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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3209278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144-51 Northern Boulevard, Flushing, New York 11354
(Address of principal excutive offices)
(718) 961-5400
(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 $0.01
par value.
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of February 29, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $129,191,000. This figure is based
on the closing price on the Nasdaq National Market for a share of the
registrant's Common Stock, $0.01 par value, on February 29, 2000, the last
trading date in February 2000, which was $14.00.
The number of shares of the registrant's Common Stock outstanding as of
February 29, 2000 was 9,615,471 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1999 are incorporated herein by reference in Part II, and portions
of the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 16, 2000 are incorporated herein by reference in
Part III.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................... 1
General.......................................................... 1
Market Area and Competition...................................... 3
Lending Activities............................................... 4
Loan Portfolio Composition................................ 4
Loan Maturity and Repricing............................... 7
One-to-Four Family Mortgage Lending....................... 7
Home Equity Loans......................................... 9
Multi-Family Lending...................................... 9
Commercial Real Estate Lending............................10
Construction Loans........................................10
Small Business Administration Lending.....................10
Consumer and Other Lending................................11
Loan Approval Procedures and Authority....................11
Loan Concentrations.......................................12
Loan Servicing............................................12
Asset Quality....................................................12
Loan Collection...........................................12
Delinquent Loans and Non-performing Assets................12
REO.......................................................14
Allowance for Loan Losses........................................14
Investment Activities............................................18
General...................................................18
Mortgage-backed securities................................19
Sources of Funds.................................................22
General...................................................22
Deposits..................................................22
Borrowings................................................25
Subsidiary Activities............................................27
Personnel........................................................27
RISK FACTORS
Effect of Interest Rates.........................................28
Lending Activities...............................................28
Competition......................................................29
Local Economic Conditions........................................29
Legislation and Proposed Changes.................................29
Certain Anti-Takeover Provisions.................................29
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation.................................................31
General...................................................31
Bad Debt Reserves.........................................31
Distributions.............................................32
i
TABLE OF CONTENTS
(Continued)
Page
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Corporate Alternative Minimum Tax.........................32
State and Local Taxation.........................................32
New York State and New York City Taxation.................32
Delaware State Taxation...................................33
REGULATION
General..........................................................33
Investment Powers................................................34
Real Estate Lending Standards....................................34
Loans-to-One Borrower Limits.....................................34
Insurance of Accounts............................................35
Liquidity Requirements...........................................36
Qualified Thrift Lender Test.....................................36
Transactions with Affiliates.....................................37
Restrictions on Dividends and Capital Distributions..............37
Federal Home Loan Bank System....................................38
Assessments......................................................38
Branching........................................................38
Community Reinvestment...........................................38
Brokered Deposits................................................39
Capital Requirements.............................................39
General...................................................39
Tangible Capital Requirement..............................40
Core Capital Requirement..................................40
Risk-Based Requirement....................................40
Federal Reserve System...........................................41
Financial Reporting..............................................41
Standards for Safety and Soundness...............................41
Prompt Corrective Action.........................................42
Recently Enacted Legislation and Proposed Changes................42
Company Regulation...............................................43
Federal Securities Laws..........................................44
Item 2. Properties.........................................................45
Item 3. Legal Proceedings..................................................45
Item 4. Submission of Matters to a Vote of Security Holders................45
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters................................................46
Item 6. Selected Financial Data............................................46
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........46
Item 8. Financial Statements and Supplementary Data........................46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................46
ii
TABLE OF CONTENTS
(Continued)
Page
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PART III
Item 10. Directors and Executive Officers of the Registrant................47
Item 11. Executive Compensation............................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management....47
Item 13. Certain Relationships and Related Transactions....................47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................48
(a) 1. Financial Statements....................................48
(a) 2. Financial Statement Schedules...........................48
(b) Reports on Form 8-K filed during the last quarter
of fiscal 1997..............................................48
(c) Exhibits Required by Securities and Exchange
Commission Regulation S-K...................................49
SIGNATURES
POWER OF ATTORNEY
iii
PART I
Statements contained in this Annual Report on Form 10-K relating to plans,
strategies, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking information is inherently
subject to risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, factors discussed under the captions "Business--Allowance
for Loan Losses", "Business--Market Area and Competition" and "Risk Factors"
below, and elsewhere in this Form 10-K and in other documents filed by the
Company with the Securities and Exchange Commission from time to time.
Forward-looking statements may be identified by terms such as "may", "will",
"should", "could", "expects", "plans", "intends", "anticipates", "believes",
"estimates", "predicts", "forecasts", "potential" or "continue" or similar terms
or the negative of these terms. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. The Company has
no obligation to update these forward-looking statements.
Item 1. Business.
General
Flushing Financial Corporation (the "Company") is a Delaware corporation
organized in May 1994 at the direction of Flushing Savings Bank, FSB (the
"Bank") for the purpose of acquiring and holding all of the outstanding capital
stock of the Bank issued upon its conversion from a federal mutual savings bank
to a federal stock savings bank (the "Conversion"). The Conversion was completed
on November 21, 1995. In connection with the Conversion, the Company issued
12,937,500 shares of common stock at a price of $7.67 per share to the Bank's
eligible depositors who subscribed for shares, and to an employee benefit trust
established by the Company for the purpose of holding shares for allocation or
distribution under certain employee benefit plans of the Company and the Bank
(the "Employee Benefit Trust"). The Company realized net proceeds of $96.5
million from the sale of its common stock and utilized approximately $48.3
million of such proceeds to purchase 100% of the issued and outstanding shares
of the Bank's common stock. Flushing Financial Corporation's common stock is
traded on the Nasdaq National Market under the symbol "FFIC".
The primary business of the Company is the operation of its wholly-owned
subsidiary, the Bank. In addition to directing, planning and coordinating the
business activities of the Bank, the Company invests primarily in U.S.
government and federal agency securities, federal funds, mortgage-backed
securities, and investment grade corporate obligations. The Company also holds a
note evidencing a loan that it made to the Employee Benefit Trust to enable the
Employee Benefit Trust to acquire 1,035,000 shares, or 8% of the common stock
issued in the Conversion. The Company has in the past increased growth through
acquisition of financial institutions and branches of other financial
institutions, and will pursue growth through acquisitions that are, or are
expected to be within a reasonable time-frame, accretive to earnings, as
opportunities arise. The Bank also seeks increased growth through the opening of
new branches. The Company may also organize or acquire, through merger or
otherwise, other financial services related companies. The activities of the
Company are funded by that portion of the proceeds of the sale of common stock
in the Conversion that the Company was permitted by the Office of Thrift
Supervision ("OTS") to retain, and earnings thereon, and by dividends, if any,
received from the Bank.
The Company is a unitary savings and loan holding company, which, under
existing laws, is generally not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender. Under regulations of the OTS, the Bank is a qualified
thrift lender if its ratio of qualified thrift investments to portfolio assets
("QTL Ratio") is 65% or more, on a monthly average basis in nine of every 12
months. At December 31, 1999, the Bank's QTL Ratio was 85.0%, and the Bank had
1
maintained more than 65% of its "portfolio assets" in qualified thrift
investments in at least nine of the preceding 12 months. See
"Regulation--Qualified Thrift Lender Test" and "Regulation--Company
Regulation."
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company. The Company utilizes the
support staff of the Bank from time to time, as needed. Additional employees may
be hired as deemed appropriate by the management of the Company.
Unless otherwise disclosed, the information presented in the financial
statements and this Form 10-K reflect the financial condition and results of
operations of the Company, the Bank and the Bank's subsidiaries on a
consolidated basis. Management views the Company and its subsidiaries as
operating as a single unit, a community savings bank. Therefore, segment
information is not provided. At December 31, 1999, the Company had total assets
of $1.25 billion, deposits of $666.9 million and stockholders' equity of $118.2
million. Also, at December 31, 1999, loans receivable, net of the allowance for
loan losses and unearned income, totaled $875.9 million, representing
approximately 70.1% of the Company's total assets, and mortgage-backed
securities with a carrying value of $269.0 million, represented approximately
21.5% of the Company's total assets.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits together with funds generated from
ongoing operations and borrowings, primarily in (i) originations and purchases
of one-to-four family residential mortgage loans, multi-family income producing
property loans and commercial real estate loans; (ii) mortgage loan surrogates
such as mortgage-backed securities; and (iii) U.S. government and federal agency
securities, corporate fixed-income securities and other marketable securities.
To a lesser extent, the Bank originates certain other loans, including
construction loans, Small Business Administration ("SBA") loans and other small
business and consumer loans. The Bank's revenues are derived principally from
interest on its mortgage and other loans and mortgage-backed securities
portfolio, and interest and dividends on other investments in its securities
portfolio. The Bank's primary sources of funds are deposits, Federal Home Loan
Bank-New York ("FHLB-NY") borrowings, repurchase agreements, principal and
interest payments on loans, mortgage-backed and other securities, proceeds from
sales of securities and, to a lesser extent, proceeds from sales of loans.
On September 9, 1997, the Company acquired New York Federal Savings Bank
("New York Federal") and merged it with the Bank in a cash transaction valued at
approximately $13 million. This acquisition was immediately accretive to the
Company's earnings and was accounted for under the purchase method of
accounting.
In November of 1997, the Bank established a wholly owned real estate
investment trust subsidiary, Flushing Preferred Funding Corporation ("FPFC").
The Bank has transferred, in the aggregate, $326.4 million in real estate loans
to FPFC. The assets transferred to FPFC are viewed by regulators as part of the
Bank's assets in consolidation. However, the establishment of FPFC provides an
additional vehicle for access by the Company to the capital markets for future
investment opportunities.
In March of 1998, the Bank formed a service corporation, Flushing Service
Corporation, to market insurance products and mutual funds. The insurance
products and mutual funds sold are products of unrelated insurance and
securities firms from which the service corporation earns a commission.
Management is currently reviewing the profitability potential of various new
products to further extend the Bank's product lines and market.
As part of the Company's exploration in new retailing concepts and
products, the Bank opened its first in-store supermarket branch in June 1998 in
the neighborhood of New Hyde Park through an alliance with the
2
Edwards Supermarket chain. In November 1999, the Bank opened its second
supermarket branch in Co-op City in the Bronx through an alliance with the
Edwards Supermarket chain. These supermarket branches can address virtually all
of their customers' financial needs, with the added convenience of extended
hours and time saving grocery store access. A traditional branch is scheduled to
open in the second quarter of 2000 at a new location in Flushing, Queens.
On August 18, 1998, the Board of Directors of the Company declared a
three-for-two split of the Company's common stock in the form of a 50% stock
dividend, which was paid on September 30, 1998. Each stockholder received one
additional share for every two shares of the Company's common stock held at the
record date, September 10, 1998. Cash was paid in lieu of fractional shares.
This dividend was not paid on shares held in treasury.
Market Area and Competition
The Bank has been, and intends to continue to be, a community oriented
savings institution offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank is headquartered in Flushing, New
York, located in the Borough of Queens. It currently operates out of its main
office and eight branch offices, located in the New York City Boroughs of
Queens, Brooklyn, Manhattan, and the Bronx, and in Nassau County, New York.
Substantially all of the Bank's mortgage loans are secured by properties located
in the New York City metropolitan area. During the last three years, the
unemployment and real estate values in the New York City metropolitan area have
been relatively stable, which has favorably impacted the Bank's asset quality.
See "--Asset Quality." There can be no assurance that the stability of these
economic factors will continue.
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. Particularly intense competition exists for deposits and in
all of the lending activities emphasized by the Bank. The Bank's competition for
loans comes principally from commercial banks, other savings banks, savings and
loan associations, mortgage banking companies, insurance companies, finance
companies and credit unions. Management anticipates that competition for
multi-family loans, commercial real estate loans and one-to-four family
residential mortgage loans will continue to increase in the future. Thus, no
assurances can be given that the Bank will be able to maintain or increase its
current level of origination of such loans, as contemplated by management's
current business strategy. The Bank's most direct competition for deposits
historically has come from other savings banks, commercial banks, savings and
loan associations and credit unions. In addition, the Bank faces increasing
competition for deposits from products offered by brokerage firms, insurance
companies and other financial intermediaries, such as money market and other
mutual funds and annuities. Trends toward the consolidation of the banking
industry and the lifting of interstate banking and branching restrictions may
make it more difficult for smaller, community-oriented banks, such as the Bank,
to compete effectively with large, national, regional and super-regional banking
institutions. Notwithstanding the intense competition, the Bank has been
successful in maintaining its deposit base.
For a discussion of the Company's business strategies, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy," included in the Annual Report of Stockholders
for the fiscal year ended December 31, 1999 (the "Annual Report"), incorporated
herein by reference.
3
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional fixed-rate mortgage loans and adjustable rate mortgage ("ARM")
loans secured by one-to-four family residences, mortgage loans secured by
multi-family income producing properties or commercial real estate, construction
loans, SBA loans, other small business loans and consumer loans. At December 31,
1999, the Bank had gross loans outstanding of $882.7 million (before reserves
and unearned income), of which $423.1 million, or 47.93%, were one-to-four
family residential mortgage loans (including $18.0 million of condominium loans,
$8.9 million of co-operative apartment loans and $5.4 million of home equity
loans). Of the one-to-four family residential loans outstanding on that date,
43.87% were ARM loans and 56.13% were fixed-rate loans. At December 31, 1999,
multi-family loans totaled $310.6 million, or 35.19% of gross loans, commercial
real estate loans totaled $137.1 million, or 15.53% of gross loans, construction
loans totaled $6.2 million, or 0.70% of gross loans, SBA loans totaled $2.4
million, or 0.27% of gross loans, and consumer and other loans totaled $3.4
million, or 0.38% of gross loans.
The Bank has traditionally emphasized the origination and acquisition of
one-to-four family residential mortgage loans, which include ARM loans,
fixed-rate mortgage loans and home equity loans. However, in recent years, the
Bank has also placed emphasis on multi-family and commercial real estate loans.
The Bank expects to continue its emphasis on multi-family and commercial real
estate loans as well as on one-to-four family residential mortgage loans. From
December 31, 1998 to December 31, 1999, one-to-four family residential mortgage
loans increased $51.1 million, or 13.7%, multi-family loans increased $33.2
million, or 12.0%, and commercial real estate loans increased $35.7 million, or
35.2%. Fully underwritten one-to-four family residential mortgage loans are
considered by the banking industry to have less risk than other types of loans.
Multi-family income producing real estate loans and commercial real estate loans
generally have higher yields than one-to-four family residential loans and
shorter terms to maturity, but typically involve higher principal amounts and
generally expose the lender to greater credit risk than fully underwritten
one-to-four family residential mortgage loans. The Bank's strategy to emphasize
multi-family and commercial real estate loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with multi-family and commercial real estate loans may require
the Bank to increase its provisions for loan losses and to maintain an allowance
for loan losses as a percentage of total loans in excess of the allowance
currently maintained by the Bank. To date, the Company has not experienced
significant losses in its multi-family and commercial real estate loan
portfolios.
The Bank's lending activities are subject to federal and state laws and
regulations. Interest rates charged by the Bank on loans are affected primarily
by the demand for such loans, the supply of money available for lending
purposes, the rate offered by the Bank's competitors and, in the case of
corporate entities, the creditworthiness of the borrower. Many of those factors
are, in turn, affected by regional and national economic conditions, and the
fiscal, monetary and tax policies of the federal government.
4
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
At December 31,
--------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage Loans:
One-to-four family residential(1) $414,194 46.92% $361,786 47.69% $289,286 47.67%
Co-operative apartment (2) 8,926 1.01 10,238 1.35 12,065 1.99
Multi-family real estate 310,594 35.19 277,437 36.57 230,229 37.95
Commercial real estate 137,072 15.53 101,401 13.37 68,182 11.24
Construction 6,198 0.70 3,203 0.42 2,797 0.46
-------- -------- -------- -------- -------- --------
Gross mortgage loans 876,984 99.35 754,065 99.40 602,559 99.31
Small Business Administration loans 2,369 0.27 2,616 0.35 2,789 0.46
Consumer and other loans 3,379 0.38 1,899 0.25 1,385 0.23
-------- -------- -------- -------- -------- --------
Gross loans 882,732 100.00% 758,580 100.00% 606,733 100.00%
======== ======== ========
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (28) (1,263) (1,838)
Allowance for loan losses (6,818) (6,762) (6,474)
-------- -------- --------
Loans, net $875,886 $750,555 $598,421
======== ======== ========
At December 31,
-----------------------------------------------
1996 1995
-------------------- ----------------------
Percent Percent
Amount of Total Amount of Total
-------- --------- ---------- -----------
Mortgage Loans:
One-to-four family residential(1) $223,273 57.28% $155,435 54.20%
Co-operative apartment (2) 13,245 3.40 14,653 5.11
Multi-family real estate 104,870 26.91 69,140 24.11
Commercial real estate 46,698 11.98 45,215 15.77
Construction -- -- -- --
-------- -------- -------- -------
Gross mortgage loans 388,086 99.57 284,443 99.19
Small Business Administration loans -- -- -- --
Consumer and other loans 1,680 0.43 2,328 0.81
-------- ------- -------- -------
Gross loans 389,766 100.00% 286,771 100.00%
======== =======
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (1,548) (1,335)
Allowance for loan losses (5,437) (5,310)
-------- --------
Loans, net $382,781 $280,126
======== ========
- ----------
(1) One-to-four family residential loans also include home equity and
condominium loans. At December 31, 1999, gross home equity loans totaled
$5.4 million and condominium loans totaled $18.0 million.
(2) Consists of loans secured by shares representing interests in individual
co-operative units that are generally owner occupied.
5
The following table sets forth the Bank's loan originations (including the
net effect of refinancings) and the changes in the Bank's portfolio of loans,
including purchases, sales and principal reductions for the years indicated:
For the Year Ended December 31,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
(In thousands)
Mortgage Loans
At beginning of year $754,065 $602,559 $388,086
Mortgage loans originated:
One-to-four family 91,312 83,051 42,756
Co-operative 300 113 475
Multi-family 77,895 84,328 79,976
Commercial 49,744 52,211 17,121
Construction 8,158 3,332 3,016
------------------ ----------------- -----------------
Total mortgage loans originated 227,409 223,035 143,344
------------------ ----------------- -----------------
Acquired loans:
1-4 family loans purchased 15,008 27,174 49,965
Commercial mortgages purchased 884 -- --
Acquired NY Federal 1-4 family loans -- -- 901
Acquired NY Federal multi-family loans -- -- 62,405
Acquired NY Federal commercial loans -- -- 11,717
------------------ ------------------ -----------------
Total acquired mortgage loans 15,892 27,174 124,988
------------------ ------------------ -----------------
Less:
Principal reductions 120,008 98,251 53,416
Mortgage loan foreclosures 374 452 443
------------------ ------------------ -----------------
At end of year $876,984 $754,065 $602,559
================== ================= =================
SBA, Consumer and Other Loans
At beginning of year $4,515 $4,174 $1,680
Loans originated:
SBA loans 2,376 3,741 1,328
Acquired NY Federal SBA -- -- 2,029
Small business loans 2,617 1,316 --
Other loans 1,159 1,467 1,803
------------------ ----------------- ------------------
Total loans originated 6,152 6,524 5,160
------------------ ----------------- -----------------
Less:
Sales 2,280 2,918 80
Repayments 2,543 3,265 2,586
Charge-offs 96 -- --
------------------ ----------------- -----------------
At end of year $5,748 $4,515 $4,174
================== ================= =================
6
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of the Bank's loan portfolio at December 31, 1999. Loans
that have adjustable-rates are shown as being due in the period during which the
interest rates are next subject to change. The table does not reflect
prepayments or scheduled principal amortization, which totaled $120.0 million
for the year ended December 31, 1999. Certain adjustable rate loans have
features which limit changes in interest rates on a short-term basis and over
the life of the loan.
At December 31, 1999
----------------------------------------------------------------------------------------------------------
Mortgage Loans Other Loans
-------------------------------------------------------------------- --------------------------
Total
One-to- Consumer Loans
Four Family Co-operative Multi-family Commercial Construction SBA and Other Receivable
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
(In thousands)
Amounts due:
Within one year $39,118 $4,277 $11,939 $13,316 $6,198 $ -- $579 $75,427
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
After one year (1)
One to two years 29,894 844 44,949 11,190 -- 11 625 87,513
Two to three years 20,299 1,193 34,570 15,152 -- 4 1,418 72,636
Three to five 20,428 294 64,007 41,526 -- 419 750 127,424
years
Five to ten years 83,519 1,122 100,215 35,694 -- 1,557 7 222,114
Over ten years 220,936 1,196 54,914 20,194 -- 378 -- 297,618
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
Total due after
One year 375,076 4,649 298,655 123,756 -- 2,369 2,800 807,305
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
Total amounts due $414,194 $8,926 $310,594 $137,072 $ 6,198 $ 2,369 $3,379 $882,732
=========== ============ ============ ========== ============ ======== ========= ==========
(1) Of the $807.3 million of loans due after one year, $435.1 million are
adjustable rate loans and $372.2 million are fixed-rate loans.
One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured
by one-to-four family residences, including townhouses and condominium units,
located in its primary lending area. For purposes of the description contained
in this section, one-to-four family residential mortgage loans and co-operative
apartment loans are collectively referred to herein as "residential mortgage
loans." The Bank offers both fixed-rate and adjustable-rate residential mortgage
loans with maturities of up to 30 years and a general maximum loan amount of
$650,000. Loan originations generally result from applications received from
mortgage brokers and mortgage bankers, existing or past customers, and persons
who respond to Bank marketing efforts and referrals. Residential mortgage loans
were $423.1 million, or 47.93% of gross loans, at December 31, 1999.
Partly in response to the intense competition for originations of
one-to-four family residential mortgage loans, the Bank has a program of
correspondent relationships with several mortgage bankers and brokers operating
in the New York metropolitan area. Under this program, the Bank purchases
individual newly originated one-to-four family loans originated by such
correspondents. The loans are underwritten pursuant to the Bank's credit
underwriting standards and each loan is reviewed by Bank personnel prior to
purchase to ensure conformity with such standards. During 1999, through these
relationships, the Bank purchased $15.0 million in one-to-four family mortgage
loans, as compared to $27.2 million in 1998 and $50.0 million during 1997.
The Bank generally originates residential mortgage loans in amounts up to
80% of the appraised value or the sale price, whichever is less. The Bank may
make residential mortgage loans with loan-to-value ratios of up to 95% of the
appraised value of the mortgaged property; however, private mortgage insurance
is required whenever loan-to-value ratios exceed 80% of the appraised value of
the property securing the loan.
7
Traditionally, residential mortgage loans originated by the Bank have been
underwritten to FNMA and other agency guidelines to facilitate securitization
and sale in the secondary market. These guidelines require, among other things,
verification of the loan applicant's income. However, from time to time, and
with increasing frequency, the Bank originates residential mortgage loans to
self-employed individuals within the Bank's local community without verification
of the borrower's level of income, provided that the borrower's stated income is
considered reasonable for the borrower's type of business. These loans involve a
higher degree of risk as compared to the Bank's other fully underwritten
residential mortgage loans as there is a greater opportunity for borrowers to
falsify or overstate their level of income and ability to service indebtedness.
To mitigate this risk, the Bank typically limits the amount of these loans to
80% of the appraised value of the property or the sale price, whichever is less.
These loans also are not as readily salable in the secondary market as the
Bank's other fully underwritten loans, either as whole loans or when pooled or
securitized. FNMA does not purchase such loans. The Bank believes, however, that
its willingness to make such loans is an aspect of its commitment to be a
community-oriented bank. Although there are a number of purchasers for such
loans, there can be no assurance that such purchasers will continue to be active
in the market or that the Bank will be able to sell such loans in the future.
The Bank originated $37.3 million, $36.8 million and $26.6 million in loans of
this type during 1999, 1998 and 1997, respectively.
The Bank's fixed-rate residential mortgage loans typically are originated
for terms of 15 and 30 years and are competitively priced based on market
conditions and the Bank's cost of funds. The Bank charges origination fees of up
to 2%; loans with fees of less than 2% generally carry a higher interest rate.
The Bank originated and purchased $24.2 million, $44.3 million and $32.9 million
of 15-year fixed-rate residential mortgage loans in 1999, 1998 and 1997,
respectively. The Bank also originated and purchased $47.4 million, $30.8
million and $8.0 million of 30-year fixed rate residential mortgage loans in
1999, 1998 and 1997, respectively. These loans have been retained to provide
flexibility in the management of the Company's interest rate sensitivity
position. At December 31, 1999, $237.5 million, or 56.13%, of the Bank's
residential mortgage loans consisted of fixed rate loans.
The Bank offers ARM loans with adjustment periods of one, three, five,
seven or ten years. Interest rates on ARM loans currently offered by the Bank
are adjusted at the beginning of each adjustment period based upon a fixed
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. From time to time, the Bank may originate ARM loans at an initial
rate lower than the U.S. Treasury constant maturity index as a result of a
discount on the spread for the initial adjustment period. ARM loans generally
are subject to limitations on interest rate increases of 2% per adjustment
period and an aggregate adjustment of 6% over the life of the loan. Origination
fees of up to 2% are charged for ARM loans; loans with fees of less than 2%
generally carry a higher interest rate. The Bank originated and purchased
one-to-four family residential ARM loans totaling $35.0 million, $35.2 million
and $52.3 million during 1999, 1998 and 1997, respectively. At December 31,
1999, $185.6 million, or 43.87%, of the Bank's residential mortgage loans
consisted of ARM loans.
The volume and adjustment periods of ARM loans originated by the Bank have
been affected by such market factors as the level of interest rates, demand for
loans, competition, consumer preferences and the availability of funds. In
general, consumers show a preference for ARM loans in periods of high interest
rates and for fixed-rate loans when interest rates are low. In periods of
declining interest rates, the Bank may experience refinancing activity in ARM
loans, whose interest rates may be fully indexed, to fixed-rate loans.
The retention of ARM loans in the Bank's portfolio helps reduce the Bank's
exposure to interest rate risks. However, in an environment of rapidly
increasing interest rates as was experienced in the 1970's, it is possible for
the interest rate increase to exceed the maximum aggregate adjustment on ARM
loans and negatively affect the spread between the Bank's interest income and
its cost of funds.
8
ARM loans generally involve credit risks different from those inherent in
fixed-rate loans, primarily because if interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default.
However, this potential risk is lessened by the Bank's policy of originating ARM
loans with annual and lifetime interest rate caps that limit the increase of a
borrower's monthly payment. The Bank has not in the past, nor does it currently
originate ARM loans which provide for negative amortization.
Home Equity Loans. Home equity loans are included in the Bank's portfolio
of one-to-four family residential mortgage loans. These loans are offered as
adjustable-rate "home equity lines of credit" on which interest only is due for
an initial term of 10 years and thereafter principal and interest payments
sufficient to liquidate the loan are required for the remaining term, not to
exceed 20 years. These loans also may be offered as fully amortizing closed-end
fixed-rate loans for terms up to 15 years. All home equity loans are made on
one-to-four family residential and condominium units, which are owner-occupied,
and are subject to a 80% loan-to-value ratio computed on the basis of the
aggregate of the first mortgage loan amount outstanding and the proposed home
equity loan. They are granted in amounts from $25,000 to $100,000. The
underwriting standards for home equity loans are substantially the same as those
for residential mortgage loans. At December 31, 1999, home equity loans totaled
$5.4 million, or 0.61%, of gross loans.
Multi-Family Lending. Loans secured by multi-family income producing
properties (including mixed-use properties) were $310.6 million, or 35.19% of
gross loans, at December 31, 1999, all of which were secured by properties
located within the Bank's market area. The Bank's multi-family loans had an
average principal balance of $532,751 at December 31, 1999, and the largest
multi-family loan held in the Bank's portfolio had a principal balance of $6.3
million. Multi-family loans are generally offered at adjustable rates tied to a
market index for terms of five to 10 years with adjustment periods from one to
five years. On a select and limited basis, multi-family loans may be made at
fixed rates for terms of seven, 10 or 15 years. An origination fee of up to 1%
is typically charged on multi-family loans.
In underwriting multi-family loans, the Bank reviews the expected net
operating income generated by the real estate collateral securing the loan, the
age and condition of the collateral, the financial resources and income level of
the borrower and the borrower's experience in owning or managing similar
properties. The Bank typically requires debt service coverage of at least 125%
of the monthly loan payment. Multi-family loans generally are made up to 75% of
the appraised value of the property securing the loan or the sale price of the
property, whichever is less. The Bank generally obtains personal guarantees from
these borrowers and typically orders an environmental report on the property
securing the loan.
Loans secured by multi-family income producing property generally involve a
greater degree of risk than residential mortgage loans and carry larger loan
balances. The increased credit risk is a result of several factors, including
the concentration of principal in a smaller number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty in evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family income producing
property is typically dependent upon the successful operation of the related
property. If the cash flow from the property is reduced, the borrower's ability
to repay the loan may be impaired. Loans secured by multi-family income
producing property also may involve a greater degree of environmental risk. The
Bank seeks to protect against this risk through obtaining an environmental
report. See "--Asset Quality--REO."
9
Commercial Real Estate Lending. Loans secured by commercial real estate
were $137.1 million, or 15.53% of the Bank's gross loans, at December 31, 1999.
The Bank's commercial real estate loans are secured by improved properties such
as offices, motels, small business facilities, strip shopping centers,
warehouses, religious facilities and mixed-use properties. At December 31, 1999,
substantially all of the Bank's commercial real estate loans were secured by
properties located within the Bank's market area. At that date, the Bank's
commercial real estate loans had an average principal balance of $649,629, and
the largest of such loans, which was secured by a hotel, had a principal balance
of $5.4 million. Typically, commercial real estate loans are originated at a
range of $100,000 to $6.0 million. Commercial real estate loans are generally
offered at adjustable rates tied to a market index for terms of five to 15
years, with adjustment periods from one to five years. On a select and limited
basis, commercial real estate loans may be made at fixed interest rates for
terms of seven, 10 or 15 years. An origination fee of up to 1% is typically
charged on all commercial real estate loans.
In underwriting commercial real estate loans, the Bank employs the same
underwriting standards and procedures as are employed in underwriting
multi-family loans.
Commercial real estate loans generally carry larger loan balances than
one-to-four family residential mortgage loans and involve a greater degree of
credit risk for the same reasons applicable to multi-family loans.
Construction Loans. The Bank's construction loans primarily have been made
to finance the construction of one-to-four family residential properties and
multi-family residential real estate properties. The Bank's policies provide
that construction loans may be made in amounts up to 65% of the estimated value
of the developed property and only if the Bank obtains a first lien position on
the underlying real estate. In addition, the Bank generally requires firm
end-loan commitments, either from the Bank or another financial institution, and
personal guarantees on all construction loans. Construction loans are generally
made with terms of two years or less and with adjustable interest rates that are
tied to a market index. Advances are made as construction progresses and
inspection warrants, subject to continued title searches to ensure that the Bank
maintains a first lien position. Construction loans outstanding at December 31,
1999 totaled $6.2 million, or 0.70% of gross loans.
Construction loans involve a greater degree of risk than other loans
because, among other things, the underwriting of such loans is based on an
estimated value of the developed property, which can be difficult to ascertain
in light of uncertainties inherent in such estimations. In addition,
construction lending entails the risk that the project may not be completed due
to cost overruns or changes in market conditions.
Small Business Administration Lending. With the purchase of New York
Federal on September 9, 1997, the Company entered into the SBA market. These
loans are extended to small businesses and are guaranteed by the Small Business
Administration at 80% of the loan balance for loans with balances of $100,000 or
less, and at 75% of the loan balance for loans with balances greater than
$100,000. All SBA loans are underwritten in accordance with SBA Standard
Operating Procedures and the Bank generally obtains personal guarantees and
collateral, where applicable, from SBA borrowers. Typically, SBA loans are
originated at a range of $50,000 to $1.0 million with terms ranging from five to
25 years. SBA loans are generally offered at adjustable rates tied to the prime
rate (as published in the Wall Street Journal) with adjustment periods of one to
three months. The Bank generally sells the guaranteed portion of the SBA loan in
the secondary market and retains the servicing rights on these loans collecting
a servicing fee of approximately 1%. At December 31, 1999, SBA loans totaled
$2.4 million, representing 0.27% of gross loans.
10
Consumer and Other Lending. The Bank originates other loans for business,
personal, or household purposes. Total consumer and other loans outstanding at
December 31, 1999 amounted to $3.4 million, or 0.38% of gross loans. Business
loans are personally guaranteed by the owners, and may also be secured by
additional collateral, including equipment and inventory. The maximum loan size
for a business loan is $75,000, with a maximum term of five years. Consumer
loans generally consist of passbook loans and overdraft lines of credit.
Generally, unsecured consumer loans are limited to amounts of $5,000 or less for
terms of up to five years. The Bank offers credit cards to its customers through
a third party financial institution and receives an origination fee and
transactional fees for processing such accounts, but does not underwrite or
finance any portion of the credit card receivables.
The underwriting standards employed by the Bank for consumer and other
loans include a determination of the applicant's payment history on other debts
and assessment of the applicant's ability to meet payments on all of his or her
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the collateral,
if any, to the proposed loan amount. Unsecured loans tend to have higher risk,
and therefore command a higher interest rate.
Loan Approval Procedures and Authority. The Bank's Board-approved lending
policies establish loan approval requirements for its various types of loan
products. Pursuant to the Bank's Residential Mortgage Lending Policy, all
residential mortgage loans require three signatures for approval. Residential
mortgage loans that do not exceed $500,000 must have the approval of the Bank's
Senior Mortgage Officer and two other loan officers. For residential mortgage
loans greater than $500,000, at least one of the approvals must be from the
President, Executive Vice President or a Senior Vice President (collectively,
"Authorized Officers") and the other two may be from the Bank's Senior Mortgage
Officer, Loan Underwriting Manager or Senior Underwriter. The Loan Committee,
the Executive Committee or the full Board of Directors also must approve
residential mortgage loans in excess of $650,000. Pursuant to the Bank's
Commercial Real Estate Lending Policy, all loans secured by commercial real
estate properties and multi-family income producing properties, must be approved
by the President or the Executive Vice President upon the recommendation of the
Commercial Loan Department Officer. Such loans in excess of $700,000 also
require Loan or Executive Committee or Board approval. In accordance with the
Bank's Business and Consumer Loan Policies, all business and consumer loans
require two signatures for approval, one of which must be from an Authorized
Officer. In addition, for business loans, the approval of the Bank's President
and ratification by the Loan Committee of the Board of Directors is required.
The Bank's Construction Loan Policy requires that the Loan or Executive
Committee or the Board of Directors of the Bank must approve all construction
loans. Any loan, regardless of type, that deviates from the Bank's written loan
policies must be approved by the Loan or Executive Committee or the Bank's Board
of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application, a credit report is ordered and certain other financial information
is obtained. An appraisal of the real estate intended to secure the proposed
loan is required. Such appraisals currently are performed by the Bank's staff
appraiser or an independent appraiser designated and approved by the Bank. The
Bank's Board of Directors annually approves the independent appraisers used by
the Bank and approves the Bank's appraisal policy. It is the Bank's policy to
require borrowers to obtain title insurance and hazard insurance on all real
estate first mortgage loans prior to closing. Borrowers generally are required
to advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and, in some cases, hazard insurance
premiums.
11
Loan Concentrations. The maximum amount of credit that the Bank can extend
to any single borrower or related group of borrowers generally is limited to 15%
of the Bank's unimpaired capital and surplus. Applicable law and regulations
permit an additional amount of credit to be extended, equal to 10% of unimpaired
capital and surplus, if the loan is secured by readily marketable collateral,
which generally does not include real estate. See "Regulation." However, it is
currently the Bank's policy not to extend such additional credit. At December
31, 1999, the Bank had no loans in excess of the maximum dollar amount of loans
to one borrower that the Bank was authorized to make. At that date, the three
largest concentrations of loans to one borrower consisted of loans secured by a
combination of commercial real estate and multi-family income producing
properties with an aggregate principal balance of $11.4 million, $8.5 million
and $8.1 million for each of the three borrowers.
Loan Servicing. At December 31, 1999, the Bank was servicing $32.7 million
of mortgage loans and $5.9 million of SBA loans for others. The Bank's policy is
to retain the servicing rights to the mortgage and SBA loans that it sells in
the secondary market. In order to increase revenue, management intends to
continue this policy.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Bank generally sends the borrower a
written notice of non-payment when the loan is first past due. In the event
payment is not then received, additional letters and phone calls generally are
made in order to encourage the borrower to meet with a representative of the
Bank to discuss the delinquency. If the loan still is not brought current and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is delinquent 45 days or more, the Bank may commence foreclosure
proceedings against real property that secures the real estate loan and attempt
to repossess personal or business property that secures an SBA loan, business
loan, consumer loan or co-operative apartment loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan generally is
sold at foreclosure or by the Bank as soon thereafter as practicable. Decisions
as to when to commence foreclosure actions for multi-family, commercial real
estate and construction loans are made on a case by case basis. Since
foreclosure typically halts the sale of the collateral and may be a lengthy
procedure in the State of New York, the Bank may consider loan work-out
arrangements to work with multi-family or commercial real estate borrowers in an
effort to restructure the loan rather than foreclose, particularly if the
borrower is, in the opinion of management, able to manage the project. In
certain circumstances, on rental properties, the Bank may institute proceedings
to seize the rent.
On mortgage loans or loan participations purchased by the Bank, for which
the seller retains the servicing, the Bank receives monthly reports with which
it monitors the loan portfolio. Based upon servicing agreements with the
servicers of the loans, the Bank relies upon the servicer to contact delinquent
borrowers, collect delinquent amounts and initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Bank and its servicing agents. At December
31, 1999, the Bank did not have any loans that were serviced by others.
Delinquent Loans and Non-performing Assets. The Bank generally discontinues
accruing interest on delinquent loans when a loan is 90 days past due or
foreclosure proceedings have been commenced, whichever first occurs. At that
time, previously accrued but uncollected interest is reversed from income. Loans
in default 90 days or more as to their maturity date but not their payments,
however, continue to accrue interest as long as the borrower continues to remit
monthly payments.
12
The following table sets forth information regarding all non-accrual loans,
loans which are 90 days or more delinquent and still accruing, and real estate
owned ("REO") at the dates indicated. During the years ended December 31, 1999,
1998 and 1997, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totaled $208,000, $180,000
and $180,000, respectively. These amounts were not included in the Bank's
interest income for the respective periods.
At December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans:
One-to-four family residential $1,349 $1,261 $1,897 $1,835 $2,042
Co-operative apartment 29 15 -- 32 109
Multi-family residential -- -- -- 505 2,119
Commercial real estate 1,779 1,280 512 -- 427
Construction -- -- -- -- --
------ ------ ------ ------ ------
Total non-accrual mortgage loans 3,157 2,556 2,409 2,372 4,697
Other non-accrual loans 39 41 49 36 50
------ ------ ------ ------ ------
Total non-accrual loans 3,196 2,597 2,458 2,408 4,747
Loans 90 days or more delinquent
and still accruing -- -- -- -- 234
------ ------ ------ ------ ------
Total non-performing loans 3,196 2,597 2,458 2,408 4,981
Foreclosed real estate 368 77 433 1,218 1,869
------ ------ ------ ------ ------
Total non-performing assets $3,564 $2,674 $2,891 $3,626 $6,850
====== ====== ====== ====== ======
Troubled debt restructurings -- -- -- -- --
====== ====== ====== ====== ======
Non-performing loans to gross loans 0.36% 0.34% 0.41% 0.62% 1.74%
Non-performing assets to total assets 0.29% 0.23% 0.27% 0.47% 0.97%
13
REO. The Bank has been aggressively marketing its REO properties. At
December 31, 1999, the Bank owned four properties with a carrying value of
$368,000.
The Bank currently obtains environmental reports in connection with the
underwriting of commercial real estate loans, and typically obtains
environmental reports in connection with the underwriting of multi-family loans.
For all other loans, the Bank obtains environmental reports only if the nature
of the current or, to the extent known to the Bank, prior use of the property
securing the loan indicates a potential environmental risk. However, the Bank
may not be aware of such uses or risks in any particular case, and, accordingly,
there is no assurance that real estate acquired by the Bank in foreclosure is
free from environmental contamination or that, if any such contamination or
other violation exists, the Bank will not have any liability therefor.
Allowance for Loan Losses
The Bank has established and maintains on its books an allowance for loan
losses that is designed to provide reserves for estimated losses inherent in the
Bank's overall loan portfolio. The allowance is established through a provision
for loan losses based on management's evaluation of the risk inherent in the
various components of its loan portfolio and other factors, including historical
loan loss experience, changes in the composition and volume of the portfolio,
collection policies and experiences, trends in the volume of non-accrual loans
and regional and national economic conditions. The Company maintains an internal
loan review committee that reviews the quality of loans and reports to the Loan
Committee of the Board of Directors on a monthly basis. The determination of the
amount of the allowance for loan losses includes estimates that are susceptible
to significant changes due to changes in appraisal values of collateral,
national and regional economic conditions and other factors. In connection with
the determination of the allowance, the market value of collateral ordinarily is
evaluated by the Bank's staff appraiser; however, the Bank may from time to time
obtain independent appraisals for significant properties. Current year
charge-offs, charge-off trends, new loan production and current balance by
particular loan categories also are taken into account in determining the
appropriate amount of the allowance.
In assessing the adequacy of the allowance, management reviews the Bank's
loan portfolio by separate categories which have similar risk and collateral
characteristics; e.g. commercial real estate, multi-family real estate,
one-to-four family residential loans, co-operative apartment loans, SBA loans,
business loans and consumer loans. General provisions are established against
performing loans in the Bank's portfolio in amounts deemed prudent from time to
time based on the Bank's qualitative analysis of the factors described above.
The determination of the amount of the allowance for loan losses also includes a
review of loans on which full collectibility is not reasonably assured. The
primary risk element considered by management with respect to each one-to-four
family residential loan, co-operative apartment loan, SBA loan, business loan
and consumer loan is any current delinquency on the loan. The primary risk
elements considered with respect to commercial real estate and multi-family
loans are the financial condition of the borrower, the sufficiency of the
collateral (including changes in the value of the collateral) and the record of
payment.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"), which can require the
establishment of additional general allowances or specific loss allowances or
require charge-offs. Such authorities may require the Bank to make additional
provisions to the allowance based on their judgments about information available
to them at the time of their examination. An OTS policy statement provides
guidance for OTS examiners in determining whether the levels of general
valuation allowances for savings institutions are adequate. The policy statement
requires that if a savings institution's general valuation allowance policies
and procedures are deemed to be inadequate, the general valuation allowance
would be compared to certain ranges of general valuation allowances deemed
acceptable by the OTS depending in part on the savings institution's level of
classified assets.
14
The Bank's provision for loan losses was $36,000, $214,000 and $104,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1999, the total allowance for loan losses was $6.8 million, representing 213.29%
of non-performing loans and 191.29% of non-performing assets, compared to ratios
of 260.36% and 252.83% respectively, at December 31, 1998. The Bank continues to
monitor and modify the level of its allowance for loan losses in order to
maintain the allowance at a level which management considers adequate to provide
for probable loan losses based on available information.
Management of the Bank believes that the current allowance for loan losses
is adequate in light of current economic conditions and the composition of its
loan portfolio and other available information and the Board of Directors
concurs in this belief. However, many factors may require additions to the
allowance for loan losses in future periods beyond those currently revealed.
These factors include future adverse changes in economic conditions, changes in
interest rates and changes in the financial capacity of individual borrowers
(any of which may affect the ability of borrowers to make repayments on loans),
changes in the real estate market within the Bank's lending area and the value
of collateral, or a review and evaluation of the Bank's loan portfolio in the
future. The determination of the amount of the allowance for loan losses
includes estimates that are susceptible to significant changes due to changes in
appraisal values of collateral, national and regional economic conditions,
interest rates and other factors. In addition, the Bank's increased emphasis on
commercial real estate and multi-family loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with commercial real estate, multi-family loans and construction
loans may require the Bank to increase its provisions for loan losses and to
maintain an allowance for loan losses as a percentage of total loans that is in
excess of the allowance currently maintained by the Bank. Provisions for loan
losses are charged against net income. See "--Lending Activities" and "--Asset
Quality."
15
The following table sets forth changes in, and the balance of, the Bank's
allowance for loan losses at and for the dates indicated.
At and For the Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of year 6,762 $ 6,474 $ 5,437 $ 5,310 $ 5,370
Provision for loan losses 36 214 104 418 496
Provision acquired from NY Federal -- -- 979 -- --
Loans charged-off:
One-to-four family 32 91 85 220 312
Co-operative 2 -- 44 162 183
Multi-family -- -- -- 41 251
Commercial -- -- -- 68 260
Construction -- -- -- -- --
Other 99 12 77 44 46
------ ------- ------- ------- -------
Total loans charged-off 133 103 206 535 1,052
------ ------- ------- ------- -------
Recoveries:
Mortgage loans 153 177 155 244 496
Other -- -- 5 -- --
------ ------- ------- ------- -------
Total recoveries 153 177 160 244 496
------ ------- ------- ------- -------
Balance at end of year 6,818 $ 6,762 $ 6,474 $ 5,437 $ 5,310
====== ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the year
to average loans outstanding during the year (0.00)% (0.01)% 0.01% 0.09% 0.21%
Ratio of allowance for loan losses to
gross loans at end of the year 0.77% 0.89% 1.07% 1.39% 1.85%
Ratio of allowance for loan losses to
non-performing loans at the end of year 213.29% 260.36% 263.38% 225.79% 106.61%
Ratio of allowance for loan losses to
non-performing assets at the end of year 191.29% 252.83% 223.94% 149.94% 77.52%
16
The following table sets forth the Bank's allocation of its allowance for
loan losses to the total amount of loans in each of the categories listed at the
dates indicated. The numbers contained in the "Amount" column indicate the
allowance for loan losses allocated for each particular loan category. The
numbers contained in the column entitled "Percentage of Loans in Category to
Total Loans" indicate the total amount of loans in each particular category as a
percentage of the Bank's total loan portfolio.
At December 31,
-----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ---------------------
Percentage Percentage Percentage
of Loans in of Loans in of Loans in
Category to Category to Category to
Loan Category Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------- ------------------- ---------------------
(Dollars in thousands)
Mortgage Loans:
One-to-four family $1,903 46.92% $2,575 47.69% $1,711 47.67%
Co-operative 144 1.01 278 1.35 510 1.99
Multi-family 1,216 35.19 1,395 36.57 1,021 37.95
Commercial 3,003 15.53 1,990 13.37 3,073 11.24
Construction 24 0.70 114 0.42 128 0.46
------------------ ------------------ -------------------
Total mortgage loans 6,290 99.35 6,352 99.40 6,443 99.31
Small Business
Administration loans 237 0.27 273 0.35 23 0.46
Other Loans 291 0.38 137 0.25 8 0.23
------------------ ------------------ -------------------
Total loans $6,818 100.00% $6,762 100.00% $6,474 100.00%
================== ================== ===================
At December 31,
-------------------------------------------
1996 1995
------------------- --------------------
Percentage Percentage
of Loans in of Loans in
Category to Category to
Loan Category Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------- --------------------
Mortgage Loans:
One-to-four family $1,065 57.28% $1,126 54.20%
Co-operative 458 3.40 407 5.11
Multi-family 1,456 26.91 1,625 24.11
Commercial 2,434 11.98 2,139 15.77
Construction -- -- -- --
------------------------ -------------------
Total mortgage loans 5,413 99.57 5,297 99.19
Small Business
Administration loans -- -- -- --
Other Loans 24 0.43 13 0.81
------------------------ -------------------
Total loans $5,437 100.00% $5,310 100.00%
======================== ===================
17
Investment Activities
General. The investment policy of the Company, which is approved by the
Board of Directors, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity. In establishing
its investment strategies, the Company considers its business and growth
strategies, the economic environment, its interest rate risk exposure, its
interest rate sensitivity "gap" position, the types of securities to be held,
and other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Management Strategy," included in the Annual
Report and incorporated herein by reference.
Federally chartered savings institutions have authority to invest in
various types of assets, including U.S. government obligations, securities of
various federal agencies, mortgage-backed and mortgage-related securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers acceptances, reverse repurchase agreements, loans of federal
funds, and, subject to certain limits, corporate securities, commercial paper
and mutual funds. All mortgage-backed securities held by the Company and the
Bank are directly or indirectly insured or guaranteed by Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
or the Government National Mortgage Association ("GNMA").
The Investment Committee of the Bank and the Company meets quarterly to
monitor investment transactions and to establish investment strategy. The Board
of Directors reviews the investment policy on an annual basis and investment
activity on a monthly basis.
The Company classifies its investment securities as available for sale.
Unrealized gains and losses for available-for-sale securities are excluded from
earnings and included in Accumulated Other Comprehensive Income (a separate
component of equity), net of taxes. At December 31, 1999, the Company had $285.0
million in securities available for sale which represented 22.81% of total
assets. These securities had an aggregate market value at that date that was
approximately 2.4 times the amount of the Company's equity at that date. The
cumulative balance of unrealized net losses on securities available for sale was
$4.5 million, net of taxes, at December 31, 1999. As a result of the magnitude
of the Company's holdings of securities available for sale, changes in interest
rates could produce significant changes in the value of such securities and
could produce significant fluctuations in the equity of the Company. See Note 6
of "Notes to Consolidated Financial Statements," included in the Annual Report
and incorporated herein by reference. The Company may from time to time sell
securities and realize a loss if the proceeds of such sale may be reinvested in
loans or other assets offering more attractive yields.
At December 31, 1999, the Company had no investment in a particular
issuer's securities that either alone, or together with any investments in the
securities of any affiliate(s) of such issuer, exceeded 10% of the Company's
equity.
18
The table below sets forth certain information regarding the amortized cost
and market values of the Company's and Bank's securities portfolio, interest
bearing deposits and federal funds, and FHLB-NY stock at the dates indicated.
Securities available for sale are recorded at market value. See Note 6 of Notes
to Consolidated Financial Statements, included in the Annual Report,
incorporated herein by reference.
At December 31,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------------------- ---------------------- ----------------------
(In thousands)
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies $ 10,988 $ 10,636 $ 13,213 $ 13,425 $120,106 $120,123
Corporate debentures -- -- 4,711 4,710 13,149 13,178
Public utility 1,001 1,004 945 944 2,247 2,271
---------------------- ---------------------- ----------------------
Total bonds and other debt securities 11,989 11,640 18,869 19,079 135,502 135,572
---------------------- ---------------------- ----------------------
Equity securities:
Common stock 1,655 1,670 2,390 2,776 606 1,187
Preferred stock 2,676 2,684 2,309 2,414 2,768 2,843
---------------------- ---------------------- ----------------------
Total equity securities 4,331 4,354 4,699 5,190 3,374 4,030
---------------------- ---------------------- ----------------------
Mortgage-backed securities:
FHLMC 9,758 9,657 14,831 14,894 34,015 34,120
FNMA 14,639 14,602 20,717 21,102 55,559 56,068
GNMA 252,626 244,763 265,089 266,425 125,585 126,922
---------------------- ---------------------- ----------------------
Total mortgage-backed securities 277,023 269,022 300,637 302,421 215,159 217,110
---------------------- ---------------------- ----------------------
Total securities available for sale 293,343 285,016 324,205 326,690 354,035 356,712
---------------------- ---------------------- ----------------------
Interest-bearing deposits and
Federal funds sold 9,019 9,019 12,008 12,008 84,838 84,838
FHLB--New York stock 22,592 22,592 17,320 17,320 14,356 14,356
---------------------- ---------------------- ----------------------
Total $324,954 $316,627 $353,533 $356,018 $453,229 $455,906
====================== ====================== ======================
Mortgage-backed securities. All of the mortgage-backed securities currently
held by the Company are issued or guaranteed by FNMA, FHLMC or GNMA. At December
31, 1999, the Company had $269.0 million invested in mortgage-backed securities,
of which $13.7 million was invested in adjustable-rate mortgage-backed
securities. The mortgage loans underlying these adjustable-rate securities
generally are subject to limitations on annual and lifetime interest rate
increases. The Company anticipates that investments in mortgage-backed
securities may continue to be used in the future to supplement mortgage lending
activities. Mortgage-backed securities are more liquid than individual mortgage
loans and may be used more easily to collateralize obligations of the Bank.
19
The following table sets forth the Company's mortgage-backed securities
purchases, sales and principal repayments for the years indicated:
For the Year Ended December 31,
------------------------------------------
1999 1998 1997
------------------------------------------
(In thousands)
At beginning of year $ 302,421 $ 217,110 $ 141,038
Purchases of mortgage-backed securities 59,059 245,942 136,063
Amortization of unearned premium, net of
accretion of unearned discount (2,064) (1,386) (473)
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale (9,792) (189) 2,830
Sales of mortgage-backed securities -- (66,136) (33,934)
Principal repayments received on
mortgage-backed securities (80,602) (92,920) (28,414)
------------------------------------------
Net increase(decrease) in mortgage-backed securities (33,399) 85,311 76,072
------------------------------------------
At end of year $ 269,022 $ 302,421 $ 217,110
==========================================
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed and value of such
securities. The Bank held no collateralized mortgage obligations ("CMO") at
December 31, 1999, 1998 and 1997. The Bank does not have any derivative
instruments, including CMO's, with market values that are extremely sensitive to
changes in interest rates.
20
The table below sets forth certain information regarding the amortized
cost, estimated fair value, annualized weighted average yields and maturities of
the Company's and the Bank's debt and equity securities at December 31, 1999.
The stratification of balances is based on stated maturities. Equity securities
and the FHLB-New York stock are shown as immediately maturing, except for
preferred stocks with stated redemption dates, which are shown in the period
they are scheduled to be redeemed. Assumptions for repayments and prepayments
are not reflected for mortgage-backed securities. The Company and the Bank carry
these investments at their estimated fair value in the consolidated financial
statements.
At December 31, 1999
------------------------------------------------------------------------------
Five to Ten More than Ten
One Year or Less One to Five Years Years Years
----------------- ------------------ ----------------- -----------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
----------------- ------------------ ----------------- -----------------
(Dollars in thousands)
Securities available for sale
Bonds and other debt securities:
U.S. government agencies -- -- -- -- $5,988 7.83% $5,000 6.68%
Public utility -- -- 1,001 7.96 -- --
-- --
----------------- ----------------- ----------------- -----------------
Total bonds and other debt
securities -- -- -- -- 6,989 7.85 5,000 6.68
----------------- ----------------- ----------------- -----------------
Equity securities:
Common stock $ 1,655 1.50% -- -- -- -- -- --
Preferred stock
835 8.84 $1,533 8.08% 308 7.29 -- --
----------------- ----------------- ----------------- -----------------
Total equity securities
2,490 3.96 1,533 8.08 308 7.29 -- --
----------------- ----------------- ----------------- -----------------
Mortgage-backed securities:
FHLMC
427 7.11 -- -- 1,298 8.09 8,033 7.52
FNMA
52 7.10 -- -- 2,657 6.79 11,930 7.75
GNMA
-- -- -- -- 11 7.31 252,615 7.37
----------------- ----------------- ----------------- -----------------
Total mortgage-backed securities
479 7.11 -- -- 3,966 7.22 272,578 7.39
----------------- ----------------- ----------------- -----------------
Interest-bearing deposits and Federal
Funds sold 9,019 4.05 -- -- -- -- -- --
FHLB--New York stock 22,592 6.75 -- -- -- -- -- --
------------------ ----------------- ----------------- -----------------
Total securities $34,580 5.85% $1,533 8.08% $11,264 7.61% $277,578 7.38%
================= ================= ================= =================
At December 31, 1999
------------------------------------------
Total Securities
------------------------------------------
Average
Remaining Weighted
Years to Amortized Estimated Average
Maturity Cost Fair Value Yield
------------------------------------------
Securities available for sale
Bonds and other debt securities:
U.S. government agencies 10.01 $10,988 $10,636 7.31%
Public utility 8.81 1,001 1,004 7.96
------------------------------------------
Total bonds and other debt
securities 9.91 11,989 11,640 7.36
------------------------------------------
Equity securities:
Common stock N/A 1,655 1,670 1.50
Preferred stock
1.91 2,676 2,684 8.23
------------------------------------------
Total equity securities
1.19 4,331 4,354 5.66
------------------------------------------
Mortgage-backed securities:
FHLMC
19.46 9,758 9,657 7.58
FNMA
20.13 14,639 14,602 7.57
GNMA
28.12 252,626 244,763 7.37
------------------------------------------
Total mortgage-backed securities
27.39 277,023 269,022 7.39
------------------------------------------
Interest-bearing deposits and Federal
Funds sold N/A 9,019 9,019 4.05
FHLB--New York stock N/A 22,592 22,592 6.75
------------------------------------------
Total securities 26.44 $324,954 $316,627 7.23%
==========================================
21
Sources of Funds
General. Deposits, FHLB-NY borrowings, repurchase agreements, principal and
interest payments on loans, mortgage-backed and other securities, and proceeds
from sales of loans and securities are the Company's primary sources of funds
for lending, investing and other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits principally consist of passbook
accounts, money market accounts, demand accounts, NOW accounts and certificates
of deposit. The Bank has a relatively stable retail deposit base drawn from its
market area through its nine full service offices. The Bank seeks to retain
existing depositor relationships by offering quality service and competitive
interest rates, while keeping deposit growth within reasonable limits. It is
management's intention to balance its goal to remain competitive in interest
rates on deposits while seeking to manage its cost of funds to finance its
strategies.
The Bank's core deposits, consisting of passbook accounts, NOW accounts,
money market accounts, and non-interest bearing demand accounts, are typically
more stable and lower costing than other sources of funding. However, the flow
of deposits into a particular type of account is influenced significantly by
general economic conditions, changes in prevailing money market and other
interest rates, and competition. Certificate of deposit accounts opened with the
Bank during the past several years were generally opened at rates which were
lower than the weighted average rate paid by the Bank on its certificate of
deposit accounts, and, maturing certificate of deposit accounts were generally
reinvested by depositors in new certificate of deposit accounts which paid a
lower rate than was paid on the maturing deposit. As a result, the Bank saw the
cost of its certificate of deposit accounts decline to 5.24% in 1999 from 5.61%
in 1998 and 5.68% in 1997. The decline in the cost of certificate of deposit
accounts, coupled with a reduced rate paid on passbook accounts, resulted in the
Bank's cost of interest-bearing deposits declining to 3.96% in 1999 from 4.43%
in 1998 and 4.44% in 1997.
During the second half of 1999, as interest rates began to increase, the
Bank raised interest rates on its certificate of deposit accounts to remain
competitive. The interest rates paid on certificate of deposit accounts opened
during the later part of 1999 were generally at levels that were above the
Bank's weighted average cost of existing certificate of deposit accounts. A
continuation of increasing interest rates, or of rates on new certificate of
deposit accounts at levels above the overall cost of funds being paid at year
end, could result in an increase in the Company's cost of deposits and a
narrowing of the Company's net interest margin.
Included in deposits are certificates of deposit with a balance of $100,000
or greater totaling $43.0 million, $30.5 million and $29.9 million at December
31, 1999, 1998 and 1997, respectively.
22
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented.
At December 31,
---------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Percent Weighted Percent Weighted
of Average of Average
Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate
----------- -------- --------- ----------- -------- ----------
(Dollars in thousands)
Passbook accounts (1) $195,910 29.37% 2.07% $203,949 30.71% 2.29%
NOW accounts (1) 27,463 4.12 1.90 26,788 4.03 1.90
Demand accounts (1) 20,490 3.07 -- 27,505 4.14 --
Mortgagors' escrow deposits 11,023 1.65 0.79 6,563 0.99 1.06
----------- -------- --------- ----------- -------- ----------
Total 254,886 38.21 1.83 264,805 39.87 1.98
----------- ------- --------- ----------- -------- ----------
Money market accounts (1) 40,378 6.05 3.23 28,439 4.28 2.69
Certificate of deposit accounts
with original maturities of:
6 Months and less 46,265 6.94 4.36 54,268 8.17 4.30
6 to 12 Months 64,499 9.67 4.73 81,092 12.21 4.96
12 to 30 Months 171,087 25.67 5.42 139,397 21.00 5.71
30 to 48 Months 28,632 4.29 6.07 41,543 6.26 6.17
48 to 72 Months 60,309 9.04 6.24 50,323 7.58 6.22
72 Months or more 885 0.13 6.31 4,192 0.63 6.54
----------- --------- --------- ----------- -------- ----------
Total certificate
of deposit accounts 371,677 55.74 5.36 370,815 55.85 5.47
----------- --------- --------- ----------- -------- ----------
Total deposits (2) $666,941 100.00% 3.88% $664,059 100.00% 3.96%
=========== ========= ========= =========== ======== ==========
At December 31,
--------------------------------------
1997
-------------------------------------
Percent Weighted
of Average
Total Nominal
Amount Deposits Rate
-------------- --------- ----------
Passbook accounts (1) $201,668 30.75% 2.90%
NOW accounts (1) 23,825 3.63 1.90
Demand accounts (1) 19,263 2.94 --
Mortgagors' escrow deposits 4,900 0.75 1.17
-------------- --------- ----------
Total 249,656 38.07 2.55
-------------- --------- ----------
Money market accounts (1) 23,526 3.59 2.86
Certificate of deposit accounts
with original maturities of:
6 Months and less 61,916 9.44 5.31
6 to 12 Months 75,340 11.49 5.53
12 to 30 Months 130,414 19.87 6.05
30 to 48 Months 56,209 8.57 6.48
48 to 72 Months 54,406 8.29 6.36
72 Months or more 4,444 0.68 6.67
-------------- --------- ----------
Total certificate
of deposit accounts 382,729 58.34 5.94
-------------- --------- ----------
Total deposits (2) $655,911 100.00% 4.54%
============== ========= ==========
- ----------
(1) Weighted average nominal rate as of the year end date equals the stated
rate offered.
(2) Included in the above balances are IRA and Keogh deposits totaling $86.8
million, $86.4 million and $85.8 million at December 31, 1999, 1998 and
1997, respectively.
23
The following table presents by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated and the years
to maturity of the certificate accounts outstanding at December 31, 1999.
At December 31, 1999
At December 31, ------------------------------------------------------
----------------------------------------- Within One One to Three There-
1999 1998 1997 Year Year after Total
------------ ------------ -------------- ------------- ------------- ------------- ------------
(Dollars in thousands)
Certificate of deposit accounts:
2.99 or less $370 $136 $625 $275 $95 -- $370
3.00 to 3.99 5,717 22,234 -- 5,717 -- -- 5,717
4.00 to 4.99 131,874 82,899 21,265 122,392 7,755 $1,727 131,874
5.00 to 5.99 172,863 161,122 220,994 62,027 92,959 17,877 172,863
6.00 to 6.99 49,392 92,038 124,682 15,019 23,781 10,592 49,392
7.00 to 7.99 11,461 12,386 15,163 7,363 4,098 -- 11,461
----------- ------------ ------------- ------------ ------------ ----------- ------------
Total $371,677 $370,815 $382,729 $212,793 $128,688 $30,196 $371,677
=========== ============ ============= ============ ============ =========== ============
The following table presents by various maturity categories the amount of
certificate of deposit accounts with balances of $100,000 or more at December
31, 1999 and their annualized weighted average interest rates.
Amount Weighted Average Rate
-------------- ---------------------
(Dollars in thousands)
Maturity Period:
Three months or less $10,578 5.11%
Over three through six months 5,399 5.18
Over six through 12 months 7,242 5.53
Over 12 months 19,773 5.90
---------- ------------
Total $42,992 5.55%
========== ============
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Year Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
Net deposits/withdrawals) (1) $(22,100) $(19,824) $(6,009)
Interest credited on deposits 24,982 27,972 26,566
Deposits acquired from New York Federal -- -- 50,875
------------ ------------ -----------
Total increase (decrease) in deposits $ 2,882 $8,148 $71,432
============ ============ ===========
- ----------
(1) Includes mortgagors' escrow deposits.
24
The following table sets forth the distribution of the Bank's average
deposit accounts for the years indicated, the percentage of total deposit
portfolio, and the average interest cost of each deposit category presented.
Average balances for all years shown are derived from daily balances.
For The Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Percent of Percent of
Average Total Average Average Total Average
Balance Deposits Cost Balance Deposits Cost
-------------------------------------- --------------------------------------
(Dollars in thousands)
Passbook accounts $200,601 30.19% 2.07% $202,291 30.53% 2.74%
NOW accounts 26,281 3.96 1.90 24,375 3.68 1.91
Demand accounts 24,624 3.71 -- 26,177 3.95 --
Mortgagors' escrow deposits 11,718 1.76 0.79 6,724 1.01 1.06
-------------------------------------- --------------------------------------
Total 263,224 39.62 1.80 259,567 39.17 2.34
Money market accounts 36,191 5.45 3.05 26,240 3.96 2.95
Certificate of deposit accounts 364,947 54.93 5.24 376,787 56.87 5.61
-------------------------------------- --------------------------------------
Total deposits $664,362 100.00% 3.76% $662,594 100.00% 4.22%
====================================== ======================================
For The Year Ended December 31,
--------------------------------------
1997
--------------------------------------
Percent of
Average Total Average
Balance Deposits Cost
--------------------------------------
Passbook accounts $206,196 33.56% 2.85%
NOW accounts 22,679 3.69 1.90
Demand accounts 12,306 2.00 --
Mortgagors' escrow deposits 6,044 0.98 1.17
--------------------------------------
Total 247,225 40.23 2.58
Money market accounts 24,367 3.97 2.84
Certificate of deposit accounts 342,898 55.80 5.68
--------------------------------------
Total deposits $614,490 100.00% 4.32%
======================================
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank has increased utilization of borrowings as an alternative and cost
effective source of funds for lending, investing and other general purposes. The
Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such
advances generally are secured by a blanket lien against the Bank's mortgage
portfolio and the Bank's investment in the stock of the FHLB-NY. In addition,
the Bank may pledge mortgage-backed securities to obtain advances from the
FHLB-NY. See "Regulation -- Federal Home Loan Bank System". The maximum amount
that the FHLB-NY will advance for purposes other than for meeting withdrawals
fluctuates from time to time in accordance with the policies of the FHLB-NY. The
Bank also enters into repurchase agreements with the FHLB-NY. These agreements
are recorded as financing transactions and the obligations to repurchase are
reflected as a liability in the Company's consolidated financial statements. The
cost of borrowed funds was 6.02%, 6.16% and 6.22% for 1999, 1998 and 1997,
respectively. The average balances of borrowed funds were $379.3 million, $303.6
million and $132.3 million for 1999, 1998 and 1997, respectively.
25
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
At or For the Year Ended December 31,
------------------------------------------------------
1999 1998 1997
----------------- ----------------- ---------------
(Dollars in thousands)
Securities Sold with the Agreement to Repurchase
Average balance outstanding $118,849 $110,274 $6,904
Maximum amount outstanding at any month
end during the period $120,000 $130,000 $100,000
Balance outstanding at the end of period $110,000 $120,000 $100,000
Weighted average interest rate during the period 5.83% 5.81% 5.84%
Weighted average interest rate at end of period 5.81% 5.83% 5.83%
FHLB-NY Advances
Average balance outstanding $260,410 $193,299 $125,295
Maximum amount outstanding at any month
end during the period $341,831 $216,406 $187,112
Balance outstanding at the end of period $341,831 $215,458 $187,112
Weighted average interest rate during the period 6.11% 6.36% 6.34%
Weighted average interest rate at end of period 6.09% 6.26% 6.34%
Other Borrowings
Average balance outstanding -- -- $75
Maximum amount outstanding at any month
end during the period -- -- $75
Balance outstanding at the end of period -- -- $75
Weighted average interest rate during the period -- -- --
Weighted average interest rate at end of period -- -- --
Total Borrowings
Average balance outstanding $379,259 $303,573 $132,274
Maximum amount outstanding at any month
end during the period $451,831 $346,406 $287,187
Balance outstanding at the end of period $451,831 $335,458 $287,187
Weighted average interest rate during the period 6.02% 6.16% 6.22%
Weighted average interest rate at end of period 6.02% 6.11% 6.16%
26
Subsidiary Activities
At December 31, 1999, the Bank had three wholly-owned subsidiaries: FSB
Properties, Inc. ("Properties"), Flushing Preferred Funding Corporation ("FPFC")
and Flushing Service Corporation.
(a) Properties was formed in 1976 under the Bank's New York State leeway
investment authority. The original purpose of Properties was to engage in joint
venture real estate equity investments. The Bank discontinued these activities
in 1986. The last joint venture in which Properties was a partner was dissolved
in 1989. The last remaining property acquired by the dissolution of these joint
ventures was disposed of in 1998.
(b) FPFC was formed in the fourth quarter of 1997 as a real estate
investment trust for the purpose of acquiring, holding and managing real estate
mortgage assets.
(c) Flushing Service Corporation was formed in 1998 to market insurance
products and mutual funds. The insurance products and mutual funds sold are
products of unrelated insurance and securities firms from which the service
corporation earns a commission.
Personnel
At December 31, 1999, the Bank had 178 full-time employees and 57 part-time
employees. None of the Bank's employees are represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be good.
27
RISK FACTORS
In addition to the other information contained in this Annual Report on
Form 10-K, the following factors and other considerations should be considered
carefully in evaluating the Company, the Bank and their business.
Effect of Interest Rates
Like most financial institutions, the Company's results of operations
depends to a large degree on its net interest income. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets, a
significant increase in market interest rates could adversely affect net
interest income. Conversely, under such circumstances, a significant decrease in
market interest rates could result in increased net interest income. As a
general matter, the Company seeks to manage its business to limit its overall
exposure to interest rate fluctuations. However, fluctuations in market interest
rates are neither predictable nor controllable and may have a material adverse
impact on the operations and financial condition of the Company.
Prevailing interest rates also affect the extent to which borrowers prepay
and refinance loans. Declining interest rates tend to result in an increased
number of loan prepayments and loan refinancings to lower than original interest
rates, as well as prepayments of mortgage-backed securities. Such prepayments
and refinancings adversely affect the average yield on the Company's loan and
mortgage-backed securities portfolio, the value of mortgage loans and
mortgage-backed securities in the Company's portfolio, the levels of such assets
that are retained by the Company, net interest income and loan servicing income.
However, the Bank may receive additional loan fees when existing loans are
refinanced, which may partially offset reduced yield on the Bank's loan
portfolio resulting from prepayments. In periods of low interest rates, the
Bank's level of core deposits also may decline if depositors seek higher
yielding instruments or other investments not offered by the Bank, which in turn
may increase the Bank's cost of funds and decrease its net interest margin to
the extent alternative funding sources are utilized. Significant increases in
prevailing interest rates may significantly affect demand for loans and value of
bank collateral. See "--Local Economic Conditions."
Lending Activities
Multi-family and commercial real estate loans, the increased origination of
which is part of management's strategy, and construction loans, the level of
which remains low but has been increasing, are generally viewed as exposing the
lender to a greater risk of loss than fully underwritten one-to-four family
residential loans and typically involve higher principal amounts per loan.
Repayment of multi-family and commercial real estate loans generally is
dependent, in large part, upon sufficient income from the property to cover
operating expenses and debt service. Repayment of construction loans is
contingent upon the successful completion and operation of the project. Changes
in local economic conditions and government regulations, which are outside the
control of the borrower or lender, also could affect the value of the security
for the loan or the future cash flow of the affected properties.
As a result of management's strategy to increase its originations of
one-to-four family mortgage loans through more aggressive marketing, and the
Bank's commitment to be a community-oriented bank, the Bank increased
substantially the origination of residential mortgage loans to self-employed
individuals within the Bank's local community without verification of the
borrower's level of income. These loans involve a higher degree of risk as
compared to the Bank's other fully underwritten residential mortgage loans as
there is a greater opportunity for borrowers to falsify or overstate their level
of income and ability to service indebtedness. To mitigate this risk, the Bank
typically limits the amount of these loans to 80% of the appraised value or sale
price, whichever is less. These loans are not as readily salable in the
secondary market as the Bank's other fully underwritten loans, either as whole
loans or when pooled or securitized.
28
There can be no assurance that the Bank will be able to successfully
implement its business strategies. In assessing the future earnings prospects of
the Bank, investors should consider, among other things, the Bank's level of
origination of one-to-four family loans, the Bank's emphasis on commercial real
estate and multi-family loans and the greater risks associated with such loans.
See "Business -- Lending Activities".
Competition
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. The future earnings prospects of the Bank will be affected
by the Bank's ability to compete effectively with other financial institutions
and to implement its business strategies. See "Business - Market Area and
Competition."
Local Economic Conditions
Although general economic conditions in the New York City metropolitan area
have improved since the early 1990's, there can be no assurance that the local
economy will continue to improve or remain at current conditions.
A decline in the local economy, national economy or metropolitan area real
estate market could adversely affect the financial condition and results of
operations of the Company, including through decreased demand for loans or
increased competition for good loans, increased non-performing loans and loan
losses and resulting additional provisions for loan losses and for losses on
real estate owned. Although management of the Bank believes that the current
allowance for loan losses is adequate in light of current economic conditions,
many factors may require additions to the allowance for loan losses in future
periods above those currently revealed. These factors include: (i) adverse
changes in economic conditions and changes in interest rates that may affect the
ability of borrowers to make payments on loans, (ii) changes in the financial
capacity of individual borrowers, (iii) changes in the local real estate market
and the value of the Bank's loan collateral, and (iv) future review and
evaluation of the Bank's loan portfolio, internally or by regulators. The amount
of the allowance for loan losses at any time represents good faith estimates
that are susceptible to significant changes due to changes in appraisal values
of collateral, national and regional economic conditions, prevailing interest
rates and other factors. See "Business - Allowance for Loan Losses."
Legislation and Proposed Changes
From time to time, legislation is enacted or regulations are promulgated
that have the effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive balance between
banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks and other financial
institutions are frequently made in Congress, in the New York legislature and
before various bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on the
Bank or the Company.
Certain Anti-Takeover Provisions
On September 17, 1996, the Company adopted a Stockholder Rights Plan (the
"Rights Plan") designed to preserve long-term values and protect stockholders
against stock accumulations and other abusive tactics to acquire control of the
Company. Under the Rights Plan, each stockholder of record at the close of
business on September 30, 1996 received a dividend distribution of one right to
purchase from the Company one one-hundredth-fiftieth of a share of a new series
of junior participating preferred stock at a price of $64,
29
subject to certain adjustments. The rights will become exercisable only if any
person or group acquires 15% or more of the Company's common stock ("Common
Stock") or commences a tender or exchange offer which, if consummated, would
result in that person or group owning at least 15% of the Common Stock (the
"acquiring person or group"). In such case, all stockholders other than the
acquiring person or group will be entitled to purchase, by paying the $64
exercise price, Common Stock (or a common stock equivalent) with a value of
twice the exercise price. In addition, at any time after such event, and prior
to the acquisition by any person or group of 50% or more of the Common Stock,
the Board of Directors may, at its option, require each outstanding right (other
than rights held by the acquiring person or group) to be exchanged for one share
of Common Stock (or one common stock equivalent). The rights expire on September
30, 2006.
The Rights Plan, as well as certain provisions of the Company's Certificate
of Incorporation and Bylaws, the Bank's federal Stock charter and Bylaws,
certain federal regulations and provisions of Delaware corporation law, and
certain provisions of remuneration plans and agreements applicable to employees
and officers of the Bank may have anti-takeover effects by discouraging
potential proxy contests and other takeover attempts, particularly those which
have not been negotiated with the Board of Directors. The Rights Plan and those
other provisions, as well as applicable regulatory restrictions, may also
prevent or inhibit the acquisition of a controlling position in the Common Stock
and may prevent or inhibit takeover attempts that certain stockholders may deem
to be in their or other stockholders' interest or in the interest of the Company
or the Bank, or in which stockholders may receive a substantial premium for
their shares over then current market prices. The Rights Plan and those other
provisions may also increase the cost of, and thus discourage, any such future
acquisition or attempted acquisition, and would render the removal of the
current Board of Directors or management of the Bank or the Company more
difficult.
30
FEDERAL, STATE AND LOCAL TAXATION
The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company.
Federal Taxation
General. The Company reports its income using a calendar year and the
accrual method of accounting. The Company is subject to the federal tax laws and
regulations which apply to corporations generally; including, since the
enactment of the Small Business Job Protection Act in 1996 (the "Act"), those
governing the Bank's deductions for bad debts, described below.
Bad Debt Reserves. Prior to the enactment of the Act, which was signed into
law on August 20, 1996, savings institutions which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts"), such as the Bank, were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualifying
thrifts could compute deductions for bad debts using either the specific charge
off method of Section 166 of the Internal Revenue Code (the "Code") or the
reserve method of Section 593 of the Code.
Prior to its modification by the Act, Section 593 permitted a qualifying
thrift to establish a reserve for bad debts and to make annual additions
thereto, which, within specified formula limits, could be deducted in arriving
at its taxable income. A qualifying thrift could elect annually to compute its
allowable deduction to bad debt reserves for "qualifying real property loans,"
generally loans secured by certain interests in real property, under either (i)
the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, subject to certain
limitations, a qualifying thrift generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income (determined
without regard to this deduction and with additional adjustments). Under the
experience method, a qualifying thrift was generally allowed a deduction for an
addition to its bad debt reserve equal to the greater of (i) an amount based on
its actual average experience for losses in the current and five preceding
taxable years, or (ii) an amount necessary to restore the reserve to its balance
as of the close of the base year, defined as the last taxable year beginning
before January 1, 1988. The Bank's deduction for additions to its bad debt
reserve with respect to non-qualifying loans had to be computed under the
experience method. Any deduction for the addition to the reserve for
non-qualifying loans reduced the maximum permissible addition to the reserve for
qualifying real property loans calculated under the percentage of taxable income
method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by qualifying thrifts, effective for taxable years
beginning after 1995. Qualifying thrifts that are treated as large banks, such
as the Bank, are required to use the specific charge off method, pursuant to
which the amount of any debt may be deducted only as it actually becomes wholly
or partially worthless.
A thrift institution required to change its method of computing reserves
for bad debt is required to treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amount of
the thrift institution's "applicable excess reserves" must be included in income
ratably over a six-taxable year period, beginning with the first taxable year
beginning after 1995. In the case of a thrift institution that is treated as a
large bank, such as the Bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for losses
on qualifying real property loans and its reserve for losses on nonqualifying
loans as of the close of its last taxable year beginning before January 1, 1996,
over (ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). The Bank's
applicable
31
excess reserves as of December 31, 1995 were approximately $300,000; of which
$120,000 remains to be included in future taxable income as of December 31,
1999.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders that are considered to result in distributions
from the pre-1988 reserves or the supplemental reserve for losses on loans
("excess distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and post-1951 accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation. The
amount of additional taxable income resulting from an excess distribution is an
amount that when reduced by the tax attributable to the income is equal to the
amount of the excess distribution. Thus, slightly more than one and one-half
times the amount of the excess distribution made would be includable in gross
income for federal income tax purposes, assuming a 35% federal corporate income
tax rate. See "Regulation--Restrictions on Dividends and Capital Distributions"
for limits on the payment of dividends by the Bank. The Bank does not intend to
pay dividends or make non-dividend distributions described above that would
result in a recapture of any portion of its pre-1988 bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes an alternative minimum
tax on corporations equal to the excess, if any, of 20% of alternative minimum
taxable income ("AMTI") over a corporation's regular federal income tax
liability. AMTI is equal to taxable income with certain adjustments. Only 90% of
AMTI can be offset by net operating loss carryforwards.
State and Local Taxation
New York State and New York City Taxation. The Company is subject to the
New York State Franchise Tax on Banking Corporations in an annual amount equal
to the greater of (i) 9% of "entire net income" allocable to New York State
during the taxable year or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 0.01% of the value of
assets allocable to New York State with certain modifications, (b) 3% of
"alternative entire net income" allocable to New York State or (c) $250. Entire
net income is similar to federal taxable income, subject to certain
modifications (including that net operating losses cannot be carried back or
carried forward), and alternative entire net income is equal to entire net
income without certain deductions which are allowable in the calculation of
entire net income. The Bank also is subject to a similarly calculated New York
City tax of 9% on income allocated to New York City and similar alternative
taxes. In addition, the Bank is subject to a temporary Metropolitan
Transportation Business Tax Surcharge for tax years ending before December 31,
2001, at a rate of 17% of the New York State Franchise Tax.
Notwithstanding the repeal of the federal income tax provisions permitting
bad debt deductions under the reserve method, New York State has enacted
legislation maintaining the preferential treatment of additional loss reserves
for qualifying real property and non-qualifying loans of qualifying thrifts for
both New York State and New York City tax purposes. Calculation of the amount of
additions to reserves for qualifying real property loans is limited to the
larger of the amount derived by the percentage of taxable income method or the
experience method. For these purposes, the applicable percentage to calculate
the bad debt deduction under the percentage of taxable income method is 32% of
taxable income, reduced by additions to reserves for non-qualifying loans,
except that the amount of the addition to the reserve cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Under
the experience method, the maximum addition to a loan reserve generally equals
the amount necessary to increase the balance of the bad debt reserve at the
close of the taxable year to the greater of (i) the amount that bears the same
ratio to loans outstanding at the close of the taxable year as the total net bad
debts sustained during the current and five preceding taxable years bears to the
sum of the loans outstanding at the close of those six years, or (ii) the
balance of the bad debt reserve at the close of the "base year," or, if the
amount of
32
loans outstanding has declined since the base year, the amount which bears the
same ratio to the amount of loans outstanding at the close of the taxable year
as the balance of the reserve at the close of the base year. For these purposes,
the "base year" is the last taxable year beginning before 1988. The amount of
additions to reserves for non-qualifying loans is computed under the experience
method. The aggregate amount of additions to reserves for losses on qualifying
real property and reserves for losses on non-qualifying loans cannot exceed the
amount by which 12% of the amount of the total deposits or withdrawable accounts
of depositors of the Bank at the close of the taxable year exceeds the sum of
the Bank's surplus, undivided profits and reserves at the beginning of such
year. The new legislation also allows an exclusion from entire net income for
New York State and New York City tax purposes for any amounts a thrift is
required to include in federal taxable income as a recapture of its bad debt
reserve as a consequence of the Act.
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.
REGULATION
General
On May 10, 1994, the Bank converted from a New York State chartered mutual
savings bank to a federally chartered mutual savings bank pursuant to Section
5(o) of the Home Owners' Loan Act, as amended ("HOLA"). On that date, the OTS
replaced the New York State Banking Department (the "Banking Department") as the
Bank's chartering authority and the FDIC as the Bank's primary federal
regulator. Although the FDIC is no longer the primary federal regulator of the
Bank, the Bank remains subject to regulation and examination by the FDIC as its
deposit insurer. The Bank's deposits are insured up to the applicable limits
permitted by law. See "--Insurance of Accounts."
The Bank is also subject to certain regulations promulgated by the Federal
Reserve Board. Moreover, in connection with converting to a federal charter, the
Bank became a member of the FHLB-NY.
The activities of federal savings institutions are governed by HOLA and, in
certain respects, the Federal Deposit Insurance Act ("FDIA"). Most regulatory
functions relating to deposit insurance and to conservatorships and
receiverships of insured institutions are exercised by the FDIC. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandated the
establishment of a risk-based deposit insurance assessment system and required
imposition of numerous additional safety and soundness operational standards and
restrictions. FDICIA and the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") each contain provisions affecting numerous
aspects of the operations and regulations of federal savings banks and empowers
the OTS and the FDIC, among other agencies, to promulgate regulations
implementing its provisions.
The OTS has extensive authority over the operations of the Bank. As part of
this authority, the Bank is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and back-up examinations by the
FDIC. The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the applicable rules and
regulations of, the OTS. The Company also is subject to regulation under the
federal securities laws.
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Bank and the Company. The description does
not purport to be a comprehensive description of applicable laws, rules and
regulations and is qualified in its entirety by reference to applicable laws,
rules and regulations.
33
Investment Powers
The Bank is subject to comprehensive regulation governing its investments
and activities. Among other things, the Bank may invest in (i) residential
mortgage loans, education loans and credit card loans in an unlimited amount,
(ii) non-residential real estate loans up to 400% of total capital, (iii)
commercial business loans up to 20% of assets (however, amounts over 10% of
total assets must be used only for small business loans) and (iv) in general,
consumer loans and highly rated commercial paper and corporate debt securities
in the aggregate up to 35% of assets. In addition, the Bank may invest up to 3%
of its assets in service corporations, an unlimited percentage of its assets in
operating subsidiaries (which may only engage in activities permissible for the
Bank itself) and under certain conditions may invest in finance subsidiaries.
Other than investments in service corporations, operating subsidiaries, finance
subsidiaries and stock of government-sponsored agencies, such as FHLMC and FNMA,
the Bank generally is not permitted to make equity investments. See
"Business--Investment Activities." A service corporation in which the Bank may
invest is permitted to engage in activities reasonably related to the activities
of a federal savings bank as the OTS may approve on a case by case basis and
certain activities preapproved by the OTS, which, among other things, include
providing certain support services for the institution; originating, investing
in, selling, purchasing, servicing or otherwise dealing with specified types of
loans and participations (principally loans that the parent institution could
make); specified real estate activities, including limited real estate
development, securities brokerage services; certain insurance brokerage
activities, and other specified investments and services.
Real Estate Lending Standards
FDICIA requires each federal banking agency to adopt uniform regulations
prescribing standards for extensions of credit (i) secured by real estate, or
(ii) made for the purpose of financing the construction of improvements on real
estate. In prescribing these standards, the banking agencies must consider the
risk posed to the deposit insurance funds by real estate loans, the need for
safe and sound operation of insured depository institutions and the availability
of credit. The OTS and the other federal banking agencies adopted uniform
regulations, effective March 19, 1993. The OTS regulation requires each savings
association to establish and maintain written internal real estate lending
standards consistent with safe and sound banking practices and appropriate to
the size of the institution and the nature and scope of its real estate lending
activities. The policy must also be consistent with accompanying OTS guidelines,
which include maximum loan-to-value ratios for the following types of real
estate loans: raw land (65%), land development (75%), nonresidential
construction (80%), improved property (85%) and one-to-four family residential
construction (85%). Owner-occupied one-to-four family mortgage loans and home
equity loans do not have maximum loan-to-value ratio limits, but those with a
loan-to-value ratio at origination of 90% or greater are to be backed by private
mortgage insurance or readily marketable collateral. Institutions are also
permitted to make a limited amount of loans that do not conform to the proposed
loan-to-value limitations so long as such exceptions are appropriately reviewed
and justified. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
Loans-to-One Borrower Limits
The Bank generally is subject to the same loans-to-one borrower limits that
apply to national banks. With certain exceptions, loans and extensions of credit
outstanding at one time to one borrower (including certain related entities of
the borrower) may not exceed 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus for loans fully secured
by certain readily marketable collateral. At December 31, 1999, the largest
amount the Bank could lend to one borrower was approximately $15.8 million, and
at that date, the Bank's largest aggregate amount of loans-to-one borrower was
$11.4 million, all of which was performing according to its terms. See
"Business--Lending Activities."
34
Insurance of Accounts
The deposits of the Bank are insured up to $100,000 per depositor (as
defined by law and regulations) by the FDIC. Approximately 97% of the Bank's
deposits are presently insured by the FDIC under the BIF. The remainder are
insured by the FDIC under the SAIF. The deposits insured under the SAIF are
those acquired in the acquisition of New York Federal. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, insured
institutions. It also may prohibit any insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
the insurance funds. The FDIC also has the authority to initiate enforcement
actions where the OTS has failed or declined to take such action after receiving
a request to do so from the FDIC.
The FDIC utilizes a risk-based deposit insurance assessment system. Under
this system, the FDIC assigns each institution to one of three capital
categories -- "well capitalized," "adequately capitalized" and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of FDIA, as
discussed below. These three categories are then divided into three
subcategories which reflect varying levels of supervisory concern. The matrix so
created results in nine assessment risk classifications.
Assessment rates during most of 1995 ranged from $0.23 per $100 of deposits
for an institution in the highest category to $0.31 of deposits for an
institution in the lowest category. On August 8, 1995, the FDIC amended its
regulation on assessments to establish a new assessment rate schedule for the
BIF ranging from $0.04 per $100 of deposits for an institution in the highest
category to $0.31 per $100 of deposits for an institution in the lowest
category. The FDIC's new rate schedule for the BIF was made effective with the
first day of the month following the month in which the BIF achieved full
capitalization to the statutory required 1.25% reserve ratio, which occurred in
the second half of 1995.
As a result of the lowering of BIF rates in August 1995, the Bank paid
$824,000 in deposit insurance premiums for the year ended December 31, 1995.
Thereafter, the FDIC voted to reduce the BIF assessment schedule even further so
that most BIF members, including the Bank, paid a statutory minimum annual
assessment rate of $2,000 for 1996. Deposit insurance for SAIF members was
revised to the same schedule as BIF members effective January 1, 1997. As of the
date of this Report, the annual FDIC assessment rate for BIF and SAIF member
institutions varies between 0.00% to 0.27% per annum. At December 31, 1999, the
Bank's annual assessment rate was 0.00%.
The Bank's assessment rate in effect from time to time will depend upon the
capital category and supervisory subcategory to which the Bank is assigned by
the FDIC. In addition, the FDIC is authorized to increase federal deposit
insurance assessment rates for BIF and SAIF members to the extent necessary to
protect the BIF and SAIF and, under current law, would be required to increase
such rates to $0.23 per $100 of deposits if the BIF or SAIF reserve ratio again
falls below the required 1.25%. Any increase in deposit insurance assessment
rates, as a result of a change in the category or subcategory to which the Bank
is assigned or the exercise of the FDIC's authority to increase assessment rates
generally, could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
On September 30, 1996, as part of an omnibus appropriations bill, the
Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted. The Funds Act
eliminated the deposit insurance premium disparity that existed since the second
half of 1995 between banks insured by the BIF and thrifts insured by the SAIF.
The
35
Act (i) required SAIF institutions to pay a one-time special assessment to
bring the SAIF's reserve ratio up to 1.25%, (ii) requires BIF institutions,
beginning January 1, 1997, to pay a portion of the interest due on the Finance
Corporation ("FICO") bonds issued in connection with the savings and loan
association crisis in the late 1980s, and (iii) requires BIF institutions to pay
their full pro rata share of the FICO payments starting the earlier of January
1, 2000 or the date at which no savings institution continues to exist. The Bank
was required, as of January 1, 2000, to pay its full pro rata share of the FICO
payments. The FICO assessment rate for the first quarter of 2000 was $0.0212 per
$100 of deposits for both BIF and SAIF institutions. For the second quarter of
2000, the rate is set at $0.0208 per $100 of deposits for both BIF and SAIF
institutions. These rates are subject to change. The Bank paid $100,000,
$102,000 and $87,000 for its share of the interest due on FICO bonds in 1999,
1998 and 1997, respectively.
Liquidity Requirements
The Bank is subject to OTS regulations that require maintenance of an
average daily balance of liquid assets (cash and certain securities with
detailed maturity limitations and marketability requirements) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. The OTS may vary the amount of the
liquidity requirement by regulation, but only within pre-established statutory
limits of no less than 4% and no greater than 10%. For the greater part of 1997,
OTS regulation set the liquidity requirement at 5%, with a 1% short-term
liquidity requirement. Amendments to OTS regulations, effective November 27,
1997, reduced the liquidity requirement from 5% to 4% and removed the 1%
short-term liquidity requirement. In addition, these amendments eliminated the
requirement that obligations of FNMA, GNMA and FHLMC must have five years or
less remaining until maturity to qualify as a liquid asset. At December 31,
1999, the Bank's liquidity ratio, computed in accordance with the OTS
requirements, as amended, was 9.72%. Unlike the Bank, the Company is not subject
to OTS regulatory requirements on the maintenance of minimum levels of liquid
assets.
Qualified Thrift Lender Test
Institutions regulated by the OTS are required to meet a qualified thrift
lender ("QTL") test to avoid certain restrictions on their operations. FDICIA
and applicable OTS regulations require such institutions to maintain at least
65% of its portfolio assets (total assets less intangibles, properties used to
conduct the institution's business and liquid assets not exceeding 20% of total
assets) in "qualified thrift investments" on a monthly average basis in nine of
every 12 months. Qualified thrift investments constitute primarily residential
mortgage loans and related investments, including certain mortgage-backed and
mortgage-related securities. A savings institution that fails the QTL test must
either convert to a bank charter or, in general, it will be prohibited from: (i)
making an investment or engaging in any new activity not permissible for a
national bank, (ii) paying dividends not permissible under national bank
regulations, (iii) obtaining advances from any FHLB, and (iv) establishing any
new branch office in a location not permissible for a national bank in the
institution's home state. One year following the institution's failure to meet
the QTL test, any holding company parent of the institution must register and be
subject to supervision as a bank holding company. In addition, beginning three
years after the institution failed the QTL test, the institution would be
prohibited from refinancing any investment or engaging in any activity not
permissible for a national bank and would have to repay any outstanding advances
from an FHLB as promptly as possible. At December 31, 1999, the Bank had
maintained more than 65% of its "portfolio assets" in qualified thrift
investments in at least nine of the preceding 12 months. Accordingly, on that
date, the Bank had met the QTL test.
On September 30, 1996, as part of the omnibus appropriations bill, Congress
enacted the Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory
Paperwork Reduction Act"), modifying and expanding investment authority under
the QTL test. Prior to the enactment of the Regulatory Paperwork Reduction Act,
commercial, corporate, business, or agricultural loans were limited in the
aggregate to 10% of a thrift's assets and education loans were limited to 5% of
a thrift's assets. Further, federal savings associations meeting a different
asset test under the Code (the "domestic building and loan association test")
36
were qualified for favorable tax treatment. The amendments permit federal
thrifts to invest in, sell, or otherwise deal in education and credit card loans
without limitation and raise from 10% to 20% of total assets the aggregate
amount of commercial, corporate, business, or agricultural loans or investments
that may be made by a thrift, subject to a requirement that amounts in excess of
10% of total assets be used only for small business loans. In addition, the
legislation defines "qualified thrift investment" to include, without limit,
education, small business, and credit card loans; and removes the 10% limit on
personal, family, or household loans for purposes of the QTL test. The
legislation also provides that a thrift meets the QTL test if it qualifies as a
domestic building and loan association under the Code.
Transactions with Affiliates
Transactions between the Bank and any related party or "affiliate" are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is any
company or entity which controls, is controlled by or is under common control
with the Bank, including the Company, the Bank's subsidiaries, and any other
subsidiary of the Bank or the Company that may be formed or acquired in the
future. Generally, Sections 23A and 23B (i) limit the extent to which the Bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of the Bank's capital stock and surplus, and impose 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 Bank or subsidiary as those provided to a non-affiliate. Each loan or
extension of credit to an affiliate by the Bank must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of credit extended. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition, the Bank may not (i) loan or
otherwise extend credit to an affiliate, except to any affiliate which engages
only in activities which are permissible for bank holding companies under
Section 4(c) of the Bank Company Act, or (ii) purchase or invest in any stocks,
bonds, debentures, notes or similar obligations of any affiliates, except
subsidiaries of the Bank.
In addition, the Bank is subject to Regulation O promulgated under Sections
22(g) and 22(h) of the Federal Reserve Act. Regulation O requires that loans by
the Bank to a director, executive officer or to a holder of more than 10% of the
Common Stock, and to certain affiliated interests of such insiders, may not, in
the aggregate, exceed the Bank's loans-to-one borrower limit. Loans to insiders
and their related interests must also be made on terms substantially the same as
offered, and follow credit underwriting procedures that are not less stringent
than those applied, in comparable transactions to other persons, with prior
Board approval required for certain loans. In addition, the aggregate amount of
extensions of credit by the Bank to all insiders cannot exceed the institution's
unimpaired capital and surplus. Section 22(g) places additional restrictions on
loans to executive officers of the Bank.
The Bank is in compliance with these regulations.
Restrictions on Dividends and Capital Distributions
The Bank is subject to OTS limitations on capital distributions, which
include cash dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other distributions charged to
the Bank's capital account. In general, the applicable regulation permits
specified levels of capital distributions by a savings institution that meets at
least its minimum capital requirements, so long as the OTS is provided with at
least 30 days' advance notice and has no objection to the distribution.
Under OTS capital distribution regulations which became effective April 1,
1999, an institution is not required to file an application with, or to provide
a notice to, the OTS if neither the institution nor the proposed capital
distribution meet any of the criteria for any such application or notice as
provided below. An institution will be required to file an application with the
OTS if the institution is not eligible for expedited treatment by
37
the OTS, if the total amount of all its capital distributions for the applicable
calendar year exceeds the net income for that year to date plus the retained net
income (net income less capital distributions) for the preceding two years, if
it would not be at least adequately capitalized following the distribution, or
if its proposed capital distribution would violate a prohibition contained in
any applicable statute, regulation, or agreement between the association and the
OTS. By contrast, only notice to the OTS is required for an institution that is
not otherwise required to file an application as provided in the preceding
sentence, if it would not be well capitalized following the distribution, if the
association's proposed capital distribution would reduce the amount of or retire
any part of its common or preferred stock or retire any part of debt instruments
such as notes or debentures included in capital under OTS regulations, or if it
is a subsidiary of a savings and loan holding company. The Bank is a subsidiary
of a savings and loan holding company and, therefore, is subject to the 30-day
advance notice requirement. At December 31, 1999, the Bank's allowable capital
distribution was approximately $13.5 million.
Federal Home Loan Bank System
In connection with converting to a federal charter, the Bank became a
member of the FHLB-NY, which is one of 12 regional FHLBs governed and regulated
by the Federal Housing Finance Board. Each FHLB serves as a source of liquidity
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 its Board of Directors.
As a member, the Bank is required to purchase and maintain stock in the
FHLB-NY in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. Pursuant to this
requirement, at December 31, 1999, the Bank was required to maintain $22.6
million of FHLB-NY stock. The Bank was in compliance with this requirement at
that time.
Assessments
Savings institutions are required by OTS regulations to pay assessments to
the OTS to fund the operations of the OTS. The general assessment, paid on a
quarterly or semi-annual basis, as determined from time to time by the Director
of the OTS, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the institution's latest quarterly
thrift financial report. Based on the average balance of the Bank's total assets
for the year ended December 31, 1999, the Bank's OTS assessments were $200,000
for that period.
Branching
OTS regulations permit federally chartered savings institutions to branch
nationwide to the extent allowed by federal statute. This permits federal
savings associations to geographically diversify their loan portfolios and lines
of business. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, the Bank has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take
38
such record into account in its evaluation of certain applications by the
institution. The methodology used by the OTS for determining an institution's
compliance with the CRA focuses on three tests: (a) a lending test, to evaluate
the institution's record of making loans in its service areas; (b) an investment
test, to evaluate the institution's record of investing in community development
projects, affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (c) a service test, to evaluate the
institution's delivery of services through its branches, ATMs, and other
offices. The Bank received a CRA rating of "2" in its most recent completed CRA
examination which was completed by the OTS in July 1997. The OTS commenced a CRA
examination in March 2000, which has not yet been completed. Under OTS
regulations, a CRA rating of "2" is the second highest rating available on a
scale from "1" to "4" with "1" being assigned to institutions that have an
outstanding record of meeting community credit needs and "4" being assigned to
institutions that are in substantial noncompliance in meeting community credit
needs. An institution that receives a "2" is considered to have a satisfactory
record of meeting community credit needs. Institutions that receive
unsatisfactory ratings (i.e., "3" or "4") may face difficulties in securing
approval for new activities or acquisitions. The CRA requires all institutions
to make public disclosure of their CRA ratings.
Brokered Deposits
The FDIC has promulgated regulations implementing the FDICIA limitations on
brokered deposits. Under the regulations, well-capitalized institutions are not
subject to brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do not
pay an effective yield on any such deposit which exceeds by more than (a) 75
basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) 120 basis points for retail deposits and 130 basis
points for wholesale deposits accepted outside the institution's normal market
area, respectively, from the current yield on comparable maturity U.S. Treasury
obligations. Undercapitalized institutions are not permitted to accept brokered
deposits and may not 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 the institution's normal market area or in
the market area in which such deposits are being solicited. Pursuant to the
regulation, the Bank, as a well-capitalized institution, may accept brokered
deposits.
Capital Requirements
General. The Bank is required to maintain minimum levels of regulatory
capital. Since FIRREA, capital requirements established by the OTS generally
must be no less stringent than the capital requirements applicable to national
banks. The OTS also is authorized to impose capital requirements in excess of
these standards on a case-by-case basis.
Any institution that fails any of its applicable capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. See "--Prompt Corrective
Action."
The OTS' capital regulations create three capital requirements: a tangible
capital requirement, a leverage or core capital requirement and a risk-based
capital requirement. At December 31, 1999, the Bank's capital levels exceeded
applicable OTS capital requirements. The three OTS capital requirements are
described below.
39
Tangible Capital Requirement. Under current OTS regulations, each savings
institution must maintain tangible capital equal to at least 1.50% of its
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At December 31, 1999, the Bank
had intangible assets consisting of $4.6 million in goodwill and no purchased
mortgage servicing rights. At that date, the Bank's tangible capital ratio was
8.28%.
In calculating adjusted total assets, adjustments are made to total assets
to give effect to the exclusion of certain assets from capital and to
appropriately account for the investments in and assets of both includable and
non-includable subsidiaries.
Core Capital Requirement. The current OTS core capital requirement ranges
between 3% and 5% of adjusted total assets. Savings institutions that receive
the highest supervisory rating for safety and soundness are required to maintain
a minimum core capital ratio of 3%, while the capital floor for all other
savings institutions generally ranges from 4% to 5%, as determined by the OTS on
a case by case basis. Core capital includes common stockholders' equity
(including retained income), non-cumulative perpetual preferred stock and
related surplus, minority interest in the equity accounts of fully consolidated
subsidiaries and (subject to phase-out) qualifying supervisory goodwill. The
Bank has no qualifying supervisory goodwill. At December 31, 1999, the Bank's
core capital ratio was 8.28%.
Effective October 1, 1998, the OTS relaxed regulations limiting the amount
of servicing assets, together with purchased credit card receivables, includable
in core capital from 50% of such capital to 100% of such capital, subject to
limitations on fair value. At December 31, 1999, the Bank had no purchased
mortgage servicing rights or purchased credit card receivables.
Risk-Based Requirement. The risk-based capital standard adopted by the OTS
requires savings institutions to maintain a minimum ratio of total capital to
risk-weighted assets of 8%. Total capital consists of core capital, defined
above, and supplementary capital but excludes the effect of recognizing deferred
taxes based upon future income after one year. Supplementary capital consists of
certain capital instruments that do not qualify as core capital, and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only in an amount equal to the amount of core capital. In
determining the risk-based capital ratios, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
significant categories of assets are (i) 0% for cash and securities issued by
the federal government or unconditionally backed by the full faith and credit of
the federal government; (ii) 20% for securities (other than equity securities)
issued by federal government sponsored agencies and mortgage-backed securities
issued by, or fully guaranteed as to principal and interest by, the FNMA or the
FHLMC, except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans and certain qualifying multi-family
mortgage loans not more than 90 days delinquent and having a loan-to-value ratio
of not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or the FHLMC; and (iv) 100% for all other loans and
investments, including consumer loans, home equity loans, commercial loans, and
one-to-four family residential real estate loans more than 90 days delinquent,
and all repossessed assets or assets more than 90 days past due. At December 31,
1999, the Bank's risk-based capital ratio was 16.33%. Risk-based capital
excludes the effect of recognizing deferred taxes based upon future income after
one year.
In 1993, the OTS adopted a final rule incorporating an interest-rate risk
component into the risk-based capital regulation. Under the rule, an institution
with a greater than "normal" level of interest rate risk will be subject to a
deduction of its interest rate risk component from total capital for purposes of
calculating the risk-based capital requirement. As a result, such an institution
may be required to maintain additional capital in
40
order to comply with the risk-based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio value exceeding 2% of the estimated market value
of its assets in the event of a 200 basis point increase or decrease (with
certain minor exceptions) in interest rates. The interest rate risk component
will be calculated, on a quarterly basis, as one-half of the difference between
an institution's measured interest rate risk and 2%, multiplied by the market
value of its assets. The rule establishes a "lag" time between the reporting
date of the data used to calculate an institution's interest rate risk and the
effective date of each quarter's interest rate risk component. The rule also
authorizes the director of the OTS, or his designee, to waive or defer an
institution's interest rate risk component on a case-by-case basis. At December
31, 1999, the Bank did not have more than "normal" interest rate risk and was
not subject to any deduction from total capital under this rule. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Risk," included in the Annual Report to Shareholders
and incorporated herein by reference.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and checking
accounts) and non-personal time deposits. At December 31, 1999, the Bank was in
compliance with these requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by
the OTS. Because required reserves must be maintained in the form of vault cash
or a non-interest-bearing account at a Federal Reserve Bank directly or through
another bank, the effect of this reserve requirement is to reduce an
institution's earning assets. The amount of funds necessary to satisfy this
requirement has not had a material effect on the Bank's operations.
As a creditor and financial institution, the Bank is also subject to
additional regulations promulgated by the FRB, including, without limitation,
regulations implementing requirements of the Truth in Savings Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act and the
Truth-in-Lending Act.
Financial Reporting
The Bank is required to submit independently audited annual reports to the
FDIC and the OTS. These publicly available reports must include (a) annual
financial statements prepared in accordance with GAAP and such other disclosure
requirements as required by the FDIC or the OTS and (b) a report, signed by the
Bank's chief executive officer and chief financial officer which contains
statements about the adequacy of internal controls and compliance with
designated laws and regulations, and attestations by independent auditors
related thereto. The Bank is required to monitor the foregoing activities
through an independent audit committee.
Standards for Safety and Soundness
The FDIA Act, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994 ("Community Development Act"), requires each
federal bank regulatory agency to establish safety and soundness standards for
institutions under its authority. On July 10, 1995, the federal banking
agencies, including the OTS, jointly released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines took effect August 9, 1995.
The guidelines, among other things, require savings institutions to maintain
internal controls, information systems and internal audit systems that are
appropriate to the size, nature and scope of the institution's business. The
guidelines also establish general standards relating to loan documentation,
credit underwriting, interest rate risk exposure, asset growth, and
compensation, fees and benefits. Savings institutions are required to maintain
safeguards to prevent the payment of excessive compensation to an executive
officer, employee, director or principal shareholder. The OTS may determine that
a savings institution is not in compliance with the safety and
41
soundness guidelines and, upon doing so, may require the institution to submit
an acceptable plan to achieve compliance with the guidelines. An institution
must submit an acceptable compliance plan to the OTS within 30 days of receipt
or request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory actions. Management believes that the Bank
currently meets the standards adopted in the interagency guidelines.
Additionally, under FDICIA, as amended by the Community Development Act,
federal banking agencies are required to establish standards relating to asset
quality and earnings that the agencies determine to be appropriate. Effective
October 1, 1998, the federal banking agencies, including the OTS, adopted
guidelines relating to asset quality and earnings which require insured
institutions to maintain systems, consistent with their size and the nature and
scope of their operations, to identify problem assets and prevent deterioration
in those assets as well as to evaluate and monitor earnings and insure that
earnings are sufficient to maintain adequate capital and reserves.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the FDICIA, each appropriate
agency and the FDIC is required to take prompt corrective action to resolve the
problems of insured depository institutions that do not meet minimum capital
ratios. Such action must be accomplished at the least possible long-term cost to
the appropriate deposit insurance fund.
The federal banking agencies, including the OTS, adopted substantially
similar regulations to implement Section 38 of the FDIA. Under the regulations,
an institution is deemed to be (i) "well capitalized" if it has total risk-based
capital of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has
a Tier 1 leverage capital ratio of 5% or more and is not subject to any order or
final capital directive 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% or more, a Tier 1 risk-based capital ratio of 4% or more and
a Tier 1 leverage capital ratio of 4% or more (3% 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%, a Tier 1
risk-based capital ratio that is less than 4% or a Tier 1 leverage capital ratio
that is less than 4% (3% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6%, a Tier 1 risk-based capital ratio that is less than 3% or a Tier 1 leverage
capital ratio that is less than 3%, and (v) "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than 2%.
Section 38 of the FDIA and the regulations promulgated thereunder also specify
circumstances under which a federal banking agency may 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 (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 1999, the Bank met the criteria to
be considered a "well capitalized" institution.
Recently Enacted Legislation and Proposed Changes
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act (the "Modernization Act"). Among other things, the Modernization Act permits
qualifying bank holding companies to affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or complementary thereto, as determined by the Federal Reserve Board. Subject to
certain limitations, a national bank may, through a financial subsidiary, engage
in similar activities. The Modernization Act also prohibits the creation or
acquisition of new unitary savings and loan holding companies that are
affiliated with nonbanking firms, but "grandfathers" existing savings and loan
holding companies, such as the Company. Grandfathered companies retain the
existing powers available to unitary savings and loan holding companies. See
"--Company Regulation." Certain business combinations which were impermissible
prior to the effective date of the Modernization Act are now possible and could
lead to further consolidation in the financial services
42
industry and an increase in the service offerings of our competitors. We cannot
predict at this time, however, the resulting changes in the competitive
environment in the Bank's market area or the impact, if any, of such changes on
the Bank or the Company.
The Modernization Act also requires financial institutions to disclose, on
ATM machines, any non-customer fees and to disclose to their customers upon the
issuance of an ATM card any fees that may be imposed by the institutions on ATM
users. For older ATMs, financial institutions will have until December 31, 2004,
to provide such notices.
In addition, the Modernization Act calls for heightened privacy protection
of customer information gathered by financial institutions. The OTS has recently
proposed regulations implementing the privacy protection provisions of the
Modernization Act. Under the proposed regulations, each financial institution is
to (i) adopt procedures to protect customers' "non-public personal information",
(ii) disclose its privacy policy, including identifying to customers others with
whom it shares "non-public personal information", at the time of establishing
the customer relationship and annually thereafter, and (iii) provide its
customers with the ability to "opt-out" of having the financial institution
share their personal information with affiliated third parties. The proposed
regulations suggest an effective date of November 13, 2000. This date may be
changed in the final regulations. We intend to review our current privacy
protection policy for compliance with these regulations when they are adopted in
final form and to amend that policy as needed.
Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of HOLA, is required to register with the OTS and is subject
to OTS regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Company and any non-savings
institution subsidiaries it later forms or acquires. Among other things, this
authority permits the OTS to restrict or prohibit activities that it determines
pose a serious risk to the Bank. See "--Restrictions on Dividends and Capital
Distributions."
HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS; acquiring
or retaining, with certain exceptions, more than 5% of a non-subsidiary savings
institution, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by HOLA; or acquiring or
retaining control of a depository institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the OTS will consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary savings and loan holding company, the Company currently is not
restricted as to the types of business activities in which it may engage,
provided that the Bank continues to meet the QTL test. See "--Qualified Thrift
Lender Test". Upon any non-supervisory acquisition by the Company of another
savings association or savings bank that meets the QTL test and is deemed to be
a savings institution by the OTS, the Company would become a multiple savings
and loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Company Act, subject to the prior approval of
the OTS, and activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition
43
of a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. Under New York law,
reciprocal interstate acquisitions are authorized for savings and loan holding
companies and savings institutions. Certain states do not authorize interstate
acquisitions under any circumstances; however, federal law authorizing
acquisitions in supervisory cases preempts such state law.
Federal law generally provides that no "person" acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
Federal Securities Laws
The 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
Company is subject to the information and reporting requirements, regulations
governing proxy solicitations, insider trading restrictions and other
requirements applicable to companies whose stock is registered under the
Exchange Act.
44
Item 2. Properties.
The Bank conducts its business through nine full-service offices. The
Bank's main office is located at 144-51 Northern Boulevard, Flushing, New York.
The Bank believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank and the Company.
Date Leased or Lease Expiration Net Book Value at
Office Leased or Owned Acquired Date December 31, 1999
------ --------------- -------- ---- -----------------
Main Office
144-51 Northern Blvd.
Flushing, NY 11354............. owned 1972 NA $2,548,492
Broadway Branch
159-18 Northern Blvd.
Flushing, NY 11358............. owned 1962 NA 958,824
Auburndale Branch
188-08 Hollis Court Blvd.
Flushing, NY 11358............. owned 1991 NA 1,212,743
Springfield Branch
61-54 Springfield Blvd.
Bayside, NY 11364.............. leased 1991 11/30/2001 31,492
Bay Ridge Branch
7102 Third Avenue
Brooklyn, NY 11209............. owned 1991 NA 414,919
Irving Place Branch
33 Irving Place
New York, NY 10003............. leased 1991 11/30/2001 441,406
New Hyde Park Branch
661 Hillside Avenue
New Hyde Park, NY 11040........ leased 1971 12/31/2011 51,793
Supermarket Branch
653 Hillside Avenue
New Hyde Park, NY 11040........ leased 1998 6/01/2003 236,247
Supermarket Branch
713 Coop City Boulevard
Bronx, NY 10475................ leased 1999 11/10/2004 306,449
Total premises and equipment, net $6,202,365
Item 3. Legal Proceedings.
The Bank is involved in various legal actions arising in the ordinary
course of its business which, in the aggregate, involve amounts which are
believed by management to be immaterial to the financial condition and results
of operations of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
None
45
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
The information regarding Flushing Financial Corporation common stock and
related stockholder matters appears on page 6 of the 1999 Annual Report to
Shareholders ("Annual Report") under the caption "Market Price of Common Stock"
and is incorporated herein by this reference.
Item 6. Selected Financial Data.
Information regarding selected financial data appears on pages 5 and 6 of
the Annual Report under the caption "Selected Financial Data" and is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 7 through 17 of the Annual
Report under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is incorporated herein by this
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Interest Rate Risk" on
page 11 of the Annual Report and in Notes 14 and 15 of the Notes to Consolidated
Financial Statements is incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data.
Information regarding the financial statements and the Independent
Auditor's Report appears on pages 18 through 42 of the Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
46
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding the directors and executive officers of the Company
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held May 16, 2000 under the captions "Board Nominees", "Continuing
Directors" and "Executive Officers Who Are Not Directors" and is incorporated
herein by this reference.
Item 11. Executive Compensation.
Information regarding executive compensation appears in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 16, 2000 under
the caption "Executive Compensation" and is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held May 16, 2000 under the caption "Stock Ownership of Certain Beneficial
Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held May
16, 2000 under the caption "Stock Ownership of Management" and is incorporated
herein by this reference.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on May 16, 2000 under the captions "Compensation Committee Interlocks
and Insider Participation" and "Certain Transactions" and is incorporated herein
by this reference.
47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Shareholders for the year ended December 31, 1999 and are incorporated
herein by this reference:
o Consolidated Statements of Condition at December 31, 1999 and 1998
o Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1999
o Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three-year period ended December 31, 1999
o Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1999
o Notes to Consolidated Financial Statements
o Report of Independent Accountants
The remaining information appearing in the Annual Report to Shareholders is
not deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto included in the Company's Annual Report to
Shareholders for the year ended December 31, 1999 and are incorporated herein by
this reference:
(b) Reports on Form 8-K filed during the last quarter of fiscal 1999
None
48
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
- ------
3.1 Articles of Incorporation of Flushing Financial Corporation (1)
3.2 By-Laws of Flushing Financial Corporation (1)
4.1 Rights Agreement, dated as of September 17, 1996, between Flushing Financial Corporation and
State Street Bank and Trust Company, as Rights Agent (10)
10.1 Annual Incentive Plan for Selected Officers (1)
10.2 Employment Agreements between Flushing Savings Bank, FSB and Certain Officers (1)(6)
10.3 Employment Agreements between Flushing Financial Corporation and
Certain Officers (2)(6)
10.3(a) Amendment No. 1 to Employment Agreement between Flushing Financial Corporation
and Michael J. Hegarty (3)
10.3(b) Amendment to Employment Agreement between Flushing Financial Corporation
and Certain Officers (including Michael J. Hegarty) (3)
10.3(c) Amendment No. 3 to Employment Agreement between Flushing Financial Corporation
and Michael J. Hegarty, and Amendment No. 2 to Employment Agreement between
Flushing Savings Bank, FSB and Michael J. Hegarty (4)
10.4 Special Termination Agreements (2)
10.5 Employee Severance Compensation Plan of Flushing Savings Bank, FSB (1)
10.6(a) Amended and Restated Outside Director Retirement Plan (9)
10.6(b) Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (2)
10.7 Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (1)
10.8 Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial
Corporation, and each Director (1)
10.8(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial
Corporation, and each Director (3)
10.8(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial
Corporation, and Certain Officers (3)(6)
10.9 Employee Benefit Trust Agreement (1)
10.9(a) Amendment to the Employee Benefit Trust Agreement (9)
10.10 Loan Document for Employee Benefit Trust (1)
10.11 Guarantee by Flushing Financial Corporation (1)
10.12 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial
Corporation and Gerard P. Tully, Sr. (4)
10.12(a) Amendment to Gerard P. Tully, Sr. Consulting Agreement (9)
10.12(b) Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (12)
10.12(c) Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement
10.13 Flushing Financial Corporation 1996 Restricted Stock Incentive Plan (7)
10.14 Flushing Financial Corporation 1996 Stock Option Incentive Plan (7)
10.15 Amendments to 1996 Restricted Stock Incentive Plan (8)
10.16 Amendments to 1996 Stock Option Incentive Plan (8)
10.17 Agreement and Plan of Merger as of April 24, 1997, by and between Flushing
Financial Corporation, Flushing Savings Bank, FSB and New York Federal
Savings Bank (5)
10.18 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial
Corporation and James F. McConnell (11)
10.19 Retirement Agreement between Flushing Savings Bank, FSB, Flushing Financial
Corporation and James F. McConnell (11)
13.1 1999 Annual Report to Shareholders
49
Exhibit
Number
- ------
22.1 Subsidiaries information incorporated herein by reference to Part I - Subsidiary Activities
23.1 Consent of Independent Accountants
27 Financial Data Schedule
99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2000,
which will be filed with the SEC within 30 days from the date this Form 10-K is filed.
- ----------
(1) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1995.
(3) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended September 30, 1996.
(4) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1996.
(5) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended June 30, 1997.
(6) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended September 30, 1997.
(7) Incorporated by reference to Exhibits filed with the Proxy Statement for
the Annual Meeting of Stockholders held May 21, 1996.
(8) Incorporated by reference to Exhibits filed with the Proxy Statements for
the Annual Meetings of Stockholders held April 29, 1997 and May 20, 1998.
(9) Incorporated by reference to Exhibits filed with the Form 10-K for the year
ended December 31, 1997.
(10) Incorporated by reference to Exhibit filed with Form 8-K filed September
30, 1996.
(11) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended March 31, 1998.
(12) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1998.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the Company has duly caused this report, or amendment thereto, to
be signed on its behalf by the undersigned, thereunto duly authorized, in New
York, New York, on March 29, 2000.
FLUSHING FINANCIAL CORPORATION
By: /s/ MICHAEL J. HEGARTY
-----------------------------------
Michael J. Hegarty
President and CEO
POWER OF ATTORNEY
We, the undersigned directors and officers of Flushing Financial
Corporation (the "Company") hereby severally constitute and appoint Michael J.
Hegarty and Monica C. Passick as our true and lawful attorneys and agents, each
acting alone and with full power of substitution and re-substitution, to do any
and all things in our names in the capacities indicated below which said Michael
J. Hegarty or Monica C. Passick may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with the report on Form 10-K, or amendment thereto, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the report on Form 10-K, or amendment
thereto; and we hereby approve, ratify and confirm all that said Michael J.
Hegarty or Monica C. Passick shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K, or amendment thereto, has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/ MICHAEL J. HEGARTY Director, President (Principal Executive Officer) March 29, 2000
- ----------------------------------
Michael J. Hegarty
/S/ GERARD P. TULLY, SR. Director, Chairman March 29, 2000
- ----------------------------------
Gerard P. Tully, Sr.
/S/ MONICA C. PASSICK Treasurer (Principal Financial and Accounting Officer) March 29, 2000
- ----------------------------------
Monica C. Passick
/S/ JAMES D. BENNETT Director March 29, 2000
- ----------------------------------
James D. Bennett
/S/ JOHN M. GLEASON Director March 29, 2000
- ----------------------------------
John M. Gleason
51
/S/ LOUIS C. GRASSI Director March 29, 2000
- ----------------------------------
Louis C. Grassi
/S/ ROBERT A. MARANI Director March 29, 2000
- ----------------------------------
Robert A. Marani
/S/ JOHN O. MEAD Director March 29, 2000
- ----------------------------------
John O. Mead
/S/ VINCENT F. NICOLOSI Director March 29, 2000
- ----------------------------------
Vincent F. Nicolosi
/S/ FRANKLIN F. REGAN, JR. Director March 29, 2000
- ----------------------------------
Franklin F. Regan, Jr.
/S/ JOHN E. ROE, SR. Director March 29, 2000
- ----------------------------------
John E. Roe, Sr.
/S/ MICHAEL J. RUSSO Director March 29, 2000
- ----------------------------------
Michael J. Russo
52