**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2003**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 [NO FEE REQUIRED]

**Forthe transition period from               to                    **

**CommissionFile No.: 1-13503**

**Staten Island Bancorp, Inc.**

(Exact name of registrantas 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 telephonenumber, including area code: **(718) 447-8880**

Securities registeredpursuant to Section 12(g) of the Act: **NotApplicable**

Securities registered pursuant to Section 12(b) ofthe Act: **Common Stock (par value $.01 per share)**

(Title of Class)

Indicate by check markwhether the Registrant (1) has filed all reports required by Section 13or 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 forthe past 90 days. Yes x   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes x   No o

Based upon the $19.48closing price of the Registrant’s common stock as of June 30, 2003, theaggregate market value of the 48,066,801 shares of the Registrant’s commonstock deemed to be held by non-affiliates of the Registrant was $936.3 million.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 of shares of CommonStock outstanding as of March 4, 2004:  **60,744,832**

 

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**TABLE OF CONTENTS**
| ** **        | ** **                                                                                       | **PAGE. NO.** |
|-------------------|--------------------------------------------------------------------------------------------------|---------------|
| **PART I**   |                                                                                             |
| ITEM  1.          | Business                                                                                         | 1             |
| ITEM 2.           | Properties                                                                                       | 33            |
| ITEM 3.           | Legal Proceedings                                                                                | 33            |
| ITEM 4.           | Submission Of Matters To A Vote Of  Security Holders                                             | 33            |
| **PART II**  |                                                                                             |
| ITEM 5.           | Market For Registrant’s Common  Equity                                                      | 34            |
| ITEM 6.           | Selected  Financial Data                                                                         | 35            |
| ITEM 7.           | Management’s  Discussion And Analysis Of Financial Condition And Results Of Operations      | 36            |
| ITEM 7A.          | Quantitative  And Qualitative Disclosure About Market Risk                                       | 47            |
| ITEM 8.           | Financial  Statements And Supplementary Data                                                     | 51            |
| ITEM 9.           | Changes In And Disagreements With  Accountants On Accounting And Financial Disclosure            | 91            |
| ITEM  9A.         | Controls and Procedures                                                                          | 91            |
| **PART III** |                                                                                             |
| ITEM  10.         | Directors And Executive Officers  Of The Registrant                                              | 91            |
| ITEM 11.          | Executive  Compensation                                                                          | 94            |
| ITEM 12.     | Security  Ownership Of Certain Beneficial Owners And Management And Related Stockholder  Matters | 98            |
| ITEM 13.          | Certain  Relationships And Related Transactions                                                  | 101           |
| ITEM 14.          | Principal  Accounting Fees and Services                                                          | 102           |
| **PART IV**  |                                                                                             |
| ITEM 15.          | Exhibits,  Financial Statement Schedules, And Reports On Form 8-K                           | 103           |

 

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**Forward-LookingStatements**

In addition to historicalinformation, this Annual Report on Form 10-K includes certain “forward-lookingstatements,” as defined in the Securities Act of 1933 and the SecuritiesExchange Act of 1934, based on current management expectations. The Company’sactual results could differ materially from those management expectations. Suchforward-looking statements include statements regarding the Company’sintentions, beliefs or current expectations as well as the assumptions on whichsuch statements are based. Also included in such forward-looking statements arestatements regarding the Company’s proposed merger with Independence CommunityBank Corp. (“ICBC” or “Independence”). Stockholders and potential stockholdersare cautioned that any such forward-looking statements are not guarantees offuture performance and involve risks and uncertainties, and that actual resultsmay differ materially from those contemplated by such forward-lookingstatements. Words such as “expect,” “feel,” “believe,” “will,” “may,” “anticipate,”“plan,” “estimate,” “intend,” “should,” and similar expressions or the negativethereof are intended to identify forward looking statements. Factors that couldcause future results to vary from current management expectations include, butare not limited to, general economic conditions, legislative and regulatorychanges, monetary fiscal policies of the federal government, changes in taxpolicies, rates and regulations of federal, state and local tax authorities,changes in interest rates, deposit flows, cost of funds, demand for loanproducts, demand for financial services, competition, changes in the quality orcomposition of the Company’s loan and investment portfolios, changes inaccounting principles, policies or guidelines and other economic, competitive,governmental and technological factors affecting the Company’s operations,markets, products services and fees. In addition, the benefits from theproposed merger with ICBC may not be fully realized due to, among other things,the business of the Company and ICBC may not be combined successfully, or suchcombination may take longer to accomplish than expected, the growthopportunities and cost savings from the merger of the Company and ICBC may notbe fully realized or may take longer to realize than expected, operating costand business disruption following the completion of the merger, includingadverse effects on relationships with employees, may be greater than expected,governmental approvals of the merger may not be obtained, or adverse regulatoryconditions may be imposed in connection with governmental approvals of themerger. The Company undertakes no obligation to update or revise anyforward-looking statements to reflect changed assumptions, the occurrence ofunanticipated events or changes to future operating results over time.

**PART I**

**Item1. Business**

Staten Island Bancorp, Inc. is a Delaware corporationorganized in July 1997 by SI Bank & Trust (the “Bank” or “SIBT”),formerly Staten Island Savings Bank, for the purpose of becoming a unitaryholding company of the Bank. The Bank’s conversion from the mutual to stockform and the concurrent offer and sale of the Company’s common stock wasconsummated on December 22, 1997. The only significant assets of theCompany are the capital stock of the Bank, the Company’s loan to its EmployeeStock Ownership Plan (“ESOP”) and investment securities.

On November 25, 2003, the Company announced thatit had signed a definitive agreement to merge with ICBC. Pursuant to theagreement, the Company will merge with ICBC (the “Merger”), in a transactionvalued at the time of execution of the definitive agreement at approximately$1.5 billion or $23.88 per SIB share. Upon completion of the acquisition, theCompany’s wholly owned subsidiary, SI Bank & Trust, will merge withand into the Independence Community Bank.

Under the terms of the Merger agreement, which wasapproved unanimously by both boards of directors, as well as the Company’s andIndependence’s shareholders at special meetings held on March 8, 2004, theaggregate consideration to be paid in the Merger will consist of $368.50million in cash and approximately 28,850,000 shares of ICBC’s common stock. Holdersof SIB common stock will receive cash 

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or shares of ICBC’s commonstock pursuant to an election, proration and allocation procedure subject tothe total consideration being comprised of approximately 75% paid in ICBC’scommon stock and 25% paid in cash. The value of the merger consideration pershare of SIB common stock will be calculated in accordance with the followingformula: the sum of (i) $5.97025 and (ii) 0.4674 times the average ofthe closing prices of ICBC’s common stock for the ten consecutive full tradingdays ending on the tenth business day before the completion of the Merger. Basedon the $38.32 closing price of ICBC’s common stock on November 21, 2003,the last full trading day prior to the date of the Merger agreement, SIBstockholders would receive $23.88 per share in cash or 0.6232 share of ICBC’scommon stock for each share of SIB common stock. The value of the Mergerconsideration and the actual exchange ratio per share of SIB common stock at thecompletion of the Merger will vary from the initial values if the average ICBCcommon stock price during the ten trading day measurement period is greater orless than $38.32, which is likely.

The Merger is expected to close in the second quarterof 2004 and is subject to receipt of various regulatory approvals and certainother conditions.

In connection with the Merger, the Company has agreedto sell a substantial portion of the assets and operations of SIB MortgageCorp., the Bank’s mortgage banking subsidiary (“SIB Mortgage”), as part of aplan to exit the mortgage banking business. As a result of these plans, undergenerally accepted accounting principles, the Company must report the Bank’sresults as “continuing operations” and the results of the mortgage bankingbusiness of SIB Mortgage as “discontinued operations.”

The business and management of the Company consistsprimarily of the business and management of the Bank. The Company neither ownsnor leases any property, but instead uses the premises and equipment of theBank. At the present time, the Company does not intend to employ any personsother than officers of the Bank and the Company utilizes the support staff ofthe Bank from time to time. Additional employees will be hired as appropriate tothe extent the Company expands or changes its business in the future.

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

**ContinuingOperations**

SI Bank & Trustwas originally founded as a New York State chartered savings bank in 1864. TheBank maintains a network of 17 full-service branch offices located in StatenIsland, New York, three branch offices located in Brooklyn, New York, threelimited service branch offices in Staten Island and 15 full service branchoffices in Ocean, Monmouth, Union and Middlesex counties of New Jersey. During2003, the Bank opened a full service branch office in Brooklyn, New York. TheBank also maintains a lending center and Trust Department on Staten Islandalong with a commercial lending office in Brooklyn.

The Bank has served the communities and residents ofStaten Island for over 139 years and, more recently, the borough of Brooklynand certain counties in the State of New Jersey. As of June 30, 2003 (thelatest available data), the Bank had the largest market share of any depositoryinstitution on Staten Island with over 34% of the total deposits. Historically,the Bank also has been among the leaders in terms of the number and amount ofresidential mortgage loan originations in Staten Island. SIBT’s operatingstrategy emphasizes customer service and convenience and, in a large part, theBank attributes its commitment to maintaining customer satisfaction for itsmarket share position. The Bank attempts to differentiate itself from itscompetitors by providing the type of personalized customer service notgenerally available from larger banks, while offering a greater variety ofproducts and services than is typically available from smaller local depositoryinstitutions. The Bank has an experienced management team directing itsoperations. The Bank’s Chairman and Chief Executive Officer and President andChief Operating Officer 

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have 38 years and 34 years,respectively, of service with the Bank while the other executive officers ofthe Bank have an average of 16 years of service with SIBT.

On September 5, 2000 the Bank changed its name toSI Bank & Trust to reflect the expansion into new product lines and newgeographic markets which has taken place over the past six years. Over the pastsix years, the Bank has transformed itself into a full service community bankand its new name, reflects its geographic and product diversity. On January 14,2000, the Company acquired First State Bancorp, the holding company for FirstState Bank, Howell, New Jersey. The branch system of First State Bank, whichwas merged with and into SI Bank & Trust, consisted of four branchesin Ocean County and two in Monmouth County, New Jersey. In December 2000,the Bank opened a new branch in Jackson, New Jersey. Four new branches wereopened 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 March 2003 and August 2000, the Bankopened two new branches in Brooklyn, New York. During 2003, the deposits at thethree Brooklyn locations grew by 28% and totaled $256.4 million in theaggregate at December 31, 2003.

On December 8, 2000, the Company purchased fouradditional branches in New Jersey. Three of these branches are located in UnionCounty and one is in Middlesex County, New Jersey. The deposits acquired inthis transaction were $41.0 million. The Bank’s deposits in the State of NewJersey grew by 8% in 2003 and totaled $930.2 million at December 31, 2003.

The Bank is subject to examination and comprehensiveregulation by the Office of Thrift Supervision (“OTS”), which is the Bank’schartering authority and primary federal regulator. The Bank is also regulatedby the Federal Deposit Insurance Corporation (“FDIC”), which is theadministrator of the Bank Insurance Fund (“BIF”). In addition, the Bank issubject to certain reserve requirements established by the Board of Governorsof the Federal Reserve System (“FRB”) and is a member of the Federal Home LoanBank (“FHLB”) of New York, which is one of the 12 regional banks comprising theFHLB System.

SI Bank & Trust’sexecutive office is located at 1535 Richmond Avenue, Staten Island, New York10314, and its telephone number is (718) 447-8880.

**DiscontinuedOperations**

As previously indicated, as part of the Merger withICBC, the Company agreed to sell a substantial portion of its mortgage bankingbusiness pursuant to an Asset Purchase Agreement among the Company, SIBMC, ICBCand Lehman Brothers Bancorp Inc. Pursuant to the agreement with Lehman BrothersBancorp Inc., which closed as of March 1, 2004, 24 offices of SIBMC weresold to Lehman Brothers Bancorp Inc. or an affiliate as well as the majority ofSIBMC’s remaining “pipeline” of loan applications in process. Pursuant to itsagreements with Lehman Brothers Bancorp, by March 31, 2004 it isanticipated that Lehman Brothers Bancorp, Inc. or an affiliate willpurchase approximately $500.0 million of SIBMC’s remaining loans held for sale.In addition, as of March 8, 2004, 52 other offices of SIBMC have beentransferred to other purchasers and the remaining 13 offices have either beenclosed or are operating only in a limited capacity to complete the processingof certain loan applications in process. SIBMC is no longer accepting any newbusiness and its operations currently are limited to completing such sales andmatters related to the cessation of business.

SIB Mortgage Corp. (“SIBMC” or the “Mortgage Company”),a wholly owned subsidiary of the Bank, originated residential mortgage loans in42 states for re-sale into the secondary market. SIB Mortgage Corp. wasincorporated in 1998 in the State of New Jersey to acquire the residentiallending operations and substantially all of the assets of Ivy Mortgage Corp.enabling the Bank to enter the mortgage banking business and become a nationaloriginator of single family residential loans.

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SIBMC, which previously operated as a separatebusiness segment (Mortgage Banking), had $14.9 billion in loan originations andloan sales of $16.7 billion for the twelve months ended December 31, 2003.SIBMC had a net loss for the year 2003 of $44.3 million.

**AvailableInformation**

Staten Island Bancorp, Inc.is a public company and files annual, quarterly and special reports, proxystatements and other information with the Securities and Exchange Commission. TheCompany’s filings are available to the public at the SEC’s web site athttp://www.sec.gov. Members of the public may also read and copy any documentthe Company files at the SEC’s Public Reference Room at 450 Fifth Street,N.W., Washington, D.C. 20549. You can request copies of these documents bywriting to the SEC and paying a fee for the copying cost. Please call the SECat 1-800-SEC-0330 for more information about the operation of the publicreference room. In addition to the foregoing, the Company maintains a web siteat www.sibk.com. The Company immediately after receipt by the SEC makesavailable on its Internet web site copies of its Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and anyamendments to such documents as soon as reasonably practicable after weelectronically file such material with, or furnish such documents to, the SEC.

**Market Area andCompetition**

The Company facessignificant competition both in making loans and in attracting deposits. Thereare a significant number of financial institutions located within the Company’smarket area, many of which have greater financial resources than the Company.The Company’s competition for loans comes principally from commercial banks,other savings banks, savings associations and mortgage-banking companies. TheCompany’s most direct competition for deposits has historically come fromsavings associations, other savings banks, commercial banks and credit unions.The Company faces additional competition for deposits from short-term moneymarket funds and other corporate and government securities funds and from othernon-depository financial institutions such as brokerage firms and insurancecompanies.

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**Lending Activities**

**Loan Activity:**   Thefollowing table sets forth the Company’s activity in its loan portfolio,including loans held for sale.
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                               | ** ** | **(Dollars in  Thousands)**                | ** ** |
| Total loans held  at beginning of period |       | $                                          | 5,121,393  |   | $ | 3,987,445 |   | $ | 2,962,197 |   |
| Originations of loans:                   |       |                                       |       |   |   |   |   |
| Mortgage loans:                          |       |                                       |       |   |   |   |   |
| Single-family residential                |       | 15,966,686                                 |       | 9,428,155 |   | 4,408,052 |   |
| Multi-family residential                 |       | 31,957                                     |       | 18,899 |   | 5,069 |   |
| Commercial real estate                   |       | 205,738                                    |       | 158,916 |   | 77,044 |   |
| Construction and land                    |       | 142,910                                    |       | 115,371 |   | 344,955 |   |
| Home equity                              |       | 19,780                                     |       | 17,990 |   | 11,291 |   |
| Other loans:                             |       |                                       |       |   |   |   |   |
| Student loans                            |       | 339                                        |       | 517 |   | 638 |   |
| Passbook loans                           |       | 7,592                                      |       | 10,035 |   | 9,865 |   |
| Commercial Business loans                |       | 66,006                                     |       | 54,855 |   | 59,442 |   |
| Other consumer loans                     |       | 1,311                                      |       | 1,735 |   | 5,691 |   |
| Total originations                       |       | 16,442,319                                 |       | 9,806,473 |   | 4,922,047 |   |
| Purchases of  loans:                     |       |                                       |       |   |   |   |   |
| Mortgage loans:                          |       |                                       |       |   |   |   |   |
| Single-family residential                |       | 1,468,831                                  |       | 586,351 |   | 382,243 |   |
| Multi-family residential                 |       | —                                     |       | — |   | — |   |
| Commercial real estate                   |       | —                                     |       | — |   | — |   |
| Construction and land                    |       | —                                     |       | 178,192 |   | 87,818 |   |
| Home equity                              |       | —                                     |       | — |   | — |   |
| Other loans:                             |       |                                       |       |   |   |   |   |
| Passbook loans                           |       | —                                     |       | — |   | — |   |
| Commercial Business loans                |       | —                                     |       | — |   | — |   |
| Other consumer loans                     |       | —                                     |       | — |   | 2,119 |   |
| Total purchases                          |       | 1,468,831                                  |       | 764,543 |   | 472,180 |   |
| Total originations and purchases         |       | 17,911,150                                 |       | 10,571,016 |   | 5,394,227 |   |
| Loans sold:                              |       |                                       |       |   |   |   |   |
| Mortgage loans:                          |       |                                       |       |   |   |   |   |
| Single-family residential                |       | 16,368,165                                 |       | 7,904,825 |   | 3,179,238 |   |
| Total loans sold                         |       | 16,368,165                                 |       | 7,904,825 |   | 3,179,238 |   |
| Transfers to real estate owned           |       | 3,631                                      |       | 12,952 |   | 279 |   |
| Transfers to  repossessed assets         |       | 270                                        |       | 246 |   | 404 |   |
| Charge-offs                              |       | 7,207                                      |       | 7,072 |   | 4,265 |   |
| Repayments                               |       | 1,939,538                                  |       | 1,511,973 |   | 1,184,793 |   |
| Net activity in  loans                   |       | (407,661                                   | )          | 1,133,948 |   | 1,025,248 |   |
| Gross loans held at end  of period       |       | $                                          | 4,713,732  |   | $ | 5,121,393 |   | $ | 3,987,445 |   |

 

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**ContinuingOperations**

At December 31,2003, the Company’s total net loans held for investment amounted to $3.5billion or 47.1% of the Company’s total assets at such date. The Bank’s primaryemphasis has been, and continues to be, the origination of loans secured byfirst liens on single-family residences (which includes one-to-four-familyresidences) located primarily in Staten Island and, to a lesser extent, otherareas in New York City. At December 31, 2003, $2.7 billion or 75.4% of theCompany’s net loan portfolio were secured by single-family residences of which$1.1 billion were located on Staten Island and an additional $260.1 millionwere located in other areas of New York City. During 2003, the Bank retainedfor its portfolio $539.3 million of relatively higher yielding one-tofour-family residential loans originated by the Mortgage Company to lessen itsdependence on the New York City economy and increase the yield on its loanportfolio.

In addition to loans secured by single-familyresidential real estate, the Company’s mortgage loan portfolio includes loanssecured by commercial real estate, which amounted to $508.5 million or 14.4% ofthe net loan portfolio at December 31, 2003, construction and land loans,which totaled $170.3 million or 4.8% of the net loan portfolio at December 31,2003, home equity loans, which totaled $22.0 million or 0.6% of the net loanportfolio at December 31, 2003, and loans secured by multi-family (overfour units) residential properties, which amounted to $71.4 million or 2.0% ofthe net loan portfolio at December 31, 2003. In addition to mortgageloans, the Company originates various other loans including commercial businessloans and consumer loans. At December 31, 2003, the Company’s total otherloans amounted to $97.3 million or 2.8% of the net loan portfolio.

The types of loans thatthe Company may originate are subject to federal and state law and regulations.Interest rates charged by the Company on loans are affected principally by thedemand for such loans, the supply of money available for lending purposes andthe rates offered by its competitors. These factors are, in turn, affected bygeneral and economic conditions, the monetary policy of the federal government,including the Federal Reserve Board, legislative tax policies and governmentalbudgetary matters.

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**Loan PortfolioComposition.****  **The following table sets forth thecomposition of the Bank’s loans held for investment portfolio at the datesindicated.
| ** **      | ** ** | **At December 31,**        | ** ** |
|-----------------|------------|--------------------------------------|------------|
| ** **      | ** ** | **2003**                             | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **      | ** ** | **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             |   | $         | 2,660,051 |   |   | 75.44  | %      |      | $      | 2,671,041 |   |   | 78.04  | %         |   | $      | 2,062,897 |   |   | 73.50     | %      |   | $      | 2,206,972 |   |      | 77.50  | %      |   | $      | 1,737,913 |   |   | 80.83  | % |   |
|---------------------------------------|--------|-----------|-----------|--------|--------|--------|--------|-----------|--------|-----------|--------|--------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|--------|--------|-----------|--------|-----------|--------|--------|--------|--------|-----------|--------|--------|--------|---|--------|
| Multi-family residential              |   | 71,384    |      |   | 2.03   | %      |   | 56,545    |   |      | 1.65   | %      |   | 48,783    |   |   | 1.74      | %      |   | 49,034    |   |   | 1.72   | %         |   | 42,501    |   |   | 1.98   | %      |      |
| Commercial real estate                |   | 508,466   |      |   | 14.42  | %      |   | 418,708   |   |      | 12.23  | %      |   | 335,260   |   |   | 11.95     | %      |   | 307,407   |   |   | 10.80  | %         |   | 223,809   |   |   | 10.41  | %      |      |
| Construction and land                 |   | 170,259   |      |   | 4.83   | %      |   | 153,144   |   |      | 4.48   | %      |   | 245,515   |   |   | 8.75      | %      |   | 152,956   |   |   | 5.37   | %         |   | 60,105    |   |   | 2.80   | %      |      |
| Home equity                           |   | 21,986    |      |   | 0.62   | %      |   | 19,032    |   |      | 0.56   | %      |   | 12,815    |   |   | 0.46      | %      |   | 10,699    |   |   | 0.38   | %         |   | 5,390     |   |   | 0.25   | %      |      |
| Total mortgage loans                  |   | 3,432,146 |      |   | 97.34  | %      |   | 3,318,470 |   |      | 96.96  | %      |   | 2,705,270 |   |   | 96.39     | %      |   | 2,727,068 |   |   | 95.77  | %         |   | 2,069,718 |   |   | 96.27  | %      |      |
| Other loans:                          |   |      |      |   |   |   |   |      |   |      |   |   |   |      |   |   |      |   |   |      |   |   |   |      |   |      |   |   |   |   |      |
| Student loans                         |   | 151       |      |   | 0.00   | %      |   | 228       |   |      | 0.01   | %      |   | 288       |   |   | 0.01      | %      |   | 333       |   |   | 0.01   | %         |   | 657       |   |   | 0.03   | %      |      |
| Passbook loans                        |   | 8,822     |      |   | 0.25   | %      |   | 8,692     |   |      | 0.26   | %      |   | 7,477     |   |   | 0.26      | %      |   | 6,237     |   |   | 0.22   | %         |   | 5,357     |   |   | 0.25   | %      |      |
| Commercial business loans             |   | 58,975    |      |   | 1.67   | %      |   | 62,777    |   |      | 1.83   | %      |   | 60,898    |   |   | 2.17      | %      |   | 52,980    |   |   | 1.86   | %         |   | 33,646    |   |   | 1.56   | %      |      |
| Other consumer loans                  |   | 29,338    |      |   | 0.83   | %      |   | 37,362    |   |      | 1.09   | %      |   | 42,356    |   |   | 1.51      | %      |   | 63,984    |   |   | 2.25   | %         |   | 49,395    |   |   | 2.30   | %      |      |
| Total other loans                     |   | 97,286    |      |   | 2.76   | %      |   | 109,059   |   |      | 3.19   | %      |   | 111,019   |   |   | 3.95      | %      |   | 123,534   |   |   | 4.34   | %         |   | 89,055    |   |   | 4.14   | %      |      |
| Total loans receivable                |   | 3,529,432 |      |   | 100.10 | %      |   | 3,427,529 |   |      | 100.15 | %      |   | 2,816,289 |   |   | 100.34    | %      |   | 2,850,602 |   |   | 100.11 | %         |   | 2,158,773 |   |   | 100.41 | %      |      |
| Less:                                 |   |      |      |   |   |   |   |      |   |      |   |   |   |      |   |   |      |   |   |      |   |   |   |      |   |      |   |   |   |   |      |
| Premium (discount) on loans purchased |   | 3,226     |      |   | 0.09   | %      |   | 3,941     |   |      | 0.12   | %      |   | 5,135     |   |   | 0.18      | %      |   | 5,713     |   |   | 0.20   | %         |   | 4,640     |   |   | 0.22   | %      |      |
| Allowance for loan losses             |   | (25,441   | )         |   | (0.72  | )%     |   | (22,773   | )      |      | (0.67  | )%     |   | (20,041   | )      |   | (0.71     | )%     |   | (14,638   | )      |   | (0.51  | )%        |   | (14,271   | )      |   | (0.66  | )%     |      |
| Deferred loan costs, (fees) net       |   | 18,701    |      |   | 0.53   | %      |   | 13,795    |   |      | 0.40   | %      |   | 5,236     |   |   | 0.19      | %      |   | 5,983     |   |   | 0.20   | %         |   | 897       |   |   | 0.03   | %      |      |
| Loans receivable,  net                |   | $         | 3,525,918 |   |   | 100.00 | %      |      | $      | 3,422,492 |   |   | 100.00 | %         |   | $      | 2,806,619 |   |   | 100.00    | %      |   | $      | 2,847,660 |   |      | 100.00 | %      |   | $      | 2,150,039 |   |   | 100.00 | % |   |

 

The above table does not include any information withrespect to the Company’s loans held for sale.

7

 

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The lending activities of SIBT are subject to writtenunderwriting standards and loan origination procedures established bymanagement and approved by the Bank’s Board of Directors.

The Bank’s primary source of loan applications forresidential mortgages are independent mortgage brokers in both 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.

Certain officers of the Bank have been authorized bythe Board of Directors to approve loans up to certain designated amounts. Theloan review committee of the Board of Directors must approve all loans over $2million and all loans where new monies advanced would increase the borrowers orguarantors total outstanding credit with the Bank above $5 million, up to 5% ofthe Bank’s unimpaired capital and surplus. Loans in excess of $10 million andall loans where new monies advanced would increase the borrowers or guarantorsto the outstanding credit with the Bank above 5% of the Bank’s unimpairedcapital and surplus must be approved by the full Board of Directors of theBank.

A federal savings association generally may not makeloans to one borrower and related entities in an amount which exceeds 15% ofits unimpaired capital and surplus, although loans in an amount equal to anadditional 10% of unimpaired capital and surplus may be made to a borrower ifthe loans are fully secured by readily marketable securities. However, the Bankmaintains a more restrictive limit of loans to any one borrower and relatedentities of 5% of the Bank’s unimpaired capital and surplus, or $24.6 millionat December 31, 2003. As of December 31, 2003, the Bank’s largestconcentration of loans to any one borrower and related entities (excludingintra-company loans) was $20.4 million ($17.1 million outstanding and $3.3million unfunded) and these loans were performing in accordance with theirterms.

**Single-FamilyResidential Loans.****  **Substantiallyall of the Company’s single-family residential mortgage loans consist ofconventional loans. Conventional loans are loans that are neither insured bythe Federal Housing Administration (“FHA”) or partially guaranteed by theDepartment of Veterans Affairs (“VA”). Approximately 41.4% of the Company’ssingle-family residential mortgage loans retained in the portfolio are securedby properties located in Staten Island and an additional 9.8% are secured byproperties in other areas of New York City. As of December 31, 2003, $2.7billion, or 75.4%, of the Company’s net loans consisted of single - familyresidential mortgage loans. The Bank originated $1.1 billion of single-familyresidential mortgage loans during the year ended December 31, 2003 comparedto $872.4 million and $659.4 million in 2002 and 2001, respectively. During theyear 2003, the Bank sold $222.0 million of single family residential loans,primarily fixed rate loans, to maintain and improve the Bank’s level ofinterest rate risk.

The Bank’s residential mortgage loans have eitherfixed-rates of interest or interest rates which adjust periodically during theterm of the loan. Fixed-rate loans generally have maturities ranging from 10 to30 years and are fully amortizing with monthly or bi-weekly loan paymentssufficient to repay the total amount of the loan with interest by the end ofthe loan term. The Bank’s fixed-rate loans generally are originated underterms, conditions and documentation which permit them to be sold to U.S.Government-sponsored agencies, such as the Federal Home Loan MortgageCorporation (“FHLMC”), and other 

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investors in the secondarymarket for mortgages. At December 31, 2003, $1.0 billion, or 38.8%, 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 adjustable rate single family residential mortgageloans currently offered by the Bank include one, three and five year adjustablerate loans. At December 31, 2003, the Bank’s one through three-year,five-year and ten-year ARM loans amounted to $190.7 million, $993.5 million and$428.1 million, respectively. The Bank’s adjustable-rate single-familyresidential real estate loans generally have a cap of 2% to 3% on any increaseor decrease in the interest rate at any adjustment date, and include aspecified cap on the maximum interest rate over the life of the loan, which capis generally 5% or 6% above the initial rate. The Bank may offer ARM loans withinitial rates which are below the fully indexed rate. The Bank’sadjustable-rate loans require that any payment adjustment resulting from achange in the interest rate of an adjustable-rate loan be sufficient to resultin full amortization of the loan by the end of the loan term and, thus, do notpermit any of the increased payment to be added to the principal amount of theloan, or so-called negative amortization. At December 31, 2003, $1.6billion or 61.2% of the Bank’s single-family residential mortgage loans wereadjustable-rate loans compared to $1.4 billion or 51.8% at December 31,2002.

Adjustable-rate loans decrease the risks associatedwith changes in interest rates but involve other risks, primarily because asinterest rates increase, the loan payment by the borrower increases to theextent permitted by the terms of the loan, thereby increasing the potential fordefault. Moreover, as with fixed-rate loans, as interest rates increase, themarketability of the underlying collateral property may be adversely affectedby higher interest rates. The Bank believes that these risks, which have nothad a material adverse effect on the Bank to date, generally, are less than therisks associated with holding fixed-rate loans in a rising interest rateenvironment.

The volume and types of ARMs originated by the Bankhave been affected by such market factors as the level of interest rates,competition, consumer preferences and availability of funds. Accordingly,although the Bank will continue to offer single-family ARMs, there can be noassurance that in the future the Bank will be able to originate a sufficientvolume of single-family ARMs to increase or maintain the proportion that theseloans bear to total loans.

The Bank’s single-family residential mortgage loansgenerally do not exceed $1.0 million. In addition, the maximum loan-to-value (“LTV”)ratio for the Bank’s single-family residential mortgage loans, generally, is95% of the appraised value of the secured property, provided, however, thatprivate mortgage insurance is obtained on the portion of the principal amountthat exceeds 80% of the appraised value. Loans purchased by the Bank from SIBMCare underwritten on substantially similar terms as loans originated directly bythe Bank.

At December 31, 2003, the Company’s home equityloans amounted to $22.0 million or 0.6% of the Company’s net loans. The Bankoffers floating and fixed-rate home equity lines of credit. Home equity loans,like single-family residential mortgage loans, are secured by the underlyingequity in the borrower’s residence. However, the Bank generally obtains asecond mortgage position to secure home equity loans. The Bank’s home equityloans generally require LTV ratios of 80% or less after taking intoconsideration any first mortgage loan.

**CommercialReal Estate Loans and Multi-Family Residential Loans.****  **At December 31, 2003, the Company’s commercialreal estate loans and multi-family residential mortgage loans amounted to$508.5 million and $71.4 million, respectively, or 14.4% and 2.0%,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 

9

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estate loans. Because ofsuch factors, in recent years the Bank has increased its efforts in originatingcommercial real estate loans and multi-family residential loans.

The Bank’s commercial real estate loans generally aresecured by small office buildings, retail and industrial use buildings, stripshopping centers and other commercial uses located in the Bank’s market area.The Bank’s commercial real estate loans seldom exceed $2.5 million and as of December 31,2003, the average size of the Bank’s commercial real estate loans wasapproximately $422,500. The Bank originated $205.7 million of commercial realestate loans during the year ended December 31, 2003 compared to $158.9million and $77.0 million of commercial real estate loan originations in 2002and 2001, respectively.

The Bank’s multi-family residential real estate loansare concentrated in Brooklyn and, to a lesser extent, Staten Island. The Bankoriginated $32.0 million of multi-family residential real estate loans duringthe year ended December 31, 2003 compared to $18.9 million and $5.1million of originations in 2002 and 2001, respectively. The Bank generally hasnot been a substantial originator of multi-family residential real estate loansdue to, among other factors, the relatively limited amount of apartment andother multi-family properties on Staten Island.

The Bank’s commercial real estate and multi-familyresidential loans generally are five- or ten-year adjustable-rate loans indexedto the five-year U.S. Treasury obligation plus a margin. Generally, fees ofbetween 0.50% and 1.50% of the principal loan balance are charged to theborrower upon closing. The Bank generally charges prepayment penalties oncommercial real estate and multi-family residential mortgage loans. Althoughterms for multi-family residential and commercial real estate loans may vary, theBank’s underwriting standards generally provide for terms of up to 25 yearswith amortization of principal over the term of the loan and LTV ratios of notmore than 75%. Generally, the Bank obtains personal guarantees of theprincipals as additional security for commercial real estate and multi-familyresidential loans.

The Bank evaluates various aspects of commercial andmulti-family residential real estate loan transactions in an effort to mitigaterisk to the extent possible. In underwriting these loans, consideration isgiven to the stability of the property’s cash flow history, future operatingprojections, current and projected occupancy, position in the market, locationand physical condition. The Bank has also generally imposed a debt coverageratio (the ratio of net cash from operations before payment of debt service todebt service) which is appropriate for the term of the loan. The underwritinganalysis also includes credit checks and a review of the financial condition ofthe borrower and guarantor, if applicable. An appraisal report is prepared byan independent appraiser commissioned by the Bank to substantiate propertyvalues for every commercial real estate and multi-family loan transaction. Allappraisal reports are reviewed by the Bank prior to the closing of the loan.

Commercial real estate and multi-family residentiallending entails substantially different risks when compared to single-familyresidential lending because such loans often involve large loan balances tosingle borrowers and because the payment experience on such loans is typicallydependent on the successful operation of the project or the borrower’sbusiness. These risks can also be significantly affected by supply and demandconditions in the local market for apartments, offices, warehouses, or othercommercial space. The Bank attempts to minimize its risk exposure by limitingsuch lending to proven businesses, only considering properties with existingoperating performance which can be analyzed, requiring conservative debt coverageratios and periodically monitoring the operation and physical condition of thecollateral.

As of December 31, 2003, $4.4 million or 0.9% ofthe Bank’s commercial real estate loans and $248,000 of its multi-familyresidential real estate loans were on non-accrual status.

**Constructionand Land Loans.****  **Theconstruction loans originated are primarily residential construction loans toreal estate builders and, to a lesser extent, residential construction loans to

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individuals who have acontract with a builder for the construction of their residence. The Bank willalso originate construction loans for multi-family projects and non-residentialproperty. At December 31, 2003, the Company’s construction and land loanportfolio, amounted to $170.3 million or 4.8% of the Company’s net loanportfolio, of which $58.7 million consisted of residential construction loans,$7.3 million of multi-family construction loans, $29.4 million ofnon-residential construction loans and $75.0 million of land loans. Inaddition, at such date the Company had $22.5 million of undisbursed funds forconstruction loans in process. The Company disbursed $142.9 million ofconstruction and land loans during the year ended December 31, 2003compared to $115.3 million and $345.0 million of construction loans in 2002 and2001, respectively.

The Company’s construction loans generally havefloating rates of interest for a term of up to two years. Construction loans tobuilders are typically made with a maximum loan to value ratio of 75%. TheCompany’s construction loans to builders are made on either a pre-sold orspeculative (unsold) basis. However, the Company generally limits the number ofunsold homes under construction to its builders, with the amount dependent onthe reputation of the builder, the present outstanding obligations of the builder,the location of the property and prior sales of homes in the development andthe surrounding area. The Company generally limits the number of constructionloans for speculative units.

Prior to making a commitment to fund a constructionloan, the Company requires an appraisal of the property by independentappraisers licensed or certified in the state where the property is located.The Company’s staff also reviews and inspects each project at the commencementof construction and prior to every disbursement of funds during the term of theconstruction loan. Loan proceeds are disbursed after inspections of the projectbased on a percentage of completion. The Company requires monthly interestpayments during the construction term.

The Company originates land loans to developers forthe purpose of holding or developing the land (i.e., roads, sewer and water)for sale. At December 31, 2003, the Company had $75.0 million of landloans. Such loans are secured by a lien on the property, are generally limitedto 65% of the appraised value of the security property and are typically madefor a period of up to two years with a floating interest rate based on theprime rate. The Company requires monthly interest payments during the term ofthe land loan. The principal of the loan is reduced as lots are sold andreleased. In addition, the Bank generally obtains personal guarantees from itsborrowers and originates such loans to developers with whom it has establishedrelationships.

Construction and land lending generally is consideredto involve a higher level of risk as compared to permanent single-familyresidential lending, due to the concentration of principal in a limited numberof loans and borrowers and the effects of general economic conditions ondevelopers and builders. Moreover, a construction loan can involve additionalrisks because of the inherent difficulty in estimating both a property’s valueat completion of the project and the estimated cost (including interest) of theproject. The nature of these loans is such that they are generally moredifficult to evaluate and monitor. In addition, speculative construction loansto a builder are secured by unsold homes and thus pose a greater potential riskto the Company than construction loans to individuals on their personalresidences.

The Company has attempted to minimize the foregoingrisks by, among other things, limiting the extent of its construction and landlending to primarily residential properties. In addition, the Company hasadopted strict underwriting guidelines and other requirements for loans whichare believed to involve higher elements of credit risk. It is also the Company’spolicy, when possible, to obtain personal guarantees from the principals of itscorporate borrowers on its construction and land loans.

At December 31, 2003 the Company had $1.6 millionof construction and land loans that were on non-accrual status compared to $1.1million at December 31, 2002.

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**OtherLoans.****  **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 $97.3 million or 2.8% of the Company’s net loan portfolio atDecember 31, 2003.

At December 31, 2003, the Company’s commercialbusiness loans amounted to $59.0 million or 1.7% of the Company’s net loanportfolio. The Bank’s commercial business loans have a term of up to five yearsand may have either fixed rates of interest or, to a lesser extent, floatingrates tied to the prime rate. The Bank’s commercial business loans are made tosmall to medium sized businesses within the Bank’s market area. A substantialportion of the Bank’s small business loans is unsecured with the remaindergenerally secured by perfected security interests in accounts receivable andinventory or other corporate assets. The Bank generally obtains personalguarantees from the principals of the borrower with respect to all commercialbusiness loans. In addition, the Bank may extend loans for a commercialbusiness purpose which are secured by a mortgage on the proprietor’s home orthe business property. In such cases, the loan, while underwritten tocommercial business loan standards, is reported as a single-family orcommercial real estate mortgage loan, as the case may be. Commercial businessloans generally are deemed to involve a greater degree of risk thansingle-family residential mortgage loans.

The Bank’s commercial business loans include discountedloans, which amounted to $4.9 million or 0.1% of the Bank’s net loans at December 31,2003. The Bank’s discounted loans, which are made primarily to localbusinesses, are designed to provide an interim source of financing and requireno payment of principal or interest until the due date of the loan, which maybe up to one year but generally is 60 or 90 days from the date of origination.While the borrower is contractually obligated to repay the entire face amountof the loan at maturity, the Bank advances only a portion of the face amountwith the difference constituting the interest component. In addition topersonal guarantees, 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 December 31, 2003, included in total otherconsumer loans was $19.7 million of loans primarily secured by manufacturedhousing which represented 0.6% of the Bank’s net loan portfolio. At December 31,2002, the Company’s manufactured housing loans amounted to $23.3 million. TheBank  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 and, when necessary, is assisted by athird party in the collection process. The Bank discontinued purchasing theseloans in 2001. At December 31, 2003, the Company had $181,000 in loans securedby manufactured housing in non-accrual status compared to $803,000 innon-accrual manufactured housing loans at December 31, 2002.

The balance of the Bank’s other loans consists ofloans secured by savings accounts, loans on overdraft accounts, homeimprovement loans, student loans and various other personal loans.

**LoanOrigination Costs and Fees.****  **Inaddition to interest earned on loans, the Bank receives loan origination feesor “points” on a portion of the loans it originates. Loan points are a percentageof the principal amount of the mortgage loan and are charged to the borrower inconnection with the origination of the loan. Loan costs, which are deferred,are primarily the direct costs to originate a loan, fees paid to brokers andmortgage taxes which are charged in certain states that the Bank operates in.

In accordance with SFAS No. 91,which addresses the accounting for non-refundable fees and costs associatedwith originating or acquiring loans, the Bank’s loan origination fees andcertain related direct loan origination costs and fees are offset, and theresulting net amount is deferred and amortized as an 

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adjustmentto interest income over the contractual life, adjusted for prepayments, of therelated loans resulting in an adjustment to the yield of such loans. For loansthat are sold by the Bank, the unamortized portion of the deferred fees andcosts is an adjustment to the gain or loss on the sale. At December 31,2003, the Bank had $18.7 million of such net deferred loan costs.

**DiscontinuedOperations**

SIB Mortgage Corp., a wholly owned subsidiary of theBank, conducted mortgage banking in 42 states. As previously indicated, as partof the Merger, the Company agreed to sell a substantial portion of SIBMC’sbusiness. As of March 15, 2004, such sales have been completed in largepart. SIBMC is no longer accepting any new business and its operations arelimited to finalizing such sales and matters related to the cessation ofbusiness.

SIBMC’s primary business was to originate or purchaseresidential loans through retail, wholesale and bulk purchase channels and sellthem either into the secondary market with servicing released, or, to a lesserextent, to the Bank for retention in its portfolio. SIBMC services its loansheld for sale on an interim basis and its loans held for investment whichconsist of residential permanent and construction loans.

SIBMC’s loan originations and purchases during 2003totaled $16.4 billion compared to $9.4 billion in 2002 and $4.0 billion in2001. The record level of originations for 2003 was driven primarily by thelevel of refinance transactions due to the favorable interest rate environmentduring the year and the increased volume resulting from the geographicexpansion of SIBMC in 2001 into 15 additional states as well as the opening of19 de novo offices in 2002. These origination levels resulted in record loansales in 2003 of $16.7 billion compared to loan sales of $8.4 billion in 2002and $2.9 billion in 2001. To meet the demands from the increased loanorigination volumes, SIBMC expanded its back office operations to both serviceand transfer loans to investors.

The Bank has provided SIBMC with a $1.8 billion lineof credit to finance its loan originations, which includes a working capitalline of $35.0 million. At December 31, 2003, $1.0 billion was outstandingon such line of credit for loan originations. The working capital line ofcredit to SIBMC for day-to-day operating expenses was $22 million at December 31,2003. As of March 5, 2004, $1.1 billion was outstanding on the SIBMC lineof credit for loan originations and $32.0 million was outstanding on theworking capital portion of the line.

SIBMC originated loans that conform to theunderwriting standards for purchase by FHLMC, FNMA and GNMA (“conforming loans”)as well as FHA loans, VA loans and non-conforming loans. Non-conforming loansgenerally consist of loans which, primarily because of size or otherunderwriting requirements, do not satisfy the guidelines for sale to FNMA orFHLMC and other private secondary market investors at the time of origination.During the year ended December 31, 2003, non-conforming conventional loansrepresented approximately 44.2% of SIBMC’s total volume of mortgage loansoriginated*.*

Retail loan origination activities performed by SIBMCincluded soliciting, completing and processing mortgage loan applications andpreparing and organizing the necessary loan documentation. Loan applicationsare examined for compliance with underwriting criteria and, if all requirementsare met, SIBMC issues a commitment to the prospective borrower specifying theamount of the loan and the loan origination fees, points and closing costs tobe paid by the borrower or seller and the date on which the commitment expires.

SIBMC had $867.3 million in commitments to sell loansat December 31, 2003. SIBMC recorded the gain or loss on loan sales at thetime of sale. When SIBMC sold loans, pursuant to relatively standardrepresentations and warranties, it assumed limited recourse for first paymentdefaults, fraud and non-compliance with its investors’ underwriting guidelines.The first payment default recourse is generally 

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limited to a loan thatgoes into foreclosure where the delinquency occurred within the first 90 daysafter a loan is sold to an investor. The recourse obligation for fraud andnon-compliance to underwriting of loans standards is generally for the life ofthe loan. During 2003 and 2002, SIBMC repurchased $17.1 million and $4.9million, respectively, of loans incurring losses of $661,000 and $2.6 million,respectively, with respect to such repurchases.

The Company established areserve, the representation and warranty reserve (“R&WR) to provide forpotential losses in the normal course of business with respect to loans originatedfor sale by the Mortgage Company. Such losses are due primarily to loansoriginated for sale not fully satisfying the representations and warranties (“R&W”)made by the Mortgage Company in connection with the sale of such loans. In theevent the representations and warranties are breached, the Mortgage Company maybe required to repurchase the loans, remit a portion of its sales price or makeother concessions, which reduce the amount of gain recognized by the MortgageCompany. The R&WR totaled $5.2 million at December 31, 2003 and isincluded in other liabilities on the Company’s consolidated statements offinancial condition at such date. Provisions to the R&WR reduce the amountof gains on sales.

**Asset Quality**

**General.****  **As a part of the Company’s efforts to improve itsasset quality, it has enhanced the loan review area, along with developing andimplementing an asset classification system which now includes single-familyresidential loans. All of the Bank’s assets are subject to review under thisclassification system. Problem loans are reviewed by the Board of Directors atregularly scheduled Board meetings.

When a borrower fails to make a required payment on aloan, the Company attempts to cure the deficiency by contacting the borrowerand seeking payment. Contacts are generally made 16 days after a payment isdue. In most cases, deficiencies are cured promptly. If a delinquencycontinues, late charges are assessed and additional efforts are made to collectthe loan. While the Company generally prefers to work with borrowers to resolvesuch problems, when the account becomes 90 days delinquent, the Companyinstitutes foreclosure or other proceedings, as necessary, to minimize anypotential loss.

Loans are placed on non-accrual status when, in thejudgment of management, the probability of collection of interest is deemed tobe doubtful and the value of the collateral is not sufficient to satisfy allinterest, principal and potential costs due on the loan. Prior to 1998, theCompany’s policy was to cease accruing interest on any loan which was 90 daysor more past due as to principal or interest. Commencing in 1998, managementreviews the collateral value, payment history of individual secured loans alongwith the financial condition of the borrower to determine the accrual status ofthe loan when they approach 90 days past due. When a loan is placed onnon-accrual status, previously accrued unpaid interest is deducted frominterest income. At December 31, 2003, the Company had $31.3 million ofloans in non-accrual status compared to $17.4 million as of December 31,2002. Included in non-accrual loans are non-accrual loans in the held for saleportfolio at SIB Mortgage of $8.4 million and $0.9 million at December 31,2003 and December 31, 2002, respectively. The Company maintains arepresentation and warranty reserve to provide for losses recognized on thesale of these held for sale loans. The balance in the representation andwarranty reserve at December 31, 2003 and December 31, 2002 was $5.2million and $3.5 million, respectively.

Real estate acquired by the Company as a result offoreclosure or deed-in-lieu of foreclosure and repossessed assets is classifiedas real estate owned until sold. These foreclosed assets are considered heldfor sale and are carried at the lower of fair value minus the estimated coststo sell the property. After the date of acquisition, all costs incurred inmaintaining the property are expensed. The Company performs ongoing inspectionsof the properties and adjusts the carrying value as needed. The Companyattempts to sell all properties through brokers and its own personnel. At December 31,2003, the Company had $2.6 million in these properties compared to $9.7 millionas of December 31, 2002.

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**Delinquent Loans.****  **The following table sets forth information concerningdelinquent but still accruing loans at December 31, 2003, in dollaramounts and as a percentage of each category of the Bank’s loan portfolio. Theamounts presented represent the total outstanding principal balances of therelated loans, rather than the actual payment amounts which are past due.Non-accrual loans are not included in the table below.
| ** **                | ** ** | **December 31, 2003**      | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **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 |       | $                                    | 15,319     |   |   | 0.40 | % |   | $ | 4,345 |   |   | 0.11 | % |   | $ | 3,299 |   |   | 0.09 | % |   |
| Multi-family residential  |       | —                               |       |   | — |   |   | 283 |   |   | 0.40 |   |   | — |   |   | — |   |   |
| Commercial real estate    |       | 535                                  |       |   | 0.11 |   |   | 324 |   |   | 0.06 |   |   | — |   |   | — |   |   |
| Construction and land     |       | 453                                  |       |   | 0.27 |   |   | 587 |   |   | 0.34 |   |   | 75 |   |   | 0.04 |   |   |
| Home equity               |       | 172                                  |       |   | 0.78 |   |   | — |   |   | 0.00 |   |   | 200 |   |   | 0.91 |   |   |
| Total mortgage loans      |       | 16,479                               |       |   | 0.36 |   |   | 5,539 |   |   | 0.12 |   |   | 3,574 |   |   | 0.08 |   |   |
| Other loans:              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial business loans |       | 1,063                                |       |   | 1.80 |   |   | 463 |   |   | 0.79 |   |   | 69 |   |   | 0.12 |   |   |
| Other loans               |       | 1,017                                |       |   | 2.65 |   |   | 448 |   |   | 1.17 |   |   | 123 |   |   | 0.32 |   |   |
| Total other loans         |       | 2,080                                |       |   | 2.14 |   |   | 911 |   |   | 0.94 |   |   | 192 |   |   | 0.20 |   |   |
| Total delinquent  loans   |       | $                                    | 18,559     |   |   | 0.39 | % |   | $ | 6,450 |   |   | 0.14 | % |   | $ | 3,766 |   |   | 0.08 | % |   |

 

**Classifiedand Criticized Assets.****  **Federalregulations require that each insured institution classify its assets on aregular 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 “specialmention” also must be established and maintained for assets which do notcurrently expose an insured institution to a sufficient degree of risk towarrant classification as substandard, doubtful or loss.

For the twelve months ended December 31, 2003classified assets decreased by $2.3 million to $80.0 million. The primaryreasons for this decrease was the upward trend in the economy and the growthand changing mix of the loan portfolio. Management continues its efforts toenhance its loan servicing and collection procedures along with continuedemphasis on loan review and loan underwriting. The assets were classified intothe following categories at December 31, 2003, special mention $31.4million, substandard $43.0 million, doubtful $5.5 million.

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**Non-Accrual Loans,Non-Accruing Assets and Loans Past Due 90 Days or More and Still Accruing.****  **The following table sets forthinformation with respect to non-accrual loans, non-accruing assets (other realestate owned, repossessed assets) and loans past due 90 days or more and stillaccruing.
| ** **                                                                      | ** ** | **At December 31,**        | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                      | ** ** | **2003**                             | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                                      | ** ** | **(Dollars in Thousands)** | ** ** |
| **Non-accrual loans:**                                                          |       |                                 |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family residential                                                       |       | $                                    | 24,034     |   | $ | 11,942 |   | $ | 7,663 |   | $ | 3,335 |   | $ | 2,899 |   |
| Multi-family residential                                                        |       | 248                                  |       | — |   | — |   | 340 |   | — |   |
| Commercial real estate                                                          |       | 4,385                                |       | 2,687 |   | 4,086 |   | 2,979 |   | 5,568 |   |
| Construction and land                                                           |       | 1,598                                |       | 1,094 |   | 2,117 |   | 524 |   | 1,793 |   |
| Home equity                                                                     |       | —                               |       | — |   | 38 |   | 5 |   | 106 |   |
| Other loans:                                                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Commercial business loans                                                       |       | 778                                  |       | 797 |   | 558 |   | 1,482 |   | 1,783 |   |
| Other consumer loans                                                            |       | 284                                  |       | 837 |   | 631 |   | 1,111 |   | 325 |   |
| Total non-accrual loans                                                         |       | 31,327                               |       | 17,357 |   | 15,093 |   | 9,776 |   | 12,474 |   |
| **Non-accruing assets:**                                                        |       |                                 |       |   |   |   |   |   |   |   |   |
| Other real estate  owned, net                                                   |       | 2,613                                |       | 9,445 |   | 996 |   | 762 |   | 887 |   |
| Other repossessed  assets, net                                                  |       | —                               |       | 236 |   | 231 |   | 131 |   | — |   |
| Total non-accruing loan assets                                                  |       | 33,940                               |       | 27,038 |   | 16,320 |   | 10,669 |   | 13,361 |   |
| **Loans past due 90 days or more and still  accruing**                          |       | 3,766                                |       | 5,684 |   | 7,213 |   | 7,068 |   | 6,886 |   |
| Non-accruing loan  assets and loans past due 90 days or more and still accruing |       | $                                    | 37,706     |   | $ | 32,722 |   | $ | 23,533 |   | $ | 17,737 |   | $ | 20,247 |   |
| Non-accruing loan assets to total loans(1)                                      |       | 0.72                                 | %          | 0.53 | % | 0.41 | % | 0.36 | % | 0.62 | % |
| Non-accruing loan assets to total assets                                        |       | 0.45                                 | %          | 0.39 | % | 0.27 | % | 0.20 | % | 0.30 | % |
| Non-accruing loans to total loans(1)                                            |       | 0.66                                 | %          | 0.34 | % | 0.38 | % | 0.33 | % | 0.58 | % |
| Non-accruing  loans to total assets                                             |       | 0.42                                 | %          | 0.25 | % | 0.25 | % | 0.19 | % | 0.28 | % |

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(1)          Total loans includes loans held for investment and loansheld for sale.

Non-accrual loans and other real estate owned at December 31,2003 totaled $33.9 million, up from $27.0 million at December 31, 2002 and$16.3 million at December 31, 2001.

The interest income that would have been recordedduring the year ended December 31, 2003 if all of the Company’snon-accrual loans at the end of such period had been current in accordance withtheir terms during such period was $2.0 million. The actual amount of interestrecorded as income (on a cash basis) on such loans during 2003 amounted to $356,000.

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**Allowance for Loan Losses.****  **The following table sets forth theactivity in the Bank’s allowance for loan losses during the periods indicated.
| ** **                                                              | ** ** | **Year Ended December 31** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                              | ** ** | **2003**                                  | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                              | ** ** | **(Dollars in Thousands)**      | ** ** |
| Allowance at  beginning of period                                       |       | $                                         | 22,773     |   | $ | 20,041 |   | $ | 14,638 |   | $ | 14,271 |   | $ | 16,617 |   |
| Provisions (Benefit):                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Continuing operations                                                   |       | 6,968                                     |       | 4,130 |   | 5,464 |   | 250 |   | (1,740 | ) |
| Discontinued operations                                                 |       | 655                                       |       | 4,724 |   | 3,293 |   | 402 |   | (103 | ) |
| Increase as a  result of acquisition                                    |       | —                                    |       | — |   | — |   | 847 |   | — |   |
| Charge-offs:                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Single-family residential                                               |       | 1,015                                     |       | 4,898 |   | 1,854 |   | 120 |   | 148 |   |
| Multi-family residential                                                |       | —                                    |       | — |   | — |   | — |   | — |   |
| Commercial real estate                                                  |       | 34                                        |       | — |   | — |   | 134 |   | 474 |   |
| Construction and land                                                   |       | 32                                        |       | — |   | — |   | 6 |   | — |   |
| Other loans                                                             |       | 4,898                                     |       | 2,174 |   | 2,411 |   | 1,926 |   | 1,043 |   |
| Total charge-offs                                                       |       | 5,979                                     |       | 7,072 |   | 4,265 |   | 2,186 |   | 1,665 |   |
| Recoveries:                                                             |       |                                      |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                         |       |                                      |       |   |   |   |   |   |   |   |   |
| Single-family residential                                               |       | 97                                        |       | 10 |   | 131 |   | 19 |   | 456 |   |
| Multi-family residential                                                |       | —                                    |       | — |   | — |   | — |   | — |   |
| Commercial real estate                                                  |       | —                                    |       | — |   | — |   | 27 |   | 34 |   |
| Construction and land                                                   |       | —                                    |       | 15 |   | — |   | — |   | — |   |
| Other loans                                                             |       | 927                                       |       | 925 |   | 780 |   | 1,008 |   | 672 |   |
| Total recoveries                                                        |       | 1,024                                     |       | 950 |   | 911 |   | 1,054 |   | 1,162 |   |
| Allowance at end  of period                                             |       | $                                         | 25,441     |   | $ | 22,773 |   | $ | 20,041 |   | $ | 14,638 |   | $ | 14,271 |   |
| Allowance for  loan losses to total non-accruing loans at end of period |       | 111.04                                    | %          | 138.18 | % | 132.78 | % | 149.73 | % | 114.40 | % |
| Allowance for loan  losses to total loans at end of period              |       | 0.68                                      | %          | 0.44 | % | 0.50 | % | 0.49 | % | 0.65 | % |

 

The Company’s allowance for loan losses was $25.4million at December 31, 2003 or 111.0% of non-accrual loans held forinvestment and 0.72% of the Company’s loans held for investment, at such date.The level of the allowance for loan losses is intended to be maintained at alevel sufficient to absorb all estimated, probable losses inherent in the heldfor investment loan portfolio. In determining the appropriate level of theallowance for loan losses and accordingly, the level of the provision for loanlosses, the Company on a quarterly basis reviews the mix and volume of theportfolio and its inherent risks, the level of non-accruing loans anddelinquencies, historical loss experience, local and national economicconditions including the direction of real estate values and current trends inregulatory supervision.

17

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Thefollowing table sets forth information concerning the allocation of the Company’sallowance for loan losses by loan category at the dates indicated.
| ** **  | ** ** | **At December 31,**        | ** ** |
|-------------|------------|--------------------------------------|------------|
| ** **  | ** ** | **2003**                             | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **  | ** ** | **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 |       | $                                    | 12,129     |   |   | 78.15 | % |   | $ | 10,476 |   |   | 80.24 | % |   | $ | 8,463 |   |   | 75.53 | % |   | $ | 2,686 |   |   | 79.60 | % |   | $ | 5,890 |   |   | 82.77 | % |   |
| Commercial  |       | 9,213                                |       |   | 20.77 |   |   | 10,027 |   |   | 18.42 |   |   | 7,599 |   |   | 22.70 |   |   | 9,237 |   |   | 17.93 |   |   | 5,579 |   |   | 14.67 |   |   |
| Other loans |       | 4,099                                |       |   | 1.08 |   |   | 2,270 |   |   | 1.34 |   |   | 3,979 |   |   | 1.77 |   |   | 2,715 |   |   | 2.47 |   |   | 2,802 |   |   | 2.56 |   |   |
| Total       |       | $                                    | 25,441     |   |   | 100.00 | % |   | $ | 22,773 |   |   | 100.00 | % |   | $ | 20,041 |   |   | 100.00 | % |   | $ | 14,638 |   |   | 100.00 | % |   | $ | 14,271 |   |   | 100.00 | % |   |

 

The Company will continueto monitor and modify its allowance for loan losses as conditions dictate.While management believes, based on information currently available, the Bank’sallowance for loan losses is sufficient to cover losses inherent in its loanportfolio at this time, no assurance can be given that the Company’s level ofallowance for loan losses will be sufficient to absorb future loan lossesincurred by the Company, or that future adjustments to the allowance for loanlosses will not be necessary if economic and other conditions differ substantiallyfrom those conditions used by management to determine the current level of theallowance for loan losses. In addition, the OTS, as an integral part of itsexamination process, periodically reviews the Company’s allowance for loanlosses. Such agency may require the Company to make adjustments to the loanloss reserve based upon their own judgments which could differ from those ofmanagement.

**SecuritiesActivities**

**General.****  **As of December 31, 2003, the Company hadsecurities including the investment in Federal Home Loan Bank of New York stocktotaling $2.1 billion or 28.5% of the Company’s total assets at such date. Theunrealized appreciation on the Company’s securities available for sale amountedto $8.3 million, net of income taxes, as of December 31, 2003. Thesecurities investment policy of the Company, which has been established by theBoard of Directors, is designed, among other things, to assist the Company inits asset/liability management policies. The investment policy emphasizesprincipal preservation, favorable returns on investments, maintaining liquiditywithin designated guidelines, minimizing credit risk and maintainingflexibility. The current securities investment policies permit investments invarious types of assets including obligations of the U.S. Treasury and federalagencies, investment grade corporate obligations, various types ofmortgage-backed and mortgage-related securities, commercial paper, certificatesof deposit, equities and federal funds sold to financial institutions approvedby the Board of Directors.

The Company’s securities portfolio, on anon-consolidated basis, as of December 31, 2003 was $40.1 million,consisting of equity investments, certain corporate bonds and trust preferredsecurities, which are not permitted investments for a federally charteredthrift.

At December 31, 2003, all of the Company’ssecurities were classified as available for sale. Such classification providesthe Company with the flexibility to sell securities if deemed appropriate inresponse to, among other factors, changes in interest rates. Securitiesclassified as available for sale are carried at fair value. Unrealized gainsand losses on available for sale securities are recognized as direct increasesor decreases in equity, net of applicable income taxes.

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**Securities PortfolioActivity.****  **Thefollowing table sets forth the activity in the Company’s aggregate securitiesportfolio during the periods indicated.
| ** **                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                     | ** ** | **(Dollars In Thousands)**       | ** ** |
| Securities at  beginning of period                             |       | $                                          | 1,023,582  |   | $ | 1,528,639 |   | $ | 1,888,946 |   |
| Purchases:                                                     |       |                                       |       |   |   |   |   |
| U.S. Government and agencies                                   |       | 1,299,750                                  |       | 40,785 |   | — |   |
| Agency mortgage-backed securities                              |       | 731,823                                    |       | 357,462 |   | 193,731 |   |
| Agency CMOs                                                    |       | —                                     |       | 52,077 |   | 13,974 |   |
| Private CMOs                                                   |       | 88,426                                     |       | 20,180 |   | — |   |
| Other debt securities                                          |       | 7,132                                      |       | 45,195 |   | 88,844 |   |
| Marketable equity securities                                   |       | 36,914                                     |       | 36,119 |   | 40,479 |   |
| Total purchases                                                |       | 2,164,045                                  |       | 551,818 |   | 337,028 |   |
| Sales:                                                         |       |                                       |       |   |   |   |   |
| U.S. Government and agencies                                   |       | 1,801                                      |       | — |   | 10,000 |   |
| State and municipals                                           |       | —                                     |       | 29,813 |   | — |   |
| Agency mortgage-backed securities                              |       | —                                     |       | 169,656 |   | 76,410 |   |
| Other debt securities                                          |       | 53,281                                     |       | 111,483 |   | 59,496 |   |
| Marketable equity securities                                   |       | 30,575                                     |       | 51,091 |   | 66,350 |   |
| Total sales                                                    |       | 85,657                                     |       | 362,043 |   | 212,256 |   |
| Repayments and  prepayments:                                   |       |                                       |       |   |   |   |   |
| U.S. Government and agencies                                   |       | 495,068                                    |       | 46,775 |   | 112,730 |   |
| State and municipals                                           |       | 504                                        |       | 290 |   | 115 |   |
| Agency mortgage-backed securities                              |       | 316,955                                    |       | 262,134 |   | 195,000 |   |
| Agency CMOs                                                    |       | 71,565                                     |       | 95,489 |   | 109,018 |   |
| Private CMOs                                                   |       | 75,548                                     |       | 279,184 |   | 76,058 |   |
| Other debt securities                                          |       | 1,608                                      |       | 234 |   | 170 |   |
| Marketable equity securities                                   |       | —                                     |       | 8,740 |   | 1,250 |   |
| Total repayments and prepayments                               |       | 961,248                                    |       | 692,846 |   | 494,341 |   |
| Accretion of  discount and (amortization of premium)           |       | (3,542                                     | )          | (1,798 | ) | 499 |   |
| Write-down for  other than temporary impairment                |       | (819                                       | )          | (2,691 | ) | (14,506 | ) |
| Unrealized gains  or (losses) on available-for-sale securities |       | (5,441                                     | )          | 2,503 |   | 23,269 |   |
| Securities at end of  period                                   |       | $                                          | 2,130,920  |   | $ | 1,023,582 |   | $ | 1,528,639 |   |

 

**Mortgage-Backedand Mortgage-Related Securities.****  **TheCompany purchases mortgage-backed securities and mortgage-related securities inorder to generate positive interest rate spreads with minimal administrativeexpense, lower its credit risk as a result of guarantees provided by FNMA,FHLMC and GNMA, increase the liquidity of the Company and utilize thesesecurities as collateral for borrowing. The Company has primarily invested inmortgage-backed and mortgage- related securities issued or sponsored by privateissuers, and by GNMA, FNMA and FHLMC. At December 31, 2003, the Company’ssecurities included $1.1 billion, or 14.5% of total assets, of mortgage-backedand mortgage-related securities. At such date, 7.7% of the mortgage-backed andmortgage-related securities were adjustable rate and 92.3% were fixed rate. Theportfolio of mortgage-backed and mortgage-related securities had a weightedaverage yield of 4.80%, and an anticipated or estimated duration of 4.88 yearsas of December 31, 2003.

The portfolio of mortgage-backed and mortgage-relatedsecurities consisted of mortgage-backed securities of $980.1 million, or 13.1%of total assets, and CMOs of $102.8 million, or 1.4% of total assets, at December 31,2003. The mortgage backed securities were issued or guaranteed by GNMA, FHLMCor 

19

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FNMA and $12.9 million ofthe CMOs were issued or guaranteed by FHLMC and GNMA and $89.9 million wereprivately issued and are all rated AAA.

**U.S.Government and Agency Obligations.****  **AtDecember 31, 2003, the Company’s U.S. Government agency securitiesportfolio, which was all rated AAA, consisted of callable securities andtotaled $824.1 million with a weighted average maturity of 9.7 years and aweighted average life of 0.2 years to the call date.

**OtherSecurities.****  **At December 31,2003 the Company’s other securities totaled $69.7 million or 0.9 % of totalassets. Other securities consist of $69.0 million in corporate bonds and trustpreferreds, $495,000 in municipal bonds and $250,000 in foreign bonds. Thecorporate bonds and trust preferreds consist of $22.9 million in fixed ratebonds and $46.1 million in adjustable-rate bonds using three month LIBOR as theprimary index and have average ratings of BBB or better. The weighted averagematurity of the corporate bond portfolio is 24.7 years.

At December 31, 2003 there were no othersecurities that were considered other than temporarily impaired. During 2003the Company sold one corporate bond with a carrying value of $4.7 million thatwas considered other than temporarily impaired that had been written down $4.8million in the year 2001.

Thefollowing table sets forth certain information regarding the contractualmaturities of the Bank’s U.S. Government Agency obligations and othersecurities (all of which were classified as available for sale) at December 31,2003.
| ** **                                     | ** ** | **At December 31, 2003**      | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                     | ** ** | **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 | % |   |   | $ | 10,000 |   |   |   | 5.01 | % |   |   | $ | 803,700 |   |   |   | 3.58 | % |   |   | $ | 8,500 |   |   |   | 5.74 | % |   |
| Other securities                               |       |                                         | 225        |   |   |   | 6.57 |   |   |   | 5,105 |   |   |   | 6.36 |   |   |   | 250 |   |   |   | 2.50 |   |   |   | 66,768 |   |   |   | 5.00 |   |   |
|                                           |       |                                         | $          | 225 |   |   |   |   |   |   |   | $ | 15,105 |   |   |   |   |   |   |   | $ | 803,950 |   |   |   |   |   |   |   | $ | 75,268 |   |   |   |   |   |   |

 

**EquitySecurities.****  **At December 31,2003 the Company’s investment in equity securities, including the investment inthe Federal Home Loan Bank of New York stock was $154.2 million or 2.1% oftotal assets. The equity investment consisted primarily of $118.4 million inFHLB stock, $29.0 million in mutual funds, $6.6 million in preferred stock and$101,000 in common stock. The required level of investment in FHLB stock as amember is the higher of 5% of the amount of advances the Bank has outstandingwith the FHLB or 1% of residential mortgage loans. There is no market for theCompany’s FHLB stock, however, when the required level of ownership declines,the FHLB repurchases the stock. All equity investments are classified asavailable for sale.

During the fourth quarter,the FHLB of New York suspended the payment of dividends, of which the Companyrecorded $4.2 million in 2003. In January 2004 the FHLB of New Yorkannounced that it was reinstating the payment of a cash dividend, but at a lowerannualized rate than previously paid.

**Sources of Funds**

**General.****  **Deposits, repayments and prepayments of loans andsecurities, proceeds from sales of loans and securities, proceeds from maturingsecurities and cash flows from operations are the primary sources of theCompany’s funds for use in lending, investing and for other general purposes.The Company also utilizes borrowings, primarily FHLB advances and reverserepurchase agreements, to fund its operations when needed.

Depending upon market conditions and funding needs,the Bank at times uses brokered CDs as an alternative source of funds. Thebrokered CDs are issued by nationally recognized brokerage firms 

20

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approved by the Board ofDirectors. At December 31, 2003 and 2002 the balance in brokered CDs was$324.5 million and $124.5 million, respectively.

**Deposits.****  **The Bank offers a variety of deposit accounts whichhave a range of interest rates and terms. At December 31, 2003, the Bank’sdeposit accounts consisted of savings (including club accounts), NOW accounts,checking accounts, money market accounts and certificates of deposit (“CDs”)(including brokered CDs). The Bank also offers certificates of deposit accountswith balances in excess of $100,000 at preferential rates (jumbo certificates)and also Individual Retirement Accounts (“IRA”) and other qualified planaccounts. While jumbo certificate of deposit accounts are accepted by the Bankat preferential rates, other than brokered CDs, the Bank does not solicit suchdeposits outside of its market area as such deposits are more difficult toretain than core deposits. To enhance the deposit products it offers, buildcustomer relationships and increase market share in certain markets, the Bankoffers a money market account (that also requires the opening of acorresponding checking account).

At December 31, 2003, the Bank’s deposits totaled$3.8 billion, of which 84.9% were interest bearing deposits at such date. Coredeposits (savings accounts, non-interest bearing commercial and retail demanddeposits, money market accounts and NOW accounts) were $2.6 billion or 68.4% oftotal deposits and certificates of deposit were $1.2 billion or 31.6% of totaldeposits. Included in the Bank’s certificates of deposit were $324.5 million ofbrokered deposits at December 31, 2003. Although the Bank has asignificant portion of its deposits in core deposits, management monitors theactivity in these accounts and, based on historical experience and the Bank’scurrent pricing strategy, believes it will continue to retain a large portionof these deposits. The Bank is not limited with respect to the rates it mayoffer on deposit products.

The flow of deposits is influenced significantly bygeneral economic conditions, changes in prevailing interest rates andcompetition. The Bank’s deposits are primarily obtained from the areas in whichits branch offices are located. The Bank relies primarily on competitivepricing of its deposit products, customer service and long standingrelationships with customers to attract and retain deposits. The Bank alsoutilizes traditional marketing methods including television, radio and printmedia and direct mail programs to attract new customers and deposits.

In addition, the Bank’s business development officershave actively solicited, through individual meetings and other contacts,deposit accounts, particularly commercial accounts. To attract and retaincommercial deposit accounts, the Bank offers a complete line of commercialaccount products and services. The Bank’s lending officers and branch managershave increased their efforts to solicit new deposits from the Bank’s loancustomers and other residents and businesses in their market area.

The Bank’s market areas are Staten Island, New York,Brooklyn, New York and the following counties in New Jersey; Ocean, Monmouth,Union and Middlesex. Staten Island, which represents 60.7% of the Bank’s totaldeposits continues to be the Bank’s primary market area. The Bank continues tohold over 34% of the deposits in the Staten Island market which as of June 30,2003 was the highest percentage held by any one depository institution onStaten Island.

For the year ended December 31, 2003, deposits,before interest credited, increased $328.0 million compared with an increase of$489.8 million in 2002. Inclusive of interest credited, deposits increased$383.2 million in 2003 and $562.8 million in 2002.

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Thefollowing table sets forth the activity in the Bank’s deposits during theperiods indicated.
| ** **                | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **2003**                                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                | ** ** | **(Dollars in Thousands)**        | ** ** |
| Beginning balance         |       | $                                           | 3,464,134  |   | $ | 2,901,328 |   | $ | 2,345,213 |   |
| Net increase              |       | 328,000                                     |       | 489,791 |   | 474,265 |   |
| Interest credited         |       | 55,214                                      |       | 73,015 |   | 81,850 |   |
| Net increase in  deposits |       | 383,214                                     |       | 562,806 |   | 556,115 |   |
| Ending balance            |       | $                                           | 3,847,348  |   | $ | 3,464,134 |   | $ | 2,901,328 |   |

 

Thefollowing table sets forth, by various interest rate categories, thecertificates of deposit with the Bank at the dates indicated. 
| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **    | ** ** | **(Dollars in Thousands)**       | ** ** |
| 0.00 to 2.99% |       | $                                          | 886,340    |   | $ | 659,873 |   | $ | 250,444 |   |
| 3.00 to 3.99% |       | 145,444                                    |       | 197,989 |   | 268,821 |   |
| 4.00 to 4.99% |       | 128,787                                    |       | 150,188 |   | 295,784 |   |
| 5.00 to 6.99% |       | 44,565                                     |       | 86,525 |   | 256,381 |   |
| 7.00 to 8.99% |       | 9,953                                      |       | 10,795 |   | 12,470 |   |
| Total         |       | $                                          | 1,215,089  |   | $ | 1,105,370 |   | $ | 1,083,900 |   |

 

**Weighted Average Rate.****  **The following table sets forth the amount and remainingmaturities of the Bank’s certificates of deposit at December 31, 2003.
| ** **    | ** ** | **Six MonthsAnd 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% |       |                                 | $          | 547,929                                           |       |                                             |       | $                                                   | 228,686    |                       |       | $ | 93,056 |   |   | $ | 7,493 |   |   |   | $ | 9,176 |   |   |
| 3.00 to 3.99% |       |                                 | 44,905     |                                              |       |                                             | 43,902     |                                                |       | 14,518                     |       |   | 3,283 |   |   |   | 38,836 |   |   |
| 4.00 to 4.99% |       |                                 | 4,540      |                                              |       |                                             | 12,926     |                                                |       | 8,851                      |       |   | 22,854 |   |   |   | 79,616 |   |   |
| 5.00 to 6.99% |       |                                 | 7,016      |                                              |       |                                             | 6,277      |                                                |       | 9,824                      |       |   | 17,788 |   |   |   | 3,660 |   |   |
| 7.00 to 8.99% |       |                                 | —     |                                              |       |                                             | —     |                                                |       | 528                        |       |   | — |   |   |   | 9,425 |   |   |
| Total         |       |                                 | $          | 604,390                                           |       |                                             |       | $                                                   | 291,791    |                       |       | $ | 126,777 |   |   | $ | 51,418 |   |   |   | $ | 140,713 |   |   |

 

As of December 31,2003 the aggregate amount of outstanding certificates of deposit in amountsgreater than or equal to $100,000 was approximately $366.2 million. Thefollowing table presents the maturity of these certificates of deposit at suchdate.
| ** **                       | ** ** | **December 31, 2003**      | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **(Dollars in Thousands)** | ** ** |
| 3 months or less                 |       |                                 | $          | 135,135 |   |   |
| Over 3 months  through 6 months  |       |                                 | 33,124     |   |   |
| Over 6 months  through 12 months |       |                                 | 43,487     |   |   |
| Over 12 months                   |       |                                 | 154,434    |   |   |
| Total                            |       |                                 | $          | 366,180 |   |   |

 

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The following table sets forth theaverage dollar amount of deposits in the various types of deposit accountsoffered by the Bank at the dates indicated.
| ** **                | ** ** | **Year to Date Average as of December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2003**                                                                       | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                | ** ** | **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          |       | $                                                                              | 1,134,877  |   |   | 0.90 | % |   | $ | 1,000,455 |   |   | 1.74 | % |   | $ | 817,890 |   |   | 2.18 | % |   |
| Certificates of  deposits |       | 1,162,306                                                                      |       |   | 2.62 |   |   | 1,116,366 |   |   | 3.49 |   |   | 1,017,634 |   |   | 5.22 |   |   |
| Money market  accounts    |       | 716,767                                                                        |       |   | 1.91 |   |   | 516,547 |   |   | 2.80 |   |   | 228,297 |   |   | 3.70 |   |   |
| NOW accounts              |       | 146,488                                                                        |       |   | 0.85 |   |   | 128,020 |   |   | 1.40 |   |   | 101,981 |   |   | 1.83 |   |   |
| Demand deposits           |       | 633,000                                                                        |       |   | — |   |   | 526,843 |   |   | — |   |   | 453,120 |   |   | — |   |   |
| Total                     |       | $                                                                              | 3,793,438  |   |   | 1.47 | % |   | $ | 3,288,231 |   |   | 2.21 | % |   | $ | 2,618,922 |   |   | 3.10 | % |   |

 

**BorrowedFunds.****  **TheCompany’s borrowings at December 31, 2003 were $3.0 billion or 39.4% 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 $2.4 billion and repurchase agreements withsecurities brokerage firms were $461.9 million, respectively, at December 31,2003.

The Mortgage Company had a $250.0 million line ofcredit with a domestic bank at December 31, 2003. The Bank guarantees thisline of credit by agreeing to, among other things, repurchase loans that remainon the line for more than 60 days. The balance outstanding at the MortgageCompany from third parties to the Mortgage Company as of December 31, 2003and 2002 was $121.0 million and $474.6 million respectively.

Thefollowing table sets forth information with respect to the Company’s borrowingsat and during the periods indicated.
| ** **                       | ** ** | **At or For the Year Ended** December 31,  | ** ** |
|----------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **2003**                                                                           | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                       | ** ** | **(Dollars in Thousands**                                                | ** ** |
| Maximum month-end  balance       |       | $                                                                                  | 3,108,739  |   | $ | 2,923,828 |   | $ | 2,535,392 |   |
| Average Balance                  |       | $                                                                                  | 2,802,395  |   | $ | 2,629,271 |   | $ | 2,399,963 |   |
| Year end balance                 |       | $                                                                                  | 2,950,927  |   | $ | 2,756,927 |   | $ | 2,451,762 |   |
| Weighted average  interest rate: |       |                                                                               |       |   |   |   |   |
| At end of year                   |       | 3.35                                                                               | %          | 4.13 | % | 4.64 | % |
| During the year                  |       | 3.91                                                                               | %          | 4.41 | % | 5.39 | % |

 

**Trust Activities**

The Bank also provides a full range of trust andinvestment services, and acts as executor or administrator of estates and astrustee for various types of trusts. Trust and investment services are offeredthrough the Bank’s Trust Department which was acquired in 1995. Fiduciary andinvestment services are provided primarily to persons and entities located inthe banking branch market area. Services offered include fiduciary services fortrusts and estates, money management, custodial services and pension andemployee benefits consulting. As of December 31, 2003, the TrustDepartment maintained approximately 300 trust/fiduciary accounts with anaggregate value of $362.0 million.

The accounts maintained bythe 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 

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accountsfor which the Bank merely acts as a custodian. The Company receives feesdepending upon the level and type of service provided. The Trust Departmentadministers various trust accounts (revocable, irrevocable, charitable trusts,and trusts under wills), agency accounts (various investment fund products),estate accounts and employee benefit plan accounts (assorted plans and IRAaccounts). Two trust officers, a trust investment officer and related staff areassigned to the Trust Department. The administration of trust and fiduciaryaccounts are monitored by the Trust Investment Committee of the Board ofDirectors of SI Bank & Trust as well as a management committeeconsisting of certain senior officers of the Bank.

**Subsidiaries**

SIB Mortgage Corp., (SIBMC) is a wholly ownedsubsidiary of the Bank incorporated in the State of New Jersey in 1998. SIBMChad assets totaling $1.2 billion at December 31, 2003. In November 2003,the Company agreed to sell a substantial portion of the assets and operationsof SIB Mortgage Corp. as part of a plan to exit the mortgage banking business.

SIB Investment Corporation (“SIBIC”) is a wholly ownedsubsidiary of the Bank that was incorporated in the State of New Jersey in 1998for the purpose of managing certain investments of the Bank. The Banktransferred the common stock and a majority of the preferred stock of StatenIsland Funding Corporation to SIBIC. The consolidated assets of SIBIC at December 31,2003 were $961.9 million.

Staten Island Funding Corporation (“SIFC”) is a whollyowned subsidiary of SIBIC incorporated in the State of Maryland in 1998 for thepurpose of establishing a real estate investment trust (“REIT”). The Bank transferredreal estate mortgage loans totaling $648.0 million, net, to SIFC in 1998. Inreturn, the Bank received all the shares of common stock and preferred stock inSIFC. The assets of SIFC totaled $689.4 million at December 31, 2003.

SIB Financial Services Corporation (“SIBFSC”) is awholly owned subsidiary of the Bank incorporated in the State of New York in2000. SIBFSC was formed as a licensed life insurance agency to sell theproducts of SBLI USA Mutual Insurance Company, Inc. SIBFSC had assets of $1.4million as of December 31, 2003.

In 2002, the Bankintroduced a program to offer annuities, mutual funds, stocks, life insuranceand other investment products through its branch network. The program iscoordinated by a third party vendor and the sales generate fee income for theBank.

**Employees**

The Bank had 698 full-timeemployees and 226 part-time employees at December 31, 2003. SIBMC had1,515 full-time employees and 68 part-time employees at December 31, 2003.None of these employees are represented by a collective bargaining agreement.As of March 8, 2004, SIBMC had less than 100 employees.

**REGULATION**

**General**

The Bank is a federally chartered and insured savingsbank subject to extensive regulation and supervision by the OTS, as the primaryfederal regulator of savings associations, and the FDIC, as the administratorof the Bank Insurance Fund (“BIF”).

The federal banking lawscontain numerous provisions affecting various aspects of the business andoperations of savings associations and savings and loan holding companies. Thefollowing description of statutory and regulatory provisions and proposals,which is not intended to be a complete description of 

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theseprovisions or their effects on the Company or the Bank, is qualified in itsentirety by reference to the particular statutory or regulatory provisions orproposals. In addition, the Company is subject to the Securities and ExchangeAct of 1934, as amended, and the rules and regulations of the SECpromulgated thereunder.

**Regulation ofSavings and Loan Holding Companies**

**HoldingCompany Acquisitions.****  **TheCompany is a savings and loan holding company within the meaning of the HomeOwners’ Loan Act, as amended (“HOLA”). The HOLA and OTS regulations generallyprohibit a savings and loan holding company, without prior OTS approval, fromacquiring, directly or indirectly, the ownership or control of any othersavings association or savings and loan holding company, or all, orsubstantially all, of the assets or more than 5% of the voting shares thereof.These provisions also prohibit, among other things, any director or officer ofa savings and loan holding company, or any individual who owns or controls morethan 25% of the voting shares of such holding company, from acquiring controlof any savings association not a subsidiary of such savings and loan holdingcompany, unless the acquisition is approved by the OTS.

**HoldingCompany Activities.****  **TheCompany operates as a unitary savings and loan holding company. Generally,there are limited restrictions on the activities of a unitary savings and loanholding company which applied to become or was a unitary savings and loanholding company prior to May 4, 1999 and its non-savings associationsubsidiaries.

Under the enacted Gramm-Leach-Bliley Act of 1999 (the “GLBA”),companies which applied to the OTS after May 4, 1999 to become unitarysavings and loan holding companies are restricted to engaging in thoseactivities traditionally permitted to multiple savings and loan holdingcompanies. Under the GLBA, no company may acquire control of a savings and loanholding company after May 4, 1999, unless the company is engaged only inactivities traditionally permitted to a multiple savings and loan holdingcompany or newly permitted to a financial holding company under Section 4(k)of the Bank Holding Company Act. Corporate reorganizations are permitted, butthe transfer of grandfathered unitary thrift holding company status throughacquisition is not permitted.

If the Director of the OTS determines that there isreasonable cause to believe that the continuation by a savings and loan holdingcompany of an activity constitutes a serious risk to the financial safety,soundness or stability of its subsidiary savings institution, the Director mayimpose such restrictions as deemed necessary to address such risk, includinglimiting (i) payment of dividends by the savings institution; (ii) transactionsbetween the savings institution and its affiliates; and (iii) anyactivities of the savings institution that might create a serious risk that theliabilities of the holding company and its affiliates may be imposed on thesavings institution. Notwithstanding the above rules as to permissiblebusiness activities of grandfathered unitary savings and loan holding companiesunder the GLBA, if the savings institution subsidiary of such a holding companyfails to meet the Qualified Thrift Lender (“QTL”) test, as discussed under “Regulationof Federal Savings Banks—Qualified Thrift Lender Test,” then such unitaryholding company also shall become subject to the activities restrictions applicableto multiple savings and loan holding companies and, unless the savingsinstitution requalifies as a QTL within one year thereafter, shall register as,and become subject to the restrictions applicable to, a bank holding company.

The GLBA also imposed new financial privacyobligations and reporting requirements on all financial institutions. Theprivacy regulations require, among other things, that financial institutionsestablish privacy policies and disclose such policies to its customers at thecommencement of a customer relationship and annually thereafter. In addition,financial institutions are required to permit customers to opt out of thefinancial institution’s disclosure of the customer’s financial information tonon-affiliated third parties. Such regulations became mandatory as of July 1,2001.

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The HOLA requires every savings association subsidiaryof a savings and loan holding company to give the OTS at least 30 days advancenotice of any proposed dividends to be made on its guarantee, permanent orother non-withdrawable stock, or else such dividend will be invalid.

**AffiliateRestrictions.****  **Transactionsbetween a savings association and its “affiliates” are subject to quantitativeand qualitative restrictions under Sections 23A and 23B of the Federal ReserveAct. Affiliates of a savings association include, among other entities, thesavings association’s holding company and companies that are under commoncontrol with the savings association.

In general, Sections 23A and 23B, and OTS regulations issuedin connection therewith limit the extent to which a savings association or itssubsidiaries may engage in certain “covered transactions” with affiliates to anamount equal to 10% of the association’s capital and surplus, in the case ofcovered transactions with any one affiliate, and to an amount equal to 20% ofsuch capital and surplus, in the case of covered transactions with allaffiliates. In addition, a savings association and its subsidiaries may engagein covered transactions and certain other transactions only on terms and undercircumstances that are substantially the same, or at least as favorable to thesavings association or its subsidiary, as those prevailing at the time forcomparable transactions with nonaffiliated companies. A “covered transaction”is defined to include a loan or extension of credit to an affiliate; a purchaseof investment securities issued by an affiliate; a purchase of assets from anaffiliate, with certain exceptions; the acceptance of securities issued by anaffiliate as collateral for a loan or extension of credit to any party; or theissuance of a guarantee, acceptance or letter of credit on behalf of anaffiliate.

In addition, under the OTS regulations, a savingsassociation may not make a loan or extension of credit to an affiliate unlessthe affiliate is engaged only in activities permissible for bank holdingcompanies; a savings association may not purchase or invest in securities of anaffiliate other than shares of a subsidiary; a savings association and its subsidiariesmay not purchase a low-quality asset from an affiliate; and coveredtransactions and certain other transactions between a savings association orits subsidiaries and an affiliate must be on terms and conditions that areconsistent with safe and sound banking practices. With certain exceptions, eachloan or extension of credit by a savings association to an affiliate must besecured by collateral with a market value ranging from 100% to 130% (dependingon the type of collateral) of the amount of the loan or extension of credit.

The OTS regulationgenerally excludes all non-bank and non-savings association subsidiaries ofsavings associations from treatment as affiliates, except to the extent thatthe OTS or the Federal Reserve Board decides to treat such subsidiaries asaffiliates. The regulation also requires savings associations to make andretain records that reflect affiliate transactions in reasonable detail, andprovides that certain classes of savings associations may be required to give theOTS prior notice of affiliate transactions.

**Regulation ofFederal Savings Banks**

**RegulatorySystem.****  **As afederally insured savings bank, lending activities and other investments of theBank must comply with various statutory and regulatory requirements. The Bankis regularly examined by the OTS and must file periodic reports concerning itsactivities and financial condition.

Although the OTS is the Bank’s primary regulator, theFDIC has “backup enforcement authority” over the Bank. The Bank’s eligibledeposit accounts are insured by the FDIC under the BIF, up to applicablelimits.

**FederalHome Loan Banks.****  **The Bankis a member of the FHLB System. Among other benefits, FHLB membership providesthe Bank with a central credit facility. The Bank is required to own capitalstock in an FHLB in an amount equal to the greater of: 1% of its aggregateoutstanding principal amount of its residential mortgage loans, home purchasecontracts and similar obligations at the beginning of each 

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calendar year, or 5% ofits FHLB advances (borrowings). The current investment in FHLB stock is basedon 5% of the Bank’s borrowings outstanding from the FHLB.

**RegulatoryCapital Requirements.****  **OTScapital regulations require savings banks to satisfy minimum capital standards,risk-based capital requirements, a leverage requirement and a tangible capitalrequirement. Savings banks must meet each of these standards in order to bedeemed in compliance with OTS capital requirements. In addition, the OTS mayrequire a savings association to maintain capital above the minimum capitallevels.

All savings banks are required to meet a minimumrisk-based capital requirement of total capital (core capital plussupplementary capital) equal to 8% of risk-weighted assets (which includes thecredit risk equivalents of certain off-balance sheet items). In calculatingtotal capital for purposes of the risk-based requirement, supplementary capitalmay not exceed 100% of core capital. Under the leverage requirement, a savingsbank is required to maintain core capital equal to a minimum of 3% of adjustedtotal assets. A savings bank is also required to maintain tangible capital inan amount at least equal to 1.5% of its adjusted total assets.

These capital requirements are viewed as minimumstandards by the OTS, and most institutions are expected to maintain capitallevels well above the minimum. In addition, the OTS regulations provide thatminimum capital levels higher than those provided in the regulations may beestablished by the OTS for individual savings associations, upon adetermination that the savings association’s capital is or may becomeinadequate in view of its circumstances. The OTS regulations provide thathigher individual minimum regulatory capital requirements may be appropriate incircumstances where, among others: (1) a savings association has a highdegree of exposure to interest rate risk, prepayment risk, credit risk,concentration of credit risk, certain risks arising from nontraditionalactivities, or similar risks or a high proportion of off-balance sheet risk; (2) asavings association is growing, either internally or through acquisitions, atsuch a rate that supervisory problems are presented that are not dealt withadequately by OTS regulations; and (3) a savings association may beadversely affected by the activities or condition of its holding company,affiliates, subsidiaries or other persons or savings associations with which ithas significant business relationships. The Bank is not subject to any suchindividual minimum regulatory capital requirement.

The Bank’s tangible capital ratio was 6.30%, its corecapital ratio was 6.32% and its total risk-based capital ratio was 12.34% at December 31,2003.

The OTS and the FDIC generally are authorized to takeenforcement action against a savings association that fails to meet its capitalrequirements, which action may include restrictions on operations and bankingactivities, the imposition of a capital directive, a cease-and-desist order,civil money penalties or harsher measures such as the appointment of a receiveror conservator or a forced merger into another institution. In addition, undercurrent regulatory policy, an association that fails to meet its capitalrequirements is prohibited from paying any dividends.

**PromptCorrective Action.****  **Theprompt corrective action regulation of the OTS, promulgated under the FederalDeposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), requirescertain mandatory actions and authorizes certain other discretionary actions tobe taken by the OTS against a savings bank that falls within certainundercapitalized capital categories specified in the regulation.

The regulation establishes five categories of capitalclassification: “well capitalized,” “adequately capitalized,” “undercapitalized,”“significantly undercapitalized,” and “critically undercapitalized.” Under theregulation, the ratio of total capital to risk-weighted assets, core capital torisk-weighted assets and the leverage ratio are used to determine aninstitution’s capital classification. The Bank meets the capital requirementsof a “well capitalized” institution under applicable OTS regulations.

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In general, the prompt corrective action regulationprohibits an insured depository institution from declaring any dividends,making any other capital distribution, or paying a management fee to acontrolling person if, following the distribution or payment, the institutionwould be within any of the three undercapitalized categories. In addition,adequately capitalized institutions may accept brokered deposits only with awaiver from the FDIC and are subject to restrictions on the interest rates thatcan be paid on such deposits. Undercapitalized institutions may not acceptrenewed or rollover brokered deposits.

Institutions that are classified as undercapitalizedare subject to certain mandatory supervisory actions, including: (i) increasedmonitoring by the appropriate federal banking agency for the institution andperiodic review of the institution’s efforts to restore its capital, (ii) arequirement that the institution submit a capital restoration plan acceptableto the appropriate federal banking agency and implement that plan, and thateach company having control of the institution guarantee compliance with thecapital restoration plan in an amount not exceeding the lesser of 5% of theinstitution’s total assets at the time it received notice of beingundercapitalized, or the amount necessary to bring the institution intocompliance with applicable capital standards at the time it fails to complywith the plan, and (iii) a limitation on the institution’s ability to makeany acquisition, open any new branch offices, or engage in any new line ofbusiness without the prior approval of the appropriate federal banking agencyfor the institution or the FDIC.

The regulation also provides that the OTS may take anyof certain additional supervisory actions against an undercapitalizedinstitution if the agency determines that such actions are necessary to resolvethe problems of the institution at the least possible long-term cost to thedeposit insurance fund. These supervisory actions include: (i) requiringthe institution to raise additional capital or be acquired by anotherinstitution or holding company if certain grounds exist, (ii) restrictingtransactions between the institution and its affiliates, (iii) restrictinginterest rates paid by the institution on deposits, (iv) restricting theinstitution’s asset growth or requiring the institution to reduce its assets, (v) requiringreplacement of senior executive officers and directors, (vi) requiring theinstitution to alter or terminate any activity deemed to pose excessive risk tothe institution, (vii) prohibiting capital distributions by bank holdingcompanies without prior approval by the FRB, (viii) requiring theinstitution 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.

Institutions classified as undercapitalized that failto submit a timely, acceptable capital restoration plan or fail to implementsuch a plan are subject to the same supervisory actions as significantlyundercapitalized institutions. Significantly undercapitalized institutions aresubject to the mandatory provisions applicable to undercapitalizedinstitutions. The regulation also makes mandatory for significantly undercapitalizedinstitutions certain of the supervisory actions that are discretionary forinstitutions classified as undercapitalized, creates a presumption in favor ofcertain discretionary supervisory actions, and subjects significantlyundercapitalized institutions to additional restrictions, including aprohibition on paying bonuses or raises to senior executive officers withoutthe prior written approval of the appropriate federal bank regulatory agency.In addition, significantly undercapitalized institutions may be subjected tocertain of the restrictions applicable to critically undercapitalizedinstitutions.

The regulation requires that an institution be placedinto conservatorship or receivership within 90 days after it becomes criticallyundercapitalized, unless the OTS, with concurrence of the FDIC, determines thatother action would better achieve the purposes of the prompt corrective actionprovisions of FDICIA. Any such determination must be renewed every 90 days. Adepository institution also must be placed into receivership if the institutioncontinues to be critically undercapitalized on average during the fourthquarter after the institution initially became critically undercapitalized,unless the institution’s 

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federal bank regulatoryagency, with concurrence of the FDIC, makes certain positive determinationswith respect to the institution.

Critically undercapitalized institutions are alsosubject to the restrictions generally applicable to significantlyundercapitalized institutions and to a number of other severe restrictions.Critically undercapitalized institutions may be prohibited from engaging in anumber of activities, including entering into certain transactions or payinginterest above a certain rate on new or renewed liabilities.

If the OTS determines that an institution is in anunsafe or unsound condition, or if the institution is deemed to be engaging inan unsafe and unsound practice, the OTS may, if the institution is wellcapitalized, reclassify it as adequately capitalized; if the institution isadequately capitalized but not well capitalized, require it to comply withrestrictions applicable to undercapitalized institutions; and, if theinstitution is undercapitalized, require it to comply with certain restrictionsapplicable to significantly undercapitalized institutions.

At December 31, 2003, the Bank was in the “well-capitalized”category for purposes of the above regulations and as such is not subject toany of the above mentioned restrictions.

**Conservatorship/Receivership.****  **In addition to the grounds discussed under “PromptCorrective Action,” the OTS (and, under certain circumstances, the FDIC) mayappoint a conservator or receiver for a savings association if any one or moreof a number of circumstances exist, including, without limitation, thefollowing: (i) the institution’s assets are less than its obligations tocreditors and others, (ii) a substantial dissipation of assets or earningsdue to any violation of law or any unsafe or unsound practice, (iii) anunsafe or unsound condition to transact business, (iv) a willful violationof a final cease-and-desist order, (v) the concealment of the institution’sbooks, papers, records or assets or refusal to submit such items for inspectionto any examiner or lawful agent of the appropriate federal banking agency orstate bank or savings association supervisor, (vi) the institution islikely to be unable to pay its obligations or meet its depositors’ demands inthe normal course of business, (vii) the institution has incurred, or islikely to incur, losses that will deplete all or substantially all of itscapital, and there is no reasonable prospect for the institution to becomeadequately capitalized without federal assistance, (viii) any violation oflaw or unsafe or unsound practice that is likely to cause insolvency orsubstantial dissipation of assets or earnings, weaken the institution’scondition, or otherwise seriously prejudice the interests of the institution’sdepositors or the federal deposit insurance fund, (ix) the institution isundercapitalized and the institution has no reasonable prospect of becomingadequately capitalized, fails to become adequately capitalized when required todo so, fails to submit a timely and acceptable capital restoration plan, ormaterially fails to implement an accepted capital restoration plan, (x) theinstitution is critically undercapitalized or otherwise has substantiallyinsufficient capital, or (xi) the institution is found guilty of certaincriminal offenses related to money laundering.

**EnforcementPowers.****  **The OTSand, 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-affiliatedparties” (a term defined to include, among other persons, directors, officers,employees, controlling stockholders, agents and stockholders who participate inthe conduct of the affairs of the institution). This enforcement authorityincludes, without limitation: (i) the ability to terminate a savingsassociation’s deposit insurance, (ii) institute cease-and-desistproceedings, (iii) bring suspension, removal, prohibition and criminalproceedings against institution-affiliated parties, and (iv) assess substantialcivil money penalties. As part of a cease-and-desist order, the agencies mayrequire a savings association or an institution-affiliated party to takeaffirmative action to correct conditions resulting from that party’s actions,including to make restitution or provide reimbursement, indemnification orguarantee against loss; restrict the growth of the institution; and rescindagreements and contracts.

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**CapitalDistribution Regulation.****  **Asa subsidiary of a savings and loan holding company the Bank is required toprovide advance notice to the OTS of any proposed capital distribution on itscapital stock.

**QualifiedThrift Lender 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, the QTL test under HOLA regulationsrequires that 65% of an institution’s “portfolio assets” (as defined) consistof certain housing and consumer-related assets on a monthly average basis innine out of every 12 months. Assets that qualify without limit for inclusion aspart of the 65% requirement are loans made to purchase, refinance, construct,improve or repair domestic residential housing and manufactured housing; homeequity loans; mortgage-backed securities (where the mortgages are secured bydomestic residential housing or manufactured housing); stock issued by theFHLB; and direct or indirect obligations of the FDIC. In addition, smallbusiness loans, credit card loans, student loans and loans for personal, familyand household purposes are allowed to be included without limitation asqualified investments. The following assets, among others, also may be includedin meeting the test subject to an overall limit of 20% of the savingsinstitution’s portfolio assets: 50% of residential mortgage loans originated andsold within 90 days of origination; 100% of consumer and educational loans(limited to 10% of total portfolio assets); and stock issued by the FHLMC orthe FNMA. Portfolio assets consist of total assets minus the sum of (i) goodwilland other intangible assets, (ii) property used by the savings institutionto conduct its business, and (iii) liquid assets up to 20% of theinstitution’s total assets.

At December 31, 2003, under the expanded QTLtest, approximately 89.7% of the Bank’s portfolio assets were qualified thriftinvestments.

OTS regulations also permit a savings association toqualify as a QTL by qualifying under the Code as a “domestic building and loanassociation.” The Bank is a domestic building and loan association as definedin the Code.

**FDICAssessments.****  **Thedeposits of the Bank are insured to the maximum extent permitted by the BIF,which is administered by the FDIC, and are backed by the full faith and creditof 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 may terminate the deposit insurance of anyinsured depository institution, including the Bank, if it determines after ahearing that the institution has engaged or is engaging in unsafe or unsoundpractices, is in an unsafe or unsound condition to continue operations, or hasviolated any applicable law, regulation, order or any condition imposed by anagreement with the FDIC. It also may suspend deposit insurance temporarilyduring the hearing process for the permanent termination of insurance, if theinstitution has no tangible capital. If insurance of accounts is terminated,the accounts at the institution at the time of the termination, less subsequentwithdrawals, shall continue to be insured for a period of six months to twoyears, as determined by the FDIC. Management is aware of no existingcircumstances which would result in termination of the Bank’s depositinsurance.

The FDIC’s deposit insurance premiums are assessedthrough a risk-based system under which all insured depository institutions areplaced into one of nine categories and assessed insurance premiums based upontheir level of capital and supervisory evaluation. Under the system,institutions classified as 

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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 $569,000 ininsurance deposit premiums during 2003.

**CommunityReinvestment Act and the Fair Lending Laws.****  **Savings associations have a responsibility under theCommunity Reinvestment Act (“CRA”) and related regulations of the OTS to helpmeet the credit needs of their communities, including low-and moderate-incomeneighborhoods. In addition, the Equal Credit Opportunity Act and the FairHousing Act (together, the “Fair Lending Laws”) prohibit lenders fromdiscriminating in their lending practices on the basis of characteristicsspecified in those statutes. An institution’s failure to comply with theprovisions of CRA could, at a minimum, result in regulatory restrictions on itsactivities, and failure to comply with the Fair Lending Laws could result inenforcement actions by the OTS, as well as other federal regulatory agenciesand the Department of Justice.

**Safetyand Soundness Guidelines.****  **TheOTS and the other federal banking agencies have established guidelines forsafety and soundness, addressing operational and managerial, as well ascompensation matters for insured financial institutions. Institutions failingto meet these standards are required to submit compliance plans to theirappropriate federal regulators. The OTS and the other agencies have alsoestablished guidelines regarding asset quality and earnings standards forinsured institutions.

**Changeof Control.****  **Subjectto certain limited exceptions, no company can acquire control of a savingsassociation without the prior approval of the OTS, and no individual mayacquire control of a savings association if the OTS objects. Any company thatacquires control of a savings association becomes a savings and loan holdingcompany subject to extensive registration, examination and regulation by theOTS. Conclusive control exists, among other ways, when an acquiring partyacquires more than 25% of any class of voting stock of a savings association orsavings and loan holding company, or controls in any manner the election of amajority of the directors of the company. In addition, a rebuttable presumptionof control exists if, among other things, a person acquires more than 10% ofany class of a savings association or savings and loan holding company’s votingstock (or 25% of any class of stock) and, in either case, any of certainadditional control factors exist.

Companies subject to theBank Holding Company Act that acquire or own savings associations are no longerdefined as savings and loan holding companies under the HOLA and, therefore,are not generally subject to supervision and regulation by the OTS. OTSapproval is no longer required for a bank holding company to acquire control ofa savings association, although the OTS has a consultative role with the FRB inexamination, enforcement and acquisition matters.

**TAXATION**

**Federal Taxation**

**General.****  **The Company and the Bank are subject to federalincome taxation in the same general manner as other corporations with someexceptions discussed below. The following discussion of federal taxation isintended only to summarize certain pertinent federal income tax matters and isnot a comprehensive description of the tax rules applicable to the Bank.The Bank’s federal income tax returns have been audited or closed without auditby the IRS through 1999.

**Methodof Accounting.****  **Forfederal income tax purposes, the Bank currently reports its income and expenseson the accrual method of accounting and uses a tax year ending December 31for filing its consolidated federal income tax returns. The Small BusinessProtection Act of 1996 (the “1996 Act”) eliminated the use of the reservemethod of accounting for bad debt reserves by savings institutions, effectivefor taxable years beginning after 1995.

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**BadDebt Reserves.****  **Prior tothe 1996 Act, the Bank was permitted to establish a reserve for bad debts andto make annual additions to the reserve. These additions could, withinspecified formula limits, be deducted in arriving at the Bank’s taxable income.As a result of the 1996 Act, the Bank must use the specific charge-off methodin computing its bad debt deduction beginning with its 1996 Federal tax return.In addition, the federal legislation requires the recapture (over a six yearperiod) of the excess of tax bad debt reserves at December 31, 1995 overthose established as of December 31, 1987. There is no reserve subject torecapture as of December 31, 2003.

As discussed more fully below, the Bank andsubsidiaries file combined New York State Franchise and New York City FinancialCorporation tax returns. The basis of the determination of each tax is thegreater of a tax on entire net income (or on alternative entire net income) ora tax computed on taxable assets. However, for state purposes, New York Stateenacted legislation in 1996, which among other things, decoupled the Federal andNew York State tax laws regarding thrift bad debt deductions and permits thecontinued use of the bad debt reserve method under section 593. Thus, providedthe Bank continues to satisfy certain definitional tests and other conditions,for New York State and City income tax purposes, the Bank is permitted tocontinue to use the special reserve method for bad debt deductions. Thedeductible annual addition to the state reserve may be computed using aspecific formula based on the Bank’s loss history (“Experience Method”) or astatutory percentage equal to 32% of the Bank’s New York State or City taxableincome (“Percentage Method”).

**TaxableDistributions and Recapture.****  **Priorto the 1996 Act, bad debt reserves created prior to January 1, 1988 weresubject to recapture into taxable income should the Bank fail to meet certainthrift asset and definitional tests. New federal legislation eliminated thesethrift related recapture rules. However, under current law, pre-1988reserves remain subject to recapture should the Bank make certain non-dividenddistributions or cease to maintain a bank charter.

At December 31, 2003the Bank’s total federal pre-1988 bad debt reserve was approximately$11.7 million. This reserve reflects the cumulative effects of federal tax deductionsby the Bank for which no Federal income tax provision has been made.

**State and LocalTaxation**

**NewYork State and New York City Taxation.****  **The Company and the Bank report income on a combinedcalendar year basis to both New York State and New York City. New York StateFranchise Tax on corporations is imposed in an amount equal to the greater of (a) 8.0%of “entire net income” allocable to New York State (b) 3.00% of “alternativeentire net income” allocable to New York State (c) 0.01% of the average valueof assets allocable to New York State or (d) nominal minimum tax. Entirenet income is based on federal taxable income, subject to certainmodifications. Alternative entire net income is equal to entire net incomewithout certain modifications. The New York City Corporation Tax is imposedusing similar alternative taxable income methods and rates*.*

A temporary Metropolitan Transportation Business TaxSurcharge on Banking corporations doing business in the Metropolitan Districthas been applied since 1982. The Bank transacts a significant portion of itsbusiness within this District and is subject to this surcharge. For the taxyear ended December 31, 2003, the surcharge rate is 17% of the statefranchise tax liability calculated at 9% of New York taxable income.

A New York State net operating loss deduction isallowed for net operating losses sustained in tax years beginning on or after January 1,2001. The net operating loss may be carried forward to the succeeding 20taxable years. There is no carry back provision. New York City does not have anet operating loss deduction provision for a financial institution. At December 31,2003, the Bank has a New York State net operating loss carryforward ofapproximately $40.0 million due to the taxable loss sustained by thediscontinued operations in 2003. A $528,000 valuation allowance has beenprovided for a portion of the 

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deferred tax asset set upfor the operating loss carry forward related to New York State generated by thelosses from the discontinued operation of the Company. The valuation allowancewas established due to the fact that management believes there may not besufficient future taxable income in New York State to utilize the total amountof the deferred tax asset for this loss carry forward.

**Delaware State Taxation.****  **As a Delaware holding company not earning income inDelaware, the Company is exempt from Delaware corporate income tax, but, isrequired to file an annual report with and pay an annual franchise tax to theState of Delaware. The tax is imposed as a percentage of the capital base ofthe Company with an annual maximum of$150,000.The Delaware tax for 2003 was $150,000. SIBMC is subject to taxes for theadditional states that they operate in.

**Item2. Properties**

The Executive offices of the Company and the Bank arelocated in a leased facility in Staten Island, New York. In addition, the Bankoperates four administrative offices located on Staten Island, all of which areowned and one lending office located in Brooklyn, New York which is leased. TheBank has 35 full service branch offices and three limited service branchoffices. The branch facilities, of which 22 owned and 16 are leased are locatedin Staten Island, New York (20) Brooklyn, New York (3) and New Jersey(15). The Bank also has three leased branch locations of which two are inBrooklyn, New York and one in New Jersey which upon completion of the mergerthe one in New Jersey will be opened and the two in Brooklyn, New York will bedisposed. The final lease expiration date for all leased properties of the Bankis 2017.

In addition, the Bank maintains 62 automated tellermachines (“ATMs”) all of which are in Bank facilities.

SIBIC conducts its business from its executive officelocated in Middletown, New Jersey which is leased with an expiration date in2004.

SIBMC conducts itsbusiness from it two leased executive and administrative offices in Branchburg,New Jersey and 89 retail loan origination offices in 42 states, all of whichare leased with the final lease expiration date in 2007. As a result of thesale of a substantial portion of the operations and assets of the MortgageCompany all of the executive, administrative and retail offices will either besold or closed in the first four months of 2004.

**Item 3. Legal Proceedings.**

As previously disclosed by the Company in its form 10-K/Awhich was filed February 11, 2003, the Company reported that in October 2002,shortly after the Company announced its intention to restate its financialstatements, it was informed by staff of the U.S. Securities and ExchangeCommission (“SEC”) that the SEC is conducting an informal inquiry with respectto certain of the matters reflected in the announcement. The Company iscooperating fully with the inquiry.

The Company also isinvolved in various legal proceedings occurring in the normal course ofbusiness. Although it is impossible to predict the outcome of any such legal proceedings,the Company believes that such proceedings, individually and in the aggregate,will not have a material effect on the Company.

**Item4. Submission of Matters to a Vote of Security-Holders.**

Not applicable.

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**PART II**

**Item 5. Market for Registrant’s Common Equity**

The Company’s Common Stock is currently listed on theNew York Stock Exchange (NYSE) under the symbol “SIB.” As of March 4, 2004,60,744,832 shares of common stock were issued and outstanding, and held byapproximately 8,998 holders of record.

Information relating todividends and the high, low and quarter-end closing sales prices of the CommonStock appears on page 89 of the Company’s Financial Statements, whichbegin on page 51 and which is incorporated herein by reference.

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**Item 6. Selected Financial Data**

The following selectedhistorical financial data is derived in part from the audited financialstatements of Staten Island Bancorp, Inc. (the “Company”). The selectedhistorical financial data set forth below should be read in conjunction withthe historical financial statements of the Company, including the relatednotes, included elsewhere herein. All per share amounts have been adjusted forthe two-for-one stock split in the year 2001.
| ** **                                                                                | ** ** | **At December 31,**                                   | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2003**                                                        | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
| ** **                                                                                | ** ** | **(000’s omitted, except share data)** | ** ** |
| **Selected Financial Condition  Data:**                                                   |       |                                                            |       |   |   |   |   |   |   |   |   |
| Total assets                                                                              |       | $                                                               | 7,486,156  |   | $ | 6,935,095 |   | $ | 6,005,053 |   | $ | 5,240,864 |   | $ | 4,489,314 |   |
| Securities available for sale                                                             |       | 2,012,520                                                       |       | 911,342 |   | 1,425,739 |   | 1,808,396 |   | 1,903,804 |   |
| Loans, net                                                                                |       | 3,525,918                                                       |       | 3,422,492 |   | 2,806,619 |   | 2,847,660 |   | 2,150,039 |   |
| Loans held for sale                                                                       |       | 1,200,031                                                       |       | 1,729,890 |   | 1,185,593 |   | 116,163 |   | 46,588 |   |
| Intangible assets(1)                                                                      |       | 54,638                                                          |       | 57,881 |   | 58,871 |   | 62,447 |   | 15,432 |   |
| Deposits                                                                                  |       | 3,847,348                                                       |       | 3,464,134 |   | 2,901,328 |   | 2,345,213 |   | 1,820,233 |   |
| Borrowings                                                                                |       | 2,950,927                                                       |       | 2,756,927 |   | 2,451,762 |   | 2,241,011 |   | 2,049,411 |   |
| Stockholders’ equity                                                                 |       | 604,965                                                         |       | 614,268 |   | 563,803 |   | 585,532 |   | 571,377 |   |
| Tangible book value per share                                                             |       | 9.13                                                            |       | 9.23 |   | 8.08 |   | 7.49 |   | 7.19 |   |
| Common shares outstanding                                                                 |       | 60,290,796                                                      |       | 60,269,397 |   | 62,487,286 |   | 69,841,974 |   | 77,387,246 |   |
| **Selected  Operating Data—Continuing Operations:**                                  |       |                                                            |       |   |   |   |   |   |   |   |   |
| Net interest income                                                                       |       | $                                                               | 163,997    |   | $ | 175,231 |   | $ | 150,742 |   | $ | 138,366 |   | $ | 138,889 |   |
| Provision (benefit) for loan losses                                                       |       | 6,968                                                           |       | 4,130 |   | 5,465 |   | 250 |   | (1,966 | ) |
| Other income                                                                              |       | 32,691                                                          |       | 26,361 |   | 4,781 |   | 17,835 |   | 9,124 |   |
| Other expenses                                                                            |       | 89,812                                                          |       | 86,472 |   | 101,645 |   | 66,121 |   | 57,392 |   |
| Income tax expense                                                                        |       | 42,791                                                          |       | 44,904 |   | 15,085 |   | 33,992 |   | 36,834 |   |
| Net income                                                                                |       | 57,117                                                          |       | 66,086 |   | 33,328 |   | 55,837 |   | 55,754 |   |
| Earnings per share fully diluted                                                          |       | 1.01                                                            |       | 1.13 |   | 0.55 |   | 0.83 |   | 0.74 |   |
| Cash dividends paid per share                                                             |       | 0.54                                                            |       | 0.46 |   | 0.32 |   | 0.26 |   | 0.21 |   |
| **Selected  Operating Ratios—Continuing Operations:**                                |       |                                                            |       |   |   |   |   |   |   |   |   |
| Performance Ratios:(2)                                                                    |       |                                                            |       |   |   |   |   |   |   |   |   |
| Return on average assets                                                                  |       | 0.85                                                            | %          | 1.05 | % | 0.59 | % | 1.13 | % | 1.35 | % |
| Return on average equity                                                                  |       | 10.56                                                           | %          | 12.27 | % | 5.91 | % | 10.02 | % | 8.95 | % |
| Dividend pay-out ratio                                                                    |       | 51.79                                                           | %          | 39.11 | % | 58.26 | % | 33.60 | % | 30.44 | % |
| Average interest-earning  assets to average                                               |       |                                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                                                              |       | 114.97                                                          | %          | 113.32 | % | 115.61 | % | 118.13 | % | 125.83 | % |
| Interest rate spread(3)                                                                   |       | 2.25                                                            | %          | 2.58 | % | 2.24 | % | 2.16 | % | 2.60 | % |
| Net interest margin(3)                                                                    |       | 2.62                                                            | %          | 2.99 | % | 2.86 | % | 2.94 | % | 3.51 | % |
| Non-interest  expenses, exclusive of amortization of intangible assets, to average assets |       | 1.32                                                            | %          | 1.37 | % | 1.71 | % | 1.23 | % | 1.34 | % |
| **Asset  Quality Ratios:**                                                                | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Non-accruing  assets to total assets at end of period(4)                                  |       | 0.45                                                            | %          | 0.39 | % | 0.27 | % | 0.20 | % | 0.30 | % |
| Allowance  for loan losses to non-accruing loans at end of period                         |       | 111.04                                                          | %          | 138.18 | % | 132.78 | % | 149.73 | % | 114.40 | % |
| Allowance  for loan losses to total loans at end of period(5)                             |       | 0.68                                                            | %          | 0.44 | % | 0.50 | % | 0.49 | % | 0.65 | % |
| **Capital Ratios:**                                                                       |       |                                                            |       |   |   |   |   |   |   |   |   |
| Average  equity to average assets                                                         |       | 8.01                                                            | %          | 8.55 | % | 10.01 | % | 11.28 | % | 15.11 | % |
| Tangible  equity to assets at end of period                                               |       | 7.30                                                            | %          | 7.93 | % | 8.28 | % | 10.09 | % | 13.01 | % |
| Total capital to risk-weighted assets                                                     |       | 14.20                                                           | %          | 14.68 | % | 14.41 | % | 18.77 | % | 25.58 | % |
|                                                                                           |            |                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)    Consistsof excess of cost over fair value of net assets acquired (“goodwill”), coredeposit intangibles and loan servicing assets which amounted to $50.2 million,$1.4 million and $3.0 million, respectively, at December 31, 2003.

(2)    With theexception of end of period ratios, all ratios are based on average dailybalances during the respective periods.

(3)    Interestrate spread represents the difference between the weighted average yield oninterest-earning assets and the weighted average cost of interest-bearingliabilities; net interest margin represents net interest income as a percentageof average interest-earning assets.

(4)    Non-accruingassets consist of non-accrual loans and real estate acquired throughforeclosure or by deed-in-lieu thereof.

(5)    Calculatedon the basis of total loans including loans held for sale.

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**Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

The following discussion is intended to assist inunderstanding the financial condition and results of operations of StatenIsland Bancorp, Inc. The information contained in this section should beread in conjunction with the Consolidated Financial Statements and theaccompanying Notes to Financial Statements and the other sections contained inthis Annual Report on Form 10K.

As previously announced, the Company and IndependenceCommunity Bank Corp. (“Independence”) entered into an Agreement and Plan ofMerger, dated as of November 24, 2003, pursuant to which the Company willmerge with and into Independence (“the Merger”). In connection with the Merger,the Company has agreed to sell a substantial portion of the assets andoperations of the Bank’s mortgage banking subsidiary (“SIB Mortgage”), as partof a plan to exit the mortgage banking business. These sales are anticipated tobe finalized during the first quarter of 2004. As a result of these plans,under generally accepted accounting principles, the Company must report theBank’s results as “continuing operations” and the results of the mortgagebanking business of SIB Mortgage as “discontinued operations.” The merger hasbeen approved by both the Company and Independence shareholders at specialmeetings held on March 8, 2004 and is subject to regulatory approval. Themerger is expected to be completed in the second quarter of 2004.

The Company is a unitarysavings and loan holding company. The Company’s financial condition and resultsof continuing operations are dependant primarily on the operations by itswholly owned Federally chartered savings bank subsidiary, SI Bank &Trust. The Company’s results of continuing operations depend primarily on itsnet interest income, which is the difference between interest income oninterest-earning assets and interest expense on interest-bearing liabilities.The Company’s results of operations also are affected by the provision orbenefit for loan losses, the level of its non-interest income, and expenses andincome tax expense.

**Critical AccountingPolicies**

**Accountingfor Possible Loan Losses.****  **The Company calculates its allowance for loan losses inaccordance with Statement of Financial Accounting Standards No. 5, “Accountingfor Contingencies” (“SFAS 5”). This accounting standard is used to determinethe allowance associated with large groups of smaller balance homogeneous loansthat are collectively evaluated for probable estimated losses. The allowancefor loan losses represents management’s estimate of probable but unconfirmedlosses in the loan portfolio as of the date of the financial statements.

SFAS 114, “Accounting by Creditors for Impairment of aLoan,” provides guidelines for determining and measuring impairment in loans.For each loan that we determine to be impaired, impairment is measured as theamount by which the carrying balance of the loan, including all accruedinterest and negative escrow balances exceeds the estimate of fair value. Aspecific reserve is established on all impaired loans within the allowance forloan losses. Generally, we consider non-accrual loans to be impaired loans.

In determining the adequacy of the allowance for loanlosses for the Company’s loan portfolio, management completes a generalvaluation allowance (“GVA”) analysis prior to the end of each quarterlyreporting period. The GVA analysis stratifies the Company’s commercial andconsumer loan portfolios. Each category is further segregated into various riskrating categories. Percentages, which consider chargeoffs over the past twentyfour months, are applied to the resulting risk rated categories.

All other loans that do not have specific reservesassigned also have reserves assigned based on historical loss percentages andthe resulting risk rated categories within each loan portfolio. Managementcombines the results of the GVA analysis with judgments concerningmacro-economic conditions and portfolio concentrations to determine the appropriatelevel of the allowance for loan losses.

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Due to inherent limitations in using modelingtechniques and GVA percentages, the Company also maintains an unallocatedreserve. This reserve addresses short-term changes in the Company’s loanproducts and portfolio growth, in addition to changes in the macro-economicenvironment and other factors affecting the portfolio as a whole. At the end ofeach quarter, management determines the adequacy of the unallocated reserve toaddress these risks. The allowance for loan losses is reviewed and approved bythe Company’s Board of Directors on a quarterly basis.

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

Declines in the fair value of securities available forsale are reviewed to determine if they are other than temporary in nature.Declines in value that are judged other than temporary in nature are recognizedin the consolidated statements of income. The Company’s policy is to treat adecline in the investment’s quoted market price exceeding 20% that has lastedfor more than six months as an other than temporary decline in value andreflect the decline in value in current earnings.

**DerivativeFinancial Instruments.**   On January 1, 2001,the Company adopted SFAS 133, “Accounting for Derivative Instruments andHedging Activities” (“SFAS 133”) which defines forward sale commitments asderivative financial instruments. In accordance with SFAS 133, derivativefinancial instruments are recognized in the statement of financial condition atfair value while changes in the fair value are recognized in the consolidatedstatement of income.

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS149”). SFAS 149 amends and clarifies accounting for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS 133. In particular, this Statement clarifiesunder what circumstances a contract with an initial net investment meets thecharacteristic of a derivative and when a derivative contains a financingcomponent that warrants special reporting in the statement of cash flows. ThisStatement is generally effective for contracts entered into or modified after June 30,2003.

**Accountingfor Discontinued Operations.****  **Pursuant to its decision in 2003 to exit the mortgagebanking business, which is anticipated to be substantially completed during thefirst quarter of 2004, the Company’s Consolidated Statements of Income presentthe results of continuing operations and the discontinued business separately.This presentation is in accordance with the provisions of SFAS 144, Accountingfor the Impairment or Disposal of Long-Lived Assets (“SFAS 144”).

SFAS 144 states that in a period in which a componentof an entity either has been disposed of or is classified as held for sale, theincome statement of a business enterprise for current and prior periods shallreport the results of operations of the component, including and gain or lossrecognized for the writedown of long-lived assets to fair value less cost tosell, in discontinued operations. For purposes of this statement the mortgagebanking business qualifies as a component of the business since it is aseparate major line of business with clearly separate operations and activitiesand a distinct customer base, and its activities can be clearly distinguishedand measured for financial reporting purposes.

See Item 1Business—Discontinued Operations for more discussion regarding the sale of asubstantial portion of the Mortgage Company’s operations and assets.

**Changes inFinancial Condition**

**General.****  **The Company had total assets of $7.5 billion at December 31,2003 and $6.9 billion at December 31, 2002. The asset growth of $551.1million or 7.9% primarily reflects a $1.1 billion increase in securitiesavailable for sale, which increased from $911.0 million at December 31,2002 to $2.0 billion at 

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December 31, 2003 anda $103.4 million or 3.0% increase in loans, net. Funding for these assetincreases came from the $529.9 million or 30.6% reduction in loans held forsale, which decreased from $1.7 billion at December 31, 2002 to $1.2billion at December 31, 2003, as well as the $383.2 million or 11.1%increase in deposits and a $194.0 million or 7.0% increase in borrowed funds.The shift between the Company’s loans held for sale and securities availablefor sale primarily reflects the initial impact in the fourth quarter of 2003 ofthe Company’s determination to exit the mortgage banking business. As theCompany’s loans held for sale begin to be reduced, the Company intends toreinvest these funds primarily in additional securities.

**Cashand Cash Equivalents.****  **Cashand cash equivalents, which consists of cash and due from banks, money marketaccounts and other interest-bearing deposits amounted to an aggregate of $100.7million at December 31, 2003 compared to $137.1 million at December 31,2002.

**Loans,net.****  **TheCompany’s net loan portfolio increased by $103.4 million during the year ended December 31,2003. During 2003 and 2002, the Bank continued its business development effortsdesigned to increase residential loan originations by working closely withlocal mortgage brokers, expanding its product mix and providing excellentcustomer service. The Bank had originations of $332.8 million in commercialreal estate, multi-family residential and construction loans in 2003 as itcontinued its efforts to increase the level of its commercial lending in theState of New Jersey as well as the Bank’s market area in Staten Island andBrooklyn. The Bank had loan sales of $222.0 million during 2003 which consistedprimarily of new loan originations with longer terms and fixed rates ofinterest. During 2003, the Bank also retained for its own portfolio $539.3million in relatively higher yielding adjustable-rate mortgage loans originatedby the Mortgage Company.

**Loansheld for sale.****  **Loandemand continued to be primarily for one to four-family residential loans. Therecord growth in loan originations was driven by the continuing low interestrate environment resulting in a record number of refinance transactions. Loansheld for sale decreased by $529.9 million during 2003 as loans sales of $16.1billion exceeded loan originations of $14.9 billion at the Mortgage Company.

**Securities.**   TheCompany’s securities, including the Bank’s investment in Federal Home Loan Bank(“FHLB”) of New York stock, amounted to an aggregate of $2.1 billion or 28.5%of assets at December 31, 2003 compared to $1.0 billion or 14.8% of assetsat December 31, 2002. The increase of $1.1 billion or 108.2% during2003 was due to purchases of $2.2 billion partially offset by amortization,prepayments and maturities of $961.2 million and securities sales of $85.7million. Purchases consisted primarily of $1.3 billion in U.S. Agencysecurities and $731.8 million in Agency mortgage-backed securities. The netincrease in the securities portfolio was primarily due to the Company’sinvestment of available funds generated from the reduction in the loans heldfor sale portfolio. Other than its investment in FHLB stock, all of the Company’ssecurities were classified as available for sale at both December 31, 2003and 2002.

**Deposits.****  **Deposits increased $383.2 million or11.1% to $3.8 billion at December 31, 2003 compared to $3.5 billion at December 31,2002. The increase was due to an increase of $125.5 million in money marketaccounts, an increase of $81.3 million in savings accounts, an increase of$42.3 million in demand deposits, an increase of $109.7 million in certificatesof deposit and an increase of $24.4 million in NOW accounts. The increase indeposits during 2003 was partially due to growth in our markets of New Jerseyand Brooklyn, New York. The growth of deposits also was driven by the promotionof a money market account linked to a non-interest checking account and fullyear impact in 2003 of the opening of four de-novo branches in the state of NewJersey during 2002 and the opening of one branch in Brooklyn, New York in 2003.These new branches had aggregate deposit balances of $135.6 million at December 31,2003 compared to $79.2 million at December 31, 2002.

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Core deposits, which consist of savings, money market,NOW and demand deposits increased $273.5 million or 11.6%. These depositstotaled $2.6 billion or 68.4% of total deposits at December 31, 2003compared to $2.4 billion or 68.1% of total deposits at December 31, 2002.The Company continued to expand its business development efforts in 2003 inorder to continue to attract commercial business relationships.

**BorrowedFunds.****  **TheCompany’s borrowings at December 31, 2003 were $3.0 billion or 39.4% ofassets compared to $2.8 billion or 39.8% of assets at December 31, 2002,which represents an increase of $194.0 million or 7.0%. The Company utilizedborrowings in 2003 primarily to fund the growth of loans held for sale by theMortgage Company. Since the announcement of the Company exiting the mortgagebanking business, as loans held for sale declined, borrowed funds werereinvested into the investment securities portfolio. The Company’s borrowingsconsist of repurchase agreements with the FHLB and nationally recognizedbrokerage firms, advances from the FHLB which are secured by the one to fourfamily residential loans and an overnight line of credit with a domestic bank.

**Stockholders’ Equity.**   Stockholders’equity amounted to $605.0 million at December 31, 2003 compared to $614.3million at December 31, 2002, or 8.1% and 8.9% of total assets at suchrespective dates. The decrease of $9.3 million in stockholders’ equity during2003 was due to the purchase of 2.1 million shares of treasury stock at anaggregate cost of $35.6 million or $17.24 per share, aggregate cash dividendpayments of $29.6 million and the decrease in the unrealized appreciation ofsecurities available for sale, net of tax of $3.3 million. These decreases werepartially offset by net income of $12.8 million, an allocation of ESOP andRecognition and Retention Plan (“RRP”) shares resulting in an increase of$17.0 million and the exercise of 2.1 million stock options resulting inan increase of $29.4 million.

**Comparison ofResults of Operations for the Years Ended December 31, 2003 and2002—Continuing Operations**

The following discussion and analysis should be readin conjunction with the Company’s Consolidated Financial Statements and Notesto the Consolidated Financial Statements beginning on page 51 of thisreport.

39

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**Average Balances, NetInterest Income, Yields Earned and Rates Paid.****  **The following table sets forth, for the periodsindicated, information regarding (i) the total dollar amount of interestincome from interest-earning assets and the resulting average yields; (ii) thetotal dollar amount of interest expense on interest-bearing liabilities and theresulting average rate; (iii) net interest income; (iv) interest ratespread; and (v) net interest margin. Information is based on average dailybalances during the indicated periods.
| ** **                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                        | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |   |
| ** **                                                                        | ** ** | **Average**                                | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |   |
| ** **                                                                        | ** ** | **Balance**                                | ** ** | **Interest** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Cost** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Cost** | ** ** |   |
| ** **                                                                        | ** ** | **(000’s omitted)**              | ** ** |
| Interest-earning assets:                                                          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable(1):                                                             |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate loans                                                                 |       | $                                          | 3,282,085  |   | $ | 200,301 |   |   | 6.10 | % |   | $ | 2,831,677 |   | $ | 201,923 |   |   | 7.13 | % |   | $ | 2,556,228 |   | $ | 185,679 |   |   | 7.26 | % |   |   |
| Loans to SIBMC                                                                    |       | 1,534,413                                  |       | 60,621 |   |   | 3.95 | % |   | 1,371,587 |   | 62,391 |   |   | 4.55 | % |   | 830,849 |   | 50,350 |   |   | 6.06 | % |   |   |
| Other loans                                                                       |       | 103,121                                    |       | 7,574 |   |   | 7.34 | % |   | 106,781 |   | 8,700 |   |   | 8.15 | % |   | 115,867 |   | 10,537 |   |   | 9.09 | % |   |   |
| Total loans                                                                       |       | 4,919,619                                  |       | 268,496 |   |   | 5.46 | % |   | 4,310,045 |   | 273,014 |   |   | 6.33 | % |   | 3,502,944 |   | 246,566 |   |   | 7.04 | % |   |   |
| Securities(2)                                                                     |       | 1,157,890                                  |       | 48,179 |   |   | 4.16 | % |   | 1,450,722 |   | 84,059 |   |   | 5.79 | % |   | 1,722,506 |   | 112,466 |   |   | 6.53 | % |   |   |
| Other interest-earning assets(3)                                                  |       | 190,678                                    |       | 1,841 |   |   | 0.97 | % |   | 96,362 |   | 1,438 |   |   | 1.49 | % |   | 43,065 |   | 1,105 |   |   | 2.57 | % |   |   |
| Total interest-earning assets                                                     |       | 6,268,187                                  |       | 318,516 |   |   | 5.08 | % |   | 5,857,129 |   | 358,511 |   |   | 6.12 | % |   | 5,268,515 |   | 360,137 |   |   | 6.84 | % |   |   |
| Noninterest-earning assets                                                        |       | 486,321                                    |       |   |   |   |   |   |   | 440,980 |   |   |   |   |   |   |   | 364,766 |   |   |   |   |   |   |   |   |
| Total assets                                                                      |       | $                                          | 6,754,508  |   |   |   |   |   |   |   | $ | 6,298,109 |   |   |   |   |   |   |   | $ | 5,633,281 |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                     |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposits                                                     |       | $                                          | 863,255    |   | 14,938 |   |   | 1.73 | % |   | $ | 644,567 |   | 16,280 |   |   | 2.53 | % |   | $ | 330,278 |   | 10,309 |   |   | 3.12 | % |   |   |
| Savings and escrow accounts                                                       |       | 1,116,034                                  |       | 10,255 |   |   | 0.92 | % |   | 988,429 |   | 17,437 |   |   | 1.76 | % |   | 811,929 |   | 17,810 |   |   | 2.19 | % |   |   |
| Certificates of deposit                                                           |       | 1,162,306                                  |       | 30,424 |   |   | 2.62 | % |   | 1,116,366 |   | 39,008 |   |   | 3.49 | % |   | 1,017,634 |   | 53,071 |   |   | 5.22 | % |   |   |
| Total deposits                                                                    |       | 3,141,595                                  |       | 55,617 |   |   | 1.77 | % |   | 2,749,362 |   | 72,725 |   |   | 2.65 | % |   | 2,159,841 |   | 81,190 |   |   | 3.76 | % |   |   |
| Total borrowings                                                                  |       | 2,310,555                                  |       | 98,902 |   |   | 4.28 | % |   | 2,419,419 |   | 110,555 |   |   | 4.57 | % |   | 2,397,201 |   | 128,205 |   |   | 5.35 | % |   |   |
| Total interest-bearing liabilities                                                |       | 5,452,150                                  |       | 154,519 |   |   | 2.83 | % |   | 5,168,781 |   | 183,280 |   |   | 3.55 | % |   | 4,557,042 |   | 209,395 |   |   | 4.59 | % |   |   |
| Noninterest-bearing liabilities(4)                                                |       | 761,654                                    |       |   |   |   |   |   |   | 590,923 |   |   |   |   |   |   |   | 512,076 |   |   |   |   |   |   |   |   |
| Total liabilities                                                                 |       | 6,213,804                                  |       |   |   |   |   |   |   | 5,759,704 |   |   |   |   |   |   |   | 5,069,118 |   |   |   |   |   |   |   |   |
| Stockholders’ equity                                                         |       | 540,704                                    |       |   |   |   |   |   |   | 538,405 |   |   |   |   |   |   |   | 564,163 |   |   |   |   |   |   |   |   |
| Total liabilities and stockholders’ equity                              |       | $                                          | 6,754,508  |   |   |   |   |   |   |   | $ | 6,298,109 |   |   |   |   |   |   |   | $ | 5,633,281 |   |   |   |   |   |   |   |   |
| Net interest-earning assets                                                       |       | $                                          | 816,037    |   |   |   |   |   |   |   | $ | 688,348 |   |   |   |   |   |   |   | $ | 711,473 |   |   |   |   |   |   |   |   |
| Net interest income/interest rate spread                                          |       |                                       |       | $ | 163,997 |   |   | 2.25 | % |   |   |   | $ | 175,231 |   |   | 2.58 | % |   |   |   | $ | 150,742 |   |   | 2.24 | % |   |   |
| Net interest margin                                                               |       |                                       |       |   |   |   | 2.62 | % |   |   |   |   |   |   | 2.99 | % |   |   |   |   |   |   | 2.86 | % |   |   |
| Ratio of average interest-earning assets to average  interest-bearing liabilities |       |                                       |       |   |   |   | 114.97 | % |   |   |   |   |   |   | 113.32 | % |   |   |   |   |   |   | 115.61 | % |   |   |

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(1)              The average balance of loans receivable includesnon-accruing loans, interest on which is recognized on a cash basis, and loansheld for sale.

(2)              Securities include the Bank’s investment in FHLB of NewYork stock.

(3)              Includes money market accounts, Federal Funds sold andinterest-earning bank deposits.

(4)              Consists primarily of demand deposit accounts.

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**Rate/Volume Analysis.****  **The following table sets forth the effects ofchanging rates and volumes on net interest income of the Company. Informationis provided with respect to (i) effects on interest income attributable tochanges in volume (changes in volume multiplied by prior rate) and (ii) effectson interest income attributable to changes in rate (changes in rate multipliedby prior volume). The change in interest due to both volume and rate has beenallocated proportionately between volume and rate based on the absolute dollaramounts of the change in each.
| ** **                         | ** ** | **2003 compared to 2002** | ** ** | **2002 compared to 2001** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                         | ** ** | **Change due to**              | ** ** | **Change due to**              | ** ** |
| ** **                         | ** ** | **Rate**                                 | ** ** | **Volume**                               | ** ** | **Total** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Total** | ** ** |
| ** **                         | ** ** | **000’s omitted**              | ** ** |
| Interest-Earning Assets:           |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Loans Receivable:                  |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Real estate loans                  |       | $                                        | (31,311    | )                                        | $          | 29,689 |   | $ | (1,622 | ) | $ | (3,450 | ) | $ | 19,694 |   | $ | 16,244 |   |
| Loans to SIBM                      |       | (8,715                                   | )          | 6,945                                    |       | (1,770 | ) | (14,820 | ) | 26,861 |   | 12,041 |   |
| Other loans                        |       | (835                                     | )          | (291                                     | )          | (1,126 | ) | (1,049 | ) | (788 | ) | (1,837 | ) |
| Total loans                        |       | (40,861                                  | )          | 36,343                                   |       | (4,518 | ) | (19,319 | ) | 45,767 |   | 26,448 |   |
| Securities                         |       | (20,908                                  | )          | (14,972                                  | )          | (35,880 | ) | (11,828 | ) | (16,579 | ) | (28,407 | ) |
| Other interest-earning assets      |       | (639                                     | )          | 1,042                                    |       | 403 |   | (606 | ) | 939 |   | 333 |   |
| Total interest-earning assets      |       | (62,408                                  | )          | 22,413                                   |       | (39,995 | ) | (31,753 | ) | 30,127 |   | (1,626 | ) |
| Interest-Bearing  Liabilities:     |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Deposits:                          |       |                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| NOW and money market accounts      |       | (5,964                                   | )          | 4,622                                    |       | (1,342 | ) | (2,280 | ) | 8,251 |   | 5,971 |   |
| Savings and escrow accounts        |       | (9,204                                   | )          | 2,022                                    |       | (7,182 | ) | (3,846 | ) | 3,473 |   | (373 | ) |
| Certificates of deposit            |       | (10,132                                  | )          | 1,548                                    |       | (8,584 | ) | (18,826 | ) | 4,763 |   | (14,063 | ) |
| Total                              |       | (25,300                                  | )          | 8,192                                    |       | (17,108 | ) | (24,952 | ) | 16,487 |   | (8,465 | ) |
| Borrowings                         |       | (6,809                                   | )          | (4,844                                   | )          | (11,653 | ) | (18,828 | ) | 1,178 |   | (17,650 | ) |
| Total interest-bearing liabilities |       | (32,109                                  | )          | 3,348                                    |       | (28,761 | ) | (43,780 | ) | 17,665 |   | (26,115 | ) |
| Net Change in Net  Interest Income |       | $                                        | (30,299    | )                                        | $          | 19,065 |   | $ | (11,234 | ) | $ | 12,027 |   | $ | 12,462 |   | $ | 24,489 |   |

** **

**General.****  **The Company reported income from continuingoperations of $57.1 million or $1.01 on a diluted share basis for the yearended December 31, 2003 compared to income from continuing operations of$66.1 million or $1.13 on a diluted share basis for the year ended December 31,2002. The $9.0 million decrease in income was the result of an $11.2 milliondecrease in net interest income, a $2.8 million increase in the provision forloan losses and a $3.3 million increase in other expenses, which were partiallyoffset by a $6.3 million increase in total other income and a decrease of $2.1million in income tax expense.

The return on average equity and average assets fromcontinuing operations for the year ended December 31, 2003 was 10.56% and0.85%, respectively, compared to 12.27% and 1.05%, respectively for the yearended December 31, 2002.

**NetInterest Income.****  **Netinterest income decreased by $11.2 million, or 6.4%, to $164.0 million for 2003from $175.2 million for 2002. The decrease versus a year ago reflects areduction caused by the declining rate environment, which was only partiallyoffset by increases in both the average balances of interest-earning assets andinterest-bearing liabilities. The net interest rate spread and margin decreasedto 2.25% and 2.62%, respectively, for the year ended December 31, 2003from 2.58% and 2.99% for the year ended December 31, 2002.

**InterestIncome.**   Average interest-earning assetsincreased by $411.1 million, or 7.0% to $6.3 billion in 2003 from $5.9 billionin 2002. The increase primarily reflected an increase in the Bank’s averagewarehouse line of credit to SIBM of $162.8 million or 11.9%, which was used tofund increased loan 

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origination volume and anincrease of $450.4 million or 15.9% in the average balance of real estateloans. The average balance of securities decreased $292.8 million to $1.2billion.

A continued decline in the level of market interestrates resulted in a decline in the average yield on interest-earning assets of104 basis points in 2003 compared to 2002. Interest income on total loansdecreased by a combined $4.5 million, or 1.7%, to $268.5 million for 2003 from$273.0 million for 2002. This decrease reflects an 87 basis point decline inthe average yield on loans from 6.33% in 2002 to 5.46% in 2003, which waspartially offset by the increase in the average balances. Interest income onsecurities decreased by $35.9 million to $48.2 million for 2003 from$84.1million in 2002 due to a lower average balance of investment securities in2003 coupled with a 163 basis point reduction in the average yield primarilydue to the continued declining interest rate environment during the year.

**InterestExpense.****  **Totalinterest expense was $154.5 million for the year ended December 31, 2003compared to $183.3 million for the year ended December 31, 2002, adecrease of $28.8 million or 15.7%. The reasons for the decrease were a $17.1million decrease in the average cost of interest-bearing deposits and an $11.7million decrease in the average cost of borrowings.

The decrease in the average cost of interest-bearingdeposits was reflected in all segments of the deposit base. The average cost ofinterest-bearing deposits decreased to 1.77% for the year ended December 31,2003 or 88 basis points from 2.65% for the year ended December 31, 2002.The decrease in the average cost of interest-bearing deposits reflects theoverall decline in market interest rates in 2003. The decrease in the averagecost of interest-bearing deposits was partially offset by an increase of$392.2 million in the average balance of interest bearing deposits to $3.1billion in 2003. The increase in the average balance reflects the Bank’sleading position in its primary market of Staten Island as well as its recentexpansion efforts in New Jersey and Brooklyn, New York.

The decrease in the interest expense on borrowings wasdue to a decrease of 29 basis points in the average cost to 4.28% for the yearended December 31, 2003 compared to 4.57% for the year ended December 31,2002. This was primarily the result of the rollover of borrowings to lowerrates due to the general decline in the interest rate environment during 2003.In addition, the average balance of borrowings decreased by $108.9 million to$2.3 billion during 2003.

**Provisionfor Loan Losses.****  **Theprovision for loan losses in 2003 was $7.0 million compared to $4.1 millionin 2002. Net charge-offs were $4.6 million and $1.2 million for 2003 and 2002,respectively. The $3.4 million increase in net charge-offs was primarily theresult of the $2.6 million charge-off in 2003 related to the Bank’s mobile homeportfolio.

Non-accruing assets at December 31, 2003, totaled$33.9 million and consisted of $31.3 million of non-accruing loans and $2.6million of ORE. At December 31, 2002, non-accruing assets totaled $27.0million and consisted of $17.3 million of non-accruing loans and $9.7 millionof ORE.

The allowance for loan losses was $25.4 million at December 31,2003, or 111.0% of non-accrual held for investment loans at such date, comparedto $22.8 million at December 31, 2002, or 138.2% of non-accrual held forinvestment loans at such date. While the level of non-accruing held forinvestment loans increased during the year, management believes that theCompany’s credit quality remains strong.

**OtherIncome.****  **Otherincome was $32.7 million for the year ended December 31, 2003, an increaseof $6.3 million from $26.4 million the year ago period. This increase wasprimarily due to an increase of $13.3 million in service and fee income and a$1.0 increase in gains on securities transactions. These increases werepartially offset by a $4.9 million in net losses on loan sales and a $2.9million decrease in other income in 2003 compared to 2002.

The increase in service and fee income in 2003compared to 2002 was primarily due to $11.9 million in fees earned by the Bankas a result of its guarantee of certain third party lines of credit for theMortgage 

42

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Company and a $1.4 millionincrease in banking related service fees as a result of the overall increase inthe Bank’s deposit base. The increase in net losses on loan sales reflectmarket changes and delayed deliveries into the secondary market. The reductionin other income was primarily due to the receipt of a one time liquidatingdividend from the Company’s former data processing provider in 2002.

**OtherExpense.****  **Totalother expense was $89.8 million for 2003, an increase of $3.3 million from$86.5 million in 2002. Increases in professional fees of $5.0 million,occupancy and equipment expenses of $1.9 million, as well as, data processingfees and other expenses of approximately $1.0 million each were partiallyoffset by a $5.3 million reduction in personnel expense. The increase inprofessional fees was primarily due to higher legal, audit and consulting fees,including merger related expenses of approximately $1.7 million. The reductionin personnel expense reflects a $6.2 million reduction in stock option expensedue to the discontinuance in September 2002 of variable plan accounting onthe Company’s stock option plan, an increase in the deferral of staff expenserelating to loan originations, as well as reductions in bonus and incentivepayments. These personnel expense reductions were partially offset by increasesin staff expense relating to branch expansion and other operational staffingneeds plus normal pay increases. The increase in data processing and otherexpenses are primarily due to the Bank’s recent branch expansion.

**Income Tax Expense.****  **Total income tax expense decreased$2.1 million, or 4.7%, to $42.8 million in 2003 from $44.9 million in 2002. Thedecrease in the current year, compared to 2002, was due to lower pre-tax incomepartly offset by a an increase in the effective tax rate from 40.5% in 2002 to42.8 % in 2003. The increase in the 2003 effective tax rate as compared to 2002was primarily related to the loss of state and local tax benefits associatedwith a 2003 New York State and New York City net operating loss.

**Comparison of Resultsof Operation for the Years Ended December 31, 2003 and 2002—DiscontinuedOperations**

The net loss from discontinued operations for the yearended December 31, 2003 was $44.3 million, or $0.78 per diluted share,compared with net income of $29.6 million, or $0.51 per diluted share a yearago. Increases in net interest income of $13.7 million, other income of $92.0million and a $52.9 million reduction in the provision income taxes were morethan offset by increases in other expenses of $236.6 million.

Net interest income increased $13.7 million from $33.3million in 2002 to $47.0 million in 2003 due to the record volume of loanoriginations and the resulting increased balances in loans held for sale duringthe year 2003 compared to 2002. The increase in other income reflects a $146.1million increase in the gains on loan sales, which reached $351.8 million in2003 as compared to $205.7 million in 2002, as well as a $23.0 million increasein loan fees, which were partially offset by the $77.0 million reduction ingains on derivative transactions, which reflects a $64.4 million of losses in2003 compared to $12.6 million of gains in 2002. The increase in other expensesreflects both the costs associated with the record volume of originations andsales in 2003 and the increases in costs and fees associated with arrangementsto transfer a substantial portion of the operations of the Mortgage Company.

The Company sold asubstantial portion of the operations of the Mortgage Company during March,2004. See Item 1 Business—Discontinuted Operations for more discussionregarding the sale of a substantial portion of the Mortgage Company’soperations and its assets.

**Comparison ofResults of Operations for the Years Ended December 31, 2002 and2001—Continuing Operations**

**General.****  **The Company reported income from continuingoperations of $66.1 million or $1.13 per diluted share for the year ended December 31,2002 compared to income from continuing operations of $33.3 million or $0.55per diluted share for the year ended December 31, 2001. The $32.8 millionincrease 

43

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in income in 2002 comparedto 2001 was due to a $24.5 million increase in net interest income, a$1.3 million decrease in the provision for loan losses, a $21.6 millionincrease in total other income and a decrease of $15.2 million in total otherexpenses. These were partially offset by an increase of $29.8 million in theprovision for income taxes. The return on average equity and average assetsfrom continuing operations for the year ended December 31, 2002 was 12.27%and 1.05%, respectively, compared to 5.91% and 0.59%, respectively, for theyear ended December 31, 2001.

**NetInterest Income.****  **Netinterest income increased by $24.5 million, or 16.3%, to $175.2 million for2002 from $150.7 million for 2001. The increase primarily reflects a $26.1million reduction in interest expense caused by the declining rate environmentwhich was partially offset by the $1.6 million reduction in interest income. Asignificant increase in the volume of interest-earning assets andinterest-bearing liabilities also contributed to the increase in net interestincome.

**InterestIncome.****  **Averageinterest-earning assets increased by $588.6 million, or 11.2% to $5.9 billionin 2002 from $5.3 billion in 2001. The increase primarily reflected an increasein the Bank’s average warehouse line of credit to SIBM of $540.7 million or65.1%, which was used to fund increased loan origination volume and an increaseof $275.5 million or 10.8% in the average balance of real estate loans. Theaverage balance of securities decreased $271.8 million to $1.5 billion.

A continued decline in the level of market interestrates resulted in a decline in the yield on average earning assets of 72 basispoints in 2002 compared to 2001. Interest income on loans increased by $26.4million, or 10.7%, to $273.0 million for 2002 from $246.6 million for 2001. Theincrease reflects a 71 basis decrease in the yield on loans, which was morethan offset by the increased average balances previously noted. Interest incomeon securities decreased by $28.4 million to $84.1 million for 2002 from $112.5million in 2001 due to a lower average balance of investment securities in 2002coupled with a 74 basis point reduction in the average yield primarily due tothe continued declining interest rate environment during the year.

**InterestExpense.****  **Totalinterest expense was $183.3 million for the year ended December 31, 2002compared to $209.4 million for the year ended December 31, 2001, adecrease of $26.1 million or 12.5%. The reasons for the decrease were an $8.5million decrease in the average cost of interest-bearing deposits and a $17.7million decrease in the average cost of borrowings.

The decrease in the average cost of interest-bearingdeposits was reflected in all segments of the deposit base. The average cost ofinterest-bearing deposits decreased to 2.65% for the year ended December 31,2002 or 111 basis points from 3.76% for the year ended December 31, 2001.The decrease in the average cost of interest-bearing deposits reflects theoverall decline in market interest rates in 2002. The decrease in the averagecost of interest-bearing deposits was offset by an increase of $589.5 millionin the average balance of interest bearing deposits to $2.7 billion in 2002.The increase in the average balance reflects the Bank’s leading position in itsprimary market of Staten Island as well as its expansion efforts in New Jerseyand Brooklyn, New York.

The decrease in the interest expense on certificatesof deposit (“CD”) was due to a decrease of 173 basis point in average cost ofCDs to 3.49% for the year ended December 31, 2002 compared to 5.22% forthe year ended December 31, 2001. This was primarily the result of therollover of CDs to lower rates due to the general decline in the interest rateenvironment during 2002. The average balance of CDs increased $98.7 million or9.7% to $1.1 billion, which partially offset the decrease in the average cost.

The decrease in the interest expense on borrowings wasdue to a decrease of 78 basis points in the average cost to 4.57% for the yearended December 31, 2002 compared to 5.35% for the year ended December 31,2001. This was primarily the result of the rollover of borrowings to lowerrates due to the general decline in the interest rate environment during 2002.The average balance of borrowings increased $22.2 million to $2.4 billionduring 2002, which partially offset the decrease in the average cost.

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**Provision for Loan Losses.****  **The provision for loan losses in2002 was $4.1 million compared to $5.5 million in 2001.

Non-accruing assets at December 31,2002, totaled $27.0 million and consisted of $17.3 million of non-accruingloans and $9.7 million of ORE. At December 31, 2001, non-accruing assetstotaled $16.3 million and consisted of $15.1 million of non-accruing loans and$1.2 million of ORE.

The allowance for loanlosses was $22.8 million at December 31, 2002, or 138.2% of non-accrualloans at such date, compared to $20.0 million at December 31, 2001, or132.8% of non-accrual loans at such date.

**Other Income.**   Totalother income was $26.4 million for the year ended December 31, 2002, anincrease of $21.6 million from $4.8 million in 2001. This increase wasprimarily due a $2.6 million increase in service and fee income, a $1.4 millionincrease in net gains on loan sales, a $14.2 million decrease in losses onsecurity transactions and a $3.3 million increase in other income. The increasein service and fee income was primarily due to an increase in deposittransactions fees reflecting the increase in the overall deposit base and theintroduction of new products. The decrease in losses on security transactionswas primarily due to the Company recording an impairment charge of $14.5million in 2001 on four corporate bonds, three of which were collaterized bondobligations. The increase in other income was due to the receipt in 2002 of aone time liquidating dividend from the Company’s former data processingprovider.

**Other Expense.**   Total other expenses were $86.5million for 2002, a decrease of $15.1 million or 14.9% from $101.6 million in2001. This decrease was primarily caused by a $14.7 million decrease inpersonnel expense and a $4.6 million decrease in the amortization of intangibleassets, which were partially offset by increases in occupancy and equipment of$733,000, data processing of $725,000, marketing of $922,000, professional feesof $586,000 and other expenses $1.2 million. In the third quarter of 2002, theCompany determined that the settlement of certain stock option exercisestriggered the recognition of compensation expense for certain stock optionsunder the Stock Option Plan This resulted in compensation expense which isincluded in personnel costs of $6.2 million and $27.2 million, respectively forthe years ended December 31, 2002 and 2001. In the third quarter of 2002the Company discontinued the settlement procedure which required therecognition of compensation expense for the Stock Option Plan. Partiallyoffsetting the $21.0 million decrease in stock option expense were a $3.0million increase in the non-cash expense for the Employees Stock Ownership Plan(“ESOP”) due to the increase in the market value of the Company’s stock during2002 and a $1.8 million increase in salaries due to normal merit increases andexpansion of the Bank’s branch network. Amortization of intangible assetsdecreased as goodwill was tested and was not considered to be impaired andtherefore, was not amortized in 2002 in accordance with SFAS No. 142, “Goodwilland Other Intangible Assets.” The increase in occupancy and equipment,marketing, other expenses and to a lesser extent data processing were theresult of the expansion of the Bank’s branch network.

**Income Tax Expense.**   Totalincome tax expense increased $29.8 million to $44.9 million in 2002 from $15.1million in 2001. The increase in the provision for income taxes was due to a$62.6 million increase in income before taxes and an increase in the effectivetax rate from 31.2% for 2001 to 40.5% for 2002. The increase in the effectivetax rate was primarily due to the increase in pre-tax income and the amount andmix of the items creating the difference between book and taxable income.

**Comparison of Results of Operation for the Years EndedDecember 31, 2002 and 2001—Discontinued Operations**

Net income fromdiscontinued operations for the year ended December 31, 2002 was $29.6million, or $0.51 per diluted share compared to net income from discontinuedoperations of $12.4 million, or $0.20 per diluted share for the year ended December 31,2001. The increase in net income primarily reflects increases in net interestincome of $21.6 million and other income of $138.3 million, which werepartially offset by a $128.4 million increase in other expenses and a $13.0million increase in the provision for income taxes.

45

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Net interest incomeincreased $21.6 million from $11.7 million in 2001 to $33.3 million in 2002 dueto the increased volume of loan originations and the resulting increasedbalances in loans held for sale during the year 2002 compared to 2001. Theincrease in other income reflects a $114.2 million increase in the gains onloan sales, which reached $205.7 million in 2002 as compared to $91.5 millionin 2001, as well as, an $11.6 million and a $12.5 million increase in gains onderivative transactions and loan fees, respectively. The $128.4 millionincrease in other expenses reflects the increased costs associated with theincreased volume of loan originations and sales in 2002 as compared to 2001.

**Liquidity**

The Company’s liquidity,represented by the Company’s ability to generate cash and cash equivalents, isa product of its operating, investing and financing activities. The Company’sprimary sources of funds are deposits, loan sales, repayments, prepayments andmaturities of outstanding loans and mortgage-backed securities, maturities ofinvestment securities and other short-term investments and funds provided fromoperations. While scheduled payments from the repayment of loans andmortgage-backed securities and maturing investment securities and short-terminvestments are relatively predictable sources of funds, deposit flows and loanprepayments are greatly influenced by general interest rates, economicconditions and competition. In addition, the Company invests excess funds infederal funds sold and other short-term interest-earning assets which provideliquidity to meet lending requirements.

Liquidity management isboth a daily and long-term function of business management. Excess liquidity isgenerally invested in short-term investments such as federal funds. The Companyuses its sources of funds primarily to meet its ongoing commitments, to paymaturing certificates of deposit and savings withdrawals, fund loan commitmentsand maintain a portfolio of mortgage-backed and mortgage-related securities andinvestment securities. At December 31, 2003, the Company’s total approvedloan commitments outstanding amounted to $1.1 billion while the forwardcommitments to sell loans to third party investors amounted to $1.0 billion. Atthe same date, the undisbursed portion of construction loans and other mortgageloans totaled $54.9 million and unused credit lines equaled $110.5 million.Certificates of deposit scheduled to mature in one year or less at December 31,2003 totaled $896.2 million. Amortization from investments and loans isprojected at $1.7 billion over the next 12 months. Based on historicalexperience, the Bank’s current pricing strategy and the Bank’s strong coredeposit base, management believes that a significant portion of maturingdeposits will remain with the Bank. The Company anticipates that it willcontinue to have sufficient funds to meet its current commitments. In the eventthe funds required exceed the funds generated by the Bank and the MortgageCompany, additional sources of funds such as repurchase agreements, FHLBadvances, overnight lines of credit and brokered certificates of deposit areavailable to the Company.

**Contractual Obligations**
| ** **                     | ** ** | ** **                    | ** ** | **One Year** | ** ** | **Over one Year** | ** ** | **Over 3 Years**  | ** ** | **Over**            | ** ** |
|--------------------------------|------------|-------------------------------|------------|-------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------|------------|
| ** **                     | ** ** | **Total**                     | ** ** | **or less**  | ** ** | **to 3 Years**    | ** ** | **to Five Years** | ** ** | **Five Years** | ** ** |
| ** **                     | ** ** | **(000’S Omitted)** | ** ** |
| Federal Home Loan Bank Debt(1) |       | $                             | 2,183,000  |              | $          | 1,200,000                   |       |                        | $          | 535,000             |       |   |   | $ | 303,000 |   |   | $ | 330,000 |   |
| SIBMC outside line             |       | 120,990                       |       | 120,990           |       |                        | —     |                        |       |                | —     |   |   | — |   |
| Repurchase agreements(2)       |       | 461,937                       |       | 356,020           |       |                        | 105,890    |                        |       |                | —     |   |   | 26,942 |   |
| Operating leases               |       | 40,586                        |       | 8,635             |       |                        | 12,575     |                        |       |                | —     |   |   | 11,806 |   |
| Total obligations              |       | $                             | 2,806,513  |              | $          | 1,685,645                   |       |                        | $          | 653,465             |       |   |   | $ | 303,000 |   |   | $ | 368,748 |   |

----

(1)          Includesadvances and repurchase agreements.

(2)          Includes a mortgage overfive years.

46

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**Off-Balance-SheetObligations**

TheCompany is a party to financial instruments with off-balance-sheet risk in thenormal course of business to meet the financing needs of its customers. Thesefinancial instruments include commitments to extend credit and standby lettersof credit. Those instruments involve, to varying degrees, elements of creditrisk in excess of the amount recognized in the balance sheet. The Company’sexposure to credit loss in the event of non-performance by the other party tothe financial instrument for commitments to extend credit and standby lettersof credit is represented by the contractual notional amount of thoseinstruments. The Company uses the same credit policies in making commitmentsand conditional obligations as it does for on-balance-sheet instruments.

**ContingentLiabilities and Commitments**

TheCompany’s contingent liabilities and commitments as of December 31, 2003are as follows:
| ** **                       | ** ** | ** **                    | ** ** | **One Year** | ** ** | ** **         | ** ** | ** **         | ** ** | **More  Than**   | ** ** |
|----------------------------------|------------|-------------------------------|------------|-------------------|------------|--------------------|------------|--------------------|------------|------------------|------------|
| ** **                       | ** ** | **Total**                     | ** ** | **or Less**  | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                       | ** ** | **(000’s omitted)** | ** ** |
| Lines of credit                  |       | $                             | 110,483    |              | $          | 103,904            |       | $                  | 4,645      |             |       | $ | — |   |   | $ | 1,934 |   |
| Standby letters  of credit       |       | 6,403                         |       | 6,403             |       | —             |       |               | —     |             |       | — |   |
| Other commitments  to make loans |       | 1,055,402                     |       | 1,042,746         |       | 12,656             |       |               | —     |             |       | — |   |
| Total                            |       | $                             | 1,172,288  |              | $          | 1,153,053          |       | $                  | 17,301     |             |       | $ | — |   |   | $ | 1,934 |   |

 

**Capital**

At December 31, 2003 the Bank’s capital ratiosexceeded all the regulatory requirements. Under OTS regulations, the Bank isrequired to comply with each of three separate capital adequacy standards. Atsuch date, the Bank had tangible capital of $465.0 million or 6.30% of adjustedassets compared to a requirement of $110.7 million or 1.50% of adjusted assets,core capital of $466.4 million or 6.32% of adjusted assets compared to arequirement of $295.2 million or 4% of adjusted assets and risk based capitalof $490.6 million or 12.34% of risk weighed assets compared to a requirement of$318.9 million or 8% of risk weighted assets.

**Impact of Inflationand Changing Prices**

The consolidated financialdata presented herein have been prepared in accordance with generally acceptedaccounting principles, which require the measurement of financial position andoperating results in terms of historical dollars, without considering changes inrelative purchasing power over time due to inflation. Unlike most industrialcompanies, virtually all of the Company’s assets and liabilities are monetaryin nature. As a result, interest rates generally have a more significant impacton the Company’s performance than does the effect of inflation.

**Item 7A. Quantitative and Qualitative Disclosure aboutMarket Risk.**

**MarketRisk.****  **TheCompany’s primary market risk in its continuing operations is interest ratevolatility due to the potential impact on net interest income and the marketvalue of all interest-earning assets and interest-bearing liabilities. TheCompany is not subject to foreign exchange or commodity price risk and theCompany does not own any trading assets.

**Assetand Liability Management.****  **The principal goal of the Company’s interest rate riskmanagement is to minimize the potential of adverse effects of material andprolonged increases or decreases in interest rates on the Company’s results ofoperations. The Company evaluates the inherent interest rate risk in certainbalance sheet accounts in an effort to determine the acceptable level ofinterest 

47

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rate risk exposure basedon the Company’s business plan, operating environment, capital, liquidityrequirements and performance objectives. The Board of Directors sets limits forearnings at risk and the net portfolio value (“NPV”) ratio in order to reducethe potential vulnerability of the Company’s operations to changes in interestrates. The Company’s Asset and Liability Management Committee (“ALCO”) iscomprised of members of the Company’s management under the direction of theBoard of Directors. The purpose of the ALCO is to coordinate asset andliability management consistent with the Company’s business plan and Boardapproved policies and limits. The ALCO establishes and monitors the volume andmix of assets and funding sources taking into account relative costs andspreads, interest rate sensitivity and liquidity needs. The objectives are tomanage assets and funding sources to produce results that are consistent withliquidity, capital adequacy, growth, risk and profitability goals. The ALCOgenerally meets on a quarterly basis to review, among other things, economicconditions and interest rate outlook, current and projected liquidity needs andcapital positions, anticipated changes in the volume and mix of assets andliabilities and interest rate risk exposure limits compared to currentprojections pursuant to “gap analysis” and income simulations. At each meeting,the ALCO recommends appropriate strategy changes based on such review which arethen reported to the Board of Directors.

**InterestRate Sensitivity.****  **Interestrate sensitivity is a measure of the difference between amounts ofinterest-earning assets and interest-bearing liabilities which either repriceor mature within a given period of time. The difference, or the interest raterepricing “gap,” provides an indication of the extent by which an institution’sinterest rate spread will be affected by changes in interest rates. A gap isconsidered positive when the amount of interest-rate sensitive assets exceedsthe amount of interest-rate sensitive liabilities, and is considered negativewhen the amount of interest-rate sensitive liabilities exceeds the amount ofinterest-rate sensitive assets. Generally, during a period of rising interestrates, a negative gap within shorter maturities would adversely affect netinterest income, while a positive gap within shorter maturities would result inan increase in net interest income. During a period of falling interest rates,a negative gap within shorter maturities would result in an increase in netinterest income while a positive gap within shorter maturities would have theopposite effect. As of December 31, 2003, the ratio of the Company’sone-year interest rate gap to total assets was a positive 1.8% and its ratio ofinterest-earning assets to interest-bearing liabilities maturing or repricingwithin one year was 103.6%. The one year interest rate gap was a positive 13.7%and the ratio of interest-earning assets to interest-bearing liabilitiesmaturing or repricing in one year was 135.0% at December 31, 2002.

The static gap analysis alone is not a completerepresentation of interest rate risk since it fails to account for changes inprepayment speeds on the Company’s loan and investment portfolios in differentrate environments and does not address the extent to which rates on assets orliabilities may change or reprice. The behavior of deposit balances will alsovary with changes in the customer mix, management’s pricing strategies andchanges in the general level of interest rates. Thus, gap analysis does not providea comprehensive presentation of the possible risks to income embedded in thebalance sheet, customer structure and various management strategies.

To measure earnings at risk, the Company makesextensive use of an earnings simulation model in the formation of its interestrate risk management strategies. The model uses management assumptionsconcerning the repricing of assets and liabilities, as well as business volumesprojected under a variety of interest rate scenarios. These scenarios incorporateinterest rate increases of 200 basis points and decreases of 100 basis pointsover a twelve-month period.

Management’s assumptions for prepayment speeds in theloan portfolio reflect the industry standards for the Company’s market area andmanagement’s review of past behavior of the Company’s borrowers in response tochanges in both general market interest rates and rates offered by the Bank.Management’s assumptions for the pricing and movement in deposit products isbased on a review of depositors past behavior in various interest rate andeconomic environments. Rates on non-maturity deposits rise and fall with marketrates, but tend to move less proportionately. Rates offered on retailcertificates of deposit 

48

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tend to move in closeconcert with market interest rates, though history suggests less rapidly asmarket rates rise. The Company’s deposit volumes are relatively insensitive tointerest rate movements within the range encompassed by the income simulationinterest rate scenarios.

At December 31, 2003, based on the incomesimulation model for the continuing operations of the Company, the potentialearnings at risk due to a gradual 200 basis point rise or a gradual 100 basispoint decline in the market interest rates over the next twelve months was a 2.3%decrease in projected net interest income in a rising rate environment and a..76% increase in net interest income in a declining rate environment. At December 31,2003 not all rates could decline by 100 basis points without reaching zero. Inthese scenarios rates are reduced by 50% of their value at December 31,2003.

Management has included all financial instruments andassumptions which are expected to have a material effect in calculating theCompany’s potential net income from continuing operations. These measures ofrisk represent the Company’s exposure to interest rate movements at aparticular point in time. The ALCO monitors the Company’s risk profile on aquarterly basis, or as needed, to monitor the potential effects of movements ininterest rates and other issues which may impact the Company’s liquidity orearnings.

49

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Thefollowing table summarizes the anticipated maturities or repricing of theCompany’s interest-earning assets and interest-bearing liabilities as of December 31,2003 based on the information and assumptions set forth in the notes below.
| ** **                                                                                                           | ** ** | **Within Three  Months**        | ** ** | **More than  Three Months  to Twelve  Months** | ** ** | **More than  One Year to  Three Years** | ** ** | **More than  Three Years to  Five Years** | ** ** | **Over Five  Years** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                                                                                           | ** ** | **(Dollars in Thousands)** | ** ** |
| Interest-earning assets:                                                                                             |       |                                 |       |                                                          |       |                                                        |       |                                                          |       |                      |       |      |       |   |   |   |   |   |   |
| Loans receivable:(1)(2)(3)                                                                                           |       |                                 |       |                                                          |       |                                                        |       |                                                          |       |                      |       |      |       |   |   |   |   |   |   |
| Mortgage loans:                                                                                                      |       |                                 |       |                                                          |       |                                                        |       |                                                          |       |                      |       |      |       |   |   |   |   |   |   |
| Fixed                                                                                                                |       |                                 | $          | 172,573                                                       |       |                                                        |       | $                                                             | 314,032    |                      |       | $         | 437,477    |   |   | $ | 179,381 |   |   | $ | 273,994 |   | $ | 1,377,457 |   |
| Adjustable                                                                                                           |       |                                 | 1,429,080  |                                                          |       |                                                        | 493,122    |                                                          |       | 699,144                   |       |      | 358,608    |   |   | 233,007 |   | 3,212,961 |   |
| Other loans                                                                                                          |       |                                 | 9,030      |                                                          |       |                                                        | 29,892     |                                                          |       | 24,950                    |       |      | 11,477     |   |   | 16,638 |   | 91,987 |   |
| Securities                                                                                                           |       |                                 |       |                                                          |       |                                                        |       |                                                          |       |                      |       |      |       |   |   |   |   |   |   |
| Non-mortgage(4)                                                                                                      |       |                                 | 845,269    |                                                          |       |                                                        | 10,098     |                                                          |       | 25,689                    |       |      | 2,096      |   |   | 159,301 |   | 1,042,453 |   |
| Mortgage-backed  fixed(3)                                                                                            |       |                                 | 142,052    |                                                          |       |                                                        | 243,408    |                                                          |       | 350,216                   |       |      | 147,718    |   |   | 107,649 |   | 991,043 |   |
| Mortgage-backed  adjustable(3)                                                                                       |       |                                 | 13,860     |                                                          |       |                                                        | 24,350     |                                                          |       | 37,404                    |       |      | 3,947      |   |   | 3,189 |   | 82,750 |   |
| Other  interest-earning assets                                                                                       |       |                                 | 137,000    |                                                          |       |                                                        | —     |                                                          |       | —                    |       |      | —     |   |   | — |   | 137,000 |   |
| Total  interest-earning assets                                                                                       |       |                                 | 2,748,864  |                                                          |       |                                                        | 1,114,902  |                                                          |       | 1,574,880                 |       |      | 703,227    |   |   | 793,778 |   | 6,935,651 |   |
| Interest-bearing  liabilities:                                                                                       |       |                                 |       |                                                          |       |                                                        |       |                                                          |       |                      |       |      |       |   |   |   |   |   |   |
| Deposits:                                                                                                            |       |                                 |       |                                                          |       |                                                        |       |                                                          |       |                      |       |      |       |   |   |   |   |   |   |
| NOW accounts(5)                                                                                                      |       |                                 | 36,151     |                                                          |       |                                                        | 99,416     |                                                          |       | 45,189                    |       |      | —     |   |   | — |   | 180,756 |   |
| Savings  accounts(5)                                                                                                 |       |                                 | 101,440    |                                                          |       |                                                        | 315,590    |                                                          |       | 383,216                   |       |      | 112,711    |   |   | 214,151 |   | 1,127,108 |   |
| Money market  deposit accounts(5)                                                                                    |       |                                 | 152,907    |                                                          |       |                                                        | 451,077    |                                                          |       | 160,553                   |       |      | —     |   |   | — |   | 764,537 |   |
| Certificates of  deposit                                                                                             |       |                                 | 354,659    |                                                          |       |                                                        | 541,522    |                                                          |       | 178,668                   |       |      | 139,141    |   |   | 1,099 |   | 1,215,089 |   |
| Other  borrowings(6)                                                                                                 |       |                                 | 313,910    |                                                          |       |                                                        | 1,363,100  |                                                          |       | 640,890                   |       |      | 303,000    |   |   | 330,027 |   | 2,950,927 |   |
| Total  interest-bearing liabilities                                                                                  |       |                                 | 959,067    |                                                          |       |                                                        | 2,770,705  |                                                          |       | 1,408,516                 |       |      | 554,852    |   |   | 545,277 |   | 6,238,417 |   |
| Excess  (deficiency) of interest-earning assets over  interest-bearing liabilities                              |       |                                 | $          | 1,789,797                                                     |       |                                                        |       | $                                                             | (1,655,803 | )                         |       | $         | 166,364    |   |   | $ | 148,375 |   |   | $ | 248,501 |   | $ | 697,234 |   |
| Cumulative excess  (deficiency) of interest-earning assets over interest-bearing liabilities                         |       |                                 | $          | 1,789,797                                                     |       |                                                        |       | $                                                             | 133,994    |                      |       | $         | 300,358    |   |   | $ | 448,733 |   |   | $ | 697,234 |   |   |   |
| Cumulative excess  (deficiency) of interest-earning assets over interest-bearing liabilities as  a percent of assets |       |                                 | 23.91      | %                                                             |       |                                                        | 1.79       | %                                                             |       | 4.01                      | %          |      | 5.99       | % |   | 9.31 | % |   |   |

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(1)    Adjustable-rate loans are included in the period inwhich interest rates are next scheduled to adjust rather than in the period inwhich they are due. Fixed-rate loans are included in the periods in which theyare scheduled to be repaid, based on scheduled amortization, as adjusted totake into account estimated prepayments in the current rate environment. Loansheld for sale are included in the time period they are expected to be sold.

(2)    Balanceshave been reduced for non-accruing loans, which amounted to $31.3 million at December 31,2003.

(3)    Reflectsestimated prepayments in the current interest rate environment.

(4)    Based oncontractual maturities and if callable based on call date.

(5)    Althoughthe Company’s NOW accounts, passbook savings accounts and money market depositaccounts are subject to immediate withdrawal, management considers asubstantial amount of such accounts to be core deposits having significantlylonger effective maturities. The decay rates used on these accounts are basedon management’s estimates based on experience and should not be regarded asindicative of the actual withdrawals that may be experienced by the Company. Ifall of the Company’s NOW accounts, passbook savings accounts and 

50

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money market depositaccounts had been assumed to be subject to repricing within one year,interest-earning liabilities which were estimated to mature or reprice within oneyear would have exceeded interest-bearing assets with comparablecharacteristics by $781.8 million or 10.44% of total assets. For purposes ofthis presentation, escrow advances have been included with NOW accounts.

(6)    Based onmaturity date.

Certain assumptions arecontained in the previous table which affect the presentation therein. Althoughcertain assets and liabilities may have similar maturities or periods ofrepricing, they may react in different degrees to changes in market interestrates. The interest rates on certain types of assets and liabilities mayfluctuate in advance of changes in market interest rates, while interest ratesof other types of assets and liabilities lag behind changes in market interestrates. Certain assets, such as adjustable-rate mortgage loans, have featureswhich restrict changes in interest rates on a short-term basis and over thelife of the asset. In the event of a change in interest rates, prepayment andearly withdrawal levels would likely deviate significantly from those assumedin calculating the table.

**Item 8. Financial Statements and Supplementary Data.**

**Report ofIndependent Auditors**

To the Board of Directors and Stockholders of StatenIsland Bancorp, Inc:

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of income, of changes instockholders’ equity and of cash flows present fairly, in all materialrespects, the financial position of Staten Island Bancorp, Inc. and itssubsidiary (the “Company”) at December 31, 2003 and 2002 and the resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with auditing standards generallyaccepted in the United States of America, which require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

On November 24, 2003, the Company entered into anAgreement and Plan of Merger. See Note 18 for further discussion.

/s/ PricewaterhouseCoopersLLPNew York, New YorkJanuary 27, 2004

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**Staten IslandBancorp, Inc. and SubsidiaryConsolidated Statements of Financial ConditionDecember 31, 2003 and 2002**
| ** **                                                                                                                                                                                                                 | ** ** | **2003**                                                    | ** ** | **2002**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------|------------|
| ** **                                                                                                                                                                                                                 | ** ** | **(000’s omitted, except  share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                 |       |                                                        |       |      |       |
| Assets:                                                                                                                                                                                                                    |       |                                                        |       |      |       |
| Cash and due from banks                                                                                                                                                                                                    |       | $                                                           | 100,699    |      | $          | 137,085 |   |
| Federal funds sold                                                                                                                                                                                                         |       | 137,000                                                     |       | 237,000   |       |
| Securities available for  sale                                                                                                                                                                                             |       | 2,012,520                                                   |       | 911,432   |       |
| Federal Home Loan Bank  of New York stock                                                                                                                                                                                  |       | 118,400                                                     |       | 112,150   |       |
| Loans, net of allowance  for loan losses of $25.4 million and $22.8 million at December 31, 2003  and 2002, respectively                                                                                              |       | 3,525,918                                                   |       | 3,422,492 |       |
| Loans held for sale                                                                                                                                                                                                        |       | 1,200,031                                                   |       | 1,729,890 |       |
| Accrued interest  receivable                                                                                                                                                                                               |       | 26,150                                                      |       | 23,976    |       |
| Premises and equipment,  net                                                                                                                                                                                               |       | 51,784                                                      |       | 47,545    |       |
| Intangible assets, net                                                                                                                                                                                                     |       | 54,638                                                      |       | 57,881    |       |
| Other assets                                                                                                                                                                                                               |       | 259,016                                                     |       | 255,644   |       |
| **Total assets**                                                                                                                                                                                                           |       | $                                                           | 7,486,156  |      | $          | 6,935,095 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                              |       |                                                        |       |      |       |
| Liabilities:                                                                                                                                                                                                               |       |                                                        |       |      |       |
| Deposits                                                                                                                                                                                                                   |       |                                                        |       |      |       |
| Savings                                                                                                                                                                                                                    |       | $                                                           | 1,127,108  |      | $          | 1,045,767 |   |
| Certificates of deposit                                                                                                                                                                                                    |       | 1,215,089                                                   |       | 1,105,370 |       |
| Money market                                                                                                                                                                                                               |       | 764,537                                                     |       | 639,037   |       |
| NOW accounts                                                                                                                                                                                                               |       | 158,825                                                     |       | 134,450   |       |
| Demand deposits                                                                                                                                                                                                            |       | 581,789                                                     |       | 539,510   |       |
| Total deposits                                                                                                                                                                                                             |       | 3,847,348                                                   |       | 3,464,134 |       |
| Borrowed funds                                                                                                                                                                                                             |       | 2,950,927                                                   |       | 2,756,927 |       |
| Advances from borrowers  for taxes and insurance                                                                                                                                                                           |       | 21,931                                                      |       | 23,537    |       |
| Accrued interest and  other liabilities                                                                                                                                                                                    |       | 60,985                                                      |       | 76,229    |       |
| **Total  liabilities**                                                                                                                                                                                                     |       | 6,881,191                                                   |       | 6,320,827 |       |
| Commitments and Contingencies (Note 19)                                                                                                                                                                                    |       |                                                        |       |      |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                                                             |       |                                                        |       |      |       |
| Common stock, par value  $.01 per share, 100,000,000 shares authorized 90,260,624 issued and  60,290,796 outstanding at December 31, 2003 and 90,260,624 issued and  60,269,397 outstanding at December 31, 2002 |       | 903                                                         |       | 903       |       |
| Additional paid-in  capital                                                                                                                                                                                                |       | 600,592                                                     |       | 586,405   |       |
| Retained earnings                                                                                                                                                                                                          |       | 374,987                                                     |       | 391,739   |       |
| Unallocated common stock  held by ESOP                                                                                                                                                                                     |       | (24,722                                                     | )          | (27,468   | )          |
| Unearned common stock  held by RRP                                                                                                                                                                                         |       | (3,854                                                      | )          | (8,894    | )          |
| Less—Treasury stock  (29,969,828 and 29,991,227 shares at December 31, 2003 and 2002,  respectively) at cost                                                                                                     |       | (351,222                                                    | )          | (339,982  | )          |
|                                                                                                                                                                                                                       |       | 596,684                                                     |       | 602,703   |       |
| Accumulated other  comprehensive income, net of taxes                                                                                                                                                                      |       | 8,281                                                       |       | 11,565    |       |
| **Total  stockholders’ equity**                                                                                                                                                                                       |       | 604,965                                                     |       | 614,268   |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                        |       | $                                                           | 7,486,156  |      | $          | 6,935,095 |   |

 

The accompanying notes are an integral part of these statements.

52

----

**Staten IslandBancorp, Inc. and SubsidiaryConsolidated Statements of IncomeFor the Years Ended December 31, 2003, 2002 and 2001**
| ** **                                                 | ** ** | **2003**                                                                 | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                 | ** ** | **(000’s omitted, except per share data)** | ** ** |
| **Continuing  Operations:**                                |       |                                                                     |       |     |       |     |       |
| **Interest  Income:**                                      |       |                                                                     |       |     |       |     |       |
| Loans                                                      |       | $                                                                        | 268,496    |     | $          | 273,014  |       | $ | 246,566 |   |
| Securities  available for sale                             |       | 48,179                                                                   |       | 84,059   |       | 112,466  |       |
| Other earning  assets                                      |       | 1,841                                                                    |       | 1,438    |       | 1,105    |       |
| Total interest  income                                     |       | 318,516                                                                  |       | 358,511  |       | 360,137  |       |
| **Interest  Expense:**                                     |       |                                                                     |       |     |       |     |       |
| Borrowed funds                                             |       | 98,902                                                                   |       | 110,555  |       | 128,205  |       |
| Certificates of  deposit                                   |       | 30,424                                                                   |       | 39,008   |       | 53,071   |       |
| Savings and escrow                                         |       | 14,938                                                                   |       | 17,437   |       | 17,810   |       |
| Money market and  NOW                                      |       | 10,255                                                                   |       | 16,280   |       | 10,309   |       |
| Total interest  expense                                    |       | 154,519                                                                  |       | 183,280  |       | 209,395  |       |
| Net interest  income                                       |       | 163,997                                                                  |       | 175,231  |       | 150,742  |       |
| Provision for Loan  Losses                                 |       | 6,968                                                                    |       | 4,130    |       | 5,465    |       |
| Net interest  income after provision for loan losses       |       | 157,029                                                                  |       | 171,101  |       | 145,277  |       |
| **Other Income  (Loss):**                                  |       |                                                                     |       |     |       |     |       |
| Service and fee  income                                    |       | 28,105                                                                   |       | 14,774   |       | 12,128   |       |
| Net gain (loss) on  loan sales                             |       | (4,270                                                                   | )          | 677      |       | (679     | )          |
| Unrealized gain on  derivative transactions                |       | 358                                                                      |       | —   |       | —   |       |
| Loan fees                                                  |       | 200                                                                      |       | 751      |       | 731      |       |
| Other income                                               |       | 7,687                                                                    |       | 10,554   |       | 7,214    |       |
| Securities  transactions                                   |       | 611                                                                      |       | (395     | )          | (14,613  | )          |
| Total other income                                         |       | 32,691                                                                   |       | 26,361   |       | 4,781    |       |
| **Other  Expenses:**                                       |       |                                                                     |       |     |       |     |       |
| Personnel                                                  |       | 47,764                                                                   |       | 53,088   |       | 67,834   |       |
| Occupancy and  equipment                                   |       | 8,274                                                                    |       | 6,654    |       | 6,252    |       |
| Data processing                                            |       | 7,637                                                                    |       | 6,682    |       | 5,957    |       |
| Amortization of  intangible assets                         |       | 483                                                                      |       | 483      |       | 5,078    |       |
| Professional fees                                          |       | 7,994                                                                    |       | 3,001    |       | 2,415    |       |
| Depreciation                                               |       | 3,966                                                                    |       | 3,641    |       | 3,310    |       |
| Marketing                                                  |       | 2,371                                                                    |       | 2,654    |       | 1,732    |       |
| Other                                                      |       | 11,323                                                                   |       | 10,269   |       | 9,067    |       |
| Total other  expenses                                      |       | 89,812                                                                   |       | 86,472   |       | 101,645  |       |
| Income before  provision for income taxes                  |       | 99,908                                                                   |       | 110,990  |       | 48,413   |       |
| **Provision for income taxes**                             |       | 42,791                                                                   |       | 44,904   |       | 15,085   |       |
| **Income from continuing operations**                      |       | 57,117                                                                   |       | 66,086   |       | 33,328   |       |
| **Discontinued Operations:**                               |       |                                                                     |       |     |       |     |       |
| Income (loss)  before provision (benefit) for income taxes |       | (75,339                                                                  | )          | 51,433   |       | 21,286   |       |
| Provision  (benefit) for income taxes                      |       | (31,051                                                                  | )          | 21,872   |       | 8,881    |       |
| Income (loss) from  discontinued operations                |       | (44,288                                                                  | )          | 29,561   |       | 12,405   |       |
| Cumulative effect  of change in accounting principle       |       | —                                                                   |       | 4,731    |       | —   |       |
| Net income                                                 |       | $                                                                        | 12,829     |     | $          | 100,378  |       | $ | 45,733 |   |
| **Earnings per share—Basic**                          |       |                                                                     |       |     |       |     |       |
| Income from  continuing operations                         |       | $                                                                        | 1.05       |     | $          | 1.18     |       | $ | 0.55 |   |
| Income (loss) from  discontinued operations                |       | (0.81                                                                    | )          | 0.53     |       | 0.21     |       |
| Cumulative effect  of change in accounting principle       |       | —                                                                   |       | 0.09     |       | —   |       |
| Net income                                                 |       | $                                                                        | 0.24       |     | $          | 1.80     |       | $ | 0.76 |   |
| **Earnings per share—Diluted**                        |       |                                                                     |       |     |       |     |       |
| Income from  continuing operations                         |       | $                                                                        | 1.01       |     | $          | 1.13     |       | $ | 0.55 |   |
| Income (loss) from  discontinued operations                |       | (0.78                                                                    | )          | 0.51     |       | 0.20     |       |
| Cumulative effect  of change in accounting principle       |       | —                                                                   |       | 0.08     |       | —   |       |
| Net income                                                 |       | $                                                                        | 0.23       |     | $          | 1.72     |       | $ | 0.75 |   |

 

The accompanying notes are an integral part of these statements.

53

----

**StatenIsland Bancorp, Inc. and Subsidiary**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

**Forthe Years Ended December 31, 2003, 2002 and 2001**
| ** **                                                                                                          | ** ** | **Common  Stock**                                               | ** ** | **Additional  Paid-in  Capital** | ** ** | **Unallocated  Common  Stock Held  by ESOP** | ** ** | **Unearned  Common  Stock Held  by RRP** | ** ** | **Treasury  Stock** | ** ** | **Comprehensive  Income** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss),  Net of Tax** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------|------------|---------------------------|------------|------------------------|------------|----------------------------------------------------------------------------------|------------|-----------|------------|
| ** **                                                                                                          | ** ** | **(000’s omitted, except share data)** | ** ** |
| Balance,  January 1, 2001                                                                                      |       |                                                            | $          | 451                              |       |                                                   |       | $                                                  | 537,744    |                |       |                      | $          | (32,962                | )          |                                                                             |       | $         | (19,784    | ) |   | $ | (188,321 | ) |   | — |   |   | $ | 291,345 |   |   | $ | (2,941 | ) |   | $ | 585,532 |   |
| Allocation of  457,808 ESOP shares                                                                                  |       |                                                            | —     |                             |       |                                                   | 2,378      |                                               |       |                | 2,747      |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 5,125 |   |
| Earned RRP shares                                                                                                   |       |                                                            | —     |                             |       |                                                   | 2,163      |                                               |       |                | —     |                      |       |                   | 5,451      |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 7,614 |   |
| Treasury stock  purchases (7,679,546), at cost                                                                      |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | (104,362  | )          |   | — |   |   | — |   |   | — |   |   | (104,362 | ) |
| Cash dividends  paid ($0.32 per share)                                                                              |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | (19,418 | ) |   | — |   |   | (19,418 | ) |
| Exercise of  324,858 stock options                                                                                  |       |                                                            | —     |                             |       |                                                   | 440        |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | 3,214     |       |   | — |   |   | — |   |   | — |   |   | 3,654 |   |
| Compensation expense  from variable award plan                                                                      |       |                                                            | —     |                             |       |                                                   | 27,234     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 27,234 |   |
| Change in  unrealized appreciation (depreciation) on securities, net of reclassification  adjustment and tax effect |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | 12,691 |   |   | — |   |   | 12,691 |   |   | 12,691 |   |
| Stock dividends  (45,130,312 shares)                                                                                |       |                                                            | 452        |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | (452 | ) |   | — |   |   | — |   |
| Net income                                                                                                          |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | 45,733 |   |   | 45,733 |   |   | — |   |   | 45,733 |   |
| Comprehensive  income                                                                                               |       |                                                            |       |                             |       |                                                   |       |                                               |       |                |       |                      |       |                   |       |                                                                             |       |      |       |   | $ | 58,424 |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2001                                                                                    |       |                                                            | 903        |                             |       |                                                   | 569,959    |                                               |       |                | (30,215    | )                         |       |                   | (14,333    | )                                                                                |       | (289,469  | )          |   |   |   |   | 317,208 |   |   | 9,750 |   |   | 563,803 |   |
| Allocation of  457,808 ESOP shares                                                                                  |       |                                                            | —     |                             |       |                                                   | 6,858      |                                               |       |                | 2,747      |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 9,605 |   |
| Earned RRP shares                                                                                                   |       |                                                            | —     |                             |       |                                                   | 2,745      |                                               |       |                | —     |                      |       |                   | 5,439      |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 8,184 |   |
| Treasury stock  purchases (3,120,327 shares), at cost                                                               |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | (60,163   | )          |   | — |   |   | — |   |   | — |   |   | (60,163 | ) |
| Cash dividends  paid ($0.46 per share)                                                                              |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | (25,847 | ) |   | — |   |   | (25,847 | ) |
| Exercise of  902,438 stock options                                                                                  |       |                                                            | —     |                             |       |                                                   | 594        |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | 9,650     |       |   |   |   |   | — |   |   | — |   |   | 10,244 |   |
| Compensation  expense from variable award plan                                                                      |       |                                                            | —     |                             |       |                                                   | 6,249      |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 6,249 |   |
| Change in  unrealized appreciation (depreciation) on securities, net of reclassification  adjustment and tax effect |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | 1,815 |   |   | — |   |   | 1,815 |   |   | 1,815 |   |
| Net income                                                                                                          |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | 100,378 |   |   | 100,378 |   |   | — |   |   | 100,378 |   |
| Comprehensive  income                                                                                               |       |                                                            |       |                             |       |                                                   |       |                                               |       |                |       |                      |       |                   |       |                                                                             |       |      |       |   | $ | 102,193 |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2002                                                                                    |       |                                                            | 903        |                             |       |                                                   | 586,405    |                                               |       |                | (27,468    | )                         |       |                   | (8,894     | )                                                                                |       | (339,982  | )          |   |   |   |   | $ | 391,739 |   |   | $ | 11,565 |   |   | $ | 614,268 |   |
| Allocation of  457,808 ESOP shares                                                                                  |       |                                                            | —     |                             |       |                                                   | 6,135      |                                               |       |                | 2,746      |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 8,881 |   |
| Earned RRP shares                                                                                                   |       |                                                            | —     |                             |       |                                                   | 3,057      |                                               |       |                | —     |                      |       |                   | 5,040      |                                                                             |       | —    |       |   | — |   |   | — |   |   | — |   |   | 8,097 |   |
| Treasury stock  purchases (2,065,864 shares), at cost                                                               |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | (35,616   | )          |   | — |   |   | — |   |   | — |   |   | (35,616 | ) |
| Cash dividends  paid ($0.54 per share)                                                                              |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | — |   |   | (29,581 | ) |   | — |   |   | (29,581 | ) |
| Exercise of  2,087,263 stock options                                                                                |       |                                                            | —     |                             |       |                                                   | 4,995      |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | 24,376    |       |   | — |   |   | — |   |   | — |   |   | 29,371 |   |
| Change in unrealized  appreciation (depreciation) on securities, net of tax                                         |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | (3,284 | ) |   | — |   |   | (3,284 | ) |   | (3,284 | ) |
| Net income                                                                                                          |       |                                                            | —     |                             |       |                                                   | —     |                                               |       |                | —     |                      |       |                   | —     |                                                                             |       | —    |       |   | 12,829 |   |   | 12,829 |   |   | — |   |   | 12,829 |   |
| Comprehensive  income                                                                                               |       |                                                            |       |                             |       |                                                   |       |                                               |       |                |       |                      |       |                   |       |                                                                             |       |      |       |   | $ | 9,545 |   |   |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2003                                                                                    |       |                                                            | $          | 903                              |       |                                                   |       | $                                                  | 600,592    |                |       |                      | $          | (24,722                | )          |                                                                             |       | $         | (3,854     | ) |   | $ | (351,222 | ) |   |   |   |   | $ | 374,987 |   |   | $ | 8,281 |   |   | $ | 604,965 |   |

 

The accompanying notes are an integral part of these statements.

54

----

**Staten IslandBancorp, Inc. and SubsidiaryConsolidated Statements of Cash FlowsFor the Years Ended December 31, 2003, 2002 and 2001**
| ** **                                                                                   | ** ** | **2003**                 | ** ** | **2002**   | ** ** | **2001**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                   | ** ** | **(000’s omitted)** | ** ** |
| **Cash Flows from Operating Activities:**                                                    |       |                     |       |       |       |       |       |
| Net income                                                                                   |       | $                        | 12,829     |       | $          | 100,378    |       | $ | 45,733 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                     |       |       |       |       |       |
| Depreciation and  software amortization                                                      |       | 7,725                    |       | 6,246      |       | 5,020      |       |
| (Accretion) and  amortization of securities and mortgage premiums                            |       | 4,257                    |       | 1,798      |       | (606       | )          |
| Amortization of  intangible assets                                                           |       | 3,345                    |       | 581        |       | 5,343      |       |
| Securities  impairment charges                                                               |       | 819                      |       | 2,691      |       | 14,506     |       |
| Realized (gain)  loss on sale of available-for-sale securities                               |       | (1,430                   | )          | (2,296     | )          | 107        |       |
| Expense charge  relating to allocated and earned portions of employee benefit plans          |       | 16,978                   |       | 24,038     |       | 39,973     |       |
| Provision for loan  losses                                                                   |       | 7,623                    |       | 8,854      |       | 8,757      |       |
| Increase in cash  surrender value of BOLI                                                    |       | (7,687                   | )          | (7,554     | )          | (7,214     | )          |
| Gain on sale of  loans held for sale                                                         |       | (347,493                 | )          | (206,400   | )          | (94,240    | )          |
| Unrealized (gain)  loss on derivative transactions                                           |       | 64,058                   |       | (12,587    | )          | (1,020     | )          |
| Origination of  loans held for sale                                                          |       | (14,883,713              | )          | (7,885,954 | )          | (3,804,338 | )          |
| Purchase of loans  held for sale                                                             |       | (1,468,831               | )          | (535,349   | )          | (118,812   | )          |
| Proceeds from sale  of loans held for sale                                                   |       | 16,804,740               |       | 7,907,873  |       | 2,957,830  |       |
| Repayment of loans  held for sale                                                            |       | 359,834                  |       | 407,152    |       | 228,303    |       |
| Decrease in  deferred loan fees                                                              |       | 15,002                   |       | (8,317     | )          | (9,293     | )          |
| Decrease  (increase) in accrued interest receivable                                          |       | (2,174                   | )          | 4,625      |       | 2,304      |       |
| (Increase)  decrease in other assets                                                         |       | (22,555                  | )          | (14,986    | )          | (34,450    | )          |
| Increase  (decrease) in accrued interest and other liabilities                               |       | (10,269                  | )          | (18,972    | )          | 19,052     |       |
| Deferred income  taxes (benefit)                                                             |       | 10,319                   |       | 9,349      |       | (14,080    | )          |
| Net cash provided  by (used in) operating activities                                         |       | 563,377                  |       | (218,830   | )          | (757,125   | )          |
| **Cash Flows from Investing Activities:**                                                    |       |                     |       |       |       |       |       |
| (Increase)  decrease in Federal Funds sold                                                   |       | 100,000                  |       | (199,000   | )          | (26,000    | )          |
| Maturities and  amortization of mortgage back securities and CMO’s                      |       | 464,068                  |       | 636,807    |       | 380,076    |       |
| Maturities and  amortization of all other available-for-sale securities                      |       | 497,180                  |       | 56,039     |       | 114,265    |       |
| Sale of mortgage  backed securities and CMO’s                                           |       | —                   |       | 175,522    |       | 75,410     |       |
| Sale of all other  available for sale securities                                             |       | 87,087                   |       | 188,817    |       | 136,846    |       |
| Purchases of  mortgage back securities and CMO’s                                        |       | (820,249                 | )          | (429,719   | )          | (207,705   | )          |
| Purchases of all  other available-for-sale securities, net                                   |       | (1,337,546               | )          | (112,849   | )          | (106,973   | )          |
| Principal  collected on loans                                                                |       | 1,227,337                |       | 1,105,771  |       | 957,400    |       |
| Deferred loan fees  (increase) decrease                                                      |       | (5,148                   | )          | (5,100     | )          | 748        |       |
| Loans made to  customers                                                                     |       | (1,558,606               | )          | (1,920,519 | )          | (1,117,709 | )          |
| Purchase of loans                                                                            |       | —                   |       | (229,194   | )          | (353,368   | )          |
| Sale of loans                                                                                |       | 222,025                  |       | 203,352    |       | 315,650    |       |
| Purchase of  Federal Home Loan Bank of NY common stock                                       |       | (6,250                   | )          | (9,250     | )          | (22,350    | )          |
| Capital  expenditures                                                                        |       | (11,049                  | )          | (13,813    | )          | (11,162    | )          |
| Net cash provided  by (used in) investing activities                                         |       | (1,141,151               | )          | (553,136   | )          | 135,128    |       |
| **Cash Flows from Financing Activities:**                                                    |       |                     |       |       |       |       |       |
| Net increase in  deposit accounts                                                            |       | 383,214                  |       | 562,806    |       | 556,115    |       |
| Increase in  borrowings                                                                      |       | 194,000                  |       | 305,165    |       | 210,751    |       |
| Cash dividends  paid                                                                         |       | (29,581                  | )          | (25,847    | )          | (19,418    | )          |
| Purchase of  treasury stock                                                                  |       | (35,616                  | )          | (60,163    | )          | (104,362   | )          |
| Exercise of stock  options                                                                   |       | 29,371                   |       | 10,244     |       | 3,654      |       |
| Net cash provided  by financing activities                                                   |       | 541,388                  |       | 792,205    |       | 646,740    |       |
| Net increase  (decrease) in cash and cash equivalents                                        |       | (36,386                  | )          | 20,239     |       | 24,743     |       |
| Cash and Cash  Equivalents, beginning of year                                                |       | 137,085                  |       | 116,846    |       | 92,103     |       |
| Cash and Cash  Equivalents, end of year                                                      |       | $                        | 100,699    |       | $          | 137,085    |       | $ | 116,846 |   |
| **Supplemental Disclosure of Cash Flow  Information:**                                       |       |                     |       |       |       |       |       |
| Cash paid for—                                                                          |       |                     |       |       |       |       |       |
| Interest                                                                                     |       | $                        | 164,227    |       | $          | 188,529    |       | $ | 222,735 |   |
| Income taxes                                                                                 |       | 60,130                   |       | 78,632     |       | 17,599     |       |
| Stock dividends                                                                              |       | —                   |       | —     |       | 452        |       |
| Transferred to ORE                                                                           |       | 3,901                    |       | 12,952     |       | 279        |       |

 

The accompanying notes are an integral part of these statements.

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**Staten IslandBancorp, Inc. and SubsidiaryNotes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001**

**1. Organization/Form ofOwnership**

Staten Island Bancorp, Inc. (the “Company”) isthe holding company for its wholly owned savings bank subsidiary, SI Bank &Trust (the “Bank”). The Bank was originally founded as a New York Statechartered savings bank in 1864. In 1997, the Bank converted to a federallychartered stock savings bank with the concurrent formation of a holding companyand an initial public offering (“IPO”) of common stock.

The Company, a Delaware corporation, was organized bythe Bank for the purpose of acquiring all of the capital stock of the Bankpursuant to the conversion of the Bank from a federally chartered mutualsavings bank to a federally chartered stock savings bank. In addition togenerally accepted accounting principles, the Company is subject to thefinancial reporting requirements of the Securities Exchange Act of 1934, asamended, and the regulations of the U.S. Securities and Exchange Commissionthereunder.

As previously announced, the Company and IndependenceCommunity Bank Corp. (“Independence”) entered into an Agreement and Plan ofMerger, dated as of November 24, 2003, pursuant to which the Company willmerge with and into Independence (“the Merger”). In connection with the Merger,the Company has agreed to sell a substantial portion of the assets andoperations of SIB Mortgage Corp., the Bank’s mortgage banking subsidiary (“SIBMortgage”), as part of a plan to exit the mortgage banking business. As aresult of these plans, under generally accepted accounting principles, theCompany must report the Bank’s results as “continuing operations” and theresults of the mortgage banking business of SIB Mortgage as “discontinuedoperations.” The Merger has been approved by both the Company and Independenceshareholders at special meetings held on March 8, 2004 and is subject toregulatory approval. The Merger is expected to be finalized in the secondquarter of 2004.

The Bank is a communitysavings bank providing a complete line of retail and commercial bankingservices along with trust services and life insurance sales. Individualcustomer deposits are insured up to $100,000 by the Federal Deposit InsuranceCorporation (“FDIC”). The Bank’s primary regulator is the Office of ThriftSupervision (“OTS”).

**2. Summary ofSignificant Accounting Policies**

The accounting and reporting policies of the Companyand subsidiary conform to generally accepted accounting principles and to generalpractice within the banking industry.

Certain reclassifications have been made to theprior-year amounts to conform with current-year presentation.

The following is a description of the more significantpolicies which the Company follows in preparing and presenting its consolidatedfinancial statements.

**Basisof Presentation.**   The accompanying consolidatedfinancial statements include the accounts of the Company and the Bank. The Bank’swholly owned subsidiaries are SIB Mortgage Corp. (the “Mortgage Company”),which is considered discontinued operations for all years presented, SIBInvestment Corporation (“SIBIC”), Staten Island Funding Corporation (“SIFC”)and SIB Financial Services Corporation (“SIBFSC”).

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The Mortgage Company was initially established toacquire the operations of Ivy Mortgage. SIFC was established as a real estateinvestment trust, SIBIC was established to hold certain Bank investments andSIBFSC was formed as a licensed life insurance agency to sell the products ofthe SBLI USA Mutual Life Insurance Co.

All significant intercompany transactions and balancesare eliminated in consolidation.

In preparing the consolidated financial statements,management is required to make estimates and assumptions that affect thereported assets, liabilities, revenues and expenses as of the dates of thefinancial statements. Actual results could differ significantly from thoseestimates.

**Cashand Cash Equivalents.****  **Forpurposes of reporting cash flows, cash and cash equivalents include cash anddue from banks, money market deposits, interest-bearing and certificates ofdeposit, all of which mature within ninety days.

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

Declines in the fair value of securities available forsale are reviewed to determine if they are other than temporary in nature.Declines in value that are judged other than temporary in nature are recognizedin the consolidated statements of income. The Company’s policy is to treat adecline in the investment’s quoted market price exceeding 20% that has lastedfor more than six months as an other than temporary decline in value andreflect the decline in value in current earnings.

**Loans.****  **Loans are stated at the principalamount outstanding, net of unearned income, loan origination fees and costs,and an allowance for loan losses. Loan origination fees and costs arerecognized in interest income as an adjustment to yield over the life of theloan or at the time of the sale of the loan for loans held in the portfolio andloans held for sale. Premiums and discounts on purchased mortgage loans areamortized over the average life of the loan using a method which approximatesthe level yield method.

Loans are placed on non-accrual status when theinterest or principal payments are 90 days or more than 90 days past dueunless, in the opinion of management, collection is deemed probable. Wheninterest accruals are discontinued, the recognition of interest income ceasesand previously accrued interest remaining unpaid is reversed against income.Any cash payments received thereafter are applied to principal, and interestincome is recognized when management determines that the financial conditionand payment record of the borrower warrant the recognition of income. TheCompany has defined its impaired loans as its non-accrual loans under theguidance of SFAS No. 114, entitled, “Accounting by Creditors forImpairment of a Loan.” Pursuant to this accounting guidance, a valuationallowance is recorded on impaired loans to reflect the difference, if any,between the loan face value and the present value of projected cash flows,observable fair value or collateral value. This valuation allowance is reportedwithin the overall allowance for loan losses.

**LoansHeld for Sale.****  **Mortgageloans held for sale are collateralized residential real estate loans.Generally, these loans are carried at the lower of cost or fair value asdetermined on an aggregate basis. In December 2003 the Mortgage Companydesignated a hedging relationship for a majority of the mortgage loans held forsale and a forward sale agreement with an investor. In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, if changes in thefair value of the loans are 

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highly correlated to thechanges in the fair value of the forward sales derivative contract, those loansare carried at estimated fair value with unrealized gains and losses recordedin the consolidated income statement. The portion of loans held for sale notdesignated in a hedging relationship are carried at the lower of cost or fairvalue as determined on an aggregate basis. Included in the balance is $5.5million in deferred loan costs and $10.2 million for the mark to market loanbasis adjustment as of December 31, 2003.

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

The amount of the allowance for loan losses isinherently subjective, as it requires making material estimates which may varyfrom actual results. These estimates are evaluated periodically and, asadjustments become necessary, they are reflected in operations during theperiods in which they become known. Considerations in this evaluation includepast and anticipated loss experience, current portfolio composition andevaluation of real estate collateral, as well as current and anticipated economicconditions. In the opinion of management, the allowance, when taken as a whole,is adequate to absorb estimated loan losses inherent in the Company’s entireloan portfolio.

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

**Investmentsin Real Estate.****  **Investmentsin real estate consist of real estate acquired through foreclosure or by deedin lieu of foreclosure and repossessed assets (owned real estate, or “ORE”).ORE properties are carried at the lower of cost or fair value at the date offoreclosure (new cost basis) and at the lower of the new cost basis or fairvalue less estimated selling costs thereafter.

**Goodwilland Other Intangibles.**   Goodwill, representingthe excess of purchase price over the fair value of net assets acquired usingthe purchase method of accounting, was amortized using the straight-line methodover periods not exceeding 20 years through 2001.

**BankOwned Life Insurance (“BOLI”).****  **In August 1999, the Bankinvested in BOLI policies to fund certain future employee benefit costs. TheBank’s investment totaled approximately $100 million and the Bank is theprimary beneficiary of these policies. The cash surrender value of the BOLIpolicies as of December 31, 2003 and 2002 were $131.9 million and $124.2million, respectively, which is recorded in the Company’s consolidatedstatements of financial condition as other assets. Changes in the cashsurrender value of BOLI are recorded as other income in the consolidatedstatements of income.

**DemandDeposits, Cash Reserve Requirements.**   Each of theBank’s commercial and personal demand (checking) accounts and NOW accounts hasa related interest-bearing money market sweep account. The sole purpose of thesweep accounts is to reduce the non-interest-bearing reserve balances that theBank is required to maintain with the Federal Reserve Bank, and therebyincrease funds available for investment. Although the sweep accounts areclassified as money market accounts for regulatory purposes, they are includedin demand deposits and NOW accounts in the accompanying consolidated statementsof financial condition. The required reserve at the Federal Reserve Bank of NewYork under the Federal Reserve Act and Regulation D was $25.3 million and $23.2million at December 31, 2003 and 2002, respectively. As of December 31,2003 and 2002, the required reserves for deposit liabilities was fulfilled bythe cash held in the Bank’s vault except for the $7.0 million compensatingbalance required to be held at the Federal Reserve Bank.

**Representation****& Warranty Reserve.  **The MortgageCompany established a Representation & Warranty Reserve (“R&WR”).The R&WR is intended to provide for the liabilities associated withresidential loans sold, or awaiting sale, in the normal course of business. TheR&WR differs from the 

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traditional allowance forloan losses in as much as the allowance for loan losses provides for lossesassociated with loans held for investment and the R&WR provides for losseson loans sold.

Losses that flow through the R&WR include premiumrecapture, losses associated with the sale of impaired loans to the extent thatthe loans sold were “held for sale” loans, re-bids/down-bids, indemnificationsand any associated costs or fees associated with loans held for sale.

The R&WR is reflected on the Company’s balance sheetwithin other liabilities. Provisions to the R&WR are reflected by areduction in net gains on loan sales.

**DerivativeFinancial Instruments.****  **The Company currently utilizes certain derivativeinstruments, primarily forward delivery sale commitments, in its efforts tomanage interest-rate risk associated with its mortgage loan interest-ratelocked commitments and mortgage loans held for sale. On January 1, 2001,the Company adopted SFAS No. 133, Accounting for Derivative Instrumentsand Hedging Activities, (“SFAS 133”) which defines forward salecommitments as derivative financial instruments. Derivative financialinstruments are recognized in the consolidated statement of financial conditionat fair value while changes in the fair value are recognized in theconsolidated statement of income for years ending after December 31, 2000.

Prior to June 30, 2002, the Company accounted forinterest-rate locked commitments as off-balance sheet financial instruments. OnMarch 13, 2002 the FASB Derivatives Implementation Group clearedImplementation Issue C13 (“Issue C13”), which offers clear guidance on thecircumstances in which a loan commitment must be included in the scope of SFAS133 and thus be accounted for as a derivative instrument. Upon the clearance ofC13 the Company identified certain commitments that should be accounted for asderivative instruments. At the date the associated loan is closed, the fairvalue of the loan commitments on that date becomes part of the loan basis.

The effective date of the implementation guidance inIssue C13 for the Company was July 1, 2002, when the effects of initiallycomplying with the guidance was reported as a change of accounting principle.As a result of adoption of this principle, the Company recorded a gain of $4.7million, net of taxes of $3.4 million, resulting from the mark to market ofcertain loan commitments as of June 30, 2002. This gain is included in theresults of discontinued operations for the year ended December 31, 2002.

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statements 133 on Derivative Instruments and Hedging Activities”(“SFAS 149”). SFAS 149 amends and clarifies accounting for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities under SFAS 133. In particular, thisStatement clarifies under what circumstances a contract with an initialinvestment meets the characteristics of a derivative and when a derivativecontains a financing component that warrants special reporting in the statementof cash flows. This Statement is generally effective for contracts entered intoor modified after June 30, 2003. The impact of adopting SFAS 133 was notmaterial to the financial statements.

**ComprehensiveIncome.**   Comprehensive income includes net incomeand all other changes in stockholders’ equity during a period, except thoseresulting from investments by stockholders and dividends to stockholders. Othercomprehensive income includes revenues, expenses, gains and losses that, undergenerally accepted accounting principles, are included in comprehensive incomebut excluded from net income.

Comprehensive income and accumulated othercomprehensive income are reported, net of related income taxes. Accumulatedother comprehensive income consists solely of unrealized holding gains andlosses on available-for-sale securities. Additional information on thecomponents of comprehensive income is set forth in Note 15 of the Notes toConsolidated Financial Statements.

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**IncomeTaxes.****  **Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to the differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases (“temporarydifferences”). Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which temporarydifferences are expected to be recovered or settled. A partial valuationallowance has been provided for a portion of the deferred tax asset set up forthe operating loss carry forward related to New York State generated by thelosses from the discontinued operation of the Company. The valuation allowancewas established due to the fact that management believes there may not besufficient future taxable income in New York State to utilize the total amountof the deferred tax asset for this loss carry forward. The effect of changes intax laws or rates on deferred tax assets and liabilities is recognized in the periodthat includes the enactment date.

**TreasuryStock.****  **Repurchasesof common stock are recorded as treasury stock at cost.

**CommonStock.****  **On November 19,2001, the Company paid a stock dividend of one share for each share of stockheld (two-for-one stock split) to shareholders of record on November 5,2001. At December 31, 2003, the amount of shares outstanding were60,290,796. All share amounts and earnings per share amounts have been adjustedto reflect the stock split.

**EarningsPer Share.****  **Earningsper share (“EPS”) are computed by dividing net income by the weighted averagenumber of shares of common stock and potential common shares outstanding,adjusted for the unallocated or unearned portion of shares held by the Company’sEmployee Stock Ownership Plan (“ESOP”) and Recognition and Retention Plan (“RRP”).

**Stock-BasedCompensation.****  **For theyear 2003, the Company accounted for its amended and restated 1998 Stock OptionPlan (the “Stock Option Plan”) as a fixed award plan. For the years 1998through September 2002, the Company accounted for the Stock Option Plan asa variable award plan using the intrinsic value method prescribed in AccountingPrinciples Board Opinion (“APB”) No. 25 and recorded compensation expenseon all granted options equal to the difference between the option exerciseprice and the fair market value of the Company’s common stock at the exercisedate or at the financial reporting date, whichever is earlier. Under thismethod, to the extent that the market value of the underlying stock exceeds thestock option exercise price, increases or decreases in the value of stockoptions are reflected as additional charges or credits to compensation expense.Effective September 24, 2002, management rescinded the method of cashlessexercise under the Stock Option Plan that had required the recognition ofcompensation expense, and reestablished the Stock Option Plan as a fixed awardplan under APB No. 25. Therefore, no additional compensation expense dueto changes in fair market value of the Company’s common stock has beenrecognized under the Stock Option Plan since September 24, 2002.

SFAS No. 123, “Accounting for Stock-BasedCompensation,” encourages but does not require companies to record compensationcost for stock-based employee compensation plans at fair value rather than theintrinsic value-based method. The following table compares reported net incomeand earnings per share on a pro forma basis, assuming that the Companyaccounted for stock based compensation under SFAS No. 123. The effects ofapplying SFAS No. 123 in this pro forma disclosure are not indicative offuture amounts. For the year 2001 and the period ended September 24, 2002the Company accounted for the stock option plan as a variable plan and recordedcompensation expense based on the difference between the option exercise priceand the fair market value of the Company’s common stock.

In December 2002,the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure and amendment for SFAS No. 123.”This statement amends SFAS No. 123 “Accounting for Stock-BasedCompensation,” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation. In addition, this statement amends the disclosure requirements ofSFAS No. 123 to require prominent disclosures in 

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both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. This statement shall be effective forfinancial statements for fiscal years ending after December 15, 2002. Theadoption of this statement has not had a material effect on the financialstatements.
| ** **                                                                                                                                    | ** ** | **Year Ended December 31,**                               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2003**                                                                 | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                                                                    | ** ** | **(000’s omitted, except per share data)** | ** ** |
| Net income as reported                                                                                                                        |       | $                                                                        | 12,829     |   | $ | 100,378 |   | $ | 45,733 |   |
| Add: Stock based  employee compensation expense included in reported net income, net of related  tax effects                                  |       | —                                                                   |       | 3,375 |   | 14,706 |   |
| Deduct: Total  stock based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 3,872                                                                    |       | 4,556 |   | 14,706 |   |
| Pro forma net  income                                                                                                                         |       | $                                                                        | 8,957      |   | $ | 99,197 |   | $ | 45,733 |   |
| Earnings per share                                                                                                                            |       |                                                                     |       |   |   |   |   |
| Basic as reported                                                                                                                             |       | $                                                                        | 0.24       |   | $ | 1.80 |   | $ | 0.76 |   |
| Basic proforma                                                                                                                                |       | 0.17                                                                     |       | 1.78 |   | 0.76 |   |
| Diluted as reported                                                                                                                           |       | 0.23                                                                     |       | 1.72 |   | 0.75 |   |
| Diluted proforma                                                                                                                              |       | 0.16                                                                     |       | 1.70 |   | 0.75 |   |

 

**3. New AccountingPronouncements.**

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

In June 2002, the FASB issued SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities” (“SFAS 146”). ThisStatement requires that a liability for a cost associated with an exit ordisposal of an activity be recognized when the liability is incurred. Theprovisions of the statement are effective for exit or disposal activitiesinitiated after December 31, 2002. The Company does not expect theadoption of this statement to have a material effect.

In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”). The interpretationrequires a guarantor to recognize liabilities for the fair value of itsobligations under a guarantee upon the guarantee’s issuance. The interpretationdoes not address the subsequent measurement of the guarantor’s recognizedliability over the term of the guarantee. FIN 45 also requires certainfinancial statement disclosures regarding guarantees including the nature andterms of the guarantee, and the carrying amount of the liability, ifapplicable, for the guarantor’s obligations under the guarantee. The initialrecognition and initial measurement provisions of FIN 45 are applicable on aprospective basis to guarantees issued or modified after December 31,2002, irrespective of the guarantor’s year-end. The disclosure requirements areeffective for financial statements of interim or annual periods ending after December 15,2002. The adoption of this statement has not had a material effect on thefinancial statements.

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS149”). SFAS 149 amends and clarifies accounting for 

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derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities under SFAS 133. In particular, this Statement clarifiesunder what circumstances a contract with an initial net investment meets the characteristicof a derivative and when a derivative contains a financing component thatwarrants special reporting in the statement of cash flows. This Statement isgenerally effective for contracts entered into or modified after June 30,2003.

In May 2003 the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” SFAS 150 became effective for the Company at the first interim periodbeginning after June 15, 2003. The Company has reviewed the requirementsof FASB No. 150 and at the present time has no such financial instrumentsthat have the characteristics noted.

In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addressesconsolidation by business enterprises of “variable interest entities” FIN 46requires existing unconsolidated variable interest entities to be consolidatedby their primary beneficiaries if the entities do not effectively disperse riskamong parties involved. The primary beneficiary of a variable interest entityis the party that absorbs a majority of the entity’s expected losses, receivesa majority of its expected residual returns, or both, as a result of holdingvariable interests, which are the ownership, contractual, or other interests inan entity. Among the scope exceptions of FIN 46 are transfers to qualifiedspecial-purpose entities and “grandfathered” qualifying special-purposeentities subject to the reporting requirements of SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities” (“SFAS 140”), who do not consolidate those entities. FIN 46applies immediately to variable interest entities created after January 31,2003 and to variable interest entities in which an enterprise obtains aninterest after that date. It applies in the first fiscal year or interim periodbeginning after September 15, 2003, to variable interest entities in whichan enterprise holds a variable interest that it acquired before February 1,2003. The adoption of this statement has not had a material effect on thefinancial statements.

In October 2003, the FASB added a project to itsagenda to clarify SFAS 33, as amended by SFAS 138 and 149 with respect todetermining the fair value of the interest rate lock commitments (“IRLC”). In December 2003,the SEC staff announced that it intends to release a Staff Accounting Bulletinthat will require IRLC’s, issued after April 1, 2004, be accounted for aswritten options that would be reported as a liability until expiration ortermination of the commitment. The Company currently recognizes IRLCs at fairvalue, either as an asset or liability based on market conditions. At December 31,2003 the Company recorded an IRLC asset, included in other assets and gain onsale of loans of $6.0 million.

Neither, the FASB nor the SEC have issued finaltechnical guidance in this area and as such it is not possible to know forcertain the impact of this guidance. However, the Company believes that theprimary effect will be moving the recognition of loan sale gain on firstmortgages from interest rate lock date to loan sale date. As such the Companydoes not believe that the future guidance will have a material effect on theCompany or its reported financial results.

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**4. InvestmentSecurities—Securities Available for Sale**

Theamortized cost and approximate market value of the Company’s securitiesavailable for sale and Federal Home Loan Bank of New York stock are summarizedas follows:
| ** **                                                | ** **   | **December 31, 2003** | ** **   |
|-----------------------------------------------------------|--------------|---------------------------------|--------------|
| ** **                                                | ** **   | **Amortized  Cost**             | ** **   | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Market  Value** | ** ** |
| ** **                                                | ** **   | **(000’s omitted)**   | ** **   |
| Debt securities:                                          | *** *** | *** ***                    | *** *** |   | *** *** | *** *** |   |   | *** *** | *** *** |   | *** *** | *** *** |
| U.S. Government and agencies                              |         | $                               | 822,247      |   |   | $ | 2,299 | *** *** |   |   | $ | (422 | ) |   | $ | 824,124 |   |
| GNMA, FNMA and FHLMC mortgage participation  certificates |         | 970,289                         |         |   | 10,687 | *** *** |   |   | (871 | ) |   | 980,105 |   |
| Agency CMOs                                               |         | 12,800                          |         |   | 127 | *** *** |   |   | — |   |   | 12,927 |   |
| Privately issued CMOs                                     |         | 90,703                          |         |   | 4 | *** *** |   |   | (801 | ) |   | 89,906 |   |
| Other                                                     |         | 70,230                          |         |   | 976 | *** *** |   |   | (1,508 | ) |   | 69,698 |   |
|                                                      |         | 1,966,269                       |         |   | 14,093 | *** *** |   |   | (3,602 | ) |   | 1,976,760 |   |
| Marketable equity  securities:                            | ** **   | ** **                      | ** **   |   | ** ** | *** *** |   |   | ** ** |   |   | ** ** | ** ** |
| Common stocks                                             |         | 100                             |         |   | 1 | *** *** |   |   | — |   |   | 101 |   |
| FHLB stock                                                |         | 118,400                         |         |   | — | *** *** |   |   | — |   |   | 118,400 |   |
| Preferred stocks                                          |         | 6,523                           |         |   | 125 | *** *** |   |   | — |   |   | 6,648 |   |
| IIMF capital appreciation fund                            |         | 24,954                          |         |   | 4,057 | *** *** |   |   | — |   |   | 29,011 |   |
|                                                      |         | 149,977                         |         |   | 4,183 | *** *** |   |   | — |   |   | 154,160 |   |
| Total securities  available for sale                      |         | $                               | 2,116,246    |   |   | $ | 18,276 | *** *** |   |   | $ | (3,602 | ) |   | $ | 2,130,920 |   |

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

 

The Bank as a savings bank member of the Federal HomeLoan Bank of New York (“FHLBNY”) is required to purchase shares of the FHLBNYstock at $100 par value. The amount of shares required to be purchased is basedon the asset size of the Bank or level of advances from the FHLBNY. At December 31,2003 and 2002 the Bank held 1,184,000 and 1,121,500 shares of FHLBNY capitalstock. During the fourth 

63

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quarter, the FHLB of NewYork suspended the payment of dividends, of which the Company recorded $4.2million in 2003. In January 2004 the FHLB of New York declared a cashdividend, but at a lower annualized rate than previously paid.

Theamortized cost and market value of debt securities available for sale at December 31,2003 and 2002, by contractual maturity, are shown below. Expected maturitieswill differ from contractual maturities because borrowers and issuers may havethe right to call or prepay obligations with or without call or prepaymentpenalties.
| ** **                                              | ** ** | **December 31, 2003** | ** ** | **December 31, 2002** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                              | ** ** | **Amortized  Cost**             | ** ** | **Market  Value**               | ** ** | **Amortized  Cost** | ** ** | **Market  Value** | ** ** |
| ** **                                              | ** ** | **(000’s omitted)**   | ** ** | **(000’s omitted)**   | ** ** |
| Due in one year  or less                                |       | $                               | 224        |                            | $          | 226 |   | $ | — |   | $ | — |   |
| Due after one  year through five years                  |       | 15,070                          |       | 15,742                          |       | 16,777 |   | 17,914 |   |
| Due after five  years through ten years                 |       | 803,901                         |       | 805,318                         |       | 10,177 |   | 10,890 |   |
| Due after ten  years                                    |       | 73,283                          |       | 72,536                          |       | 112,370 |   | 106,876 |   |
|                                                    |       | 892,478                         |       | 893,822                         |       | 139,324 |   | 135,680 |   |
| GNMA, FNMA , FHLMC mortgage participation  certificates |       | 1,073,791                       |       | 1,082,938                       |       | 719,686 |   | 744,372 |   |
|                                                    |       | $                               | 1,966,269  |                            | $          | 1,976,760 |   | $ | 859,010 |   | $ | 880,052 |   |

 

Proceeds from sales andcalls of securities available for sale during 2003, 2002 and 2001 were$604,859,000, $420,167,000 and $322,540,000 with realized gross gains of$3,387,000, $24,659,000 and $6,386,000 and realized gross losses of $2,776,000,$25,054,000 and $20,999,000, respectively. Gross losses in 2003, 2002 and 2001include write-downs of approximately $819,000, $2,691,000 and $14,506,000respectively, on securities whose decline in value was deemed to be other thantemporary.

**5. Loans**

A significant portion of the Bank’s loans are toborrowers who are domiciled in New York City. The income of many of thosecustomers is dependent on the economy of New York City and surrounding areas.In addition, a significant portion of the loans to borrowers domiciled in NewYork City are real estate loans with mortgages on Staten Island properties,which is a borough of New York City.

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

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Loans,net held in the portfolio consist of the following at December 31, 2003and 2002:
| ** **                                          | ** ** | **December 31,**         | ** ** |
|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                          | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                                          | ** ** | **(000’s omitted)** | ** ** |
| Loans secured by  mortgages on real estate:         |       |                          |       |   |   |
| 1-4 family residential                              |       | $                             | 2,660,051  |   | $ | 2,671,041 |   |
| Multi-family properties                             |       | 71,384                        |       | 56,545 |   |
| Commercial properties                               |       | 508,466                       |       | 418,708 |   |
| Home equity                                         |       | 21,986                        |       | 19,032 |   |
| Construction and land                               |       | 170,259                       |       | 153,144 |   |
| Deferred origination costs and unearned income, net |       | 21,927                        |       | 17,736 |   |
| Net loans secured by mortgages on real estate       |       | 3,454,073                     |       | 3,336,206 |   |
| Other loans:                                        |       |                          |       |   |   |
| Student                                             |       | 151                           |       | 228 |   |
| Passbook                                            |       | 8,822                         |       | 8,692 |   |
| Commercial business                                 |       | 58,975                        |       | 62,777 |   |
| Other consumer                                      |       | 29,338                        |       | 37,362 |   |
| Total other loans                                   |       | 97,286                        |       | 109,059 |   |
| Net loans before the allowance for loan losses      |       | 3,551,359                     |       | 3,445,265 |   |
| Allowance for  loan losses                          |       | (25,441                       | )          | (22,773 | ) |
| Net loans                                           |       | $                             | 3,525,918  |   | $ | 3,422,492 |   |

 

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Asummary of activity in the Company’s allowance for loan losses for the yearsended December 31, 2003, 2002 and 2001, is as follows:
| ** **                                                              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                              | ** ** | **(000’s omitted)**              | ** ** |
| Allowance at beginning of period                                        |       | $                                          | 22,773     |   | $ | 20,041 |   | $ | 14,638 |   |
| Provisions                                                              |       |                                       |       |   |   |   |   |
| Continuing operations                                                   |       | 6,968                                      |       | 4,130 |   | 5,464 |   |
| Discontinued operations                                                 |       | 655                                        |       | 4,724 |   | 3,293 |   |
| Charge-offs:                                                            |       |                                       |       |   |   |   |   |
| Mortgage loans:                                                         |       |                                       |       |   |   |   |   |
| Single-family residential                                               |       | 1,015                                      |       | 4,898 |   | 1,854 |   |
| Multi-family residential                                                |       | —                                     |       | — |   | — |   |
| Commercial real estate                                                  |       | 34                                         |       | — |   | — |   |
| Construction and land                                                   |       | 32                                         |       | — |   | — |   |
| Other loans                                                             |       | 4,898                                      |       | 2,174 |   | 2,411 |   |
| Total charge-offs                                                       |       | 5,979                                      |       | 7,072 |   | 4,265 |   |
| Recoveries:                                                             |       |                                       |       |   |   |   |   |
| Mortgage loans:                                                         |       |                                       |       |   |   |   |   |
| Single-family residential                                               |       | 97                                         |       | 10 |   | 131 |   |
| Multi-family residential                                                |       | —                                     |       | — |   | — |   |
| Commercial real estate                                                  |       | —                                     |       | — |   | — |   |
| Construction and land                                                   |       | —                                     |       | 15 |   | — |   |
| Other loans                                                             |       | 927                                        |       | 925 |   | 780 |   |
| Total recoveries                                                        |       | 1,024                                      |       | 950 |   | 911 |   |
| Allowance at end  of period.                                            |       | $                                          | 25,441     |   | $ | 22,773 |   | $ | 20,041 |   |
| Allowance for  loan losses to total non-accruing loans at end of period |       | 111.04                                     | %          | 138.18 | % | 132.78 | % |
| Allowance for loan  losses to total loans at end of period              |       | 0.68                                       | %          | 0.44 | % | 0.50 | % |

 

Non-accrual loans of $31,327,000, $17,357,000 and$15,093,000 at December 31, 2003, 2002 and 2001, respectively, representthe Company’s recorded investment in loans for which impairment has beenrecognized in accordance with SFAS No. 114 and SFAS No. 118. The lossof interest income associated with loans on non-accrual status wasapproximately $2,009,000, $1,026,000 and $935,000 for the years ended December 31,2003, 2002 and 2001, respectively. The actual amount of interest recorded asincome (on a cash basis) on such loans amounted to $356,000, $1,401,000 and$46,000 for the years ended December 31, 2003, 2002 and 2001,respectively.

At December 31, 2003 and 2002, the valuationallowance related to all impaired loans totaled $10,596,000 and $8,525,000respectively, and such amounts are included in the allowance for loan lossesshown in the consolidated statements of financial condition. The averagerecorded investment in impaired loans for the years ended December 31,2003 and 2002, was approximately $23,548,000 and $18,918,000, respectively.

At December 31, 2003 and 2002, the Company hadORE totaling $2,613,000 and $9,445,000, respectively, classified in otherassets.

At December 31, 2003and 2002, the Company was servicing mortgages for others totaling $444,611,000and $432,569,000, respectively.

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**6. Loans Held forSale**

Mortgage loans held for sale consist of mortgage loanscollateralized by one-to-four family residential real estate. The loans areoriginated to borrowers domiciled throughout the United States and thus theMortgage Company is not dependent on the economy of any one area of thecountry.

The Mortgage Company sells its residential mortgageloans to a variety of investors. Conforming fixed rate and adjustable ratemortgages are primarily sold as agency (Fannie Mae, Freddie Mac or Ginnie Mae)mortgage backed securities with non- conforming fixed and adjustable ratemortgages marketed as whole loans to private investors. The Mortgage Companysells its second mortgages as whole loans to private investors.

The Bank’s loans held for sale consist primarily ofconforming 30 year fixed rate loans which are sold to the government agenciesas whole loans. In December 2003 the Bank discontinued designating new loancommitments, as loans held for sale, since all loans originated will be held inthe Bank’s portfolio.

As of December 31,2003 the consolidated Company had $1.2 billion in loans held for sale with aweighted average coupon of 6.31%. Included in the balance is $5.5 million indeferred loan costs and $10.2 million for the mark to market loan basisadjustment as of December 31, 2003.

**7. DerivativeFinancial Instruments**

The Company currently utilizes certain derivativeinstruments, primarily forward delivery sale commitments, in its efforts tomanage interest-rate risk associated with its mortgage loan interest-ratelocked commitments and mortgage loans held for sale. On January 1, 2001,the Company adopted SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities”, (“SFAS 133”) which defines forward sale commitments asderivative financial instruments. In accordance with SFAS 133, derivativefinancial instruments are recognized in the statement of financial condition atfair value while changes in the fair value are recognized in the statement ofincome for years ending after December 31, 2000.

Prior to June 30, 2002, the Company accounted forinterest-rate locked commitments as off-balance sheet financial instruments. OnMarch 13, 2002 the FASB cleared Implementation Issue C13, which offersclear guidance on the circumstances in which a loan commitment must be includedin the scope of SFAS 133 and thus be accounted for as a derivative instrument.Upon the clearance of C13 by FASB the Company identified certain commitmentsthat should be accounted for as derivative instruments in accordance with SFAS133.

The effective date of the implementation guidance inIssue C13 for the Company was July 1, 2002, when the effects of initiallycomplying with the guidance was reported as a change of accounting principle.The outcome was that the Company recorded a net gain of $8.1 million ($4.7million net of tax) resulting from the mark to market of certain loancommitments as of June 30, 2002. This gain is included in the results ofdiscontinued operations for the year ended December 31, 2002.

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifiesaccounting for derivative instruments, including certain derivative instrumentsembedded in other contracts, and for hedging activities under SFAS 133. Inparticular, this Statement clarifies under what circumstances a contract withan initial net investment meets the characteristic of a derivative and when aderivative contains a financing component that warrants special reporting inthe statement of cash flows. This Statement became effective for contractsentered into or modified after June 30, 2003. The impact of adopting SFAS149 was immaterial to the financial statements.

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**8. Premises andEquipment**

Premisesand equipment at December 31, 2003 and 2002 are summarized as follows:
| ** **                                           | ** ** | **December 31,**         | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **(000’s omitted)** | ** ** |
| Land                                                 |       | $                             | 6,861      |   | $ | 6,861 |   |
| Building and  leasehold improvements                 |       | 37,380                        |       | 34,776 |   |
| Furniture,  fixtures and equipment                   |       | 38,448                        |       | 30,589 |   |
|                                                 |       | 82,689                        |       | 72,226 |   |
| Less—Accumulated  depreciation and amortization |       | (30,905                       | )          | (24,681 | ) |
|                                                 |       | $                             | 51,784     |   | $ | 47,545 |   |

 

**9. IntangibleAssets Net**

The Company adopted Statement of Financial Standards No. 142“Goodwill and Other Intangible Assets,” (“SFAS 142”) effective January 1,2002. In accordance with SFAS No. 142, the Company is no longer requiredto amortize goodwill resulting from acquisitions At the effective date, theCompany had goodwill of $53.0 million. An annual impairment test of thegoodwill is conducted to determine if there is a need to writedown thegoodwill.

Thecarrying amount of goodwill and other intangible assets (in 000’s) at December 31,2003 and December 31, 2002 is as follows:
| ** **                 | ** ** | **As of December 31, 2003** | ** ** | **As of December 31, 2002** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                 | ** ** | **Original  Amount**                            | ** ** | **Accumulated  Amortization**                   | ** ** | **Net Carrying  Value** | ** ** | **Original  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Value** | ** ** |
| Goodwill                   |       | $                                               | 64,111     |                                            |       | $ | 13,922 |   |   |   | $ | 50,189 |   |   | $ | 64,111 |   |   | $ | 11,147 |   |   |   | $ | 52,964 |   |   |
| Core deposit  intangibles  |       | 2,895                                           |       |                                            | 1,466      |   |   |   | 1,429 |   |   | 2,895 |   |   | 983 |   |   |   | 1,912 |   |   |
| Other intangibles          |       | 480                                             |       |                                            | 480        |   |   |   | — |   |   | 480 |   |   | 393 |   |   |   | 87 |   |   |
| Total                      |       | $                                               | 67,486     |                                            |       | $ | 15,868 |   |   |   | 51,618 |   |   | $ | 67,486 |   |   | $ | 12,523 |   |   |   | 54,963 |   |   |
| Loan servicing  asset, net |       |                                            |       |                                            |       |   |   |   | 3,020 |   |   |   |   |   |   |   |   |   | 2,918 |   |   |
| Intangible assets, net     |       |                                            |       |                                            |       |   |   |   | $ | 54,638 |   |   |   |   |   |   |   |   |   | $ | 57,881 |   |   |

 

Estimated future amortization expense (in 000’s)related to the core deposit and other intangibles is as follows:

Forthe year ending:
| 2004 |   | 483 |   |
|------|--------|-----|--------|
| 2005 |   | 483 |   |
| 2006 |   | 463 |   |

 

The $2.8 million ofgoodwill on the books of the Mortgage Company as of December 31, 2003 wasdetermined to be impaired as a result of the pending sale of the operations andassets of the Mortgage Company and was therefore written off in 2003.

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**10. Due Depositors**

Thefollowing table provides deposits by type and the weighted average rate at theperiods indicated.
| ** **                | ** ** | **December 31,**         | ** ** |
|---------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                | ** ** | **Balance**                   | ** ** | **Weighted  Average Rate** | ** ** | **Balance** | ** ** | **Weighted  Average Rate** | ** ** |
| ** **                | ** ** | **(000’s omitted)** | ** ** |
| Savings accounts          |       | $                             | 1,127,108  |   |   | 0.41 | % |   | $ | 1,045,767 |   |   | 1.37 | % |   |
| Certificates of  deposits |       | 890,637                       |       |   | 2.51 |   |   | 980,879 |   |   | 2.95 |   |   |
| Brokered deposits         |       | 324,452                       |       |   | 1.76 |   |   | 124,491 |   |   | 3.49 |   |   |
| Money market  accounts    |       | 764,537                       |       |   | 1.67 |   |   | 639,037 |   |   | 2.26 |   |   |
| NOW accounts              |       | 158,825                       |       |   | 0.59 |   |   | 134,450 |   |   | 1.19 |   |   |
| Demand deposits           |       | 581,789                       |       |   | — |   |   | 539,510 |   |   | — |   |   |
| Total                     |       | $                             | 3,847,348  |   |   | 1.21 | % |   | $ | 3,464,134 |   |   | 1.84 | % |   |

 

Scheduledmaturities of certificates of deposit at December 31, 2003 are summarizedas follows:
| ** **           | ** ** | **Amount**                    | ** ** | **Weighted  Average Rate** | ** ** |
|----------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **(000’s omitted)** | ** ** |
| 2004                 |       | $                             | 896,181    |                            |       | 1.87 | % |   |
| 2005                 |       | 126,777                       |       |                            | 2.44       |   |   |
| 2006                 |       | 51,418                        |       |                            | 4.47       |   |   |
| 2007                 |       | 109,072                       |       |                            | 4.56       |   |   |
| 2008 and  thereafter |       | 31,641                        |       |                            | 3.45       |   |   |
|                 |       | $                             | 1,215,089  |                            |       | 2.32 | % |   |

 

The deposit accounts of each depositor are insured upto $100,000 by the Bank Insurance Fund of the FDIC. The aggregate amounts ofoutstanding certificates of deposit in denominations of $100,000 or more at December 31,2003 and 2002 were approximately $366,180,000 and $395,878,000, respectively.

At December 31, 2003 and 2002, the Bank hadoverdrawn demand deposit accounts which were reclassified as loans totaling$6,383,000 and $5,931,000, respectively. These unplanned overdrafts resultprimarily from the payment of checks clearing through the Federal Reserve Bank.A majority of the unplanned overdrafts are paid off the following day by thecustomer or the checks paid are returned and the charge against the accountreversed.

At December 31, 2003 and 2002, the Bank hadpledged securities available for sale of $23.2 million and $26.8 million,respectively, as collateral for municipal deposits and for deposits held byclients of the Bank’s trust department.

The Bank charges a penaltyfor the early withdrawal of principal from certificates of deposit. These earlywithdrawal penalties totaled $121,000, $163,000 and $196,000, respectively, inthe years ending December 31, 2003, 2002 and 2001.

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**11. Borrowed Funds**

TheCompany was obligated for borrowings as follows (000’s omitted): 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2003**              | ** ** | **2002** | ** ** |
| ** **                      | ** ** | **Amount**            | ** ** | **Weighted**Average Rate | ** ** | **Amount** | ** ** | **Weighted**Average Rate | ** ** |
| Repurchase  agreements Non-FHLB |       | $                     | 461,910    |   |   | 2.73 | % |   | $ | 269,260 |   |   | 5.08 | % |   |
| Repurchase  agreements FHLB     |       | 185,000               |       |   | 5.42 |   |   | 200,000 |   |   | 5.39 |   |   |
| FHLB advances                   |       | 2,183,000             |       |   | 3.38 |   |   | 1,813,000 |   |   | 4.41 |   |   |
| Secured line of  credit         |       | 120,990               |       |   | 1.95 |   |   | 474,637 |   |   | 1.99 |   |   |
| Mortgage payable                |       | 27                    |       |   | 12.00 |   |   | 30 |   |   | 12.00 |   |   |
|                            |       | $                     | 2,950,927  |   |   | 3.35 | % |   | $ | 2,756,927 |   |   | 4.13 | % |   |

 

The average balance of borrowings for the years ended December 31,2003 and 2002 was $2,802,395,000 and $2,629,271,000 respectively. The maximummonth-end balance of borrowings for the years ended December 31, 2003 and2002 was $3,108,739,000 and $2,923,828,000, respectively. The interest expensefor borrowings for years ended December 31, 2003 and 2002 was $109,554,000and $115,889,000 respectively.

TheCompany’s borrowings at December 31, 2003 had contractual maturities asfollows (000’s omitted):
| ** **           | ** ** | **Amount** | ** ** | **Weighted  Average Rate** | ** ** |
|----------------------|------------|------------|------------|---------------------------------|------------|
| 2004                 |       | $          | 1,556,020  |                            |       | 2.30 | % |   |
| 2005                 |       | 495,090    |       |                            | 4.84       |   |   |
| 2006                 |       | 145,800    |       |                            | 4.62       |   |   |
| 2007                 |       | 90,000     |       |                            | 3.60       |   |   |
| 2008 and  thereafter |       | 664,017    |       |                            | 4.39       |   |   |
|                 |       | $          | 2,950,927  |                            |       | 3.35 | % |   |

 

As of December 31, 2003, $1,056,824,000 ofinvestment securities and $1,971,579,000 in mortgage loans were pledged ascollateral for these borrowed funds.

At December 31, 2003,the Bank had available a $100.0 million line of credit with the Federal HomeLoan Bank of New York and two Federal Funds lines of credit for $25.0 millionand $10.0 million at two commercial banking institutions. These lines of creditwere not in use at December 31, 2003. The Mortgage Company had a $250.0million line of credit with Greenwich Capital at December 31, 2003. Thisline of credit was secured by loans held for sale and was also guaranteed bythe Bank. The Bank guarantees the line of credit by agreeing to, among otherthings, repurchase loans that remain on the line for more than 60 days. Thebalance outstanding on this line as of December 31, 2003 was $121.0million.

**12. EmployeeBenefit Plans**

**DefinedBenefit Plan.**   Costs of the Company’s definedbenefit plan are accounted for in accordance with SFAS No. 87 and 132. Thefollowing tables set forth the change in benefit obligations, the change in theplan assets, the current allocation of the plan assets, the funded status ofthe plan and the amounts recognized in the accompanying consolidated financialstatements at December 31, 2003 and 2002 based upon the latest availableactuarial measurement dates of December 31, 2003 and 2002. For the yearending December 31, 2004, the Company expects there will be no employercontributions to the Plan.

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TheCompany amended the defined benefit plan to freeze future benefit accruals on December 31,1999.
| ** **                                      | ** ** | **December 31,**         | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|
| ** **                                      | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                                      | ** ** | **(000’s omitted)** | ** ** |
| Projected benefit obligation, beginning of year |       | $                             | 21,619     |   | $ | 20,016 |   |
| Interest cost                                   |       | 1,381                         |       | 1,369 |   |
| Benefits paid                                   |       | (1,099                        | )          | (1,025 | ) |
| Actuarial loss                                  |       | 759                           |       | 1,259 |   |
| Projected benefit  obligation, end of year      |       | $                             | 22,660     |   | $ | 21,619 |   |

 

Thefollowing table sets forth the plan’s change in plan assets:
| ** **                                       | ** ** | **December 31,**         | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(000’s omitted)** | ** ** |
| Fair value of the plan assets, beginning of year |       | $                             | 22,477     |   | $ | 25,052 |   |
| Actual return on plan assets                     |       | 3,932                         |       | (4,050 | ) |
| Employer contributions                           |       | —                        |       | 2,500 |   |
| Benefits paid                                    |       | (1,099                        | )          | (1,025 | ) |
| Fair value of  plan assets, end of year          |       | $                             | 25,310     |   | $ | 22,477 |   |
| Funded status                                    |       | $                             | 10,286     |   | $ | 6,945 |   |
| Employer  contribution                           |       | —                        |       | 2,500 |   |
| Unrecognized net  actuarial loss (gain)          |       | (152                          | )          | 841 |   |
| Prepaid cost                                     |       | $                             | 10,134     |   | $ | 10,286 |   |

 

Thefollowing table sets forth the plan’s weighted-average asset allocations at January 1,2003 and 2004, by asset category.
| **Asset Category**              | ** ** | ** ** | ** ** | **Plan assets at  December 31, 2003** | ** ** | **Plan assets at  December 31, 2002** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Equity securities                    |       |       | 69         | %                                                         |       |                                                      | 58         | % |   |
| Debt Securities  (Bond Mutual Funds) |       |       | 31         | %                                                         |       |                                                      | 42         | % |   |
| Real Estate                          |       |       | 0          | %                                                         |       |                                                      | 0          | % |   |
| Other                                |       |       | 0          | %                                                         |       |                                                      | 0          | % |   |
| Total                                |       |       | 100        | %                                                         |       |                                                      | 100        | % |   |

** **

**InvestmentPolicies and Strategies for Plan Assets.****  **Plan assets are invested in sixdiversified investment funds of the RSI Retirement Trust (the “Trust”), a noload series open-ended mutual fund. In addition, a small portion of the assets(less than 1%) is invested in RS Group common stock. The investment fundsinclude four equity mutual funds and two bond mutual funds, each with its owninvestment objectives, investment strategies and risks, as detailed in theTrust’s prospectus. The Trust has been given discretion by the Plan Sponsor todetermine the appropriate strategic asset allocation versus plan liabilities,as governed by the Trust’s Statement of Investment Objectives and Guidelines(the “Guidelines”).

The long-term investment objective is to be invested65% in equity securities (equity mutual funds) and 35% in debt securities (bondmutual funds). If the plan is underfunded under the Guidelines, the bond 

71

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fund portion will betemporarily increased to 50% in order to lessen asset value volatility. Whenthe plan is no longer underfunded, the bond fund portion will be decreased backto 35%. Asset rebalancing is performed at least annually, with interimadjustments made when the investment mix varies more than 5% from the target(i.e., a 10% target range).

The investment goal is to achieve investment resultsthat will contribute to the proper funding of the pension plan by exceeding therate of inflation over the long-term. In addition, investment managers for theTrust are expected to provide above average performance when compared to theirpeer managers. Performance volatility is also monitored. Risk/volatility isfurther managed by the distinct investment objectives of each of the Trustfunds and the diversification within each fund.

Thecomponents of net pension expense are as follows:
| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **Actual  2003**                           | ** ** | **Actual  2002** | ** ** | **Actual  2001** | ** ** | **Projected  2004** | ** ** |
| Service cost—benefits earned during the year |       | $                                          | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Interest cost on  projected benefit obligation    |       | 1,381                                      |       | 1,368 |   | 1,363 |   | 1,384 |   |
| Net amortization  and deferral                    |       | —                                     |       | — |   | — |   | — |   |
| Expected return  on plan assets                   |       | (1,977                                     | )          | (2,209 | ) | (2,493 | ) | (2,232 | ) |
| Deferred  investment (gain)                       |       | 748                                        |       | — |   | (29 | ) | 503 |   |
| Net pension  (income) expense                     |       | $                                          | 152        |   | $ | (841 | ) | $ | (1,159 | ) | $ | (345 | ) |
| Major assumptions  utilized:                      |       |                                       |       |   |   |   |   |   |   |
| Weighted average  discount rate                   |       | 6.25                                       | %          | 6.50 | % | 7.00 | % | 6.25 | % |
| Expected long-term rate  of return on assets      |       | 9.00                                       | %          | 9.00 | % | 9.00 | % | 9.00 | % |

 

The long-term rate-of-return-on assets assumption wasset based on historical return earned by equities and fixed income securities,adjusted to reflect expectations of future returns as applied to the plan’starget allocation of asset classes. Equities and fixed income securities wereassumed to earn real rates of return in ranges of 5-9% and 2-6%, respectively.The long-term inflation rate was estimated to be 3%. When these overall returnexpectations are applied to the plan’s target allocation, the expected rate ofreturn is determined to be 9.0% which is roughly the midpoint of the range ofexpected return.

For the year ended December 31, 2004, the Companydoes not expect to make any contributions.

**PostretirementBenefits.****  **TheCompany provides postretirement benefits, including medical care and lifeinsurance, which cover substantially all active employees hired prior to December 31,1999 upon their retirement.

TheCompany postretirement benefits are unfunded. The following table shows thecomponents of the plan’s accrued postretirement benefit cost included in otherliabilities in the consolidated statements of financial condition as of December 31,2003 and 2002 based upon the latest acturial measurement dates of October 1,2003 and 2002.
| ** **                                       | ** ** | **December 31,**         | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                                       | ** ** | **(000’s omitted)** | ** ** |
| Accumulated  postretirement benefit obligations: |       |                          |       |   |   |
| Retirees                                         |       | $                             | 2,345      |   | $ | 1,712 |   |
| Other fully eligible participants                |       | 4,521                         |       | 3,559 |   |
| Unrecognized gain (loss)                         |       | (1,616                        | )          | (404 | ) |
| Unrecognized past service liability              |       | 209                           |       | 284 |   |
| Accrued  postretirement benefit cost             |       | $                             | 5,459      |   | $ | 5,151 |   |

 

72

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Netperiodic postretirement benefit cost included the following components:
| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **Actual**2003                             | ** ** | **Actual**2002 | ** ** | **Actual**2001 | ** ** | **Projected**2004 | ** ** |
| ** **                                                       | ** ** | **(000’s omitted)**              | ** ** |
| Service cost—benefits attributed to service during  period  |       | $                                          | 265        |   | $ | 240 |   | $ | 209 |   |   | $ | 329 |   |   |
| Interest cost on  accumulated postretirement Benefit  obligation |       | 349                                        |       | 295 |   | 273 |   |   | 422 |   |   |
| Amortization of:                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Unrecognized  (gain) loss                                        |       | —                                     |       | — |   | (31 | ) |   | 82 |   |   |
| Unrecognized past  service liability                             |       | (75                                        | )          | (75 | ) | (75 | ) |   | (75 | ) |   |
| Net period  postretirement benefit cost                          |       | $                                          | 539        |   | $ | 460 |   | $ | 376 |   |   | $ | 758 |   |   |

 

The estimated net periodic postretirement cost for theyear 2004 is $758,000 and of this amount $249,000 is the estimated employercontribution.

Theaverage health care cost trend rate assumptions significantly affects theamounts reported. The assumed health care cost trend rates and discount rateutilized at December 31, 2003 and 2002 were the following:
| ** **                                                                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Discount Rate                                                                      |       | 6.25     | %          | 6.75     | %          |
| Health care trend  rate assumed for next year                                      |       | 10.0     | %          | 9.0      | %          |
| Rate to which the  cost trend rate is assumed to decline (the ultimate trend rate) |       | 3.75     | %          | 4.50     | %          |
| Year that the rate  reaches the ultimate trend rate                                |       | 2010     |       | 2008     |       |

 

A onepercentage-point change in assumed health care cost trend rates would have thefollowing effect:
| ** **                                    | ** ** | **One Percentage Point  Increase** | ** ** | **One Percentage Point  Decrease** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                    | ** ** | **(000’s omitted)**                | ** ** |
| Effect on total  of service and interest cost |       |                                         | 47         |                                         |       |   | (50 | ) |   |
| Effect on post  retirement benefit obligation |       |                                         | 420        |                                         |       |   | (479 | ) |   |

** **

**401(k)Plan.****  **The Bankhas a 401(k) plan (the “401(k) Plan”) covering substantially all full-timeemployees. The 401(k) Plan provides for employer matching contributions subjectto a specified maximum and also contains a profit-sharing feature whichprovides for contributions at the discretion of the Company. The 401(k) Planexpense in 2003, 2002 and 2001 was matched through stock contributions underthe ESOP at the Bank and through cash contributions at the Mortgage Company.The amounts matched for the years ended December 31, 2003, 2002 and 2001were approximately $1,620,000, $960,000 and $686,000, respectively.

**EmployeeStock Ownership Plan.****  **TheEmployee Stock Ownership Plan (“ESOP”) borrowed $41,262,000 from the Company in1997 and used the funds to purchase 6,877,000 shares of the Company’s stockissued in the conversion. The loan has an interest rate of 8.25% and is beingrepaid over a 15-year period. The loan was issued on December 19, 1997.Shares purchased are held in a suspense account for allocation among theparticipants as the loan is paid. Contributions to the ESOP and shares releasedfrom the loan collateral are in an amount proportional to repayment of the ESOPloan. Shares allocated are first used for the employer matching contributionfor the 401(k) plan, with the remaining shares allocated 

73

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to the participants basedon compensation as described in the ESOP in the year of allocation. The vestingschedule is the same as the Bank’s current 401(k) plan. Forfeitures from the401(k) matching contributions are used to reduce future employer 401(k)matching contributions, while forfeitures from shares allocated to theparticipants are allocated among the participants in the same way ascontributions. There were 457,808 shares allocated in the ESOP in each of theyears 2003, 2002 and 2001.

Compensation expense for the ESOP is recorded inaccordance with SOP 93-6, which requires the compensation expense to berecorded during the period in which the shares become committed to be releasedto participants. The compensation expense is measured based upon the fairmarket value of the stock during the period, and, to the extent that the fairmarket value of the shares committed to be released differs from the originalcost of such share, the difference is recorded as an adjustment to additionalpaid in capital. The Company recorded compensation expense of $7,749,000,$8,417,000 and $5,437,000 for the ESOP for the years ended December 31,2003, 2002 and 2001, respectively.

**Recognitionand Retention Plan.****  **TheCompany maintains the 1998 Recognition and Retention Plan (the “RRP”), whichwas implemented in July 1998, for the directors and officers of the Company.The objective of the RRP is to enable the Company to provide officers anddirectors of the Company with a proprietary interest in the Company as anincentive to contribute to its success. During 1998, the RRP purchased3,438,500 shares of common stock of the Company or 4% of the common stock soldin the Conversion on the open market. These purchases were funded by theCompany. Awards vest at a rate of 20% per year for directors and officers,commencing one year from the date of award. Awards become 100% vested uponretirement, termination of employment due to death or disability or upon changeof control. The Company recorded compensation expense of $3,318,000, $5,872,000and $5,991,000 for the RRP for the years ended December 31, 2003, 2002 and2001, respectively.

Thefollowing table sets forth the activity in the RRP:
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                 | ** ** | **Number of  Shares**                 | ** ** | **Weighted**Average Price | ** ** | **Number of  Shares** | ** ** | **Weighted**Average Price | *** *** | **Number of  Shares** | ** ** | **Weighted**Average Price | ** ** |
| Granted                    |       | —                                     |       |   | $ | — |   |   | — |   |   | $ | — |   |   | — |   |   | $ | — |   |   |
| Vested                     |       | 551,850                                    |       |   | 10.09 |   |   | 595,710 |   |   | 10.09 |   |   | 597,010 |   |   | 10.09 |   |   |
| Forfeited                  |       | 400                                        |       |   | 9.31 |   |   | 22,460 |   |   | 10.13 |   |   | 13,690 |   |   | 10.03 |   |   |
| Shares available for grant |       | 392,290                                    |       |   |   |   |   | 391,890 |   |   |   |   |   | 369,430 |   |   |   |   |   |

** **

**StockOption Plan.****  **The Companymaintains the Stock Option Plan. Pursuant to the Stock Option Plan, the Companyhas reserved 8,596,250 shares of common stock for future issuance, which isequal to 10% of the common stock sold in the Conversion. Under the Stock OptionPlan, stock options (which expire 10 years from the date of grant) have beengranted to the directors, officers and certain employees of the Bank and theMortgage Company. Each option entitles the holder to purchase one share of theCompany’s common stock at an exercise price equal to the fair market value ofthe stock at the date of the grant. Options will be exercisable in whole or inpart over the vesting period. The options vest ratably over a three-tofive-year period. However, all options become 100% exercisable in the event theemployee terminates his or her employment due to retirement, death ordisability or upon change of control.

The Company accounted for the Stock Option Plan as avariable award plan using the intrinsic value method prescribed in APB No. 25from plan inception through September 24, 2002. Compensation expense wasrecorded on all outstanding options equal to the difference between the optionexercise price and the fair market value of the Company’s common stock at theexercise date or at the financial reporting date, whichever is earlier.Effective September 24, 2002, the Company reestablished the Stock OptionPlan as a fixed plan under APB No 25. and no compensation expense was recordedduring the year ended 

74

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December 31, 2003.The resulting non-cash charge to compensation expense for the years ended December 31,2002 and 2001 was $6,249,000 and $27,234,000, respectively.

**Stock Option Activity.****  **The following table sets forthactivity in the Stock Option Plan and the weighted average fair value of theoptions granted:
| ** **                                        | ** ** | **Year Ended December 31,** | *** *** |
|---------------------------------------------------|------------|--------------------------------------------|--------------|
| ** **                                        | ** ** | **2003**                                   | ** **   | **2002** | ** ** | **2001** | ** ** |
| ** **                                        | ** ** | **Number  of  Options**                    | ** **   | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Options  outstanding, beginning  of year          |       | 7,181,851                                  |         |   | $ | 13.07 |   |   | 7,246,262 |   |   | $ | 11.95 |   |   | 6,155,600 |   |   | $ | 11.34 |   |   |
| Options granted                                   |       | 62,864                                     |         |   | 20.33 |   |   | 923,983 |   |   | 20.10 |   |   | 1,484,920 |   |   | 14.27 |   |   |
| Options exercised                                 |       | (2,087,263                                 | )            |   | 12.02 |   |   | (902,438 | ) |   | 11.35 |   |   | (324,858 | ) |   | 11.25 |   |   |
| Options forfeited                                 |       | (7,590                                     | )            |   | 15.05 |   |   | (85,956 | ) |   | 12.23 |   |   | (69,400 | ) |   | 11.28 |   |   |
| Options outstanding end of year                   |       | 5,149,862                                  |         |   | 13.58 |   |   | 7,181,851 |   |   | 13.07 |   |   | 7,246,262 |   |   | 11.95 |   |   |
| Remaining options  available for grant under plan |       | 131,829                                    |         |   |   |   |   | 187,103 |   |   |   |   |   | 1,025,130 |   |   |   |   |   |
| Exercisable  options, end of Year                 |       | 3,515,226                                  |         |   | 11.76 |   |   | 4,082,954 |   |   | 11.70 |   |   | 3,391,542 |   |   | 11.40 |   |   |
| Weighted average fair  value of options granted   |       | $                                          | 5.47         |   |   |   |   |   | $ | 6.13 |   |   |   |   |   | $ | 3.89 |   |   |   |   |   |
|                                                   |            |                                            |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefair value of each option granted is estimated on the date of grant using theBlack-Scholes option-pricing model using the following weighted averageassumptions:
| ** **               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate  |       | 3.95     | %          | 3.43     | %          | 4.50     | %          |
| Expected dividend  yield |       | 2.75     |       | 2.70     |       | 2.70     |       |
| Volatility               |       | 33.57    |       | 36.41    |       | 30.74    |       |
| Expected life in years   |       | 6        |       | 6        |       | 6        |       |

 

Thefollowing table shows stock options which were outstanding and stock optionswhich were exercisable as of December 31, 2003.
| **Options Outstanding**            | ** ** | **Options Exercisable**            | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Outstanding  as of  12/31/2003** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Exercisable  as of  12/31/2003** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $  8.156-10.195               |       | 180,800                                 |       |   | 6.1 |   |   | 9.289 |   | 112,400 |   | $ | 9.340 |   |
| $10.195-12.234                          |       | 2,967,643                               |       |   | 4.5 |   |   | 11.438 |   | 2,967,643 |   | 11.438 |   |
| $12.234-14.273                          |       | 101,528                                 |       |   | 7.7 |   |   | 13.040 |   | 33,584 |   | 13.062 |   |
| $14.273-16.312                          |       | 915,986                                 |       |   | 7.8 |   |   | 14.380 |   | 381,074 |   | 14.380 |   |
| $16.312-18.351                          |       | —                                  |       |   | — |   |   | — |   | — |   | — |   |
| $18.351-20.390                          |       | 983,905                                 |       |   | 9.0 |   |   | 20.115 |   | 20,525 |   | 20,100 |   |
|                                    |       | 5,149,862                               |       |   | 6.1 |   |   | $ | 13.575 |   | 3,515,226 |   | $ | 11.756 |   |
|                                         |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

** **

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**Supplemental ExecutiveRetirement Plan.****  **In1993, the Company adopted a Supplemental Executive Retirement Plan (the “ExecutivePlan”) for certain senior officers that provides for payments upon retirement,death or disability. The Company amended the Executive Plan to freeze futurebenefit accruals on December 31, 1999. The annual benefit is based uponannual salary (as defined) plus interest. Net periodic pension expense for theExecutive Plan for the years ended December 31, 2003, 2002 and 2001 wasapproximately $160,00, $145,000 and $134,000, respectively.

**13. Income Taxes**

Theprovision (benefit) for income taxes consists of the following:
| ** **      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------|------------|--------------------------------------------|------------|
| ** **      | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **      | ** ** | **(000’s omitted)**              | ** ** |
| Current:        |       |                                       |       |   |   |   |   |
| Federal         |       | $                                          | 476        |   | $ | 50,763 |   | $ | 33,613 |   |
| State and Local |       | 945                                        |       | 6,665 |   | 4,433 |   |
|            |       | 1,421                                      |       | $ | 57,428 |   | 38,046 |   |
| Deferred        |       | 10,319                                     |       | 9,348 |   | (14,080 | ) |
|            |       | $                                          | 11,740     |   | $ | 66,776 |   | $ | 23,966 |   |

 

Theincome tax expense (benefit) for the combined operations is composed of thefollowing:
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **               | ** ** | **(000’s omitted)**              | ** ** |
| Continuing operations    |       | $                                          | 42,791     |   | $ | 44,904 |   | $ | 15,085 |   |
| Discontinued  operations |       | (31,051                                    | )          | 21,872 |   | 8,881 |   |
| Combined  operations     |       | $                                          | 11,740     |   | $ | 66,776 |   | $ | 23,966 |   |

 

Thefollowing tables reconcile the federal statutory rate to the Company’seffective tax rate:
| ** **                                                       | ** ** | **Year Ended December 31, 2003** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Amount**                                           | ** ** | **Percentage of**    Pretax Income   | ** ** |
| ** **                                                       | ** ** | **(000’s omitted)**                        | ** ** |
| Federal tax at  statutory rate                                   |       | $                                                    | 8,599      |   |   | 35.0 | % |   |
| State and local  income taxes (net of Federal tax benefit)  |       | 776                                                  |       |   | 3.2 |   |   |
| Tax-exempt  dividend income                                      |       | (119                                                 | )          |   | (5.0 | ) |   |
| Increase in cash  surrender value of BOLI                        |       | (2,690                                               | )          |   | (11.0 | ) |   |
| Excess executive  compensation                                   |       | 937                                                  |       |   | 3.7 |   |   |
| ESOP permanent  difference                                       |       | 1,757                                                |       |   | 7.2 |   |   |
| Other                                                            |       | 2,480                                                |       |   | 10.1 |   |   |
| Income tax  provision                                            |       | $                                                    | 11,740     |   |   | 47.8 | % |   |

 

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

 
| ** **                                                 | ** ** | **Year Ended December 31, 2001** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **Amount**                                           | ** ** | **Percentage of    Pretax Income  ** | ** ** |
| ** **                                                 | ** ** | **(000’s omitted)**                        | ** ** |
| Federal tax at  statutory rate                             |       | $                                                    | 24,395     |   |   | 35.0 | % |   |
| State and local  income taxes (net of Federal tax benefit) |       | (601                                                 | )          |   | (0.9 | ) |   |
| Tax-exempt  dividend income                                |       | (895                                                 | )          |   | (1.3 | ) |   |
| Increase in cash  surrender value of BOLI                  |       | (2,525                                               | )          |   | (3.6 | ) |   |
| Amortization of  goodwill                                  |       | 1,609                                                |       |   | 2.3 |   |   |
| Other                                                      |       | 1,983                                                |       |   | 2.9 |   |   |
| Income tax provision                                       |       | $                                                    | 23,996     |   |   | 34.4 | % |   |

 

Thecomponents of the net deferred tax asset at December 31, 2003 and 2002 areas follows:
| ** **                                | ** ** | **December 31,**         | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                                | ** ** | **(000’s omitted)** | ** ** |
| Assets:                                   |       |                          |       |   |   |
| Allowance for loan losses                 |       | $                             | 11,034     |   | $ | 9,464 |   |
| Postretirement benefit accrual            |       | 2,467                         |       | 2,307 |   |
| Non-accrual loans                         |       | 842                           |       | 1,033 |   |
| Deferred compensation                     |       | 941                           |       | 935 |   |
| ESOP shares                               |       | 2,500                         |       | 2,307 |   |
| Deferred loss on impaired securities      |       | 1,197                         |       | 3,345 |   |
| Deposit premium                           |       | 395                           |       | 264 |   |
| Stock options                             |       | 7,361                         |       | 11,474 |   |
| Other                                     |       | 8,728                         |       | 17,710 |   |
| Valuation allowance                       |       | (528                          | )          | — |   |
| Total assets                              |       | 34,937                        |       | 48,839 |   |
| Liabilities:                              |       |                          |       |   |   |
| Bad debt recapture under Section 593 |       | —                        |       | 417 |   |
| Pension plan and curtailment gain         |       | 4,619                         |       | 3,502 |   |
| Fixed-asset tax basis adjustment          |       | 708                           |       | 708 |   |
| Bond discounts                            |       | 56                            |       | 1,507 |   |
| Unrealized gain on AFS securities         |       | 6,393                         |       | 8,352 |   |
| Loan servicing asset                      |       | 1,335                         |       | 1,271 |   |
| Other                                     |       | 1,368                         |       | 1,056 |   |
| Gross deferred tax liability              |       | 14,479                        |       | 16,813 |   |
| Net deferred tax  asset                   |       | $                             | 20,458     |   | $ | 32,026 |   |

 

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At December 31, 2003 and 2002, the deferred taxasset is included in other assets in the Company’s accompanying consolidatedfinancial statements.

The net deferred tax asset at December 31, 2003and 2002 represents the anticipated federal, state and local tax benefits thatare expected to be realized in future years upon the utilization of theunderlying tax attributes comprising this balance. A valuation allowance of$528,000 has been provided for the deferred asset relating to the New YorkState net operating loss carry forward. Based upon current facts, managementbelieves it is more likely than not that the results of future operations willgenerate sufficient taxable income to realize the net deferred tax assets.However, there can be no assurance about the level of future earnings.

**Bad Debt Deduction.****  **Through January 1,1996, under Section 593 of the Internal Revenue Code, thrift institutionssuch as the Bank, which met certain definitional tests primarily relating totheir assets and the nature of their business, were permitted to establish atax reserve for bad debts and to make annual additions thereto, which additionsmay, within specified limitations, be deducted in arriving at their taxableincome. The Bank’s deduction with respect to “qualifying loans,” which aregenerally loans secured by certain interests in real property, was computedusing an amount based on the Bank’s actual loss experience (the “ExperienceMethod”) or a percentage equal to 8% of the Bank’s taxable income (the “PTIMethod”), computed without regard to this deduction and with additionalmodifications and reduced by the amount of any permitted addition to thenon-qualifying reserve. Similar deductions or additions to the Bank’s bad debtreserve are permitted under the New York State Bank Franchise Tax; however, forpurposes of these taxes, the effective allowable percentage under the PTIMethod was approximately 32% rather than 8%.

Effective January 1, 1996, Section 593 wasamended, and the Bank is unable to make additions to its federal tax bad debtreserve, however the Bank is permitted to deduct bad debts only as they occurand is additionally required to recapture (i.e., take into taxable income) theexcess of the balance of its bad debt reserves as of December 31, 1995over the balance of such reserves as of December 31, 1987. This amount hasbeen completely recaptured by December 31, 2003. At December 31, 2003the Bank’s total federal pre-1988 reserve was approximately $11.7 million. Thisreserve reflects the cumulative effects of federal tax deductions by the Bankfor which no Federal income tax provision has been made. In addition, in theevent of certain distributions or a complete liquidation, the Bank would berequired to recapture pre-1988 reserve method deductions of $11.7 million. TheBank has not provided any deferred tax liability for the recognition of suchreserve. Management has no intention of taking any such actions.

The New York State and New York City tax law has beenamended to prevent a similar recapture of the Bank’s bad debt reserve and topermit continued future use of the bad debt reserve method for purposes ofdetermining the Bank’s New York State and New York City tax liability. Thischange also provides for an indefinite deferral of the recapture of the baddebt reserves generated for New York State and New York City purposes.

Should the Bank fail to meet certain statutory tests,including maintaining at least 60% of its assets in certain qualifying assets,the Bank would be required to include into taxable income the amount that theState and City tax bad debt reserves exceed the corresponding Federal reserve.As of December 31, 2003 the Bank has not provided any deferred taxliability for recognition of the Bank’s excess State and City reserves ofapproximately $105.0 and $111.0 million, respectively. In addition, the Bank’squalifying asset percentage exceeded the 60% threshold at December 31,2003.

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**State, Local and OtherTaxes.****  **The Company files state and localtax returns on a calendar-year basis. State and local taxes imposed on theCompany primarily consist of New York State Franchise tax, New York CityFinancial Corporation tax, Delaware Franchise tax and state taxes for anadditional 40 states. These additional state taxes are attributable to theoperation of SIB Mortgage Corp., which originates or does business in theseadditional locations. The Company’s annual liability for New York State and NewYork City purposes is the greater of a tax on income or an alternative taxbased on a specified formula. Liability for other state taxes are determined inaccordance with the applicable local tax code.

**14. Treasury Stock**

TheCompany purchased 2.1 million and 3.1 million treasury shares at an aggregatecost of $35.6 million and $60.2 million during 2003 and 2002, respectively.During 2003 and 2002, 2.1 million and 902,438 shares, respectively, werereissued for the exercise of stock options. As of December 31, 2003, therewere 30.0 million shares held as treasury stock. In July 2002, the Companyannounced its ninth stock repurchase program for 3.0 million shares of theCompany’s common stock which represented 5% of the then outstanding commonstock. At December 31, 2003, 305,177 shares remained to be repurchasedunder this program. The number of shares have been adjusted for the 2-for-1stock split in November 2001. See “Common Stock” in Note 2, above.

**15. Earnings PerShare Reconciliation**

Earningsper share has been computed based on the following for the years ended December 31,2003, 2002 and 2001.
| ** **                                                        | ** ** | **Year Ended December 31,**                                  | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **2003**                                                                    | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                        | ** ** | **(000’s omitted, except per share amounts)** | ** ** |
| Net income from  continuing operations                            |       | $                                                                           | 57,117     |   | $ | 66,086 |   | $ | 33,328 |   |
| Net (loss) income  from discontinued operations                   |       | (44,288                                                                     | )          | 29,561 |   | 12,405 |   |
| Cumulative effect  of account change, net of tax                  |       | —                                                                      |       | 4,731 |   | — |   |
| Net income                                                        |       | $                                                                           | 12,829     |   | $ | 100,378 |   | $ | 45,733 |   |
| Weighted average common shares outstanding                        |       | 54,333                                                                      |       | 55,841 |   | 60,180 |   |
| Weighted average  potential common shares                         |       | 2,167                                                                       |       | 2,424 |   | 955 |   |
| Total weighted  average common shares and potential common shares |       | 56,500                                                                      |       | 58,265 |   | 61,135 |   |
| Basic earnings per share:                                         |       |                                                                        |       |   |   |   |   |
| Net income from continuing operations                             |       | $                                                                           | 1.05       |   | $ | 1.18 |   | $ | 0.55 |   |
| Net (loss) income from discontinued operations                    |       | (0.81                                                                       | )          | 0.53 |   | 0.21 |   |
| Cumulative effect of accounting change, net of tax                |       | —                                                                      |       | 0.09 |   | — |   |
| Net income                                                        |       | $                                                                           | 0.24       |   | $ | 1.80 |   | $ | 0.76 |   |
| Diluted earnings per share:                                       |       |                                                                        |       |   |   |   |   |
| Net income from continuing operations                             |       | $                                                                           | 1.01       |   | $ | 1.13 |   | $ | 0.55 |   |
| Net (loss) income from discontinued operations                    |       | (0.78                                                                       | )          | 0.51 |   | 0.20 |   |
| Cumulative effect of accounting change, net of tax                |       | —                                                                      |       | 0.08 |   | — |   |
| Net income                                                        |       | $                                                                           | (0.23      | ) | $ | 1.72 |   | $ | 0.75 |   |

 

The computation of dilutedearnings per share includes weighted average common shares outstanding andpotential common shares. Potential common shares that are antidilutive are notincluded in the 

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computationof diluted earnings per share. Options to exercise 983,905 shares were excludedfrom the above calculation because the effect would have been antidilutive forthe year ended December 31, 2003.

**16. ComprehensiveIncome**

Accounting principles generally require thatrecognized revenue, expenses, gains and losses be included in net income.Although certain changes in assets and liabilities, such as unrealized gainsand losses on available-for-sale securities, are reported as a separatecomponent of the equity section of the balance sheet, such items, along withnet income, are components of comprehensive income.

Thecomponents of other comprehensive income and related tax effects are asfollows:
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                          | ** ** | **(000’s omitted)**              | ** ** |
| Unrealized holding gains (losses) on available for  sale securities |       | $                                          | (4,830     | ) | $ | 2,108 |   | $ | 8,656 |   |
| Reclassification  adjustment for (gains) losses realized in income  |       | (611                                       | )          | 395 |   | 14,613 |   |
| Net unrealized  gains (losses)                                      |       | (5,441                                     | )          | 2,503 |   | 23,269 |   |
| Tax effect                                                          |       | 2,157                                      |       | (688 | ) | (10,578 | ) |
| Net-of-tax amount                                                   |       | $                                          | (3,284     | ) | $ | 1,815 |   | $ | 12,691 |   |

 

**17. Related PartyTransactions**

In the ordinary course of business, the Bank hasextended credit to various officers of the Company.

At December 31, 2003and 2002, the Bank had balances outstanding from various officers totaling$8,741,000 and $8,756,000 respectively. During 2003, there were loanoriginations of $2,063,000 and loan repayments of $2,078,000 on the loans heldby various officers of the Bank.

**18. DiscontinuedOperations (Agreement and Plan of Merger)**

As previously announced, the Company and IndependenceCommunity Bank Corp. (“Independence”) entered into an Agreement and Plan ofMerger, dated as of November 24, 2003, pursuant to which the Company willmerge with and into Independence (“the Merger”). In connection with the Merger,the Company has agreed to sell a substantial portion of the assets andoperations of SIB Mortgage Corp., the Bank’s mortgage banking subsidiary (“SIBMortgage”), as part of a plan to exit the mortgage banking business. As aresult of these plans, under generally accepted accounting principles, theCompany must report the Bank’s results as “continuing operations” and theresults of the mortgage banking business of SIB Mortgage as “discontinuedoperations.” Prior to the execution of the Merger agreement, the operations ofSIB Mortgage were included in the Company’s financial statement as a separatesegment.

Pursuant to the agreement with Lehman Brothers BancorpInc., which is anticipated to close as of March 1, 2004, 24 offices ofSIBMC will be sold to Lehman Brothers Bancorp Inc. or an affiliate as well asthe majority of SIBMC’s remaining “pipeline” of loan applications in process.By March 31, 2004 it also is anticipated that Lehman Brothers Bancorp, Inc.or an affiliate will purchase approximately $500.0 million of SIBMC’s remainingloans held for sale. During March 2004, it is anticipated that the otheroffices of SIBMC are either to be transferred to other purchasers, closed orwill be operating only in a limited capacity to complete the processing ofcertain loan applications in process. SIBMC is no longer accepting any newbusiness and its operations currently are limited to completing such sales andmatters related to the cessation of business.

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Theassets and liabilities from discontinued operations at December 31, 2003and 2002 were as follows:
| ** **                             | ** ** | **December 31,**         | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                             | ** ** | **(000’s omitted)** | ** ** |
| Assets:                                |       |                          |       |   |   |
| Cash, cash  equivalents and securities |       | $                             | 26,163     |   | $ | 30,879 |   |
| Loans receivable  held for sale        |       | 1,062,444                     |       | 1,729,861 |   |
| Loans, net                             |       | 54,398                        |       | 103,322 |   |
| Other assets                           |       | 83,038                        |       | 100,541 |   |
| Total assets                           |       | $                             | 1,226,043  |   | $ | 1,964,603 |   |
| Liabilities:                           |       |                          |       |   |   |
| Borrowed funds                         |       | $                             | 1,147,311  |   | $ | 1,803,701 |   |
| Other liabilities                      |       | 46,700                        |       | 84,582 |   |
| Total equity                           |       | 32,032                        |       | 76,320 |   |
| Total liabilities and  equity          |       | $                             | 1,226,043  |   | $ | 1,964,603 |   |

 

Thestatements of income from discontinued operations for the years ended December 31,2003, 2002 and 2001 follow:
| ** **                                                   | ** ** | **December 31,**         | ** ** |
|--------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                   | ** ** | **2003**                      | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                   | ** ** | **(000’s omitted)** | ** ** |
| Interest income  and fees on loans                           |       | $                             | 118,263    |   | $ | 101,012 |   | $ | 63,219 |   |
| Interest expense  on borrowed funds                          |       | 71,273                        |       | 67,725 |   | 51,556 |   |
| Net interest  income                                         |       | 46,990                        |       | 33,287 |   | 11,663 |   |
| Provision for  loan losses                                   |       | 655                           |       | 4,724 |   | 3,292 |   |
| NII after  provision                                         |       | 46,335                        |       | 28,563 |   | 8,371 |   |
| Net gains on loan sales                                      |       | 351,763                       |       | 205,723 |   | 91,488 |   |
| Unrealized gain  (loss) on derivative transactions           |       | (64,415                       | )          | 12,587 |   | 1,020 |   |
| Loan fees                                                    |       | 51,438                        |       | 28,436 |   | 15,929 |   |
| Other income                                                 |       | 338,786                       |       | 246,746 |   | 108,437 |   |
| Personnel                                                    |       | 67,072                        |       | 43,172 |   | 22,275 |   |
| Commissions                                                  |       | 280,368                       |       | 129,327 |   | 51,687 |   |
| Occupancy &  equipment                              |       | 10,207                        |       | 6,167 |   | 3,257 |   |
| Amortization of  intangible assets                           |       | 87                            |       | 97 |   | 265 |   |
| Data processing                                              |       | 256                           |       | 8 |   | 58 |   |
| Marketing                                                    |       | 5,548                         |       | 2,842 |   | 772 |   |
| Professional fees                                            |       | 11,493                        |       | 9,520 |   | 1,841 |   |
| Stationery and  supplies                                     |       | 5,873                         |       | 3,173 |   | 1,575 |   |
| Other                                                        |       | 79,556                        |       | 29,570 |   | 13,792 |   |
| Other expenses                                               |       | 460,460                       |       | 223,876 |   | 95,522 |   |
| Income (loss) before income taxes                            |       | (75,339                       | )          | 51,433 |   | 21,286 |   |
| Provision  (benefit) for income taxes                        |       | (31,051                       | )          | 21,872 |   | 8,881 |   |
| Income (loss)  before cumulative effect of accounting change |       | (44,288                       | )          | 29,561 |   | 12,405 |   |
| Cumulative effect  of accounting change                      |       | —                        |       | 4,731 |   | — |   |
| Net income (loss)—discontinued  operations              |       | $                             | (44,288    | ) | $ | 34,292 |   | $ | 12,405 |   |

 

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**19. Commitments andContingencies**

In the normal course of business, there are variousoutstanding commitments and contingent liabilities, such as standby letters ofcredit, which the Company considers to be guarantees under FIN 45 and certaincommitments to extend credit, which are not reflected in the accompanyingconsolidated financial statements. The Company uses the same policies in makingcommitments as it does for on-balance sheet instruments. No material losses areanticipated as a result of these transactions. The Company was contingentlyliable under standby letters of credit in the amount of $6.4 million at both December 31,2003 and 2002, respectively.

In addition, at December 31, 2003 and 2002,mortgage loan commitments and unused balances under revolving credit linesapproximated $1.2 billion and $1.5 billion, respectively. As of December 31,2003 and 2002, the Mortgage Company had commitments to sell loans of $424.0million and $2.7 billion, respectively.

Totaloperating rental commitments on branch offices and other facilities, whichexpire at various dates through September 2017, exclusive of renewaloptions, are as follows (000’s omitted):
| 2004                 |   | $      | 8,635  |   |
|----------------------|--------|--------|--------|--------|
| 2005                 |   | 6,681  |   |
| 2006                 |   | 5,894  |   |
| 2007                 |   | 4,539  |   |
| 2008                 |   | 3,031  |   |
| 2009 and  thereafter |   | 11,806 |   |
|                 |   | $      | 40,586 |   |

 

Rental expense included inthe consolidated statements of income was approximately $7,821,000 $5,323,000and $3,549,000 for the years ended December 31, 2003, 2002 and 2001,respectively.

**20. DisclosuresAbout Fair Value of Financial Instruments**

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

**Cashand Due from Banks and Federal Funds Sold.  **Forthese short-term instruments, the carrying amount is a reasonable estimate offair value.

**AccruedInterest.  **The carrying amount is a reasonableestimate of fair value.

**SecuritiesAvailable for Sale.  **Fair values for securitiesare based on quoted market prices or dealer quotes. If a quoted market price isnot available, fair value is estimated using quoted market prices for similarsecurities.

**Loans.  **Forloans, fair value is based on the credit and interest rate characteristics ofindividual loans. The loans are stratified by type, maturity, interest rate,underlying collateral, where applicable and credit quality ratings. Forresidential loans fair value was based on published market values of comparablesecurities in the mortgage backed securities market with an adjustment to thespread to reflect whole loans. For commercial loans fair value is estimated bydiscounting scheduled cash flows through the maturities of the loans using discountrates, which in management’s opinion best reflect current market rates thatwould be charged on loans with similar characteristics and credit quality.

**MortgageLoans Held for Sale.  **The fair values of thesefinancial instruments were based upon the published mark to market pricinginformation available as of December 31, 2003 and 2002. In December 2003the Company designated a hedging relationship for a majority of the loans heldfor sale 

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and forward sale agreementwith an investor. Due to this agreement the changes in the fair value of theloans are highly correlated to the changes in the fair value of the forwardsales derivative contract, resulting in the loans being recorded on the balancesheet at the estimated fair value as of December 31, 2003.

**DepositLiabilities.  **The fair value of demand deposits,savings accounts and certain money market deposits is the amount payable ondemand at the reporting date. The fair value of fixed-maturity certificates ofdeposit is estimated using the rates currently offered for deposits of similarremaining maturities.

Demand deposits, savings accounts and certain moneymarket deposits are valued at their carrying value. In the Company’s opinion,these deposits could be sold at a premium based on management’s knowledge ofthe results of recent sales of financial institutions in the New York Cityarea.

**AdvancesFrom Borrowers for Taxes and Insurance.  **Thecarrying amount is a reasonable estimate of fair value.

**BorrowedFunds.  **Fair value is based on discountedcontractual cash flows using current market interest rates for comparableborrowings.

Theestimated fair values of the Company’s financial instruments are as follows:
| ** **                                      | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Carrying Amount**        | ** ** | **Fair Value** | ** ** |
| ** **                                      | ** ** | **(000’s omitted)**        | ** ** |
| Financial assets:                               |       |                            |       |   |   |   |   |
| Cash and due from banks                         |       |                            | $          | 100,699 |   |   | $ | 100,699 |   |
| Federal funds sold                              |       |                            | 137,000    |   |   | 137,000 |   |
| Securities available for sale                   |       |                            | 2,012,520  |   |   | 2,012,520 |   |
| Federal Home Loan Bank of NY stock              |       |                            | 118,400    |   |   | 118,400 |   |
| Loans held in portfolio                         |       |                            | 3,551,359  |   |   | 3,660,754 |   |
| Less—Allowance for loan losses             |       |                            | (25,441    | ) |   | — |   |
| Loans held for sale                             |       |                            | 1,200,031  |   |   | 1,200,031 |   |
| Accrued interest receivable                     |       |                            | 26,150     |   |   | 26,150 |   |
| Financial liabilities:                          |       |                            |       |   |   |   |   |
| Savings and demand deposits                     |       |                            | 2,632,259  |   |   | 2,632,259 |   |
| Certificates of deposit                         |       |                            | 1,215,089  |   |   | 1,227,009 |   |
| Borrowed funds                                  |       |                            | 2,950,927  |   |   | 3,043,344 |   |
| Advances from borrowers for taxes and insurance |       |                            | 21,931     |   |   | 21,931 |   |
| Accrued interest  payable                       |       |                            | 13,145     |   |   | 13,145 |   |
|                                                 |            |                                 |            |  |  |  |  |  |  |

 

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| ** **                                      | ** ** | **December 31, 2002** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **Carrying Amount**        | ** ** | **Fair Value** | ** ** |
| ** **                                      | ** ** | **(000’s omitted)**        | ** ** |
| Financial assets:                               |       |                            |       |   |   |   |   |
| Cash and due from banks                         |       |                            | $          | 137,085 |   |   | $ | 137,085 |   |
| Federal funds sold                              |       |                            | 237,000    |   |   | 237,000 |   |
| Securities available for sale                   |       |                            | 911,432    |   |   | 911,432 |   |
| Federal Home Loan Bank of NY stock              |       |                            | 112,150    |   |   | 112,150 |   |
| Loans held in portfolio                         |       |                            | 3,445,265  |   |   | 3,568,297 |   |
| Less—Allowance for loan losses             |       |                            | (22,773    | ) |   | — |   |
| Loans held for sale                             |       |                            | 1,729,890  |   |   | 1,733,309 |   |
| Accrued interest receivable                     |       |                            | 23,976     |   |   | 23,976 |   |
| Financial liabilities:                          |       |                            |       |   |   |   |   |
| Savings and demand deposits                     |       |                            | 2,358,764  |   |   | 2,358,764 |   |
| Certificates of deposit                         |       |                            | 1,105,370  |   |   | 1,126,491 |   |
| Borrowed funds                                  |       |                            | 2,756,927  |   |   | 2,882,313 |   |
| Advances from borrowers for taxes and insurance |       |                            | 23,537     |   |   | 23,537 |   |
| Accrued interest  payable                       |       |                            | 14,897     |   |   | 14,897 |   |
|                                                 |            |                                 |            |  |  |  |  |  |  |

 

Theestimated fair values of the Company’s derivative financial instruments as of December 31,2003 and 2002, respectively, are as follows:
| ** **                                                      | ** ** | **December 31, 2003** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **Notional**                    | ** ** | **Carrying  Amount** | ** ** | **Fair**Value | ** ** |
| ** **                                                      | ** ** | **(000’s omitted)**   | ** ** |
| Derivatives related to  Mortgage loans held for sale: |       |                            |       |   |   |   |   |
| Forward delivery  commitments                                   |       | $                               | 1,696,235  |   | $(16,855 | ) | $(16,855 | ) |
| Commitments to purchase/originate  mortgages                    |       | 684,573                         |       | (5,510 | ) | (5,510 | ) |
|                                                                 |            |                                 |            |  |  |  |  |  |

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

 

The Company’s derivative financial instrumentsillustrated above are held for purposes other than trading. Fair value amountswere determined based upon available market information.

**Mortgage Loans Held forSale and Commitments to Purchase/Originate Mortgages.**   Priorto the closing and funds disbursement on a single-family residential mortgageloan, the Company generally extends an interest rate locked commitment to theborrower. Such commitments obligate the Company to close the mortgage loan at aspecified rate of interest provided the conditions to closing are satisfied.However, a period of 15 to 90 days, or more, generally elapses between the timesuch commitments are issued and the time that the Company sells the closedmortgage loans into the secondary market. During such time, the Company issubject to risk that market rates of interest may change, since the price thatinvestors will pay for mortgage loans purchased from the Company is dependent,in part, on the difference between the interest rate on such loans and thethen-current rate. Rates are based on long-term (generally 10-year) U.S.Treasury bonds plus a margin (with any such difference referred to as thespread). If market rates of interest rise, the spread between locked loans andthe U.S. Treasury rate will widen and investors 

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generally will payless to purchase such loans resulting in a reduction in the amount of theCompany’s gain recognized on sale or, in some instances, a loss. In an effortto mitigate such interest rate risk, substantially at the same time the Companyextends an interest rate locked commitment to its borrower, it also enters intoforward delivery sales commitments. Pursuant to the forward sales commitments,the Company agrees to deliver whole mortgage loans to various investors or toissue FNMA and/or FHLMC mortgage-backed securities. Gains and losses resultingfrom changes in value of forward sale commitments are recognized in earnings inthe current period.

**21. RegulatoryMatters**

TheFederal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)imposes a number of mandatory supervisory measures on banks and thriftinstitutions. One of the items FDICIA imposed was certain minimum capitalrequirements or classifications. Such classifications are used by the FDIC andother bank regulatory agencies to determine matters ranging from eachinstitution’s semiannual FDIC deposit insurance premium assessments to approvalsof applications authorizing institutions to grow their asset size or otherwiseexpand business activities. Under OTS capital regulations, the Bank is requiredto comply with each of three separate capital adequacy standards. Set forthbelow is a summary of the Bank’s compliance with OTS capital standards as of December 31,2003 and 2002 (000’s omitted):
| ** **                    | ** ** | **December 31, 2003** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Actual**                      | ** ** | **Percent** | ** ** | **Required** | ** ** | **Percent** | ** ** |
| **SI Bank & Trust:** |       |                            |       |   |   |   |   |   |   |   |   |
| Tangible capital              |       | $                               | 464,996    |   | 6.30 | % | $ | 110,675 |   |   | 1.50 | % |   |
| Core capital                  |       | 466,426                         |       | 6.32 |   | 295,191 |   |   | 4.00 |   |   |
| Risk-based  capital           |       | 490,569                         |       | 12.34 |   | 318,932 |   |   | 8.00 |   |   |
|                               |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

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

 

As part of the IPO in December 1997, inaccordance with the requirements of the OTS, the Bank established a liquidationaccount for $183,947,000 which was equal to its capital as of the date of thelatest consolidated statement of financial condition (September 30, 1997)appearing in the IPO prospectus supplement. The liquidation account is reducedto the extent that eligible account holders have reduced their qualifyingdeposits. Subsequent increases in deposits do not restore an eligible accountholder’s interest in the liquidation account. In the event of a completeliquidation of the Bank, each eligible account holder will be entitled toreceive a distribution from the liquidation account in an amount proportionateto the adjusted qualifying balances for accounts then held. This account had abalance of $26,373,000 at December 31, 2003.

In addition to therestriction described above, the Company may not declare or pay cash dividendson or repurchase any of its shares of common stock if the effect thereof wouldcause stockholders’ equity to be reduced below applicable regulatory capitalmaintenance requirements or if such declaration and payment would otherwiseviolate regulatory requirements.

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**22. Staten IslandBancorp, Inc.**

Thefollowing condensed statements of financial condition as of December 31,2003 and 2002 and condensed statements of income and cash flows for each of theyears in the three-year period ended December 31, 2003 represent theparent-company-only financial information and should be read in conjunctionwith the consolidated financial statements and the notes thereto.

**Condensed Statements of Financial Condition**
| ** **                                                                                                            | ** ** | **December 31,**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                            | ** ** | **2003**                      | ** ** | **2002** | ** ** |
| ** **                                                                                                            | ** ** | **(000’s omitted)** | ** ** |
| Assets:                                                                                                               |       |                          |       |   |   |
| Cash                                                                                                                  |       | $                             | 7,339      |   | $ | 62 |   |
| Securities available for sale                                                                                         |       | 40,137                        |       | 33,506 |   |
| Investment in Bank                                                                                                    |       | 526,682                       |       | 547,222 |   |
| ESOP loan receivable from Bank                                                                                        |       | 30,409                        |       | 32,606 |   |
| Other assets                                                                                                          |       | 2,802                         |       | 13,677 |   |
| Total assets                                                                                                          |       | $                             | 607,369    |   | $ | 627,073 |   |
| Liabilities:                                                                                                          |       |                          |       |   |   |
| Loan payable to Bank                                                                                                  |       | $                             | —     |   | $ | 7,840 |   |
| Accrued interest and other liabilities                                                                                |       | 2,404                         |       | 4,965 |   |
| Total liabilities                                                                                                     |       | 2,404                         |       | 12,805 |   |
| Stockholders’  equity:                                                                                           |       |                          |       |   |   |
| Common stock                                                                                                          |       | 903                           |       | 903 |   |
| Additional paid-in capital                                                                                            |       | 600,592                       |       | 586,405 |   |
| Retained earnings                                                                                                     |       | 374,987                       |       | 391,739 |   |
| Unallocated ESOP shares                                                                                               |       | (24,722                       | )          | (27,468 | ) |
| Unearned RRP shares                                                                                                   |       | (3,854                        | )          | (8,894 | ) |
| Less—Treasury stock (29,969,828 and 29,991,227  shares at December 31, 2003 and 2002, respectively) at cost |       | (351,222                      | )          | (339,982 | ) |
| Accumulated other comprehensive income, net of tax                                                                    |       | 8,281                         |       | 11,565 |   |
| Total stockholders’ equity                                                                                       |       | 604,965                       |       | 614,268 |   |
| Total liabilities  and stockholder’s equity                                                                      |       | $                             | 607,369    |   | $ | 627,073 |   |

 

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**Condensed Statements of Income**
| ** **                                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                             | ** ** | **(000’s omitted)**              | ** ** |
| Income:                                                                                                |       |                                       |       |   |   |   |   |
| Investment income                                                                                      |       | $                                          | 1,167      |   | $ | 2,153 |   | $ | 5,159 |   |
| Other interest income                                                                                  |       | —                                     |       | 34 |   | 50 |   |
| Interest income ESOP loan                                                                              |       | 2,623                                      |       | 2,795 |   | 2,954 |   |
| Other income                                                                                           |       | —                                     |       | 32 |   | 600 |   |
| Loss on sale of investments                                                                            |       | (2,719                                     | )          | (1,442 | ) | (1,341 | ) |
|                                                                                                   |       | 1,071                                      |       | 3,572 |   | 7,422 |   |
| Expenses:                                                                                              |       |                                       |       |   |   |   |   |
| Interest expense                                                                                       |       | 654                                        |       | 2,245 |   | 3,819 |   |
| Other expense                                                                                          |       | 2,521                                      |       | 660 |   | 423 |   |
| Income (loss) before provision (benefit) forincome taxes and  equity in undistributed earnings of Bank |       | (2,104                                     | )          | 667 |   | 3,180 |   |
| Provision for income taxes                                                                             |       | 391                                        |       | 2,052 |   | 1,676 |   |
| Income (loss) before equity in undistributed  earnings of Bank                                         |       | (2,459                                     | )          | (1,385 | ) | 1,504 |   |
| Equity in  undistributed earnings of Bank                                                              |       | 15,324                                     |       | 101,763 |   | 44,229 |   |
| Net income                                                                                             |       | $                                          | 12,829     |   | $ | 100,378 |   | $ | 45,733 |   |

 

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**Condensed Statements of Cash Flows**
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2003**                                   | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                         | ** ** | **(000’s omitted)**              | ** ** |
| Cash flows from  operating activities:                                             |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 12,829     |   | $ | 100,378 |   | $ | 45,733 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Undistributed earnings of Bank                                                     |       | (15,324                                    | )          | (101,763 | ) | (44,229 | ) |
| Impairment loss on available for sale securities                                   |       | 819                                        |       | 2,591 |   | — |   |
| Loss (gain) on sale of available-for-sale Securities                               |       | 1,900                                      |       | (1,149 | ) | 1,341 |   |
| Decrease in accrued interest receivable                                            |       | —                                     |       | 9 |   | 278 |   |
| Decrease in other assets                                                           |       | 9,730                                      |       | — |   | 1,493 |   |
| Increase in accrued interest payable                                               |       | 2,561                                      |       | 1,990 |   | 1,404 |   |
| Decrease (increase) in deferred income taxes                                       |       | 1,145                                      |       | (2,267 | ) | — |   |
| Net cash used in provided by operating activities                                  |       | 13,660                                     |       | (211 | ) | 6,020 |   |
| Cash flows from  investing activities:                                             |       |                                       |       |   |   |   |   |
| Decrease in investment in Bank                                                     |       | 39,586                                     |       | 67,285 |   | 56,346 |   |
| Sales of available-for-sale securities                                             |       | 895                                        |       | 38,540 |   | 75,072 |   |
| Purchases of available-for-sale securities                                         |       | (5,457                                     | )          | (11,169 | ) | (24,449 | ) |
| Principal collected on ESOP loan                                                   |       | 2,197                                      |       | 2,025 |   | 1,866 |   |
| Net cash (used in) provided by investing activities                                |       | 37,221                                     |       | 96,681 |   | 108,835 |   |
| Cash flows from  financing activities:                                             |       |                                       |       |   |   |   |   |
| Increase (decrease) in borrowings                                                  |       | (7,840                                     | )          | (32,222 | ) | 6,871 |   |
| Exercise of stock options                                                          |       | 29,371                                     |       | 10,244 |   | 3,654 |   |
| Dividends paid                                                                     |       | (29,581                                    | )          | (25,847 | ) | (19,418 | ) |
| Purchase of treasury stock                                                         |       | (35,616                                    | )          | (60,163 | ) | (104,362 | ) |
| Net cash used in financing activities                                              |       | (43,666                                    | )          | (107,988 | ) | (113,255 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | 7,215                                      |       | (11,518 | ) | 1,600 |   |
| Cash and cash  equivalents, beginning of year                                      |       | 62                                         |       | 11,580 |   | 9,980 |   |
| Cash and cash  equivalents, end of year                                            |       | $                                          | 7,277      |   | $ | 62 |   | $ | 11,580 |   |

 

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**23. QuarterlyFinancial Data (Unaudited)**

Selected unauditedquarterly financial data for the years ended December 31, 2003 and 2002 ispresented below. All per share amounts, including earnings per share, cashdividends declared per share and stock price amounts have been adjusted toreflect the stock dividend:
| ** **                                             | ** ** | **Fourth  Quarter**                                                      | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|
| ** **                                             | ** ** | **(000’s omitted, except per share data)** | ** ** |
| 2003:                                                  |       |                                                                     |       |               |       |                |       |               |       |
| Interest income                                        |       | $                                                                        | 78,497     |               | $          | 77,479              |       | $                  | 80,154     |   | $ | 82,386 |   |
| Interest expense                                       |       | 36,372                                                                   |       | 38,432             |       | 38,824              |       | 40,891             |       |
| Net interest income                                    |       | 42,125                                                                   |       | 39,047             |       | 41,330              |       | 41,495             |       |
| Provision for loan losses                              |       | 1,446                                                                    |       | 1,895              |       | 2,779               |       | 848                |       |
| Service and fee income                                 |       | 6,818                                                                    |       | 7,424              |       | 7,257               |       | 6,606              |       |
| Loan fees and gains                                    |       | (4,643                                                                   | )          | 1,417              |       | (896                | )          | 52                 |       |
| Unrealized gain (loss) on derivative transactions      |       | 2,091                                                                    |       | (3,625             | )          | 66                  |       | 1,826              |       |
| Other income                                           |       | 1,921                                                                    |       | 1,931              |       | 1,936               |       | 1,899              |       |
| Securities transactions                                |       | 252                                                                      |       | 46                 |       | (3                  | )          | 316                |       |
| Non-interest expense                                   |       | 23,054                                                                   |       | 22,046             |       | 21,982              |       | 22,730             |       |
| Income from continuing operations before income  taxes |       | 24,064                                                                   |       | 22,299             |       | 24,929              |       | 28,616             |       |
| Income taxes                                           |       | 10,439                                                                   |       | 9,190              |       | 11,260              |       | 11,902             |       |
| Income from continuing operations after tax            |       | 13,625                                                                   |       | 13,109             |       | 13,669              |       | 16,714             |       |
| Income from discontinued operations after tax          |       | (60,330                                                                  | )          | (3,286             | )          | 10,600              |       | 8,728              |       |
| Net Income                                             |       | (46,705                                                                  | )          | 9,823              |       | 24,269              |       | 25,442             |       |
| Basic earnings  per share—                        |       |                                                                     |       |               |       |                |       |               |       |
| Net income from continuing operations                  |       | 0.26                                                                     |       | 0.25               |       | 0.24                |       | 0.30               |       |
| Net income (loss) from discontinued operations         |       | (1.11                                                                    | )          | (0.06              | )          | 0.20                |       | 0.16               |       |
| Net income (loss)                                      |       | (0.85                                                                    | )          | 0.19               |       | 0.44                |       | 0.46               |       |
| Diluted earnings  per share—                      |       |                                                                     |       |               |       |                |       |               |       |
| Net income from continuing operations                  |       | 0.24                                                                     |       | 0.24               |       | 0.24                |       | 0.29               |       |
| Net income (loss) from discontinued operations         |       | (1.06                                                                    | )          | (0.06              | )          | 0.19                |       | 0.15               |       |
| Net income (loss)                                      |       | (0.82                                                                    | )          | 0.18               |       | 0.43                |       | 0.44               |       |
| Dividends declared per common share                    |       | 0.14                                                                     |       | 0.14               |       | 0.13                |       | 0.13               |       |
| Stock price per common share                           |       |                                                                     |       |               |       |                |       |               |       |
| High                                                   |       | 23.37                                                                    |       | 22.70              |       | 20.50               |       | 21.73              |       |
| Low                                                    |       | 19.10                                                                    |       | 19.08              |       | 14.94               |       | 14.36              |       |
| Close                                                  |       | 22.50                                                                    |       | 19.45              |       | 19.48               |       | 14.92              |       |
|                                                        |            |                                                                          |            |                    |            |                     |            |                    |            |  |  |  |  |

 

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| ** **                                                  | ** ** | ** **                                                               | ** ** | **Fourth**Quarter | ** ** | **Third**Quarter | ** ** | **Second**Quarter | ** ** | **First  Quarter** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **(000’s omitted, except per share data)** | ** ** |
| 2002:                                                       |       |                                                                     |       |              |       |             |       |              |       |
| Interest income                                             |       | $                                                                        | 88,317     |              | $          | 93,433           |       | $                 | 90,398     |               | $          | 86,363 |   |
| Interest expense                                            |       | 44,436                                                                   |       | 46,938            |       | 46,221           |       | 45,685            |       |
| Net interest income                                         |       | 43,881                                                                   |       | 46,495            |       | 44,177           |       | 40,678            |       |
| Provision for loan losses                                   |       | 2,000                                                                    |       | 230               |       | 1,100            |       | 800               |       |
| Service and fee income                                      |       | 3,955                                                                    |       | 3,947             |       | 3,649            |       | 3,223             |       |
| Loan fees and gains                                         |       | 452                                                                      |       | 891               |       | (806             | )          | 891               |       |
| Unrealized gain (loss) on derivative transactions           |       | —                                                                   |       | —            |       | —           |       | —            |       |
| Other income                                                |       | 1,928                                                                    |       | 1,918             |       | 4,879            |       | 1,829             |       |
| Securities transactions                                     |       | (2,506                                                                   | )          | 1,512             |       | 432              |       | 167               |       |
| Non-interest expense                                        |       | 21,201                                                                   |       | 6,232             |       | 20,167           |       | 38,872            |       |
| Income from continuing operations before income  taxes      |       | 24,509                                                                   |       | 48,301            |       | 31,064           |       | 7,116             |       |
| Income taxes                                                |       | 10,245                                                                   |       | 19,704            |       | 12,371           |       | 2,584             |       |
| Income from continuing operations after tax                 |       | 14,264                                                                   |       | 28,597            |       | 18,693           |       | 4,532             |       |
| Income from discontinued operations after tax               |       | 10,298                                                                   |       | 11,879            |       | 1,892            |       | 5,492             |       |
| Cumulative effect of change in accounting for FAS #133 |       | —                                                                   |       | 4,731             |       | —           |       | —            |       |
| Net Income                                                  |       | 24,562                                                                   |       | 45,207            |       | 20,585           |       | 10,024            |       |
| Basic earnings  per share—                             |       |                                                                     |       |              |       |             |       |              |       |
| Net income from continuing operations                       |       | 0.26                                                                     |       | 0.51              |       | 0.33             |       | 0.08              |       |
| Net income (loss) from discontinued operations              |       | 0.19                                                                     |       | 0.21              |       | 0.03             |       | 0.10              |       |
| Cumulative effect of change in accounting principle         |       | —                                                                   |       | 0.09              |       | —           |       | —            |       |
| Net income (loss)                                           |       | 0.45                                                                     |       | 0.81              |       | 0.36             |       | 0.18              |       |
| Diluted earnings  per share—                           |       |                                                                     |       |              |       |             |       |              |       |
| Net income from continuing operations                       |       | 0.25                                                                     |       | 0.49              |       | 0.31             |       | 0.08              |       |
| Net income (loss) from discontinued operations              |       | 0.17                                                                     |       | 0.21              |       | 0.04             |       | 0.09              |       |
| Cumulative effect of change in accounting principle         |       | —                                                                   |       | 0.08              |       | —           |       | —            |       |
| Net income (loss)                                           |       | 0.42                                                                     |       | 0.78              |       | 0.35             |       | 0.17              |       |
| Dividends declared per common share                         |       | 0.13                                                                     |       | 0.12              |       | 0.11             |       | 0.10              |       |
| Stock price per  common share                               |       |                                                                     |       |              |       |             |       |              |       |
| High                                                        |       | 21.18                                                                    |       | 21.38             |       | 22.72            |       | 20.20             |       |
| Low                                                         |       | 12.96                                                                    |       | 14.74             |       | 18.00            |       | 16.07             |       |
| Close                                                       |       | 20.14                                                                    |       | 17.40             |       | 19.20            |       | 19.68             |       |
|                                                             |            |                                                                          |            |                   |            |                  |            |                   |            |                    |            |  |  |  |  |

 

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

Not applicable.

**Item 9A. Controlsand Procedures**

Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934)as of the end of the period covered by this report. Based on such evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures are designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and regulations andare operating in an effective manner.

**PART III.**

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

Information concerning the principal position with theCompany and the Bank and principal occupation of each member of the Boardduring the past five years is set forth below.

Harry P. Doherty. Mr. Doherty has served asChairman of the Board and Chief Executive Officer of the Bank since May 1990.Mr. Doherty has also served as a director of the Mortgage Company since1998. Previously, Mr. Doherty served as President and Chief OperatingOfficer from 1989 to 1990 and Executive Vice President from 1987 to 1989. Mr. Dohertyhas been employed by the Bank since 1966. Mr. Doherty is a director ofCBANYS and is Second Vice Chairman of Americas Community Bankers.

James R. Coyle. Mr. Coyle has served as Presidentand Chief Operating Officer of the Bank since June 1990. Previously, Mr. Coyleserved as Executive Vice President from 1987 to 1990 and as Chief FinancialOfficer from 1989 to 1990. Mr. Coyle has been employed by the Bank since1970. Mr. Coyle also serves as Chairman of the Board of the Banks whollyowned subsidiary, SIB Mortgage Corp. (the Mortgage Company). Mr. Coyleserves as Director and Vice President of AMF Large Cap Equity InstitutionalFund, Inc. Mr. Coyle is a member of the Professional DevelopmentCommittee of American Community Bankers and is a member of Community BankersAssociation of New York State 

David L. Hinds, Director. Mr. Hinds retired fromDeutsche Bank/Bankers Trust Company, New York, New York in May 2000 wherehe served as Managing Director and Partner for Global Cash Management and TradeFinance. Previously, Mr. Hinds led several operating divisions, a start-uptechnology division and a global marketing and sales organization at DeutscheBank and Bankers Trust. Mr. Hinds is a director of Carver Bancorp, Inc.and SBLI Mutual Life Insurance Company. Mr. Hinds also is a co-founder ofthe Urban Bankers Coalition and former Chairman of the Executive LeadershipCouncil.

Denis P. Kelleher, Director. Mr. Kelleher isChief Executive Officer of Wall Street Access (formerly Wall Street InvestorsServices), a financial services company and member firm of the NYSE, located inNew York City. Mr. Kelleher also serves as a director of The Ireland Fund, Inc.,a closed end investment company listed on the NYSE having a main investmentfocus in Irish-based securities.

Craig G. Matthews, Director. Mr. Matthews retiredfrom KeySpan Corporation, a natural gas and electric company, located inBrooklyn, New York in March 2002 where he served as Vice Chairman, ChiefOperating Officer and Director. Mr. Matthews served as President and ChiefOperating Officer of KeySpan and its principal gas subsidiary, KeySpan EnergyDelivery, formerly, The Brooklyn Union Corporation, from 1999 to 2001 andExecutive Vice President and Chief Financial Officer from 1998-1999. 

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Prior to May 28,1998, he served as President and Chief Operating Officer of Brooklyn Union. Mr. Matthewscurrently serves as a director of Amerada Hess Corporation and Covanta EnergyCorporation. In addition, Mr. Matthews serves as President of The BrooklynPhilharmonic Orchestra, a director of Polytechnic University and a member ofthe New York City and National Advisory Boards for the Salvation Army.

Julius Mehrberg, Director. Mr. Mehrberg is aprincipal and partner in various real estate development and managementcompanies, primarily Fingerboard Estates Corp., located in Staten Island, NewYork. 

John R. Morris, Director. Mr. Morris retired fromMerrill Lynch in May 1997 where he served as a Vice President of theCapital Markets and Private Client groups. Mr. Morris has over 35 years ofexperience in the financial services area. Mr. Morris currently is aprivate investor and is self-employed as a consultant.

William E. O’Mara, Director. Mr. O’Mara retiredfrom the firm of Wohl and O’Mara, civil engineers and land surveyors, locatedin Staten Island, New York in December 2001where he served as aconsultant. Prior to January 2, 1998, he served as a partner in the firm.

Lenore F. Puleo, Director. Ms. Puleo is ExecutiveVice President of Client Services of KeySpan Corporation, Brooklyn, New York.Previously, Ms. Puleo served as Senior Vice President of KeySpanCorporation from 1994 to 2000. Ms. Puleo is a member of the Board of theUnited Way of New York City and is a member of the Board of The Eden II Programfor Autistic Children and Adults, Staten Island, New York.

Allen Weissglass,Director. Mr. Weissglass is the Chairman of Magruder Color Company, Inc.(Magruder), a family-owned organic pigments manufacturer, located in Elizabeth,New Jersey. Previously, Mr. Weissglass served as President and ChiefExecutive Officer of Magruder from 1962 to 2002. Mr. Weissglass is amember of the Advisory Board of Liberty Mutual Insurance Co., East Hanover, NewJersey.

**Executive OfficersWho Are Not Directors**

Set forth below is information concerning certainexecutive officers of the Company and the Bank or the Mortgage Company who donot serve on the Board of Directors of the Company. All executive officers areelected by the Board of Directors and serve until their successors are electedand qualified. No executive officer is related to any director or otherexecutive officer of the Company by blood, marriage or adoption, and there areno arrangements or understandings between a director of the Company and anyother person pursuant to which such person was elected an executive officer.Ages are reflected as of March 4, 2004.

Frank J. Besignano.Age 49 years. Mr. Besignano has served as Senior Vice President of theBank for Marketing, Business Development and Compliance since May 1991. Mr. Besignanohas been employed by the Bank since 1982 and previously served as VicePresident and marketing officer.

John P. Brady*.*Age 52 years. Mr. Brady has servedas Executive Vice President and Chief Lending Officer since May 1987. Mr. Bradyhas been employed by the Bank since 1982 and previously served as Vice Presidentand mortgage officer and as the Community Reinvestment Act officer for theBank. Mr. Brady is also a director of the Mortgage Company.

Donald C. Fleming.Age 55 years. Mr. Fleming has served as Senior Vice President and ChiefFinancial Officer since May 2003. Previously Mr. Fleming served asSenior Vice President for Strategic Planning and Technical Services since January 1997.

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Ira Hoberman. Age 57years. Mr. Hoberman has served as Executive Vice President of the Banksince July 2000. Prior to the merger of First State Bank with the Bank in January 2000,Mr. Hoberman served as President and Chief Executive Officer of FirstState Bank.

DeborahPagano. Age 49 years. Ms. Pagano has served as Senior VicePresident—Branch Administration for the Bank since May 1989. Ms. Paganohas been employed by the Bank since 1976 and previously served as VicePresident of the Bank.

**SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE**

Section 16(a) of the Exchange Act requiresthe Companys officers and directors, and persons who own more than 10% of theCommon Stock, to file reports of ownership and changes in ownership with theSEC and the NYSE. Officers, directors and greater than 10% stockholders arerequired by regulation to furnish the Company with copies of all Section 16(a) formsthey file. Other than the Company’s ESOP, the Company knows of no person whoowns 10% or more of the Common Stock.

Based solely on review of the copies of such formsfurnished to the Company, or written representations from its officers anddirectors, the Company believes that with respect to 2003, the Company’sofficers and directors satisfied the reporting requirements promulgated under Section 16(a) ofthe Exchange Act, except with respect to Mr. Besignano who was late reportingone transaction on Form 4, which has since been reported.

In light of the Company’spending merger with ICBC, which is expected to be completed in the secondquarter of 2004, (i) its board of Directors has not made any determinationwith respect to an audit committee financial expert and (ii) has notadopted a code of ethics (although SI Bank & Trust has had a code ofethics in place which is applicable to the Company’s executive officers).

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**Item 11.**   Executive Compensation.

**SummaryCompensation Table**

Thefollowing table sets forth a summary of certain information concerning thecompensation paid the Company’s and the Bank’s Chief Executive Officer, the fourother most highly compensated named executive officers of the Bank and thePresident of the Mortgage Company, the Bank’s wholly-owned subsidiary. All cashcompensation is paid by the Bank or the Mortgage Company. The Company does notpay any additional cash amounts for services provided by the below namedexecutive officers.
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long Term Compensation** | ** ** | ** **            | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                           | ** ** | ** **            | ** ** | **Awards** | ** ** | **Payouts** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                           | ** ** | ** **            | ** ** | ** ** | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                           | ** ** | **Other Annual** | ** ** | **Restricted** | ** ** | **Underlying** | ** ** | **LTIP** | ** ** | **All Other** | ** ** |
| **Name and Principal Position** | ** ** | ** ** | ** ** | **Year**                     | ** ** | **Salary**                           | ** ** | **Bonus**             | ** ** | **Compensation(1)** | ** ** | **Stock** | ** ** | **Options** | ** ** | **Payouts** | ** ** | **Compensation(2)** | ** ** |
| Harry P. Doherty                               |       | 2003       |       | $                            | 715,000    |                                 | $          | —                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 310,395 |   |   |
| Chairman and Chief                             |       | 2002       |       | 682,000                      |       | 170,500                              |       |                  | —     |   |   |   | — |   |   |   | 243,971 |   |   |   | — |   |   |   | 279,144 |   |   |
| Executive Officer                              |       | 2001       |       | 650,000                      |       | 422,500                              |       |                  | —     |   |   |   | — |   |   |   | 400,000 |   |   |   | — |   |   |   | 274,788 |   |   |
| James R. Coyle                                 |       | 2003       |       | $                            | 472,000    |                                 | $          | —                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 228,159 |   |   |
| President and  Chief                           |       | 2002       |       | 472,000                      |       | 94,400                               |       |                  | —     |   |   |   | — |   |   |   | 129,763 |   |   |   | — |   |   |   |   203,935 |   |   |
| Operating Officer                              |       | 2001       |       | 450,000                      |       | 234,000                              |       |                  | —     |   |   |   | — |   |   |   | 220,000 |   |   |   | — |   |   |   | 200,978 |   |   |
| John P. Brady                                  |       | 2003       |       | $                            | 240,000    |                                 | $          | —                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 149,647 |   |   |
| Executive Vice                                 |       | 2002       |       | 210,000                      |       | 50,400                               |       |                  | —     |   |   |   | — |   |   |   | 32,692 |   |   |   | — |   |   |   | 110,102 |   |   |
| President                                      |       | 2001       |       | 195,000                      |       | 37,440                               |       |                  | —     |   |   |   | — |   |   |   | 50,000 |   |   |   | — |   |   |   | 106,870 |   |   |
| Ira Hoberman                                   |       | 2003       |       | $                            | 275,000    |                                 | $          | —                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 80,475 |   |   |
| Executive Vice                                 |       | 2002       |       | 350,000                      |       | —                               |       |                  | —     |   |   |   | — |   |   |   | 26,002 |   |   |   | — |   |   |   | 67,940 |   |   |
| President                                      |       | 2001       |       | 350,000                      |       | —                               |       |                  | —     |   |   |   | — |   |   |   | 35,000 |   |   |   | — |   |   |   | 56,428 |   |   |
| Donald Fleming                                 |       | 2003       |       | $                            | 250,000    |                                 | $          | —                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 90,833 |   |   |
| Sr. Vice President                             |       | 2002       |       | 160,000                      |       | 34,800                               |       |                  | —     |   |   |   | — |   |   |   | 24,908 |   |   |   | — |   |   |   | 76,753 |   |   |
| Chief Financial  Officer                       |       | 2001       |       | 150,000                      |       | 55,350                               |       |                  | —     |   |   |   | — |   |   |   | 40,000 |   |   |   | — |   |   |   | 65,535 |   |   |
| Richard Payne                                  |       | 2003       |       | $                            | 325,000    |                                 | $          | —                |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 12,000 |   |   |
| President and  Chief Executive                 |       | 2002       |       | 197,420                      |       | 783,581                              |       |                  | —     |   |   |   | — |   |   |   | 35,734 |   |   |   | — |   |   |   | 1,650 |   |   |
| Officer of SIB  Mortgage Corp.                 |       | 2001       |       | 197,420                      |       | 296,130                              |       |                  | —     |   |   |   | — |   |   |   | 50,000 |   |   |   | — |   |   |   | 855 |   |   |
|                                                |            |            |            |                              |            |                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)     Does not include amounts attributable to miscellaneousbenefits received by the named executive officer. In the opinion of managementof the Bank, the costs to the Bank of providing such benefits to the namedexecutive officer during the year ended December 31, 2003 did not exceedthe lesser of $50,000 or 10% of the total of annual salary and bonus reportedfor the individual.

(2)     In fiscal year 2003, consists of the Bank’scontributions to the Bank’s 401(k) plan of $12,000, $12,000, $6,000 and $12,000for the account of Messrs. Doherty, Coyle, Hoberman and Brady,respectively, $174,285, $92,049 and $13,537 allocated to Messrs. Doherty,Coyle and Brady, respectively, pursuant to the Bank’s Supplemental ExecutiveRetirement Plan (SERP), and $124,020, $124,020, $74,385, $124,020 and $90,743allocated on behalf of Messrs. Doherty, Coyle, Hoberman, Brady andFleming, respectively, pursuant to the ESOP. The Mortgage Company contributed$12,000 to the 401(k) account of Mr. Payne in 2003.

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**Stock Options**

There were no grants of stock options awarded to theexecutive officers during the fiscal year ended December 31, 2003.

Thefollowing table sets forth certain information concerning exercises of stockoptions by the named executive officers during the fiscal year ended December 31,2003 and options held at December 31, 2003.

**AggregatedOption Exercises During 2003 andOption Values on December 31, 2003**
| ** **       | ** ** | **Shares Acquired on** | ** ** | ** **   | ** ** | **Number of  Unexercised  Options at Year End** | ** ** | **Value of  Unexercised  Options at Year End(1)** | ** ** |
|------------------|------------|----------------------------------|------------|--------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Name**         | ** ** | ** **                       | ** ** | **Exercise** | ** ** | **Value Realized**                                             | ** ** | **Exercisable**                                                       | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Harry P. Doherty |       |                             | 916,667    |         |       |                                                                | $          | 8,732,839                                                             |       |   |   | — |   |   |   | 377,304 |   |   | $ | — |   | $ | 1,668,194 |   |
| James R. Coyle   |       |                             | 596,667    |         |       |                                                                | 5,599,911  |                                                                  |       |   | — |   |   |   | 203,096 |   |   | — |   | 906,895 |   |
| Ira Hoberman     |       |                             | 10,000     |         |       |                                                                | —     |                                                                  |       |   | 23,333 |   |   |   | 57,669 |   |   | 189,464 |   | 430,261 |   |
| Donald Fleming   |       |                             | —     |         |       |                                                                | —     |                                                                  |       |   | 184,667 |   |   |   | 38,241 |   |   | 1,964,332 |   | 168,043 |   |
| John P. Brady    |       |                             | —     |         |       |                                                                | —     |                                                                  |       |   | 209,333 |   |   |   | 49,359 |   |   | 2,217,576 |   | 213,797 |   |
| Richard Payne    |       |                             | —     |         |       |                                                                | —     |                                                                  |       |   | 33,333 |   |   |   | 52,401 |   |   | 270,664 |   | 221,098 |   |
|                  |            |                                  |            |              |            |                                                                     |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Basedon a per share market price of $22.50 at December 31, 2003.

**Employment Agreements**

In December 1997, the Company and the Bank (theEmployers) entered into employmentagreements with each of Messrs. Doherty, Coyle, Brady, Besignano, Klingeleand Fleming and Ms. Pagano (collectively, the Senior Executive Officers).The Employers agreed to employ each Senior Executive Officer for a term ofthree years, in each case in their current respective positions. The employmentagreements are reviewed annually, and are extended each year for a successiveadditional one-year period upon the approval of the Employers Boards ofDirectors, unless either party elects, not less than 30 days prior to the annualanniversary date, not to extend the employment term.

Each of the employment agreements are terminable withor without cause by the Employers. The Senior Executive Officers have no rightto compensation or other benefits pursuant to the employment agreements for anyperiod after voluntary termination or termination by the Employers for cause.The agreements provide for certain benefits in the event of the SeniorExecutive Officer ‘s death, disability or retirement. In the event that (i) theSenior Executive Officer terminates his or her employment because of failure tocomply with any material provision of the employment agreement or the Employerschange the Senior Executive Officer’s title or duties or (ii) theemployment agreement is terminated by the Employers other than for cause,disability, retirement or death or by the executive as a result of certainadverse actions which are taken with respect to the executive’s employmentfollowing a change in control of the Company, as defined, Messrs. Dohertyand Coyle will be entitled to a cash severance amount equal to three timestheir average annual compensation, as defined, plus an amount to reimburse Messrs. Dohertyand Coyle for certain tax obligations, and the five other Senior ExecutiveOfficers will be entitled to a cash severance amount equal to two times theiraverage annual compensation, as defined.

A change in control is generally defined in theemployment agreements to include any change in control of the Company requiredto be reported under the federal securities laws, as well as (i) theacquisition by any person of 20% or more of the Company’s outstanding votingsecurities and (ii) a change in a majority of the directors of the Companyduring any three-year period without the approval of at least two-thirds of thepersons who were directors of the Company at the beginning of such period.

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With respect to the employment agreements with thefive other Senior Executive Officers, each employment agreement provides that,in the event that any of the payments to be made thereunder or otherwise upontermination of employment are deemed to constitute excess parachute paymentswithin the meaning of Section 280G of the Internal Revenue Code of 1986,as amended (the Code), then such payments and benefits received thereundershall be reduced by the amount which is the minimum necessary to result in thepayments not exceeding three times the recipient’s average annual compensationfrom the employer which was includable in the recipients gross income duringthe most recent five taxable years. Recipients of excess parachute payments aresubject to a 20% excise tax on the amount by which such payments exceed thebase amount, in addition to regular income taxes, and payments in excess of thebase amount are not deductible by the employer as compensation expense forfederal income tax purposes.

In May 2003, the Bankentered into an employment agreement with Mr. Hoberman for a term of twoyears. The employment agreement is reviewed annually, and is extended each yearfor a successive additional one year period upon the approval of the EmployersBoards of Directors, unless either party elects, not less than 30 days prior tothe annual anniversary date, to not extend the employment term. The agreementalso contains a non-compete provision effective for a period of two years afterthe termination of the agreement. Mr. Hoberman is entitled to receive apayment of $350,000 as stated in the employment agreement, as consideration forthe non-compete provision.

**DirectorsCompensation**

Directors of the Company,except for Messrs. Doherty and Coyle, receive $1,800 per meeting attendedof the Board and $1,200 per committee meeting attended ($600 in the case ofeach Bank Loan Review Committee). The Chairman of each committee of the Board receives$1,500 per meeting attended ($750 in the case of the Bank Loan ReviewCommittee). In addition, each non-employee director received an annual retainerof $30,000 and the Chairman of the Audit Committee received an additionalretainer of $3,000. Board fees are subject to periodic adjustment by the Boardof Directors. In addition to fees paid to directors for Board and committeemeetings, directors of the Company participate in the Company’s 1998 StockOption Plan and the Recognition Plan.

**Retirement Plan**

The Bank has maintained a non-contributory,tax-qualified defined benefit pension plan (the Retirement Plan) for eligibleemployees. The Bank froze the Retirement Plan as of December 31, 1999. Subsequentto December 31, 1999, there have been no new enrollments and no furtherbenefit accruals in the Retirement Plan. Credited service ceases to accrueafter December 31, 1999, however, vesting continues for periods ofemployment subsequent to such date. The Retirement Plan provides for a benefitfor each participant, including executive officers named in the SummaryCompensation Table above, equal to 2% of the participant’s final averagecompensation (highest average annual compensation during the 36 consecutivecalendar months during the 120 consecutive calendar months prior to the datethe Retirement Plan was frozen) multiplied by the participant’s years (and anyfraction thereof) of eligible employment (up to a maximum of 30 years). Aparticipant is fully vested in his or her benefit under the Retirement Planafter five years of service. The Retirement Plan is funded by the Bank on aactuarial basis and all assets are held in trust by the Retirement Plantrustee.

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Thefollowing table illustrates the annual benefit payable to eligible employeesupon normal retirement at age 65 at various levels of compensation and years ofservice under the Retirement Plan and the SERP maintained by the Bank. Theannual retirement benefits shown in the table are single life annuity amountswith no offset for Social Security benefits, and there are no other offsets tobenefits.
| **Final Average** | ** ** | ** ** | ** ** | **Years of Service(2)(3)** | ** ** |
|------------------------|------------|------------|------------|--------------------------------------|------------|
| **Compensation(1)**    | ** ** | ** ** | ** ** | **15**                               | ** ** | **20** | ** ** | **25** | ** ** | **30** | ** ** | **35** | ** ** |
| $125,000               |       | $          | 37,500     |                                 | $          | 50,000 |   | $ | 62,500 |   | $ | 75,000 |   | $ | 75,000 |   |
|   150,000    |       | 45,000     |       | 60,000                               |       | 75,000 |   | 90,000 |   | 90,000 |   |
|   175,000    |       | 52,500     |       | 70,000                               |       | 87,500 |   | 105,000 |   | 105,000 |   |
|   200,000    |       | 60,000     |       | 80,000                               |       | 100,000 |   | 120,000 |   | 120,000 |   |
|   225,000    |       | 67,500     |       | 90,000                               |       | 112,500 |   | 135,000 |   | 135,000 |   |
|   250,000    |       | 75,000     |       | 100,000                              |       | 125,000 |   | 150,000 |   | 150,000 |   |
|   300,000    |       | 90,000     |       | 120,000                              |       | 150,000 |   | 180,000 |   | 180,000 |   |
|   400,000    |       | 120,000    |       | 160,000                              |       | 200,000 |   | 240,000 |   | 240,000 |   |
|   450,000    |       | 135,000    |       | 180,000                              |       | 225,000 |   | 270,000 |   | 270,000 |   |
|   500,000    |       | 150,000    |       | 200,000                              |       | 250,000 |   | 300,000 |   | 300,000 |   |
|   550,000    |       | 165,000    |       | 220,000                              |       | 275,000 |   | 330,000 |   | 330,000 |   |
|   600,000    |       | 180,000    |       | 240,000                              |       | 300,000 |   | 360,000 |   | 360,000 |   |
|                        |            |            |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          For the fiscal year ofthe Retirement Plan beginning on or after January 1, 2003, the averagefinal compensation for computing benefits under the Retirement Plan cannotexceed $200,000. Benefits in excess of the limitation are provided through theSERP to Messrs. Doherty, Coyle and Brady.

(2)          The annual retirementbenefits shown in the table are single life annuity amounts with no offset forSocial Security benefits, and there are no other offsets to benefits.

(3)          The maximum years ofservice credited for benefit purposes is 30 years.

Thefollowing table sets forth the years of credited service and the average annualearnings determined as of December 31, 2003, the end of the 2003 planyear, for each of the individuals named in the Summary Compensation Table,except Mr. Hoberman.
| ** **        | ** ** | **Years of Credited  Service** | ** ** | **Average Annual  Earnings(1)** | ** ** |
|-------------------|------------|------------------------------------------|------------|--------------------------------------|------------|
| Harry P. Doherty  |       |                                     | 33         |                                 |       |   | $ | 505,349 |   |   |
| James R. Coyle    |       |                                     | 34         |                                 |       |   | 366,407 |   |   |
| John P. Brady     |       |                                     | 18         |                                 |       |   | 162,151 |   |   |
| Donald C. Fleming |       |                                     | 3          |                                 |       |   | 121,714 |   |   |

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(1)          AverageAnnual Earnings are frozen as of December 31, 1999 for purposes ofcalculating benefits under the Retirement Plan.

**SupplementalExecutive Retirement Plan**

The Bank has adopted theSERP to provide for eligible employees benefits that would be due under itsRetirement Plan and 401(k) Plan if such benefits were not limited under theCode. SERP benefits provided with respect to the Retirement Plan are reflectedin the pension table. The Board of Directors of the Bank also has adopted anamendment to the SERP to provide eligible employees with benefits that would bedue under the ESOP if such benefits were not limited under the Code.

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**Item 12. Security Ownership of Certain BeneficialOwners and Management**and Related Stockholder Matters

Thefollowing table sets forth, as of the Voting Record Date, certain informationas to the Common Stock beneficially owned by (i) each person or entity,including any group as that term is used in Section 13(d)(3) of theExchange Act, who or which was known to the Company to be the beneficial ownerof more than 5% of the issued and outstanding Common Stock; (ii) thedirectors of the Company; (iii) the executive officers named in theSummary Compensation Table; and (iv) all directors, and certain executiveofficers of the Company and the Bank as a group. The table reflects thetwo-for-one stock split effected in the form of a stock dividend which was paidto the Company’s stockholders on November 19, 2001.
| **Name of Beneficial  Owner or Number of  Persons in Group**                                                      | ** ** | ** ** | ** ** | **Amount and Nature  of Beneficial  Ownership as of  March 4, 2004(1)** | ** ** | **Percent of  Common Stock** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| Staten Island  Bancorp, Inc.  Employee Stock Ownership Plan Trust  1535 Richmond Avenue  Staten Island, New York 10314                          |       |       | 6,601,203  | (2)                                                                                                        |       |                                   | 10.9       | % |   |
| SI Bank & Trust Foundation  1535 Richmond Avenue  Staten Island, New York 10314                                                             |       |       | 3,629,394  |                                                                                                       |       |                                   | 6.0        |   |   |
| Barclays Global Investors, NA  45 Fremont Street  San Francisco, California 94105                                                                    |       |       | 3,538,256  | (3)                                                                                                        |       |                                   | 5.8        |   |   |
| Directors:                                                                                                                                           |       |       |       |                                                                                                       |       |                                   |       |   |   |
| James R. Coyle                                                                                                                                       |       |       | 721,637    | (4)                                                                                                        |       |                                   | 1.2        |   |   |
| Harry P. Doherty                                                                                                                                     |       |       | 984,849    | (5)                                                                                                        |       |                                   | 1.6        |   |   |
| David L. Hinds                                                                                                                                       |       |       | —     |                                                                                                       | ** ** | ** **                             | *****      |   |   |
| Denis P. Kelleher                                                                                                                                    |       |       | 321,142    | (7)                                                                                                        | ** ** | ** **                             | *****      |   |   |
| Craig G. Matthews                                                                                                                                    |       |       | 1,000      |                                                                                                       | ** ** | ** **                             | *****      |   |   |
| Julius Mehrberg                                                                                                                                      |       |       | 188,483    | (8)                                                                                                        | ** ** | ** **                             | *****      |   |   |
| John R. Morris                                                                                                                                       |       |       | 251,783    | (9)                                                                                                        | ** ** | ** **                             | *****      |   |   |
| William E. O’Mara                                                                                                                               |       |       | 186,083    | (10)                                                                                                       | ** ** | ** **                             | *****      |   |   |
| Lenore F. Puleo                                                                                                                                      |       |       | 9,133      | (6)                                                                                                        | ** ** | ** **                             | *****      |   |   |
| Allan Weissglass                                                                                                                                     |       |       | 144,891    | (11)                                                                                                       | ** ** | ** **                             | *****      |   |   |
| Named Executive  Officers:                                                                                                                           |       |       |       |                                                                                                       |       |                                   |       |   |   |
| John P. Brady                                                                                                                                        |       |       | 355,517    | (12)                                                                                                       | ** ** | ** **                             | *****      |   |   |
| Ira Hoberman                                                                                                                                         |       |       | 123,350    | (13)                                                                                                       | ** ** | ** **                             | *****      |   |   |
| Donald C.Fleming                                                                                                                                     |       |       | 313,167    | (14)                                                                                                       |       |                                   |       |   |   |
| Richard Payne                                                                                                                                        |       |       | 42,266     | (15)                                                                                                       |       |                                   | *****      |   |   |
| All directors, and  certain executive officers of the Company, named executive officers, and  executive officers of the Bank as a group (16 persons) |       |       | 4,391,214  | (16)                                                                                                       |       |                                   | 7.1        |   |   |

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     *Represents less than 1%of the outstanding Common Stock.

  (1)    Basedupon filings made pursuant to the Exchange Act and information furnished by therespective individuals. Under regulations promulgated pursuant to the ExchangeAct, shares of Common Stock are deemed to be beneficially owned by a person ifhe or she directly or indirectly has or shares 

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(i) votingpower, which includes the power to vote or to direct the voting of the shares,or (ii) investment power, which includes the power to dispose or to directthe disposition of the shares. Unless otherwise indicated, the named beneficialowner has sole voting and dispositive power with respect to the shares.

  (2)    TheStaten Island Bancorp, Inc. Employee Stock Ownership Plan Trust (Trust)was established pursuant to the Staten Island Bancorp, Inc. Employee StockOwnership Plan (ESOP) by an agreement between the Company and Messrs. Coyle,Doherty, Horn, Kelleher and O’Mara who act as trustees of the plan (Trustees).As of December 31, 2003, 4,120,274 shares of Common Stock held in theTrust were unallocated and 2,480,929 shares had been allocated to the accountsof participating employees. Under the terms of the ESOP, the Trustees willgenerally vote the allocated shares held in the Trust in accordance with theinstructions of the participating employees. Unallocated shares held in theESOP will generally be voted in the same ratio as those allocated shares forwhich instructions are given, subject to the fiduciary duties of the Trusteesand applicable law. Any allocated shares which either abstain on the proposalor are not voted will be disregarded in determining the percentage of stockvoted for and against each proposal by the participants and beneficiaries,subject to the fiduciary duties of the Trustees and applicable law. The amountof Common Stock beneficially owned by directors who serve as Trustees of theESOP and by all directors and executive officers as a group does not includethe shares held by the ESOP (except for shares allocated to an executiveofficer as a participant).

  (3)    Theinformation on the number of shares held is based upon a Schedule 13-G filed onFebruary 13, 2004 on behalf of Barclays Global Investors, NA and BarclaysGlobal Fund Advisors (the “Barclays Entities”). According to such filing, theBarclays Entities have sole voting authority and sole dispositive power withrespect to all 3,538,256 shares. The shares are held in trust accounts for theeconomic benefit of the beneficiaries of those accounts.

  (4)    Includes568,007 shares held jointly with Mr. Coyle’s spouse, 80,681 shares held bythe Bank’s 401(k) Plan, 3,870 shares held by the Directors DeferredCompensation Plan, 32,440 shares subject to stock options which are exercisablewithin 60 days of the Voting Record Date and 36,639 shares allocated to himpursuant to the ESOP.

  (5)    Includes766,184 shares held jointly with Mr. Doherty’s spouse, 112,634 shares heldby the Bank’s 401(k) Plan, 8,400 shares held by the Directors DeferredCompensation Plan, 60,992 shares subject to stock options which are exercisablewithin 60 days of the Voting Record Date and 36,639 shares allocated to himpursuant to the ESOP.

  (6)    Includes7,500 shares subject to stock options allocated to Mrs. Puleo which areexercisable within 60 days of the Voting Record Date.

  (7)    Includes2,686 shares held individually by Mr. Kelleher’s spouse, 83,873 sharesheld by the Directors’ Deferred Compensation Plan, 104,583 shares subject tostock options which are exercisable within 60 days of the Voting Record Date.

  (8)    Includes20,000 shares held individually by Mr. Mehrberg’s spouse, 84,583 sharessubject to stock options which are exercisable within 60 days of the VotingRecord Date.

  (9)    Includes130,400 shares held jointly with Mr. Morris’ spouse, 6,800 shares heldindividually by Mr. Morris’ spouse, 104,583 shares subject to stockoptions which are exercisable within 60 days of the Voting Record Date, and10,000 shares held by Mr. Morris in his individual retirement account.

(10)   Includes 104,583 shares subjectto stock options allocated to Mr. O’Mara which are exercisable within 60days of the Voting Record Date and 8,000 shares held by the Directors DeferredCompensation Plan.

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(11)   Includes 2,666 shares heldindividually by Mr. Weissglass’ spouse, 14,583 shares subject to stockoptions which are exercisable within 60 days of the Voting Record Date, 50,000shares owned by Magruder Color Company, Inc. of which Mr. Weissglassis President and Chief Executive Officer, 20,962 shares held by the WeissglassCharitable Trust of which Mr. Weissglass is a trustee. Mr. Weissglassdisclaims beneficial ownership with respect to the shares owned by MagruderColor Company, Inc.

(12)   Includes 200 shares held by Mr. Brady’sspouse, 50,076 shares held by the Bank’s 401(k) Plan, 217,506 shares subject tostock options which are exercisable within 60 days of the Voting Record Dateand 36,639 shares allocated to him pursuant to the ESOP.

(13)   Includes 10,000 shares held inthe Recognition Plan allocated to Mr. Hoberman, 1,766 shares held by theBank’s 401(k) Plan, 39,833 shares subject to stock options which areexercisable within 60 days of the voting record date and 10,332 sharesallocated to him pursuant to the ESOP.

(14)   Includes 76,806 shares heldjointly with Mr. Fleming’s spouse, 190,894 shares subject to stock options whichare exercisable within 60 days of the Voting Record date and 23,387 sharesallocated to him pursuant to the ESOP

(15)   The 42,266 shares are subjectto stock options which are exercisable within 60 days of the Voting RecordDate.

(16)   Includes10,000 shares granted pursuant to the Recognition Plan, which may be voted bydirectors and executive officers pending vesting and distribution, 224,755shares allocated to executive officers pursuant to the ESOP and 1,445,808shares which may be acquired by directors and executive officers upon theexercise of stock options exercisable within 60 days of the Voting Record Date.

**SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE**

**Equity Compensation PlanInformation.****  **Thefollowing table sets forth certain information for all equity compensationplans and individual compensation arrangements (whether with employees ornon-employees, such as directors), in effect as of December 31, 2003.
| **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(1)     |       |       | 5,149,862  | (1)                                                                                                                                                           |       |                                                                             | $          | 13.58                                                                                                                                                                   |       |   |   | 131,829 |   |   |
| Equity  Compensation Plans Not Approved by Security Holders(0) |       |       | —     |                                                                                                                                                          |       |                                                                             | —     |                                                                                                                                                                    |       |   | — |   |   |
| Total                                                          |       |       | 5,149,862  |                                                                                                                                                          |       |                                                                             | $          | 13.58                                                                                                                                                                   |       |   |   | 131,829 |   |   |

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(1)    Does not include 29,840 shares which are subject torestricted stock grants which had not yet vested as of December 31, 2003.All of such restricted stock grants were made under the Company’s 1998Recognition and Retention Plan which was approved by stockholders.

**Item 13. Certain Relationships and RelatedTransactions.**

In accordance with applicable federal laws and regulations,the Bank offers mortgage loans to its directors, officers and employees as wellas members of their immediate families for the financing of their primaryresidences and certain other loans. Section 22(h) of the FederalReserve Act generally provides that any credit extended by a savingsinstitution, such as the Bank, to its executive officers, directors and, to theextent otherwise permitted, principal stockholder(s), or any related interestof the foregoing, must be 

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on substantially the sameterms, including interest rates and collateral, as those prevailing at the timefor comparable transactions by the savings institution with non-affiliatedparties; unless the loans are made pursuant to a benefit or compensationprogram that (a) is widely available to employees of the institution and (b) doesnot give preference to any director, executive officer or principalstockholder, or certain affiliated interests of either, over other employees ofthe savings institution, and must not involve more than the normal risk ofrepayment or present other unfavorable features. The Bank’s policy is incompliance with Section 22(h) of the Federal Reserve Act.

Except as hereinafter indicated, all loans made by theBank to its executive officers and directors are made in the ordinary course ofbusiness, are made on substantially the same terms, including interest ratesand collateral, as those prevailing at the time for comparable transactionswith other persons and do not involve more than the normal risk of collectibilityor present other unfavorable features.

Inaccordance with applicable regulations, the Bank extends residential firstmortgage loans to its directors and executive officers secured by their primaryresidence pursuant to a benefit program that is widely available to employeesof the Bank and does not give preference to any executive officer or directorover other employees of the Bank. Under the terms of such loans, the interestrate is 1% below that charged on similar loans to non-employees and certain feesand charges are waived. Set forth in the following table is certain informationrelating to such preferential loans to executive officers and directors whichwere outstanding at December 31, 2003.
| **Name**            | ** ** | ** ** | ** ** | **Year Loan Made** | ** ** | **Largest Amount of  Indebtedness between  January 1, 2003  and December 31, 2003** | ** ** | **Balance as of  December 31, 2003** | ** ** | **Interest Rate** | ** ** |
|---------------------|------------|------------|------------|------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|
| Harry P. Doherty    |       |       | 1999       |                         |       |                                                                                                                        | $          | 350,918                                                  |       |                   |       | $ | 330,393 |   |   |   | 4.875 | % |   |
| John P. Brady       |       |       | 2000       |                         |       |                                                                                                                        | 213,234    |                                                     |       |                   | 210,149    |   |   |   | 5.750 | % |   |
| Frank J.  Besignano |       |       | 1999       |                         |       |                                                                                                                        | 314,867    |                                                     |       |                   | 309,218    |   |   |   | 4.375 | % |   |
| Donald C. Fleming   |       |       | 1998       |                         |       |                                                                                                                        | 187,165    |                                                     |       |                   | 183,877    |   |   |   | 5.875 | % |   |
| Deborah Pagano      |       |       | 2003       |                         |       |                                                                                                                        | 325,000    |                                                     |       |                   | 322,860    |   |   |   | 4.375 | % |   |

 

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**Item 14. Principal Accountant Fees and Services**

**Audit Fees**

The following table sets forth the aggregate fees paidby us to PricewaterhouseCoopers LLP for professional services rendered byPricewaterhouseCoopers LLP in connection with the audit of the Company’sconsolidated financial statements for 2003 and 2002, as well as the fees paidby us to PricewaterhouseCoopers LLP for audit-related services, tax servicesand all other services rendered by PricewaterhouseCoopers LLP to us during 2003and 2002.
| ** **                             | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2003**                               | ** ** | **2002** | ** ** |
| ** **                             | ** ** | **(000’s omitted)**          | ** ** |
| Audit fees(1)                          |       |                                   |       |   |   |
| Company                                |       |                                   |       |   |   |
| Year 2003                              |       | $                                      | 366        |   | $ | — |   |
| Year 2002                              |       | —                                 |       | 585 |   |
| Re-audit 2001                          |       | —                                 |       | 780 |   |
| Mortgage Co.                           |       | 111                                    |       | 73 |   |
|                                   |       | 477                                    |       | 1,438 |   |
| Audit-related fees(2)                  |       |                                   |       |   |   |
| Mortgage Company’s 401K           |       | 21                                     |       | 19 |   |
| All other fees:                        |       |                                   |       |   |   |
| Controls and procedures                |       | 173                                    |       | — |   |
| Special projects regarding acquisition |       | 102                                    |       | — |   |
| Restatements and other SEC matters     |       | —                                 |       | 280 |   |
| All other                              |       | 275                                    |       | 280 |   |
| Total                                  |       | $                                      | 773        |   | $ | 1,737 |   |

 

All fees noted above were paid to PricewaterhouseCoopersexcept for $83,000 of audit fees that were paid to Arthur Andersen in 2002.

(1)   Audit feesconsist of fees incurred in connection with the audit of our annual financialstatements and the review of the interim financial statements included in ourquarterly reports filed with the Securities and Exchange Commission, as well aswork generally only the independent auditor can reasonably be expected toprovide, such as statutory audits, consents and assistance with and review ofdocuments filed with the Securities and Exchange Commission.

(2)   Audit-relatedfees consist of fees incurred in connection with audits of the financialstatements of certain employee benefit plans.

The Audit Committee selects our independent auditorsand pre-approves all audit services to be provided by it to the Company. TheAudit Committee also reviews and pre-approves all audit-related and non-auditrelated services rendered by our independent auditors in accordance with theAudit Committee’s charter and policy on pre-approval of audit-related andnon-audit related services. In its review of these services and related feesand terms, the Audit Committee considers, among other things, the possibleeffect of the performance of such services on the independence of our independentauditors. Pursuant to its policy, the Audit Committee pre-approves certainaudit-related services and certain non-audit related tax services which arespecifically described by the Audit Committee on an annual basis and separatelyapproves other individual engagements as necessary. The Chair of the AuditCommittee has been delegated the authority to approve audit-related andnon-audit related services in lieu of the full Audit Committee. On a quarterlybasis, the Chair of the Audit Committee presents any previously-approvedengagements to the full Audit Committee.

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Each new engagement ofPricewaterhouseCoopers LLP was approved in advance by the Audit Committee, andnone of those engagements made use of the *deminimus* exception to preapproval contained in the Securities andExchange Commission rules.

**Part IV.**

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

(a)           *Documentsfiled as Part of this Report*

(1)         The following financialstatements are filed as part of this report

Report of Independent Auditors

Consolidated Statements of Condition as of December 31,2003 and 2002.

Consolidated Statements of Income for the Years Ended December 31,2003, 2002 and 2001.

Consolidated Statements of Changes in Shareholders’Equity for the Years Ended December 31, 2003, 2002 and 2001.

Consolidated Statements of Cash Flows for the Yearsended December 31, 2003, 2002 and 2001.

Notes to Consolidated Financial Statements.

(2)         All schedules for whichprovision is made in the applicable accounting regulation of the SEC areomitted because of the absence of conditions under which they are required orbecause the required information is included in the consolidated financialstatements and related notes thereto.

(3)         Thefollowing exhibits are filed as part of this Form 10-K, and thislist includes the Exhibit Index.

**Exhibit Index**
| 2.1*     | Agreement and Plan of Merger by and between  Independence Community Bank Corp. and Staten Island Bancorp, Inc.,  incorporated by reference from the Form S-4 filed by Independence  Community Bank Corp. File No. 333-111562. |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 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.                                                                                                                                                                                     |

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| 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.                 |
| 21.0       | Subsidiaries of the  Registrant - Reference is made to Item 1, “Business” for the required  information                                                          |
| 23.1       | Consent of  PricewaterhouseCoopers LLP                                                                                                                                     |
| 31.1       | Rule 13a-14(a) Certification  of Chief Executive Officer.                                                                                                        |
| 31.2       | Rule 13a-14(a) Certification  of Chief Financial Officer.                                                                                                        |
| 32.0       | Section 1350  Certification                                                                                                                                           |

----

 
| (*)     | 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 17, 2003, the Company filed a CurrentReport on Form 8-K, dated as of October 16, 2003, regardingpress releases reporting is results of operations for the quarter ended September 30,2003 and the declaration of a dividend.

On November 13, 2003, the Company filed a CurrentReport on Form 8-K, dated as of November 13, 2003, with respectto a press release that it had engaged Keefe, Bruyette & Woods, Inc.in order to assist it in evaluating its strategic options.

On November 25, 2003, the Company filed a currentreport on Form 8-K, dated as of November 24, 2003, announcingthat it had entered into an Agreement and Plan of Merger with IndependenceCommunity Bank Corp.

On December 9, 2004, the Company filed a currentReport on Form 8-K, dated as of November 24, 2004 with theAgreement and Plan of Merger with Independence as an exhibit thereto.

On December 6, 2002, the Company filed a CurrentReport on Form 8-K, dated as of December 6, 2002, with respectto a press release announcing the Company’s participation at a conference.

104

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
| ** ** | Staten Island Bancorp, Inc. |
|------------|-----------------------------|
|       | By:                         | /s/ Harry P. Doherty |
|       |                        | Harry P. Doherty |
|       |                        | *Chairman and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed by the following persons on behalf of the Registrant in thecapacities and on the dates indicated.
| ** **                 | **Name** | ** **                                         | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------------|----------|----------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ Harry P. Doherty       |     | Chairman and Chief  Executive Officer              |       | March 15, 2004 |
| Harry P. Doherty           |     |                                               |       |                |
| /s/ James R. Coyle         |     | Director, President and  Chief Operating Officer   |       | March 15, 2004 |
| James R. Coyle             |     |                                               |       |                |
| /s/ Donald C. Fleming      |     | Senior Vice President  and Chief Financial Officer |       | March 15, 2004 |
| Donald C. Fleming          |     | (principal financial and accounting officer)       |       |                |
| /s/ David L. Hinds         |     | Director                                           |       | March 15, 2004 |
| David L. Hinds             |     |                                               |       |                |
| /s/ Denis P. Kelleher      |     | Director                                           |       | March 15, 2004 |
| Denis P. Kelleher          |     |                                               |       |                |
| /s/ Craig. G. Matthews     |     | Director                                           |       | March 15, 2004 |
| Craig G. Matthews          |     |                                               |       |                |
| /s/ Julius Mehrberg        |     | Director                                           |       | March 15, 2004 |
| Julius Mehrberg            |     |                                               |       |                |
| /s/ John R. Morris         |     | Director                                           |       | March 15, 2004 |
| John R. Morris             |     |                                               |       |                |
| /s/ William E. O’Mara |     | Director                                           |       | March 15, 2004 |
| William E. O’Mara     |     |                                               |       |                |
| /s/ Lenore F. Puleo        |     | Director                                           |       | March 15, 2004 |
| Lenore F. Puleo            |     |                                               |       |                |
| /s/ Allan Weissglass       |     | Director                                           |       | March 15, 2004 |
| Allan Weissglass           |     |                                               |       |                |

 

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