The Company’sconstruction loans generally have floating rates of interest for a term of upto two years. Construction loans to builders are typically made with a maximumloan to value ratio of 75%. The Company’s construction loans to builders aremade on either a pre-sold or speculative (unsold) basis. However, the Companygenerally limits the number of unsold homes under construction to its builders,with the amount dependent on the reputation of the builder, the presentoutstanding obligations of the builder, the location of the property and priorsales of homes in the development and the surrounding area. The Companygenerally limits the number of construction loans for speculative units.

 

Prior tomaking a commitment to fund a construction loan, the Company requires anappraisal of the property by independent appraisers licensed or certified inthe state where the property is located. The Company’s staff also reviews andinspects each project at the commencement of construction and prior to everydisbursement of funds during the term of the construction loan. Loan proceedsare disbursed after inspections of the project based on a percentage ofcompletion. The Company requires monthly interest payments during theconstruction term.

 

The Companyoriginates land loans to developers for the purpose of holding or developingthe land (i.e., roads, sewer and water) for sale. At December 31, 2002, theCompany had $55.5 million of land loans. Such loans are secured by a lien onthe property, are generally limited to 65% of the appraised value of thesecurity property and are typically made for a period of up to two years with afloating interest rate based on the prime rate. The Company requires monthlyinterest payments during the term of the land loan. The principal of the loanis reduced as lots are sold and released. In addition, the Bank generallyobtains personal guarantees from its borrowers and originates such loans to developerswith whom it has established relationships.

 

Constructionand land lending generally is considered to involve a higher level of risk ascompared to permanent single-family residential lending, due to theconcentration of principal in a limited number of loans and borrowers and theeffects of general economic conditions on developers and builders. Moreover, aconstruction loan can involve additional risks because of the inherentdifficulty in estimating both a property’s value at completion of the projectand the estimated cost (including interest) of the project. The nature of theseloans is such that they are generally more difficult to evaluate and monitor.In addition, speculative construction loans to a builder are secured by unsoldhomes and thus pose a greater potential risk to the Company than constructionloans to individuals on their personal residences.

 

The Companyhas attempted to minimize the foregoing risks by, among other things, limitingthe extent of its construction and land lending to primarily residentialproperties. In addition, the Company has adopted strict underwriting guidelinesand other requirements for loans which are believed to involve higher elementsof credit risk. It is also the Company’s policy, when possible, to obtainpersonal guarantees from the principals of its corporate borrowers on itsconstruction and land loans.

 

At December31, 2002 the Company had $1.1 million of construction and land loans that wereon non-accrual status compared to $2.1 million at December 31, 2001.

 

**Other Loans.** TheCompany offers a variety of other or non-mortgage loans through the Bank. Suchother loans, which include commercial business loans, passbook loans, studentloans, overdraft loans, manufactured home loans and a variety of other personalloans, amounted to $109.1 million or 3.18% of the Company’s net loan portfolioat December 31, 2002.

 

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At December31, 2002, the Company’s commercial business loans amounted to $62.8 million or1.8% of the Company’s net loan portfolio. The Bank’s commercial business loanshave a term of up to five years and may have either fixed rates of interest or,to a lesser extent, floating rates tied to the prime rate. The Bank’scommercial business loans are made to small to medium sized businesses withinthe Bank’s market area. A substantial portion of the Bank’s small businessloans is unsecured with the remainder generally secured by perfected securityinterests in accounts receivable and inventory or other corporate assets. TheBank generally obtains personal guarantees from the principals of the borrowerwith respect to all commercial business loans. In addition, the Bank may extendloans for a commercial business purpose which are secured by a mortgage on theproprietor’s home or the business property. In such cases, the loan, whileunderwritten to commercial business loan standards, is reported as asingle-family or commercial real estate mortgage loan, as the case may be.Commercial business loans generally are deemed to involve a greater degree ofrisk than single-family residential mortgage loans.

 

The Bank’scommercial business loans include discounted loans, which amounted to $7.0million or 0.2% of the Bank’s net loans at December 31, 2002. The Bank’sdiscounted loans, which are made primarily to local businesses, are designed toprovide an interim source of financing and require no payment of principal orinterest until the due date of the loan, which may be up to one year butgenerally is 60 or 90 days from the date of origination. While the borrower iscontractually obligated to repay the entire face amount of the loan atmaturity, the Bank advances only a portion of the face amount with thedifference constituting the interest component. In addition to personalguarantees, discounted loans may also be secured by perfected securityinterests in receivables and/ or certain other assets of the Company. However,due to the lack of an amortization schedule and, in certain cases, the absenceof perfected security interests, discounted loans, generally, may be deemed toinvolve a greater risk of loss than single-family residential mortgage loans.

 

At December31, 2002, included in total other consumer loans was $23.3 million of loansprimarily secured by manufactured housing which represented 0.7% of the Bank’snet loan portfolio. At December 31, 2001, the Company’s manufactured housingloans amounted to $27.9 million. The Bank had purchased these loans after areview of the loan documentation and underwriting, which is prepared by thecompany originating the loan. The majority of the loans are secured bymanufactured housing and are located primarily in the northeastern section ofthe country. The Bank services the loan, when necessary, and is assisted by athird party in the collection process. The Bank discontinued purchasing theseloans in 2001. At December 31, 2002, the Company had $803,000 in loans securedby manufactured housing in non-accrual status compared to $133,000 innon-accrual manufactured housing loans at December 31, 2001.

 

The balance ofthe Bank’s other loans consists of loans secured by savings accounts, loans onoverdraft accounts, home improvement loans, student loans and various otherpersonal loans.

 

**Loan Origination Costs and Fees.**In addition to interest earned on loans, the Bank receives loan originationfees or “points” on a portion of the loans it originates. Loan points are apercentage of the principal amount of the mortgage loan and are charged to theborrower in connection with the origination of the loan. Loan costs, which aredeferred, are primarily the direct costs to originate a loan, fees paid tobrokers and mortgage taxes which are charged in certain states that the Bankoperates in.

 

In accordancewith SFAS No. 91, which addresses the accounting for non-refundable fees andcosts associated with originating or acquiring loans, the Bank’s loanorigination fees and certain related direct loan origination costs and fees areoffset, and the resulting net amount is deferred and amortized

 

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as anadjustment to interest income over the contractual life, adjusted forprepayments, of the related loans resulting in an adjustment to the yield ofsuch loans. For loans that are sold by the Bank, the unamortized portion of thedeferred fees and costs is an adjustment to the gain or loss on the sale. AtDecember 31, 2002, the Bank had $13.8 million of such net deferred loan costs.

 

**MortgageBanking Activities.**SIB Mortgage Corp., a wholly ownedsubsidiary of the Bank, conducts mortgage banking in 42 states. The Company’sMortgage Banking segment is conducted through SIBMC.

 

SIBMC’sprimary business is to originate or purchase residential loans through retail,wholesale and bulk purchase channels and sell them either into the secondarymarket with servicing released, or, to a lesser extent, to the Bank forretention in its portfolio. SIBMC services its loans held for sale on aninterim basis and its loans held for investment which consist of residentialpermanent and construction loans. SIBMC has no loan servicing asset recorded onits balance sheet since it currently sells all servicing rights that itoriginates. At December 31, 2002, the Bank had a loan servicing asset of $2.8million recorded on its books generated by the sale of loans into the secondarymarket.

 

SIBMCoriginates loans through a network of approximately 300 retail commissionedloan officers who solicit business through realtors, financial planners,insurance agents and other referral sources. SIBMC also derives applicationsfrom third-party sources, such as mortgage brokers, and from the Internet. Loanapplications are generally processed on a de-centralized basis in one ofSIBMC’s network of 91 offices in 42 states. SIBMC’s primary method of creditunderwriting the loans is to electronically submit the necessary data to themajor mortgage agencies’ (FHLMC or FNMA) automated underwriting facilities.SIBMC also has underwriters in all of its regions who manually underwrite loansthat are not eligible for agency submission, in which case, loans areoriginated for re-sale to individual investors in the secondary market. Allcredit decisions are based on the underwriting guidelines of the investor whois expected to purchase the loan from SIBMC. In most instances, SIBMC isdelegated to make underwriting decisions for its private investors eitherdirectly or through automated underwriting programs. Generally, all propertiessecuring loans must be appraised by a licensed appraiser. Credit reports, floodzone certifications and real estate tax certifications are required on allloans. SIBMC also requires title insurance, hazard insurance and floodinsurance when a loan is determined to be in a flood zone. To the extentnecessary, private mortgage insurance is required on loans where investorguidelines mandate. SIBMC’s underwriters are authorized to approve loans basedon the individual investors delegated authority. All limits also are subject tothe Bank’s limitations and SIBMC is subject to the same limitations as the Bankfor loans to one borrower.

 

SIBMC’s loanoriginations and purchases during 2002 totaled $9.4 billion compared to $4.0billion in 2001 and $760.1 million in 2000. The record level of originationsfor 2002 was driven primarily by the level of refinance transactions due to thefavorable interest rate environment during the year and the increased volumeresulting from the geographic expansion of SIBMC in 2001 into 15 additionalstates as well as the opening of 19 de novo offices in 2002. These originationlevels resulted in record loan sales in 2002 of $8.4 billion compared to loansales of $2.9 billion in 2001 and $503.0 million in 2000. To meet the demandsfrom the increased loan origination volumes, SIBMC expanded its back officeoperations to both service and transfer loans to investors. Management expectsto continue to seek new markets to enter either through opening new offices oracquisitions and to enhance its direct marketing channel to maintain andincrease the level of loan originations.

 

The Bank hasprovided SIBMC with a $1.8 billion line of credit to finance its loanoriginations,

 

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which includesa working capital line of $15.0 million. At December 31, 2002, $1.2 billion wasoutstanding on such line of credit for loan originations. The working capitalline of credit to SIBMC for day-to-day operating expenses was not drawn onduring 2002. Interest paid by SIBMC on such intra-Company loans is eliminatedupon consolidation in the Company’s financial statements*.*

 

In the fourthquarter of 2001, SIBMC entered into a mortgage repurchase agreement with aninternational bank as an additional source of funding. The $150.0 million lineof credit is collateralized by loans held for sale by SIBMC. This line ofcredit expired December 15, 2002 and was not renewed.  SIBMC entered into two additional lines of credit in February2002 and November 2002 for $500.0 million and $400.0 million,respectively.  The Bank guarantees thelines of credit by agreeing to, among other things, repurchase loans thatremain on the line for more than 60 days. The balance outstanding on the linesas of December 31, 2002 and 2001 are $475 million and $66 million,respectively.

 

SIBMCoriginates loans that conform to the underwriting standards for purchase byFHLMC and FNMA (“conforming loans”) as well as FHA loans, VA loans andnon-conforming loans. Non-conforming loans generally consist of loans which,primarily because of size or other underwriting requirements, do not satisfythe guidelines for sale to FNMA or FHLMC and other private secondary marketinvestors at the time of origination. During the year ended December 31, 2002,non-conforming conventional loans represented approximately 36% of SIBMC’stotal volume of mortgage loans originated*.*

 

Retail loanorigination activities performed by SIBMC include soliciting, completing andprocessing mortgage loan applications and preparing and organizing thenecessary loan documentation. Loan applications are examined for compliancewith underwriting criteria and, if all requirements are met, SIBMC issues acommitment to the prospective borrower specifying the amount of the loan andthe loan origination fees, points and closing costs to be paid by the borroweror seller and the date on which the commitment expires.

 

In the normalcourse of originating mortgage loans, SIBMC collects certain fees from theborrower.  The amount, type of feescollected and the timing of when the fees are collected vary depending upon theorigination channel and the type of loan. SIBMC also incurs certain costsassociated with loan origination, processing and underwriting.  These fees include out of pocket fees paidto third parties as well as personnel and other direct operating costs.  In accordance with SFAS 91, SIBMC defersdirect loan fees and costs incurred throughout the origination process andamortizes them over the contractual life of the loan under the interest methodas an adjustment to yield or until the loan is sold.

 

At December31, 2002, SIBMC had $1.8 billion in commitments to originate one-to-four familyresidential mortgage loans. In the normal course of business borrowers mayelect to “lock-in” the interest rate on the loan.  The term of lock-in ranges from three days prior to closing up toone year prior to closing. In accordance with Statement 133 ImplementationIssue No. C13 ("Issue C13") issued by the Derivatives ImplementationGroup of the Financial Accounting Standards Board ("FASB"), theMortgage Company's locked commitments are treated as financialderivatives.  SIBMC recognizes thechange in value of these derivatives from the date of lock-in through the dateof closing in current period earnings. For the period July 1, 2002 through December 31, 2002, the locked loancommitments had market appreciation of $27.5 million which was recorded on theconsolidated income statement as unrealized gain on derivativetransactions.  The Mortgage Company hasimplemented a hedging strategy designed to mitigate the risk associated withprice movements caused by changes in market rates of interest.  The hedging strategy consists of “locking”the loan directly with the intended investor or to a larger extent “sellingforward” mortgage-backed securities of a comparable coupon and duration.  To the extent that the loans are agencyeligible they will be delivered into that security or the trade is assignedalong with the loan to a third party.  Tothe

 

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extent thatthe loans being hedged are not agency eligible, the Mortgage Company will buyback the forward sale to close the position to eliminate the hedge and deliverthe loans to the investor on a bulk basis. The Mortgage Company enters into these transactions primarily withnationally recognized brokerage firms.**AtDecember 31, 2002, the Mortgage Company had $1.5 billion of unallocated forwardsales commitments with a market depreciation of $14.9 million whichdepreciation amount was netted against the unrealized gain on locked loancommitments with the result reported on the consolidated income statement asunrealized gain on derivative transactions.

 

The challengein hedging is estimating the percentage of approved loans that will eventuallyclose when SIBMC has given a forward interest rate commitment to the borrower.In a rising interest rate environment, a larger percentage of loans will closethan originally estimated because borrowers will not be able to get a betterrate from another lender. In a declining rate environment, a smaller percentageof loans will close because borrowers will go to another lender to get a lowerrate or negotiate a lower rate with SIBMC. In the case of rising rates SIBMCmay have insufficient hedges to cover its exposure and in the case of fallinginterest rates there will be too many hedges to deliver into, which means SIBMCwould be forced to repurchase a portion of its hedges at a loss. In an effortto protect itself against the volatility of the closing rate on its pipeline ofmortgage loans, a sensitivity report is run daily to estimate the effect onearnings given a three percentage point movement in the price of the underlyingmortgage loans. SIBMC uses this report to adjust the forward sales daily in itsefforts to reduce the fluctuations on estimated earnings, primarily due tochanges in the value of the pipeline of mortgage loans and the correspondinghedges.

 

SIBMC had $2.7billion in commitments to sell loans at December 31, 2002. SIBMC records thegain or loss on loan sales at the time of sale.  When SIBMC sells loans, pursuant to relatively standardrepresentations and warranties, it assumes limited recourse for first paymentdefaults, fraud and non-compliance with its investors’ underwriting guidelines.The first payment default recourse is generally limited to a loan that goesinto foreclosure where the delinquency occurred within the first 90 days aftera loan is sold to an investor. The recourse obligation for fraud andnon-compliance to underwriting of loan standards is generally for the life ofthe loan. During 2002 and 2001, SIBMC repurchased $4.9 million and $5.8million, respectively, of loans incurring losses of $2.6 million and $1.4million, respectively, with respect to such repurchases.

 

During 2002,the Company established a reserve to provide for the losses in the normalcourse of business with respect to loans originated for sale by the MortgageCompany. Such losses are due primarily to loans originated for sale not fullysatisfying the representations and warranties (“R&W”) made by the MortgageCompany in connection with the sale of such loans. In the event therepresentations and warranties are breached, the Mortgage Company may berequired to repurchase the loans, remit a portion of its sales price or make otherconcessions, which reduce the amount of gain recognized by the MortgageCompany.  In 2002, the Companyestablished a reserve, the representation and warranty reserve (“R&WR”),for potential losses on loans originated for sale by the Mortgage Company.  The R&WR totaled $3.5 million atDecember 31, 2002 and is included in other liabilities on the Company’sconsolidated statements of financial condition at such date.  Additional provisions to the R&WR willreduce the amount of gains on sales.

 

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**Asset Quality**

 

**General.** As a partof the Company’s efforts to improve its asset quality, it has enhanced the loanreview area, along with developing and implementing an asset classificationsystem which now includes single-family residential loans. All of the Bank’sassets are subject to review under this classification system. Loans areperiodically reviewed and the classifications are reviewed by the Board ofDirectors on at least a quarterly basis.

 

When aborrower fails to make a required payment on a loan, the Company attempts tocure the deficiency by contacting the borrower and seeking payment. Contactsare generally made 16 days after a payment is due. In most cases, deficienciesare cured promptly. If a delinquency continues, late charges are assessed andadditional efforts are made to collect the loan. While the Company generallyprefers to work with borrowers to resolve such problems, when the accountbecomes 90 days delinquent, the Company institutes foreclosure or otherproceedings, as necessary, to minimize any potential loss.

 

Loans areplaced on non-accrual status when, in the judgment of management, theprobability of collection of interest is deemed to be doubtful and the value ofthe collateral is not sufficient to satisfy all interest, principal andpotential costs due on the loan. Prior to 1998, the Company’s policy was tocease accruing interest on any loan which was 90 days or more past due as toprincipal or interest. Commencing in 1998, management reviews the collateralvalue, payment history of individual secured loans along with the financialcondition of the borrower to determine the accrual status of the loan when theyapproach 90 days past due. When a loan is placed on non-accrual status, previouslyaccrued unpaid interest is deducted from interest income. At December 31, 2002,the Company had $17.4 million of loans in non-accrual status compared to $15.1million as of December 31, 2001.

 

Real estateacquired by the Company as a result of foreclosure or deed-in-lieu offoreclosure and repossessed assets is classified as real estate owned untilsold. These foreclosed assets are considered held for sale and are carried atthe lower of fair value minus the estimated costs to sell the property. After thedate of acquisition, all costs incurred in maintaining the property areexpensed. The Company performs ongoing inspections of the properties andadjusts the carrying value as needed. The Company attempts to sell allproperties through brokers and its own personnel. At December 31, 2002, theCompany had $9.7 million in these properties compared to $1.2 million as ofDecember 31, 2001. The Company anticipates the sale of one property with acarrying value of $4.5 million to settle in the second quarter of 2003 with nosignificant loss.

 

17

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**Delinquent Loans.**The following table sets forth information concerning delinquent loans atDecember 31, 2002, in dollar amounts and as a percentage of each category ofthe Bank’s loan portfolio. The amounts presented represent the totaloutstanding principal balances of the related loans, rather than the actualpayment amounts which are past due.

 
|                       |   | **December 31, 2002**      |   |
|----------------------------|--------|----------------------------|--------|
|                       |   |                       |   |
|                       |   | **30-59 Days**             |   | **60-89 Days** |   | **90 Days or More** |   |
|                       |   |                       |   |   |   |   |   |   |   |   |   |   |   |
|                       |   | **Amount**                 |   | **Percent of  Loan  Category** |   | **Amount** |   | **Percent of  Loan  Category** |   | **Amount** |   | **Percent of  Loan  Category** |   |
|                       |   | **(Dollars in Thousands)** |   |
| Mortgage loans:            |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  residential |   | $                          | 16,496 |   | 0.38 | % | $ | 6,699 |   | 0.15 | % | $ | 4,451 |   | 0.10 | % |
| Multi-family residential   |   | —                     |   | — |   | — |   | — |   | — |   | — |   |
| Commercial real estate     |   | 3,646                      |   | 0.87 |   | 493 |   | 0.12 |   | — |   | — |   |
| Construction and land      |   | 2,787                      |   | 1.82 |   | 465 |   | 0.30 |   | 940 |   | 0.61 |   |
| Home equity                |   | 51                         |   | 0.27 |   | 8 |   | 0.04 |   | — |   | 0.00 |   |
| Total mortgage loans       |   | 22,980                     |   | 0.46 |   | 7,665 |   | 0.15 |   | 5,391 |   | 0.11 |   |
|                       |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Other loans:               |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Commercial business  loans |   | 3,014                      |   | 4.80 |   | 124 |   | 0.20 |   | 41 |   | 0.07 |   |
| Other loans                |   | 1,523                      |   | 3.29 |   | 418 |   | 0.90 |   | 252 |   | 0.54 |   |
| Total other loans          |   | 4,537                      |   | 4.16 |   | 542 |   | 0.50 |   | 293 |   | 0.27 |   |
|                       |   |                       |   |   |   |   |   |   |   |   |   |   |   |
| Total delinquent loans     |   | $                          | 27,517 |   | 0.54 | % | $ | 8,207 |   | 0.16 | % | $ | 5,684 |   | 0.11 | % |

 

18

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**Loans PastDue 90 Days or More and Still Accruing and Non-Accruing Assets.** Thefollowing table sets forth information with respect to non-accruing loans,other real estate owned, repossessed assets, and loans past due 90 days or moreand still accruing.

 
|                                                                       |   | **At December 31,**        |         |
|----------------------------------------------------------------------------|--------|----------------------------|--------------|
|                                                                       |   | **2002**                   |         | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                       |   | **(Dollars in thousands)** |         |
| Mortgage loans:                                                            |   |                       |         |
| Single-family residential                                                  |   | $                          | 11,942       |   | $ | 7,663 |   | $ | 3,335 |   | $ | 2,899 |   | $ | 7,067 |   |
| Multi-family residential                                                   |   | —                     |         | — |   | 340 |   | — |   | 131 |   |
| Commercial real estate                                                     |   | 2,687                      |         | 4,086 |   | 2,979 |   | 5,568 |   | 6,534 |   |
| Construction and land                                                      |   | 1,094                      |         | 2,117 |   | 524 |   | 1,793 |   | 1,761 |   |
| Home equity                                                                |   | —                     |         | 38 |   | 5 |   | 106 |   | 212 |   |
| Other loans:                                                               |   |                       |         |   |   |   |   |   |   |   |   |
| Commercial business loans                                                  |   | 797                        |         | 558 |   | 1,482 |   | 1,783 |   | 346 |   |
| Other consumer loans                                                       |   | 837                        |         | 631 |   | 1,111 |   | 325 |   | 181 |   |
|                                                                       |   |                       |         |   |   |   |   |   |   |   |   |
| Total non-accrual loans                                                    |   | 17,357                     |         | 15,093 |   | 9,776 |   | 12,474 |   | 16,232 |   |
| Other real estate owned, net                                               |   | 9,445                      |         | 996 |   | 762 |   | 887 |   | 849 |   |
| Other repossessed assets, net                                              |   | 236                        |         | 231 |   | 131 |   | — |   | — |   |
| Total non-accruing assets                                                  |   | 27,038                     |         | 16,320 |   | 10,669 |   | 13,361 |   | 17,081 |   |
|                                                                       |   |                       |         |   |   |   |   |   |   |   |   |
| Loans past due 90 days or more and still accruing                          |   | 5,684                      |         | 7,213 |   | 7,068 |   | 6,886 |   | 7,422 |   |
| Non-accruing assets and loans past due 90 days or  more and still accruing |   | $                          |  32,722 |   | $ |  23,533 |   | $ |  17,737 |   | $ |  20,247 |   | $ |  24,503 |   |
|                                                                       |
|                                                                       |   |                       |         |   |   |   |   |   |   |   |   |
| Non-accruing loan assets to total loans  (1)                          |   | 0.53                       | %            | 0.41 | % | 0.36 | % | 0.62 | % | 1.16 | % |
| Non-accruing loan assets to total assets                                   |   | 0.39                       | %            | 0.27 | % | 0.20 | % | 0.30 | % | 0.45 | % |
| Non-accruing loans to total loans  (1)                                |   | 0.34                       | %            | 0.38 | % | 0.33 | % | 0.58 | % | 1.10 | % |
| Non-accruing loans to total assets                                         |   | 0.25                       | %            | 0.25 | % | 0.19 | % | 0.28 | % | 0.43 | % |
|                                                                       |   |                       |         |   |   |   |   |   |   |   |   |
|                                                                            |        |                            |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Total loans including loans held forinvestment and loans held for sale.

 

Non-accrualloans and other real estate owned at December 31, 2002 totaled $27.0 million,up from $16.3 million at December 31, 2001 and $10.7 million at December31, 2000.

 

The interestincome that would have been recorded during the year ended December 31, 2002 ifall of the Company’s non-accrual loans at the end of such period had beencurrent in accordance with their terms during such period was $1.0 million. Theactual amount of interest recorded as income (on a cash basis) on such loansduring 2002 amounted to $1.4 million.

 

 

**Allowance for Loan Losses.**The Company’s allowance for loan losses was $22.8 million at December 31, 2002or 131.2% of non-accrual loans and 0.44% of the Company’s total loansreceivable, including loans held for sale, at such date. The level of theallowance for loan losses is intended to be maintained at a level sufficient toabsorb all estimated, probable losses

 

19

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inherent inthe loan portfolio. In determining the appropriate level of the allowance forloan losses and accordingly, the level of the provision for loan losses, theCompany on a quarterly basis reviews the mix and volume of the portfolio andits inherent risks, the level of non-accruing loans and delinquencies,historical loss experience, local and national economic conditions includingthe direction of real estate values and current trends in regulatorysupervision. As a result of current economic conditions, an increase in thelevel of non-accruing loans and the volume of loan originations, the provisionfor loan losses was $8.9 million for the year ended December 31, 2002 comparedto a provision of $8.8 million for the year ended December 31, 2001.

 

**Classified and Criticized Assets.**Federal regulations require that each insured institution classify its assetson a regular basis. Furthermore, in connection with examinations of insuredinstitutions, federal examiners have authority to identify problem assets and,if appropriate, classify them. There are three classifications for problemassets: “substandard,” “doubtful” and “loss.” Substandard assets have one ormore defined weaknesses and are characterized by the distinct possibility thatthe insured institution will sustain some loss if the deficiencies are notcorrected. Doubtful assets have the weaknesses of substandard assets with theadditional characteristic that the weaknesses make collection or liquidation infull on the basis of currently existing facts, conditions and valuesquestionable and there is a high probability of loss. An asset classified as aloss is considered uncollectible and of such little value that continuance asan asset of the institution is not warranted. Another category designated as“special mention” also must be established and maintained for assets which donot currently expose an insured institution to a sufficient degree of risk towarrant classification as substandard, doubtful or loss.

 

For the twelvemonths ended December 31, 2002 classified assets increased by $1.9 million to$82.3 million. The primary reasons for this increase was the downward trend inthe economy, the growth and changing mix of the loan portfolio and the increasein past due and non-accrual loans. In response to this increase, managementcontinues its efforts to enhance its loan servicing and collection proceduresalong with continued emphasis on loan review and loan underwriting. The assetswere classified into the following categories at December 31, 2002, specialmention $23.3 million, substandard $57.9 million, doubtful $1.1 million andloss $7,000.

 

20

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**Allowance for Loan Losses.**The following table sets forth the activity inthe Bank’s allowance for loan losses during the periods indicated.

 
|                                                                     |   | **Year Ended December 31**  |       |
|--------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                     |   | **2002**                    |       | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                     |   | **(Dollars in  Thousands)** |       |
|                                                                     |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Allowance at beginning of period                                         |   | $                           | 20,041     |   | $ | 14,638 |   | $ | 14,271 |   | $ | 16,617 |   | $ | 15,709 |   |
| Provisions (Benefit)                                                     |   | 8,854                       |       | 8,757 |   | 652 |   | (1,843 | ) | 1,594 |   |
| Increase as a result of acquisition                                      |   | —                      |       | — |   | 847 |   | — |   | 96 |   |
| Charge-offs:                                                             |   |                        |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                          |   |                        |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                |   | 4,898                       |       | 1,854 |   | 120 |   | 148 |   | 358 |   |
| Multi-family residential                                                 |   | —                      |       | — |   | — |   | — |   | 31 |   |
| Commercial real estate                                                   |   | —                      |       | — |   | 134 |   | 474 |   | 344 |   |
| Construction and land                                                    |   | —                      |       | — |   | 6 |   | — |   | — |   |
| Other loans                                                              |   | 2,174                       |       | 2,411 |   | 1,926 |   | 1,043 |   | 1,386 |   |
| Total charge-offs                                                        |   | 7,072                       |       | 4,265 |   | 2,186 |   | 1,665 |   | 2,119 |   |
| Recoveries:                                                              |   |                        |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                          |   |                        |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                |   | 10                          |       | 131 |   | 19 |   | 456 |   | 267 |   |
| Multi-family residential                                                 |   | —                      |       | — |   | — |   | — |   | — |   |
| Commercial real estate                                                   |   | —                      |       | — |   | 27 |   | 34 |   | 210 |   |
| Construction and land                                                    |   | 15                          |       | — |   | — |   | — |   | 3 |   |
| Other loans                                                              |   | 925                         |       | 780 |   | 1,008 |   | 672 |   | 857 |   |
| Total recoveries                                                         |   | 950                         |       | 911 |   | 1,054 |   | 1,162 |   | 1,337 |   |
| Allowance at end of period                                               |   | $                           | 22,773     |   | $ | 20,041 |   | $ | 14,638 |   | $ | 14,271 |   | $ | 16,617 |   |
|                                                                     |   |                        |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses  to total non-accruing loans at  end of period |   | 131.20                      | %          | 132.78 | % | 149.73 | % | 114.40 | % | 102.37 | % |
|                                                                     |   |                        |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses  to total loans at end of period               |   | 0.44                        | %          | 0.50 | % | 0.49 | % | 0.66 | % | 1.07 | % |

 

The followingtable sets forth information concerning the allocation of the Company’sallowance for loan losses by loan category at the dates indicated.

 
|        |   | **At  December 31,**        |   |                                                 |
|-------------|--------|-----------------------------|--------|------------------------------------------------------|
|        |   | **2002**                    |   | **2001**                                             |   | **2000** |   | **1999** |   | **1998** |   |   |
|        |   | **Amount**                  |   | **Percent of Loans in Each Category to Gross Loans** |   | **Amount** |   | **Percent of Loans in Each Category to Gross Loans** |   | **Amount** |   | **Percent of Loans in Each Category to Gross Loans** |   | **Amount** |   | **Percent of Loans in Each Category to Gross Loans** |   | **Amount** |   | **Percent of Loans in Each Category to Gross Loans** |   |   |
|        |   | **(Dollars  in Thousands)** |   |                                                 |
| Residential |   | $                           | 10,476 |                                                 | 78.60 | % | $ | 8,463 |   | 73.96 | % | $ | 2,686 |   | 77.88 | % | $ | 5,890 |   | 81.08 | % | $ | 5,562 |   | 81.90 | % |   |
| Commercial  |   | 10,027                      |   | 20.18                                                |   | 7,599 |   | 24.60 |   | 9,237 |   | 19.75 |   | 5,579 |   | 16.75 |   | 7,721 |   | 17.16 |   |   |
| Other loans |   | 2,270                       |   | 1.35                                                 |   | 3,979 |   | 1.78 |   | 2,715 |   | 2.48 |   | 2,802 |   | 2.58 |   | 3,334 |   | 2.12 |   |   |
| Total       |   | $                           | 22,773 |                                                 | 100.13 | % | $ | 20,041 |   | 100.34 | % | $ | 14,638 |   | 100.11 | % | $ | 14,271 |   | 100.41 | % | $ | 16,617 |   | 101.18 | % |
|             |        |                             |        |                                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Companywill continue to monitor and modify its allowance for loan losses as conditionsdictate. While management believes, based on information currently available,the Bank’s allowance for loan losses is sufficient to cover losses inherent inits loan portfolio at this time, no assurance can be

 

21

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given that theCompany’s level of allowance for loan losses will be sufficient to absorbfuture loan losses incurred by the Company, or that future adjustments to theallowance for loan losses will not be necessary if economic and otherconditions differ substantially from those conditions used by management todetermine the current level of the allowance for loan losses. In addition, theOTS, as an integral part of its examination process, periodically reviews theCompany’s allowance for loan losses. Such agency may require the Company tomake adjustments to the loan loss reserve based upon their own judgments whichcould differ from those of management.

 

**Securities Activities**

 

**General.** As ofDecember 31, 2002, the Company had securities including the investment inFederal Home Loan Bank of New York stock totaling $1.0 billion or 14.8% of theCompany’s total assets at such date. The unrealized appreciation on theCompany’s securities available for sale amounted to $11.6 million, net ofincome taxes, as of December 31, 2002. The securities investment policy of theCompany, which has been established by the Board of Directors, is designed,among other things, to assist the Company in its asset/liability managementpolicies. The investment policy emphasizes principal preservation, favorablereturns on investments, maintaining liquidity within designated guidelines,minimizing credit risk and maintaining flexibility. The current securitiesinvestment policies permit investments in various types of assets includingobligations of the U.S. Treasury and federal agencies, investment gradecorporate obligations, various types of mortgage-backed and mortgage-relatedsecurities, commercial paper, certificates of deposit, equities and federalfunds sold to financial institutions approved by the Board of Directors.

 

The Company’ssecurities portfolio, on a non-consolidated basis, as of December 31, 2002 was$33.5 million, consisting of equity investments and certain corporate bondswhich are not permitted investments for a federally chartered thrift.

 

At December31, 2002, all of the Company’s securities were classified as available forsale. Such classification provides the Company with the flexibility to sellsecurities if deemed appropriate in response to, among other factors, changesin interest rates. Securities classified as available for sale are carried atfair value. Unrealized gains and losses on available for sale securities arerecognized as direct increases or decreases in equity, net of applicable incometaxes.

 

22

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**Securities Portfolio Activity. **The following tablesets forth the activity in the Company’s aggregate securities portfolio duringthe periods indicated.

 
|                                                           |   | **Year Ended December 31,** |      |
|----------------------------------------------------------------|--------|-----------------------------|-----------|
|                                                           |   | **2002**                    |      | **2001** |   | **2000** |   |
|                                                           |   | **(Dollars In  Thousands)** |      |
|                                                           |   |                        |      |   |   |   |   |
| Securities at beginning of period                              |   | $                           | 1,528,639 |   | $ | 1,888,946 |   | $ | 1,963,954 |   |
| Purchases:                                                     |   |                        |      |   |   |   |   |
| U.S. Government and agencies                                   |   | 40,785                      |      | — |   | 219,313 |   |
| State and municipals                                           |   | —                      |      | — |   | 1,515 |   |
| Agency mortgage-backed securities                              |   | 357,462                     |      | 193,731 |   | 65,589 |   |
| Agency CMOs                                                    |   | 52,077                      |      | 13,974 |   | 10,981 |   |
| Private CMOs                                                   |   | 20,180                      |      | — |   | 16 |   |
| Other debt securities                                          |   | 45,195                      |      | 88,844 |   | 45,180 |   |
| Marketable equity securities                                   |   | 36,119                      |      | 40,479 |   | 39,038 |   |
| Total purchases                                                |   | 551,818                     |      | 337,028 |   | 381,632 |   |
| Sales:                                                         |   |                        |      |   |   |   |   |
| U.S. Government and agencies                                   |   | —                      |      | 10,000 |   | 198,212 |   |
| State and municipals                                           |   | 29,813                      |      | — |   | — |   |
| Agency mortgage-backed securities                              |   | 169,656                     |      | 76,410 |   | 26,075 |   |
| Agency CMOs                                                    |   | —                      |      | — |   | 645 |   |
| Private CMOs                                                   |   | —                      |      | — |   | — |   |
| Other debt securities                                          |   | 111,483                     |      | 59,496 |   | 39,797 |   |
| Marketable equity securities                                   |   | 51,091                      |      | 66,350 |   | 45,493 |   |
| Total sales                                                    |   | 362,043                     |      | 212,256 |   | 310,222 |   |
| Repayments and prepayments:                                    |   |                        |      |   |   |   |   |
| U.S. Government and agencies                                   |   | 46,775                      |      | 112,730 |   | 8,100 |   |
| State and municipals                                           |   | 290                         |      | 115 |   | 140 |   |
| Agency mortgage-backed securities                              |   | 262,134                     |      | 195,000 |   | 139,847 |   |
| Agency CMOs                                                    |   | 95,489                      |      | 109,018 |   | 35,805 |   |
| Private CMOs                                                   |   | 279,184                     |      | 76,058 |   | 24,592 |   |
| Other debt securities                                          |   | 234                         |      | 170 |   | 103 |   |
| Marketable equity securities                                   |   | 8,740                       |      | 1,250 |   | — |   |
| Total repayments and prepayments                               |   | 692,846                     |      | 494,341 |   | 208,587 |   |
| Accretion of discount and (amortization of premium)            |   | (1,798                      | )         | 499 |   | 1,227 |   |
| Write-down for other than temporary impairment                 |   | (2,691                      | )         | (14,506 | ) | — |   |
| Unrealized gains or (losses) on available-for-sale  securities |   | 2,503                       |      | 23,269 |   | 60,942 |   |
| Securities at end of period                                    |   | $                           | 1,023,582 |   | $ | 1,528,639 |   | $ | 1,888,946 |   |

 

**Mortgage-Backed and Mortgage-RelatedSecurities.** The Company purchases mortgage-backedsecurities and mortgage-related securities in order to generate positiveinterest rate spreads with minimal administrative expense, lower its creditrisk as a result of guarantees provided by FNMA, FHLMC and GNMA, increase theliquidity of the Company and utilize these securities as collateral for borrowing.The Company has primarily invested in mortgage-backed and mortgage- relatedsecurities issued or sponsored by private issuers, and by GNMA, FNMA and FHLMC.At December 31, 2002, the Company’s securities included $744 million, or 10.7%of total assets, of mortgage-backed and mortgage-related securities. At suchdate, 21.4% of the mortgage-backed and mortgage-related securities wereadjustable rate and 78.6% were fixed rate. The portfolio of mortgage-backed andmortgage-related securities had a weighted average yield of 5.48%, and ananticipated or estimated duration of 2.25 years as of December 31, 2002.

 

23

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The portfolioof mortgage-backed and mortgage-related securities consisted of mortgage-backedsecurities of $579.8 million, or 8.4% of total assets, and CMOs of $164.6million, or 2.4% of total assets, at December 31, 2002. The mortgage backedsecurities were issued or guaranteed by GNMA, FHLMC or FNMA and $86.0 millionof the CMOs were issued or guaranteed by FHLMC and GNMA and $78.6 million wereprivately issued and are all rated AAA.

 

**U.S. Government and Agency Obligations. **At December 31,2002, the Company’s U.S. Government agency securities portfolio, consisting ofcallable securities, totaled $22.3 million with a weighted average maturity of5.2 years and a weighted average life of 1.7 years to the call date.

 

**Other Securities. **At December 31, 2002 the Company’s othersecurities totaled $113.3 million or 1.6% of total assets. Other securities consistof $112.1 million in corporate bonds and preferreds, $1.0 million in municipalbonds and $250,000 in foreign bonds. The corporate bonds and preferreds consistof $49.6 million in fixed rate bonds and $62.4 million in adjustable-ratebonds using three month LIBOR as the primary index and have an average ratingof BBB+. The weighted average maturity of the corporate bond portfolio is 26.0years.

 

In thesecurities portfolio at December 31, 2002, the Company held one preferred bondwith a carrying value of $4.7 million that was considered other thantemporarily impaired and was written down $4.8 million in the year 2001 and oneequity investment where certain purchases of this investment were consideredother than temporarily impaired and was written down $2.6 million in 2002. Thetotal carrying value of this equity investment at December 31, 2002 was$24.7 million.

 

24

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The followingtable sets forth certain information regarding the contractual maturities ofthe Bank’s U.S. Government Agency obligations and other securities (all ofwhich were classified as available for sale) at December 31, 2002.

 
|                                           |   | **At  December 31, 2002**      |   |
|------------------------------------------------|--------|--------------------------------|--------|
|                                           |   |                           |   |
|                                           |   | **Maturing  in  Under 1 Year** |   | **Weighted  Average  Yield** |   | **Maturing  in 1-5  Years** |   | **Weighted  Average  Yield** |   | **Maturing  in 6-10  Years** |   | **Weighted  Average  Yield** |   | **Maturing  in  Over 10  Years** |   | **Weighted  Average  Yield** |   |
|                                           |   | **(Dollars in  Thousands)**    |   |
|                                           |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Government and federal agency obligations |   | $                              | — |   | 0.00 | % | $ | 11,000 |   | 5.03 | % | $ | 10,000 |   | 6.60 | % | $ | — |   | 0.00 | % |
|                                           |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other securities                               |   | —                         |   | 0.00 |   | 5,830 |   | 6.49 |   | 250 |   | 3.00 |   | 118,928 |   | 6.26 |   |
|                                           |   | $                              | — |   |   |   | $ | 16,830 |   |   |   | $ | 10,250 |   |   |   | $ | 118,928 |   |   |   |

 

**Equity Securities. **At December 31, 2002 the Company’sinvestment in equity securities, including the investment in the Federal HomeLoan Bank of New York stock was $143.5 million or 2.1% of total assets. Theequity investment consisted primarily of $112.2 million in FHLB stock, $24.7million in mutual funds, $6.6 million in preferred stock and $101,000 in commonstock. The required level of investment in FHLB stock as a member is the higherof 5% of the amount of advances the Bank has outstanding with the FHLB or 1% ofresidential mortgage loans. There is no market for the Company’s FHLB stock,however, when the required level of ownership declines, the FHLB repurchasesthe stock. All equity investments are classified as available for sale.

 

**Sources of Funds**

 

**General.** Deposits,repayments and prepayments of loans and securities, proceeds from sales ofloans and securities, proceeds from maturing securities and cash flows fromoperations are the primary sources of the Company’s funds for use in lending,investing and for other general purposes. The Company also utilizes borrowings,primarily FHLB advances and reverse repurchase agreements, to fund itsoperations when needed.

 

Depending uponmarket conditions and funding needs, the Bank at times does use brokered CDs asan alternative source of funds. The brokered CDs are issued by nationallyrecognized brokerage firms approved by the Board of Directors. At December 31,2002 and 2001 the balance in brokered CDs was $124.5 million and$134.9 million, respectively.

 

**Deposits.** The Bankoffers a variety of deposit accounts which have a range of interest rates andterms. At December 31, 2002, the Bank’s deposit accounts consisted of savings(including club accounts), NOW accounts, checking accounts, money marketaccounts and certificates of deposit (“CDs”) (including brokered CDs). The Bankalso offers certificates of deposit accounts with balances in excess of$100,000 at preferential rates (jumbo certificates) and also IndividualRetirement Accounts (“IRA”) and other qualified plan accounts. While jumbocertificate of deposit accounts are accepted by the Bank at preferential rates,other than brokered CDs, the Bank does not solicit such deposits outside of itsmarket area as such deposits are more difficult to retain than core deposits.To enhance the deposit products it offers, build

 

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customer relationships andincrease market share in certain markets, the Bank offers a new money marketaccount (that also requires the opening of a corresponding checking account).

 

At December31, 2002, the Bank’s deposits totaled $3.5 billion, of which 84.4% wereinterest bearing deposits at such date. Core deposits (savings accounts,non-interest bearing commercial and retail demand deposits, money marketaccounts and NOW accounts) were $2.4 billion or 68.1% of total deposits andcertificates of deposit were $1.1 billion or 31.9% of total deposits. Includedin the Bank’s certificates of deposit were $124.5 million of brokered depositsat December 31, 2002. Although the Bank has a significant portion of itsdeposits in core deposits, management monitors the activity in these accountsand, based on historical experience and the Bank’s current pricing strategy,believes it will continue to retain a large portion of these deposits. The Bankis not limited with respect to the rates it may offer on deposit products.

 

The flow ofdeposits is influenced significantly by general economic conditions, changes inprevailing interest rates and competition. The Bank’s deposits are primarilyobtained from the areas in which its branch offices are located. The Bankrelies primarily on competitive pricing of its deposit products, customerservice and long standing relationships with customers to attract and retaindeposits. The Bank also utilizes traditional marketing methods includingtelevision, radio and print media and direct mail programs to attract newcustomers and deposits.

 

In addition,the Bank’s business development officers have actively solicited, throughindividual meetings and other contacts, deposit accounts, particularlycommercial accounts. To attract and retain commercial deposit accounts, theBank offers a complete line of commercial account products and services. TheBank’s lending officers and branch managers have increased their efforts tosolicit new deposits from the Bank’s loan customers and other residents andbusinesses in their market area.

 

The Bank’smarket areas are Staten Island, New York, Brooklyn, New York and the followingcounties in New Jersey; Ocean, Monmouth, Union and Middlesex. Staten Island,which represents 65.7% of the Bank’s total deposits continues to be the Bank’sprimary market area. The Bank continues to hold over 32% of the deposits in theStaten Island market which as of June 30, 2002 was the highest percentage heldby any one institution on Staten Island.

 

For the yearended December 31, 2002, deposits, before interest credited, increased $489.8million compared with an increase of $474.3 million in 2001. Inclusive ofinterest credited, deposits increased $562.8 million in 2002 and $556.1 millionin 2001.

 

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The followingtable sets forth the activity in the Bank’s deposits during the periodsindicated.

 
|                                                |   | **Years Ended December 31,** |      |
|-----------------------------------------------------|--------|------------------------------|-----------|
|                                                |   | **2002**                     |      | **2001** |   | **2000** |   |
|                                                |   | **(Dollars  in Thousands)**  |      |
| Beginning balance                                   |   | $                            | 2,901,328 |   | $ | 2,345,213 |   | $ | 1,820,233 |   |
| Net increase (decrease) excluding acquired deposits |   | 489,791                      |      | 474,265 |   | 88,146 |   |
| Acquired deposits                                   |   | —                       |      | — |   | 368,438 |   |
| Interest credited                                   |   | 73,015                       |      | 81,850 |   | 68,396 |   |
| Net increase in deposits                            |   | 562,806                      |      | 556,115 |   | 524,980 |   |
| Ending balance                                      |   | $                            | 3,464,134 |   | $ | 2,901,328 |   | $ | 2,345,213 |   |

 

The followingtable sets forth, by various interest rate categories, the certificates ofdeposit with the Bank at the dates indicated. 

 
|          |   | **Year Ended December 31,** |      |
|---------------|--------|-----------------------------|-----------|
|          |   | **2002**                    |      | **2001** |   | **2000** |   |
|          |   | **(Dollars  in Thousands)** |      |
| 0.00 to 2.99% |   | $                           | 659,873   |   | $ | 250,444 |   | $ | — |   |
| 3.00 to 3.99% |   | 197,989                     |      | 268,821 |   | 292 |   |
| 4.00 to 4.99% |   | 150,188                     |      | 295,784 |   | 216,385 |   |
| 5.00 to 6.99% |   | 86,525                      |      | 256,381 |   | 694,684 |   |
| 7.00 to 8.99% |   | 10,795                      |      | 12,470 |   | 36,223 |   |
| Total         |   | $                           | 1,105,370 |   | $ | 1,083,900 |   | $ | 947,584 |   |

 

**Weighted Average Rate. **The following tablesets forth the amount and remaining maturities of the Bank’s certificates ofdeposit at December 31, 2002.

 
|          |   | **Six Months  And Less**    |    | **Over Six  Months Through  One Year** |   | **Over One Year  Through Two  Years** |   | **Over Two  Years Through  Three Years** |    | **Over Three  Years** |   |
|---------------|--------|-----------------------------|---------|----------------------------------------|--------|---------------------------------------|--------|------------------------------------------|---------|-----------------------|--------|
|          |   | **(Dollars  in Thousands)** |    |
| 0.00 to 2.99% |   | $                           | 404,636 |                                   | $      | 169,141                               |   | $                                        | 65,741  |                  | $      | 20,243 |   | $ | 112 |   |
| 3.00 to 3.99% |   | 26,864                      |    | 46,491                                 |   | 87,731                                |   | 15,159                                   |    | 21,744                |   |
| 4.00 to 4.99% |   | 15,274                      |    | 5,839                                  |   | 17,527                                |   | 7,901                                    |    | 103,647               |   |
| 5.00 to 6.99% |   | 35,653                      |    | 6,350                                  |   | 13,496                                |   | 9,568                                    |    | 21,458                |   |
| 7.00 to 8.99% |   | 400                         |    | 495                                    |   | —                                |   | 622                                      |    | 9,278                 |   |
| Total         |   | $                           | 482,827 |                                   | $      | 228,316                               |   | $                                        | 184,495 |                  | $      | 53,493 |   | $ | 156,239 |   |

 

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As of December31, 2002, the aggregate amount of outstanding certificates of deposit inamounts greater than or equal to $100,000 was approximately $395.9 million. Thefollowing table presents the maturity of these certificates of deposit at suchdate.

 
|                            |   | **December  31, 2002**      |    |
|---------------------------------|--------|-----------------------------|---------|
|                            |   | **(Dollars in  Thousands)** |    |
| 3 months or less                |   | $                           | 153,080 |   |
| Over 3 months through 6 months  |   | 35,874                      |    |
| Over 6 months through 12 months |   | 39,085                      |    |
| Over 12 months                  |   | 167,839                     |    |
| Total                           |   | $                           | 395,878 |   |

 

Thefollowing table sets forth the average dollar amount of deposits in thevarious types of deposit accounts offered by the Bank at the dates indicated.

 
|                     |   | **Year to  Date Average as of December 31,** |      |
|--------------------------|--------|----------------------------------------------|-----------|
|                     |   | **2002**                                     |      | **2001** |   | **2000** |   |
|                     |   | **Year to Date  Average  Balance**           |      | **Weighted  Average  Rate** |   | **Year to Date  Average  Balance** |   | **Weighted  Average  Rate** |   | **Year to Date  Average  Balance** |   | **Weighted  Average  Rate** |   |
|                     |   | **(Dollars  in Thousands )**                 |      |
| Savings accounts         |   | $                                            | 1,000,455 |   | 1.74 | % | $ | 817,890 |   | 2.18 | % | $ | 793,908 |   | 2.45 | % |
| Certificates of deposits |   | 1,116,366                                    |      | 3.49 |   | 1,017,634 |   | 5.22 |   | 827,504 |   | 5.41 |   |
| Money market accounts    |   | 516,547                                      |      | 2.80 |   | 228,297 |   | 3.70 |   | 129,002 |   | 3.20 |   |
| NOW accounts             |   | 128,020                                      |      | 1.40 |   | 101,981 |   | 1.83 |   | 90,085 |   | 2.03 |   |
| Demand deposits          |   | 526,843                                      |      | — |   | 453,120 |   | — |   | 382,814 |   | — |   |
| Total                    |   | $                                            | 3,288,231 |   | 2.21 | % | $ | 2,618,922 |   | 3.10 | % | $ | 2,223,313 |   | 3.16 | % |

 

**Borrowed Funds.**The Company’s borrowings at December 31, 2002 were $2.8 billion or 39.8% oftotal assets and consisted of primarily FHLB advances secured by the Bank’sresidential loan portfolio and reverse repurchase agreements entered into withthe FHLB and nationally recognized securities brokerage firms. FHLB advancesand repurchase agreements were $1.8 billion and $469.3 million, respectively,at December 31, 2002. In the fourth quarter of 2001, SIBMC entered into amortgage repurchase agreement with an international bank as an**additional source of funding. The $150.0million line of credit is collateralized by loans held for sale by SIBMC. Thisline of credit expired December 15, 2002 and was not renewed.  SIBMC entered into two additional lines ofcredit in February 2002 and November 2002. The Bank guarantees the lines of credit by agreeing to, among otherthings, repurchase loans that remain on the line for more than 60 days. Thebalance outstanding on the lines as of December 31, 2002 and 2001 was $474.6million and $66.3 million respectively.

 

In 2002,borrowings were used to fund certain higher yielding loan originationsprimarily at SIBMC. The Company intends to reduce borrowings as a percentage ofassets in the year 2003 and to continue to emphasize more traditional fundingsources such as deposit growth in all markets.

 

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The followingtable sets forth information with respect to the Company’s borrowings at andduring the periods indicated.

 
|                            |   | **At or For  the Year Ended December 31,** |      |
|---------------------------------|--------|--------------------------------------------|-----------|
|                            |   | **2002**                                   |      | **2001** |   | **2000** |   |
|                            |   | **(Dollars in  Thousands)**                |      |
|                            |   |                                       |      |   |   |   |   |
| Maximum month-end balance       |   | $                                          | 2,923,828 |   | $ | 2,535,392 |   | $ | 2,249,963 |   |
| Average Balance                 |   | $                                          | 2,629,271 |   | $ | 2,399,963 |   | $ | 2,147,718 |   |
| Year end balance                |   | $                                          | 2,756,927 |   | $ | 2,451,762 |   | $ | 2,241,011 |   |
| Weighted average interest rate: |   |                                       |      |   |   |   |   |
| At end of year                  |   | 4.13                                       | %         | 4.64 | % | 6.28 | % |
| During the year                 |   | 4.41                                       | %         | 5.39 | % | 6.19 | % |

 

**Trust Activities**

 

The Bank alsoprovides a full range of trust and investment services, and acts as executor oradministrator of estates and as trustee for various types of trusts. Trust andinvestment services are offered through the Bank’s Trust Department which wasacquired in 1995. Fiduciary and investment services are provided primarily topersons and entities located in the banking branch market area. Servicesoffered include fiduciary services for trusts and estates, money management,custodial services and pension and employee benefits consulting. As of December31, 2002, the Trust Department maintained approximately 390 trust/fiduciaryaccounts with an aggregate value of $271.0 million.

 

The accountsmaintained by the Trust/Investment Services Division consist of “managed” and “non-managed”accounts. “Managed” accounts are those for which the Bank has responsibilityfor administration and investment management and/or investment advice.“Non-managed” accounts are those accounts for which the Bank merely acts as acustodian. The Company receives fees depending upon the level and type ofservice provided. The Trust Department administers various trust accounts(revocable, irrevocable, charitable trusts, and trusts under wills), agencyaccounts (various investment fund products), estate accounts and employeebenefit plan accounts (assorted plans and IRA accounts). Two trust officers, atrust investment officer and related staff are assigned to the TrustDepartment. The administration of trust and fiduciary accounts are monitored bythe Trust Investment Committee of the Board of Directors of SI Bank & Trustas well as a management committee consisting of certain senior officers of theBank.

 

**Subsidiaries**

 

SIB MortgageCorp., doing business as Ivy Mortgage, (SIBMC) is a wholly owned subsidiary ofthe Bank incorporated in the State of New Jersey in 1998. SIBMC currentlyoriginates loans in 42 states and had assets totaling $2.0 billion at December31, 2002.

 

SIB InvestmentCorporation (“SIBIC”) is a wholly owned subsidiary of the Bank that wasincorporated in the State of New Jersey in 1998 for the purpose of managingcertain investments of the Bank. The Bank transferred the common stock and amajority of the preferred stock of Staten Island Funding Corporation to SIBIC.The consolidated assets of SIBIC at December 31, 2002 were $953.1 million.

 

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Staten IslandFunding Corporation (“SIFC”) is a wholly owned subsidiary of SIBIC incorporatedin the State of Maryland in 1998 for the purpose of establishing a real estateinvestment trust (“REIT”). The Bank transferred real estate mortgage loanstotaling $648.0 million, net, to SIFC in 1998. In return, the Bank received allthe shares of common stock and preferred stock in SIFC. The assets of SIFC totaled$695.7 million at December 31, 2002.

 

SIB FinancialServices Corporation (“SIBFSC”) is a wholly owned subsidiary of the Bankincorporated in the State of New York in 2000. SIBFSC was formed as a licensedlife insurance agency to sell the products of SBLI USA Mutual InsuranceCompany, Inc. SIBFSC had assets of $1.1 million as of December 31, 2002.

 

In 2002, theBank introduced a program to offer annuities, mutual funds, stocks, lifeinsurance and other investment products through its branch network. The programis coordinated by a third party vendor and the sales generate fee income forthe Bank.

 

**Employees**

 

The Bank had661 full-time employees and 217 part-time employees at December 31, 2002. SIBMChad 1356 full-time employees and 52 part-time employees at December 31, 2002.None of these employees are represented by a collective bargaining agreementand the Bank and SIBMC believes that it enjoys good relations with itspersonnel.

 

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**REGULATION**

 

**General**

 

The Bank is afederally chartered and insured savings bank subject to extensive regulationand supervision by the OTS, as the primary federal regulator of savingsassociations, and the FDIC, as the administrator of the Bank Insurance Fund(“BIF”).

 

The federalbanking laws contain numerous provisions affecting various aspects of thebusiness and operations of savings associations and savings and loan holdingcompanies. The following description of statutory and regulatory provisions andproposals, which is not intended to be a complete description of theseprovisions or their effects on the Company or the Bank, is qualified in itsentirety by reference to the particular statutory or regulatory provisions orproposals.

 

**Regulationof Savings and Loan Holding Companies**

 

**Holding CompanyAcquisitions.** The Company is a savings and loanholding company within the meaning of the Home Owners’ Loan Act, as amended(“HOLA”). The HOLA and OTS regulations generally prohibit a savings and loanholding company, without prior OTS approval, from acquiring, directly orindirectly, the ownership or control of any other savings association orsavings and loan holding company, or all, or substantially all, of the assetsor more than 5% of the voting shares thereof. These provisions also prohibit,among other things, any director or officer of a savings and loan holdingcompany, or any individual who owns or controls more than 25% of the votingshares of such holding company, from acquiring control of any savingsassociation not a subsidiary of such savings and loan holding company, unlessthe acquisition is approved by the OTS.

 

**Holding CompanyActivities.** The Company operates as a unitary savingsand loan holding company. Generally, there are limited restrictions on theactivities of a unitary savings and loan holding company which applied tobecome or was a unitary savings and loan holding company prior to May 4, 1999and its non-savings association subsidiaries.

 

Under theenacted Gramm-Leach-Bliley Act of 1999 (the “GLBA”), companies which applied tothe OTS after May 4, 1999 to become unitary savings and loan holding companiesare restricted to engaging in those activities traditionally permitted tomultiple savings and loan holding companies. Under the GLBA, no company may acquirecontrol of a savings and loan holding company after May 4, 1999, unless thecompany is engaged only in activities traditionally permitted to a multiplesavings and loan holding company or newly permitted to a financial holdingcompany under Section 4(k) of the Bank Holding Company Act. Corporatereorganizations are permitted, but the transfer of grandfathered unitary thriftholding company status through acquisition is not permitted.

 

If theDirector of the OTS determines that there is reasonable cause to believe thatthe continuation by a savings and loan holding company of an activityconstitutes a serious risk to the financial safety, soundness or stability ofits subsidiary savings institution, the Director may

 

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impose such restrictions asdeemed necessary to address such risk, including limiting (i) payment ofdividends by the savings institution; (ii) transactions between the savingsinstitution and its affiliates; and (iii) any activities of the savingsinstitution that might create a serious risk that the liabilities of theholding company and its affiliates may be imposed on the savings institution.Notwithstanding the above rules as to permissible business activities ofgrandfathered unitary savings and loan holding companies under the GLBA, if thesavings institution subsidiary of such a holding company fails to meet theQualified Thrift Lender (“QTL”) test, as discussed under “Regulation of FederalSavings Banks - Qualified Thrift Lender Test,” then such unitary holdingcompany also shall become subject to the activities restrictions applicable tomultiple savings and loan holding companies and, unless the savings institutionrequalifies as a QTL within one year thereafter, shall register as, and becomesubject to the restrictions applicable to, a bank holding company.

 

The GLBA alsoimposed new financial privacy obligations and reporting requirements on allfinancial institutions. The privacy regulations require, among other things,that financial institutions establish privacy policies and disclose suchpolicies to its customers at the commencement of a customer relationship andannually thereafter. In addition, financial institutions are required to permitcustomers to opt out of the financial institution’s disclosure of thecustomer’s financial information to non-affiliated third parties. Suchregulations became mandatory as of July 1, 2001.

 

The HOLArequires every savings association subsidiary of a savings and loan holdingcompany to give the OTS at least 30 days advance notice of any proposeddividends to be made on its guarantee, permanent or other non-withdrawablestock, or else such dividend will be invalid.

 

**Affiliate Restrictions.**Transactions between a savings association and its “affiliates” are subject toquantitative and qualitative restrictions under Sections 23A and 23B of theFederal Reserve Act. Affiliates of a savings association include, among otherentities, the savings association’s holding company and companies that areunder common control with the savings association.

 

In general,Sections 23A and 23B, and OTS regulations issued in connection therewith limitthe extent to which a savings association or its subsidiaries may engage incertain “covered transactions” with affiliates to an amount equal to 10% of theassociation’s capital and surplus, in the case of covered transactions with anyone affiliate, and to an amount equal to 20% of such capital and surplus, inthe case of covered transactions with all affiliates. In addition, a savingsassociation and its subsidiaries may engage in covered transactions and certainother transactions only on terms and under circumstances that are substantiallythe same, or at least as favorable to the savings association or its subsidiary,as those prevailing at the time for comparable transactions with nonaffiliatedcompanies. A “covered transaction” is defined to include a loan or extension ofcredit to an affiliate; a purchase of investment securities issued by anaffiliate; a purchase of assets from an affiliate, with certain exceptions; theacceptance of securities issued by an affiliate as collateral for a loan orextension of credit to any party; or the issuance of a guarantee, acceptance orletter of credit on behalf of an affiliate.

 

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In addition,under the OTS regulations, a savings association may not make a loan orextension of credit to an affiliate unless the affiliate is engaged only inactivities permissible for bank holding companies; a savings association maynot purchase or invest in securities of an affiliate other than shares of asubsidiary; a savings association and its subsidiaries may not purchase alow-quality asset from an affiliate; and covered transactions and certain othertransactions between a savings association or its subsidiaries and an affiliatemust be on terms and conditions that are consistent with safe and sound bankingpractices. With certain exceptions, each loan or extension of credit by a savingsassociation to an affiliate must be secured by collateral with a market valueranging from 100% to 130% (depending on the type of collateral) of the amountof the loan or extension of credit.

 

The OTSregulation generally excludes all non-bank and non-savings associationsubsidiaries of savings associations from treatment as affiliates, except tothe extent that the OTS or the Federal Reserve Board decides to treat suchsubsidiaries as affiliates. The regulation also requires savings associationsto make and retain records that reflect affiliate transactions in reasonabledetail, and provides that certain classes of savings associations may berequired to give the OTS prior notice of affiliate transactions.

 

**Sarbanes-OxleyAct of 2002**.  On July 30, 2002, the President signed intolaw the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended toaddress corporate and accounting fraud. In addition to the establishment of a new accounting oversight boardwhich will enforce auditing, quality control and independence standards andwill be funded by fees from all publicly traded companies, the bill restrictsprovision of both auditing and consulting services by accounting firms.  To ensure auditor independence, anynon-audit services being provided to an audit client will require preapprovalby the company’s audit committee members. In addition, the audit partners must be rotated.  The bill requires chief executive officersand chief financial officers, or their equivalent, to certify to the accuracyof periodic reports filed with the SEC, subject to civil and criminal penaltiesif they knowingly or willfully violate this certification requirement.  In addition, under the Act, counsel will berequired to report evidence of a material violation of the securities laws or abreach of fiduciary duty by a company to its chief executive officer or itschief legal officer, and, if such officer does not appropriately respond, toreport such evidence to the audit committee or other similar committee of the Boardof Directors or the Board itself.

 

Longer prisonterms will also be applied to corporate executives who violate federalsecurities laws, the period during which certain types of suits can be broughtagainst a company or its officers has been extended, and bonuses issued to topexecutives prior to restatement of a company’s financial statements are nowsubject to disgorgement if such restatement was due to corporatemisconduct.  Executives are alsoprohibited from insider trading during retirement plan “blackout” periods, andloans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SECas a result of any judicial or administrative action under the Act be depositedto a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution (“FAIR”) provision alsorequires the SEC to develop methods of improving collection rates.  The legislation accelerates the time framefor disclosures by public companies, as they must immediately disclose anymaterial changes in their financial condition or operations.  Directors and executive officers must alsoprovide information for most changes

 

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in ownership in a company’ssecurities within two business days of the change.

 

The Act alsoincreases the oversight of, and codifies certain requirements relating to auditcommittees of public companies and how they interact with the company’s“registered public accounting firm” (“RPAF”). Audit committee members must be independent and are barred fromaccepting consulting, advisory or other compensatory fees from the issuer.  In addition, companies must disclose whetherat least one member of the committee is a “financial expert” as such term isdefined by the SEC and if not, why not. Under the Act, a RPAF is prohibited from performing statutorily mandatedaudit services for a company if such company’s chief executive officer, chieffinancial officer, comptroller, chief accounting officer or any person servingin equivalent positions has been employed by such firm and participated in theaudit of such company during the one-year period preceding the audit initiationdate.  The Act also prohibits anyofficer or director of a company or any other person acting under theirdirection from taking any action to fraudulently influence, coerce, manipulateor mislead any independent public or certified accountant engaged in the auditof the company’s financial statements for the purpose of rendering the financialstatement’s materially misleading.  TheAct also requires the SEC to prescribe rules requiring inclusion of an internalcontrol report and assessment by management in the annual report toshareholders.  The Act requires the RPAFthat issues the audit report to attest to and report on management’s assessmentof the company’s internal controls.  Inaddition, the Act requires that each financial report required to be preparedin accordance with (or reconciled to) generally accepted accounting principlesand filed with the SEC reflect all material correcting adjustments that areidentified by a RPAF in accordance with generally accepted accountingprinciples and the rules and regulations of the SEC.

 

**Regulationof Federal Savings Banks**

 

**Regulatory System.**As a federally insured savings bank, lending activities and other investmentsof the Bank must comply with various statutory and regulatory requirements. TheBank is regularly examined by the OTS and must file periodic reports concerningits activities and financial condition.

 

Although theOTS is the Bank’s primary regulator, the FDIC has “backup enforcementauthority” over the Bank. The Bank’s eligible deposit accounts are insured bythe FDIC under the BIF, up to applicable limits.

 

**Federal Home LoanBanks.** The Bank is a member of the FHLB System. Amongother benefits, FHLB membership provides the Bank with a central creditfacility. The Bank is required to own capital stock in an FHLB in an amountequal to the greater of: 1% of its aggregate outstanding principal amount ofits residential mortgage loans, home purchase contracts and similar obligationsat the beginning of each calendar year, or 5% of its FHLB advances(borrowings). The current investment in FHLB stock is based on 5% of the Bank’sborrowings outstanding from the FHLB.

 

**Regulatory CapitalRequirements.** OTS capital regulations require savingsbanks to satisfy minimum capital standards, risk-based capital requirements, aleverage requirement and a

 

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tangible capital requirement.Savings banks must meet each of these standards in order to be deemed incompliance with OTS capital requirements. In addition, the OTS may require asavings association to maintain capital above the minimum capital levels.

 

All savingsbanks are required to meet a minimum risk-based capital requirement of totalcapital (core capital plus supplementary capital) equal to 8% of risk-weightedassets (which includes the credit risk equivalents of certain off-balance sheetitems). In calculating total capital for purposes of the risk-basedrequirement, supplementary capital may not exceed 100% of core capital. Underthe leverage requirement, a savings bank is required to maintain core capitalequal to a minimum of 3% of adjusted total assets. A savings bank is alsorequired to maintain tangible capital in an amount at least equal to 1.5% ofits adjusted total assets.

 

These capitalrequirements are viewed as minimum standards by the OTS, and most institutionsare expected to maintain capital levels well above the minimum. In addition,the OTS regulations provide that minimum capital levels higher than thoseprovided in the regulations may be established by the OTS for individualsavings associations, upon a determination that the savings association’scapital is or may become inadequate in view of its circumstances. The OTSregulations provide that higher individual minimum regulatory capitalrequirements may be appropriate in circumstances where, among others: (1) asavings association has a high degree of exposure to interest rate risk,prepayment risk, credit risk, concentration of credit risk, certain risksarising from nontraditional activities, or similar risks or a high proportionof off-balance sheet risk; (2) a savings association is growing, eitherinternally or through acquisitions, at such a rate that supervisory problemsare presented that are not dealt with adequately by OTS regulations; and (3) asavings association may be adversely affected by the activities or condition ofits holding company, affiliates, subsidiaries or other persons or savingsassociations with which it has significant business relationships. The Bank isnot subject to any such individual minimum regulatory capital requirement.

 

The Bank’stangible capital ratio was 6.98%, its core capital ratio was 7.01% and itstotal risk-based capital ratio was 13.28% at December 31, 2002.

 

The OTS andthe FDIC generally are authorized to take enforcement action against a savingsassociation that fails to meet its capital requirements, which action mayinclude restrictions on operations and banking activities, the imposition of acapital directive, a cease-and-desist order, civil money penalties or harshermeasures such as the appointment of a receiver or conservator or a forcedmerger into another institution. In addition, under current regulatory policy,an association that fails to meet its capital requirements is prohibited frompaying any dividends.

 

**Prompt CorrectiveAction.** The prompt corrective action regulation of theOTS, promulgated under the Federal Deposit Insurance Corporation ImprovementAct of 1991 (“FDICIA”), requires certain mandatory actions and authorizescertain other discretionary actions to be taken by the OTS against a savingsbank that falls within certain undercapitalized capital categories specified inthe regulation.

 

The regulationestablishes five categories of capital classification: “well capitalized,”

 

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“adequately capitalized,”“undercapitalized,” “significantly undercapitalized,” and “criticallyundercapitalized.” Under the regulation, the ratio of total capital torisk-weighted assets, core capital to risk-weighted assets and the leverageratio are used to determine an institution’s capital classification. The Bankmeets the capital requirements of a “well capitalized” institution underapplicable OTS regulations.

 

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In general,the prompt corrective action regulation prohibits an insured depositoryinstitution from declaring any dividends, making any other capitaldistribution, or paying a management fee to a controlling person if, followingthe distribution or payment, the institution would be within any of the threeundercapitalized categories. In addition, adequately capitalized institutionsmay accept brokered deposits only with a waiver from the FDIC and are subjectto restrictions on the interest rates that can be paid on such deposits.Undercapitalized institutions may not accept renewed or rollover brokereddeposits.

 

Institutionsthat are classified as undercapitalized are subject to certain mandatorysupervisory actions, including: (i) increased monitoring by the appropriatefederal banking agency for the institution and periodic review of theinstitution’s efforts to restore its capital, (ii) a requirement that theinstitution submit a capital restoration plan acceptable to the appropriatefederal banking agency and implement that plan, and that each company havingcontrol of the institution guarantee compliance with the capital restorationplan in an amount not exceeding the lesser of 5% of the institution’s totalassets at the time it received notice of being undercapitalized, or the amountnecessary to bring the institution into compliance with applicable capitalstandards at the time it fails to comply with the plan, and (iii) a limitationon the institution’s ability to make any acquisition, open any new branchoffices, or engage in any new line of business without the prior approval ofthe appropriate federal banking agency for the institution or the FDIC.

 

The regulationalso provides that the OTS may take any of certain additional supervisoryactions against an undercapitalized institution if the agency determines thatsuch actions are necessary to resolve the problems of the institution at theleast possible long-term cost to the deposit insurance fund. These supervisoryactions include: (i) requiring the institution to raise additional capital orbe acquired by another institution or holding company if certain grounds exist,(ii) restricting transactions between the institution and its affiliates, (iii)restricting interest rates paid by the institution on deposits, (iv)restricting the institution’s asset growth or requiring the institution toreduce its assets, (v) requiring replacement of senior executive officers anddirectors, (vi) requiring the institution to alter or terminate any activitydeemed to pose excessive risk to the institution, (vii) prohibiting capital distributionsby bank holding companies without prior approval by the FRB, (viii) requiringthe institution to divest certain subsidiaries, or requiring the institution’sholding company to divest the institution or certain affiliates of theinstitution, and (ix) taking any other supervisory action that the agencybelieves would better carry out the purposes of the prompt corrective actionprovisions of FDICIA.

 

Institutionsclassified as undercapitalized that fail to submit a timely, acceptable capitalrestoration plan or fail to implement such a plan are subject to the samesupervisory actions as significantly undercapitalized institutions.Significantly undercapitalized institutions are subject to the mandatoryprovisions applicable to undercapitalized institutions. The regulation alsomakes mandatory for significantly undercapitalized institutions certain of thesupervisory actions that are discretionary for institutions classified asundercapitalized, creates a presumption in favor of certain discretionary supervisoryactions, and subjects significantly undercapitalized institutions to additionalrestrictions, including a prohibition on paying bonuses or raises to seniorexecutive officers without the prior written approval of the appropriatefederal bank

 

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regulatory agency. In addition,significantly undercapitalized institutions may be subjected to certain of therestrictions applicable to critically undercapitalized institutions.

 

The regulationrequires that an institution be placed into conservatorship or receivershipwithin 90 days after it becomes critically undercapitalized, unless the OTS,with concurrence of the FDIC, determines that other action would better achievethe purposes of the prompt corrective action provisions of FDICIA. Any suchdetermination must be renewed every 90 days. A depository institution also mustbe placed into receivership if the institution continues to be criticallyundercapitalized on average during the fourth quarter after the institutioninitially became critically undercapitalized, unless the institution’s federalbank regulatory agency, with concurrence of the FDIC, makes certain positivedeterminations with respect to the institution.

 

Criticallyundercapitalized institutions are also subject to the restrictions generallyapplicable to significantly undercapitalized institutions and to a number ofother severe restrictions. Critically undercapitalized institutions may beprohibited from engaging in a number of activities, including entering intocertain transactions or paying interest above a certain rate on new or renewedliabilities.

 

If the OTSdetermines that an institution is in an unsafe or unsound condition, or if theinstitution is deemed to be engaging in an unsafe and unsound practice, the OTSmay, if the institution is well capitalized, reclassify it as adequatelycapitalized; if the institution is adequately capitalized but not wellcapitalized, require it to comply with restrictions applicable to undercapitalizedinstitutions; and, if the institution is undercapitalized, require it to complywith certain restrictions applicable to significantly undercapitalizedinstitutions.

 

At December31, 2002, the Bank was in the “well-capitalized” category for purposes of theabove regulations and as such is not subject to any of the above mentionedrestrictions.

 

**Conservatorship/Receivership.**In addition to the grounds discussed under “Prompt Corrective Action,” the OTS(and, under certain circumstances, the FDIC) may appoint a conservator orreceiver for a savings association if any one or more of a number ofcircumstances exist, including, without limitation, the following: (i) theinstitution’s assets are less than its obligations to creditors and others,(ii) a substantial dissipation of assets or earnings due to any violation oflaw or any unsafe or unsound practice, (iii) an unsafe or unsound condition totransact business, (iv) a willful violation of a final cease-and-desist order,(v) the concealment of the institution’s books, papers, records or assets orrefusal to submit such items for inspection to any examiner or lawful agent ofthe appropriate federal banking agency or state bank or savings associationsupervisor, (vi) the institution is likely to be unable to pay its obligationsor meet its depositors’ demands in the normal course of business, (vii) theinstitution has incurred, or is likely to incur, losses that will deplete allor substantially all of its capital, and there is no reasonable prospect forthe institution to become adequately capitalized without federal assistance,(viii) any violation of law or unsafe or unsound practice that is likely tocause insolvency or substantial dissipation of assets or earnings, weaken theinstitution’s condition, or otherwise seriously prejudice the interests of theinstitution’s depositors or the federal deposit insurance fund, (ix) theinstitution is undercapitalized and the institution has no reasonable prospectof becoming adequately capitalized, fails to become adequately capitalized when

 

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required to do so, fails tosubmit a timely and acceptable capital restoration plan, or materially fails toimplement an accepted capital restoration plan, (x) the institution iscritically undercapitalized or otherwise has substantially insufficientcapital, or (xi) the institution is found guilty of certain criminal offensesrelated to money laundering.

 

**Enforcement Powers.**The OTS and, under certain circumstances the FDIC, have substantial enforcementauthority with respect to savings associations, including authority to bringvarious enforcement actions against a savings association and any of its“institution-affiliated parties” (a term defined to include, among other persons,directors, officers, employees, controlling stockholders, agents andstockholders who participate in the conduct of the affairs of the institution).This enforcement authority includes, without limitation: (i) the ability toterminate a savings association’s deposit insurance, (ii) institutecease-and-desist proceedings, (iii) bring suspension, removal, prohibition andcriminal proceedings against institution-affiliated parties, and (iv) assesssubstantial civil money penalties. As part of a cease-and-desist order, theagencies may require a savings association or an institution-affiliated partyto take affirmative action to correct conditions resulting from that party’sactions, including to make restitution or provide reimbursement,indemnification or guarantee against loss; restrict the growth of theinstitution; and rescind agreements and contracts.

 

**Capital DistributionRegulation.** As a subsidiary of a savings and loanholding company the Bank is required to provide advance notice to the OTS ofany proposed capital distribution on its capital stock.

 

**Qualified ThriftLender Test. **Allsavings institutions are required to meet a QTL test to avoid certainrestrictions on their operations. A savings institution that does not meet theQTL test must either convert to a bank charter or comply with the followingrestrictions on its operation. Upon the expiration of three years from the datethe savings institution ceases to be a QTL, it must cease any activity and notretain any investment not permissible for a national bank and immediately repayany outstanding FHLB advances (subject to safety and soundness consideration).

 

Currently, theQTL test under HOLA regulations requires that 65% of an institution’s“portfolio assets” (as defined) consist of certain housing and consumer-relatedassets on a monthly average basis in nine out of every 12 months. Assets thatqualify without limit for inclusion as part of the 65% requirement are loansmade to purchase, refinance, construct, improve or repair domestic residentialhousing and manufactured housing; home equity loans; mortgage-backed securities(where the mortgages are secured by domestic residential housing ormanufactured housing); stock issued by the FHLB; and direct or indirectobligations of the FDIC. In addition, small business loans, credit card loans,student loans and loans for personal, family and household purposes are allowedto be included without limitation as qualified investments. The followingassets, among others, also may be included in meeting the test subject to anoverall limit of 20% of the savings institution’s portfolio assets: 50% ofresidential mortgage loans originated and sold within 90 days of origination;100% of consumer and educational loans (limited to 10% of total portfolio assets);and stock issued by the FHLMC or the FNMA. Portfolio assets consist of totalassets minus the sum of (i) goodwill and other intangible assets, (ii) propertyused by the savings institution to conduct its business, and (iii)

 

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liquid assets up to 20% of theinstitution’s total assets.

 

At December31, 2002, under the expanded QTL test, approximately 99.0% of the Bank’sportfolio assets were qualified thrift investments.

 

OTSregulations also permit a savings association to qualify as a QTL by qualifyingunder the Code as a “domestic building and loan association.” The Bank is adomestic building and loan association as defined in the Code.

 

**FDIC Assessments.**The deposits of the Bank are insured to the maximum extent permitted by theBIF, which is administered by the FDIC, and are backed by the full faith andcredit of the U.S. Government. As insurer, the FDIC is authorized to conductexaminations of, and to require reporting by, FDIC-insured institutions. Italso may prohibit any FDIC-insured institution from engaging in any activitythe FDIC determines by regulation or order to pose a serious threat to theFDIC. The FDIC also has the authority to initiate enforcement actions againstsavings institutions, after giving the OTS an opportunity to take such action.

 

The FDIC mayterminate the deposit insurance of any insured depository institution,including the Bank, if it determines after a hearing that the institution hasengaged or is engaging in unsafe or unsound practices, is in an unsafe orunsound condition to continue operations, or has violated any applicable law,regulation, order or any condition imposed by an agreement with the FDIC. Italso may suspend deposit insurance temporarily during the hearing process forthe permanent termination of insurance, if the institution has no tangiblecapital. If insurance of accounts is terminated, the accounts at theinstitution at the time of the termination, less subsequent withdrawals, shallcontinue to be insured for a period of six months to two years, as determinedby the FDIC. Management is aware of no existing circumstances which wouldresult in termination of the Bank’s deposit insurance.

 

The FDIC’sdeposit insurance premiums are assessed through a risk-based system under whichall insured depository institutions are placed into one of nine categories andassessed insurance premiums based upon their level of capital and supervisoryevaluation. Under the system, institutions classified as well capitalized andconsidered healthy pay the lowest premium while institutions that are less thanadequately capitalized and considered of substantial supervisory concern paythe highest premium. Risk classification of all insured institutions is made bythe FDIC for each semi-annual assessment period. The Bank paid $512,000 ininsurance deposit premiums during 2002.

 

**CommunityReinvestment Act and the Fair Lending Laws.** Savingsassociations have a responsibility under the Community Reinvestment Act (“CRA”)and related regulations of the OTS to help meet the credit needs of theircommunities, including low-and moderate-income neighborhoods. In addition, theEqual Credit Opportunity Act and the Fair Housing Act (together, the “FairLending Laws”) prohibit lenders from discriminating in their lending practiceson the basis of characteristics specified in those statutes. An institution’sfailure to comply with the provisions of CRA could, at a minimum, result inregulatory restrictions on its activities, and failure to comply with the FairLending Laws could result in enforcement actions by the OTS, as well as otherfederal regulatory agencies and the Department of Justice.

 

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**Safety and SoundnessGuidelines.** The OTS and the other federal bankingagencies have established guidelines for safety and soundness, addressingoperational and managerial, as well as compensation matters for insuredfinancial institutions. Institutions failing to meet these standards arerequired to submit compliance plans to their appropriate federal regulators.The OTS and the other agencies have also established guidelines regarding assetquality and earnings standards for insured institutions.

 

**Change of Control.**Subject to certain limited exceptions, no company can acquire control of asavings association without the prior approval of the OTS, and no individualmay acquire control of a savings association if the OTS objects. Any companythat acquires control of a savings association becomes a savings and loanholding company subject to extensive registration, examination and regulationby the OTS. Conclusive control exists, among other ways, when an acquiringparty acquires more than 25% of any class of voting stock of a savingsassociation or savings and loan holding company, or controls in any manner theelection of a majority of the directors of the company. In addition, arebuttable presumption of control exists if, among other things, a personacquires more than 10% of any class of a savings association or savings andloan holding company’s voting stock (or 25% of any class of stock) and, ineither case, any of certain additional control factors exist.

 

Companiessubject to the Bank Holding Company Act that acquire or own savingsassociations are no longer defined as savings and loan holding companies underthe HOLA and, therefore, are not generally subject to supervision andregulation by the OTS. OTS approval is no longer required for a bank holdingcompany to acquire control of a savings association, although the OTS has aconsultative role with the FRB in examination, enforcement and acquisitionmatters.

 

**TAXATION**

 

**Federal Taxation**

 

**General.**The Company and the Bank are subject to federal income taxation in the samegeneral manner as other corporations with some exceptions discussed below. Thefollowing discussion of federal taxation is intended only to summarize certainpertinent federal income tax matters and is not a comprehensive description ofthe tax rules applicable to the Bank. The Bank’s federal income tax returnshave been audited or closed without audit by the IRS through 1998.

 

**Method of Accounting.**For federal income tax purposes, the Bank currently reports its income andexpenses on the accrual method of accounting and uses a tax year endingDecember 31 for filing its consolidated federal income tax returns. The SmallBusiness Protection Act of 1996 (the “1996 Act”) eliminated the use of thereserve method of accounting for bad debt reserves by savings institutions,effective for taxable years beginning after 1995.

 

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**Bad Debt Reserves.**  Prior to the 1996 Act, the Bank waspermitted to establish a reserve for bad debts and to make annual additions tothe reserve. These additions could, within specified formula limits, bededucted in arriving at the Bank’s taxable income. As a result of the 1996 Act,the Bank must use the specific charge-off method in computing its bad debtdeduction beginning with its 1996 Federal tax return. In addition, the federallegislation requires the recapture (over a six year period) of the excess oftax bad debt reserves at December 31, 1995 over those established as ofDecember 31, 1987. The amount of such reserve subject to recapture as ofDecember 31, 2002 is approximately $1.2 million. The Bank began to recapturethe reserve in 1998.

 

As discussedmore fully below, the Bank and subsidiaries file combined New York StateFranchise and New York City Financial Corporation tax returns. The basis of thedetermination of each tax is the greater of a tax on entire net income (or onalternative entire net income) or a tax computed on taxable assets. However,for state purposes, New York State enacted legislation in 1996, which amongother things, decoupled the Federal and New York State tax laws regardingthrift bad debt deductions and permits the continued use of the bad debtreserve method under section 593. Thus, provided the Bank continues to satisfycertain definitional tests and other conditions, for New York State and Cityincome tax purposes, the Bank is permitted to continue to use the specialreserve method for bad debt deductions. The deductible annual addition to thestate reserve may be computed using a specific formula based on the Bank’s losshistory (“Experience Method”) or a statutory percentage equal to 32% of theBank’s New York State or City taxable income (“Percentage Method”).

 

**Taxable Distributionsand Recapture.** Prior to the 1996 Act, bad debtreserves created prior to January 1, 1988 were subject to recapture intotaxable income should the Bank fail to meet certain thrift asset anddefinitional tests. New federal legislation eliminated these thrift relatedrecapture rules. However, under current law, pre-1988 reserves remain subjectto recapture should the Bank make certain non-dividend distributions or ceaseto maintain a bank charter.

 

At December31, 2002 the Bank’s total federal pre-1988 reserve was approximately $11.7million. This reserve reflects the cumulative effects of federal tax deductionsby the Bank for which no Federal income tax provision has been made.

 

**Minimum Tax.**The Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a baseof regular taxable income plus certain tax preferences (“alternative minimumtaxable income” or “AMTI”). The AMT is payable to the extent such AMTI is inexcess of an exemption amount. Net operating losses for tax years throughDecember 31, 2000 can offset no more than 90% of AMTI. The job creation andworker assistance act of 2002 has provided that a net operating loss deductionattributable to net operating loss carry backs arising in taxable years endingin 2001 and 2002, as well as net operating loss carry forwards to these taxableyears will offset 100% of  “AMTI”.Certain payments of alternative minimum tax may be used as credits againstregular tax liabilities in future years. The Bank has not been subject to thealternative minimum tax and has no such amounts available as credits forcarryover.

 

**Net Operating LossCarryovers.** A financial institution may carry back netoperating

 

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losses to the preceding twotaxable years and forward to the succeeding 20 taxable years. This provisionapplies to tax years beginning after August 5, 1997. The job creation andworker assistance act of 2002 has extended the net operating carry back periodto five years for net operating losses arising in taxable years ending in 2001and 2002.  At December 31, 2002, theBank had no net operating loss carry backs or carry forwards for federal incometax purposes.

 

**CorporateDividends-Received Deduction.**  The Company may exclude from its income 100%of dividends received from the Bank as a member of the same affiliated group ofcorporations. The corporate dividends-received deduction is 80% in the case ofdividends received from corporations which are 20% or more owned by theCompany. Dividends received from corporations less than 20% owned are 70%excluded.

 

**Stateand Local Taxation**

 

**New York State andNew York City Taxation.** The Company and the Bankreport income on a combined calendar year basis to both New York State and NewYork City. New York State Franchise Tax on corporations is imposed in an amountequal to the greater of (a) 8.0% of “entire net income” allocable to New YorkState (b) 3.00% of “alternative entire net income” allocable to New York State(c) 0.01% of the average value of assets allocable to New York State or (d)nominal minimum tax. Entire net income is based on federal taxable income,subject to certain modifications. Alternative entire net income is equal toentire net income without certain modifications. The New York City CorporationTax is imposed using similar alternative taxable income methods and rates*.*

 

A temporaryMetropolitan Transportation Business Tax Surcharge on Banking corporationsdoing business in the Metropolitan District has been applied since 1982. TheBank transacts a significant portion of its business within this District andis subject to this surcharge. For the tax year ended December 31, 2002, thesurcharge rate is 17% of the state franchise tax liability calculated at 9% ofNew York taxable income.

 

**Delaware StateTaxation.** As a Delaware holding company not earningincome in Delaware, the Company is exempt from Delaware corporate income tax,but, is required to file an annual report with and pay an annual franchise taxto the State of Delaware. The tax is imposed as a percentage of the capitalbase of the Company with an annual maximum of $150,000. The Delaware taxfor 2002 was $150,000. SIBMC is subject to taxes for the additional states thatthey operate in.

 

**Item 2.        Properties**

 

The executiveoffices of the Company and the Bank are located in a leased facility in StatenIsland, New York.  In addition, the Bankoperates 4 administrativeoffices located on Staten Island, all of which are owned and 1 lending officelocated in Brooklyn, New York which is leased. The Bank has 34 full service branch offices and three limited servicebranch offices.  The branch facilities,of which 15 are leased and 22 owned, are located in Staten Island, New York(20), Brooklyn, New York (2), and New Jersey (15).  The final lease expiration date for its properties is 2017.

 

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In addition,the Bank maintains 58 automated teller machines (“ATMs”) all of which are inBank facilities.

 

SIBMC conductsits business from its executive and administrative office in Branchburg, NewJersey and 91 retail loan origination offices in 42 states, all of which are leasedwith the final lease expiration date in 2007.

 

SIBIC conductsits business from its executive office located in Middletown, New Jersey whichis leased with an expiration date in 2003.

 

**Item 3.        LegalProceedings.**

 

As previouslydisclosed by the Company in its Form 10-K/A which was filed February 11, 2003,the Company reported that in October 2002, shortly after the Company announced its intention to restate itsfinancial statements, it was informed by staff of the U.S. Securities andExchange Commission (“SEC”) that the SEC is conducting an informal inquiry withrespect to certain of the matters reflected in the announcement.  The Company is cooperating fully with theinquiry.

 

The Companyalso is involved in various legal proceedings occurring in the normal course ofbusiness.  Although it is impossible topredict the outcome of any such legal proceedings, the Company believes thatsuch proceedings, individually and in the aggregate, will not have a materialeffect on the Company.

 

**Item 4.        Submissionof Matters to a Vote of Security-Holders.**

 

Notapplicable.

 

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**PARTII**

 

**Item 5.        Marketfor Registrant’s Common Equity and Related Stockholder Matters.**

 

Theinformation required herein to stockholders, to the extent applicable, isincorporated by reference from pages 43 and 44 and the inside back cover of theCompany’s Annual Report to Stockholders for the year ended December 31, 2002(“2002 Annual Report”)

 

**Item 6.        SelectedFinancial Data.**

 

Theinformation required herein is incorporated by reference from page 9 of the2002 Annual Report.

 

**Item 7.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

Theinformation required herein is incorporated by reference from pages 10 to 21 ofthe 2002 Annual Report.

 

**Item 7A.     Quantitativeand Qualitative Disclosure about Market Risk.**

 

Informationrequired herein is incorporated by reference from pages 10 to 14 of the 2002Annual Report.

 

**Item 8.        FinancialStatements and Supplementary Data.**

 

Theinformation required herein is incorporated by reference from pages 21 to theback cover of the 2002 Annual Report.

 

**Item 9.        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.**

 

Theinformation required herein is incorporated by reference form page 19 of thedefinitive proxy statement of the company for the Annual Meeting ofStockholders to be held on May 15, 2003 (“Definitive Proxy Statement”), whichDefinitive Proxy Statement will be filed within 30 days of the date hereof.

 

**PARTIII.**

 

**Item 10.      Directorsand Executive Officers of the Registrant.**

 

Theinformation required herein is incorporated by reference from pages 2 to 7 ofthe Definitive Proxy Statement.

 

**Item 11.      ExecutiveCompensation**.

 

Theinformation required herein is incorporated by reference from pages 10 to 17 ofthe Definitive Proxy Statement.

 

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**Item 12.      SecurityOwnership of Certain Beneficial Owners and Management**.

 

The information required hereinby Item 403 of Regulation S-K is incorporated by reference from pages 7 to 10of the Definitive Proxy Statement.

 

**Equity Compensation Plan Information. **The following tablesets forth certain information for all equity compensation plans and individualcompensation arrangements (whether with employees or non-employees, such asdirectors), in effect as of December 31, 2002.

 
| **Plan  Category**                                           |   | **Number of Shares to be issued upon  the Exercise of Outstanding Options,  Warrants and Rights** |   | **Weighted Average  Exercise Price of  Outstanding Options** |   | **Number of Shares Remaining  Available for Future Issuance  (Excluding Shares Reflected in  the First Column)** |   |
|--------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------|--------|
|                                                         |   |                                                                                              |   |                                                         |   |                                                                                                             |   |
| Equity Compensation  Plans Approved by Security  Holders     |   | 7,181,851(1)                                                                                      |   | $13.07                                                       |   | 187,103                                                                                                          |   |
| Equity Compensation Plans  Not Approved by Security  Holders |   | —                                                                                            |   | —                                                       |   | —                                                                                                           |   |
| Total                                                        |   | 7,181,851                                                                          |   | $13.07                                                       |   | 187,103                                                                                                          |   |

 

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(1)               Does not include 582,090 shares which aresubject to restricted stock grants which had not yet vested as of December 31,2002. All of such restricted stock grants were made under the Company’s 1998Recognition and Retention Plan which was approved by stockholders.

 

**Item 13.      CertainRelationships and Related Transactions.**

 

Theinformation required herein is incorporated by reference from pages 14 to 16 ofthe Definitive Proxy Statement.

 

**Item 14.      Controlsand Procedures.**

 

Under thesupervision and with the participation of the Company’s management, includingits Chief Executive Officer and Chief Financial Officer, the Company hasevaluated the effectiveness of the design and operation of its disclosurecontrols and procedures, as defined in regulations promulgated by the SEC underthe Securities Exchange Act of 1934, as amended (“Exchange Act”), within 90days of the filing date of this annual report. As discussed in Note 23 to the Company’s Consolidated FinancialStatements at and for the year ended December 31, 2002, the Company announcedin October 2002 that it was restating its financial results for the year endedDecember 31, 2001.  Primarily due toissues arising in the context of such restatement, management has determinedthat the Company’s disclosure controls and procedures and internal controlsneed certain improvements, including as discussed below.  In addition, the Company’s management andthe Audit Committee have been advised by PricewaterhouseCoopers LLP of certainreportable conditions for the year ended December 31, 2002 under standardsestablished by the American Institute of Certified Public Accountants(“AICPA”).  These reportable conditions,which are not material weaknesses, as defined by the AICPA, relate to theCompany’s controls and procedures for appropriately assessing and applyinggenerally accepted accounting principles in areas such as its stock-basedcompensation plans, maintaining its income tax provisions and valuing itsinvestment securities.  Management ofthe Company has taken, and is continuing to take, certain actions designed toenhance the

 

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Company’s disclosure controlsand procedures as well as its internal control structure.  In particular, the Company retained athird-party consultant in November 2002 to assist it in its review andpreparation of financial reports and in the application of accountingprinciples.  The Company also is seekingto add qualified personnel in its accounting and financial reporting area.  The Company also has revised its policiesand procedures regarding the preparation of tax estimates and with respect toits review and valuation of investment securities.  Management is continuing to review its policies and proceduresand anticipates that additional improvements will be made as part of itsefforts to continue to strengthen the disclosure controls and procedures andinternal control structure of the Company.

 

**PartIV.**

 

**Item 15.      Exhibits,Financial Statement Schedules and Reports on Form 8-K.**

 

(a)           Documents filed as Part of thisReport

 

(1)           The following financial statementsare incorporated by reference from Item 8 hereof (see Exhibit 13.0):
|            | Report of  Independent Auditors                                                                          |
|-----------------|----------------------------------------------------------------------------------------------------------|
|            | Consolidated  Statements of Condition as of December 31, 2002 and 2001.                                  |
|            | Consolidated  Statements of Income for the Years Ended December 31, 2002, 2001 and 2000.                 |
|            | Consolidated  Statements of Changes in Shareholders’ Equity for the Years Ended December  31, 2002, |
| 2001 and  2000. |
|            | Consolidated  Statements of Cash Flows for the Years ended December 31, 2002, 2001 and  2000.            |
|            | Notes to  Consolidated Financial Statements.                                                             |
|                 |                                                                                                          |

 

(2)           All schedules for which provision ismade in the applicable accounting regulation of the SEC are omitted because ofthe absence of conditions under which they are required or because the requiredinformation is included in the consolidated financial statements and relatednotes thereto.

 

(3)           The following exhibits are filed aspart of this Form 10-K, and this list includes the Exhibit Index.

 

Exhibit Index
|   |   |                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
| 3.1*   |   | Certificate  of Incorporation of Staten Island Bancorp, Inc.                                                          |
| 3.2*   |   | Bylaws of  Staten Island Bancorp, Inc.                                                                                |
| 4.0*   |   | Specimen  Stock Certificate of Staten Island Bancorp, Inc.                                                            |
| 10.1*  |   | Form of  Employment Agreement among Staten Island Bancorp, Inc., SI Bank & Trust  and certain executive officers. |
| 10.2*  |   | Form of Employment Agreement between Staten  Island Bancorp, Inc. and each of Harry P. Doherty and James R. Coyle.    |
| 10.3*  |   | Form of  Employment Agreement between SI Bank & Trust and each                                                    |

 

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|       |   | of Harry P. Doherty and James R. Coyle.                                                                                                                          |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4**     |   | Amended and  Restated 1998 Stock Option Plan                                                                                                                     |
| 10.5**     |   | Amended and  Restated 1998 Recognition and Retention Plan and Trust Agreement                                                                                    |
| 10.6***    |   | Deferred  Compensation Plan                                                                                                                                      |
| 10.7****   |   | Employment  Agreement between the Bank and Ira Hoberman.                                                                                                         |
| 10.8*****  |   | Supplemental  Executive Retirement Plan (SERP)                                                                                                                   |
| 10.9*****  |   | Master Repurchase Agreement by and among  Credit Suisse First Boston Mortgage Capital LLC, SIB Mortgage Corp. and SI  Bank & Trust, dated December 14, 2001. |
| 10.10***** |   | Master Repurchase Agreement by and among  CDC Mortgage Capital, Inc., SIB Mortgage Corp. and SI Bank & Trust, dated  February 12, 2002.                      |
| 13.0       |   | 2002 Annual  Report to Stockholders                                                                                                                              |
| 21.0       |   | Subsidiaries  of the Registrant - Reference is made to Item 1, “Business” for the required  information                                                |
| 23.0*****  |   | Consent of  Arthur Andersen, LLP                                                                                                                                 |
| 23.1       |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                           |
| 99.1       |   | Certification  of Chief Executive Officer.                                                                                                                       |
| 99.2       |   | Certification  of Chief Financial Officer.                                                                                                                       |

 

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| (*)     |   | Incorporated  herein by reference from the Company’s Registration Statement on Form S-1  (Registration No. 333-32113) filed by the Company with the SEC. |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (**)    |   | Incorporated  herein by reference from the Company’s definitive proxy statement dated April  1, 2002.                                                    |
| (***)   |   | Incorporated  herein by reference from the Company’s Annual Report on Form 10-K for the  year ended December 31, 1998.                                   |
| (****)  |   | Incorporated  herein by reference from the Company’s Annual Report on Form 10-K for the  year ended December 31, 2000.                                   |
| (*****) |   | Previously  filed on April 1, 2002 in the Company’s Annual Report on Form 10-K for the  year ended December 31, 2001.                                    |

 

(b)           Reports on Form 8-K

 

On October 11,2002, the Company filed a Current Report on Form 8-K, dated as of October 9,2002, regarding a press release reporting its estimated results of operationsfor the quarter ended September 30, 2002.

 

On October 18,2002, the Company filed a Current Report on Form 8-K, dated as of October 16,2002, regarding press releases reporting is results of operations for thequarter ended September 30, 2002 and the declaration of a dividend.

 

On November15, 2002, the Company filed a Current Report on Form 8-K, dated as of November15, 2002, with respect to a press release announcing revisions to certainfinancial items.

 

On December 6,2002, the Company filed a Current Report on Form 8-K, dated as of December 6,2002, with respect to a press release announcing the Company’s participation ata conference.

 

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SIGNATURES

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | STATEN  ISLAND BANCORP, INC. |
|--------|------------------------------|
|   |                         |
|   | By:                          | /s/ Harry P.  Doherty |   |
|   |                         | Harry P.  Doherty |
|   |                         | Chairman and  Chief Executive Officer |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this Report has beensigned by the following persons on behalf of the Registrant in the capacitiesand on the dates indicated.

 
| **Name**                    |   | **Title**                                                                                        |   | **Date**       |
|-----------------------------|--------|--------------------------------------------------------------------------------------------------|--------|----------------|
|                        |   |                                                                                             |   |           |
| /s/ Harry P.  Doherty       |   | Chairman and  Chief Executive Officer                                                            |   | March 31, 2003 |
| Harry P.  Doherty           |   |                                                                                             |   |           |
|                        |   |                                                                                             |   |           |
| /s/ James R.  Coyle         |   | Director,  President and Chief Operating Officer                                                 |   | March 31, 2003 |
| James R.  Coyle             |   |                                                                                             |   |           |
|                        |   |                                                                                             |   |           |
| /s/ Edward  J. Klingele     |   | Senior Vice  President and Chief Financial Officer (principal financial and accounting  officer) |   | March 31, 2003 |
| Edward J.  Klingele         |   |                                                                                             |   |           |
|                        |   |                                                                                             |   |           |
| /s/ William  G. Horn        |   | Director                                                                                         |   |           |
| William G.  Horn            |   |                                                                                             |   | March 31, 2003 |
|                        |   |                                                                                             |   |           |
| /s/ Denis P.  Kelleher      |   | Director                                                                                         |   |           |
| Denis P.  Kelleher          |   |                                                                                             |   | March 31, 2003 |
|                        |   |                                                                                             |   |           |
| /s/ Julius  Mehrberg        |   | Director                                                                                         |   |           |
| Julius  Mehrberg            |   |                                                                                             |   | March 31, 2003 |
|                        |   |                                                                                             |   |           |
| /s/ John R.  Morris         |   | Director                                                                                         |   |           |
| John R.  Morris             |   |                                                                                             |   | March 31, 2003 |
|                        |   |                                                                                             |   |           |
| /s/ William  E. O’Mara |   | Director                                                                                         |   |           |
| William E.  O’Mara     |   |                                                                                             |   | March 31, 2003 |
|                        |   |                                                                                             |   |           |
| /s/ Lenore  F. Puleo        |   | Director                                                                                         |   |           |
| Lenore F.  Puleo            |   |                                                                                             |   | March 31, 2003 |
|                        |   |                                                                                             |   |           |
| /s/ Allan  Weissglass       |   | Director                                                                                         |   |           |
| Allan Weissglass            |   |                                                                                             |   | March 31, 2003 |
|                             |        |                                                                                                  |        |                |  |

 

49

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**CERTIFICATION**

 

I, Harry P.Doherty, Chairman of the Board and Chief Executive Officer of Staten IslandBancorp, Inc., certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Staten Island Bancorp, Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: March  31, 2003 | /s/ Harry P.  Doherty                              |   |
|-----------------------|----------------------------------------------------|--------|
|                  | Harry P.  Doherty                                  |
|                  | Chairman of the Board and  Chief Executive Officer |

 

50

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**CERTIFICATION**

 

I, Edward J.Klingele, Senior Vice President and Chief Financial Officer of Staten IslandBancorp, Inc., certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Staten Island Bancorp, Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: March  31, 2003 | /s/ Edward  J. Klingele                             |   |
|-----------------------|-----------------------------------------------------|--------|
|                  | Edward J.  Klingele                                 |
|                  | Senior Vice  President and  Chief Financial Officer |
|                       |                                                     |        |  |

 

51

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