INDEPENDENCE COMMUNITY BANK CORP - 10-Q Quarterly Report


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. At May 5, 2004, the registrant had 82,945,196 shares of common stock ($.01 par value per share) outstanding.

Independence Community Bank was originally founded as a New York-chartered savings bank in 1850. In April 1992, the Bank reorganized into the mutual holding company form of organization pursuant to which the Bank became a wholly owned stock savings bank subsidiary of a newly formed mutual holding company (the “Mutual Holding Company”).

In April 1997, the Board of Directors of the Bank and the Board of Trustees of the Mutual Holding Company adopted a plan of conversion to convert the Mutual Holding Company to the stock form of organization and simultaneously merge it with and into the Bank and all of the outstanding shares of Bank common stock held by the Mutual Holding Company would be cancelled (the “Conversion”).

As part of the conversion and reorganization, Independence Community Bank Corp. (the “Company”) was incorporated under Delaware law in June 1997. The Company is regulated by the Office of Thrift Supervision (“OTS”) as a registered savings and loan holding company. The Company completed its initial public offering on March 13, 1998, issuing 70,410,880 shares of common stock resulting in proceeds of $685.7 million, net of $18.4 million of expenses. The Company used $343.0 million, or approximately 50% of the net proceeds, to purchase all of the outstanding stock of the Bank. The Company also loaned $98.9 million to the Company’s Employee Stock Ownership Plan (the “ESOP”) which used such funds to purchase 5,632,870 shares of the Company’s common stock in the open market subsequent to completion of the initial public offering. As part of the Plan of Conversion, the Company formed the Independence Community Foundation (the “Foundation”) and concurrently with the completion of the initial public offering donated 5,632,870 shares of common stock of the Company valued at the time of their contribution at $56.3 million. The Foundation was established in order to further the Company’s and the Bank’s commitment to the communities they serve.

Additionally, the Bank established, in accordance with the requirements of the New York State Banking Department (the “Department”), a liquidation account for the benefit of depositors of the Bank as of March 31, 1996 and September 30, 1997 in the amount of $319.7 million, which was equal to the Bank’s total equity as of the date of the latest consolidated statement of financial condition (August 31, 1997) appearing in the final prospectus used in connection with the Conversion. The liquidation account is reduced as, and to the extent that, eligible and supplemental eligible account holders (as defined in the Bank’s Plan of Conversion) have reduced their qualifying deposits as of each March 31st. Subsequent increases in deposits do not restore an eligible supplemental account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder or supplemental eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying balances for accounts then held.

In addition to the restriction described above, the Bank may not declare or pay cash dividends on its shares of common stock if the effect thereof would cause the Bank’s stockholder’s equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements.

The Bank provides financial services primarily to individuals and small to medium-sized businesses within the New York City metropolitan area. The Bank is subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Department.

The Board of Directors declared the Company’s twenty-third consecutive quarterly cash dividend on April 23, 2004. The dividend amounted to $0.23 per share of common stock and is payable on May 20, 2004 to stockholders of record on May 6, 2004.

On July 24, 2003 the Company announced that its Board of Directors authorized the eleventh stock repurchase plan for up to three million shares of the Company’s outstanding common shares subject to the completion of their tenth stock repurchase program. The Company completed its tenth stock repurchase plan

and commenced its eleventh stock repurchase program on August 26, 2003. Repurchases will be made by the Company from time to time in open-market transactions as, in the opinion of management, market conditions warrant.

The repurchased shares are held as treasury stock. A portion of such shares was utilized to fund the stock portion of the merger consideration paid in two acquisitions of other financial institutions by the Company in prior years as well as consideration paid in October 2002 to increase the Company’s minority equity investment in Meridian Capital Group, LLC (“Meridian Capital”). Treasury shares also are being used to fund the Company’s stock benefit plans, in particular, the 1998 Stock Option Plan (the “Option Plan”), the Directors Fee Plan and the 2002 Stock Incentive Plan (the “Stock Incentive Plan”).

During the quarter ended March 31, 2004, the Company did not repurchase shares of its common stock. The Company issued 264,061 shares of treasury stock in connection with the exercise of options at a value of $4.3 million during the quarter ended March 31, 2004. At March 31, 2004, the Company had repurchased a total of 33,512,516 shares pursuant to the eleven repurchase programs at an aggregate cost of $553.9 million and reissued 12,208,542 shares at $179.0 million. As of March 31, 2004, there were approximately 2,790,329 shares remaining to be purchased pursuant to the Company’s eleventh repurchase program.

The Company’s principal business is conducted through the Bank, which is a full-service, community-oriented financial institution headquartered in Brooklyn, New York. As of March 31, 2004, the Bank operated 86 banking offices located in the greater New York Metropolitan area, which includes the five boroughs of New York City, Nassau, Suffolk and Westchester counties of New York and the northern New Jersey counties of Essex, Union, Bergen, Hudson and Middlesex. In addition, the Company maintains one branch facility in Maryland and a lending office in Florida as a result of the expansion of the Company’s commercial real estate lending activities to the Baltimore-Washington market and Boca Raton, Florida market as discussed below. The Company currently expects to expand its branch network through the opening of approximately seven branch locations in 2004 in addition to integrating the 35 additional branches which resulted from the merger with Staten Island Bancorp, Inc. (“Staten Island”) in April 2004 (See Note 2). The Company opened two of the new offices in Manhattan during the first quarter of 2004. During July 2003, the Company announced the expansion of its commercial real estate lending activities to the Baltimore-Washington market and Boca Raton, Florida market. The loans generated in these areas are referred primarily by Meridian Capital, which already has an established presence in these market areas.

The Bank’s deposits are insured to the maximum extent permitted by law by the Bank Insurance Fund and the Savings Association Insurance Fund administered by the FDIC. The Bank is subject to examination and regulation by the FDIC, which is the Bank’s primary federal regulator, and the Department, which is the Bank’s chartering authority and its primary state regulator. The Bank also is subject to certain reserve requirements established by the Board of Governors of the Federal Reserve System and is a member of the Federal Home Loan Bank (“FHLB”) of New York, which is one of the 12 regional banks comprising the FHLB system. The Company is subject to the examination and regulation of the OTS as a registered savings and loan holding company.

The Company completed its acquisition of Staten Island and the merger of Staten Island’s wholly owned subsidiary, SI Bank & Trust (“SI Bank”), with and into the Bank, all effective as of the close of business on April 12, 2004. None of the financial information contained is this Quarterly Report on Form 10-Q includes any financial data of Staten Island since the merger was completed subsequent to March 31, 2004.

Under the terms of the Agreement and Plan of Merger between the Company and Staten Island dated November 24, 2003 (the “Staten Island Agreement”), the aggregate consideration paid in the merger consisted of $368.5 million in cash and approximately 28,200,070 shares of the Company’s common stock. Holders of Staten Island common stock received cash or shares of the Company’s common stock pursuant to an election, proration and allocation procedure subject to the total consideration being comprised of approximately 75% paid in the Company’s common stock and 25% paid in cash. The value of the merger consideration per share of Staten Island common stock was calculated in accordance with the following formula: the sum of (i) $5.97025 and (ii) 0.4674 times the average of the closing prices of the Company’s common stock for the ten consecutive full trading days ending on the tenth business day before the completion of the merger. The average price of the Company’s common stock during the ten trading day measurement period was $39.26, resulting in Staten Island stockholders receiving $24.3208 per share in cash or 0.6195 share of the Company’s common stock for each share of Staten Island common stock.

In addition on March 1, 2004, Staten Island and the Company announced the completion of the sale of the majority of the assets and operations of Staten Island Mortgage Corp., the mortgage banking subsidiary of SI Bank, to Lehman Brothers. The remaining Staten Island Mortgage Corp. offices were sold or shut down by March 31, 2004. At April 12, 2004, Staten Island Mortgage Corp. had $295.4 million of loans available-for-sale, all of which are expected to be sold by the end of June 2004.

As a result of the Staten Island acquisition, the Company acquired approximately $7.15 billion in assets and assumed approximately $3.79 billion in deposits and $2.74 billion in other liabilities.

The following is a description of the significant accounting policies of the Company and its subsidiaries. These policies conform with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements of the Company were prepared in accordance with instructions to Form 10-Q and therefore do not include all the information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. All normal, recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. Certain reclassifications have been made to the prior years’ financial statements to conform with the current year’s presentation. The Company uses the equity method of accounting for investments in less than majority-owned entities.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. These interim financial statements should be read in conjunction with the Company’s consolidated audited financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2003 (“2003 Annual Report”).

The Company has identified the evaluation of the allowance for loan losses, goodwill and deferred tax assets as critical accounting estimates where amounts are sensitive to material variation. Critical accounting estimates are significantly affected by management judgment and uncertainties and there is a likelihood that materially different amounts would be reported under different, but reasonably plausible, conditions or assumptions. A description of these policies, which significantly affect the determination of the Company’s financial condition and results of operations are summarized in Note 3 (“Summary of Significant Accounting Policies”) of the Consolidated Financial Statements in the 2003 Annual Report.

For stock options, granted prior to January 1, 2003, the Company uses the intrinsic value based methodology which measures compensation cost for such stock options as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee or non-employee director must pay to acquire the stock. To date, no compensation expense has been recorded at the time of grant for stock options granted prior to January 1, 2003, since, for all granted options, the market price on the date of grant equaled the amount employees or non-employee directors must pay to acquire stock. However, compensation expense has been recognized as a result of the accelerated vesting of options occurring upon the retirement of senior officers. Under the terms of the Company’s option plans, unvested options held by retiring senior officers and non-employee directors of the Company only vest upon retirement if the Board of Directors or the Committee administering the option plan allow the acceleration of the vesting of such unvested options.

Effective January 1, 2003, the Company recognizes stock-based compensation expense on options granted subsequent to January 1, 2003 in accordance with the fair value-based method of accounting described in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation, as amended.”

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and is based on certain assumptions including dividend yield, stock volatility, the risk free rate of return, expected term and turnover rate. The fair value of each option is expensed over its vesting period. Because the Company recognized the fair value provisions prospectively, compensation expense related to employee stock options granted did not have a full impact during 2003. The adoption of SFAS No. 123, as amended, did not have a material effect on the Company’s financial condition or results of operations. See Note 13 hereof. See also Note 4 hereof for a discussion of the exposure draft proposing to mandate option expensing.

Comprehensive income includes net income and all other changes in equity during a period, except those resulting from investments by owners and distribution to owners. OCI includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, but excluded from net income. Comprehensive income and accumulated OCI are reported net of related income taxes. Accumulated OCI consists of unrealized gains and losses on available-for-sale securities, net of related income taxes and the change in fair value of interest rate swap agreements, net of related income taxes, designated as cash flow hedges.

The following is a description of new accounting pronouncements and their effect on the Company’s financial condition and results of operations.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, addresses consolidation by business enterprises of variable interest entities with certain characteristics. In December 2003, the FASB published a revision to FIN 46 to clarify some of the provisions of FIN 46 and to exempt certain entities from its requirements. FIN 46, as revised, applies to variable interest entities that are commonly referred to as special-purpose entities for periods ending after December 15, 2003 and for all other types of variable interest entities for periods ending after March 15, 2004. The adoption of FIN 46, as revised, did not have a material impact on the Company’s financial condition or results of operations.

In November 2003, the FASB issued Emerging Issues Task Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” The Company complied with the disclosure provisions of this rule in Note 3 to the Consolidated Financial Statements included in its 2003 Annual Report. In March 2004, the FASB reached a consensus regarding the application of a three-step impairment model to determine whether cost method investments are other-than-temporarily impaired. The Company is currently evaluating the impact of adopting the provisions of this rule, which are required to be applied prospectively to all current and future investments accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other cost method investments for reporting periods beginning after June 15, 2004.

In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement amends the disclosure requirements of SFAS No. 87, “Employers’ Accounting for Pensions,” No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The Statement requires interim disclosure that is addressed in Note 12 but did not change the recognition and measurement requirements of the amended Statements.

In January 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP FAS 106-1”), in response to the signing into law in December 2003 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act provides for a federal subsidy equal to 28% of prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D. FSP FAS 106-1 allows plan sponsors the option of accounting for the effects of the Act in financial statements for periods that cover the date of enactment or making a one-time election to defer the accounting for the effects of the Act until final guidance is issued by the FASB. The Company had decided to make the one-time election to defer recognizing the effects of the Act until final guidance is issued. Therefore, the expense amounts shown in Note 12 do not reflect the potential effects of the Act, which are not expected to have a material effect on the Company’s Consolidated Financial Statements.

On March 31, 2004, the FASB published an Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95 (the “Exposure Draft”). FASB is proposing, among other things, amendments to SFAS No. 123 and thus, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally would be measured at fair value at the grant date. The grant-date fair value would be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments (unless observable market prices for the same or similar options are available). The cost would be recognized over the requisite service period (often the vesting period). The cost of employee services received in exchange for liabilities would be measured initially at the fair value (rather than the previously allowed intrinsic value under APB Opinion No. 25, Accounting for Stock Issued to Employees) of the liabilities and would be remeasured subsequently at each reporting date through settlement date.

The proposed changes in accounting would replace existing requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and would eliminate the ability to account for share-based compensation transactions using APB Opinion No 25 which did not require companies to expense options. Under the terms of the Exposure Draft, the accounting for similar transactions involving parties other than employees or the accounting for employee stock ownership plans that are subject to American Institute of Certified Public Accountants (“AICPA”) Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans, would remain unchanged.

The Exposure Draft provides that the proposed statement would be applied to public entities prospectively for fiscal years beginning after December 15, 2004, as if all share-based compensation awards vesting, granted, modified, or settled after December 15, 1994 had been accounted for using the fair value-based method of accounting.

The FASB is soliciting comments on the Exposure Draft through June 30, 2004 and is expected to issue the final statement in the fourth quarter of 2004.

The amortized cost and estimated fair value of securities available-for-sale at March 31, 2004 are as follows:

The amortized cost and estimated fair value of securities available-for-sale at December 31, 2003 are as follows:

Loans available-for-sale are carried at the lower of aggregate cost or fair value and are summarized as follows:

The Company originates and sells multi-family residential mortgage loans in the secondary market to Fannie Mae while retaining servicing. The Company underwrites these loans using its customary underwriting standards, funds the loans, and sells the loans to Fannie Mae at agreed upon pricing thereby eliminating rate and basis exposure to the Company. The Company can originate and sell loans to Fannie Mae for not more than $20.0 million per loan. During the quarter ended March 31, 2004, the Company originated for sale

$139.3 million and sold $244.8 million of fixed-rate multi-family loans in the secondary market to Fannie Mae with servicing retained by the Company. Included in the $244.8 million of loans sold in the first quarter of 2004 were $116.6 million of loans that were originally held in portfolio. Under the terms of the sales program, the Company retains a portion of the associated credit risk. The Company has a 100% first loss position on each multi-family residential loan sold to Fannie Mae under such program until the earlier of (i) the aggregate losses on the multi-family residential loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off. The maximum loss exposure is available to satisfy any losses on loans sold in the program subject to the foregoing limitations. Substantially all the loans sold to Fannie Mae under this program are newly originated using the Company’s underwriting guidelines. At March 31, 2004, the Company serviced $3.65 billion of loans sold to Fannie Mae pursuant to this program with a maximum potential loss exposure of $139.5 million.

The maximum loss exposure of the associated credit risk related to the loans sold to Fannie Mae under this program is calculated pursuant to a review of each loan sold to Fannie Mae. A risk level is assigned to each such loan based upon the loan product, debt service coverage ratio and loan to value ratio of the loan. Each risk level has a corresponding sizing factor which, when applied to the original principal balance of the loan sold, equates to a recourse balance for the loan. The sizing factors are periodically reviewed by Fannie Mae based upon its ongoing review of loan performance and are subject to adjustment. The recourse balances for each of the loans are aggregated to create a maximum loss exposure for the entire portfolio at any given point in time. The Company’s maximum loss exposure for the entire portfolio of sold loans is periodically reviewed and, based upon factors such as amount, size, types of loans and loan performance, may be adjusted downward. Fannie Mae is restricted from increasing the maximum exposure on loans previously sold to it under this program as long as (i) the total borrower concentration (i.e., the total amount of loans extended to a particular borrower or a group of related borrowers) as applied to all mortgage loans delivered to Fannie Mae since the sales program began does not exceed 10% of the aggregate loans sold to Fannie Mae under the program and (ii) the average principal balance per loan of all mortgage loans delivered to Fannie Mae since the sales program began continues to be $4.0 million or less.

Although all of the loans serviced for Fannie Mae (both loans originated for sale and loans sold from portfolio) are currently fully performing, the Company has established a liability related to the fair value of the retained credit exposure. This liability represents the amount that the Company would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon an industry based default curve with a range of estimated losses. At March 31, 2004 the Company had a $7.5 million liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae.

As a result of retaining servicing on $3.76 billion of loans sold to Fannie Mae, which include both loans originated for sale and loans sold from portfolio, the Company had a $7.3 million servicing asset at March 31, 2004.

A summary of changes in loan servicing assets, which is included in other assets, is summarized as follows:

During the third quarter of 2003, the Company announced that ICM Capital, L.L.C. (“ICM Capital”), a newly formed subsidiary of the Bank, was approved as a Delegated Underwriting and Servicing (“DUS”) mortgage lender by Fannie Mae. Under the Fannie Mae DUS program, ICM Capital will underwrite, fund and sell mortgages on multi-family residential properties to Fannie Mae, with servicing retained. Participation in the DUS program requires ICM Capital to share the risk of loan losses with Fannie Mae with one-third of all losses assumed by ICM Capital with the remaining two-thirds of all losses being assumed by Fannie Mae. There were no loans originated under this DUS program during the quarter ended March 31, 2004 and ICM Capital did not effect the Company’s statement of condition or results of operations for the quarter ended March 31, 2004.

The Bank has a two-thirds ownership interest in ICM Capital and Meridian Company, LLC (“Meridian Company”), a Delaware limited liability company, has a one-third ownership interest. ICM Capital is an integral part of the expansion of the Company’s multi-family lending activities along the East Coast and its operations will be coordinated with those of Meridian Capital. Meridian Capital is 65% owned by Meridian Capital Funding, Inc. (“Meridian Funding”), a New York-based mortgage brokerage firm, with the remaining 35% minority equity investment held by the Company. Meridian Funding and Meridian Company have the same principal owners. See Note 15 hereof.

Over the past few years, the Company has de-emphasized the origination for portfolio of single-family residential mortgage loans in favor of higher yielding loan products. In November 2001, the Company entered into a private label program for the origination of single-family residential mortgage loans through its branch network under a mortgage origination assistance agreement with Cendant Mortgage Corporation, doing business as PHH Mortgage Services (“Cendant”). Under this program, the Company utilizes Cendant’s mortgage loan origination platforms (including telephone and Internet platforms) to originate loans that close in the Company’s name. The Company funds the loans directly, and, under a separate loan and servicing rights purchase and sale agreement, sells the loans and related servicing to Cendant on a non-recourse basis at agreed upon pricing. During the quarter ended March 31, 2004, the Company originated for sale $23.9 million and sold $22.0 million of single-family residential mortgage loans through the program. In the future, the Company may continue to originate certain adjustable and fixed-rate residential mortgage loans for portfolio retention, but at significantly reduced levels.

A summary of mortgage-banking activity income is as follows for the periods indicated:

Mortgage loan commitments to borrowers related to loans originated for sale are considered a derivative instrument under SFAS No. 149. In addition, forward loan sale agreements with Fannie Mae and Cendant also meet the definition of a derivative instrument under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). See Note 14 hereof.

The following table sets forth the composition of the Company’s loan portfolio at the dates indicated.

The loan portfolio is concentrated primarily in loans secured by real estate located in the New York metropolitan area. The real estate loan portfolio is diversified in terms of risk and repayment sources. The underlying collateral consists of multi-family residential apartment buildings, single-family residential properties and owner occupied/ non-owner occupied commercial properties. The risks inherent in these portfolios are dependent not only upon regional and general economic stability, which affects property values, but also the financial condition and creditworthiness of the borrowers.

During the third quarter of 2003, the Company announced the expansion of its commercial real estate lending activities to the Baltimore-Washington and the Boca Raton, Florida markets. The loans are referred primarily by Meridian Capital, which already has an established presence in these market areas. During the quarter ended March 31, 2004, the Company originated for portfolio $27.3 million and originated for sale $39.5 million of multi-family residential loans in the Baltimore-Washington market. During the quarter ended March 31, 2004, the Company also originated $38.6 million of loans for portfolio retention in the Florida market. Of such loans, $32.2 million were commercial real estate loans and $6.4 million were multi-family residential loans. The Company will review this expansion program periodically and establish and adjust its targets based on market acceptance, credit performance, profitability and other relevant factors. At March 31, 2004, the Company’s exposure to the Baltimore-Washington market area consisted primarily of $89.0 million of mortgage warehouse lines of credit, $7.4 million of commercial real estate loans and $72.9 million of multi-family residential loans. The Company’s exposure to the Florida market consisted primarily of $49.5 million of commercial real estate loans and $33.3 million of multi-family residential loans at March 31, 2004.

The following table sets forth information with respect to non-performing assets identified by the Company, including non-performing loans and other real estate owned at the dates indicated. Non-performing loans consist of non-accrual loans and loans 90 days or more past due as to interest and principal.

The determination of the level of the allowance for loan losses and the periodic provisions to the allowance charged to income is the responsibility of management. In assessing the level of the allowance for loan losses, the Company considers the composition and outstanding balance of its loan portfolio, the growth or decline of loan balances within various segments of the overall portfolio, the state of the local (and to a certain degree, the national) economy as it may impact the performance of loans within different segments of the portfolio, the loss experience related to different segments or classes of loans, the type, size and geographic concentration of loans held by the Company, the level of past due and non-performing loans, the value of collateral securing the loan, the level of classified loans and the number of loans requiring heightened management oversight. The continued shifting of the composition of the loan portfolio to be more commercial-bank like by increasing the balance of commercial real estate and business loans and mortgage warehouse lines of credit may increase the level of known and inherent losses in the Company’s loan portfolio.

The formalized process for assessing the level of the allowance for loan losses is performed on a quarterly basis. Individual loans are specifically identified by loan officers as meeting the criteria of pass, criticized or classified loans. Such criteria include, but are not limited to, non-accrual loans, past maturity loans, impaired loans, chronic delinquencies and loans requiring heightened management oversight. Each loan is assigned to a risk level of special mention, substandard, doubtful and loss. Loans that do not meet the criteria to be characterized as criticized or classified are categorized as pass loans. Each risk level, including pass loans, has an associated reserve factor that increases as the risk level category increases. The reserve factor for criticized and classified loans becomes larger as the risk level increases but is the same factor regardless of the loan type. The reserve factor for pass loans differs based upon the loan and collateral type. Commercial business loans have a larger loss factor applied to pass loans since these loans are deemed to have higher levels of known and inherent loss than commercial real estate and multi-family residential loans. The reserve factor is applied to the aggregate balance of loans designated to each risk level to compute the aggregate reserve requirement. This method of analysis is performed on the entire loan portfolio.

The reserve factors that are applied to pass, criticized and classified loans are generally reviewed by management on a quarterly basis unless circumstances require a more frequent assessment. In assessing the reserve factors, the Company takes into consideration, among other things, the state of the national and/or local economies which could affect the Company’s customers or underlying collateral values, the loss experience related to different segments or classes of loans, changes in risk categories, the acceleration or decline in loan portfolio growth rates and underwriting or servicing weaknesses. To the extent that such assessment results in an increase or decrease to the reserve factors that are applied to each risk level, the

Company may need to adjust its provision for loan losses which could impact earnings in the period in which such provisions are taken.

The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. Management believes that, based on information currently available, the Company’s allowance for loan losses at March 31, 2004 was at a level to cover all known and inherent losses in its loan portfolio at such date that were both probable and reasonable to estimate. In the future, management may adjust the level of its allowance for loan losses as economic and other conditions dictate. In addition, the FDIC and the Department as an integral part of their examination process periodically review the Company’s allowance for possible loan losses. Such agencies may require the Company to adjust the allowance based upon their judgment.

The following table sets forth the activity in the Company’s allowance for loan losses during the periods indicated.

Effective April 1, 2001, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which resulted in discontinuing the amortization of goodwill. Under SFAS No. 142,

goodwill is instead carried at its book value as of April 1, 2001 and any future impairment of goodwill will be recognized as non-interest expense in the period of impairment. However, under SFAS No. 142, identifiable intangible assets (such as core deposit premiums) with identifiable lives will continue to be amortized. Core deposit intangibles held by the Company are amortized on a straight-line basis over seven years.

The Company’s goodwill was $185.2 million at March 31, 2004 and December 31, 2003. However, as a result of the Staten Island transaction, the Company will recognize an increase in goodwill during the second quarter of 2004. The Company did not recognize an impairment loss as a result of its most recent annual impairment test effective October 1, 2003. In accordance with SFAS No. 142, the Company tests the value of its goodwill at least annually.

The following table sets forth the Company’s identifiable intangible assets at the dates indicated:

The following sets forth the estimated amortization expense for the years ended December 31:

Amortization expense related to identifiable intangible assets was $0.1 million and $1.4 million for the quarters ended March 31, 2004 and 2003, respectively.

However, as a result of the Staten Island transaction, the Company will recognize an increase in identifiable intangible assets and the associated amortization of such assets during the second quarter of 2004.

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is computed using the same method as basic EPS, but reflects the potential dilution of common stock equivalents. Shares of common stock held by the ESOP that have not been allocated to participants’ accounts or are not committed to be released for allocation and unvested 1998 Recognition and Retention Plan and Trust Agreement (the “Recognition Plan”) shares are not considered to be outstanding for the calculation of basic EPS. However, a portion of such shares is considered in the calculation of diluted EPS as common stock equivalents of basic EPS. Diluted EPS also reflects the potential dilution that would occur if stock options were exercised and converted into common stock. The dilutive effect of unexercised stock options is calculated using the treasury stock method.

The following table is a reconciliation of basic and diluted weighted-average common shares outstanding for the periods indicated.

At March 31, 2004 and March 31, 2003, there were 83,846 and 867,650 shares respectively, that could potentially dilute EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive.

The Company has a noncontributory defined benefit pension plan (the “Pension Plan”) covering substantially all of its full-time employees and certain part-time employees who qualify. Employees first hired on or after August 1, 2000 are not eligible to participate in the Pension Plan. The Company makes annual contributions to the Pension Plan equal to the amount necessary to satisfy the funding requirements of the Employee Retirement Income Security Act (“ERISA”).

The Company also has a Supplemental Executive Retirement Plan (the “Supplemental Plan”). The Supplemental Plan is a nonqualified, unfunded plan of deferred compensation covering those senior officers of the Company whose benefits under the Pension Plan would be limited by Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986, as amended.

The Company contributed $0.3 million to the Plan during the quarter ended March 31, 2004 but does not expect to contribute any additional funds for the remainder of the year ended December 31, 2004.

The Company currently provides certain health care and life insurance benefits to eligible retired employees and their spouses. The coverage provided depends upon the employee’s date of retirement and years of service with the Company. The Company’s plan for its postretirement benefit obligation is unfunded. Effective April 1, 1995, the Company adopted SFAS No. 106 “Employer’s Accounting for Postretirement Benefits Other Than Pensions” (“SFAS No. 106”). In accordance with SFAS No. 106, the Company elected to recognize the cumulative effect of this change in accounting principle over future accounting periods. The Company uses a January 1, measurement date for its postretirement benefits.

The Company also sponsors an incentive savings plan (“401(k) Plan”) whereby eligible employees may make tax deferred contributions up to certain limits. The Company makes matching contributions up to the lesser of 6% of employee compensation, or $3,000. Beginning in fiscal 1999, the matching contribution for full-

time employees was in the form of shares held in the ESOP while the contribution for part-time employees remained a cash contribution. However, beginning January 1, 2001, the matching contribution for all employees, full- and part-time, is in the form of shares held in the ESOP. The Company may reduce or cease matching contributions if it is determined that the current or accumulated net earnings or undivided profits of the Company are insufficient to pay the full amount of contributions in a plan year.

The Company established the ESOP for full-time employees in March 1998 in connection with the Conversion. To fund the purchase in the open market of 5,632,870 shares of the Company’s common stock, the ESOP borrowed funds from the Company. The collateral for the loan is the common stock of the Company purchased by the ESOP. The loan to the ESOP is being repaid principally from the Bank’s contributions to the ESOP over a period of 20 years. Dividends paid by the Company on shares owned by the ESOP are also utilized to repay the debt. The Bank contributed $1.4 million and $1.8 million to the ESOP during the quarters ended March 31, 2004 and 2003, respectively. Dividends paid on ESOP shares, which reduced the Bank’s contribution to the ESOP and were utilized to repay the ESOP loan, totaled $1.2 million and $0.8 million for the quarters ended March 31, 2004 and 2003, respectively. The loan from the Company had an outstanding principal balance of $83.2 million and $84.0 million at March 31, 2004 and December 31, 2003, respectively.

Shares held by the ESOP are held by an independent trustee for allocation among participants as the loan is repaid. The number of shares released annually is based upon the ratio that the current principal and interest payment bears to the original principal and interest payments to be made. ESOP participants become 100% vested in the ESOP after three years of service. Shares allocated are first used to satisfy the employer matching contribution for the 401(k) Plan with the remaining shares allocated to the ESOP participants based upon includable compensation in the year of allocation. Forfeitures from the 401(k) Plan match portions are used to reduce the employer 401(k) Plan match while forfeitures from shares allocated to the ESOP participants are allocated among the participants.

Compensation expense related to the 70,411 shares committed to be released during the three months ended March 31, 2004 was $2.4 million, which was equal to the shares committed to be released by the ESOP multiplied by the average fair value of the common stock during the period in which they were committed to be released. At March 31, 2004, there were 1,415,771 shares allocated, 3,943,009 shares unallocated and 274,090 shares that had been distributed to participants in connection with their withdrawal from the ESOP. At March 31, 2004, the 3,943,009 unallocated shares had a fair value of $160.7 million.

The Recognition Plan was implemented in September 1998, was approved by stockholders in September 1998, and may make restricted stock awards in an aggregate amount up to 2,816,435 shares (4% of the shares of common stock sold in the Conversion excluding shares contributed to the Foundation). The objective of the Recognition Plan is to enable the Company to provide officers, key employees and non-employee directors of the Company with a proprietary interest in the Company as an incentive to contribute to its success. During the year ended March 31, 1999, the Recognition Plan purchased all 2,816,435 shares in open market transactions. The Recognition Plan provides that awards may be designated as performance share awards, subject to the achievement of performance goals, or non-performance share awards which are subject solely to time vesting requirements. Certain key executive officers have been granted performance-based shares. These shares become earned only if annually established corporate performance targets are achieved. On September 25, 1998, the Committee administering the Recognition Plan issued grants covering 2,188,517 shares of stock of which 844,931 were deemed performance based. These awards were fully vested as of September 30,

2003. The Committee granted 11,000 performance-based shares in the year ended December 31, 2002 and non-performance-based share awards covering 52,407 shares, 123,522 shares and 91,637 shares during the three months ended March 31, 2004, the year ended December 31, 2003 and the year ended December 31, 2002, respectively.

The stock awards granted to date generally vest on a straight-line basis over a three, four or five-year period beginning one year from the date of grant. However, certain stock awards granted during the year ended December 31, 2002 will fully vest on the fourth anniversary of the date of grant. Subject to certain exceptions, awards become 100% vested upon termination of employment due to death, disability or retirement. However, senior officers and non-employee directors of the Company who elect to retire, require the approval of the Board of Directors or the Committee administering the Recognition Plan to accelerate the vesting of these shares. The amounts also become 100% vested upon a change in control of the Company.

Compensation expense is recognized over the vesting period at the fair market value of the common stock on the date of grant for non-performance share awards. The expense related to performance share awards is recognized over the vesting period at the fair market value on the measurement date(s). The Company recorded compensation expense of $1.0 million and $2.5 million related to the Recognition Plan for the three months ended March 31, 2004 and 2003, respectively.

The Company accounts for stock-based compensation on awards granted prior to January 1, 2003 using the intrinsic value method. Since each option granted prior to January 1, 2003 had an exercise price equal to the fair market value of one share of the Company’s stock on the date of the grant, no compensation cost at date of grant has been recognized.

Beginning in 2003, the Company recognizes stock-based compensation expense on options granted in 2003 and in subsequent years in accordance with the fair value-based method of accounting described in SFAS No. 123. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and is based on certain assumptions including dividend yield, stock volatility, the risk free rate of return, expected term and turnover rate. The fair value of each option is expensed over its vesting period. There were 250,000 options granted during the quarter ended March 31, 2004 and approximately $201,000 in compensation expense recognized under this statement. There were no options granted during the quarter ended March 31, 2003 and therefore no compensation expense was recognized under this statement during such period.

The Option Plan was implemented in September 1998 and was approved by stockholders in September 1998. The Option Plan may grant options covering shares aggregating in total 7,041,088 shares (10% of the shares of common stock sold in the Conversion excluding the shares contributed to the Foundation). Under the Option Plan, stock options (which expire ten years from the date of grant) have been granted to officers, key employees and non-employee directors of the Company. The option exercise price per share was the fair market value of the common stock on the date of grant. Each stock option or portion thereof is exercisable at any time on or after such option vests and is generally exercisable until the earlier to occur of ten years after its date of grant or six months after the date on which the optionee’s employment terminates (three years after termination of service in the case of non-employee directors), unless extended by the Board of Directors to a period not to exceed five years from the date of such termination. Subject to certain exceptions, options become 100% exercisable upon termination of employment due to death, disability or retirement. However, senior officers and non-employee directors of the Company who elect to retire, require the approval of the Board of Directors or the Committee administering the Option Plan to accelerate the vesting of options. Options become 100% vested upon a change in control of the Company.

On September 25, 1998, the Board of Directors issued options covering 6,103,008 shares of common stock vesting over a five-year period at a rate of 20% per year, beginning one year from date of grant. These options were fully vested as of September 30, 2003. During the three months ended March 31, 2004, the year ended December 31, 2003 and the year ended December 31, 2002, the Board of Directors granted options covering 5,000, 220,750 and 93,000 shares, respectively. During the year ended December 31, 2003 and the year ended December 31, 2002, the Committee administering the Plan approved the accelerated vesting of 30,000 and 8,000 options due to the retirement of senior officers, resulting in $0.2 million and $0.1 million of compensation expense, respectively. At March 31, 2004, there were options covering 4,889,421 shares outstanding pursuant to the Option Plan.

The Stock Incentive Plan was approved by stockholders at the May 23, 2002 annual meeting. The Stock Incentive Plan may grant options covering shares aggregating an amount equal to 2,800,000 shares. The Stock Incentive Plan also provides for the ability to issue restricted stock awards which cannot exceed 560,000 shares and which are part of the 2,800,000 shares. Options awarded to date under the Stock Incentive Plan generally vest over a four-year period at a rate of 25% per year and expire ten years from the date of grant. The Board of Directors granted options covering 245,000, 15,000 and 789,650 shares during the three months ended March 31, 2004, the year ended December 31, 2003 and the year ended December 31, 2002, respectively. At March 31, 2004, there were 989,325 options and 5,000 restricted share awards outstanding related to this plan.

Broad National Bancorporation (“Broad”) and Statewide Financial Corp. (“Statewide”)(companies the Company acquired in 1999 and 2000, respectively) maintained several stock option plans for officers, directors and other key employees. Generally, these plans granted options to individuals at a price equivalent to the fair market value of the stock at the date of grant. Options awarded under the plans generally vested over a five-year period and expired ten years from the date of grant. In connection with the Broad and Statewide acquisitions, options which were converted by election of the option holders to options to purchase the Company’s common stock totaled 602,139 and became 100% exercisable at the effective date of the acquisitions. At March 31, 2004, there were 125,757 options outstanding related to these plans.

In connection with the Staten Island acquisition in April 2004, options which were converted by election of the option holders to options to purchase the Company’s common stock totaled 2,762,184 and became 100% exercisable at the effective date of the acquisition.

The following table compares reported net income and earnings per share to net income and earnings per share on a pro forma basis for the periods indicated, assuming that the Company accounted for stock-based

compensation based on the fair value of each option grant as required by SFAS No. 123. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.


(1)	Includes costs associated with restricted stock awards granted pursuant to the Recognition Plan and Stock Incentive Plan and stock option grants awarded under the various stock option plans.

The Company concurrently adopted the provisions of SFAS No. 133, and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an amendment of FASB Statement No. 133” on January 1, 2001. The Company adopted the provisions of SFAS No. 149 effective July 1, 2003. The Company’s derivative instruments outstanding at March 31, 2004 included commitments to fund loans available-for-sale and forward loan sale agreements.

The Company’s use of derivative financial instruments creates exposure to credit risk. This credit exposure relates to losses that would be recognized if the counterparties fail to perform their obligations under the contracts. To mitigate its exposure to non-performance by the counterparties, the Company deals only with counterparties of good credit standing and establishes counterparty credit limits.

The Company adopted new accounting requirements relating to SFAS No. 149 which requires that mortgage loan commitments related to loans originated for sale be accounted for as derivative instruments. In accordance with SFAS No. 133 and SFAS No. 149, derivative instruments are recognized in the statement of financial condition at fair value and changes in the fair value thereof are recognized in the statement of operations. The Company originates single-family and multi-family residential loans for sale pursuant to programs with Cendant and Fannie Mae. Under the structure of the programs, at the time the Company initially issues a loan commitment in connection with such programs, it does not lock in a specific interest rate. At the time the interest rate is locked in by the borrower, the Company concurrently enters into a forward loan sale agreement with respect to the sale of such loan at a set price in an effort to manage the interest rate risk inherent in the locked loan commitment. The forward loan sale agreement meets the definition of a derivative

instrument under SFAS No. 133. Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan. The period from the time the borrower locks in the interest rate to the time the Company funds the loan and sells it to Fannie Mae or Cendant is generally 30 days. The fair value of each instrument will rise or fall in response to changes in market interest rates subsequent to the dates the interest rate locks and forward loan sale agreements are entered into. In the event that interest rates rise after the Company enters into an interest rate lock, the fair value of the loan commitment will decline. However, the fair value of the forward loan sale agreement related to such loan commitment should increase by substantially the same amount, effectively eliminating the Company’s interest rate and price risk.

At March 31, 2004, the Company had $1.04 billion of loan commitments outstanding related to loans being originated for sale. Of such amount, $548.8 million related to loan commitments for which the borrowers had not entered into interest rate locks and $495.6 million which were subject to interest rate locks. At March 31, 2004, the Company had $495.6 million of forward loan sale agreements. The fair market value of the loan commitments with interest rate locks was a gain of $21.6 million and the fair market value of the related forward loan sale agreements was a loss of $21.6 million at March 31, 2004.

The Company is engaged in certain activities with Meridian Capital. Meridian Capital is deemed to be a “related party” of the Company as such term is defined in Statement of Financial Accounting Standards No. 57. Such treatment is triggered due to the Company’s accounting for the investment in Meridian Capital using the equity method. The Company has a 35% minority equity investment in Meridian Capital, which is 65% owned by Meridian Funding, a New York-based mortgage brokerage firm. Meridian Capital refers borrowers seeking financing of their multi-family residential and/or commercial real estate loans to the Company as well as to numerous other financial institutions.

All loans resulting from referrals from Meridian Capital are underwritten by the Company using its loan underwriting standards and procedures. Meridian Capital receives a fee from the borrower upon the funding of the loans by the Company. The Company generally has not paid any referral fees to Meridian Capital. In the future, the Company may consider paying such fees if it is deemed necessary for competitive reasons.

The loans originated by the Company resulting from referrals by Meridian Capital account for a significant portion of the Company’s total loan originations. In addition, referrals from Meridian Capital accounted for the substantial majority of the loans originated for sale in 2003 and the first quarter of 2004. The ability of the Company to continue to originate multi-family residential and commercial real estate loans at the levels experienced in the past may be a function of, among other things, maintaining the Meridian Capital relationship.

During the third quarter of 2003, the Company announced that ICM Capital, a newly formed subsidiary of the Bank, was approved as a DUS mortgage lender by Fannie Mae. The Bank has a two-thirds ownership interest in ICM Capital and the Meridian Company has a one-third ownership interest. Meridian Funding and Meridian Company have the same principal owners.

Under the DUS program, ICM Capital will underwrite, fund and sell mortgages on multi-family residential properties to Fannie Mae, with servicing retained. Participation in the DUS program requires ICM Capital to share the risk of loan losses with Fannie Mae with one-third of all losses assumed by ICM Capital and two-thirds of all losses assumed by Fannie Mae. ICM Capital is an integral part of the expansion of the Company’s multi-family lending activities along the East Coast and will work closely with Meridian Capital. There were no loans originated under the DUS program by ICM Capital during the quarter ended March 31, 2004.

The Company has also entered into other transactions with Meridian Capital, Meridian Company, Meridian Funding and several of their executive officers in the normal course of business. Such relationships include depository relationships with the Bank and six residential mortgage loans made in the ordinary course of the Bank’s business.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company’s results of operations depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, which principally consist of loans, mortgage-related securities and investment securities, and interest expense on interest-bearing liabilities, which consist of deposits and borrowings. Net interest income is determined by the Company’s interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.

The Company’s results of operations also are affected by (a) the provision for loan losses resulting from management’s assessment of the level of the allowance for loan losses, (b) its non-interest income, including service fees and related income, mortgage-banking activities and gains and losses from the sales of loans and securities, (c) its non-interest expense, including compensation and employee benefits, occupancy expense, data processing services, amortization of intangibles and (d) income tax expense.

The Bank is a community-oriented bank, which emphasizes customer service and convenience. As part of this strategy, the Bank offers products and services designed to meet the needs of its retail and commercial customers. The Company generally has sought to achieve long-term financial strength and stability by increasing the amount and stability of its net interest income and non-interest income and by maintaining a high level of asset quality. In pursuit of these goals, the Company has adopted a business strategy of controlled growth, emphasizing commercial real estate and multi-family residential lending, commercial business lending, mortgage warehouse lines of credit and retail and commercial deposit products, while maintaining asset quality and stable liquidity.

None of the financial information contained is this Quarterly Report on Form 10-Q includes any financial data of Staten Island since the merger was completed subsequent to March 31, 2004.

Statements contained in this Quarterly Report of Form 10-Q which are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors. Included in such forward-looking statements are statements regarding the merger of the Company and Staten Island. See Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 1 hereof.

Words such as “expect”, “feel”, “believe”, “will”, “may”, “anticipate”, “plan”, “estimate”, “intend”, “should”, and similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of the Company, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the growth opportunities and cost savings from the merger of the Company and Staten Island may not be fully realized or may take longer to realize than expected; (2) operating costs and business disruption resulting from the merger, including adverse effects on relationships with employees, may be greater than expected; (3) competitive factors which could affect net interest income and non-interest income, general economic conditions which could affect the volume of loan originations, deposit flows and real estate values; (4) the levels of non-interest income and the amount of loan losses as well as other factors discussed in the documents filed by the Company with the Securities and Exchange Commission (“SEC”) from time to time. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

The Company is a public company and files annual, quarterly and special reports, proxy statements and other information with the SEC. Members of the public may read and copy any document the Company files at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Members of the public can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room. The Company’s SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov. In addition to the foregoing, the Company maintains a web site at www.myindependence.com. The Company’s website content is made available for informational purposes only. It should neither be relied upon for investment purposes nor is it incorporated by reference into this Form 10-Q. The Company makes available 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 any amendments to such documents as soon as reasonable practicable after it electronically files such material with or furnishes such documents to the SEC.

Total assets increased by $428.3 million, or 4.5%, from $9.55 billion at December 31, 2003 to $9.97 billion at March 31, 2004 primarily due to an increase of $429.5 million in the loan portfolio. This increase was funded primarily through the use of borrowings, including the issuance of $250.0 million of 3.75% Fixed Rate/ Floating Rate Subordinated Notes Due 2014 (“Notes”), and the growth in deposits.

Cash and cash equivalents increased from $172.0 million at December 31, 2003 to $225.9 million at March 31, 2004. The $53.9 million increase in liquidity was principally due to funds received from the issuance of the $247.3 million Notes in March 2004, which funds had yet to be fully redeployed.

The aggregate securities available-for-sale portfolio (which includes investment securities and mortgage-related securities) decreased $45.9 million, or 1.8%, from $2.51 billion at December 31, 2003 to $2.46 billion at March 31, 2004. The decrease in securities available-for-sale was due to proceeds from security sales being utilized to partially fund the growth in the loan portfolio.

The Company’s mortgage-related securities portfolio decreased $53.4 million to $2.16 billion at March 31, 2004 compared to $2.21 billion at December 31, 2003. The securities were comprised of $1.85 billion of AAA rated CMOs and $92.7 million of CMOs which were issued or guaranteed by Freddie Mac, Fannie Mae or GNMA (“Agency CMOs”) and $216.8 million of mortgage-backed pass through certificates which were also issued or guaranteed by Freddie Mac, Fannie Mae or GNMA. The decrease in the portfolio was primarily due to $169.6 million received from principal repayments combined with sales of $61.7 million. Partially offsetting these decreases were purchases of $72.1 million of AAA-rated CMOs with an average yield of 4.71% and $81.6 million of Agency CMOs with a weighted average yield of 4.32%. The unrealized gain on this portfolio increased $27.4 million during the quarter ended March 31, 2004.

The Company’s investment securities portfolio increased $7.5 million to $304.5 million at March 31, 2004 compared to December 31, 2003. The increase was primarily due to $24.6 million of purchases, primarily $10.0 million of preferred securities with a weighted average yield of 7.00% and $14.6 million of U.S. Treasury securities with a weighted average yield of 1.22%. Partially offsetting the purchases were sales of $17.4 million of securities, primarily preferred securities.

At March 31, 2004, the Company had a $26.5 million net unrealized gain, net of tax, on available-for-sale investment and mortgage-related securities as compared to $7.0 million at December 31, 2003.

Loans available-for-sale increased by $6.0 million to $12.0 million at March 31, 2004 compared to December 31, 2003. The Company originates and sells multi-family residential mortgage loans in the secondary market to Fannie Mae while retaining servicing. As part of these transactions, the Company retains a portion of the associated credit risk. During the three months ended March 31, 2004, the Company originated $139.3 million and sold $244.8 million of loans to Fannie Mae under this program and as a result serviced $3.65 billion of loans with a maximum potential loss exposure of $139.5 million. Multi-family loans available-for-sale at March 31, 2004 totaled $7.5 million compared to $3.2 million at December 31, 2003. Included in the $244.8 million of loans sold in the first quarter of 2004 were $116.6 million of loans that were originally held in portfolio at a weighted average yield of 5.02%.

The Company also originates and sells single-family residential mortgage loans under a mortgage origination assistance agreement with Cendant. The Company funds the loans directly and sells the loans and related servicing to Cendant. The Company originated $23.9 million and sold $22.0 million of such loans during the three months ended March 31, 2004. Single-family residential mortgage loans available-for-sale at March 31, 2004 totaled $4.5 million compared to $2.7 million at December 31, 2003.

Both programs discussed above were established in order to further the Company’s ongoing strategic objective of increasing non-interest income related to lending and/or servicing revenue.

Loans, net, increased by $429.8 million, or 7.1%, to $6.52 billion at March 31, 2004 from $6.09 billion at December 31, 2003. The Company continues to focus on expanding its higher yielding loan portfolios of commercial real estate, commercial business and variable-rate mortgage warehouse lines of credit as part of its business plan. The Company is also committed to remaining a leader in the multi-family residential loan market. The Company originated for its own portfolio approximately $823.5 million of mortgage loans during the three months ended March 31, 2004 compared to $167.4 million for the quarter ended March 31, 2003. During the first three quarters of 2003, the Company put a greater emphasis on selling the majority of the multi-family residential loans it originated due to the low interest rate environment. During the fourth quarter of 2003, as interest rates began to rise, the Company retained for portfolio 75% of the multi-family residential loans it originated as compared to 44% in the third quarter, 22% during the second quarter and 14% during the first quarter of 2003. During the first quarter of 2004, the Company retained 80% of the multi-family residential loans it originated for portfolio.

Multi-family residential loans increased $131.4 million to $2.95 billion at March 31, 2004 compared to $2.82 billion at December 31, 2003. The increase was primarily due to originations for portfolio retention of $537.7 million which was partially offset by repayments of $296.5 million and $116.6 million of loans sold to Fannie Mae at a weighted average yield of 5.02%. Multi-family residential loans comprised 44.7% of the total loan portfolio at March 31, 2004 compared to 45.7% at December 31, 2003.

Commercial real estate loans increased $162.2 million or 10.1% to $1.77 billion at March 31, 2004 compared to $1.61 billion at December 31, 2003. The increase was primarily due to $284.9 million of originations partially offset by $122.7 million of loan repayments. As a result of these activities, commercial real estate loans comprised 26.9% of the total loan portfolio at March 31, 2004 compared to 26.2% at December 31, 2003.

Commercial business loans increased $50.7 million, or 8.4%, from $606.2 million at December 31, 2003 to $656.9 million at March 31, 2004. The increase was due primarily to originations and advances of $60.1 million partially offset by $9.6 million of repayments and $0.4 million of charge-offs during the three months ended March 31, 2004. As a result of the Company’s customers’ view of the economic environment, the Company experienced a slowdown in commercial business loan activity during 2003 and continuing into 2004. Commercial business loans comprised 9.9% of the total loan portfolio at March 31, 2004 compared to 9.8% at December 31, 2003.

Mortgage warehouse lines of credit are secured short-term advances extended to mortgage-banking companies to fund the origination of one-to-four family mortgages. Advances under mortgage warehouse lines of credit increased $97.6 million, or 18.5%, from $527.3 million at December 31, 2003 to $624.9 million at March 31, 2004. At March 31, 2004, there were $853.8 million of unused lines of credit related to mortgage warehouse lines of credit. Mortgage warehouse lines of credit comprised 9.5% of the total loan portfolio at March 31, 2004 compared to 8.5% at December 31, 2003.

Partially offsetting the growth in the multi-family, commercial real estate, commercial business loan and mortgage warehouse line of credit portfolios was the run-off of the Company’s single-family and cooperative apartment portfolio. This portfolio decreased $21.5 million from $284.4 million at December 31, 2003 to $262.9 million at March 31, 2004. The decline was due to repayments combined with the decreased emphasis on originating these loans for portfolio in favor of higher yielding commercial real estate and commercial business loans. The Company originates and sells single-family residential mortgage loans to Cendant as previously discussed.

Non-performing assets as a percentage of total assets amounted to 0.38% at both March 31, 2004 and December 31, 2003. The Company’s non-performing assets, which consist of non-accrual loans, loans past due 90 days or more as to interest or principal and accruing and other real estate owned acquired through foreclosure or deed-in-lieu thereof, increased slightly by $1.2 million, or 3.2%, to $37.8 million at March 31, 2004 from $36.6 million at December 31, 2003. The increase in non-performing assets was primarily due to a $1.1 million increase in loans contractually past maturity but which are continuing to pay in accordance with their original repayment schedule. Non-accrual loans were $35.8 million at March 31, 2004 and primarily consisted of $20.3 million of commercial real estate loans, $12.2 million of commercial business loans, $1.7 million of single-family residential and cooperative apartment loans and $1.0 million of multi-family residential loans.

The Company’s allowance for loan losses amounted to $79.2 million at March 31, 2004, as compared to $79.5 million at December 31, 2003. At March 31, 2004, the Company’s allowance amounted to 1.20% of total loans and 209.8% of total non-performing loans compared to 1.29% and 217.3% at December 31, 2003, respectively. The Company’s allowance decreased $0.3 million during the three months ended March 31, 2004 due to $0.3 million in net charge-offs, or 0.005% of average total loans.

In assessing the level of the allowance for loan losses and the periodic provisions to the allowance charged to income, the Company considers the composition and outstanding balance of its loan portfolio, the growth or decline of loan balances within various segments of the overall portfolio, the state of the local (and to a certain degree, the national) economy as it may impact the performance of loans within different segments of the portfolio, the loss experience related to different segments or classes of loans, the type, size and geographic concentration of loans held by the Company, the level of past due and non-performing loans, the value of collateral securing loans, the level of classified loans and the number of loans requiring heightened management oversight. The continued shifting of the composition of the loan portfolio to be more commercial-bank like by increasing the balance of commercial real estate and business loans and mortgage warehouse lines of credit may increase the level of known and inherent losses in the Company’s loan portfolio.

The Company has identified the evaluation of the allowance for loan losses as a critical accounting estimate where amounts are sensitive to material variation. The allowance for loan losses is considered a critical accounting estimate because there is a large degree of judgment in (i) assigning individual loans to specific risk levels (pass, special mention, substandard, doubtful and loss), (ii) valuing the underlying collateral securing the loans, (iii) determining the appropriate reserve factor to be applied to specific risk levels for criticized and classified loans (special mention, substandard, doubtful and loss) and (iv) determining reserve factors to be applied to pass loans based upon loan type. To the extent that loans

change risk levels, collateral values change or reserve factors change, the Company may need to adjust its provision for loan losses which would impact earnings.

Management has discussed the development and selection of this critical accounting estimate with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the Company’s disclosure relating to it in this Management’s Discussion and Analysis (“MD&A”).

Management believes the allowance for loan losses at March 31, 2004 was at a level to cover the known and inherent losses in the portfolio that were both probable and reasonable to estimate. In the future, management may adjust the level of its allowance for loan losses as economic and other conditions dictate. Management reviews the allowance for loan losses not less than quarterly.

Effective April 1, 2001, the Company adopted SFAS No. 142, which resulted in discontinuing the amortization of goodwill. However, under the terms of SFAS No. 142, identifiable intangibles with identifiable lives continue to be amortized.

The Company’s goodwill, which aggregated $185.2 million at March 31, 2004, resulted from the acquisitions of Broad and Statewide as well as the acquisition in January 1996 of Bay Ridge Bancorp, Inc. The Company’s $47,000 of identifiable intangible assets at March 31, 2004 resulted primarily from one branch office purchase transaction effected in fiscal 1996. The Company’s intangible assets decreased by $0.1 million to $47,000 at March 31, 2004 from $0.2 million at December 31, 2003. The decrease was a result of amortization of the identifiable intangible assets. The amortization of identified intangible assets will continue to reduce net income until such intangible assets are fully amortized. However, the remaining identified intangibles as of March 31, 2004 will be completely amortized by April 2004. As a result of the Staten Island transaction, the Company will recognize an increase in goodwill and identifiable intangible assets and the associated amortization of identifiable intangible assets during the second quarter of 2004.

The Company performs a goodwill impairment test on an annual basis. The Company did not recognize an impairment loss as a result of its annual impairment test effective October 1, 2003. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired while conversely, if the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and the Company must measure the amount of impairment loss, if any.

The fair value of an entity with goodwill may be determined by a combination of quoted market prices, a present value technique or multiples of earnings or revenue. Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for the measurement, if available. However, the market price of an individual equity security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit as a whole. The quoted market price of an individual equity security, therefore, need not be the sole measurement basis of the fair value of a reporting unit. A present value technique is another method with which to estimate the fair value of a group of net assets. If a present value technique is used to measure fair value, estimates of future cash flows used in that technique shall be consistent with the objective of measuring fair value. Those cash flow estimates shall incorporate assumptions that the marketplace participants would use in their estimates of fair value. If that information is not available without undue cost and effort, an entity may use its own assumptions. A third method of estimating the fair value of a reporting unit, is a valuation technique based on multiples of earnings or revenue.

The Company currently uses a combination of quoted market prices of its publicly traded stock and multiples of earnings in its goodwill impairment test.

The Company has identified the goodwill impairment test as a critical accounting estimate due to the various methods (quoted market price, present value technique or multiples of earnings or revenue) and judgment involved in determining the fair value of a reporting unit. A change in judgment could result in

goodwill being considered impaired which would result in a charge to non-interest expense in the period of impairment.

The Company holds BOLI policies to fund certain future employee benefit costs and to provide tax-exempt returns to the Company. The BOLI is recorded at its cash surrender value and changes in value are recorded in non-interest income. BOLI increased $0.2 million to $176.0 million at March 31, 2004 compared to $175.8 million at December 31, 2003.

Other assets decreased $18.5 million from $267.6 million at December 31, 2003 to $249.1 million at March 31, 2004. The decrease was primarily due to decreases of $10.8 million in net deferred tax assets and $6.2 million in FHLB stock.

The Company had a net deferred tax asset of $44.9 million at March 31, 2004 compared to $55.7 million at December 31, 2003. The decrease was primarily due to an increase in the deferred tax liability associated with an increase in the net unrealized gain on securities available-for-sale.

The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The Company must assess the deferred tax assets and establish a valuation allowance where realization of a deferred asset is not considered “more likely than not.” The Company generally uses the expectation of future taxable income in evaluating the need for a valuation allowance. Since the Company has reported taxable income for Federal, state and local income tax purposes in each of the past two years and in management’s opinion, in view of the Company’s previous, current and projected future earnings, such deferred tax assets are expected to be fully realized.

The Company has identified the valuation of deferred tax assets as a critical accounting estimate due to the judgment involved in projecting future taxable income, determining when differences are expected to be reversed and establishing a valuation allowance. Changes in management’s judgments and estimates may have an impact on the Company’s net income.

Deposits increased $97.3 million or 1.8% to $5.40 billion at March 31, 2004 compared to $5.30 billion at December 31, 2003. The increase was due to deposit inflows totaling $85.1 million as well as interest credited of $12.2 million.

Complementing the increased emphasis on expanding commercial and consumer relationships, lower costing core deposits (consisting of all deposit accounts other than certificates of deposit) grew by $164.6 million, or 4.2%, to $4.09 billion at March 31, 2004 compared to $3.93 billion at December 31, 2003. This increase reflects both the continued successful implementation of the Company’s business strategy of increasing core deposits as well as the current interest rate environment. Execution of this strategy is evidenced by the increase in core deposits to 75.7% of total deposits at March 31, 2004 compared to 74.0% of total deposits at December 31, 2003.

The Company focuses on the growth of core deposits as a key element of its asset/liability management process to lower interest expense and thus increase net interest margin given that these deposits have a lower cost of funds than certificates of deposit and borrowings. Core deposits also reduce liquidity fluctuations since these accounts generally are considered to be less likely than certificates of deposit to be subject to disintermediation. In addition, these deposits improve non-interest income through increased customer related fees and service charges. The weighted average interest rate paid on core deposits was 0.53% compared to 2.11% for certificates of deposit and 3.05% for borrowings for the quarter ended March 31, 2004.

Borrowings decreased $50.0 million to $2.87 billion at March 31, 2004 compared to $2.92 billion at December 31, 2003. The decrease was principally due to a $350.0 million decrease in repurchase agreements partially offset by a $300.0 million increase in FHLB advances.

During the quarter ended March 31, 2004, the Company paid-off $1.10 billion of short-term borrowings that matured at a weighted average interest rate of 1.25%. The Company also borrowed $1.05 billion of short-term low costing floating-rate borrowings. These borrowings generally mature within 30 days and have a weighted average interest rate of 1.15%. The Company anticipates replacing a portion of these short-term borrowings with lower costing core deposits.

The Company is managing its leverage position and had a borrowing (including subordinated notes) to asset ratio of 32.7% at March 31, 2004 and 32.1% at December 31, 2003.

Subordinated notes increased $247.4 million to $395.8 million at March 31, 2004 compared to $148.4 million at December 31, 2003. On March 22, 2004, the Bank issued $250.0 million aggregate principal amount of Notes. The Notes bear interest at a fixed rate of 3.75% per annum for the first five years, and convert to a floating rate thereafter until maturity based on the US Dollar three-month LIBOR plus 1.82%. Beginning on April 1, 2009 the Bank has the right to redeem the Notes at par plus accrued interest. The net proceeds of $247.4 million were used for general corporate purposes. The Notes qualify as Tier 2 capital of the Bank under the capital guidelines of the FDIC.

The Holding Company’s stockholders’ equity totaled $1.04 billion at March 31, 2004 compared to $991.1 million at December 31, 2003. The $53.4 million increase was primarily due to net income of $38.1 million and a $19.5 million increase in the net unrealized gain on securities available-for-sale. In addition, the increase was also attributable to $3.0 million related to the exercise of stock options and related tax benefit, $2.7 million related to the ESOP shares committed to be released with respect to the three months ended March 31, 2004, amortization of the earned portion of restricted stock grants of $1.0 million, and $0.2 million of stock compensation costs. These increases were partially offset by a $11.1 million decrease due to dividends declared.

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Information is based on average daily balances during the indicated periods and is annualized where appropriate.

The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income and expense attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income and expense attributable to changes in rate (changes in rate multiplied by prior volume). The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.


(1)	Includes loans available-for-sale.

(2)	Includes home equity loans and lines of credit, FHA and conventional home improvement loans, automobile loans, passbook loans and secured and unsecured personal loans.

Comparison of Results of Operations for the Three Months Ended March 31, 2004 and 2003

The Company reported an 16.1% increase in diluted earnings per share to $0.72 for the quarter ended March 31, 2004 compared to $0.62 for the quarter ended March 31, 2003. Net income increased 15.7% to $38.1 million for the quarter ended March 31, 2004 compared to $33.0 million for the quarter ended March 31, 2003.

On a linked quarter basis, net income increased $1.9 million, or 5.2%, from $36.2 million for the quarter ended December 31, 2003 while diluted earnings per share increased 4.3% from $0.69 for the quarter ended December 31, 2003.

Net interest income increased by $8.5 million or 11.6% to $81.5 million for the quarter ended March 31, 2004 as compared to $73.0 million for the quarter ended March 31, 2003. The increase was due to a $6.9 million increase in interest income combined with a $1.6 million decrease in interest expense. The increase in net interest income primarily reflected a $1.63 billion increase in average interest-earning assets during the quarter ended March 31, 2004 as compared to the same period in the prior year, offset in part by the 33 basis point decrease in net interest margin.

The Company’s net interest margin decreased 33 basis points to 3.64% for the quarter ended March 31, 2004 compared to 3.97% for the quarter ended March 31, 2003. The average yield on interest-earning assets declined 80 basis points for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003 which was partially offset by a decline of 50 basis points in the cost of average interest-bearing liabilities. The compression in net interest margin was primarily attributable to new assets for portfolio retention being originated at lower yields.

On a linked quarter basis, net interest margin declined by 6 basis points to 3.64% for the quarter ended March 31, 2004, from 3.70% for the quarter ended December 31, 2003. For the quarter ended March 31, 2004, the weighted average interest rate earned on interest-earning assets declined 9 basis points compared to the quarter ended December 31, 2003. By comparison, the weighted average interest rate paid on interest-bearing liabilities declined 3 basis points compared to the quarter ended December 31, 2003.

Interest income increased by $6.9 million to $117.6 million for the quarter ended March 31, 2004 compared to $110.7 million for the quarter ended March 31, 2003. Interest income on loans declined $1.8 million due primarily to a decrease in the yield on the average loan portfolio of 89 basis points to 5.78% for the quarter ended March 31, 2004 from 6.67% for the quarter ended March 31, 2003. Partially offsetting the decline in yield were higher average outstanding loan balances of $642.9 million compared to the prior year quarter.

The increase in the average balance of loans is primarily attributable to increases of $508.4 million in the average balance of multi-family residential loans and $407.2 million in the average balance of commercial real estate loans for the three months ended March 31, 2004 compared to the three months ended March 31, 2003. The increase in average balance was funded by the use of borrowings, and to a lesser extent, the growth in deposits.

Partially offsetting the above increases in the average balance of loans was a $245.6 million decline in the average balance of the single-family and cooperative loan portfolios which management has decided to let run-off as maintenance of such portfolio is not consistent with the Company’s overall business model. The Company does, however, originate single-family loans for sale through its private label program with Cendant. In addition, the average balance of mortgage warehouse lines of credit decreased $159.1 million, in part, due to the softening of demand for mortgage warehouse funding which began in the fourth quarter of 2003 as the refinance market began to contract.

Income on investment securities increased $0.9 million due to an increase in the average outstanding balance of investment securities of $67.0 million and an increase in the average yield of 17 basis points to 4.57% for the quarter ended March 31, 2004 compared to the same period in 2003.

Interest income on mortgage-related securities increased $10.7 million during the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003 as a result of an $1.02 billion increase in the average balance which was funded by the use of borrowings and the growth in deposits. The increase in the average balance was partially offset by a 7 basis point decrease in the yield earned from 4.31% for the quarter ended March 31, 2003 to 4.24% for the quarter ended March 31, 2004.

Income on other interest-earning assets decreased $1.4 million in the current quarter compared to the prior year quarter primarily due to a decrease in the dividends received on FHLB stock of $1.0 million. As of March 31, 2004, the Company had $129.6 million of FHLB stock. The FHLB of New York decreased the amount of dividends paid to its stockholders in the first quarter of 2004 compared to the first quarter of 2003. The FHLB of New York did not pay a dividend in the fourth quarter of 2003.

Interest expense decreased $1.6 million or 4.2% to $36.1 million for the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003. This decrease primarily reflects a 29 basis point decrease in the average rate paid on deposits to 0.92% for the quarter ended March 31, 2004 compared to 1.21% for the quarter ended March 31, 2003. This decrease was partially offset by a $444.1 million increase in the average balance of deposits. The average balance of core deposits increased $663.8 million, or 19.3%, to $4.10 billion for the quarter ended March 31, 2004 compared to $3.44 billion for the quarter ended March 31, 2003. Core deposits are defined as all deposits other than certificates of deposit. Lower costing core deposits represented approximately 75.7% of total deposits at March 31, 2004 compared to 68.9% at March 31, 2003. This increase reflects the success of the Company’s strategy of lowering its overall cost of funds while emphasizing the expansion of its commercial and consumer relationships.

Interest expense on borrowings decreased $0.8 million due to a decline in the average rate paid on such borrowings of 171 basis points from 4.76% in the quarter ended March 31, 2003 to 3.05% in the quarter ended March 31, 2004. Partially offsetting the decline in the average rate paid was an increase of $957.4 million in the average balance of borrowings as the Company utilized borrowings as a funding source pending replacement of a portion of such funding with core deposits. During 2003, the Company borrowed $1.08 billion of short-term low costing floating-rate borrowings, and invested the funds primarily in mortgage-backed securities with characteristics designed to minimize both interest rate and extension risk while maximizing yield. During the three months ended March 31, 2004, the Company repaid $1.10 billion of short-term borrowings and borrowed an additional $1.05 billion. The Company anticipates replacing a portion of these short-term borrowings with lower costing core deposits.

Interest expense on subordinated notes was $1.7 million during the quarter ended March 31, 2004. On March 22, 2004, the Bank issued $250.0 million aggregate principal amount of Notes (as previously discussed) and issued $150.0 million in 3.5% Fixed Rate/ Floating Rate Subordinated Notes Due 2013 at the end of the second quarter of 2003.

The Company’s provision for loan losses decreased $2.0 million for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. Based on the improved quality in the characteristics of the loan portfolio, the Company did not record a provision for loan losses in the first quarter of 2004.

In assessing the level of the allowance for loan losses and the periodic provision charged to income, the Company considers the composition of its loan portfolio, the growth of loan balances within various segments of the overall portfolio, the state of the local (and to a certain degree, the national) economy as it may impact the performance of loans within different segments of the portfolio, the loss experience related to different segments or classes of loans, the type, size and geographic concentration of loans held by the Company, the level of past due and non-performing loans, the value of collateral securing the loan, the level of classified loans and the number of loans requiring heightened management oversight.

Non-performing assets as a percentage of total assets totaled 38 basis points at March 31, 2004 compared to 64 basis points at March 31, 2003. Non-performing assets decreased 27.7% to $37.8 million at March 31, 2004 compared to $52.2 million at March 31, 2003. The $14.4 million decrease was primarily due to a decrease of $14.9 million in non-accrual loans which was partially offset by a $0.4 million increase in loans that are contractually past due 90 days or more as to maturity, although current as to monthly principal and interest payments. The $14.9 million decrease in non-accrual loans was primarily due to decreases of $9.6 million in commercial business loans, $2.4 million in single-family residential and cooperative loans, $2.0 million in commercial real estate loans and $1.2 million in multi-family residential loans, partially offset

by an increase of $0.3 million in consumer loans. The Company’s allowance for loan losses to total loans amounted to 1.20% and 1.38% of total loans at March 31, 2004 and March 31, 2003, respectively.

The Company continues to stress and emphasize the development of fee-based income throughout its operations. As a result of a variety of initiatives, the Company experienced a 4.6% increase in non-interest income, from $26.2 million for the quarter ended March 31, 2003 to $27.5 million for quarter ended March 31, 2004.

The Company recorded gains on sales of loans and securities of $2.9 million primarily from the sales of $74.8 million of securities during the quarter ended March 31, 2004, compared to $27,000 for the quarter ended March 31, 2003.

One revenue channel that the Company stresses and which is a primary driver of non-interest income, is earnings from the Company’s mortgage-banking activities. In the quarter ended March 31, 2004, revenue from the Company’s mortgage-banking business amounted to $4.5 million compared to $8.6 million in the quarter ended March 31, 2003. The Company originates multi-family residential loans for sale in the secondary market to Fannie Mae with the Company retaining servicing on all loans sold. Under the terms of the sales program, the Company also retains a portion of the associated credit risk. At March 31, 2004, the Company’s maximum potential exposure related to secondary market sales to Fannie Mae under this program was $139.5 million. The Company also has a program with Cendant to originate and sell single-family residential mortgage loans and servicing in the secondary market. See Note 6 to Notes to Consolidated Financial Statements included herein.

As a result of the interest rate environment in effect during the first three quarters of 2003, and as part of the Company’s business model, the majority of the multi-family residential loans the Company originated during 2003 were sold in the secondary market to Fannie Mae. During the fourth quarter of 2003, as interest rates began to rise, the Company retained the majority of the multi-family residential loans it originated for portfolio retention. The Company sold multi-family residential mortgage loans totaling $244.8 million during the quarter ended March 31, 2004 compared to $570.5 million during the quarter ended March 31, 2003. Included in the $244.8 million of loans sold in the first quarter of 2004 were $116.6 million of loans that were originally held in portfolio. On a linked quarter basis, the Company sold $197.5 million of multi-family residential mortgage loans to Fannie Mae in the quarter ended December 31, 2003. In addition, the Company sold $22.0 million of single-family residential loans during the quarter ended March 31, 2004 compared to $36.2 million during the quarter ended March 31, 2003.

Mortgage-banking activities for the quarter ended March 31, 2004 reflected $3.9 million in gains, $1.4 million in servicing fees and $0.4 million of origination fees partially offset by $1.2 million of amortization of servicing assets. Included in the $3.9 million of gains were $0.4 million of provisions recorded related to the retained credit exposure on multi-family residential loans sold to Fannie Mae. This category also included a $21.6 million increase in the fair value of loan commitments for loans originated for sale and a $21.6 million decrease in the fair value of forward loan sale agreements which are entered into with respect to the sale of such loans. The $4.1 million decrease in revenue from mortgage-banking activities for the quarter ended March 31, 2004 compared to the prior year quarter was primarily due to an decrease in the gain on sales of loans to Fannie Mae of $1.9 million combined with an $3.2 million decrease in origination fees. The Company recorded $2.1 million of income from mortgage-banking activities in the quarter ended December 31, 2003.

Service fee income decreased by $1.1 million, or 7.4% for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. Included in service fee income are prepayment and modification fees on loans. These fees are effectively a partial offset to the decreases realized in the net interest margin. Prepayment fees decreased $0.7 million to $3.8 million for the quarter ended March 31, 2004 compared to $4.5 million for the quarter ended March 31, 2003. Modification and extension fees increased $0.1 million to $0.6 million for the quarter ended March 31, 2004 compared to $0.5 million for the quarter ended March 31, 2003. On a linked quarter basis, the total of these combined fees decreased by $5.6 million from $9.9 million for the quarter ended December 31, 2003 compared to $4.3 million for the quarter ended March 31, 2004

reflecting the softening of the refinance market experienced throughout 2003 and continuing in the first quarter of 2004.

Another component of service fees are revenues generated from the branch system which decreased by $0.3 million, or 4.1%, to $8.0 million for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. The decrease was primarily due to decreased NSF fees on deposit accounts.

In addition, the Company also recorded an increase for the quarter ended March 31, 2004 of approximately $0.4 million in the cash surrender value of BOLI compared to the quarter ended March 31, 2003. On a linked quarter basis, income related to BOLI increased by $0.5 million to $2.6 million for the quarter ended March 31, 2004 as compared to the quarter ended December 31, 2003.

Other non-interest income increased $3.2 million to $3.9 million for the three months ended March 31, 2004 compared to $0.7 million for the three months ended March 31, 2003. The increase was primarily attributable to increased income from the Company’s equity investment in Meridian Capital of $2.6 million and a tax refund of $0.6 million related to the Company’s acquisition of Statewide in January 2000.

Non-interest expense increased $3.6 million, or 7.9%, to $49.6 million for the quarter ended March 31, 2004 compared to $46.0 million for the quarter ended March 31, 2003. This increase was primarily attributable to increases of $3.2 million in compensation and benefits, $2.0 million in occupancy costs and $0.6 million of data processing costs which were partially offset by a $1.3 million decrease in the amortization of identifiable intangible assets and a $0.9 million decrease in other expenses.

Total compensation and benefits expense increased $3.2 million or 13.2% to $27.0 million for the quarter ended March 31, 2004 as compared to $23.8 million for the same period in the prior year. This increase was comprised of increases in salaries of $2.1 million, $1.0 million in management incentive expenses, ESOP costs of $0.8 million, deferred compensation expense of $0.4 million and $0.3 million of postretirement health care benefits expense. Partially offsetting these increases were lower Recognition Plan costs of $1.6 million. The increase in compensation and benefit expense in the 2004 period was primarily attributable to expansion of the Company’s commercial and retail lending operations during the past year.

Occupancy costs increased $2.0 million or 33.8% to $7.9 million for the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003. Data processing costs increased $0.6 million, or 21.3%, to $3.1 million for the quarter ended March 31, 2004 as compared to $2.5 million for the quarter ended March 31, 2003. The increase in both occupancy and data processing costs is a result of the increased number of branch facilities resulting from the continuation of the de novo branch expansion program as well as the expansion of the commercial real estate lending activities to the Baltimore-Washington and Florida markets through the establishment of loan production offices in these areas. The Company expects occupancy costs to increase in 2004 due to the completion of the Staten Island merger.

Advertising expenses increased by $0.9 million from $1.7 million in the quarter ended March 31, 2003 to $1.8 million in the quarter ended March 31, 2004. The cost reflects the Company’s continued focus on brand awareness through, in part, increased advertising in print media, radio and direct marketing programs and support of the de novo branches.

Amortization of identifiable intangible assets decreased by $1.3 million to $0.1 million for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. The decrease was due to intangible assets from a branch purchase transaction effected in fiscal 1996 being fully amortized during the quarter ended March 31, 2003. The remaining identified intangibles as of March 31, 2004 will be completely amortized by April 2004. However, as a result of the Staten Island transaction, the Company will recognize an increase in identifiable intangible assets and the associated amortization of such assets during the second quarter of 2004.

Other non-interest expenses decreased $0.9 million to $9.6 million from $10.5 million for the quarter ended March 31, 2004 compared to the same period in the prior year. Other non-interest expenses include

such items as professional services, business development expenses, equipment expenses, recruitment costs, office supplies, commercial bank fees, postage, insurance, telephone expenses and maintenance and security.

On a linked quarter basis, non-interest expense decreased $0.3 million to $49.6 million for the quarter ended March 31, 2004 from $49.9 million for the quarter ended December 31, 2003. The decrease was due to decreases of $2.7 million in other non-interest expenses and $0.6 million in advertising costs, partially offset by increases of $2.1 million in compensation and benefits expense, $0.8 million in data processing costs and $0.1 million in occupancy costs. The increase in compensation and benefits of $2.1 million primarily consisted of increases of $1.1 million in salaries expense and $1.0 million in management incentive costs.

Compliance with changing regulation of corporate governance and public disclosure has resulted in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and recently adopted revisions to the listing requirements of The Nasdaq Stock Market, are creating uncertainty for companies such as ours. The Company is committed to maintaining high standards of corporate governance and public disclosure. Compliance with the various new requirements is resulting in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Income tax expense amounted to $21.2 million and $18.3 million for the quarter ended March 31, 2004 and 2003, respectively. The increase recorded in the 2003 period reflected the $8.1 million increase in the Company’s income before provision for income taxes. As of March 31, 2004, the Company had a net deferred tax asset of $44.9 million compared to $65.2 million at March 31, 2003.

The following table sets forth the Bank’s compliance with applicable regulatory capital requirements at March 31, 2004.

The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company’s primary sources of funds are deposits, the amortization, prepayment and maturity of outstanding loans, mortgage-related securities, the maturity of debt securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans, mortgage-related securities and maturing debt securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in federal funds sold and other short-term interest-earning assets that provide liquidity to meet lending requirements. Prior to fiscal 1999, the Company generated sufficient cash through its deposits to fund its asset generation, using borrowings only to a limited degree as a source of funds. However, due to the Company’s continued focus on

expanding its commercial real estate and business loan portfolios the Company has increased its use of borrowings. The Company increased its total borrowings (including subordinated notes) to $3.23 billion at March 31, 2004 from $3.06 billion at December 31, 2003. At March 31, 2004, the Company had the ability to borrow from the FHLB an additional $607.5 million on a secured basis, utilizing mortgage-related loans and securities as collateral.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as federal funds sold, U.S. Treasury securities or preferred securities. On a longer term basis, the Company maintains a strategy of investing in its various lending products. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related securities and investment securities. Certificates of deposit scheduled to mature in one year or less at March 31, 2004 totaled $1.01 billion or 77.2% of total certificates of deposit. Based on historical experience, management believes that a significant portion of maturing deposits will remain with the Company. The Company anticipates that it will continue to have sufficient funds, together with borrowings, to meet its current commitments.

The notional principal amount of the off-balance sheet financial instruments at March 31, 2004 and December 31, 2003 are as follows:

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments. As a financial institution, the Company’s primary component of market risk is interest rate risk. Interest rate risk is defined as the sensitivity of the Company’s current and future earnings to changes in the level of market rates of interest. Market risk arises in the ordinary course of the Company’s business, as the repricing characteristics of its assets do not match those of its liabilities. Based upon the Company’s nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Company’s various loan portfolios, concentrated primarily within the greater New York City metropolitan area (which includes parts of northern New Jersey and southern Connecticut), are subject to risks associated with the local economy. The Company does not own any trading assets.

Net interest margin represents net interest income as a percentage of average interest-earning assets. Net interest margin is directly affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of assets and liabilities and the credit quality of the loan portfolio. Management’s asset/ liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks and to maintain adequate liquidity.

Management responsibility for interest rate risk resides with the Asset and Liability Management Committee (“ALCO”). The committee is chaired by the Chief Financial Officer, and includes the Chief

Executive Officer, Chief Credit Officer and the Company’s senior business-unit and financial executives. Interest rate risk management strategies are formulated and monitored by ALCO within policies and limits approved by the Board of Directors. These policies and limits set forth the maximum risk which the Board of Directors deems prudent, govern permissible investment securities and off-balance sheet instruments, and identify acceptable counterparties to securities and off-balance sheet transactions.

ALCO risk management strategies allow for the assumption of interest rate risk within the Board approved limits. The strategies are formulated based upon ALCO’s assessments of likely market developments and trends in the Company’s lending and consumer banking businesses. Strategies are developed with the aim of enhancing the Company’s net income and capital, while ensuring the risks to income and capital from adverse movements in interest rates are acceptable.

The Company’s strategies to manage interest rate risk include (i) increasing the interest sensitivity of its mortgage loan portfolio through the use of adjustable-rate loans or relatively short-term (primarily five years) balloon loans, (ii) originating relatively short-term or variable-rate consumer and commercial business loans as well as mortgage warehouse lines of credit, (iii) investing in securities available-for-sale, primarily mortgage-related instruments with maturities or estimated average lives of less than five years, (iv) promoting stable savings, demand and other transaction accounts, (v) utilizing variable-rate borrowings which have imbedded derivatives to cap the cost of borrowings, (vi) using interest rate swaps to modify the repricing characteristics of certain variable rate borrowings, (vii) entering into forward loan sale agreements to offset rate risk on rate-locked loan commitments originated for sale, (viii) maintaining a strong capital position and (ix) maintaining a relatively high level of liquidity and/or borrowing capacity.

As part of the overall interest rate risk management strategy, management has entered into derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The interest rate risk management strategy at times involves modifying the repricing characteristics of certain borrowings and entering into forward loan sale agreements to offset rate risk on rate-locked loan commitments originated for sale so that changes in interest rates do not have a significant adverse effect on net interest income, net interest margin and cash flows. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include interest rate swaps and forward loan sale agreements.

At March 31, 2004, the Company had $1.04 billion of loan commitments outstanding related to loans being originated for sale. Of such amount, $548.8 million related to loan commitments for which the borrowers had not entered into interest rate locks and $495.6 million which were subject to interest rate locks. At March 31, 2004, the Company had $495.6 million of forward loan sale agreements. The fair market value of the loan commitments with interest rate lock was a gain of $21.6 million and the fair market value of the related forward loan sale agreements was a loss of $21.6 million at March 31, 2004.

Management uses a variety of analyses to monitor the sensitivity of net interest income, primarily a dynamic simulation model complemented by a traditional gap analysis and, to a lesser degree, a net portfolio value analysis.

The simulation model measures the sensitivity of net interest income to changes in market interest rates. The simulation involves a degree of estimation based on certain assumptions that management believes to be reasonable. Factors considered include contractual maturities, prepayments, repricing characteristics, deposit retention and the relative sensitivity of assets and liabilities to changes in market interest rates.

The Board has established certain limits for the potential volatility of net interest income as projected by the simulation model. Volatility is measured from a base case where rates are assumed to be flat. Volatility is expressed as the percentage change, from the base case, in net interest income over a 12-month period.

The model is kept static with respect to the composition of the balance sheet and, therefore does not reflect management’s ability to proactively manage asset composition in changing market conditions.

Management may choose to extend or shorten the maturities of the Company’s funding sources and redirect cash flows into assets with shorter or longer durations.

Based on the information and assumptions in effect at March 31, 2004, the model shows that a 200 basis point gradual increase in interest rates over the next twelve months would decrease net interest income by $13.6 million or 4.1%, while a 100 basis point gradual decrease in interest rates would increase net interest income by $0.3 million or 0.1%.

Gap analysis complements the income simulation model, primarily focusing on the longer term structure of the balance sheet. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s “interest rate sensitivity gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At March 31, 2004, the Company’s one-year cumulative gap position was a negative 2.67% compared to a negative 2.24% at December 31, 2003. A positive gap will generally result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap will generally have the opposite results on the net interest margin.

The following gap analysis table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2004, that are anticipated by the Company, using certain assumptions based on historical experience and other market-based data, to reprice or mature in each of the future time periods shown. The amount of assets and liabilities shown which reprice or mature during a particular period was determined in accordance with the earlier of the term to reprice or the contractual maturity of the asset or liability.

The gap analysis is an incomplete representation of interest rate risk. The gap analysis sets forth an approximation of the projected repricing of assets and liabilities at March 31, 2004 on the basis of contractual maturities, anticipated prepayments, callable features and scheduled rate adjustments for selected time periods. The actual duration of mortgage loans and mortgage-backed securities can be significantly affected by changes in mortgage prepayment activity. The major factors affecting mortgage prepayment rates are prevailing interest rates and related mortgage refinancing opportunities. Prepayment rates will also vary due to a number of other factors, including the regional economy in the area where underlying collateral is located, seasonal factors and demographic variables.

In addition, the gap analysis does not account for the effect of general interest rate movements on the Company’s net interest income because the actual repricing dates of various assets and liabilities will differ from the Company’s estimates and it does not give consideration to the yields and costs of the assets and liabilities or the projected yields and costs to replace or retain those assets and liabilities. Callable features of certain assets and liabilities, in addition to the foregoing, may also cause actual experience to vary from that indicated. The uncertainty and volatility of interest rates, economic conditions and other markets which affect the value of these call options, as well as the financial condition and strategies of the holders of the options, increase the difficulty and uncertainty in predicting when they may be exercised.

Among the factors considered in our estimates are current trends and historical repricing experience with respect to similar products. As a result, different assumptions may be used at different points in time. Within the one year time period, money market accounts were assumed to decay at 55%, savings accounts were assumed to decay at 30% and NOW accounts were assumed to decay at 40%. Deposit decay rates (estimated deposit withdrawal activity) can have a significant effect on the Company’s estimated gap. While the Company believes such assumptions are reasonable, there can be no assurance that these assumed decay rates will approximate actual future deposit withdrawal activity.

The following table reflects the repricing of the balance sheet, or “gap” position at March 31, 2004.


(1)	Based upon contractual maturity, repricing date, if applicable, and management’s estimate of principal prepayments. Includes loans available-for-sale.

(2)	Based upon contractual maturity, repricing date, if applicable, and projected repayments of principal based upon experience. Amounts exclude the unrealized gains/ (losses) on securities available-for-sale.

(3)	Includes interest-earning cash and due from banks, overnight deposits and FHLB stock.

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-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 our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

The following table contains information about our purchases of equity securities during the first quarter of 2004.

On July 24, 2003 the Company announced that its Board of Directors authorized the eleventh stock repurchase plan for up to three million shares of the Company’s outstanding common shares. Since that announcement, the Company has purchased 209,671 shares for an aggregate cost of $6.9 million at an average price per share of $32.82.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Delaware		11-3387931
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
195 Montague Street, Brooklyn, New York		11201
(Address of principal executive office)		(Zip Code)


			Page

Part I Financial Information
	Item 1	Financial Statements
		Consolidated Statements of Financial Condition as of March 31, 2004 (unaudited) and December 31, 2003		2
		Consolidated Statements of Income for the three months ended March 31, 2004 and 2003 (unaudited)		3
		Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2004 and 2003 (unaudited)		4
		Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)		5
		Notes to Consolidated Financial Statements (unaudited)		6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
	Item 3	Quantitative and Qualitative Disclosures About Market Risk		43
	Item 4	Controls and Procedures		46
Part II Other Information
	Item 1	Legal Proceedings		47
	Item 2	Changes in Securities and Use of Proceeds		47
	Item 3	Defaults upon Senior Securities		47
	Item 4	Submission of Matters to a Vote of Security Holders		47
	Item 5	Other Information		47
	Item 6	Exhibits and Reports on Form 8-K		48
Signatures				49
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION


			March 31,			December 31,
			2004			2003

			(Unaudited)			(Audited)
ASSETS:
Cash and due from banks — interest-bearing			$	113,526		$	43,950
Cash and due from banks — non-interest-bearing				112,403			128,078

		Total cash and cash equivalents		225,929			172,028

Securities available-for-sale:
	Investment securities ($27,132 and $14,593 pledged to creditors, respectively)			304,462			296,945
	Mortgage-related securities ($1,523,933 and $1,872,549 pledged to creditors, respectively)			2,158,314			2,211,755

		Total securities available-for-sale		2,462,776			2,508,700

Loans available-for-sale				11,950			5,922

Mortgage loans on real estate				4,985,214			4,714,388
Other loans				1,616,526			1,457,843

		Total loans		6,601,740			6,172,231
		Less: allowance for possible loan losses		(79,193	)		(79,503	)

		Total loans, net		6,522,547			6,092,728

Premises, furniture and equipment, net				103,438			101,383
Accrued interest receivable				37,919			37,046
Goodwill				185,161			185,161
Identifiable intangible assets, net				47			190
Bank owned life insurance (“BOLI”)				175,988			175,800
Other assets				249,155			267,649

		Total assets	$	9,974,910		$	9,546,607

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Deposits
	Savings deposits		$	1,631,720		$	1,613,161
	Money market deposits			488,628			401,024
	Active management account deposits			464,294			475,647
	Interest-bearing demand deposits			743,016			694,102
	Non-interest-bearing demand deposits			762,127			741,261
	Certificates of deposit			1,311,655			1,378,902

		Total deposits		5,401,440			5,304,097

Borrowings				2,866,300			2,916,300
Subordinated notes				395,818			148,429
Escrow and other deposits				127,021			76,260
Accrued expenses and other liabilities				139,856			110,410

		Total liabilities		8,930,435			8,555,496

Stockholders’ equity:
	Common stock, $.01 par value: 125,000,000 shares authorized, 76,043,750 shares issued; 54,739,776 and 54,475,715 shares outstanding at March 31, 2004 and December 31, 2003, respectively			760			760
	Additional paid-in-capital			763,932			761,880
	Treasury stock at cost: 21,303,974 and 21,568,035 shares at March 31, 2004 and December 31, 2003, respectively			(375,843	)		(380,088	)
	Unallocated common stock held by ESOP			(67,975	)		(69,211	)
	Unvested awards under Recognition Plan			(8,246	)		(7,598	)
	Retained earnings, partly restricted			705,337			678,353
	Accumulated other comprehensive income:
		Net unrealized gain on securities available-for-sale, net of tax		26,510			7,015

		Total stockholders’ equity		1,044,475			991,111

		Total liabilities and stockholders’ equity	$	9,974,910		$	9,546,607



		Three Months Ended
		March 31,

		2004		2003

INTEREST INCOME:
Mortgage loans on real estate		$	72,124	$	72,512
Other loans			18,430		19,887
Loans available-for-sale			183		1,506
Investment securities			3,461		2,592
Mortgage-related securities			22,849		12,190
Other			568		2,009

	Total interest income		117,615		110,696

INTEREST EXPENSE:
Deposits			12,526		14,990
Borrowings			21,890		22,681
Subordinated notes			1,690		—

	Total interest expense		36,106		37,671

Net interest income			81,509		73,025
Provision for loan losses			—		2,000

	Net interest income after provision for loan losses		81,509		71,025
NON-INTEREST INCOME:
Net gain on sales of loans and securities			2,865		27
Mortgage-banking activities			4,492		8,649
Service fees			13,595		14,681
BOLI			2,636		2,197
Other			3,865		683

	Total non-interest income		27,453		26,237

NON-INTEREST EXPENSE:
Compensation and employee benefits			26,975		23,819
Occupancy costs			7,933		5,930
Data processing fees			3,131		2,580
Advertising			1,847		1,720
Amortization of identifiable intangible assets			143		1,427
Other			9,567		10,475

	Total non-interest expense		49,596		45,951

Income before provision for income taxes			59,366		51,311
Provision for income taxes			21,223		18,343

	Net income	$	38,143	$	32,968

Basic earnings per share		$	0.76	$	0.65

Diluted earnings per share		$	0.72	$	0.62


														Unearned
											Unallocated			Common						Accumulated
					Additional						Common			Stock Held by						Other
			Common		Paid-in			Treasury			Stock Held			Recognition			Retained			Comprehensive
			Stock		Capital			Stock			by ESOP			Plan			Earnings			Income/(Loss)			Total

Balance — December 31, 2003			$	760	$	761,880		$	(380,088	)	$	(69,211	)	$	(7,598	)	$	678,353		$	7,015		$	991,111
Comprehensive income:
	Net income for the three months ended March 31, 2004			—		—			—			—			—			38,143			—			38,143
	Other comprehensive income, net of tax of $14.7 million
		Change in net unrealized gains on securities available-for-sale, net of tax of $12.0 million		—		—			—			—			—			—			21,571			21,571
		Less: reclassification adjustment of net losses realized in net income, net of tax		—		—			—			—			—			—			(2,076	)		(2,076	)

Comprehensive income				—		—			—			—			—			38,143			19,495			57,638
Treasury stock issued upon option exercises (264,061 shares)				—		(1,243	)		4,245			—			—			—			—			3,002
Dividends declared				—		—			—			—			—			(11,159	)		—			(11,159	)
Stock compensation expense				—		201			—			—			—			—			—			201
ESOP shares committed to be released				—		1,485			—			1,236			—			—			—			2,721
Amortization of earned portion of Recognition Plan awards				—		1,609			—			—			(648	)		—			—			961

Balance — March 31, 2004			$	760	$	763,932		$	(375,843	)	$	(67,975	)	$	(8,246	)	$	705,337		$	26,510		$	1,044,475

Balance — December 31, 2002			$	760	$	742,006		$	(318,182	)	$	(74,154	)	$	(11,782	)	$	575,927		$	5,693		$	920,268
Comprehensive income:
	Net income for the three months ended March 31, 2003			—		—			—			—			—			32,968			—			32,968
	Other comprehensive income, net of tax of $1.1 million
		Change in net unrealized losses on cash flow hedges, net of tax of $0.4 million		—		—			—			—			—			—			(1,201	)		(1,201	)
		Change in net unrealized gains on securities available-for- sale, net of tax of $0.7 million		—		—			—			—			—			—			1,963			1,963

Comprehensive income				—		—			—			—			—			32,968			762			33,730
Repurchase of common stock (1,275,500 shares)				—		—			(32,945	)		—			—			—			—			(32,945	)
Treasury stock issued upon option exercises (169,057 shares)				—		220			3,256			—			—			—			—			3,476
Dividends declared				—		—			—			—			—			(7,798	)		—			(7,798	)
ESOP shares committed to be released				—		586			—			1,236			—			—			—			1,822
Amortization of earned portion of Recognition Plan awards				—		876			—			—			1,660			—			—			2,536

Balance — March 31, 2003			$	760	$	743,688		$	(347,871	)	$	(72,918	)	$	(10,122	)	$	601,097		$	6,455		$	921,089


	The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments


	Employers’ Disclosures about Pensions and Other Postretirement Benefits


	Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003


					Gross		Gross
			Amortized		Unrealized		Unrealized			Estimated
			Cost		Gains		Losses			Fair Value


			(In Thousands)
Investment securities:
	Debt securities:
		U.S. government and agencies	$	27,717	$	42	$	(1	)	$	27,758
		Corporate		118,923		2,012		(242	)		120,693
		Municipal		1,855		349		—			2,204

	Total debt securities			148,495		2,403		(243	)		150,655

	Equity securities:
		Preferred		153,446		3,161		(4,191	)		152,416
		Common		386		1,005		—			1,391

	Total equity securities			153,832		4,166		(4,191	)		153,807

Total investment securities				302,327		6,569		(4,434	)		304,462

Mortgage-related securities:
	Fannie Mae pass through certificates			201,970		3,231		(473	)		204,728
	Government National Mortgage Association (“GNMA”) pass through certificates			6,272		489		—			6,761
	Freddie Mac pass through certificates			4,996		316		(2	)		5,310
		Collateralized mortgage obligation bonds		1,906,548		36,589		(1,622	)		1,941,515

Total mortgage-related securities				2,119,786		40,625		(2,097	)		2,158,314

Total securities available-for-sale			$	2,422,113	$	47,194	$	(6,531	)	$	2,462,776



		At or for the
		Three Months Ended
		March 31,

		2004			2003


		(Dollars in
		Thousands)
Balance at beginning of period		$	7,772		$	6,445
	Capitalized servicing asset		854			2,574
	Reduction of servicing asset		(1,282	)		(1,433	)

Balance at end of period		$	7,344		$	7,586



	For the Three Months
	Ended March 31,

	2004			2003


	(Dollars in Thousands)
Origination fees	$	395		$	3,642
Servicing fees		1,349			520
Gain on sales		3,946			5,836
Change in fair value of loan commitments		17,157			4,546
Change in fair value of forward loan sale agreements		(17,157	)		(4,546	)
Amortization of loan servicing asset		(1,198	)		(1,349	)

Total mortgage-banking activity income	$	4,492		$	8,649



		March 31, 2004					December 31, 2003

				Percent					Percent
		Amount		of Total			Amount		of Total


		(Dollars in Thousands)
Mortgage loans:
	Single-family residential and cooperative apartment	$	262,866		4.0	%	$	284,367		4.6	%
	Multi-family residential		2,953,104		44.7			2,821,706		45.7
	Commercial real estate		1,774,955		26.9			1,612,711		26.2

	Total principal balance — mortgage loans		4,990,925		75.6			4,718,784		76.5
	Less net deferred fees		5,711		0.1			4,396		0.1

Total mortgage loans			4,985,214		75.5			4,714,388		76.4

Commercial business loans, net of deferred fees			656,889		9.9			606,204		9.8

Other loans:
	Mortgage warehouse lines of credit		624,930		9.5			527,254		8.5
	Home equity loans and lines of credit		310,891		4.7			296,986		4.8
	Consumer and other loans		23,912		0.4			27,538		0.5

	Total principal balance — other loans		959,733		14.6			851,778		13.8
	Less unearned discounts and deferred fees		96		0.0			139		0.0

Total other loans			959,637		14.6			851,639		13.8

Total loans receivable			6,601,740		100.0	%		6,172,231		100.0	%

Less allowance for loan losses			79,193					79,503

Loans receivable, net		$	6,522,547				$	6,092,728


(1)	Consists primarily of FHA home improvement loans and home equity loans and lines of credit.

(2)	Reflects loans that are 90 days or more past maturity which continue to make payments on a basis consistent with the original repayment schedule.

(3)	Net of related valuation allowances.

(4)	Non-performing assets consist of non-performing loans and OREO. Non-performing loans consist of (i) non-accrual loans and (ii) loans 90 days or more past due as to interest or principal.


(1)	Includes commercial business loans, mortgage warehouse lines of credit, home equity loans and lines of credit, automobile loans and secured and unsecured personal loans.

(2)	Non-performing loans consist of (i) non-accrual loans and (ii) loans 90 days or more past due as to interest or principal.



			At March 31, 2004						At December 31, 2003

			Gross				Net		Gross				Net
			Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
			Amount		Amortization		Amount		Amount		Amortization		Amount


			(Dollars in Thousands)
Amortized intangible assets:
	Deposit intangibles		$	47,559	$	47,512	$	47	$	47,559	$	47,369	$	190

		Total	$	47,559	$	47,512	$	47	$	47,559	$	47,369	$	190


1.	Organization/ Form of Ownership


	Business


2.	Acquisitions


3.	Summary of Significant Accounting Policies



	For the Three
	Months Ended
	March 31,

	2004			2003


	(In Thousands)
Service cost-benefits earned during the period	$	370		$	355
Interest cost on projected benefit obligation		778			743
Expected return on Pension Plan assets		(996	)		(854	)
Amortization of net asset		(50	)		(50	)
Amortization of prior service cost		(273	)		(273	)
Recognized net actuarial loss		172			366

Pension expense		1			287
Net adjustment		2			(45	)

Net pension expense	$	3		$	242


	Loan Commitments for Loans Originated for Sale and Forward Loan Sale Agreements


	Average Balances, Net Interest Income, Yields Earned and Rates Paid



				For the Three Months Ended


				March 31, 2004							March 31, 2003

				Average				Average			Average				Average
				Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost


				(Dollars in thousands)
Interest-earning assets:
	Loans receivable⁽¹⁾:
		Mortgage loans		$	4,919,185	$	72,307		5.88	%	$	4,249,173	$	74,018		6.97	%
		Commercial business loans			591,737		9,312		6.33			561,195		9,725		7.03
		Mortgage warehouse lines of credit			443,893		4,815		4.29			602,964		6,657		4.42
		Other loans⁽²⁾			329,585		4,303		5.25			228,122		3,505		6.23

	Total loans				6,284,400		90,737		5.78			5,641,454		93,905		6.67
	Investment securities				302,814		3,461		4.57			235,823		2,592		4.40
	Mortgage-related securities				2,155,153		22,849		4.24			1,130,682		12,190		4.31
	Other interest-earning assets⁽³⁾				206,391		568		1.11			311,515		2,009		2.62

Total interest-earning assets					8,948,758		117,615		5.26			7,319,474		110,696		6.06

Non-interest-earning assets					746,503							696,258

		Total assets		$	9,695,261						$	8,015,732

Interest-bearing liabilities:
	Deposits:
		Savings		$	1,622,401	$	1,403		0.35	%	$	1,562,825	$	2,658		0.69	%
		Money market			452,680		1,527		1.36			190,294		338		0.72
		Active management accounts (“AMA”)			470,528		918		0.78			511,558		1,590		1.26
		Interest-bearing demand⁽⁴⁾			808,500		1,599		0.80			565,676		1,029		0.74
		Certificates of deposit			1,347,637		7,079		2.11			1,567,361		9,375		2.43

			Total interest-bearing deposits		4,701,746		12,526		1.07			4,397,714		14,990		1.38
			Non interest-bearing deposits		750,301		—		—			610,247		—		—

			Total deposits		5,452,047		12,526		0.92			5,007,961		14,990		1.21

Subordinated notes					175,655		1,690		3.87			—		—		—
Borrowings					2,890,437		21,890		3.05			1,933,050		22,681		4.76

		Total interest-bearing liabilities			8,518,139		36,106		1.70			6,941,011		37,671		2.20

Non-interest-bearing liabilities					158,995							147,049

		Total liabilities			8,677,134							7,088,060
		Total stockholders’ equity			1,018,127							927,672

Total liabilities and stockholders’ equity				$	9,695,261						$	8,015,732

Net interest-earning assets				$	430,619						$	378,463

Net interest income/interest rate spread						$	81,509		3.56	%			$	73,025		3.86	%

Net interest margin									3.64	%						3.97	%

Ratio of average interest-earning assets to average interest-bearing liabilities									1.05	x						1.05	x


(1)	The average balance of loans receivable includes loans available-for-sale and non-performing loans, interest on which is recognized on a cash basis.

(2)	Includes home equity loans and lines of credit, FHA and conventional home improvement loans, automobile loans, passbook loans and secured and unsecured personal loans.

(3)	Includes federal funds sold, interest-earning bank deposits and FHLB stock.

(4)	Includes NOW and checking accounts.



			Three Months Ended March 31, 2004
			Compared to Three Months Ended
			March 31, 2003


			Increase (Decrease)
			due to						Total Net
									Increase
			Rate			Volume			(Decrease)


			(In Thousands)
Interest-earning assets:
Loans receivable:
	Mortgage loans⁽¹⁾		$	(12,227	)	$	10,517		$	(1,710	)
	Commercial business loans			(958	)		545			(413	)
	Mortgage warehouse lines of credit			(184	)		(1,658	)		(1,842	)
	Other loans⁽²⁾			(613	)		1,411			798

Total loans receivable				(13,892	)		10,815			(3,167	)
Investment securities				110			759			869
Mortgage-related securities				(202	)		10,860			10,658
Other interest-earning assets				(909	)		(532	)		(1,441	)

Total net change in income on interest-earning assets				(14,983	)		21,902			6,919
Interest-bearing liabilities:
	Deposits:
		Savings		(1,354	)		99			(1,255	)
		Money market		465			723			1,188
		AMA deposits		(556	)		(117	)		(673	)
		Interest-bearing demand		90			479			569
		Certificates of deposit		(1,094	)		(1,201	)		(2,295	)

Total deposits				(2,449	)		(17	)		(2,466	)
Borrowings				(9,859	)		9,068			(791	)
Subordinated notes				—			1,690			1,690

Total net change in expense on interest-bearing liabilities				12,308			10,741			(1,567	)

Net change in net interest income			$	(2,675	)	$	11,161		$	8,486



		Required					Actual					Excess

		Percent			Amount		Percent			Amount		Percent			Amount


		(Dollars in Thousands)
Tier I leverage capital ratio⁽¹⁾⁽²⁾			4.0	%	$	379,115		8.0	%	$	757,787		4.0	%	$	378,672
Risk-based capital ratios:⁽²⁾
	Tier I		4.0			322,201		9.4			757,787		5.4			435,586
	Total		8.0			644,402		15.2			1,223,842		7.2			579,440


(1)	Reflects the 4.0% requirement to be met in order for an institution to be “adequately capitalized” under applicable laws and regulations.

(2)	The Bank is categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized “well capitalized”, the Bank must maintain Tier 1 leverage capital of 5%, Tier 1 risk-based capital of 6% and total risk-based capital of 10%.



		Contract or Amount

		March 31, 2004		December 31, 2003


		(In Thousands)
Financial instruments whose contract amounts represent credit risk:
	Commitments to extend credit — mortgage loans	$	724,929	$	563,049
	Commitments to extend credit — commercial business loans		247,457		426,883
	Commitments to extend credit — mortgage warehouse lines of credit		853,803		952,615
	Commitments to extend credit — other loans		119,476		111,736
	Standby letters of credit		29,271		28,049
	Commercial letters of credit		776		363

Total		$	1,975,712	$	2,082,695


Item 3.	Quantitative and Qualitative Disclosures About Market Risk


		0 – 90			91 – 180			181 – 365			1 – 5			Over
		Days			Days			Days			Years			5 Years			Total


		(In Thousands)
Interest-earning assets:
	Mortgage loans⁽¹⁾	$	528,301		$	277,908		$	470,807		$	2,426,391		$	1,293,757		$	4,997,164
	Commercial business and other loans		1,072,324			65,133			110,373			331,191			37,505			1,616,526
	Securities available-for-sale⁽²⁾		441,348			129,993			276,784			1,161,299			412,689			2,422,113
	Other interest-earning assets⁽³⁾		119,838			—			—			—			129,565			249,403

Total interest-earning assets			2,161,811			473,034			857,964			3,918,881			1,873,516			9,285,206
Interest-bearing liabilities:
	Savings, NOW and money market deposits		308,630			308,630			617,259			645,841			1,574,319			3,454,679
	Certificates of deposit		534,129			263,860			226,532			287,108			—			1,311,629
	Borrowings		1,401,300			100,000			—			550,000			815,000			2,866,300
	Subordinated notes		(219	)		(219	)		(438	)		146,691			250,000			395,815

Total interest-bearing liabilities			2,243,840			672,271			843,353			1,629,640			2,639,319			8,028,423
Interest sensitivity gap			(82,029	)		(199,237	)		14,611			2,289,241			(765,803	)

Cumulative interest sensitivity gap		$	(82,029	)	$	(281,266	)	$	(266,655	)	$	2,022,586		$	1,256,783

Cumulative interest sensitivity gap as a percentage of total assets			(0.82	)%		(2.82	)%		(2.67	)%		20.28	%		12.60	%




Part II
	Item 1.	*Legal Proceedings* Not applicable
	Item 2.	*Changes in Securities and Use of Proceeds*


					Total Number of		Maximum Number
					Shares Purchased		of Remaining
					as Part of a		Shares that May
	Total Number of		Average Price		Publicly		Be Purchased
Period	Shares Purchased		Paid per Share		Announced Plan		Under the Plan

January 1-31, 2004		—	$	—		—		2,790,329
February 1-29, 2004		—		—		—		2,790,329
March 1-31, 2004		—		—		—		2,790,329

Total		—	$	—		—


		Item 3.		*Defaults upon Senior Securities* Not applicable
		Item 4.		*Submission of Matters to a Vote of Security Holders*
				a) In connection with the merger of Staten Island Bancorp, Inc. with and into Independence Community Bank Corp., the Company held a Special Meeting of Stockholders on March 8, 2004. Proxies were solicited with respect to such meeting under Regulation 14A of the Securities Exchange Act of 1934, as amended, pursuant to a joint proxy statement/ prospectus dated February 2, 2004. Of the 54,684,662 shares of the Company’s common stock eligible to vote at the special meeting, 38,683,002 were represented in person or by proxy.


		Item 6.		*Exhibits and Reports on Form 8-K* a) Exhibits


No.		Description

31.1		Certification pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Date		Item and Description

March 3, 2004		5 & 7 — On March 3, 2004, the Company announced that its President and Chief Executive Officer had presented at the Keefe, Bruyette & Woods Eastern Regional Bank Symposium on March 3, 2004.
March 2, 2004		5 & 7 — On March 1, 2004, the Company issued a joint press release with Staten Island Bancorp, Inc. reporting the completion of the sale of the majority of the assets and operations of Staten Island Mortgage Corp., the mortgage banking subsidiary of SI Bank & Trust, to Lehman Brothers.
January 20, 2004		9 — On January 20, 2004, the Company issued a press release reporting its earnings for the quarter and fiscal year ended December 31, 2003.


Date: May 10, 2004		By: /s/ ALAN H. FISHMAN Alan H. Fishman President and Chief Executive Officer

Date: May 10, 2004		By: /s/ FRANK W. BAIER Frank W. Baier Executive Vice President, Chief Financial Officer, Treasurer and Principal Accounting Officer