Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[ X ]

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

For the Year Ended December 31, 2003

 [   ]

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

Commission file number 0-27782

Dime Community Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (718) 782-6200

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

Preferred Stock Purchase Rights

(Title of Class)

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 twelve months (or for such shorter period that the registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days.

YES

 X  

NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [X]

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

 X  

NO

As of March 8, 2004, there were 25,088,079 shares of the registrant's common stock, $0.01 par value, outstanding.  The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003 was approximately $518.0 million.  This figure is based upon the closing price on the NASDAQ National Market for a share of the registrant's common stock on June 30, 2003, which was $25.34 as reported in the Wall Street Journal on July 1, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the definitive Proxy Statement dated April 10, 2004 to be distributed on behalf of the Board of Directors of Registrant in connection with the Annual Meeting of Shareholders to be held on May 20, 2004 and any adjournment thereof and which is expected to be filed with the Securities and Exchange Commission on or about April 11, 2004, are incorporated by reference in Part III.

- # -

TABLE OF CONTENTS

Page

PART I

Item 1.  Business

      General

3

      Acquisitions

4

      Market Area, Competition and Factors That May Affect Future Results

4

      Lending Activities

5

      Asset Quality

11

      Allowance for Loan Losses

14

      Investment Activities

15

      Sources of Funds

19

      Subsidiary Activities

22

      Personnel

23

      Federal, State and Local Taxation

                 Federal Taxation

23

                 State and Local Taxation

23

      Regulation

                 General

24

                 Regulation of Federal Savings Associations

24

                 Regulation of Holding Company

32

                 Federal Securities Laws

32

Item 2. Properties

32

Item 3. Legal Proceedings

32

Item 4. Submission of Matters to a Vote of Security Holders

33

PART II

Item 5. Market for the Company's Common Stock and Related Stockholder

                 Matters

33

Item 6. Selected Financial Data

34

Item 7. Management Discussion and Analysis of Financial Condition and

                 Results of Operations

36

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

58

Item 8.    Financial Statements and Supplementary Data

63

Item 9.    Changes in and Disagreements with Accountants on Accounting and

                 Financial Disclosure

63

Item 9A. Controls and Procedures

63

PART III

Item 10. Directors and Executive Officers of the Company

63

Item 11. Executive Compensation

63

Item 12. Security Ownership of Certain Beneficial Owners and

                  Management and Related Stockholder Matters

63

Item 13. Certain Relationships and Related Transactions

64

Item 14. Principal Accounting Fees and Services

64

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on

                 Form 8-K

64

Signatures

65

This Annual Report on Form 10-K contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  These statements may be identified by use of words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "outlook," "plan," "potential," "predict," "project," "should," "will," "would" and similar terms and phrases, including references to assumptions.

Forward-looking statements are based upon various assumptions and analyses made by the Company (as defined subsequently herein) in light of management's experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate under the circumstances. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond the Company's control) that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These factors include, without limitation, the following:

•

the timing and occurrence or non-occurrence of events may be subject to circumstances beyond the Company's control;  

•

there may be increases in competitive pressure among financial institutions or from non-financial institutions;

•

changes in the interest rate environment may reduce interest margins;

•

changes in deposit flows, loan demand or real estate values may adversely affect the business of The Dime Savings Bank of Williamsburgh (the "Bank");

•

changes in accounting principles, policies or guidelines may cause the Company's financial condition to be perceived differently;

•

general economic conditions, either nationally or locally in some or all areas in which the Company conducts business, or conditions in the securities markets or the banking industry may be less favorable than the Company currently anticipates;

•

legislation or regulatory changes may adversely affect the Company's business;

•

technological changes may be more difficult or expensive than the Company  anticipates;

•

success or consummation of new business initiatives may be more difficult or expensive than the Company anticipates; or

•

litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than the Company anticipates.

The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

PART I

Item 1.

Business

General

Dime Community Bancshares, Inc. (the "Holding Company," and together with its direct and indirect subsidiaries, the "Company") is a Delaware corporation and parent company of the Bank, a federally-chartered stock savings bank.  

The Holding Company is a unitary savings and loan holding company, which, under existing law, is generally not restricted as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender ("QTL").  The Holding Company's primary business is the operation of its wholly-owned subsidiary, the Bank. Under regulations of the Office of Thrift Supervision ("OTS"), the Bank is a QTL if its ratio of qualified thrift investments to portfolio assets ("QTL Ratio") was 65% or more, on a monthly average basis, in nine of the previous twelve months.  At December 31, 2003, the Bank's QTL Ratio was 82.52%, and the Bank maintained more than 65% of its portfolio assets in qualified thrift investments throughout the year ended December 31, 2003.

On July 18, 2002, the Boards of Directors of the Holding Company and each of its direct and indirect subsidiaries other than DSBW Preferred Funding Corporation and DSBW Residential Preferred Funding Corporation, approved changes in the fiscal year end of each company from June 30^th to December 31^st.  

The Holding Company neither owns nor leases any property but instead uses the premises and equipment of the Bank.  The Holding Company does not employ any persons other than certain officers of the Bank who do not receive any additional compensation as officers of the Holding Company.  The Holding Company utilizes the support staff of the Bank from time to time, as required.  Additional employees may be hired as deemed appropriate by the Holding Company's management.

The Bank's principal business has been, and continues to be, gathering deposits from customers within its market area, and investing those deposits primarily in multi-family residential mortgage loans, commercial real estate loans, one- to four-family residential mortgage loans, construction loans, consumer loans, mortgage-backed securities ("MBS"), obligations of the U.S. Government and Government Sponsored Entities ("GSEs"), and corporate debt and equity securities. The Bank's revenues are derived principally from interest on its loan and securities portfolios. The Bank's primary sources of funds are deposits; loan amortization, prepayments and maturities; MBS amortization, prepayments and maturities; investment securities maturities; advances ("Advances") from the Federal Home Loan Bank of New York ("FHLBNY"); securities sold under agreement to repurchase ("REPOS"); and, the sale of real estate loans to the secondary market.  

The Company's website address is www.dsbwdirect.com. The Company makes available free of charge through its website, by clicking the Investor Relations tab and selecting "SEC Filings," its Annual and Transition Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission ("SEC").

In order to further assist in the interpretive reading of the statistical data presented in Parts I and II of this Annual Report, management has elected to add information related to the unaudited 12-month period ended December 31, 2002 and the unaudited six-month period ended December 31, 2001.

Acquisitions

On January 21, 1999, the Holding Company completed the acquisition of Financial Bancorp, Inc., the holding company of Financial Federal Savings Bank, F.S.B (the "FIBC Acquisition").  The consolidated operating results for the twelve months ended June 30, 1999 reflected the addition of earnings from the FIBC Acquisition for the period January 21, 1999 through June 30, 1999.  The FIBC Acquisition was accounted for as a purchase transaction, generating $44.2 million of goodwill.   

Market Area, Competition and Factors That May Affect Future Results

The Bank has been, and intends to remain, a community-oriented financial institution providing financial services and loans for housing within its market areas. The Bank maintains its headquarters in the Williamsburg section of the borough of Brooklyn, New York, and operates twenty full-service retail banking offices located in the New York City boroughs of Brooklyn, Queens, and the Bronx, and in Nassau County, New York.  The Bank gathers deposits primarily from the communities and neighborhoods in close proximity to its branches.  The Bank's primary lending area is the New York City metropolitan area, although its overall lending area is much larger, and extends approximately 150 miles in each direction from its corporate headquarters in Brooklyn.  The majority of the Bank's mortgage loans are secured by properties located in its primary lending area, and approximately 75% of these loans are secured by real esta te properties located in the New York City boroughs of Brooklyn, Queens and Manhattan.

The New York City banking environment is extremely competitive.  The Bank's competition for loans exists principally from savings banks, commercial banks, mortgage banks and insurance companies. The Bank has faced sustained competition for the origination of multi-family residential and commercial real estate loans, which together comprised 92.0% of the Bank's loan portfolio at December 31, 2003.  Management anticipates that the current level of competition for multi-family residential and commercial real estate loans will continue for the foreseeable future, and this competition may inhibit the Bank's ability to maintain its current level of such loans.

The Bank gathers deposits in direct competition with commercial banks, savings banks and brokerage firms, many among the largest in the nation.  In addition, it must also compete for deposit monies against the stock markets and mutual funds, especially during periods of strong performance in the U.S. equity markets.  Over the previous decade, consolidation in the financial services industry, coupled with the emergence of Internet banking, has dramatically altered the deposit gathering landscape.  Facing increasingly efficient and larger competitors, the Bank’s strategy to attract depositors and originate loans has increasingly utilized targeted marketing and delivery of technology-enhanced, customer-friendly banking services while controlling operating expenses.

This competition occurs within an economic and financial framework that is largely beyond the control of financial institutions.  The interest rates paid to depositors and charged to borrowers, while affected by marketplace competition, are generally a function of broader-based macroeconomic and financial factors, including the level of U.S. Gross Domestic Product, the supply of, and demand for, loanable funds, and the impact of global trade and international financial markets.  Within this environment, the Federal Open Market Committee's ("FOMC's") monetary policy and governance of short-term rates also significantly influence the interest rates paid and charged by financial institutions.

The Bank's success is additionally impacted by the overall condition of the economy, particularly in the New York City metropolitan area.  As home to many national companies in the financial and business services, and as a popular destination for domestic travelers, the New York City economy is particularly sensitive to the economic health of the U.S.  Success in banking is more easily achieved when local income levels increase due to economic strength.  The Bank has demonstrated that even in periods of intense competition, such as those that existed during 2003, it can succeed by effectively implementing its business strategies.  However, if the local market for multi-family residential and commercial real estate declines, the Bank may experience greater delinquencies or be unable to originate the volume of loans that it otherwise anticipates.

Lending Activities

Loan Portfolio Composition.   The Bank's loan portfolio consists primarily of mortgage loans secured by multi-family residential apartment buildings, including buildings organized under cooperative form of ownership ("Underlying Cooperatives"); commercial properties; and one- to four-family residences, including condominiums and cooperative apartments.  At December 31, 2003, the Bank's loan portfolio totaled $2.19 billion. Within the loan portfolio, $1.73 billion, or 79.1%, were multi-family residential loans, $309.8 million, or 14.1%, were loans to finance commercial real estate, $137.8 million, or 6.3%, were loans to finance one- to four-family properties, including condominium or cooperative apartments, $4.6 million, or 0.2%, were loans to finance multi-family residential and one- to four-family residential properties with full or partial credit guarantees provided by either the Federal Housin g Administration (''FHA'') or the Veterans Administration (''VA''), and $2.9 million, or 0.1%, were loans to finance real estate construction.  Of the total mortgage loan portfolio outstanding at that date, $1.67 billion, or 76.1%, were adjustable-rate loans (''ARMs'') and $524.5 million, or 23.9%, were fixed-rate loans.  Of the Bank’s multi-family residential and commercial real estate loans, $1.62 billion, or 79.3%, were ARMs at December 31, 2003, the majority of which reprice no longer than 7 years from their origination date and carry a total amortization period of no longer than 30 years.  At December 31, 2003, the Bank's loan portfolio additionally included $4.1 million in consumer loans, composed of passbook loans, student loans, consumer installment loans, overdraft loans and mortgagor advances.  

The types of loans the Bank may originate are subject to federal laws and regulations  (See "Regulation – Regulation of Federal Savings Associations").

The following table sets forth the composition of the Bank's real estate and other loan portfolios (including loans held for sale) in dollar amounts and percentages at the dates indicated:

(1)

Includes acquisition of $192.3 million in loans as a result of the FIBC Acquisition on January 21, 1999, which were composed primarily of one- to four-family loans.

Loan Originations, Purchases, Sales and Servicing.  The Bank originates both ARMs and fixed-rate loans, depending upon customer demand and market rates of interest.  For the year ended December 31, 2003, total loan originations were $1.10 billion.  Originations of ARMs were approximately 80% of total loan originations during the year ended December 31, 2003.  The majority of both ARM and fixed-rate originations were multi-family residential and commercial real estate loans.  Multi-family residential real estate loans are either retained in the Bank's portfolio or sold in the secondary market to the Federal National Mortgage Association ("FNMA").  One- to four-family adjustable rate and fixed-rate mortgage loans with maturities up to 15 years are retained for the Bank’s portfolio.  Generally, the Bank sells its newly originated one- to four-family fixed-rate mortgage loans with maturities greater than fifteen years in the secondary market to FNMA or the State of New York Mortgage Agency (''SONYMA'').  

During the year ended December 31, 2003, sales of fixed-rate one- to four-family mortgage and student loans totaled $15.8 million. During December 2002, the Bank entered into a multi-family seller/servicing agreement with FNMA. The agreement provides  that the Bank will sell $200 million of multi-family residential loans to FNMA over the 18-month period ending in May 2004.  The majority of the loans sold have possessed, and will continue to possess, a minimum term to maturity or repricing of seven years.  In December 2002, the Bank sold approximately $73.4 million of multi-family residential loans to FNMA.  During the year ended December 31, 2003, the Bank sold an additional $87.1 million of such loans to FNMA.  Currently, the Bank has no arrangement in which it sells commercial real estate loans to the secondary market.

The Bank generally retains the servicing rights in connection with loans it sells in the secondary market.  As of December 31, 2003, the Bank was servicing $191.4 million of loans for non-related institutions.  On all loans other than multi-family residential loans sold to FNMA, the Bank generally receives a loan servicing fee equal to 0.25% of the outstanding principal balance.  For the multi-family residential loans sold to FNMA, the loan servicing fees vary as they are derived based upon the difference between the actual origination rate and contractual pass-through rate of the loans sold at the time of sale.  At December 31, 2003, the Bank had recorded mortgage servicing rights of $2.3 million.

The following table sets forth the Bank's loan originations (including loans held for sale), loan sales and principal repayments for the periods indicated:

(1)

Includes Home Equity and Home Improvement Loans.

(2)

Comprised primarily of one-to-four family mortgage loans received in the FIBC Acquisition.

(2)

Includes multi-family residential sold to FNMA, fixed-rate one- to four-family mortgage loans and student loans.

Loan Maturity and Repricing.   The following table shows the earlier of the maturity or the repricing period of the Bank's loan portfolio (including loans held for sale) at December 31, 2003.  ARMs are shown as being due in the period during which the interest rates are next scheduled to adjust. The table does not include prepayments or scheduled principal amortization.  Scheduled loan repricing and estimated prepayment and amortization information is presented on an aggregate basis for loans in "Item 7A.  Quantitative and Qualitative Disclosure About Market Risk – Interest Sensitivity Gap."

- # -

The following table sets forth the outstanding principal balances in each loan category (including loans held for sale) at December 31, 2003 that are due to mature or reprice after December 31, 2004, and whether such loans have fixed or adjustable interest rates:

Multi-family Residential Lending and Commercial Real Estate Lending.   The Bank originates adjustable-rate and fixed-rate multi-family residential (five or more residential units), underlying cooperative mortgages and commercial real estate loans.  The properties underlying these loans are generally located in the Bank's primary lending area. At December 31, 2003, the Bank had multi-family residential loans totaling $1.73 billion in its portfolio comprising 79.1% of the gross loan portfolio.  Of the Bank’s multi-family residential loans, $1.54 billion, or 88.7%, were secured by apartment buildings and $195.6 million, or 11.3%, were secured by Underlying Cooperatives at December 31, 2003.  The Bank also had $309.8 million of commercial real estate loans in its portfolio at December 31, 2003, representing 14.1% of its total loan portfolio.

The Bank originated multi-family residential, underlying cooperative mortgages and commercial real estate loans totaling $1.04 billion during the year ended December 31, 2003 and $397.7 million during the six months ended December 31, 2002.  At December 31, 2003, the Bank had $89.7 million of commitments accepted by borrowers to originate multi-family residential and commercial real estate loans, compared to $109.9 million outstanding at December 31, 2002.  

Multi-family residential, underlying cooperative mortgages and commercial real estate loans originated by the Bank were secured by three distinct property types: (1) fully residential apartment buildings; (2) "mixed-use" properties that feature a combination of residential units and commercial units within the same building; and (3) fully commercial real estate buildings.  The underwriting procedures for each of these property types are substantially similar.  Loans secured by fully residential apartment buildings are classified by the Bank as multi-family residential loans in all instances.  Loans secured by fully commercial real estate buildings are classified as commercial real estate loans in all instances.  Loans secured by mixed-use properties may be classified as either multi-family residential or commercial real estate loans.  The classification of loans secured by mixed-use propertie s is determined based upon the percentage of the property's rental income that is received from its residential tenants compared to its commercial tenants.  If more than 50% of the rental income earned on a mixed-use property is received from residential tenants, the full balance of the loan is classified as a multi-family residential loan.  Conversely, if less than 50% of the rental income earned on a mixed-use property is received from residential tenants, the full balance of the loan is classified as a commercial real estate loan.  In the event that the rental income earned is divided exactly 50% each between residential and commercial tenants, the entire loan balance is classified as either a multi-family residential or commercial real estate loan based upon a comparison of the physical space within the property allocated to residential tenants and commercial tenants.  At December 31, 2003, mixed use properties that are classified as one- to four-family residential, multi-family resid ential or commercial real estate loans totaled $704.4 million

Multi-family residential loans are generally viewed as exposing the Bank to a greater risk of loss than one- to four-family residential loans and typically involve higher loan principal amounts.  Multi-family residential and commercial real estate loans in the Bank's portfolio generally range in amount from $250,000 to $4.0 million, and have an average loan size of approximately $1.0 million and a median loan balance of $698,571.  Multi-family residential loans in this range are generally secured by buildings that possess between 5 and 100 apartments. The Bank had a total of $1.65 billion of multi-family residential loans in its portfolio secured by buildings with under 100 units as of December 31, 2003.  Principally as a result of rent control and rent stabilization laws that limit the amount of rent that may be charged to tenants, the associated rent rolls for buildings of this type indicate a rent ra nge that would be considered affordable for low- to moderate-income households, regardless of the household income profiles of the associated census tracks.

At December 31, 2003, the Bank had 238 multi-family residential and commercial real estate loans with principal balances greater than $2.0 million, totaling $841.2 million.  These loans, while underwritten to the same standards as all other multi-family residential and commercial real estate loans, tend to expose the Bank to a higher degree of risk due to the potential impact of losses from any one loan relative to the size of the Bank's capital position.  

The typical adjustable-rate multi-family residential and commercial real estate loan carries a final maturity of 10 or 12 years, and an amortization period not exceeding 30 years. These loans generally have an interest rate that adjusts once after the fifth or seventh year indexed to the 5-year FHLBNY advance rate (plus a spread typically approximating 225 basis points), but may not adjust below the initial interest rate of the loan. Prepayment fees are assessed throughout the life of the loans.  The Bank also offers fixed-rate, self-amortizing, multi-family residential and commercial real estate loans with maturities of up to fifteen years.

It is the Bank's policy to require appropriate insurance protection, including title and hazard insurance, on all real estate mortgage loans at closing.  Borrowers generally are required to advance funds for certain expenses such as real estate taxes, hazard insurance and flood insurance.

The underwriting standards for new multi-family residential loans generally require (1) a maximum loan-to-value ratio of 75% based upon an appraisal performed by an independent, state licensed appraiser, and (2) sufficient cash flow from the underlying property to adequately service the debt, represented by a minimum debt service ratio of 120%.  In certain cases, the Bank may additionally require environmental hazard reports on multi-family residential properties.  As part of the underwriting process for multi-family residential real estate loans, the Bank considers the borrower's experience in owning or managing similar properties, the value of the property based upon the income approach, and the Bank's lending experience with the borrower.  The Bank utilizes, where appropriate, rent or lease income, the borrower's credit history and business experience, and valuation determined under the income approach when un derwriting multi-family real estate applications.  

Repayment of multi-family residential loans is dependent, in large part, on cash flow from the collateral property sufficient to satisfy operating expenses and debt service. Economic events and government regulations, such as rent control and rent stabilization laws, which are outside the control of the borrower or the Bank, could impair the future cash flow of such properties. As a result, rental income might not rise sufficiently over time to satisfy increases in the loan rate at repricing or in overhead expenses (e.g., utilities, taxes, insurance).

During the period July 1, 1998 through December 31, 2003, the Bank's charge-offs related to its multi-family residential loan portfolio totaled $211,000. As of December 31, 2003, the Bank had no non-performing multi-family residential loans. (See "Asset Quality" and "Allowance for Loan Losses."  See "Lending Activities - Loan Approval Authority and Underwriting" for discussions of the Bank's underwriting procedures utilized in originating multi-family residential loans).

The Bank's three largest multi-family residential loans at December 31, 2003 were a $15.0 million loan originated in December 2003 secured by a nine story building in Manhattan, New York, consisting of 159 loft cooperative apartments; a $12.0 million loan originated in June 2003 secured by an eighteen story apartment building located in Manhattan, New York containing 265 apartment units and eleven retail stores, and a $10.0 million loan originated in December 2002 secured by a nine story apartment building located in Manhattan, New York containing 87 apartment units and one office unit.

The underwriting standards for new commercial real estate loans generally require that the loan-to-value ratio not exceed 65% and that sufficient cash flow from the underlying property exist to adequately service the debt, represented by a minimum debt service ratio of 120%.  To originate commercial real estate loans, the Bank requires a security interest in personal property and standby assignments of rents and leases in addition to the security interest in the underlying property.  The maximum dollar amount of any individual commercial real estate loan conforms to the Bank's general policies on lending limits.

Commercial real estate loans are generally viewed as exposing the Bank to a greater risk of loss than both one- to four-family and multi-family residential mortgage loans.  Because payment of loans secured by commercial real estate often is dependent upon successful operation and management of the collateral properties, repayment of such loans may be subject, to a greater extent, to adverse conditions in the real estate market or the economy.  The Bank seeks to minimize these risks by; 1) limiting the number of such loans, 2) lending only to established customers and borrowers otherwise known or recommended, 3) generally restricting such loans to the New York metropolitan area, and 4) obtaining personal guarantees, if possible.  The Bank utilizes, where appropriate, rent or lease income, the borrower's credit history and business experience, and valuation determined under the income approach when underwriting com mercial real estate loan applications.  

During the period July 1, 1998 through December 31, 2003, the Bank's charge-offs related to its commercial real estate loan portfolio totaled $6,000. As of December 31, 2003, the Bank had no non-performing commercial real estate loans (See "Asset Quality" and "Allowance for Loan Losses."  See "Lending Activities - Loan Approval Authority and Underwriting" for a discussion of the Bank's underwriting procedures utilized in originating commercial real estate loans).

The Bank's three largest commercial real estate loans at December 31, 2003 were an $11.4 million loan originated in December 2001 and secured by a building in Manhattan, New York containing 10 commercial stores and 34 loft apartments; a $9.0 million loan originated in July 2003, and secured by three commercial properties with a total of 14 retail stores and 20 offices located in Rego Park, New York; and an $8.9 million loan originated in January 2003 and secured by a 17-story loft building in Manhattan, New York containing 63 commercial tenants.

One- to Four-Family Mortgage and Cooperative Apartment Lending.   The Bank offers residential first and second mortgage loans secured primarily by owner-occupied, one- to four-family residences, including condominium and cooperative apartments.  The majority of one- to four-family loans in the Bank's loan portfolio were obtained through the FIBC Acquisition and the acquisition of Pioneer Savings Bank, F.S.B. in 1996.  The Bank originated $30.1 million of one- to four-family mortgages during the year ended December 31, 2003, the majority of which were home equity and home improvement loans.  At December 31, 2003, $137.8 million, or 6.3%, of the Bank's loans, consisted of one- to four-family mortgage and cooperative apartment loans.  The Bank is a participating seller/servicer with two government-sponsored mortgage agencies: FNMA and SONYMA, and generally underwrites its one- to four-family re sidential mortgage loans to conform with standards required by these agencies.  

Although the collateral for cooperative apartment loans is composed of shares in a cooperative corporation (i.e., a corporation whose primary asset is the underlying real estate) and a proprietary lease in the borrower's apartment, cooperative apartment loans are treated as one- to four-family loans.  The Bank's portfolio of cooperative apartment loans was $13.8 million, or 0.6% of total loans, as of December 31, 2003.  Adjustable-rate cooperative apartment loans continue to be originated for portfolio.  

For all one- to four-family loans originated by the Bank, upon receipt of a completed loan application from a prospective borrower: (1) a credit report is reviewed, (2) income, assets and certain other information are verified by an independent credit agency, and, (3) if necessary, additional financial information is required to be submitted by the borrower. An appraisal of the real estate intended to secure the proposed loan is obtained, which is performed by an independent appraiser designated and approved by the Board of Directors.

During the period July 1, 1998 through December 31, 2003, the Bank's charge-offs related to its one- to four-family and cooperative apartment loan portfolio totaled $815,000.  As of December 31, 2003, the Bank had non-performing one- to four-family loans totaling $346,000  (See "Asset Quality" and "Allowance for Loan Losses").

The Bank generally sells its newly originated conforming fixed-rate one- to four-family mortgage loans with maturities in excess of 15 years in the secondary market to FNMA and SONYMA, and its non-conforming fixed-rate one- to four-family mortgage loans with maturities in excess of 15 years to various private sector secondary market purchasers. With few exceptions, such as SONYMA, the Bank retains the servicing rights on all such loans sold. During the year ended December 31, 2003, the Bank sold one- to four-family mortgage loans totaling $15.4 million to non-affiliates.  As of December 31, 2003, the Bank's portfolio of one- to four-family fixed-rate mortgage loans serviced for others totaled $33.7 million.

Home Equity and Home Improvement Loans.  Home equity loans and home improvement loans, the majority of which are included in one- to four-family loans, are originated to a maximum of $250,000.  At the time of origination, the combined balance of the first mortgage and home equity or home improvement loan may not exceed the following limitations: 1) 89% of the appraised value of the collateral property at origination of the home equity or home improvement loan in the event that the Bank holds the first mortgage on the collateral property; or 2) 85% of the appraised value of the collateral property at origination of the home equity or home improvement loan in the event that the Bank does not hold the first mortgage on the collateral property.  On home equity and home improvement loans, the borrower pays an initial interest rate that may be as low as 200 basis points below the prime rate of interest in effect at origination.  After six months, the interest rate adjusts and ranges from the prime interest rate in effect at the time to 100 basis points above the prime interest rate in effect at the time.  The combined outstanding balance of the Bank's home equity and home improvement loans was $32.8 million at December 31, 2003.

Equity credit is also available on multi-family residential and commercial real estate loans.  These loans are underwritten in the same manner as first mortgage loans on these properties, except that the combined loan-to-value ratio of the first mortgage and the equity line cannot exceed 75%.  On equity loans, the borrower pays an interest rate ranging from 100 to 200 basis points above the prime rate.  The outstanding balance of these equity loans was less than $5.0 million at December 31, 2003, on outstanding total lines of $19.8 million.

Loan Approval Authority and Underwriting.   The Board of Directors of the Bank establishes lending authorities for individual officers as to the various types of loan products.  In addition, the Bank maintains a Loan Operating Committee that has collective loan approval authority.  The Loan Operating Committee is composed of, at a minimum, the Chief Executive Officer, the President, the Chief Financial Officer, and a credit officer overseeing the underwriting function for the respective type of loan being originated.  The Loan Operating Committee has authority to approve loan originations in amounts up to $3.0 million.  Both the Loan Operating Committee and the Board of Directors must approve all loan originations exceeding $3.0 million.  All loans approved by the Loan Operating Committee are presented to the Board of Directors for its review.  In addition, regulatory restrictions imposed on the Bank's lending activities limit the amount of credit that can be extended to any one borrower to 15% of unimpaired capital and unimpaired surplus (See  ''Regulation - Regulation of Federal Savings Associations - Loans to One Borrower'').

Asset Quality

Non-performing loans (i.e., delinquent loans for which interest accruals have ceased in accordance with the Bank's policy - typically loans 90 days or more past due) totaled $525,000 and $2.1 million at December 31, 2003 and 2002, respectively.  Accrual of interest is discontinued when its receipt is in doubt, which typically occurs when a loan becomes 90 days past due as to principal or interest.  When interest accruals are discontinued, any interest accrued to income in the current year is reversed. Payments on nonaccrual loans are generally applied to principal.  Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of the collateral is sufficient to cover the principal balance and accrued interest.  Loans are returned to accrual status once the doubt concerning collectibility has been removed and the borrower has demonstrated performance in accordance with the loan terms and conditions.  The Bank had no loans that were 90 days past due and still accruing interest at December 31, 2003, or 2002 or at June 30, 2002, 2001, 2000 or 1999.

The Bank had a total of 30 real estate and consumer loans, totaling $1.4 million, delinquent 60-89 days at December 31, 2003, compared to a total of 37 such delinquent loans, totaling $1.0 million, at December 31, 2002.   The majority of the dollar amount of both non-performing loans and loans delinquent 60-89 days was composed of real estate loans.  The majority of the count of both non-performing loans and loans delinquent 60-89 days was composed of consumer loans (primarily depositor loans).  The increase in the amount delinquent 60-89 days from December 31, 2002 to December 31, 2003, resulted from a net increase of $437,000 of delinquent real estate loans during the period.  The 60-89 day delinquency levels fluctuate monthly, and are generally considered a less accurate indicator of credit quality trends than non-performing loans.  

Under accounting principles generally accepted in the United States of America ("GAAP"), the Bank is required to account for certain loan modifications or restructurings as ''troubled-debt restructurings.'' In general, the modification or restructuring of a loan constitutes a troubled-debt restructuring if the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider.  Current regulations of the OTS require that troubled-debt restructurings remain classified as such until either the loan is repaid or returns to its original terms.  The Bank had no loans classified as troubled-debt restructurings at December 31, 2003 or December 31, 2002.  

Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting By Creditors for Impairment of a Loan," as amended by Statement of Financial Accounting Standards ("SFAS") No. 118 "Accounting by Creditors for Impairment of a Loan- Income Recognition and Disclosures an amendment of FASB Statement No. 114," ("Amended SFAS 114") provides guidelines for determining and measuring impairment in loans. For each loan that the Bank determines to be impaired, impairment is measured by the amount that the carrying balance of the loan, including all accrued interest, exceeds the estimate of its fair value.  A specific reserve is established on all impaired loans to the extent of impairment and comprises a portion of the allowance for loan losses.  Generally, the Bank considers non-performing and troubled-debt restructured multi-family residentia l and commercial real estate loans, along with non-performing one- to four-family loans exceeding $333,700, to be impaired. Non-performing one-to four-family loans of $333,700 or less are considered homogeneous loan pools and are not required to be evaluated for impairment.  There were no loans considered impaired by the Bank under Amended SFAS 114 as of December 31, 2003.  The recorded investment in loans deemed impaired was approximately $690,000, consisting of one loan, at December 31, 2002.  The average total balance of impaired loans was approximately $314,000 during the year ended December 31, 2003, $684,000 during the six months ended December 31, 2002, and $3.2 million and $3.7 million during the years ended June 30, 2002 and 2001, respectively. The decrease in both the current and average balance of impaired loans resulted primarily from the repayment in June 2002 of an impaired $2.9 million troubled-debt restructured loan.  At both December 31, 2003 and 2002, there were no reserves allocated within the allowance for loan losses for impaired loans.  At June 30, 2002, reserves totaling $88,000 were allocated within the allowance for loan losses for impaired loans.  At December 31, 2003, non-performing loans exceeded impaired loans by $525,000, due to $525,000 of one- to four-family and consumer loans, which, while on non-performing status, were not deemed impaired since they had individual outstanding balances less than $333,700.  

Other Real Estate Owned (“OREO”).  Property acquired by the Bank as a result of a foreclosure on a mortgage loan or a deed in lieu of foreclosure is classified as OREO and is recorded at the lower of the recorded investment in the related loan or the fair value of the property at the date of acquisition, with any resulting write down charged to the allowance for loan losses. The Bank obtains a current appraisal on an OREO property as soon as practicable after it takes possession of the real property. The Bank will generally reassess the value of OREO at least annually thereafter.  There were no OREO properties as of December 31, 2003.  The balance of OREO was $134,000 at December 31, 2002 and $114,000 at June 30, 2002, consisting of one property in both instances.  During the six months ended December 31, 2002, a reserve of $20,000 was reversed on the OREO property.  This property was sol d in January 2003 and no loss was recognized on the sale.

The following table sets forth information regarding non-performing loans, non-performing assets, impaired loans and troubled-debt restructurings at the dates indicated:

Monitoring of Delinquent Loans.  Management of the Bank reviews delinquent loans on a monthly basis and reports to its Board of Directors regarding the status of all delinquent and non-performing loans in the Bank's portfolio.  

The Bank's loan servicing policies and procedures require that an automated late notice be sent to a delinquent borrower as soon as possible after a payment is ten days late in the case of a multi-family residential or commercial real estate loan, or fifteen days late in the event of a one- to four-family or consumer loan.  A second letter is sent to the borrower if payment has not been received within 30 days of the due date.  Thereafter, periodic letters are mailed and phone calls are placed to the borrower until payment is received.  When contact is made with the borrower at any time prior to foreclosure, the Bank will attempt to obtain the full payment due or negotiate a repayment schedule with the borrower to avoid foreclosure.

Generally, the Bank initiates foreclosure proceedings when a loan is 90 days past due.  The Bank retains outside counsel experienced in foreclosure and bankruptcy procedures to institute foreclosure and other actions on non-performing loans.  As soon as practicable after initiating foreclosure proceedings on a loan, the Bank hires an independent appraiser to prepare an estimate of the fair value of the underlying collateral.  If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure action is completed, the property securing the loan is generally sold.  It is the Bank's general policy to dispose of properties acquired through foreclosure or deeds in lieu thereof as quickly and prudently as possible in consideration of market conditions, the physical condition of the property and any other mitigating conditions.

Classified Assets.  Federal regulations and Bank policy require that loans and other assets possessing certain characteristics be classified as ''Substandard,'' ''Doubtful'' or ''Loss'' assets. An asset is considered ''Substandard'' if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. ''Substandard'' assets have a well-defined weakness or weaknesses and are characterized by the distinct possibility that the Bank will sustain ''some loss'' if deficiencies are not corrected. Assets classified as ''Doubtful'' have all of the weaknesses inherent in those classified ''Substandard'' with the added characteristic that the weaknesses present make ''collection or liquidation in full,'' on the basis of current existing facts, conditions, and values, ''highly questionable and improbable.'' Assets classified as ''Loss'' are those considered ''uncollect ible'' and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.  Assets which do not expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess potential weaknesses that deserve management's attention are designated ''Special Mention.''

The Bank's Loan Loss Reserve Committee reviews all loans in the Bank's portfolio quarterly, with particular emphasis on problem loans, in order to determine whether any loans require reclassification in accordance with applicable regulatory guidelines.  The Loan Loss Reserve Committee reports its recommendations to the Bank's Board of Directors on a quarterly basis. The Loan Loss Reserve Committee, subject to approval of the Bank's Board of Directors, establishes policies relating to the internal classification of loans.  The Bank believes that its classification policies are consistent with regulatory policies. All non-performing loans, troubled-debt restructurings and OREO are considered to be classified assets. In addition, the Bank maintains a "watch list," composed of loans that, while performing, are characterized by weaknesses requiring special attention from management and are considered to be potent ial problem loans. All loans on the watch list are considered to be classified assets or are otherwise categorized as "Special Mention."  As a result of its review of the loan portfolio, the Loan Loss Reserve Committee may decide to reclassify one or more of the loans on the watch list.  

The year ended December 31, 2003 saw the continuation of a strong real estate market throughout the New York metropolitan area.  As a result, the Bank's level of classified assets continued their historic low levels.

At December 31, 2003, the Bank had 13 loans totaling $935,000 designated Special Mention, compared to 19 loans totaling $1.3 million at December 31, 2002.  

At December 31, 2003, the Bank had $494,000 of assets classified Substandard, consisting of five loans.  At December 31, 2002, the Bank had $1.9 million of assets classified Substandard, consisting of eighteen loans and one OREO property.  

At both December 31, 2003 and 2002, the Bank had no assets classified as either Doubtful or Loss.  The watch list contained 15 loans totaling $1.1 million at December 31, 2003, compared to 25 loans totaling $1.8 million at December 31, 2002.

The following table sets forth at December 31, 2003 the Bank's aggregate carrying value of the assets classified as either Substandard or Special Mention:

Allowance for Loan Losses

The allowance for loan losses was determined in accordance with GAAP, under which the Bank is required to maintain an appropriate allowance for loan losses.  The Loan Loss Reserve Committee is charged with, among other functions, specific responsibility for monitoring the appropriateness of the loan loss reserve. The Loan Loss Reserve Committee's findings, along with recommendations for changes to loan loss reserve provisions, if any, are reported directly to the Bank's senior management and the Board of Directors.

The following table sets forth activity in the Bank's allowance for loan losses at or for the dates indicated:

(1)

Total loans represents gross loans, net of deferred loan fees and discounts.  

(2)

On January 21, 1999, the Bank acquired $192.3 million of loans as a result of  the FIBC Acquisition, which added  $84.4 million to the average balance of loans during the twelve months ended June 30, 1999.

Based upon its evaluation of the loan portfolio, management believes that the Bank has maintained its allowance for loan losses at a level which management believes is appropriate to absorb losses inherent within the Bank's loan portfolio as of the balance sheet dates.  The allowance for loan losses was $15.0 million at December 31, 2003 compared to $15.4 million at December 31, 2002. During the year ended December 31, 2003, the Bank reclassified $699,000 of its existing allowance for loan losses balance to other liabilities in order to separately account for reserves related to loan origination commitments.   In addition, during the year ended December 31, 2003, the Bank recorded a provision of $288,000 to the allowance for loan losses to provide for growth in its loan portfolio balances.  The Bank also recorded net charge-offs of $29,000 during the year ended December 31, 2003, virtua lly all of which related to consumer loans.  

Factors considered in determining the appropriateness of the allowance for loan losses include the Bank's past loan loss experience, known and inherent risks in the portfolio, existing adverse situations which may affect the borrower's ability to repay, estimated value of underlying collateral and current economic conditions in the Bank's lending area. While management uses available information to estimate losses on loans, future additions to, or reductions in, the allowance may be necessary based on changes in economic conditions beyond management's control. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to, or reductions in, the allowance based on judgments different from those of management. Management believes, based upon all relevant and avai lable information, that the allowance for loan losses is appropriate to absorb losses inherent in the portfolio.

The following table sets forth the Bank's allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated:

(1)

Total loans represent gross loans less FHA and VA guaranteed loans.

Investment Activities

Investment Strategies of the Holding Company.  The Holding Company's principal asset is its investment in the Bank's common stock, which amounted to $286.9 million at December 31, 2003.  All of the Holding Company's other investments were intended primarily to provide future liquidity which may be utilized for general business activities, which may include, but are not limited to: (1) purchases of the Holding Company's common stock into treasury; (2) repayment of principal and interest on the Holding Company's $25.0 million subordinated note obligation; (3) subject to applicable limitations, the payment of dividends on the Holding Company's common stock; and/or (4) investments in the equity securities of other financial institutions and other investments not permitted to the Bank.  The Holding Company cannot assure that it will engage in any of these activities in the future.

The Holding Company's investment policy calls for investments in relatively short-term, liquid securities similar to the securities defined in the securities investment policy of the Bank.

Investment Policy of the Bank.   The investment policy of the Bank, which is established by its Board of Directors, is designed to help the Bank achieve its overall asset/liability management objectives and to comply with the applicable regulations of the OTS.  Generally, when selecting new investments for the Bank's portfolio, the policy calls for management to emphasize principal preservation, liquidity, diversification, short maturities and/or repricing terms, and a favorable return on investment. The policy permits investments in various types of liquid assets, including obligations of the U.S. Treasury and federal agencies, investment grade corporate obligations, various types of MBS, commercial paper, certificates of deposit ("CDs") and overnight federal funds sold to financial institutions.  The Bank's Board of Directors periodically approves all financial institutions that buy federa l funds from the Bank.  

Investment strategies are implemented by the Asset and Liability Management Committee ("ALCO"), composed of the Chief Executive Officer, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, and other senior management officers.  The strategies take into account the overall composition of the Bank's balance sheet, including loans and deposits, and are intended to protect and enhance the Bank's earnings and market value.  The strategies are reviewed monthly by the ALCO and reported regularly to the Board of Directors.  

During the year ended December 31, 2003, the six months ended December 31, 2002 and the twelve months ended June 30, 2002 and 2001, neither the Holding Company nor the Bank held any derivative instruments or any embedded derivative instruments that require bifurcation.  The Holding Company or the Bank may, with respective Board approval, engage in hedging transactions utilizing derivative instruments.

Mortgage-Backed Securities.  MBS provide the portfolio with investments offering desirable repricing, cash flow and credit quality characteristics. MBS yield less than the loans that underlie the securities because of the cost of payment guarantees and credit enhancements that reduce credit risk to the investor.  Although MBS guaranteed by federally sponsored agencies carry a reduced credit risk compared to whole loans, such securities remain subject to the risk that fluctuating interest rates, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and thus affect both the prepayment speed and value of such securities.  However, MBS are more liquid than individual mortgage loans and may readily be used to collateralize borrowings.  The MBS portfolio also provides the Holding Company and the Bank with important interest rate risk management features, as the entire portfolio provides monthly cash flow for re-investment at current market interest rates.  None of the Bank's MBS as of December 31, 2003 possess call features.

The Company's consolidated investment in MBS totaled $462.7 million, or 15.6% of total assets, at December 31, 2003, the majority of which was owned by the Bank.  At December 31, 2003, the Bank had $426.0 million in Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"), which comprised the largest component of its MBS portfolio.  All of these CMOs and REMICs were either U.S agency guaranteed obligations or issued by private financial institutions.  All of the non-agency guaranteed obligations were rated in the highest ratings category by at least one nationally recognized rating agency at the time of purchase.  None of the CMOs and REMICs had stripped principal and interest components and all occupied priority tranches within their respective issues.  As of December 31, 2003, the fair value of CMOs and REMICs was approximately $2.8 million below their cost basis.

The remaining MBS portfolio was composed of pass –through securities guaranteed by the Government National Mortgage Agency ("GNMA"), The Federal Home Loan Mortgage Corporation ("FHLMC") or FNMA.  These securities approximated 7.9% of the total MBS portfolio at December 31, 2003.  This portfolio is further composed of a $23.5 million investment in ARM MBS pass-through securities with a weighted average term to next rate adjustment of less than one year, a $9.2 million investment in seasoned fixed-rate GNMA, FNMA and FHLMC pass-through securities with an estimated remaining life of less than three years, and a $4.0 million investment in balloon MBS (the ''Balloon Payment Securities"), which provide a return of principal and interest on a monthly basis, and have original maturities of between five and seven years, at which point the entire remaining principal balance is repaid.

GAAP requires investments in equity securities that have readily determinable fair values and all investments in debt securities to be classified in one of the following three categories and accounted for accordingly:  trading securities, securities available for sale or securities held to maturity.  Neither the Company nor the Bank had any securities classified as trading securities during the twelve months ended December 31, 2003, nor do they presently anticipate establishing a trading portfolio.  Unrealized gains and losses on available for sale securities are reported as a separate component of stockholders' equity referred to as accumulated other comprehensive income, net of deferred taxes.  At December 31, 2003, the Holding Company and the Bank had, on a combined basis, $499.1 million of securities classified as available for sale, which represented 16.8% of total assets at December 31, 2003. Based upon the size of the available for sale portfolio, future variations in market values of the available for sale portfolio could result in fluctuations in the Company's consolidated stockholders' equity.

The Company typically classifies purchased MBS as available for sale, in recognition of the greater prepayment uncertainty associated with these securities, and carries these securities at fair market value.  The amortized cost of MBS available for sale exceeded their fair value by $1.9 million at December 31, 2003.

- # -

The following table sets forth activity in the MBS portfolio for the periods indicated:

U. S. Treasury and Agency Obligations.  At December 31, 2003, the Company's consolidated investment in U. S. Treasury and agency securities totaled $5.0 million.  Virtually all of these investments were agency obligations issued either by the Federal Home Loan Bank ("FHLB"), FHLMC, or FNMA.  

Corporate Debt Obligations.  Both the Holding Company and the Bank invest in the short-term investment-grade debt obligations of various corporations. Corporate debt obligations generally carry both a higher rate of return and a higher degree of credit risk than U.S. Treasury and agency securities with comparable maturities. In addition, corporate securities are generally less liquid than comparable U.S. Treasury and agency securities. In recognition of the additional risks associated with these securities, the Bank's investment policy limits new investments in corporate debt obligations to companies rated single ''A'' or better by one of the nationally recognized rating agencies, and limits investments in any one corporate entity to the lesser of 1% of total assets or 15% of the Bank's equity. At December 31, 2003, the Company's consolidated portfolio of corporate debt obligations totaled $22.0 million.  The m ajority of these investments are held by the Bank.

Equity Investments.  The Company's consolidated investment in equity securities totaled $10.1 million at December 31, 2003.  The largest single investment in this category was a $5.0 million investment in preferred stock issued by FNMA.  The remaining investment was composed primarily of various equity mutual fund investments.

The following table sets forth the amortized cost and fair value of the total portfolio of investment securities and MBS at the dates indicated:

(1)

The net unrealized gain (loss) at December 31, 2003 and 2002 and June 30, 2002 and 2001 relates to available for sale securities in accordance with SFAS 115, "Accounting for Investments in Debt and Equity Securities."  The net unrealized gain (loss) is presented in order to reconcile the ''Amortized Cost'' of the securities portfolio to the recorded value reflected in the Company's Consolidated Statements of Condition.

The following table sets forth the amortized cost and fair value of the total portfolio of investment securities and MBS, by accounting classification and type of security, at the dates indicated:

(1)

MBS include both pass-through securities and investments in CMOs and REMICs.

(2)

Includes corporate debt obligations.

(3)

The net unrealized gain (loss) at December 31, 2003 and 2002, and June 30, 2002 and 2001 relates to available for sale securities in accordance with SFAS No. 115. The net unrealized gain (loss) is presented in order to reconcile the ''Amortized Cost'' of the securities portfolio to the recorded value reflected in the Company's Consolidated Statements of Condition.

- # -

The following table sets forth certain information regarding the amortized cost, fair value and weighted average yield of investment securities and MBS at December 31, 2003, by remaining period to contractual maturity. With respect to MBS, the entire carrying amount of the security at December 31, 2003 is reflected in the maturity period that includes the final security payment date and, accordingly, no effect has been given to periodic repayments or possible prepayments.  The investment policies of both the Holding Company and the Bank call for the purchase of only priority tranches when investing in MBS.  As a result, the weighted average duration of the Company's MBS approximates 2.1 years as of December 31, 2003, when giving consideration to anticipated repayments or possible prepayments, which is far less than their calculated average maturity in the table below.  Other than obligations of federal agencies a nd GSEs, neither the Holding Company nor the Bank had a combined investment in securities issued by any one entity in excess of 15% of stockholders' equity at December 31, 2003.

                                                                                                                      At December 31, 2003

Sources of Funds

General.   The Bank's primary sources of funding for its lending and investment activities include deposits, repayments of loans and MBS, investment security maturities and redemptions, Advances from the FHLBNY, and borrowing in the form of REPOS made with various financial institutions, including the FHLBNY.  The Bank also sells selected multi-family residential and commercial real estate loans to FNMA, and long-term, one- to four-family residential real estate loans to either FNMA or SONYMA.

Deposits.   The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank, at December 31, 2003 and presently, offers savings accounts, money market accounts, checking accounts, NOW and Super NOW accounts, and CDs. The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition from other financial institutions and investment products. Traditionally, the Bank has relied upon direct marketing, customer service, convenience and long-standing relationships with customers to generate deposits.  The communities in which the Bank maintains branch offices have historically provided the Bank with nearly all of its deposits. At December 31, 2003, the Bank had deposit liabilities of $2.04 billion, up $114.5 million from December 31, 2002 (See "Item 7 – Management's Discussion and Analysis of Financia l Condition and Results of Operations – Liquidity and Capital Resources").  Within total deposits at December 31, 2003, $175.7 million, or 8.6%, consisted of CDs with balances over $100,000.  Individual Retirement Accounts totaled $122.9 million, or 6.0% of total deposits.

In June 2000, the Bank's Board of Directors approved the acceptance of brokered CDs up to an aggregate limit of $120.0 million.  At December 31, 2003 and 2002, the Bank had no brokered CDs.  

The following table presents the deposit activity of the Bank for the periods indicated:

At December 31, 2003, the Bank had $175.7 million in CDs over $100,000 maturing as follows:

The following table sets forth the distribution of the Bank's deposit accounts and the related weighted average interest rates at the dates indicated:

- # -

The following table presents, by interest rate ranges, the amount of CDs outstanding at the dates indicated and the period to maturity of the CDs outstanding at December 31, 2003:

                                                  Period to Maturity at December 31, 2003     

Borrowings.   The Bank has been a member and shareholder of the FHLBNY since 1980. One of the privileges given to FHLBNY shareholders is the ability to secure Advances under various lending programs at competitive interest rates.  The Bank, as a member of the FHLBNY, is provided with a borrowing line that equaled $886.2 million at December 31, 2003.  

The Bank had Advances from the FHLBNY totaling $534.0 million and $555.0 million at December 31, 2003 and 2002, respectively. At December 31, 2003, the Bank maintained sufficient collateral, as defined by the FHLBNY (principally in the form of real estate loans), to secure such Advances.  

REPOS totaled $12.7 million and $95.5 million, respectively, at December 31, 2003 and 2002.  REPOS involve the delivery of securities to broker-dealers as collateral for borrowing transactions. The securities remain registered in the name of the Bank, and are returned upon the maturities of the agreements. Funds to repay the Bank's REPOS at maturity will be provided primarily by cash received from the maturing securities.

Presented below is information concerning REPOS and FHLBNY Advances for the periods presented:

(1) Excluding prepayment expenses of $2,555 on securities sold under agreements to repurchase recorded during the year ended December 31, 2003, the average interest cost of securities sold under agreement to repurchase was 5.29% during the year ended December 31, 2003.  Excluding prepayment expenses of $339 on securities sold under agreements to repurchase recorded during the year ended June 30, 2002, the average interest cost of securities sold under agreement to repurchase was 4.31% during the year ended June 30, 2002.  There were no prepayments of securities sold under agreements to repurchase during the six months ended December 31, 2002 or the year ended June 30, 2001.

- # -

(1) Amounts in the above table exclude the effects of prepayment expenses paid on FHLBNY Advances.  Including prepayment expenses paid on FHLBNY Advances of $1.6 million during the year ended December 31, 2003, $3.6 million during the six months ended December 31, 2002 and $5.9 million during the twelve months ended June 30, 2002, the average interest cost on FHLBNY Advances was 4.30% during the year ended December 31, 2003, 6.18% during the six months ended December 31, 2002 and 6.94% during the twelve months ended June 30, 2002.  

During the year ended December 31, 2003, the Bank prepaid a total of $30.0 million in FHLBNY Advances and $52.0 million in REPOS.  The prepaid FHLBNY Advances possessed a combined average interest rate of 5.89% and an average remaining term to maturity of 1.1 years on their respective prepayment dates.  The Bank did not replace these prepaid FHLBNY Advances and REPOS.  The prepayments on borrowings were made in order to take advantage of reductions in interest rates.  

During the six months ended December 31, 2002, the Bank prepaid a total of $152.5 million in FHLBNY Advances.  The prepaid FHLBNY Advances possessed a combined average interest rate of 6.62% and an average remaining term to maturity of less than one year on their respective prepayment dates.  The majority of these prepaid FHLBNY Advances were replaced with new FHLBNY Advances.  During the six months ended December 31, 2002, the average rate on the replacement FHLBNY Advances was 3.26%.  These FHLBNY Advances possessed an average remaining term to their next maturity, call or repricing of approximately 5.0 years at December 31, 2002.  The remainder of the prepaid FHLBNY Advances were not replaced with borrowed funds as liquidity generated from deposit inflows and loan and MBS amortization replaced their need as a source of funding.  

During the twelve months ended June 30, 2002, the Bank prepaid a total of $254.0 million in FHLBNY Advances and REPOS.  The prepaid FHLBNY Advances and REPOS possessed a combined average interest rate of 5.43% and an average remaining term to maturity of less than one year on their respective prepayment dates.  The majority of these prepaid FHLBNY Advances and REPOS were replaced with new FHLBNY Advances.  During the twelve months ended June 30, 2002, the average rate on new FHLBNY Advances was 3.91%.  These FHLBNY Advances possessed an average remaining term to maturity of approximately 5 years at June 30, 2002.  The remainder of the prepaid FHLBNY Advances and REPOS were not replaced with borrowed funds as liquidity generated from deposit inflows and loan and MBS amortization replaced their need as a source of funding.  

Subsidiary Activities

In addition to the Bank, the Holding Company's direct and indirect subsidiaries consist of six wholly-owned corporations, one of which is directly owned by the Holding Company and five of which are directly or indirectly owned by the Bank.  DSBW Preferred Funding Corp. is a direct subsidiary of Havemeyer Equities, Inc., which is a direct subsidiary of the Bank.  The following table presents an overview of the Holding Company's subsidiaries as of December 31, 2003:

Personnel

As of December 31, 2003, the Company had 318 full-time employees and 93 part-time employees.  The employees are not represented by a collective bargaining unit, and both the Holding Company and all of its subsidiaries consider their relationships with their employees to be good.

Federal, State and Local Taxation

Federal Taxation

The following is a discussion of material tax matters and does not purport to be a comprehensive description of the tax rules applicable to the Company.

General.  The Bank was last audited by the Internal Revenue Service ("IRS") for its taxable year ended December 31, 1988.  For federal income tax purposes, the Company files consolidated income tax returns on a June 30 fiscal year basis using the accrual method of accounting and will be subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's tax reserve for bad debts, discussed below.

Tax Bad Debt Reserves.  The Bank, as a "large bank" under IRS classifications (i.e., one with assets having an adjusted basis of more than $500 million), is unable to make additions to its tax bad debt reserve, is permitted to deduct bad debts only as they occur and is required to recapture (i.e., take into income), over a multi-year period, a portion of the balance of its tax bad debt reserves as of June 30, 1997.  Since the Bank has already provided a deferred income tax liability for this tax for financial reporting purposes, there was no adverse impact to the Bank's financial condition or results of operations from the enactment of the federal legislation that imposed such recapture.  

Distributions. To the extent that the Bank makes "non-dividend distributions" to shareholders, such distributions are considered distributions from the Bank's "base year reserve" (i.e., its reserve as of December 31, 1987, to the extent thereof), and then from its supplemental reserve for losses on loans.  An amount based on the amount distributed will be included in the Bank's taxable income in the year of distribution.  Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank's current or accumulated earnings and profits will not be so included in the Bank's income.

The amount of additional taxable income created from a non-dividend distribution is the amount that, when reduced by the amount of the tax attributable to this income, is equal to the amount of the distribution. Thus, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. (See "Regulation - Regulation of Federal Savings Associations - Limitation on Capital Distributions" for limits on the payment of dividends by the Bank). The Bank does not intend to pay dividends that would result in a recapture of any portion of its tax bad debt reserves.

Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended (the "Code") imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the customary tax treatment of those items. Thus, the Bank's AMTI is increased by 75% of the amount by which the Bank's adjusted current earnings exceed its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses).

State and Local Taxation

State of New York. The Company is subject to New York State ("NYS") franchise tax on one of several alternative bases, whichever results in the highest tax, and files combined returns for purposes of this tax. The basic tax is measured by "entire net income," which is federal taxable income with adjustments. For NYS tax purposes, as long as the Bank continues to satisfy certain definitional tests relating to its assets and the nature of its business, it will be permitted deductions, within specified formula limits, for additions to its bad debt reserves for purposes of computing its entire net income.

The Bank's deduction with respect to "qualifying loans," which are generally loans secured by certain interests in real property, may be computed using an amount based on the Bank's actual loss experience (the "Experience Method") or 32% of the Bank's entire net income, computed without regard to this deduction and reduced by the amount of any permitted addition to the Bank's reserve for non-qualifying loans.  The Bank's deduction with respect to non-qualifying loans must be computed pursuant to the Experience Method which is based on the Bank's actual charge-offs.  Each year the Bank will review the most appropriate method of calculating the deduction attributable to an addition to the tax bad debt reserves.

The portion of the NYS bad debt reserve in excess of a reserve amount computed pursuant to the Experience Method is subject to recapture upon a non-dividend distribution in a manner similar to the recapture of the federal bad debt reserves for such distributions. In addition, the reserve is subject to recapture in the event that the Bank fails to satisfy a thrift definitional test relating to the composition of its assets or fails to maintain a thrift charter.

The NYS tax rate for the year ended December 31, 2003 was 9.03% of taxable income.  This rate includes a commuter transportation surcharge. In general, the Holding Company is not required to pay NYS tax on dividends and interest received from the Bank.

City of New York.  The Holding Company and the Bank are also both subject to a New York City banking corporation tax of 9% on taxable income allocated to New York City.

New York City generally conforms its tax law to NYS tax law in the determination of taxable income (including the laws relating to bad debt reserves).  However, New York City tax law does not allow a deduction for the carryover of a net operating loss of a banking company.

State of Delaware. As a Delaware holding company not earning income in Delaware, the Holding Company is exempted from Delaware corporate income tax, but is required to file an annual report and pay an annual franchise tax to the State of Delaware.

Regulation

General

The Bank is subject to extensive regulation, examination, and supervision by the OTS, as its chartering agency, and the Federal Deposit Insurance Corporation ("FDIC"), as its deposit insurer. The Bank's deposit accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"), which are administered by the FDIC.  The Bank must file reports with the OTS concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other depository institutions. The OTS conducts periodic examinations to assess the Bank's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings association may engage and is intended pri marily for the protection of the insurance fund and depositors.  As a publicly-held unitary savings and loan holding company, the Holding Company is required to file certain reports with, and otherwise comply with the rules and regulations of, the SEC under the federal securities laws and of the OTS.

The OTS and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the OTS, the FDIC or the United States Congress, could have a material adverse impact on the operations of the Company.

The following discussion is intended to be a summary of the material statutes and regulations applicable to savings associations and savings and loan holding companies, and does not purport to be a comprehensive description of all such statutes and regulations.

Regulation of Federal Savings Associations

Business Activities.   The Bank derives its lending and investment powers from the Home Owner's Loan Act, as amended (''HOLA''), and the regulations of the OTS enacted thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities, and certain other assets. The Bank may also establish service corporations that may engage in activities not otherwise permissible for the Bank, including certain real estate equity investments and securities and insurance brokerage. These investment powers are subject to various limitations, including (a) a prohibition against the acquisition of any corporate debt security not rated in one of the four highest rating categories; (b) a limit of 400% of capital on the aggregate amount of loans secured by commercial property; (c) a limit of 20% of asset s on commercial loans, with the amount of commercial loans in excess of 10% of assets being limited to small business loans; (d) a limit of 35% of assets on the aggregate amount of consumer loans and acquisitions of certain debt securities; (e) a limit of 5% of assets on non-conforming loans (i.e., loans in excess of the specific limitations of HOLA); and (f) a limit of the greater of 5% of assets or capital on certain construction loans made for the purpose of financing property which is, or is expected to become, residential.

Loans to One Borrower.   Under HOLA, savings associations are generally subject to the same limits on loans to one borrower as are imposed on national banks. Generally, under these limits, a savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the association's unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily-marketable collateral. Such collateral is defined to include certain debt and equity securities and bullion, but generally does not include real estate. At December 31, 2003, the Bank's limit on loans to one borrower was $61.5 million.  The Bank's largest aggregate amount of loans to one borrower was $33.5 million and the second largest borrower had an aggregate balance of $22.7 million.

QTL Test.  HOLA requires a savings association to satisfy a QTL test.  A savings association may satisfy the QTL test by maintaining at least 65% of its ''portfolio assets'' in certain ''qualified thrift investments'' during at least nine months of the most recent twelve-month period. ''Portfolio assets'' means, in general, an association's total assets less the sum of (a) specified liquid assets up to 20% of total assets, (b) certain intangibles, including goodwill, credit card relationships and purchased mortgage servicing rights, and (c) the value of property used to conduct the association's business. ''Qualified thrift investments'' include various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, small business loans, education loans, and credit card loans.  A savings association may additionally s atisfy the QTL test by qualifying as a "domestic building and loan association" as defined in the Code.  At December 31, 2003, the Bank maintained 82.5% of its portfolio assets in qualified thrift investments. The Bank also satisfied the QTL test in each of the prior 12 months and, therefore, was a QTL.  

A savings association that fails the QTL test must either operate under certain restrictions on its activities or convert to a bank charter. The initial restrictions include prohibitions against (a) engaging in any new activity not permissible for a national bank, (b) paying dividends not permissible under national bank regulations, and (c) establishing any new branch office in a location not permissible for a national bank in the association's home state. In addition, within one year of the date a savings association ceases to satisfy the QTL test, any company controlling the association must register under, and become subject to the requirements of, the Bank Holding Company Act of 1956, as amended.  A savings association that has failed the QTL test may requalify under the QTL test and be free of such limitations, however, may do so only once.  If the savings association does not requalify under the QTL test within three years after failing the QTL test, it would be required to terminate any activity, and dispose of any investment, not permissible for a national bank and repay as promptly as possible any outstanding Advances from the FHLBNY.

Capital Requirements.  OTS regulations require savings associations to satisfy three minimum capital standards: (1) a tangible capital ratio of 1.5% of total assets as adjusted under OTS regulations; (2) a risk-based capital ratio of 8% of risk-based capital (as defined under OTS regulations) to total risk-based assets (also as defined under OTS regulations); and (3) a leverage capital ratio (as defined under OTS regulations).  For a depository institution that has been assigned the highest composite rating of 1 under the Uniform Financial Institutions Rating, the minimum leverage capital required ratio is 3%.  For any other depository institution, the minimum leverage capital required ratio is 4%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution.  

In determining the amount of risk-based assets for purposes of the risk-based capital requirement, a savings association must compute its risk-based assets by multiplying its assets and certain off-balance sheet items by risk-weights, which range from 0% for cash and obligations issued by the United States government or its agencies, to 100% for consumer and commercial loans, as assigned by the OTS capital regulations based on the risks the OTS believes are inherent in the type of asset.

Tangible capital is defined, generally, as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related earnings, and minority interests in equity accounts of fully consolidated subsidiaries, less intangibles other than certain purchased mortgage servicing rights and investments in, and loans to, subsidiaries engaged in activities not permissible for a national bank.

Core capital is defined similarly to tangible capital, however, additionally includes, among other items, certain qualifying supervisory goodwill and certain purchased credit card relationships.  Supplementary capital includes cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, and the allowance for possible loan losses.  The OTS and other federal banking regulators adopted, effective October 1, 1998, an amendment to their risk-based capital guidelines that permits insured depository institutions to include in supplementary capital up to 45% of the pretax net unrealized holding gains on certain available-for-sale equity securities, as such gains are computed under the guidelines.  The allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-based assets, and th e amount of supplementary capital that may be included as total capital cannot exceed the amount of core capital.

The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") requires that the OTS and other federal banking agencies revise their risk-based capital standards, with appropriate transition rules, to ensure that they take into account interest rate risk ("IRR"), concentration of risk and the risks of non-traditional activities.  The OTS regulations do not include a specific IRR component of the risk-based capital requirement.  However, the OTS monitors the IRR of individual institutions through a variety of methods, including an analysis of the change in net portfolio value ("NPV").  NPV is defined as the net present value of the expected future cash flows on an entity's assets and liabilities and, therefore, hypothetically represents the value of an institution's net worth.  The OTS has also used the NPV analysis as part of its evaluation of certain applications or notic es submitted by thrift institutions.  In addition, OTS Thrift Bulletin 13a provides guidance on the management of IRR and the responsibility of boards of directors in that area.  The OTS, through its general oversight of the safety and soundness of savings associations, retains the right to impose minimum capital requirements on individual institutions to the extent they are not in compliance with certain written guidelines established by the OTS regarding NPV analysis.  The OTS has not imposed any such requirements on the Company.

The table below presents the Bank's regulatory capital as compared to the OTS regulatory capital requirements at December 31, 2003:

                                                                           As of December 31, 2003

                                                                                         Minimum Capital

                                                           Actual                        Requirement

The following is a reconciliation of GAAP capital to regulatory capital for the Bank:

Limitation on Capital Distributions.   OTS regulations currently impose limitations upon capital distributions by savings associations, such as cash dividends, payments to purchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger, and other distributions charged against capital.  

As the subsidiary of a savings and loan holding company, the Bank is required to file a notice with the OTS at least 30 days prior to each capital distribution.  However, if the total amount of all capital distributions (including each proposed capital distribution) for the applicable calendar year exceeds net income for that year plus the retained net income for the preceding two years, then the Bank must file an application for OTS approval of a proposed capital distribution.  In addition, the OTS can prohibit a proposed capital distribution otherwise permissible under the regulation if it has determined that the association is in need of more than customary supervision or that a proposed distribution by an association would constitute an unsafe or unsound practice. Furthermore, under the OTS prompt corrective action regulations, the Bank would be prohibited from making any capital distribution if, after the distrib ution, the Bank failed to satisfy its minimum capital requirements, as described above  (See ''Regulation - Regulation of Federal Savings Associations - Prompt Corrective Regulatory Action'').

In addition, pursuant to the Federal Deposit Insurance Act ("FDIA"), an insured depository institution such as the Bank is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized" as defined in the FDIA.

Liquidity.   Pursuant to OTS regulations, the Bank is required to maintain sufficient liquidity to ensure its safe and sound operation (See "Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," for further discussion).  At December 31, 2003, the Bank's liquid assets approximated 25.8% of total assets.

Assessments.   Savings associations are required by OTS regulation to pay semi-annual assessments to the OTS to fund its operations.  The regulations base the assessment for individual savings associations, other than those with total assets never exceeding $100.0 million, on three components: the size of the association on which the basic assessment is based; the association's supervisory condition, which results in percentage increases for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination; and the complexity of the association's operations, which results in percentage increases for a savings association that managed over $1 billion in trust assets, serviced loans for other institutions aggregating more than $1 billion, or had certain off-balance sheet assets aggregating more than $1 billion.  

Branching.   Subject to certain limitations, HOLA and OTS regulations permit federally chartered savings associations to establish branches in any state of the United States. The authority to establish such a branch is available (a) in states that expressly authorize branches of savings associations located in another state and (b) to an association that either satisfies the QTL test or qualifies as a ''domestic building and loan association'' under the Code, which imposes qualification requirements similar to those for a QTL under HOLA (See ''Regulation - Regulation of Federal Savings Associations - QTL Test'').  This authority under HOLA and the OTS regulations preempts any state law purporting to regulate branching by federal savings associations.

Community Reinvestment.   Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association possesses a continuing and affirmative obligation, consistent with its safe and sound operation, to help satisfy the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services it believes are best suited to its particular community. The CRA requires the OTS, in connection with its examination of a savings association, to assess the association's record of meeting the credit needs of its community and consider such record in its evaluation of certain applications by such association.  The assessment is composed of three tests: (a) a lending test, to evaluate the institution's record of making loans in its service areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, automated teller machines and other offices.  The CRA also requires all institutions to make public disclosure of their CRA ratings. The Bank received an "Outstanding" CRA rating in its most recent examination.  

Regulations implementing the requirements under the Gramm-Leach-Bliley Act of 1999 ("Gramm-Leach") that insured depository institutions publicly disclose certain agreements that are in fulfillment of the CRA became effective April 1, 2001.  The Bank has no such agreements in place at this time.

Transactions with Related Parties.   The Bank's authority to engage in transactions with its ''affiliates'' is limited by OTS regulations and Sections 23A and 23B of the Federal Reserve Act (''FRA''). In general, an affiliate of the Bank is any company that controls the Bank or any other company that is controlled by a company that controls the Bank, excluding the Bank's subsidiaries other than those that are insured depository institutions.  A subsidiary of a bank that is not also a depository institution is generally not treated as an affiliate of the bank for purposes of Sections 23A and 23B, however, the Federal Reserve Bank has proposed treating any subsidiary of a bank that is engaged in activities not permissible for bank holding companies under the Bank Holding Company Act ("BHC Act") as an affiliate for purposes of Sections 23A and 23B.  OTS regulations prohibit a savings associatio n from (a) lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies under Section 4(c) of the BHC Act, and (b) purchasing the securities of any affiliate other than a subsidiary. Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings association and also limits the aggregate amount of transactions with all affiliates to 20% of the savings association's capital and surplus. Extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the association as those prevailing at the time for comparable trans actions with nonaffiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered, or would apply, to nonaffiliated companies.

Effective April 1, 2003, the Federal Reserve Board ("FRB") rescinded its interpretations of Section 23A and 23B of the FRA and replaced them with Regulation W.  Regulation W made various changes to certain interpretations regarding Sections 23A and 23B, including expanding the definition of affiliate and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B.

The OTS issued a final rule, effective October 6, 2003, which conformed its regulations on transactions with affiliates to Regulation W.  In addition, the rule implemented additional restrictions imposed on savings associations under Section 11 of HOLA, including provisions prohibiting a savings association from advancing a loan to an affiliate that is engaged in non-bank holding company activities and provisions prohibiting a savings association from purchasing or investing in securities issued by an affiliate that is not a subsidiary.  The final rule also includes certain specific exemptions from these prohibitions.  The FRB and the OTS expect each depository institution that was subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W and the final OTS rule.  Implementation of these regulations did not have a material impact upon the financial condition o r results of operations of the Company.

Section 402 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley).  The prohibition, however, does not apply to extensions of credit advanced by an insured depository institution, such as the Bank, that is subject to the insider lending restrictions of Section 22(h) of the FRA, as implemented by Regulation O (12 CFR 215).

The Bank's authority to extend credit to its directors, executive officers, and shareholders owning 10% or more of the Holding Company's outstanding common stock, as well as to entities controlled by such persons, is additionally governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the FRB thereunder. Among other matters, these provisions require that extensions of credit to insiders (a) be made on terms substantially the same as, and follow credit underwriting procedures not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the association's capital. In addition, extensions of cred it in excess of certain limits must be approved in advance by the association's board of directors.

Transactions between the Bank and the remainder of the Company, and any of their affiliates, are subject to various conditions and limitations  

Enforcement.   Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the OTS possesses primary enforcement responsibility over federally-chartered savings associations and has the authority to bring enforcement action against all ''institution-affiliated parties,'' including any controlling stockholder or any shareholder, attorney, appraiser or accountant who knowingly or recklessly participates in any violation of applicable law or regulation, breach of fiduciary duty or certain other wrongful actions that cause, or are likely to cause, more than minimal loss or other significant adverse effect on an insured savings association. Civil penalties cover a wide series of violations and actions and range from $5,000 for each day during which violations of law, regulations, orders, and certain written agreements and conditions continue, up to $1 million per day for such violat ions if the person obtained a substantial pecuniary gain as a result of such violation or knowingly or recklessly caused a substantial loss to the institution. Criminal penalties for certain financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. In addition, regulators possess substantial discretion to take enforcement action against an institution that fails to comply with regulatory structure, particularly with respect to capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship, or the termination of deposit insurance. Under FDICIA, the FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings association. If action is not taken by the Director, the FDIC possesses authority to take such action under certain circumstances.

Standards for Safety and Soundness.   Pursuant to FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, the OTS, together with the other federal bank regulatory agencies, has adopted a set of guidelines prescribing safety and soundness standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other features, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, direc tor or principal shareholder.  In addition, the OTS adopted regulations pursuant to FDICIA that authorize, but do not require, the OTS to order an institution that has been given notice by the OTS that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the OTS must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the ''prompt corrective action'' provisions of FDICIA (See "Regulation - Regulation of Savings Associations – Prompt Corrective Regulatory Action").  If an institution fails to comply with such an order, the OTS may seek enforcement in judicial proceedings and the imposition of civil money penalties.

Real Estate Lending Standards.   The OTS and the other federal banking agencies adopted regulations to prescribe standards for extensions of credit that are (a) secured by real estate or (b) made for the purpose of financing the construction of improvements on real estate.  The regulations require each savings association to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its real estate lending activities. The standards must additionally conform to accompanying OTS guidelines, which include loan-to-value ratios for the different types of real estate loans. Associations are also permitted to make a limited amount of loans that do not conform to the loan-to-value limitations provided such exceptions are reviewed and justified appropriately. The guidelines additionally list a number of lending situations in which exceptions to the loan-to-value standards are permitted.

Prompt Corrective Regulatory Action.   Under the OTS prompt corrective action regulations, the OTS is required to take certain, and authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of five categories based on the association's capital. Generally, a savings association is considered ''well capitalized'' if it maintains all of the following capital ratios:  1) Total capital to risk-based assets of at least 10.0%; 2) Core capital to risk-based assets of at least 6.0%; and 3) Core capital to adjusted total assets of at least 5.0%.  In addition, in order to be considered "well capitalized," the savings association cannot be subject to any order or directive of the OTS to satisfy or maintain specific capital levels.  A savings association is considered ''adequately capitalized'' if it maintain s all of the following capital ratios:  1) Total capital to risk-based assets of at least 8.0%; 2) Core capital to risk-based assets of at least 4.0%; and 3) Core capital to adjusted total assets of at least 4.0% (or at least 3.0% if the association receives the highest possible overall rating on its most recent safety and soundness examination by the OTS).  A savings association is considered "undercapitalized" if it maintains any of the following capital ratios:  1) Total capital to total risk-based assets of less than 8.0%; 2) Core capital to risk-based assets of less than 4.0%; or 3) Core capital to adjusted total assets of less than 4.0% (or of less than 3.0% if the association receives the highest possible overall rating on its most recent safety and soundness examination by the OTS).   A savings association is considered "significantly undercapitalized" if it maintains any of the following capital ratios:  1) Total capital to risk-based assets of less than 6.0%; 2) Core capital to risk-based assets of less than 3.0%; or 3) Core capital to adjusted total assets of less than 3.0%.  A savings association that has a tangible capital to assets ratio equal to or less than 2% is deemed to be ''critically undercapitalized.'' The elements of an association's capital for purposes of the prompt corrective action regulations are defined generally as they are under the regulations for minimum capital requirements  (See ''Regulation - Regulation of Savings Associations - Capital Requirements'').  As of December 31, 2003, the Bank satisfied all criteria necessary to be categorized as "well capitalized" under the regulatory framework for prompt corrective action.  

The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as an association's capital deteriorates within the three undercapitalized categories. All associations are prohibited from paying dividends, other capital distributions or management fees to any controlling person if, following such distribution, the association would be undercapitalized. An undercapitalized association is required to file a capital restoration plan within 45 days of the date the association receives notice that it is within any of the three undercapitalized categories. The OTS is required to monitor closely the condition of an undercapitalized association and to restrict the asset growth, acquisitions, branching, and new lines of business of such an association. Significantly undercapitalized associations are subject to restrictions on compensation of senior executive officers.  Such an association may not, without OTS consent, pay any bonus or provide compensation to any senior executive officer at a rate exceeding the officer's average rate of compensation (excluding bonuses, stock options and profit-sharing) during the 12 months preceding the month the association became undercapitalized. A significantly undercapitalized association may also be subject, among other actions, to forced changes in the composition of its board of directors or senior management, additional restrictions on transactions with affiliates, restrictions on acceptance of deposits from correspondent associations, further restrictions on asset growth, restrictions on rates paid on deposits, forced termination or reduction of activities deemed risky, and any further operational restrictions deemed necessary by the OTS.

If one or more grounds exist for appointing a conservator or receiver for an association, the OTS may require the association to issue additional debt or stock, sell assets, be acquired by a depository association holding company or combine with another depository association. The OTS and FDIC possess a broad range of justifications pursuant to which they may appoint a receiver or conservator for an insured depository association. Under FDICIA, the OTS is required to appoint a receiver (or with the concurrence of the FDIC, a conservator) for a critically undercapitalized association within 90 days after the association becomes critically undercapitalized or, with the concurrence of the FDIC, to take such other action that would better achieve the purposes of the prompt corrective action provisions. Such alternative action can be renewed for successive 90-day periods. However, if the association continues to be critically underc apitalized on average during the quarter that begins 270 days after it initially became critically undercapitalized, a receiver must be appointed, unless the OTS makes certain findings with which the FDIC concurs and the Director of the OTS and the Chairman of the FDIC certify that the association is viable. In addition, an association that is critically undercapitalized is subject to more severe restrictions on its activities, and is prohibited, without prior approval of the FDIC, from, among other actions, entering into certain material transactions or paying interest on new or renewed liabilities at a rate that would significantly increase the association's weighted average cost of funds.

When appropriate, the OTS can require corrective action by a savings association holding company under the ''prompt corrective action'' provisions of FDICIA.

Insurance of Deposit Accounts.  Savings associations are subject to a risk-based assessment system for determining the amount of deposit insurance premium they will be required to pay.  Under the risk-based assessment system, which began in 1993, the FDIC assigns an institution to one of three capital categories based on the institution's financial information as of its most recent quarterly financial report filed with the applicable bank regulatory agency prior to the commencement of the assessment period.  The three capital categories consist of (a) well capitalized, (b) adequately capitalized, or (c) undercapitalized.  The FDIC also assigns an institution to one of three supervisory subcategories within each capital group.  The supervisory subgroup to which an institution is assigned is based upon an evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds.  An institution's assessment rate depends on the capital category and supervisory subcategory to which it is assigned.  Under the regulations, there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied.  Assessment rates currently range from 0.0% of deposits for an institution in the highest category (i.e., well-capitalized and financially sound, with no more than a few minor weaknesses) to 0.27% of deposits for an institution in the lowest category (i.e., undercapitalized and substantial supervisory concern).  The FDIC is authorized to raise the assessment rates as necessary to maintain the required reserve ratio of 1.25% of assessable deposits.  Both the BIF and SAIF currently satisfy the reserve ratio requirement.  If the FDI C determines that assessment rates should be increased, institutions in all risk categories could be affected.  The FDIC has exercised this authority several times in the past and could raise insurance assessment rates in the future.  

The Deposit Insurance Funds Act of 1996 amended the FDIA to recapitalize the SAIF and expand the assessment base for the payments of Financing Corporation ("FICO") bonds.  FICO bonds were sold by the federal government in order to finance the recapitalization of the SAIF and BIF insurance funds that was necessitated following payments made from the funds to compensate depositors of federally-insured depository institutions that experienced bankruptcy and dissolution during the 1980's and 1990's.  The quarterly adjusted rate of assessment for FICO bonds is 0.0172% for both BIF-and SAIF-insured institutions.  

Privacy and Security Protection.  The OTS has adopted regulations implementing the privacy protection provisions of Gramm-Leach.  The regulations require financial institutions to adopt procedures to protect customers and their "non-public personal information."  The regulations require the Bank to disclose its privacy policy, including identifying with whom it shares "non-public personal information," to customers at the time of establishing the customer relationship and annually thereafter.  In addition, the Bank is required to provide its customers the ability to "opt-out" of the sharing of their personal information with unaffiliated third parties, if the sharing of such information does not satisfy any of the permitted exceptions.  The Bank's existing privacy protection policy complies with the regulations.  Implementation of the regulations did not have a material impact on the business, financial condition or results of operations of the Company.

The OTS and other federal banking agencies have adopted guidelines establishing standards for safeguarding customer information to implement certain provisions of Gramm-Leach.  The guidelines describe the agencies' expectations for the creation, implementation and maintenance of an information security program, including administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities.  The standards set forth in the guidelines are intended to insure the security and confidentiality of customer records and information, protect against anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial customer harm or inconvenience.  The Bank has implemented these guidelines, which did not have a material imp act on the business, financial condition or results of operations of the Company.

Gramm-Leach additionally permits each state to enact legislation that is more protective of consumers' personal information.  Currently, there are a number of privacy bills pending in the New York legislature.  Management of the Company cannot predict the impact, if any, these bills will have if enacted.

Internet Banking.  Technological developments are dramatically altering the methods by which most companies, including financial institutions, conduct their business.  The growth of the Internet is prompting banks to reconsider business strategies and adopt alternative distribution and marketing systems.  The federal banking regulatory agencies have conducted seminars and published materials targeted at various aspects of Internet banking and have indicated their intention to re-evaluate their regulations to ensure they encourage bank efficiency and competitiveness consistent with safe and sound banking practices.  The Company cannot assure that federal bank regulatory agencies will not adopt new regulations that will not materially affect or restrict the Bank's Internet operations.

Insurance Activities.  As a federal savings bank, the Bank is generally permitted to engage in certain insurance activities through subsidiaries.  OTS regulations promulgated pursuant to Gramm-Leach prohibit depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an insurance product or annuity from an entity not affiliated with the depository institution.  The regulations additionally require prior disclosure of this prohibition if such products are offered to credit applicants.  Implementation of these regulations did not have a material impact upon the financial condition or results of operations of the Company.

Federal Home Loan Bank System.   The Bank is a member of the FHLBNY, which is one of the twelve regional FHLB's composing the FHLB System. Each FHLB provides a central credit facility primarily for its member institutions. Any Advances from the FHLBNY must be secured by specified types of collateral, and long-term Advances may be obtained only for the purpose of providing funds for residential housing finance.  The Bank, as a member of the FHLBNY, is currently required to acquire and hold shares of capital stock in the FHLBNY in an amount equal to the greater of:  (i) $500; (ii) 1% of the unpaid principal balance of residential mortgage loans and contracts and other mortgage related assets at the beginning of each year; or (iii) 5% of the Bank's aggregate outstanding advances from the FHLBNY.  

Pursuant to regulations promulgated by the Federal Housing Finance Board, as required by Gramm-Leach, the FHLBNY has adopted a capital plan that changed the foregoing minimum stock ownership requirements for FHLBNY stock.  Under the new capital plan, each member of the FHLBNY will be required to maintain a minimum investment in FHLBNY capital stock in an amount equal to the sum of (i) the greater of $1,000 or 0.20% of the member's mortgage-related assets, and (ii) 4.50% of the dollar amount of any outstanding Advances under such members Advances, Collateral Pledge and Security Agreement with the FHLBNY.  The FHLBNY, however, has postponed the implementation of the new capital plan, and the new implementation date has not yet been determined.  The Bank is currently in compliance with the requirements of the new capital plan and does not expect its implementation to have a material impact upon its financial conditi on or results of operations.

Federal Reserve System.   The Bank is subject to provisions of the FRA and FRB regulations pursuant to which depository institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily NOW and regular checking accounts).  FRB regulations generally require that reserves be maintained in the amount of 3% of the aggregate of transaction accounts up to $45.4 million.  Aggregate transaction accounts in excess of $45.4 million are currently subject to a reserve of $1.2 million plus 10%.  FRB regulations currently exempt the initial $6.6 million of otherwise reservable balances from the reserve requirements, which exemption is adjusted by the FRB at the end of each year.  The Bank is in compliance with the foregoing reserve requirements.

Because required reserves must be maintained in the form of either vault cash, a non-interest-bearing account at a Federal Reserve Bank, or a pass-through account as defined by the FRB, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The balances maintained to satisfy the FRB reserve requirements may be used to satisfy liquidity requirements imposed by the OTS.

FRB members are additionally authorized to borrow from the Federal Reserve ''discount window,'' however, FRB regulations require such institutions to hold reserves in the form of vault cash or deposits with Federal Reserve Banks in order to borrow.

Anti-Money Laundering and Customer Identification.   The Company is subject to OTS regulations implementing the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA PATRIOT Act").  The USA PATRIOT Act provides the federal government with powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements.  By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act enacts measures intended to encourage information sharing among bank regulatory and law enforcement agencies.  In addition, certain provisions of Title III and the related OTS regulations impose affirmative obligations on a broad range of financial institutions, including banks and thrifts.  Title III imposes t he following requirements, among others, with respect to financial institutions:

•

Establishment of anti-money laundering programs.

•

Establishment of procedures for obtaining identifying information from customers opening new accounts, including verifying their identity within a reasonable period of time.

•

Establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering.

•

Prohibition on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks.

The OTS adopted interim final rules implementing the USA PATRIOT Act in 2002 and adopted final rules implementing the customer identification requirements on May 9, 2003.  The final rule became effective June 9, 2003, however, financial institutions were permitted until October 1, 2003 to comply with the final rule.  Compliance with the regulations adopted under USA PATRIOT Act did not have a material adverse impact on the financial condition or results of operations of the Company.

Regulation of Holding Company

The Holding Company is a non-diversified unitary savings and loan holding company within the meaning of HOLA. As such, it is required to register with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Holding Company's non-savings association subsidiaries.  Among other effects, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness, or stability of a subsidiary savings association.

HOLA prohibits a savings association holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings association or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings association, non-subsidiary holding company, or non-subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application by a holding company to acquire a savings association, the OTS must consider the financial and managerial resources and future prospects of the company and savings association involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, and competitive factors.

As a unitary savings and loan holding company, the Holding Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to satisfy the QTL test  (See ''Regulation - Regulation of Federal Savings Associations - QTL Test'' for a discussion of the QTL requirements).  Upon any non-supervisory acquisition by the Holding Company of another savings association or a savings bank that satisfies the QTL test and is deemed to be a savings association by the OTS and that will be held as a separate subsidiary, the Holding Company will become a multiple savings association holding company and will be subject to limitations on the types of business activities in which it may engage. HOLA limits the activities of a multiple savings association holding company and its non-insured association subsidiaries primarily to activities permissible for b ank holding companies under Section 4(c)(8) of the BHC Act, subject to prior approval of the OTS, and to other activities authorized by OTS regulation.

The OTS is prohibited from approving any acquisition that would result in a multiple savings association holding company controlling savings associations in more than one state, subject to two exceptions: an acquisition of a savings association in another state (a) in a supervisory transaction, or (b) pursuant to authority under the laws of the state of the association to be acquired that specifically permit such acquisitions. The conditions imposed upon interstate acquisitions by those states that have enacted authorizing legislation vary.

Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies.  A unitary savings and loan holding company that is "grand-fathered," i.e., became a unitary savings and loan holding company pursuant to an application filed with the OTS prior to May 4, 1999, such as the Holding Company, retains its authority under the prior law.  All other savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach.  Gramm-Leach also prohibits non-financial companies from acquiring grandfathered savings and loan association holding companies.

The Bank must file a notice with the OTS prior to the declaration or payment of any dividends or other capital distributions to the Holding Company  (See ''Regulation - Regulation of Federal Savings Associations - Limitation on Capital Distributions'').

Federal Securities Laws

The Holding Company's common stock is registered with the SEC under Section 12(g) of the Exchange Act.  It is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

Item 2.  Properties

The headquarters of both the Holding Company and the Bank are located at 209 Havemeyer Street, Brooklyn, New York  11211.  The headquarters building is fully owned by the Bank.  The Bank conducts its business through twenty full-service retail banking offices located throughout Brooklyn, Queens, the Bronx and Nassau County, New York.

Item 3.  Legal Proceedings

The Company is not involved in any pending legal proceedings other than legal actions arising in the ordinary course of business which, in the aggregate, involve amounts which are believed to be material to its financial condition and results of operations.

Item 4.  Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.  Market for the Holding Company's Common Stock and Related Stockholder Matters

The Holding Company's common stock is traded on the Nasdaq National Market and quoted under the symbol "DCOM."  Prior to June 15, 1998, the Holding Company's common stock was quoted under the symbol "DIME."

The following table indicates the high and low sales price for the Holding Company's common stock and dividends declared during the periods indicated.  The Holding Company's common stock began trading on June 26, 1996, the date of the initial public offering.  All amounts have been adjusted to reflect the Company's 50% stock dividends paid on August 21, 2001 and April 24, 2002.

On December 31, 2003, the last trading date in the fiscal year, the Holding Company's common stock closed at $30.76. Management estimates that the Holding Company had approximately 3,700 shareholders of record as of March 11, 2004, including persons or entities holding stock in nominee or street name through various brokers and banks. There were 25,410,074 shares of common stock outstanding at December 31, 2003.

On August 21, 2001, the Holding Company paid a 50% common stock dividend to all shareholders of record as of July 31, 2001.  This dividend had the effect of a three-for-two stock split.  On April 24, 2002, the Holding Company paid a 50% common stock dividend to all shareholders of record as of April 1, 2002.  This dividend also had the effect of a three-for-two stock split.

During the year ended December 31, 2003, the Holding Company paid cash dividends totaling $15.8 million, representing $0.62 per outstanding common share.  During the six months ended December 31, 2002, the Holding Company paid cash dividends totaling $6.2 million, representing $0.24 per outstanding common share.  During the year ended June 30, 2002, the Holding Company paid cash dividends totaling $9.9 million, which represented $0.38 per outstanding common share as adjusted for the stock splits effective August 21, 2001 and April 24, 2002.  During the year ended June 30, 2001, the Holding Company paid cash dividends totaling $8.7 million, which represented $0.34 per outstanding common share.  

On January 22, 2004, the Board of Directors declared a cash dividend of $0.20 per common share to all shareholders of record as of January 30, 2004.  This dividend was paid on February 5, 2004.

On February 19, 2004, the Board of Directors declared a 50% stock dividend having the effect of a 3-for-2 stock split to all shareholders of record as of March 1, 2004.  This dividend will be paid on March 16, 2004.

The Holding Company is subject to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of net assets (the amount by which total assets exceed total liabilities) over statutory capital, or if no such excess exists, to net profits for the current and/or immediately preceding fiscal year.

As the principal asset of the Holding Company, the Bank could be called upon to provide funds for the Holding Company's payment of dividends  (See "Regulation – Regulation of Federal Savings Associations – Limitation on Capital Distributions").  (See Note 2 to the Company's Audited Financial Statements for a discussion of limitations on distributions from the Bank to the Holding Company).

In April 2000, the Holding Company issued $25.0 million in subordinated notes payable, with a stated annual coupon rate of 9.25%. It is required, pursuant to the provisions of the notes, to first satisfy the interest obligation on these notes, which approximates $2.4 million annually, prior to the authorization and payment of common stock cash dividends.  Management of the Holding Company does not believe that this requirement will materially affect its ability to pay dividends to its common shareholders.

Item 6.  Selected Financial Data

Financial Highlights

(Dollars in Thousands, except per share data)

The consolidated financial and other data of the Company as of and for the years ended December 31, 2003, June 30, 2002, June 30, 2001, June 30, 2000, and June 30, 1999,and the six months ended December 31, 2002 set forth below is derived in part from, and should be read in conjunction with, the Company's Consolidated Financial Statements and Notes thereto.  The consolidated financial and other data for the year ended December 31, 2002 and the six months ended December 31, 2001 are unaudited.  Amounts as of and for the six months ended December 31, 2002 and the years ended June 30, 2002, 2001, 2000 and 1999 have been reclassified to conform to the December 31, 2003 presentation.  

(1)

Loans, net represents gross loans (including loans held for sale) less net deferred loan fees and allowance for loan losses.

(2)

Amount includes investment in FHLBNY capital stock.

- # -

- # -

- # -

(3)

With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods. Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.

(4)

The net interest spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities.  

(5)

The net interest margin represents net interest income as a percentage of average interest-earning assets.  

(6)

In calculating these ratios, amortization expense related to goodwill and the core deposit intangible is excluded from non-interest expense.

(7)

The efficiency ratio represents non-interest expense as a percentage of the sum of net interest income and non-interest income, excluding any gains or losses on sales of assets.

(8)

Total loans represents loans, net, plus the allowance for loan losses.

(9)

For purposes of computing the ratios of earnings to fixed charges, earnings represent income before taxes, extraordinary items and the cumulative effect of accounting changes plus fixed charges.  Fixed charges represent total interest expense, including and excluding interest on deposits.

- # -

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

The Holding Company’s primary business is the operation of the Bank.  The Company’s consolidated results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings.  The Bank additionally generates non-interest income such as service charges and other fees and income associated with the Bank’s purchase of Bank Owned Life Insurance (“BOLI”).  Non-interest expenses primarily consist of employee compensation and benefits, federal deposit insurance premiums, data processing fees, marketing expenses and other operating expenses.  The Company’s consolidated results of operations are also significantly affected by general economic and competitive conditions (particularly fluct uations in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies.

The Bank’s primary strategy is to increase its household and deposit market shares in the communities that it serves, either through direct marketing, acquisitions or purchases of deposits.  The Bank also seeks to increase its product and service utilization for each individual depositor.  In addition, the Bank’s primary strategy includes the origination of, and investment in, mortgage loans, with an emphasis on multi-family residential loans secured by mixed use properties that are classified as either multi-family residential or commercial real estate loans based upon the income characteristics of the underlying collateral property.  Multi-family residential lending is a significant business of the Bank, reflecting the fact that much of the housing in its primary lending area is multi-family.  Recently we have had success in increasing our portfolio of loans secured by mixed-use properties that are classified as commercial real estate loans, typified by commercial units on ground level and residential apartment units on upper floors.  

We believe that multi-family residential and commercial real estate loans provide advantages as investment assets.  Initially, they offer a higher yield than one-to four-family loans or investment securities of comparable maturities or terms to repricing.  Origination and processing costs for the Bank’s multi-family residential and commercial real estate loans are lower per thousand dollars of originations than comparable one-to four-family loan costs.  In addition, the Bank’s market area generally has provided a stable flow of new and refinanced multi-family residential and commercial real estate loan originations.  In order to address the higher credit risk associated with multi-family residential and commercial real estate lending, the Bank has developed underwriting standards that it believes are reliable in order to maintain consistent credit quality for its loans.

The Bank also strives to provide a stable source of liquidity and earnings through the purchase of investment grade securities; seeks to maintain the asset quality of its loans and other investments; and uses appropriate portfolio and asset/liability management techniques in an effort to manage the effects of interest rate volatility on its profitability and capital.  In 2003, we experienced modest growth in assets, primarily in MBS available for sale and commercial real estate loans secured by mixed-use properties.  Increases in real estate loan origination levels were driven by the continuation of the low interest rate environment during 2003.  This environment also resulted in an increase in principal repayments on loans and MBS resulting from increased customer refinance activities.  Deposits grew in 2003 due to the success of various sales and marketing activities during the period, primarily for money ma rket accounts, while we continued to manage our cost of funds by prepaying higher cost REPOS.

During 2003 we experienced an increase in net interest income attributable to a decline in the average cost of interest-bearing liabilities as a result of a shift in the composition of interest-bearing liabilities away from higher cost borrowings towards lower cost CDs, money market and other deposit accounts, and a decline in the average cost of borrowed funds due to general declines in interest rates during the period.  The decline in interest rates, particularly long-term rates between October 2002 and June 2003, also reduced the average yield on real estate loans and MBS as these assets repriced in the lower rate environment that prevailed throughout the year.  The Bank’s general policy has been to emphasize growth in real estate loans as its primary interest-earning asset, and de-emphasize its investment and MBS portfolios while loan origination demand is strong.  However, as part of a specific investment strategy to achieve a desirable balance of yield and liquidity on short-term investments in the prevailing interest rate environment, the Bank purchased MBS during 2003 resulting in an increase in the average balance of the portfolio which helped to partially offset the impact of the lower yields in the prevailing environment.  We also benefited from increased prepayment fee income, as a result of prepayments related to the low interest rate environment.

We have positioned ourselves for a potential turn in interest rates by not fully deploying our strong capital position in the historically low interest rate environment of 2003.  We would expect a controlled deployment of our capital should interest rates rise steadily, though we could experience some pressure on our net interest income should rates rise rapidly.  

- # -

Overview

Dime Community Bancshares, Inc. (the "Holding Company," and together with its direct and indirect subsidiaries, the "Company") is a Delaware corporation and parent company of the Bank, a federally-chartered stock savings bank.  The Holding Company's primary business is the operation of the Bank.  

The Bank's principal business has been, and continues to be, gathering deposits from customers within its market area, and investing those deposits primarily in multi-family residential mortgage loans, commercial real estate loans, one- to four-family residential mortgage loans, construction loans, consumer loans, mortgage-backed securities ("MBS"), obligations of the U.S. Government and Government Sponsored Entities ("GSEs"), and corporate debt and equity securities. The Bank's revenues are derived principally from interest on its loan and securities portfolios. The Bank's primary sources of funds are deposits; loan amortization, prepayments and maturities; MBS amortization, prepayments and maturities; investment securities maturities; advances ("Advances") from the Federal Home Loan Bank of New York ("FHLBNY"); securities sold under agreement to repurchase ("REPOS"); and, the sale of real estate loans to the secondary market.  

The Company's consolidated results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings.  The Bank additionally generates non-interest income such as service charges and other fees and income associated with the Bank's purchase of Bank Owned Life Insurance ("BOLI").  Non-interest expenses primarily consist of employee compensation and benefits, federal deposit insurance premiums, data processing fees, marketing expenses and other operating expenses.  The Company's consolidated results of operations are also significantly affected by general economic and competitive conditions (particularly fluctuations in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies.

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2003 contains a summary of the significant accounting policies adopted by the Company. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. The Company’s policies with respect to the methodologies it uses to determine the allowance for loan losses, the valuation of mortgage servicing rights and asset impairment judgments (including the valuation of goodwill and intangible assets and other than temporary declines in the value of securities), and loan income recognition are the Company’s most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations and involve a high degree of complexity and require managemen t to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the Company's results of operations or financial condition.

The following is a description of the Company's critical accounting policies and an explanation of the methods and assumptions underlying their application. These critical policies and their application are reviewed periodically and at least annually with the Audit Committee of the Company's Board of Directors.

Allowance for Loan Losses.

The loan loss reserve methodology consists of several key components, including a review of the two elements of the Bank's loan portfolio, classified loans (i.e. non-performing loans, troubled-debt restructuring and impaired loans under Amended SFAS 114) and performing loans.  At December 31, 2003, the majority of the allowance for loan losses was allocated to performing loans, which represented the overwhelming majority of the Bank's loan portfolio.

Performing loans are reviewed at least quarterly based upon the premise that there are losses inherent within the loan portfolio that have not been identified as of the balance sheet date.  As a result, the Bank calculates an allowance for loan losses related to its performing loans by deriving an expected loan loss percentage and applying it to its performing loans.  In deriving the expected loan loss percentage, the Bank considers the following criteria: the Bank's historical loss experience; the age and payment history of the loans (commonly referred to as their "seasoned quality"); the type of loan (i.e., one- to four-family, multi-family residential, commercial real estate, cooperative apartment or consumer); the underwriting history of the loan (i.e., whether it was underwritten by the Bank or a predecessor institution acquired subsequently by the Bank and, therefore, originally subjected to different underwriting criteria); both the current condition and recent history of the overall local real estate market (in order to determine the accuracy of utilizing recent historical charge-off data in order to derive the expected loan loss percentages); the level of and trend in non-performing loans; the level and composition of new loan activity; and the existence of geographic loan concentrations (as the overwhelming majority of the Bank's loans are secured by real estate properties located in the New York City metropolitan area) or specific industry conditions within the portfolio segments.  Since these criteria effect the expected loan loss percentages that are applied to performing loans, changes in any one or more of these criteria will effect the amount of the allowance and the provision for loan losses.  The Bank applied the process of determining the allowance for loan losses consistently throughout the year ended December 31, 2003, the six months ended December 31, 2002 and the t welve months ended June 30, 2002 and 2001.

Loans classified as Special Mention, Substandard or Doubtful are reviewed individually on a quarterly basis by the Loan Loss Reserve Committee to determine if specific reserves are appropriate.  Under the guidance established by Amended SFAS 114, loans determined to be impaired are evaluated in order to establish whether the estimated value of the underlying collateral determined from independent appraisals is sufficient to satisfy the existing debt.  For each loan that the Bank determines to be impaired, impairment is measured by the amount that the carrying balance of the loan, including all accrued interest, exceeds the estimate of its fair value.  A specific reserve is established on all impaired loans to the extent of impairment and comprises a portion of the allowance for loan losses.  Generally, the Bank considers non-performing and troubled-debt restructured multi-family residential and commercial real estate loans, along with non-performing one- to four-family loans exceeding $333,700, to be impaired. Non-performing one-to four-family loans of $333,700 or less are considered homogeneous loan pools and are not required to be evaluated for impairment.  

There were no impaired loans at December 31, 2003.  The recorded investment in loans deemed impaired was approximately $690,000, consisting of one loan, at December 31, 2002.  The average total balance of impaired loans was approximately $314,000 during the year ended December 31, 2003, $684,000 during the six months ended December 31, 2002, and $3.2 million and $3.7 million during the years ended June 30, 2002 and 2001, respectively. The decrease in both the current and average balance of impaired loans resulted primarily from the repayment in June 2002 of an impaired $2.9 million troubled-debt restructured loan.  At both December 31, 2003 and 2002, there were no reserves allocated within the allowance for loan losses for impaired loans.  

If approved by the Board of Directors, the Bank will additionally increase its valuation allowance in an amount recommended by the Loan Loss Reserve Committee to appropriately reflect the anticipated loss from any other loss classification category.  Typically, the Bank's policy is to charge-off immediately all balances classified ''Loss'' and all charge-offs are recorded as a reduction of the allowance for loan losses.  The Bank applied this process consistently throughout the year ended December 31, 2003, the six months ended December 31, 2002 and the twelve months ended June 30, 2002 and 2001.

The Loan Loss Reserve Committee's determination of the estimated fair value of the underlying collateral is subject to assumptions and judgments made by the committee.  A specific valuation allowance could differ materially as a result of changes in these assumptions and judgments.