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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $153,936,000. This figure is based
on the closing price on the Nasdaq National Market for a share of the
registrant's Common Stock, $0.01 par value, on February 26, 1999, the last
trading date in February 1999, which was $15.25.
The number of shares of the registrant's Common Stock outstanding as of
February 28, 1999 was 10,450,567 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1998 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 18, 1999 are incorporated herein by reference in
Part III.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business..............................................................1
General ............................................................1
Market Area and Competition.........................................3
Lending Activities..................................................4
Loan Portfolio Composition...................................4
Loan Maturity and Repricing..................................7
One-to-Four Family Mortgage Lending..........................7
Home Equity Loans............................................9
Multi-Family Lending.........................................9
Commercial Real Estate Lending..............................10
Construction Loans..........................................10
Small Business Administration Lending.......................10
Consumer and Other Lending..................................11
Loan Approval Procedures and Authority......................11
Loan Concentrations.........................................12
Loan Servicing..............................................12
Asset Quality......................................................12
Loan Collection.............................................12
Delinquent Loans and Non-performing Assets..................12
REO.........................................................14
Allowance for Loan Losses..........................................14
Investment Activities..............................................18
General.....................................................18
Mortgage-backed securities..................................19
Sources of Funds...................................................22
General.....................................................22
Deposits....................................................22
Borrowings..................................................25
Subsidiary Activities..............................................27
Personnel..........................................................27
RISK FACTORS
Effect of Interest Rates...........................................28
Lending Activities.................................................28
Competition........................................................29
Local Economic Conditions..........................................29
Year 2000 Compliance...............................................29
Pending Legislation................................................30
Legislation and Proposed Changes...................................31
Certain Anti-Takeover Provisions...................................31
i
TABLE OF CONTENTS
(Continued)
Page
----
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation...................................................32
General.....................................................32
Bad Debt Reserves...........................................32
Distributions...............................................33
Corporate Alternative Minimum Tax...........................33
State and Local Taxation...........................................33
New York State and New York City Taxation...................33
Delaware State Taxation.....................................34
REGULATION
General ...........................................................34
Investment Powers..................................................35
Real Estate Lending Standards......................................35
Loans-to-One Borrower Limits.......................................36
Insurance of Accounts..............................................36
Liquidity Requirements.............................................37
Qualified Thrift Lender Test.......................................37
Transactions with Affiliates.......................................38
Restrictions on Dividends and Capital Distributions................39
Federal Home Loan Bank System......................................40
Assessments........................................................40
Branching..........................................................40
Community Reinvestment.............................................40
Year 2000 Compliance...............................................41
Brokered Deposits..................................................41
Capital Requirements...............................................42
General.....................................................42
Tangible Capital Requirement................................42
Core Capital Requirement....................................42
Risk-Based Requirement......................................42
Federal Reserve System.............................................43
Financial Reporting................................................44
Standards for Safety and Soundness.................................44
Prompt Corrective Action...........................................44
Pending Legislation................................................45
Company Regulation.................................................45
Federal Securities Laws............................................46
Item 2. Properties...........................................................47
Item 3. Legal Proceedings....................................................47
Item 4. Submission of Matters to a Vote of Security Holders..................47
ii
TABLE OF CONTENTS
(Continued)
Page
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PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters................................................48
Item 6. Selected Financial Data..............................................48
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................48
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........48
Item 8. Financial Statements and Supplementary Data..........................48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................48
PART III
Item 10. Directors and Executive Officers of the Registrant..................49
Item 11. Executive Compensation..............................................49
Item 12. Security Ownership of Certain Beneficial Owners and Management......49
Item 13. Certain Relationships and Related Transactions......................49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....50
(a) 1. Financial Statements......................................50
(a) 2. Financial Statement Schedules.............................50
(b) Reports on Form 8-K filed during the last quarter
of fiscal 1997............................................50
(c) Exhibits Required by Securities and Exchange Commission
Regulation S-K............................................51
SIGNATURES
POWER OF ATTORNEY
iii
PART I
Statements contained in this Annual Report on Form 10-K relating to plans,
strategies, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking information is inherently
subject to risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, factors discussed under the captions "Business--General",
"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. The Company has no
obligation to update these forward-looking statements.
Item 1. Business.
General
Flushing Financial Corporation (the "Company") is a Delaware corporation
organized in May 1994 at the direction of Flushing Savings Bank, FSB (the
"Bank") for the purpose of acquiring and holding all of the outstanding capital
stock of the Bank issued upon its conversion from a federal mutual savings bank
to a federal stock savings bank (the "Conversion"). The Conversion was completed
on November 21, 1995. In connection with the Conversion, the Company issued
12,937,500 shares of common stock at a price of $7.67 per share to the Bank's
eligible depositors who subscribed for shares, and to an employee benefit trust
established by the Company for the purpose of holding shares for allocation or
distribution under certain employee benefit plans of the Company and the Bank
(the "Employee Benefit Trust"). The Company realized net proceeds of $96.5
million from the sale of its common stock and utilized approximately $48.3
million of such proceeds to purchase 100% of the issued and outstanding shares
of the Bank's common stock. Flushing Financial Corporation's common stock is
traded on the Nasdaq National Market under the symbol "FFIC".
The primary business of the Company is the operation of its wholly-owned
subsidiary, the Bank. In addition to directing, planning and coordinating the
business activities of the Bank, the Company invests primarily in U.S.
government and federal agency securities, federal funds, mortgage-backed
securities, and investment grade corporate obligations. The Company also holds a
note evidencing a loan that it made to the Employee Benefit Trust to enable the
Employee Benefit Trust to acquire 1,035,000 shares, or 8% of the common stock
issued in the Conversion. The Company has in the past increased growth through
acquisition of financial institutions and branches of other financial
institutions, and will pursue growth through acquisitions that are, or are
expected to be within a reasonable time-frame, accretive to earnings, as
opportunities arise. The Company may also organize or acquire, through merger or
otherwise, other financial services related companies. The activities of the
Company are funded by that portion of the proceeds of the sale of common stock
in the Conversion that the Company was permitted by the Office of Thrift
Supervision ("OTS") to retain, and earnings thereon, and by dividends, if any,
received from the Bank.
The Company is a unitary savings and loan holding company, which, under
existing laws, is generally not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender. Under regulations of the Office of Thrift Supervision
(the "OTS") the Bank is a qualified thrift lender if its ratio of qualified
thrift investments to portfolio assets ("QTL Ratio") is 65% or more, on a
monthly average basis in nine of every 12 months. At December 31, 1998, the
Bank's QTL Ratio was 88.6%, and the Bank had maintained more than 65% of its
"portfolio assets" in qualified thrift investments in at least nine of the
preceding 12 months. See "Regulation--Qualified Thrift Lender Test" and
"Regulation--Company Regulation."
1
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company. The Company utilizes the
support staff of the Bank from time to time, as needed. Additional employees may
be hired as deemed appropriate by the management of the Company.
Unless otherwise disclosed, the information presented in the financial
statements and this Form 10-K reflect the financial condition and results of
operations of the Company, the Bank and the Bank's subsidiaries on a
consolidated basis. At December 31, 1998, the Company had total assets of $1.1
billion, deposits of $664.1 million and stockholders' equity of $132.1 million.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits together with funds generated from
ongoing operations and borrowings, primarily in (i) originations and purchases
of one-to-four-family residential mortgage loans, multi-family income-producing
property loans and commercial real estate loans; (ii) mortgage loan surrogates
such as mortgage-backed securities; and (iii) U.S. government and federal agency
securities, corporate fixed-income securities and other marketable securities.
To a lesser extent, the Bank originates certain other loans, including
construction loans, Small Business Administration ("SBA") loans and other small
business and consumer loans. At December 31, 1998, the Bank had loans
receivable, net of allowance for loan losses and unearned income, of $750.6
million, representing approximately 65.7% of the Company's total assets, and
held mortgage-backed securities with a carrying value of $291.6 million,
representing approximately 25.5% of the Company's total assets. 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, reverse
repurchase agreements, principal and interest payments on loans, mortgage-backed
and other securities, proceeds from sales of securities and, to a lesser extent,
proceeds from sales of loans.
On September 9, 1997, the Company acquired New York Federal Savings Bank
("New York Federal") and merged it with the Bank in a cash transaction valued at
approximately $13 million. This acquisition was immediately accretive to the
Company's earnings and was accounted for under the purchase method of
accounting.
In November of 1997, the Bank established a wholly owned real estate
investment trust subsidiary, Flushing Preferred Funding Corporation ("FPFC"),
and transferred $256.7 million in real estate loans from the Bank to FPFC. On
September 30, 1998, the Bank transferred an additional $69.7 million in real
estate loans from the Bank to FPFC. The assets transferred to FPFC are viewed by
regulators as part of the Bank's assets in consolidation. However, the
establishment of FPFC provides an additional vehicle for access by the Company
to the capital markets for future investment opportunities. In addition, under
current law, all income earned by FPFC distributed to the Bank in the form of a
dividend has the effect of reducing the Company's income tax expense.
In March of 1998, the Bank formed a service corporation, Flushing Service
Corporation, to market insurance products and mutual funds. The insurance
products and mutual funds sold are products of unrelated insurance and
securities firms from which the service corporation earns a commission.
Management is currently reviewing the profitability potential of various new
products to further extend the Bank's product lines and market.
As part of the Company's exploration in new retailing concepts and
products, the Bank opened its first in-store supermarket branch in June 1998 in
the neighborhood of New Hyde Park through an alliance with the Edwards
Supermarket chain. The new supermarket branch can address virtually all of its
customers' financial needs, with the added convenience of extended hours and
time saving grocery store access.
2
On August 18, 1998, the Board of Directors of the Company declared a
three-for-two split of the Company's common stock in the form of a 50% stock
dividend, which was paid on September 30, 1998. Each stockholder received one
additional share for every two shares of the Company's common stock held at the
record date, September 10, 1998. Cash was paid in lieu of fractional shares.
This dividend was not paid on shares held in treasury. All share and per share
amounts in this Annual Report on Form 10-K have been retroactively restated to
reflect the three-for-two split paid on September 30, 1998.
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 seven branch offices, located in the New York City Boroughs of
Queens, Brooklyn and Manhattan, and in Nassau County, New York. Substantially
all of the Bank's mortgage loans are secured by properties located in the New
York City metropolitan area. During the last three years, the unemployment and
real estate values in the New York City metropolitan area have been relatively
stable, which has favorably impacted the Bank's asset quality. See "--Asset
Quality." There can be no assurance that the stability of these economic factors
will continue.
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. Particularly intense competition exists for deposits and in
all of the lending activities emphasized by the Bank. The Bank's competition for
loans comes principally from commercial banks, other savings banks, savings and
loan associations, mortgage banking companies, insurance companies, finance
companies and credit unions. Management anticipates that competition for
multi-family loans, commercial real estate loans and one-to-four family
residential mortgage loans will continue to increase in the future. Thus, no
assurances can be given that the Bank will be able to maintain or increase its
current level of such loans, as contemplated by management's current business
strategy. The Bank's most direct competition for deposits historically has come
from other savings banks, commercial banks, savings and loan associations and
credit unions. In addition, the Bank faces increasing competition for deposits
from products offered by brokerage firms, insurance companies and other
financial intermediaries, such as money market and other mutual funds and
annuities. Trends toward the consolidation of the banking industry and the
lifting of interstate banking and branching restrictions may make it more
difficult for smaller, community-oriented banks, such as the Bank, to compete
effectively with large, national, regional and super-regional banking
institutions. Notwithstanding the intense competition, the Bank has been
successful in maintaining its deposit base.
For a discussion of the Company's business strategies, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy," included in the Annual Report of Stockholders
for the fiscal year ended December 31, 1998 (the "Annual Report"), incorporated
herein by reference.
3
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional fixed-rate residential 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, 1998, the Bank had gross loans outstanding of $758.6 million
(before reserves and unearned income), of which $372.0 million, or 49.04%, were
one-to-four family residential mortgage loans (including $16.5 million of
condominium loans, and $5.9 million of home equity loans). Of the one-to-four
family residential loans outstanding on that date, 51.52% were ARM loans and
48.48% were fixed-rate loans. At December 31, 1998, multi-family loans totaled
$277.4 million, or 36.57% of gross loans, commercial real estate loans totaled
$101.4 million, or 13.37%, construction loans totaled $3.2 million, or 0.42%,
SBA loans totaled $2.6 million, or 0.35%, and consumer and other loans totaled
$1.9 million, or 0.25% of gross loans.
The Bank has traditionally emphasized the origination and acquisition of
one-to-four family residential mortgage loans, which include ARM loans,
fixed-rate mortgage loans and home equity loans. However, in recent years, the
Bank has also placed emphasis on multi-family and commercial real estate loans.
The Bank expects to continue its emphasis on multi-family and commercial real
estate loans as well as on one-to-four family residential mortgage loans. From
December 31, 1997 to December 31, 1998, one-to-four-family residential mortgage
loans increased $70.7 million, or 23.45%, multi-family loans increased $47.2
million, or 20.50%, and commercial loans increased $33.2 million, or 48.72%.
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 loans and shorter terms to
maturity, but typically involve higher principal amounts and generally expose
the lender to greater credit risk than fully underwritten one-to-four family
residential mortgage loans. The Bank's strategy to emphasize multi-family and
commercial real estate loans can be expected to increase the overall level of
credit risk inherent in the Bank's loan portfolio. The greater risk associated
with multi-family and commercial real estate loans may require the Bank to
increase its provisions for loan losses and to maintain an allowance for loan
losses as a percentage of total loans in excess of the allowance currently
maintained by the Bank. To date, the Company has not experienced significant
losses in its multi-family and commercial real estate loan portfolios.
The Bank's lending activities are subject to federal and state laws and
regulations. Interest rates charged by the Bank on loans are affected primarily
by the demand for such loans, the supply of money available for lending
purposes, the rate offered by the Bank's competitors and, in the case of
corporate entities, the creditworthiness of the borrower. Many of those factors
are, in turn, affected by regional and national economic conditions, and the
fiscal, monetary and tax policies of the federal government.
4
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
At December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- -------------------- --------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Mortgage Loans:
One-to-four family (1) $ 361,786 47.69% $ 289,286 47.67% $ 223,273 57.28% $ 155,435 54.20%
Co-operative (2) 10,238 1.35 12,065 1.99 13,245 3.40 14,653 5.11
Multi-family real estate 277,437 36.57 230,229 37.95 104,870 26.91 69,140 24.11
Commercial real estate 101,401 13.37 68,182 11.24 46,698 11.98 45,215 15.77
Construction 3,203 0.42 2,797 0.46 -- -- -- --
--------- ------ --------- ------ --------- ------ --------- ------
Gross mortgage loans 754,065 99.40 602,559 99.31 388,086 99.57 284,443 99.19
Small Business Administration loans 2,616 0.35 2,789 0.46 -- -- -- --
Consumer and other loans 1,899 0.25 1,385 0.23 1,680 0.43 2,328 0.81
--------- ------ --------- ------ --------- ------ --------- ------
Gross loans 758,580 100.00% 606,733 100.00% 389,766 100.00% 286,771 100.00%
====== ====== ====== ======
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (1,263) (1,838) (1,548) (1,335)
Allowance for loan losses (6,762) (6,474) (5,437) (5,310)
--------- --------- --------- ---------
Loans, net $ 750,555 $ 598,421 $ 382,781 $ 280,126
========= ========= ========= =========
At December 31,
------------------------
1994
------------------------
Percent
Amount of Total
------ --------
Mortgage Loans:
One-to-four family (1) $ 133,006 51.39%
Co-operative (2) 16,155 6.24
Multi-family real estate 56,559 21.85
Commercial real estate 49,512 19.13
Construction 364 0.14
--------- ------
Gross mortgage loans 255,596 98.75
Small Business Administration loans -- --
Consumer and other loans 3,231 1.25
--------- ------
Gross loans 258,827 100.00%
======
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (1,341)
Allowance for loan losses (5,370)
---------
Loans, net $ 252,116
=========
(1) One-to-four family residential loans also include home equity and
condominium loans. At December 31, 1998, gross home equity loans totaled
$5.9 million and condominium loans totaled $16.5 million.
(2) Consists of loans secured by shares representing interests in individual
co-operative units that are generally owner occupied.
5
The following table sets forth the Bank's loan originations (including the
net effect of refinancings) and the changes in the Bank's portfolio of loans,
including purchases, sales and principal reductions for the years indicated:
For the Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
MORTGAGE LOANS
At beginning of year $ 602,559 $ 388,086 $ 284,443
Mortgage loans originated:
One-to-four family 83,051 42,756 51,309
Co-operative 113 475 76
Multi-family 84,328 79,976 43,184
Commercial 52,211 17,121 7,501
Construction 3,332 3,016 --
--------- --------- ---------
Total mortgage loans originated 223,035 143,344 102,070
--------- --------- ---------
Acquired loans:
Loans purchased (1) 27,174 49,965 39,873
Acquired NY Federal 1-4 family loans -- 901 --
Acquired NY Federal multi-family loans -- 62,405 --
Acquired NY Federal commercial loans -- 11,717 --
--------- --------- ---------
Total acquired mortgage loans 27,174 124,988 39,873
--------- --------- ---------
Less:
Principal reductions 98,251 53,416 37,150
Mortgage loan foreclosures 452 443 1,150
--------- --------- ---------
At end of year $ 754,065 $ 602,559 $ 388,086
========= ========= =========
SBA, CONSUMER AND OTHER LOANS
At beginning of year $ 4,174 $ 1,680 $ 2,328
Acquired NY Federal SBA -- 2,029 --
Net Bank activity 341 465 (648)
--------- --------- ---------
At end of year $ 4,515 $ 4,174 $ 1,680
========= ========= =========
(1) For a description of the Bank's loan purchase activity, see "--One-to-Four
Family Mortgage Lending".
6
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of the Bank's loan portfolio at December 31, 1998. 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 $98.3 million for
the year ended December 31, 1998. Certain adjustable rate loans have features
which limit changes in interest rates on a short-term basis and over the life of
the loan.
At December 31,
-----------------------------------------------------------------------------------------------
Mortgage Loans Other Loans
------------------------------------------------------------ -------------------
One-to- Co- Multi- Total Loans
Four Family operative family Commercial Construction SBA Consumer Receivable
----------- --------- ------ ---------- ------------ -------- -------- ----------
(In thousands)
Amounts due:
Within one year $ 48,668 $ 5,309 $ 16,255 $ 10,122 $ 3,203 -- $ 111 $ 83,668
-------- -------- -------- -------- -------- -------- -------- --------
After one year (1)
One to two years 21,154 1,070 32,067 8,101 -- -- 221 62,613
Two to three years 30,949 828 54,362 14,055 -- -- 819 101,013
Three to five years 33,459 851 82,812 39,914 -- $ 344 748 158,128
Five to ten years 74,246 1,124 49,618 19,997 -- 1,677 -- 146,662
Over ten years 153,310 1,056 42,323 9,212 -- 595 -- 206,496
-------- -------- -------- -------- -------- -------- -------- --------
Total due after
one year 313,118 4,929 261,182 91,279 -- 2,616 1,788 674,912
-------- -------- -------- -------- -------- -------- -------- --------
Total amounts due $361,786 $ 10,238 $277,437 $101,401 $ 3,203 $ 2,616 $ 1,899 $758,580
======== ======== ======== ======== ======== ======== ======== ========
(1) Of the $674.9 million of loans due after one year, $365.0 million are
adjustable rate loans and $309.9 million are fixed-rate loans.
One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured
by one-to-four family residences, including townhouses and condominium units,
located in its primary lending area. For purposes of the description contained
in this section, one-to-four family residential mortgage loans and co-operative
apartment loans are collectively referred to herein as "residential mortgage
loans." The Bank offers both fixed-rate and ARM 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 existing or past
customers, persons who respond to Bank marketing efforts and referrals from
mortgage brokers and mortgage bankers.
Partly in response to the intense competition for originations of
one-to-four family residential mortgage loans, the Bank has a program of
correspondent relationships with several mortgage bankers and brokers operating
in the New York metropolitan area. Under this program, the Bank purchases
individual newly originated one-to-four family loans originated by such
correspondents. The loans are underwritten pursuant to the Bank's credit
underwriting standards and each loan is reviewed by Bank personnel prior to
purchase to ensure conformity with such standards. During 1998, through these
relationships, the Bank purchased $27.2 million in one-to-four family mortgage
loans, as compared to $50.0 million in 1997 and $39.9 million during 1996.
The Bank generally originates residential mortgage loans in amounts up to
80% of the appraised value or the sale price, whichever is less. The Bank may
make residential mortgage loans with loan-to-value ratios of up to 95% of the
appraised value of the mortgaged property; however, private mortgage insurance
is required whenever loan-to-value ratios exceed 80% of the appraised value of
the property securing the loan.
7
Traditionally, residential mortgage loans originated by the Bank have been
underwritten to FNMA and other agency guidelines to facilitate securitization
and sale in the secondary market. These guidelines require, among other things,
verification of the loan applicant's income. However, from time to time, and
with increasing frequency, the Bank originates residential mortgage loans to
self-employed individuals within the Bank's local community without verification
of the borrower's level of income, provided that the borrower's stated income is
considered reasonable for the borrower's type of business. These loans involve a
higher degree of risk as compared to the Bank's other fully underwritten
residential mortgage loans as there is a greater opportunity for borrowers to
falsify or overstate their level of income and ability to service indebtedness.
To mitigate this risk, the Bank typically limits the amount of these loans to
80% of the appraised value of the property or the sale price, whichever is less.
These loans also are not as readily salable in the secondary market as the
Bank's other fully underwritten loans, either as whole loans or when pooled or
securitized. FNMA does not purchase such loans. The Bank believes, however, that
its willingness to make such loans is an aspect of its commitment to be a
community-oriented bank. Although there are a number of purchasers for such
loans, there can be no assurance that such purchasers will continue to be active
in the market or that the Bank will be able to sell such loans in the future.
The Bank originated $36.8 million, $26.6 million and $19.0 million in loans of
this type during 1998, 1997 and 1996, respectively.
The Bank's fixed-rate residential mortgage loans typically are originated
for terms of 15 and 30 years and are competitively priced based on market
conditions and the Bank's cost of funds. The Bank charges origination fees of up
to 2%; loans with fees of less than 2% generally carry a higher interest rate.
The Bank originated $44.3 million and $33.8 million of 15-year fixed-rate
residential mortgage loans in 1998 and 1997, respectively. The Bank also
originated $29.9 million and $4.7 million of 30-year fixed rate residential
mortgage loans in 1998 and 1997, respectively. These loans have been retained to
provide flexibility in the management of the Company's interest rate sensitivity
position.
The Bank offers ARM loans with adjustment periods of one, three, five,
seven or ten years. Interest rates on ARM loans currently offered by the Bank
are adjusted at the beginning of each adjustment period based upon a fixed
spread above the average yield on United States treasury securities, adjusted to
a constant maturity which corresponds to the adjustment period of the loan (the
"U.S. Treasury constant maturity index") as published weekly by the Federal
Reserve Board. From time to time, the Bank may originate ARM loans at an initial
rate lower than the U.S. Treasury constant maturity index as a result of a
discount on the spread for the initial adjustment period. ARM loans generally
are subject to limitations on interest rate increases of 2% per adjustment
period and an aggregate adjustment of 6% over the life of the loan. Origination
fees of up to 2% are charged for ARM loans; loans with fees of less than 2%
generally carry a higher interest rate. The Bank originated and purchased
one-to-four family residential ARM loans totaling $23.9 million and $12.7
million, respectively, during 1998 and $21.6 million and $29.8 million,
respectively, during 1997. At December 31, 1998, $191.2 million, or 51.52%, 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, as opposed to fixed-rate 30-year loans, in the
Bank's portfolio helps reduce the Bank's exposure to interest rate risks.
However, in an environment of rapidly increasing interest rates as was
experienced in the 1970's, it is possible for the interest rate increase to
exceed the maximum aggregate adjustment on ARM loans and negatively affect the
spread between the Bank's interest income and its cost of funds.
8
ARM loans generally involve credit risks different from those inherent in
fixed-rate loans, primarily because if interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default.
However, this potential risk is lessened by the Bank's policy of originating ARM
loans with annual and lifetime interest rate caps that limit the increase of a
borrower's monthly payment. The Bank has not in the past, nor does it currently
originate ARM loans which provide for negative amortization.
Home Equity Loans. Home equity loans are included in the Bank's portfolio
of one-to-four family residential mortgage loans. These loans are offered as
adjustable-rate "home equity lines of credit" on which interest only is due for
an initial term of 10 years and thereafter principal and interest payments
sufficient to liquidate the loan are required for the remaining term, not to
exceed 20 years. These loans also may be offered as fully amortizing closed-end
fixed-rate loans for terms up to 15 years. All home equity loans are made on
one-to-four family residential and condominium units, which are owner-occupied,
and are subject to a 80% loan-to-value ratio computed on the basis of the
aggregate of the first mortgage loan amount outstanding and the proposed home
equity loan. They are granted in amounts from $25,000 to $100,000. The
underwriting standards for home equity loans are substantially the same as those
for residential mortgage loans. At December 31, 1998, home equity loans totaled
$5.9 million, or .78%, of gross loans.
Multi-Family Lending. Loans secured by multi-family income producing
properties (including mixed-use properties) constituted approximately $277.4
million, or 36.57%, of gross loans at December 31, 1998, 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 $559,000 at December 31,
1998, and the largest multi-family loan held in the Bank's portfolio had a
principal balance of $5.9 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 a debt service coverage of at least 125%
of the monthly loan payment. Multi-family loans generally are made up to 70% of
the appraised value of the property securing the loan or the sale price of the
property, whichever is less. The Bank generally obtains personal guarantees from
these borrowers and typically orders an environmental report on the property
securing the loan.
Loans secured by multi-family income producing property generally involve a
greater degree of risk than residential mortgage loans and carry larger loan
balances. The increased credit risk is a result of several factors, including
the concentration of principal in a smaller number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty in evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family income producing
property is typically dependent upon the successful operation of the related
property. If the cash flow from the property is reduced, the borrower's ability
to repay the loan may be impaired. Loans secured by multi-family income
producing property also may involve a greater degree of environmental risk. The
Bank seeks to protect against this risk through obtaining an environmental
report. See "--Asset Quality--REO."
9
Commercial Real Estate Lending. Loans secured by commercial real estate
constituted approximately $101.4 million, or 13.37%, of the Bank's gross loans
at December 31, 1998. The Bank's commercial real estate loans are secured by
improved properties such as offices, motels, small business facilities, strip
shopping centers, warehouses, religious facilities and mixed-use properties. At
December 31, 1998, 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
$583,000, and the largest of such loans, which was secured by a hotel, had a
principal balance of $5.5 million. Typically, commercial real estate loans are
originated at a range of $100,000 to $6.0 million. Commercial real estate loans
are generally offered at adjustable rates tied to a market index for terms of
five to 15 years, with adjustment periods from one to five years. On a select
and limited basis, commercial real estate loans may be made at fixed interest
rates for terms of seven, 10 or 15 years. An origination fee of up to 1% is
typically charged on all commercial real estate loans.
In underwriting commercial real estate loans, the Bank employs the same
underwriting standards and procedures as are employed in underwriting
multi-family loans.
Commercial real estate loans generally carry larger loan balances than
one-to-four family residential mortgage loans and involve a greater degree of
credit risk for the same reasons applicable to multi-family loans.
Construction Loans. The Bank's construction loans primarily have been made
to finance the construction of one-to-four family residential properties and
multi-family residential real estate properties. The Bank's policies provide
that construction loans may be made in amounts up to 70% 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 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, 1998 totaled $3.2 million, or 0.42% of gross
loans.
Construction loans involve a greater degree of risk than other loans
because, among other things, the underwriting of such loans is based on an
estimated value of the developed property, which can be difficult to ascertain
in light of uncertainties inherent in such estimations. In addition,
construction lending entails the risk that the project may not be completed due
to cost overruns or changes in market conditions.
Small Business Administration Lending. With the purchase of New York
Federal on September 9, 1997, the Company entered into the SBA market. These
loans are extended to small businesses and are guaranteed by the Small Business
Administration at 80% of the loan balance for loans with balances of $100,000 or
less, and at 75% of the loan balance for loans with balances greater than
$100,000. All SBA loans are underwritten in accordance with SBA Standard
Operating Procedures and the Bank generally obtains personal guarantees and
collateral, where applicable, from SBA borrowers. Typically, SBA loans are
originated at a range of $50,000 to $1.0 million with terms ranging from five to
25 years. SBA loans are generally offered at adjustable rates tied to the prime
rate (as published in the Wall Street Journal) with adjustment periods of one to
three months. The Bank generally sells the guaranteed portion of the SBA loan in
the secondary market and retains the servicing rights on these loans collecting
a fee of approximately 1%. At December 31, 1998, SBA loans totaled $2.6 million,
representing 0.35% of gross loans.
10
Consumer and Other Lending. The Bank originates other loans for business,
personal, or household purposes. Total consumer and other loans outstanding at
December 31, 1998 amounted to $1.9 million, or 0.25%, 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, overdraft lines of credit, automobile
loans and other personal loans. Generally, unsecured consumer loans are limited
to amounts of $5,000 or less for terms of up to five years. The Bank offers
credit cards to its customers through a third party financial institution and
receives an origination fee and transactional fees for processing such accounts,
but does not underwrite or finance any portion of the credit card receivables.
The underwriting standards employed by the Bank for consumer and other
loans include a determination of the applicant's payment history on other debts
and assessment of the applicant's ability to meet payments on all of his or her
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the collateral,
if any, to the proposed loan amount. Unsecured loans tend to have higher risk,
and therefore command a higher interest rate.
Loan Approval Procedures and Authority. The Bank's Board-approved lending
policies establish loan approval requirements for its various types of loan
products. Pursuant to the Bank's Residential Mortgage Lending Policy, all
residential mortgage loans require three signatures for approval. Residential
mortgage loans which do not exceed $500,000 must have the approval of the Bank's
Senior Mortgage Officer and two other loan officers. For residential mortgage
loans greater than $500,000, at least one of the approvals must be from the
President, Executive Vice President or a Senior Vice President (collectively,
"Authorized Officers") and the other two may be from the Bank's Senior Mortgage
Officer, Loan Underwriting Manager or Senior Underwriter. Residential mortgage
loans in excess of $650,000 also must be approved by the Loan Committee, the
Executive Committee or the full Board of Directors. Pursuant to the Bank's
Commercial Real Estate Lending Policy, all loans secured by commercial real
estate properties and multi-family income producing properties, must be approved
by the President or the Executive Vice President upon the recommendation of the
Commercial Loan Department Officer. Such loans in excess of $700,000 also
require Loan or Executive Committee or Board approval. In accordance with the
Bank's Business and Consumer Loan Policies, all business and consumer loans
require two signatures for approval, one of which must be from an Authorized
Officer. In addition, for business loans, the approval of the Bank's President
and ratification by the Loan Committee of the Board of Directors is required.
The Bank's Construction Loan Policy requires that all construction loans must be
approved by the Loan or Executive Committee or the Board of Directors of the
Bank. Any loan, regardless of type, that deviates from the Bank's written loan
policies must be approved by the Loan or Executive Committee or the Bank's Board
of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application, a credit report is ordered and certain other financial information
is obtained. An appraisal of the real estate intended to secure the proposed
loan is required. Such appraisals currently are performed by the Bank's staff
appraiser or an independent appraiser designated and approved by the Bank. The
Bank's Board of Directors annually approves the independent appraisers used by
the Bank and approves the Bank's appraisal policy. It is the Bank's policy to
require borrowers to obtain title insurance and hazard insurance on all real
estate first mortgage loans prior to closing. Borrowers generally are required
to advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and, in some cases, hazard insurance
premiums.
11
Loan Concentrations. The maximum amount of credit that the Bank can extend
to any single borrower or related group of borrowers generally is limited to 15%
of the Bank's unimpaired capital and surplus. Applicable law and regulations
permit an additional amount of credit to be extended, equal to 10% of unimpaired
capital and surplus, if the loan is secured by readily marketable collateral,
which generally does not include real estate. See "Regulation." However, it is
currently the Bank's policy not to extend such additional credit. At December
31, 1998, 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
multi-family income producing properties with an aggregate principal balance of
$10.3 million, $7.6 million and $7.4 million for each of the three borrowers.
Loan Servicing. At December 31, 1998, the Bank was servicing loans
aggregating $34.8 million for others. The Bank's policy is to retain the
servicing rights to the mortgage and SBA loans that it sells in the secondary
market. In order to increase revenue, management intends to continue this
policy.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Bank generally sends the borrower a
written notice of non-payment when the loan is first past due. In the event
payment is not then received, additional letters and phone calls generally are
made in order to encourage the borrower to meet with a representative of the
Bank to discuss the delinquency. If the loan still is not brought current and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is delinquent 45 days or more, the Bank may commence foreclosure
proceedings against real property that secures the real estate loan and attempt
to repossess personal or business property that secures an SBA loan, business
loan, consumer loan or co-operative apartment loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan generally is
sold at foreclosure or by the Bank as soon thereafter as practicable. Decisions
as to when to commence foreclosure actions for multi-family, commercial real
estate and construction loans are made on a case by case basis. Since
foreclosure typically halts the sale of the collateral and may be a lengthy
procedure in the State of New York, the Bank may consider loan work-out
arrangements to work with multi-family or commercial real estate borrowers in an
effort to restructure the loan rather than foreclose, particularly if the
borrower is, in the opinion of management, able to manage the project. In
certain circumstances, on rental properties, the Bank may institute proceedings
to seize the rent.
On mortgage loans or loan participations purchased by the Bank, the Bank
receives monthly reports from its loan servicers with which it monitors the loan
portfolio. Based upon servicing agreements with the servicers of the loans, the
Bank relies upon the servicer to contact delinquent borrowers, collect
delinquent amounts and initiate foreclosure proceedings, when necessary, all in
accordance with applicable laws, regulations and the terms of the servicing
agreements between the Bank and its servicing agents.
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. Loans in
default 90 days or more as to their maturity date but not their payments,
however, continue to accrue interest. With respect to loans on non-accrual
status, previously accrued but unpaid interest is deducted from interest income
six months after the date it becomes past due.
12
The following table sets forth information regarding all non-accrual loans,
loans which are 90 days or more delinquent and still accruing, and real estate
owned ("REO") at the dates indicated. During the years ended December 31, 1998,
1997 and 1996, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totaled $180,000, $180,000
and $145,000, respectively. These amounts were not included in the Bank's
interest income for the respective periods.
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans:
One-to-four family residential $1,261 $1,897 $1,835 $2,042 $2,375
Co-operative apartment 15 -- 32 109 153
Multi-family residential -- -- 505 2,119 890
Commercial real estate 1,280 512 -- 427 1,452
Construction -- -- -- -- 364
------ ------ ------ ------ ------
Total non-accrual mortgage loans 2,556 2,409 2,372 4,697 5,234
Other non-accrual loans 41 49 36 50 63
------ ------ ------ ------ ------
Total non-accrual loans 2,597 2,458 2,408 4,747 5,297
Mortgage loans 90 days or more delinquent
and still accruing -- -- -- 234 14
Other loans 90 days or more delinquent
and still accruing -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 2,597 2,458 2,408 4,981 5,311
Foreclosed real estate 77 433 1,218 1,869 3,468
------ ------ ------ ------ ------
Total non-performing assets $2,674 $2,891 $3,626 $6,850 $8,779
====== ====== ====== ====== ======
Troubled debt restructurings -- -- -- -- $3,220
====== ====== ====== ====== ======
Non-performing loans to gross loans (1) 0.34% 0.41% 0.62% 1.74% 2.05%
Non-performing assets to total assets (1) 0.23% 0.27% 0.47% 0.97% 1.48%
(1) Ratios do not include troubled debt restructurings where the loans are
performing in accordance with the agreement.
13
REO. The Bank has been aggressively marketing its REO properties. At
December 31, 1998, the Bank owned one property with a carrying value of $77,000.
The Bank currently obtains environmental reports in connection with the
underwriting of commercial real estate loans, and typically obtains
environmental reports in connection with the underwriting of multi-family loans.
For all other loans, the Bank obtains environmental reports only if the nature
of the current or, to the extent known to the Bank, prior use of the property
securing the loan indicates a potential environmental risk. However, the Bank
may not be aware of such uses or risks in any particular case, and, accordingly,
there is no assurance that real estate acquired by the Bank in foreclosure is
free from environmental contamination or that, if any such contamination or
other violation exists, the Bank will not have any liability therefor.
Allowance for Loan Losses
The Bank has established and maintains on its books an allowance for loan
losses that is designed to provide reserves for estimated losses inherent in the
Bank's overall loan portfolio. The allowance is established through a provision
for loan losses based on management's evaluation of the risk inherent in the
various components of its loan portfolio and other factors, including historical
loan loss experience, changes in the composition and volume of the portfolio,
collection policies and experiences, trends in the volume of non-accrual loans
and regional and national economic conditions. The Company maintains an internal
loan review committee that reviews the quality of loans and reports to the Loan
Committee of the Board of Directors on a monthly basis. The determination of the
amount of the allowance for loan losses includes estimates that are susceptible
to significant changes due to changes in appraisal values of collateral,
national and regional economic conditions and other factors. In connection with
the determination of the allowance, the market value of collateral ordinarily is
evaluated by the Bank's staff appraiser; however, the Bank may from time to time
obtain independent appraisals for significant properties. Current year
charge-offs, charge-off trends, new loan production and current balance by
particular loan categories also are taken into account in determining the
appropriate amount of the allowance.
In assessing the adequacy of the allowance, management reviews the Bank's
loan portfolio by separate categories which have similar risk and collateral
characteristics; e.g. commercial real estate, multi-family real estate,
one-to-four family residential loans, co-operative apartment loans, SBA loans,
business loans and consumer loans. General provisions are established against
performing loans in the Bank's portfolio in amounts deemed prudent from time to
time based on the Bank's qualitative analysis of the factors described above.
The determination of the amount of the allowance for loan losses also includes a
review of loans on which full collectibility is not reasonably assured. The
primary risk element considered by management with respect to each one-to-four
family residential loan, co-operative apartment loan, SBA loan, business loan
and consumer loan is any current delinquency on the loan. The primary risk
elements considered with respect to commercial real estate and multi-family
loans are the financial condition of the borrower, the sufficiency of the
collateral (including changes in the value of the collateral) and the record of
payment.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"), which can require the
establishment of additional general allowances or specific loss allowances or
require charge-offs. Such authorities may require the Bank to make additional
provisions to the allowance based on their judgments about information available
to them at the time of their examination. An OTS policy statement provides
guidance for OTS examiners in determining whether the levels of general
valuation allowances for savings institutions are adequate. The policy statement
requires that if a savings institution's general valuation allowance policies
and procedures are deemed to be inadequate, the general valuation allowance
would be compared to certain ranges of general valuation allowances deemed
acceptable by the OTS depending in part on the savings institution's level of
classified assets.
14
The Bank's provision for loan losses was $214,000, $104,000 and $418,000
for the years ended December 31, 1998, 1997 and 1996, respectively. At December
31, 1998, the total allowance for loan losses was $6.8 million, representing
260.36% of non-performing loans and 252.83% of non-performing assets, compared
to ratios of 263.38% and 223.94% respectively, at December 31, 1997. The Bank
continues to monitor and modify the level of its allowance for loan losses in
order to maintain the allowance at a level which management considers adequate
to provide for probable loan losses based on available information.
Management of the Bank believes that the current allowance for loan losses
is adequate in light of current economic conditions and the composition of its
loan portfolio and other available information and the Board of Directors
concurs in this belief. However, many factors may require additions to the
allowance for loan losses in future periods beyond those currently revealed.
These factors include future adverse changes in economic conditions, changes in
interest rates and changes in the financial capacity of individual borrowers
(any of which may affect the ability of borrowers to make repayments on loans),
changes in the real estate market within the Bank's lending area and the value
of collateral, or a review and evaluation of the Bank's loan portfolio in the
future. The determination of the amount of the allowance for loan losses
includes estimates that are susceptible to significant changes due to changes in
appraisal values of collateral, national and regional economic conditions,
interest rates and other factors. In addition, the Bank's increased emphasis on
commercial real estate and multi-family loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with commercial real estate and multi-family loans may require
the Bank to increase its provisions for loan losses and to maintain an allowance
for loan losses as a percentage of total loans that is in excess of the
allowance currently maintained by the Bank. Provisions for loan losses are
charged against net income. See "--Lending Activities" and "--Asset Quality."
15
The following table sets forth the Bank's allowance for loan losses at and
for the dates indicated.
For the Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of year $ 6,474 $ 5,437 $ 5,310 $ 5,370 $ 5,723
Provision for loan losses 214 104 418 496 246
Provision acquired from NY Federal -- 979 -- -- --
Loans charged-off:
One-to-four family 91 85 220 312 341
Co-operative -- 44 162 183 71
Multi-family -- -- 41 251 14
Commercial -- -- 68 260 303
Construction -- -- -- -- --
Other 12 77 44 46 65
------- ------- ------- ------- -------
Total loans charged-off 103 206 535 1,052 794
------- ------- ------- ------- -------
Recoveries:
Mortgage loans 177 155 244 496 195
Other -- 5 -- -- --
------- ------- ------- ------- -------
Total recoveries 177 160 244 496 195
------- ------- ------- ------- -------
Balance at end of year $ 6,762 $ 6,474 $ 5,437 $ 5,310 $ 5,370
======= ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the year
to average loans outstanding during the year (0.01)% 0.01% 0.09% 0.21% 0.24%
Ratio of allowance for loan losses to
gross loans at end of the year 0.89% 1.07% 1.39% 1.85% 2.07%
Ratio of allowance for loan losses to
non-performing loans at the end of year 260.36% 263.38% 225.79% 106.61% 101.11%
Ratio of allowance for loan losses to
non-performing assets at the end of year 252.83% 223.94% 149.94% 77.52% 61.17%
16
The following table sets forth the Bank's allocation of its allowance for
loan losses to the total amount of loans in each of the categories listed at the
dates indicated. The numbers contained in the "Amount" column indicate the
allowance for loan losses allocated for each particular loan category. The
numbers contained in the column entitled "Percentage of Loans in Category to
Total Loans" indicate the total amount of loans in each particular category as a
percentage of the Bank's total loan portfolio.
At December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to to to to to
Loan Category Amount Total Amount Total Amount Total Amount Total Amount Total
- -------------------------------------------------------- ----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
Mortgage Loans:
One-to-four family $2,575 47.69% $1,711 47.67% $1,065 57.28% $1,126 54.20% $1,132 51.39%
Co-operative 278 1.35 510 1.99 458 3.40 407 5.11 125 6.24
Multi-family 1,395 36.57 1,021 37.95 1,456 26.91 1,625 24.11 1,024 21.85
Commercial 1,990 13.37 3,073 11.24 2,434 11.98 2,139 15.77 3,070 19.13
Construction 114 0.42 128 0.46 -- -- -- -- -- 0.14
--------------- --------------- --------------- --------------- ---------------
Total mortgage loans 6,352 99.40 6,443 99.31 5,413 99.57 5,297 99.19 5,351 98.75
Small Business
Administration loans 273 0.35 23 0.46 -- -- -- -- -- --
Other Loans 137 0.25 8 0.23 24 0.43 13 0.81 19 1.25
--------------- --------------- --------------- --------------- ---------------
Total loans $6,762 100.00% $6,474 100.00% $5,437 100.00% $5,310 100.00% $5,370 100.00%
=============== =============== =============== =============== ===============
17
Investment Activities
General. The investment policy of the Company, which is approved by the
Board of Directors, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity. In establishing
its investment strategies, the Company considers its business and growth
strategies, the economic environment, its interest rate 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, repurchase agreements, loans of federal funds, and,
subject to certain limits, corporate securities, commercial paper and mutual
funds. All mortgage-backed securities held by the Company and the Bank are
directly or indirectly insured or guaranteed by Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") or the
Government National Mortgage Association ("GNMA").
The Investment Committee of the Bank and the Company meets quarterly to
monitor investment transactions and to establish investment strategy. The Board
of Directors reviews the investment policy on an annual basis and investment
activity on a monthly basis.
The Company classifies its investment securities as available for sale.
Unrealized gains and losses for available-for-sale securities are excluded from
earnings and included in Accumulated Other Comprehensive Income (a separate
component of equity), net of taxes. At December 31, 1998, the Company had $326.7
million in securities available for sale which represented 28.61% of total
assets. These securities had an aggregate market value at that date that was
approximately 2.5 times the amount of the Company's equity at that date. The
cumulative balance of unrealized net gains on securities available for sale was
$1.3 million, net of taxes, at December 31, 1998. 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, 1998, the Company had no investment in a particular
issuer's securities that either alone, or together with any investments in the
securities of any affiliate(s) of such issuer, exceeded 10% of the Company's
equity.
18
The table below sets forth certain information regarding the amortized cost
and market values of the Company's and Bank's securities portfolio, interest
bearing deposits and federal funds, and FHLB-NY stock at the dates indicated.
Securities available for sale are recorded at market value. See Note 6 of Notes
to Consolidated Financial Statements, included in the Annual Report,
incorporated herein by reference.
At December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------------------------- -------------------------- --------------------------
(In thousands)
SECURITIES AVAILABLE FOR SALE
Bonds and other debt securities:
U.S. government and agencies $13,213 $13,425 $120,106 $120,123 $150,045 $148,141
Corporate debentures 4,711 4,710 13,149 13,178 37,050 37,433
Public utility 945 944 2,247 2,271 4,305 4,294
-------------------------- -------------------------- --------------------------
Total bonds and other debt securities 18,869 19,079 135,502 135,572 191,400 189,868
-------------------------- -------------------------- --------------------------
Equity securities:
Common stock 2,390 2,776 606 1,187 606 738
Preferred stock 2,309 2,414 2,768 2,843 250 251
-------------------------- -------------------------- --------------------------
Total equity securities 4,699 5,190 3,374 4,030 856 989
-------------------------- -------------------------- --------------------------
Mortgage-backed securities:
FHLMC 14,831 14,894 34,015 34,120 47,217 46,406
FNMA 20,717 21,102 55,559 56,068 83,727 83,756
GNMA 265,089 266,425 125,585 126,922 10,973 10,876
-------------------------- -------------------------- --------------------------
Total mortgage-backed securities 300,637 302,421 215,159 217,110 141,917 141,038
-------------------------- -------------------------- --------------------------
Total securities available for sale 324,205 326,690 354,035 356,712 334,173 331,895
-------------------------- -------------------------- --------------------------
INTEREST-BEARING DEPOSITS AND
FEDERAL FUNDS SOLD 12,008 12,008 84,838 84,838 27,465 27,465
FHLB--NEW YORK STOCK 17,320 17,320 14,356 14,356 4,158 4,158
-------------------------- -------------------------- --------------------------
Total $353,533 $356,018 $453,229 $455,906 $365,796 $363,518
========================== ========================== ==========================
Mortgage-backed securities. All of the mortgage-backed securities currently
held by the Company are issued or guaranteed by FNMA, FHLMC or GNMA. At December
31, 1998, the Company had $302.4 million invested in mortgage-backed securities,
of which $20.7 million was invested in adjustable-rate mortgage-backed
securities. The mortgage loans underlying these adjustable-rate securities
generally are subject to limitations on annual and lifetime interest rate
increases. The Company anticipates that investments in mortgage-backed
securities may continue to be used in the future to supplement mortgage lending
activities. Mortgage-backed securities are more liquid than individual mortgage
loans and may be used more easily to collateralize obligations of the Bank.
19
The following table sets forth the Company's mortgage-backed securities
purchases, sales and principal repayments for the years indicated:
For the Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------
(In thousands)
At beginning of year $217,110 $141,038 $179,300
Purchases of mortgage-backed securities 245,942 136,063 8,415
Amortization of unearned premium, net of
accretion of unearned discount (1,386) (473) (908)
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale (189) 2,830 (2,249)
Sales of mortgage-backed securities (66,136) (33,934) (4,742)
Principal repayments received on
mortgage-backed securities (92,920) (28,414) (38,778)
---------------------------------------------------------------
Net increase (decrease) in mortgage-backed securities 85,311 76,072 (38,262)
---------------------------------------------------------------
At end of year $302,421 $217,110 $141,038
===============================================================
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed and value of such
securities. The Bank held one collateralized mortgage obligation ("CMO") with a
market value of $4.5 million at December 31, 1996 and none at December 31, 1998
and 1997. The Bank does not have any derivative instruments, including CMO's,
with market values that are extremely sensitive to changes in interest rates.
20
The table below sets forth certain information regarding the amortized
cost, estimated fair value, annualized weighted average yields and maturities of
the Company's and the Bank's debt and equity securities at December 31, 1998.
The stratification of balances is based on stated maturities. Assumptions for
repayments and prepayments are not reflected for mortgage-backed securities. The
Company and the Bank carry these investments at their estimated fair value in
the consolidated financial statements.
At December 31, 1998
-------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten 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:
U.S. government agencies -- -- -- -- $8,213 7.36%
Corporate debt $4,001 5.75% -- -- 242 8.37
Public utility 945 6.31 -- -- -- --
------------------------ ------------------------ ------------------------
Total bonds and other debt securities 4,946 5.86 -- -- 8,455 7.39
------------------------ ------------------------ ------------------------
Equity securities:
Common stock 2,390 1.50 -- -- -- --
Preferred stock 301 7.61 $1,600 8.03 % 308 7.27
------------------------ ------------------------ ------------------------
Total equity securities 2,691 2.18 1,600 8.03 308 7.27
------------------------ ------------------------ ------------------------
Mortgage-backed securities:
FHLMC -- -- 752 7.11 603 8.12
FNMA -- -- 171 7.10 2,153 7.06
GNMA -- -- -- -- 16 7.31
------------------------ ------------------------ ------------------------
Total mortgage-backed securities -- -- 923 7.11 2,772 7.29
------------------------ ------------------------ ------------------------
INTEREST-BEARING DEPOSITS AND FEDERAL
FUNDS SOLD 12,008 4.56 -- -- -- --
FHLB--NEW YORK STOCK 17,320 7.00 -- -- -- --
------------------------ ------------------------ ------------------------
Total securities $36,965 5.70% $2,523 7.69% $11,535 7.36%
======================== ======================== ========================
At December 31, 1998
------------------------------------------------------------------------------
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:
U.S. government agencies $5,000 6.68% 9.11 $13,213 $13,425 7.10%
Corporate debt 468 6.07 1.74 4,711 4,710 5.92
Public utility -- -- 0.28 945 944 6.31
------------------------ ---------------------------------------------------
Total bonds and other debt securities 5,468 6.63 6.85 18,869 19,079 6.77
------------------------ ---------------------------------------------------
Equity securities:
Common stock -- -- N/A 2,390 2,776 1.50
Preferred stock 100 11.00 4.49 2,309 2,414 8.00
------------------------ ---------------------------------------------------
Total equity securities 100 11.00 4.49 4,699 5,190 4.70
------------------------ ---------------------------------------------------
Mortgage-backed securities:
FHLMC 13,476 7.45 20.42 14,831 14,894 7.46
FNMA 18,393 7.59 21.15 20,717 21,102 7.53
GNMA 265,073 7.36 28.79 265,089 266,425 7.36
------------------------ ---------------------------------------------------
Total mortgage-backed securities 296,942 7.38 27.85 300,637 302,421 7.38
------------------------ ---------------------------------------------------
INTEREST-BEARING DEPOSITS AND FEDERAL
FUNDS SOLD -- -- N/A 12,008 12,008 4.56
FHLB--NEW YORK STOCK -- -- N/A 17,320 17,320 7.00
------------------------ ---------------------------------------------------
Total securities $302,510 7.36% 24.24 $353,533 $356,018 7.20%
======================== ===================================================
21
Sources of Funds
General. Deposits, FHLB-NY borrowings, 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 eight full service offices. The Bank seeks to retain
existing depositor relationships by offering quality service and competitive
interest rates, while keeping deposit growth within reasonable limits. It is
management's intention to balance its goal to remain competitive in interest
rates on deposits while seeking to manage its cost of funds to finance its
strategies.
The Bank's core deposits, consisting of passbook accounts, NOW accounts,
money market, and non-interest bearing demand accounts, are typically more
stable and lower cost 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 the low interest rate environment of the
past several years, the Bank experienced a shift by depositors from passbook
accounts to higher costing certificate of deposit accounts. Although the Bank
has not had to raise interest rates on its deposit accounts to remain
competitive, it has had to increase borrowing activity. These trends contributed
to the increase in the Company's higher average cost of funds from 4.39% for
1996 to 4.74% for 1997 and to 4.97% for 1998. A continuation of these trends
could result in a further increase in the Company's cost of funds and a
narrowing of the Company's net interest margin.
Included in deposits are certificates of deposit with a balance of $100,000
or greater totaling $30.5 million, $29.9 million and $22.0 million at December
31, 1998, 1997 and 1996, respectively.
22
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented.
At December 31,
-----------------------------------------------------------------------------------
1998 1997
----------------------------------------- --------------------------------------
Percent of Weighted Percent of Weighted
Total Average Total Average
Amount Deposits Nominal Rate Amount Deposits Nominal Rate
----------- ----------- ------------ --------- ----------- ------------
(Dollars in thousands)
Passbook accounts (1) $203,949 30.71% 2.29% $201,668 30.75% 2.90%
NOW accounts (1) 26,788 4.03 1.90 23,825 3.63 1.90
Demand accounts (1) 27,505 4.14 -- 19,263 2.94 --
Mortgagors' escrow deposits (1) 6,563 0.99 1.06 4,900 0.75 1.17
----------- ----------- ------------ --------- ----------- ------------
Total 264,805 39.87 1.98 249,656 38.07 2.55
----------- ----------- ------------ --------- ----------- ------------
Money market accounts (1) 28,439 4.28 2.69 23,526 3.59 2.86
Certificate of deposit accounts
with original maturities of:
6 Months and less 54,268 8.17 4.30 61,916 9.44 5.31
6 to 12 Months 81,092 12.21 4.96 75,340 11.49 5.53
12 to 30 Months 139,397 21.00 5.71 130,414 19.87 6.05
30 to 48 Months 41,543 6.26 6.17 56,209 8.57 6.48
48 to 72 Months 50,323 7.58 6.22 54,406 8.29 6.36
72 Months or more 4,192 0.63 6.54 4,444 0.68 6.67
----------- ----------- ------------ --------- ----------- ------------
Total certificate of deposit accounts 370,815 55.85 5.47 382,729 58.34 5.94
----------- ----------- ------------ --------- ----------- ------------
Total deposits (2) $664,059 100.00% 3.96% $655,911 100.00% 4.54%
=========== =========== ============ ========= =========== ============
At December 31,
----------------------------------------------
1996
----------------------------------------------
Percent of Weighted
Total Average
Amount Deposits Nominal Rate
-------------- ------------ ------------
(Dollars in thousands)
Passbook accounts (1) $209,690 35.88% 2.86%
NOW accounts (1) 21,408 3.66 1.90
Demand accounts (1) 10,293 1.76 --
Mortgagors' escrow deposits (1) 3,425 0.59 1.47
-------------- ------------ ------------
Total 244,816 41.89 2.64
-------------- ------------ ------------
Money market accounts (1) 25,180 4.31 2.85
Certificate of deposit accounts
with original maturities of:
6 Months and less 60,207 10.30 5.04
6 to 12 Months 77,881 13.32 5.15
12 to 30 Months 113,108 19.36 6.19
30 to 48 Months 15,307 2.62 6.10
48 to 72 Months 47,079 8.05 6.10
72 Months or more 901 0.15 5.90
-------------- ------------ ------------
Total certificate of deposit accounts 314,483 53.80 5.69
-------------- ------------ ------------
Total deposits (2) $584,479 100.00% 4.29%
============== ============ ============
(1) Weighted average nominal rate as of the year end date equals the stated
rate offered.
(2) Included in the above balances are IRA and Keogh deposits totaling $86.4
million, $85.8 million and $83.9 million at December 31, 1998, 1997 and
1996, respectively.
23
The following table presents by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated and the years
to maturity of the certificate accounts outstanding at December 31, 1998.
At December 31, 1998
-----------------------------------------------
At December 31, Within One to
----------------------------------------- One Three There-
1998 1997 1996 Year Year after Total
-------- -------- -------- -------- ------- ------- --------
(Dollars in thousands)
Certificate of deposit accounts:
2.99 or less $136 $625 $37 $42 $94 -- $136
3.00 to 3.99 22,234 -- -- 22,234 -- -- 22,234
4.00 to 4.99 82,899 21,265 28,283 71,730 10,093 $1,076 82,899
5.00 to 5.99 161,122 220,994 192,557 98,343 45,629 17,150 161,122
6.00 to 6.99 92,038 124,682 59,822 58,905 21,035 12,098 92,038
7.00 to 7.99 12,386 15,163 33,784 1,327 11,059 -- 12,386
-------- -------- -------- -------- ------- ------- --------
Total $370,815 $382,729 $314,483 $252,581 $87,910 $30,324 $370,815
======== ======== ======== ======== ======= ======= ========
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, 1998 and their annualized weighted average interest rates.
Amount Weighted Average Rate
------ ---------------------
(Dollars in thousands)
Maturity Period:
Three months or less $5,220 5.53%
Over three through six months 1,871 5.06
Over six through 12 months 5,877 5.15
Over 12 months 17,581 5.88
------- ----
Total $30,549 5.63%
======= ====
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Year Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
(Dollars in thousands)
Net deposits / (withdrawals) (1) $(19,824) $(6,009) $453
Interest credited on deposits 27,972 26,566 24,162
Deposits acquired from New York Federal -- 50,875 --
-------- -------- --------
Total increase in deposits $8,148 $71,432 $24,615
======== ======== ========
(1) Includes mortgagors' escrow deposits.
24
The following table sets forth the distribution of the Bank's average
deposit accounts for the years indicated, the percentage of total deposit
portfolio, and the average interest cost of each deposit category presented.
Average balances for all years shown are derived from daily balances.
For The Year Ended December 31,
---------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Percent Percent
Average of Total Average Average of Total Average
Balance Deposits Cost Balance Deposits Cost
------------------------------------- -------------------------------------
(Dollars in thousands)
Passbook accounts $202,291 30.53% 2.74% $206,196 33.56% 2.85%
NOW accounts 24,375 3.68 1.91 22,679 3.69 1.90
Demand accounts 26,177 3.95 -- 12,306 2.00 --
Mortgagors' escrow deposits 6,724 1.01 1.06 6,044 0.98 1.17
Total 259,567 39.17 2.34 247,225 40.23 2.58
Money market accounts 26,240 3.96 2.95 24,367 3.97 2.84
------------------------------------- -------------------------------------
Certificate of deposit accounts 376,787 56.87 5.61 342,898 55.80 5.68
------------------------------------- -------------------------------------
Total deposits $662,594 100.00% 4.22% $614,490 100.00% 4.32%
===================================== =====================================
For The Year Ended December 31,
-------------------------------------
1996
-------------------------------------
Percent
Average of Total Average
Balance Deposits Cost
-------------------------------------
(Dollars in thousands)
Passbook accounts $214,843 37.55% 2.86%
NOW accounts 19,483 3.41 1.90
Demand accounts 10,230 1.79 --
Mortgagors' escrow deposits 4,292 0.75 1.47
Total 248,848 43.50 2.64
Money market accounts 26,470 4.63 2.80
-------------------------------------
Certificate of deposit accounts 296,867 51.87 5.68
-------------------------------------
Total deposits $572,185 100.00% 4.22%
=====================================
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.
Upon the Bank's conversion from a New York State chartered mutual savings bank
to a federally chartered mutual savings bank on May 10, 1994, the Bank became a
member of, and became 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. See
"Regulations -- 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 in reverse repurchase agreements with the FHLB-NY. These agreements are
recorded as financing transactions and the obligations to repurchase are
reflected as a liability in the Company's consolidated financial statements.
25
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
At or For the Year Ended December 31,
--------------------------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in thousands)
SECURITIES SOLD WITH THE AGREEMENT TO REPURCHASE
Average balance outstanding $110,274 $6,904 --
Maximum amount outstanding at any month
end during the period $130,000 $100,000 --
Balance outstanding at the end of period $120,000 $100,000 --
Weighted average interest rate during the period 5.81% 5.84% --
Weighted average interest rate at end of period 5.83% 5.83% --
FHLB-NY ADVANCES
Average balance outstanding $193,299 $125,295 $36,396
Maximum amount outstanding at any month
end during the period $216,406 $187,112 $51,000
Balance outstanding at the end of period $215,458 $187,112 $51,000
Weighted average interest rate during the period 6.36% 6.34% 5.77%
Weighted average interest rate at end of period 6.26% 6.34% 5.85%
OTHER BORROWINGS
Average balance outstanding -- $75 --
Maximum amount outstanding at any month
end during the period -- $75 --
Balance outstanding at the end of period -- $75 --
Weighted average interest rate during the period -- -- --
Weighted average interest rate at end of period -- -- --
TOTAL BORROWINGS
Average balance outstanding $303,573 $132,274 $36,396
Maximum amount outstanding at any month
end during the period $346,406 $287,187 $51,000
Balance outstanding at the end of period $335,458 $287,187 $51,000
Weighted average interest rate during the period 6.16% 6.22% 5.77%
Weighted average interest rate at end of period 6.11% 6.16% 5.85%
26
Subsidiary Activities
At December 31, 1998, 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.
(b) FPFC was formed in the fourth quarter of 1997 as a real estate
investment trust for the purpose of acquiring, holding and managing real estate
mortgage assets.
(c) Flushing Service Corporation was formed in 1998 to market insurance
products and mutual funds. The insurance products and mutual funds sold are
products of unrelated insurance and securities firms from which the service
corporation earns a commission.
Personnel
At December 31, 1998, the Bank had 171 full-time employees and 53 part-time
employees. None of the Bank's employees are represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be good.
27
RISK FACTORS
In addition to the other information contained in this Annual Report on
Form 10-K, the following factors and other considerations should be considered
carefully in evaluating the Company, the Bank and their business.
Effect of Interest Rates
Like most financial institutions, the Company's results of operations
depends to a large degree on its net interest income. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets, a
significant increase in market interest rates could adversely affect net
interest income. Conversely, under such circumstances, a significant decrease in
market interest rates could result in increased net interest income. As a
general matter, the Company seeks to manage its business to limit its overall
exposure to interest rate fluctuations. However, fluctuations in market interest
rates are neither predictable nor controllable and may have a material adverse
impact on the operations and financial condition of the Company.
Prevailing interest rates also affect the extent to which borrowers prepay
and refinance loans. Declining interest rates tend to result in an increased
number of loan prepayments and loan refinancings to lower than original interest
rates, as well as prepayments of mortgage-backed securities. Such prepayments
and refinancings adversely affect the average yield on the Company's loan and
mortgage-backed securities portfolio, the value of mortgage loans and
mortgage-backed securities in the Company's portfolio, the levels of such assets
that are retained by the Company, net interest income and loan servicing income.
However, the Bank may receive additional loan fees when existing loans are
refinanced, which may partially offset reduced yield on the Bank's loan
portfolio resulting from prepayments. In periods of low interest rates, the
Bank's level of core deposits also may decline if depositors seek higher
yielding instruments or other investments not offered by the Bank, which in turn
may increase the Bank's cost of funds and decrease its net interest margin to
the extent alternative funding sources are utilized. Significant increases in
prevailing interest rates may significantly affect demand for loans and value of
bank collateral. See "--Local Economic Conditions."
Lending Activities
Multi-family and commercial real estate loans, the increased origination of
which is part of management's strategy, 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. Changes in local economic conditions and
government regulations, which are outside the control of the borrower or lender,
also could affect the value of the security for the loan or the future cash flow
of the affected properties.
As a result of management's strategy to increase its originations of
one-to-four family mortgage loans through more aggressive marketing, and the
Bank's commitment to be a community-oriented bank, the Bank increased
substantially the origination of residential mortgage loans to self-employed
individuals within the Bank's local community without verification of the
borrower's level of income. These loans involve a higher degree of risk as
compared to the Bank's other fully underwritten residential mortgage loans as
there is a greater opportunity for borrowers to falsify or overstate their level
of income and ability to service indebtedness. To mitigate this risk, the Bank
typically limits the amount of these loans to 80% of the appraised value or sale
price, whichever is less. These loans are not as readily salable in the
secondary market as the Bank's other fully underwritten loans, either as whole
loans or when pooled or securitized.
28
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. There can be no assurance that the Bank will
be able to successfully implement its business strategies. In assessing the
future earnings prospects of the Bank, investors should consider, among other
things, the Bank's level of origination of one-to-four family loans, the Bank's
proposed increased 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. See "Business - Market Area and Competition."
Local Economic Conditions
Although general economic conditions in the New York City metropolitan area
have improved since the early 1990's, there can be no assurance that the local
economy will continue to improve or remain at current conditions.
A decline in the local economy, national economy or metropolitan area real
estate market could adversely affect the financial condition and results of
operations of the Company, including through decreased demand for loans or
increased competition for good loans, increased non-performing loans and loan
losses and resulting additional provisions for loan losses and for losses on
real estate owned. Although management of the Bank believes that the current
allowance for loan losses is adequate in light of current economic conditions,
many factors may require additions to the allowance for loan losses in future
periods above those currently revealed. These factors include: (i) adverse
changes in economic conditions and changes in interest rates that may affect the
ability of borrowers to make payments on loans, (ii) changes in the financial
capacity of individual borrowers, (iii) changes in the local real estate market
and the value of the Bank's loan collateral, and (iv) future review and
evaluation of the Bank's loan portfolio, internally or by regulators. The amount
of the allowance for loan losses at any time represents good faith estimates
that are susceptible to significant changes due to changes in appraisal values
of collateral, national and regional economic conditions, prevailing interest
rates and other factors. See "Business Allowance for Loan Losses."
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third party data
processing vendor and purchased software run on in-house computer networks. As
the year 2000 approaches, a critical business issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. As a result, in 1997, the Company established a year 2000 task
force to ensure that its computer systems will function properly in the year
2000. The task force has contacted the Company's data processing vendor and
software suppliers to determine whether the systems used by the Company are year
2000 compliant and, if not, to assess the corrective steps being taken. The
Company's data processing vendor and the majority of the other vendors which
have been contacted have indicated that their hardware and/or software will be
year 2000 compliant. Testing is being performed for compliance and regular
monthly reports are being submitted to the Company's Board of Directors by the
task force. While some expenses have been incurred, year 2000 compliance is not
expected to have a material effect on the Company's consolidated financial
condition, results of operations, or cash flows. However, given the uncertainty
inherent in the year 2000 problem, there can be no assurance that
29
the Company or its third party vendors will meet their respective target date
for compliance which could result in a material adverse effect on the Company
and its operations. For a further discussion of this issue, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000 Compliance" included in the Annual Report, incorporated herein by
reference. See "Regulation--Year 2000 Compliance."
Pending Legislation
Draft legislation providing for financial modernization recently has been
reported out of the Banking Committees in both the United States House of
Representatives and Senate. Both currently pending versions would substantially
repeal the Glass-Steagall Act restrictions on bank affiliations with securities
firms and thereby allow commercial banking and investment banking to be
combined. The proposed legislation also would repeal restrictions on bank
affiliations with insurance companies. There are substantial differences between
the proposed bills, however, on the structure and regulation of new banking
activities, particularly as to whether the new securities and insurance
activities may be conducted through subsidiaries of banks, as desired by the
United States Treasury Department, or must be conducted only through
subsidiaries of bank holding companies, as sought by the Federal Reserve Board.
Unlike earlier versions of financial modernization legislation, current
House and Senate versions do not provide for elimination of the thrift charter
or for the merger of the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). The bills, as reported out of the House and Senate
Banking Committees, prohibit new unitary savings and loan holding companies that
are affiliated with nonbanking firms, but grandfather existing unitary savings
and loans holding companies, such as the Company, and all applications filed to
become a unitary savings and loan holding company as of March 4, 1999 in the
House bill and February 28, 1999 in the Senate bill. Such grandfathered
companies would retain all of the existing powers available to unitary savings
and loan holding companies. See "Regulation - Holding Company Regulation."
Various proposals regarding changes to the Community Reinvestment Act also
are being discussed in Congress and are highly controversial, with proposals to
increase regulatory compliance requirements and proposals to ease regulatory
compliance both currently under consideration. See "Regulation Community
Reinvestment Act."
Currently, members of the BIF pay a FICO assessment at the rate of $0.013
per $100 of deposits and members of the SAIF pay a FICO assessment at a rate of
$0.065 per $100 of deposits. Under existing legislation, effective January 1,
2000, the FICO assessment rate for members of the BIF and members of the SAIF
would be equalized, which would have the effect of increasing the FICO
assessments paid by the Bank, since most of its deposits are insured by the BIF.
See "Regulation - Insurance of Accounts." The financial modernization
legislation pending in the Senate would extend the FICO assessment differential
for three more years. The current version in the House of Representatives would
retain the existing date for equalization.
Various amendments to and alternative forms of financial modernization
legislation have been proposed and substantial disagreement remains on many key
issues, including the issues regarding unitary thrift holding companies, the
structure of new banking activities and CRA reform discussed above. Current
provisions of both the House and Senate versions of the legislation may undergo
substantial change before final legislation, if any, is enacted. Thus, there can
be no assurance as to whether any form of financial modernization legislation
will be enacted or, if so, what the provisions of any such final legislation may
be. Accordingly, management cannot predict the possible impact of such
legislation on the Bank or Company.
30
Legislation and Proposed Changes
From time to time, legislation is enacted or regulations are promulgated
that have the effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive balance between
banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks and other financial
institutions are frequently made in Congress, in the New York legislature and
before various bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on the
Bank or the Company.
Certain Anti-Takeover Provisions
On September 17, 1996, the Company adopted a Stockholder Rights Plan (the
"Rights Plan") designed to preserve long-term values and protect stockholders
against stock accumulations and other abusive tactics to acquire control of the
Company. Under the Rights Plan, each stockholder of record at the close of
business on September 30, 1996 received a dividend distribution of one right to
purchase from the Company one one-hundredth-fiftieth of a share of a new series
of junior participating preferred stock at a price of $64, subject to certain
adjustments. The rights will become exercisable only if any person or group
acquires 15% or more of the Company's common stock ("Common Stock") or commences
a tender or exchange offer which, if consummated, would result in that person or
group owning at least 15% of the Common Stock (the "acquiring person or group").
In such case, all stockholders other than the acquiring person or group will be
entitled to purchase, by paying the $64 exercise price, Common Stock (or a
common stock equivalent) with a value of twice the exercise price. In addition,
at any time after such event, and prior to the acquisition by any person or
group of 50% or more of the Common Stock, the Board of Directors may, at its
option, require each outstanding right (other than rights held by the acquiring
person or group) to be exchanged for one share of Common Stock (or one common
stock equivalent). The rights expire on September 30, 2006.
The Rights Plan, as well as certain provisions of the Company's Certificate
of Incorporation and Bylaws, the Bank's federal Stock charter and Bylaws,
certain federal regulations and provisions of Delaware corporation law, and
certain provisions of remuneration plans and agreements applicable to employees
and officers of the Bank may have anti-takeover effects by discouraging
potential proxy contests and other takeover attempts, particularly those which
have not been negotiated with the Board of Directors. The Rights Plan and those
other provisions, as well as applicable regulatory restrictions, may also
prevent or inhibit the acquisition of a controlling position in the Common Stock
and may prevent or inhibit takeover attempts that certain stockholders may deem
to be in their or other stockholders' interest or in the interest of the Company
or the Bank, or in which stockholders may receive a substantial premium for
their shares over then current market prices. The Rights Plan and those other
provisions may also increase the cost of, and thus discourage, any such future
acquisition or attempted acquisition, and would render the removal of the
current Board of Directors or management of the Bank or the Company more
difficult.
31
FEDERAL, STATE AND LOCAL TAXATION
The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company.
Federal Taxation
General. The Company reports its income using a calendar year and the
accrual method of accounting. The Company is subject to the federal tax laws and
regulations which apply to corporations generally; including, since the
enactment of the Small Business Job Protection Act in 1996 (the "Act"), those
governing the Bank's deductions for bad debts, described below.
Bad Debt Reserves. Prior to the enactment of the Act, which was signed into
law on August 20, 1996, savings institutions which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts"), such as the Bank, were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualifying
thrifts could compute deductions for bad debts using either the specific charge
off method of Section 166 of the Internal Revenue Code (the "Code") or the
reserve method of Section 593 of the Code.
Prior to its modification by the Act, Section 593 permitted a qualifying
thrift to establish a reserve for bad debts and to make annual additions
thereto, which, within specified formula limits, could be deducted in arriving
at its taxable income. A qualifying thrift could elect annually to compute its
allowable deduction to bad debt reserves for "qualifying real property loans,"
generally loans secured by certain interests in real property, under either (i)
the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, subject to certain
limitations, a qualifying thrift generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income (determined
without regard to this deduction and with additional adjustments). Under the
experience method, a qualifying thrift was generally allowed a deduction for an
addition to its bad debt reserve equal to the greater of (i) an amount based on
its actual average experience for losses in the current and five preceding
taxable years, or (ii) an amount necessary to restore the reserve to its balance
as of the close of the base year, defined as the last taxable year beginning
before January 1, 1988. The Bank's deduction for additions to its bad debt
reserve with respect to non-qualifying loans had to be computed under the
experience method. Any deduction for the addition to the reserve for
non-qualifying loans reduced the maximum permissible addition to the reserve for
qualifying real property loans calculated under the percentage of taxable income
method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by qualifying thrifts, effective for taxable years
beginning after 1995. Qualifying thrifts that are treated as large banks, such
as the Bank, are required to use the specific charge off method, pursuant to
which the amount of any debt may be deducted only as it actually becomes wholly
or partially worthless.
A thrift institution required to change its method of computing reserves
for bad debt is required to treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amount of
the thrift institution's "applicable excess reserves" must be included in income
ratably over a six-taxable year period, beginning with the first taxable year
beginning after 1995. In the case of a thrift institution that is treated as a
large bank, such as the Bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for losses
on qualifying real property loans and its reserve for losses on nonqualifying
loans as of the close of its last taxable year beginning before January 1, 1996,
over (ii) the balances of such reserves as of the close of
32
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; of which $180,000 remains to be included in future
taxable income as of December 31, 1998.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders that are considered to result in distributions
from the pre-1988 reserves or the supplemental reserve for losses on loans
("excess distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and post-1951 accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation. The
amount of additional taxable income resulting from an excess distribution is an
amount that when reduced by the tax attributable to the income is equal to the
amount of the excess distribution. Thus, slightly more than one and one-half
times the amount of the excess distribution made would be includable in gross
income for federal income tax purposes, assuming a 35% federal corporate income
tax rate. See "Restrictions on Dividends and Capital Distributions" under
"Regulation" for limits on the payment of dividends by the Bank. The Bank does
not intend to pay dividends or make non-dividend distributions described above
that would result in a recapture of any portion of its pre-1988 bad debt
reserves.
Corporate Alternative Minimum Tax. The Code imposes an alternative minimum
tax on corporations equal to the excess, if any, of 20% of alternative minimum
taxable income ("AMTI") over a corporation's regular federal income tax
liability. AMTI is equal to taxable income with certain adjustments. Only 90% of
AMTI can be offset by net operating loss carryforwards.
State and Local Taxation
New York State and New York City Taxation. The Company is subject to the
New York State Franchise Tax on Banking Corporations in an annual amount equal
to the greater of (i) 9% of "entire net income" allocable to New York State
during the taxable year or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 0.01% of the value of
assets allocable to New York State with certain modifications, (b) 3% of
"alternative entire net income" allocable to New York State or (c) $250. Entire
net income is similar to federal taxable income, subject to certain
modifications (including that net operating losses cannot be carried back or
carried forward), and alternative entire net income is equal to entire net
income without certain deductions which are allowable in the calculation of
entire net income. The Bank also is subject to a similarly calculated New York
City tax of 9% on income allocated to New York City and similar alternative
taxes. In addition, the Bank is subject to a temporary Metropolitan
Transportation Business Tax Surcharge for tax years ending before December 31,
2001, at a rate of 17% of the New York State Franchise Tax.
Notwithstanding the repeal of the federal income tax provisions permitting
bad debt deductions under the reserve method, New York State has enacted
legislation maintaining the preferential treatment of additional loss reserves
for qualifying real property and non-qualifying loans of qualifying thrifts for
both New York State and New York City tax purposes. Calculation of the amount of
additions to reserves for qualifying real property loans is limited to the
larger of the amount derived by the percentage of taxable income method or the
experience method. For these purposes, the applicable percentage to calculate
the bad debt deduction under the percentage of taxable income method is 32% of
taxable income, reduced by additions to reserves for non-qualifying loans,
except that the amount of the addition to the reserve cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Under
the experience method, the maximum addition to a loan reserve generally equals
the amount necessary to increase the balance of the bad debt reserve at the
close of the taxable year to the greater of (i) the amount that bears the same
ratio to loans outstanding at the close of the taxable year as the total net bad
debts
33
sustained during the current and five preceding taxable years bears to the sum
of the loans outstanding at the close of those six years, or (ii) the balance of
the bad debt reserve at the close of the "base year," or, if the amount of loans
outstanding has declined since the base year, the amount which bears the same
ratio to the amount of loans outstanding at the close of the taxable year as the
balance of the reserve at the close of the base year. For these purposes, the
"base year" is the last taxable year beginning before 1988. The amount of
additions to reserves for non-qualifying loans is computed under the experience
method. The aggregate amount of additions to reserves for losses on qualifying
real property and reserves for losses on non-qualifying loans cannot exceed the
amount by which 12% of the amount of the total deposits or withdrawable accounts
of depositors of the Bank at the close of the taxable year exceeds the sum of
the Bank's surplus, undivided profits and reserves at the beginning of such
year. The new legislation also allows an exclusion from entire net income for
New York State and New York City tax purposes for any amounts a thrift is
required to include in federal taxable income as a recapture of its bad debt
reserve as a consequence of the Act.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
General
On May 10, 1994, the Bank converted from a New York State chartered mutual
savings bank to a federally chartered mutual savings bank pursuant to Section
5(o) of the Home Owners' Loan Act, as amended ("HOLA"). On that date, the OTS
replaced the New York State Banking Department (the "Banking Department") as the
Bank's chartering authority and the FDIC as the Bank's primary federal
regulator. Although the FDIC is no longer the primary federal regulator of the
Bank, the Bank remains subject to regulation and examination by the FDIC as its
deposit insurer. The Bank's deposits are insured up to the applicable limits
permitted by law. See "--Insurance of Accounts."
The Bank is also subject to certain regulations promulgated by the Federal
Reserve Board. Moreover, in connection with converting to a federal charter, the
Bank became a member of the FHLB-NY.
The activities of federal savings institutions are governed by HOLA and, in
certain respects, the Federal Deposit Insurance Act ("FDIA"). Most regulatory
functions relating to deposit insurance and to conservatorships and
receiverships of insured institutions are exercised by the FDIC. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandated the
establishment of a risk-based deposit insurance assessment system and required
imposition of numerous additional safety and soundness operational standards and
restrictions. FDICIA and the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") each contain provisions affecting numerous
aspects of the operations and regulations of federal savings banks and empowers
the OTS and the FDIC, among other agencies, to promulgate regulations
implementing its provisions.
The OTS has extensive authority over the operations of the Bank. As part of
this authority, the Bank is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and back-up examinations by the
FDIC. The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the applicable rules and
regulations of, the OTS. The Company also is subject to regulation under the
federal securities laws.
34
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.
Investment Powers
The Bank is subject to comprehensive regulation governing its investments
and activities. Among other things, the Bank may invest in (i) residential
mortgage loans, education loans and credit card loans in an unlimited amount,
(ii) non-residential real estate loans up to 400% of total capital, (iii)
commercial business loans up to 20% of assets (however, amounts over 10% of
total assets must be used only for small business loans) and (iv) in general,
consumer loans and highly rated commercial paper and corporate debt securities
in the aggregate up to 35% of assets. In addition, the Bank may invest up to 3%
of its assets in service corporations, an unlimited percentage of its assets in
operating subsidiaries (which may only engage in activities permissible for the
Bank itself) and under certain conditions may invest in finance subsidiaries.
Other than investments in service corporations, operating subsidiaries, finance
subsidiaries and stock of government-sponsored agencies, such as FHLMC and FNMA,
the Bank generally is not permitted to make equity investments. See
"Business--Investment Activities." A service corporation in which the Bank may
invest is permitted to engage in activities reasonably related to the activities
of a federal savings bank as the OTS may approve on a case by case basis and
certain activities preapproved by the OTS, which, among other things, include
providing certain support services for the institution; originating, investing
in, selling, purchasing, servicing or otherwise dealing with specified types of
loans and participations (principally loans that the parent institution could
make); specified real estate activities, including limited real estate
development, securities brokerage services; certain insurance brokerage
activities, and other specified investments and services.
Real Estate Lending Standards
FDICIA requires each federal banking agency to adopt uniform regulations
prescribing standards for extensions of credit (i) secured by real estate, or
(ii) made for the purpose of financing the construction of improvements on real
estate. In prescribing these standards, the banking agencies must consider the
risk posed to the deposit insurance funds by real estate loans, the need for
safe and sound operation of insured depository institutions and the availability
of credit. The OTS and the other federal banking agencies adopted uniform
regulations, effective March 19, 1993. The OTS regulation requires each savings
association to establish and maintain written internal real estate lending
standards consistent with safe and sound banking practices and appropriate to
the size of the institution and the nature and scope of its real estate lending
activities. The policy must also be consistent with accompanying OTS guidelines,
which include maximum loan-to-value ratios for the following types of real
estate loans: raw land (65%), land development (75%), nonresidential
construction (80%), improved property (85%) and one-to-four family residential
construction (85%). Owner-occupied one-to-four family mortgage loans and home
equity loans do not have maximum loan-to-value ratio limits, but those with a
loan-to-value ratio at origination of 90% or greater are to be backed by private
mortgage insurance or readily marketable collateral. Institutions are also
permitted to make a limited amount of loans that do not conform to the proposed
loan-to-value limitations so long as such exceptions are appropriately reviewed
and justified. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
Loans-to-One Borrower Limits
The Bank generally is subject to the same loans-to-one borrower limits that
apply to national banks. With certain exceptions, loans and extensions of credit
outstanding at one time to one borrower (including certain related entities of
the borrower) may not exceed 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus for loans fully secured
by certain readily marketable
35
collateral. At December 31, 1998, the largest amount the Bank could lend to one
borrower was approximately $16.8 million, and at that date, the Bank's largest
aggregate amount of loans-to-one borrower was $10.3 million, all of which was
performing according to its terms. See "Business--Lending Activities."
Insurance of Accounts
The deposits of the Bank are insured up to $100,000 per depositor (as
defined by law and regulations) by the FDIC. Approximately 93% of the Bank's
deposits are presently insured by the FDIC under the BIF. The remainder are
insured by the FDIC under the SAIF. The deposits insured under the SAIF are
those acquired in the acquisition of New York Federal. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, insured
institutions. It also may prohibit any insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
the insurance funds. The FDIC also has the authority to initiate enforcement
actions where the OTS has failed or declined to take such action after receiving
a request to do so from the FDIC.
Effective January 1, 1994, a risk-based deposit insurance assessment system
was implemented by the FDIC. Under the system, the FDIC assigns each institution
to one of three capital categories -- "well capitalized," "adequately
capitalized" and "undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system under Section
38 of FDIA, as discussed below. These three categories are then divided into
three subcategories which reflect varying levels of supervisory concern. The
matrix so created results in nine assessment risk classifications.
Assessment rates during 1994 and most of 1995 ranged from $0.23 per $100 of
deposits for an institution in the highest category to $0.31 of deposits for an
institution in the lowest category. On August 8, 1995, the FDIC amended its
regulation on assessments to establish a new assessment rate schedule for the
BIF ranging from $0.04 per $100 of deposits for an institution in the highest
category to $0.31 per $100 of deposits for an institution in the lowest
category. The FDIC's new rate schedule for the BIF was made effective with the
first day of the month following the month in which the BIF achieved full
capitalization to the statutory required 1.25% reserve ratio, which occurred in
the second half of 1995.
The Bank paid $1.3 million in federal deposit insurance premiums to the BIF
for the year ended December 31, 1994. As a result of the lowering of BIF rates
in August 1995, the Bank paid $824,000 in deposit insurance premiums for the
year ended December 31, 1995. Thereafter, the FDIC voted to reduce the BIF
assessment schedule even further so that most BIF members, including the Bank,
paid a statutory minimum annual assessment rate of $2,000 for 1996. Deposit
insurance for SAIF members was revised to the same schedule as BIF members
effective January 1, 1997. As of the date of this Report, the annual FDIC
assessment rate for BIF and SAIF member institutions varies between 0.00% to
0.27% per annum. At December 31, 1998, the Bank's annual assessment rate was
0.00%.
The Bank's assessment rate in effect from time to time will depend upon the
capital category and supervisory subcategory to which the Bank is assigned by
the FDIC. In addition, the FDIC is authorized to increase federal deposit
insurance assessment rates for BIF and SAIF members to the extent necessary to
protect the BIF and SAIF and, under current law, would be required to increase
such rates to $0.23 per $100 of deposits if the BIF or SAIF reserve ratio again
falls below the required 1.25%. Any increase in deposit insurance assessment
rates, as a result of a change in the category or subcategory to which the Bank
is assigned or the exercise of the FDIC's authority to increase assessment rates
generally, could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
36
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
On September 30, 1996, as part of an omnibus appropriations bill, the
Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted. The Funds Act
eliminated the deposit insurance premium disparity that existed since the second
half of 1995 between banks insured by the BIF and thrifts insured by the SAIF.
The Act (i) required SAIF institutions to pay a one-time special assessment to
bring the SAIF's reserve ratio up to 1.25%, (ii) requires BIF institutions,
beginning January 1, 1997, to pay a portion of the interest due on the Finance
Corporation ("FICO") bonds issued in connection with the savings and loan
association crisis in the late 1980s, and (iii) requires BIF institutions to pay
their full pro rata share of the FICO payments starting the earlier of January
1, 2000 or the date at which no savings institution continues to exist. Since
January 1, 1997, the FICO assessment on SAIF institutions has been at the rate
of $0.065 per $100 of deposits and the FICO assessment on BIF institutions has
been at the rate of $0.013 per $100 of deposits. These rates are subject to
change. The Bank paid $102,000 and $87,000 for its share of the interest due on
FICO bonds in 1998 and 1997, respectively.
Congress is considering various proposals that may affect the deposit
insurance funds and the FICO assessment. See "Risk Factors--Pending
Legislation."
Liquidity Requirements
The Bank is subject to OTS regulations that require maintenance of an
average daily balance of liquid assets (cash and certain securities with
detailed maturity limitations and marketability requirements) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. The OTS may vary the amount of the
liquidity requirement by regulation, but only within pre-established statutory
limits of no less than 4% and no greater than 10%. For 1996 and the greater part
of 1997, OTS regulation set the liquidity requirement at 5%, with a 1%
short-term liquidity requirement. Amendments to OTS regulations, effective
November 27, 1997, reduced the liquidity requirement from 5% to 4% and removed
the 1% short-term liquidity requirement. In addition, these amendments
eliminated the requirement that obligations of FNMA, GNMA and FHLMC must have
five years or less remaining until maturity to qualify as a liquid asset. At
December 31, 1998, the Bank's liquidity ratio, computed in accordance with the
OTS requirements, as amended, was 18.28%. Unlike the Bank, the Company is not
subject to OTS regulatory requirements on the maintenance of minimum levels of
liquid assets.
Qualified Thrift Lender Test
Institutions regulated by the OTS are required to meet a qualified thrift
lender ("QTL") test to avoid certain restrictions on their operations. FDICIA
and applicable OTS regulations require such institutions to maintain at least
65% of its portfolio assets (total assets less intangibles, properties used to
conduct the institution's business and liquid assets not exceeding 20% of total
assets) in "qualified thrift investments" on a monthly average basis in nine of
every 12 months. Qualified thrift investments constitute primarily residential
mortgage loans and related investments, including certain mortgage-backed and
mortgage-related securities. A savings institution that fails the QTL test must
either convert to a bank charter or, in general, it will be prohibited from: (i)
making an investment or engaging in any new activity not permissible for a
national bank, (ii) paying dividends not permissible under national bank
regulations, (iii) obtaining advances from any FHLB, and (iv) establishing any
new branch office in a location not permissible for a national bank in the
institution's home state. One year following the institution's failure to meet
the QTL test, any holding company parent of the institution must register and be
subject to supervision as a bank holding company. In addition, beginning three
years after the institution failed the QTL test, the institution would be
prohibited from refinancing any investment or engaging in any activity not
permissible for a national bank and would have to repay any outstanding advances
from an FHLB as promptly as possible. At December 31, 1998, the
37
Bank had maintained more than 65% of its "portfolio assets" in qualified thrift
investments in at least nine of the preceding 12 months. Accordingly, on that
date, the Bank had met the QTL test.
On September 30, 1996, as part of the omnibus appropriations bill, Congress
enacted the Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory
Paperwork Reduction Act"), modifying and expanding investment authority under
the QTL test. Prior to the enactment of the Regulatory Paperwork Reduction Act,
commercial, corporate, business, or agricultural loans were limited in the
aggregate to 10% of a thrift's assets and education loans were limited to 5% of
a thrift's assets. Further, federal savings associations meeting a different
asset test under the Code (the "domestic building and loan association test")
were qualified for favorable tax treatment. The amendments permit federal
thrifts to invest in, sell, or otherwise deal in education and credit card loans
without limitation and raise from 10% to 20% of total assets the aggregate
amount of commercial, corporate, business, or agricultural loans or investments
that may be made by a thrift, subject to a requirement that amounts in excess of
10% of total assets be used only for small business loans. In addition, the
legislation defines "qualified thrift investment" to include, without limit,
education, small business, and credit card loans; and removes the 10% limit on
personal, family, or household loans for purposes of the QTL test. The
legislation also provides that a thrift meets the QTL test if it qualifies as a
domestic building and loan association under the Code.
Transactions with Affiliates
Transactions between the Bank and any related party or "affiliate" are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is any
company or entity which controls, is controlled by or is under common control
with the Bank, including the Company, the Bank's subsidiaries, and any other
subsidiary of the Bank or the Company that may be formed or acquired in the
future. Generally, Sections 23A and 23B (i) limit the extent to which the Bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of the Bank's capital stock and surplus, and impose an
aggregate limit on all such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the Bank or subsidiary as those provided to a non-affiliate. Each loan or
extension of credit to an affiliate by the Bank must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of credit extended. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition, the Bank may not (i) loan or
otherwise extend credit to an affiliate, except to any affiliate which engages
only in activities which are permissible for bank holding companies under
Section 4(c) of the Bank Company Act, or (ii) purchase or invest in any stocks,
bonds, debentures, notes or similar obligations of any affiliates, except
subsidiaries of the Bank.
In addition, the Bank is subject to Regulation O promulgated under Sections
22(g) and 22(h) of the Federal Reserve Act. Regulation O requires that loans by
the Bank to a director, executive officer or to a holder of more than 10% of the
Common Stock, and to certain affiliated interests of such insiders, may not, in
the aggregate, exceed the Bank's loans-to-one borrower limit. Loans to insiders
and their related interests must also be made on terms substantially the same as
offered, and follow credit underwriting procedures that are not less stringent
than those applied, in comparable transactions to other persons, with prior
Board approval required for certain loans. In addition, the aggregate amount of
extensions of credit by the Bank to all insiders cannot exceed the institution's
unimpaired capital and surplus. Section 22(g) places additional restrictions on
loans to executive officers of the Bank.
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
38
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. As discussed below, the OTS has amended its regulations
governing capital distributions effective April 1, 1999.
The OTS regulation in effect prior to April 1, 1999 establishes three tiers
of institutions, based primarily on their capital level. Generally, the Tier 1
group is composed of institutions that before and after the proposed
distribution meet or exceed all applicable capital requirements and have not
been informed by the OTS that they are in need of more than normal supervision.
A Tier 1 institution may make capital distributions during any calendar year
equal to the higher of (i) 100% of net income for the calendar year-to-date plus
an amount that would reduce by one-half its "surplus capital ratio" at the
beginning of the calendar year or (ii) 75% of net income over the previous four
quarters. As applied to the Bank, "surplus capital ratio" means the percentage
by which the Bank's ratio of total capital to assets exceeds the ratio of its
capital requirement, as modified to reflect any applicable individual minimum
capital requirements imposed upon the Bank. Any additional capital distributions
would require prior regulatory approval. In the event the Bank's capital fell
below its capital requirement or the OTS notified it that it was in need of more
than normal supervision, the Bank's ability to make capital distributions would
be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. Furthermore, under FDICIA, the Bank would be
prohibited from making any capital distributions if, after the distribution, the
Bank would have: (i) a total risk-based capital ratio of less than 8%, (ii) a
Tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of
less than 4% (3% in the event that the Bank is assigned a MACRO Rating of 1, the
highest examination rating of the OTS for savings institutions). In June 1996,
the Bank's Board of Directors declared a dividend of $11.5 million, which was
paid to the Company in installment amounts from July to November 1996. At
December 31, 1998, the Bank qualified as a Tier 1 institution for purposes of
this regulation, and the Bank's allowable capital distribution was approximately
$30.5 million.
Tier 2 institutions are those in compliance with their current, but not
their fully phased-in, capital requirements. Tier 2 institutions may make
distributions of up to 75% of their net income for the most recent four-quarter
period. Tier 1 and Tier 2 institutions may seek OTS approval to pay dividends
beyond these amounts.
Tier 3 institutions have capital levels below their current required
minimum levels and may not make any capital distributions without the prior
written approval of the OTS.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit 30 days prior written notice to the OTS of a proposed
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution deemed
to be in need of more than normal supervision by the OTS may be treated as a
Tier 2 or Tier 3 institution as a result of such a determination.
Under the revised OTS capital distribution regulations effective April 1,
1999, an institution is not required to file an application with, or to provide
a notice to, the OTS if neither the institution nor the proposed capital
distribution meet any of the criteria for any such application or notice as
provided below. An institution will be required to file an application with the
OTS if the institution is not eligible for expedited treatment by 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
39
institution that is not otherwise required to file an application as provided in
the preceding sentence, if it would not be well capitalized following the
distribution, if the association's proposed capital distribution would reduce
the amount of or retire any part of its common or preferred stock or retire any
part of debt instruments such as notes or debentures included in capital under
OTS regulations, or if it is a subsidiary of a savings and loan holding company.
The Bank is a subsidiary of a savings and loan holding company and, therefore,
is subject to the 30-day advance notice requirement of the revised OTS capital
distribution regulations effective April 1, 1999.
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, 1998, the Bank was required to maintain $17.3
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, 1998, the Bank's OTS assessments were $201,000
for that period.
Branching
OTS regulations permit federally chartered savings institutions to branch
nationwide to the extent allowed by federal statute. This permits federal
savings associations to geographically diversify their loan portfolios and lines
of business. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, the Bank has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take 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
40
benefiting low or moderate income individuals and businesses; and (c) a service
test, to evaluate the institution's delivery of services through its branches,
ATMs, and other offices. The Bank received a CRA rating of "2" in its most
recent CRA examination which was conducted by the OTS in July 1997. Under OTS
regulations, a CRA rating of "2" is the second highest rating available on a
scale from "1" to "4" with "1" being assigned to institutions that have an
outstanding record of meeting community credit needs and "4" being assigned to
institutions that are in substantial noncompliance in meeting community credit
needs. An institution that receives a "2" is considered to have a satisfactory
record of meeting community credit needs. Institutions that receive
unsatisfactory ratings (i.e., "3" or "4") may face difficulties in securing
approval for new activities or acquisitions. The CRA requires all institutions
to make public disclosure of their CRA ratings. Congress currently is
considering various proposals to amend the CRA. See "Risk Factors - Pending
Legislation."
Year 2000 Compliance
In May 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. The interagency statement addresses the concern that unless financial
institutions address the technology issues relating to the coming of the year
2000, there might be major disruptions in the operations of financial
institutions. The statement provides guidance to financial institutions,
providers of data services, and all examining personnel of the federal banking
agencies regarding the year 2000 problem. The federal banking agencies have been
conducting year 2000 compliance examinations, and the failure to implement a
year 2000 program may be seen by the federal banking agencies as an unsafe and
unsound banking practice. See "Risk Factors--Year 2000 Compliance."
Brokered Deposits
The FDIC has promulgated regulations implementing the FDICIA limitations on
brokered deposits. Under the regulations, well-capitalized institutions are not
subject to brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do not
pay an effective yield on any such deposit which exceeds by more than (a) 75
basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) 120 basis points for retail deposits and 130 basis
points for wholesale deposits accepted outside the institution's normal market
area, respectively, from the current yield on comparable maturity U.S. Treasury
obligations. Undercapitalized institutions are not permitted to accept brokered
deposits and may not solicit deposits by offering an effective yield that
exceeds by more than 75 basis points the prevailing effective yields on insured
deposits of comparable maturity in the institution's normal market area or in
the market area in which such deposits are being solicited. Pursuant to the
regulation, the Bank, as a well-capitalized institution, may accept brokered
deposits.
Capital Requirements
General. The Bank is required to maintain minimum levels of regulatory
capital. Since FIRREA, capital requirements established by the OTS generally
must be no less stringent than the capital requirements applicable to national
banks. The OTS also is authorized to impose capital requirements in excess of
these standards on a case-by-case basis.
Any institution that fails any of its applicable capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement
41
proceedings or otherwise, could require one or more of a variety of corrective
actions. See "--Prompt Corrective Action."
The OTS' capital regulations create three capital requirements: a tangible
capital requirement, a leverage or core capital requirement and a risk-based
capital requirement. At December 31, 1998, 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, 1998, the Bank
had intangible assets consisting of $5.0 million in goodwill and no purchased
mortgage servicing rights. At that date, the Bank's tangible capital ratio was
9.46%.
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, 1998, the Bank's
core capital ratio was 9.46%.
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, 1998, the Bank had no purchased
mortgage servicing rights or purchased credit card receivables.
Risk-Based Requirement. The risk-based capital standard adopted by the OTS
requires savings institutions to maintain a minimum ratio of total capital to
risk-weighted assets of 8%. Total capital consists of core capital, defined
above, and supplementary capital but excludes the effect of recognizing deferred
taxes based upon future income after one year. Supplementary capital consists of
certain capital instruments that do not qualify as core capital, and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only in an amount equal to the amount of core capital. In
determining the risk-based capital ratios, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
significant categories of assets are (i) 0% for cash and securities issued by
the federal government or unconditionally backed by the full faith and credit of
the federal government; (ii) 20% for securities (other than equity securities)
issued by federal government sponsored agencies and mortgage-backed securities
issued by, or fully guaranteed as to principal and interest by, the FNMA or the
FHLMC, except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans and certain qualifying multi-family
mortgage loans not more than 90 days delinquent and having a loan-to-value ratio
of not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or the FHLMC; and (iv) 100% for all other loans and
investments, including consumer loans, home equity loans,
42
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, 1998, the Bank's risk-based capital ratio was 19.43%.
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, 1998, the Bank did not have
more than "normal" interest rate risk and was not subject to any deduction from
total capital under this rule. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Interest Rate Risk," included in
the Annual Report to Shareholders and incorporated herein by reference.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and checking
accounts) and non-personal time deposits. At December 31, 1998, the Bank was in
compliance with these requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by
the OTS. Because required reserves must be maintained in the form of vault cash
or a non-interest-bearing account at a Federal Reserve Bank directly or through
another bank, the effect of this reserve requirement is to reduce an
institution's earning assets. The amount of funds necessary to satisfy this
requirement has not had a material effect on the Bank's operations.
As a creditor and financial institution, the Bank is also subject to
additional regulations promulgated by the FRB, including, without limitation,
regulations implementing requirements of the Truth in Savings Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act and the
Truth-in-Lending Act.
Financial Reporting
The Bank is required to submit independently audited annual reports to the
FDIC and the OTS. These publicly available reports must include (a) annual
financial statements prepared in accordance with GAAP and such other disclosure
requirements as required by the FDIC or the OTS and (b) a report, signed by the
Bank's chief executive officer and chief financial officer which contains
statements about the adequacy of internal controls and compliance with
designated laws and regulations, and attestations by independent auditors
related thereto. The Bank is required to monitor the foregoing activities
through an independent audit committee.
Standards for Safety and Soundness
The FDIA Act, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994 ("Community Development Act"), requires each
federal bank regulatory agency to
43
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.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the FDICIA, each appropriate
agency and the FDIC is required to take prompt corrective action to resolve the
problems of insured depository institutions that do not meet minimum capital
ratios. Such action must be accomplished at the least possible long-term cost to
the appropriate deposit insurance fund.
The federal banking agencies, including the OTS, adopted substantially
similar regulations to implement Section 38 of the FDIA. Under the regulations,
an institution is deemed to be (i) "well capitalized" if it has total risk-based
capital of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has
a Tier 1 leverage capital ratio of 5% or more and is not subject to any order or
final capital directive to meet and maintain a specific capital level for any
capital measure, (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and
a Tier 1 leverage capital ratio of 4% or more (3% under certain circumstances)
and does not meet the definition of "well capitalized," (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8%, a Tier 1
risk-based capital ratio that is less than 4% or a Tier 1 leverage capital ratio
that is less than 4% (3% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6%, a Tier 1 risk-based capital ratio that is less than 3% or a Tier 1 leverage
capital ratio that is less than 3%, and (v) "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than 2%.
Section 38 of the FDIA and the regulations promulgated thereunder also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 1998, the Bank met the criteria to
be considered a "well capitalized" institution.
44
Pending Legislation
For a discussion of pending legislation that could impact the Company's
business and operations, see "Risk Factors -- Pending Legislation."
Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of HOLA, is required to register with the OTS and is subject
to OTS regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Company and any non-savings
institution subsidiaries it later forms or acquires. Among other things, this
authority permits the OTS to restrict or prohibit activities that it determines
pose a serious risk to the Bank. See "--Restrictions on Dividends and Capital
Distributions."
HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS; acquiring
or retaining, with certain exceptions, more than 5% of a non-subsidiary savings
institution, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by HOLA; or acquiring or
retaining control of a depository institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the OTS will consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary savings and loan holding company, the Company currently is not
restricted as to the types of business activities in which it may engage,
provided that the Bank continues to meet the QTL test. See "--Qualified Thrift
Lender Test" and "Risk Factors--Pending Legislation." Upon any non-supervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Company
Act, subject to the prior approval of the OTS, and activities authorized by OTS
regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. Under
New York law, reciprocal interstate acquisitions are authorized for savings and
loan holding companies and savings institutions. Certain states do not authorize
interstate acquisitions under any circumstances; however, federal law
authorizing acquisitions in supervisory cases preempts such state law.
Federal law generally provides that no "person" acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of
45
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.
There is, as of the date of this report, proposed legislation pending in
Congress that may affect the Bank's thrift charter and the Company's status as a
unitary savings and loan Holding Company. See "Risk Factors--Pending
Legislation."
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.
46
Item 2. Properties.
The Bank conducts its business through eight 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, 1998
Main Office
144-51 Northern Blvd.
Flushing, NY 11354................... owned 1972 NA $3,155,577
Broadway Branch
159-18 Northern Blvd.
Flushing, NY 11358................... owned 1962 NA 1,059,195
Auburndale Branch
188-08 Hollis Court Blvd.
Flushing, NY 11358................... owned 1991 NA 828,119
Springfield Branch
61-54 Springfield Blvd.
Bayside, NY 11364.................... leased 1991 11/30/2001 58,098
Bay Ridge Branch
7102 Third Avenue
Brooklyn, NY 11209................... owned 1991 NA 448,913
Irving Place Branch
33 Irving Place
New York, NY 10003................... leased 1991 11/30/2001 538,935
New Hyde Park Branch
661 Hillside Avenue
New Hyde Park, NY 11040.............. leased 1971 12/31/2011 74,453
Supermarket Branch
653 Hillside Avenue
New Hyde Park, NY 11040.............. leased 1998 6/01/2003 277,535
Total premises and equipment, net $6,440,825
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
47
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 1998 Annual Report to
Shareholders ("Annual Report") under the caption "Market Price of Common Stock"
and is incorporated herein by this reference.
Item 6. Selected Financial Data.
Information regarding selected financial data appears on pages 5 and 6 of
the Annual Report under the caption "Selected Financial Data" and is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 7 through 17 of the Annual
Report under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is incorporated herein by this
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Interest Rate Risk" on
page 15 of the Annual Report and in Notes 14 and 15 of the Notes to Consolidated
Financial Statements is incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data.
Information regarding the financial statements and the Independent
Auditor's Report appears on pages 18 through 42 of the Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
48
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding the directors and executive officers of the Company
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held May 18, 1999 under the captions "Board Nominees", "Continuing
Directors" and "Executive Officers Who Are Not Directors" and is incorporated
herein by this reference.
Item 11. Executive Compensation.
Information regarding executive compensation appears in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 18, 1999 under
the caption "Executive Compensation" and is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held May 18, 1999 under the caption "Stock Ownership of Certain Beneficial
Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held May
18, 1999 under the caption "Stock Ownership of Management" and is incorporated
herein by this reference.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on May 18, 1999 under the captions "Compensation Committee Interlocks
and Insider Participation" and "Certain Transactions" and is incorporated herein
by this reference.
49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
The following financial statements are included in the Company's Annual
Report to Shareholders for the year ended December 31, 1998 and are incorporated
herein by this reference:
o Consolidated Statements of Condition at December 31, 1998 and 1997
o Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1998
o Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three-year period ended December 31, 1998
o Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1998
o Notes to Consolidated Financial Statements
o Report of Independent Accountants
The remaining information appearing in the Annual Report to Shareholders is
not deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto included in the Company's Annual Report to
Shareholders for the year ended December 31, 1998 and are incorporated herein by
this reference:
(b) Reports on Form 8-K filed during the last quarter of fiscal 1998
None
50
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
- ------
3.1 Articles of Incorporation of Flushing Financial Corporation (1)
3.2 By-Laws of Flushing Financial Corporation (1)
4.1 Rights Agreement, dated as of September 17, 1996, between Flushing
Financial Corporation and State Street Bank and Trust Company, as
Rights Agent (10)
10.1 Annual Incentive Plan for Selected Officers (1)
10.2 Employment Agreements between Flushing Savings Bank, FSB and
Certain Officers (1)(6)
10.3 Employment Agreements between Flushing Financial Corporation and
Certain Officers (2)(6)
10.3(a) Amendment No. 1 to Employment Agreement between Flushing Financial
Corporation and Michael J. Hegarty (3)
10.3(b) Amendment to Employment Agreement between Flushing Financial
Corporation and Certain Officers (including Michael J. Hegarty) (3)
10.3(c) Amendment No. 3 to Employment Agreement between Flushing Financial
Corporation and Michael J. Hegarty, and Amendment No. 2 to
Employment Agreement between Flushing Savings Bank, FSB and Michael
J. Hegarty (4)
10.4 Special Termination Agreements (2)
10.5 Employee Severance Compensation Plan of Flushing Savings Bank, FSB
(1)
10.6(a) Amended and Restated Outside Director Retirement Plan (9)
10.6(b) Flushing Savings Bank, FSB Outside Director Deferred Compensation
Plan (2)
10.7 Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (1)
10.8 Form of Indemnity Agreement among Flushing Savings Bank, FSB,
Flushing Financial Corporation, and each Director (1)
10.8(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing
Financial Corporation, and each Director (3)
10.8(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing
Financial Corporation, and Certain Officers (3)(6)
10.9 Employee Benefit Trust Agreement (1)
10.9(a) Amendment to the Employee Benefit Trust Agreement (9)
10.10 Loan Document for Employee Benefit Trust (1)
10.11 Guarantee by Flushing Financial Corporation (1)
10.12 Consulting Agreement between Flushing Savings Bank, FSB, Flushing
Financial Corporation and Gerard P. Tully, Sr. (4)
10.12(a) Amendment to Gerard P. Tully, Sr. Consulting Agreement (9)
10.12(b) Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement
10.13 Flushing Financial Corporation 1996 Restricted Stock Incentive Plan
(7)
10.14 Flushing Financial Corporation 1996 Stock Option Incentive Plan (7)
10.15 Amendments to 1996 Restricted Stock Incentive Plan (8)
10.16 Amendments to 1996 Stock Option Incentive Plan (8)
10.17 Agreement and Plan of Merger as of April 24, 1997, by and between
Flushing Financial Corporation, Flushing Savings Bank, FSB and New
York Federal Savings Bank (5)
10.18 Consulting Agreement between Flushing Savings Bank, FSB, Flushing
Financial Corporation and James F. McConnell (11)
10.19 Retirement Agreement between Flushing Savings Bank, FSB, Flushing
Financial Corporation and James F. McConnell (11)
13.1 1998 Annual Report to Shareholders
51
22.1 Subsidiaries information incorporated herein by reference to Part I
- Subsidiary Activities
23.1 Consent of Independent Accountants
27 Financial Data Schedule
99.1 Proxy Statement for the Annual Meeting of Shareholders to be held
on May 18, 1999, which will be filed with the SEC within 30 days
from the date this Form 10-K is filed.
- ----------
(1) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1995.
(3) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended September 30, 1996.
(4) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1996.
(5) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended June 30, 1997.
(6) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended September 30, 1997.
(7) Incorporated by reference to Exhibits filed with the Proxy Statement for
the Annual Meeting of Stockholders held May 21, 1996.
(8) Incorporated by reference to Exhibits filed with the Proxy Statements for
the Annual Meetings of Stockholders held April 29, 1997 and May 20, 1998.
(9) Incorporated by reference to Exhibits filed with the Form 10-K for the year
ended December 31, 1997.
(10) Incorporated by reference to Exhibit filed with Form 8-K filed September
30, 1996.
(11) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended March 31, 1998.
52
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, 1999.
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 March 29, 1999
- ---------------------------- (Principal Executive Officer)
Michael J. Hegarty
/S/ GERARD P. TULLY, SR. Director, Chairman March 29, 1999
- ----------------------------
Gerard P. Tully, Sr.
/S/ MONICA C. PASSICK Treasurer (Principal Financial March 29, 1999
- ---------------------------- and Accounting Officer)
Monica C. Passick
/S/ ROBERT A. MARANI Director March 29, 1999
- ----------------------------
Robert A. Marani
53
/S/ JOHN O. MEAD Director March 29, 1999
- ----------------------------
John O. Mead
/S/ JAMES F. MCCONNELL Director March 29, 1999
- ----------------------------
James F. McConnell
/S/ FRANKLIN F. REGAN, JR. Director March 29, 1999
- ----------------------------
Franklin F. Regan, Jr.
/S/ JOHN E. ROE, SR. Director March 29, 1999
- ----------------------------
John E. Roe, Sr.
/S/ MICHAEL J. RUSSO Director March 29, 1999
- ----------------------------
Michael J. Russo
/S/ JOHN M. GLEASON Director March 29, 1999
- ----------------------------
John M. Gleason
/S/ VINCENT F. NICOLOSI Director March 29, 1999
- ----------------------------
Vincent F. Nicolosi
/S/ LOUIS C. GRASSI Director March 29, 1999
- ----------------------------
Louis C. Grassi
/S/ JAMES D. BENNETT Director March 29, 1999
- ----------------------------
James D. Bennett
54