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, 2001
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 executive 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. [X]
As of February 28, 2002, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $214,310,000. This figure is based
on the closing price on that date on the Nasdaq National Market for a share of
the registrant's Common Stock, $0.01 par value, which was $16.90.
The number of shares of the registrant's Common Stock outstanding as of
February 28, 2002 was 13,356,496 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 2001 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 21, 2002 are incorporated herein by reference in
Part III.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business ............................................................................ 1
General ........................................................................ 1
Market Area and Competition .................................................... 2
Lending Activities ............................................................. 3
Loan Portfolio Composition ............................................. 3
Loan Maturity and Repricing ............................................ 6
One-to-Four Family Mortgage Lending .................................... 6
Home Equity Loans ...................................................... 8
Multi-Family Lending ................................................... 8
Commercial Real Estate Lending ......................................... 8
Construction Loans ..................................................... 9
Small Business Administration Lending .................................. 9
Consumer and Other Lending ............................................. 9
Loan Approval Procedures and Authority ................................. 9
Loan Concentrations .................................................... 10
Loan Servicing ......................................................... 10
Asset Quality .................................................................. 10
Loan Collection ........................................................ 10
Delinquent Loans and Non-performing Assets ............................. 11
REO .................................................................... 11
Allowance for Loan Losses ...................................................... 11
Investment Activities .......................................................... 15
General ................................................................ 15
Mortgage-backed securities ............................................. 16
Sources of Funds ............................................................... 19
General ................................................................ 19
Deposits ............................................................... 19
Borrowings ............................................................. 22
Subsidiary Activities .......................................................... 23
Personnel ...................................................................... 23
RISK FACTORS
Effect of Interest Rates ....................................................... 24
Lending Activities ............................................................. 24
Competition .................................................................... 25
Local Economic Conditions ...................................................... 25
Legislation and Proposed Changes ............................................... 25
Certain Anti-Takeover Provisions ............................................... 25
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation ............................................................... 26
General ................................................................ 26
Bad Debt Reserves ...................................................... 26
Distributions .......................................................... 27
Corporate Alternative Minimum Tax ...................................... 27
State and Local Taxation ....................................................... 27
New York State and New York City Taxation .............................. 27
Delaware State Taxation ................................................ 28
i
REGULATION
General ........................................................................ 28
Holding Company Regulation ..................................................... 29
Investment Powers .............................................................. 29
Real Estate Lending Standards .................................................. 30
Loans-to-One Borrower Limits ................................................... 30
Insurance of Accounts .......................................................... 30
Qualified Thrift Lender Test ................................................... 31
Transactions with Affiliates ................................................... 32
Restrictions on Dividends and Capital Distributions ............................ 32
Federal Home Loan Bank System .................................................. 33
Assessments .................................................................... 33
Branching ...................................................................... 33
Community Reinvestment ......................................................... 33
Brokered Deposits .............................................................. 34
Capital Requirements ........................................................... 34
General ................................................................ 34
Tangible Capital Requirement ........................................... 34
Core Capital Requirement ............................................... 34
Risk-Based Requirement ................................................. 35
Federal Reserve System ......................................................... 35
Financial Reporting ............................................................ 36
Standards for Safety and Soundness ............................................. 36
Gramm-Leach-Bliley Act ......................................................... 36
USA Patriot Act ................................................................ 37
Prompt Corrective Action ....................................................... 37
Federal Securities Laws ........................................................ 38
Item 2. Properties .......................................................................... 39
Item 3. Legal Proceedings ................................................................... 39
Item 4. Submission of Matters to a Vote of Security Holders ................................. 39
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ............ 40
Item 6. Selected Financial Data ............................................................. 40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................... 40
Item 8. Financial Statements and Supplementary Data ......................................... 40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Registrant ................................. 41
Item 11. Executive Compensation ............................................................. 41
Item 12. Security Ownership of Certain Beneficial Owners and Management ..................... 41
Item 13. Certain Relationships and Related Transactions ..................................... 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................... 42
(a) 1. Financial Statements .................................................... 42
(a) 2. Financial Statement Schedules ........................................... 42
(b) Reports on Form 8-K filed during the last quarter of fiscal 2001 ........... 42
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K .... 43
SIGNATURES
POWER OF ATTORNEY
ii
PART I
Statements contained in this Annual Report on Form 10-K relating to plans,
strategies, economic performance and trends, projections of results of specific
activities or investments 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"). The Bank was organized in 1929 as a New York State chartered mutual
savings bank. In 1994, the Bank converted to a federally chartered mutual
savings bank. The Company acquired all of the stock of the Bank upon its
conversion from a federal mutual savings bank to a federal stock savings bank on
November 21, 1995. The primary business of the Company at this time is the
operation of its wholly-owned subsidiary, the Bank. At December 31, 2001, the
Company had total assets of $1.5 billion, deposits of $818.5 million and
stockholders' equity of $133.4 million. Flushing Financial Corporation's common
stock is traded on the Nasdaq National Market under the symbol "FFIC".
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.
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.
In addition to operating the Bank, the Company invests primarily in U.S.
government and federal agency securities, federal funds, mortgage-backed
securities, and corporate securities. The Company also holds a note evidencing a
loan that it made 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 funds provided by this loan enabled the Employee Benefit Trust to
acquire 1,552,500 shares, or 8% of the common stock issued in our initial public
offering. 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 primarily funded by
dividends, if any, received from the Bank.
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 (1) originations and purchases
of one-to-four family residential mortgage loans (focusing on mixed-use
properties - properties that
1
contain both residential dwelling units and commercial units), multi-family
income producing property loans and commercial real estate loans; (2) mortgage
loan surrogates such as mortgage-backed securities; and (3) 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.
As a federal savings bank, the Bank's primary regulator is the Office of Thrift
Supervision ("OTS"). The Bank's deposits are insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation ("FDIC"). Additionally, the
Bank is a member of the Federal Home Loan Bank ("FHLB") system.
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.
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. On July 17, 2001, the Board of Directors of the
Company again declared a three-for-two split of the Company's common stock in
the form of a 50% stock dividend, which was paid on August 30, 2001. Each
stockholder received one additional share for every two shares of the Company's
common stock held at the record date, August 10, 2001. With respect to each of
these stock dividends, cash was paid in lieu of fractional shares and the
dividend was not paid on shares held in treasury. All share and per share data
in this Form 10-K have been adjusted to reflect these stock dividends.
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 nine branch offices, located in the New York City Boroughs of Queens,
Brooklyn, Manhattan, and 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, 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" and "Risk
Factors - Local Economic Conditions." 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 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 have made 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 increasing its deposit base and loan portfolios.
2
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 to Stockholders
for the fiscal year ended December 31, 2001 (the "Annual Report"), incorporated
herein by reference.
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,
2001, the Bank had gross loans outstanding of $1,073.0 million (before reserves
and net deferred costs), of which $468.4 million, or 43.66%, were one-to-four
family residential mortgage loans (including $23.2 million of condominium loans,
$6.6 million of co-operative apartment loans and $5.6 million of home equity
loans). Of the one-to-four family residential loans outstanding on that date,
43.0% were ARM loans and 57.0% were fixed-rate loans. At December 31, 2001,
multi-family loans totaled $369.7 million, or 34.45% of gross loans, commercial
real estate loans totaled $214.4 million, or 19.98% of gross loans, construction
loans totaled $13.8 million, or 1.29% of gross loans, SBA loans totaled $3.9
million, or 0.36% of gross loans, and consumer and other loans totaled $2.8
million, or 0.26% 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, mixed-use property mortgage loans and home equity
loans. Increasingly, the Bank has placed greater 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 (primarily focusing on mixed-use property mortgage
loans). From December 31, 2000 to December 31, 2001, one-to-four family
residential mortgage loans decreased $7.4 million, or -1.6%, multi-family loans
increased $35.3 million, or 10.6%, and commercial real estate loans increased
$46.9 million, or 28.0%. 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 could 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, and has determined that, at this time,
additional provisions are not required.
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.
3
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
At December 31,
------------------------------------------------------------------------------------
2001 2000 1999
-------------------------- ------------------------ ------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Mortgage Loans:
One-to-four family residential (1) $461,801 43.04% $467,784 47.13% $414,194 46.92%
Co-operative apartment (2) 6,601 0.62 8,009 0.81 8,926 1.01
Multi-family real estate 369,651 34.45 334,307 33.68 310,594 35.19
Commercial real estate 214,410 19.98 167,549 16.88 137,072 15.53
Construction 13,807 1.29 8,304 0.84 6,198 0.70
----------- ----------- --------- ----------- --------- -----------
Gross mortgage loans 1,066,270 99.38 985,953 99.34 876,984 99.35
Small Business Administration
Loans 3,911 0.36 2,844 0.29 2,369 0.27
Consumer and other loans 2,814 0.26 3,704 0.37 3,379 0.38
----------- ----------- --------- ----------- --------- -----------
Gross loans 1,072,995 100.00% 992,501 100.00% 882,732 100.00%
=========== =========== ========= ===========
Unearned loan fees and deferred
costs, net 787 579 (28)
Less: Allowance for loan losses (6,585) (6,721) (6,818)
----------- --------- ---------
Loans, net $1,067,197 $986,359 $875,886
=========== ========= =========
----------------------------------------------------
1998 1997
------------------------ ------------------------
Percent of Percent of
Amount Total Amount Total
--------- ----------- --------- -----------
(Dollars in thousands)
Mortgage Loans:
One-to-four family residential (1) $361,786 47.69% $289,28 47.67%
Co-operative apartment (2) 10,238 1.35 12,065 1.99
Multi-family real estate 277,437 36.57 230,229 37.95
Commercial real estate 101,401 13.37 68,182 11.24
Construction 3,203 0.42 2,797 0.46
--------- ----------- --------- -----------
Gross mortgage loans 754,065 99.40 602,559 99.31
Small Business Administration
Loans 2,616 0.35 2,789 0.46
Consumer and other loans 1,899 0.25 1,385 0.23
--------- ----------- --------- -----------
Gross loans 758,580 100.00% 606,733 100.00%
=========== ===========
Unearned loan fees and deferred
costs, net (1,263) (1,838)
Less: Allowance for loan losses (6,762) (6,474)
--------- ---------
Loans, net $750,555 $598,421
========= =========
(1) One-to-four family residential loans also include home equity and
condominium loans. At December 31, 2001, gross home equity loans totaled
$5.6 million and condominium loans totaled $23.2 million. Mixed-use
property mortgage loans included in one-to-four family residential loans
totaled $109.8 million at December 31, 2001.
(2) Consists of loans secured by shares representing interests in individual
co-operative units that are generally owner occupied.
4
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,
----------------------------------------------------
2001 2000 1999
---------- -------- --------
(In thousands)
Mortgage Loans
At beginning of year $985,953 $876,984 $754,065
Mortgage loans originated:
One-to-four family residential 81,244 78,128 91,312
Co-operative apartment 136 265 300
Multi-family real estate 70,999 63,813 77,895
Commercial real estate 62,076 41,948 49,744
Construction 8,719 5,078 8,158
---------- -------- --------
Total mortgage loans originated 223,174 189,232 227,409
---------- -------- --------
Mortgage loans purchased:
One-to-four family residential 876 15,658 15,008
Commercial real estate -- -- 884
---------- -------- --------
Total mortgage loans purchased 876 15,658 15,892
---------- -------- --------
Less:
Principal reductions 143,614 95,695 120,008
Mortgage loan foreclosures 119 226 374
---------- -------- --------
At end of year $1,066,270 $985,953 $876,984
========== ======== ========
SBA, Consumer and Other Loans
At beginning of year $6,548 $5,748 $4,515
Loans originated:
SBA loans 3,409 3,635 2,376
Small business loans 507 845 2,617
Other loans 2,346 3,021 1,159
---------- -------- --------
Total other loans originated 6,262 7,501 6,152
---------- -------- --------
Less:
Sales 1,648 2,474 2,280
Repayments 4,296 4,151 2,543
Charge-offs 141 76 96
---------- -------- --------
At end of year $6,725 $6,548 $5,748
========== ======== ========
5
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of the Bank's loan portfolio at December 31, 2001. 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 $147.9 million
for the year ended December 31, 2001. Certain adjustable rate loans have
features that limit changes in interest rates on a short-term basis and over the
life of the loan.
At December 31, 2001
---------------------------------------------------------------------------------------
Mortgage Loans Other Loans
-------------------------------------------------------- -----------------------------
One-to-
Four Co- Multi- Consumer Total Loans
Family operative family Commercial Construction SBA and Other Receivable
------ --------- ------ ---------- ------------ --- --------- ----------
(In thousands)
Amounts due:
Within one year $39,817 $3,299 $29,997 $25,951 $10,808 $3,668 $1,521 $ 115,061
-------- ------ -------- -------- ------- ------ ------ ----------
After one year (1)
One to two years 15,843 528 35,147 13,169 2,999 -- 635 68,334
Two to three years 9,122 354 27,813 26,422 -- 126 497 64,334
Three to five years 69,221 641 138,240 73,592 -- 67 161 281,922
Five to ten years 85,306 788 66,534 52,066 -- 50 -- 204,744
Over ten years 242,492 991 71,920 23,210 -- -- -- 338,613
-------- ------ -------- -------- ------- ------ ------ ----------
Total due after
one year 421,984 3,302 339,654 188,459 2,999 243 1,293 957,934
-------- ------ -------- -------- ------- ------ ------ ----------
Total amounts due $461,801 $6,601 $369,651 $214,410 $13,807 $3,911 $2,814 $1,072,995
======== ====== ======== ======== ======= ====== ====== ==========
(1) Of the $957.9 million of loans due after one year, $505.1 million are
adjustable rate loans and $452.8 million are fixed-rate loans.
One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured
by one-to-four family residences, including mixed-use properties, 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 $468.4 million, or 43.66% of gross
loans, at December 31, 2001.
During 2001, the Bank focused its origination efforts with respect to
one-to-four family mortgage loans on mixed-use properties. These properties
contain up to four residential dwelling units and a commercial unit. The primary
income producing units of these properties are the residential dwelling units.
Mixed-use property mortgage loans generally have a higher interest rate than
single family dwellings. Mixed-use property mortgage loans also have a higher
degree of risk than single family dwellings, as repayment of the loan is usually
dependent on the income produced from renting the residential units and the
commercial unit. At December 31, 2001, mixed-use property mortgage loans
included in one-to-four family residential mortgage loans amounted to $109.8
million, an increase of $43.8 million from the $66.0 million at December 31,
2000.
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 may, from
time-to-time, purchase 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 2001, through
these relationships, the Bank purchased $0.9 million in one-to-four family
mortgage loans, as compared to $15.7 million in 2000 and $15.0 million during
1999.
6
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.
Residential mortgage loans originated by the Bank have generally 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 self-employed
borrowers to falsify or overstate their level of income and ability to service
indebtedness. This risk is mitigated by the Bank's policy to limit the amount of
one-to-four family residential mortgage loans to 80% of the appraised value of
the property or the sale price, whichever is less. The Bank believes that its
willingness to make such loans is an aspect of its commitment to be a
community-oriented bank. The Bank originated $11.1 million, $18.7 million and
$37.3 million in loans of this type during 2001, 2000 and 1999, 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 originated and purchased $39.9
million, $11.2 million and $24.2 million of 15-year fixed-rate residential
mortgage loans in 2001, 2000 and 1999, respectively. The Bank also originated
and purchased $10.7 million, $23.4 million and $47.4 million of 30-year fixed
rate residential mortgage loans in 2001, 2000 and 1999, respectively. These
loans have been retained to provide flexibility in the management of the
Company's interest rate sensitivity position. At December 31, 2001, $267.0
million, or 57.0%, 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. The Bank
originated and purchased one-to-four family residential ARM loans totaling $31.7
million, $59.4 million and $35.0 million during 2001, 2000 and 1999,
respectively. At December 31, 2001, $201.4 million, or 43.0%, 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, 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.
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.
7
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 generally granted in amounts from $25,000 to $100,000. The
Loan Committee approves loans in excess of $100,000. The underwriting standards
for home equity loans are substantially the same as those for residential
mortgage loans. At December 31, 2001, home equity loans totaled $5.6 million, or
0.52%, of gross loans.
Multi-Family Lending. Loans secured by multi-family income producing
properties were $369.7 million, or 34.45% of gross loans, at December 31, 2001,
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 $489,000 at
December 31, 2001, and the largest multi-family loan held in the Bank's
portfolio had a principal balance of $6.0 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 after an inspection
has been made of 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."
Commercial Real Estate Lending. Loans secured by commercial real estate
were $214.4 million, or 19.98% of the Bank's gross loans, at December 31, 2001.
The Bank's commercial real estate loans are secured by improved properties such
as offices, motels, small business facilities, strip shopping centers,
warehouses, and religious facilities. At December 31, 2001, 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 $717,100, and the largest of such
loans, which was secured by an office building, had a principal balance of $5.9
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.
8
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,
2001 totaled $13.8 million, or 1.29% 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. These loans are extended to small
businesses and are guaranteed by the SBA to a maximum of 85% of the loan balance
for loans with balances of $150,000 or less, and to a maximum of 75% of the loan
balance for loans with balances greater than $150,000. The maximum amount the
SBA can guarantee is $1.0 million. 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,
2001, SBA loans totaled $3.9 million, representing 0.36% of gross loans.
Consumer and Other Lending. The Bank originates other loans for business,
personal, or household purposes. Total consumer and other loans outstanding at
December 31, 2001 amounted to $2.8 million, or 0.26% 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. The Bank's Residential Mortgage Lending Policy establishes authorized
levels of approval. Residential mortgage loans that do not exceed $500,000
require two signatures for approval, one of which must be from the President,
Executive Vice President or a Senior Vice President (collectively, "Authorized
Officers") and the other from a Senior Underwriter, Underwriter or Junior
Underwriter in the Residential Mortgage Loan Department (collectively, "Loan
Officers"). For residential mortgage loans greater than $500,000, three
signatures are required for approval, at least two of which must be from the
Authorized Officers, and the other one may be a Loan Officer. 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,
9
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. An independent appraiser designated and approved by the Bank
currently performs such appraisals. The Bank's staff appraiser reviews the
appraisals. 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.
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, 2001, 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 $8.4 million, $8.1 million and
$8.1 million for each of the three borrowers.
Loan Servicing. At December 31, 2001, the Bank was servicing $22.1 million
of mortgage loans and $7.2 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, 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,
10
regulations and the terms of the servicing agreements between the Bank and its
servicing agents. At December 31, 2001, the Bank held $5.7 million of 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.
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, 2001,
2000 and 1999, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totaled $117,000, $79,000
and $208,000, respectively. These amounts were not included in the Bank's
interest income for the respective periods.
At December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans:
One-to-four family residential $1,958 $1,336 $1,349 $1,261 $1,897
Co-operative apartment 20 -- 29 15 --
Multi-family real estate 225 156 -- -- --
Commercial real estate -- -- 1,779 1,280 512
Construction -- -- -- -- --
------ ------ ------ ------ ------
Total non-accrual mortgage loans 2,203 1,492 3,157 2,556 2,409
Other non-accrual loans 117 126 39 41 49
------ ------ ------ ------ ------
Total non-accrual loans 2,320 1,618 3,196 2,597 2,458
Loans 90 days or more delinquent
and still accruing -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 2,320 1,618 3,196 2,597 2,458
Foreclosed real estate 93 44 368 77 433
------ ------ ------ ------ ------
Total non-performing assets $2,413 $1,662 $3,564 $2,674 $2,891
====== ====== ====== ====== ======
Troubled debt restructurings -- -- -- -- --
====== ====== ====== ====== ======
Non-performing loans to gross loans 0.22% 0.16% 0.36% 0.34% 0.41%
Non-performing assets to total assets 0.16% 0.12% 0.29% 0.23% 0.27%
REO. The Bank aggressively markets its REO properties. At December 31,
2001, the Bank owned one property with a carrying value of $93,000.
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
11
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. Management 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 appraised 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 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.
Management of the Bank believes that the current allowance for loan losses
is adequate in light of current economic conditions, the composition of its loan
portfolio and other available information and the Board of Directors concurs in
this belief. Accordingly, the Bank did not record a provision for loan losses
for the years ended December 31, 2001 and 2000. The Bank's provision for loan
losses was $36,000 for the year ended December 31, 1999. At December 31, 2001,
the total allowance for loan losses was $6.6 million, representing 283.85% of
non-performing loans and 272.94% of non-performing assets, compared to ratios of
415.32% and 404.28% respectively, at December 31, 2000. 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.
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 appraised 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 could 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
12
the Bank. Provisions for loan losses are charged against net income. See
"--Lending Activities" and "--Asset Quality."
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,
------------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------- ------
(Dollars in thousands)
Balance at beginning of year $6,721 $6,818 $6,762 $6,474 $5,437
Provision for loan losses -- -- 36 214 104
Provision acquired from New York Federal -- -- -- -- 979
Loans charged-off:
One-to-four family 1 4 32 91 85
Co-operative apartment -- -- 2 -- 44
Multi-family real estate 2 2 -- -- --
Commercial real estate -- -- -- -- --
Construction -- -- -- -- --
Other 146 93 99 12 77
------ ------ ------ ------- ------
Total loans charged-off 149 99 133 103 206
------ ------ ------ ------- ------
Recoveries:
Mortgage loans 6 -- 153 177 155
Other loans 7 2 -- -- 5
------ ------ ------ ------- ------
Total recoveries 13 2 153 177 160
------ ------ ------ ------- ------
Balance at end of year $6,585 $6,721 $6,818 $6,762 $6,474
====== ====== ====== ======= ======
Ratio of net charge-offs (recoveries) during the year
to average loans outstanding during the year 0.01% 0.01% 0.00% (0.01)% 0.01%
Ratio of allowance for loan losses to
gross loans at end of the year 0.61% 0.68% 0.77% 0.89% 1.07%
Ratio of allowance for loan losses to
non-performing loans at the end of year 283.85% 415.32% 213.29% 260.36% 263.38%
Ratio of allowance for loan losses to
non-performing assets at the end of year 272.94% 404.28% 191.29% 252.83% 223.94%
13
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,
-------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ------------------- ------------------- --------------------- -------------------
Percentage Percentage Percentage Percentage of Percentage of
of Loans in of Loans in of Loans in Loans in Loans in
Category to Category to Category to Category to Category to
Loan Category Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ------------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Mortgage Loans:
One-to-four family $1,870 43.04% $1,916 47.13% $1,903 46.92% $2,575 47.69% $1,711 47.67%
Co-operative 109 0.62 126 0.81 144 1.01 278 1.35 510 1.99
Multi-family 982 34.45 1,134 33.68 1,216 35.19 1,395 36.57 1,021 37.95
Commercial 3,007 19.98 2,983 16.88 3,003 15.53 1,990 13.37 3,073 11.24
Construction 34 1.29 27 0.84 24 0.70 114 0.42 128 0.46
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans 6,002 99.38 6,186 99.34 6,290 99.35 6,352 99.40 6,443 99.31
Small Business
Administration loans 418 0.36 295 0.29 237 0.27 273 0.35 23 0.46
Other Loans 165 0.26 240 0.37 291 0.38 137 0.25 8 0.23
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total loans $6,585 100.00% $6,721 100.00% $6,818 100.00% $6,762 100.00% $6,474 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
14
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.
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 (other than unrealized losses considered other than
temporary) 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, 2001, the Company had $305.5 million in
securities available for sale which represented 20.54% of total assets. These
securities had an aggregate market value at December 31, 2001 that was
approximately 2.3 times the amount of the Company's equity at that date. The
cumulative balance of unrealized net gains on securities available for sale was
$1.8 million, net of taxes, at December 31, 2001. 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, 2001, the Company had no investment in a particular
issuer's securities, excluding government agencies, 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.
15
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, 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,
--------------------------------------------------------------------------
2001 2000 1999
------------------------- ------------------------- -----------------------
Amortized Amortized Amortized
Cost Market Value Cost Market Value Cost Market Value
-------- -------- -------- -------- -------- --------
(In thousands)
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies $ -- $ -- $5,990 $5,932 $10,988 $10,636
Corporate debentures 32,884 32,985 2,835 2,847 -- --
Public utility 8,042 8,132 1,001 1,038 1,001 1,004
-------- -------- -------- -------- -------- --------
Total bonds and other debt securities 40,926 41,117 9,826 9,817 11,989 11,640
-------- -------- -------- -------- -------- --------
Mutual funds 18,899 18,867 3,566 3,593 -- --
-------- -------- -------- -------- -------- --------
Equity securities:
Common stock 243 842 243 505 1,655 1,670
Preferred stock 1,641 1,655 2,608 2,679 2,676 2,684
-------- -------- -------- -------- -------- --------
Total equity securities 1,884 2,497 2,851 3,184 4,331 4,354
-------- -------- -------- -------- -------- --------
Mortgage-backed securities:
GNMA 132,678 134,125 201,688 200,718 252,626 244,763
FNMA 50,895 51,359 9,516 9,725 14,639 14,602
FHLMC 20,552 20,810 8,527 8,612 9,758 9,657
REMIC and CMO 36,292 36,764 19,493 19,571 -- --
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities 240,417 243,058 239,224 238,626 277,023 269,022
-------- -------- -------- -------- -------- --------
Total securities available for sale 302,126 305,539 255,467 255,220 293,343 285,016
-------- -------- -------- -------- -------- --------
Interest-bearing deposits and 28,367 28,367 12,185 12,185 9,019 9,019
Federal funds sold
-------- -------- -------- -------- -------- --------
Total $330,493 $333,906 $267,652 $267,405 $302,362 $294,035
======== ======== ======== ======== ======== ========
Mortgage-backed securities. At December 31, 2001, the Company had $243.1
million invested in mortgage-backed securities, of which $18.1 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.
16
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,
----------------------------------------------
2001 2000 1999
----------------------------------------------
(In thousands)
At beginning of year $238,626 $269,022 $302,421
Purchases of mortgage-backed securities 131,818 22,265 59,059
Amortization of unearned premium, net of
accretion of unearned discount (848) (927) (2,064)
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale 3,239 7,403 (9,792)
Sales of mortgage-backed securities (27,484) (23,007) --
Principal repayments received on
mortgage-backed securities (102,293) (36,130) (80,602)
-------- -------- --------
Net increase (decrease) in mortgage-backed securities 4,432 (30,396) (33,399)
-------- -------- --------
At end of year $243,058 $238,626 $269,022
======== ======== ========
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. Neither the Company nor the Bank has any derivative instruments that
are extremely sensitive to changes in interest rates.
17
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, 2001.
The stratification of balances is based on stated maturities. Equity securities
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.
One to Five Five to Ten
One Year or Less Years Years
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Securities available for sale
Bonds and other debt securities:
Corporate debt $17,500 6.57% $15,384 6.18% -- --
Public utility 7,041 6.54 1,001 7.96 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total bonds and other debt securities 25,541 6.57 16,385 6.29 --
---------- ---------- ---------- ---------- ---------- ----------
Mutual funds 18,899 3.80 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Equity securities:
Common stock 243 7.42 -- -- -- --
Preferred stock 735 5.77 -- -- $306 7.33%
---------- ---------- ---------- ---------- ---------- ----------
Total equity securities 978 6.18 -- -- 306 7.33
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities:
GNMA -- -- -- -- -- --
FNMA -- -- -- -- 18,559 5.74
FHLMC -- -- -- -- -- --
REMIC and CMO -- -- -- -- 3,923 6.26
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities -- -- 22,482 5.83
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing deposits and Federal
Funds sold 28,367 1.50 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total securities $72,785 3.87% $16,385 6.29% $22,788 5.85%
========== ========== ========== ========== ========== ==========
More than Ten
Years Total Securities
----------------------- -------------------------------------------------
Average
Weighted Remaining Weighted
Amortized Average Years to Amortized Estimated Average
Cost Yield Maturity Cost Fair Value Yield
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Securities available for sale
Bonds and other debt securities:
Corporate debt -- -- 1.27 $32,884 $32,985 6.39%
Public utility -- -- 1.19 8,042 8,132 6.72
---------- ---------- ---------- ---------- ---------- ----------
Total bonds and other debt securities -- 1.25 40,926 41,117 6.45
---------- ---------- ---------- ---------- ---------- ----------
Mutual funds -- -- N/A 18,899 18,867 3.80
---------- ---------- ---------- ---------- ---------- ----------
Equity securities:
Common stock -- -- N/A 243 842 7.42
Preferred stock $600 9.96% 11.14 1,641 1,655 7.59
---------- ---------- ---------- ---------- ---------- ----------
Total equity securities 600 9.96 11.14 1,884 2,497 7.57
---------- ---------- ---------- ---------- ---------- ----------
Mortgage-backed securities:
GNMA 132,678 7.06 26.71 132,678 134,125 7.06
FNMA 32,336 6.32 13.74 50,895 51,359 6.11
FHLMC 20,552 6.68 20.32 20,552 20,810 6.68
REMIC and CMO 32,369 6.08 21.72 36,292 36,764 6.10
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities 217,935 6.77 22.66 240,417 243,058 6.68
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing deposits and Federal
Funds sold -- -- N/A 28,367 28,367 1.50
---------- ---------- ---------- ---------- ---------- ----------
Total securities $218,535 6.78% 19.50 $330,493 $333,906 6.05%
========== ========== ========== ========== ========== ==========
18
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 ten 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 maintain competitive 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. During 2001, the nation's economy slowed, and
was generally considered to be in a recession. In response to the slowing
economy, the Federal Reserve lowered interest rates throughout the year. The
Bank responded by lowering interest rates paid to its depositors. The Bank also
saw an increase in its due to depositors of $136.5 million. The new deposits
were obtained at rates that were lower than the weighted average interest rate
of existing deposits. In addition, certificate of deposit accounts were renewed
at interest rates which were lower than was paid on the maturing deposits. As a
result, during 2001, the weighted average interest rate paid by the Bank on its
deposits declined throughout the year. The cost of deposits declined to 3.71% in
the fourth quarter of 2001 from 4.36% in the fourth quarter of 2000. For the
year ended December 31, 2001, the cost of deposits was 4.08% compared to 4.17%
in 2000. However, it appears the decline in interest rates may have ended in the
fourth quarter of 2001. While we are unable to predict the direction of future
interest rate changes, it appears interest rates will not go lower. Should
interest rates increase during 2002, it 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 more totaling $75.2 million, $53.7 million and $43.0 million at December 31,
2001, 2000 and 1999, respectively.
19
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,
------------------------------------------------------------------
2001 2000
-------------------------------- --------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Passbook accounts (1) $195,855 23.64% 1.73% $186,207 26.99% 2.08%
NOW accounts (1) 33,107 4.00 1.01 29,615 4.29 1.92
Demand accounts (1) 28,594 3.45 -- 20,913 3.03 --
Mortgagors' escrow deposits 10,065 1.21 0.53 7,753 1.12 0.65
-------- -------- -------- -------- -------- --------
Total 267,621 32.30 1.41 244,488 35.43 1.84
-------- -------- -------- -------- -------- --------
Money market accounts (1) 93,789 11.32 2.39 43,136 6.25 3.49
Certificate of deposit accounts
with original maturities of:
6 Months and less 60,948 7.36 2.77 45,025 6.53 5.38
6 to 12 Months 62,607 7.56 3.64 29,586 4.29 5.40
12 to 30 Months 215,477 25.99 4.88 214,237 31.08 5.76
30 to 48 Months 23,166 2.80 5.18 17,689 2.56 5.85
48 to 72 Months 99,064 11.96 6.24 88,794 12.87 6.50
72 Months or more 5,910 0.71 6.69 6,856 0.99 6.63
-------- -------- -------- -------- -------- --------
Total certificate of deposit accounts 467,172 56.38 4.76 402,187 58.32 5.87
-------- -------- -------- -------- -------- --------
Total deposits (2) $828,582 100.00% 3.41% $689,811 100.00% 4.29%
======== ======== ======== ======== ======== ========
At December 31,
------------------------------
1999
------------------------------
Weighted
Percent Average
of Total Nominal
Amount Deposits Rate
-------- -------- --------
(Dollars in thousands)
Passbook accounts (1) $195,910 29.37% 2.07%
NOW accounts (1) 27,463 4.12 1.90
Demand accounts (1) 20,490 3.07 --
Mortgagors' escrow deposits 11,023 1.65 0.79
-------- -------- --------
Total 254,886 38.21 1.83
-------- -------- --------
Money market accounts (1) 40,378 6.05 3.23
Certificate of deposit accounts
with original maturities of:
6 Months and less 46,265 6.94 4.36
6 to 12 Months 64,499 9.67 4.73
12 to 30 Months 171,087 25.67 5.42
30 to 48 Months 28,632 4.29 6.07
48 to 72 Months 60,309 9.04 6.24
72 Months or more 885 0.13 6.31
-------- -------- --------
Total certificate of deposit accounts 371,677 55.74 5.35
-------- -------- --------
Total deposits (2) $666,941 100.00% 3.88%
======== ======== ========
(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 $111.8
million, $92.7 million and $86.8 million at December 31, 2001, 2000 and
1999, respectively.
20
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, 2001.
At December 31, 2001
----------------------------------------------
At December 31, Within One to
--------------------------------- One Three There-
2001 2000 1999 Year Years after Total
-------- -------- -------- -------- -------- ------- --------
(Dollars in thousands)
Certificate of deposit accounts:
2.99 or less $68,945 $621 $370 $61,306 $7,144 $495 $68,945
3.00 to 3.99 97,942 -- 5,717 55,381 41,872 689 97,942
4.00 to 4.99 87,440 30,294 131,874 41,306 32,715 13,419 87,440
5.00 to 5.99 87,143 204,136 172,863 39,390 43,746 4,007 87,143
6.00 to 6.99 102,429 141,608 49,392 53,595 15,389 33,445 102,429
7.00 to 7.99 23,273 25,528 11,461 589 203 22,481 23,273
-------- -------- -------- -------- -------- ------- --------
Total $467,172 $402,187 $371,677 $251,567 $141,069 $74,536 $467,172
======== ======== ======== ======== ======== ======= ========
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, 2001 and their annualized weighted average interest rates.
Amount Weighted Average Rate
------ ---------------------
(Dollars in thousands)
Maturity Period:
Three months or less $11,656 4.64%
Over three through six months 8,377 3.98
Over six through 12 months 15,119 4.25
Over 12 months 40,023 5.43
------- ----
Total 75,175 4.91%
======= ====
The following table presents the deposit activity, including mortgagors'
escrow deposits, of the Bank for the periods indicated.
For the Year Ended December 31,
--------------------------------
(Dollars in thousands)
2001 2000 1999
-------- -------- --------
Net deposits / (withdrawals) $109,060 ($4,603) ($22,100)
Interest credited on deposits 29,711 27,473 24,982
-------- -------- --------
Total increase (decrease) in deposits $138,771 $22,870 $2,882
======== ======== ========
21
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,
-----------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
Average of Total Average Average of Total Average Average of Total Average
Balance Deposits Cost Balance Deposits Cost Balance Deposits Cost
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Passbook accounts $188,701 25.01% 2.00% $189,852 27.84% 2.07% $200,601 30.19% 2.07%
NOW accounts 30,736 4.07 1.64 27,838 4.08 1.90 26,281 3.96 1.90
Demand accounts 26,319 3.49 -- 23,200 3.40 -- 24,624 3.71 --
Mortgagors' escrow
deposits 13,013 1.72 0.53 13,177 1.93 0.65 11,718 1.76 0.79
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total 258,769 34.29 1.68 254,067 37.25 1.79 263,224 39.62 1.80
Money market
accounts 71,820 9.52 3.21 42,791 6.27 3.36 36,191 5.45 3.05
Certificate of deposit
accounts 423,812 56.19 5.44 385,237 56.48 5.58 364,947 54.93 5.24
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total deposits $754,401 100.00% 3.94% $682,095 100.00% 4.03% $664,362 100.00% 3.76%
======== ======== ======== ======== ======== ======== ======== ======== ========
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 broker-dealers and 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 average cost of borrowed funds was 5.90%, 6.18% and 6.02% for
2001, 2000 and 1999, respectively. The average balances of borrowed funds were
$508.4 million, $478.7 million and $379.3 million for 2001, 2000 and 1999,
respectively.
22
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,
--------------------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Securities Sold with the Agreement to Repurchase
Average balance outstanding $156,640 $145,575 $129,945
Maximum amount outstanding at any month
end during the period $182,226 $164,382 $145,000
Balance outstanding at the end of period $113,150 $164,382 $135,000
Weighted average interest rate during the period 5.71% 5.81% 5.80%
Weighted average interest rate at end of period 5.60% 5.87% 5.75%
FHLB-NY Advances
Average balance outstanding $351,794 $333,100 $249,314
Maximum amount outstanding at any month
end during the period $400,285 $353,119 $316,831
Balance outstanding at the end of period $400,285 $344,457 $316,831
Weighted average interest rate during the period 5.98% 6.34% 6.13%
Weighted average interest rate at end of period 5.37% 6.36% 6.13%
Total Borrowings
Average balance outstanding $508,434 $478,675 $379,259
Maximum amount outstanding at any month
end during the period $513,915 $508,839 $451,831
Balance outstanding at the end of period 513,435 $508,839 451,831
Weighted average interest rate during the period 5.90% 6.18% 6.02%
Weighted average interest rate at end of period 5.42% 6.20% 6.02%
Subsidiary Activities
At December 31, 2001, 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. FPFC also provides an additional vehicle for access by the
Company to the capital markets for future opportunities.
(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, 2001, the Bank had 187 full-time employees and 62 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.
23
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, 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. Additionally, in a rising
interest rate environment, a borrower's ability to repay adjustable rate
mortgages can be negatively affected as payments increase at repricing dates.
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.
The focus of management's strategy in its originations of one-to-four
family mortgage loans is on mixed-use property mortgage loans, and on
residential mortgage loans to self-employed individuals within the Bank's local
community without verification of the borrower's level of income. Repayment of
mixed-use property real estate loans generally is dependent, in large part, upon
sufficient income from the property to cover operating expenses and debt service
payments. Mortgage loans originated without verifying the borrower's level of
income 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
self-employed borrowers to falsify or overstate their level of income and
ability to service indebtedness. These risks are mitigated by the Bank's policy
to limit the amount of one-to-four family residential mortgage 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.
There can be no assurance that the Bank will be able to successfully
implement its business strategies with respect to these higher yielding loans.
In assessing the future earnings prospects of the Bank, investors should
24
consider, among other things, the Bank's level of origination of one-to-four
family loans (including mixed-use property mortgage loans and loans to
self-employed borrowers), 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
General economic conditions in the New York City metropolitan area, which
had been strong for several years through the year ended December 31, 2000,
generally declined in the year ended December 31, 2001. The local economy was
further hurt by the September 11, 2001 attacks on New York City's financial
district, in particular, the destruction of the World Trade Center buildings.
Although this decline in the local economy has not had a significant adverse
effect on the Company's financial condition or results of operations to date,
there can be no assurance that the decline in the local economy experienced
during 2001 will not have such an adverse effect in the future.
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 could require additions to the allowance for loan losses in future
periods above those currently revealed. These factors include: (1) adverse
changes in economic conditions and changes in interest rates that may affect the
ability of borrowers to make payments on loans, (2) changes in the financial
capacity of individual borrowers, (3) changes in the local real estate market
and the value of the Bank's loan collateral, and (4) 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 two-hundred twenty-fifth of a share of a new
series of junior participating preferred stock at a price of $64, subject to
certain adjustments. The rights will become exercisable only if any person or
25
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.
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. 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 (1) 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 (2) 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 excess reserves as of December 31, 1995 were approximately $300,000;
the recapture of which was completed during the year ended December 31, 2001.
26
Distributions. To the extent that the Bank makes "nondividend
distributions" to stockholders 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. Generally,
only 90% of AMTI can be offset by net operating loss carryback and
carryforwards. Under the recently enacted Job Creation and Worker Assistance Act
of 2002, however, a net operating loss deduction attributable to net operating
loss carrybacks arising in 2001 and 2002, as well as net operating loss
carryforwards to these years, may offset 100% of AMTI.
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 (1) 8.5% (8.0% effective January 1, 2002) of "entire net
income" allocable to New York State during the taxable year or (2) 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
arising during any taxable year prior to January 1, 2001 cannot be carried back
or carried forward, and net operating losses arising during any taxable year
beginning on or after January 1, 2001 cannot be carried back. Alternative entire
net income is equal to entire net income without certain deductions which are
allowable in the calculation of entire net income. The Company also is subject
to a similarly calculated New York City tax of 9% on income allocated to New
York City (although net operating losses cannot be carried back or carried
forward regardless of when they arise) and similar alternative taxes. In
addition, the Company is subject to a tax surcharge at a rate of 17% of the New
York State Franchise Tax that is attributable to business activity carried on
within the Metropolitan Commuter Transportation District. This tax surcharge is
assessed as if the New York State Franchise tax is imposed at a 9% rate.
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 (1) 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 (2) the balance
of the bad debt reserve at the close of the "base year," or, if the amount of
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
27
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. In no event may the additions to
reserves for qualifying real property loans be greater than the larger of the
amount determined under the experience method or the amount which, when added to
the additions to reserves for non-qualifying loans, equal the amount by which
12% 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 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
The Company, as a savings and loan holding company, 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 may form or acquire.
Among other things, this authority permits the OTS to restrict or prohibit
activities that it determines may pose a serious risk to the Bank. As a publicly
owned company, the Company is required to file certain reports with the
Securities and Exchange Commission ("SEC") under Federal securities laws. The
Bank is a member of the FHLB System. The Bank is subject to extensive regulation
by the OTS, as its chartering agency, and the FDIC, as the insurer of the Bank's
deposits. The Bank is also subject to certain regulations promulgated by the
other federal agencies. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with or acquisitions of other savings institutions. There are periodic
examinations by the OTS and the FDIC to examine whether the Bank is in
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily to ensure the safe and sound operation of the
Bank for the protection of the insurance fund and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of an adequate allowance for possible loan losses for
regulatory purposes. Any change in such regulation, whether by the OTS, the
FDIC, other federal agencies or the United States Congress, could have a
material adverse impact on the Company, the Bank and their operations.
The activities of federal savings institutions are governed primarily by
the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA"). Most regulatory functions relating to
deposit insurance and to the administration of 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 these
laws empower the OTS and the FDIC, among other agencies, to promulgate
regulations implementing their provisions.
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.
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Holding Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of the HOLA. As such, the Company 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 may form or acquire.
Among other things, this authority permits the OTS to restrict or prohibit
activities that it determines may 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 (1) acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS; (2) 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 (3) 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 the impact of any competitive factors that may
be involved.
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 qualified thrift lender ("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: (1) interstate supervisory
acquisitions by savings and loan holding companies, and (2) the acquisition 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 (1) the acquisition would substantially lessen competition; (2) the
financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (3) 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.
Investment Powers
The Bank is subject to comprehensive regulation governing its investments
and activities. Among other things, the Bank may invest in (1) residential
mortgage loans, mortgage-backed securities, education loans and credit card
loans in an unlimited amount, (2) non-residential real estate loans up to 400%
of total capital, (3) commercial business loans up to 20% of assets (however,
amounts over 10% of total assets must be used only for small business loans) and
(4) in general, consumer loans and highly rated commercial paper and corporate
debt securities in the
29
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 certain of government-sponsored enterprises, 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, as
well as certain activities preapproved by the OTS, which 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 which are either (1) secured by
real estate, or (2) 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, 2001, the largest
amount the Bank could lend to one borrower was approximately $17.2 million, and
at that date, the Bank's largest aggregate amount of loans-to-one borrower was
$8.4 million, all of which were performing according to their terms. See
"Business -- Lending Activities."
Insurance of Accounts
The deposits of the Bank are insured up to $100,000 per depositor (as
defined by federal law and regulations) by the FDIC. Approximately 93% of the
Bank's deposits are presently insured by the FDIC under the Bank Insurance Fund
("BIF"). The remainder are insured by the FDIC under the Savings Association
Insurance Fund ("SAIF"). The deposits insured under the SAIF are a result of
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.
30
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. 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, 2001, 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 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
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 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 is subject to change. The
Bank paid $134,000, $138,000 and $100,000 for its share of the interest due on
FICO bonds in 2001, 2000 and 1999, respectively.
Qualified Thrift Lender Test
Institutions regulated by the OTS are required to meet a QTL test to avoid
certain restrictions on their operations. FDICIA and applicable OTS regulations
require such institutions to maintain at least 65% of their 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: (1) making an
investment or engaging in any new activity not permissible for a national bank,
(2) paying dividends not permissible under national bank regulations, (3)
obtaining advances from any FHLB, and (4) 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, 2001, 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 an 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")
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
31
limitation and raised 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 Regulatory
Paperwork Reduction Act 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
generally 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 qualifying subsidiary of the Bank or the Company that may be
formed or acquired in the future. Generally, Sections 23A and 23B (1) 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 (2) 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. The term "covered transaction" includes the
making of loans, purchase of assets, issuance of a guarantee and other similar
types of transactions. 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. In
addition, the Bank may not (1) 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 (2)
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. Prior Board
approval is 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. These laws place 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, 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 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 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
32
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 the association 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. As of December
31, 2001, the Bank had paid all eligible retained earnings to the Company in the
form of cash dividends.
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, 2001, the Bank was required to maintain $20.0
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, 2001, the Bank's OTS assessments were $235,000
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 an obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods located in the community. 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 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 "Satisfactory" in its most recent completed CRA examination, which was
completed as of March 13, 2000. Institutions that receive less than a
satisfactory rating may face difficulties in securing approval for new
activities or acquisitions. The CRA requires all institutions to make public
disclosure of their CRA ratings.
33
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 (1)
with a waiver from the FDIC and (2) subject to the limitation that they do not
pay an effective yield on any such deposit which exceeds by more than 75 basis
points (a) 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 percent for retail deposits and 130 percent 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 and core capital requirement and a risk-based
capital requirement. At December 31, 2001, the Bank's capital levels exceeded
applicable OTS capital requirements. The three OTS capital requirements are
described below.
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, 2001, the Bank
had intangible assets consisting of $3.9 million in goodwill and no purchased
mortgage servicing rights. At that date, the Bank's tangible capital ratio was
7.32%.
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, 2001, the Bank's
core capital ratio was 7.32%.
34
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, 2001, 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 (1) 0% for cash and securities issued by
the federal government or unconditionally backed by the full faith and credit of
the federal government; (2) 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; (3) 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 (4) 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,
2001, the Bank's risk-based capital ratio was 13.58%. 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 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, 2001, 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 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, 2001, 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.
35
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 generally accepted accounting
principles 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 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.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (the "Modernization Act") was signed into law on
November 12, 1999. 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 "--
Holding 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
industry and an increase in the service offerings of our competitors. To date,
management has not observed significant consolidation in the Bank's market area
as a result of
36
the Modernization Act. We cannot assure you, however, that the Modernization Act
will not result in changes in the competitive environment in the Bank's market
area or otherwise impact 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 enacted
regulations implementing the privacy protection provisions of the Modernization
Act. Under the regulations, each financial institution is to (1) adopt
procedures to protect customers' "non-public personal information", (2) 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 (3) provide its customers
with the ability to "opt-out" of having the financial institution share their
personal information with affiliated third parties. The regulations became
effective on November 13, 2000, with compliance voluntary prior to July 1, 2001.
Management has reviewed and amended our privacy protection policy and believes
we are in compliance with these regulations.
USA Patriot Act
In light of the September 11 attacks, President Bush signed the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT) Act of 2001 (the "Patriot Act") on October 26,
2001 to enhance protections against money laundering and criminal laws against
terrorist activities, and give law enforcement authorities greater investigative
powers. Among other things, the Patriot Act (1) requires financial institutions
that administer, maintain or manage private bank accounts or correspondent
accounts for foreign persons to establish due diligence policies; (2) prohibits
correspondent accounts with foreign shell banks; (3) permits sharing of
information among financial institutions, regulators and law enforcement
regarding persons engaged in terrorist or money laundering activities; (4)
requires financial institutions to verify customer identification at account
opening; (5) requires financial institutions to report suspicious activities;
and (6) requires financial institutions to establish an anti-money laundering
compliance program.
Provisions under the Patriot Act become effective at varying times. The U.
S. Treasury Department, the Board of Governors of the Federal Reserve System and
other federal bank regulatory agencies have issued some regulations implementing
provisions of the Patriot Act, and more are to follow. At this time, we are not
able to predict with any certainty the impact of compliance with the Patriot Act
and regulations thereunder on the operations of the Bank, but because the Bank's
business is primarily domestic in nature, we do not anticipate that any such
impact will be significant.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the FDICIA, each appropriate
banking agency 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 (1) "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 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, (2) "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 leverage
capital ratio of 4% or more (3% under certain circumstances) and does not meet
the definition of "well capitalized," (3) "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 leverage capital ratio that is less than 4% (3% under
certain circumstances), (4) "significantly undercapitalized" if it has a total
risk-based capital ratio that is
37
less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a
leverage capital ratio that is less than 3%, and (5) "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, 2001, the Bank met
the criteria to be considered a "well capitalized" institution.
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.
38
Item 2. Properties.
The Bank conducts its business through ten 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, 2001
Main Office
144-51 Northern Blvd
Flushing, NY 11354 .............................. Owned 1972 NA $1,877,830
Broadway Branch
159-18 Northern Blvd
Flushing, NY 11358 .............................. Owned 1962 NA 802,121
Auburndale Branch
188-08 Hollis Court Blvd
Flushing, NY 11358 .............................. Owned 1991 NA 1,107,426
Springfield Branch
61-54 Springfield Blvd
Bayside, NY 11364 ............................... Leased 1991 11/30/2006 35,303
Bay Ridge Branch
7102 Third Avenue
Brooklyn, NY 11209 .............................. Owned 1991 NA 382,257
Irving Place Branch
33 Irving Place
New York, NY 10003 .............................. Leased 1991 11/30/2006 332,234
New Hyde Park Branch
661 Hillside Avenue
New Hyde Park, NY 11040 ......................... Leased 1971 12/31/2011 54,751
Kissena Branch
44-43 Kissena Boulevard
Flushing, NY 11355 .............................. Leased 2000 5/31/2010 633,253
New Hyde Park In-Store Branch
653 Hillside Avenue
New Hyde Park, NY 11040 ......................... Leased 1998 6/01/2003 150,409
Co-op City In-Store Branch
713 Co-op City Boulevard
Bronx, NY 10475 ................................. Leased 1999 11/10/2004 189,731
Total premises and equipment, net $5,565,315
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
39
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 2001 Annual Report to
Stockholders ("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 19 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 12 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 20 through 44 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.
40
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 Stockholders
to be held May 21, 2002 ("Proxy Statement") 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 Proxy Statement
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 Proxy Statement 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 Proxy
Statement 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 Proxy Statement under the captions "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" and is
incorporated herein by this reference.
41
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 Stockholders for the year ended December 31, 2001 and are incorporated
herein by this reference:
o Consolidated Statements of Financial Condition at December 31, 2001
and 2000
o Consolidated Statements of Income for each of the three years in the
period ended December 31, 2001
o Consolidated Statements of Changes in Stockholders' Equity for each of
the three years in the period ended December 31, 2001
o Consolidated Statements of Cash Flow for each of the three years in
the period ended December 31, 2001
o Notes to Consolidated Financial Statements
o Report of Independent Accountants
The remaining information appearing in the Annual Report to Stockholders 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
Stockholders for the year ended December 31, 2001 and are incorporated herein by
this reference:
(b) Reports on Form 8-K filed during the last quarter of fiscal 2001
None.
42
(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 (6)
10.1 Annual Incentive Plan for Selected Officers (1)
10.2 Amended and Restated Employment Agreements between Flushing Savings
Bank, FSB and Certain Officers (9)
10.3 Amended and Restated Employment Agreements between Flushing Financial
Corporation and Certain Officers (9)
10.4 Amended and Restated Employment Agreement between Flushing Financial
Corporation and Michael J. Hegarty (10)
10.5 Amended and Restated Employment Agreement between Flushing Savings
Bank, FSBand Michael J. Hegarty (10)
10.6 Employment Agreement between Flushing Financial Corporation and John
R. Buran (10)
10.7 Employment Agreement between Flushing Savings Bank, FSB and John R.
Buran (10)
10.8 Form of Special Termination Agreement as Amended (9)
10.9 Amended and Restated Employee Severance Compensation Plan of Flushing
Savings Bank, FSB (9)
10.10(a) Amended and Restated Outside Director Retirement Plan (9)
10.10(b) Amended and Restated Flushing Savings Bank, FSB Outside Director
Deferred Compensation Plan (9)
10.11 Restated Flushing Savings Bank, FSB Supplemental Savings Incentive
Plan
10.12(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing
Financial Corporation, and each Director (On September 29, 1998, an
Indemnity Agreement substantially identical in all material respect to
the Indemnity Agreement filed as exhibit 10.8(a) to the Company's SEC
Form 10-Q for the quarterly period ended September 30, 1996 was also
entered into with each of James D. Bennett and Louis C. Grassi) (2)
10.12(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing
Financial Corporation, and Certain Officers (An Indemnity Agreement
substantially identical in all material respect to the Indemnity
Agreement filed as exhibit 10.8(b) to the Company's SEC Form 10-Q for
the quarterly period ended September 30, 1996 was also entered into
with each of John R. Buran, Robert L. Callicutt, and Francis W.
Korzekwinski on January 22, 2001, July 20, 1999, and July 20, 1999,
respectively) (2)
10.13 Employee Benefit Trust Agreement (1)
10.13(a) Amendment to the Employee Benefit Trust Agreement (5)
10.14 Loan Document for Employee Benefit Trust (1)
10.15 Guarantee by Flushing Financial Corporation (1)
10.16 Consulting Agreement between Flushing Savings Bank, FSB, Flushing
Financial Corporation and Gerard P. Tully, Sr. (3)
10.16(a) Amendment to Gerard P. Tully, Sr. Consulting Agreement (5)
10.16(b) Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (7)
10.16(c) Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement (8)
10.16(d) Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement
10.17 1996 Restricted Stock Incentive Plan of Flushing Financial Corporation
(as amended through March 19, 2002)
10.18 1996 Stock Option Incentive Plan of Flushing Financial Corporation (as
amended through March 19, 2002)
10.19 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 (4)
13.1 2001 Annual Report to Stockholders
22.1 Subsidiaries information incorporated herein by reference to Part I -
Subsidiary Activities
23.1 Consent of Independent Accountants
43
99.1 Proxy Statement for the Annual Meeting of Stockholders to be held on
May 21, 2002, 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-Q for the quarter
ended September 30, 1996.
(3) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1996.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended June 30, 1997.
(5) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1997.
(6) Incorporated by reference to Exhibits filed with Form 8-K filed September
30, 1996.
(7) Incorporated by reference to Exhibit filed with the Form 10-K for the year
ended December 31, 1998.
(8) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1999.
(9) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended September 30, 2000.
(10) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 2000.
44
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, 2002.
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 March 29, 2002
- ---------------------------- Executive Officer)
Michael J. Hegarty
/s/ GERARD P. TULLY, SR. Director, Chairman March 29, 2002
- ----------------------------
Gerard P. Tully, Sr.
/s/ MONICA C. PASSICK Treasurer (Principal Financial and March 29, 2002
- ---------------------------- Accounting Officer)
Monica C. Passick
/s/ JAMES D. BENNETT Director March 29, 2002
- ----------------------------
James D. Bennett
/s/ LOUIS C. GRASSI Director March 29, 2002
- ----------------------------
Louis C. Grassi
/s/ ROBERT A. MARANI Director March 29, 2002
- ----------------------------
Robert A. Marani
45
/s/ JOHN O. MEAD Director March 29, 2002
- ----------------------------
John O. Mead
/s/ VINCENT F. NICOLOSI Director March 29, 2002
- ----------------------------
Vincent F. Nicolosi
/s/ FRANKLIN F. REGAN, JR. Director March 29, 2002
- ----------------------------
Franklin F. Regan, Jr.
/s/ JOHN E. ROE, SR. Director March 29, 2002
- ----------------------------
John E. Roe, Sr.
/s/ MICHAEL J. RUSSO Director March 29, 2002
- ----------------------------
Michael J. Russo
46
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
EXHIBIT INDEX
Exhibit No.Description
- ---------- --------------------------------------------------------------------
10.11 Restated Flushing Savings Bank, FSB Supplemental Savings Incentive
Plan
10.16(d) Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement
10.17 1996 Restricted Stock Incentive Plan of Flushing Financial Corporation
(as amended through March 19, 2002)
10.18 1996 Stock Option Incentive Plan of Flushing Financial Corporation (as
amended through March 19, 2002)
13.1 2001 Annual Report to Stockholders
23.1 Consent of Independent Accountants
47