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.
<PAGE>
TABLE OF CONTENTS
Page
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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
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TABLE OF CONTENTS
(Continued)
Page
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= ========= =========
<CAPTION>
At December 31,
------------------------
1994
------------------------
Percent
Amount of Total
------ --------
<S> <C> <C>
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
=========
</TABLE>
(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
<PAGE>
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:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
(1) For a description of the Bank's loan purchase activity, see "--One-to-Four
Family Mortgage Lending".
6
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------
Mortgage Loans Other Loans
------------------------------------------------------------ -------------------
One-to- Co- Multi- Total Loans
Four Family operative family Commercial Construction SBA Consumer Receivable
----------- --------- ------ ---------- ------------ -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
(1) Ratios do not include troubled debt restructurings where the loans are
performing in accordance with the agreement.
13
<PAGE>
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
<PAGE>
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
<PAGE>
The following table sets forth the Bank's allowance for loan losses at and
for the dates indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
16
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
=============== =============== =============== =============== ===============
</TABLE>
17
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------------------------- -------------------------- --------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
========================== ========================== ==========================
</TABLE>
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
<PAGE>
The following table sets forth the Company's mortgage-backed securities
purchases, sales and principal repayments for the years indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
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
===============================================================
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
======================== ======================== ========================
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
======================== ===================================================
</TABLE>
21
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
=========== =========== ============ ========= =========== ============
<CAPTION>
At December 31,
----------------------------------------------
1996
----------------------------------------------
Percent of Weighted
Total Average
Amount Deposits Nominal Rate
-------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
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%
============== ============ ============
</TABLE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------
At December 31, Within One to
----------------------------------------- One Three There-
1998 1997 1996 Year Year after Total
-------- -------- -------- -------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======= ======= ========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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%
===================================== =====================================
<CAPTION>
For The Year Ended December 31,
-------------------------------------
1996
-------------------------------------
Percent
Average of Total Average
Balance Deposits Cost
-------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
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%
=====================================
</TABLE>
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
<PAGE>
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------
1998 1997 1996
-------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C>
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%
</TABLE>
26
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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.
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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.
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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,
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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
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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.
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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
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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.
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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.
<TABLE>
<CAPTION>
Date Leased or Lease Expiration Net Book Value at
Office Leased or Owned Acquired Date December 31, 1998
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
/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
[PHOTOS]
FLUSHING FINANCIAL CORPORATION
Flushing
Financial
1998 ANNUAL REPORT
[GRAPHIC]
ON TARGET TO COMMUNITY BANKING
<PAGE>
Flushing Financial Corporation and Subsidiaries
Corporate Profile
Flushing Financial Corporation, a Delaware corporation, was formed in May 1994
to serve as the holding company for Flushing Savings Bank, FSB, a federally
chartered, FDIC insured savings institution originally organized in 1929.
The Bank is a consumer-oriented savings institution primarily engaged in
attracting deposits from the local communities of Queens, Nassau, Brooklyn and
Manhattan and investing such deposits and other available funds primarily in
originations of multi-family mortgage loans, commercial real estate loans and
one-to-four family residential loans.
Flushing Financial Corporation's common stock is publicly traded on the Nasdaq
National Market(R) under the symbol of "FFIC."
Flushing Financial Corporation and Subsidiaries
Table of Contents
1. Financial Highlights
2. To Our Shareholders
5. Selected Financial Data
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
18. Consolidated Financial Statements
24. Notes to Consolidated Financial Statements
42. Report of Independent Accountants
IBC Corporate and Shareholder Information
<PAGE>
Flushing Financial Corporation and Subsidiaries
Financial Highlights
<TABLE>
<CAPTION>
===========================================================================================
At or for the year ended December 31, 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in thousands, except per share data)
Selected Financial Data
Total assets ............................................. $ 1,142,055 $ 1,088,476
Loans receivable, net .................................... 750,555 598,421
Mortgage-backed securities ............................... 302,421 217,110
Other securities ......................................... 24,269 139,602
Real estate owned, net ................................... 77 433
Deposits ................................................. 664,059 655,911
Stockholders' equity ..................................... 132,087 136,443
Dividends paid per common share .......................... $ 0.22 $ 0.15
Book value per share ..................................... $ 12.12 $ 11.57
===========================================================================================
Selected Operating Data
Net interest income ...................................... $ 36,144 $ 32,071
Net income ............................................... 10,190 8,531
Basic earnings per share ................................. $ 1.00 $ 0.80
Diluted earnings per share ............................... $ 0.98 $ 0.79
===========================================================================================
Financial Ratios
Return on average assets ................................. 0.92% 0.96%
Return on average equity ................................. 7.51 6.41
Net interest margin ...................................... 3.43 3.74
Net interest rate spread ................................. 2.88 3.06
Efficiency ratio ......................................... 53.44 53.91
Equity to total assets ................................... 11.57 12.53
Non-performing assets to total assets .................... 0.23 0.27
Allowance for possible loan losses to gross loans ........ 0.89 1.07
Allowance for possible loan losses to non-performing loans 260.36 263.38
===========================================================================================
</TABLE>
DILUTED EARNINGS
NET LOAN PORTFOLIO NET INCOME PER SHARE
(dollars in millions) (dollars in millions) (dollars)
1998 $751 1998 $10.2 1998 $0.98
1997 $598 1997 $ 8.5 1997 $0.79
1996 $383 1996 $ 6.7 1996 $0.57
1995 $280 1995 $ 3.3
1
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
To Our Shareholders In 1998, Flushing Financial Corporation achieved its
fourth consecutive year of increased earnings, balancing asset growth with
profitability. As interest rate spreads narrowed, we improved income by
increasing multi-family, residential and commercial real estate loan
originations while continuing to concentrate on asset quality and also
controlling costs. With our successful community banking approach, we
affirm our strategic position as an independent community bank delivering
value to our customers and you, our shareholders.
Throughout 1998, Flushing Financial Corporation continued to implement
its strategic plan to pursue structured and orderly growth and took
tangible steps to explore new retail concepts and products to accommodate
our customers' needs.
With our successful community banking approach, we affirm our strategic position
as an independent community bank.
o We significantly increased our loan portfolio by $152 million, or 25
percent from the prior year. For 1998, we originated loans of $110
million for one-to-four family residential mortgage loans, $84 million
for multi-family real estate loans, $52 million for commercial real
estate loans and $3 million in construction loans.
o We maintained asset quality in 1998. Non-performing assets totaled
only $2.7 million at December 31, 1998, a small decrease from the
prior year. The allowance for loan losses to non-performing loans was
260 percent at the end of 1998.
o We expanded and deepened our relationships with small businesses by
providing Small Business Administration (SBA) loans and other
commercial loan products.
o We opened our first in-store supermarket branch, offering complete
banking services and flexible hours, through an alliance with the
Edwards Supermarket chain. We believe this will prove to be a cost
efficient means of branch expansion that will offer our customers
greater access to our services and enable us to increase the Bank's
presence and market penetration in the markets we serve.
o We began offering a variety of investment and insurance products,
including mutual funds, tax-deferred annuities and retirement planning
services, through the newly established Flushing Service Corporation.
We are pleased to report that net income increased in 1998 to $10.2
million, up 19.5 percent from the $8.5 million reported in 1997. Net
interest income improved by 12.7 percent to $36.1 million as we shifted our
asset mix to
2
<PAGE>
- --------------------------------------------------------------------------------
We intend to concentrate on originating multi-family, residential and commercial
real estate loans and increasing core deposits.
[GRAPHIC]
compensate for narrowing spreads and used an increased level of wholesale
borrowings to fund asset growth.
We continued to maintain control over operating costs in 1998 as evidenced
by our stable efficiency ratio of 53.4 percent. We intend to continue our
efforts to maintain and improve efficiency through further improvements to
our operations infrastructure in the year ahead.
Your Company improved shareholder value based on each of the following
market indicators:
o Diluted earnings per share increased 24 percent to a record $0.98 in
1998 from $0.79 in 1997.
o Book value per share improved to $12.12 in 1998, up from $11.57 per
share in 1997.
o Dividends paid in 1998 increased 47 percent to $0.22 per share as
compared to $0.15 per share paid in 1997. Moreover, we are happy to
inform you that this trend is continuing and that we have increased
our dividend payment to $0.08 per share for the first quarter of 1999.
o Flushing declared a 3-for-2 stock split, distributed on September 30,
1998 in the form of a 50 percent stock dividend, which we believe will
provide you with increased liquidity in the market for our stock.
o Return on average equity increased to 7.5 percent in 1998 as compared
to 6.4 percent in 1997 as we employed our capital base more
profitably.
o The Bank's regulatory equity ratios continued to be well in excess of
its requirements. As of December 31, 1998 the Bank's risk-based equity
was 19.4 percent and tangible and core equity were each 9.5 percent.
This strong capital base allows us flexibility in pursuing alternative
strategies for sustained future growth and increased shareholder
value.
o Flushing's strong capital position also enabled us to continue our
stock repurchase programs. During 1998, 757,000 shares of our stock
were repurchased at a cost of $14 million. Through December 31, 1998,
approximately 19 percent of the common shares issued in connection
with Flushing Financial Corporation's initial public offering, were
repurchased at a cost of $34 million, thus enhancing the value of the
remaining shares outstanding that you own. This strategy is continuing
into 1999 with another program to repurchase five percent of our
outstanding shares.
3
<PAGE>
- --------------------------------------------------------------------------------
Looking Ahead 1999 will continue to be a year of change and exploration as
Flushing Financial Corporation seeks to capitalize on its niche in the
marketplace. As an independent community bank, we will differentiate
ourselves through providing superior customer service as the strongest
foundation for our future business growth.
Achieving our business goals will continue to be the basis for accomplishing the
primary and broader objective of optimizing our shareholders' return on their
investment.
We intend to concentrate on our primary business of originating
multi-family, residential and commercial real estate loans and increasing
our core deposits. We expect to introduce new products and services, take
advantage of cross selling opportunities, improve technology and expand our
community involvement.
We will continue to emphasize strong financial performance and look for
opportunities for acquisitions and expansion that will be accretive to
earnings.
Achieving our business goals will continue to be the basis for
accomplishing the primary and broader objective of optimizing our
shareholders' return on their investment. We believe that we are well
positioned to meet this objective.
The election of James D. Bennett and Louis C. Grassi to our Board of
Directors in 1998 brings exceptionally strong business experience and
perspective to our Board process. We welcome their contribution as we
address the strategic and business challenges faced by Flushing Financial
Corporation in the current market environment.
Before closing, we wish to thank James F. McConnell who retired as
President and Chief Executive Officer last October, after 24 years of
dedicated service to the Bank. We are pleased that Jim will remain with us
as a Director and consultant, allowing Flushing Financial Corporation to
continue to draw upon his knowledge and many years of experience.
Once again, we are grateful to the entire Board for its active guidance, to
our employees for their service to our customers and commitment to the
Bank, to our customers for their valued trust and to you, our shareholders,
for the confidence you express through your investment in our institution.
[PHOTO] [PHOTO]
Michael J. Hegarty Gerard P. Tully, Sr.
President & Chairman of the Board
Chief Executive Officer
4
<PAGE>
Flushing Financial Corporation and Subsidiaries
Selected Financial Data
<TABLE>
<CAPTION>
====================================================================================================================================
At or for the year ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Selected Financial Condition Data
<S> <C> <C> <C> <C> <C>
Total assets(1) ........................................ $1,142,055 $1,088,476 $ 775,343 $ 708,384 $ 592,014
Loans, net(1) .......................................... 750,555 598,421 382,781 280,126 252,116
Securities held to maturity ............................ -- -- -- -- 90,945
Securities available for sale .......................... 326,690 356,712 331,895 381,447 195,978
Real estate owned, net ................................. 77 433 1,218 1,869 3,468
Deposits ............................................... 664,059 655,911 584,479 559,864 532,141
Borrowed funds ......................................... 335,458 287,187 51,000 -- 10,000
Stockholders' equity ................................... 132,087 136,443 133,281 141,330 40,115
Book value per share(2)(3) ............................. 12.12 11.57 10.77 10.93 NA
Selected Operating Data
Interest and dividend income ........................... $ 82,846 $ 66,866 $ 55,061 $ 44,705 $ 42,511
Interest expense ....................................... 46,702 34,795 26,302 22,898 19,440
------------------------------------------------------------------------
Net interest income .................................. 36,144 32,071 28,759 21,807 23,071
Provision for loan losses .............................. 214 104 418 496 246
------------------------------------------------------------------------
Net interest income after provision
for loan losses .................................... 35,930 31,967 28,341 21,311 22,825
------------------------------------------------------------------------
Non-interest income:
Net gains (losses) on sales of securities
and loans .......................................... 368 67 126 (316) (122)
Deferred gain from sale of real estate ............... -- -- -- 2,784 --
Other income ......................................... 2,927 2,596 1,623 2,217 1,321
------------------------------------------------------------------------
Total non-interest income .......................... 3,295 2,663 1,749 4,685 1,199
------------------------------------------------------------------------
Non-interest expense:
Other operating expenses ............................. 23,023 19,324 18,224 17,358 16,258
Provision (recovery) for deposits at Nationar ........ -- -- (660) 660 --
Conversion expenses .................................. -- -- -- 2,222 --
------------------------------------------------------------------------
Total non-interest expense ......................... 23,023 19,324 17,564 20,240 16,258
------------------------------------------------------------------------
Income before income tax provision ..................... 16,202 15,306 12,526 5,756 7,766
Income tax provision ................................... 6,012 6,775 5,811 2,470 3,331
------------------------------------------------------------------------
Net income ......................................... $ 10,190 $ 8,531 $ 6,715 $ 3,286 $ 4,435
========================================================================
Basic earnings per share(3)(4) ......................... $ 1.00 $ 0.80 $ 0.57 Not meaningful NA
Diluted earnings per share(3)(4) ....................... $ 0.98 $ 0.79 $ 0.57 Not meaningful NA
Dividends declared per share(3) ........................ $ 0.22 $ 0.15 $ 0.05 -- NA
Dividend payout ratio .................................. 23.4% 18.9% 9.3% -- NA
</TABLE>
(Footnotes on the following page)
5
<PAGE>
Flushing Financial Corporation and Subsidiaries
Selected Financial Data
<TABLE>
<CAPTION>
====================================================================================================================================
At or for the year ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets .................................. 0.92% 0.96% 0.89% 0.53% 0.70%
Return on average equity .................................. 7.51 6.41 4.90 6.08 10.66
Average equity to average assets .......................... 12.24 15.00 18.17 8.70 6.56
Equity to total assets .................................... 11.57 12.53 17.19 19.95 6.78
Interest rate spread during period ........................ 2.88 3.06 3.29 3.51 3.82
Net interest margin ....................................... 3.43 3.74 4.01 3.74 3.90
Non-interest expense to average assets .................... 2.08 2.18 2.33 3.26 2.56
Efficiency ratio .......................................... 53.44 53.91 58.33 64.69 65.48
Average interest-earning assets to average
interest-bearing liabilities ............................ 1.12x 1.17x 1.20x 1.06x 1.03x
Regulatory capital ratios(5):
Tangible capital .......................................... 9.46% 9.11% 12.67% 14.85% 7.87%
Core capital .............................................. 9.46 9.11 12.67 14.85 7.87
Total risk-based capital .................................. 19.43 19.76 27.43 30.48 17.01
Asset quality ratios:
Non-performing loans to gross loans(6) .................... 0.34% 0.41% 0.62% 1.74% 2.05%
Non-performing assets to total assets(7) .................. 0.23 0.27 0.47 0.97 1.48
Net charge-offs (recoveries) to average loans ............. (0.01) 0.01 0.09 0.21 0.24
Allowance for loan losses to gross loans .................. 0.89 1.07 1.39 1.85 2.07
Allowance for loan losses to total
non-performing assets(7) ................................ 252.83 223.94 149.94 77.52 61.17
Allowance for loan losses to total
non-performing loans(6) ................................. 260.36 263.38 225.79 106.61 101.11
Full-service customer facilities ............................ 8 7 7 7 7
</TABLE>
(1) Includes the effect of the acquisition of New York Federal Savings Bank on
September 9, 1997 in a purchase transaction valued at approximately $13.0
million in cash.
(2) Calculated by dividing stockholders' equity of $132.1 million and $136.4
million at December 31, 1998 and 1997, respectively, by 10,898,805 and
11,796,930 shares outstanding at December 31, 1998 and 1997, respectively.
(3) All per share data has been adjusted for the three-for-two stock split
distributed on September 30, 1998 in the form of a stock dividend.
(4) The Company completed its initial public offering on November 21, 1995.
Earnings of the Company from the period November 21, 1995 through December
31, 1995 year end were $655,000 which, based on 11,903,328 weighted average
shares outstanding for the same period, equals $0.05 per share. The shares
held in the Company's Employee Benefit Trust are not included in shares
outstanding for purposes of calculating earnings per share. Unvested
restricted stock awards are not included in basic earnings per share
calculations, but are included in diluted earnings per share calculations.
(5) The Bank exceeded all minimum regulatory capital requirements during the
periods presented.
(6) Non-performing loans consist of non-accrual loans and loans delinquent 90
days or more that are still accruing.
(7) Non-performing assets consists of non-performing loans and real estate
owned.
Market Price of Common Stock
Flushing Financial Corporation Common Stock is traded on the Nasdaq National
Market under the symbol "FFIC". As of December 31, 1998, the Company had
approximately 890 shareholders of record, not including the number of persons or
entities holding stock in nominee or street name through various brokers and
banks. At December 31, 1998, the last trading date in 1998 for Nasdaq, the
Company's stock closed at $15.8125. The following table shows the high and low
closing sales price of the Common Stock during the periods indicated. Such
prices do not necessarily reflect retail markups, markdowns or commissions. All
price and dividend information has been adjusted for the three-for-two stock
split distributed on September 30, 1998 in the form of a stock dividend. See
Note 12 of Notes to Consolidated Financial Statements for dividend restrictions.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------
High Low Dividend High Low Dividend
==============================================================
<S> <C> <C> <C> <C> <C> <C>
First Quarter .......... $17.25 $13.88 $ .05 $14.33 $11.59 $ .03
Second Quarter ......... 19.50 16.25 .05 15.83 11.83 .04
Third Quarter .......... 20.33 12.58 .06 16.42 13.33 .04
Fourth Quarter ......... 17.19 10.50 .06 16.50 14.00 .04
</TABLE>
6
<PAGE>
Flushing Financial Corporation and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Flushing Financial Corporation ("Holding Company") is the parent holding company
for Flushing Savings Bank, FSB ("Bank"), a federally chartered stock savings
bank. On November 21, 1995, the Bank completed its Conversion ("Conversion")
from a federally chartered mutual savings bank to a federally chartered stock
savings bank. The following discussion of financial condition and results of
operations include the collective results of the Holding Company and the Bank
(collectively the "Company"), but reflects principally the Bank's activities.
The Company's principal business is attracting retail deposits from the general
public and investing those deposits together with funds generated from
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 Company originates certain other loans, including
construction loans, Small Business Administration loans and other small business
loans.
The Company's results of operations depend primarily on net interest income,
which is the difference between the interest income earned on its loan and
security portfolios, and its cost of funds, consisting primarily of interest
paid on deposit accounts and borrowed funds. Net interest income is the result
of the Company's interest rate margin, which is the difference between the
average yield earned on interest-earning assets and the average cost of
interest-bearing liabilities, and the average balance of interest-earning assets
compared to the average balance of interest-bearing liabilities. The Company
also generates non-interest income from loan fees, service charges on deposit
accounts, mortgage servicing fees, late charges and other fees and net gains and
losses on sales of securities and loans. The Company's operating expenses
consist principally of employee compensation and benefits, occupancy and
equipment costs, other general and administrative expenses and income tax
expense. The Company's results of operations also can be significantly affected
by its periodic provision for loan losses and specific provision for losses on
real estate owned ("REO"). Such results also are significantly affected by
general economic and competitive conditions, including changes in market
interest rates, the strength of the local economy, government policies and
actions of regulatory authorities.
The Company has in the past increased growth through acquisitions of financial
institutions or 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. On September 9, 1997, the
Holding Company acquired New York Federal Savings Bank ("New York Federal") in a
cash transaction valued at approximately $13 million.
In November 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 the 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. 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 and distributed to the Bank in the form of a dividend has
the effect of reducing the Company's income tax expense.
During the first quarter of 1998, the Bank formed Flushing Service Corporation
("FSC"), a 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 FSC earns a commission. FSC became fully
operational during the month of June 1998.
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. All
share and per share amounts in this Annual Report have been retroactively
restated to reflect the three-for-two split paid on September 30, 1998.
Statements contained in this Annual Report relating to plans, strategies,
objectives, 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, the factors set forth in the third paragraph of this
section, and under captions "Management Strategy", "Other Trends and
Contingencies" and "Year 2000 Compliance" below, and elsewhere in this Annual
Report and in other documents filed by the Company with the Securities and
Exchange Commission from time to time. The Company has no obligations to update
these forward-looking statements.
7
<PAGE>
Flushing Financial Corporation and Subsidiaries
Flushing Savings Bank, FSB
The Bank was organized in 1929 as a New York State chartered mutual savings
bank. On May 10, 1994, the Bank converted to a federally chartered mutual
savings bank and changed its name from Flushing Savings Bank to Flushing Savings
Bank, FSB. As a federal savings bank, the Bank's primary regulator is the Office
of Thrift Supervision ("OTS"). The Bank's deposits are insured to the maximum
allowable amount by the Federal Deposit Insurance Corporation ("FDIC").
Management Strategy
Management's strategy is to continue the Bank's focus as a consumer-oriented
institution serving its local markets. In furtherance of this objective, the
Company intends to (1) continue its emphasis on the origination of one-to-four
family residential mortgage, multi-family real estate and commercial real estate
loans, (2) seek to maintain asset quality, (3) seek to manage deposit growth and
maintain a low cost of funds, (4) seek to manage interest rate risk, and (5)
explore new business opportunities. The Company has in the past increased growth
through acquisitions of financial institutions and branches of other financial
institutions, and will continue to pursue growth through acquisitions that are,
or are expected to be within a reasonable time frame, accretive to earnings.
There can be no assurance that the Company will be able to effectively implement
this strategy. The Company's strategy is subject to change by the Board of
Directors.
One-to-Four Family, Multi-Family Real Estate and Commercial Real Estate Lending.
The Company has traditionally emphasized the origination and acquisition of
one-to-four family residential mortgage loans, which include adjustable rate
mortgage ("ARM") loans, fixed rate mortgage loans and home equity loans.
However, in recent years, the Company has also placed emphasis on multi-family
and commercial real estate loans. The Company expects to continue its emphasis
on multi-family and commercial real estate loans as well as on one-to-four
family residential mortgage loans. At December 31, 1998, the Company's
one-to-four family residential mortgage loans, multi-family real estate loans
and commercial real estate loans amounted to $372.0 million (49.0%), $277.4
million (36.6%) and $101.4 million (13.4%), respectively, of gross loans.
The Company seeks to increase its originations of one-to-four family,
multi-family real estate and commercial real estate loans through aggressive
marketing and by maintaining competitive interest rates and origination fees.
The Company's marketing efforts include advertising in its local markets and
frequent contacts with mortgage brokers and other professionals who serve as
referral sources. As part of these efforts, the Company established
relationships with mortgage bankers who originate one-to-four family mortgage
loans in the New York metropolitan area that are then purchased by the Company.
Loans purchased by the Company from these mortgage bankers comply with the
Bank's underwriting standards. Purchases of such loans totaled $27.2 million
during 1998 compared to $50.0 million during 1997. The acquisition of New York
Federal in September of 1997 also augmented the Company's market share, adding
$62.4 million of multi-family real estate loans, $11.7 million of commercial
real estate loans and $0.9 million of one-to-four family loans at the time of
the acquisition. The acquisition of New York Federal also expanded the Bank's
line of loan products with the acquisition of $2.0 million in Small Business
Administration loans.
Fully underwritten one-to-four family residential mortgage loans generally 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 a greater risk of credit loss than one-to-four family residential
mortgage loans. The Company's increased emphasis on multi-family and commercial
real estate loans could increase the overall level of credit risk inherent in
the Company's loan portfolio. The greater risk associated with multi-family and
commercial real estate loans may require the Company 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 Company. To
date, the Company has not experienced significant losses in its multi-family and
commercial real estate loan portfolios.
Maintain Asset Quality. By adherence to its strict underwriting standards the
Bank has been able to minimize net losses from impaired loans with net
charge-offs declining from $46,000 for the year ended December 31, 1997, to net
recoveries of $74,000 for the year ended December 31, 1998. The Company has
maintained the strength of its loan portfolio, as evidenced by the Company's
ratio of its allowance for loan losses to non-performing loans of 260.36% at
December 31, 1998, essentially unchanged from 263.38% at December 31, 1997. The
Company seeks to maintain its loans in performing status through, among other
things, strict collection efforts, and consistently monitors non-performing
assets in an effort to return them to performing status. To this end, 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 of the Bank on
a monthly basis. From time to time, the Company has sold and may continue to
make sales of non-performing assets. Non-performing assets declined to $2.7
million at December 31, 1998 from $2.9 million at December 31, 1997.
Non-performing assets as a percentage of total assets declined from 0.27% at
December 31, 1997 to 0.23% at December 31, 1998.
Managing Deposit Growth and Maintaining Low Cost of Funds. The Company has a
relatively stable retail deposit base drawn from its market area through its
eight full-service offices. Although the Company seeks to retain existing
deposits and maintain depositor relationships by offering quality service and
competitive interest rates to its customers, the Company seeks to keep deposit
growth within reasonable limits. During the current low interest rate
environment, the Bank has experienced a shift by depositors from lower costing
savings,
8
<PAGE>
Flushing Financial Corporation and Subsidiaries
NOW and money market accounts to higher costing certificate of deposit accounts.
Management intends to balance its goal to maintain competitive interest rates on
deposits while seeking to manage its overall cost of funds to finance its
strategies. Historically, the Company has relied on its deposit base as its
principal source of funding. The Bank is also a member of the Federal Home Loan
Bank of New York ("FHLB-NY"), which provides it with an additional source of
borrowing which the Company has increasingly utilized.
Managing Interest Rate Risk. The Company seeks to reduce its exposure to
interest rate risk by managing the interest rate sensitivity of its assets and
extending the interest rate sensitivity of its liabilities. The mix of loans
originated by the Company (fixed-rate or ARM) is determined in large part by
borrowers' preferences, and the proportion of loans originated as fixed-rate
loans may increase should interest rates decline. The Company seeks to adjust
the interest rate sensitivity of its assets by retaining ARM loans it
originates, and by purchasing additional ARM loans or adjustable-rate
mortgage-backed securities and fixed-rate mortgage-backed securities with
remaining estimated lives of less than five years. In order to maintain
flexibility in managing the Company's interest rate sensitive assets,
substantially all of the fixed-rate residential mortgage loans originated by the
Company since 1990 were made in conformance with Federal National Mortgage
Association ("FNMA") requirements to facilitate sale in the secondary market.
Prevailing interest rates also affect the extent to which borrowers repay and
refinance loans. In a declining interest rate environment, the number of loan
prepayments and loan refinancings may increase, as well as prepayments of
mortgage-backed securities. Call provisions associated with the Company's
investment in U.S. government agency and corporate securities may also adversely
affect yield in a declining interest rate environment. Such prepayments and
calls may adversely affect the yield of the Company's loan portfolio and
mortgage-backed and other securities as the Company reinvests the prepaid funds
in a lower interest rate environment. However, the Company typically receives
additional loan fees when existing loans are refinanced, which partially offset
the reduced yield on the Company's loan portfolio resulting from prepayments. In
periods of low interest rates, the Company's level of core deposits also may
decline if depositors seek higher yielding instruments or other investments not
offered by the Company, which in turn may increase the Company's cost of funds
and decrease its net interest margin to the extent alternative funding sources
are utilized.
Exploring New Business Opportunities. 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. Also during
the second quarter of 1998, the Company launched Flushing Service Corporation,
which began offering mutual funds, tax-deferred annuities and other investment
products, expanding the services offered by the Bank.
Also, in June 1998 the Bank established a Business and Community Development
Department. In the Company's demanding and constantly evolving marketplace, it
is expected that this office will play an active role in enhancing the Company's
reputation as an essential player in the local economy, and expanding its
participation in new business opportunities.
Management is currently reviewing the profitability of various new products to
further expand the Company's product lines and market.
Interest Rate Sensitivity Analysis
A financial institution's exposure to the risks of changing interest rates may
be analyzed, in part, by examining the extent to which its assets and
liabilities are "interest rate sensitive" and by monitoring the institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that time period. A gap is considered positive when the amount
of interest-earning assets maturing or repricing exceeds the amount of
interest-bearing liabilities maturing or repricing within the same period. A gap
is considered negative when the amount of interest-bearing liabilities maturing
or repricing exceeds the amount of interest-earning assets maturing or repricing
within the same period. Accordingly, a positive gap may enhance net interest
income in a rising rate environment and reduce net interest income in a falling
rate environment. Conversely, a negative gap may enhance net interest income in
a falling rate environment and reduce net interest income in a rising rate
environment.
The table below sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
was determined in accordance with the earlier of the term to repricing or the
contractual terms of the asset or liability. Prepayment assumptions for
mortgage-backed securities are based on industry averages. Passbook and Money
Market accounts were assumed to have a withdrawal or "run-off" rate of 3% and
7%, respectively, based on historical experience. Management believes that these
assumptions are indicative of actual prepayments and withdrawals experienced by
the Company.
9
<PAGE>
Flushing Financial Corporation and Subsidiaries
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap Analysis at December 31, 1998
----------------------------------------------------------------------------------------
More than More than More than More than
Three Three One Year Three Years Five Years
Months Months to to Three to Five to Ten More than
and Less One Year Years Years Years Ten Years Total
========================================================================================
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Mortgage loans .......................... $ 20,144 $ 93,575 $ 193,652 $177,007 $221,151 $ 48,536 $ 754,065
Other loans ............................. 269 781 1,420 845 1,200 -- 4,515
Short-term securities(1) ................ 10,800 -- -- -- -- -- 10,800
Securities available for sale:
Mortgage-backed securities ............ 15,797 49,804 89,577 57,082 64,049 26,112 302,421
Other ................................. 7,720 306 1,656 -- 8,927 5,660 24,269
----------------------------------------------------------------------------------------
Total interest-earning assets ....... 54,730 144,466 286,305 234,934 295,327 80,308 $1,096,070
----------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Passbook accounts ....................... 1,530 4,590 11,692 11,001 24,740 150,396 203,949
NOW accounts ............................ -- -- -- -- -- 26,788 26,788
Money market accounts ................... 498 1,494 3,573 3,090 6,021 13,763 28,439
Certificate of deposit accounts ......... 101,768 150,813 87,910 28,861 1,463 -- 370,815
Mortgagors' escrow deposits ............. -- -- -- -- -- 6,563 6,563
Borrowed funds .......................... 32,260 52,073 155,786 45,000 50,000 339 335,458
----------------------------------------------------------------------------------------
Total interest-bearing liabilities(2) $136,056 $ 208,970 $ 258,961 $ 87,952 $ 82,224 $ 197,849 $ 972,012
----------------------------------------------------------------------------------------
Interest rate sensitivity gap ........... $(81,326) $ (64,504) $ 27,344 $146,982 $213,103 $(117,541)
Cumulative interest rate sensitivity gap $(81,326) $(145,830) $(118,486) $ 28,496 $241,599 $ 124,058
Cumulative interest rate sensitivity gap
as a percentage of total assets ....... (7.12)% (12.77)% (10.37)% 2.50% 21.15% 10.86%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities .......... 40.23% 57.73% 80.38% 104.12% 131.21% 112.76%
</TABLE>
(1) Consists of interest-earning deposits.
(2) Does not include non-interest-bearing demand accounts totaling $27.5
million at December 31, 1998.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar estimated maturities or periods to repricing, they may react in
differing degrees to changes in market interest rates and may bear rates that
differ in varying degrees from the rates that would apply upon maturity and
reinvestment or upon repricing. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features that
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a significant change in the level of
interest rates, prepayments on loans and mortgage-backed securities, and deposit
withdrawal or "run-off" levels, would likely deviate materially from those
assumed in calculating the above table. In the event of an interest rate
increase, some borrowers may be unable to meet the increased payments on their
adjustable-rate debt. The interest rate sensitivity analysis assumes that the
nature of the Company's assets and liabilities remains static. Interest rates
may have an effect on customer preferences for deposits and loan products.
Finally, the maturity and repricing characteristics of many assets and
liabilities as set forth in the above table are not governed by contract but
rather by management's best judgement based on current market conditions and
anticipated business strategies.
10
<PAGE>
Flushing Financial Corporation and Subsidiaries
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
upon the relative amount of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
The following table sets forth certain information relating to the Company's
Consolidated Statements of Financial Condition and the Consolidated Statements
of Income for the years ended December 31, 1998, 1997 and 1996, and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average daily balances. The yields
include amortization of fees that are considered adjustments to yields.
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
====================================================================================================================================
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Mortgage loans, net(1)(2) ....... $ 660,475 $56,810 8.60% $491,834 $41,835 8.51% $324,427 $28,940 8.92%
Other loans, net(1)(2) .......... 3,275 376 11.48 2,268 227 10.01 1,997 221 11.07
------------------------------ ----------------------------- --------------------------
Total loans, net .............. 663,750 57,186 8.62 494,102 42,062 8.51 326,424 29,161 8.93
------------------------------ ----------------------------- --------------------------
Mortgage-backed securities ...... 314,685 20,887 6.64 180,615 12,651 7.00 160,371 10,422 6.50
Other securities ................ 44,578 3,025 6.79 151,400 10,422 6.88 215,772 14,698 6.81
------------------------------ ----------------------------- --------------------------
Total securities .............. 359,263 23,912 6.66 332,015 23,073 6.95 376,143 25,120 6.68
------------------------------ ----------------------------- --------------------------
Interest-earning deposits
and federal funds sold ........ 31,752 1,748 5.51 30,871 1,731 5.61 14,414 780 5.41
---------------------------------------------------------------------------------------------
Total interest-earning assets ..... 1,054,765 82,846 7.85 856,988 66,866 7.80 716,981 55,061 7.68
----------------- ----------------- ---------------
Non-interest-earning assets ....... 52,945 30,076 36,736
---------- -------- --------
Total assets .................. $1,107,710 $887,064 $753,717
========== ======== ========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Deposits:
Passbook accounts ............. $ 202,291 5,549 2.74 $206,196 5,884 2.85 $214,843 6,142 2.86
NOW accounts .................. 24,375 466 1.91 22,679 432 1.90 19,483 370 1.90
Money market accounts ......... 26,240 773 2.95 24,367 692 2.84 26,470 741 2.80
Certificate of deposit accounts 376,787 21,128 5.61 342,898 19,487 5.68 296,867 16,848 5.68
Mortgagors' escrow deposits ... 6,724 71 1.06 6,044 71 1.17 4,292 63 1.47
------------------------------ ----------------------------- --------------------------
Total deposits ................ 636,417 27,987 4.40 602,184 26,566 4.41 561,955 24,164 4.30
Other borrowed funds .............. 303,573 18,715 6.16 132,274 8,229 6.22 36,396 2,099 5.77
Other interest-bearing liabilities -- -- -- -- -- -- 457 39 8.53
---------------------------------------------------------------------------------------------
Total interest-bearing liabilities 939,990 46,702 4.97 734,458 34,795 4.74 598,808 26,302 4.39
----------------- ----------------- ---------------
Other liabilities(3) .............. 32,115 19,570 17,975
---------- -------- --------
Total liabilities ............. 972,105 754,028 616,783
Equity ............................ 135,605 133,036 136,934
---------- -------- --------
Total liabilities and equity .. $1,107,710 $887,064 $753,717
========== ======== ========
Net interest income/net interest
rate spread(4) .................. $36,144 2.88% $32,071 3.06% $28,759 3.29%
================= ================= ===============
Net interest-earning assets/net
interest margin(5) .............. $ 114,775 3.43% $122,530 3.74% $118,173 4.01%
========== ==== ======== ==== ======== ====
Ratio of interest-earning assets
to interest-bearing liabilities . 1.12x 1.17x 1.20x
==== ==== ====
</TABLE>
(1) Average balances include non-accrual loans.
(2) Loan interest income includes loan fee income of approximately $969,000,
$912,000 and $1.0 million for the years ended December 31, 1998, 1997 and
1996, respectively.
(3) Includes non-interest-bearing demand deposit accounts.
(4) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income before the provision for
loan losses divided by average interest-earning assets.
11
<PAGE>
Flushing Financial Corporation and Subsidiaries
Rate/Volume Analysis
The following table presents the impact of changes in interest rates and in the
volume of interest-earning assets and interest-bearing liabilities on the
Company's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by the prior
rate), (ii) changes attributable to changes in rate (changes in rate multiplied
by the prior volume) and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Increase (Decrease) in Net Interest Income
---------------------------------------------------------------------
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, 1997 December 31, 1996
---------------------------------------------------------------------
Due to Due to
-------------------- -------------------
Volume Rate Net Volume Rate Net
====================================================================================================================================
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Mortgage loans, net ........................................ $ 14,351 $ 624 $ 14,975 $ 14,933 $ (2,038) $ 12,895
Other loans ................................................ 101 48 149 30 (24) 6
Mortgage-backed securities ................................. 9,385 (1,149) 8,236 1,316 913 2,229
Other securities ........................................... (7,349) (48) (7,397) (4,384) 108 (4,276)
Interest-earning deposits and federal funds sold ........... 49 (32) 17 890 61 951
---------------------------------------------------------------------
Total interest-earning assets ............................ 16,537 (557) 15,980 12,785 (980) 11,805
---------------------------------------------------------------------
Interest-Bearing Liabilities
Deposits:
Passbook accounts ........................................ (111) (224) (335) (258) -- (258)
NOW accounts ............................................. 32 2 34 62 -- 62
Money market accounts .................................... 53 28 81 (59) 10 (49)
Certificate of deposit accounts .......................... 1,925 (284) 1,641 2,615 24 2,639
Mortgagors' escrow deposits .............................. 8 (8) -- 8 -- 8
Other borrowed funds ....................................... 10,655 (169) 10,486 5,532 598 6,130
Other interest-bearing liabilities ......................... -- -- -- (39) -- (39)
---------------------------------------------------------------------
Total interest-bearing liabilities ....................... 12,562 (655) 11,907 7,861 632 8,493
---------------------------------------------------------------------
Net change in net interest income .......................... $ 3,975 $ 98 $ 4,073 $ 4,924 $ (1,612) $ 3,312
====================================================================================================================================
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
General. Net income increased $1.7 million to $10.2 million, or $0.98 per common
share, for the year ended December 31, 1998 from $8.5 million, or $0.79 per
common share, for the year ended December 31, 1997. This is due primarily to an
increase of $4.1 million in net interest income and an increase of $632,000 in
non-interest income, which were partially offset by an increase of $3.7 million
in non-interest expense.
Interest Income. Interest income increased $15.9 million, or 23.9%, to $82.8
million for the year ended December 31, 1998 from $66.9 million for the year
ended December 31, 1997. This increase was primarily due to an increase of $15.1
million in interest and fees on loans during 1998 and an increase of $839,000 in
interest and dividends on investment securities. The increase in interest and
fee income from loans reflects a $169.6 million increase in the average balance
of loans to $663.8 million during 1998, and an eleven basis point increase in
the yield on loans. The increase in interest and dividend income from investment
securities reflects a $27.2 million increase in the average balances of
investment securities during 1998 to $359.3 million which, however, was
partially offset by a 29 basis point decline in the yield on investment
securities. Other interest income remained constant at $1.7 million in both 1998
and 1997.
Interest Expense. Interest expense increased $11.9 million, or 34.2%, from $34.8
million for the year ended December 31, 1997 to $46.7 million for the year ended
December 31, 1998. The increase in interest expense is due to a $205.5 million
increase in the average balance of total interest-bearing liabilities to $940.0
million during 1998, and a 23 basis point increase in the cost of
interest-bearing liabilities. The increase in the average balance and cost of
funds reflects the Bank's use of higher costing FHLB-NY advances as an
alternative source of funding to leverage its highly capitalized balance sheet.
12
<PAGE>
Flushing Financial Corporation and Subsidiaries
The average balance for deposits increased $34.2 million to $636.4 million for
1998 which, however, was partially offset by a one basis point decline in the
cost of deposits to 4.40% for 1998. The increase in deposits also reflects a
shift in depositor preferences from lower costing passbook accounts to higher
costing certificate of deposit accounts. The average balance for borrowed funds
increased $171.3 million from $132.3 million for 1997 to $303.6 million for
1998, the effect of which, however, was partially offset by a decline in the
cost of borrowed funds of six basis points to 6.16% during 1998.
NET INTEREST INCOME.
Net interest income for the year ended December 31, 1998 totaled $36.1 million,
an increase of $4.0 million from $32.1 million for 1997. The net interest
margin, however, declined 31 basis points from 3.74% for the year ended December
31, 1997 to 3.43% for the year ended December 31, 1998. This decline in margin
is the result of a 23 basis point increase in the average cost of funds from
4.74% for 1997 to 4.97% for 1998 as the Company increased utilization of higher
costing borrowed funds to fund asset growth. The increased cost of funds was
partially offset by a five basis point increase in the average yield of
interest-earning assets, primarily a result of an increase in the average
balance of loans. Despite the decline in margin, net interest income increased
12.7% from 1997 to 1998 due to the higher average balance of interest-earning
assets.
Provision for Loan Losses. Provision for loan losses for the year December 31,
1998 was $214,000 as compared to $104,000 for the year ended December 31, 1997.
In assessing the adequacy of the Company's allowance for loan losses, management
considers the Company's historical loss experience, recent trends in losses,
collection policies and collection experience, trends in the volume of
non-performing loans, changes in the composition and volume of the gross loan
portfolio, and local and national economic conditions. The ratio of
non-performing loans to gross loans improved to 0.34% at December 31, 1998 from
0.41% at December 31, 1997. The allowance for loan losses as percentage of
non-performing loans was 260.36% and 263.38% at December 31, 1998 and 1997,
respectively. The ratio of allowance for loan losses to gross loans was 0.89%
and 1.07% at December 31, 1998 and 1997, respectively. The Company experienced
net recoveries of $74,000 in 1998 while in the year ended December 31, 1997 the
Company incurred net charge-offs of $46,000.
Non-Interest Income. Non-interest income for the year ended December 31, 1998
totaled $3.3 million, an increase of $632,000, or 23.7%, from the 1997 level of
$2.7 million. The increase is due primarily to increased fee income from
mortgage and banking services, increased gains on sales of securities and the
guaranteed portion of Small Business Administration loans, and an increase in
dividends on FHLB-NY stock. The year ended December 31, 1997 also included the
receipt of $436,000 associated with settlements of contract disputes.
Non-Interest Expense. Non-interest expense for the year ended December 31, 1998
totaled $23.0 million, representing an increase of $3.7 million, or 19.1% from
the year ended December 31, 1997. This increase is primarily attributable to the
full year impact of the acquisition of New York Federal Savings Bank in
September 1997. Salaries and professional services expense increased a net of
$2.6 million, which included $1.5 million of expenses associated with the
planned retirement of a senior executive and one-time payouts under certain
employees' employment agreements. Despite the increased costs, the efficiency
ratio improved to 53.4% for 1998 compared to 53.9% for 1997.
Income Tax Provisions. Income tax expense for the year ended December 31, 1998
totaled $6.0 million, compared to $6.8 million for the year ended December 31,
1997. This represents a decline of 7.2% in the effective tax rate of 44.3% for
the year ended December 31, 1997 to 37.1% for the year ended December 31, 1998.
This decline reflects the ancillary benefit of the Bank's implementation of a
real estate investment trust in November of 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
General. Net income increased $1.8 million to $8.5 million, or $0.79 per common
share, for the year ended December 31, 1997 from $6.7 million, or $0.57 per
common share, for the year ended December 31, 1996. This was due primarily to an
increase of $3.3 million in net interest income, partially offset by an increase
of $1.8 million in non-interest expense.
Interest Income. Interest income increased $11.8 million, or 21.4%, to $66.9
million for the year ended December 31, 1997 from $55.1 million for the year
ended December 31, 1996. This increase was primarily due to an additional $12.9
million in interest and fees on loans during 1997, offset in part by a $2.0
million decrease in interest and dividends on investment securities. The
increase in interest and fee income from loans was a result of higher average
loan balances which increased from $326.4 million for 1996 to $494.1 million in
1997. The decline in interest and dividend income from investment securities was
the result of a $44.1 million dollar decline in the average balances of the
investment securities during 1997 as compared to 1996. Other interest income
also increased by $1.0 million due to an increase in the average balance of
federal funds sold.
13
<PAGE>
Flushing Financial Corporation and Subsidiaries
Interest Expense. Interest expense increased $8.5 million, or 32.3%, from $26.3
million for the year ended December 31, 1996 to $34.8 million for the year ended
December 31, 1997. The increase in interest expense was due primarily to a $95.9
million increase in the average balances of borrowed funds from $36.4 million
for 1996 to $132.3 million for 1997. The Company also increased its usage of
FHLB-NY advances as an alternative source of funding to leverage its highly
capitalized balance sheet. The increase in the average balances for deposits
from $557.7 million for 1996 to $596.1 million for 1997 also contributed to the
increase in interest expense. The increase in deposits also reflected a shift in
depositor preferences from lower costing passbook and money market accounts to
higher costing certificate of deposit accounts.
Net Interest Income. Net interest income for the year ended December 31, 1997
totaled $32.1 million, an increase of $3.3 million from 1996 net interest income
of $28.8 million. Net interest margin, however, declined 27 basis points from
4.01% for the year ended December 31, 1996 to 3.74% for the year ended December
31, 1997. This decline in margin was the result of a 35 basis point increase in
the average cost of funds from 4.39% for 1996 to 4.74% for 1997 as the Company
increased utilization of borrowed funds and interest rates on deposits increased
due to the shift in deposit mix. Partially offsetting this decline in margin was
a 12 basis point increase in the average yield of interest-earning assets,
primarily as a result of an increase in multi-family and commercial real estate
loans. Interest rate spread also declined by 23 basis points from 3.29% for 1996
to 3.06% for 1997. Despite this decline in margin and spread, net interest
income increased 11.5% from 1996 to 1997 due to the increased loan volume.
Provision for Loan Losses. Provision for loan losses for the year ended December
31, 1997 was $104,000 as compared to $418,000 for the year ended December 31,
1996. In assessing the adequacy of the Company's allowance for loan losses,
management considers the Company's historical loss experience, recent trends in
losses, collection policies and collection experience, trends in the volume of
non-performing loans, changes in the composition and volume of the gross loan
portfolio, local and national economic conditions, overall portfolio quality and
review of specific problem loans. As a result of sales of non-performing assets,
which reduced the total volume of non-performing loans held by the Company, the
ratio of non-performing loans to gross loans improved from 0.62% at December 31,
1996 to 0.41% December 31, 1997. Also as a result of the reduction in the
overall level of non-performing loans, the Company's allowance for loan losses
as percentage of non-performing loans increased from 225.79% December 31, 1996
to 263.38% at December 31, 1997. The ratio of allowance for loan losses to gross
loans was 1.07% and 1.39% at December 31, 1997 and 1996, respectively. Net
charge-offs declined $266,000 from $312,000 for the year ended December 31, 1996
to $46,000 for the year ended December 31, 1997.
Non-Interest Income. Non-interest income for the year ended December 31, 1997
totaled $2.7 million, an increase of $914,000 from 1996 levels. The increase was
due to a planned increase in loan and other fees and the receipt of $436,000
associated with settlements of contract disputes, offset in part by a decline in
gain on sales of securities.
Non-Interest Expense. Non-interest expense for the year ended December 31, 1997
totaled $19.3 million, representing an increase of $1.8 million from the year
ended December 31, 1996. This increase was primarily attributable to the
acquisition of New York Federal in September 1997, and by a onetime recovery of
a provision for deposits at Nationar in 1996 of $660,000. The effect of these
factors was offset in part by a $430,000 decline in professional service expense
and a $592,000 decline in data-processing expense as the Company converted to a
new data processor in 1997.
Income Tax Provisions. Income tax expense for the year ended December 31, 1997
totaled $6.8 million, as compared to $5.8 million for the year ended December
31, 1996. This represents a decline of 2.1% in the effective tax rate of 46.4%
for the year ended December 31, 1996 to 44.3% for the year ended December 31,
1997. This decline reflects the ancillary benefit of the Bank's implementation
of a real estate investment trust in November of 1997.
LIQUIDITY, REGULATORY CAPITAL AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, 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.
Deposit flows and mortgage prepayments, however, are greatly influenced by
general interest rates, economic conditions and competition. At December 31,
1998, the Bank had an over-night line of credit of approximately $46.2 million
with the FHLB-NY. In total, as of December 31, 1998, the Bank may borrow up to
$280.3 million from the FHLB-NY in Federal Home Loan advances and over-night
lines of credit. As of December 31, 1998, the Bank had borrowed $215.5 million
in FHLB-NY advances. There was no over-night line of credit outstanding at
December 31, 1998. In addition, the Bank had $120.0 million in reverse
repurchase agreements with the FHLB-NY to fund lending and investment
opportunities. (See Note 8 of Notes to Consolidated Financial Statements.)
14
<PAGE>
Flushing Financial Corporation and Subsidiaries
Pursuant to OTS regulations regarding liquidity requirements, the Bank is
required to maintain an average daily balance of liquid assets (cash, and
certain securities with detailed maturity limitations and marketability
requirements) equal to a monthly average of not less than a specified percentage
of its net withdrawable deposit accounts plus short-term borrowings. The OTS may
vary the amount of the liquidity requirement by regulation, but only within
pre-established statutory limits of no less than 4% and no greater than 10%. For
the greater part of 1997, OTS regulation set the liquidity requirement at 5%,
with a 1% short term liquidity requirement. Amendments to OTS regulations,
effective November 27, 1997, reduced the liquidity requirement from 5% to 4% and
removed the 1% short term liquidity requirement. In addition, these amendments
eliminated the requirement that obligations of FNMA, GNMA and FHLMC must have
five years or less remaining until maturity to qualify as a liquid asset. At
December 31, 1998 and 1997 the Bank's liquidity ratio, computed in accordance
with the OTS requirement, was 18.28% and 24.53%, respectively. Unlike the Bank,
the Holding Company is not subject to OTS regulatory requirements on the
maintenance of minimum levels of liquid assets.
The Company's most liquid assets are cash and cash equivalents, which include
cash and due from banks, overnight interest-earning deposits and federal funds
sold with original maturities of 90 days or less. The level of these assets is
dependent on the Company's operating, financing, lending and investing
activities during any given period. At December 31, 1998, cash and cash
equivalents totaled $22.7 million, a decrease of $67.6 million from December 31,
1997. The Company also held marketable securities available for sale with a
carrying value of $326.7 million at December 31, 1998.
At December 31, 1998, the Company had outstanding loan commitments of $42.5
million, open lines of credit for borrowers of $2.7 million and commitments to
purchase mortgage loans of $6.6 million. The Company's total interest and
operating expenses in 1998 were $46.7 million and $23.0 million, respectively.
Certificates of deposit accounts which are scheduled to mature in one year or
less as of December 31, 1998 totaled $252.6 million.
During 1998, funds provided by the Company's operating activities amounted to
$19.9 million. These funds, together with $39.7 million provided by financing
activities and $90.4 million available at the beginning of the year, were
utilized to fund net investing activities of $127.2 million. Financing
activities were primarily provided by FHLB-NY borrowings with original
maturities greater than one year and reverse repurchase agreements. Additional
funds were provided by principal payments and calls on loans and securities. The
primary investment activity of the Company is the origination and purchase of
loans, and the purchase of mortgage-backed securities. During 1998, the Bank had
loan originations of $223.0 million and purchased $27.2 million of loans.
Further, during 1998, the Company purchased $251.6 million of mortgage-backed
and other securities.
At the time of the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank, the Bank was required by the
OTS to establish a liquidation account which is reduced as and to the extent
that eligible account holders reduce their qualifying deposits. The balance of
the liquidation account at December 31, 1998 was $12.4 million. In the unlikely
event of a complete liquidation of the Bank, each eligible account holder will
be entitled to receive a distribution from the liquidation account. The Bank is
not permitted to declare or pay a dividend or to repurchase any of its capital
stock if the effect would be to cause the Bank's regulatory capital to be
reduced below the amount required for the liquidation account. Unlike the Bank,
the Holding Company is not subject to OTS regulatory restrictions on the
declaration or payment of dividends to its stockholders, although the source of
such dividends could depend upon dividend payments from the Bank. The Holding
Company is subject, however, to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of its net assets
(the amount by which total assets exceed total liabilities) over its stated
capital or, if there is no such excess, to its net profits for the current
and/or immediately preceding fiscal year.
Regulatory Capital Position. Under OTS capital regulations, the Bank is required
to comply with each of three separate capital adequacy standards: tangible
capital, core capital and total risk-based capital. Such classifications are
used by the OTS and other bank regulatory agencies to determine matters ranging
from each institution's semi-annual FDIC deposit insurance premium assessments,
to approvals of applications authorizing institutions to grow their asset size
or otherwise expand business activities. At December 31, 1998 and 1997, the Bank
exceeded each of the three OTS capital requirements. (See Note 13 of the Notes
to Consolidated Financial Statements.)
INTEREST RATE RISK
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"), which requires the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in fair value of investments due to
changes in interest rate risk. Generally, the fair value of financial
investments such as loans and securities fluctuates inversely with changes in
interest rates. As a result, increases in interest rates could result in
decreases in the fair value of the Company's interest-earning assets which could
adversely affect the Company's results of operations if sold, or, in the case of
securities classified as available for sale, the Company's stockholders' equity
if retained.
15
<PAGE>
Flushing Financial Corporation and Subsidiaries
The Company manages the mix of interest-earning assets and interest-bearing
liabilities on a continuous basis to maximize return and adjust risk exposure.
On a quarterly basis, management prepares the "Earnings and Economic Exposure to
Changes In Interest Rate" report for review by the Board of Directors, as
summarized below. This report quantifies the potential changes in net interest
income and net portfolio value should interest rates go up or down (shocked) 400
basis points, assuming the yield curves of the rate shocks will be parallel to
each other. Net portfolio value is defined as interest-earning assets net of
interest-bearing liabilities. All changes in income and value are measured as
percentage changes from the projected net interest income and net portfolio
value at the base interest rate scenario. The base interest rate scenario
assumes interest rates at December 31, 1998 and various estimates regarding
prepayment and call activities are made at each level of rate shock. Actual
results could differ significantly from these estimates. The Company's current
interest rate exposure is within the guidelines set forth by the Board of
Directors, with the exceptions of the plus 200, 300 and 400 basis points which
exceed the guidelines of minus 30.00%, minus 45.00% and minus 60%, respectively.
These exceptions have been reviewed with the Board of Directors. Management is
taking steps to bring these exposures within the guidelines.
<TABLE>
<CAPTION>
Projected Percentage Change In
-------------------------------------------
Change in Interest Rate Net Interest Income Net Portfolio Value
==============================================================================================
<S> <C> <C>
- -400 Basis Points ......................... 6.00% 31.00%
- -300 Basis Points ......................... 5.00 22.00
- -200 Basis Points ......................... 3.00 14.00
- -100 Basis Points ......................... 1.00 7.00
Base Interest Rate ........................ -- --
+100 Basis Points ......................... -4.00 -16.00
+200 Basis Points ......................... -11.00 -34.00
+300 Basis Points ......................... -18.00 -52.00
+400 Basis Points ......................... -25.00 -68.00
</TABLE>
IMPACT OF NEW ACCOUNTING STANDARDS
In June of 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which amends SFAS No. 52 and 107, and
supercedes FASB Statements No. 80, 105 and 119. This Pronouncement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. This
Statement requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of these
derivatives at fair value. Adoption of this Pronouncement is not expected to
have a material impact on the Company's financial position or results of
operations.
In October of 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", an amendment of SFAS No. 65. This Pronouncement
amends SFAS No. 65 to permit classification as trading, available for sale, or
held to maturity mortgage-backed securities retained after the securitization of
mortgage loans held for sale. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. Adoption of this Pronouncement is not
expected to have a material impact on the Company's financial position or
results of operations.
OTHER TRENDS AND CONTINGENCIES
The Company's net interest rate margin declined 31 basis points from 3.74% for
the year ended December 31, 1997 to 3.43% for the year ended December 31, 1998.
This decline was due primarily to a 23 basis point increase in the average cost
of deposits and borrowings as the Company increased utilization of higher
costing borrowed funds to fund balance sheet growth. The increased cost of funds
was partially offset by a five basis point increase in average yield on loans
and other investments and the higher average balance of interest-earning assets.
Comparing 1998 to 1997, the Company experienced an increase in the average
balance of deposits of $34.2 million, of which $33.9 million was in higher
costing certificates of deposits. The Company seeks to maintain its certificates
of deposit at competitive rates. Starting in 1996, the Company had increased its
utilization of FHLB-NY advances as an alternative source of funding. Borrowed
funds averaged $303.6 million for 1998 with an average cost of 6.16% as compared
to an average balance of $132.3 million for 1997 with an average cost of 6.22%.
These trends contributed to the increase in the Company's average cost of funds
from 4.74% for the year ended December 31, 1997 to 4.97% for the year ended
December 31, 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.
16
<PAGE>
Flushing Financial Corporation and Subsidiaries
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 vendors,
and purchased software operating on in-house computer networks. As the year 2000
approaches, a critical business issue has emerged regarding how existing
software, such as application programs and operating systems, will accommodate
the year 2000 date value. In the past, such software was programmed to assume
that all year values begin with "19". In response to this business concern, the
Company established, in 1997, a Year 2000 Task Force ("Y2K Task Force") to
evaluate whether its computer systems will function properly in the year 2000,
and report to the Board of Directors on a monthly basis. With the implementation
of the Y2K Task Force, actions were taken to remedy the Company's year 2000
problems and management expects internal systems to be year 2000 compliant by
March 31, 1999. However, given the inherent uncertainty in the year 2000
problem, there can be no assurances that the Company will meet its target date
for compliance. The Company plans to continue monitoring its year 2000 readiness
until the year 2000.
Since its formation, the Y2K Task Force has contacted parties with which the
Company has material relationships, including the Company's data processing
vendors, and software suppliers to determine whether the systems used, or relied
upon, by the Company are year 2000 compliant, and if not to assess the
corrective steps being taken. The Company has also contacted all borrowers with
loan balances outstanding in excess of two million dollars to assess the state
of each such party's year 2000 readiness, and is currently awaiting their
response for assessment. The Company's investment securities portfolio, which
amounted to 28.6% of total assets at December 31, 1998, consists primarily of
U.S. government securities or U.S. government agency backed mortgage-backed
securities. Although the Company is attempting to monitor and evaluate the
efforts of these other parties, it cannot control the success of their efforts.
The Company's data processing vendors and the majority of other vendors have
indicated that their hardware and/or software is or will be year 2000 compliant
prior to the date change. The Company's in-house systems for which year 2000
compliance could not be assured are being replaced. Assessment and testing for
year 2000 compliance has been performed on in-house systems and for the
Company's third party data processing vendors. The anticipated costs to upgrade
various in-house equipment is approximately $100,000, of which $48,000 has
already been expensed. These costs consist primarily of software version
upgrades. The foregoing estimate of costs does not include the time that
internal staff is devoting to testing and monitoring year 2000 compliance,
although these activities are not expected to involve significant incremental
cost. Based on compliance efforts and testing through December 31, 1998,
management does not believe that costs of year 2000 compliance will have a
material adverse effect on the Company's consolidated financial condition,
results of operations, or cash flow.
The Company is also dependent in its business upon the availability of public
utilities, including communications and power services. The Company cannot
predict the year 2000 readiness of such utilities or the outcome of their
remediation efforts.
The Company believes that the most reasonably likely worst case scenario, should
the Company's in-house and third party vendor systems not meet the year 2000
compliance, would be an inability to process banking transactions, calculate
investment yields and costs, send and receive electronic data with third
parties, or engage in similar normal business activities. Should the Company
need to manually calculate and complete transactions, assuming a doubling in
manpower, the cost of alternative methods of doing business is projected to be
approximately $250,000 in additional expenses per month.
Management believes that a more likely scenario, if the Company's systems are
not year 2000 compliant, would be a temporary disruption of service to its
customers. The Company is of the opinion that its contingency plans would
mitigate the long-term effect of such a scenario and that a temporary disruption
would not have a material adverse effect on its consolidated financial
condition, results of operations or cash flow.
In the unanticipated event that the Company experiences a disruption of service,
the Company has developed contingency plans that management believes will combat
the unavailability of each mission critical system, including the identification
of reasonable substitutes for the functions of such systems. Some of these
contingency plans have already been in place for unanticipated data processing
vendor downtime that occurs during the normal course of business.
The discussion above of the Company's efforts, and management's expectations,
relating to year 2000 compliance are forward-looking statements, which are based
on management's best estimate of various factors involving numerous assumptions.
The Company's ability to achieve year 2000 compliance and the level of
incremental costs associated therewith could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
17
<PAGE>
Flushing Financial Corporation and Subsidiaries
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks ...................................................................... $ 11,934 $ 8,258
Federal funds sold and overnight interest-earning deposits ................................... 10,800 82,094
Securities available for sale:
Mortgage-backed securities ................................................................. 302,421 217,110
Other securities ........................................................................... 24,269 139,602
Loans ........................................................................................ 757,317 604,895
Less: Allowance for loan losses ............................................................ (6,762) (6,474)
------------------------------
Net loans .................................................................................. 750,555 598,421
Interest and dividends receivable ............................................................ 7,120 9,282
Real estate owned, net ....................................................................... 77 433
Bank premises and equipment, net ............................................................. 6,441 6,493
Federal Home Loan Bank of New York stock ..................................................... 17,320 14,356
Goodwill ..................................................................................... 5,004 5,370
Other assets ................................................................................. 6,114 7,057
------------------------------
Total assets ............................................................................... $ 1,142,055 $ 1,088,476
==============================
LIABILITIES
Due to depositors:
Non-interest-bearing ....................................................................... $ 27,505 $ 19,263
Interest-bearing ........................................................................... 629,991 631,748
Mortgagors' escrow deposits .................................................................. 6,563 4,900
Borrowed funds ............................................................................... 335,458 287,187
Other liabilities ............................................................................ 10,451 8,935
------------------------------
Total liabilities .......................................................................... 1,009,968 952,033
------------------------------
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY
Preferred stock, ($0.01 par value, authorized 5,000,000 shares; none issued) -- --
Common stock, ($0.01 par value, authorized 20,000,000 shares;
11,355,678 and 12,842,410 shares issued at December 31, 1998 and 1997,
respectively; 10,898,805 and 11,796,930 shares outstanding
at December 31, 1998 and 1997, respectively) ............................................... 114 89
Additional paid-in capital ................................................................... 75,452 101,717
Treasury stock, at average cost (456,873 and 1,045,480 shares at
December 31, 1998 and 1997, respectively) .................................................. (6,949) (19,666)
Unearned compensation ........................................................................ (9,332) (10,922)
Retained earnings ............................................................................ 71,460 63,766
Accumulated other comprehensive income, net of taxes ......................................... 1,342 1,459
------------------------------
Total stockholders' equity ................................................................. 132,087 136,443
------------------------------
Total liabilities and stockholders' equity ................................................. $ 1,142,055 $ 1,088,476
==============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
Flushing Financial Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans .................................................. $ 57,186 $ 42,062 $ 29,162
Interest and dividends on securities:
Taxable interest .......................................................... 23,670 22,779 24,708
Tax-exempt interest ....................................................... 18 47 63
Dividends ................................................................. 224 247 348
Other interest income ....................................................... 1,748 1,731 780
--------------------------------------------
Total interest and dividend income ........................................ 82,846 66,866 55,061
--------------------------------------------
INTEREST EXPENSE
Deposits .................................................................... 27,987 26,566 24,164
Other interest expense ...................................................... 18,715 8,229 2,138
--------------------------------------------
Total interest expense .................................................... 46,702 34,795 26,302
--------------------------------------------
Net interest income ..................................................... 36,144 32,071 28,759
Provision for loan losses ................................................... 214 104 418
--------------------------------------------
Net interest income after provision for loan losses ..................... 35,930 31,967 28,341
--------------------------------------------
NON-INTEREST INCOME
Other fee income ............................................................ 1,386 1,190 763
Net gain on sales of securities and loans ................................... 368 67 126
Other income ................................................................ 1,541 1,406 860
--------------------------------------------
Total non-interest income ................................................. 3,295 2,663 1,749
--------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits .............................................. 12,454 10,213 8,214
Occupancy and equipment ..................................................... 1,943 1,908 2,093
Professional services ....................................................... 1,943 1,583 2,013
Federal deposit insurance premiums .......................................... 102 87 2
Data processing ............................................................. 1,231 873 1,465
Depreciation and amortization of premises and equipment ..................... 984 804 956
Real estate owned expenses, net ............................................. 98 109 318
Recovery for deposits at Nationar ........................................... -- -- (660)
Other operating ............................................................. 4,268 3,747 3,163
--------------------------------------------
Total non-interest expense ................................................ 23,023 19,324 17,564
--------------------------------------------
Income before income taxes .................................................. 16,202 15,306 12,526
PROVISION FOR INCOME TAXES
Federal ..................................................................... 5,044 4,491 3,540
State and local ............................................................. 968 2,284 2,271
--------------------------------------------
Total provision for income taxes .......................................... 6,012 6,775 5,811
--------------------------------------------
Net income .................................................................. $ 10,190 $ 8,531 $ 6,715
============================================
Basic earnings per share .................................................... $ 1.00 $ 0.80 $ 0.57
Diluted earnings per share .................................................. $ 0.98 $ 0.79 $ 0.57
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Flushing Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year ............................................................ $ 89 $ 89 $ 86
Restricted stock awards of 427,650 shares ............................................. -- -- 3
Stock dividend (3,785,168 shares, 1,339,590 shares funded
from Treasury) ...................................................................... 25 -- --
---------------------------------------
Balance, end of year ................................................................ $ 114 $ 89 $ 89
=======================================
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year ............................................................ $ 101,717 $ 101,278 $ 96,515
Stock dividend ........................................................................ (26,914) -- --
Release of shares from Employee Benefit Trust (29,220, 27,060 and 30,987 shares
for the years ended
December 31, 1998, 1997 and 1996, respectively) ..................................... 238 204 134
Restricted stock awards ( 45,750 and 447,600 shares for the years
ended December 31, 1997 and 1996, respectively) ..................................... -- 104 4,629
Tax benefit of unearned compensation .................................................. 411 131 --
---------------------------------------
Balance, end of year ................................................................ $ 75,452 $ 101,717 $ 101,278
=======================================
TREASURY STOCK
Balance, beginning of year ............................................................ $ (19,666) $ (12,065) $ --
Purchases of common shares outstanding (757,146, 420,477
and 667,653 shares for the years ended December 31, 1998,
1997 and 1996, respectively) ........................................................ (14,239) (8,247) (12,223)
Stock dividend ........................................................................ 26,889 -- --
Restricted stock award forfeitures (20,900, 3,300 and 5,250 shares
for the years ended December 31, 1998, 1997 and 1996, respectively) ................. (410) (54) (85)
Restricted stock awards (25,000, 30,500 and 13,300 shares for the
years ended December 31, 1998, 1997 and 1996, respectively) ......................... 520 560 243
Repurchase of restricted stock awards (21,112 shares) ................................. (484) -- --
Options exercised (23,175, and 7,400 shares for the years ended
December 31, 1998 and 1997, respectively) ........................................... 441 140 --
---------------------------------------
Balance, end of year ................................................................ $ (6,949) $ (19,666) $ (12,065)
=======================================
UNEARNED COMPENSATION
Balance, beginning of year ............................................................ $ (10,922) $ (11,660) $ (7,681)
Release of shares from Employee Benefit Trust (29,220, 27,060 and 30,987 shares
for the year ended
December 31, 1998, 1997 and 1996, respectively) ..................................... 248 240 238
Restricted stock awards (25,000, 45,750 and 447,600 shares for the
years ended December 31, 1998, 1997 and 1996, respectively) ......................... (470) (665) (4,875)
Restricted stock award forfeitures (20,900, 4,950 and 7,875 shares
for the years ended December 31, 1998, 1997 and 1996, respectively) ................. 410 54 85
Restricted stock award expense ........................................................ 1,402 1,109 573
---------------------------------------
Balance, end of year ................................................................ $ (9,332) $ (10,922) $ (11,660)
=======================================
</TABLE>
Continued
20
<PAGE>
Flushing Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (continued)
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
RETAINED EARNINGS
Balance, beginning of year ............................................................ $ 63,766 $ 56,869 $ 50,777
Net income ............................................................................ 10,190 8,531 6,715
Stock options exercised (23,175 and 11,100 shares for the years ended
December 31, 1998 and 1997, respectively) ........................................... (66) (19) --
Restricted stock awards (25,000 shares) ............................................... (50) -- --
Cash dividends declared and paid ...................................................... (2,380) (1,615) (623)
---------------------------------------
Balance, end of year ................................................................ $ 71,460 $ 63,766 $ 56,869
=======================================
ACCUMULATED OTHER COMPREHENSIVE
INCOME, NET OF TAXES
Balance, beginning of year ............................................................ $ 1,459 $ (1,230) $ 1,633
Change in net unrealized gain (loss), net of taxes of approximately $(38),
$2,290 and $(2,385) for the years ended December 31, 1998,
1997 and 1996, respectively, on securities available for sale ....................... (52) 2,717 (2,795)
Less: Reclassification adjustment for gains included in net income,
net of taxes of approximately $37, $24 and $58 for the years ended
December 31, 1998, 1997 and 1996, respectively ...................................... (65) (28) (68)
---------------------------------------
Balance, end of year ................................................................ $ 1,342 $ 1,459 $ (1,230)
=======================================
TOTAL STOCKHOLDERS' EQUITY ............................................................ $ 132,087 $ 136,443 $ 133,281
=======================================
COMPREHENSIVE INCOME
Net income ............................................................................ $ 10,190 $ 8,531 $ 6,715
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities ............................................. (117) 2,689 (2,863)
---------------------------------------
Comprehensive income .................................................................. $ 10,073 $ 11,220 $ 3,852
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
Flushing Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................................ $ 10,190 $ 8,531 $ 6,715
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ........................................................... 214 104 418
Provision for losses on real estate owned ........................................... 33 -- 150
Recovery for deposits at Nationar ................................................... -- -- (660)
Depreciation and amortization of bank premises and equipment ........................ 984 804 956
Amortization of goodwill ............................................................ 366 122 --
Net (gain) loss on sales of securities .............................................. (102) (52) (126)
Net gain on sales of loans .......................................................... (266) (15) --
Net loss (gain) on sales of real estate owned ....................................... 14 109 (72)
Amortization of unearned premium, net of accretion of unearned discount ............. 2,315 653 1,188
Amortization of deferred income ..................................................... (832) (858) (933)
Deferred income tax (benefit) provision ............................................. 523 (155) (42)
Deferred compensation ............................................................... 210 164 174
Changes in other assets and liabilities ............................................... 4,392 (748) 4,443
Unearned compensation ................................................................. 1,888 1,029 945
---------------------------------------
Net cash provided by operating activities ............................................. 19,929 9,688 13,156
---------------------------------------
INVESTING ACTIVITIES
Purchases of bank premises and equipment .............................................. (932) (1,501) (638)
Purchases of Federal Home Loan Bank shares ............................................ (2,964) (8,938) --
Purchases of securities available for sale ............................................ (251,575) (168,527) (141,594)
Proceeds from sales and calls of securities available for sale ........................ 186,370 108,060 128,355
Proceeds from maturities and prepayments of securities available for sale ............. 93,010 40,198 55,432
Net originations and repayments of loans .............................................. (123,743) (91,786) (63,965)
Purchases of loans .................................................................... (28,020) (124,988) (39,873)
Proceeds from sales of real estate owned .............................................. 616 489 1,462
Acquisition of New York Federal, net of cash and cash equivalents ..................... -- (5,171) --
---------------------------------------
Net cash used in investing activities ................................................. (127,238) (252,164) (60,821)
---------------------------------------
</TABLE>
Continued
22
<PAGE>
Flushing Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flow (continued)
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in non-interest-bearing deposits .............................. $ 8,242 $ 11,797 $ (80)
Net (decrease) increase in interest-bearing deposits .................................. (1,757) 60,985 23,727
Net increase (decrease) in mortgagors' escrow deposits ................................ 1,663 (1,350) 968
Net (decrease) increase in short-term borrowed funds .................................. (30,000) 5,000 25,000
Increases in long-term borrowed funds ................................................. 78,271 231,187 26,000
Purchases of treasury stock, net ...................................................... (14,348) (7,601) (12,223)
Cash dividends paid ................................................................... (2,380) (1,615) (623)
---------------------------------------
Net cash provided by financing activities ........................................... 39,691 298,403 62,769
---------------------------------------
Net increase (decrease) in cash and cash equivalents .................................. (67,618) 55,927 15,104
Cash and cash equivalents, beginning of year .......................................... 90,352 34,425 19,321
---------------------------------------
Cash and cash equivalents, end of year .............................................. $ 22,734 $ 90,352 $ 34,425
---------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid ......................................................................... $ 45,394 $ 33,254 $ 26,263
Income taxes paid ..................................................................... 4,976 6,532 5,422
Non-cash activities:
Loans originated as the result of real estate sales ................................. 40 637 307
Loans transferred through the foreclosure of a related mortgage
loan to real estate owned ......................................................... 420 374 1,262
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
Flushing Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
1. Nature of Operations
Flushing Financial Corporation (the "Holding Company"), a Delaware business
corporation, is a savings and loan holding company organized at the direction of
its subsidiary, Flushing Savings Bank, FSB (the "Bank"), in connection with the
Bank's conversion from a mutual to capital stock form of organization. The
Holding Company and its direct and indirect wholly-owned subsidiaries, the Bank,
Flushing Preferred Funding Corporation, Flushing Service Corporation and FSB
Properties, Incorporated are collectively herein referred to as the "Company".
The Company's principal business is attracting retail deposits from the general
public and investing those deposits together with funds generated from
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 Company originates certain other loans, including
construction loans and Small Business Administration loans. The Bank conducts
its business through eight full-service banking offices, four of which are
located in Queens County, two in Nassau County, one in Kings County (Brooklyn)
and one in New York County (Manhattan), New York.
2. Summary of Significant Accounting Policies
The accounting and reporting policies of the Company follow generally accepted
accounting principles ("GAAP") and general practices applicable to the banking
industry. The policies which materially affect the determination of the
Company's financial position, results of operations and cash flows are
summarized below.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
Flushing Financial Corporation and its wholly direct and indirect owned
subsidiaries, the Bank, Flushing Preferred Funding Corporation ("FPFC"),
Flushing Service Corporation ("FSC") and FSB Properties, Incorporated
("Properties"). FPFC is a real estate investment trust incorporated on November
5, 1997 to hold a portion of the Bank's mortgage loans to facilitate access to
capital markets. FSC was formed to market insurance products and mutual funds.
Properties is an inactive subsidiary whose purpose was to manage real estate
properties and joint ventures. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates. Certain
reclassifications have been made to prior year amounts to conform to the current
year presentation.
Cash and cash equivalents:
For the purpose of reporting cash flows, the Company defines cash and due from
banks, overnight interest-earning deposits and federal funds sold with original
maturities of 90 days or less as cash and cash equivalents.
Securities available for sale:
Securities are classified as available for sale when management intends to hold
the securities for an indefinite period of time or when the securities may be
utilized for tactical asset/liability purposes and may be sold from time to time
to effectively manage interest rate exposure and resultant prepayment risk and
liquidity needs. Premiums and discounts are amortized or accreted, respectively,
using the level-yield method. Realized gains and losses on the sales of
securities are determined using the specific identification method. Unrealized
gains and losses on securities available for sale are excluded from earnings and
reported as accumulated other comprehensive income, net of taxes.
Unamortized loan origination fees:
The portion of loan origination fees that exceeds the direct costs of
underwriting and closing loans is deferred. The deferred fees received in
connection with a loan are recognized as an adjustment of the loan's yield over
the shorter of the repricing period or the contractual life of the related loan
by the interest method, which results in a constant rate of return.
24
<PAGE>
Flushing Financial Corporation and Subsidiaries
Allowance for loan losses:
The Company maintains an allowance for loan losses at an amount which, in
management's judgment, is adequate to absorb estimated losses on existing loans
that may become uncollectible. Management's judgment in determining the adequacy
of the allowance is based on evaluations of the collectibility of loans. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available.
Accrual of income on loans:
Interest on loans is recognized as income when earned except to the extent that
the underlying loan is deemed doubtful of collection and placed on non-accrual
status. Loans are generally placed on non-accrual status when they become past
due in excess of ninety days as to payment of principal or interest, and
previously accrued interest is reversed. A non-accrual loan can be returned to
accrual status after the loan meets certain criteria. Subsequent cash payments
received on non-accrual loans that do not meet the criteria are applied first as
a reduction of principal until all principal is recovered and then subsequently
to interest.
Real estate owned:
Real estate owned consists of property acquired by foreclosure. These properties
are carried at the lower of carrying amount or fair value less estimated costs
to sell (hereinafter defined as fair value). This determination is made on an
individual asset basis. If the fair value is less than the carrying amount, the
deficiency is recognized as a valuation allowance. Further decreases to fair
value will be recorded in this valuation allowance through a provision for
losses on real estate owned. The Company utilizes estimates of fair value to
determine the amount of its valuation allowance. Actual values may differ from
those estimates.
Bank premises and equipment:
Bank premises and equipment are stated at cost, less depreciation accumulated on
a straight-line basis over the estimated useful lives of the related assets (5
to 40 years). Leasehold improvements are amortized on a straight-line basis over
the terms of the related leases or the lives of the assets, whichever is
shorter.
Federal Home Loan Bank Stock:
In connection with the Bank's borrowings from the FHLB-NY, the Bank is required
to purchase shares of FHLB-NY non-marketable capital stock at par. Such shares
are redeemed by FHLB-NY at par with reductions in the Bank's borrowing levels.
The Bank carries this investment at historical cost.
Securities sold under agreements to repurchase:
Securities sold under agreements to repurchase are accounted for as
collateralized financing and are carried at amounts at which the securities will
be subsequently reacquired as specified in the respective agreements.
Goodwill:
The portion of the discount on the estimated fair value of net assets acquired
in the acquisition of New York Federal is amortized using the interest method
over the estimated lives of the related assets or liabilities. The cost of
acquisition is amortized using the straight-line method over fifteen years. The
Company periodically reviews its goodwill for possible impairment.
Earnings per share:
Basic earnings per share for the years ended December 31, 1998, 1997 and 1996
was computed by dividing net income by the total weighted average number of
common shares outstanding, including only the vested portion of restricted stock
awards. Diluted earnings per share includes the additional dilutive effect of
stock options outstanding and the unvested portions of restricted stock awards
during the period. The shares held in the Company's Employee Benefit Trust are
not included in shares outstanding for purposes of calculating earnings per
share. The weighted average shares outstanding have been adjusted to reflect the
three-for-two stock split effected in the form of a stock dividend that was
distributed on September 30, 1998.
Earnings per share has been computed based on the following:
<TABLE>
<CAPTION>
====================================================================================================================================
(Amounts in thousands except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................................................................... $10,190 $ 8,531 $ 6,715
Divided by:
Weighted average common shares outstanding ............................................. 10,194 10,660 11,702
Weighted average common stock equivalents .............................................. 241 156 65
-----------------------------------
Total weighted average common shares outstanding & common stock equivalents .............. 10,435 10,816 11,767
Basic earnings per share ................................................................. $ 1.00 $ 0.80 $ 0.57
Diluted earnings per share ............................................................... $ 0.98 $ 0.79 $ 0.57
====================================================================================================================================
</TABLE>
25
<PAGE>
Flushing Financial Corporation and Subsidiaries
3. Loans
The composition of loans as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
================================================================================
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
One-to-four family ........................... $361,786 $289,286
Multi-family ................................. 277,437 230,229
Commercial ................................... 101,401 68,182
Co-operative ................................. 10,238 12,065
Construction ................................. 3,203 2,797
Small Business Administration ................ 2,616 2,789
Consumer and other ........................... 1,899 1,385
-------------------------
Gross loans ................................ 758,580 606,733
Less: Unearned income ........................ 1,263 1,838
-------------------------
Total loans .............................. $757,317 $604,895
================================================================================
</TABLE>
The total amount of loans on non-accrual status as of December 31, 1998, 1997
and 1996 was $2,597,000, $2,458,000 and $2,408,000, respectively. At December
31, 1998, impaired loans totaled $2,597,000; and $137,000, or 2.0%, of the
allowance for loan losses relates to impaired loans. At December 31, 1997,
impaired loans totaled $2,771,000; and $330,000, or 5.1%, of the allowance for
loan losses relates to impaired loans. The portion of the impaired loan amount
above 100% of the loan-to-value ratio is charged off. Impaired loans include
loans on non-accrual status and loans that are performing but deemed substandard
by management. Impaired loans are analyzed on an individual basis. The average
balance of impaired loans was $3,094,000, $2,637,000 and $3,947,000 for 1998,
1997 and 1996, respectively.
The following is a summary of interest foregone on non-accrual loans:
<TABLE>
<CAPTION>
===============================================================================================
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recognized had the loans performed in
accordance with their original terms ................................... $222 $180 $210
Less: Interest income included in the results of operations ............. 42 -- 65
------------------
Foregone interest ........................................................ $180 $180 $145
===============================================================================================
</TABLE>
The following are changes in the allowance for loan losses:
<TABLE>
<CAPTION>
===================================================================================================
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year ........................................ $ 6,474 $ 5,437 $ 5,310
Provision for loan losses ......................................... 214 104 418
Additional allowance acquired with the purchase of New York Federal -- 979 --
Charge-offs ....................................................... (103) (206) (535)
Recoveries ........................................................ 177 160 244
-----------------------------
Balance, end of year ............................................ $ 6,762 $ 6,474 $ 5,437
===================================================================================================
</TABLE>
4. Real Estate Owned
The following are changes in the allowance for losses on real estate owned:
<TABLE>
<CAPTION>
===================================================================================================
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year .............................. $ 74 $ 281 $ 388
Provision ............................................... 33 -- 150
Reduction due to sales of real estate owned ............. (107) (207) (257)
----------------------------------
Balance, end of year .................................. $ -- $ 74 $ 281
===================================================================================================
</TABLE>
26
<PAGE>
Flushing Financial Corporation and Subsidiaries
5. Bank Premises and Equipment, Net
Bank premises and equipment at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
================================================================================
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land ................................................... $ 801 $ 801
Building and leasehold improvements .................... 3,483 3,317
-------------------
Equipment and furniture ................................ 8,101 7,383
Total ................................................ 12,385 11,501
Less: Accumulated depreciation and amortization ........ 5,944 5,008
-------------------
Bank premises and equipment, net ..................... $ 6,441 $ 6,493
================================================================================
</TABLE>
6. Accounting for Debt and Equity Securities
Investments in equity securities that have readily determinable fair values and
all investments in debt securities are classified in one of the following three
categories and accounted for accordingly: (1) trading securities, (2) securities
available for sale and (3) securities held to maturity.
The Company did not hold any trading securities or securities held to maturity
during the years ended December 31, 1998, 1997 and 1996. Securities available
for sale are recorded at estimated fair value based on dealer quotations where
available. Actual values may differ from estimates provided by outside dealers.
Securities classified as held to maturity are stated at cost, adjusted for
amortization of premium and accretion of discount using the level-yield method.
The amortized cost and estimated fair value of the Company's securities,
classified as available for sale as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Gross Gross
Amortized Estimated Unrealized Unrealized
(In thousands) Cost Fair Value Gains Losses
========================================================================================================================
<S> <C> <C> <C> <C>
U.S. Treasury securities and government agencies $ 13,213 $ 13,425 $ 212 $ --
Corporate debt securities ...................... 4,711 4,710 4 5
Public utility debt securities ................. 945 944 -- 1
Other .......................................... 4,699 5,190 598 107
--------------------------------------------------------------
Total other securities ....................... 23,568 24,269 814 113
Mortgage-backed securities ..................... 300,637 302,421 2,090 306
--------------------------------------------------------------
Total securities available for sale .......... $324,205 $326,690 $ 2,904 $ 419
========================================================================================================================
</TABLE>
The amortized cost and estimated fair value of the Company's securities,
classified as available for sale at December 31, 1998, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
-----------------------
Estimated
Amortized Fair
(In thousands) Cost Value
================================================================================
<S> <C> <C>
Due in one year or less .......................... $ 7,637 $ 8,026
Due after one year through five years ............ 1,600 1,656
Due after five years through ten years ........... 8,763 8,927
Due after ten years .............................. 5,568 5,660
-----------------------
Total other securities ......................... 23,568 24,269
Mortgage-backed securities ....................... 300,637 302,421
-----------------------
Total securities available for sale ............ $324,205 $326,690
================================================================================
</TABLE>
27
<PAGE>
Flushing Financial Corporation and Subsidiaries
The amortized cost and estimated fair value of the Company's securities
classified as available for sale at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Gross Gross
Amortized Estimated Unrealized Unrealized
(In thousands) Cost Fair Value Gains Losses
========================================================================================================================
<S> <C> <C> <C> <C>
U.S. Treasury securities and government agencies $120,106 $120,123 $ 366 $ 349
Corporate debt securities ...................... 13,149 13,178 36 7
Public utility debt securities ................. 2,247 2,271 33 9
Other .......................................... 3,374 4,030 665 9
--------------------------------------------------------------
Total other securities ....................... 138,876 139,602 1,100 374
Mortgage-backed securities ..................... 215,159 217,110 2,683 732
--------------------------------------------------------------
Total securities available for sale .......... $354,035 $356,712 $ 3,783 $ 1,106
========================================================================================================================
</TABLE>
For the year ended December 31, 1998, gross gains of $387,000 and losses of
$285,000 were realized on sales of securities available for sale. For the year
ended December 31, 1997, gross gains of $506,000 and losses of $454,000 were
realized on sales of securities available for sale. For the year ended December
31, 1996, gross gains of $500,000 and losses of $374,000 were realized on sales
of securities available for sale.
7. Due to Depositors
Due to depositors as of December 31, 1998 and 1997, and the weighted average
rate on deposits at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
=========================================================================================
Weighted
Average Cost
(Dollars in thousands) 1998 1997 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing deposits:
Certificate of deposit accounts . $370,815 $382,729 5.47%
Passbook savings accounts ....... 203,949 201,668 2.29
Money market accounts ........... 28,439 23,526 2.69
NOW accounts .................... 26,788 23,825 1.90
--------------------------
Total interest-bearing deposits 629,991 631,748
Non-interest-bearing deposits:
Demand accounts ................. 27,505 19,263
--------------------------
Total due to depositors ....... $657,496 $651,011
=========================================================================================
</TABLE>
The aggregate amount of time deposits with denominations greater than $100,000
was $30,549,000 and $29,856,000 at December 31, 1998 and 1997, respectively.
Interest expense on deposits, for the years ended December 31, 1998, 1997 and
1996, respectively, is summarized as follows:
<TABLE>
<CAPTION>
================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Certificate of deposit accounts ......... $21,128 $19,487 $16,848
Passbook savings accounts ............... 5,549 5,884 6,142
Money market accounts ................... 773 692 741
NOW accounts ............................ 466 432 370
---------------------------------
Total due to depositors ............... 27,916 26,495 24,101
Mortgagors' escrow deposits ............. 71 71 63
---------------------------------
Total deposit expense ................. $27,987 $26,566 $24,164
================================================================================
</TABLE>
28
<PAGE>
Flushing Financial Corporation and Subsidiaries
8. Borrowed Funds
Borrowed funds as of December 31, 1998 and 1997, respectively, are summarized as
follows:
<TABLE>
<CAPTION>
================================================================================
1998 1997
----------------------------------------------
Weighted Weighted
At December 31, Amount Average Rate Amount Average Rate
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Short-term borrowings:(1)
Reverse repurchase agreements $ -- --% $ 20,000 5.91%
FHLB-NY advances ............ 15,000 5.78% 10,000 6.35%
----------------------------------------------
Total short-term borrowings 15,000 5.78% 30,000 6.05%
----------------------------------------------
Long-term borrowings:
Reverse repurchase agreements 120,000 5.83% 80,000 5.82%
FHLB-NY advances ............ 200,458 6.30% 177,112 6.34%
----------------------------------------------
Total long-term borrowings 320,458 6.11% 257,112 6.18%
----------------------------------------------
Other borrowings .............. -- 75
----------------------------------------------
Total borrowings .......... $335,458 $287,187
================================================================================
</TABLE>
(1) Borrowings with an original maturity date of less than one year.
As part of the Company's strategy to finance investment opportunities and manage
its cost of funds, the Company enters into reverse repurchase agreements with
the Federal Home Loan Bank of New York ("FHLB-NY"). These agreements are
recorded as financing transactions and the obligations to repurchase are
reflected as a liability in the consolidated financial statements. The
securities underlying the agreements are held in the name of the FHLB-NY.
FHLB-NY, who may sell, loan or otherwise dispose of such securities to other
parties in the normal course of their operations, agrees to resell to the
Company the same securities at the maturities of the agreements. The Company
retains the right of substitution of collateral throughout the terms of the
agreements. All the reverse repurchase agreements are collateralized by
mortgage-backed securities. Information relating to these agreements at or for
the years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
===============================================================================================
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Book value of collateral ............................................... $135,555 $114,408
Estimated fair value of collateral ..................................... 136,579 115,547
Average balance of outstanding agreements during the year .............. 110,274 6,904
Maximum balance of outstanding agreements at a month end during the year 130,000 100,000
Average interest rate of outstanding agreements during the year ........ 5.81% 5.84%
===============================================================================================
</TABLE>
Pursuant to a blanket collateral agreement with the FHLB-NY, advances are
secured by all of the Bank's stock in the FHLB-NY, certain qualifying mortgage
loans, mortgage-backed and mortgage-related securities, and other securities not
otherwise pledged in an amount at least equal to 110% of the advances
outstanding.
9. Income Taxes
Flushing Financial Corporation files consolidated Federal and combined New York
State and New York City income tax returns with its subsidiaries, with the
exception of FPFC, which files separate Federal, New York State and New York
City income tax returns as a real estate investment trust entity. A deferred tax
liability is recognized on all taxable temporary differences and a deferred tax
asset is recognized on all deductible temporary differences and operating losses
and tax credit carryforwards. A valuation allowance is recognized to reduce the
potential deferred tax asset if it is "more likely than not" that all or some
portion of that potential deferred tax asset will not be realized. This Company
must also take into account changes in tax laws or rates when valuing the
deferred income tax amounts it carries on its Consolidated Statements of
Financial Condition.
The Company's annual tax liability for New York State and New York City was the
greater of a tax based on "entire net income", "alternative entire net income",
"taxable assets" or a minimum tax. For the year ended December 31, 1998, the
Company's state and city tax was based on "alternative entire net income", while
the Company's state and city tax liability for the years ended December 31, 1997
and 1996 was based on "entire net income".
29
<PAGE>
Flushing Financial Corporation and Subsidiaries
Income tax provisions (benefits) for the years ended December 31, 1998, 1997 and
1996, are summarized as follows:
<TABLE>
<CAPTION>
================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Federal:
Current .................................. $ 5,532 $ 5,148 $ 3,304
Deferred ................................. (488) (657) 236
--------------------------------
Total federal tax provision ............ 5,044 4,491 3,540
--------------------------------
State and Local:
Current .................................. (43) 1,782 2,549
Deferred ................................. 1,011 502 (278)
--------------------------------
Total state and local tax provision .... 968 2,284 2,271
--------------------------------
Total income tax provision ............. $ 6,012 $ 6,775 $ 5,811
================================================================================
</TABLE>
The income tax provision in the Consolidated Statements of Income has been
provided at effective rates of 37%, 44% and 46% for the years ended December 31,
1998, 1997 and 1996, respectively. The effective rates differ from the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
================================================================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes at federal statutory rate ............................. $ 5,671 35% $ 5,357 35% $ 4,258 34%
Increase (reduction) in taxes resulting from:
State & local income tax, net of Federal income tax benefit 629 4 1,485 10 1,499 12
Other ..................................................... (288) (2) (67) (1) 54 --
----------------------------------------------------------------
Taxes at effective rate ................................. $ 6,012 37% $ 6,775 44% $ 5,811 46%
================================================================================================================================
</TABLE>
The components of the income taxes for the years ended December 31, 1998, 1997
and 1996; attributable to income from operations and changes in equity are as
follows:
<TABLE>
<CAPTION>
========================================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income from operations ................................................. $ 6,012 $ 6,775 $ 5,811
Equity:
Change in fair value of securities available for sale ................ (75) 2,266 (2,443)
Compensation expense for tax purposes in excess of that recognized for
financial reporting purposes ....................................... (411) (131) --
-----------------------------
Total .............................................................. $ 5,526 $ 8,910 $ 3,368
========================================================================================================
</TABLE>
The components of the net deferred tax asset as of December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
================================================================================
For the years ended December 31, 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax asset:
Postretirement benefits ................................ $2,683 $1,989
Allowance for loan losses .............................. 267 1,545
Deferred income ........................................ -- 230
Other .................................................. 870 518
-----------------
Deferred tax asset ................................... 3,820 4,282
-----------------
Deferred tax liabilities:
Unrealized gains on securities available for sale ...... 1,143 1,218
Depreciation ........................................... 542 492
Other .................................................. 11 --
-----------------
Deferred tax liability ............................... 1,696 1,710
-----------------
Net deferred tax asset included in other assets .... $2,124 $2,572
================================================================================
</TABLE>
30
<PAGE>
Flushing Financial Corporation and Subsidiaries
The Company has recorded a net deferred tax asset of $2,124,000. This represents
the anticipated net federal, state and local tax benefits expected to be
realized in future years upon the utilization of the underlying tax attributes
comprising this balance. The Company has reported taxable income for federal,
state, and local tax purposes in each of the past three years and in
management's opinion, in view of the Company's previous, current and projected
future earnings trend, such net deferred tax asset will be fully realized.
Accordingly, no valuation allowance was deemed necessary for the net deferred
tax asset at December 31, 1998.
10. Benefit Plans
Defined Contribution Plans:
The Company maintains a profit-sharing plan and the Bank maintains a 401(k)
plan. Both plans are tax-qualified defined contribution plans which cover
substantially all employees. Annual contributions are at the discretion of the
Company's Board of Directors, but not to exceed the maximum amount allowable
under the Internal Revenue Code. Currently, annual matching contributions under
the Bank's 401(k) plan equal fifty percent of the employee's contributions, up
to a maximum of three percent of the employee's compensation. The Board of
Director's discretion to amend these arrangements is limited to prospective
changes only. Annual contributions by the Bank into the 401(k) plan for
employees vests 20% per year over a five year period. Compensation expense
recorded by the Company and its subsidiaries for these plans amounted to
$526,000, $469,000 and $419,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
Employee Benefit Trust:
An Employee Benefit Trust ("EBT") has been established to assist the Company in
funding its benefit plan obligations. In connection with the Bank's conversion,
the EBT borrowed $7,928,000 from the Company and used $7,000 of cash received
from the Bank to purchase 1,035,000 shares of the common stock of the Company.
The loan will be repaid principally from the Company's discretionary
contributions to the EBT and dividend payments received on common stock held by
the EBT, or will be forgiven by the Company, over a period of 30 years. At
December 31, 1998 the loan had an outstanding balance of $6,949,000, bearing a
fixed interest rate of 6.22% per annum. The loan obligation of the EBT is
considered unearned compensation and, as such, is recorded as a reduction of the
Company's stockholders' equity. Both the loan obligation and the unearned
compensation are reduced by the amount of loan repayments made by the EBT or
forgiven by the Company. Shares purchased with the loan proceeds are held in a
suspense account for contribution to specified benefit plans as the loan is
repaid or forgiven. Shares released from the suspense account are used solely
for funding matching contributions under the Bank's 401(k) plan and
contributions to the Company's profit-sharing plan. Since annual contributions
are discretionary with the Company or dependent upon employee contributions,
compensation payable under the EBT cannot be estimated. For the years ended
December 31, 1998, 1997 and 1996, the Company funded $463,000, $411,000 and
$372,000, respectively, of its contributions to the Bank's 401(k) and profit
sharing plans from the EBT.
The shares held in the suspense account are pledged as collateral and are
reported as unallocated EBT shares in stockholders' equity. As shares are
released from the suspense account, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. The EBT shares as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
=====================================================================================
December 31, 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Shares owned by Employee Benefit Trust, beginning balance 943,803 970,863
Shares released and allocated ........................... 29,220 27,060
-------------------------
Shares owned by Employee Benefit Trust, ending balance .. 914,583 943,803
=========================
Market value of unallocated shares ...................... $14,462,000 $15,022,000
=====================================================================================
</TABLE>
31
<PAGE>
Flushing Financial Corporation and Subsidiaries
Restricted Stock Plan:
The 1996 Restricted Stock Incentive Plan ("Restricted Stock Plan") became
effective on May 21, 1996 after adoption by the Board of Directors and approval
by shareholders. The aggregate number of shares of common stock which may be
issued under the Restricted Stock Plan, as amended, may not exceed 474,750
shares to employees, and may not exceed 155,250 shares to Outside Directors, for
a total of 630,000 shares. Lapsed, forfeited or canceled awards and shares
withheld from an award to satisfy tax obligations will not count against these
limits, and will be available for subsequent grants. The shares distributed
under the Restricted Stock Plan may be shares held in treasury or authorized but
unissued shares. The following table summarizes certain activity for the
Restricted Stock Plan after giving effect to the 3-for-2 common stock split.
<TABLE>
<CAPTION>
===========================================================================================================
For the years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares available for future Restricted Stock Awards at beginning of year 58,390 77,775 --
Shares authorized for Restricted Stock Awards .......................... 112,500 -- 517,500
Restricted Stock Awards ................................................ (32,000) (45,750) (447,600)
Restricted shares repurchased to satisfy tax obligations ............... 28,132 21,415 --
Forfeitures ............................................................ 28,050 4,950 7,875
-------------------------------
Shares available for future Restricted Stock Awards at end of year ..... 195,072 58,390 77,775
===========================================================================================================
</TABLE>
All grants vest 20% per year over a five year period with full vesting in the
event of death, disability, retirement or a change in control. Total restricted
stock award expense in 1998, 1997 and 1996 was $1,402,000, $1,109,000 and
$573,000, respectively.
Stock Option Plan:
The 1996 Stock Option Incentive Plan ("Stock Option Plan") became effective on
May 21, 1996 after adoption by the Board of Directors and approval by
shareholders. The Stock Option Plan provides for the grant of incentive stock
options intended to comply with the requirements of Section 422 of the Internal
Revenue Code, nonstatutory stock options, and stock appreciation rights granted
in tandem with such options. The aggregate number of shares of common stock
which may be issued under the Stock Option Plan, as amended, with respect to
options granted to employees may not exceed 1,130,625 shares, and with respect
to options granted to Outside Directors may not exceed 463,125 shares, for a
total of 1,593,750 shares. Lapsed, forfeited or canceled options will not count
against these limits and will be available for subsequent grants. However, the
cancellation of an option upon exercise of a related stock appreciation right
will count against these limits. Options with respect to more than 112,500
shares of common stock may not be granted to any employee in any calendar year.
The shares distributed under the Stock Option Plan may be shares held in
treasury or authorized but unissued shares. All grants vest over a five year
period. The following table summarizes certain information regarding the Stock
Option Plan after giving effect to the 3-for-2 common stock split.
<TABLE>
<CAPTION>
--------------------
Weighted
Shares Average
Underlying Exercise
Options Price
===========================================================================================
<S> <C> <C>
Balance outstanding December 31, 1996 .............................. 1,130,775 $10.88
Granted ............................................................ 91,500 $14.53
Exercised .......................................................... (11,100) $10.83
Forfeited .......................................................... (9,900) $10.83
-------------------
Balance outstanding December 31, 1997 .............................. 1,201,275 $11.54
Granted ............................................................ 64,000 $14.70
Exercised .......................................................... (34,763) $10.83
Forfeited .......................................................... (56,100) $14.34
-------------------
Balance Outstanding December 31, 1998 .............................. 1,174,412 $11.20
===================
Shares available for future stock option awards at December 31, 1998 373,475
===========================================================================================
</TABLE>
32
<PAGE>
Flushing Financial Corporation and Subsidiaries
The following table summarizes information about the Stock Option Plan at
December 31, 1998:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------
Weighted Weighted
Number Average Number Average
Outstanding at Remaining Exercisable at Exercise
Exercise Prices 12/31/98 Contractual Life 12/31/98 Price
=====================================================================================================================
<S> <C> <C> <C> <C>
$10.83 1,034,212 7.4 Years 490,162 $ 10.83
$12.00-$15.00 118,200 8.8 Years 41,280 $ 13.65
$15.01-$19.00 22,000 9.5 Years 600 $ 15.58
-------------------------------------------------------------------------------------
$10.83-$19.00 1,174,412 7.6 Years 532,042 $ 11.05
=====================================================================================================================
</TABLE>
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its Stock Option Plan.
Accordingly, no compensation cost has been recognized for options granted under
the Stock Option Plan. Had compensation cost for the Company's Stock Option Plan
been determined based on the fair value at the grant dates, consistent with the
method prescribed by SFAS No. 123, the Company's net income and earnings per
share would have been as follows. However, the initial impact of the new rules,
as per SFAS No. 123, may not be representative of the effect on income in future
years because the options vest over several years and additional option grants
may be made each year.
<TABLE>
<CAPTION>
================================================================================
(Dollars in thousands,
except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported ....................... $10,190 $8,531 $6,715
Pro forma ......................... $ 9,540 $8,101 $6,421
Diluted earnings per share:
As reported ....................... $ 0.98 $ 0.79 $ 0.57
Pro forma ......................... $ 0.91 $ 0.75 $ 0.55
================================================================================
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The weighted average assumptions used for
grants made in 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
================================================================================
1998 Grants 1997 Grants 1996 Grants
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield ...................... 1.50% 1.21% 0.93%
Expected volatility ................. 35.22% 28.55% 27.41%
Risk-free interest rate ............ 4.38% 6.08% 6.58%
Expected option life ................ 7 Years 7 years 7 Years
================================================================================
</TABLE>
Pension Plans:
The Company also has a defined benefit pension plan covering substantially all
of its employees (the "Retirement Plan"). The benefits are based on years of
service and the employee's compensation during the three consecutive years out
of the final ten years of service that produces the highest average. The
Company's funding policy is to contribute annually the maximum amount that can
be deducted for federal income tax purposes. Contributions are intended to
provide not only for the benefits attributed to service to date but also for
those expected to be earned in the future.
The components of the net pension expense are as follows:
<TABLE>
<CAPTION>
================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost .................................. $ 341 $ 298 $ 309
Interest cost ................................. 517 487 422
Amortization of transition asset .............. -- (2) (5)
Amortization of past service liability ........ (24) (24) (25)
Amortization of unrecognized gain ............. (34) -- --
Return on plan assets ......................... (701) (581) (505)
----------------------------
Net pension expense ......................... $ 99 $ 178 $ 196
================================================================================
</TABLE>
33
<PAGE>
Flushing Financial Corporation and Subsidiaries
The following table sets forth for the Retirement Plan, the change in benefit
obligation and assets, and for the Company, the amounts recognized in the
Consolidated Statements of Financial Condition at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
===========================================================================================================
For the years ended December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ............................................. $ 7,270 $ 6,077
Service cost ........................................................................ 341 298
Interest cost ....................................................................... 517 487
Actuarial loss ...................................................................... 189 619
Benefits paid ....................................................................... (218) (211)
Plan amendments ..................................................................... 99 --
-------------------
Benefit obligation at end of year ................................................... 8,198 7,270
-------------------
Change in plan assets:
Market value of assets at beginning of year ......................................... 8,863 7,255
Actual return on plan assets ........................................................ 20 1,626
Employer contributions .............................................................. 52 193
Benefits paid ....................................................................... (218) (211)
-------------------
Market value of plan assets at end of year .......................................... 8,717 8,863
-------------------
Funded status ....................................................................... 519 1,593
Unrecognized net gain from past experience different from that assumed and effects of
changes in assumptions ............................................................ (194) (1,144)
Prior service cost not yet recognized in periodic pension cost ...................... (134) (159)
-------------------
Prepaid pension cost included in other assets ....................................... $ 191 $ 290
===========================================================================================================
</TABLE>
Assumptions used in 1998, 1997 and 1996 to develop periodic pension amounts
were:
<TABLE>
<CAPTION>
================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average discount rate ...................... 6.75% 7.25% 7.50%
Rate of increase in future compensation levels ...... 4.00% 5.00% 5.50%
Expected long-term rate of return on assets ......... 8.50% 8.00% 8.00%
================================================================================
</TABLE>
The Bank has an Outside Director Retirement Plan (the "Directors' Plan"), which
provides benefits to each outside director whose years of service as an outside
director (including service as a director or trustee of the Bank or any
predecessor) plus age equal or exceed 75. Benefits are also payable to an
outside director whose status as an outside director terminates because of
disability or who is an outside director upon a change of control (as defined in
the Directors' Plan). An eligible director will be paid an annual retirement
benefit equal to the last annual retainer paid, plus fees paid to such director
for attendance at Board meetings during the twelve month period prior to
retirement. Such benefit will be paid in equal monthly installments for the
lesser of the number of months such director served as an outside director or
120 months, provided, however, that a director's retirement benefits will be
paid in a cash lump sum in the event of a change of control. In the event of the
director's death, the surviving spouse shall receive the equivalent benefit. No
benefits will be payable to a director who is removed for cause. The Holding
Company has guaranteed the payment of benefits under the Directors' Plan. Upon
adopting the Directors' Plan, the Bank elected to immediately recognize the
effect of adopting the Directors' Plan.
The components of the net pension expense for the Directors' Plan are as
follows:
<TABLE>
<CAPTION>
================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost ..................................... $-- $ 9 $ 8
Interest cost .................................... -- -- 51
Amortization of past service liability ........... 83 83 --
-----------------------
Net pension expense .............................. $83 $92 $59
================================================================================
</TABLE>
34
<PAGE>
Flushing Financial Corporation and Subsidiaries
The following table sets forth for the Directors' Plan, the change in benefit
obligation and assets, and for the Company, the amounts recognized in the
Consolidated Statements of Financial Condition at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
==============================================================================================================
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ................................................. $ 1,654 $ 1,641
Service cost ............................................................................ -- 9
Actuarial loss .......................................................................... 97 22
Benefits paid ........................................................................... (22) (18)
Plan amendments ......................................................................... 224 --
------------------
Benefit obligation at end of year ....................................................... 1,953 1,654
------------------
Change in plan assets:
Market value of assets at beginning of year ............................................. -- --
Employer contributions .................................................................. 22 18
Benefits paid ........................................................................... (22) (18)
------------------
Market value of assets at end of year ................................................... -- --
------------------
Funded status ........................................................................... (1,953) (1,654)
Unrecognized net loss (gain) from past experience different from that assumed and effects
of changes in assumptions ............................................................. 79 (18)
Prior service cost not yet recognized in periodic pension cost .......................... 969 828
------------------
Accrued pension cost included in other liabilities .................................... $ (905) $ (844)
==============================================================================================================
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the weighted average
discount rate used in determining the actuarial present value of the projected
benefit obligation was 6.75%, 7.25% and 7.75%, respectively. The level of future
retainers and meeting fees was projected to remain constant.
11. Postretirement Benefits Other Than Pension
The Company sponsors two defined postretirement benefit plans that cover all
full-time permanent employees and their spouses. One plan provides medical
benefits through a fifty percent cost sharing arrangement. The other plan
provides life insurance benefits and is noncontributory. These retiree programs
are available to retirees with five years of service. Under these programs,
eligible retirees receive lifetime medical and life insurance coverage for
themselves and lifetime medical coverage for their spouses.
Comprehensive medical plan benefits equal the lesser of the normal plan benefit
or the total amount not paid by Medicare. Life insurance benefits for retirees
are based on annual compensation and age at retirement. As of December 31, 1998,
the Bank has not adopted a funding policy.
The following table sets forth for the postretirement plans, the change in
benefit obligation and assets, and for the Company, the amounts recognized in
the Consolidated Statements of Financial Condition:
<TABLE>
<CAPTION>
==============================================================================================================
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year .............................................. $ 1,660 $ 1,304
Service cost ......................................................................... 118 69
Actuarial loss ....................................................................... 188 110
Benefits paid ........................................................................ 1,153 243
Plan amendments ...................................................................... (112) (66)
-------------------
Benefit obligation at end of year .................................................... 3,007 1,660
-------------------
Change in plan assets:
Market value of assets at beginning of year .......................................... -- --
Employer contributions ............................................................... 112 66
Benefits paid ........................................................................ (112) (66)
-------------------
Market value of assets at end of year ................................................ -- --
-------------------
Funded status ........................................................................ (3,007) (1,660)
Unrecognized net loss from past experience different from that assumed and effects
of changes in assumptions .......................................................... 1,202 113
Prior service cost not yet recognized in periodic expense ............................ (619) (722)
-------------------
Accrued postretirement cost included in other liabilities .......................... $(2,424) $(2,269)
==============================================================================================================
</TABLE>
35
<PAGE>
Assumptions used in determining the actuarial present value of the accumulated
postretirement benefit obligations as of December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
==============================================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rate of return on plan assets ............................... NA NA NA
Discount rate ............................................... 6.75% 7.25% 7.50%
Rate of increase in health care costs:
Initial ................................................... 6.75% 7.50% 10.00%
Ultimate (year 2005) ...................................... 5.00% 5.00% 5.50%
Annual rate of salary increases ............................. NA NA NA
==============================================================================================================
</TABLE>
The health care cost trend rate assumptions have a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1998 by $327,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit costs for the year then ended by $38,000.
For the year ended December 31, 1998, 1997 and 1996, the resulting net periodic
postretirement benefit expense consisted of the following components:
<TABLE>
<CAPTION>
==============================================================================================================
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost .............................................. $ 118 $ 69 $ 49
Interest cost ............................................. 188 110 96
Amortization of unrecognized loss ......................... 63 -- --
Amortization of past service liability .................... (102) (102) (102)
----------------------------------------
Net postretirement benefit expense ........................ $ 267 $ 77 $ 43
==============================================================================================================
</TABLE>
12. Stockholders' Equity
Dividend Restrictions:
In connection with the Bank's conversion from mutual to stock form in November
1995, a special liquidation account was established at the time of conversion,
in accordance with the requirements of the Office of Thrift Supervision ("OTS"),
which was equal to its capital as of June 30, 1995. The liquidation account is
reduced as and to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases in deposits do not restore an eligible
account holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held. As of
December 31, 1998, the Bank's liquidation account was $12.4 million and was
presented within retained earnings. Accordingly, the Bank's retained earnings
were restricted by that amount.
In addition to the restriction described above, the Bank may not declare or pay
cash dividends on or repurchase any of its shares of common stock if the effect
thereof would cause the stockholders' equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements.
Stock Split:
The Company declared a three-for-two stock split which was distributed on
September 30, 1998 in the form of a stock dividend. This dividend was not paid
on shares held in treasury. Shares issued and outstanding for prior years have
been restated to reflect this three-for-two stock split.
Treasury Stock Transactions:
During 1998, the Holding Company repurchased 757,146 shares of its outstanding
common stock. Also during 1998, 1,339,590 shares of Treasury stock were used to
pay the stock dividend discussed above. At December 31, 1998, the Company had
456,873 shares of Treasury stock which, among other things, could be held to
satisfy obligations under the Company's Restricted Stock Plan and Stock Option
Plan. Treasury stock is being accounted for using the average cost method.
36
<PAGE>
Flushing Financial Corporation and Subsidiaries
13. Regulatory Capital
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes a number of mandatory supervisory measures on banks and thrift
institutions. Among other matters, FDICIA established five capital zones or
classifications (well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized). Such
classifications are used by the OTS and other bank regulatory agencies to
determine matters ranging from each institution's semi-annual FDIC deposit
insurance premium assessments, to approvals of applications authorizing
institutions to grow their asset size or otherwise expand business activities.
Under OTS capital regulations, the Bank is required to comply with each of three
separate capital adequacy standards. As of December 31, 1998, the Bank has been
categorized as "well-capitalized" by the OTS under the prompt corrective action
regulations and continues to exceed all regulatory capital requirements. Set
forth below is a summary of the Bank's compliance with OTS capital standards as
of December 31, 1998 and 1997:
================================================================================
December 31, 1998 December 31, 1997
--------------------- --------------------
Percent of Percent of
(Dollars in thousands) Amount Assets Amount Assets
===============================================================================
Tangible capital:
Capital level ............... $105,535 9.46% $ 95,355 9.11%
Requirement ................. 16,729 1.50% 15,708 1.50%
Excess ...................... $ 88,806 7.96% $ 79,647 7.61%
Core (Tier I) capital:
Capital level ............... $105,535 9.46% $ 95,355 9.11%
Requirement ................. 44,611 4.00% 41,887 4.00%
Excess ...................... $ 60,924 5.46% $ 53,468 5.11%
Total risk-based capital:
Capital level ............... $112,297 19.43% $101,794 19.76%
Requirement ................. 46,238 8.00% 41,212 8.00%
Excess ...................... $ 66,059 11.43% $ 60,582 11.76%
===============================================================================
14. Commitments and Contingencies
Commitments:
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and lines of
credit. The instruments involve, to varying degrees, elements of credit and
market risks in excess of the amount recognized in the consolidated financial
statements.
The Company's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for loan commitments and lines of
credit is represented by the contractual amounts of these instruments.
Commitments to extend credit (principally real estate mortgages), purchase
mortgage loans and lines of credit (principally home equity lines of credit)
amounted to approximately $42,476,000, $6,601,000 and $2,697,000, respectively,
at December 31, 1998. Since generally all of the loan commitments are expected
to be drawn upon, the total loan commitments approximate future cash
requirements, whereas the amounts of lines of credit may not be indicative of
the Company's future cash requirements. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
As of December 31, 1998, commitments to extend credit for fixed-rate real estate
mortgages amounted to $15.3 million, with an average interest rate of 7.42%.
Commitments to extend credit are legally binding agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and require payment
of a fee. The Company evaluates each customer's credit worthiness on a case by
case basis. Collateral held consists primarily of real estate.
37
<PAGE>
Flushing Financial Corporation and Subsidiaries
The Company's minimum annual rental payments for Bank premises due under
non-cancelable leases are as follows:
- --------------------------------------------------------------------------------
Minimum Rental
================================================================================
(In thousands)
Years ending December 31:
1999 ............................................................ $ 484
2000 ............................................................ 498
2001 ............................................................ 516
2002 ............................................................ 533
2003 ............................................................ 554
Thereafter ...................................................... 1,633
------
Total minimum payments required ............................... $4,218
================================================================================
The leases have escalation clauses for operating expenses and real estate taxes.
Certain lease agreements provide for increases in rental payments based upon
increases in the consumer price index. Rent expense under these leases for the
years ended December 31, 1998, 1997 and 1996 was approximately $451,000,
$449,000 and $406,000, respectively.
Contingencies:
The Company is a defendant in various lawsuits. Management of the Company, after
consultation with outside legal counsels, believes that the resolution of these
various matters will not result in any material effect on the Company's
consolidated financial condition, results of operations or cash flows.
15. Concentration of Credit Risk
The Company's lending is concentrated in one-to-four family and multi-family
residential real estate and commercial real estate loans to borrowers in the
metropolitan New York area. The Company evaluates each customer's credit
worthiness on a case-by-case basis under the Company's established underwriting
policies. The collateral obtained by the Company generally consists of first
liens on one-to-four family and multi-family residential real estate and
commercial income producing real estate.
16. Disclosures About Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
that the Company disclose the estimated fair values for certain of its financial
instruments. Financial instruments include items such as loans, deposits,
securities, commitments to lend and other items as defined in SFAS No. 107.
Fair value estimates are supposed to represent estimates of the amounts at which
a financial instrument could be exchanged between willing parties in a current
transaction other than in a forced liquidation. However, in many instances
current exchange prices are not available for many of the Company's financial
instruments, since no active market generally exists for a significant portion
of the Bank's financial instruments. Accordingly, the Company uses other
valuation techniques to estimate fair values of its financial instruments such
as discounted cash flow methodologies and other methods allowable under SFAS No.
107.
Fair value estimates are subjective in nature and are dependent on a number of
significant assumptions based on management's judgment regarding future expected
loss experience, current economic condition, risk characteristics of various
financial instruments, and other factors. In addition, SFAS No. 107 allows a
wide range of valuation techniques, therefore, it may be difficult to compare
the Company's fair value information to independent markets or to other
financial institutions' fair value information.
The Company generally holds its earning assets, other than securities available
for sale, to maturity and settles its liabilities at maturity. However, fair
value estimates are made at a specific point in time and are based on relevant
market information. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire holdings of
a particular instrument. Accordingly, as assumptions change, such as interest
rates and prepayments, fair value estimates change and these amounts may not
necessarily be realized in an immediate sale.
SFAS No. 107 does not require disclosure about fair value information for items
that do not meet the definition of a financial instrument or certain other
financial instruments specifically excluded from its requirements. These items
include core deposit intangibles and other customer relationships, premises and
equipment, leases, income taxes, foreclosed properties and equity.
Further, SFAS No. 107 does not attempt to value future income or business. These
items may be material and accordingly, the fair value information presented does
not purport to represent, nor should it be construed to represent, the
underlying "market" or franchise value of the Company.
38
<PAGE>
Flushing Financial Corporation and Subsidiaries
The estimated fair value of each material class of financial instruments as of
December 31, 1998 and 1997 and the related methods and assumptions used to
estimate fair value are as follows:
Cash and due from banks, overnight interest-earning deposits and federal funds
sold, FHLB-NY stock, interest and dividends receivable, mortgagors' escrow
deposits, borrowed funds and other liabilities:
The carrying amounts are a reasonable estimate of fair value.
Securities available for sale:
The estimated fair values of securities available for sale are contained in Note
6 of notes to consolidated financial statements. Fair value is based upon quoted
market prices, where available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities and
adjusted for differences between the quoted instrument and the instrument being
valued.
Loans:
The estimated fair value of loans as of December 31, 1998 and 1997 is
$777,715,000 and $608,164,000, respectively.
Fair value is estimated by discounting the expected future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and remaining maturities.
For non-accruing loans, fair value is generally estimated by discounting
management's estimate of future cash flows with a discount rate commensurate
with the risk associated with such assets.
Due to depositors:
The estimated fair value of deposits as of December 31, 1998 and 1997 was
$661,494,000 and $653,300,000, respectively.
The fair values of demand, passbook savings, NOW and money market deposits are,
by definition, equal to the amount payable on demand at the reporting date (i.e.
their carrying value). The fair value of fixed-maturity certificates of deposits
are estimated by discounting the expected future cash flows using the rates
currently offered for deposits of similar remaining maturities.
Other financial instruments:
The fair values of commitments to sell, lend or borrow are estimated using the
fees currently charged or paid to enter into similar agreements, taking into
account the remaining terms of the agreements and the present credit worthiness
of the counterparties or on the estimated cost to terminate them or otherwise
settle with the counterparties at the reporting date. For fixed-rate loan
commitments to sell, lend or borrow, fair values also consider the difference
between current levels of interest rates and committed rates (where applicable).
As of December 31, 1998 and 1997, the fair values of the above financial
instruments approximate the recorded amounts of the related fees and were not
considered to be material.
17. Recent Accounting Pronouncements
In June of 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which amends SFAS No. 52 and 107, and it
supercedes FASB Statements No. 80, 105 and 119. This Pronouncement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. This
Statement requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of these
derivatives at fair value. Adoption of this Pronouncement is not expected to
have a material impact on the Company's financial position or results of its
operations.
In October of 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", an amendment of SFAS No. 65. This Pronouncement
amends SFAS No. 65 to permit classification as trading, available for sale, or
held to maturity mortgage-backed securities retained after the securitization of
mortgage loans held for sale. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. Adoption of this Pronouncement is not
expected to have a material impact on the Company's financial position or
results of its operations.
39
<PAGE>
Flushing Financial Corporation and Subsidiaries
18. Quarterly Financial Data (unaudited)
Selected unaudited quarterly financial data for the fiscal years ended December
31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
====================================================================================================================================
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly operating data:
Interest income .................................... $20,989 $20,828 $20,532 $20,497 $18,903 $17,366 $15,940 $14,658
Interest expense ................................... 12,003 11,968 11,302 11,429 10,649 9,132 7,994 7,021
-----------------------------------------------------------------------------
Net interest income .............................. 8,986 8,860 9,230 9,068 8,254 8,234 7,946 7,637
Provision for loan losses .......................... 40 15 42 116 37 -- 47 20
Other operating income ............................. 803 962 770 760 1,014 774 444 431
Other expense ...................................... 5,396 6,032 5,660 5,936 5,324 5,013 4,434 4,554
-----------------------------------------------------------------------------
Income before income tax expense ................... 4,353 3,775 4,298 3,776 3,907 3,995 3,909 3,494
Income tax expense ................................. 1,589 1,317 1,555 1,551 1,582 1,802 1,786 1,604
-----------------------------------------------------------------------------
Net income ....................................... $ 2,764 $ 2,458 $ 2,743 $ 2,225 $ 2,325 $ 2,193 $ 2,123 $ 1,890
=============================================================================
Basic earnings per share ........................... $ 0.28 $ 0.24 $ 0.26 $ 0.21 $ 0.22 $ 0.21 $ 0.20 $ 0.17
Diluted earnings per share ......................... $ 0.27 $ 0.24 $ 0.25 $ 0.21 $ 0.21 $ 0.20 $ 0.19 $ 0.17
Dividends per share ................................ $ 0.06 $ 0.06 $ 0.05 $ 0.05 $ 0.04 $ 0.04 $ .04 $ 0.03
Average common shares outstanding for
Basic earnings per share ......................... 9,919 10,209 10,436 10,419 10,562 10,632 10,688 10,760
Diluted earnings per share ....................... 10,119 10,454 10,725 10,670 10,787 10,809 10,805 10,860
====================================================================================================================================
</TABLE>
19. Parent Company Only Financial Information
Earnings of the Bank are recognized by the Holding Company using the equity
method of accounting. Accordingly, earnings of the Bank are recorded as
increases in the Holding Company's investment, any dividends would reduce the
Holding Company's investment in the Bank, and any changes in the Bank's
unrealized gain or loss on securities available for sale, net of taxes, would
increase or decrease, respectively, the Holding Company's investment in the
Bank. The condensed financial statements for the Holding Company at and for the
years ended December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
=====================================================================================
1998 1997
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Condensed Statements of Financial Condition
Assets:
Cash and due from banks ................................. $ 463 $ 243
Federal funds sold and overnight interest-earning deposit 3,500 6,500
Securities available for sale:
Mortgage-backed securities ............................ 10,850 --
Other securities ...................................... 6,193 28,005
Interest receivable ................................... 108 402
Investment in Bank .................................... 111,602 101,840
Other assets ............................................ 425 2
-----------------------
Total assets .......................................... $ 133,141 $ 136,992
======================
Liabilities:
Other liabilities ....................................... $ 1,054 $ 549
-----------------------
Total liabilities ..................................... 1,054 549
-----------------------
Stockholders' equity:
Common stock ............................................ 114 89
Additional paid-in capital .............................. 75,452 101,717
Unearned compensation ................................... (9,332) (10,922)
Treasury stock .......................................... (6,949) (19,666)
Retained earnings ....................................... 71,460 63,766
Accumulated other comprehensive income, net of taxes .... 1,342 1,459
-----------------------
Total equity .......................................... 132,087 136,443
-----------------------
Total liabilities and equity .......................... $ 133,141 $ 136,992
=====================================================================================
</TABLE>
Continued
40
<PAGE>
Flushing Financial Corporation and Subsidiaries
19. Parent Company Only Financial Information (continued)
<TABLE>
<CAPTION>
============================================================================================================
1998 1997
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Condensed Statements of Income
Interest income ................................................................... $ 1,831 $ 2,391
Other operating expenses .......................................................... 500 478
----------------------
Income before taxes and equity in undistributed earnings of subsidiary .......... 1,331 1,913
Income tax expense ................................................................ 545 848
----------------------
Income before equity in undistributed earnings of subsidiary .................... 786 1,065
Equity in undistributed earnings of the Bank ...................................... 9,404 7,466
----------------------
Net income ...................................................................... $ 10,190 $ 8,531
======================
Condensed Statements of Cash Flow
Operating activities:
Net income ........................................................................ $ 10,190 $ 8,531
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of the Bank .................................. (9,404) (7,466)
Net change in operating assets and liabilities ................................ 451 (149)
Amortization of unearned premium, net of accretion of unearned discount ....... 118 2
Net gain on sales of securities ............................................... (8) --
Unearned compensation, net .................................................... 1,888 1,029
----------------------
Net cash provided by operating activities ................................... 3,235 1,947
----------------------
Investing activities:
Purchases of securities available for sale ...................................... (26,835) (3,075)
Proceeds from sales and calls of securities available for sale .................. 37,548 7,302
----------------------
Net cash provided by investing activities ................................... 10,713 4,227
----------------------
Financing activities:
Purchase of treasury stock ...................................................... (14,348) (7,601)
Cash dividends paid ............................................................. (2,380) (1,615)
----------------------
Net cash used in financing activities ....................................... (16,728) (9,216)
----------------------
Net decrease in cash and cash equivalents ......................................... (2,780) (3,042)
Cash and cash equivalents, beginning of year ...................................... 6,743 9,785
----------------------
Cash and cash equivalents, end of year ............................................ $ 3,963 $ 6,743
============================================================================================================
</TABLE>
41
<PAGE>
Rpeort of Independent Accountants
To the Board of Directors and Stockholders of
Flushing Financial Corporation:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows present fairly, in all material respects, the financial
position of FLUSHING FINANCIAL CORPORATION and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 26, 1999
42
<PAGE>
Flushing Financial Corporation and Subsidiaries
Corporate Information
Executive Management
Gerard P. Tully, Sr.
Chairman of the Board
Michael J. Hegarty
President & Chief Executive Officer
Monica C. Passick
Senior Vice President, Treasurer &
Chief Financial Officer
Henry A. Braun
Senior Vice President
Anna M. Piacentini
Senior Vice President &
Corporate Secretary
Board of Directors
Gerard P. Tully, Sr.--Chairman
Real estate development and management
Michael J. Hegarty
President & Chief Executive Officer of the
Company and Bank
James D. Bennett
Attorney in Rockville Centre, New York
John M. Gleason
Funeral Services and Real Estate
Louis C. Grassi
Managing Partner of Grassi & Co., CPAs, P.C.
Robert A. Marani
Commercial real estate development
and management
James F. McConnell
Retired President & CEO of Company
and Bank
John O. Mead
Retired fabric manufacturer and marketer
Vincent F. Nicolosi
Attorney in Bayside, New York
Franklin F. Regan, Jr.
Attorney in Flushing, New York
John E. Roe, Sr.
Chairman and CEO of City Underwriting
Agency, Inc., insurance brokers
Michael J. Russo
Consulting engineer, President and
Director of Operations for Northeastern
Aviation Corp.
Corporate Headquarters
Flushing Savings Bank, FSB
144-51 Northern Boulevard
Flushing, New York 11354
facsimile 718-961-7646
Retail Branch Locations
Flushing
144-51 Northern Boulevard
718-961-5400
159-18 Northern Boulevard
718-961-7400
188-08 Hollis Court Boulevard
718-445-3351
Bayside
51-54 Springfield Boulevard
718-631-2200
New Hyde Park
661 Hillside Avenue
516-488-6400
In-store Branch (Edwards Supermarket)
653 Hillside Avenue
516-354-4652
Bay Ridge
7102 Third Avenue
718-836-8088
Manhattan
33 Irving Place
212-477-9360
Loan Originations
Flushing
144-51 Northern Boulevard
718-961-5400
New York Federal Division
33 Irving Place
212-477-9424
Flushing Financial Corporation and Subsidiaries
Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders of
Flushing Financial Corporation will be held
at 2:00 pm May 18, 1999 at the LaGuardia
Marriott located at 102-05 Ditmars Boulevard,
East Elmhurst, New York 11369.
Stock Listing
Nasdaq National Market(R)
Symbol "FFIC"
Transfer Agent and Registrar
State Street Bank and Trust Company
c/o EquiServe
P.O. Box 8200
Boston, Massachusetts 02266-8200
1-800-426-5523
Independent Certified
Public Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
212-596-8000
Legal Counsel
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
212-837-6000
Shareholder Relations
Kehoe, White, Van Negris and Company, Inc.
766 Madison Avenue
New York, New York 10021
212-396-0606
Designed by Curran & Connors, Inc. / www.curran-connors.com
<PAGE>
[LOGO]
Exhibit 10.12(b)
Amendment No.2 to Gerard P. Tully, Sr. Consulting Agreement.
AMENDMENT #2 TO TULLY AGREEMENT
This Agreement to the Tully Agreement dated as of December 1, 1995 as
amended (The "Tully Agreement") is entered into as of December 1, 1998 between
Flushing Savings Bank, FSB, a federal savings bank (the "Bank"), Flushing
Financial Corporation ("the Company"), and Gerard P. Tully, Sr. ("Mr. Tully").
WITNESSTH:
WHEREAS, the Bank and Mr. Tully entered into the Tully Agreement as of
December 1, 1995 and the Bank and Mr. Tully desire to amend the Tully Agreement
to extend the term thereof as set forth herein;
NOW, THEREFORE, for good and adequate consideration, the sufficiency of
which is hereby acknowledged, the Bank and Mr. Tully agree as follows:
1. Section 1 of the Tully Agreement as previously amended is hereby amended
by replacing the date "November 30, 1998" with the date "November 30, 2001.
2. Section 3 of the Tully Agreement is hereby amended be replacing the
aggregate fee per month to be $8,333.33.
3. The amendment set forth in paragraphs 1 and 2 shall be effective
December 1, 1998. Except as amended by paragraphs 1 and 2 hereof, the Agreement
as previously amended shall remain in effect in accordance with its terms.
IN WITNESS WHEREOF, Mr. Tully and the Bank have caused this Amendments to
be executed on this 28th day of December, 1998.
FLUSHING SAVINGS BANK, FSB
By: /s/ Michael J. Hegarty
-------------------------------
FLUSHING FINANCIAL CORPORATION
By: /s/ Anna M. Piacentini
-------------------------------
/s/ Gerard Tully
-------------------------------
Gerard P. Tully, Sr.
Exhibit 23.1
Consent of Independent Accountants
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Flushing Financial Corporation on Form S-8 No. 33-98202 and Form S-8 No.
333-3878, of our report dated January 26, 1999, on our audits of the
consolidated financial statements and financial statement schedules of Flushing
Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and for
the years ended December 31, 1998, 1997, and 1996, which report is incorporated
by reference in the Annual Report on Form 10-K of Flushing Financial
Corporation.
/s/ Pricewaterhouse Coopers LLP
---------------------------
New York, New York
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1998 and the
Consolidated Statement of Income for the twelve months ended December 31, 1998,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,934
<INT-BEARING-DEPOSITS> 6,800
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 326,690
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 757,317
<ALLOWANCE> 6,762
<TOTAL-ASSETS> 1,142,055
<DEPOSITS> 664,059
<SHORT-TERM> 15,000
<LIABILITIES-OTHER> 10,451
<LONG-TERM> 320,458
0
0
<COMMON> 114
<OTHER-SE> 131,973
<TOTAL-LIABILITIES-AND-EQUITY> 1,142,055
<INTEREST-LOAN> 57,186
<INTEREST-INVEST> 23,912
<INTEREST-OTHER> 1,748
<INTEREST-TOTAL> 82,846
<INTEREST-DEPOSIT> 27,987
<INTEREST-EXPENSE> 46,702
<INTEREST-INCOME-NET> 36,144
<LOAN-LOSSES> 214
<SECURITIES-GAINS> 102
<EXPENSE-OTHER> 19,830
<INCOME-PRETAX> 16,202
<INCOME-PRE-EXTRAORDINARY> 16,202
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,190
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 7.85
<LOANS-NON> 2,597
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,474
<CHARGE-OFFS> 103
<RECOVERIES> 177
<ALLOWANCE-CLOSE> 6,762
<ALLOWANCE-DOMESTIC> 6,762
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,762
</TABLE>
