INDEPENDENCE COMMUNITY BANK CORP - 10-Q Quarterly Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-23229

INDEPENDENCE COMMUNITY BANK CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 13-3387931
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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)

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

Yes [X] No [ ]

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. At August 6, 2002,
the registrant had 57,201,752 shares of common stock ($.01 par value per share)
outstanding.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

INDEPENDENCE COMMUNITY BANK CORP.

TABLE OF CONTENTS

1

INDEPENDENCE COMMUNITY BANK CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

See accompanying notes to consolidated financial statements.
2

INDEPENDENCE COMMUNITY BANK CORP.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes to consolidated financial statements.
3

INDEPENDENCE COMMUNITY BANK CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

See accompanying notes to consolidated financial statements.

4

INDEPENDENCE COMMUNITY BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes to consolidated financial statements.
5

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION/FORM OF OWNERSHIP

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

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

As part of the conversion and reorganization, Independence Community Bank
Corp. (the "Company") was incorporated under Delaware law in June 1997. The
Company is regulated by the Office of Thrift Supervision ("OTS") as a registered
savings and loan holding company. The Company completed its initial public
offering on March 13, 1998 and issued 70,410,880 shares of common stock
resulting in proceeds of $685.7 million, net of expenses, which totaled $18.4
million. The Company used $343.0 million, or approximately 50% of the net
proceeds, to purchase all of the outstanding stock of the Bank. The Company also
loaned $98.9 million to the Company's Employee Stock Ownership Plan (the "ESOP")
which used such funds to purchase 5,632,870 shares of the Company's common stock
in the open market subsequent to completion of the initial public offering.

As part of the Plan of Conversion, the Company formed the Independence
Community Foundation (the "Foundation") and concurrently with the completion of
the initial public offering donated 5,632,870 shares of common stock of the
Company valued at the time of its contribution at $56.3 million. The Foundation
was established in order to further the Company's and the Bank's commitment to
the communities they serve.

Additionally, the Bank established, in accordance with the requirements of
the New York State Banking Department ("Department"), a liquidation account for
the benefit of depositors of the Bank as of March 31, 1996 and September 30,
1997 in the amount of $319.7 million, which was equal to the Bank's total equity
as of the date of the latest consolidated statement of financial condition
(August 31, 1997) appearing in the final prospectus used in connection with the
reorganization and conversion of the Bank and the Mutual Holding Company.

The Board of Directors declared the Company's sixteenth consecutive
quarterly cash dividend on July 26, 2002. The dividend amounted to $0.13 per
share of common stock and is payable on August 22, 2002 to shareholders of
record on August 8, 2002.

On September 28, 2001 the Company announced that its Board of Directors
authorized the ninth stock repurchase plan for up to an additional three million
shares of the Company's outstanding common shares. As of June 30, 2002, a total
of 1,413,721 shares had been repurchased at an average cost of $26.73 per share
under the ninth repurchase plan. As of June 30, 2002, a total of 28,716,566
shares had been purchased at an aggregate cost of $424.1 million pursuant to the
Company's nine repurchase programs. Repurchases will be made by the Company from
time to time in open-market transactions as, in the opinion of management,
market and other conditions warrant.

The repurchased shares are held as treasury stock. As discussed below, a
portion of such shares was utilized to fund the stock portion of the merger
consideration paid in two acquisitions of other financial institutions by the
Company. Treasury shares also are being used to fund the Company's stock benefit
plans, in particular, the 1998 Stock Option Plan ("Option Plan"), the Directors
Fee Plan and the 2002 Stock Incentive Plan ("Stock Incentive Plan") which was
approved by stockholders at the May 23, 2002 annual meeting, and for general
corporate purposes.

6

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Financial Statement Presentation

The accompanying financial statements were prepared in accordance with
instructions to Form 10-Q and therefore do not include all the information or
footnotes necessary for a complete presentation of financial condition, results
of operations and cash flows in conformity with generally accepted accounting
principles. All normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations for the six months
ended June 30, 2002 are not necessarily indicative of the results to be expected
for the year ending December 31, 2002. These interim financial statements should
be read in conjunction with the Company's consolidated audited financial
statements and the notes thereto contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.

Business

The Company's principal business is conducted through the Bank, which is a
full-service, community-oriented financial institution headquartered in
Brooklyn, New York. The Bank currently operates 72 full-service banking offices
located in the greater New York Metropolitan area, which includes the five
boroughs of New York City, Nassau, Suffolk and Westchester Counties of New York
and the Northern New Jersey counties of Essex, Union, Bergen, Hudson and
Middlesex. The Company currently expects to expand its branch network through
the opening of approximately twelve branch locations, including approximately
three in Manhattan, during the next twelve to eighteen months. During the six
months ended June 30, 2002, the Company opened three new locations, one each in
Westchester and Suffolk Counties, and one on Staten Island, which opened during
the second quarter. The Bank's deposits are insured by the Bank Insurance Fund
and the Savings Association Insurance Fund to the maximum extent permitted by
law. The Bank is subject to examination and regulation by the Federal Deposit
Insurance Corporation, which is the Bank's primary federal regulator, and the
Department, which is the Bank's chartering authority and its primary state
regulator. The Bank also is subject to certain reserve requirements established
by the Board of Governors of the Federal Reserve System and is a member of the
Federal Home Loan Bank ("FHLB") of New York, which is one of the 12 regional
banks comprising the FHLB system. The Company is subject to the examination and
regulation of the Office of Thrift Supervision as a registered savings and loan
holding company.

3. EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted EPS is computed
using the same method as basic EPS, but reflects the potential dilution of
common stock equivalents. Shares of common stock held by the ESOP that have not
been allocated to participants' accounts or are not committed to be released for
allocation as well as non-vested 1998 Recognition and Retention Plan and Trust
Agreement (the "Recognition Plan") shares are not considered to be outstanding
for the calculation of basic EPS. However, a portion of such shares is
considered in the calculation of diluted EPS as common stock equivalents of
basic EPS. Basic and diluted weighted-average common shares outstanding were
51,822,272 and 55,141,152 shares, respectively, for the quarter ended June 30,
2002 compared to 52,472,381 and 54,201,793 shares, respectively for the quarter
ended June 30, 2001. For the six months ended June 30, 2002, basic and diluted
weighted-average common shares outstanding were 51,874,302 and 55,020,647
shares, respectively, compared to 52,624,416 and 54,013,127 shares,
respectively, for the six months ended June 30, 2001.

7

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. BENEFIT PLANS

Employee Stock Ownership Plan

To fund the purchase in the open market of 5,632,870 shares of the
Company's common stock, the ESOP borrowed funds from the Company. The loan to
the ESOP is being repaid principally from the Bank's contributions to the ESOP
over a period of 20 years. Dividends paid by the Company on shares owned by the
ESOP also are utilized to repay the debt. The collateral for the loan is the
shares of common stock of the Company purchased by the ESOP.

Shares held by the ESOP are held by an independent trustee for allocation
among participants as the loan is repaid. The number of shares released annually
is based upon the ratio that the current principal and interest payments bears
to the original principal and interest payments to be made. ESOP participants
become 100% vested in the ESOP after three years of service. Compensation
expense related to the 140,822 shares committed to be released during the six
months ended June 30, 2002 was $3.8 million, which was equal to the shares
committed to be released by the ESOP multiplied by the average fair value of the
common stock during the period in which they were released. At June 30, 2002,
1,012,018 shares were allocated to participants' accounts.

1998 Recognition and Retention Plan

The Recognition Plan was implemented in September 1998 and may make
restricted stock awards in an aggregate amount up to 2,816,435 shares (4% of the
shares of common stock sold in the Conversion). During fiscal 1999, the
Recognition Plan purchased all 2,816,435 shares in the open market. The
Recognition Plan provides that awards may be designated as performance share
awards, subject to the achievement of performance goals, or non-performance
share awards which are subject solely to time vesting requirements. Certain
participants have been granted performance-based shares. These shares become
earned only if annually-established corporate performance targets are achieved.
On September 25, 1998, the Committee administering the Recognition Plan issued
grants covering 2,188,517 shares of stock of which 844,931 were deemed
performance based. The Committee granted performance-based share awards of
200,000 and 11,000 in fiscal 2001 and the six months ended June 30, 2002,
respectively and non-performance share awards covering 25,363 shares, 105,363
shares and 76,075 shares during the fiscal year ended March 31, 2001, the nine
months ended December 31, 2001 and the six months ended June 30, 2002,
respectively. The stock awards granted to date are generally payable over a
five-year period at a rate of 20% per year, beginning one year from the date of
grant. However, certain stock awards granted during the six months ended June
30, 2002 will be 100% vested after four years from the date of grant. Subject to
certain exceptions, awards become 100% vested upon termination of employment due
to death, disability or retirement. However, senior officers and non-employee
directors of the Company who elect to retire, require the approval of the Board
of Directors or the Committee administering the Recognition Plan to accelerate
the vesting of these shares. The amounts also become 100% vested upon a change
in control of the Company. Compensation expense is recognized over the vesting
period at the fair market value of the common stock on the date of grant for
non-performance share awards. The expense related to performance share awards is
recognized over the vesting period at the fair market value on the measurement
date. The Company recorded compensation expense of $4.7 million related to the
Recognition Plan for the six months ended June 30, 2002.

1998 Stock Option Plan

The Option Plan was implemented in September 1998. The Option Plan may
grant options covering shares aggregating an amount equal to 7,041,088 shares
(10% of the shares of common stock sold in the Conversion). Under the Option
Plan, stock options (which expire ten years from the date of grant) have been
granted to officers, key employees and non-employee directors of the Company.
The option exercise price per share was the fair market value of the common
stock on the date of grant. Each stock option or portion thereof

8

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

is exercisable at any time on or after such option vests and is generally
exercisable until the earlier of ten years after its date of grant or six months
after the date on which the optionee's employment terminates (three years after
termination of service in the case of non-employee directors), unless extended
by the Board of Directors to a period not to exceed five years from the date of
such termination. Subject to certain exceptions, options become 100% exercisable
upon termination of employment due to death, disability or retirement. However,
senior officers and non-employee directors of the Company who elect to retire,
require the approval of the Board of Directors or the Committee administering
the Option Plan to accelerate the vesting of options. Options become 100% vested
upon a change in control of the Company. On September 25, 1998, the Board of
Directors issued options covering 6,101,608 shares of common stock vesting over
a five-year period at a rate of 20% per year, beginning one year from date of
grant. The Board of Directors granted options covering 325,000, 295,500 and
88,000 shares, respectively, during the fiscal year ended March 31, 2001, the
nine months ended December 31, 2001 and the six months ended June 30, 2002. The
granting of these options did not affect the Company's results of operations for
the six months ended June 30, 2002 or its statement of condition at June 30,
2002. In the first six months of 2002, the Committee administering the Plan
approved the acceleration of 8,000 options due to the retirement of a senior
officer, resulting in $0.1 million of compensation expense. At June 30, 2002,
there were 6,117,714 options outstanding pursuant to the 1998 Stock Option Plan.

2002 Stock Incentive Plan

The Stock Incentive Plan was approved by stockholders at the May 23, 2002
annual meeting. The Stock Incentive Plan may grant options covering shares
aggregating an amount equal to 2,800,000 shares. Options awarded under the Stock
Incentive Plan generally vest over a four-year period at a rate of 25% per year
and expire ten years from the date of grant. The Board of Directors granted
options covering 788,650 shares during the six months ended June 30, 2002. The
granting of these options did not affect the Company's results of operations for
the six months ended June 30, 2002 or its statement of condition at June 30,
2002.

Other Stock Plans

Broad National Bancorporation ("Broad") and Statewide Financial Corp.
("Statewide") maintained several stock option plans for officers, directors and
other key employees. Generally, these plans granted options to individuals at a
price equivalent to the fair market value of the stock at the date of grant.
Options awarded under the plans generally vested over a five-year period and
expired ten years from the date of grant. In connection with the Broad and
Statewide acquisitions, options which were converted by election of the option
holders to options to purchase the Company's common stock totaled 602,139 and
became 100% exercisable at the effective date of the acquisitions. At June 30,
2002, there were 159,283 options outstanding related to these plans.

5. COMPREHENSIVE INCOME

Comprehensive income includes net income and all other changes in equity
during a period, except those resulting from investments by owners and
distribution to owners. Other comprehensive income includes revenues, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income, but excluded from net income. Comprehensive
income and accumulated other comprehensive income are reported net of related
income taxes. Accumulated other comprehensive income consists solely of
unrealized gains and losses on available-for-sale securities.

9

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. SECURITIES AVAILABLE-FOR-SALE

The amortized cost and estimated fair value of securities
available-for-sale at June 30, 2002 are as follows:

10

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The amortized cost and estimated fair value of securities
available-for-sale at December 31, 2001 are as follows:

11

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LOAN PORTFOLIO COMPOSITION

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

12

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. NON-PERFORMING ASSETS

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

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

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

(3) Net of related loss allowances.

9. ALLOWANCE FOR LOAN LOSSES

It is management's policy to maintain an allowance for loan losses based
upon, among other things, an assessment of prior loss experience, total loans
outstanding, the volume of loan originations, the type, size and geographic
concentration of loans held by the Company, general economic conditions as well
as those existing in the Bank's market area, the level of past due and
non-accrual loans, the value of collateral securing the loans, the level of
classified loans and the number of loans requiring heightened management
oversight. Management believes that based on information currently available,
the Company's allowance for possible loan losses is sufficient to cover all
known and inherent losses in its loan portfolio that are both probable and

13

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reasonable to estimate at this time. In the future, management may adjust the
level of its allowance for loan losses as economic and other conditions dictate.

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

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

(2) Non-performing loans consist of (i) non-accrual loans, (ii) loans 90 days or
more past due as to interest or principal and (iii) other loans which have
been identified by the Company as presenting uncertainty with respect to the
collectibility of interest or principal.

10. GOODWILL AND INTANGIBLE ASSETS

Effective April 1, 2001, the Company adopted SFAS No. 142, which resulted
in discontinuing the amortization of goodwill. Under the Statement, goodwill is
instead carried at its book value as of April 1, 2001 and any future impairment
of goodwill will generally be recognized as non-interest expense in the period
of impairment. However, under the terms of the Statement, identifiable
intangibles (such as core deposit premiums) with identifiable lives will
continue to be amortized.

The Company's goodwill was $185.2 million at June 30, 2002 and December 31,
2001. The Company did not recognize an impairment loss as a result of its
transitional impairment test effective April 1, 2001 or its annual impairment
test effective October 1, 2001. The Company will test the value of its goodwill
at least annually.

14

INDEPENDENCE COMMUNITY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the Company's identifiable intangible assets
at the periods indicated:

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

2002........................................................ $6,935
2003........................................................ $1,855
2004........................................................ $ 191
2005........................................................ $ --

Amortization expense on intangible assets was $1.7 million and $1.9 million
for the quarters ended June 30, 2002 and 2001, respectively, and $3.6 million
for both the six months ended June 30, 2002 and 2001. In addition, the six month
2001 period included $3.6 million related to the amortization of goodwill
reflecting the amortization of goodwill occurring prior to the adoption of the
Statement by the Company.

The following table discloses the effect on net income and basic and
diluted earnings per share of excluding amortization expense related to goodwill
which was recognized in the six months ended June 30, 2001 as if such goodwill
had not been recognized in accordance with SFAS No. 142.

15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

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

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

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

In addition to historical information, this Quarterly Report on Form 10-Q
includes certain "forward-looking statements" based on current management
expectations. The Company's actual results could differ materially, as defined
in the Securities Act of 1933 and the Securities Exchange Act of 1934, from
management's expectations. Such forward-looking statements include statements
regarding management's current intentions, beliefs or expectations as well as
the assumptions on which such statements are based. These forward-looking
statements are subject to significant business, economic and competitive
uncertainties and contingencies, many of which are not subject to the Company's
control. Stockholders and potential stockholders are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Factors that could cause
future results to vary from current management expectations include, but are not
limited to, general economic conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, changes in tax policies,
rates and regulations of federal, state and local tax authorities, changes in
interest rates, deposit flows, the cost of funds, demand for loan products,
demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, availability and cost of energy
resources and other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
fees.

The Company undertakes no obligation to update or revise any
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results overtime.

CHANGES IN FINANCIAL CONDITION

General

Total assets at June 30, 2002 were $7.96 billion, an increase of $333.9
million, from $7.62 billion at December 31, 2001. The increase resulted mainly
from the growth of the Company's available-for-sale securities portfolio, which
was funded by increased deposits and borrowings. At June 30, 2002, by comparison
to December 31, 2001, the Company's available-for-sale securities portfolio,
loan portfolio and other assets had grown by $276.8 million, $61.3 million and
$24.0 million, respectively. The increases were partially offset by a $28.8
million decrease in cash and cash equivalents.

16

Cash and Federal Funds Sold (Collectively "Cash and Cash Equivalents")

Cash and cash equivalents decreased by 13.8%, from $207.6 million at
December 31, 2001 to $178.9 million at June 30, 2002. The $28.8 million decrease
was principally due to the use of such assets to fund security purchases and
loan originations. (see "-- Securities available-for-sale" and "Loans" below).

Securities Available-for-Sale

The aggregate available-for-sale securities portfolio (which includes
investment securities and mortgage-related securities) increased $276.8 million
or 26.9% from $1.03 billion at December 31, 2001 to $1.30 billion at June 30,
2002.

The Company's mortgage-related securities portfolio increased from $902.2
million at December 31, 2001 to $1.16 billion at June 30, 2002. The portfolio
was comprised of $1.12 billion of AAA rated CMOs and $47.5 million of CMOs which
were issued or guaranteed by the FHLMC, the FNMA or the GNMA ("Agency CMOs").
The $261.9 million increase in the portfolio was primarily due to purchases of
$467.5 million of AAA rated CMOs with an average yield of 6.17% and $58.4
million of Agency CMOs with a weighted average yield of 5.65%. Partially
offsetting the purchases were proceeds totaling approximately $249.2 million
received from normal principal repayments and a $14.7 million sale of an agency
CMO at a loss of $0.2 million.

As of June 30, 2002 and December 31, 2001, the Company's investment
securities totaled $140.8 million and $125.8 million, respectively, all of which
were classified as available-for-sale. The $15.0 million increase was primarily
due to purchases of preferred securities and bonds totaling $70.5 million which
were partially offset by the proceeds from maturing securities of $4.8 million
and from sales of $50.3 million of securities with a weighted average yield of
4.16% at a $0.5 million gain.

At June 30, 2002, the Company had a $14.7 million net unrealized gain on
available-for-sale investment and mortgage-related securities as compared to a
$13.7 million net unrealized gain at December 31, 2001.

Loans

Loans increased by $61.3 million or 1.0% to $5.94 billion at June 30, 2002
from $5.88 billion at December 31, 2001. The Company continued its focus on
expanding its higher yielding portfolios of commercial real estate and
commercial business loans as part of its business plan. The Company originated
for its own portfolio during the six months ended June 30, 2002 approximately
$470.7 million of mortgage loans.

Multi-family residential loans increased $74.1 million to $2.81 billion at
June 30, 2002 compared to $2.73 billion at December 31, 2001. The increase was
primarily due to approximately $320.2 million of originations for portfolio
retention partially offset by $235.4 million of repayments. Commercial real
estate loans increased by $49.6 million during the six months ended June 30,
2002. The Company originated $144.4 million of commercial real estate loans
during the six months ended June 30, 2002 but experienced $94.8 million of
repayments during the period. As a result of these activities, multi-family
residential mortgage loans comprised 47.2% and commercial real estate loans
comprised 18.0% of the loan portfolio at June 30, 2002. In addition to
continuing to generate mortgage loans for portfolio secured by multi-family and
commercial real estate, the Company also originates and sells 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 six months ended June 30, 2002, the Company sold $423.0 million of such
loans. As a result of this sales activity, at June 30, 2002, the Company
serviced $1.33 billion of multi-family loans for Fannie Mae.

Mortgage warehouse lines of credit are short-term secured advances extended
to mortgage-banking companies primarily to fund the origination of one-to-four
family mortgages. Mortgage warehouse lines of credit decreased $82.4 million
from $446.5 million at December 31, 2001 to $364.1 million at June 30, 2002, due
to normal seasonality. Commercial business loans increased $129.4 million or
19.4% to $795.3 million at June 30, 2002 primarily due to originations and
advances during the six months ended June 30, 2002 of $255.6 million partially
offset by loan repayments of $119.0 million. Partially offsetting the growth in
the multi-family and commercial real estate business loan portfolios was the
run-off of the Company's residential mortgage portfolio. Single-family
residential and cooperative apartment loans decreased $148.4 million from
17

an aggregate of $852.8 million at December 31, 2001 to an aggregate of $704.4
million at June 30, 2002. The decline was due to run-off as a result of the
competitive interest rate environment as well as the reduced emphasis on
originating these loans for portfolio in favor of higher yielding commercial
real estate and business loans. The Company originates and sells single-family
residential mortgage loans under a mortgage origination assistance agreement
with Cendant Mortgage Corporation ("Cendant"). The Company funds the loans
directly and sells the loans and related servicing to Cendant. The Company sold
$64.8 million of such loans during the six months ended June 30, 2002.

Non-Performing Assets

The overall quality of the Company's assets remained strong with
non-performing assets as a percentage of total assets amounting to 47 basis
points (0.47%) at June 30, 2002 compared to 61 basis points (0.61%) at December
31, 2001. At June 30, 2002, the Company's non-performing assets consisted of
$34.9 million of non-accrual loans, $145,000 of loans past due 90 days or more
as to interest and accruing, $2.3 million of loans past due 90 days or more as
to principal and accruing ($0.7 million of which were commercial real estate
loans and $1.6 million of which were multi-family residential loans) and $7,000
of other real estate acquired through foreclosure or deed-in-lieu thereof.
Non-performing assets decreased by $8.8 million to $37.3 million at June 30,
2002 from $46.2 million at December 31, 2001.

The decrease was primarily due to a $15.8 million decrease in loans past
due 90 days or more as to principal but still accruing interest, partially
offset by a $7.1 million increase in non-accrual loans, primarily commercial
real estate and commercial business loans.

Allowance for Loan Losses

The Company's allowance for loan losses amounted to $80.1 million at June
30, 2002, as compared to $78.2 million at December 31, 2001. At June 30, 2002,
the Company's allowance amounted to 1.35% of total loans and 214.6% of total
non-performing loans compared to 1.33% and 170.0% at December 31, 2001,
respectively.

The Company's allowance for loan losses increased $1.9 million from
December 31, 2001 to June 30, 2002 due to a $4.0 million provision for loan
losses and $2.1 million of net charge-offs. The provision recorded reflected the
Company's increase in non-accrual loans, increase in classified loans, the
continued emphasis on commercial real estate and business loan originations,
which are generally considered to have greater risk of loss, as well as the
recognition of the current economic conditions.

The Company has identified the evaluation of the allowance for loan losses
as a critical accounting policy where amounts are sensitive to material
variation. This policy is significantly affected by management judgement and
uncertainties and there is a likelihood that materially different amounts would
be reported under different, but reasonably plausible, conditions or
assumptions. It is management's policy to maintain an allowance for loan losses
based upon, among other things, an assessment of prior loss experience, total
loans outstanding, the volume of loan originations, the type, size and
geographic concentration of loans held by the Company, general economic
conditions, the level of past due and non-accrual loans, the value of collateral
securing the loan, the level of classified loans and the number of loans
requiring heightened management oversight.

Although management believes the allowance for loan losses at June 30, 2002
was adequate, it will continue to evaluate the adequacy of the allowance for
loan losses as changes in loan portfolio composition, the level of
non-performing loans, the level of classified loans, the level of delinquencies
and charge-offs, changes in economic conditions and other factors may result in
the need for adjustments to the allowance.

Goodwill and Intangible Assets

Effective April 1, 2001, the Company adopted SFAS No. 142, which resulted
in discontinuing the amortization of goodwill. The Company's goodwill which
aggregated $185.2 million at June 30, 2002 resulted from the acquisitions of
Broad and Statewide as well as the acquisition of Bay Ridge Bancorp, Inc. in
January 1996. The Company's $5.4 million of identifiable intangible assets at
June 30, 2002 resulted primarily from two branch purchase transactions effected
in fiscal 1996. The Company's intangible assets decreased by

18

$3.6 million to $5.4 million at June 30, 2002 from $9.0 million at December 31,
2001 primarily as a result of the amortization of the intangible assets. The
amortization of identified intangible assets will continue to reduce net income
until such intangible assets are fully amortized. Most of the remaining
identified intangibles as of June 30, 2002 will be amortized by the end of June
2003.

The Company has identified the goodwill impairment test as a critical
accounting policy. 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. 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 Company did not recognize an impairment
loss as a result of its transitional impairment test effective April 1, 2001 or
its annual impairment test effective October 1, 2001. The Company is required to
test the value of its goodwill at least annually.

Deposits

Deposits increased $124.6 million or 2.6% to $4.92 billion at June 30, 2002
compared to $4.79 billion at December 31, 2001. The increase was due to deposit
inflows totaling $80.2 million and interest credited of $44.4 million. Lower
costing core deposits increased $272.6 million, or 9.3%, to $3.21 billion at
June 30, 2002 compared to December 31, 2001 and increased $636.1 million, or
24.7%, from June 30, 2001. This increase reflects the continued successful
implementation of the Company's business strategy of increasing core deposits as
well as the current interest rate environment and complements the increased
emphasis on expanding commercial and consumer relationships. Execution of this
strategy is evidenced by the increase in core deposits to approximately 65.3% of
total deposits at June 30, 2002 compared to 61.3% and 54.2% of total deposits at
December 31, 2001 and June 30, 2001, respectively.

Borrowings

Borrowings increased $201.8 million or 12.0% to $1.88 billion at June 30,
2002 compared to $1.68 billion at December 31, 2001. During the six months ended
June 30, 2002, the Company took advantage of favorable rates by locking in
$350.0 million of adjustable-rate four-year borrowings from the FHLB of New
York. These borrowings have a weighted average interest rate of 2.81% and are
indexed to the London Inter-Bank Offered Rate (LIBOR). This increase was
primarily used to fund the growth in the available-for-sale securities portfolio
and to fund loan originations.

Company-Obligated Mandatorily Redeemable Cumulative Trust Preferred
Securities

On June 30, 1997, $11.5 million of 9.5% Cumulative Trust Preferred
Securities (the "Trust Preferred Securities") were issued by BNB Capital Trust
(the "Trust"), a Delaware statutory business trust formed by Broad. The net
proceeds from the issuance were invested in Broad in exchange for its junior
subordinated debentures. The sole asset of the Trust, the obligor on the Trust
Preferred Securities, is $11.9 million principal amount of 9.5% Junior
Subordinated Debentures (the "Junior Subordinated Debentures") due June 30,
2027. Broad entered into several contractual arrangements (which the Company
assumed as part of the Broad acquisition) for the purpose of guaranteeing the
Trust's payment of distributions on, payments on any redemptions of, and any
liquidation distribution with respect to, the Trust Preferred Securities. As a
result of the Broad acquisition, all the assets, liabilities and obligations of
Broad as to securities became assets, liabilities and obligations of the
Company.

Cash distributions on both the Trust Preferred Securities and the Junior
Subordinated Debentures are payable quarterly in arrears on the last day of
March, June, September and December of each year.

The Trust Preferred Securities are subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated Debentures at
stated maturity or, at the option of the Company, their earlier redemption in
whole upon the occurrence of certain changes in the tax treatment or capital
treatment of the Trust Preferred Securities, or a change in the law such that
the Trust would be considered an investment company and (ii) in whole or in part
at any time on or after June 30, 2002 contemporaneously with the optional
redemption by the Company of the Junior Subordinated Debentures in whole or in
part. The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after June 30, 2002, in whole at any time or in
part from time to time, or (ii) in whole, but not in part, at any time
19

within 90 days following the occurrence and continuation of certain changes in
the tax treatment or capital treatment of the Trust Preferred Securities, or a
change in law such that the Trust would be considered an investment company.

As a result of favorable market conditions during fiscal 2001, the Company
purchased $0.4 million of the Trust Preferred Securities through an open market
transaction. In accordance with the terms of the trust indenture, BNB Capital
Trust, a wholly-owned subsidiary of the Company, redeemed all of its outstanding
Trust Preferred Securities of $11.5 million, at $10.00 per share, effective June
30, 2002. The redemption was the result of the Company's well capitalized
position, as well as the high interest rate paid on the Trust Preferred
Securities in relation to the current interest rate environment.

Equity

At June 30, 2002, total stockholders' equity totaled $907.1 million, or
$15.77 per share, compared to $880.5 million, or $15.08 per share at December
31, 2001. This $26.6 million increase was primarily due to net income of $60.4
million, amortization of the earned portion of restricted stock grants of $4.7
million, $0.1 million related to accelerated vesting of stock options, $9.0
million related to the exercise of stock options and the issuance of shares in
payment of directors' fees and $4.0 million related to ESOP shares committed to
be released for the six months ended June 30, 2002. Partially offsetting the
increases were a $40.0 million reduction in capital due to the purchase of
shares in connection with the Company's ongoing open market stock repurchase
program and $12.3 million of dividends declared. Tangible book value per share
was $12.46 and the tangible equity to tangible assets ratio was 9.22% at June
30, 2002.

20

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

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

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

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

(3) Includes federal funds sold, interest-earning bank deposits, FHLB stock,
overnight commercial paper and certificates of deposit.

(4) Includes NOW, money market and checking accounts.

21

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 attributable to changes in volume (changes in volume
multiplied by prior rate) and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.

- ---------------
(1) Includes home equity lines of credit and improvement loans, student loans,
automobile loans, passbook loans, credit card loans and secured and
unsecured personal loans.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND
2001

General

The Company reported a 54.1% increase in diluted earnings per share to
$0.57 for the quarter ended June 30, 2002 compared to $0.37 for the quarter
ended June 30, 2001. Net income increased 56.9% to $31.7 million for the quarter
ended June 30, 2002 compared to $20.2 million for the quarter ended June 30,
2001.

Cash earnings for the quarter ended June 30, 2002 increased 48.0% to $36.2
million and increased 46.7% per diluted share to $0.66 compared to the same
period in the prior year. Cash earnings include net income adjusted for the
amortization of intangibles and certain charges related to the Company's stock
benefit plans, net of tax. The Company believes the reporting of cash earnings
along with earnings calculated in accordance

22

with generally accepted accounting principles (GAAP) provides further insight
into the Company's operating performance.

Net Interest Income

Net interest income increased by $21.5 million or 36.9% to $79.8 million
for the three months ended June 30, 2002 as compared to $58.3 million for the
three months ended June 30, 2001. The increase was due to a $16.8 million
decrease in interest expense combined with a $4.7 million increase in interest
income. The growth in net interest income primarily reflects the 79 basis point
increase in net interest margin as well as a $791.0 million increase in average
interest-earning assets during the three months ended June 30, 2002, as compared
to the same period in the prior year. The increase in average interest-earning
assets was primarily attributable to growth in mortgage-related securities,
commercial mortgage and business loans and mortgage warehouse lines of credit.

The Company's net interest margin increased 79 basis points to 4.35% for
the three months ended June 30, 2002 compared to 3.56% for the three months
ended June 30, 2001. For the three months ended June 30, 2002 as compared to the
three months ended June 30, 2001, the rate paid on average interest-bearing
liabilities decreased 142 basis points, more than offsetting the 53 basis point
decline in yields earned on interest-earning assets. This decline mirrored the
movement in the yield curve with short-term rates declining more rapidly than
longer-term rates. Complementing the movement in the yield curve, the Company
contributed to the improvement in net interest margin by originating higher
yielding commercial loan products through its expanded presence in the New York
metropolitan market and the continuing evolution of a retail banking sales
culture focused on delivering core deposits. In addition, the Company continued
a disciplined pricing strategy for deposits, which was effective in addressing
the current interest rate yield curve. Management expects that favorable
repricing of deposits should level off during the remainder of the calendar
year.

Interest income increased by $4.7 million to $124.1 million for the quarter
ended June 30, 2002 compared to $119.4 million for the quarter ended June 30,
2001. Interest income on loans increased $0.7 million due to a $423.6 million
increase in the average balance of loans offset by a 52 basis point decrease in
the yield earned on loans from 7.62% for the three months ended June 30, 2001 to
7.10% for the three months ended June 30, 2002. The increase in the average
balance is primarily due to a $489.0 million increase in the average balance of
commercial mortgage and business loans, accompanied by a $129.0 million increase
in the average balance of multi-family loans. Partially offsetting the growth in
these three portfolios was a decrease of $262.9 million in the average balance
of the Company's single-family and cooperative apartment loans due to an
increase in prepayments. In addition, the Company primarily originates
single-family loans for sale through its private label program with Cendant. The
decrease in yield is due to the current interest rate yield curve and the
Company's investment in commercial business loans and mortgage warehouse lines
of credit which are primarily variable-rate loans.

Income on investment securities declined $1.9 million due to a $143.7
million decrease in the average balance of investment securities for the quarter
ended June 30, 2002 compared to the same period in the prior year partially
offset by a 14 basis point increase in the yield earned from 5.40% for the
quarter ended June 30, 2001 to 5.54% for the quarter ended June 30, 2002.
Interest income on mortgage-related securities increased $7.0 million during the
three months ended June 30, 2002 compared to the three months ended June 30,
2001 as a result of a $517.4 million increase in the average balance of these
securities partially offset by a 38 basis point decrease in the yield earned
from 6.33% for the quarter ended June 30, 2001 to 5.95% for the quarter ended
June 30, 2002. The increase in the average balance was primarily due to an
increase of borrowings which were invested in mortgage-related securities. The
overall decline in the yields on securities reflected the decline in general
market rates of interest experienced during calendar 2001.

Income on other interest-earning assets (consisting primarily of interest
on federal funds and dividends on FHLB stock in the current period) decreased
$1.1 million in the current quarter compared to the prior year quarter due to a
decrease of $0.7 million in interest on short-term investments and a decrease of
$0.4 million in dividends on FHLB stock.

23

Interest expense decreased $16.8 million to $44.3 million or 27.5% for the
three months ended June 30, 2002 as compared to the three months ended June 30,
2001. This decrease primarily reflects a 185 basis point decrease in the average
rate paid on deposits to 1.69% for the quarter ended June 30, 2002 compared to
3.54% for the quarter ended June 30, 2001. The decrease in rates was
attributable to the continued disciplined pricing strategy which was effective
in addressing the current interest rate yield curve. This decrease was partially
offset by a $212.7 million increase in the average balance of deposits as a
result of the Company's continuing evolution of a retail banking sales culture
focused on increasing the amount of lower costing core deposits. The average
balance of core deposits increased $727.6 million for the three months ended
June 30, 2002 compared to the three months ended June 30, 2001. The $534.3
million increase in the average balance of FHLB borrowings, which have primarily
been used to fund purchase of mortgage-related securities and commercial
mortgage and business loan originations, resulted in additional interest expense
of $4.3 million.

Provision for Loan Losses

The Company's provision for loan losses increased slightly by $125,000 for
the three months ended June 30, 2002 compared to the three months ended June 30,
2001. The provision recorded reflected the Company's increase in non-accrual
loans, the increase in classified loans, the level of delinquencies and
charge-offs, the increase in mortgage warehouse advances, the continued emphasis
on commercial mortgage and business loan originations as well as the recognition
of the current economic condition.

Non-performing assets as a percentage of total assets totaled 47 basis
points at June 30, 2002 compared to 42 basis points at June 30, 2001.
Non-performing assets increased 22.6% to $37.3 million at June 30, 2002 compared
to $30.5 million at June 30, 2001. The $6.8 million increase was primarily due
to an increase of $20.1 million in non-accrual loans, primarily commercial
mortgage and business loans, which was partially offset by a $13.0 million
decrease on loans that are contractually past due 90 days or more as to
maturity, although current as to monthly principal and interest payments. The
Company's allowance amounted to 1.35% of total loans at both June 30, 2002 and
2001.

Non-Interest Income

Emphasis on fee-based income continues to gain momentum throughout the
various divisions within the Company. As a result of a variety of initiatives,
the Company experienced a 23.1% increase in non-interest income, from $13.6
million for the quarter ended June 30, 2001 to $16.8 million for quarter ended
June 30, 2002.

During the quarter ended June 30, 2002, the Company recognized net gains of
$0.3 million on the sales of loans and securities, primarily related to $0.5
million in gains on sales of equity securities partially offset by a $0.2
million loss on the sale of a $14.7 million agency CMO. During the quarter ended
June 30, 2001, the Company recognized net gains of $0.8 million on the sale of
loans and securities substantially all of which relates to the gain on the sale
of a $4.7 million investment security.

In the quarter ended June 30, 2002, the Company's mortgage-banking
activities resulted in total revenue of $2.6 million compared to $3.0 million in
the quarter ended June 30, 2001. The Company continues to originate for sale
multi-family residential loans in the secondary market to Fannie Mae with the
Company retaining servicing on all loans sold. As part of these transactions,
the Company retains a portion of the associated credit risk. At June 30, 2002,
the Company's maximum potential exposure related to secondary market sales to
Fannie Mae under this program was $89.5 million. Such amount will continue to
increase as long as the Company continues to sell loans under this program to
Fannie Mae. The Company retains this level of exposure until the portfolio of
loans are paid in entirety or the Company funds claims by Fannie Mae for the
maximum loss exposure. Although all of the loans in the portfolio are currently
fully performing, the Company has determined that the establishment of a
liability related to the fair value of the retained credit exposure is
appropriate. As a result, during the quarter ended June 30, 2002, the Company
recorded a $0.7 million liability related to this potential exposure. At June
30, 2002 the liability totaled $3.1 million.

The $0.4 million decrease in mortgage-banking activities for the quarter
ended June 30, 2002 compared to the prior year quarter was primarily due to the
addition of $0.7 million to the retained recourse liability, $0.3

24

million lower gains on sales and capitalized servicing rights and $0.4 million
additional amortization of capitalized servicing rights partially offset by $0.9
million of origination and servicing fees. During the quarter ended June 30,
2002, the Company sold $216.7 million of loans compared to $142.7 million during
the quarter ended June 30, 2001.

Service fee income increased by $3.8 million, or 48.5% for the quarter
ended June 30, 2002 compared to the quarter ended June 30, 2001. The increase
was principally due to approximately $1.6 million in mortgage prepayment fees
combined with a $0.5 million increase in the Company's modification and
extension fees on mortgage loans and a $0.4 million increase in non-deferred
loan fees due to the current interest rate environment and resulting refinance
market. In addition, banking fees increased $0.4 million, or 6.2% related
primarily to increased service fees on deposit accounts resulting from the
growth in core deposits, particularly commercial demand deposits, as well as an
increase in per unit charges and the introduction in June 2001 of a debit card
program. The increase in fee income is also partly due to increased fees of $1.0
million on the sales of mutual funds and annuity products as investors seek
higher yielding investment opportunities.

Non-Interest Expenses

Non-interest expense increased $7.3 million to $45.1 million for the
quarter ended June 30, 2002 compared to the quarter ended June 30, 2001. This
increase was primarily attributable to a $4.5 million increase in compensation
and benefits, $0.5 million increase in occupancy costs and $2.4 million increase
in other non-interest expense. Effective April 1, 2001, the Company adopted SFAS
No. 142 which resulted in discontinuing the amortization of goodwill. As a
result, there was no amortization of goodwill for the comparative quarters. The
Company currently expects to open approximately twelve de novo branch locations
during the twelve months ended June 30, 2003 and as a result anticipates
experiencing higher annual operating costs.

Compensation and employee benefits expense increased $4.5 million or 23.4%
to $23.7 million for the three months ended June 30, 2002 as compared to the
same period in the prior year. The increase was due to increases in compensation
of $1.9 million, incentive pay of $2.1 million and stock related benefit plan
costs of $0.7 million. The additional compensation and incentive pay was
primarily the result of the continuing build-up and expansion of the Company's
infrastructure. During calendar 2001 and 2002, the Company recruited several
senior executives, including a Chief Credit Officer and Chief Information
Officer, to add to senior management. In addition, the Company increased the
number of highly experienced senior lenders to serve pre-existing markets and to
expand into neighboring geographical areas. The Company also realized increases
as a result of the expansion of retail banking initiatives, such as the addition
of a private/banking wealth management group in 2002.

Occupancy costs increased $0.5 million or 9.4% to $6.1 million during the
three months ended June 30, 2002 as compared to the three months ended June 30,
2001. The increase was primarily the result of additional costs associated with
the expansion of commercial lending, private banking group and de novo branches.

Data processing service expenses increased by $0.2 million or 9.4% to $2.6
million during the three months ended June 30, 2002 as compared to the three
months ended June 30, 2001. The increase was primarily the result of additional
costs associated with the expansion of operations resulting from the five de
novo branches opened during the twelve months ended June 30, 2002.

Amortization of intangible assets will continue under SFAS No. 142. The
Company's intangible assets consist primarily of core deposit intangibles
recorded as the result of premiums paid on deposits acquired from two branch
purchase transactions. Amortization of intangible assets decreased $0.2 million
during the quarter ended June 30, 2002 compared to the quarter ended June 30,
2001. The decrease was due to the April 2002 completion of the amortization of
the premium incurred in the acquisition in April 2001 of Summit Bank's
Mortgage-Banking Finance Group.

Other non-interest expenses increased $2.4 million or 34.6% to $9.5 million
for the three months ended June 30, 2002 compared to the same period in the
prior year. These costs primarily relate to branch facilities

25

and back office support associated with business initiatives. These expenses
also include items such as professional services, equipment expenses, office
supplies, postage, telephone expenses and maintenance and security.

INCOME TAXES

Income tax expense amounted to $17.8 million and $12.1 million for the
three months ended June 30, 2002 and 2001, respectively. The increase
experienced in the 2002 period reflected the $17.2 million increase in the
Company's income before provision for income taxes partially offset by a
decrease in the Company's effective tax rate for the three months ended June 30,
2002 to 36.0% compared to 37.5% for the three months ended June 30, 2001.

As of June 30, 2002, the Company had a net deferred tax asset of $55.5
million including a $6.6 million valuation allowance. The Company has identified
the valuation of deferred tax assets as a critical accounting policy. During
fiscal 2001, the Company recorded a $17.2 million adjustment of the deferred tax
asset reflecting the fair market value of stock contributed to the Foundation at
its inception in March 1998. The valuation allowance relates to management's
expectation that a portion of such deferred tax asset may not be fully realized.

COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND
2001

General

The Company reported a 61.8% increase in diluted earnings per share to
$1.10 for the six months ended June 30, 2002 compared to $0.68 for the six
months ended June 30, 2001. Net income increased 64.9% to $60.4 million for the
six months ended June 30, 2002 compared to $36.6 million for the six months
ended June 30, 2001. Effective April 1, 2001, the Company adopted SFAS No. 142,
which resulted in discontinuing the amortization of goodwill, which totaled
$185.2 million at such date. As a result of the adoption, net income increased
by $3.6 million and diluted earnings per share increased by $0.06 for the six
months ended June 30, 2002.

Cash earnings for the six months ended June 30, 2002 increased 44.8% to
$69.5 million and increased 41.6% per diluted share to $1.26 compared to the
same period in the prior year. Cash earnings include net income adjusted for the
amortization of goodwill and intangibles and certain charges related to the
Company's stock benefit plans, net of tax.

Net Interest Income

Net interest income increased by $39.7 million or 34.6% to $154.6 million
for the six months ended June 30, 2002 as compared $114.9 million for the six
months ended June 30, 2001. The increase was due to a $34.6 million decrease in
interest expense combined with a $5.1 million increase in interest income. The
growth in net interest income primarily reflects the 76 basis point increase in
net interest margin as well as a $719.8 million increase in average
interest-earning assets during the six months ended June 30, 2002, as compared
to the same period in the prior year. The increase in average interest-earning
assets was primarily attributable to growth in commercial mortgage and business
loans and mortgage-related securities.

The Company's net interest margin increased 76 basis points to 4.27% for
the six months ended June 30, 2002 compared to 3.51% for the six months ended
June 30, 2001. For the six months ended June 30, 2002 as compared to the six
months ended June 30, 2001, the rate paid on average interest-bearing
liabilities decreased 144 basis points, more than offsetting the 59 basis point
decline in yields earned on interest-earning assets. This decline mirrored the
movement in the yield curve with short-term rates declining more rapidly than
longer-term rates. Complementing the movement in the yield curve, the Company
contributed to the improvement in net interest margin by originating higher
yielding commercial loan products through its expanded presence in the New York
metropolitan market and the continuing evolution of a retail banking sales
culture focused on delivering core deposits. In addition, the Company continued
a disciplined pricing

26

strategy for deposits, which was effective in addressing the current interest
rate yield curve. Management expects that favorable repricing of deposits should
level off during the remainder of the calendar year.

Interest income increased by $5.1 million to $244.9 million for the six
months ended June 30, 2002 compared to $239.8 million for the six months ended
June 30, 2001. Interest income on loans increased $0.7 million due to a $418.6
million increase in the average balance of loans offset by a 53 basis point
decrease in the yield earned on loans from 7.68% for the six months ended June
30, 2001 to 7.15% for the six months ended June 30, 2002. The increase in the
average balance is primarily due to a $514.6 million increase in the average
balance of commercial mortgage and business loans, accompanied by a $116.5
million increase in the average balance of mortgage warehouse lines of credit.
The increase in the mortgage warehouse lines of credit was due to internal
growth of $33.0 million fueled by a robust residential mortgage refinance market
and the acquisition in April 2001 of $83.5 million of outstanding mortgage
warehouse advances. Partially offsetting the growth in these three portfolios
was a decrease of $247.4 million in the average balance of the Company's
single-family and cooperative apartment loans due to an increase in prepayments
as borrowers refinanced their loans elsewhere. The Company primarily originates
single-family loans for sale through its private label program with Cendant. The
average balance of multi-family residential loans remained level as new business
was offset by prepayments and the Company continued its emphasis on originating
multi-family residential loans for sale in the secondary market. The decrease in
yield is due to the current interest rate yield curve and the Company's
investment in commercial business loans and mortgage warehouse lines of credit
which are primarily variable-rate loans and thus, are repricing downward in the
current interest rate environment.

Income on investment securities declined $3.0 million due to a 34 basis
point decrease in the yield earned from 5.79% for the six months ended June 30,
2001 to 5.45% for the six months ended June 30, 2002 and a $95.4 million
decrease in the average balance of investment securities for the six months
ended June 30, 2002 compared to the same period in the prior year. Interest
income on mortgage-related securities increased $9.4 million during the six
months ended June 30, 2002 compared to the six months ended June 30, 2001 as a
result of a $359.4 million increase in the average balance of these securities
partially offset by a 37 basis point decrease in the yield earned from 6.36% for
the six months ended June 30, 2001 to 5.99% for the six months ended June 30,
2002. The increase in the average balance was primarily due to an increase of
borrowings, the proceeds of which were invested in mortgage-related securities.
The declines in the yields on securities reflected the decline in general market
rates of interest experienced during calendar 2001. Income on other
interest-earning assets (consisting primarily of interest on federal funds and
dividends on FHLB stock in the current period) decreased $2.0 million in the
current six months compared to the same period in the prior year due to a
decrease of $1.0 million in interest on short-term investments and a decrease of
$1.0 million in dividends on FHLB stock.

Interest expense decreased $34.6 million or 27.7% to $90.3 million for the
six months ended June 30, 2002 as compared to the six months ended June 30,
2001. This decrease primarily reflects a 186 basis point decrease in the average
rate paid on deposits to 1.81% for the six months ended June 30, 2002 compared
to 3.67% for the six months ended June 30, 2001. The decrease in rates was
attributable to the continued disciplined pricing strategy which was effective
in addressing the current interest rate yield curve. This decrease was partially
offset by a $248.0 million increase in the average balance of deposits as a
result of the Company's continuing evolution of a retail banking sales culture
focused on increasing the amount of lower costing core deposits. The average
balance of core deposits increased $717.1 million for the six months ended June
30, 2002 compared to the six months ended June 30, 2001. The $419.7 million
increase in the average balance of FHLB borrowings, which have primarily been
used to fund purchase of mortgage-related securities and commercial mortgage and
business loan originations, resulted in additional interest expense of $6.2
million.

Provision for Loan Losses

The Company's provision for loan losses increased by $1.5 million for the
six months ended June 30, 2002 compared to the six months ended June 30, 2001.
The provision recorded reflected the Company's increase in non-accrual loans,
the increase in classified loans, increase in delinquencies and charge-offs, the
increase in

27

mortgage warehouse advances, the continued emphasis on commercial mortgage and
business loan originations as well as the recognition of the current economic
condition.

Non-Interest Income

As a result of a variety of initiatives, the Company experienced a 25.6%
increase in non-interest income, from $26.2 million for the six months ended
June 30, 2001 to $33.0 million for six months ended June 30, 2002.

During the six months ended June 30, 2002, the Company recognized net gains
of $0.5 million on the sales of loans and securities, substantially all of which
relates to the gain on the sale of equity securities. During the six months
ended June 30, 2001, the Company recognized a net gain of $1.1 million on the
sale of $4.7 million of securities.

In the six months ended June 30, 2002, the Company's mortgage-banking
activities resulted in total revenue of $4.7 million compared to $7.1 million in
the six months ended June 30, 2001. The Company continues to originate for sale
multi-family residential loans in the secondary market to Fannie Mae with the
Company retaining servicing on all loans sold.

The $2.3 million decrease in mortgage-banking activities for the six months
ended June 30, 2002 compared to the same period in the prior year was primarily
due to the establishment of the $3.1 million liability related to the retained
credit exposure, $1.7 million lower gains on sales and $1.0 million additional
amortization of capitalized servicing rights partially offset by increases of
$1.5 million of gains on capitalized servicing rights and $1.5 million of higher
origination and servicing fees. During the six months ended June 30, 2002, the
Company sold $423.0 million of loans. During the six months ended June 30, 2001,
the Company sold $555.8 million, of which $295.7 million were originated for
sale and $260.1 million were sold from portfolio.

Service fee income increased by $9.0 million, or 63.6% for the six months
ended June 30, 2002 compared to the six months ended June 30, 2001. The increase
was principally due to approximately $3.3 million in mortgage prepayment fees
combined with a $1.6 million increase in the Company's modification and
extension fees on mortgage loans and a $1.1 million increase in non-deferred
loan fees due to the current interest rate environment and resulting refinance
market. In addition, banking fees increased $1.5 million, or 13.5% related
primarily to increased service fees on deposit accounts resulting from the
growth in core deposits, particularly commercial demand deposits as well as an
increase in per unit charges and the introduction in June 2001 of a debit card
program. The increase in fee income is also partly due to increased fees of $1.4
million on the sales of mutual funds and annuity products as investors seek
higher yielding investment opportunities.

Income on BOLI increased $0.7 million, or 28.3% to $3.4 million for the six
months ended June 30, 2002 compared to the six months ended June 30, 2001 due to
an increase in the cash surrender value of BOLI.

Non-Interest Expenses

Non-interest expense, excluding amortization of goodwill, increased $14.4
million to $88.9 million for the six months ended June 30, 2002 compared to the
six months ended June 30, 2001. This increase was primarily attributable to a
$10.6 million increase in compensation and benefits, $1.2 million increase in
data processing fees and $2.4 million in other non-interest expense. Effective
April 1, 2001, the Company adopted SFAS No. 142 which resulted in discontinuing
the amortization of goodwill. As a result, amortization of goodwill decreased by
$3.6 million for the six months ended June 30, 2002 compared to June 30, 2001.
The Company currently expects to open approximately twelve locations during the
next twelve to eighteen months and as a result anticipates higher annual
operating costs.

Compensation and employee benefits expense increased $10.6 million or 30.0%
to $46.1 million for the six months ended June 30, 2002 as compared to the same
period in the prior year. The increase was due to increases in compensation of
$4.5 million, incentive pay of $3.1 million, stock-related benefit plan costs of
$1.7 million, medical costs of $0.8 million and post-retirement health care
costs of $0.3 million. The additional

28

compensation and incentive pay was primarily the result of the continuation of
building and expanding the Company's infrastructure. During calendar 2001 and
2002, the Company recruited several senior executives, including a Chief Credit
Officer and Chief Information Officer, to add to senior management. In addition,
the Company increased the number of highly experienced senior lenders to serve
its pre-existing markets and to expand into neighboring geographical areas. The
Company also realized increases as a result of the expansion of retail banking
initiatives, such as the addition of a private/banking wealth management group
in 2002.

Occupancy costs increased $0.3 million to $11.9 million during the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001.
The increase was primarily the result of the expansion of operations resulting
from the opening of five de novo branches during the twelve months ended June
30, 2002.

Data processing service expenses increased by $1.2 million or 30.9% to $5.1
million during the six months ended June 30, 2002 as compared to the six months
ended June 30, 2001. The increase was primarily the result of additional costs
associated with the expansion of operations resulting from the five de novo
branches opened during the twelve months ended June 30, 2002.

Amortization of intangible assets will continue under SFAS No. 142. The
Company's intangible assets consist primarily of core deposit intangibles
recorded as the result of premiums paid on deposits acquired from two branch
purchase transactions. Amortization of intangible assets decreased $40,000
during the six months ended June 30, 2002 compared to the six months ended June
30, 2001. The decrease was due to the completion in April 2002 of the
amortization of the premium incurred in the acquisition in April 2001 of Summit
Bank's Mortgage-Banking Finance Group.

Other non-interest expenses increased $2.4 million, or 14.6%, to $19.0
million for the six months ended June 30, 2002 compared to the same period in
the prior year. These costs primarily relate to branch facilities and back
office support associated with business initiatives. These expenses also include
items such as professional services, equipment expenses, office supplies,
postage, telephone expenses and maintenance and security.

Income Taxes

Income tax expense amounted to $34.3 million and $24.0 million for the six
months ended June 30, 2002 and 2001, respectively. The increase experienced in
the 2002 period reflected the $34.1 million increase in the Company's income
before income taxes partially offset by a decrease in the Company's effective
tax rate for the six months ended June 30, 2002 to 36.2% compared to 39.6% for
the six months ended June 30, 2001. The decrease in effective tax rate was
primarily due to the adoption of SFAS No. 142, effective April 1, 2001, which
discontinues the amortization of non-tax-deductible goodwill for book purposes.

REGULATORY CAPITAL REQUIREMENTS

The following table sets forth the Bank's compliance with applicable
regulatory capital requirements at June 30, 2002.

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

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

29

LIQUIDITY AND COMMITMENTS

The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, the amortization, prepayment and maturity
of outstanding loans, mortgage-related securities, the maturity of debt
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans, mortgage-related
securities and maturing debt securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, the Company invests excess funds in federal funds sold
and other short-term interest-earning assets that provide liquidity to meet
lending requirements. Prior to fiscal 1999, the Company generated sufficient
cash through its deposits to fund its asset generation, using borrowings from
the FHLB of New York, only to a limited degree as a source of funds. However,
due to the Company's increased focus on expanding its commercial mortgage and
business loan portfolios, the Company increased its FHLB borrowings to $1.88
billion at June 30, 2002.

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. At June 30, 2002, there were
outstanding commitments and unused lines of credit by the Company to originate
or acquire mortgage loans aggregating $236.8 million consisting primarily of
fixed and adjustable-rate multi-family residential loans and fixed-rate
commercial real estate loans, which are expected to close during the twelve
months ended June 30, 2003. In addition, at June 30, 2002, unused commercial
business lines of credit and mortgage warehouse lines of credit outstanding were
$262.9 million and $290.5 million, respectively. At June 30, 2002 outstanding
commitments for other loans totaled $78.4 million, primarily comprised of home
equity loans and lines of credit. Certificates of deposit scheduled to mature in
one year or less at June 30, 2002 totaled $1.39 billion. 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.

30

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ALCO risk management strategies allow for the assumption of interest rate
risk within the Board approved limits. The strategies are formulated based upon
ALCO's assessments of likely market developments and trends in the Company's
lending and consumer banking businesses. Strategies are developed with the aim
of enhancing the Company's net income and capital, while ensuring the risks to
income and capital from adverse movements in interest rates are acceptable.
Management monitors the sensitivity of net interest income by utilizing a
dynamic simulation model complemented by a traditional GAP analysis.

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

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

The model is kept static with respect to the composition of the balance
sheet and, therefore does not reflect management's ability to proactively manage
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 June 30, 2002, the
model shows that a 200 basis point gradual increase in interest rates over the
next twelve months would decrease net interest income by $6.9 million or 2.13%,
while a 100 basis point gradual decrease in interest rates would decrease net
interest income by $3.8 million or 1.17%.

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 re-price within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or re-pricing within a specific time period and
the amount of interest-bearing liabilities maturing or re-pricing 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 June 30,
2002, the Company's one-year cumulative gap position was negative 7.93%. A
positive gap will generally result in the net interest margin increasing in a
rising rate environment and decreasing in a falling rate environment. A negative
gap will generally have the opposite results on the net interest margin.

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 2002, that are anticipated
by the Company, using certain assumptions based on historical experience and
other market-based data, to re-price or mature in each of the future time
periods

31

shown (the Gap Table). The amount of assets and liabilities shown which re-price
or mature during a particular period was determined in accordance with the
earlier of the term to re-price or the contractual maturity of the asset or
liability. The Gap Table sets forth an approximation of the projected re-pricing
of assets and liabilities at June 30, 2002 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 impacted by changes in mortgage
prepayment activity. The major factors affecting mortgage prepayment rates are
prevailing interest rates and related mortgage refinancing opportunities.
Prepayment rates will also vary due to a number of other factors, including the
regional economy in the area where underlying collateral is located, seasonal
factors and demographic variables.

The Gap Table does not indicate the impact of general interest rate
movements on the Company's net interest income because the actual repricing
dates of various assets and liabilities will differ from the Company's estimates
and it does not give consideration to the yields and costs of the assets and
liabilities or the projected yields and costs to replace or retain those assets
and liabilities. Callable features of certain assets and liabilities, in
addition to the foregoing, may also cause actual experience to vary from that
indicated. The uncertainty and volatility of interest rates, economic conditions
and other markets which affect the value of these call options, as well as the
financial condition and strategies of the holders of the options, increase the
difficulty and uncertainty in predicting when they may be exercised. Among the
factors considered in our estimates are current trends and historical repricing
experience with respect to similar products. As a result, different assumptions
may be used at different points in time. Within the one year time period, money
market accounts were assumed to decay at 55%, savings accounts were assumed to
decay at 30% and NOW accounts were assumed to decay at 40%. Deposit decay rates
(estimated deposit withdrawal activity) can have a significant impact on the
Company's estimated gap. While the Company believes such assumptions are
reasonable, there can be no assurance that assumed decay rates will approximate
actual future deposit withdrawal activity.

The following table reflects the repricing of the balance sheet, or "gap"
position at June 30, 2002.

- ---------------
(1) Based upon contractual maturity, repricing date, if applicable, and
management's estimate of principal prepayments.

(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 federal funds sold, overnight deposits and FHLB stock.

32

OTHER INFORMATION

There were no broker non-votes on these two proposals.
ITEM 5.
OTHER INFORMATION
On August 12, 2002, the Chief Executive Officer and the
Chief Financial Officer of the Company voluntarily filed
pursuant to a Form 8-K the sworn statements attached thereto
as Exhibits 99.1 and 99.2 with the Securities and Exchange
Commission ("SEC") with respect to the matters set forth in
the SEC's Order No. 4-460, dated June 27, 2002 (the
"Order"), and pursuant to Section 21(a)(1) of the Securities
and Exchange Act of 1934. The Company has chosen to
voluntarily comply with the provisions of the Order even
though it is not subject to the Order.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
a) Reports on Form 8-K

33

SIGNATURES

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

INDEPENDENCE COMMUNITY BANK CORP.

Date: August 13, 2002 By: /s/ ALAN H. FISHMAN
----------------------------------------------
Alan H. Fishman
President and
Chief Executive Officer

Date: August 13, 2002 By: /s/ JOHN B. ZURELL
----------------------------------------------
John B. Zurell
Executive Vice President and
Chief Financial Officer