10-K 1 y18520e10vk.htm FORM 10-K e10vk
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to
0-23229
(Commission File Number)
INDEPENDENCE COMMUNITY BANK CORP.
(Exact name of registrant as specified in its charter)
     
Delaware   11-3387931
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
195 Montague Street, Brooklyn, New York   11201
(Address of principal executive office)   (Zip Code)
(718) 722-5300
(Registrant’s telephone number, including area code)
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)
     Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).     YES þ          NO o
     Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 12 or 15(d) of the Act.     YES o          NO þ
     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 þ          NO o
     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 amendments to this Form 10-K.     o
     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-b-2 of the Exchange Act.     Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o
     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act).     YES o          NO þ
     The aggregate market value of the 72,743,823 shares of the Registrant’s common stock held by non-affiliates (82,593,245 shares outstanding less 9,849,422 shares held by affiliates), based upon the closing price of $36.93 for the Common Stock on June 30, 2005, the last business day in the Registrant’s second quarter, was approximately $2.69 billion. Shares of Common Stock held by each executive officer and director, the Registrant’s 401(k) Plan and Employee Stock Ownership Plan have been excluded since such persons and entities may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
     As of February 28, 2006, there were 82,593,245 shares of the Registrant’s common stock issued and outstanding.
 
 


 

INDEPENDENCE COMMUNITY BANK CORP.
2005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
         
       
     
      1
      1
      2
      2
      4
      4
      4
      17
      23
      27
      31
      31
      33
      42
    44
    47
    48
    48
    48
 
       
    49
    51
    53
    77
    82
    141
    141
    141
 
       
    142
    148
    157
    160
    161
 
       
    162
 SIGNATURES   165
 EX-10.5: AMENDED AND RESTATED CHANGE IN CONTROL SEVERENCE PLAN
 EX-10.25: CHANGE IN CONTROL SEVERENCE PLAN
 EX-10.27: INCENTIVE COMPENSATION PLAN
 EX-10.28: EMPLOYMENT AND NONCOMPETITION AGREEMENT
 EX-23.1: CONSENT OF ERNST & YOUNG LLP
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION


Table of Contents

PART I
ITEM 1.      Business
Independence Community Bank Corp.
      Independence Community Bank Corp. (the “Holding Company”) is a Delaware corporation organized in June 1997 by Independence Community Bank (the “Bank”), for the purpose of becoming the parent savings and loan holding company of the Bank. The Bank’s reorganization to the stock form of organization and the concurrent initial public offering of the Holding Company’s common stock was completed on March 13, 1998 (the “Conversion”). The assets of the Holding Company are primarily the capital stock of the Bank, dividends receivable from the Bank, securities available-for-sale, a minority investment in a mortgage brokerage firm and certain cash and cash equivalents. The business and management of the Holding Company consists primarily of the business and management of the Bank (the Holding Company and the Bank are collectively referred to herein as the “Company”). The Holding Company neither owns nor leases any property, but instead uses the premises and equipment of the Bank. At the present time, the Holding Company does not intend to employ any persons other than officers of the Bank, and will continue to utilize the support staff of the Bank from time to time. Additional employees may be hired as appropriate to the extent the Holding Company expands or changes its business in the future.
      On October 24, 2005, the Company, Sovereign Bancorp, Inc. (“Sovereign”) and Iceland Acquisition Corp. (“Merger Sub”), a wholly owned subsidiary of Sovereign, entered into an Agreement and Plan of Merger (the “Merger Agreement”).
      Subject to the terms and conditions of the Merger Agreement, which has been approved by the Boards of Directors of all parties and by the stockholders of the Holding Company, Merger Sub will be merged with and into the Company (the “Merger”). Upon effectiveness of the Merger, each outstanding share of common stock of the Company other than shares owned by the Company (other than in a fiduciary capacity), Sovereign or their subsidiaries and other than dissenting shares will be converted into the right to receive $42 per share in cash and the Holding Company will become a subsidiary of Sovereign.
      Concurrently with the execution of the Merger Agreement, Sovereign entered into an Investment Agreement (the “Investment Agreement”) with Banco Santander Central Hispano, S.A. (“Banco Santander”) providing for the purchase by Banco Santander of approximately $2.4 billion of Sovereign’s common stock and, if necessary, up to $1.2 billion of its preferred stock and other securities, the proceeds of which would be used to finance the Merger.
      The merger is currently expected to close during the second quarter of 2006 and is subject to various customary conditions, including the receipt of certain regulatory approvals, including approval of the acquisition of control of the Holding Company by Sovereign by the Office of Thrift Supervision and the New York State Banking Department. The transaction received approval from the Holding Company’s stockholders at a special meeting of stockholders held on January 25, 2006. The Merger is not, however, contingent upon the closing of the transactions contemplated by the Investment Agreement.
      See “Legal Proceedings” set forth in Item 3 hereof and Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof for additional information.
      On April 12, 2004, the Company completed its acquisition of Staten Island Bancorp, Inc. (“SIB”) and the merger of SIB’s wholly owned subsidiary, SI Bank & Trust (“SI Bank”), with and into the Bank. The results of operations of SIB are included in the Consolidated Statements of Income and Comprehensive Income subsequent to April 12, 2004. The Company’s 2005 and 2004 earnings per share reflect the issuance of 28,200,070 shares as part of the consideration paid for SIB. See Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof for additional information.
      The Company’s executive office is located at 195 Montague Street, Brooklyn, New York 11201, and its telephone number is (718) 722-5300. The Company’s web address is www.myindependence.com.
Independence Community Bank
      The Bank’s principal business is gathering deposits from customers within its market area and investing those deposits along with borrowed funds primarily in multi-family residential mortgage loans,

1


Table of Contents

commercial real estate loans, commercial business loans, lines of credit to mortgage bankers, consumer loans, mortgage-related securities, investment securities and interest-bearing deposits. The Bank’s revenues are derived principally from interest on its loan and securities portfolios while its primary sources of funds are deposits, borrowings, loan amortization and prepayments and maturities of mortgage-related securities and investment securities. The Bank offers a variety of loan and deposit products to its customers. The Bank also makes available other financial instruments, such as annuity products and mutual funds, through arrangements with a third party.
      The Bank has continued to broaden its banking strategy by emphasizing commercial bank-like products, primarily commercial real estate and business loans, mortgage warehouse lines of credit and commercial deposits. This strategy focuses on increasing both net interest income and fee-based revenue while concurrently diversifying the Bank’s customer base.
Change in Fiscal Year End
      The Company announced in October 2001 that it changed its fiscal year end from March 31, to December 31, effective December 31, 2001. This change provided internal efficiencies as well as aligned the Company’s reporting cycle with regulators, taxing authorities and the investor community.
Market Area and Competition
      The Company is a community-oriented financial institution providing financial services and loans for housing and commercial businesses primarily within its market area. The Company has sought to set itself apart from its many competitors by tailoring its products and services to meet the diverse needs of its customers, by emphasizing customer service and convenience and by being actively involved in community affairs in the neighborhoods and communities it serves. The Company gathers deposits primarily from the communities and neighborhoods in close proximity to its branches, which deposits continue to constitute the primary funding source of the Bank’s operations. The Company oversees its 126 branch office network from its headquarters located in downtown Brooklyn, including the 35 additional branches which resulted from the acquisition of SIB in April 2004. The Company operates 20 branch offices on Staten Island, 20 branch offices in the borough of Brooklyn, another twelve in the borough of Queens, 14 in Manhattan and seven more branches dispersed among the Bronx, Nassau and Suffolk Counties of New York. The Company also operates 52 branches in the New Jersey counties of Bergen, Essex, Hudson, Middlesex, Monmouth, Ocean and Union. At its banking offices located on Staten Island, the Bank conducts business as SI Bank & Trust, a division of the Bank. During 2005, the Company closed four branch offices, one each in Brooklyn and Westchester and two in New Jersey. In addition, the Bank maintains one branch facility in Maryland and loan production offices in Maryland, Florida and Illinois as a result of the expansion of the Company’s commercial real estate lending activities as discussed below. The Company opened one new office in Manhattan during the first quarter of 2006 and currently expects to open two additional new branch offices during the remainder of 2006.
      Although the Company generally lends throughout the New York City metropolitan area, the majority of its real estate loans are secured by properties located in the boroughs of Brooklyn, Queens, Staten Island and Manhattan, Nassau County, Long Island, and the counties in northern and central New Jersey. In 2003, the Company expanded its commercial real estate lending activities to the Baltimore-Washington and the Boca Raton, Florida markets. In addition, during the third quarter of 2004, the Company expanded its commercial real estate lending activities to the Chicago market. The Company’s customer base within the New York City metropolitan area, like that of the urban neighborhoods which it serves, is racially and ethnically diverse and is comprised of mostly middle-income households and, to a lesser degree, low to moderate income households. Most of the businesses located in its primary market area that the Company lends to are small or medium sized and are primarily dependent upon the regional economy, which economy, due to its connections to the national economy, may be adversely affected not only by conditions within the local market but also by conditions existing elsewhere. Loans to such borrowers may be more sensitive to adverse changes in the local economy than single-family residential loans. Increased delinquencies or other problems with such loans could affect the Company’s financial condition and profitability. At December 31, 2005, approximately 77% of the loan portfolio consisted of commercial real estate, commercial

2


Table of Contents

business and multi-family residential loans. These portfolios, as a percent of total loans, have increased during 2005 due to the decrease in the size of the single-family residential mortgage loan portfolio due to repayments and the Company’s strategy of expanding the origination of higher yielding commercial real estate and commercial business loans.
      During 2005, the national and local economy continued to strengthen, New York City’s economy continued its growth as Real Gross City Product (“GCP”) (an inflation-adjusted measure of the overall New York City economy) grew for the eighth consecutive quarter after 11 quarters of decline. The GCP growth rate of 3.4% for the third quarter of 2005 compared unfavorably to the U.S. Gross Domestic Product of 4.3%. Factors that limited New York City’s third quarter 2005 economic performance included a higher rate of inflation and unemployment than the nation.
      The inflation rate in New York City rose in the third quarter of 2005 to 4.1% which was higher than the corresponding national rate of 3.8% for the same period. New York City’s higher inflation rate weakens its competitiveness when compared with the rest of the nation.
      The unemployment rate also remained higher than the national rate. New York City’s rate of 5.6% in the third quarter of 2005 compared unfavorably to the national rate of 5.0%. New York City’s rate, however, was at its lowest level since the second quarter of 2001.
      Commercial real estate vacancies fell for the seventh consecutive quarter. In particular, the Manhattan vacancy rate fell to 9.6% compared to 11.4% for the third quarter of 2004. New York City’s rate was at its lowest level since the fourth quarter of 2001. A decline in the vacancy rate has a positive effect on commercial real estate values.
      Historically, the New York City metropolitan area has benefited from being the corporate headquarters of many large industrial and commercial national companies, which have, in turn, attracted many smaller companies, particularly within the service industry. However, as a consequence of being the home of many national companies and to a large number of national securities and investment banking firms, as well as being a popular travel destination, the New York City metropolitan area is particularly sensitive to the economic health of the United States. As a result, economic deterioration in other parts of the United States often has had an adverse impact on the economic climate of New York City.
      The Company’s earnings are significantly affected by changes in market interest rates. The Federal Open Market Committee (“FOMC”) of the Board of Governors of the Federal Reserve (“Federal Reserve Board”) raised the federal funds rate (the rate at which banks borrow funds from one another) eight times, in 25 basis point increments to 4.25% during 2005 (and further raised it an additional 25 basis points to 4.50% in January 2006). While short-term U.S. Treasury yields have shown similar increases in 2005, the two and three year U.S. Treasury yields have shown more modest increases. The five, seven and ten year U.S. Treasury yields have shown smaller increases in 2005 resulting in a continued flattening of the U.S. Treasury yield curve. See “Risk Factors” set forth in Item 1A hereof, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Net Interest Income” set forth in Item 7 hereof and “Quantitative and Qualitative Disclosures about Market Risk” set forth in Item 7a for further discussion on how changes in market interest rates and U.S. Treasury yield curves affect the Company’s results of operations.
      The Company faces significant competition both in making loans and in attracting deposits. The New York City metropolitan area has a significant concentration of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources than the Company. Over the past 10 years, consolidation of the banking industry in the New York City metropolitan area has continued, resulting in the Company facing larger and increasingly efficient competitors. The Company’s competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage-banking companies, commercial finance companies and insurance companies. The Company’s most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations, credit unions and commercial finance companies. The Company faces additional competition for deposits from short-term money market funds and other corporate and government securities funds and from other financial institutions such as brokerage firms and insurance companies.

3


Table of Contents

Forward Looking Information
      Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors. Included in such forward-looking statements are statements regarding the proposed merger providing for the acquisition of the Company by Sovereign. See Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      Words such as “expect”, “feel”, “believe”, “will”, “may”, “anticipate”, “plan”, “estimate”, “intend”, “should”, and similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to, financial projections and estimates and their underlying assumptions; statements regarding plans, objectives and expectations with respect to future operations, products and services; and statements regarding future performance. Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of the Company, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (1) the businesses of the Company and Sovereign may not be combined successfully, or such combination may take longer to accomplish than expected; (2) the growth opportunities and cost savings from the merger of the Company and Sovereign may not be fully realized or may take longer to realize than expected; (3) operating costs and business disruption following the completion of the merger, including adverse effects on relationships with employees, may be greater than expected; (4) governmental approvals of the merger may not be obtained, or adverse regulatory conditions may be imposed in connection with governmental approvals of the merger; (5) diversion of management time to address merger-related issues, (6) litigation or other adversarial proceedings relating to the merger or to Banco Santander’s proposed investment in Sovereign (7) competitive factors which could affect net interest income and non-interest income and/or general economic conditions which could affect the volume of loan originations, deposit flows and real estate values; (8) the levels of non-interest income and the amount of loan losses as well as other factors discussed in the documents filed by the Company with the Securities and Exchange Commission (the “SEC”) from time to time. The Company does not undertake any obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.
Available Information
      The Company is a public company and files annual, quarterly and special reports, proxy statements and other information with the SEC. Members of the public may read and copy any document the Company files at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Members of the public can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference room. The Company’s SEC filings are also available to the public at the SEC’s web site at http://www.sec.gov. In addition to the foregoing, the Company maintains a web site at www.myindependence.com. The Company’s website content is made available for informational purposes only. It should neither be relied upon for investment purposes nor is it incorporated by reference into this Form 10-K. The Company makes available on its internet web site copies of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such documents as soon as practicable after it electronically files such material with or furnishes such documents to the SEC.
Lending Activities
      General. At December 31, 2005, the Company’s net loan portfolio totaled $12.20 billion (not including $22.1 million of loans available-for-sale), which represented 63.9% of the Company’s total assets of $19.08 billion at such date. A key corporate objective during the past several years has been to change the mix of the Company’s loan portfolio by reducing the origination of one-to-four family residential mortgage loans and cooperative apartment loans while concurrently expanding the origination of higher yielding commercial real estate and commercial business loans as well as variable-rate

4


Table of Contents

mortgage warehouse lines of credit. Although these portfolios as a percent of total loans declined during 2004 due to the increase in the size of the single-family residential mortgage loan portfolio as a result of the SIB transaction, the percentage of the portfolio comprised of such loans increased in 2005 (and increased on an aggregate dollar basis as well) as the Company continued to implement its business strategy and continued to de-emphasize the origination of single-family residential loans.
      The largest individual category of loans in the Company’s portfolio continues to be multi-family residential mortgage loans, which totaled $4.74 billion or 38.6% of the Company’s total loan portfolio at December 31, 2005. Such loans are secured primarily by apartment buildings located in the Company’s market area. Reflecting the shift in the Company’s loan portfolios as a result of the SIB transaction, the second and third largest loan categories are commercial real estate loans and single-family residential and cooperative apartment loans, which totaled $3.69 billion or 30.0% and $1.93 billion or 15.7%, respectively, of the total loan portfolio at December 31, 2005. Commercial business loans were $977.0 million, or 7.9% of the total loan portfolio, at December 31, 2005 while loans made under mortgage warehouse lines of credit accounted for $453.5 million or 3.7% of the total loan portfolio at such date. The remainder of the loan portfolio was comprised of $481.6 million of home equity loans and lines of credit and $35.9 million of consumer and other loans.
      The types of loans that the Company may originate are subject to federal and state laws and regulations. Interest rates charged by the Company on loans are affected principally by the demand for such loans and the supply of money available for lending purposes, the rates offered by its competitors, the emphasis placed on the origination of various types of loans and the terms and credit risks associated with the loans. These factors in turn, are affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.

5


Table of Contents

      Loan Portfolio and Loans Available-for-Sale Composition. The following table sets forth the composition of the Company’s loan portfolio and loans available-for-sale at the dates indicated.
                                                                                   
    At December 31,
     
    2005   2004   2003   2002   2001
                     
        Percent       Percent       Percent       Percent       Percent
        of       of       of       of       of
(Dollars in Thousands)   Amount   Total   Amount   Total   Amount   Total   Amount   Total   Amount   Total
 
Loan portfolio:
                                                                               
Mortgage loans:
                                                                               
 
Single-family residential and cooperative apartment
  $ 1,932,516       15.7 %   $ 2,490,062       22.1 %   $ 284,367       4.6 %   $ 556,279       9.5 %   $ 849,140       14.6 %
 
Multi-family residential (1)
    4,743,308       38.6       3,800,649       33.8       2,821,706       45.7       2,436,666       41.9       2,731,513       46.5  
 
Commercial real estate
    3,687,226       30.0       3,034,254       27.0       1,612,711       26.2       1,312,760       22.6       1,019,379       17.3  
                                                             
Total principal balance – mortgage loans
    10,363,050       84.3       9,324,965       82.9       4,718,784       76.5       4,305,705       74.0       4,600,032       78.4  
 
Less net deferred fees
    10,753       0.1       9,875       0.1       4,396       0.1       7,665       0.1       11,198       0.2  
                                                             
Total mortgage loans on real estate
    10,352,297       84.2       9,315,090       82.8       4,714,388       76.4       4,298,040       73.9       4,588,834       78.2  
                                                             
Commercial business loans, net of deferred fees
    977,022       7.9       809,392       7.2       606,204       9.8       598,267       10.3       665,829       11.3  
                                                             
Other loans:
                                                                               
 
Mortgage warehouse lines of credit
    453,541       3.7       659,942       5.9       527,254       8.5       692,434       11.9       446,542       7.6  
 
Home equity loans and lines of credit
    481,597       3.9       416,351       3.7       296,986       4.8       201,952       3.5       141,905       2.4  
 
Consumer and other loans
    35,913       0.3       47,817       0.4       27,538       0.5       26,971       0.4       32,002       0.5  
                                                             
Total principal balance – other loans
    971,051       7.9       1,124,110       10.0       851,778       13.8       921,357       15.8       620,449       10.5  
 
Less unearned discounts and deferred fees
          0.0             0.0       139       0.0       291       0.0       677       0.0  
                                                             
Total other loans
    971,051       7.9       1,124,110       10.0       851,639       13.8       921,066       15.8       619,772       10.5  
Total loans receivable
    12,300,370       100.0 %     11,248,592       100.0 %     6,172,231       100.0 %     5,817,373       100.0 %     5,874,435       100.0 %
                                                             
Less allowance for loan losses
    101,467               101,435               79,503               80,547               78,239          
                                                             
Loans receivable, net
  $ 12,198,903             $ 11,147,157             $ 6,092,728             $ 5,736,826             $ 5,796,196          
                                                             
Loans available- for-sale:
                                                                               
 
Single-family residential
  $ 4,172             $ 74,121             $ 2,687             $ 7,576             $ 3,696          
 
Multi-family residential
    17,900               22,550               3,235               106,803                        
                                                             
Total loans available- for-sale
  $ 22,072             $ 96,671             $ 5,922             $ 114,379             $ 3,696          
                                                             
 
(1)  Includes loans secured by mixed-use (combined residential and commercial use) properties. At December 31, 2005 and 2004, such loans totaled $2.18 billion and $1.59 billion, respectively.

6


Table of Contents

     Contractual Principal Repayments and Interest Rates. The following table sets forth scheduled contractual amortization of the Company’s loans at December 31, 2005, as well as the dollar amount of such loans which are scheduled to mature after one year and which have fixed or adjustable interest rates. Demand loans, overdraft loans and loans having no schedule of repayments and no stated maturity are reported as due in one year or less. The table does not include loans available-for-sale.
                                                                     
    Principal Repayments Contractually Due in Year(s) Ended December 31,
     
    Total at    
    December 31,    
(In Thousands)   2005   2006   2007   2008   2009   2010-2015   2016-2021   Thereafter
 
Mortgage loans:
                                                               
 
Single-family residential and cooperative apartment(1)
  $ 1,893,562     $ 7,870     $ 3,119     $ 5,744     $ 10,227     $ 109,409     $ 274,393     $ 1,482,800  
 
Multi-family residential(2)(3)
    4,742,034       40,073       103,466       163,160       460,578       3,093,541       847,236       33,980  
 
Commercial real estate(3)
    3,687,226       153,824       134,522       129,127       271,681       2,174,027       533,598       290,447  
Commercial business loans(4)
    982,225       293,047       110,662       53,224       78,319       316,115       79,371       51,487  
Other loans:
                                                               
 
Mortgage warehouse lines of credit
    453,541       453,541                                      
 
Consumer and other loans(5)
    517,510       18,716       7,158       11,643       23,205       263,981       166,708       26,099  
                                                 
   
Total(6)
  $ 12,276,098     $ 967,071     $ 358,927     $ 362,898     $ 844,010     $ 5,957,073     $ 1,901,306     $ 1,884,813  
                                                 
 
(1)  Does not include $39.0 million of single-family residential loans serviced by others.
 
(2)  Does not include $1.3 million of multi-family residential loans serviced by others.
 
(3)  Multi-family residential and commercial real estate loans are generally originated with a term to maturity of five to seven years and may be extended by the borrower for an additional five-year period.
 
(4)  Does not include $5.2 million of deferred fees.
 
(5)  Includes home equity loans and lines of credit, FHA and conventional home improvement loans, automobile loans, passbook loans and secured and unsecured personal loans.
 
(6)  Of the $11.31 billion of loan principal repayments contractually due after December 31, 2006, $9.09 billion have fixed rates of interest and $2.22 billion have adjustable rates of interest.
     Loan Originations, Purchases, Sales and Servicing. The Company originates multi-family residential loans, commercial real estate and business loans, advances under mortgage warehouse lines of credit, single-family residential mortgage loans, cooperative apartment loans, home equity loans and lines of credit, and consumer and other loans. The relative volume of originations is dependent upon customer demand and current and expected future levels of interest rates.
      During 2005, the Company continued its focus on expanding its higher yielding and/or variable-rate portfolios of commercial real estate and commercial business loans as well as expanding its mortgage warehouse lines of credit portfolio as part of its business plan.
      In addition to continuing to generate multi-family residential mortgage loans for its portfolio, the Company originates and sells multi-family residential mortgage loans in the secondary market to Fannie Mae while retaining servicing. This relationship supports the Company’s ongoing strategic objective of increasing non-interest income related to lending and servicing revenue. The Company underwrites these loans using its customary underwriting standards, funds the loans, and sells the loans to Fannie Mae at agreed upon pricing thereby eliminating interest rate and basis exposure to the Company. Generally, the Company can originate and sell loans to Fannie Mae for not more than $20.0 million per loan. During the year ended December 31, 2005, the Company sold $1.57 billion of fixed-rate multi-family loans in the secondary market to Fannie Mae with servicing retained by the Company. Included in the $1.57 billion of loans sold during 2005 were $377.9 million that were originally held in portfolio with a weighted average yield of 5.27%. Under the terms of the sales program with Fannie Mae, the Company retains a portion of the credit risk associated with such loans. The Company has a 100% first loss position on each multi-family residential loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate losses on the multi-family residential loans sold to Fannie Mae reaching the maximum

7


Table of Contents

loss exposure for the portfolio as a whole or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off. The maximum loss exposure is available to satisfy any losses on loans sold in the program subject to the foregoing limitations. At December 31, 2005, the Company serviced $6.27 billion of loans for Fannie Mae sold to it pursuant to this program with a maximum potential loss exposure of $186.7 million.
      The maximum loss exposure of the associated credit risk related to the loans sold to Fannie Mae under this program is calculated pursuant to a review of each loan sold to Fannie Mae. A risk level is assigned to each such loan based upon the loan product, debt service coverage ratio and loan to value ratio of the loan. Each risk level has a corresponding sizing factor which, when applied to the original principal balance of the loan sold, equates to a recourse balance for the loan. The sizing factors are periodically reviewed by Fannie Mae based upon its ongoing review of loan performance and are subject to adjustment. The recourse balances for each of the loans are aggregated to create a maximum loss exposure for the entire portfolio at any given point in time. The Company’s maximum loss exposure for the entire portfolio of sold loans is periodically reviewed and, based upon factors such as amount, size, types of loans and loan performance, may be adjusted downward. Fannie Mae is restricted from increasing the maximum exposure on loans previously sold to it under this program as long as (i) the total borrower concentration (i.e., the total amount of loans extended to a particular borrower or a group of related borrowers) as applied to all mortgage loans delivered to Fannie Mae since the sales program began does not exceed 10% of the aggregate loans sold to Fannie Mae under the program and (ii) the average principal balance per loan of all mortgage loans delivered to Fannie Mae since the sales program began continues to be $4.0 million or less.
      The Company has not sold multi-family residential loans to any other entities besides Fannie Mae during the last five years.
      Although all of the loans serviced for Fannie Mae (both loans originated for sale and loans sold from portfolio) are currently fully performing, the Company has established a liability related to the fair value of the retained credit exposure. This liability represents the amount that the Company estimates that it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses that the portfolio is projected to incur based upon an industry-based default curve with a range of estimated losses. At December 31, 2005 the Company had a $9.4 million liability related to the fair value of the retained credit exposure for loans sold to Fannie Mae under this sales program.
      As a result of retaining servicing on $6.31 billion of multi-family residential loans sold to Fannie Mae, which includes both loans originated for sale and loans sold from portfolio, the Company had a $9.5 million loan servicing asset at December 31, 2005 compared to $11.8 million at December 31, 2004. During 2005 the Company sold $1.57 billion of multi-family loans to Fannie Mae and recorded a $4.1 million servicing asset, which was partially offset by $6.4 million of amortization expense related to the servicing asset.
      At December 31, 2005, the Company had a $4.4 million loan servicing asset related to $493.4 million of single-family residential loans that were sold in the secondary market with servicing retained. Such loans were acquired by the Company as a result of the SIB transaction. The Company recorded $1.9 million of amortization expense of this servicing asset during 2005.
      During the third quarter of 2003, the Company announced that ICM Capital, L.L.C. (“ICM Capital”), a subsidiary of the Bank, was approved as a Delegated Underwriting and Servicing (“DUS”) mortgage lender by Fannie Mae. Under the Fannie Mae DUS program, ICM Capital may underwrite, fund and sell mortgages on multi-family residential properties to Fannie Mae, with servicing retained. Participation in the DUS program requires ICM Capital to share the risk of loan losses with Fannie Mae with one-third of all losses assumed by ICM Capital with the remaining two-thirds of all losses being assumed by Fannie Mae. There have been no loans originated under this DUS program since inception.
      The Bank has a two-thirds ownership interest in ICM Capital and Meridian Company, LLC (“Meridian Company”), a Delaware limited liability company, has a one-third ownership interest in ICM Capital. ICM Capital’s loan originations are expected to be referred by Meridian Capital Group, LLC (“Meridian Capital”). Meridian Capital is 65% owned by Meridian Capital Funding, Inc.

8


Table of Contents

(“Meridian Funding”), a New York-based mortgage brokerage firm, with the remaining 35% minority equity investment held by the Holding Company. Meridian Funding and Meridian Company have the same principal owners. See Note 21 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      Over the past several years, the Company has de-emphasized the origination for portfolio of single-family residential mortgage loans in favor of higher yielding loan products. In November 2001, the Company entered into a private label program for the origination of single-family residential mortgage loans through its branch network under a mortgage origination assistance agreement with Cendant Mortgage Corporation, doing business as PHH Mortgage Services (“Cendant”). In January 2005, Cendant was spun off from its parent company, Cendant Corporation, to PHH Corporation. Cendant was subsequently renamed PHH Mortgage Corporation (“PHH Mortgage”). Under this program, the Company utilizes PHH Mortgage’s mortgage loan origination platforms (including telephone and Internet platforms) to originate loans that close in the Company’s name. The Company funds the loans directly, and, under a separate loan and servicing rights purchase and sale agreement, sells the loans and related servicing to PHH Mortgage on a non-recourse basis at agreed upon pricing. During the year ended December 31, 2005, the Company originated for sale $83.3 million and sold $81.7 million of single-family residential mortgage loans through the program. The Company is using this program as a means of increasing non-interest income while efficiently serving its client base. In recent years the Company has continued to originate to a very limited degree certain adjustable and fixed-rate single-family residential mortgage loans for portfolio retention. During 2005, the Company originated $13.0 million of such loans compared to $143.4 million during 2004. The level of originations experienced in 2004 was primarily a result of funding SIB loan commitments in existence at the time the acquisition was completed in April 2004. The Company does not foresee any material expansion of such lending activities.
      Mortgage loan commitments to borrowers related to loans originated for sale are considered a derivative instrument under Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). In addition, forward loan sale agreements with Fannie Mae and PHH Mortgage also meet the definition of a derivative instrument under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). For more information regarding the Company’s derivative instruments, see Note 19 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      During the fourth quarter of 2002, the Company entered into a private label program for the origination and servicing of small business lines of credit through an origination assistance agreement with Wells Fargo & Company (“Wells Fargo”). This program is referred to as “Business Custom Capital” and consists of the extension of unsecured lines of credit, up to $100,000, to small business customers in the Company’s market area with over $50,000 in annual sales. These lines are underwritten, funded and serviced by Wells Fargo for their own portfolio and have no impact on the Company’s Statement of Financial Condition. The Company is using this program as a means of increasing non-interest income as the Company receives an upfront fee for lines originated and a fee on the outstanding balance of the line for a period of three years after origination.
      As of December 31, 2005, the Company serviced $528.9 million of single-family residential mortgage loans and $6.83 billion of multi-family residential loans for others.

9


Table of Contents

      Loan Activity. The following table shows the activity in the Company’s loan portfolio and loans available-for-sale portfolio during the periods indicated.
                             
    Year Ended December 31,
     
(In Thousands)   2005   2004   2003
 
Total principal balance of loans and loans available-for-sale held at the beginning of period
  $ 11,360,818     $ 6,188,498     $ 5,944,961  
Acquired from SIB acquisition
          3,856,856        
Originations of loans for portfolio:
                       
 
Single-family residential and cooperative apartment
    13,013       143,386       13,710  
 
Multi-family residential
    1,626,639       2,419,918       1,131,460  
 
Commercial real estate
    1,202,280       1,474,481       651,862  
 
Commercial business loans
    603,808       375,987       289,930  
 
Mortgage warehouse lines of credit(1)
    9,977,225       10,187,771       10,291,152  
 
Consumer(2)
    272,434       229,342       239,165  
                   
   
Total originations for portfolio
    13,695,399       14,830,885       12,617,279  
                   
Originations of loans for sale:
                       
 
Single-family residential
    83,323       122,813       172,459  
 
Multi-family residential
    1,177,609       1,141,099       1,621,584  
 
Commercial business loans
    3,676       3,377       4,066  
                   
   
Total originations of loans for sale
    1,264,608       1,267,289       1,798,109  
                   
Purchases of loans:
                       
 
Mortgage warehouse lines of credit
                76,334  
                   
   
Total purchases
                76,334  
                   
   
Total originations and purchases
    14,960,007       16,098,174       14,491,722  
                   
Loans sold:
                       
 
Single-family residential
    95,851       348,935       174,208  
 
Multi-family residential
    1,570,602       2,074,725       1,727,329  
 
Commercial business loans
    3,676       3,373       4,066  
                   
   
Total sold
    1,670,129       2,427,033       1,905,603  
Repayments(3)
    12,312,298       12,355,677       12,342,582  
                   
Net loan activity
    977,580       5,172,320       243,537  
                   
   
Total principal balance of loans and loans available-for-sale held at the end of period
    12,338,398       11,360,818       6,188,498  
Less:
                       
 
Discounts on loans purchased and net deferred fees at end of period
    15,956       15,555       10,345  
                   
   
Total loans and loans available-for-sale at end of period
  $ 12,322,442     $ 11,345,263     $ 6,178,153  
                   
 
(1)  Represents advances on the lines of credit.
 
(2)  Includes home equity loans and lines of credit, FHA and conventional home improvement loans, automobile loans, passbook loans and secured and unsecured personal loans.
 
(3)  Includes repayment of mortgage warehouse line advances ($10.18 billion for mortgage warehouse lines of credit during the year ended December 31, 2005) and loans charged-off or transferred to other real estate owned.
     Multi-Family Residential and Commercial Real Estate Lending. The Company originates multi-family (five or more units) residential mortgage loans, which are secured primarily by apartment buildings, cooperative apartment buildings and mixed-use (combined residential and commercial) properties located primarily in the Company’s market area. These loans are comprised primarily of middle-income housing located primarily in the boroughs of Brooklyn, Queens, Manhattan, the

10


Table of Contents

Bronx and Northern New Jersey. In 2003, the Company expanded its commercial real estate lending (both multi-family residential and commercial real estate mortgage loans) activities to the Baltimore-Washington and the Boca Raton, Florida markets. In addition during the third quarter of 2004, the Company continued the expansion of its commercial real estate lending activities to the Chicago market. The Company expects the loans to be referred to the Company primarily by Meridian Capital, which already has an established presence in these market areas.
      The following table sets forth loan originations regarding the Company’s loan expansion program for the period indicated as follows:
                             
    Year Ended December 31, 2005
     
    Baltimore-    
    Washington   Florida   Chicago
(Dollars in Thousands)   Market Area   Market Area   Market Area
 
Originations for portfolio:
                       
 
Multi-family residential
  $ 196,747     $ 186,444     $ 38,910  
 
Commercial real estate
    38,764       78,860       3,769  
Originations for sale:
                       
 
Multi-family residential
    248,355       262,365       11,910  
                   
   
Total originations
  $ 483,866     $ 527,669     $ 54,589  
                   
                             
    Year Ended December 31, 2004
     
    Baltimore-    
    Washington   Florida   Chicago
(Dollars in Thousands)   Market Area   Market Area   Market Area
 
Originations for portfolio:
                       
 
Multi-family residential
  $ 126,696     $ 88,748     $  
 
Commercial real estate
    66,965       113,223        
Originations for sale:
                       
 
Multi-family residential
    140,860       82,861        
                   
   
Total originations
  $ 334,521     $ 284,832     $  
                   
      The Company reviews its expansion program periodically and establishes and adjusts its targets based on market acceptance, credit performance, profitability and other relevant factors.
      The main competitors for loans in the Company’s market area tend to be commercial banks, savings banks, savings and loan associations, credit unions, mortgage-banking companies and insurance companies. Historically, the Company has been an active lender of multi-family residential mortgage loans for portfolio retention. During the past several years, in order to further its commitment to remain a leader in the multi-family market, the Company has developed a relationship with Fannie Mae to originate and sell multi-family residential mortgage loans in the secondary market while retaining servicing. The Company determines whether to originate a loan for portfolio retention or for sale based upon the yield and terms of the loan. Due to the low interest rate environment during 2003 and 2002, a larger portion of the Company’s multi-family residential loan originations were for sale as opposed to portfolio retention. During 2004 and 2005, as interest rates were in transition, the Company also sold lower-yielding multi-family residential loans from portfolio to Fannie Mae. See “Business-Lending Activities-Loan Originations, Purchases, Sales and Servicing”.
      At December 31, 2005, multi-family residential mortgage loans totaled $4.74 billion, or 38.6% of the Company’s total loan portfolio. The level of originations of multi-family residential loans for portfolio for the year ended December 31, 2005 decreased by $793.3 million, or 32.8% to $1.63 billion during the year ended December 31, 2005 compared to $2.42 billion for the year ended December 31, 2004. The decline in originations in 2005 was due to rising interest rates and increased competition. As general market rates of interest increased in 2005 the increase in the average cost of interest-bearing liabilities used to fund the originations outpaced the increase in the average yield earned on those originations. This reduced the profitability of such loans and the Company determined

11


Table of Contents

to reduce the level of multi-family originations. The weighted average yield on multi-family originations during 2005 was 5.26%, an increase of 30 basis points compared to 4.96% for 2004 originations. However, the average interest rate paid on interest-bearing liabilities increased 58 basis points to 2.17% for the year ended December 31, 2005 compared to 1.59% for the year ended December 31, 2004. Multi-family residential mortgage loans in the Company’s portfolio generally range from $500,000 to $25.0 million and have an average loan size of approximately $1.5 million.
      At December 31, 2005, the Company had $17.9 million of multi-family loans available-for-sale. During the year ended December 31, 2005 the Company originated for sale $1.18 billion and sold $1.57 billion (of which $377.9 million was sold from portfolio) of multi-family residential loans to Fannie Mae with servicing retained by the Bank. By comparison, during the year ended December 31, 2004 the Company originated for sale $1.14 billion and sold $2.07 billion (of which $953.8 million was sold from portfolio) of multi-family residential loans to Fannie Mae with servicing retained by the Company. The Company chose to sell fewer loans out of portfolio as general market rates of interest continued to rise in 2005. The weighted average interest rate of loans sold out of portfolio to Fannie Mae was 5.27% during 2005 compared to 4.89% during 2004. Increased competition also reduced sales of loans originated for sale as the interest rates and terms on loans Fannie Mae was willing to purchase were no longer as attractive to borrowers as competitors’ terms and pricing, thus resulting in reduced originations.
      The Company has developed during the past several years working relationships with several mortgage brokers. Under the terms of the arrangements with such brokers, the brokers refer potential loans to the Company. The loans are appraised and underwritten by the Company utilizing its underwriting policies and standards. The mortgage brokers receive a fee from the borrower upon the funding of the loans by the Company. In recent years, mortgage brokers have been the source of substantially all of the multi-family residential and commercial real estate loans originated by the Company. In October 2002, in furtherance of its business strategy regarding commercial real estate and multi-family loan originations and sales, the Company increased from 20% to 35% its minority investment in Meridian Capital, which is 65% owned by Meridian Funding. Meridian Funding is primarily engaged in the origination of commercial real estate and multi-family mortgage loans. The loans originated by the Company resulting from referrals by Meridian Capital account for a significant portion of the Company’s total loan originations. For the year ended December 31, 2005, such loans originated by Meridian Funding accounted for approximately 24.6% of the aggregate amount of loans originated for portfolio and for sale compared to 27.7% for the year ended December 31, 2004. With respect to the loans which were originated for portfolio in 2005 (excluding mortgage warehouse lines of credit), loans resulting from referrals from Meridian Capital amounted to approximately 65.3% of such loans compared to 69.3% for the year ended December 31, 2004. In addition, referrals from Meridian Capital accounted for the majority of the loans originated for sale in 2005. All loans resulting from referrals from Meridian Capital are underwritten by the Company using its loan underwriting standards and procedures. The Company generally does not pay referral fees to Meridian Capital. However the Company paid fees aggregating approximately $0.7 million and $1.0 million to Meridian Capital for the years ended December 31, 2005 and 2004, respectively. The ability of the Company to continue to originate multi-family residential and commercial real estate loans at the levels experienced in recent years may be a function of, among other things, maintaining the mortgage broker relationships discussed above. See Note 21 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      When approving new multi-family residential mortgage loans, the Company follows a set of underwriting standards which generally permit a maximum loan-to-value ratio of 80% based on an appraisal performed by either one of the Company’s in-house licensed and certified appraisers or by a Company-approved licensed and certified independent appraiser (whose appraisal is reviewed by a Company licensed and certified appraiser), and sufficient cash flow from the underlying property to adequately service the debt. A minimum debt service ratio of 1.25 generally is required on multi-family residential mortgage loans. The Company also considers the financial resources of the borrower, the borrower’s experience in owning or managing similar properties, the market value of the property and the Company’s lending experience with the borrower. For loans sold in the secondary

12


Table of Contents

market to Fannie Mae, the maximum loan-to-value ratio is 80% and the minimum debt service ratio is 1.25. The Company’s current lending policy for loans originated for portfolio and for sale requires that newly originated loans in excess of $5.0 million be approved by at least two members of the Credit Committee of the Board of Directors, the composition of which is changed periodically.
      It is the Company’s policy to require appropriate insurance protection, including title and hazard insurance, on all mortgage loans prior to closing. Other than cooperative apartment loans, mortgage loan borrowers generally are required to advance funds for certain items such as real estate taxes, flood insurance and private mortgage insurance, when applicable.
      The Company’s multi-family residential mortgage loans include loans secured by cooperative apartment buildings. In underwriting these loans, the Company applies the normal underwriting criteria used with other multi-family properties. In addition, the Company generally will not make a loan on a cooperative apartment building unless at least 50% of the total units in the building are owner-occupied. However, the Company will consider making a loan secured by a cooperative apartment building if it has a large positive rental income which significantly exceeds maintenance expense. At December 31, 2005, the Company had $284.6 million of loans secured by cooperative apartment buildings.
      The Company’s typical multi-family residential mortgage loan is originated with a term to repricing or maturity of 5 to 7 years. These loans generally have fixed interest rates and may be extended by the borrower, upon payment of an additional fee, for an additional 5-year period at an interest rate based on the 5-year Federal Home Loan Bank of New York (“FHLB”) advance rate plus a margin at the time of extension. Under the terms of the Company’s multi-family residential mortgage loans, the principal balance generally is amortized at the rate of 1% per year with the remaining principal due in full at maturity. Prepayment penalties are generally part of the terms of these loans.
      In addition to multi-family residential mortgage loans, the Company originates commercial real estate loans. This growing portfolio is comprised primarily of loans secured by commercial and industrial properties, office buildings and small shopping centers located primarily within the Company’s market area. During July 2003 the Company expanded its commercial real estate lending activities to the Baltimore-Washington and the Boca Raton, Florida markets. In addition, during the third quarter of 2004, the Company continued the expansion of its commercial real estate lending activities to the Chicago market. During 2005, the company originated $38.8 million of such loans in the Baltimore-Washington market, $78.9 million in the Florida market and $3.8 million in the Chicago market.
      At December 31, 2005, commercial real estate loans amounted to $3.69 billion or 30.0% of total loans. This portfolio increased $653.0 million, or 21.5%, during the year ended December 31, 2005 due to the Company’s increased emphasis on originating higher yielding commercial real estate and business loans in line with its business strategy. The Company originated $1.20 billion of commercial real estate loans during the year ended December 31, 2005 compared to $1.47 billion for the year ended December 31, 2004. The decline in originations in 2005 was due to rising interest rates and increased competition. As general market rates of interest increased in 2005, the increase in the average cost of interest-bearing liabilities used to fund the originations of such loans outpaced the increase in the average yield earned on those originations. This reduced the profitability of such loans and the Company determined to reduce the level of commercial real estate originations. The Company intends to continue to emphasize the origination for portfolio of these higher yielding loan products.
      The Company’s commercial real estate loans generally range in amount from $50,000 to $25.0 million, and have an average size of approximately $1.6 million. The Company originates commercial real estate loans using similar underwriting standards as applied to multi-family residential mortgage loans. The Company reviews rent or lease income, rent rolls, business receipts, the borrower’s credit history and business experience, and comparable values of similar properties when underwriting commercial real estate loans.
      Loans secured by apartment buildings and other multi-family residential and commercial properties generally are larger and considered to involve a higher inherent risk of loss than single-family residential mortgage or cooperative apartment loans. Payments on loans secured by multi-family residential and commercial properties are often dependent on the successful operation or management of the properties and are subject, to a

13


Table of Contents

greater extent, to adverse conditions in the real estate market or the local economy. The Company seeks to minimize these risks through its underwriting policies, which generally limit the origination of such loans to loans secured by properties located in the Company’s market area and require such loans to be qualified on, among other things, the basis of the property’s income and debt service ratio.
      Single-Family Residential and Cooperative Apartment Lending. The Company, through its private label program with PHH Mortgage, offers both fixed-rate and adjustable-rate mortgage loans secured by single-family residential properties located in the Company’s primary market area. Under its agreement with PHH Mortgage, the Company offers a range of single-family residential loan products through various delivery channels, supported by direct consumer advertising, including telemarketing, branch referrals and the Company’s Internet website. At December 31, 2005, the Company had $4.2 million of loans available-for-sale to PHH Mortgage. During 2005, the Company originated for sale $83.3 million and sold $81.7 million of loans to PHH Mortgage. The Company will continue to emphasize this program as a means of increasing non-interest income.
      Over the past few years, the Company has de-emphasized the origination for portfolio of single-family residential mortgages and cooperative apartment loans in favor of higher yielding loan products. Although the Company’s cooperative apartment loans in the past have related to properties located in the boroughs of Manhattan, Brooklyn and Queens, in recent periods substantially all of such loans originated or purchased have related to properties located in Manhattan. At December 31, 2005, $1.93 billion, or 15.7%, of the Company’s total loan portfolio consisted of single-family residential mortgage loans and cooperative apartment loans, of which $995.5 million were adjustable-rate mortgage loans (“ARMs”), as compared to $2.49 billion or 22.1% of the total loan portfolio at December 31, 2004. The $557.5 million decrease was primarily due to repayments.
      The interest rates on the Company’s ARMs fluctuate based upon a spread above the average yield on United States Treasury securities, adjusted to a constant maturity which corresponds to the adjustment period of the loan (the “U.S. Treasury constant maturity index”) as published weekly by the Federal Reserve Board. In addition, ARMs generally are subject to limitations on interest increases or decreases of 2% per adjustment period and an interest rate cap during the life of the loan established at the time of origination. Certain of the Company’s ARMs can be converted at certain times to fixed-rate loans upon payment of a fee. Included in single-family residential loans is a modest amount of loans partially or fully guaranteed by the Federal Housing Administration (“FHA”) or the Department of Veterans’ Affairs (“VA”).
      In order to provide financing for low and moderate-income home buyers, the Company participates in residential mortgage programs and products sponsored by, among others, the Community Preservation Corporation and Neighborhood Housing Services. Various programs sponsored by these groups provide low and moderate income households with fixed-rate mortgage loans which are generally below prevailing fixed market rates and which allow below-market down payments for the construction of affordable rental housing.
      Commercial Business Lending Activities. Part of the Company’s strategy to shift its portfolio mix is expanding its commercial business loan portfolio. The Company makes commercial business loans directly to businesses located primarily in its market area and targets small- and medium-sized businesses with annual revenue up to $500.0 million. Commercial business loans are obtained primarily from existing customers, branch referrals, accountants, attorneys and direct inquiries. As of December 31, 2005, commercial business loans totaled $977.0 million, or 7.9%, of the Company’s total loan portfolio compared to $809.4 million, or 7.2%, of the total loan portfolio at December 31, 2004. The Company originated $603.8 million of commercial business loans for portfolio during the year ended December 31, 2005 compared to $376.0 million for the year ended December 31, 2004.
      Commercial business loans originated by the Company generally range in amount from $50,000 to $10.0 million and have an average loan size of approximately $370,000. These loans include lines of credit, revolving credit, time loans and term loans. The loans generally range from one year to ten years and include floating, fixed and adjustable rates. Such loans are generally secured by real estate, receivables, inventory, equipment, machinery and vehicles and are often further enhanced by the personal guarantees of the principals of the

14


Table of Contents

borrower. The Company’s current lending policy for loans originated for portfolio and for sale requires that newly originated loans in excess of $5.0 million be approved by two non-officer directors of the Credit Committee of the Board of Directors. Although commercial business loans generally are considered to involve greater credit risk, and generally bear a corresponding higher yield, than certain other types of loans, management intends to continue emphasizing the origination of commercial business loans to small- and medium-sized businesses in its market area.
      Included in commercial business loans are lease financing activities. ICB Leasing Corp., a subsidiary of the Bank, was formed during the third quarter of 2004 to provide equipment lease financing and term loans to its customers. The Company originated $3.9 million of such loans during the fourth quarter of 2004 and $124.6 million during the year ended December 31, 2005. Also included in commercial business loans are small business lending activities. Small business lending activities are targeted to customers within the Company’s market area with annual sales of $5.0 million or less. The Company offers various products to small business customers in its market area which include (i) originating secured loans for its own portfolio, (ii) originating secured loans in amounts up to $2.0 million using the Company’s underwriting standards and guidelines from the Small Business Administration (“SBA”), and selling, at a gain, the guaranteed portion (75%) of each loan, with servicing retained, and (iii) offering access to unsecured lines of credit up to $100,000 through its private label program with Wells Fargo. (See “ — Loan Origination, Purchases, Sales and Servicing”). The Company originated $3.7 million and sold $3.7 million of SBA loans during the year ended December 31, 2005. The Company offers these activities to better serve its small business customers as well as a means of increasing non-interest income.
      Mortgage Warehouse Lines of Credit. Mortgage warehouse lines of credit are revolving lines of credit to small- and medium-sized mortgage-banking companies at interest rates indexed at a spread to the prime rate as listed in the Wall Street Journal. The lines are drawn upon by such companies to fund the origination of mortgages, primarily one-to-four family loans, where the amount of the draw is generally no higher than 99% of the loan amount, which, in turn, in most cases, is no higher than 80% of the appraised value of the property. In most cases, where the amount of the draw is in excess of 80% of the appraised value, the mortgage is covered by private mortgage insurance or government insurance through the FHA. In substantially all cases, prior to funding the advance, the mortgage banker has received an approved commitment for the sale of the loan, which in turn reduces credit exposure associated with the line. The lines are repaid upon completion of the sale of the mortgage loan to third parties, which usually occurs within 90 days of origination of the loan. During the period between the origination and sale of the loan, the Company maintains possession of the original mortgage note. These loans are of short duration and are made to customers located primarily in New Jersey and surrounding states whose primary business is mortgage refinancing. In the event of rising interest rates, the Company would expect that the use of these lines of credit would be substantially reduced and replaced only to the extent of strength in the general housing market.
      Mortgage warehouse lines of credits to mortgage bankers generally range in amount from $1.0 million to $35.0 million, and have an average size of approximately $9.8 million. The Company establishes limits on mortgage warehouse lines of credit using its normal underwriting standards. The Company reviews credit history, business experience, process controls and procedures and requires personal guarantees of the principals of the borrower.
      As of December 31, 2005, advances under mortgage warehouse lines of credit totaled $453.5 million, or 3.7% of the Company’s total loan portfolio compared to $659.9 million at December 31, 2004. The decline was due to the continued rising interest rate environment that began in 2004. During 2005, advances on mortgage warehouse lines of credit totaled $10.00 billion and repayments totaled $10.18 billion. Unused mortgage warehouse lines of credit totaled $828.2 million at December 31, 2005. Utilization of the borrowers’ lines of credit approximated 35% and 47% of the total lines approved at December 31, 2005 and December 31, 2004, respectively.
      Consumer Lending Activities. The Company offers a variety of consumer loans including home equity loans and lines of credit, automobile loans and passbook loans in order to provide a full range of financial services to its customers. Such loans are obtained primarily through existing and walk-in

15


Table of Contents

customers and direct advertising. At December 31, 2005, $517.5 million or 4.2% of the Company’s total loan portfolio was comprised of consumer loans.
      The largest component of the Company’s consumer loan portfolio is home equity loans and lines of credit. Home equity lines of credit are a form of revolving credit and are secured by the underlying equity in the borrower’s primary or secondary residence. The loans are underwritten in a manner such that they result in a risk of loss which is similar to that of single-family residential mortgage loans. The Company’s home equity lines of credit have interest rates that adjust or float based on the prime rate listed in the Wall Street Journal, have loan-to-value ratios of 80% or less, and are generally for amounts of less than $150,000. The loan repayment is generally based on a 20 year term consisting of principal amortization plus accrued interest. At December 31, 2005, home equity loans and lines of credit amounted to $481.6 million, or 3.9%, of the Company’s total loan portfolio. The Company had an additional $192.6 million of unused commitments pursuant to such equity lines of credit at December 31, 2005.
      Loan Approval Authority and Underwriting. The Board of Directors of the Bank has established lending authorities for individual officers as to its various types of loan products. For multi-family residential mortgage loans, commercial real estate and commercial business loans, an Executive Vice President and a Senior Vice President have the authority to approve newly originated loans in amounts up to $3.0 million and for the private banking group within the Company’s business banking area, two Senior Vice Presidents acting jointly have authority to approve up to $500,000. Amounts up to $5.0 million may be approved by either the Chief Executive Officer or the Chief Credit Officer.
      Single-family residential mortgage loans and cooperative apartment loans and home equity loans of less than $300,000 can be approved by an individual loan officer, while loans up to and including $500,000 must be approved by a senior loan officer. Two senior officers acting jointly have the authority to approve such loans in amounts up to $750,000 and those loans exceeding $750,000 may be approved by two senior officers acting jointly (one of whom must be the Chief Executive Officer, Chief Credit Officer or Executive Vice President — Consumer Banking.) Consumer loans of less than $50,000 can be approved by an individual loan officer and loans between $50,000 and $100,000 can be approved by an individual senior loan officer. Loans between $100,000 and $300,000 must be approved by the joint action of two senior loan officers.
      Any mortgage loan, cooperative apartment and commercial business loan in excess of $5.0 million must be approved by at least two members of the Credit Committee of the Board of Directors, which consists of various directors, the composition of which is changed periodically and the joint action of two senior officers, one of whom must be the Chief Executive Officer, Chief Credit Officer, Executive Vice President-Consumer Banking or Senior Vice President-Lending, Consumer Banking.
      With certain limited exceptions, the Company’s credit administration policy limits the amount of credit related to mortgage loans and commercial loans that can be extended to any one borrower to $20.0 million, substantially less than the limits imposed by applicable law and regulation. With certain exceptions, the Company’s policy also limits the amount of commercial business or commercial real estate loans that can be extended to any affiliated borrowing group to $40.0 million. Exceptions to the above policy limits must have the approval of the Chief Executive Officer, Chief Credit Officer and two members of the Credit Committee of the Board of Directors. With certain limited exceptions, a New York-chartered savings bank may not make loans or extend credit for commercial, corporate or business purposes (including lease financing) to a single borrower, the aggregate amount of which would exceed (i) 15% of the Bank’s net worth if the loan is unsecured, or (ii) 25% of net worth if the loan is secured. Excluding relationships that include loans that have been sold to Fannie Mae and against which Fannie Mae has recourse, the outstanding aggregate loan balance to the Company’s largest lending relationship was $118.9 million at December 31, 2005 which was in compliance with the regulatory limitations.
      Appraisals for multi-family residential and commercial real estate loans are generally conducted either by licensed and certified internal appraisers or qualified external appraisers. In addition, the Company generally reviews internally all appraisals conducted by independent appraisers on multi-family residential and commercial real estate properties.

16


Table of Contents

      Loan Origination and Loan Fees. In addition to interest earned on loans, the Company receives loan origination fees or “points” for many of the loans it originates. Loan points are a percentage of the principal amount of the mortgage loan and are charged to the borrower in connection with the origination of the loan. The Company also offers a number of residential loan products on which no points are charged.
      The Company’s loan origination fees and certain related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the contractual life of the related loans as an adjustment to the yield of such loans. At December 31, 2005, the Company had $16.0 million of net deferred loan fees.
Asset Quality
      The Company generally places loans on non-accrual status when principal or interest payments become 90 days past due, except those loans reported as 90 days past maturity within the overall total of non-performing loans. However, FHA or VA loans continue to accrue interest because their interest payments are guaranteed by various government programs and agencies. Loans may be placed on non-accrual status earlier if management believes that collection of interest or principal is doubtful or when such loans have such well defined weaknesses that collection in full of principal or interest may not be probable. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income.
      Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold. Such assets are carried at the lower of fair value minus estimated costs to sell the property, or cost (generally the balance of the loan on the property at the date of acquisition). All costs incurred in acquiring or maintaining the property are expensed and costs incurred for the improvement or development of such property are capitalized up to the extent of their net realizable value.

17


Table of Contents

      Delinquent loans. The following table sets forth delinquencies in the Company’s loan portfolio as of the dates indicated:
                                                                                                   
    At December 31, 2005   At December 31, 2004   At December 31, 2003
             
    60-89 Days   90 Days or More   60-89 Days   90 Days or More   60-89 Days   90 Days or More
                         
        Principal       Principal       Principal       Principal       Principal       Principal
    Number   Balance   Number   Balance   Number   Balance   Number   Balance   Number   Balance   Number   Balance
(Dollars in Thousands)   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans
 
Mortgage loans:
                                                                                               
 
Single-family residential and cooperative apartment
    13     $ 2,824       33     $ 3,175       52     $ 7,855       67     $ 7,495       18     $ 1,217       20     $ 1,526  
 
Multi-family residential
    2       438       4       184       3       508       6       1,083       4       936       4       673  
 
Commercial real estate
    4       742       22       6,869       7       4,041       27       10,005       2       14,400       17       7,600  
Commercial business loans
    7       4,177       36       7,292       22       7,637       52       17,895       2       285       40       10,392  
Consumer and other loans(1)
    24       83       26       314       34       143       34       327       34       138       42       880  
                                                                         
Total
    50     $ 8,264       121     $ 17,834       118     $ 20,184       186     $ 36,805       60     $ 16,976       123     $ 21,071  
                                                                         
Delinquent loans to total loans(2)
            0.07 %             0.14 %             0.18 %             0.33 %             0.28 %             0.34 %
                                                                         
 
(1)  Includes home equity loans and lines of credit, FHA and conventional home improvement loans, automobile loans, passbook loans, piano loans, overdraft checking loans and secured and unsecured personal loans.
 
(2)  Total loans includes loans receivable less deferred loan fees and unamortized discounts, net.

18


Table of Contents

     Non-Performing Assets. The following table sets forth information with respect to non-performing assets identified by the Company, including non-performing loans and OREO at the dates indicated.
                                               
    At December 31,
     
(Dollars in Thousands)   2005   2004   2003   2002   2001
 
Non-accrual loans:
                                       
 
Mortgage loans:
                                       
   
Single-family residential and cooperative apartment
  $ 3,175     $ 7,495     $ 1,526     $ 3,041     $ 4,172  
   
Multi-family residential
    792       1,394       1,131       1,136       2,312  
   
Commercial real estate
    8,351       12,517       20,061       11,738       6,780  
 
Commercial business loans
    15,707       22,002       12,244       22,495       13,313  
 
Other loans(1)
    300       236       840       568       1,225  
                               
     
Total non-accrual loans
    28,325       43,644       35,802       38,978       27,802  
                               
Loans past due 90 days or more as to:
                                       
 
Interest and accruing
    86       117       40       152       130  
 
Principal and accruing(2)
    8,722       5,517       742       2,482       18,089  
                               
     
Total past due accruing loans
    8,808       5,634       782       2,634       18,219  
                               
Total non-performing loans
    37,133       49,278       36,584       41,612       46,021  
                               
Other real estate owned, net(3)
    1,279       2,512       15       7       130  
                               
Total non-performing assets(4)
  $ 38,412     $ 51,790     $ 36,599     $ 41,619     $ 46,151  
                               
Restructured loans
  $ 4,045     $ 4,198     $ 4,345     $ 4,674     $ 4,717  
                               
 
Non-performing loans as a percent of total loans
    0.30 %     0.44 %     0.59 %     0.72 %     0.78 %
 
Non-performing assets as a percent of total assets
    0.20 %     0.29 %     0.38 %     0.52 %     0.61 %
 
Allowance for loan losses as a percent of total loans
    0.82 %     0.90 %     1.29 %     1.38 %     1.33 %
 
Allowance for loan losses as a percent of non-performing loans
    273.25 %     205.84 %     217.32 %     193.57 %     170.01 %
 
(1)  Consists primarily of home equity loans and lines of credit and FHA home improvement loans.
 
(2)  Reflects loans that are 90 days or more past maturity which continue to make payments on a basis consistent with the original repayment schedule.
 
(3)  Net of related valuation allowances.
 
(4)  Non-performing assets consist of non-performing loans and OREO. Non-performing loans consist of (i) non-accrual loans and (ii) accruing loans 90 days or more past due as to interest or principal.

19


Table of Contents

     Non-performing assets decreased $13.4 million or 25.8% to $38.4 million at December 31, 2005 compared to $51.8 million at December 31, 2004. The decrease primarily reflects a $15.3 million decrease in non-accrual loans, a $1.2 million decrease in other real estate owned, partially offset by a $3.1 million increase in loans past due 90 days or more as to principal but still accruing, which loans continued to make payments on a basis consistent with the original repayment schedule. Non-accrual loans had decreases of $6.3 million in non-accrual commercial business loans, $4.3 million in non-accrual single-family residential and cooperative apartment loans, $4.1 million in non-accrual commercial real estate loans and $0.6 million in non-accrual multi-family residential loans.
      Loans 90 days or more past maturity on which payments continued to be made on a basis consistent with the original repayment schedule increased $3.1 million to $8.7 million at December 31, 2005 compared to December 31, 2004. The Company is continuing its efforts to have the borrowers refinance or extend the term of such loans.
      The interest income that would have been recorded during the years ended December 31, 2005, 2004 and 2003 if all of the Bank’s non-accrual loans at the end of each such period had been current in accordance with their terms during such periods was $1.2 million, $1.8 million and $1.1 million, respectively.
      A New York-chartered savings bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Federal Deposit Insurance Corporation (“FDIC”) and the New York State Banking Department (“Department”), which can order the establishment of additional general or specific loss allowances. The FDIC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner, and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Although the Company believes that its allowance for loan losses was at a level to cover all known and inherent losses in its loan portfolio at December 31, 2005 that were both probable and reasonable to estimate, there can be no assurance that the regulators, in reviewing the Company’s loan portfolio, will not request the Company to materially adjust its allowance for possible loan losses, thereby affecting the Company’s financial condition and results of operations at the date and for the period during which such adjustment must be recognized.
      Criticized and Classified Assets. Federal banking regulations require that each insured institution classify its assets on a regular basis. Furthermore, in connection with examinations of insured institutions, federal and state examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the same weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, resulting in a high probability of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The Company also categorizes assets as “special mention”. These are generally defined as assets that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset. However, they do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss.
      The Company’s senior management reviews and classifies loans continually and reports the results of its reviews to the Board of Directors on a monthly basis. The Company has also experienced significant improvement in the level of classified loans during 2005. At December 31, 2005, the Company had classified an aggregate of $61.7 million of assets (a portion of which consisted of

20


Table of Contents

non-accrual loans) which was a 25.7% improvement compared to $83.0 million at December 31, 2004. In addition, at December 31, 2005 the Company had $127.6 million of assets that were designated by the Company as special mention compared to $97.1 million at December 31, 2004.
      Allowance for Loan Losses. The determination of the level of the allowance for loan losses and the periodic provisions to the allowance charged to income is the responsibility of management. In assessing the level of the allowance for loan losses, the Company considers the composition and outstanding balance of its loan portfolio, the growth or decline of loan balances within various segments of the overall portfolio, the state of the local (and to a certain degree, the national) economy as it may impact the performance of loans within different segments of the portfolio, the loss experience related to different segments or classes of loans, the type, size and geographic concentration of loans held by the Company, the level of past due and non-performing loans, the value of collateral securing the loan, the level of classified loans and the number of loans requiring heightened management oversight. The continued shifting of the composition of the loan portfolio to be more commercial-bank like by increasing the balance of commercial real estate and business loans and mortgage warehouse lines of credit may increase the level of known and inherent losses in the Company’s loan portfolio.
      The formalized process for assessing the level of the allowance for loan losses is performed on a quarterly basis. Individual loans are specifically identified by loan officers as meeting the criteria of pass, criticized or classified loans. Such criteria include, but are not limited to, non-accrual loans, past maturity loans, impaired loans, chronic delinquencies and loans requiring heightened management oversight. Each loan is assigned to a risk level of special mention, substandard, doubtful and loss. Loans that do not meet the criteria to be characterized as criticized or classified are categorized as pass loans. Each risk level, including pass loans, has an associated reserve factor that increases as the risk level category increases. The reserve factor for criticized and classified loans becomes larger as the risk level increases. The reserve factor for pass loans differs based upon the loan type and collateral type. Commercial business loans and commercial real estate loans have a larger loss factor applied to pass loans since these loans are deemed to have higher levels of known and inherent loss than single-family residential and multi-family residential loans. The reserve factor is applied to the aggregate balance of loans designated to each risk level to compute the aggregate reserve requirement. This method of analysis is performed on the entire loan portfolio.
      The reserve factors that are applied to pass, criticized and classified loans are generally reviewed by management on a quarterly basis unless circumstances require a more frequent assessment. In assessing the reserve factors, the Company takes into consideration, among other things, the state of the national and/or local economies which could affect the Company’s customers or underlying collateral values, the loss experience related to different segments or classes of loans, changes in risk categories, the acceleration or decline in loan portfolio growth rates and underwriting or servicing weaknesses. To the extent that such assessment results in an increase or decrease to the reserve factors that are applied to each risk level, the Company may need to adjust its provision for loan losses which could impact earnings in the period in which such provisions are taken.
      The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest, according to the contractual terms of the loan agreement. The measurement value of the Company’s impaired loans is based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the observable market prices of the loan, or the fair value of the underlying collateral if the loan is collateral dependent. The Company identifies and measures impaired loans in conjunction with its assessment of the level of the allowance for loan losses. Specific factors used in the identification of impaired loans include, but are not limited to, delinquency status, loan-to-value ratio, the condition of the underlying collateral, credit history and debt coverage. Impaired loans totaled $21.3 million at December 31, 2005 with a related allowance allocated of $1.1 million applicable to such loans.
      The Company’s allowance for loan losses amounted to $101.5 million at December 31, 2005 as compared to $101.4 million at December 31, 2004. The Company’s allowance amounted to 0.82% of total loans at December 31, 2005 and 0.90% at December 31, 2004. The allowance for loan losses as a percent of non-performing loans was 273.3% at

21


Table of Contents

December 31, 2005 compared to 205.8% at December 31, 2004.
      The Company’s allowance for loan losses increased $0.1 million from December 31, 2004 to December 31, 2005 due to the net recoveries of $0.1 million. The Company did not record a provision for loan losses during 2005 due to the improved quality in the characteristics of the loan portfolio including a reduction in classified loans and net charge-offs and the recognition of current economic conditions. Although there was no provision recorded in 2005, adjustments were made to the allowance for loan losses by loan category to reflect changes in the Company’s loan mix and risk characteristics.
      The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. Management believes that, based on information currently available, the Company’s allowance for loan losses at December 31, 2005 was at a level to cover all known and inherent losses in its loan portfolio at such date that were both probable and reasonable to estimate. In the future, management may adjust the level of its allowance for loan losses as economic and other conditions dictate. In addition, the FDIC and the Department as an integral part of their examination process periodically review the Company’s allowance for possible loan losses. Such agencies may require the Company to adjust the allowance based upon their judgment.
      The following table sets forth the activity in the Company’s allowance for loan losses during the periods indicated.
                                           
                    Nine Months
        Ended
    Year Ended December 31,   December 31,
         
(Dollars in Thousands)   2005   2004   2003   2002   2001
 
Allowance at beginning of period
  $ 101,435     $ 79,503     $ 80,547     $ 78,239     $ 71,716  
Allowance of acquired institution (SIB)
          24,069                    
Provision:
                                       
 
Mortgage loans
          2,000       2,300       3,733       4,200  
 
Commercial business and other loans(1)
                1,200       4,267       3,675  
                               
 
Total provision
          2,000       3,500       8,000       7,875  
                               
Charge-offs:
                                       
 
Mortgage loans
    97       1,227       6,202       1,159       850  
 
Commercial business and other loans(1)(2)
    2,982       10,500       1,179       7,202       1,756  
                               
 
Total charge-offs
    3,079       11,727       7,381       8,361       2,606  
                               
Recoveries:
                                       
 
Mortgage loans
    455       5,775       364       1,170       83  
 
Commercial business and other loans(1)
    2,656       1,815       2,473       1,499       1,171  
                               
 
Total recoveries
    3,111       7,590       2,837       2,669       1,254  
                               
Net loans recovered /(charged-off)
    32       (4,137 )     (4,544 )     (5,692 )     (1,352 )
                               
Allowance at end of period
  $ 101,467     $ 101,435     $ 79,503     $ 80,547     $ 78,239  
                               
Net loans charged-off to allowance for loan losses
    N/A       4.08 %     5.72 %     7.07 %     1.73 %
Net loans charged-off to average loans outstanding during year
    N/A       0.04 %     0.08 %     0.10 %     0.02 %
Allowance for possible loan losses as a percent of total loans
    0.82 %     0.90 %     1.29 %     1.38 %     1.33 %
Allowance for possible loan losses as a percent of total non-performing loans (3)
    273.25 %     205.84 %     217.32 %     193.57 %     170.01 %
 
(1)  Includes commercial business loans, mortgage warehouse lines of credit, home equity loans and lines of credit, automobile loans and secured and unsecured personal loans.
 
(2)  Includes a $9.2 million charge-off related to the mortgage warehouse line of credit portfolio in 2004.
 
(3)  Non-performing loans consist of (i) non-accrual loans and (ii) accruing loans 90 days or more past due as to interest or principal.

22


Table of Contents

     The following table sets forth information concerning the allocation of the Company’s allowance for loan losses by loan category at the dates indicated.
                                                                                 
    At December 31,
     
    2005   2004   2003   2002   2001
                     
    Amount of       Amount of       Amount of       Amount of       Amount of    
(Dollars in Thousands)   Allowance   Percent(1)   Allowance   Percent(1)   Allowance   Percent(1)   Allowance   Percent(1)   Allowance   Percent(1)
 
Mortgage loans
  $ 77,425       84.2 %   $ 71,867       82.8 %   $ 56,549       76.4 %   $ 52,087       73.9 %   $ 53,094       78.1 %
Commercial business loans
    17,729       7.9       22,191       7.2       16,974       9.8       22,927       10.3       18,595       11.3  
Mortgage warehouse lines of credit
    4,226       3.7       5,161       5.9       4,016       8.5       3,516       11.9       4,349       7.6  
Other loans(2)
    2,087       4.2       2,216       4.1       1,964       5.3       2,017       3.9       2,201       3.0  
                                                             
Total
  $ 101,467       100.0 %   $ 101,435       100.0 %   $ 79,503       100.0 %   $ 80,547       100.0 %   $ 78,239       100.0 %
                                                             
 
(1)  Percent of loans in each category to total loans.
 
(2)  Includes home equity loans and lines of credit, FHA home improvement loans, student loans, automobile loans, passbook loans and secured and unsecured personal loans.
Environmental Issues
      The Company encounters certain environmental risks in its lending activities. Under federal and state environmental laws, lenders may become liable under certain circumstances for costs of cleaning up hazardous materials found on property securing their loans. In addition, the existence of hazardous materials may make it uneconomic for a lender to foreclose on such properties. Although environmental risks are usually associated with loans secured by commercial real estate, risks also may be substantial for loans secured by residential real estate if environmental contamination makes security property unsuitable for use. This could also have a negative effect on nearby property values. The Company attempts to control its risk by requiring a Phase One environmental assessment be completed as part of its underwriting review for all commercial real estate mortgage applications.
      The Company believes its procedures regarding the assessment of environmental risk are adequate and the Company is unaware of any environmental issues which would subject it to any material liability as of the date hereof. However, no assurance can be given that the values of properties securing loans in the Company’s portfolio will not be adversely affected by unforeseen environmental risks.
Investment Activities
      Investment Policies. The investment policy of the Company, which is established by the Board of Directors, is designed to help the Company achieve its fundamental asset/liability management objectives. Generally, the policy calls for the Company to emphasize principal preservation, liquidity, diversification, short maturities and/or repricing terms, and a favorable return on investment when selecting new investments for the Company’s investment and mortgage-related securities portfolios. In addition, the policy sets forth objectives which are designed to limit new investments to those which further the Company’s goals with respect to interest rate risk management. The Company’s current securities investment policy permits investments in various types of liquid assets including obligations of the U.S. Treasury and federal agencies, investment-grade corporate and trust obligations, preferred securities, various types of mortgage-related securities, including collateralized mortgage obligations (“CMOs”), commercial paper and insured certificates of deposit. The Bank, as a New York-chartered savings bank, is permitted to make certain investments in equity securities and stock mutual funds. At December 31, 2005, these equity investments totaled $11.9 million. See “— Regulation-Activities and Investments of FDIC-Insured State-Chartered Banks”.
      The Company has the ability to enter into various derivative contracts for hedging purposes to facilitate its ongoing asset/liability management process. The Company’s hedging activities are limited to interest rate swaps, caps and floors with outstanding notional amounts not to exceed in the aggregate 10% of total assets. The objective of any hedging activities is to reduce the Company’s interest rate risk. Similarly, the Company does not invest in mortgage-related securities which are deemed by rating agencies to be “high risk,” or purchase bonds which are not rated investment grade.

23


Table of Contents

      Mortgage-Related Securities. Mortgage-related securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally U.S. Government agencies and government-sponsored enterprises) that pool and repackage the participation interests in the form of securities, to investors such as the Company. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Fannie Mae and the Government National Mortgage Association (“GNMA”). The Company primarily invests in CMO private issuances, which are principally AAA rated and are current pay sequential pass-throughs or planned amortization class structures, and CMOs backed by U.S. Government agency securities.
      Mortgage-related securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. However, the existence of the guarantees or insurance generally results in such securities bearing yields which are less than the loans underlying such securities.
      Freddie Mac is a publicly traded corporation chartered by the U.S. Government. Freddie Mac issues participation certificates backed principally by conventional mortgage loans. Freddie Mac guarantees the timely payment of interest and the ultimate return of principal on participation certificates. Fannie Mae is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not backed by the full faith and credit of the United States, but because Freddie Mac and Fannie Mae are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks. GNMA is a government agency within the Department of Housing and Urban Development which is intended to help finance government — assisted housing programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and the timely payment of principal and interest on GNMA securities are guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. Because Freddie Mac, Fannie Mae and GNMA were established to provide support for low-and middle-income housing, there are limits to the maximum size of one-to-four family loans that qualify for these programs.
      At December 31, 2005, the Company’s $3.16 billion of mortgage-related securities, which represented 16.5% of the Company’s total assets at such date, were comprised of $1.94 billion of AAA rated CMOs, $72.2 million of CMOs which were issued or guaranteed by Freddie Mac, Fannie Mae or GNMA (“Agency CMOs”) and $1.14 billion of pass through certificates, which were also issued or guaranteed by Freddie Mac, Fannie Mae or GNMA. The portfolio decreased by $323.9 million during the year ended December 31, 2005 primarily due to $734.6 million of principal payments received combined with sales of $417.6 million which were partially offset by $910.5 million of purchases. The purchases during the year ended December 31, 2005 primarily consisted of $720.6 million of AAA rated CMOs with an average yield of 4.72% and $160.0 million of Fannie Mae pass through certificates with a weighted average yield of 4.58%.
      At December 31, 2005, the contractual maturity of approximately 85.6% of the Company’s mortgage-related securities was within five years. The actual maturity of a mortgage-related security is generally less than its stated maturity due to repayments of the underlying mortgages. Prepayments at a rate different than that anticipated will affect the yield to maturity. The yield is based upon the interest income and the amortization of any premium or discount related to the mortgage-backed security. In accordance with generally accepted accounting principles used in the United States (“GAAP”), premiums and discounts are amortized over the estimated lives of the securities, which decrease and increase interest income, respectively. The repayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of mortgage-related securities, and these assumptions are reviewed periodically to reflect actual prepayments. If prepayments are faster than anticipated, the life of the security may be shortened and may result in the acceleration of any unamortized premium. Although repayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate col-

24


Table of Contents

lateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of repayments. During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the repayment of the underlying mortgages and the related security. Under those circumstances, the Company may be subject to reinvestment risk to the extent that the Company’s mortgage-related securities amortize or repay faster than anticipated and the Company is not able to reinvest the proceeds of such repayments and prepayments at comparable rates. During 2005, as mortgage rates increased, the Company experienced a decrease in repayments, prepayments and maturities to $734.6 million for the year ended December 31, 2005 compared to $997.1 million for the year ended December 31, 2004. As a result, the Company also experienced a corresponding decline in the amortization of premium to $16.9 million for the year ended December 31, 2005 compared to $19.4 million for the year ended December 31, 2004.
      The following table sets forth the activity in the Company’s mortgage-related securities portfolio during the periods indicated, all of which are available-for-sale.
                         
    Year Ended December 31,
     
(In Thousands)   2005   2004   2003
 
Mortgage-related securities at beginning of period
  $ 3,479,482     $ 2,211,755     $ 1,038,742  
Acquired from SIB acquisition
          1,620,015        
Purchases
    910,503       840,250       2,823,123  
Sales
    (417,551 ) (1)     (158,340 ) (1)      
Repayments, prepayments and maturities
    (734,641 )     (997,105 )     (1,627,540 )
Amortization of premiums
    (16,902 )     (19,388 )     (26,216 )
Accretion of discounts
    577       1,345       2,002  
Change in unrealized gains/(losses) on available-for-sale mortgage-related securities
    (65,879 )     (19,050 )     1,644  
                   
Mortgage-related securities at end of period
  $ 3,155,589     $ 3,479,482     $ 2,211,755  
                   
 
(1)  The Company recognized a net gain of $3.3 million and $2.9 million on the sale of mortgage-related securities during the years ended December 31, 2005 and 2004, respectively. No gain or loss was recognized for the year ended December 31, 2003.
     Investment Securities. The Company has the authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, preferred securities, mutual funds, equity securities and corporate and trust obligations. The Company’s investment securities portfolio decreased $35.4 million to $418.9 million at December 31, 2005 compared to $454.3 million at December 31, 2004. The decrease was due to sales totaling $59.9 million, primarily consisting of corporate bonds and preferred securities combined with maturities, calls and repayments aggregating $160.2 million. Partially offsetting these decreases were $188.9 million of purchases, primarily $100.0 million of federal agency securities with a weighted average yield of 4.84%, $56.4 million of corporate bonds with a weighted average yield of 4.48% and $22.9 million of U.S. Treasury securities with a weighted average yield of 3.74%.

25


Table of Contents

      The following table sets forth the activity in the Company’s investment securities portfolio, all of the securities of which are available-for-sale, during the periods indicated.
                         
    Year Ended December 31,
     
(In Thousands)   2005   2004   2003
 
Investment securities at beginning of period
  $ 454,305     $ 296,945     $ 224,908  
Acquired from SIB acquisition
          469,947        
Purchases
    188,907       186,291       225,240  
Sales
    (59,887 ) (1)     (155,495 ) (1)     (48,410 ) (1)
Maturities, calls and repayments
    (160,206 )     (332,330 )     (101,535 )
Amortization of premium
    (130 )     (726 )     (223 )
Accretion of discounts
    124       187       128  
Other-than-temporary impairment charge on securities
          (12,737 )      
Change in unrealized gains/(losses) on available-for-sale investment securities
    (4,202 )     2,223       (3,163 )
                   
Investment securities at end of period
  $ 418,911     $ 454,305     $ 296,945  
                   
 
(1)  The Company recognized net gains of $3.3 million, $1.0 million and $0.5 million on the sale of investment securities during the years ended December 31, 2005, 2004 and 2003, respectively.
     The following table sets forth information regarding the amortized cost and fair value of the Company’s investment and mortgage-related securities at the dates indicated.
                                                       
    At December 31,
     
    2005   2004   2003
             
    Amortized   Estimated   Amortized   Estimated   Amortized   Estimated
(In Thousands)   Cost   Fair Value   Cost   Fair Value   Cost   Fair Value
 
Available-for-sale:
                                               
 
Investment securities:
                                               
   
U.S. Government and agencies
  $ 231,716     $ 227,662     $ 212,016     $ 212,068     $ 15,549     $ 15,585  
   
Corporate
    95,342       95,441       89,093       89,381       119,013       119,575  
   
Municipal
    160       161       4,630       4,866       4,282       4,590  
   
Equity Securities:
                                               
     
Preferred
    94,350       95,578       146,604       146,930       158,462       155,869  
     
Common
    69       69       486       1,060       386       1,326  
                                     
     
Total investment securities
    421,637       418,911       452,829       454,305       297,692       296,945  
                                     
 
Mortgage-related securities:
                                               
   
Fannie Mae
    442,269       435,526       449,182       451,375       142,956       146,177  
   
GNMA
    17,545       16,729       7,259       7,563       8,981       9,655  
   
Freddie Mac
    699,890       688,289       973,750       978,235       5,140       5,411  
   
CMOs
    2,069,694       2,015,045       2,057,221       2,042,309       2,043,558       2,050,512  
                                     
   
Total mortgage-related securities
    3,229,398       3,155,589       3,487,412       3,479,482       2,200,635       2,211,755  
                                     
Total securities available-for-sale
  $ 3,651,035     $ 3,574,500     $ 3,940,241     $ 3,933,787     $ 2,498,327     $ 2,508,700  
                                     

26


Table of Contents

      The following table sets forth certain information regarding the contractual maturities of the Company’s investment and mortgage-related securities at December 31, 2005, all of which securities were classified as available-for-sale.
                                                                             
    At December 31, 2005, Contractually Maturing
     
        Weighted       Weighted       Weighted       Weighted    
    Under 1   Average   1-5   Average   6-10   Average   Over 10   Average    
(Dollars in Thousands)   Year   Yield (1)   Years   Yield (1)   Years   Yield (1)   Years   Yield (1)   Total
 
Investment securities:
                                                                       
 
U.S. Government and agencies
  $ 11,080       2.53 %   $ 30,129       4.08 %   $ 113,005       4.90 %   $ 73,448       5.01 %   $ 227,662  
 
Corporate
    1,700       5.62       8,244       4.56       9,862       4.46       75,635       4.67       95,441  
 
Municipal
                                        161       6.45       161  
Mortgage-related securities:
                                                                       
 
Fannie Mae
    5,749       3.35       285,121       4.64       125,958       4.98       18,698       5.55       435,526  
 
GNMA
    3       4.28       1,527       4.48                   15,199       4.60       16,729  
 
Freddie Mac
    5,397       5.19       637,787       4.72       34,988       4.84       10,117       5.56       688,289  
 
CMOs
    107,204       5.01       1,659,547       4.53       223,779       4.70       24,515       5.50       2,015,045  
                                                       
   
Total
  $ 131,133       4.75 %   $ 2,622,355       4.58 %   $ 507,592       4.82 %   $ 217,773       4.99 %   $ 3,478,853  
                                                       
 
(1)  The weighted average yield is based on amortized cost.
Sources of Funds
      General. Deposits are the primary source of the Company’s funds for lending and other investment purposes. In addition to deposits, the Company derives funds from loan principal and interest payments, maturities and sales of securities, interest on securities and borrowings (including subordinated and senior notes). Loan payments are a relatively stable source of funds, while deposit inflows and outflows are influenced by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes.
      Depending upon market conditions and funding needs, the Company at times uses brokered certificates of deposit (“CDs”) and brokered money market accounts as alternative sources of funds. The brokered CDs are issued by nationally recognized brokerage firms.
      Deposits. The Company’s product line is structured to attract both consumer and business prospects. The current product line includes negotiable order of withdrawal (“NOW”) accounts (including the “Independence Rewards Plus Checkingtm product), money market accounts (including brokered accounts), non-interest-bearing checking accounts, passbook and statement savings accounts, business checking accounts, cash management services, New Jersey municipal deposits, Interest on Lawyers Trust Accounts (“IOLTA”), Interest on Lawyers Accounts (“IOLA”) and term certificate accounts (including brokered CDs).
      Since 2002, the Company’s product line has been expanded to attract middle market business and larger corporate customers by offering a full suite of non-credit cash management services. The current product line includes lockbox services, sweep accounts, automated clearing house (ACH) services, account reconciliation services, escrow services, zero balance accounts, cash concentration, wire transfer services, and a cash management suite of services that business customers can access via the internet. Business customers benefit from these services through reduced operational costs, accelerated funds availability, and increased interest income. The primary goal in development of these services was to increase core deposits from business customers by offering additional products and services where fees are offset with compensating balances on deposit. Accounting for these service dollars and compensating balances are calculated through the Company’s account analysis system, which provides its customers with earnings credits applied against equivalent balances for services.
      Development of these products and services was designed to penetrate new markets by obtaining larger deposit relationships from business customers as well as offering borrowing customers additional

27


Table of Contents

business banking products in order to increase their deposit relationships. Approximately 1,295 business customers are using some form of cash management services as of December 31, 2005.
      The Company’s deposits are obtained primarily from the areas in which its branch offices are located. Prior to 2004 the Company neither paid fees to brokers to solicit funds for deposit nor did it actively solicit negotiable-rate certificates of deposit with balances of $100,000 or more. However, the Company assumed $281.4 million of brokered CDs as a result of the SIB transaction of which $33.0 million remained outstanding at December 31, 2004. In addition, the Company used brokered CDs and brokered money market accounts as an alternative funding source during 2005 to reduce its dependence on higher costing wholesale borrowings. The Company had $677.0 million of brokered CDs and $482.3 million of brokered money market accounts outstanding at December 31, 2005.
      The Company attracts deposits through a network of convenient office locations offering a variety of accounts and services, competitive interest rates and convenient customer hours. The Company’s branch network consists of 126 branch offices. During the year ended December 31, 2005 the Company opened seven branches: four in Manhattan, New York, and one each in Queens, New York, Brooklyn, New York and in Middlesex County, New Jersey. As a result of the SIB transaction, the Company continues to hold over 28% of the deposits in the Staten Island market which as of June 30, 2005 was the highest percentage held by any one depository institution on Staten Island.
      During the first quarter of 2006 the Company opened one branch in Manhattan, New York. The Company currently expects to expand its branch network through the opening of approximately two additional branch offices during the remainder of 2006.
      During 2002, the Company also expanded its retail banking services to include a private banking/wealth management group. This group was added to broaden and diversify the Company’s customer base and offers personalized and specialized services, including a carefully selected range of managed investment alternatives through third parties, to meet the needs of the Company’s clients. As of December 31, 2005, the private banking/wealth management group had $447.8 million in deposits of which $415.9 million or 92.9% were core deposits compared to $227.6 million in deposits of which $185.7 million were core deposits at December 31, 2004. In addition, this group had $40.3 million and $41.6 million of primarily multi-family and commercial business loans outstanding at December 31, 2005 and December 31, 2004, respectively.
      In addition to its branch network, the Company currently maintains 230 ATMs in or at its branch offices and 35 ATMs at remote sites. The Company currently plans to install 7 additional ATMs in its offices and four ATMs at remote sites by the end of calendar 2006.
      Supplementing the Company’s branch and ATM network are its Call Center, the Interactive Voice Response unit and its Internet Banking services. On an average monthly basis, the Company’s Call Center responds to and processes over 60,000 customer transactional requests and informational inquiries. The Call Center also provides account-opening services and can accept loan applications related to the Company’s consumer loan product line. The Interactive Voice Response unit provides automated voice and touch-tone information to approximately 400,000 telephoned inquiries per month. The Company’s Internet Banking site currently has approximately 92,000 users and provides a wide range of product and account information to both existing and new customers. Services on this site include account-opening capabilities, consumer loan applications, on-line bill paying and other products and services.
      Deposit accounts offered by the Company vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Company is not limited with respect to the rates it may offer on deposit accounts. In determining the characteristics of its deposit accounts, consideration is given to the profitability to the Company, matching terms of the deposits with loan products, the attractiveness to customers and the rates offered by the Company’s competitors.
      The Company’s focus on customer service has facilitated its growth and retention of lower costing NOW accounts, money market accounts, non-interest bearing checking accounts, business checking accounts and savings accounts, which generally bear interest rates substantially less than certificates of deposit. During the first quarter of 2005, the Company introduced the Independence RewardsPlus

28


Table of Contents

Checkingtm product and utilized certain certificates of deposit promotions as an alternative funding source to reduce its dependence on higher costing wholesale borrowings. As a result of these initiatives, core deposits increased $196.0 million, or 2.8%, to $7.23 billion at December 31, 2005 compared to $7.03 billion at December 31, 2004. Certificates of deposit increased $1.44 billion, or 63.6% to 3.72 billion at December 31, 2005 compared to $2.27 billion at December 31, 2004. As a result of the increase in certificates of deposit, core deposits amounted to 66.1% of total deposits at December 31, 2005 compared to 75.6% at December 31, 2004. During the year ended December 31, 2005, the weighted average rate paid on the Company’s deposits, excluding certificates of deposit was 1.04%, as compared to a weighted average rate of 2.94% paid on the Company’s certificates of deposit during this period. At December 31, 2005, approximately 65.1% of the Company’s certificates of deposit portfolio was scheduled to mature within one year, reflecting customer preference to maintain their time deposits with relatively short terms during the current economic environment.
      The Company’s deposits increased $1.64 billion or 17.6% to $10.95 billion at December 31, 2005 from December 31, 2004. The increase was due to deposit inflows of $1.48 billion, of which $1.35 billion was certificates of deposit, combined with interest credited of $162.9 million. For further information regarding the Company’s deposit liabilities see Note 11 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      The following table sets forth the activity in the Company’s deposits during the periods indicated.
                         
    Year Ended December 31,
     
(In Thousands)   2005   2004   2003
 
Deposits at beginning of period
  $ 9,305,064     $ 5,304,097     $ 4,940,060  
Deposits of acquired institution (SI Bank)
          3,786,020        
Other net increase before interest credited
    1,477,352       129,588       310,780  
Interest credited
    162,867       85,359       53,257  
                   
Net increase in deposits
    1,640,219       4,000,967       364,037  
                   
Deposits at end of period
  $ 10,945,283     $ 9,305,064     $ 5,304,097  
                   
      The following table sets forth by various interest rate categories the certificates of deposit with the Company at the dates indicated.
                         
    At December 31,
     
(In Thousands)   2005   2004   2003
 
0.01% to 1.49%
  $ 476,101     $ 889,289     $ 784,734  
1.50% to 1.99%
    29,043       253,834       51,754  
2.00% to 2.99%
    166,995       200,353       84,664  
3.00% to 3.99%
    1,548,185       344,084       252,363  
4.00% to 4.99%
    1,377,977       427,794       78,809  
5.00% to 5.99%
    95,487       117,955       105,348  
6.00% to 6.99%
    12,053       27,473       19,281  
7.00% to 8.99%
    9,753       10,633       1,949  
                   
    $ 3,715,594     $ 2,271,415     $ 1,378,902  
                   

29


Table of Contents

      The following table sets forth the amount and remaining contractual maturities of the Company’s certificates of deposit at December 31, 2005.
                                                 
        Over   Over   Over        
    Six   Six Months   One Year   Two Years   Over    
    Months   Through   Through   Through   Three    
(In Thousands)   Or Less   One Year   Two Years   Three Years   Years   Total
 
0.01% to 1.49%
  $ 360,837     $ 95,826     $ 16,355     $ 2,865     $ 218     $ 476,101  
1.50% to 1.99%
    6,715       1,377       20,118       831       2       29,043  
2.00% to 2.99%
    109,836       4,918       4,921       22,252       25,068       166,995  
3.00% to 3.99%
    968,290       236,851       280,471       52,962       9,611       1,548,185  
4.00% to 4.99%
    332,269       259,050       426,131       43,000       317,527       1,377,977  
5.00% to 5.99%
    26,933       5,916       49,642       84       12,912       95,487  
6.00% to 6.99%
    11,721       55       24       232       21       12,053  
7.00% to 8.99%
                8,455       1,294       4       9,753  
                                     
Total
  $ 1,816,601     $ 603,993     $ 806,117     $ 123,520     $ 365,363     $ 3,715,594  
                                     
      As of December 31, 2005, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $1.75 billion, which included $677.0 million of brokered CDs. The following table presents the maturity of these certificates of deposit at such date.
         
(In Thousands)   Amount
 
3 months or less
  $ 683,382  
Over 3 months through 6 months
    327,527  
Over 6 months through 12 months
    191,122  
Over 12 months
    550,047  
       
    $ 1,752,078  
       
      Borrowings. The Company may obtain advances from the FHLB of New York based upon the security of the common stock it owns in that bank and certain of its residential mortgage loans, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Such advances are generally available to meet seasonal and other withdrawals of deposit accounts, to fund increased lending or for investment purchases. The Company had $2.04 billion of FHLB advances outstanding at December 31, 2005 with maturities of ten years or less with approximately 50.0% having a maturity of less than one year. At December 31, 2005 the Company had the ability to borrow, from the FHLB, an additional $2.40 billion on a secured basis, utilizing mortgage-related loans and securities as collateral. Another funding source available to the Company is repurchase agreements with the FHLB and other counterparties. These repurchase agreements are generally collateralized by CMOs or U.S. Government and agency securities held by the Company. At December 31, 2005, the Company had $2.91 billion of repurchase agreements outstanding with the majority maturing between one and five years.
      Borrowings (not including subordinated and senior notes) decreased $555.2 million to $4.96 billion at December 31, 2005 compared to $5.51 billion at December 31, 2004. The decrease was principally due to repayments of borrowings as the Company used the increase in deposits, in particular, certificates of deposit, as a lower costing alternative funding source. For the year ended December 31, 2005, the weighted average interest rate of borrowings was 3.23% compared to the weighted average interest rate of certificates of deposit of 2.94%.
      The Company continues to reposition its balance sheet to more closely align the duration of its interest-earning asset base with its supporting funding sources. The Company also utilized the increase in deposits as an alternative funding source to reduce its dependence on higher costing borrowings. During the year ended December 31, 2005, the Company paid-off $2.08 billion of primarily short-term borrowings that matured with a weighted average interest rate of 2.91% and borrowed approximately $668.0 million of long-term fixed-rate borrowings at a weighted average interest rate of 3.68%. The Company also borrowed $894.9 million of short-term floating-rate borrowings. These borrowings generally mature within 30 days and have a

30


Table of Contents

weighted average interest rate of 4.12%. The Company anticipates replacing a portion of these short-term borrowings with lower costing deposits.
      The Company has also used the issuance of subordinated and senior notes as a funding source. The Company had $397.3 million of subordinated notes outstanding at December 31, 2005 which qualify as Tier 2 capital of the Bank under the capital guidelines of the FDIC.
      During 2005 the Company issued $250.0 million aggregate principal amount of 4.90% Fixed Rate Notes due 2010. The Company used $150.0 million of the $248.1 million of net proceeds to make a capital contribution to the Bank.
      The Company is managing its leverage position and had a borrowings (including subordinated and senior notes) to asset ratio of 29.4% at December 31, 2005 and 33.3% at December 31, 2004.
      For further discussion of the Company’s borrowings see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Business Strategy-Controlled Growth” set forth in Item 7 hereof and Notes 12, 13 and 14 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
Trust Activities
      The Bank also provides a full range of trust and investment services, and acts as executor or administrator of estates and as trustee for various types of trust. Trust and investment services are offered through the Bank’s Private Banking Trust and Investment Department, which was acquired as a result of the SIB transaction. Fiduciary and investment services are provided primarily to persons and entities located in the banking branch market area. Services offered include fiduciary services for trusts and estates, money management, custodial services and pension and employee benefits consulting. As of December 31, 2005, the Trust and Investment Management Department maintained approximately 294 trust/fiduciary accounts with an aggregate value of $217.3 million.
      The accounts maintained by the Trust and Investment Management Department consist of “managed” and “non-managed” accounts. “Managed” accounts are those for which the Bank has responsibility for administration and investment management and/or investment advice. The Bank under special situations utilizes outside investment partners for the Investment Management process. “Non-managed” accounts are those accounts for which the Bank merely acts as a custodian. The Company receives fees depending upon the level and type of service provided. The Trust and Investment Management Department administers various trust accounts (revocable, irrevocable, charitable trusts and trusts under wills), agency accounts (various investment fund products), estate accounts and employee benefit plan accounts (assorted plans and IRA accounts).
Employees
      The Company had 1,974 full-time employees and 444 part-time employees at December 31, 2005. None of these employees are represented by a collective bargaining agreement or agent and the Company considers its relationship with its employees to be good.
Subsidiaries
      At December 31, 2005, the Holding Company’s two active subsidiaries were the Bank and Mitchamm Corp. (“Mitchamm”).
      Mitchamm Corp. Mitchamm was established in September 1997 primarily to operate Mail Boxes Etc. (“MBE”) franchises, which provide mail services, packaging and shipping services primarily to individuals and small businesses. Mitchamm had the area franchise for MBE in Brooklyn, Queens and Staten Island. During 2003, Mitchamm sold the MBE franchise for a gain of $0.3 million. Mitchamm currently operates one facility.
      BNB Capital Trust. BNB Capital Trust (the “Issuer Trust”) (assumed by the Holding Company as part of the acquisition of Broad National Bancorporation (“Broad”) is a statutory business trust formed under Delaware law in June 1997. As a result of the Broad acquisition, the Issuer Trust is wholly owned by the Holding Company. In accordance with the terms of the trust indenture, the Trust redeemed all of its outstanding 9.5% Cumulative Trust Preferred Securities (the “Trust Preferred Securities”) totaling $11.5 million, at $10.00 per share, effective June 30, 2002. Accordingly, the Issuer Trust is now considered to be an inactive subsidiary.
      The following are the subsidiaries of the Bank:
      Independence Community Investment Corp. (“ICIC”). ICIC was established in December

31


Table of Contents

1998, and is the Delaware-chartered holding company for Independence Community Realty Corp. (“ICRC”), Renaissance Asset Corporation (“RAC”) and Staten Island Funding Corporation (“SIFC”). On December 18, 1998 the Bank transferred 1,000 shares of ICRC’s common stock, par value $.01 per share, and 9,889 shares of junior preferred stock, stated value $1,000 per share, to ICIC in return for all 1,000 shares of ICIC’s common stock, par value $.01 per share. At December 31, 2005, ICIC held $223.3 million of securities available-for-sale and $230.7 million of short-term investments.
      Independence Community Realty Corp. ICRC was established in September 1996 as a real estate investment trust. On October 1, 1996, the Bank transferred to ICRC real estate loans with a fair market value of approximately $834.0 million in return for all 1,000 shares of ICRC’s common stock and all 10,000 shares of ICRC’s 8% junior preferred stock. In January 1997, 111 officers and employees of the Bank each received one share of 8% junior preferred stock with a stated value of $1,000 per share of ICRC. At December 31, 2005, ICRC held $2.53 billion of loans and $98.5 million of short-term investments.
      Renaissance Asset Corporation. RAC, which was acquired from Broad, was established by Broad National Bank (“Broad National”) in November 1997 as a New Jersey real estate investment trust. At December 31, 2005, RAC held $864.0 million of loans and $384.3 million of short-term investments. Effective January 1, 2003, RAC was merged into a newly formed Delaware corporation, also called Renaissance Asset Corporation, with the Delaware company being the surviving entity. Pursuant to the terms of the merger, each share of common and preferred stock of the New Jersey corporation was converted into an identical share of the Delaware corporation.
      Staten Island Funding Corporation. SIFC, which was acquired from SIB, was established by SI Bank in 1998 as a Maryland real estate investment trust. At December 31, 2005, SIFC held $610.7 million of loans and $13.1 million of short-term investments.
      Independence Community Insurance Agency, Inc. (“ICIA”). ICIA was established in 1984. ICIA was formed as a licensed life insurance agency to sell the products of the new mutual insurance company formed by the Savings Bank Life Insurance Department of New York.
      Wiljo Development Corp. (“Wiljo”). The assets of Wiljo consist primarily of the office space in the building in which the Company’s executive office is located and its limited partnership interest in the partnership which owns the remaining portion of the building. At December 31, 2005, Wiljo had total assets of $7.9 million and the Company’s equity investment in Wiljo amounted to $7.8 million.
      Broad National Realty Corp. (“BNRC”). BNRC was established by Broad National in July 1987. The assets of BNRC consist primarily of an office building located at 909 Broad Street, Newark, New Jersey. BNRC is also the holding company for Broad Horizons Inc. (“Horizon”). BNRC had total assets of $2.7 million at December 31, 2005.
      Broad Horizons Inc. Horizon was established by Broad National in May 1998 to manage vacant land located at 901 Broad Street, Newark, New Jersey. Horizon’s assets totaled $178,000 at December 31, 2005.
      BNB Investment Corp. (“Investment Corp”). Investment Corp. was established by Broad National in February 1987 to hold various investment securities. Investment Corp. had total assets of $62.0 million, of which $61.8 million was short-term investments, at December 31, 2005.
      SIB Investment Corporation (“SIBIC”). SIBIC was established by SI Bank in 1998 to manage certain investments of SI Bank. SIBIC is currently inactive and had no assets at December 31, 2005.
      Bronatoreo, Inc. (“Bronatoreo”). Bronatoreo was established by Broad National in August 1992 to maintain parking lots located behind 905 Broad Street, Newark, New Jersey. Bronatoreo had total assets of $1.8 million at December 31, 2005.
      Statewide Financial Services (“SFS”). SFS was established by Statewide Savings Bank, S.L.A. in July 1985 to sell annuity products. SFS is currently inactive with no assets.
      SIB Financial Services Corporation (“SIBFSC”). SIBFSC was established by SI Bank in 2000. SIBFSC was formed as a licensed life insurance agency to sell the products of SBLI USA Mutual Insurance Company, Inc. SIBFSC is

32


Table of Contents

currently inactive and had no assets at December 31, 2005.
      ICM Capital L.L.C. (“ICMC”). ICMC was established in July 2003 to act as a mortgage lender and to participate in the Fannie Mae DUS program. ICMC is 66.67% owned by the Bank and 33.33% owned by Meridian Company. At December 31, 2005, ICMC assets totaled $8.4 million consisting of short-term investments. See “Business-Lending Activities-Loan Originations, Purchases, Sales and Servicing”.
      SIB Mortgage Corp. (“SIBMC”). SIBMC was established by SI Bank in 1998 to participate in the mortgage banking business. In March 2004 the majority of SIBMC’s assets (consisting primarily of loans) and operations were sold as part of a plan to exit the mortgage banking business. In 2005 as a result of the Company’s decision to wind down the remaining operations of SIBMC, all remaining loans held by SIBMC were either sold in the secondary market or transferred to the Company’s single-family residential mortgage portfolio. At December 31, 2005, SIBMC had total assets of $18.0 million consisting primarily of short-term investments.
      Independence Community Commercial Reinvestment Corp. (“ICCRC”). ICCRC was established in July 2004. ICCRC is an economic development organization awarded New Market Tax Credit (“NMTC”) allocations in 2004 from the Community Development Financial Institutions Fund of the U.S. Department of Treasury. The NMTC Program promotes business and economic development in low-income communities. The NMTC Program permits ICCRC to receive a credit against federal income taxes for making qualified equity investments in investment vehicles known as Community Development Entities. The credits provided to ICCRC total 39% of the initial value of the $113.0 million investment and will be claimed over a seven-year credit allowance period. ICCRC held $133.4 million of loans at December 31, 2005.
      ICB Leasing Corp. (“Leasing Corp.”). Leasing Corp. was established in September 2004 to engage in the business of equipment leasing. At December 31, 2005, Leasing Corp. held $117.7 million of loans and had total assets of $126.1 million.
Regulation
      Set forth below is a brief description of certain laws and regulations which are applicable to the Company and the Bank. The description of the laws and regulations hereunder, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
The Holding Company
      General. Upon consummation of the Conversion, the Holding Company became subject to regulation as a savings and loan holding company under the Home Owners’ Loan Act, as amended (“HOLA”), instead of being subject to regulation as a bank holding company under the Bank Holding Company Act of 1956 because the Bank made an election under Section 10(l) of HOLA to be treated as a “savings association” for purposes of Section 10(e) of HOLA. As a result, the Holding Company registered with the Office of Thrift Supervision (“OTS”) and is subject to OTS regulations, examinations, supervision and reporting requirements relating to savings and loan holding companies. The Holding Company is also required to file certain reports with, and otherwise comply with the rules and regulations of, the Department and the SEC. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Holding Company and affiliates thereof.
      Activities Restrictions. The Holding Company operates as a unitary savings and loan holding company. Generally, there are only limited restrictions on the activities of a unitary savings and loan holding company that applied to become or was a unitary savings and loan holding company prior to May 4, 1999 and its non-savings institution subsidiaries. Under the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), companies that applied to the OTS to become unitary savings and loan holding companies after May 4, 1999 are restricted to engaging in those activities traditionally permitted to multiple savings and loan holding companies. If the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director may impose such restrictions as deemed

33


Table of Contents

necessary to address such risk, including limiting (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of grandfathered unitary savings and loan holding companies under the GLBA, if the savings institution subsidiary of such a holding company fails to meet the Qualified Thrift Lender (“QTL”) test, as discussed under ‘-Qualified Thrift Lender Test,” then such unitary holding company also shall become subject to the activities restrictions applicable to multiple savings and loan holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, shall register as, and become subject to the restrictions applicable to, a bank holding company. See “—Qualified Thrift Lender Test.”
      The GLBA also imposed new financial privacy obligations and reporting requirements on all financial institutions. The privacy regulations require, among other things, that financial institutions establish privacy policies and disclose such policies to its customers at the commencement of a customer relationship and annually thereafter. In addition, financial institutions are required to permit customers to opt out of the financial institution’s disclosure of the customer’s financial information to non-affiliated third parties. Such regulations became mandatory as of April 1, 2001.
      If the Holding Company were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, as set forth below, the activities of the Holding Company and any of its subsidiaries (other than the Bank or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof any business activity other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple savings and loan holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in clause (vii) above also must be approved by the Director of the OTS prior to being engaged in by a multiple savings and loan holding company.
      Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a savings association can comply with the QTL test by either meeting the QTL test set forth in the HOLA and implementing regulations or qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986, as amended (the “Code”). A savings bank subsidiary of a savings and loan holding company that does not comply with the QTL test must comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; and (iii) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the institution ceases to meet the QTL test, it must cease any activity and not retain any investment not permissible for a national bank (subject to safety and soundness considerations).
      The QTL test set forth in the HOLA requires that qualified thrift investments (“QTIs”) represent 65% of portfolio assets of the savings institution and its consolidated subsidiaries. Portfolio assets are defined as total assets less intangibles, property used by a savings association in its business and liquidity investments in an amount not exceeding 20% of assets. Generally, QTIs are residential housing related assets. The 1996 amendments allow small

34


Table of Contents

business loans, credit card loans, student loans and loans for personal, family and household purpose to be included without limitation as qualified investments. At December 31, 2005, approximately 93.5% of the Bank’s assets were invested in QTIs, which was in excess of the percentage required to qualify the Bank under the QTL test in effect at that time.
      Limitations on Transactions with Affiliates. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions.
      In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a savings institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the savings institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings institution. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a savings institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At December 31, 2005, the Bank was in compliance with the above restrictions.
      Restrictions on Acquisitions. Except under limited circumstances, savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of the OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Except with the prior approval of the Director, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company’s stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company.
      The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office located in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act (“FDIA”); or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by the state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions).
      Federal Securities Laws. The Holding Company’s common stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Holding Company is subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements under the Exchange Act.

35


Table of Contents

The Bank
      General. The Bank is subject to extensive regulation and examination by the Department, as its chartering authority, and by the FDIC, as the insurer of its deposits, and is subject to certain requirements established by the OTS as a result of the Holding Company’s status as a registered savings and loan holding company. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The Bank must file reports with the Department and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as establishing branches and mergers with, or acquisitions of, other depository institutions. There are periodic examinations by the Department and the FDIC to test the Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive 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 regulation, whether by the Department, the FDIC or as a result of the enactment of legislation, could have a material adverse impact on the Company, the Bank and their operations.
      Capital Requirements. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks which, like the Bank, are not members of the Federal Reserve System.
      The FDIC’s capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC’s regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain mortgage servicing rights.
      The FDIC also requires that savings banks meet a risk-based capital standard. The risk-based capital standard for savings banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier II) capital) to risk-weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At December 31, 2005, the Bank exceeded each of its regulatory capital requirements. See Note 23 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      Activities and Investments of New York-Chartered Savings Banks. The Bank derives its lending, investment and other authority primarily from the applicable provisions of New York Banking Law and the regulations of the Department, as limited by FDIC regulations and other federal laws and regulations. See “ — Activities and Investments of FDIC Insured State — Chartered Banks.” These New York laws and regulations authorize savings banks, including the Bank, to invest in real estate mortgages, consumer and commercial loans,

36


Table of Contents

certain types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain other assets. Under the statutory authority for investing in equity securities, a savings bank may directly invest up to 7.5% of its assets in certain corporate stock and may also invest up to 7.5% of its assets in certain mutual fund securities. Investment in stock of a single corporation is limited to the lesser of 2% of the outstanding stock of such corporation or 1% of the savings bank’s assets, except as set forth below. Such equity securities must meet certain tests of financial performance. A savings bank’s lending powers are not subject to percentage of asset limitations, although there are limits applicable to single borrowers. A savings bank may also, pursuant to the “leeway” authority, make investments not otherwise permitted under the New York Banking Law. This authority permits investments in otherwise impermissible investments of up to 1% of the savings bank’s assets in any single investment, subject to certain restrictions and to an aggregate limit for all such investments of up to 5% of assets. Additionally, in lieu of investing in such securities in accordance with the reliance upon the specific investment authority set forth in the New York Banking Law, savings banks are authorized to elect to invest under a “prudent person” standard in a wider range of debt and equity securities as compared to the types of investments permissible under such specific investment authority. However, in the event a savings bank elects to utilize the “prudent person” standard, it will be unable to avail itself of the other provisions of the New York Banking Law and regulations which set forth specific investment authority. A New York-chartered stock savings bank may also exercise trust powers upon approval of the Department.
      Under New York Banking Law, the Department has the authority to maintain the power of state-chartered banks reciprocal with those of a national bank.
      New York-chartered savings banks may also invest in subsidiaries under their service corporation investment power. A savings bank may use this power to invest in corporations that engage in various activities authorized for savings banks, plus any additional activities which may be authorized by the Department. Investment by a savings bank in the stock, capital notes and debentures of its service corporations is limited to 3% of the savings bank’s assets, and such investments, together with the savings bank’s loans to its service corporations, may not exceed 10% of the savings bank’s assets.
      With certain limited exceptions, a New York-chartered savings bank may not make loans or extend credit for commercial, corporate or business purposes (including lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of the bank’s net worth. The Bank currently complies with all applicable loans-to-one-borrower limitations.
      Activities and Investments of FDIC-Insured State-Chartered Banks. The activities and equity investments of FDIC-insured, state-chartered banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an FDIC-insured state-chartered bank may not directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements.
      Also excluded from the foregoing proscription is the investment by a state-chartered, FDIC-insured bank in common and preferred stock listed on a national securities exchange and in shares of an investment company registered under the Investment Company Act of 1940. In order to qualify for the exception, a state-chartered FDIC-insured bank must (i) have held such types of investments during

37


Table of Contents

the 14-month period from September 30, 1990 through November 26, 1991, (ii) be chartered in a state that authorized such investments as of September 30, 1991 and (iii) file a one-time notice with the FDIC in the required form and receive FDIC approval of such notice. In addition, the total investment permitted under the exception may not exceed 100% of the bank’s tier one capital as calculated under FDIC regulations. The Bank received FDIC approval of its notice to engage in this investment activity on February 26, 1993. As of December 31, 2005, the book value of the Bank’s investments under this exception was $11.9 million, which equaled 1.01% of its Tier I capital. Such grandfathering authority is subject to termination upon the FDIC’s determination that such investments pose a safety and soundness risk to the Bank or in the event the Bank converts its charter or undergoes a change in control.
      Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
      Under the New York Banking Law, the Department may issue an order to a New York-chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the Department that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Department to discontinue such practices, such director, trustee or officer may be removed from office by the Department after notice and an opportunity to be heard. The Bank does not know of any past or current practice, condition or violation that might lead to any proceeding by the Department against the Bank or any of its directors or officers. The Department also may take possession of a banking organization under specified statutory criteria.
      Prompt Corrective Action. Section 38 of the FDIA provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Under regulations adopted by the federal banking regulators, an institution shall be deemed to be (i) “well capitalized” if it has total risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure, (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized,” (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances), (iv) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0% and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The regulations also provide that a federal banking regulator may, after notice and an opportunity for a hearing, reclassify a “well capitalized” institution as “adequately capitalized” and may require an “adequately capitalized” institution or an “undercapitalized” institution to comply with supervisory actions as if it were in the next lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. The federal banking regulator may not, however, reclassify a “significantly undercapitalized” institution as “critically undercapitalized.”
      An institution generally must file a written capital restoration plan which meets specified requirements, as well as a performance guaranty by each company that controls the institution, with an appropriate federal banking regulator within 45 days of the date that the institution receives notice or is

38


Table of Contents

deemed to have notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Immediately upon becoming undercapitalized, an institution becomes subject to statutory provisions which, among other things, set forth various mandatory and discretionary restrictions on the operations of such an institution.
      As December 31, 2005, the Bank had capital levels which qualified it as a “well-capitalized” institution. See Note 23 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      FDIC Insurance Premiums. The Bank is a member of the Bank Insurance Fund (“BIF”) administered by the FDIC. The Bank also has accounts insured by the Savings Association Insurance Fund (“SAIF”) as a result of certain acquisitions and branch purchases involving SAIF-insured deposits. Such SAIF-insured deposits amounted to $3.37 billion as of December 31, 2005. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity that the FDIC determines by regulation or order poses a serious threat to the FDIC.
      The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which would result in termination of the Bank’s deposit insurance.
      Since January 1, 2000, all FDIC-insured institutions are assessed the same rate for their BIF and SAIF assessable deposits to fund the Financing Corporation. Based upon the $8.38 billion of BIF-assessable deposits and $3.37 billion of SAIF-assessable deposits at December 31, 2005, the Bank expects to pay approximately $388,000 in insurance premiums per quarter during calendar 2006.
      On February 8, 2006, the President signed into law legislation that merges the BIF and the SAIF, eliminates any disparities in bank and thrift risk-based premium assessments, reduces the administrative burden of maintaining and operating two separate funds and establishes certain new insurance coverage limits and a mechanism for possible periodic increases. The legislation also gives the FDIC greater discretion to identify the relative risks all institutions present to the deposit insurance fund and set risk-based premiums.
      Major provisions in the legislation include:
  •  Maintaining basic deposit and municipal account insurance coverage at $100,000 but providing for a new basic insurance coverage for retirement accounts of $250,000. Insurance coverage for basic deposit and retirement accounts could be increased for inflation every five years in $10,000 increments beginning in 2011.
 
  •  Providing the FDIC with the ability to set the designated reserve ratio within a range of between 1.15% and 1.50%, rather than maintaining 1.25% at all times regardless of prevailing economic conditions.
 
  •  Providing a one-time assessment credit of $4.7 billion to banks and savings associations in existence on December 31, 1996. The institutions qualifying for the credit may use it to offset future premiums with certain limitations.
 
  •  Requiring the payment of dividends of 100% of the amount that the insurance fund exceeds 1.5% of the estimated insured deposits and the payment of 50% of the amount that the insurance fund exceeds 1.35% of the estimated insured deposits. (when the reserve is greater than 1.35% but no more than 1.5%).
 
  •  The merger of the SAIF and BIF must occur no later than July 1, 2006. Other provisions will become effective within 90 days of the publication date of the final FDIC regulations implementing the legislation.
      Brokered Deposits. The FDIA restricts the use of brokered deposits by certain depository

39


Table of Contents

institutions. Under the FDIA and applicable regulations, (i) a “well capitalized insured depository institution” may solicit and accept, renew or roll over any brokered deposit without restriction, (ii) an “adequately capitalized insured depository institution” may not accept, renew or roll over any brokered deposit unless it has applied for and been granted a waiver of this prohibition by the FDIC and (iii) an “undercapitalized insured depository institution” may not (x) accept, renew or roll over any brokered deposit or (y) solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution’s normal market area or in the market area in which such deposits are being solicited. The term “undercapitalized insured depository institution” is defined to mean any insured depository institution that fails to meet the minimum regulatory capital requirement prescribed by its appropriate federal banking agency. The FDIC may, on a case-by-case basis and upon application by an adequately capitalized insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does not constitute an unsafe or unsound practice with respect to such institution. The Company had $677.0 million of brokered certificates of deposit and $482.3 million of brokered money market accounts outstanding at December 31, 2005 compared to $33.0 million of outstanding brokered certificates of deposit at December 31, 2004. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Deposits” set forth in Item 7 hereof.
      Community Investment and Consumer Protection Laws. In connection with its lending activities, the Bank is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the federal Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and the CRA.
      The CRA requires insured institutions to define the communities that they serve, identify the credit needs of those communities and adopt and implement a “Community Reinvestment Act Statement” pursuant to which they offer credit products and take other actions that respond to the credit needs of the community. The responsible federal banking regulator (in the case of the Bank, the FDIC) must conduct regular CRA examinations of insured financial institutions and assign to them a CRA rating of “outstanding,” “satisfactory,” “needs improvement” or “unsatisfactory.” The Bank’s latest federal CRA rating based upon its last examination is “satisfactory.”
      The Company is also subject to provisions of the New York Banking Law which impose continuing and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community (“NYCRA”), which are similar to those imposed by the CRA. The NYCRA requires the Department to make an annual written assessment of a bank’s compliance with the NYCRA, utilizing a four-tiered rating system, and make such assessment available to the public. The NYCRA also requires the Department to consider a bank’s NYCRA rating when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of any such application. The Bank’s latest NYCRA rating received from the Department based upon its last examination is “satisfactory.”
      Limitations on Dividends. The Holding Company is a legal entity separate and distinct from the Bank. The Holding Company’s principal source of revenue consists of dividends from the Bank. The payment of dividends by the Bank is subject to various regulatory requirements including a requirement, as a result of the Holding Company’s savings and loan holding company status, that the Bank notify the Director of the OTS not less than 30 days in advance of any proposed declaration by its directors of a dividend.
      Under New York Banking Law, a New York-chartered stock savings bank may declare and pay dividends out of its net profits, unless there is an impairment of capital, but approval of the Department is required if the total of all dividends declared in a calendar year would exceed the total of its net profits for that year combined with its net profits of the preceding two years, subject to certain adjustments.
      During 2005, the Bank funded an aggregate of $80.0 million which had been approved in prior years. During 2004, as part of the SIB transaction, the Bank requested and received approval from

40


Table of Contents

the Department and notified the OTS of the distribution to the Company of an aggregate $400.0 million. The Bank declared and funded $370.0 million to pay the cash portion of the merger consideration paid in the transaction. The remaining $30.0 million was declared and funded in 2005. During 2003, the Bank requested and received approval of the distribution to the Company of an aggregate of $100.0 million. The Bank declared $75.0 million and funded $50.0 million during 2003 and $25.0 million in 2005. The Bank declared and funded the remaining $25.0 million during 2005. The distributions, other than the one in 2004 used to fund the cash portion of the consideration paid in the SIB transaction, were primarily used by the Company to fund the Company’s open market stock repurchase programs and dividends.
      Miscellaneous. The Bank is subject to certain restrictions on loans to the Holding Company or its non-bank subsidiaries, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company or its non-bank subsidiaries. The Bank also is subject to certain restrictions on most types of transactions with the Holding Company or its non-bank subsidiaries, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms.
      Federal Home Loan Bank System. The Bank is a member of the FHLB of New York, which is one of 12 regional FHLBs that administers the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. The Bank had $3.12 billion of FHLB borrowings outstanding at December 31, 2005.
      As an FHLB member, the Bank is required to purchase and maintain stock in the FHLB of New York in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of its advances from the FHLB of New York, whichever is greater. At December 31, 2005, the Bank had approximately $167.3 million in FHLB stock, which resulted in its compliance with this requirement.
      The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low-and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid in the past and could continue to do so in the future. These contributions also could have an adverse effect on the value of FHLB stock in the future.
      Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts and personal and business demand deposits) and non-personal time deposits. As of December 31, 2005, the Bank was in compliance with applicable requirements. However, because required reserves must be maintained in the form of vault cash or a non-interest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce an institution’s earning assets.
Sarbanes-Oxley Act of 2002
      On July 30, 2002, the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting fraud was signed into law. In addition to the establishment of a new accounting oversight board (the Public Company Accounting Oversight Board) which enforces auditing, quality control and independence standards and is funded by fees from all publicly traded companies, the Act restricts the provision of both auditing and consulting services by accounting firms. To ensure auditor independence, any non-audit services being provided to an audit client are required to be pre-approved by the Company’s audit committee members. In addition, the audit partners must be rotated. The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, counsel is required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if

41


Table of Contents

such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
      Longer prison terms were legislated for corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SEC as a result of any judicial or administrative action under the Act be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution (“FAIR”) provision also requires the SEC to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company’s securities within two business days of the change.
      The Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the Company’s “registered public accounting firm” (“RPAF”). Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is an “audit committee financial expert” (as such term is defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statement’s materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. The Act requires the RPAF that issues the audit report to attest to and report on management’s assessment of the company’s internal controls. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC.
      As a result of the Act, the SEC has promulgated numerous regulations implementing various provisions of the Act.
Taxation
     Federal Taxation
      General. The Company is subject to federal income taxation in the same general manner as other corporations with some exceptions discussed below.
      The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company. The Company’s federal income tax returns have been audited or closed without audit by the Internal Revenue Service through 2001.
      Taxable Distributions and Recapture. Prior to the Small Business Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should the Bank fail to meet certain thrift asset and definitional tests. New federal legislation eliminated those thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the Bank make certain non-dividend distributions or cease to maintain a bank charter.
      At December 31, 2005, the Bank’s total federal pre-1988 reserve was approximately $42.5 million. This reserve reflects the cumulative effects of federal tax deductions by the Company for which no Federal income tax provision has been made.

42


Table of Contents

      Corporate Dividends-Received Deduction. The Holding Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends-received deduction is 80% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received or accrued on their behalf.
     State and Local Taxation
      New York State and New York City Taxation. The Company and certain eligible and qualified subsidiaries report income on a combined calendar year basis to both New York State and New York City. New York State Franchise Tax on corporations is imposed in an amount equal to the greater of (a) 7.5% of “entire net income” allocable to New York State (b) 3% of “alternative entire net income” allocable to New York State (c) 0.01% of the average value of assets allocable to New York State or (d) nominal minimum tax. Entire net income is based on federal taxable income, subject to certain modifications. Alternative entire net income is equal to entire net income without certain modifications. The New York City Corporation Tax is imposed in an amount equal to the greater of 9% of “entire net income” allocable to New York City or similar alternative taxable methods and rates as New York State.
      A Metropolitan Transportation Business Tax Surcharge on Corporations doing business in the Metropolitan District has been applied since 1982. The Company transacts a significant portion of its business within this District and is subject to this surcharge. For the tax year ended December 31, 2005, the surcharge rate is 20.4% of New York State franchise tax liability.
      New York State enacted legislation in 1996, which among other things, decoupled the Federal and New York State tax laws regarding thrift bad debt deductions and permits the continued use of the bad debt reserve method under Section 593 of the Code. Thus, provided the Bank continues to satisfy certain definitional tests and other conditions, for New York State and City income tax purposes, the Bank is permitted to continue to use the special reserve method for bad debt deductions. The deductible annual addition to the state reserve may be computed using a specific formula based on the Bank’s loss history (“Experience Method”) or a statutory percentage equal to 32% of the Bank’s New York State or City taxable income (“Percentage Method”).
      If the Bank fails to meet certain thrift assets and definitional tests for New York State and New York City tax purposes, it would have to recapture into taxable income approximately $286.4 million of previously recognized bad debt deductions. As of December 31, 2005 no related deferred taxes have been recognized.
      New Jersey State Taxation. The Company and certain eligible and qualified subsidiaries report income on a separate company basis, as New Jersey Law does not permit consolidated return filing. The state of New Jersey imposes a tax on entire net income at a rate of 9% of allocated income on corporations.
      Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. The tax is imposed as a percentage of the capital base of the Company with an annual maximum of $165,000. The Holding Company pays the maximum franchise tax.

43


Table of Contents

ITEM 1A.      Risk Factors
       In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating the Company and its business because such factors may have a significant effect on its operating results and financial condition. As a result of the risk factors set forth below and the information presented elsewhere in this Annual Report on Form 10-K, actual results could differ materially from those included in any forward-looking statements.
If we Fail to Complete the Merger or the Closing of the Merger is Significantly Delayed, it may have an Adverse Impact on our Business
      As discussed above under “Item 1. — Business” on October 24, 2005, the Company entered into a merger agreement with Sovereign Bancorp, Inc. under which Sovereign will acquire the Company. The proposed merger is subject to the satisfaction of various closing conditions, including the approval from the Office of Thrift Supervision, and other conditions described in the Merger Agreement. We cannot assure you that these conditions will be satisfied or that the proposed merger will be successfully completed or completed without significant delay. In the event that the proposed merger is not completed or if the completion of the merger is significantly delayed: (i) Management’s attention from our day-to-day business may be diverted; (ii) we may lose key employees; (iii) our relationships with clients may be disrupted as a result of uncertainties with regard to our business and prospects; (iv) we may be involved in litigation or other adversarial proceedings relating to the merger or to Banco Santander’s proposed investment in Sovereign; and (v) the market price of shares of our common stock may decline to the extent that the current market price of those shares reflects an assumption by investors that the proposed merger will be completed.
      Any such events could adversely affect our stock price and harm our business and operating results.
Our Loan Portfolio Includes Commercial Real Estate, Commercial Business and Multi-Family Residential Loans Which Have a Generally Higher Risk of Loss Than Single-Family Residential Loans
      Over the past several years the Company has increased its investment in commercial real estate loans, commercial business loans and multi-family residential loans, both in terms of dollar amounts and as a percentage of our loan portfolio. Such loans generally have a higher inherent risk of loss than single-family residential mortgage or cooperative apartment loans because repayment of the loans or lines often depends on the successful operation of a business or the underlying property. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market and the local economy. In addition, our commercial real estate and multi-family residential loans have significantly larger average loan balances compared to our single-family residential mortgage and cooperative apartment loans. Our commercial real estate and commercial business loans aggregated $4.66 billion or 37.9% of the total loan portfolio at December 31, 2005. We continue to originate multi-family residential loans consistent with our historical involvement in such lending. Such loans totaled $4.74 billion or 38.6% of the total loan portfolio at December 31, 2005. In addition, we originate and sell multi-family residential loans to Fannie Mae under a special program. Under the terms of the sales program, we retain a portion of the associated credit risk. At December 31, 2005, our maximum potential loss exposure with respect to the $6.27 billion in loans sold under this program was $186.7 million.
Loan Origination Levels Could be Adversely Affected if Mortgage Broker Relationship Ceases
      In recent years, mortgage brokers have been the source of substantially all of the multi-family residential and commercial real estate loans originated by the Company. The loans originated by the Company resulting from referrals by Meridian Capital account for a significant portion of the Company’s total loan originations, including the majority of the loans originated for sale. The ability of the Company to continue to originate multi-family residential and commercial real estate loans at the levels experienced in recent years may be a function of, among other things, maintaining the

44


Table of Contents

level of referrals from Meridian Capital to the Company or increasing the number of referrals from other mortgage broker relationships.
Adverse Economic and Business Conditions in Our Market Area Could Cause an Increase in Loan Delinquencies and Non-performing Assets, Including Loan Charge-offs, Which in Turn May Negatively Affect the Company’s Income and Growth.
      Although the Company lends throughout the New York City metropolitan area, the substantial majority of its real estate loans are secured primarily by properties located in the boroughs of Brooklyn, Queens and Manhattan, Nassau County, Long Island, and the counties in northern and central New Jersey. Furthermore, at December 31, 2005, approximately 77% of our loan portfolio consists of commercial real estate, commercial business and multi-family residential loans. Such loans may be more sensitive to adverse changes in the local economy than single-family residential loans.
      The Company’s results of operation may be adversely affected by changes in prevailing economic conditions, particularly in the metropolitan New York area, including (i) decreases in real estate values; (ii) changes in interest rates which may cause a decrease in interest rate spreads; (iii) adverse employment conditions; (iv) the monetary and fiscal policies of the Federal government; (v) and other significant external events.
      These factors could adversely affect the Company’s results of operations and consequently its financial condition because borrowers may not be able to repay their loans, the value of collateral securing the Company’s loans to borrowers may decline and the quality of the loan portfolio may deteriorate. This could result in an increase in delinquencies and non-performing assets or require the Company to charge-off a percentage of its loans and/or increase the Company’s provisions for loan losses, which would reduce the Company’s earnings.
Competition With Other Financial Institutions Could Adversely Affect our Growth and Profitability
      The Company faces intense competition both in making loans and in attracting deposits. The Company competes primarily on the basis of its depository rates, the terms of the loans it originates and the quality of the Company’s financial and depository services. The New York City metropolitan area has a significant concentration of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources. Over the past 10 years, consolidation of the banking industry in the New York City metropolitan area has continued resulting in the Company having to face larger and increasingly efficient competitors.
      This competition has made it more difficult for the Company to make new loans as competitors have recently been offering loans with lower fixed rates and loans on more attractive terms than the Company has been willing to offer. In addition, the Company has at times offered higher deposit rates in its market area which also decreases net interest margin. The Company’s profitability depends upon its continued ability to successfully compete in its market area and lowering interest rates on loans and increasing rates paid on deposits in response to competitive pressure could decrease the Company’s net interest margin.
      The Company expects competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to market entry, enabled banks to expand their geographic reach by providing services over the Internet and enabled non-depository institutions to offer products and services that traditionally have been provided by banks. Recent changes in federal banking law permit affiliation under certain circumstances among banks, securities firms and insurance companies, which also may change the competitive environment in which the Company conducts business.
Rising Interest Rates Could Reduce our Net Income
      The Company’s ability to earn a profit depends primarily on its net interest income, which is the difference between the interest income on interest-earning assets, such as loans and investments, and interest expense on our interest-bearing liabilities, such as deposits and borrowings.
      The majority of the Company’s interest- earning assets generally bear fixed interest rates for a contractual period of time. However, the Company’s interest-bearing liabilities that fund the interest-earning assets generally have shorter

45


Table of Contents

contractual maturities or no stated maturities, such as core deposits. This imbalance can create significant earnings volatility, because market interest rates change over time. In addition, short-term and long-term interest rates do not necessarily change at the same time or at the same rate. During 2005, the FOMC of the Federal Reserve Board raised the federal funds rate (the rate at which banks borrow funds from one another) eight times, in 25 basis point increments to 4.25% during 2005 (and further raised it an additional 25 basis points to 4.50% in January 2006). While these short-term market rates (which are used as a guide to price the Bank’s deposits) have increased, longer term market interest rates (which are used as a guide to price the Bank’s longer term loans) have not. This flattening of the market yield curve has had a negative impact on net interest margin, and if the increase in short-term interest rates continues to outpace the increase in long-term rates, the Company would experience further compression on its net interest margin which would have a negative effect on the Company’s earnings.
      Changes in interest rates also affect the value of the Company’s interest-earning assets, and in particular the securities available-for-sale portfolio. Generally, the value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available-for-sale are reported as a separate component of stockholders’ equity, net of tax. Decreases in the fair value of securities available-for-sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity.
Our Allowance for Loan Losses may be Inadequate, which Could Adversely Affect our Earnings
      The Company’s allowance for loan losses may not be sufficient to cover actual loan losses and if the Company is required to increase its allowance, earnings may be reduced in the period in which the allowance is increased. The Company has identified the evaluation of the allowance for loan losses as a critical accounting estimate where amounts are sensitive to material variation due to the large degree of judgment in (i) assigning individual loans to specific risk levels (pass, special mention, substandard, doubtful and loss); (ii) valuing the underlying collateral securing the loans; (iii) determining the appropriate reserve factor to be applied to specific risk levels for criticized and classified loans (special mention, substandard, doubtful and loss); and (iv) determining reserve factors to be applied to pass loans based upon loan type. To the extent that loans change risk levels, collateral values change or reserve factors change, the Company may need to adjust its provision for loan losses which would impact earnings.
      Management believes the allowance for loan losses at December 31, 2005 was at a level to cover the known and inherent losses in the portfolio that were both probable and reasonable to estimate. In the future, management may adjust the level of its allowance for loan losses as economic and other conditions dictate. In addition, the FDIC and the Department as an integral part of their examination process periodically review the Company’s allowance for possible loan losses. Such agencies may require the Company to adjust the allowance based upon their judgment.
Our Ability to Pay Dividends is Restricted
      Although the Holding Company has been paying regular quarterly dividends since 1998, its ability to pay dividends to stockholders depends to a large extent upon the dividends the Holding Company receives from the Bank. Dividends paid by the Bank are subject to restrictions under various federal and state banking laws. In addition, the Bank must maintain certain capital levels, which may restrict the ability of the Bank to pay dividends to the Holding Company. The Bank’s regulators have the authority to prohibit the Bank or the Company from engaging in unsafe or unsound practices in conducting its business. As a consequence, bank regulators could deem the payment of dividends by the Bank to be an unsafe or unsound practice, depending on the Bank’s financial condition or otherwise, and prohibit such payments. If the Bank were unable to pay dividends to the Holding Company, the Board of Directors might cease paying or reduce the rate or frequency at which the Company pays dividends to stockholders.
Our Stock Value May Suffer from Anti-Takeover Provisions That May Impede Potential Takeovers Other than the Pending Merger with Sovereign
      Provisions in our corporate documents and in Delaware corporate law, as well as certain federal regulations and certain contractual restrictions in our merger agreement with Sovereign, may make it

46


Table of Contents

difficult and expensive to pursue a tender offer, change in control or takeover attempt that the board of directors opposes. As a result, stockholders may not have an opportunity to participate in such a transaction, and the trading price of our stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. Anti-takeover provisions include: (i) limitation on the acquisition of more than 10% of the issued and outstanding shares of common stock; (ii) limitations on voting rights; (iii) the election of members of the board of directors to staggered three-year terms; (iv) the absence of cumulative voting by stockholders in the election of directors; (v) provisions governing nominations of directors by stockholders; (vi) provisions governing the submission of stockholder proposals; (vii) provisions prohibiting the calling of special meetings of stockholders except by the board of directors; (viii) our ability to issue preferred stock and additional shares of common stock without stockholder approval; (ix) super-majority voting provisions for the approval of certain business combinations; and (x) super-majority voting provisions to amend our corporate documents.
      These provisions also will make it more difficult for an outsider to remove the current board of directors or management and may discourage potential proxy contests and other potential takeover attempts other than the pending merger with Sovereign.
We are Subject to Extensive Governmental Regulation Which May Affect our Operations
      The Company and the Bank are subject to extensive federal and state governmental supervision and regulation, which are intended primarily for the protection of depositors. The Company and the Bank are also subject to various laws and regulations which impose restrictions and requirements on our operations. Laws, regulations and policies adopted by federal or state authorities could significantly affect the Company’s business operations. The Company and Bank are also subject to periodic examination by federal and state banking regulators who may impose, among other things, restrictions on operations, which restrictions could substantially affect the implementation of our business plan. In addition, the Company and Bank are subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted but could adversely affect our business and operations in the future.
Changes in the Value of Goodwill Could Reduce our Earnings
      The Company is required, by generally accepted accounting principles, to test goodwill for impairment at least annually. Testing for impairment of goodwill involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. As of December 31, 2005, if the $1.19 billion of goodwill reflected as an asset of the Company was deemed fully impaired and the Company was required to charge-off all of its goodwill, the pro forma reduction to stockholders’ equity would be approximately $14.40 per share.
ITEM 1B.      Unresolved Staff Comments
       None.

47


Table of Contents

ITEM 2.      Properties
       The Company’s executive and administrative offices are located at 195 Montague Street, Brooklyn, New York. The Company owns the space it occupies in this facility. At December 31, 2005, the Company maintained 126 branches of which 39 were owned and 87 were leased under various lease agreements expiring at various times through 2098. The Company is also obligated under various other leases for facilities to support its private banking/ wealth management group and the expansion of its commercial real estate lending activities out of the New York metropolitan area. Additional information regarding properties and lease commitments are included in Notes 8 and 20 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof. The Company believes that its facilities are adequate to meet its present and currently foreseeable needs.
ITEM 3.      Legal Proceedings
       The Company is involved in routine legal proceedings occurring in the ordinary course of business which in the opinion of management, in the aggregate, will not have a material adverse effect on the consolidated financial condition and results of operations of the Company.
      On November 4, 2005, a putative class action complaint was filed on behalf of the Holding Company’s stockholders in the Court of Chancery of the State of Delaware against the Holding Company, the members of the Company’s board of directors and Sovereign in connection with the proposed merger of the Company with Sovereign. The complaint alleges, among other things, that the directors of the Holding Company breached their fiduciary duties of due care and good faith by failing to conduct an adequate auction process or market check of the Company’s value and failing to maximize stockholder value; creating deterrents to third party offers (including by agreeing to a termination fee to Sovereign in certain circumstances under the merger agreement); and breaching their duty of loyalty by continuing in office and receiving fees following the merger. The complaint also names Sovereign as a defendant and alleges that Sovereign aided and abetted the breaches by the Holding Company’s directors. Among other things, the complaint seeks class action status, a court order enjoining the consummation of the merger and directing the defendants to take appropriate steps to maximize stockholder value, unspecified damages and the payment of attorneys’ and experts’ fees. The lawsuit is in its preliminary stage. The Holding Company believes that the claims in the lawsuit are without merit and intends to vigorously defend it.
ITEM 4.      Submission of Matters to a Vote of Security Holders
       None.

48


Table of Contents

PART II
ITEM 5.       Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
       The common stock trades on the Nasdaq National Market System under the symbol “ICBC”. As of December 31, 2005, there were 82,332,449 shares of common stock outstanding.
      Effective July 1, 2004, the Company’s Certificate of Incorporation was amended to increase the amount of authorized common stock the Company may issue from 125 million shares to 250 million shares. The Company’s stockholders approved and authorized such amendment at the annual meeting of stockholders held on June 24, 2004.
      As of February 28, 2006 the Holding Company had 16,761 stockholders of record not including the number of persons or entities holding stock in nominee or street name through various brokers and banks.
      The following table sets forth the high and low closing stock prices of the Holding Company’s common stock as reported by the Nasdaq National Market System. Price information appears in major newspapers under the symbols “IndepCmntyBk” or “IndpCm”.
                                 
    Year Ended   Year Ended
    December 31, 2005   December 31, 2004
         
    High   Low   High   Low
 
First Quarter
  $ 41.98     $ 38.60     $ 41.41     $ 34.92  
Second Quarter
    39.21       35.34       40.93       35.24  
Third Quarter
    37.56       33.14       40.49       35.03  
Fourth Quarter
    40.10       30.92       43.18       36.95  
      The following table sets forth the high and low bid information of the Holding Company’s common stock as reported by the Nasdaq National Market System. Such bid information reflects inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
                                 
    Year Ended   Year Ended
    December 31, 2005   December 31, 2004
         
Bid   High   Low   High   Low
 
First Quarter
  $ 42.48     $ 38.25     $ 41.45     $ 34.70  
Second Quarter
    39.46       34.52       41.54       35.02  
Third Quarter
    37.73       32.93       40.65       34.82  
Fourth Quarter
    40.43       30.66       43.35       36.54  
      The following schedule summarizes the cash dividends per share of common stock paid by the Holding Company during the periods indicated. Dividends are paid quarterly.
                 
    Year Ended   Year Ended
    December 31, 2005   December 31, 2004
 
First Quarter
  $ 0.26     $ 0.22  
Second Quarter
    0.27       0.23  
Third Quarter
    0.27       0.24  
Fourth Quarter
    0.27       0.25  
      The following schedule summarizes the total cash dividends paid by the Holding Company on its common stock during the periods indicated.
                 
    Year Ended   Year Ended
(In Thousands)   December 31, 2005   December 31, 2004
 
First Quarter
  $ 21,112     $ 11,159  
Second Quarter
    21,691       18,176  
Third Quarter
    21,507       19,222  
Fourth Quarter
    21,143       20,266  
      On January 25, 2006, the Board of Directors declared a quarterly cash dividend of $0.27 per share of Common Stock, payable on February 23, 2006, to stockholders of record at the close of business on February 9, 2006.
      See “Business-Regulation — The Bank — Limitations on Dividends” set forth in Item 1 hereof, “Liquidity and Commitments” set forth in Item 7 hereof and Notes 1 and 25 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof for discussions of the restrictions on the Holding Company’s ability to pay dividends.

49


Table of Contents

      The following table contains information about the Company’s purchases of its equity securities pursuant to its twelfth stock repurchase plan during the quarter ended December 31, 2005.
                                 
            Total Number    
            of Shares   Maximum Number
            Purchased as   of Remaining
    Total Number   Average Price   Part of a   Shares that May Be
    of Shares   Paid per   Publicly   Purchased Under
Period   Purchased   Share   Announced Plan   the Plan
 
October 1 — October 31, 2005
        $             3,536,027  
November 1 — November 30, 2005
                      3,536,027  
December 1 — December 31, 2005
                      3,536,027  
                         
Total
        $                
                         
      On July 24, 2003 the Company announced that its Board of Directors authorized the eleventh stock repurchase plan for up to three million shares of the Company’s outstanding common shares. The Company completed its eleventh stock repurchase program on August 12, 2005 for an aggregate cost of $111.0 million at an average price of $37.00.
      On May 27, 2005, the Company announced that its Board of Directors authorized the twelfth stock repurchase plan for up to five million shares of the Company’s outstanding common shares subject to completion of the eleventh stock repurchase program. The Company completed its eleventh stock repurchase plan and commenced its twelfth stock repurchase program on August 12, 2005. As of December 31, 2005, 1,463,973 shares had been repurchased pursuant to the Company’s twelfth repurchase program at an average cost of $34.32 per share. The Company suspended its twelfth repurchase program as a result of entering into the Agreement and Plan of Merger among the Company, Sovereign and Iceland Acquisition Corp. dated as of October 24, 2005. See “Business — Independence Community Bank Corp.” set forth in Item 1 hereof and Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof for additional information of the Agreement and Plan of Merger.
      See Item 12 hereto for information regarding the Company’s equity plans required by Item 201(d) of Regulation S-K.

50


Table of Contents

ITEM 6.      Selected Financial Data
                                         
    At December 31,
     
(In Thousands)   2005   2004   2003   2002   2001
 
Selected Financial Condition Data:
                                       
Total assets
  $ 19,083,120     $ 17,753,479     $ 9,546,607     $ 8,023,643     $ 7,624,798  
Cash and cash equivalents
    1,079,182       360,877       172,028       199,057       207,633  
Investment securities available-for-sale
    418,911       454,305       296,945       224,908       125,803  
Mortgage-related securities available-for-sale
    3,155,589       3,479,482       2,211,755       1,038,742       902,191  
Loans available-for-sale
    22,072       96,671       5,922       114,379       3,696  
Loans receivable, net
    12,198,903       11,147,157       6,092,728       5,736,826       5,796,196  
Goodwill(1)
    1,185,566       1,155,572       185,161       185,161       185,161  
Identifiable intangible assets, net
    67,676       79,056       190       2,046       8,981  
Deposits
    10,945,283       9,305,064       5,304,097       4,940,060       4,794,775  
Borrowings
    4,956,729       5,511,972       2,916,300       1,931,550       1,682,788  
Subordinated notes
    397,260       396,332       148,429              
Senior notes
    247,986                          
Total stockholders’ equity
    2,285,780       2,304,043       991,111       920,268       880,533  
                                         
                    For the Nine
                    Months
        Ended
    For the Year Ended December 31,   December 31,
         
(Dollars In Thousands, Except Per Share Data)   2005   2004   2003   2002   2001
 
Selected Operating Data:
                                       
Interest income
  $ 837,579     $ 689,408     $ 440,120     $ 485,503     $ 362,206  
Interest expense
    338,714       213,915       147,375       175,579       172,626  
                               
Net interest income
    498,865       475,493       292,745       309,924       189,580  
                               
Provision for loan losses
          2,000       3,500       8,000       7,875  
                               
Net interest income after provision for loan losses
    498,865       473,493       289,245       301,924       181,705  
Net gain (loss) on loans and securities
    6,791       (8,535 )     765       557       2,850  
Other non-interest income
    118,089       130,044       111,974       74,561       41,623  
Amortization of intangible assets
    11,380       8,268       1,855       6,971       5,761  
Other non-interest expense
    286,453       262,807       186,948       178,084       109,880  
                               
Income before provision for income taxes
    325,912       323,927       213,181       191,987       110,537  
Provision for income taxes
    112,440       111,755       76,211       69,585       40,899  
                               
Net income
  $ 213,472     $ 212,172     $ 136,970     $ 122,402     $ 69,638  
                               
Basic earnings per share
  $ 2.70     $ 2.96     $ 2.74     $ 2.37     $ 1.33  
                               
Diluted earnings per share
  $ 2.62     $ 2.84     $ 2.60     $ 2.24     $ 1.27  
                               
(footnotes on next page)

51


Table of Contents

                                         
                    At or For the
                    Nine Months
        Ended
    At or For the Year Ended December 31,   December 31,
         
(Dollars In Thousands, Except Per Share Data)   2005   2004   2003   2002   2001(2)
 
Key Operating Ratios and Other Data:
                                       
Performance Ratios:(3)
                                       
Return on average assets
    1.18 %     1.37 %     1.58 %     1.56 %     1.27 %
Return on average equity
    9.31       11.31       14.60       13.56       11.01  
Return on average tangible assets
    1.27       1.46       1.61       1.59       1.30  
Return on average tangible equity
    20.63       21.79       18.20       17.19       14.38  
Average interest-earning assets to average interest-bearing liabilities
    102.03       102.17       105.10       106.51       106.55  
Interest rate spread(4)
    3.09       3.43       3.58       4.08       3.55  
Net interest margin(4)
    3.13       3.46       3.68       4.23       3.77  
Non-interest expense to average assets
    1.65       1.75       2.18       2.34       2.10  
Efficiency ratio(5)
    46.43       43.40       46.19       46.32       47.53  
Dividend payout ratio(6)
    40.84       33.10       26.15       22.32       21.26  
Cash dividends declared per common share
  $ 1.07     $ 0.94     $ 0.68     $ 0.50     $ 0.27  
Asset Quality Ratios:
                                       
Non-performing loans as a percent of total loans at end of period
    0.30 %     0.44 %     0.59 %     0.72 %     0.78 %
Non-performing assets to total assets at end of period(7)
    0.20       0.29       0.38       0.52       0.61  
Allowance for loan losses to non-performing loans at end of period
    273.25       205.84       217.32       193.57       170.01  
Allowance for loan losses to total loans at end of period
    0.82       0.90       1.29       1.38       1.33  
Capital and Other Information:(3)
                                       
Book value per share
  $ 27.76     $ 27.13     $ 18.19     $ 16.36     $ 15.08  
Tangible book value per share
    12.54       12.59       14.79       13.03       11.76  
Equity to assets at end of period
    11.98 %     12.98 %     10.38 %     11.47 %     11.54 %
Leverage capital(8)
    6.98       5.51       8.14       8.73       8.60  
Total capital to risk-weighted assets at end of period(8)
    12.59       11.47       12.39       11.40       12.20  
Number of full-service offices at end of period
    125       122       84       73       69  
 
(1)  Represents the excess of cost over fair value of net assets acquired less identifiable intangible assets. See Note 9 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
 
(2)  Where applicable, ratios have been annualized.
 
(3)  With the exception of end of period ratios and the efficiency ratio, all ratios are based on average daily balances during the respective periods.
 
(4)  Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities; net interest margin represents net interest income as a percentage of average interest-earning assets.
 
(5)  Reflects adjusted operating expense (net of amortization of goodwill and identifiable intangible assets) as a percent of the aggregate of net interest income and adjusted non-interest income (excluding gains and losses on loans and securities). Amortization of identifiable intangible assets is excluded from the calculation since it is a non-cash expense and gains and losses on loans and securities are excluded since they are generally considered by the Company’s management to be non-recurring in nature. The operating efficiency ratio is not a financial measurement required by generally accepted accounting principles in the United States of America. However, the Company believes such information is useful to investors in evaluating the Company’s operations. The ratio would have been 47.75% for the year ended December 31, 2005 if the adjustments noted above were not made.
 
(6)  Represents cash dividends declared per common share as a percent of diluted earnings per share.
 
(7)  Non-performing assets consist of non-accrual loans, loans past due 90 days or more as to interest or principal repayment and accruing and real estate acquired through foreclosure or by deed-in-lieu therefore.
 
(8)  Ratios reflect the capital position of the Bank only.

52


Table of Contents

ITEM 7.       Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
      The Company’s results of operations continue to depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, which principally consist of loans, mortgage-related securities and investment securities, and interest expense on interest-bearing liabilities, which consist of deposits and borrowings (including subordinated and senior notes). Net interest income is determined by the Company’s interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.
      The Company’s results of operations also are affected by the amount of (a) the provision for loan losses resulting from management’s assessment of the level of the allowance for loan losses, (b) its non-interest income, including service fees and related income, mortgage-banking activities and gains and losses from the sales of loans and securities, (c) its non-interest expense, including compensation and employee benefits, occupancy expense, data processing services, amortization of intangibles and (d) income tax expense.
      The Bank is a community-oriented bank, which emphasizes customer service and convenience. As part of this strategy, the Bank offers products and services designed to meet the needs of its retail and commercial customers. The Company generally has sought to achieve long-term financial strength and stability by increasing the amount and stability of its net interest income and non-interest income combined with maintaining a high level of asset quality. In pursuit of these goals, the Company has adopted a business strategy of controlled growth, emphasizing the origination of commercial real estate and multi-family residential loans, commercial business loans, mortgage warehouse lines of credit and retail and commercial deposit products, while maintaining asset quality and stable liquidity levels.
Business Strategy
      Controlled growth. In recent years, the Company has sought to increase its assets and expand its operations through internal growth as well as through acquisitions.
      On October 24, 2005, the Company, Sovereign and Iceland Acquisition Corp. (“Merger Sub”) a wholly owned subsidiary of Sovereign, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Subject to the terms and conditions of the Merger Agreement, which has been approved by the Boards of Directors of all parties and by the stockholders of the Holding Company, Merger Sub will be merged with and into the Company (the “Merger”). Upon effectiveness of the Merger, each outstanding share of common stock of the Company other than shares owned by the Company (other than in a fiduciary capacity), Sovereign or their subsidiaries and other than dissenting shares will be converted into the right to receive $42 per share in cash and the Holding Company will become a subsidiary of Sovereign. See “Business-Independence Community Bank Corp.” in Item 1 hereof and Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      During the year ended December 31, 2005, the Company opened seven de novo branches while it opened six de novo branches during the year ended December 31, 2004. In addition, during 2003, the Company opened one branch facility in Maryland as a result of the expansion of the Company’s commercial real estate lending activities to the Baltimore-Washington area. During the first quarter of 2006 the Company opened one branch in Manhattan, New York, which brings the total to 127 banking offices. In addition, the Company currently expects to expand its branch network through the opening of approximately two additional banking locations during the remainder of calendar 2006.
      The Company’s assets increased by $1.33 billion, or 7.5%, from $17.75 billion at December 31, 2004 to $19.08 billion at December 31, 2005 resulting primarily from internal growth of the Company’s loan portfolio and a temporary build-up in liquidity by increasing cash and cash equivalents. The increases were primarily funded through the increase in deposits.
      The Company has selectively used acquisitions in the past as a means to expand its footprint and operations. The Company completed its acquisition of SIB and the merger of SIB’s wholly owned subsidiary, SI Bank, with and into the Bank on April 12, 2004. SIB had $7.15 billion in total assets effective the close of business on April 12, 2004.

53


Table of Contents

SI Bank, a full service federally chartered savings bank, operated 17 full service branch offices on Staten Island, three full service branch offices in Brooklyn, and a total of 15 full service branch offices in New Jersey. See Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      In addition to the opportunity to enhance stockholder value, the acquisition presented the Company with a number of strategic opportunities and benefits that assisted its growth as a leading community-oriented financial institution. The opportunities included expanding the Company’s asset generation capabilities through use of SIB’s strong core deposit funding base; increasing deposit market share in the Company’s core New York City metropolitan area market and strengthening its balance sheet.
      The Company completed its acquisition of Broad, which had $646.3 million in assets, effective the close of business on July 31, 1999 and its acquisition of Statewide Financial Corp. (“Statewide”), which had $745.2 million in assets, effective the close of business on January 7, 2000. The Company also completed several other smaller whole bank and branch acquisitions in earlier periods.
      Emphasis on Commercial Real Estate, Commercial Business and Multi-family Lending. Since 1999, the Company has focused on expanding its higher yielding loan portfolios as compared to single-family mortgage loans, including portfolios of fixed and variable-rate commercial real estate loans, commercial business loans and mortgage warehouse lines of credit. Although the Company has deemphasized the origination of single-family residential loans over the past few years, the Company experienced a significant increase in its single-family residential portfolio during 2004 of approximately $2.21 billion as a result of the SIB transaction. Given the concentration of multi-family housing units in the New York City metropolitan area, as well as the Company’s commitment to remain a leader in the multi-family loan market, the Company continues to emphasize the origination (both for portfolio and for sale) of loans secured by first liens on multi-family residential properties, which consist primarily of mortgage loans secured by apartment buildings. In addition to continuing to generate mortgage loans secured by multi-family and commercial real estate, the Company also commenced a strategy in the fourth quarter of 2000 to originate and sell multi-family residential mortgage loans in the secondary market to Fannie Mae while retaining servicing in order to further the Company’s ongoing strategic objective of increasing non-interest income related to lending and servicing revenue.
      During the year ended December 31, 2005, the Company originated for sale $1.18 billion and sold $1.57 billion of multi-family residential mortgage loans, of which $377.9 million were from the Company’s portfolio. See “Business-Lending Activities-Loan Originations, Purchases, Sales and Servicing”. In addition, to further expand its variable-rate loan portfolios, in November 2003, the Company purchased certain mortgage warehouse lines from The Provident Bank. The acquisition increased the mortgage warehouse line of credit portfolio by approximately $207.0 million in lines with $76.3 million in outstanding advances at the time of acquisition. At December 31, 2005, mortgage warehouse lines of credit totaled $1.28 billion with $453.5 million outstanding at such date.
      Commercial real estate, commercial business, multi-family residential loans and mortgage warehouse lines of credit all generally have a higher inherent risk of loss than single-family residential mortgage or cooperative apartment loans because repayment of the loans or lines often depends on the successful operation of a business or the underlying property. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market and the local economy. In addition, the Company’s commercial real estate and multi-family residential loans have significantly larger average loan balances compared to its single-family residential mortgage and cooperative apartment loans.
      The Company’s commercial real estate, commercial business and mortgage warehouse lines of credit portfolios comprised in the aggregate $5.12 billion, or 41.6% of its total loan portfolio at December 31, 2005 compared to $4.50 billion, or 40.1% at December 31, 2004. These portfolios as a percent of total loans at December 31, 2004 comprised a slightly smaller percentage of the portfolio than at December 31, 2005 due to the increase in the size of the single-family residential loan portfolio as a result of the SIB transaction in April 2004.
      Maintain Asset Quality. Management believes that maintaining high asset quality is key to achieving and sustaining long-term financial

54


Table of Contents

success. Accordingly, the Company has sought to maintain a high level of asset quality and moderate credit risk through its underwriting standards and by generally limiting its origination to loans secured by properties or collateral located in its market area. Non-performing assets as a percentage of total assets at December 31, 2005 amounted to 0.20% and the ratio of the allowance for loan losses to non-performing loans amounted to 273.3%, while at December 31, 2004, the percentages were 0.29% and 205.8%, respectively. Non-performing assets decreased $13.4 million or 25.8% to $38.4 million at December 31, 2005 compared to $51.8 million at December 31, 2004. The Company’s non-accrual loans decreased $15.3 million to $28.3 million at December 31, 2005 with the decrease being primarily related to commercial business loans, commercial real estate loans and single-family residential mortgage loans. Loans 90 days or more past maturity which continued to make payments on a basis consistent with the original repayment schedule increased by $3.1 million to $8.8 million at December 31, 2005.
      Stable Source of Liquidity. The Company purchases short-to medium-term investment securities and mortgage-related securities combining what management believes to be appropriate liquidity, yield and credit quality in order to achieve a managed and a reasonably predictable source of liquidity to meet loan demand as well as a stable source of interest income. These portfolios, which totaled in the aggregate $3.57 billion at December 31, 2005 compared to $3.93 billion at December 31, 2004, are comprised primarily of mortgage-related securities totaling $3.16 billion (of which $2.02 billion consists of CMOs and $1.14 billion consists of mortgage-backed securities), $95.4 million of corporate bonds, $227.7 million of obligations of the U.S. Government and federal agencies and $95.6 million of preferred securities. In accordance with the Company’s policy, securities purchased by the Company generally must be rated at least “investment grade” upon purchase.
      Emphasis on Retail Deposits and Customer Service. The Company, as a community-based financial institution, is largely dependent upon its growth and retention of competitively priced core deposits (consisting of all deposit accounts other than certificates of deposit) to provide a stable source of funding. The Company has retained many loyal customers over the years through a combination of quality service, customer convenience, an experienced staff and a commitment to the communities which it serves. Complementing the increased emphasis on expanding commercial and consumer relationships, lower costing core deposits increased $196.0 million or 2.8%, to $7.23 billion at December 31, 2005, as compared to December 31, 2004. This increase in core deposits reflects both the continued successful implementation of the Company’s business strategy of increasing core deposits, as well as the successful performance of the Company’s de novo branch program. However, core deposits decreased to 66.1% of total deposits at December 31, 2005 compared to 75.6% of total deposits at December 31, 2004 as a result of a $1.44 billion increase in certificates of deposit as the Company utilized certain certificates of deposit promotions (including brokered certificates of deposit) as an alternative funding source to reduce its dependence on higher costing wholesale borrowings.
Critical Accounting Estimates
      Note 1 of Notes to Consolidated Financial Statements in Item 8, “Financial Statements and Supplementary Data”, hereof contains a summary of the Company’s significant accounting policies. Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. The estimates with respect to the methodologies used to determine the allowance for loan losses, and judgments regarding goodwill and deferred tax assets are the Company’s most critical accounting estimates. Critical accounting estimates are significantly affected by management judgment and uncertainties and there is a likelihood that materially different amounts would be reported under different, but reasonably plausible, conditions or assumptions.
      The following is a description of the Company’s critical accounting estimates and an explanation of the methods and assumptions underlying their application. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the Company’s disclosure relating to it in this Management’s Discussion and Analysis.
      Allowance for Loan Losses. In assessing the level of the allowance for loan losses and the periodic provisions to the allowance charged to income, the Company considers the composition and

55


Table of Contents

outstanding balance of its loan portfolio, the growth or decline of loan balances within various segments of the overall portfolio, the state of the local (and to a certain degree, the national) economy as it may impact the performance of loans within different segments of the portfolio, the loss experience related to different segments or classes of loans, the type, size and geographic concentration of loans held by the Company, the level of past due and non-performing loans, the value of collateral securing loans, the level of classified loans and the number of loans requiring heightened management oversight. The continued shifting of the composition of the loan portfolio to be more commercial-bank like by increasing the balance of commercial real estate and business loans and mortgage warehouse lines of credit may increase the level of known and inherent losses in the Company’s loan portfolio.
      The Company has identified the evaluation of the allowance for loan losses as a critical accounting estimate where amounts are sensitive to material variation. The allowance for loan losses is considered a critical accounting estimate because there is a large degree of judgment in (i) assigning individual loans to specific risk levels (pass, special mention, substandard, doubtful and loss), (ii) valuing the underlying collateral securing the loans, (iii) determining the appropriate reserve factor to be applied to specific risk levels for criticized and classified loans (special mention, substandard, doubtful and loss) and (iv) determining reserve factors to be applied to pass loans based upon loan type. To the extent that loans change risk levels, collateral values change or reserve factors change, the Company may need to adjust its provision for loan losses which would impact earnings.
      Management believes the allowance for loan losses at December 31, 2005 was at a level to cover the known and inherent losses in the portfolio that were both probable and reasonable to estimate. In the future, management may adjust the level of its allowance for loan losses as economic and other conditions dictate. Management reviews the allowance for loan losses not less than quarterly.
      Goodwill. Effective April 1, 2001, the Company adopted SFAS No. 142, which resulted in discontinuing the amortization of goodwill. Under SFAS No. 142, goodwill is carried at its book value as of April 1, 2001 and any future impairment of goodwill will be recognized as non-interest expense in the period of impairment.
      The Company performs a goodwill impairment test on an annual basis. The Company did not recognize an impairment loss as a result of its annual impairment test effective October 1, 2005. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired while conversely, if the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired and the Company must measure the amount of impairment loss, if any.
      The fair value of an entity with goodwill may be determined by a combination of quoted market prices, a present value technique or multiples of earnings or revenue. Quoted market prices in active markets are considered to be the best evidence of fair value and are to be used as the basis for the measurement, if available. However, the market price of an individual equity security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit as a whole. The quoted market price of an individual equity security, therefore, need not be the sole measurement basis of the fair value of a reporting unit. A present value technique is another method with which to estimate the fair value of a group of net assets. If a present value technique is used to measure fair value, estimates of future cash flows used in that technique shall be consistent with the objective of measuring fair value. Those cash flow estimates shall incorporate assumptions that the marketplace participants would use in their estimates of fair value. If that information is not available without undue cost and effort, an entity may use its own assumptions. A third method of estimating the fair value of a reporting unit, is a valuation technique based on multiples of earnings or revenue.
      The Company currently uses a combination of quoted market prices of its publicly traded stock and multiples of earnings in its goodwill impairment test.
      The Company has identified the goodwill impairment test as a critical accounting estimate due to the various methods (quoted market price, present value technique or multiples of earnings or revenue) and judgment involved in determining the fair value of a reporting unit. A change in judgment could result in goodwill being considered impaired

56


Table of Contents

which would result in a charge to non-interest expense in the period of impairment.
      Deferred Tax Assets. The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws expected to be in effect when the differences are expected to reverse. The Company must assess the deferred tax assets and establish a valuation allowance where realization of a deferred asset is not considered “more likely than not.” The Company generally uses the expectation of future taxable income in evaluating the need for a valuation allowance. In management’s opinion, since the Company reported taxable income for Federal, state and local income tax purposes in each of the past two fiscal years in view of the Company’s previous, current and projected future earnings, such deferred tax assets are expected to be fully realized. Therefore the Company has not established a valuation allowance for deferred tax assets at December 31, 2005. See Note 22 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      The Company has identified the valuation of deferred tax assets as a critical accounting estimate due to the judgment involved in projecting future taxable income, determining when differences are expected to be reversed and establishing a valuation allowance. Changes in management’s judgments and estimates may have an impact on the Company’s net income.
Changes in Financial Condition
      Total assets increased by $1.33 billion, or 7.5%, from $17.75 billion at December 31, 2004 to $19.08 billion at December 31, 2005 resulting primarily from the internal growth of the Company’s loan portfolio. The Company’s loan portfolio in the aggregate grew by $1.05 billion and cash and cash equivalents increased by $718.3 million during the year ended December 31, 2005, the effect of which was partially offset by a $359.3 million decrease in the securities available-for-sale portfolio during the year ended December 31, 2005.
      The growth was funded through the increase of $1.64 billion in deposits and by replacing $359.3 million of investment securities with higher yielding loans. The increase in deposits was also used to reduce the Company’s dependence on higher costing wholesale borrowings. Borrowings decreased $555.2 million (excluding subordinated debt and the issuance of senior notes discussed below) during the year ended December 31, 2005.
      Cash and Cash Equivalents. Cash and cash equivalents increased from $360.9 million at December 31, 2004 to $1.08 billion at December 31, 2005. The $718.3 million increase in cash and cash equivalents was primarily due to a temporary build-up of liquidity at the end of the fourth quarter that was used to pay down borrowings in early 2006. The increase was partially offset by the redeployment of funds into other interest-earning assets as well as to purchase shares pursuant to the Company’s twelfth stock repurchase program. The Company suspended its twelfth repurchase program as a result of its entering into the Agreement and Plan of Merger among the Company, Sovereign Bancorp, Inc. and Iceland Acquisition Corp. on October 24, 2005. (See “Business-Independence Community Bank Corp.” set forth in Item 1 hereof and Note 2 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof for additional information).
      Securities Available-for-Sale. The aggregate securities available-for-sale portfolio (which includes investment securities and mortgage-related securities) decreased $359.3 million, or 9.1%, from $3.93 billion at December 31, 2004 to $3.57 billion at December 31, 2005. The decrease in securities available-for-sale was due to $477.4 million of sales combined with $894.8 million of securities calls and repayments, the proceeds of which were redeployed to fund the growth of the Company’s loan portfolio as well as to purchase shares pursuant to the Company’s stock repurchase program. These decreases were partially offset by $1.10 billion of purchases. Securities available-for-sale had a net unrealized loss of $76.5 million at December 31, 2005 compared to a net unrealized loss of $6.5 million at December 31, 2004. The increase in the unrealized loss on the portfolio was primarily a result of changes in market interest rates and not credit quality of the issuers. The Company continues to actively manage the size of its securities portfolio in relation to total assets and as such had a securities-to-asset ratio of 18.7% as of December 31, 2005 as compared to 22.2% as of December 31, 2004.
      The Company’s mortgage-related securities portfolio decreased $323.9 million to $3.16 billion at December 31, 2005 compared to $3.48 billion at December 31, 2004. The securities were comprised

57


Table of Contents

of $1.94 billion of AAA-rated CMOs, $72.2 million of CMOs which were issued or guaranteed by Freddie Mac, Fannie Mae or GNMA (“Agency CMOs”) and $1.14 billion of mortgage-backed pass through certificates which were also issued or guaranteed by Freddie Mac, Fannie Mae or GNMA. The decrease in the portfolio was primarily due to $734.6 million of principal repayments received combined with sales of $417.6  million which was partially offset by purchases of $720.6 million of AAA-rated CMOs with an average yield of 4.72% and $189.9 million of Fannie Mae, GNMA and Freddie Mac mortgage-backed pass through certificates with an average yield of 4.66%. This portfolio had a net unrealized loss of $73.8 million at December 31, 2005 as compared to a net unrealized loss of $7.9 million at December 31, 2004.
      The Company’s investment securities portfolio decreased $35.4 million to $418.9 million at December 31, 2005 compared to $454.3 million at December 31, 2004. The decrease was primarily due to sales totaling $59.9 million, primarily consisting of corporate bonds and preferred securities, and calls and repayments of $160.2 million. Partially offsetting these decreases were $188.9 million of purchases, primarily $100.0 million of federal agencies with a weighted average yield of 4.84%, $56.4 million of corporate bonds with a weighted average yield of 4.48% and $22.9 million of U.S. Treasury securities with a weighted average yield of 3.74%. The net unrealized loss on this portfolio was $2.7 million at December 31, 2005 compared to a net unrealized gain of $1.5 million at December 31, 2004.
      At December 31, 2005, the Company had a $44.1 million net unrealized loss, net of tax, on available-for-sale investment and mortgage-related securities as compared to a $3.8 million net unrealized loss, net of tax, at December 31, 2004.
      Loans Available-for-Sale. Loans available-for-sale decreased by $74.6 million to $22.1 million at December 31, 2005 compared to December 31, 2004. The decrease was primarily the result of a $69.0 million decline in loans available-for-sale acquired from SIB.
      The Company sells multi-family residential mortgage loans, both newly originated and portfolio loans, in the secondary market to Fannie Mae while retaining servicing. During the year ended December 31, 2005, the Company originated $1.18 billion and sold $1.57 billion of loans to Fannie Mae under this program and as a result serviced $6.27 billion of loans with a maximum potential loss exposure (due to recourse provisions) of $186.7 million. As part of the sales to Fannie Mae, the Company retains a portion of the associated credit risk. Included in the $1.57 billion of loans sold during the year ended December 31, 2005 were $377.9 million of loans that were originally held in portfolio and were reclassified to loans available-for-sale. Multi-family loans available-for-sale at December 31, 2005 totaled $17.9 million compared to $22.6 million at December 31, 2004. See “Lending Activities-Loan Originations, Purchases, Sales and Servicing” set forth in Item 1 hereof and Notes 5 and 19 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof for additional information.
      The Company also originates and sells single-family residential mortgage loans under a mortgage origination assistance agreement with PHH Mortgage. The Company funds the loans directly and sells the loans and related servicing to PHH Mortgage. The Company originated $83.3 million and sold $81.7 million of such loans during the year ended December 31, 2005. Single-family residential mortgage loans available-for-sale under this program totaled $4.2 million at December 31, 2005 compared to $5.1 million at December 31, 2004.
      Both programs discussed above were established in order to further the Company’s ongoing strategic objective of increasing non-interest income related to lending and/or servicing revenue.
      The $69.9 million decrease in single-family residential loans available-for-sale from $74.1 million at December 31, 2004 to $4.2 million at December 31, 2005 was primarily the result of a decrease in loans available-for-sale acquired from SIB. The Company determined to wind down the remaining operations of Staten Island Mortgage Corp., the mortgage-banking subsidiary of SIB (most of the operations were sold in connection with the SIB transaction). The Company reduced the balance of such loans from $298.7 million as of April 12, 2004 (the closing of the SIB transaction) to $69.0 million at December 31, 2004. During 2005, all such loans were either sold in the secondary market or transferred to the Company’s single-family residential mortgage portfolio.
      Loans. Loans increased by $1.05 billion, or 9.4%, to $12.30 billion at December 31, 2005 from $11.25 billion at December 31, 2004. The Company continues to focus on expanding its higher yielding

58


Table of Contents

loan portfolios of commercial real estate and commercial business loans as well as variable-rate mortgage warehouse lines of credit as part of its business plan. The Company is also committed to remaining a leader in the multi-family residential loan market.
      The Company originated (both for portfolio and for sale) approximately $4.10 billion of mortgage loans during the year ended December 31, 2005 compared to $5.30 billion for the year ended December 31, 2004. During 2004 and 2005 the Company was able to maintain a balanced program of originating loans for portfolio and for sale to effectively manage the size of the Company’s balance sheet. The Company sold $1.67 billion of mortgage loans during the year ended December 31, 2005 compared to $2.42 billion during the year ended December 31, 2004.
      Multi-family residential loans increased $942.7 million or 24.8% to $4.74 billion at December 31, 2005 compared to $3.80 billion at December 31, 2004. The increase was primarily due to originations for portfolio of $1.63 billion which was partially offset by repayments of $295.6 million combined with the sale out of portfolio of $377.9 million of loans to Fannie Mae with a weighted average yield of 5.27%. Multi-family residential loans comprised 38.6% of the total loan portfolio at December 31, 2005 compared to 33.8% at December 31, 2004.
      Commercial real estate loans increased $653.0 million or 21.5% to $3.69 billion at December 31, 2005 compared to $3.03 billion at December 31, 2004. The increase was primarily due to $1.20 billion of originations partially offset by $549.2 million of loan repayments for the year ended December 31, 2005. Commercial real estate loans comprised 30.0% of the total loan portfolio at December 31, 2005 compared to 27.0% at December 31, 2004.
      Commercial business loans increased $167.6 million, or 20.7%, from $809.4 million at December 31, 2004 to $977.0 million at December 31, 2005. The increase was due primarily to originations and advances of $603.8 million partially offset by $434.1 million of repayments and $2.6 million of charge-offs during the year ended December 31, 2005. Commercial business loans comprised 7.9% of the total loan portfolio at December 31, 2005 compared to 7.2% at December 31, 2004.
      Mortgage warehouse lines of credit are secured short-term advances extended to mortgage-banking companies to fund the origination of one-to-four family mortgages. Advances under mortgage warehouse lines of credit decreased $206.4 million, or 31.3%, from $659.9 million at December 31, 2004 to $453.5 million at December 31, 2005. At December 31, 2005, there were $828.2 million of unused lines of credit related to mortgage warehouse lines of credit. See “Business-Asset Quality-Allowance for Loan Losses”. Mortgage warehouse lines of credit comprised 3.7% of the total loan portfolio at December 31, 2005 compared to 5.9% at December 31, 2004.
      The single-family residential and cooperative apartment loan portfolio decreased $557.5 million or 22.4% from $2.49 billion at December 31, 2004 to $1.93 billion at December 31, 2005. The decrease was primarily due to $625.5 million of repayments partially offset by originations of $13.0 million as well as the reclassification of $54.9 million of loans as held for portfolio during the year ended December 31, 2005. As a result, single-family and cooperative apartment loans comprised 15.7% of the total loan portfolio at December 31, 2005 compared to 22.1% at December 31, 2004. The Company also originates and sells single-family residential mortgage loans to PHH Mortgage as previously discussed.
      Non-Performing Assets. Non-performing assets as a percentage of total assets at December 31, 2005 amounted to 0.20% compared to 0.29% at December 31, 2004. The Company’s non-performing assets, which consist of non-accrual loans, accruing loans past due 90 days or more as to interest or principal and other real estate owned acquired through foreclosure or deed-in-lieu thereof, decreased by $13.4 million or 25.8% to $38.4 million at December 31, 2005 from $51.8 million at December 31, 2004. The decrease in non-performing assets was primarily due to diligent work out efforts resulting in the sale of certain non-performing loans. Non-accrual loans totaled $28.3 million at December 31, 2005, a decrease of $15.3 million or 35.1%, compared to December 31, 2004. Non-accrual loans primarily consisted of $15.7 million of commercial business loans, $8.4 million of commercial real estate loans, $3.2 million of single-family residential and cooperative apartment loans and $0.8 million of multi-family residential loans.

59


Table of Contents

      Loans 90 days or more past maturity which continued to make payments on a basis consistent with the original repayment schedule increased $3.1 million to $8.7 million at December 31, 2005 compared to December 31, 2004. The Company is continuing its efforts to have the borrowers refinance or extend the term of such loans.
      Allowance for Loan Losses. The Company’s allowance for loan losses amounted to $101.5 million at December 31, 2005 as compared to $101.4 million at December 31, 2004. At December 31, 2005 the Company’s allowance amounted to 0.82% of total loans and 273.3% of total non-performing loans compared to 0.90% and 205.8% at December 31, 2004, respectively.
      The Company’s allowance increased slightly during the year ended December 31, 2005 due to net recoveries. No provision for loan losses was recorded for the year ended December 31, 2005 primarily as a result of the improved quality in the characteristics of the loan portfolio. Although there was no provision recorded in 2005, adjustments were made to the allowance for loan losses by loan category to reflect changes in the Company’s loan mix and risk characteristics.
      Goodwill and Intangible Assets. Effective April 1, 2001, the Company adopted SFAS No. 142, which resulted in discontinuing the amortization of goodwill. However, under the terms of SFAS No. 142, identifiable intangibles with identifiable lives continue to be amortized.
      The Company’s goodwill, which aggregated $1.19 billion at December 31, 2005, resulted from the merger with SIB, the acquisitions of Broad and Statewide as well as the acquisition in January 1996 of Bay Ridge Bancorp, Inc. The $30.0 million increase in goodwill during the year ended December 31, 2005 was attributable to finalizing certain tax and accounting positions related to the SIB transaction. (See Notes 2 and 9 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof).
      The Company’s identifiable intangible assets decreased by $11.4 million to $67.7 million at December 31, 2005 compared to December 31, 2004 which was the result of the amortization of the $87.1 million core deposit intangible associated with the SIB transaction. The core deposit intangible is being amortized using the interest method over 14 years. The amortization of identified intangible assets will continue to reduce net income until such intangible assets are fully amortized.
      Bank Owned Life Insurance (“BOLI”). The Company owns BOLI policies to fund certain future employee benefit costs and to provide tax-exempt returns to the Company. The BOLI is recorded at its cash surrender value and changes in value are recorded in non-interest income. BOLI increased $15.5 million to $336.6 million at December 31, 2005 compared to December 31, 2004 as a result of an increase in the cash surrender value of the BOLI.
      Other Assets. Other assets decreased $51.7 million from $432.2 million at December 31, 2004 to $380.5 million at December 31, 2005. The decrease was primarily due to reductions of $38.8 million in tax receivables, $30.6 million in FHLB stock and $5.0 million in deferred tax assets partially offset by a $17.5 million increase in advances for borrowers real estate tax payments at the end of 2005.
      The Company had a net deferred tax asset of $73.9 million at December 31, 2005 compared to $78.8 million at December 31, 2004.
      Deposits. Deposits increased $1.64 billion or 17.6% to $10.95 billion at December 31, 2005 compared to December 31, 2004. The increase was due to deposits inflows totaling $1.48 billion as well as interest credited of $162.9 million.
      During the first quarter of 2005, the Company introduced the Independence RewardsPlus Checkingtm product and utilized certain certificates of deposit promotions as an alternative funding source to reduce its dependence on higher costing wholesale borrowings. As a result of these initiatives, core deposits increased $196.0 million, or 2.8%, to $7.23 billion at December 31, 2005 compared to $7.03 billion at December 31, 2004. Certificates of deposit increased $1.44 billion or 63.6% to $3.72 billion at December 31, 2005 compared to $2.27 billion at December 31, 2004. The increase in core deposits included $482.3 million of brokered deposits and the increase in certificates of deposit included $644.1 million of brokered certificates of deposit which are also being used as an alternative funding source to higher costing wholesale borrowings. As a result of the increase in certificates of deposit, core deposits amounted to 66.1% of total deposits at December 31, 2005 compared to 75.6% of total deposits at December 31, 2004.

60


Table of Contents

      The Company focuses on the growth of core deposits as a key element of its asset/liability management process to lower interest expense and thus increase net interest margin given that these deposits have a lower cost of funds than certificates of deposit and borrowings. Core deposits also reduce liquidity fluctuations since these accounts generally are considered to be less likely than certificates of deposit to be subject to disintermediation. In addition, these deposits improve non-interest income through increased customer related fees and service charges. The weighted average interest rate paid on core deposits was 1.04% compared to 2.94% for certificates of deposit and 3.30% for borrowings (including subordinated and senior notes) for the year ended December 31, 2005.
      In the future, the Company may choose to further increase its use of certificates of deposit as part of its asset/liability strategy to match the term and duration of the loans in its loan portfolio.
      Borrowings. Borrowings (not including subordinated and senior notes) decreased $555.2 million or 10.1% to $4.96 billion at December 31, 2005 compared to $5.51 billion at December 31, 2004. The decrease was a result of repayments of borrowings as the Company used the increase in deposits as a lower costing alternative funding source.
      The Company had $2.04 billion of FHLB advances outstanding at December 31, 2005 with maturities of ten years or less with $1.02 billion having a maturity of less than one year. At December 31, 2005 the Company had the ability to borrow from the FHLB an additional $2.40 billion on a secured basis, utilizing mortgage-related loans and securities as collateral. Another funding source available to the Company is repurchase agreements with the FHLB and other counterparts. These repurchase agreements are generally collateralized by CMOs or U.S. Government and agency securities held by the Company. At December 31, 2005, the Company had $2.91 billion of repurchase agreements outstanding with the majority maturing between one and five years.
      The Company continues to reposition its balance sheet to more closely align the duration of its interest-earning asset base with its supporting funding sources. The Company also utilized the increase in deposits as an alternative funding source to reduce its dependence on borrowings. During the year ended December 31, 2005, the Company paid-off $2.08 billion of primarily short-term borrowings with a weighted average interest rate of 2.91% that matured during the period. During the year ended December 31, 2005, the Company borrowed approximately $668.0 million of long-term borrowings with a weighted average interest rate of 3.68%. The Company also borrowed $894.9 million of short-term floating rate borrowings which generally mature within 30 days and have a weighted average interest rate of 4.12%. The Company anticipates replacing a portion of these short-term borrowings with lower costing deposits during 2006.
      The Company is managing its leverage position and had a borrowings (including subordinated and senior notes) to assets ratio of 29.4% at December 31, 2005 and 33.3% at December 31, 2004.
      For further discussion see Note 12 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      Subordinated Notes. Subordinated notes increased $1.0 million to $397.3 million at December 31, 2005 compared to $396.3 million at December 31, 2004 due to the amortization of deferred issuance costs. The notes qualify as Tier 2 capital of the Bank under the capital guidelines of the FDIC.
      For further discussion see Note 13 of the “Notes to Consolidated Financial Statements” set forth in item 8 hereof.
      Senior Notes. On September 23, 2005, the Company issued $250.0 million aggregate principal amount of 4.90% Fixed Rate Notes due 2010. The Company used $150.0 million of the $248.1 million net proceeds to make a capital contribution to the Bank to strengthen the Bank’s capital position. The remainder of the net proceeds was used for general corporate purposes.
      Stockholders’ Equity. The Company’s stockholders’ equity totaled $2.29 billion at December 31, 2005 compared to $2.30 billion at December 31, 2004. The $18.3 million decrease was primarily due to a $154.4 million reduction in capital resulting from the purchase during the year ended December 31, 2005 of 4,254,302 shares of common stock pursuant to the Company’s open market repurchase program and an $85.4 million decrease due to dividends declared. In addition, the Company had a $40.4 million increase, net of tax effect, in the net unrealized loss on securities available-for-sale. These decreases were partially offset by net income of $213.5 million, $30.1 million related

61


Table of Contents

to the exercise of stock options and the related tax benefit, $10.5 million related to the Employee Stock Ownership Plan (“ESOP”) shares committed to be released with respect to the year ended 2005, $3.3 million of stock option compensation costs and $4.5 million of awards and amortization of restricted stock grants.
      Book value per share and tangible book value per share were $27.76 and $12.54 at December 31, 2005, respectively, compared to $27.13 and $12.59 at December 31, 2004, respectively. Return on average equity and return on average tangible equity were 9.3% and 20.6% for the year ended December 31, 2005, respectively, compared to 11.3% and 21.8% for the year ended December 31, 2004, respectively.
Contractual Obligations, Commitments, Contingent Liabilities and Off-balance Sheet Arrangements
      The following table presents, as of December 31, 2005, the Company’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient, including interest payments, and do not include any unamortized premiums, or discounts, or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in the referenced notes to the Consolidated Financial Statements set forth in Item 8 hereof.
                                                 
        Payments Due In
         
            Over one   Over three    
    Note   One year   year through   years through   Over five    
(In Thousands)   Reference   or less   three years   five years   years   Total
 
Core deposits
    11     $ 7,229,689     $     $     $     $ 7,229,689  
Certificates of deposit
    11       2,537,083       985,596       373,207       6,137       3,902,023  
FHLB advances
    12       1,067,878       296,336       156,962       760,240       2,281,416  
Repurchase agreements
    12       405,772       1,986,398       657,151       219,417       3,268,738  
Subordinated notes
    13       14,625       29,250       42,028       477,195       563,098  
Senior notes
    14       12,250       24,500       271,177             307,927  
Operating leases
    20       18,386       34,005       32,899       100,150       185,440  
Purchase obligations
    20       16,907                         16,907  
      A schedule of significant commitments at December 31, 2005 and 2004 follows:
                   
    Contract or Amount
     
(In Thousands)   December 31, 2005   December 31, 2004
 
Financial instruments whose contract amounts represent credit risk:
               
 
Commitments to extend credit — mortgage loans
  $ 563,162     $ 650,101  
 
Commitments to extend credit — commercial business loans
    443,173       267,649  
 
Commitments to extend credit — mortgage warehouse lines of credit
    828,177       775,905  
 
Commitments to extend credit — other loans
    224,449       212,119  
 
Standby letters of credit
    35,983       36,633  
 
Commercial letters of credit
    543       807  
             
Total
  $ 2,095,487     $ 1,943,214  
             
      The Company originates and sells multi-family residential mortgage loans in the secondary market to Fannie Mae while retaining servicing. Under the terms of the sales program, the Company retains a portion of the associated credit risk. The Company has a 100% first loss position on each multi-family residential loan sold to Fannie Mae under such program until the earlier to occur of (i) the aggregate losses on the multi-family residential loans sold to Fannie Mae reaching the maximum loss exposure for the portfolio as a whole or (ii) until all of the loans sold to Fannie Mae under this program are fully paid off. The maximum loss exposure is available to satisfy any losses on loans sold in the program subject to the foregoing limitations. At

62


Table of Contents

December 31, 2005, the Company serviced $6.27 billion of loans for Fannie Mae under this program with a maximum potential loss exposure of $186.7 million.
      For further discussion of these commitments as well as the Company’s commitments and obligations under pension and other post-retirement benefit plans, see Notes 16 and 20 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      The Company has not had, and has no intention to have, any significant transactions, arrangements or other relationships with any unconsolidated, limited purpose entities that could materially affect its liquidity or capital resources. The Company has not, and does not intend to trade in commodity contracts.
Average Balances, Net Interest Income, Yields Earned and Rates Paid
      The table on the following page sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Information is based on average daily balances during the indicated periods.

63


Table of Contents

                                                                               
    Year Ended December 31,
     
    2005   2004   2003
             
        Average       Average       Average
    Average       Yield/   Average       Yield/   Average       Yield/
(Dollars in Thousands)   Balance   Interest   Cost   Balance   Interest   Cost   Balance   Interest   Cost
 
Interest-earning assets:
                                                                       
 
Loans receivable(1) :
                                                                       
   
Mortgage loans
  $ 9,942,883     $ 536,125       5.39 %   $ 8,007,134     $ 433,848       5.42 %   $ 4,162,397     $ 276,579       6.64 %
   
Commercial business loans
    855,474       58,237       6.81       768,246       46,861       6.10       564,851       37,281       6.60  
   
Mortgage warehouse lines of credit
    573,767       36,160       6.22       583,696       26,555       4.47       639,052       28,652       4.48  
   
Other loans(2)
    496,498       28,563       5.75       407,147       21,754       5.34       268,886       15,741       5.85  
                                                       
 
Total loans
    11,868,622       659,085       5.55       9,766,223       529,018       5.41       5,635,186       358,253       6.36  
 
Investment securities
    400,906       18,456       4.60       537,362       22,578       4.20       296,705       13,296       4.48  
 
Mortgage-related securities
    3,368,272       148,271       4.40       3,124,201       132,809       4.25       1,765,662       62,918       3.56  
 
Other interest-earning assets(3)
    290,293       11,767       4.05       294,974       5,003       1.70       263,116       5,653       2.15  
                                                       
Total interest-earning assets
    15,928,093       837,579       5.26       13,722,760       689,408       5.02       7,960,669       440,120       5.53  
                                                       
Non-interest-earning assets
    2,131,721                       1,753,873                       712,017                  
                                                       
Total assets
  $ 18,059,814                     $ 15,476,633                     $ 8,672,686                  
                                                       
Interest-bearing liabilities:                                                                        
 
Deposits:
                                                                       
   
Savings deposits
  $ 2,394,722     $ 8,398       0.35 %   $ 2,423,565     $ 8,464       0.35 %   $ 1,595,084     $ 7,886       0.49 %
   
Money market deposits
    689,339       13,551       1.97       795,658       12,259       1.54       251,447       2,303       0.92  
   
Active management accounts (“AMA”)
    543,328       7,659       1.41       711,247       8,347       1.17       498,229       4,762       0.96  
   
Interest-bearing demand deposits(4)
    2,230,243       47,195       2.12       1,147,798       11,005       0.96       700,739       4,826       0.69  
   
Certificates of deposit
    2,930,696       86,065       2.94       2,005,120       31,773       1.58       1,486,302       33,480       2.25  
                                                       
     
Total interest-bearing deposits
    8,788,328       162,868       1.85       7,083,388       71,848       1.01       4,531,801       53,257       1.18  
   
Non-interest bearing deposits
    1,500,135                   1,281,445                   672,952              
                                                       
     
Total deposits
    10,288,463       162,868       1.58       8,364,833       71,848       0.86       5,204,753       53,257       1.02  
                                                       
 
Subordinated notes
    396,797       15,621       3.94       341,230       13,279       3.89       79,253       3,029       3.82  
 
Senior notes
    67,959       3,445       5.07                                      
 
Borrowings
    4,858,563       156,780       3.23       4,725,871       128,788       2.73       2,290,401       91,089       3.98  
                                                       
Total interest-bearing liabilities
    15,611,782       338,714       2.17       13,431,934       213,915       1.59       7,574,407       147,375       1.95  
                                                       
Non-interest-bearing liabilities
    156,105                       169,204                       159,913                  
                                                       
Total liabilities
    15,767,887                       13,601,138                       7,734,320                  
Total stockholders’ equity
    2,291,927                       1,875,495                       938,366                  
                                                       
Total liabilities and stockholders’ equity
  $ 18,059,814                     $ 15,476,633                     $ 8,672,686                  
                                                       
Net interest-earning assets
  $ 316,311                     $ 290,826                     $ 386,262                  
                                                       
Net interest income/ interest rate spread
          $ 498,865       3.09 %           $ 475,493       3.43 %           $ 292,745       3.58 %
                                                       
Net interest margin
                    3.13 %                     3.46 %                     3.68 %
                                                       
Ratio of average interest-earning assets to average interest-bearing liabilities
                    1.02 x                     1.02 x                     1.05 x
                                                       
 
(1)  The average balance of loans receivable includes loans available-for-sale and non-performing loans. Interest on non-performing loans is recognized on a cash basis.
 
(2)  Includes home equity loans and lines of credit, FHA and conventional home improvement loans, automobile loans, passbook loans and secured and unsecured personal loans.
 
(3)  Includes federal funds sold, interest-earning bank deposits and FHLB stock.
 
(4)  Includes NOW (including Independence RewardsPlus Checkingtm product) and checking accounts.

64


Table of Contents

Rate/ Volume Analysis
      The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income and expense attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income and expense attributable to changes in rate (changes in rate multiplied by prior volume). The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
                                                       
    Year Ended   Year Ended
    December 31, 2005 to   December 31, 2004 to Year Ended
    Year Ended December 31, 2004   December 31, 2003
         
    Increase       Increase    
    (Decrease) due to   Total Net   (Decrease) due to   Total Net
        Increase       Increase
(In Thousands)   Rate   Volume   (Decrease)   Rate   Volume   (Decrease)
 
Interest-earning assets:
                                               
 
Loans receivable:
                                               
   
Mortgage loans(1)
  $ (5,354 )   $ 107,631     $ 102,277     $ (51,572 )   $ 208,841     $ 157,269  
   
Commercial business loans
    5,758       5,618       11,376       (3,001 )     12,581       9,580  
   
Mortgage warehouse lines of credit
    10,065       (460 )     9,605       (53 )     (2,044 )     (2,097 )
   
Other loans(2)
    1,764       5,045       6,809       (1,474 )     7,487       6,013  
                                     
 
Total loans receivable
    12,233       117,834       130,067       (56,100 )     226,865       170,765  
 
Investment securities
    2,002       (6,124 )     (4,122 )     (879 )     10,161       9,282  
 
Mortgage-related securities
    4,811       10,651       15,462       14,052       55,839       69,891  
 
Other interest-earning assets
    6,844       (80 )     6,764       (1,279 )     629       (650 )
                                     
 
Total net change in income on interest-earning assets
    25,890       122,281       148,171       (44,206 )     293,494       249,288  
Interest-bearing liabilities:
                                               
 
Deposits:
                                               
   
Savings deposits
          (66 )     (66 )     (2,808 )     3,386       578  
   
Money market deposits
    3,089       (1,797 )     1,292       2,372       7,584       9,956  
   
AMA deposits
    1,510       (2,198 )     (688 )     1,255       2,330       3,585  
   
Interest-bearing demand deposits
    20,338       15,852       36,190       2,352       3,827       6,179  
   
Certificates of deposit
    35,213       19,079       54,292       (11,539 )     9,832       (1,707 )
                                     
     
Total deposits
    60,150       30,870       91,020       (8,368 )     26,959       18,591  
 
Borrowings
    24,277       3,715       27,992       (35,595 )     73,294       37,699  
 
Subordinated notes
    172       2,170       2,342       56       10,194       10,250  
 
Senior notes
          3,445       3,445                    
                                     
 
Total net change in expense on interest-bearing liabilities
    84,599       40,200       124,799       (43,907 )     110,447       66,540  
                                     
Net change in net interest income
  $ (58,709 )   $ 82,081     $ 23,372     $ (299 )   $ 183,047     $ 182,748  
                                     
 
(1)  Includes loans available-for-sale.
 
(2)  Includes home equity loans and lines of credit, FHA and conventional home improvement loans, automobile loans, passbook loans and secured and unsecured personal loans.

65


Table of Contents

Comparison of Results of Operations for the Year Ended December 31, 2005 and the Year Ended December 31, 2004
      General. The Company reported a $1.3 million increase in net income to $213.5 million for the year ended December 31, 2005 compared to $212.2 million for the year ended December 31, 2004. However, diluted earnings per share decreased to $2.62 compared to $2.84 for the year ended December 31, 2004.
      The earnings and per share data for 2005 include for the entire period the operations of SIB which merged with the Company on April 12, 2004 and the related issuance of 28.2 million shares of the Company’s common stock in connection with the merger.
      The Company’s earnings growth was driven primarily by the benefit of the merger with SIB as well as the continued internal growth of the Company’s loan portfolio.
      Net Interest Income. Net interest income increased by $23.4 million, or 4.9%, to $498.9 million for the year ended December 31, 2005 as compared to the year ended December 31, 2004. The increase was due to a $148.2 million increase in interest income partially offset by a $124.8 million increase in interest expense. The increase in net interest income primarily reflected a $2.21 billion increase in average interest-earning assets during the year ended December 31, 2005 as compared to the same period in the prior year, reflecting in large part the effects of the SIB transaction. The growth was partially offset by the 33 basis point decrease in net interest margin between the periods from 3.46% for the year ended December 31, 2004 to 3.13% for the year ended December 31, 2005.
      Purchase accounting adjustments arising from the SIB transaction increased net interest margin 18 basis points during the year ended December 31, 2005 compared to a 23 basis point increase for the year ended December 31, 2004. Purchase accounting adjustments relate to recording acquired assets and liabilities at their fair values and amortizing/accreting the adjustment (whether gain or loss) into net interest income over the average life of the corresponding asset or liability.
      The Company’s net interest margin decreased 33 basis points to 3.13% for the year ended December 31, 2005 compared to 3.46% for the year ended December 31, 2004. The decline in net interest margin was primarily attributable to the 58 basis point increase in the average rate paid on its interest-bearing liabilities which increase was partially offset by an increase in the average yield on interest-earning assets of 24 basis points.
      The Company’s interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) decreased by 34 basis points to 3.09% for the year ended December 31, 2005 compared to 3.43% for the year ended December 31, 2004.
      The compression in net interest margin in 2005 was primarily attributable to the addition of the lower yielding SIB interest-earning portfolios as well as the origination in 2004 and 2005 of new assets for portfolio retention at lower yields. The compression was also a result of the Company repositioning its balance sheet in 2004 to more closely align the duration of its interest-earning asset base with its supporting funding sources. This resulted in increased rates being paid on interest-bearing liabilities as the Company lengthened the duration of its borrowings.
      Interest income increased by $148.2 million, or 21.5%, to $837.6 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. This increase was primarily due to a $2.21 billion increase in the average balance of the Company’s interest-earning assets and a 24 basis point increase in the average yield earned on those interest-earning assets.
      Interest income on mortgage loans, (including loans available-for-sale), increased $102.3 million to $536.1 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. This increase was due to a $1.94 billion increase in the average outstanding balance of mortgage loans for the year ended December 31, 2005 compared to the year ended December 31, 2004. Partially offsetting the increase in the average balance was a slight decrease of 3 basis points in the average yield earned on mortgage loans for the year ended December 31, 2005 compared to the prior year. The increase in the average balance of mortgage loans was primarily attributable to the $3.25 billion of mortgage loans acquired as a result of the SIB transaction as well as internal loan growth. The Company realized average balance increases of $158.8 million in single-family and cooperative loans, $885.2 million in multi-family

66


Table of Contents

residential loans and $891.8 million in commercial real estate loans for the year ended December 31, 2005 compared to the year ended December 31, 2004.
      Although the single-family mortgage portfolio increased as a result of the SIB transaction, the Company primarily originates single-family loans for sale through its previously discussed private label program with PHH Mortgage. The average balance of multi-family residential loans increased $885.2 million during 2005 due to originations (for portfolio and for sale) of $2.80 billion during 2005 compared to $3.56 billion during 2004. The originations were partially offset by multi-family loans sold to Fannie Mae of $1.57 billion during 2005 compared to $2.07 billion during 2004. The $891.8 million increase in the average balance of the commercial real estate portfolio during the year ended December 31, 2005 reflected the continued implementation of management’s strategy of shifting the loan portfolio to higher yielding loan products as well as the effect of the acquisition of the loan portfolio from SIB. The increase in yield was primarily due to increased rates on variable-rate loans as a result of the FOMC raising the federal funds rate 200 basis points during 2005.
      Interest income on other loans increased $27.8 million, or 29.2%, due primarily to average balance increases of $87.2 million in commercial business loans and $89.4 million in other loans which were partially offset by a $9.9 million decrease in the average balance of mortgage warehouse lines of credit. The increase in the average balance of commercial business loans was a result of the portfolio acquired from SIB combined with the Company’s strategy of acquiring higher yielding assets while enhancing customer satisfaction by offering a suite of related cash management products. The decline in the mortgage warehouse portfolio was due to the softening of demand from mortgage bankers for mortgage warehouse funding.
      Income on investment securities decreased $4.1 million for the year ended December 31, 2005 compared to the year ended December 31, 2004 due to a decrease in the average balance of investment securities of $136.5 million, partially offset by an increase in the average yield of 40 basis points earned on such securities from 4.20% for the year ended December 31, 2004 to 4.60% for the year ended December 31, 2005.
      Interest income on mortgage-related securities increased $15.5 million for the year ended December 31, 2005 compared to the year ended December 31, 2004 as a result of a $244.1 million increase in the average balance of mortgage-related securities combined with a 15 basis point increase in the yield earned from 4.25% for the year ended December 31, 2004 to 4.40% for the year ended December 31, 2005.
      Income on other interest-earning assets (consisting primarily of interest on federal funds and dividends on FHLB stock) increased $6.8 million for the year ended December 31, 2005 compared to the year ended December 31, 2004 primarily due to a $3.9 million increase in dividends received on FHLB stock held by the Company.
      Interest expense increased $124.8 million or 58.3% to $338.7 million for the year ended December 31, 2005 as compared to the year ended December 31, 2004. Interest expense on deposits increased $91.0 million due primarily to a 72 basis point increase in the average rate paid on deposits to 1.58% for the year ended December 31, 2005 compared to 0.86% for the year ended December 31, 2004 and a $1.92 billion increase in the average balance of deposits. The increase in the average balance was primarily the result of the $3.79 billion of deposits assumed in the SIB transaction, the introduction of the Independence RewardsPlus Checkingtm product and utilization of certificate of deposit promotions as an alternative funding source to reduce the Company’s dependence on higher costing wholesale borrowings as well as the continued deposit growth through the de novo branch expansion program.
      The average balance of core deposits increased $998.1 million, or 15.7%, to $7.36 billion for the year ended December 31, 2005 compared to $6.36 billion for the year ended December 31, 2004. Core deposits consist of all deposits other than certificates of deposit. However, the average balance of certificates of deposit increased $925.6 million or 46.2% to $2.93 billion for the year ended December 31, 2005 compared to $2.01 billion for the year ended December 31, 2004. As a result of the increase in certificates of deposit, lower costing core deposits represented approximately 66.1% of total deposits at December 31, 2005 compared to 75.6% at December 31, 2004.
      Interest expense on borrowings (excluding subordinated and senior notes) increased $28.0 million

67


Table of Contents

or 21.7% to $156.8 million for the year ended December 31, 2005 compared to $128.8 million for the year ended December 31, 2004 due to an increase in the average rate paid on such borrowings of 50 basis points to 3.23% in the year ended December 31, 2005 compared to 2.73% in the year ended December 31, 2004. The increase in the average balance was primarily due to the $2.65 billion of borrowings assumed in the SIB transaction which was partially offset by replacing a portion of its borrowings with lower costing deposits. During the year ended December 31, 2005, the Company repaid $2.08 billion of short-term borrowings at a weighted average interest rate of 2.91% and borrowed $668.0 million of longer term fixed-rate borrowings at a weighted average interest rate of 3.68%. The Company also borrowed $894.9 million of short-term floating-rate borrowings at a weighted average interest rate of 4.12%.
      Interest expense on subordinated notes increased $2.3 million to $15.6 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The average balance of subordinated notes increased $55.6 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase was due to the issuance of $250.0 million aggregate principal amount of subordinated notes on March 22, 2004.
      Interest expense on senior notes was $3.4 million for the year ended December 31, 2005. The expense relates to the issuance of $250.0 million aggregate principal amount of senior notes on September 23, 2005.
      Provision for Loan Losses. The Company did not record a provision for loan losses for the year ended December 31, 2005 compared to a $2.0 million provision for loans losses for the year ended December 31, 2004 primarily as a result of the improved quality in the characteristics of the loan portfolio. In assessing the level of the allowance for loan losses and the periodic provision charged to income, the Company considers the composition of its loan portfolio, the growth of loan balances within various segments of the overall portfolio, the state of the local (and to a certain degree, the national) economy as it may impact the performance of loans within different segments of the portfolio, the loss experience related to different segments or classes of loans, the type, size and geographic concentration of loans held by the Company, the level of past due and non-performing loans, the value of collateral securing its loan, the level of classified loans and the number of loans requiring heightened management oversight.
      Non-performing assets as a percentage of total assets decreased to 20 basis points at December 31, 2005, compared to 29 basis points at December 31, 2004. Non-performing assets decreased 25.8% to $38.4 million at December 31, 2005 compared to $51.8 million at December 31, 2004. Included in the $37.1 million of non-performing loans at December 31, 2005 were $28.3 million of non-accrual loans and $8.7 million of loans contractually past maturity but which are continuing to pay in accordance with their original repayment schedule. At December 31, 2005 and 2004, the allowance for loan losses as a percentage of total non-performing loans was 273.3% and 205.8%, respectively. See “Business-Asset Quality” set forth in Item 1 hereof.
      Non-Interest Income. The Company continues to stress and emphasize the development of fee-based income throughout its operations. The Company experienced a $3.4 million or 2.8% increase in non-interest income from $121.5 million for the year ended December 31, 2004 to $124.9 million for the year ended December 31, 2005.
      The Company recognized net gains of $6.6 million on $477.4 million of securities sold during the year ended December 31, 2005 compared to losses of $8.8 million in 2004. The 2004 losses were primarily related to a $12.7 million other-than-temporary impairment charge on investment grade Fannie Mae preferred equity securities.
      A primary driver of non-interest income is earnings from the Company’s mortgage-banking activities. During the year ended December 31, 2005, revenue from the Company’s mortgage-banking business decreased $9.5 million or 32.1% to $20.1 million compared to $29.6 million for the year ended December 31, 2004. The Company sells multi-family residential loans (both loans originated for sale and from portfolio) in the secondary market to Fannie Mae with the Company retaining servicing on all loans sold. Under the terms of the sales program, the Company also retains a portion of the associated credit risk. At December 31, 2005, the Company’s maximum potential exposure related to secondary market sales to Fannie Mae under this program was $186.7 million. The Company also has a program with PHH Mortgage to originate and sell single-family residential mortgage loans and

68


Table of Contents

servicing in the secondary market. The $9.5 million decrease in mortgage-banking activities for the year ended December 31, 2005 compared to the year ended December 31, 2004 was primarily due to reduced sales of loans as customer demand for multi-family loans originated for sale in the secondary market softened in the current interest rate cycle. See “Business-Lending Activities-Loan Originations, Purchases, Sales and Servicing”.
      During the year ended December 31, 2005, the Company sold $1.57 billion of multi-family loans under the program with Fannie Mae and sold $81.7 million of single-family residential loans. By comparison, during 2004, the Company sold $2.07 billion of multi-family loans and sold $119.3 million of single-family residential mortgages.
      Mortgage-banking activities for the year ended December 31, 2005 reflected $16.4 million in gains, $1.8 million of origination fees and $10.2 million in servicing fees partially offset by $8.3 million of amortization of servicing assets. Included in the $16.4 million of gains were $1.5 million of provisions recorded related to the retained credit exposure on multi-family residential loans sold to Fannie Mae. This category also included a $0.2 million increase in the fair value of loan commitments for loans originated for sale and a $0.2 million decrease in the fair value of forward loan sale agreements which were entered into with respect to the sale of such loans as a result of an increase in interest rates after the Company entered into the interest rate lock loan commitment and the forward loan sale agreements. The $9.5 million decrease in revenue from mortgage-banking activities for the year ended December 31, 2005 compared to the year ended December 31, 2004 reflected decreases in gains of $13.0 million and $0.3 million in origination fees partially offset by decreased amortization of servicing rights of $2.3 million and higher service fees of $1.5 million.
      Service fee income decreased $0.6 million, or, 0.9% to $66.0 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The decrease in service fee income was primarily due to a decrease in prepayment and modification fees on loans due to the decline in loan refinancing activity partially offset by additional fee income generated by the addition of the SIB branch network. Prepayment and modification fees are effectively a partial offset to the decreases realized in net interest margin. Prepayment fees decreased $5.2 million to $7.7 million for the year ended December 31, 2005 compared to $12.9 million for the year ended December 31, 2004. Modification and extension fees decreased $1.6 million to $0.6 million for the year ended December 31, 2005 compared to $2.2 million for the year ended December 31, 2004.
      A component of service fees are revenues generated from the branch system which grew by $4.1 million, or 9.2% to $48.6 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase was primarily due to additional fee income generated by the SIB branch network.
      In addition, the Company also recorded an increase for the year ended December 31, 2005 of approximately $1.2 million in the cash surrender value of BOLI compared to the year ended December 31, 2004. The increase was primarily due to the merger with SIB which resulted in an increase in the amount of BOLI held by the Company since SIB also had BOLI.
      Other non-interest income decreased $3.1 million or 16.0% to $16.1 million for the year ended December 31, 2005 compared to $19.2 million for the year ended December 31, 2004. The decrease was primarily attributable to reduced income of $3.8 million from the Company’s equity investment in Meridian Capital.
      Non-Interest Expense. Non-interest expense increased by $26.8 million, or 9.9%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004. The increase in non-interest expense was primarily attributable to the costs associated with managing a significantly larger bank franchise which resulted from the merger with SIB in April 2004 as well as merger-related costs associated with the pending acquisition of the Company. The increase was attributable to increases of $14.2 million in compensation and employee benefits, $8.6 million in occupancy costs, $3.1 million in the amortization of identifiable intangible assets and $4.0 million in other expenses. These increases were partially offset by decreases of $2.1 million in data processing fees and $1.0 million in advertising costs.
      Compensation and employee benefits expense increased $14.2 million to $149.1 million for the year ended December 31, 2005 as compared to $134.9 million in the prior year. The increase in

69


Table of Contents

compensation and benefit expense was primarily attributable to staff additions relating to the SIB transaction as well as the expansion of the Company’s commercial and retail banking and lending operations, including the opening of seven retail branches. In particular, the increase was due to increases of $12.6 million in salary and overtime expenses, $2.0 million in restricted stock award costs, $2.1 million in medical costs, $1.2 million in FICA costs and $1.6 million in stock-related benefit plan costs. Partially offsetting these increases were lower management incentives expenses of $4.3 million and lower pension cost of $0.7 million.
      Occupancy costs increased by $8.6 million to $52.3 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase was a direct result of operating the expanded branch franchise resulting from the SIB transaction as well as the increase in branch facilities resulting from the continued implementation of the Bank’s de novo branch expansion program and the expansion of the Bank’s commercial real estate lending operations in the Chicago market.
      Data processing fees decreased $2.1 million to $14.0 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The decrease was due to the Company’s continued focus on expense control which was partially offset by the Company operating an expanded branch network.
      Advertising expense decreased $1.0 million to $8.2 million from $9.1 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The cost reflects the Company’s continued focus on expense control.
      Amortization of identifiable intangible assets increased by $3.1 million to $11.4 million during the year ended December 31, 2005 as compared to the year ended December 31, 2004. The increase was primarily due to a full year of amortization of the $87.1 million core deposit intangible associated with the SIB transaction. The core deposit intangible is being amortized using the interest method over 14 years.
      Other non-interest expenses increased $4.0 million, or 6.8%, to $62.8 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase was primarily due to additional expenses associated with the expansion of operations resulting from the transaction with SIB and $4.4 million of merger-related costs associated with the pending acquisition of the Company by Sovereign. These increases were partially offset by a $1.0 million recovery received in 2005 related to a $3.8 million provision for probable losses recorded in the fourth quarter of 2002 from transactions in a commercial business deposit account. Other non-interest expenses include such items as professional services, legal expenses, business development expenses, equipment expenses, recruitment costs, office supplies, commercial bank fees, postage, insurance, telephone expenses and maintenance and security.
      Compliance with changing regulation of corporate governance and public disclosure has resulted in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and revisions to the listing requirements of The Nasdaq Stock Market, are creating additional administrative and compliance requirements for companies such as ours. The Company is committed to maintaining high standards of corporate governance and public disclosure. Compliance with the various new requirements have resulted in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
      Income Taxes. Income tax expense increased $0.7 million to $112.4 million for the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase recorded in the 2005 period was due to the $2.0 million increase in the Company’s income before provision for income taxes. The Company’s effective tax rate was 34.50% for both the year ended December 31, 2005 and 2004.
Comparison of Results of Operations for the Year Ended December 31, 2004 and the Year Ended December 31, 2003
      General. For the year ended December 31, 2004, the Company reported a 9.2% increase in diluted earnings per share to $2.84 compared to $2.60 for the year ended December 31, 2003. Net income for the year ended December 31, 2004 increased 54.9% to $212.2 million compared to $137.0 million for the year ended December 31, 2003. These results include an other-than-temporary impairment after-tax charge of $8.3 million, or

70


Table of Contents

$0.12 per diluted share for the year, related to the Company’s holdings of certain Fannie Mae Preferred Stock.
      Net Interest Income. Net interest income increased by $182.7 million, or 62.4%, to $475.5 million for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase was due to a $249.3 million increase in interest income partially offset by a $66.6 million increase in interest expense. The increase in net interest income primarily reflected a $5.76 billion increase in average interest-earning assets during the year ended December 31, 2004 as compared to the same period in the prior year resulting in large part from the SIB transaction in April 2004. Partially offsetting this increase was a decline in the average yield earned of 51 basis points from 5.53% for the year ended December 31, 2003 to 5.02% for the year ended December 31, 2004.
      Purchase accounting adjustments arising from the SIB transaction increased net interest margin 23 basis points during the year ended December 31, 2004. Purchase accounting adjustments relate to the recording of acquired assets and liabilities at their fair values and amortizing/accreting the adjustment into net interest income over the average life of the corresponding asset or liability.
      Net interest margin decreased 22 basis points to 3.46% for the year ended December 31, 2004 compared to 3.68% for the year ended December 31, 2003. The decline in net interest margin was primarily attributable to the 51 basis points decline in the average yield on interest-earning assets which decrease was partially offset by a decline in the average rate paid on interest-bearing liabilities of 36 basis points.
      The Company’s interest rate spread decreased by 15 basis points to 3.43% for the year ended December 31, 2004 compared to 3.58% for the year ended December 31, 2003.
      The compression in net interest margin was primarily attributable to the addition of the lower yielding SIB interest-earning portfolios as well as new assets generated for portfolio retention during 2004 being originated at lower yields. The compression was also a result of the Company repositioning its balance sheet to more closely align the duration of its interest-earning asset base with its supporting funding sources. This resulted in increased rates on its interest-bearing liabilities during the second half of 2004 as the Company lengthened the duration of borrowings.
      The Company continues to rely on all of the components of its business model to offset or substantially lessen the reduction in net interest income as it continues to implement the shift in its deposits to lower costing core deposits while continuing to build non-interest rate sensitive revenue channels, including in particular the expansion of its mortgage-banking activities.
      Interest income increased by $249.3 million, or 56.6%, to $689.4 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. This increase was primarily due to a $5.76 billion increase in the average balance of the Company’s interest-earning assets which was partially offset by a 51 basis point decline in the average yield earned on those interest-earning assets.
      Interest income on mortgage loans, (including loans available-for-sale), increased $157.3 million to $433.8 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. This increase was due to a $3.84 billion increase in the average outstanding balance of mortgage loans for the year ended December 31, 2004 compared to the year ended December 31, 2003. Partially offsetting the increase in the average balance was a 122 basis point decline in the average yield earned on mortgage loans for the year ended December 31, 2004 compared to the prior year. The increase in the average balance of mortgage loans was primarily attributable to the $3.25 billion of mortgage loans acquired as a result of the SIB transaction as well as internal loan growth. The Company realized aggregate average balance increases from both the SIB transaction and internal growth of $1.70 billion in the single-family and cooperative loan portfolios, $1.10 billion in the multi-family residential mortgage loan portfolio and $1.05 billion in the commercial real estate portfolio.
      Although the single-family mortgage portfolio increased as a result of the SIB transaction, the Company primarily originates single-family loans for sale through its previously discussed private label program with PHH Mortgage. The average balance of multi-family residential loans increased during 2004 due to originations (for portfolio and for sale) of $3.56 billion during 2004 compared to $2.75 billion during 2003. The originations were partially offset by multi-family loans sold to

71


Table of Contents

Fannie Mae of $2.07 billion during 2004 compared to $1.73 billion during 2003. The $1.05 billion increase in the average balance of the commercial real estate portfolio during the year ended December 31, 2004 was the result of management’s strategy of shifting to higher yielding loan products as well as the portfolio acquired from SIB. The decrease in yield was primarily due to the interest rate yield curve existing in 2004.
      Interest income on other loans increased $13.5 million, or 16.5%, due primarily to average balance increases of $203.4 million in commercial business loans and a $138.3 million in other loans which were partially offset by a $55.4 million decrease in the average balance of mortgage warehouse lines of credit. The increase in the average balance of commercial business loans was a result of the portfolio acquired from SIB combined with the Company’s strategy of acquiring higher yielding assets while enhancing customer satisfaction by offering a suite of related cash management products. The decline in the mortgage warehouse portfolio was due to the softening of demand from mortgage bankers for mortgage warehouse funding which began in the fourth quarter of 2003 as the refinance market began to contract and which continued during 2004.
      Income on investment securities increased $9.3 million for the year ended December 31, 2004 compared to the year ended December 31, 2003 due to an increase in the average balance of investment securities of $240.7 million primarily due to securities acquired from SIB, partially offset by a decline in the average yield of 28 basis points earned on such securities from 4.48% for the year ended December 31, 2003 to 4.20% for the year ended December 31, 2004.
      Interest income on mortgage-related securities increased $69.9 million for the year ended December 31, 2004 compared to the year ended December 31, 2003 as a result of a $1.36 billion increase in the average balance of such assets, primarily due to securities acquired from SIB, combined with a 69 basis point increase in the yield earned from 3.56% for the year ended December 31, 2003 to 4.25% for the year ended December 31, 2004. The increase in yield earned in the mortgage-related securities portfolio was primarily the result of lower premium amortization as paydowns on securities slowed due to increases in interest rates combined with a softening in the refinance residential mortgage market during the year ended December 31, 2004 compared to December 31, 2003.
      Income on other interest-earning assets (consisting primarily of interest on federal funds and dividends on FHLB stock) decreased $0.7 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. This decrease primarily reflected the decrease in the dividends from the FHLB of New York.
      Interest expense on deposits increased $18.6 million or 34.9% to $71.8 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. This increase primarily reflects a $3.16 billion increase in the average balance of deposits. The increase in average balance was primarily the result of the $3.79 billion of deposits assumed in connection with the SIB transaction as well as the continued deposit growth through de novo branches. The average balance of core deposits increased $2.64 billion, or 71.0%, to $6.36 billion for the year ended December 31, 2004 compared to $3.72 billion for the year ended December 31, 2003. The average rate paid on deposits decreased 16 basis points to 0.86% for the year ended December 31, 2004 compared to 1.02% for the year ended December 31, 2003. Lower costing core deposits represented approximately 75.6% of total deposits at December 31, 2004 compared to 74.0% at December 31, 2003. This increase reflects the $2.66 billion of core deposits acquired from SIB as well as the success of the Company’s strategy to lower its overall cost of funds while emphasizing the expansion of its commercial and consumer relationships.
      Interest expense on borrowings (excluding subordinated notes) increased $37.7 million or 41.4% to $128.8 million for the year ended December 31, 2004 compared to $91.1 million for the year ended December 31, 2003. The increase was primarily due to an increase of $2.44 billion in the average balance of borrowings partially offset by a decline in the average rate paid on such borrowings of 125 basis points from 3.98% in the year ended December 31, 2003 to 2.73% in the year ended December 31, 2004. The increase in the average balance was primarily the result of the $2.65 billion of borrowings assumed in the SIB transaction. During the year ended December 31, 2004, the Company borrowed approximately $1.43 billion of fixed-rate borrowings with maturities of three to four years at a weighted average interest rate of 3.26% and

72


Table of Contents

$875.0 million of short-term low costing floating-rate FHLB borrowings which were partially offset by repayments of $2.40 billion of borrowings that matured in 2004. The funds borrowed were used primarily to fund multi-family and commercial real estate loan originations.
      Interest expense on subordinated notes increased $10.3 million to $13.3 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. The Bank issued $250.0 million aggregate principal amount of 3.75% Fixed Rate/ Floating Rate Subordinated Notes Due 2014 in the first quarter of 2004 and also issued $150.0 million in 3.5% Fixed Rate/ Floating Rate Subordinated Notes Due 2013 at the end of the second quarter of 2003.
      Provision for Loan Losses. The Company’s provision for loan losses decreased by $1.5 million from $3.5 million for the year ended December 31, 2003 to $2.0 million for the year ended December 31, 2004. The decrease was primarily due to an improvement in the characteristics of the loan portfolio. In assessing the level of the allowance for loan losses and the periodic provision charged to income, the Company considers the composition of its loan portfolio, the growth of loan balances within various segments of the overall portfolio, the state of the local (and to a certain degree, the national) economy as it may impact the performance of loans within different segments of the portfolio, the loss experience related to different segments or classes of loans, the type, size and geographic concentration of loans held by the Company, the level of past due and non-performing loans, the value of collateral securing the loan, the level of classified loans and the number of loans requiring heightened management oversight.
      Non-performing assets as a percentage of total assets decreased to 29 basis points at December 31, 2004, compared to 38 basis points at December 31, 2003. Non-performing assets increased 41.5% to $51.8 million at December 31, 2004 compared to $36.6 million at December 31, 2003. Included in non-performing assets at December 31, 2004 were $20.8 million of non-performing assets acquired from SIB. Included in the $49.3 million of non-performing loans at December 31, 2004 were $43.6 million of non-accrual loans and $5.5 million of loans contractually past maturity but which are continuing to pay in accordance with their original repayment schedule. At December 31, 2004 and 2003, the allowance for loan losses as a percentage of total non-performing loans was 205.8% and 217.3%, respectively. See “Business-Asset Quality” set forth in Item 1 hereof.
      Non-Interest Income. The Company continues to stress and emphasize the development of fee-based income throughout its operations. As a result of a variety of initiatives, including the acquisition of SIB, the Company experienced an $8.8 million, or 7.8%, increase in non-interest income to $121.5 million for the year ended December 31, 2004 compared to $112.7 million for the year ended December 31, 2003.
      During 2004, the Company recognized net losses of $8.8 million on securities compared with net gains of $0.5 million in 2003. Prior to December 31, 2004, the Company held as part of its available-for-sale portfolio $72.5 million of investment grade Fannie Mae preferred equity securities, predominately bearing fixed-rates, with aggregate unrealized losses of $12.7 million ($8.3 million after-tax). Such unrealized losses were treated as a reduction of other comprehensive income and thus, a reduction to equity. However, as a result of events at Fannie Mae during 2004, the Company recorded these previously unrealized losses as an other-than-temporary impairment at December 31, 2004. Consequently, the aggregate amortized cost of these securities were reduced by $12.7 million and a corresponding other-than-temporary impairment charge to net loss on securities was recognized. This non-cash charge reduced diluted earnings per share by $0.12 for the year ended December 31, 2004 but did not reduce stockholders’ equity or related capital ratios since it was previously recorded as an unrealized loss in stockholders’ equity. At December 31, 2004, these securities had an effective yield of 6.47% and were rated AA- and Aa3 by Standard & Poor’s and Moody’s.
      A primary driver of non-interest income is earnings from the Company’s mortgage-banking activities. Income from mortgage-banking activities increased $4.2 million to $29.6 million for the year ended December 31, 2004 compared to $25.4 million for the year ended December 31, 2003. The Company sells multi-family residential loans (both loans originated for sale and from portfolio) in the secondary market to Fannie Mae with the Company retaining servicing on all loans sold. Under the terms of the sales program, the Company also retains a portion of the associated credit risk. At

73


Table of Contents

December 31, 2004, the Company’s maximum potential exposure related to secondary market sales to Fannie Mae under this program was $156.1 million. The Company also has a program with PHH Mortgage to originate and sell single-family residential mortgage loans and servicing in the secondary market. See “Business-Lending Activities-Loan Originations, Purchases, Sales and Servicing” set forth in Item 1 hereof.
      During the year ended December 31, 2004, the Company sold $2.07 billion of multi-family loans under the program with Fannie Mae and sold $119.3 million of single-family residential loans. By comparison, during 2003, the Company sold $1.73 billion of multi-family loans and sold $174.2 million of single-family residential mortgages.
      Mortgage-banking activities for the year ended December 31, 2004 reflected $29.4 million in gains, $2.1 million of origination fees and $8.7 million in servicing fees partially offset by $10.6 million of amortization of servicing assets. Included in the $29.4 million of gains were $1.0 million of provisions recorded related to the retained credit exposure on multi-family residential loans sold. This category also included a $4.7 million decrease in the fair value of loan commitments for loans originated for sale and a $4.7 million increase in the fair value of forward loan sale agreements which were entered into with respect to the sale of such loans as a result of an increase in interest rates after the Company entered into the interest rate lock loan commitment and the forward loan sale agreements. The $4.2 million increase in mortgage-banking activities for the year ended December 31, 2004 compared to the year ended December 31, 2003 was primarily due to a $10.9 million increase in gains on sales partially offset by $1.8 million of lower origination and servicing fees and $4.9 million of additional amortization of capitalized servicing rights.
      Service fee income decreased $2.7 million, or, 3.8% to $66.6 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. Included in service fee income are prepayment and modification fees on loans which are a partial offset to the decreases realized in net interest margin. The $2.7 million decrease was principally due to a decrease of $11.0 million in mortgage prepayment fees to $12.9 million and a $4.4 million decrease in modification and extension fees to $2.2 million.
      Another component of service fees are revenues generated from the branch system which grew by $11.0 million, or 32.7% to $44.5 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. The increase was primarily due to additional fee income generated by the SIB branch network and continued de novo branch expansion.
      Income on BOLI increased $5.8 million or 65.5% to $14.6 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. The increase was due in part to the $134.1 million of BOLI acquired from SIB. The Company’s holdings in BOLI at December 31, 2004 was $321.0 million.
      Other non-interest income increased by $10.7 million to $19.2 million for the year ended December 31, 2004 compared to $8.5 million for the year ended December 31, 2003. The increase was primarily attributable to income from the Company’s equity investment in Meridian Capital combined with a tax refund related to the Company’s acquisition of Statewide in January 2000 and the gain experienced on the sale of a branch facility.
      Non-Interest Expense. Non-interest expense increased by $82.3 million, or 43.6%, for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase was primarily attributable to operating the expanded franchise resulting from the SIB transaction as well as the expansion of the Company’s commercial and retail banking and lending operations. This increase primarily reflects increases of $34.7 million in compensation and employee benefit expense, $17.1 million in occupancy costs, $16.6 million in other expenses, $6.4 million in amortization of identifiable intangible assets and $6.2 million in data processing fees.
      Compensation and employee benefits expense increased $34.7 million to $134.9 million for the year ended December 31, 2004 as compared to $100.2 million in the prior year. The increase in compensation and benefits expense for the comparable periods was primarily attributable to staff additions relating to the SIB transaction as well as the expansion of the Company’s commercial and retail banking and lending operations during 2003 and 2004, including the opening of six retail branches. In particular, the increase was due to increases of $25.3 million in salary and overtime expenses, $4.3 million in management incentive expenses, $3.1 million in medical costs, $2.4 million

74


Table of Contents

in FICA costs, $1.7 million in ESOP expenses and $1.5 million in stock-related benefit plan costs. Partially offsetting these increases were lower restricted stock award costs of $3.3 million.
      Occupancy costs increased by $17.1 million to $43.7 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. Data processing fees increased $6.2 million to $16.2 million for the year ended December 31, 2004 as compared to the same period in the prior year. The increase in both occupancy and data processing fees was due to operating the expanded branch franchise resulting from the SIB transaction combined with the increased number of branch facilities resulting from the continuation of the de novo branch program as well as the expansion of the commercial real estate lending activities to the Baltimore-Washington, Florida and Chicago markets through the establishment of loan production offices in these areas.
      The Company’s advertising expenses increased $1.3 million to $9.1 million from $7.8 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. The cost reflects the Company’s continued focus on brand awareness through, in part, increased advertising in print media, radio and direct marketing programs and support of the SIB transaction and de novo branches.
      Other non-interest expenses increased $16.6 million, or 39.2%, to $58.8 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. Other non-interest expenses include such items as professional services, business development expenses, equipment expenses, recruitment costs, office supplies, commercial bank fees, postage, insurance, telephone expenses and maintenance and security. Increases in non-interest expense are primarily attributable to operating the expanded franchise resulting from the SIB transaction. In addition, the Company has incurred additional costs associated with complying with the Sarbanes-Oxley Act of 2002 and the Bank Secrecy Act.
      Although the Company experienced an increase in non-interest expense during 2004, the efficiency ratio improved to 43.4% for the year ended December 31, 2004 compared to 46.2% for the year ended December 31, 2003. This improvement resulted primarily from the cost reductions associated with the synergies realized in the SIB transaction.
      Amortization of identifiable intangible assets increased $6.4 million during the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase was due to the amortization of the $87.1 million core deposit intangible associated with the SIB transaction which was partially offset by the intangible assets from a branch purchase transaction effected in fiscal 1996 being fully amortized during the three months ended March 31, 2004.
      Income Taxes. Income tax expense increased $35.5 million to $111.8 million for the year ended December 31, 2004 compared to the year ended December 31, 2003. The increase recorded in the 2004 period reflected the $110.7 million increase in the Company’s income before provision for income taxes which was partially offset by a decrease in the Company’s effective tax rate to 34.50% for the year ended December 31, 2004 compared to 35.75% for the year ended December 31, 2003.
      The effective tax rate was reduced due to the recognition of tax credit allocations received by Independence Community Commercial Reinvestment Corporation (“ICCRC”), a subsidiary of Independence Community Bank. The credits provided to ICCRC total 39% of the initial value of the $113.0 million investment and will be claimed over a seven-year credit allowance period. This investment was made in September 2004. See “Business-Subsidiaries” set forth in Item 1 hereof.
      As of December 31, 2004, the Company had a net deferred tax asset of $78.8 million compared to $55.7 million at December 31, 2003. The $23.1 million increase was primarily due to $34.6 million of deferred tax assets resulting from the SIB transaction which was partially offset by deferred tax liabilities established in connection with fair value purchase accounting adjustments resulting from the SIB transaction.
Regulatory Capital Requirements
      The Bank is subject to minimum regulatory capital requirements imposed by the FDIC which vary according to an institution’s capital level and the composition of its assets. An insured institution is required to maintain core capital of not less than 3.0% of total assets plus an additional amount of at least 100 to 200 basis points (“leverage capital ratio”). An insured institution must also maintain a ratio of total capital to risk-based assets of 8.0%. Although the minimum leverage capital ratio is

75


Table of Contents

3.0%, the Federal Deposit Insurance Corporation Improvement Act of 1991 stipulates that an institution with less than a 4.0% leverage capital ratio is deemed to be an “undercapitalized” institution which results in the imposition of certain regulatory restrictions. See “Business-Regulation-Capital Requirements” set forth in Item 1 hereof and Note 23 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof for a discussion of the Bank’s regulatory capital requirements and compliance therewith at December 31, 2005 and December 31, 2004.
Liquidity
      The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company’s primary sources of funds are deposits, the amortization, prepayment and maturity of outstanding loans, mortgage-related securities, the maturity of debt securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans, mortgage-related securities and maturing debt securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in federal funds sold and other short-term interest-earning assets that provide liquidity to meet lending and other funding requirements. The Company decreased its total borrowings (including subordinated and senior notes) to $5.60 billion at December 31, 2005 as compared to $5.91 billion at December 31, 2004. At December 31, 2005, the Company had the ability to borrow from the FHLB an additional $2.40 billion on a secured basis, utilizing mortgage-related loans and securities as collateral. See Note 12 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
      Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as federal funds sold, U.S. Treasury securities or preferred securities. On a longer term basis, the Company maintains a strategy of investing in its various lending products. The Company uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-related securities and investment securities. Certificates of deposit scheduled to mature in one year or less at December 31, 2005 totaled $2.42 billion or 65.1% of total certificates of deposit. Based on historical experience, management believes that a significant portion of maturing deposits will remain with the Company. The Company anticipates that it will continue to have sufficient funds, together with borrowings, to meet its current commitments.
      The Holding Company’s principal business is that of its subsidiary, the Bank. The Holding Company invested 50% of the net proceeds from the Conversion in 1998 in the Bank and initially invested the remaining proceeds in short-term securities and money market investments. The Bank can pay dividends to the Holding Company to the extent such payments are permitted by law or regulation, which serves as an additional source of liquidity.
      The Holding Company’s liquidity is available to, among other things, fund acquisitions, support future expansion of operations or diversification into other banking related businesses, pay dividends or repurchase its common stock.
      Restrictions on the amount of dividends the Holding Company and the Bank may declare can affect the Company’s liquidity and cash flow needs. Under Delaware law, the Holding Company is generally limited to paying dividends to the extent of the excess of net assets of the Holding Company (the amount by which total assets exceed total liabilities) over its statutory capital or, if no such excess exists, from its net profits for the current and/or immediately preceding year.
      The Bank’s ability to pay dividends to the Holding Company is also subject to certain restrictions. Under the New York Banking Law, dividends may be declared and paid only out of the net profits of the Bank. The approval of the Superintendent of Banks of the State of New York is required if the total of all dividends declared in any calendar year will exceed the net profits for that year plus the retained net profits of the preceding two years, less any required transfers. In addition, in connection with the Conversion, the Bank elected to be deemed a savings association for certain purposes. As a result, the Bank must give notice to the OTS of a proposed capital distribution. In addition, no dividends may be declared, credited or paid if the effect thereof would cause the Bank’s capital to be reduced below the amount required by the Superintendent or the FDIC. See

76


Table of Contents

“Business - Regulation-The Bank - Limitations of Dividends” set forth in Item 1 hereof.
Impact of Inflation and Changing Prices
      The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, virtually all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than does the effect of inflation.
Impact of New Accounting Pronouncements
      For a discussion of the Impact of New Accounting Pronouncements on the Company’s financial condition or results of operations, see Note 3 of the “Notes to Consolidated Financial Statements” set forth in Item 8 hereof.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
       General. Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments. As a financial institution, the Company’s primary component of market risk is interest rate risk. Interest rate risk is defined as the sensitivity of the Company’s current and future earnings to changes in the level of market rates of interest. Market risk arises in the ordinary course of the Company’s business, as the repricing characteristics of its assets do not match those of its liabilities. Based upon the Company’s nature of operations, the Company is not subject to foreign currency exchange or commodity price risk. The Company’s various loan portfolios, concentrated primarily within the greater New York City metropolitan area (which includes parts of New Jersey and southern Connecticut), are subject to risks associated with the local economy. The Company does not own any trading assets.
      Net interest margin represents net interest income as a percentage of average interest-earning assets. Net interest margin is directly affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of assets and liabilities and the credit quality of the loan portfolio. Management’s asset/liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks and to maintain adequate liquidity.
      Management responsibility for interest rate risk resides with the Asset and Liability Management Committee (“ALCO”). The committee is chaired by the Chief Financial Officer, and includes the Chief Executive Officer, the Chief Credit Officer and the Company’s senior business-unit and financial executives. Interest rate risk management strategies are formulated and monitored by ALCO within policies and limits approved by the Board of Directors. These policies and limits set forth the maximum risk which the Board of Directors deems prudent, govern permissible investment securities and off-balance sheet instruments, and identify acceptable counterparties to securities and off-balance sheet transactions.
      ALCO risk management strategies allow for the assumption of interest rate risk within the Board approved limits. The strategies are formulated based upon ALCO’s assessments of likely market developments and trends in the Company’s lending and consumer banking businesses. Strategies are developed with the aim of enhancing the Company’s net income and capital, while ensuring the risks to income and capital from adverse movements in interest rates are acceptable.
      The Company’s strategies to manage interest rate risk include, but are not limited to, (i) increasing the interest sensitivity of its mortgage loan portfolio through the use of adjustable-rate loans or relatively short-term (primarily five years) balloon loans, (ii) originating relatively short-term or variable-rate consumer and commercial business loans as well as mortgage warehouse lines of credit, (iii) investing in securities available-for-sale, primarily mortgage-related instruments, with maturities or estimated average lives of less than five years, (iv) promoting stable savings, demand and other transaction accounts, (v) utilizing variable-rate borrowings which have imbedded derivatives to cap the cost of borrowings, (vi) using interest rate swaps to modify the repricing characteristics of certain variable rate borrowings, (vii) entering into forward loan sale agreements to offset rate risk on rate-locked

77


Table of Contents

loan commitments originated for sale, (viii) maintaining a strong capital position and (ix) maintaining a relatively high level of liquidity and/or borrowing capacity.
      As part of the overall interest rate risk management strategy, management has entered into derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The interest rate risk management strategy at times involves modifying the repricing characteristics of certain borrowings and entering into forward loan sale agreements to offset rate risk on rate-locked loan commitments originated for sale so that changes in interest rates do not have a significant adverse effect on net interest income, net interest margin and cash flows. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include forward loan sale agreements and interest rate swaps. The Company had no interest rate swaps outstanding at December 31, 2005 and 2004.
      At December 31, 2005, the Company had $78.4 million of loan commitments outstanding related to loans being originated for sale. Of such amount, $53.9 million related to loan commitments for which the borrowers had not entered into interest rate locks and $24.5 million which were subject to interest rate locks. At December 31, 2005, the Company had $24.5 million of forward loan sale agreements. The fair market value of the loan commitments with interest rate locks was a loss of $0.1 million and the fair market value of the related forward loan sale agreements was a gain of $0.1 million at December 31, 2005.
      Management uses a variety of analyses to monitor the sensitivity of net interest income. Its primary analysis tool is a dynamic net interest income simulation model complemented by a traditional interest rate gap analysis and, to a lesser degree, a net portfolio value analysis.
      Net Interest Income Simulation Model. The simulation model measures the sensitivity of net interest income to changes in market interest rates. The simulation involves a degree of estimation based on certain assumptions that management believes to be reasonable. Factors considered include contractual maturities, prepayments, repricing characteristics, deposit retention and the relative sensitivity of assets and liabilities to changes in market interest rates.
      The Board has established certain limits for the potential volatility of net interest income as projected by the simulation model. Volatility is measured from a base case where rates are assumed to be flat. Volatility is expressed as the percentage change, from the base case, in net interest income over a 12-month period.
      The model is kept static with respect to the composition of the balance sheet and, therefore does not reflect management’s ability to proactively manage asset composition in changing market conditions. Management may choose to extend or shorten the maturities of the Company’s funding sources and redirect cash flows into assets with shorter or longer durations.
      Based on the information and assumptions in effect at December 31, 2005, the model shows that a 200 basis point gradual increase in interest rates over the next twelve months would decrease net interest income by $21.0 million or 4.6%, while a 200 basis point gradual decrease in interest rates would decrease net interest income by $3.2 million or 0.7%.
      Gap Analysis. Gap analysis complements the income simulation model, primarily focusing on the longer term structure of the balance sheet. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s “interest rate sensitivity gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At December 31, 2005, the Company’s one-year cumulative gap position was a negative 14.89% compared to a negative 2.57% at December 31, 2004. The change in the one-year cumulative gap position was primarily the result of the increase in the balance of certificates of deposit due to mature within one year combined with the decline in the securities available-for-sale portfolio

78


Table of Contents

and the reduced balance in the mortgage warehouse lines of credit portfolio. A negative gap will generally result in the net interest margin decreasing in a rising rate environment and increasing in a falling rate environment. A positive gap will generally have the opposite results on the net interest margin.
      The following gap analysis table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005 that are anticipated by the Company, using certain assumptions based on historical experience and other market-based data, to reprice or mature in each of the future time periods shown. The amount of assets and liabilities shown which reprice or mature during a particular period was determined in accordance with the earlier of the term to reprice or the contractual maturity of the asset or liability.
      The gap analysis, however, is an incomplete representation of interest rate risk and has certain limitations. The gap analysis sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2005 on the basis of contractual maturities, anticipated prepayments, callable features and scheduled rate adjustments for selected time periods. The actual duration of mortgage loans and mortgage-backed securities can be significantly affected by changes in mortgage prepayment activity. The major factors affecting mortgage prepayment rates are prevailing interest rates and related mortgage refinancing opportunities. Prepayment rates will also vary due to a number of other factors, including the regional economy in the area where the underlying collateral is located, seasonal factors and demographic variables.
      In addition, the gap analysis does not account for the effect of general interest rate movements on the Company’s net interest income because the actual repricing dates of various assets and liabilities will differ from the Company’s estimates and it does not give consideration to the yields and costs of the assets and liabilities or the projected yields and costs to replace or retain those assets and liabilities. Callable features of certain assets and liabilities, in addition to the foregoing, may also cause actual experience to vary from that indicated. The uncertainty and volatility of interest rates, economic conditions and other markets which affect the value of these call options, as well as the financial condition and strategies of the holders of the options, increase the difficulty and uncertainty in predicting when they may be exercised.
      Among the factors considered in our estimates are current trends and historical repricing experience with respect to similar products. As a result, different assumptions may be used at different points in time. Within the one year time period, money market accounts, savings accounts and NOW accounts were assumed to decay at 55%, 15% and 40%, respectively. Deposit decay rates (estimated deposit withdrawal activity) can have a significant effect on the Company’s estimated gap. While the Company believes such assumptions are reasonable, there can be no assurance that these assumed decay rates will approximate actual future deposit withdrawal activity.

79


Table of Contents

      The following table reflects the repricing of the balance sheet, or “gap” position at December 31, 2005.
                                                           
(In Thousands)   0 - 90 Days   91 - 180 Days   181 - 365 Days   1 - 5 Years   Over 5 Years   Total   Fair Value
 
Interest-earning assets:
                                                       
 
Mortgage loans(1)
  $ 489,131     $ 256,947     $ 526,246     $ 4,877,735     $ 4,224,310     $ 10,374,369     $ 10,303,636  
 
Commercial business and other loans
    1,044,765       87,658       159,242       461,690       194,718       1,948,073       1,926,808  
 
Securities available-for-sale(2)
    287,820       185,393       372,417       2,168,952       636,453       3,651,035       3,574,500  
 
Other interest-earning assets(3)
    720,246                         167,294       887,540       887,540  
                                           
Total interest-earning assets
    2,541,962       529,998       1,057,905       7,508,377       5,222,775       16,861,017       16,692,484  
Interest-bearing liabilities:
                                                       
 
Savings, NOW and money market
deposits
    533,841       533,841       1,067,681       1,219,596       2,398,773       5,753,732       5,753,732  
 
Certificates of deposit
    1,051,422       732,386       569,816       1,361,970             3,715,594       3,725,319  
 
Borrowings
    1,546,729       170,000       767,000       2,309,249       163,751       4,956,729       4,965,624  
 
Subordinated notes
    (64 )     (64 )     (128 )     (1,025 )     398,541       397,260       380,000  
 
Senior notes
    (106 )     (106 )     (212 )     248,410             247,986       243,750  
                                           
Total interest-bearing liabilities
    3,131,822       1,436,057       2,404,157       5,138,200       2,961,065       15,071,301       15,068,425  
Interest sensitivity gap
    (589,860 )     (906,059 )     (1,346,252 )     2,370,177       2,261,710                  
                                           
Cumulative interest sensitivity gap
  $ (589,860 )   $ (1,495,919 )   $ (2,842,171 )   $ (471,994 )   $ 1,789,716                  
                                           
Cumulative interest sensitivity gap as a percentage of total
assets
    (3.09 )%     (7.84 )%     (14.89 )%     (2.47 )%     9.38 %                
                                           
 
(1)  Based upon contractual maturity, repricing date, if applicable, and management’s estimate of principal prepayments. Includes loans available-for-sale.
 
(2)  Based upon contractual maturity, repricing date, if applicable, and projected repayments of principal based upon experience. Amounts exclude the unrealized gains/(losses) on securities available-for-sale.
 
(3)  Includes interest-earning cash and due from banks, overnight deposits and FHLB stock.
     NPV Analysis. To a lesser degree, the Company also utilizes net portfolio value (“NPV”) analysis to monitor interest rate risk over a range of interest rate scenarios.
      NPV is defined as the net present value of the expected future cash flows of an entity’s assets and liabilities and, therefore, theoretically represents the market value of the Company’s net worth. Increases in the value of assets will increase the NPV whereas decreases in value of assets will decrease the NPV. Conversely, increases in the value of liabilities will decrease NPV whereas decreases in the value of liabilities will increase the NPV. The changes in value of assets and liabilities due to changes in interest rates reflect the interest rate sensitivity of those assets and liabilities as their values are derived from the characteristics of the asset or liability (i.e. fixed rate, adjustable rate, caps, floors) relative to the interest rate environment. For example, in a rising interest rate environment, the fair value of a fixed-rate asset will decline whereas the fair value of an adjustable-rate asset, depending on its repricing characteristics, may not decline. In a declining interest rate environment, the converse may be true.

80


Table of Contents

      The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The model assumes estimated loan prepayment rates and reinvestment rates similar to the Company’s historical experience. The following sets forth the Company’s NPV as of December 31, 2005.
                                         
        NPV as % of Portfolio
    Net Portfolio Value   Value of Assets
         
Change (in Basis points) in Interest Rates   Amount   $ Change   NPV % Change   Ratio   Change in NPV Ratio
 
    (Dollars In Thousands    
+200
  $ 1,444,324     $ (395,084 )     (21.48 )%     8.29 %     (1.64 )%
0
    1,839,408                   9.93        
-100
    2,084,172       244,764       13.31       10.94       1.01  
      As of December 31, 2005, the Company’s NPV was $1.84 billion, or 9.93% of the market value of assets. Following a 200 basis point assumed increase in interest rates, the Company’s “post shock” NPV was estimated to be $1.44 billion, or 8.29% of the market value of assets reflecting a decrease of 1.64% in the NPV ratio.
      As of December 31, 2004, the Company’s NPV was $2.13 billion, or 12.10% of the market value of assets. Following a 200 basis point assumed increase in interest rates, the Company’s “post shock” NPV was estimated to be $1.74 billion, or 10.52% of the market value of assets reflecting a decrease of 1.58% in the NPV ratio.
      Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV table presented assumes that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV table provides an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.

81


Table of Contents

ITEM 8.       Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Independence Community Bank Corp.
      We have audited the accompanying consolidated statements of financial condition of Independence Community Bank Corp. (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the financial statements referred to above present fairly, in all material respects, the consoli