UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3209278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144-51 Northern Boulevard, Flushing, New York 11354
(Address of principal excutive offices)
(718) 961-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01
par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of February 29, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $129,191,000. This figure is based
on the closing price on the Nasdaq National Market for a share of the
registrant's Common Stock, $0.01 par value, on February 29, 2000, the last
trading date in February 2000, which was $14.00.
The number of shares of the registrant's Common Stock outstanding as of
February 29, 2000 was 9,615,471 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1999 are incorporated herein by reference in Part II, and portions
of the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 16, 2000 are incorporated herein by reference in
Part III.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business........................................................... 1
General.......................................................... 1
Market Area and Competition...................................... 3
Lending Activities............................................... 4
Loan Portfolio Composition................................ 4
Loan Maturity and Repricing............................... 7
One-to-Four Family Mortgage Lending....................... 7
Home Equity Loans......................................... 9
Multi-Family Lending...................................... 9
Commercial Real Estate Lending............................10
Construction Loans........................................10
Small Business Administration Lending.....................10
Consumer and Other Lending................................11
Loan Approval Procedures and Authority....................11
Loan Concentrations.......................................12
Loan Servicing............................................12
Asset Quality....................................................12
Loan Collection...........................................12
Delinquent Loans and Non-performing Assets................12
REO.......................................................14
Allowance for Loan Losses........................................14
Investment Activities............................................18
General...................................................18
Mortgage-backed securities................................19
Sources of Funds.................................................22
General...................................................22
Deposits..................................................22
Borrowings................................................25
Subsidiary Activities............................................27
Personnel........................................................27
RISK FACTORS
Effect of Interest Rates.........................................28
Lending Activities...............................................28
Competition......................................................29
Local Economic Conditions........................................29
Legislation and Proposed Changes.................................29
Certain Anti-Takeover Provisions.................................29
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation.................................................31
General...................................................31
Bad Debt Reserves.........................................31
Distributions.............................................32
i
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
----
Corporate Alternative Minimum Tax.........................32
State and Local Taxation.........................................32
New York State and New York City Taxation.................32
Delaware State Taxation...................................33
REGULATION
General..........................................................33
Investment Powers................................................34
Real Estate Lending Standards....................................34
Loans-to-One Borrower Limits.....................................34
Insurance of Accounts............................................35
Liquidity Requirements...........................................36
Qualified Thrift Lender Test.....................................36
Transactions with Affiliates.....................................37
Restrictions on Dividends and Capital Distributions..............37
Federal Home Loan Bank System....................................38
Assessments......................................................38
Branching........................................................38
Community Reinvestment...........................................38
Brokered Deposits................................................39
Capital Requirements.............................................39
General...................................................39
Tangible Capital Requirement..............................40
Core Capital Requirement..................................40
Risk-Based Requirement....................................40
Federal Reserve System...........................................41
Financial Reporting..............................................41
Standards for Safety and Soundness...............................41
Prompt Corrective Action.........................................42
Recently Enacted Legislation and Proposed Changes................42
Company Regulation...............................................43
Federal Securities Laws..........................................44
Item 2. Properties.........................................................45
Item 3. Legal Proceedings..................................................45
Item 4. Submission of Matters to a Vote of Security Holders................45
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters................................................46
Item 6. Selected Financial Data............................................46
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........46
Item 8. Financial Statements and Supplementary Data........................46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................46
ii
<PAGE>
TABLE OF CONTENTS
(Continued)
Page
----
PART III
Item 10. Directors and Executive Officers of the Registrant................47
Item 11. Executive Compensation............................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management....47
Item 13. Certain Relationships and Related Transactions....................47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................48
(a) 1. Financial Statements....................................48
(a) 2. Financial Statement Schedules...........................48
(b) Reports on Form 8-K filed during the last quarter
of fiscal 1997..............................................48
(c) Exhibits Required by Securities and Exchange
Commission Regulation S-K...................................49
SIGNATURES
POWER OF ATTORNEY
iii
<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--Allowance
for Loan Losses", "Business--Market Area and Competition" and "Risk Factors"
below, and elsewhere in this Form 10-K and in other documents filed by the
Company with the Securities and Exchange Commission from time to time.
Forward-looking statements may be identified by terms such as "may", "will",
"should", "could", "expects", "plans", "intends", "anticipates", "believes",
"estimates", "predicts", "forecasts", "potential" or "continue" or similar terms
or the negative of these terms. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. The Company has
no obligation to update these forward-looking statements.
Item 1. Business.
General
Flushing Financial Corporation (the "Company") is a Delaware corporation
organized in May 1994 at the direction of Flushing Savings Bank, FSB (the
"Bank") for the purpose of acquiring and holding all of the outstanding capital
stock of the Bank issued upon its conversion from a federal mutual savings bank
to a federal stock savings bank (the "Conversion"). The Conversion was completed
on November 21, 1995. In connection with the Conversion, the Company issued
12,937,500 shares of common stock at a price of $7.67 per share to the Bank's
eligible depositors who subscribed for shares, and to an employee benefit trust
established by the Company for the purpose of holding shares for allocation or
distribution under certain employee benefit plans of the Company and the Bank
(the "Employee Benefit Trust"). The Company realized net proceeds of $96.5
million from the sale of its common stock and utilized approximately $48.3
million of such proceeds to purchase 100% of the issued and outstanding shares
of the Bank's common stock. Flushing Financial Corporation's common stock is
traded on the Nasdaq National Market under the symbol "FFIC".
The primary business of the Company is the operation of its wholly-owned
subsidiary, the Bank. In addition to directing, planning and coordinating the
business activities of the Bank, the Company invests primarily in U.S.
government and federal agency securities, federal funds, mortgage-backed
securities, and investment grade corporate obligations. The Company also holds a
note evidencing a loan that it made to the Employee Benefit Trust to enable the
Employee Benefit Trust to acquire 1,035,000 shares, or 8% of the common stock
issued in the Conversion. The Company has in the past increased growth through
acquisition of financial institutions and branches of other financial
institutions, and will pursue growth through acquisitions that are, or are
expected to be within a reasonable time-frame, accretive to earnings, as
opportunities arise. The Bank also seeks increased growth through the opening of
new branches. The Company may also organize or acquire, through merger or
otherwise, other financial services related companies. The activities of the
Company are funded by that portion of the proceeds of the sale of common stock
in the Conversion that the Company was permitted by the Office of Thrift
Supervision ("OTS") to retain, and earnings thereon, and by dividends, if any,
received from the Bank.
The Company is a unitary savings and loan holding company, which, under
existing laws, is generally not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender. Under regulations of the OTS, the Bank is a qualified
thrift lender if its ratio of qualified thrift investments to portfolio assets
("QTL Ratio") is 65% or more, on a monthly average basis in nine of every 12
months. At December 31, 1999, the Bank's QTL Ratio was 85.0%, and the Bank had
1
<PAGE>
maintained more than 65% of its "portfolio assets" in qualified thrift
investments in at least nine of the preceding 12 months. See
"Regulation--Qualified Thrift Lender Test" and "Regulation--Company
Regulation."
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company. The Company utilizes the
support staff of the Bank from time to time, as needed. Additional employees may
be hired as deemed appropriate by the management of the Company.
Unless otherwise disclosed, the information presented in the financial
statements and this Form 10-K reflect the financial condition and results of
operations of the Company, the Bank and the Bank's subsidiaries on a
consolidated basis. Management views the Company and its subsidiaries as
operating as a single unit, a community savings bank. Therefore, segment
information is not provided. At December 31, 1999, the Company had total assets
of $1.25 billion, deposits of $666.9 million and stockholders' equity of $118.2
million. Also, at December 31, 1999, loans receivable, net of the allowance for
loan losses and unearned income, totaled $875.9 million, representing
approximately 70.1% of the Company's total assets, and mortgage-backed
securities with a carrying value of $269.0 million, represented approximately
21.5% of the Company's total assets.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits together with funds generated from
ongoing operations and borrowings, primarily in (i) originations and purchases
of one-to-four family residential mortgage loans, multi-family income producing
property loans and commercial real estate loans; (ii) mortgage loan surrogates
such as mortgage-backed securities; and (iii) U.S. government and federal agency
securities, corporate fixed-income securities and other marketable securities.
To a lesser extent, the Bank originates certain other loans, including
construction loans, Small Business Administration ("SBA") loans and other small
business and consumer loans. The Bank's revenues are derived principally from
interest on its mortgage and other loans and mortgage-backed securities
portfolio, and interest and dividends on other investments in its securities
portfolio. The Bank's primary sources of funds are deposits, Federal Home Loan
Bank-New York ("FHLB-NY") borrowings, repurchase agreements, principal and
interest payments on loans, mortgage-backed and other securities, proceeds from
sales of securities and, to a lesser extent, proceeds from sales of loans.
On September 9, 1997, the Company acquired New York Federal Savings Bank
("New York Federal") and merged it with the Bank in a cash transaction valued at
approximately $13 million. This acquisition was immediately accretive to the
Company's earnings and was accounted for under the purchase method of
accounting.
In November of 1997, the Bank established a wholly owned real estate
investment trust subsidiary, Flushing Preferred Funding Corporation ("FPFC").
The Bank has transferred, in the aggregate, $326.4 million in real estate loans
to FPFC. The assets transferred to FPFC are viewed by regulators as part of the
Bank's assets in consolidation. However, the establishment of FPFC provides an
additional vehicle for access by the Company to the capital markets for future
investment opportunities.
In March of 1998, the Bank formed a service corporation, Flushing Service
Corporation, to market insurance products and mutual funds. The insurance
products and mutual funds sold are products of unrelated insurance and
securities firms from which the service corporation earns a commission.
Management is currently reviewing the profitability potential of various new
products to further extend the Bank's product lines and market.
As part of the Company's exploration in new retailing concepts and
products, the Bank opened its first in-store supermarket branch in June 1998 in
the neighborhood of New Hyde Park through an alliance with the
2
<PAGE>
Edwards Supermarket chain. In November 1999, the Bank opened its second
supermarket branch in Co-op City in the Bronx through an alliance with the
Edwards Supermarket chain. These supermarket branches can address virtually all
of their customers' financial needs, with the added convenience of extended
hours and time saving grocery store access. A traditional branch is scheduled to
open in the second quarter of 2000 at a new location in Flushing, Queens.
On August 18, 1998, the Board of Directors of the Company declared a
three-for-two split of the Company's common stock in the form of a 50% stock
dividend, which was paid on September 30, 1998. Each stockholder received one
additional share for every two shares of the Company's common stock held at the
record date, September 10, 1998. Cash was paid in lieu of fractional shares.
This dividend was not paid on shares held in treasury.
Market Area and Competition
The Bank has been, and intends to continue to be, a community oriented
savings institution offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank is headquartered in Flushing, New
York, located in the Borough of Queens. It currently operates out of its main
office and eight branch offices, located in the New York City Boroughs of
Queens, Brooklyn, Manhattan, and the Bronx, and in Nassau County, New York.
Substantially all of the Bank's mortgage loans are secured by properties located
in the New York City metropolitan area. During the last three years, the
unemployment and real estate values in the New York City metropolitan area have
been relatively stable, which has favorably impacted the Bank's asset quality.
See "--Asset Quality." There can be no assurance that the stability of these
economic factors will continue.
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. Particularly intense competition exists for deposits and in
all of the lending activities emphasized by the Bank. The Bank's competition for
loans comes principally from commercial banks, other savings banks, savings and
loan associations, mortgage banking companies, insurance companies, finance
companies and credit unions. Management anticipates that competition for
multi-family loans, commercial real estate loans and one-to-four family
residential mortgage loans will continue to increase in the future. Thus, no
assurances can be given that the Bank will be able to maintain or increase its
current level of origination of such loans, as contemplated by management's
current business strategy. The Bank's most direct competition for deposits
historically has come from other savings banks, commercial banks, savings and
loan associations and credit unions. In addition, the Bank faces increasing
competition for deposits from products offered by brokerage firms, insurance
companies and other financial intermediaries, such as money market and other
mutual funds and annuities. Trends toward the consolidation of the banking
industry and the lifting of interstate banking and branching restrictions may
make it more difficult for smaller, community-oriented banks, such as the Bank,
to compete effectively with large, national, regional and super-regional banking
institutions. Notwithstanding the intense competition, the Bank has been
successful in maintaining its deposit base.
For a discussion of the Company's business strategies, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy," included in the Annual Report of Stockholders
for the fiscal year ended December 31, 1999 (the "Annual Report"), incorporated
herein by reference.
3
<PAGE>
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional fixed-rate mortgage loans and adjustable rate mortgage ("ARM")
loans secured by one-to-four family residences, mortgage loans secured by
multi-family income producing properties or commercial real estate, construction
loans, SBA loans, other small business loans and consumer loans. At December 31,
1999, the Bank had gross loans outstanding of $882.7 million (before reserves
and unearned income), of which $423.1 million, or 47.93%, were one-to-four
family residential mortgage loans (including $18.0 million of condominium loans,
$8.9 million of co-operative apartment loans and $5.4 million of home equity
loans). Of the one-to-four family residential loans outstanding on that date,
43.87% were ARM loans and 56.13% were fixed-rate loans. At December 31, 1999,
multi-family loans totaled $310.6 million, or 35.19% of gross loans, commercial
real estate loans totaled $137.1 million, or 15.53% of gross loans, construction
loans totaled $6.2 million, or 0.70% of gross loans, SBA loans totaled $2.4
million, or 0.27% of gross loans, and consumer and other loans totaled $3.4
million, or 0.38% of gross loans.
The Bank has traditionally emphasized the origination and acquisition of
one-to-four family residential mortgage loans, which include ARM loans,
fixed-rate mortgage loans and home equity loans. However, in recent years, the
Bank has also placed emphasis on multi-family and commercial real estate loans.
The Bank expects to continue its emphasis on multi-family and commercial real
estate loans as well as on one-to-four family residential mortgage loans. From
December 31, 1998 to December 31, 1999, one-to-four family residential mortgage
loans increased $51.1 million, or 13.7%, multi-family loans increased $33.2
million, or 12.0%, and commercial real estate loans increased $35.7 million, or
35.2%. Fully underwritten one-to-four family residential mortgage loans are
considered by the banking industry to have less risk than other types of loans.
Multi-family income producing real estate loans and commercial real estate loans
generally have higher yields than one-to-four family residential loans and
shorter terms to maturity, but typically involve higher principal amounts and
generally expose the lender to greater credit risk than fully underwritten
one-to-four family residential mortgage loans. The Bank's strategy to emphasize
multi-family and commercial real estate loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with multi-family and commercial real estate loans may require
the Bank to increase its provisions for loan losses and to maintain an allowance
for loan losses as a percentage of total loans in excess of the allowance
currently maintained by the Bank. To date, the Company has not experienced
significant losses in its multi-family and commercial real estate loan
portfolios.
The Bank's lending activities are subject to federal and state laws and
regulations. Interest rates charged by the Bank on loans are affected primarily
by the demand for such loans, the supply of money available for lending
purposes, the rate offered by the Bank's competitors and, in the case of
corporate entities, the creditworthiness of the borrower. Many of those factors
are, in turn, affected by regional and national economic conditions, and the
fiscal, monetary and tax policies of the federal government.
4
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family residential(1) $414,194 46.92% $361,786 47.69% $289,286 47.67%
Co-operative apartment (2) 8,926 1.01 10,238 1.35 12,065 1.99
Multi-family real estate 310,594 35.19 277,437 36.57 230,229 37.95
Commercial real estate 137,072 15.53 101,401 13.37 68,182 11.24
Construction 6,198 0.70 3,203 0.42 2,797 0.46
-------- -------- -------- -------- -------- --------
Gross mortgage loans 876,984 99.35 754,065 99.40 602,559 99.31
Small Business Administration loans 2,369 0.27 2,616 0.35 2,789 0.46
Consumer and other loans 3,379 0.38 1,899 0.25 1,385 0.23
-------- -------- -------- -------- -------- --------
Gross loans 882,732 100.00% 758,580 100.00% 606,733 100.00%
======== ======== ========
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (28) (1,263) (1,838)
Allowance for loan losses (6,818) (6,762) (6,474)
-------- -------- --------
Loans, net $875,886 $750,555 $598,421
======== ======== ========
<CAPTION>
At December 31,
-----------------------------------------------
1996 1995
-------------------- ----------------------
Percent Percent
Amount of Total Amount of Total
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family residential(1) $223,273 57.28% $155,435 54.20%
Co-operative apartment (2) 13,245 3.40 14,653 5.11
Multi-family real estate 104,870 26.91 69,140 24.11
Commercial real estate 46,698 11.98 45,215 15.77
Construction -- -- -- --
-------- -------- -------- -------
Gross mortgage loans 388,086 99.57 284,443 99.19
Small Business Administration loans -- -- -- --
Consumer and other loans 1,680 0.43 2,328 0.81
-------- ------- -------- -------
Gross loans 389,766 100.00% 286,771 100.00%
======== =======
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (1,548) (1,335)
Allowance for loan losses (5,437) (5,310)
-------- --------
Loans, net $382,781 $280,126
======== ========
</TABLE>
- ----------
(1) One-to-four family residential loans also include home equity and
condominium loans. At December 31, 1999, gross home equity loans totaled
$5.4 million and condominium loans totaled $18.0 million.
(2) Consists of loans secured by shares representing interests in individual
co-operative units that are generally owner occupied.
5
<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,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
(In thousands)
Mortgage Loans
<S> <C> <C> <C>
At beginning of year $754,065 $602,559 $388,086
Mortgage loans originated:
One-to-four family 91,312 83,051 42,756
Co-operative 300 113 475
Multi-family 77,895 84,328 79,976
Commercial 49,744 52,211 17,121
Construction 8,158 3,332 3,016
------------------ ----------------- -----------------
Total mortgage loans originated 227,409 223,035 143,344
------------------ ----------------- -----------------
Acquired loans:
1-4 family loans purchased 15,008 27,174 49,965
Commercial mortgages purchased 884 -- --
Acquired NY Federal 1-4 family loans -- -- 901
Acquired NY Federal multi-family loans -- -- 62,405
Acquired NY Federal commercial loans -- -- 11,717
------------------ ------------------ -----------------
Total acquired mortgage loans 15,892 27,174 124,988
------------------ ------------------ -----------------
Less:
Principal reductions 120,008 98,251 53,416
Mortgage loan foreclosures 374 452 443
------------------ ------------------ -----------------
At end of year $876,984 $754,065 $602,559
================== ================= =================
SBA, Consumer and Other Loans
At beginning of year $4,515 $4,174 $1,680
Loans originated:
SBA loans 2,376 3,741 1,328
Acquired NY Federal SBA -- -- 2,029
Small business loans 2,617 1,316 --
Other loans 1,159 1,467 1,803
------------------ ----------------- ------------------
Total loans originated 6,152 6,524 5,160
------------------ ----------------- -----------------
Less:
Sales 2,280 2,918 80
Repayments 2,543 3,265 2,586
Charge-offs 96 -- --
------------------ ----------------- -----------------
At end of year $5,748 $4,515 $4,174
================== ================= =================
</TABLE>
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, 1999. Loans
that have adjustable-rates are shown as being due in the period during which the
interest rates are next subject to change. The table does not reflect
prepayments or scheduled principal amortization, which totaled $120.0 million
for the year ended December 31, 1999. Certain adjustable rate loans have
features which limit changes in interest rates on a short-term basis and over
the life of the loan.
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------------------------------------------------------------------
Mortgage Loans Other Loans
-------------------------------------------------------------------- --------------------------
Total
One-to- Consumer Loans
Four Family Co-operative Multi-family Commercial Construction SBA and Other Receivable
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $39,118 $4,277 $11,939 $13,316 $6,198 $ -- $579 $75,427
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
After one year (1)
One to two years 29,894 844 44,949 11,190 -- 11 625 87,513
Two to three years 20,299 1,193 34,570 15,152 -- 4 1,418 72,636
Three to five 20,428 294 64,007 41,526 -- 419 750 127,424
years
Five to ten years 83,519 1,122 100,215 35,694 -- 1,557 7 222,114
Over ten years 220,936 1,196 54,914 20,194 -- 378 -- 297,618
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
Total due after
One year 375,076 4,649 298,655 123,756 -- 2,369 2,800 807,305
----------- ------------ ------------ ---------- ------------ -------- --------- ----------
Total amounts due $414,194 $8,926 $310,594 $137,072 $ 6,198 $ 2,369 $3,379 $882,732
=========== ============ ============ ========== ============ ======== ========= ==========
</TABLE>
(1) Of the $807.3 million of loans due after one year, $435.1 million are
adjustable rate loans and $372.2 million are fixed-rate loans.
One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured
by one-to-four family residences, including townhouses and condominium units,
located in its primary lending area. For purposes of the description contained
in this section, one-to-four family residential mortgage loans and co-operative
apartment loans are collectively referred to herein as "residential mortgage
loans." The Bank offers both fixed-rate and adjustable-rate residential mortgage
loans with maturities of up to 30 years and a general maximum loan amount of
$650,000. Loan originations generally result from applications received from
mortgage brokers and mortgage bankers, existing or past customers, and persons
who respond to Bank marketing efforts and referrals. Residential mortgage loans
were $423.1 million, or 47.93% of gross loans, at December 31, 1999.
Partly in response to the intense competition for originations of
one-to-four family residential mortgage loans, the Bank has a program of
correspondent relationships with several mortgage bankers and brokers operating
in the New York metropolitan area. Under this program, the Bank purchases
individual newly originated one-to-four family loans originated by such
correspondents. The loans are underwritten pursuant to the Bank's credit
underwriting standards and each loan is reviewed by Bank personnel prior to
purchase to ensure conformity with such standards. During 1999, through these
relationships, the Bank purchased $15.0 million in one-to-four family mortgage
loans, as compared to $27.2 million in 1998 and $50.0 million during 1997.
The Bank generally originates residential mortgage loans in amounts up to
80% of the appraised value or the sale price, whichever is less. The Bank may
make residential mortgage loans with loan-to-value ratios of up to 95% of the
appraised value of the mortgaged property; however, private mortgage insurance
is required whenever loan-to-value ratios exceed 80% of the appraised value of
the property securing the loan.
7
<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 $37.3 million, $36.8 million and $26.6 million in loans of
this type during 1999, 1998 and 1997, respectively.
The Bank's fixed-rate residential mortgage loans typically are originated
for terms of 15 and 30 years and are competitively priced based on market
conditions and the Bank's cost of funds. The Bank charges origination fees of up
to 2%; loans with fees of less than 2% generally carry a higher interest rate.
The Bank originated and purchased $24.2 million, $44.3 million and $32.9 million
of 15-year fixed-rate residential mortgage loans in 1999, 1998 and 1997,
respectively. The Bank also originated and purchased $47.4 million, $30.8
million and $8.0 million of 30-year fixed rate residential mortgage loans in
1999, 1998 and 1997, respectively. These loans have been retained to provide
flexibility in the management of the Company's interest rate sensitivity
position. At December 31, 1999, $237.5 million, or 56.13%, of the Bank's
residential mortgage loans consisted of fixed rate loans.
The Bank offers ARM loans with adjustment periods of one, three, five,
seven or ten years. Interest rates on ARM loans currently offered by the Bank
are adjusted at the beginning of each adjustment period based upon a fixed
spread above the average yield on United States treasury securities, adjusted to
a constant maturity which corresponds to the adjustment period of the loan (the
"U.S. Treasury constant maturity index") as published weekly by the Federal
Reserve Board. From time to time, the Bank may originate ARM loans at an initial
rate lower than the U.S. Treasury constant maturity index as a result of a
discount on the spread for the initial adjustment period. ARM loans generally
are subject to limitations on interest rate increases of 2% per adjustment
period and an aggregate adjustment of 6% over the life of the loan. Origination
fees of up to 2% are charged for ARM loans; loans with fees of less than 2%
generally carry a higher interest rate. The Bank originated and purchased
one-to-four family residential ARM loans totaling $35.0 million, $35.2 million
and $52.3 million during 1999, 1998 and 1997, respectively. At December 31,
1999, $185.6 million, or 43.87%, of the Bank's residential mortgage loans
consisted of ARM loans.
The volume and adjustment periods of ARM loans originated by the Bank have
been affected by such market factors as the level of interest rates, demand for
loans, competition, consumer preferences and the availability of funds. In
general, consumers show a preference for ARM loans in periods of high interest
rates and for fixed-rate loans when interest rates are low. In periods of
declining interest rates, the Bank may experience refinancing activity in ARM
loans, whose interest rates may be fully indexed, to fixed-rate loans.
The retention of ARM loans in the Bank's portfolio helps reduce the Bank's
exposure to interest rate risks. However, in an environment of rapidly
increasing interest rates as was experienced in the 1970's, it is possible for
the interest rate increase to exceed the maximum aggregate adjustment on ARM
loans and negatively affect the spread between the Bank's interest income and
its cost of funds.
8
<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, 1999, home equity loans totaled
$5.4 million, or 0.61%, of gross loans.
Multi-Family Lending. Loans secured by multi-family income producing
properties (including mixed-use properties) were $310.6 million, or 35.19% of
gross loans, at December 31, 1999, all of which were secured by properties
located within the Bank's market area. The Bank's multi-family loans had an
average principal balance of $532,751 at December 31, 1999, and the largest
multi-family loan held in the Bank's portfolio had a principal balance of $6.3
million. Multi-family loans are generally offered at adjustable rates tied to a
market index for terms of five to 10 years with adjustment periods from one to
five years. On a select and limited basis, multi-family loans may be made at
fixed rates for terms of seven, 10 or 15 years. An origination fee of up to 1%
is typically charged on multi-family loans.
In underwriting multi-family loans, the Bank reviews the expected net
operating income generated by the real estate collateral securing the loan, the
age and condition of the collateral, the financial resources and income level of
the borrower and the borrower's experience in owning or managing similar
properties. The Bank typically requires debt service coverage of at least 125%
of the monthly loan payment. Multi-family loans generally are made up to 75% of
the appraised value of the property securing the loan or the sale price of the
property, whichever is less. The Bank generally obtains personal guarantees from
these borrowers and typically orders an environmental report on the property
securing the loan.
Loans secured by multi-family income producing property generally involve a
greater degree of risk than residential mortgage loans and carry larger loan
balances. The increased credit risk is a result of several factors, including
the concentration of principal in a smaller number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty in evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family income producing
property is typically dependent upon the successful operation of the related
property. If the cash flow from the property is reduced, the borrower's ability
to repay the loan may be impaired. Loans secured by multi-family income
producing property also may involve a greater degree of environmental risk. The
Bank seeks to protect against this risk through obtaining an environmental
report. See "--Asset Quality--REO."
9
<PAGE>
Commercial Real Estate Lending. Loans secured by commercial real estate
were $137.1 million, or 15.53% of the Bank's gross loans, at December 31, 1999.
The Bank's commercial real estate loans are secured by improved properties such
as offices, motels, small business facilities, strip shopping centers,
warehouses, religious facilities and mixed-use properties. At December 31, 1999,
substantially all of the Bank's commercial real estate loans were secured by
properties located within the Bank's market area. At that date, the Bank's
commercial real estate loans had an average principal balance of $649,629, and
the largest of such loans, which was secured by a hotel, had a principal balance
of $5.4 million. Typically, commercial real estate loans are originated at a
range of $100,000 to $6.0 million. Commercial real estate loans are generally
offered at adjustable rates tied to a market index for terms of five to 15
years, with adjustment periods from one to five years. On a select and limited
basis, commercial real estate loans may be made at fixed interest rates for
terms of seven, 10 or 15 years. An origination fee of up to 1% is typically
charged on all commercial real estate loans.
In underwriting commercial real estate loans, the Bank employs the same
underwriting standards and procedures as are employed in underwriting
multi-family loans.
Commercial real estate loans generally carry larger loan balances than
one-to-four family residential mortgage loans and involve a greater degree of
credit risk for the same reasons applicable to multi-family loans.
Construction Loans. The Bank's construction loans primarily have been made
to finance the construction of one-to-four family residential properties and
multi-family residential real estate properties. The Bank's policies provide
that construction loans may be made in amounts up to 65% of the estimated value
of the developed property and only if the Bank obtains a first lien position on
the underlying real estate. In addition, the Bank generally requires firm
end-loan commitments, either from the Bank or another financial institution, and
personal guarantees on all construction loans. Construction loans are generally
made with terms of two years or less and with adjustable interest rates that are
tied to a market index. Advances are made as construction progresses and
inspection warrants, subject to continued title searches to ensure that the Bank
maintains a first lien position. Construction loans outstanding at December 31,
1999 totaled $6.2 million, or 0.70% of gross loans.
Construction loans involve a greater degree of risk than other loans
because, among other things, the underwriting of such loans is based on an
estimated value of the developed property, which can be difficult to ascertain
in light of uncertainties inherent in such estimations. In addition,
construction lending entails the risk that the project may not be completed due
to cost overruns or changes in market conditions.
Small Business Administration Lending. With the purchase of New York
Federal on September 9, 1997, the Company entered into the SBA market. These
loans are extended to small businesses and are guaranteed by the Small Business
Administration at 80% of the loan balance for loans with balances of $100,000 or
less, and at 75% of the loan balance for loans with balances greater than
$100,000. All SBA loans are underwritten in accordance with SBA Standard
Operating Procedures and the Bank generally obtains personal guarantees and
collateral, where applicable, from SBA borrowers. Typically, SBA loans are
originated at a range of $50,000 to $1.0 million with terms ranging from five to
25 years. SBA loans are generally offered at adjustable rates tied to the prime
rate (as published in the Wall Street Journal) with adjustment periods of one to
three months. The Bank generally sells the guaranteed portion of the SBA loan in
the secondary market and retains the servicing rights on these loans collecting
a servicing fee of approximately 1%. At December 31, 1999, SBA loans totaled
$2.4 million, representing 0.27% of gross loans.
10
<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, 1999 amounted to $3.4 million, or 0.38% of gross loans. Business
loans are personally guaranteed by the owners, and may also be secured by
additional collateral, including equipment and inventory. The maximum loan size
for a business loan is $75,000, with a maximum term of five years. Consumer
loans generally consist of passbook loans and overdraft lines of credit.
Generally, unsecured consumer loans are limited to amounts of $5,000 or less for
terms of up to five years. The Bank offers credit cards to its customers through
a third party financial institution and receives an origination fee and
transactional fees for processing such accounts, but does not underwrite or
finance any portion of the credit card receivables.
The underwriting standards employed by the Bank for consumer and other
loans include a determination of the applicant's payment history on other debts
and assessment of the applicant's ability to meet payments on all of his or her
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the collateral,
if any, to the proposed loan amount. Unsecured loans tend to have higher risk,
and therefore command a higher interest rate.
Loan Approval Procedures and Authority. The Bank's Board-approved lending
policies establish loan approval requirements for its various types of loan
products. Pursuant to the Bank's Residential Mortgage Lending Policy, all
residential mortgage loans require three signatures for approval. Residential
mortgage loans that do not exceed $500,000 must have the approval of the Bank's
Senior Mortgage Officer and two other loan officers. For residential mortgage
loans greater than $500,000, at least one of the approvals must be from the
President, Executive Vice President or a Senior Vice President (collectively,
"Authorized Officers") and the other two may be from the Bank's Senior Mortgage
Officer, Loan Underwriting Manager or Senior Underwriter. The Loan Committee,
the Executive Committee or the full Board of Directors also must approve
residential mortgage loans in excess of $650,000. Pursuant to the Bank's
Commercial Real Estate Lending Policy, all loans secured by commercial real
estate properties and multi-family income producing properties, must be approved
by the President or the Executive Vice President upon the recommendation of the
Commercial Loan Department Officer. Such loans in excess of $700,000 also
require Loan or Executive Committee or Board approval. In accordance with the
Bank's Business and Consumer Loan Policies, all business and consumer loans
require two signatures for approval, one of which must be from an Authorized
Officer. In addition, for business loans, the approval of the Bank's President
and ratification by the Loan Committee of the Board of Directors is required.
The Bank's Construction Loan Policy requires that the Loan or Executive
Committee or the Board of Directors of the Bank must approve all construction
loans. Any loan, regardless of type, that deviates from the Bank's written loan
policies must be approved by the Loan or Executive Committee or the Bank's Board
of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application, a credit report is ordered and certain other financial information
is obtained. An appraisal of the real estate intended to secure the proposed
loan is required. Such appraisals currently are performed by the Bank's staff
appraiser or an independent appraiser designated and approved by the Bank. The
Bank's Board of Directors annually approves the independent appraisers used by
the Bank and approves the Bank's appraisal policy. It is the Bank's policy to
require borrowers to obtain title insurance and hazard insurance on all real
estate first mortgage loans prior to closing. Borrowers generally are required
to advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and, in some cases, hazard insurance
premiums.
11
<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, 1999, the Bank had no loans in excess of the maximum dollar amount of loans
to one borrower that the Bank was authorized to make. At that date, the three
largest concentrations of loans to one borrower consisted of loans secured by a
combination of commercial real estate and multi-family income producing
properties with an aggregate principal balance of $11.4 million, $8.5 million
and $8.1 million for each of the three borrowers.
Loan Servicing. At December 31, 1999, the Bank was servicing $32.7 million
of mortgage loans and $5.9 million of SBA loans for others. The Bank's policy is
to retain the servicing rights to the mortgage and SBA loans that it sells in
the secondary market. In order to increase revenue, management intends to
continue this policy.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Bank generally sends the borrower a
written notice of non-payment when the loan is first past due. In the event
payment is not then received, additional letters and phone calls generally are
made in order to encourage the borrower to meet with a representative of the
Bank to discuss the delinquency. If the loan still is not brought current and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is delinquent 45 days or more, the Bank may commence foreclosure
proceedings against real property that secures the real estate loan and attempt
to repossess personal or business property that secures an SBA loan, business
loan, consumer loan or co-operative apartment loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan generally is
sold at foreclosure or by the Bank as soon thereafter as practicable. Decisions
as to when to commence foreclosure actions for multi-family, commercial real
estate and construction loans are made on a case by case basis. Since
foreclosure typically halts the sale of the collateral and may be a lengthy
procedure in the State of New York, the Bank may consider loan work-out
arrangements to work with multi-family or commercial real estate borrowers in an
effort to restructure the loan rather than foreclose, particularly if the
borrower is, in the opinion of management, able to manage the project. In
certain circumstances, on rental properties, the Bank may institute proceedings
to seize the rent.
On mortgage loans or loan participations purchased by the Bank, for which
the seller retains the servicing, the Bank receives monthly reports with which
it monitors the loan portfolio. Based upon servicing agreements with the
servicers of the loans, the Bank relies upon the servicer to contact delinquent
borrowers, collect delinquent amounts and initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Bank and its servicing agents. At December
31, 1999, the Bank did not have any loans that were serviced by others.
Delinquent Loans and Non-performing Assets. The Bank generally discontinues
accruing interest on delinquent loans when a loan is 90 days past due or
foreclosure proceedings have been commenced, whichever first occurs. At that
time, previously accrued but uncollected interest is reversed from income. Loans
in default 90 days or more as to their maturity date but not their payments,
however, continue to accrue interest as long as the borrower continues to remit
monthly payments.
12
<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, 1999,
1998 and 1997, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totaled $208,000, $180,000
and $180,000, respectively. These amounts were not included in the Bank's
interest income for the respective periods.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One-to-four family residential $1,349 $1,261 $1,897 $1,835 $2,042
Co-operative apartment 29 15 -- 32 109
Multi-family residential -- -- -- 505 2,119
Commercial real estate 1,779 1,280 512 -- 427
Construction -- -- -- -- --
------ ------ ------ ------ ------
Total non-accrual mortgage loans 3,157 2,556 2,409 2,372 4,697
Other non-accrual loans 39 41 49 36 50
------ ------ ------ ------ ------
Total non-accrual loans 3,196 2,597 2,458 2,408 4,747
Loans 90 days or more delinquent
and still accruing -- -- -- -- 234
------ ------ ------ ------ ------
Total non-performing loans 3,196 2,597 2,458 2,408 4,981
Foreclosed real estate 368 77 433 1,218 1,869
------ ------ ------ ------ ------
Total non-performing assets $3,564 $2,674 $2,891 $3,626 $6,850
====== ====== ====== ====== ======
Troubled debt restructurings -- -- -- -- --
====== ====== ====== ====== ======
Non-performing loans to gross loans 0.36% 0.34% 0.41% 0.62% 1.74%
Non-performing assets to total assets 0.29% 0.23% 0.27% 0.47% 0.97%
</TABLE>
13
<PAGE>
REO. The Bank has been aggressively marketing its REO properties. At
December 31, 1999, the Bank owned four properties with a carrying value of
$368,000.
The Bank currently obtains environmental reports in connection with the
underwriting of commercial real estate loans, and typically obtains
environmental reports in connection with the underwriting of multi-family loans.
For all other loans, the Bank obtains environmental reports only if the nature
of the current or, to the extent known to the Bank, prior use of the property
securing the loan indicates a potential environmental risk. However, the Bank
may not be aware of such uses or risks in any particular case, and, accordingly,
there is no assurance that real estate acquired by the Bank in foreclosure is
free from environmental contamination or that, if any such contamination or
other violation exists, the Bank will not have any liability therefor.
Allowance for Loan Losses
The Bank has established and maintains on its books an allowance for loan
losses that is designed to provide reserves for estimated losses inherent in the
Bank's overall loan portfolio. The allowance is established through a provision
for loan losses based on management's evaluation of the risk inherent in the
various components of its loan portfolio and other factors, including historical
loan loss experience, changes in the composition and volume of the portfolio,
collection policies and experiences, trends in the volume of non-accrual loans
and regional and national economic conditions. The Company maintains an internal
loan review committee that reviews the quality of loans and reports to the Loan
Committee of the Board of Directors on a monthly basis. The determination of the
amount of the allowance for loan losses includes estimates that are susceptible
to significant changes due to changes in appraisal values of collateral,
national and regional economic conditions and other factors. In connection with
the determination of the allowance, the market value of collateral ordinarily is
evaluated by the Bank's staff appraiser; however, the Bank may from time to time
obtain independent appraisals for significant properties. Current year
charge-offs, charge-off trends, new loan production and current balance by
particular loan categories also are taken into account in determining the
appropriate amount of the allowance.
In assessing the adequacy of the allowance, management reviews the Bank's
loan portfolio by separate categories which have similar risk and collateral
characteristics; e.g. commercial real estate, multi-family real estate,
one-to-four family residential loans, co-operative apartment loans, SBA loans,
business loans and consumer loans. General provisions are established against
performing loans in the Bank's portfolio in amounts deemed prudent from time to
time based on the Bank's qualitative analysis of the factors described above.
The determination of the amount of the allowance for loan losses also includes a
review of loans on which full collectibility is not reasonably assured. The
primary risk element considered by management with respect to each one-to-four
family residential loan, co-operative apartment loan, SBA loan, business loan
and consumer loan is any current delinquency on the loan. The primary risk
elements considered with respect to commercial real estate and multi-family
loans are the financial condition of the borrower, the sufficiency of the
collateral (including changes in the value of the collateral) and the record of
payment.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"), which can require the
establishment of additional general allowances or specific loss allowances or
require charge-offs. Such authorities may require the Bank to make additional
provisions to the allowance based on their judgments about information available
to them at the time of their examination. An OTS policy statement provides
guidance for OTS examiners in determining whether the levels of general
valuation allowances for savings institutions are adequate. The policy statement
requires that if a savings institution's general valuation allowance policies
and procedures are deemed to be inadequate, the general valuation allowance
would be compared to certain ranges of general valuation allowances deemed
acceptable by the OTS depending in part on the savings institution's level of
classified assets.
14
<PAGE>
The Bank's provision for loan losses was $36,000, $214,000 and $104,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1999, the total allowance for loan losses was $6.8 million, representing 213.29%
of non-performing loans and 191.29% of non-performing assets, compared to ratios
of 260.36% and 252.83% respectively, at December 31, 1998. The Bank continues to
monitor and modify the level of its allowance for loan losses in order to
maintain the allowance at a level which management considers adequate to provide
for probable loan losses based on available information.
Management of the Bank believes that the current allowance for loan losses
is adequate in light of current economic conditions and the composition of its
loan portfolio and other available information and the Board of Directors
concurs in this belief. However, many factors may require additions to the
allowance for loan losses in future periods beyond those currently revealed.
These factors include future adverse changes in economic conditions, changes in
interest rates and changes in the financial capacity of individual borrowers
(any of which may affect the ability of borrowers to make repayments on loans),
changes in the real estate market within the Bank's lending area and the value
of collateral, or a review and evaluation of the Bank's loan portfolio in the
future. The determination of the amount of the allowance for loan losses
includes estimates that are susceptible to significant changes due to changes in
appraisal values of collateral, national and regional economic conditions,
interest rates and other factors. In addition, the Bank's increased emphasis on
commercial real estate and multi-family loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with commercial real estate, multi-family loans and construction
loans may require the Bank to increase its provisions for loan losses and to
maintain an allowance for loan losses as a percentage of total loans that is in
excess of the allowance currently maintained by the Bank. Provisions for loan
losses are charged against net income. See "--Lending Activities" and "--Asset
Quality."
15
<PAGE>
The following table sets forth changes in, and the balance of, the Bank's
allowance for loan losses at and for the dates indicated.
<TABLE>
<CAPTION>
At and For the Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year 6,762 $ 6,474 $ 5,437 $ 5,310 $ 5,370
Provision for loan losses 36 214 104 418 496
Provision acquired from NY Federal -- -- 979 -- --
Loans charged-off:
One-to-four family 32 91 85 220 312
Co-operative 2 -- 44 162 183
Multi-family -- -- -- 41 251
Commercial -- -- -- 68 260
Construction -- -- -- -- --
Other 99 12 77 44 46
------ ------- ------- ------- -------
Total loans charged-off 133 103 206 535 1,052
------ ------- ------- ------- -------
Recoveries:
Mortgage loans 153 177 155 244 496
Other -- -- 5 -- --
------ ------- ------- ------- -------
Total recoveries 153 177 160 244 496
------ ------- ------- ------- -------
Balance at end of year 6,818 $ 6,762 $ 6,474 $ 5,437 $ 5,310
====== ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the year
to average loans outstanding during the year (0.00)% (0.01)% 0.01% 0.09% 0.21%
Ratio of allowance for loan losses to
gross loans at end of the year 0.77% 0.89% 1.07% 1.39% 1.85%
Ratio of allowance for loan losses to
non-performing loans at the end of year 213.29% 260.36% 263.38% 225.79% 106.61%
Ratio of allowance for loan losses to
non-performing assets at the end of year 191.29% 252.83% 223.94% 149.94% 77.52%
</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,
-----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ---------------------
Percentage Percentage Percentage
of Loans in of Loans in of Loans in
Category to Category to Category to
Loan Category Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------- ------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family $1,903 46.92% $2,575 47.69% $1,711 47.67%
Co-operative 144 1.01 278 1.35 510 1.99
Multi-family 1,216 35.19 1,395 36.57 1,021 37.95
Commercial 3,003 15.53 1,990 13.37 3,073 11.24
Construction 24 0.70 114 0.42 128 0.46
------------------ ------------------ -------------------
Total mortgage loans 6,290 99.35 6,352 99.40 6,443 99.31
Small Business
Administration loans 237 0.27 273 0.35 23 0.46
Other Loans 291 0.38 137 0.25 8 0.23
------------------ ------------------ -------------------
Total loans $6,818 100.00% $6,762 100.00% $6,474 100.00%
================== ================== ===================
<CAPTION>
At December 31,
-------------------------------------------
1996 1995
------------------- --------------------
Percentage Percentage
of Loans in of Loans in
Category to Category to
Loan Category Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family $1,065 57.28% $1,126 54.20%
Co-operative 458 3.40 407 5.11
Multi-family 1,456 26.91 1,625 24.11
Commercial 2,434 11.98 2,139 15.77
Construction -- -- -- --
------------------------ -------------------
Total mortgage loans 5,413 99.57 5,297 99.19
Small Business
Administration loans -- -- -- --
Other Loans 24 0.43 13 0.81
------------------------ -------------------
Total loans $5,437 100.00% $5,310 100.00%
======================== ===================
</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 risk exposure, its
interest rate sensitivity "gap" position, the types of securities to be held,
and other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation--Management Strategy," included in the Annual
Report and incorporated herein by reference.
Federally chartered savings institutions have authority to invest in
various types of assets, including U.S. government obligations, securities of
various federal agencies, mortgage-backed and mortgage-related securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers acceptances, reverse repurchase agreements, loans of federal
funds, and, subject to certain limits, corporate securities, commercial paper
and mutual funds. All mortgage-backed securities held by the Company and the
Bank are directly or indirectly insured or guaranteed by Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
or the Government National Mortgage Association ("GNMA").
The Investment Committee of the Bank and the Company meets quarterly to
monitor investment transactions and to establish investment strategy. The Board
of Directors reviews the investment policy on an annual basis and investment
activity on a monthly basis.
The Company classifies its investment securities as available for sale.
Unrealized gains and losses for available-for-sale securities are excluded from
earnings and included in Accumulated Other Comprehensive Income (a separate
component of equity), net of taxes. At December 31, 1999, the Company had $285.0
million in securities available for sale which represented 22.81% of total
assets. These securities had an aggregate market value at that date that was
approximately 2.4 times the amount of the Company's equity at that date. The
cumulative balance of unrealized net losses on securities available for sale was
$4.5 million, net of taxes, at December 31, 1999. As a result of the magnitude
of the Company's holdings of securities available for sale, changes in interest
rates could produce significant changes in the value of such securities and
could produce significant fluctuations in the equity of the Company. See Note 6
of "Notes to Consolidated Financial Statements," included in the Annual Report
and incorporated herein by reference. The Company may from time to time sell
securities and realize a loss if the proceeds of such sale may be reinvested in
loans or other assets offering more attractive yields.
At December 31, 1999, the Company had no investment in a particular
issuer's securities that either alone, or together with any investments in the
securities of any affiliate(s) of such issuer, exceeded 10% of the Company's
equity.
18
<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,
------------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
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 $ 10,988 $ 10,636 $ 13,213 $ 13,425 $120,106 $120,123
Corporate debentures -- -- 4,711 4,710 13,149 13,178
Public utility 1,001 1,004 945 944 2,247 2,271
---------------------- ---------------------- ----------------------
Total bonds and other debt securities 11,989 11,640 18,869 19,079 135,502 135,572
---------------------- ---------------------- ----------------------
Equity securities:
Common stock 1,655 1,670 2,390 2,776 606 1,187
Preferred stock 2,676 2,684 2,309 2,414 2,768 2,843
---------------------- ---------------------- ----------------------
Total equity securities 4,331 4,354 4,699 5,190 3,374 4,030
---------------------- ---------------------- ----------------------
Mortgage-backed securities:
FHLMC 9,758 9,657 14,831 14,894 34,015 34,120
FNMA 14,639 14,602 20,717 21,102 55,559 56,068
GNMA 252,626 244,763 265,089 266,425 125,585 126,922
---------------------- ---------------------- ----------------------
Total mortgage-backed securities 277,023 269,022 300,637 302,421 215,159 217,110
---------------------- ---------------------- ----------------------
Total securities available for sale 293,343 285,016 324,205 326,690 354,035 356,712
---------------------- ---------------------- ----------------------
Interest-bearing deposits and
Federal funds sold 9,019 9,019 12,008 12,008 84,838 84,838
FHLB--New York stock 22,592 22,592 17,320 17,320 14,356 14,356
---------------------- ---------------------- ----------------------
Total $324,954 $316,627 $353,533 $356,018 $453,229 $455,906
====================== ====================== ======================
</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, 1999, the Company had $269.0 million invested in mortgage-backed securities,
of which $13.7 million was invested in adjustable-rate mortgage-backed
securities. The mortgage loans underlying these adjustable-rate securities
generally are subject to limitations on annual and lifetime interest rate
increases. The Company anticipates that investments in mortgage-backed
securities may continue to be used in the future to supplement mortgage lending
activities. Mortgage-backed securities are more liquid than individual mortgage
loans and may be used more easily to collateralize obligations of the Bank.
19
<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,
------------------------------------------
1999 1998 1997
------------------------------------------
(In thousands)
<S> <C> <C> <C>
At beginning of year $ 302,421 $ 217,110 $ 141,038
Purchases of mortgage-backed securities 59,059 245,942 136,063
Amortization of unearned premium, net of
accretion of unearned discount (2,064) (1,386) (473)
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale (9,792) (189) 2,830
Sales of mortgage-backed securities -- (66,136) (33,934)
Principal repayments received on
mortgage-backed securities (80,602) (92,920) (28,414)
------------------------------------------
Net increase(decrease) in mortgage-backed securities (33,399) 85,311 76,072
------------------------------------------
At end of year $ 269,022 $ 302,421 $ 217,110
==========================================
</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 no collateralized mortgage obligations ("CMO") at
December 31, 1999, 1998 and 1997. The Bank does not have any derivative
instruments, including CMO's, with market values that are extremely sensitive to
changes in interest rates.
20
<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, 1999.
The stratification of balances is based on stated maturities. Equity securities
and the FHLB-New York stock are shown as immediately maturing, except for
preferred stocks with stated redemption dates, which are shown in the period
they are scheduled to be redeemed. Assumptions for repayments and prepayments
are not reflected for mortgage-backed securities. The Company and the Bank carry
these investments at their estimated fair value in the consolidated financial
statements.
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------------------
Five to Ten More than Ten
One Year or Less One to Five Years Years Years
----------------- ------------------ ----------------- -----------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
----------------- ------------------ ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale
Bonds and other debt securities:
U.S. government agencies -- -- -- -- $5,988 7.83% $5,000 6.68%
Public utility -- -- 1,001 7.96 -- --
-- --
----------------- ----------------- ----------------- -----------------
Total bonds and other debt
securities -- -- -- -- 6,989 7.85 5,000 6.68
----------------- ----------------- ----------------- -----------------
Equity securities:
Common stock $ 1,655 1.50% -- -- -- -- -- --
Preferred stock
835 8.84 $1,533 8.08% 308 7.29 -- --
----------------- ----------------- ----------------- -----------------
Total equity securities
2,490 3.96 1,533 8.08 308 7.29 -- --
----------------- ----------------- ----------------- -----------------
Mortgage-backed securities:
FHLMC
427 7.11 -- -- 1,298 8.09 8,033 7.52
FNMA
52 7.10 -- -- 2,657 6.79 11,930 7.75
GNMA
-- -- -- -- 11 7.31 252,615 7.37
----------------- ----------------- ----------------- -----------------
Total mortgage-backed securities
479 7.11 -- -- 3,966 7.22 272,578 7.39
----------------- ----------------- ----------------- -----------------
Interest-bearing deposits and Federal
Funds sold 9,019 4.05 -- -- -- -- -- --
FHLB--New York stock 22,592 6.75 -- -- -- -- -- --
------------------ ----------------- ----------------- -----------------
Total securities $34,580 5.85% $1,533 8.08% $11,264 7.61% $277,578 7.38%
================= ================= ================= =================
<CAPTION>
At December 31, 1999
------------------------------------------
Total Securities
------------------------------------------
Average
Remaining Weighted
Years to Amortized Estimated Average
Maturity Cost Fair Value Yield
------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale
Bonds and other debt securities:
U.S. government agencies 10.01 $10,988 $10,636 7.31%
Public utility 8.81 1,001 1,004 7.96
------------------------------------------
Total bonds and other debt
securities 9.91 11,989 11,640 7.36
------------------------------------------
Equity securities:
Common stock N/A 1,655 1,670 1.50
Preferred stock
1.91 2,676 2,684 8.23
------------------------------------------
Total equity securities
1.19 4,331 4,354 5.66
------------------------------------------
Mortgage-backed securities:
FHLMC
19.46 9,758 9,657 7.58
FNMA
20.13 14,639 14,602 7.57
GNMA
28.12 252,626 244,763 7.37
------------------------------------------
Total mortgage-backed securities
27.39 277,023 269,022 7.39
------------------------------------------
Interest-bearing deposits and Federal
Funds sold N/A 9,019 9,019 4.05
FHLB--New York stock N/A 22,592 22,592 6.75
------------------------------------------
Total securities 26.44 $324,954 $316,627 7.23%
==========================================
</TABLE>
21
<PAGE>
Sources of Funds
General. Deposits, FHLB-NY borrowings, repurchase agreements, principal and
interest payments on loans, mortgage-backed and other securities, and proceeds
from sales of loans and securities are the Company's primary sources of funds
for lending, investing and other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits principally consist of passbook
accounts, money market accounts, demand accounts, NOW accounts and certificates
of deposit. The Bank has a relatively stable retail deposit base drawn from its
market area through its nine full service offices. The Bank seeks to retain
existing depositor relationships by offering quality service and competitive
interest rates, while keeping deposit growth within reasonable limits. It is
management's intention to balance its goal to remain competitive in interest
rates on deposits while seeking to manage its cost of funds to finance its
strategies.
The Bank's core deposits, consisting of passbook accounts, NOW accounts,
money market accounts, and non-interest bearing demand accounts, are typically
more stable and lower costing than other sources of funding. However, the flow
of deposits into a particular type of account is influenced significantly by
general economic conditions, changes in prevailing money market and other
interest rates, and competition. Certificate of deposit accounts opened with the
Bank during the past several years were generally opened at rates which were
lower than the weighted average rate paid by the Bank on its certificate of
deposit accounts, and, maturing certificate of deposit accounts were generally
reinvested by depositors in new certificate of deposit accounts which paid a
lower rate than was paid on the maturing deposit. As a result, the Bank saw the
cost of its certificate of deposit accounts decline to 5.24% in 1999 from 5.61%
in 1998 and 5.68% in 1997. The decline in the cost of certificate of deposit
accounts, coupled with a reduced rate paid on passbook accounts, resulted in the
Bank's cost of interest-bearing deposits declining to 3.96% in 1999 from 4.43%
in 1998 and 4.44% in 1997.
During the second half of 1999, as interest rates began to increase, the
Bank raised interest rates on its certificate of deposit accounts to remain
competitive. The interest rates paid on certificate of deposit accounts opened
during the later part of 1999 were generally at levels that were above the
Bank's weighted average cost of existing certificate of deposit accounts. A
continuation of increasing interest rates, or of rates on new certificate of
deposit accounts at levels above the overall cost of funds being paid at year
end, could result in an increase in the Company's cost of deposits and a
narrowing of the Company's net interest margin.
Included in deposits are certificates of deposit with a balance of $100,000
or greater totaling $43.0 million, $30.5 million and $29.9 million at December
31, 1999, 1998 and 1997, respectively.
22
<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,
---------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Percent Weighted Percent Weighted
of Average of Average
Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate
----------- -------- --------- ----------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts (1) $195,910 29.37% 2.07% $203,949 30.71% 2.29%
NOW accounts (1) 27,463 4.12 1.90 26,788 4.03 1.90
Demand accounts (1) 20,490 3.07 -- 27,505 4.14 --
Mortgagors' escrow deposits 11,023 1.65 0.79 6,563 0.99 1.06
----------- -------- --------- ----------- -------- ----------
Total 254,886 38.21 1.83 264,805 39.87 1.98
----------- ------- --------- ----------- -------- ----------
Money market accounts (1) 40,378 6.05 3.23 28,439 4.28 2.69
Certificate of deposit accounts
with original maturities of:
6 Months and less 46,265 6.94 4.36 54,268 8.17 4.30
6 to 12 Months 64,499 9.67 4.73 81,092 12.21 4.96
12 to 30 Months 171,087 25.67 5.42 139,397 21.00 5.71
30 to 48 Months 28,632 4.29 6.07 41,543 6.26 6.17
48 to 72 Months 60,309 9.04 6.24 50,323 7.58 6.22
72 Months or more 885 0.13 6.31 4,192 0.63 6.54
----------- --------- --------- ----------- -------- ----------
Total certificate
of deposit accounts 371,677 55.74 5.36 370,815 55.85 5.47
----------- --------- --------- ----------- -------- ----------
Total deposits (2) $666,941 100.00% 3.88% $664,059 100.00% 3.96%
=========== ========= ========= =========== ======== ==========
<CAPTION>
At December 31,
--------------------------------------
1997
-------------------------------------
Percent Weighted
of Average
Total Nominal
Amount Deposits Rate
-------------- --------- ----------
<S> <C> <C> <C>
Passbook accounts (1) $201,668 30.75% 2.90%
NOW accounts (1) 23,825 3.63 1.90
Demand accounts (1) 19,263 2.94 --
Mortgagors' escrow deposits 4,900 0.75 1.17
-------------- --------- ----------
Total 249,656 38.07 2.55
-------------- --------- ----------
Money market accounts (1) 23,526 3.59 2.86
Certificate of deposit accounts
with original maturities of:
6 Months and less 61,916 9.44 5.31
6 to 12 Months 75,340 11.49 5.53
12 to 30 Months 130,414 19.87 6.05
30 to 48 Months 56,209 8.57 6.48
48 to 72 Months 54,406 8.29 6.36
72 Months or more 4,444 0.68 6.67
-------------- --------- ----------
Total certificate
of deposit accounts 382,729 58.34 5.94
-------------- --------- ----------
Total deposits (2) $655,911 100.00% 4.54%
============== ========= ==========
</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 $86.8
million, $86.4 million and $85.8 million at December 31, 1999, 1998 and
1997, 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, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
At December 31, ------------------------------------------------------
----------------------------------------- Within One One to Three There-
1999 1998 1997 Year Year after Total
------------ ------------ -------------- ------------- ------------- ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit accounts:
2.99 or less $370 $136 $625 $275 $95 -- $370
3.00 to 3.99 5,717 22,234 -- 5,717 -- -- 5,717
4.00 to 4.99 131,874 82,899 21,265 122,392 7,755 $1,727 131,874
5.00 to 5.99 172,863 161,122 220,994 62,027 92,959 17,877 172,863
6.00 to 6.99 49,392 92,038 124,682 15,019 23,781 10,592 49,392
7.00 to 7.99 11,461 12,386 15,163 7,363 4,098 -- 11,461
----------- ------------ ------------- ------------ ------------ ----------- ------------
Total $371,677 $370,815 $382,729 $212,793 $128,688 $30,196 $371,677
=========== ============ ============= ============ ============ =========== ============
</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, 1999 and their annualized weighted average interest rates.
<TABLE>
<CAPTION>
Amount Weighted Average Rate
-------------- ---------------------
(Dollars in thousands)
<S> <C> <C>
Maturity Period:
Three months or less $10,578 5.11%
Over three through six months 5,399 5.18
Over six through 12 months 7,242 5.53
Over 12 months 19,773 5.90
---------- ------------
Total $42,992 5.55%
========== ============
</TABLE>
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net deposits/withdrawals) (1) $(22,100) $(19,824) $(6,009)
Interest credited on deposits 24,982 27,972 26,566
Deposits acquired from New York Federal -- -- 50,875
------------ ------------ -----------
Total increase (decrease) in deposits $ 2,882 $8,148 $71,432
============ ============ ===========
</TABLE>
- ----------
(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,
-------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Percent of Percent of
Average Total Average Average Total Average
Balance Deposits Cost Balance Deposits Cost
-------------------------------------- --------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $200,601 30.19% 2.07% $202,291 30.53% 2.74%
NOW accounts 26,281 3.96 1.90 24,375 3.68 1.91
Demand accounts 24,624 3.71 -- 26,177 3.95 --
Mortgagors' escrow deposits 11,718 1.76 0.79 6,724 1.01 1.06
-------------------------------------- --------------------------------------
Total 263,224 39.62 1.80 259,567 39.17 2.34
Money market accounts 36,191 5.45 3.05 26,240 3.96 2.95
Certificate of deposit accounts 364,947 54.93 5.24 376,787 56.87 5.61
-------------------------------------- --------------------------------------
Total deposits $664,362 100.00% 3.76% $662,594 100.00% 4.22%
====================================== ======================================
<CAPTION>
For The Year Ended December 31,
--------------------------------------
1997
--------------------------------------
Percent of
Average Total Average
Balance Deposits Cost
--------------------------------------
<S> <C> <C> <C>
Passbook accounts $206,196 33.56% 2.85%
NOW accounts 22,679 3.69 1.90
Demand accounts 12,306 2.00 --
Mortgagors' escrow deposits 6,044 0.98 1.17
--------------------------------------
Total 247,225 40.23 2.58
Money market accounts 24,367 3.97 2.84
Certificate of deposit accounts 342,898 55.80 5.68
--------------------------------------
Total deposits $614,490 100.00% 4.32%
======================================
</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. The
Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such
advances generally are secured by a blanket lien against the Bank's mortgage
portfolio and the Bank's investment in the stock of the FHLB-NY. In addition,
the Bank may pledge mortgage-backed securities to obtain advances from the
FHLB-NY. See "Regulation -- Federal Home Loan Bank System". The maximum amount
that the FHLB-NY will advance for purposes other than for meeting withdrawals
fluctuates from time to time in accordance with the policies of the FHLB-NY. The
Bank also enters into repurchase agreements with the FHLB-NY. These agreements
are recorded as financing transactions and the obligations to repurchase are
reflected as a liability in the Company's consolidated financial statements. The
cost of borrowed funds was 6.02%, 6.16% and 6.22% for 1999, 1998 and 1997,
respectively. The average balances of borrowed funds were $379.3 million, $303.6
million and $132.3 million for 1999, 1998 and 1997, respectively.
25
<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,
------------------------------------------------------
1999 1998 1997
----------------- ----------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Securities Sold with the Agreement to Repurchase
Average balance outstanding $118,849 $110,274 $6,904
Maximum amount outstanding at any month
end during the period $120,000 $130,000 $100,000
Balance outstanding at the end of period $110,000 $120,000 $100,000
Weighted average interest rate during the period 5.83% 5.81% 5.84%
Weighted average interest rate at end of period 5.81% 5.83% 5.83%
FHLB-NY Advances
Average balance outstanding $260,410 $193,299 $125,295
Maximum amount outstanding at any month
end during the period $341,831 $216,406 $187,112
Balance outstanding at the end of period $341,831 $215,458 $187,112
Weighted average interest rate during the period 6.11% 6.36% 6.34%
Weighted average interest rate at end of period 6.09% 6.26% 6.34%
Other Borrowings
Average balance outstanding -- -- $75
Maximum amount outstanding at any month
end during the period -- -- $75
Balance outstanding at the end of period -- -- $75
Weighted average interest rate during the period -- -- --
Weighted average interest rate at end of period -- -- --
Total Borrowings
Average balance outstanding $379,259 $303,573 $132,274
Maximum amount outstanding at any month
end during the period $451,831 $346,406 $287,187
Balance outstanding at the end of period $451,831 $335,458 $287,187
Weighted average interest rate during the period 6.02% 6.16% 6.22%
Weighted average interest rate at end of period 6.02% 6.11% 6.16%
</TABLE>
26
<PAGE>
Subsidiary Activities
At December 31, 1999, the Bank had three wholly-owned subsidiaries: FSB
Properties, Inc. ("Properties"), Flushing Preferred Funding Corporation ("FPFC")
and Flushing Service Corporation.
(a) Properties was formed in 1976 under the Bank's New York State leeway
investment authority. The original purpose of Properties was to engage in joint
venture real estate equity investments. The Bank discontinued these activities
in 1986. The last joint venture in which Properties was a partner was dissolved
in 1989. The last remaining property acquired by the dissolution of these joint
ventures was disposed of in 1998.
(b) FPFC was formed in the fourth quarter of 1997 as a real estate
investment trust for the purpose of acquiring, holding and managing real estate
mortgage assets.
(c) Flushing Service Corporation was formed in 1998 to market insurance
products and mutual funds. The insurance products and mutual funds sold are
products of unrelated insurance and securities firms from which the service
corporation earns a commission.
Personnel
At December 31, 1999, the Bank had 178 full-time employees and 57 part-time
employees. None of the Bank's employees are represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be good.
27
<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, and construction loans, the level of
which remains low but has been increasing, are generally viewed as exposing the
lender to a greater risk of loss than fully underwritten one-to-four family
residential loans and typically involve higher principal amounts per loan.
Repayment of multi-family and commercial real estate loans generally is
dependent, in large part, upon sufficient income from the property to cover
operating expenses and debt service. Repayment of construction loans is
contingent upon the successful completion and operation of the project. Changes
in local economic conditions and government regulations, which are outside the
control of the borrower or lender, also could affect the value of the security
for the loan or the future cash flow of the affected properties.
As a result of management's strategy to increase its originations of
one-to-four family mortgage loans through more aggressive marketing, and the
Bank's commitment to be a community-oriented bank, the Bank increased
substantially the origination of residential mortgage loans to self-employed
individuals within the Bank's local community without verification of the
borrower's level of income. These loans involve a higher degree of risk as
compared to the Bank's other fully underwritten residential mortgage loans as
there is a greater opportunity for borrowers to falsify or overstate their level
of income and ability to service indebtedness. To mitigate this risk, the Bank
typically limits the amount of these loans to 80% of the appraised value or sale
price, whichever is less. These loans are not as readily salable in the
secondary market as the Bank's other fully underwritten loans, either as whole
loans or when pooled or securitized.
28
<PAGE>
There can be no assurance that the Bank will be able to successfully
implement its business strategies. In assessing the future earnings prospects of
the Bank, investors should consider, among other things, the Bank's level of
origination of one-to-four family loans, the Bank's emphasis on commercial real
estate and multi-family loans and the greater risks associated with such loans.
See "Business -- Lending Activities".
Competition
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. The future earnings prospects of the Bank will be affected
by the Bank's ability to compete effectively with other financial institutions
and to implement its business strategies. See "Business - Market Area and
Competition."
Local Economic Conditions
Although general economic conditions in the New York City metropolitan area
have improved since the early 1990's, there can be no assurance that the local
economy will continue to improve or remain at current conditions.
A decline in the local economy, national economy or metropolitan area real
estate market could adversely affect the financial condition and results of
operations of the Company, including through decreased demand for loans or
increased competition for good loans, increased non-performing loans and loan
losses and resulting additional provisions for loan losses and for losses on
real estate owned. Although management of the Bank believes that the current
allowance for loan losses is adequate in light of current economic conditions,
many factors may require additions to the allowance for loan losses in future
periods above those currently revealed. These factors include: (i) adverse
changes in economic conditions and changes in interest rates that may affect the
ability of borrowers to make payments on loans, (ii) changes in the financial
capacity of individual borrowers, (iii) changes in the local real estate market
and the value of the Bank's loan collateral, and (iv) future review and
evaluation of the Bank's loan portfolio, internally or by regulators. The amount
of the allowance for loan losses at any time represents good faith estimates
that are susceptible to significant changes due to changes in appraisal values
of collateral, national and regional economic conditions, prevailing interest
rates and other factors. See "Business - Allowance for Loan Losses."
Legislation and Proposed Changes
From time to time, legislation is enacted or regulations are promulgated
that have the effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive balance between
banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of banks and other financial
institutions are frequently made in Congress, in the New York legislature and
before various bank regulatory agencies. No prediction can be made as to the
likelihood of any major changes or the impact such changes might have on the
Bank or the Company.
Certain Anti-Takeover Provisions
On September 17, 1996, the Company adopted a Stockholder Rights Plan (the
"Rights Plan") designed to preserve long-term values and protect stockholders
against stock accumulations and other abusive tactics to acquire control of the
Company. Under the Rights Plan, each stockholder of record at the close of
business on September 30, 1996 received a dividend distribution of one right to
purchase from the Company one one-hundredth-fiftieth of a share of a new series
of junior participating preferred stock at a price of $64,
29
<PAGE>
subject to certain adjustments. The rights will become exercisable only if any
person or group acquires 15% or more of the Company's common stock ("Common
Stock") or commences a tender or exchange offer which, if consummated, would
result in that person or group owning at least 15% of the Common Stock (the
"acquiring person or group"). In such case, all stockholders other than the
acquiring person or group will be entitled to purchase, by paying the $64
exercise price, Common Stock (or a common stock equivalent) with a value of
twice the exercise price. In addition, at any time after such event, and prior
to the acquisition by any person or group of 50% or more of the Common Stock,
the Board of Directors may, at its option, require each outstanding right (other
than rights held by the acquiring person or group) to be exchanged for one share
of Common Stock (or one common stock equivalent). The rights expire on September
30, 2006.
The Rights Plan, as well as certain provisions of the Company's Certificate
of Incorporation and Bylaws, the Bank's federal Stock charter and Bylaws,
certain federal regulations and provisions of Delaware corporation law, and
certain provisions of remuneration plans and agreements applicable to employees
and officers of the Bank may have anti-takeover effects by discouraging
potential proxy contests and other takeover attempts, particularly those which
have not been negotiated with the Board of Directors. The Rights Plan and those
other provisions, as well as applicable regulatory restrictions, may also
prevent or inhibit the acquisition of a controlling position in the Common Stock
and may prevent or inhibit takeover attempts that certain stockholders may deem
to be in their or other stockholders' interest or in the interest of the Company
or the Bank, or in which stockholders may receive a substantial premium for
their shares over then current market prices. The Rights Plan and those other
provisions may also increase the cost of, and thus discourage, any such future
acquisition or attempted acquisition, and would render the removal of the
current Board of Directors or management of the Bank or the Company more
difficult.
30
<PAGE>
FEDERAL, STATE AND LOCAL TAXATION
The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Company.
Federal Taxation
General. The Company reports its income using a calendar year and the
accrual method of accounting. The Company is subject to the federal tax laws and
regulations which apply to corporations generally; including, since the
enactment of the Small Business Job Protection Act in 1996 (the "Act"), those
governing the Bank's deductions for bad debts, described below.
Bad Debt Reserves. Prior to the enactment of the Act, which was signed into
law on August 20, 1996, savings institutions which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts"), such as the Bank, were allowed deductions for bad debts
under methods more favorable than those granted to other taxpayers. Qualifying
thrifts could compute deductions for bad debts using either the specific charge
off method of Section 166 of the Internal Revenue Code (the "Code") or the
reserve method of Section 593 of the Code.
Prior to its modification by the Act, Section 593 permitted a qualifying
thrift to establish a reserve for bad debts and to make annual additions
thereto, which, within specified formula limits, could be deducted in arriving
at its taxable income. A qualifying thrift could elect annually to compute its
allowable deduction to bad debt reserves for "qualifying real property loans,"
generally loans secured by certain interests in real property, under either (i)
the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, subject to certain
limitations, a qualifying thrift generally was allowed a deduction for an
addition to its bad debt reserve equal to 8% of its taxable income (determined
without regard to this deduction and with additional adjustments). Under the
experience method, a qualifying thrift was generally allowed a deduction for an
addition to its bad debt reserve equal to the greater of (i) an amount based on
its actual average experience for losses in the current and five preceding
taxable years, or (ii) an amount necessary to restore the reserve to its balance
as of the close of the base year, defined as the last taxable year beginning
before January 1, 1988. The Bank's deduction for additions to its bad debt
reserve with respect to non-qualifying loans had to be computed under the
experience method. Any deduction for the addition to the reserve for
non-qualifying loans reduced the maximum permissible addition to the reserve for
qualifying real property loans calculated under the percentage of taxable income
method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by qualifying thrifts, effective for taxable years
beginning after 1995. Qualifying thrifts that are treated as large banks, such
as the Bank, are required to use the specific charge off method, pursuant to
which the amount of any debt may be deducted only as it actually becomes wholly
or partially worthless.
A thrift institution required to change its method of computing reserves
for bad debt is required to treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amount of
the thrift institution's "applicable excess reserves" must be included in income
ratably over a six-taxable year period, beginning with the first taxable year
beginning after 1995. In the case of a thrift institution that is treated as a
large bank, such as the Bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for losses
on qualifying real property loans and its reserve for losses on nonqualifying
loans as of the close of its last taxable year beginning before January 1, 1996,
over (ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). The Bank's
applicable
31
<PAGE>
excess reserves as of December 31, 1995 were approximately $300,000; of which
$120,000 remains to be included in future taxable income as of December 31,
1999.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders that are considered to result in distributions
from the pre-1988 reserves or the supplemental reserve for losses on loans
("excess distributions"), then an amount based on the amount distributed will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and post-1951 accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
redemption of stock and distributions in partial or complete liquidation. The
amount of additional taxable income resulting from an excess distribution is an
amount that when reduced by the tax attributable to the income is equal to the
amount of the excess distribution. Thus, slightly more than one and one-half
times the amount of the excess distribution made would be includable in gross
income for federal income tax purposes, assuming a 35% federal corporate income
tax rate. See "Regulation--Restrictions on Dividends and Capital Distributions"
for limits on the payment of dividends by the Bank. The Bank does not intend to
pay dividends or make non-dividend distributions described above that would
result in a recapture of any portion of its pre-1988 bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes an alternative minimum
tax on corporations equal to the excess, if any, of 20% of alternative minimum
taxable income ("AMTI") over a corporation's regular federal income tax
liability. AMTI is equal to taxable income with certain adjustments. Only 90% of
AMTI can be offset by net operating loss carryforwards.
State and Local Taxation
New York State and New York City Taxation. The Company is subject to the
New York State Franchise Tax on Banking Corporations in an annual amount equal
to the greater of (i) 9% of "entire net income" allocable to New York State
during the taxable year or (ii) the applicable alternative minimum tax. The
alternative minimum tax is generally the greater of (a) 0.01% of the value of
assets allocable to New York State with certain modifications, (b) 3% of
"alternative entire net income" allocable to New York State or (c) $250. Entire
net income is similar to federal taxable income, subject to certain
modifications (including that net operating losses cannot be carried back or
carried forward), and alternative entire net income is equal to entire net
income without certain deductions which are allowable in the calculation of
entire net income. The Bank also is subject to a similarly calculated New York
City tax of 9% on income allocated to New York City and similar alternative
taxes. In addition, the Bank is subject to a temporary Metropolitan
Transportation Business Tax Surcharge for tax years ending before December 31,
2001, at a rate of 17% of the New York State Franchise Tax.
Notwithstanding the repeal of the federal income tax provisions permitting
bad debt deductions under the reserve method, New York State has enacted
legislation maintaining the preferential treatment of additional loss reserves
for qualifying real property and non-qualifying loans of qualifying thrifts for
both New York State and New York City tax purposes. Calculation of the amount of
additions to reserves for qualifying real property loans is limited to the
larger of the amount derived by the percentage of taxable income method or the
experience method. For these purposes, the applicable percentage to calculate
the bad debt deduction under the percentage of taxable income method is 32% of
taxable income, reduced by additions to reserves for non-qualifying loans,
except that the amount of the addition to the reserve cannot exceed the amount
necessary to increase the balance of the reserve for losses on qualifying real
property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding at the end of the taxable year. Under
the experience method, the maximum addition to a loan reserve generally equals
the amount necessary to increase the balance of the bad debt reserve at the
close of the taxable year to the greater of (i) the amount that bears the same
ratio to loans outstanding at the close of the taxable year as the total net bad
debts sustained during the current and five preceding taxable years bears to the
sum of the loans outstanding at the close of those six years, or (ii) the
balance of the bad debt reserve at the close of the "base year," or, if the
amount of
32
<PAGE>
loans outstanding has declined since the base year, the amount which bears the
same ratio to the amount of loans outstanding at the close of the taxable year
as the balance of the reserve at the close of the base year. For these purposes,
the "base year" is the last taxable year beginning before 1988. The amount of
additions to reserves for non-qualifying loans is computed under the experience
method. The aggregate amount of additions to reserves for losses on qualifying
real property and reserves for losses on non-qualifying loans cannot exceed the
amount by which 12% of the amount of the total deposits or withdrawable accounts
of depositors of the Bank at the close of the taxable year exceeds the sum of
the Bank's surplus, undivided profits and reserves at the beginning of such
year. The new legislation also allows an exclusion from entire net income for
New York State and New York City tax purposes for any amounts a thrift is
required to include in federal taxable income as a recapture of its bad debt
reserve as a consequence of the Act.
Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
REGULATION
General
On May 10, 1994, the Bank converted from a New York State chartered mutual
savings bank to a federally chartered mutual savings bank pursuant to Section
5(o) of the Home Owners' Loan Act, as amended ("HOLA"). On that date, the OTS
replaced the New York State Banking Department (the "Banking Department") as the
Bank's chartering authority and the FDIC as the Bank's primary federal
regulator. Although the FDIC is no longer the primary federal regulator of the
Bank, the Bank remains subject to regulation and examination by the FDIC as its
deposit insurer. The Bank's deposits are insured up to the applicable limits
permitted by law. See "--Insurance of Accounts."
The Bank is also subject to certain regulations promulgated by the Federal
Reserve Board. Moreover, in connection with converting to a federal charter, the
Bank became a member of the FHLB-NY.
The activities of federal savings institutions are governed by HOLA and, in
certain respects, the Federal Deposit Insurance Act ("FDIA"). Most regulatory
functions relating to deposit insurance and to conservatorships and
receiverships of insured institutions are exercised by the FDIC. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandated the
establishment of a risk-based deposit insurance assessment system and required
imposition of numerous additional safety and soundness operational standards and
restrictions. FDICIA and the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") each contain provisions affecting numerous
aspects of the operations and regulations of federal savings banks and empowers
the OTS and the FDIC, among other agencies, to promulgate regulations
implementing its provisions.
The OTS has extensive authority over the operations of the Bank. As part of
this authority, the Bank is required to file periodic reports with the OTS and
is subject to periodic examinations by the OTS and back-up examinations by the
FDIC. The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the applicable rules and
regulations of, the OTS. The Company also is subject to regulation under the
federal securities laws.
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Bank and the Company. The description does
not purport to be a comprehensive description of applicable laws, rules and
regulations and is qualified in its entirety by reference to applicable laws,
rules and regulations.
33
<PAGE>
Investment Powers
The Bank is subject to comprehensive regulation governing its investments
and activities. Among other things, the Bank may invest in (i) residential
mortgage loans, education loans and credit card loans in an unlimited amount,
(ii) non-residential real estate loans up to 400% of total capital, (iii)
commercial business loans up to 20% of assets (however, amounts over 10% of
total assets must be used only for small business loans) and (iv) in general,
consumer loans and highly rated commercial paper and corporate debt securities
in the aggregate up to 35% of assets. In addition, the Bank may invest up to 3%
of its assets in service corporations, an unlimited percentage of its assets in
operating subsidiaries (which may only engage in activities permissible for the
Bank itself) and under certain conditions may invest in finance subsidiaries.
Other than investments in service corporations, operating subsidiaries, finance
subsidiaries and stock of government-sponsored agencies, such as FHLMC and FNMA,
the Bank generally is not permitted to make equity investments. See
"Business--Investment Activities." A service corporation in which the Bank may
invest is permitted to engage in activities reasonably related to the activities
of a federal savings bank as the OTS may approve on a case by case basis and
certain activities preapproved by the OTS, which, among other things, include
providing certain support services for the institution; originating, investing
in, selling, purchasing, servicing or otherwise dealing with specified types of
loans and participations (principally loans that the parent institution could
make); specified real estate activities, including limited real estate
development, securities brokerage services; certain insurance brokerage
activities, and other specified investments and services.
Real Estate Lending Standards
FDICIA requires each federal banking agency to adopt uniform regulations
prescribing standards for extensions of credit (i) secured by real estate, or
(ii) made for the purpose of financing the construction of improvements on real
estate. In prescribing these standards, the banking agencies must consider the
risk posed to the deposit insurance funds by real estate loans, the need for
safe and sound operation of insured depository institutions and the availability
of credit. The OTS and the other federal banking agencies adopted uniform
regulations, effective March 19, 1993. The OTS regulation requires each savings
association to establish and maintain written internal real estate lending
standards consistent with safe and sound banking practices and appropriate to
the size of the institution and the nature and scope of its real estate lending
activities. The policy must also be consistent with accompanying OTS guidelines,
which include maximum loan-to-value ratios for the following types of real
estate loans: raw land (65%), land development (75%), nonresidential
construction (80%), improved property (85%) and one-to-four family residential
construction (85%). Owner-occupied one-to-four family mortgage loans and home
equity loans do not have maximum loan-to-value ratio limits, but those with a
loan-to-value ratio at origination of 90% or greater are to be backed by private
mortgage insurance or readily marketable collateral. Institutions are also
permitted to make a limited amount of loans that do not conform to the proposed
loan-to-value limitations so long as such exceptions are appropriately reviewed
and justified. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
Loans-to-One Borrower Limits
The Bank generally is subject to the same loans-to-one borrower limits that
apply to national banks. With certain exceptions, loans and extensions of credit
outstanding at one time to one borrower (including certain related entities of
the borrower) may not exceed 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus for loans fully secured
by certain readily marketable collateral. At December 31, 1999, the largest
amount the Bank could lend to one borrower was approximately $15.8 million, and
at that date, the Bank's largest aggregate amount of loans-to-one borrower was
$11.4 million, all of which was performing according to its terms. See
"Business--Lending Activities."
34
<PAGE>
Insurance of Accounts
The deposits of the Bank are insured up to $100,000 per depositor (as
defined by law and regulations) by the FDIC. Approximately 97% of the Bank's
deposits are presently insured by the FDIC under the BIF. The remainder are
insured by the FDIC under the SAIF. The deposits insured under the SAIF are
those acquired in the acquisition of New York Federal. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, insured
institutions. It also may prohibit any insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious threat to
the insurance funds. The FDIC also has the authority to initiate enforcement
actions where the OTS has failed or declined to take such action after receiving
a request to do so from the FDIC.
The FDIC utilizes a risk-based deposit insurance assessment system. Under
this system, the FDIC assigns each institution to one of three capital
categories -- "well capitalized," "adequately capitalized" and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of FDIA, as
discussed below. These three categories are then divided into three
subcategories which reflect varying levels of supervisory concern. The matrix so
created results in nine assessment risk classifications.
Assessment rates during most of 1995 ranged from $0.23 per $100 of deposits
for an institution in the highest category to $0.31 of deposits for an
institution in the lowest category. On August 8, 1995, the FDIC amended its
regulation on assessments to establish a new assessment rate schedule for the
BIF ranging from $0.04 per $100 of deposits for an institution in the highest
category to $0.31 per $100 of deposits for an institution in the lowest
category. The FDIC's new rate schedule for the BIF was made effective with the
first day of the month following the month in which the BIF achieved full
capitalization to the statutory required 1.25% reserve ratio, which occurred in
the second half of 1995.
As a result of the lowering of BIF rates in August 1995, the Bank paid
$824,000 in deposit insurance premiums for the year ended December 31, 1995.
Thereafter, the FDIC voted to reduce the BIF assessment schedule even further so
that most BIF members, including the Bank, paid a statutory minimum annual
assessment rate of $2,000 for 1996. Deposit insurance for SAIF members was
revised to the same schedule as BIF members effective January 1, 1997. As of the
date of this Report, the annual FDIC assessment rate for BIF and SAIF member
institutions varies between 0.00% to 0.27% per annum. At December 31, 1999, the
Bank's annual assessment rate was 0.00%.
The Bank's assessment rate in effect from time to time will depend upon the
capital category and supervisory subcategory to which the Bank is assigned by
the FDIC. In addition, the FDIC is authorized to increase federal deposit
insurance assessment rates for BIF and SAIF members to the extent necessary to
protect the BIF and SAIF and, under current law, would be required to increase
such rates to $0.23 per $100 of deposits if the BIF or SAIF reserve ratio again
falls below the required 1.25%. Any increase in deposit insurance assessment
rates, as a result of a change in the category or subcategory to which the Bank
is assigned or the exercise of the FDIC's authority to increase assessment rates
generally, could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
On September 30, 1996, as part of an omnibus appropriations bill, the
Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted. The Funds Act
eliminated the deposit insurance premium disparity that existed since the second
half of 1995 between banks insured by the BIF and thrifts insured by the SAIF.
The
35
<PAGE>
Act (i) required SAIF institutions to pay a one-time special assessment to
bring the SAIF's reserve ratio up to 1.25%, (ii) requires BIF institutions,
beginning January 1, 1997, to pay a portion of the interest due on the Finance
Corporation ("FICO") bonds issued in connection with the savings and loan
association crisis in the late 1980s, and (iii) requires BIF institutions to pay
their full pro rata share of the FICO payments starting the earlier of January
1, 2000 or the date at which no savings institution continues to exist. The Bank
was required, as of January 1, 2000, to pay its full pro rata share of the FICO
payments. The FICO assessment rate for the first quarter of 2000 was $0.0212 per
$100 of deposits for both BIF and SAIF institutions. For the second quarter of
2000, the rate is set at $0.0208 per $100 of deposits for both BIF and SAIF
institutions. These rates are subject to change. The Bank paid $100,000,
$102,000 and $87,000 for its share of the interest due on FICO bonds in 1999,
1998 and 1997, respectively.
Liquidity Requirements
The Bank is subject to OTS regulations that require maintenance of an
average daily balance of liquid assets (cash and certain securities with
detailed maturity limitations and marketability requirements) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. The OTS may vary the amount of the
liquidity requirement by regulation, but only within pre-established statutory
limits of no less than 4% and no greater than 10%. For the greater part of 1997,
OTS regulation set the liquidity requirement at 5%, with a 1% short-term
liquidity requirement. Amendments to OTS regulations, effective November 27,
1997, reduced the liquidity requirement from 5% to 4% and removed the 1%
short-term liquidity requirement. In addition, these amendments eliminated the
requirement that obligations of FNMA, GNMA and FHLMC must have five years or
less remaining until maturity to qualify as a liquid asset. At December 31,
1999, the Bank's liquidity ratio, computed in accordance with the OTS
requirements, as amended, was 9.72%. Unlike the Bank, the Company is not subject
to OTS regulatory requirements on the maintenance of minimum levels of liquid
assets.
Qualified Thrift Lender Test
Institutions regulated by the OTS are required to meet a qualified thrift
lender ("QTL") test to avoid certain restrictions on their operations. FDICIA
and applicable OTS regulations require such institutions to maintain at least
65% of its portfolio assets (total assets less intangibles, properties used to
conduct the institution's business and liquid assets not exceeding 20% of total
assets) in "qualified thrift investments" on a monthly average basis in nine of
every 12 months. Qualified thrift investments constitute primarily residential
mortgage loans and related investments, including certain mortgage-backed and
mortgage-related securities. A savings institution that fails the QTL test must
either convert to a bank charter or, in general, it will be prohibited from: (i)
making an investment or engaging in any new activity not permissible for a
national bank, (ii) paying dividends not permissible under national bank
regulations, (iii) obtaining advances from any FHLB, and (iv) establishing any
new branch office in a location not permissible for a national bank in the
institution's home state. One year following the institution's failure to meet
the QTL test, any holding company parent of the institution must register and be
subject to supervision as a bank holding company. In addition, beginning three
years after the institution failed the QTL test, the institution would be
prohibited from refinancing any investment or engaging in any activity not
permissible for a national bank and would have to repay any outstanding advances
from an FHLB as promptly as possible. At December 31, 1999, the Bank had
maintained more than 65% of its "portfolio assets" in qualified thrift
investments in at least nine of the preceding 12 months. Accordingly, on that
date, the Bank had met the QTL test.
On September 30, 1996, as part of the omnibus appropriations bill, Congress
enacted the Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory
Paperwork Reduction Act"), modifying and expanding investment authority under
the QTL test. Prior to the enactment of the Regulatory Paperwork Reduction Act,
commercial, corporate, business, or agricultural loans were limited in the
aggregate to 10% of a thrift's assets and education loans were limited to 5% of
a thrift's assets. Further, federal savings associations meeting a different
asset test under the Code (the "domestic building and loan association test")
36
<PAGE>
were qualified for favorable tax treatment. The amendments permit federal
thrifts to invest in, sell, or otherwise deal in education and credit card loans
without limitation and raise from 10% to 20% of total assets the aggregate
amount of commercial, corporate, business, or agricultural loans or investments
that may be made by a thrift, subject to a requirement that amounts in excess of
10% of total assets be used only for small business loans. In addition, the
legislation defines "qualified thrift investment" to include, without limit,
education, small business, and credit card loans; and removes the 10% limit on
personal, family, or household loans for purposes of the QTL test. The
legislation also provides that a thrift meets the QTL test if it qualifies as a
domestic building and loan association under the Code.
Transactions with Affiliates
Transactions between the Bank and any related party or "affiliate" are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is any
company or entity which controls, is controlled by or is under common control
with the Bank, including the Company, the Bank's subsidiaries, and any other
subsidiary of the Bank or the Company that may be formed or acquired in the
future. Generally, Sections 23A and 23B (i) limit the extent to which the Bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of the Bank's capital stock and surplus, and impose an
aggregate limit on all such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the Bank or subsidiary as those provided to a non-affiliate. Each loan or
extension of credit to an affiliate by the Bank must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of credit extended. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition, the Bank may not (i) loan or
otherwise extend credit to an affiliate, except to any affiliate which engages
only in activities which are permissible for bank holding companies under
Section 4(c) of the Bank Company Act, or (ii) purchase or invest in any stocks,
bonds, debentures, notes or similar obligations of any affiliates, except
subsidiaries of the Bank.
In addition, the Bank is subject to Regulation O promulgated under Sections
22(g) and 22(h) of the Federal Reserve Act. Regulation O requires that loans by
the Bank to a director, executive officer or to a holder of more than 10% of the
Common Stock, and to certain affiliated interests of such insiders, may not, in
the aggregate, exceed the Bank's loans-to-one borrower limit. Loans to insiders
and their related interests must also be made on terms substantially the same as
offered, and follow credit underwriting procedures that are not less stringent
than those applied, in comparable transactions to other persons, with prior
Board approval required for certain loans. In addition, the aggregate amount of
extensions of credit by the Bank to all insiders cannot exceed the institution's
unimpaired capital and surplus. Section 22(g) places additional restrictions on
loans to executive officers of the Bank.
The Bank is in compliance with these regulations.
Restrictions on Dividends and Capital Distributions
The Bank is subject to OTS limitations on capital distributions, which
include cash dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other distributions charged to
the Bank's capital account. In general, the applicable regulation permits
specified levels of capital distributions by a savings institution that meets at
least its minimum capital requirements, so long as the OTS is provided with at
least 30 days' advance notice and has no objection to the distribution.
Under OTS capital distribution regulations which became effective April 1,
1999, an institution is not required to file an application with, or to provide
a notice to, the OTS if neither the institution nor the proposed capital
distribution meet any of the criteria for any such application or notice as
provided below. An institution will be required to file an application with the
OTS if the institution is not eligible for expedited treatment by
37
<PAGE>
the OTS, if the total amount of all its capital distributions for the applicable
calendar year exceeds the net income for that year to date plus the retained net
income (net income less capital distributions) for the preceding two years, if
it would not be at least adequately capitalized following the distribution, or
if its proposed capital distribution would violate a prohibition contained in
any applicable statute, regulation, or agreement between the association and the
OTS. By contrast, only notice to the OTS is required for an institution that is
not otherwise required to file an application as provided in the preceding
sentence, if it would not be well capitalized following the distribution, if the
association's proposed capital distribution would reduce the amount of or retire
any part of its common or preferred stock or retire any part of debt instruments
such as notes or debentures included in capital under OTS regulations, or if it
is a subsidiary of a savings and loan holding company. The Bank is a subsidiary
of a savings and loan holding company and, therefore, is subject to the 30-day
advance notice requirement. At December 31, 1999, the Bank's allowable capital
distribution was approximately $13.5 million.
Federal Home Loan Bank System
In connection with converting to a federal charter, the Bank became a
member of the FHLB-NY, which is one of 12 regional FHLBs governed and regulated
by the Federal Housing Finance Board. Each FHLB serves as a source of liquidity
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with policies and procedures
established by its Board of Directors.
As a member, the Bank is required to purchase and maintain stock in the
FHLB-NY in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. Pursuant to this
requirement, at December 31, 1999, the Bank was required to maintain $22.6
million of FHLB-NY stock. The Bank was in compliance with this requirement at
that time.
Assessments
Savings institutions are required by OTS regulations to pay assessments to
the OTS to fund the operations of the OTS. The general assessment, paid on a
quarterly or semi-annual basis, as determined from time to time by the Director
of the OTS, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the institution's latest quarterly
thrift financial report. Based on the average balance of the Bank's total assets
for the year ended December 31, 1999, the Bank's OTS assessments were $200,000
for that period.
Branching
OTS regulations permit federally chartered savings institutions to branch
nationwide to the extent allowed by federal statute. This permits federal
savings associations to geographically diversify their loan portfolios and lines
of business. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, the Bank has a continuing and affirmative obligation, consistent
with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take
38
<PAGE>
such record into account in its evaluation of certain applications by the
institution. The methodology used by the OTS for determining an institution's
compliance with the CRA focuses on three tests: (a) a lending test, to evaluate
the institution's record of making loans in its service areas; (b) an investment
test, to evaluate the institution's record of investing in community development
projects, affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (c) a service test, to evaluate the
institution's delivery of services through its branches, ATMs, and other
offices. The Bank received a CRA rating of "2" in its most recent completed CRA
examination which was completed by the OTS in July 1997. The OTS commenced a CRA
examination in March 2000, which has not yet been completed. Under OTS
regulations, a CRA rating of "2" is the second highest rating available on a
scale from "1" to "4" with "1" being assigned to institutions that have an
outstanding record of meeting community credit needs and "4" being assigned to
institutions that are in substantial noncompliance in meeting community credit
needs. An institution that receives a "2" is considered to have a satisfactory
record of meeting community credit needs. Institutions that receive
unsatisfactory ratings (i.e., "3" or "4") may face difficulties in securing
approval for new activities or acquisitions. The CRA requires all institutions
to make public disclosure of their CRA ratings.
Brokered Deposits
The FDIC has promulgated regulations implementing the FDICIA limitations on
brokered deposits. Under the regulations, well-capitalized institutions are not
subject to brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do not
pay an effective yield on any such deposit which exceeds by more than (a) 75
basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) 120 basis points for retail deposits and 130 basis
points for wholesale deposits accepted outside the institution's normal market
area, respectively, from the current yield on comparable maturity U.S. Treasury
obligations. Undercapitalized institutions are not permitted to accept brokered
deposits and may not solicit deposits by offering an effective yield that
exceeds by more than 75 basis points the prevailing effective yields on insured
deposits of comparable maturity in the institution's normal market area or in
the market area in which such deposits are being solicited. Pursuant to the
regulation, the Bank, as a well-capitalized institution, may accept brokered
deposits.
Capital Requirements
General. The Bank is required to maintain minimum levels of regulatory
capital. Since FIRREA, capital requirements established by the OTS generally
must be no less stringent than the capital requirements applicable to national
banks. The OTS also is authorized to impose capital requirements in excess of
these standards on a case-by-case basis.
Any institution that fails any of its applicable capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. See "--Prompt Corrective
Action."
The OTS' capital regulations create three capital requirements: a tangible
capital requirement, a leverage or core capital requirement and a risk-based
capital requirement. At December 31, 1999, the Bank's capital levels exceeded
applicable OTS capital requirements. The three OTS capital requirements are
described below.
39
<PAGE>
Tangible Capital Requirement. Under current OTS regulations, each savings
institution must maintain tangible capital equal to at least 1.50% of its
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At December 31, 1999, the Bank
had intangible assets consisting of $4.6 million in goodwill and no purchased
mortgage servicing rights. At that date, the Bank's tangible capital ratio was
8.28%.
In calculating adjusted total assets, adjustments are made to total assets
to give effect to the exclusion of certain assets from capital and to
appropriately account for the investments in and assets of both includable and
non-includable subsidiaries.
Core Capital Requirement. The current OTS core capital requirement ranges
between 3% and 5% of adjusted total assets. Savings institutions that receive
the highest supervisory rating for safety and soundness are required to maintain
a minimum core capital ratio of 3%, while the capital floor for all other
savings institutions generally ranges from 4% to 5%, as determined by the OTS on
a case by case basis. Core capital includes common stockholders' equity
(including retained income), non-cumulative perpetual preferred stock and
related surplus, minority interest in the equity accounts of fully consolidated
subsidiaries and (subject to phase-out) qualifying supervisory goodwill. The
Bank has no qualifying supervisory goodwill. At December 31, 1999, the Bank's
core capital ratio was 8.28%.
Effective October 1, 1998, the OTS relaxed regulations limiting the amount
of servicing assets, together with purchased credit card receivables, includable
in core capital from 50% of such capital to 100% of such capital, subject to
limitations on fair value. At December 31, 1999, the Bank had no purchased
mortgage servicing rights or purchased credit card receivables.
Risk-Based Requirement. The risk-based capital standard adopted by the OTS
requires savings institutions to maintain a minimum ratio of total capital to
risk-weighted assets of 8%. Total capital consists of core capital, defined
above, and supplementary capital but excludes the effect of recognizing deferred
taxes based upon future income after one year. Supplementary capital consists of
certain capital instruments that do not qualify as core capital, and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only in an amount equal to the amount of core capital. In
determining the risk-based capital ratios, total assets, including certain
off-balance sheet items, are multiplied by a risk weight based on the risks
inherent in the type of assets. The risk weights assigned by the OTS for
significant categories of assets are (i) 0% for cash and securities issued by
the federal government or unconditionally backed by the full faith and credit of
the federal government; (ii) 20% for securities (other than equity securities)
issued by federal government sponsored agencies and mortgage-backed securities
issued by, or fully guaranteed as to principal and interest by, the FNMA or the
FHLMC, except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans and certain qualifying multi-family
mortgage loans not more than 90 days delinquent and having a loan-to-value ratio
of not more than 80% at origination unless insured to such ratio by an insurer
approved by the FNMA or the FHLMC; and (iv) 100% for all other loans and
investments, including consumer loans, home equity loans, commercial loans, and
one-to-four family residential real estate loans more than 90 days delinquent,
and all repossessed assets or assets more than 90 days past due. At December 31,
1999, the Bank's risk-based capital ratio was 16.33%. Risk-based capital
excludes the effect of recognizing deferred taxes based upon future income after
one year.
In 1993, the OTS adopted a final rule incorporating an interest-rate risk
component into the risk-based capital regulation. Under the rule, an institution
with a greater than "normal" level of interest rate risk will be subject to a
deduction of its interest rate risk component from total capital for purposes of
calculating the risk-based capital requirement. As a result, such an institution
may be required to maintain additional capital in
40
<PAGE>
order to comply with the risk-based capital requirement. An institution with a
greater than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio value exceeding 2% of the estimated market value
of its assets in the event of a 200 basis point increase or decrease (with
certain minor exceptions) in interest rates. The interest rate risk component
will be calculated, on a quarterly basis, as one-half of the difference between
an institution's measured interest rate risk and 2%, multiplied by the market
value of its assets. The rule establishes a "lag" time between the reporting
date of the data used to calculate an institution's interest rate risk and the
effective date of each quarter's interest rate risk component. The rule also
authorizes the director of the OTS, or his designee, to waive or defer an
institution's interest rate risk component on a case-by-case basis. At December
31, 1999, the Bank did not have more than "normal" interest rate risk and was
not subject to any deduction from total capital under this rule. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Interest Rate Risk," included in the Annual Report to Shareholders
and incorporated herein by reference.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and checking
accounts) and non-personal time deposits. At December 31, 1999, the Bank was in
compliance with these requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements imposed by
the OTS. Because required reserves must be maintained in the form of vault cash
or a non-interest-bearing account at a Federal Reserve Bank directly or through
another bank, the effect of this reserve requirement is to reduce an
institution's earning assets. The amount of funds necessary to satisfy this
requirement has not had a material effect on the Bank's operations.
As a creditor and financial institution, the Bank is also subject to
additional regulations promulgated by the FRB, including, without limitation,
regulations implementing requirements of the Truth in Savings Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act and the
Truth-in-Lending Act.
Financial Reporting
The Bank is required to submit independently audited annual reports to the
FDIC and the OTS. These publicly available reports must include (a) annual
financial statements prepared in accordance with GAAP and such other disclosure
requirements as required by the FDIC or the OTS and (b) a report, signed by the
Bank's chief executive officer and chief financial officer which contains
statements about the adequacy of internal controls and compliance with
designated laws and regulations, and attestations by independent auditors
related thereto. The Bank is required to monitor the foregoing activities
through an independent audit committee.
Standards for Safety and Soundness
The FDIA Act, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994 ("Community Development Act"), requires each
federal bank regulatory agency to establish safety and soundness standards for
institutions under its authority. On July 10, 1995, the federal banking
agencies, including the OTS, jointly released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines took effect August 9, 1995.
The guidelines, among other things, require savings institutions to maintain
internal controls, information systems and internal audit systems that are
appropriate to the size, nature and scope of the institution's business. The
guidelines also establish general standards relating to loan documentation,
credit underwriting, interest rate risk exposure, asset growth, and
compensation, fees and benefits. Savings institutions are required to maintain
safeguards to prevent the payment of excessive compensation to an executive
officer, employee, director or principal shareholder. The OTS may determine that
a savings institution is not in compliance with the safety and
41
<PAGE>
soundness guidelines and, upon doing so, may require the institution to submit
an acceptable plan to achieve compliance with the guidelines. An institution
must submit an acceptable compliance plan to the OTS within 30 days of receipt
or request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory actions. Management believes that the Bank
currently meets the standards adopted in the interagency guidelines.
Additionally, under FDICIA, as amended by the Community Development Act,
federal banking agencies are required to establish standards relating to asset
quality and earnings that the agencies determine to be appropriate. Effective
October 1, 1998, the federal banking agencies, including the OTS, adopted
guidelines relating to asset quality and earnings which require insured
institutions to maintain systems, consistent with their size and the nature and
scope of their operations, to identify problem assets and prevent deterioration
in those assets as well as to evaluate and monitor earnings and insure that
earnings are sufficient to maintain adequate capital and reserves.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the FDICIA, each appropriate
agency and the FDIC is required to take prompt corrective action to resolve the
problems of insured depository institutions that do not meet minimum capital
ratios. Such action must be accomplished at the least possible long-term cost to
the appropriate deposit insurance fund.
The federal banking agencies, including the OTS, adopted substantially
similar regulations to implement Section 38 of the FDIA. Under the regulations,
an institution is deemed to be (i) "well capitalized" if it has total risk-based
capital of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has
a Tier 1 leverage capital ratio of 5% or more and is not subject to any order or
final capital directive to meet and maintain a specific capital level for any
capital measure, (ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and
a Tier 1 leverage capital ratio of 4% or more (3% under certain circumstances)
and does not meet the definition of "well capitalized," (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8%, a Tier 1
risk-based capital ratio that is less than 4% or a Tier 1 leverage capital ratio
that is less than 4% (3% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6%, a Tier 1 risk-based capital ratio that is less than 3% or a Tier 1 leverage
capital ratio that is less than 3%, and (v) "critically undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than 2%.
Section 38 of the FDIA and the regulations promulgated thereunder also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 1999, the Bank met the criteria to
be considered a "well capitalized" institution.
Recently Enacted Legislation and Proposed Changes
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act (the "Modernization Act"). Among other things, the Modernization Act permits
qualifying bank holding companies to affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or complementary thereto, as determined by the Federal Reserve Board. Subject to
certain limitations, a national bank may, through a financial subsidiary, engage
in similar activities. The Modernization Act also prohibits the creation or
acquisition of new unitary savings and loan holding companies that are
affiliated with nonbanking firms, but "grandfathers" existing savings and loan
holding companies, such as the Company. Grandfathered companies retain the
existing powers available to unitary savings and loan holding companies. See
"--Company Regulation." Certain business combinations which were impermissible
prior to the effective date of the Modernization Act are now possible and could
lead to further consolidation in the financial services
42
<PAGE>
industry and an increase in the service offerings of our competitors. We cannot
predict at this time, however, the resulting changes in the competitive
environment in the Bank's market area or the impact, if any, of such changes on
the Bank or the Company.
The Modernization Act also requires financial institutions to disclose, on
ATM machines, any non-customer fees and to disclose to their customers upon the
issuance of an ATM card any fees that may be imposed by the institutions on ATM
users. For older ATMs, financial institutions will have until December 31, 2004,
to provide such notices.
In addition, the Modernization Act calls for heightened privacy protection
of customer information gathered by financial institutions. The OTS has recently
proposed regulations implementing the privacy protection provisions of the
Modernization Act. Under the proposed regulations, each financial institution is
to (i) adopt procedures to protect customers' "non-public personal information",
(ii) disclose its privacy policy, including identifying to customers others with
whom it shares "non-public personal information", at the time of establishing
the customer relationship and annually thereafter, and (iii) provide its
customers with the ability to "opt-out" of having the financial institution
share their personal information with affiliated third parties. The proposed
regulations suggest an effective date of November 13, 2000. This date may be
changed in the final regulations. We intend to review our current privacy
protection policy for compliance with these regulations when they are adopted in
final form and to amend that policy as needed.
Company Regulation
The Company is a non-diversified unitary savings and loan holding company
within the meaning of HOLA, is required to register with the OTS and is subject
to OTS regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Company and any non-savings
institution subsidiaries it later forms or acquires. Among other things, this
authority permits the OTS to restrict or prohibit activities that it determines
pose a serious risk to the Bank. See "--Restrictions on Dividends and Capital
Distributions."
HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS; acquiring
or retaining, with certain exceptions, more than 5% of a non-subsidiary savings
institution, a non-subsidiary holding company, or a non-subsidiary company
engaged in activities other than those permitted by HOLA; or acquiring or
retaining control of a depository institution that is not federally insured. In
evaluating applications by holding companies to acquire savings institutions,
the OTS will consider the financial and managerial resources and future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary savings and loan holding company, the Company currently is not
restricted as to the types of business activities in which it may engage,
provided that the Bank continues to meet the QTL test. See "--Qualified Thrift
Lender Test". Upon any non-supervisory acquisition by the Company of another
savings association or savings bank that meets the QTL test and is deemed to be
a savings institution by the OTS, the Company would become a multiple savings
and loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Company Act, subject to the prior approval of
the OTS, and activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition
43
<PAGE>
of a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. Under New York law,
reciprocal interstate acquisitions are authorized for savings and loan holding
companies and savings institutions. Certain states do not authorize interstate
acquisitions under any circumstances; however, federal law authorizing
acquisitions in supervisory cases preempts such state law.
Federal law generally provides that no "person" acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
Federal Securities Laws
The Company's Common Stock is registered with the SEC under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information and reporting requirements, regulations
governing proxy solicitations, insider trading restrictions and other
requirements applicable to companies whose stock is registered under the
Exchange Act.
44
<PAGE>
Item 2. Properties.
The Bank conducts its business through nine full-service offices. The
Bank's main office is located at 144-51 Northern Boulevard, Flushing, New York.
The Bank believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank and the Company.
<TABLE>
<CAPTION>
Date Leased or Lease Expiration Net Book Value at
Office Leased or Owned Acquired Date December 31, 1999
------ --------------- -------- ---- -----------------
<S> <C> <C> <C> <C>
Main Office
144-51 Northern Blvd.
Flushing, NY 11354............. owned 1972 NA $2,548,492
Broadway Branch
159-18 Northern Blvd.
Flushing, NY 11358............. owned 1962 NA 958,824
Auburndale Branch
188-08 Hollis Court Blvd.
Flushing, NY 11358............. owned 1991 NA 1,212,743
Springfield Branch
61-54 Springfield Blvd.
Bayside, NY 11364.............. leased 1991 11/30/2001 31,492
Bay Ridge Branch
7102 Third Avenue
Brooklyn, NY 11209............. owned 1991 NA 414,919
Irving Place Branch
33 Irving Place
New York, NY 10003............. leased 1991 11/30/2001 441,406
New Hyde Park Branch
661 Hillside Avenue
New Hyde Park, NY 11040........ leased 1971 12/31/2011 51,793
Supermarket Branch
653 Hillside Avenue
New Hyde Park, NY 11040........ leased 1998 6/01/2003 236,247
Supermarket Branch
713 Coop City Boulevard
Bronx, NY 10475................ leased 1999 11/10/2004 306,449
Total premises and equipment, net $6,202,365
</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
45
<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 1999 Annual Report to
Shareholders ("Annual Report") under the caption "Market Price of Common Stock"
and is incorporated herein by this reference.
Item 6. Selected Financial Data.
Information regarding selected financial data appears on pages 5 and 6 of
the Annual Report under the caption "Selected Financial Data" and is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information regarding management's discussion and analysis of financial
condition and results of operations appears on pages 7 through 17 of the Annual
Report under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is incorporated herein by this
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the section captioned "Interest Rate Risk" on
page 11 of the Annual Report and in Notes 14 and 15 of the Notes to Consolidated
Financial Statements is incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data.
Information regarding the financial statements and the Independent
Auditor's Report appears on pages 18 through 42 of the Annual Report and is
incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
46
<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 16, 2000 under the captions "Board Nominees", "Continuing
Directors" and "Executive Officers Who Are Not Directors" and is incorporated
herein by this reference.
Item 11. Executive Compensation.
Information regarding executive compensation appears in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held May 16, 2000 under
the caption "Executive Compensation" and is incorporated herein by this
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held May 16, 2000 under the caption "Stock Ownership of Certain Beneficial
Owners" and is incorporated herein by this reference.
Information regarding security ownership of management appears in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held May
16, 2000 under the caption "Stock Ownership of Management" and is incorporated
herein by this reference.
Item 13. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions
appears in the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on May 16, 2000 under the captions "Compensation Committee Interlocks
and Insider Participation" and "Certain Transactions" and is incorporated herein
by this reference.
47
<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, 1999 and are incorporated
herein by this reference:
o Consolidated Statements of Condition at December 31, 1999 and 1998
o Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1999
o Consolidated Statements of Changes in Stockholders' Equity for each of
the years in the three-year period ended December 31, 1999
o Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1999
o Notes to Consolidated Financial Statements
o Report of Independent Accountants
The remaining information appearing in the Annual Report to Shareholders is
not deemed to be filed as a part of this report, except as expressly provided
herein.
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto included in the Company's Annual Report to
Shareholders for the year ended December 31, 1999 and are incorporated herein by
this reference:
(b) Reports on Form 8-K filed during the last quarter of fiscal 1999
None
48
<PAGE>
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
3.1 Articles of Incorporation of Flushing Financial Corporation (1)
3.2 By-Laws of Flushing Financial Corporation (1)
4.1 Rights Agreement, dated as of September 17, 1996, between Flushing Financial Corporation and
State Street Bank and Trust Company, as Rights Agent (10)
10.1 Annual Incentive Plan for Selected Officers (1)
10.2 Employment Agreements between Flushing Savings Bank, FSB and Certain Officers (1)(6)
10.3 Employment Agreements between Flushing Financial Corporation and
Certain Officers (2)(6)
10.3(a) Amendment No. 1 to Employment Agreement between Flushing Financial Corporation
and Michael J. Hegarty (3)
10.3(b) Amendment to Employment Agreement between Flushing Financial Corporation
and Certain Officers (including Michael J. Hegarty) (3)
10.3(c) Amendment No. 3 to Employment Agreement between Flushing Financial Corporation
and Michael J. Hegarty, and Amendment No. 2 to Employment Agreement between
Flushing Savings Bank, FSB and Michael J. Hegarty (4)
10.4 Special Termination Agreements (2)
10.5 Employee Severance Compensation Plan of Flushing Savings Bank, FSB (1)
10.6(a) Amended and Restated Outside Director Retirement Plan (9)
10.6(b) Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (2)
10.7 Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (1)
10.8 Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial
Corporation, and each Director (1)
10.8(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial
Corporation, and each Director (3)
10.8(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial
Corporation, and Certain Officers (3)(6)
10.9 Employee Benefit Trust Agreement (1)
10.9(a) Amendment to the Employee Benefit Trust Agreement (9)
10.10 Loan Document for Employee Benefit Trust (1)
10.11 Guarantee by Flushing Financial Corporation (1)
10.12 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial
Corporation and Gerard P. Tully, Sr. (4)
10.12(a) Amendment to Gerard P. Tully, Sr. Consulting Agreement (9)
10.12(b) Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (12)
10.12(c) Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement
10.13 Flushing Financial Corporation 1996 Restricted Stock Incentive Plan (7)
10.14 Flushing Financial Corporation 1996 Stock Option Incentive Plan (7)
10.15 Amendments to 1996 Restricted Stock Incentive Plan (8)
10.16 Amendments to 1996 Stock Option Incentive Plan (8)
10.17 Agreement and Plan of Merger as of April 24, 1997, by and between Flushing
Financial Corporation, Flushing Savings Bank, FSB and New York Federal
Savings Bank (5)
10.18 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial
Corporation and James F. McConnell (11)
10.19 Retirement Agreement between Flushing Savings Bank, FSB, Flushing Financial
Corporation and James F. McConnell (11)
13.1 1999 Annual Report to Shareholders
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
22.1 Subsidiaries information incorporated herein by reference to Part I - Subsidiary Activities
23.1 Consent of Independent Accountants
27 Financial Data Schedule
99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2000,
which will be filed with the SEC within 30 days from the date this Form 10-K is filed.
</TABLE>
- ----------
(1) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1995.
(3) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended September 30, 1996.
(4) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1996.
(5) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended June 30, 1997.
(6) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended September 30, 1997.
(7) Incorporated by reference to Exhibits filed with the Proxy Statement for
the Annual Meeting of Stockholders held May 21, 1996.
(8) Incorporated by reference to Exhibits filed with the Proxy Statements for
the Annual Meetings of Stockholders held April 29, 1997 and May 20, 1998.
(9) Incorporated by reference to Exhibits filed with the Form 10-K for the year
ended December 31, 1997.
(10) Incorporated by reference to Exhibit filed with Form 8-K filed September
30, 1996.
(11) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter
ended March 31, 1998.
(12) Incorporated by reference to Exhibits filed with Form 10-K for the year
ended December 31, 1998.
50
<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, 2000.
FLUSHING FINANCIAL CORPORATION
By: /s/ MICHAEL J. HEGARTY
-----------------------------------
Michael J. Hegarty
President and CEO
POWER OF ATTORNEY
We, the undersigned directors and officers of Flushing Financial
Corporation (the "Company") hereby severally constitute and appoint Michael J.
Hegarty and Monica C. Passick as our true and lawful attorneys and agents, each
acting alone and with full power of substitution and re-substitution, to do any
and all things in our names in the capacities indicated below which said Michael
J. Hegarty or Monica C. Passick may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with the report on Form 10-K, or amendment thereto, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the report on Form 10-K, or amendment
thereto; and we hereby approve, ratify and confirm all that said Michael J.
Hegarty or Monica C. Passick shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K, or amendment thereto, has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ MICHAEL J. HEGARTY Director, President (Principal Executive Officer) March 29, 2000
- ----------------------------------
Michael J. Hegarty
/S/ GERARD P. TULLY, SR. Director, Chairman March 29, 2000
- ----------------------------------
Gerard P. Tully, Sr.
/S/ MONICA C. PASSICK Treasurer (Principal Financial and Accounting Officer) March 29, 2000
- ----------------------------------
Monica C. Passick
/S/ JAMES D. BENNETT Director March 29, 2000
- ----------------------------------
James D. Bennett
/S/ JOHN M. GLEASON Director March 29, 2000
- ----------------------------------
John M. Gleason
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ LOUIS C. GRASSI Director March 29, 2000
- ----------------------------------
Louis C. Grassi
/S/ ROBERT A. MARANI Director March 29, 2000
- ----------------------------------
Robert A. Marani
/S/ JOHN O. MEAD Director March 29, 2000
- ----------------------------------
John O. Mead
/S/ VINCENT F. NICOLOSI Director March 29, 2000
- ----------------------------------
Vincent F. Nicolosi
/S/ FRANKLIN F. REGAN, JR. Director March 29, 2000
- ----------------------------------
Franklin F. Regan, Jr.
/S/ JOHN E. ROE, SR. Director March 29, 2000
- ----------------------------------
John E. Roe, Sr.
/S/ MICHAEL J. RUSSO Director March 29, 2000
- ----------------------------------
Michael J. Russo
</TABLE>
52
Exhibit 10.12(c)
Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement.
AMENDMENT TO TULLY AGREEMENT
This Amendment to the Agreement dated as of December 1, 1995 (the
"Agreement") is entered into as of July 1, 1999 between Flushing Savings Bank,
FSB (the "Bank"), Flushing Financial Corporation ("the Company"), and Gerard P.
Tully, Sr. ("Mr. Tully").
WITNESSTH:
The Agreement is amended as set forth herein;
1. Section 3 of the Agreement is hereby amended by replacing the
Aggregate fee per month to be $11,250.
2. The amendment set forth in paragraph 1 hereof shall be effective
July 1, 1999 and except as amended by paragraph 1 hereof, the Agreement
shall remain in effect in accordance with its terms.
IN WITNESS WHEREOF, Mr. Tully, the Bank and the Company have caused
this Amendment to be executed on this 20th day of July, 1999.
FLUSHING SAVINGS BANK, FSB
By: /s/ Michael J. Hegarty
----------------------------------------
Michael J. Hegarty, President and C.E.O
FLUSHING FINANCIAL CORPORATION
By: /s/ Anna M. Piacentini
----------------------------------------
Anna M. Piacentini, Senior Vice President
By: /s/ Gerard P. Tully, Sr.
----------------------------------------
Gerard P. Tully, Sr.
53
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC SELECTED FINANCIAL DATA
FLUSHING =================================================================
FINANCIAL CORP.
<TABLE>
<CAPTION>
====================================================================================================================================
At or for the year ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA
Total assets(1) ...................................... $1,249,529 $1,142,055 $1,088,476 $ 775,343 $ 708,384
Loans, net(1) ........................................ 875,886 750,555 598,421 382,781 280,126
Securities available for sale ........................ 285,016 326,690 356,712 331,895 381,447
Real estate owned, net ............................... 368 77 433 1,218 1,869
Deposits ............................................. 666,941 664,059 655,911 584,479 559,864
Borrowed funds ....................................... 451,831 335,458 287,187 51,000 --
Stockholders' equity ................................. 118,176 132,087 136,443 133,281 141,330
Book value per share(2) (3) .......................... 12.15 12.12 11.57 10.77 10.93
SELECTED OPERATING DATA
Interest and dividend income ......................... $ 87,143 $ 82,846 $ 66,866 $ 55,061 $ 44,705
Interest expense ..................................... 47,795 46,702 34,795 26,302 22,898
---------------------------------------------------------------------------
Net interest income ................................ 39,348 36,144 32,071 28,759 21,807
Provision for loan losses ............................ 36 214 104 418 496
---------------------------------------------------------------------------
Net interest income after provision for loan losses 39,312 35,930 31,967 28,341 21,311
---------------------------------------------------------------------------
Non-interest income:
Net gains (losses) on sales of securities and loans 252 368 67 126 (316)
Deferred gain from sale of real estate ............. -- -- -- -- 2,784
Other income ....................................... 3,622 2,927 2,596 1,623 2,217
---------------------------------------------------------------------------
Total non-interest income ........................ 3,874 3,295 2,663 1,749 4,685
---------------------------------------------------------------------------
Non-interest expense:
Other operating expenses ........................... 22,646 23,023 19,324 18,224 17,358
Provision (recovery) for deposits at Nationar ...... -- -- -- (660) 660
Conversion expenses ................................ -- -- -- -- 2,222
---------------------------------------------------------------------------
Total non-interest expense ....................... 22,646 23,023 19,324 17,564 20,240
---------------------------------------------------------------------------
Income before income tax provision ................... 20,540 16,202 15,306 12,526 5,756
Income tax provision ................................. 7,805 6,012 6,775 5,811 2,470
---------------------------------------------------------------------------
Net income ....................................... $ 12,735 $ 10,190 $ 8,531 $ 6,715 $ 3,286
===========================================================================
Basic earnings per share(3) (4) ...................... $ 1.40 $ 1.00 $ 0.80 $ 0.57 Not meaningful
Diluted earnings per share(3) (4) .................... $ 1.37 $ 0.98 $ 0.79 $ 0.57 Not meaningful
Dividends declared per share(3) ...................... $ 0.32 $ 0.22 $ 0.15 $ 0.05 --
Dividend payout ratio ................................ 22.9% 22.0% 18.9% 9.3% --
</TABLE>
(Footnotes on the following page)
5
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC SELECTED FINANCIAL DATA
FLUSHING =================================================================
FINANCIAL CORP.
<TABLE>
<CAPTION>
====================================================================================================================================
At or for the year ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA
Performance ratios:
Return on average assets ...................................... 1.08% 0.92% 0.96% 0.89% 0.53%
Return on average equity ...................................... 10.31 7.51 6.41 4.90 6.08
Average equity to average assets .............................. 10.49 12.24 15.00 18.17 8.70
Equity to total assets ........................................ 9.46 11.57 12.53 17.19 19.95
Interest rate spread .......................................... 3.05 2.88 3.06 3.29 3.51
Net interest margin ........................................... 3.49 3.43 3.74 4.01 3.74
Non-interest expense to average assets ........................ 1.92 2.08 2.18 2.33 3.26
Efficiency ratio .............................................. 51.54 53.44 53.91 58.33 64.69
Average interest-earning assets to average
interest-bearing liabilities ............................... 1.11x 1.12x 1.17x 1.20x 1.06x
Regulatory capital ratios(5):
Tangible capital .............................................. 8.28% 9.46% 9.11% 12.67% 14.85%
Core capital .................................................. 8.28 9.46 9.11 12.67 14.85
Total risk-based capital ...................................... 16.33 19.43 19.76 27.43 30.48
Asset quality ratios:
Non-performing loans to gross loans(6) ........................ 0.36% 0.34% 0.41% 0.62% 1.74%
Non-performing assets to total assets(7) ...................... 0.29 0.23 0.27 0.47 0.97
Net charge-offs (recoveries) to average loans ................. -- (0.01) 0.01 0.09 0.21
Allowance for loan losses to gross loans ...................... 0.77 0.89 1.07 1.39 1.85
Allowance for loan losses to total non-performing assets(7) ... 191.29 252.83 223.94 149.94 77.52
Allowance for loan losses to total non-performing loans(6) .... 213.29 260.36 263.38 225.79 106.61
Full-service customer facilities .............................. 9 8 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 $118.2 million and $132.1
million at December 31, 1999 and 1998, respectively, by 9,725,971 and
10,898,805 shares outstanding at December 31, 1999 and 1998, 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.
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC MARKET PRICE OF COMMON STOCK
FLUSHING =================================================================
FINANCIAL CORP.
Flushing Financial Corporation Common Stock is traded on the Nasdaq National
Market(R) under the symbol "FFIC". As of December 31, 1999 the Company had
approximately 837 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, 1999 the last trading date in 1999 for Nasdaq(R), the
Company's stock closed at $14.8125. The following table shows the high and low
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>
===============================================================================================
1999 1998
----------------------------------------------------------------
High Low Dividend High Low Dividend
================================================================
<S> <C> <C> <C> <C> <C> <C>
First Quarter .............. $16.38 $13.75 $ .08 $17.25 $13.88 $ .05
Second Quarter ............. 15.63 12.88 .08 19.50 16.25 .05
Third Quarter .............. 19.13 15.38 .08 20.33 12.58 .06
Fourth Quarter ............. 17.00 14.38 .08 17.19 10.50 .06
</TABLE>
6
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC MANAGEMENT'S DISCUSSION AND
FLUSHING ANALYSIS OF FINANCIAL CONDITION
FINANCIAL CORP. 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 includes 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.
The Bank has also sought increased growth through the opening of new branches.
In June 1998, the Bank opened its first in-store supermarket branch in the
neighborhood of New Hyde Park. In November 1999, the Bank opened its second
in-store supermarket branch in Co-Op City in the Bronx. A traditional branch is
scheduled to open in the second quarter of 2000 at a new location in Flushing,
Queens.
In November 1997, the Bank established a real estate investment trust
subsidiary, Flushing Preferred Funding Corporation ("FPFC"). The Bank has
transferred, in the aggregate, $326.4 million in real estate loans to FPFC. The
assets transferred to FPFC are viewed by regulators as part of the Bank's assets
in consolidation. The establishment of FPFC provides an additional vehicle for
access by the Company to the capital markets for future investment
opportunities.
During 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.
As part of the Company's strategy to find ways to best utilize its available
capital, during 1999 Flushing Financial Corporation continued its stock
repurchase programs by repurchasing 1,268,900 shares of its common stock,
bringing the total number of treasury shares, at December 31, 1999, to 1,629,707
and the total number of outstanding common shares to 9,725,971. At December 31,
1999, 388,945 shares remain to be repurchased under the current stock repurchase
program.
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 the Private Securities Litigation Reform Act of 1995, 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. Forward-looking statements may be identified by terms such as "may",
"will", "should", "could", "expects", "plans", "intends", "anticipates",
"believes", "estimates", "predicts", "forecasts", "potential", or " continue" or
similar terms or the negative of these terms. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. The Company has no obligations to update these forward-looking
statements.
7
sustaining growth/securing opportunities
<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. The
company has also opened new branches and is planning to open an additional
branch in the second quarter of 2000. 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. During 1999, loan originations and purchases
were $106.6 million for one-to-four family residential mortgage loans, $77.9
million for multi-family real estate loans, $50.6 million for commercial real
estate loans and $8.2 million for construction loans. At December 31, 1999, the
Company's one-to-four family residential mortgage loans, multi-family real
estate loans and commercial real estate loans amounted to $423.1 million
(47.9%), $310.6 million (35.2%) and $137.1 million (15.5%), 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. In addition, to a lesser extent, 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. 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
recoveries of $20,000 and $74,000 for the years ended December 31, 1999 and
1998, respectively. 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 213.29% and 260.36% at December 31, 1999 and 1998,
respectively. 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 amounted to $3.6 million at December 31, 1999 and $2.7 million at
December 31, 1998. Non-performing assets as a percentage of total assets were
0.29% at December 31, 1999 and 0.23% at December 31, 1999.
8
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
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
nine 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. 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 to provide funding for asset growth which has increased net interest
income.
Managing Interest Rate Risk. The Company seeks to manage its interest rate risk
by actively reviewing the repricing and maturities of its interest rate
sensitive assets and liabilities. The mix of loans originated by the Company
(fixed or ARM) is determined in large part by borrowers preferences and
prevailing market conditions. The Company seeks to manage the interest rate risk
of the loan portfolio by actively managing its security portfolio and
borrowings. By adjusting the mix of fixed and adjustable rate securities, as
well as the maturities of the securities, the Company has the ability to manage
the combined interest rate sensitivity of its assets. In order to maintain
flexibility in managing the Company's interest rate sensitive assets, the
majority of fixed rate residential mortgage loans originated by the Company in
recent years were made in accordance with Federal National Mortgage Association
("FNMA") requirements to facilitate sale in the secondary market. Additionally,
the Company seeks to balance the interest rate sensitivity of its assets by
managing the maturities of its liabilities.
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. An increasing interest rate environment would tend to extend the
lives of fixed rate mortgages and mortgage-backed securities, which could
adversely affect net interest income.
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. A second in-store Edwards
Supermarket branch was opened in November 1999 in Co-Op City in the Bronx. These
supermarket branches can address virtually all of their customers' financial
needs, with the added convenience of extended hours and time saving grocery
store access. 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.
The Bank also established, in June 1998, a Business and Community Development
Department. In the Company's demanding and constantly evolving marketplace, this
office plays 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.
9
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
The table below sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999 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 5%, based
on historical experience. Management believes that these assumptions are
indicative of actual prepayments and withdrawals experienced by the Company.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap Analysis at December 31, 1999
----------------------------------------------------------------------------------------
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 .......................... $ 14,870 $ 73,048 $ 225,070 $ 179,691 $299,310 $ 84,995 $ 876,984
Other loans ............................. 396 1,071 1,688 2,593 -- -- 5,748
Short-term securities(1) ................ 5,875 -- -- -- -- -- 5,875
Securities available for sale:
Mortgage-backed securities ............ 7,605 27,548 44,890 37,104 66,208 85,667 269,022
Other ................................. 919 -- 1,047 -- 5,906 8,122 15,994
----------------------------------------------------------------------------------------
Total interest-earning assets ....... 29,665 101,667 272,695 219,388 371,424 178,784 1,173,623
----------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Passbook accounts ....................... 2,449 7,347 18,146 16,377 34,294 117,297 195,910
NOW accounts ............................ -- -- -- -- -- 27,463 27,463
Money market accounts ................... 505 1,515 3,740 3,375 7,067 24,176 40,378
Certificate of deposit accounts ......... 83,194 129,599 128,688 29,169 1,027 -- 371,677
Mortgagors' escrow deposits ............. -- -- -- -- -- 11,023 11,023
Borrowed funds .......................... 30,000 86,174 180,334 80,000 75,000 323 451,831
----------------------------------------------------------------------------------------
Total interest-bearing liabilities(2) $116,148 $ 224,635 $ 330,908 $ 128,921 $117,388 $180,282 $1,098,282
----------------------------------------------------------------------------------------
Interest rate sensitivity gap ........... $(86,483) $(122,968) $ (58,213) $ 90,467 $254,036 $ (1,498)
Cumulative interest rate sensitivity gap $(86,483) $(209,451) $(267,664) $(177,197) $ 76,839 $ 75,341
Cumulative interest rate sensitivity gap
as a percentage of total assets ....... (6.93)% (16.79)% (21.46)% (14.20)% 6.16% 6.04%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities .......... 25.54% 38.54% 60.15% 77.87% 108.37% 106.86%
</TABLE>
(1) Consists of interest-earning deposits.
(2) Does not include non-interest bearing demand accounts totaling $20.5
million at December 31, 1999.
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
10
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
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.
INTEREST RATE RISK
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles, which requires the measurement of
financial position and operating results in terms of historical dollars without
considering the changes in fair value of certain investments due to changes in
interest rates. 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 such assets were sold, or, in the case of securities
classified as available for sale, decreases in the Company's stockholders'
equity, if such securities were retained.
The Company manages the mix of interest-earning assets and interest-bearing
liabilities on a continuous basis to maximize return and adjust its exposure to
interest rate risk. 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) 300 basis points, assuming the yield curves of the rate shocks will be
parallel to each other. The Company has been calculating the changes in the net
interest income and net portfolio value for several years. During 1999, the OTS
placed its focus on the net portfolio value ratio. This is now the ratio used by
the OTS to measure the interest rate sensitivity of the Company. Net portfolio
value is defined as the market value of assets net of the market value of
liabilities. The market value of assets and liabilities is determined using a
discounted cash flow calculation. The net portfolio value ratio is the ratio of
the net portfolio value to the market value of assets. 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, 1999. Various estimates
regarding prepayment assumptions are made at each level of rate shock. Actual
results could differ significantly from these estimates. The Company is within
the guidelines established by the Board of Directors for each interest rate
level for Net Interest Income and the Net Portfolio Value Ratio. However, for
Net Portfolio Value, the Company does not meet the guidelines established by the
Board of Directors for plus 100 and 300 basis points, which exceed the Board's
guidelines of minus 15% and minus 45%, respectively. These exceptions have been
reviewed with the Board of Directors, and steps are being taken to bring these
exposures within guidelines.
<TABLE>
<CAPTION>
Projected Percentage Change In
----------------------------------------- Net Portfolio
Change in Interest Rate Net Interest Income Net Portfolio Value Value Ratio
=========================================================================================
<S> <C> <C> <C>
- -300 basis points............... 5.08% 24.14% 16.05%
- -200 basis points............... 5.69 20.54 15.96
- -100 basis points............... 4.77 15.09 15.60
Base interest rate.............. -- -- 14.05
+100 basis points............... -6.37 -16.56 12.19
+200 basis points............... -13.50 -33.14 10.17
+300 basis points............... -20.83 -48.32 8.17
</TABLE>
11
sustaining growth/securing opportunities
<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, 1999, 1998 and 1997, 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, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
===============================================================================================================================
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Mortgage loans, net(1) (2)........... $ 800,668 $65,998 8.24% $ 660,475 $56,810 8.60%
Other loans, net(1) (2).............. 5,515 545 9.88 3,275 376 11.48
----------------------------------- -----------------------------------
Total loans, net................... 806,183 66,543 8.25 663,750 57,186 8.62
----------------------------------- -----------------------------------
Mortgage-backed securities........... 287,154 18,703 6.51 314,685 20,887 6.64
Other securities..................... 20,331 1,212 5.96 44,578 3,025 6.79
----------------------------------- -----------------------------------
Total securities................... 307,485 19,915 6.48 359,263 23,912 6.66
----------------------------------- -----------------------------------
Interest-earning deposits and
federal funds sold................. 12,346 685 5.55 31,752 1,748 5.51
----------------------------------- -----------------------------------
Total interest-earning assets.......... 1,126,014 87,143 7.74 1,054,765 82,846 7.85
------------------- -------------------
Non-interest-earning assets............ 52,174 52,945
---------- ----------
Total assets......................... $1,178,188 $1,107,710
========== ==========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Deposits:
Passbook accounts.................. $ 200,601 4,156 2.07 $ 202,291 5,549 2.74
NOW accounts....................... 26,281 499 1.90 24,375 466 1.91
Money market accounts.............. 36,191 1,105 3.05 26,240 773 2.95
Certificate of deposit accounts.... 364,947 19,130 5.24 376,787 21,128 5.61
Mortgagors' escrow deposits........ 11,718 92 0.79 6,724 71 1.06
----------------------------------- -----------------------------------
Total deposits................... 639,738 24,982 3.91 636,417 27,987 4.40
Other borrowed funds................. 379,259 22,813 6.02 303,573 18,715 6.16
----------------------------------- -----------------------------------
Total interest-bearing liabilities..... 1,018,997 47,795 4.69 939,990 46,702 4.97
------------------- -------------------
Other liabilities(3)................... 35,655 32,115
---------- ----------
Total liabilities.................... 1,054,652 972,105
Equity................................. 123,536 135,605
---------- ----------
Total liabilities and equity......... $1,178,188 $1,107,710
========== ==========
Net interest income/net interest
rate spread(4)....................... $39,348 3.05% $36,144 2.88%
=================== ===================
Net interest-earning assets/net
interest margin(5)................... $ 107,017 3.49% $ 114,775 3.43%
========== ===== ========== =====
Ratio of interest-earning assets to
interest-bearing liabilities......... 1.11x 1.12x
===== =====
<CAPTION>
=====================================================================================
For the years ended December 31, 1997
- -------------------------------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
=====================================================================================
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Mortgage loans, net(1) (2)........... $491,834 $41,835 8.51%
Other loans, net(1) (2).............. 2,268 227 10.01
----------------------------------
Total loans, net................... 494,102 42,062 8.51
----------------------------------
Mortgage-backed securities........... 180,615 12,651 7.00
Other securities..................... 151,400 10,422 6.88
----------------------------------
Total securities................... 332,015 23,073 6.95
----------------------------------
Interest-earning deposits and
federal funds sold................. 30,871 1,731 5.61
----------------------------------
Total interest-earning assets.......... 856,988 66,866 7.80
--------------------
Non-interest-earning assets............ 30,076
--------
Total assets......................... $887,064
========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Deposits:
Passbook accounts.................. $206,196 5,884 2.85
NOW accounts....................... 22,679 432 1.90
Money market accounts.............. 24,367 692 2.84
Certificate of deposit accounts.... 342,898 19,487 5.68
Mortgagors' escrow deposits........ 6,044 71 1.17
----------------------------------
Total deposits................... 602,184 26,566 4.41
Other borrowed funds................. 132,274 8,229 6.22
----------------------------------
Total interest-bearing liabilities..... 734,458 34,795 4.74
--------------------
Other liabilities(3)................... 19,570
--------
Total liabilities.................... 754,028
Equity................................. 133,036
--------
Total liabilities and equity......... $887,064
========
Net interest income/net interest
rate spread(4)....................... $32,071 3.06%
====================
Net interest-earning assets/net
interest margin(5)................... $122,530 3.74%
======== ========
Ratio of interest-earning assets to
interest-bearing liabilities......... 1.17x
========
</TABLE>
(1) Average balances include non-accrual loans.
(2) Loan interest income includes loan fee income of approximately $1,304,000,
$969,000 and $912,000 for the years ended December 31, 1999, 1998 and 1997,
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.
12
Flushing Financial Corporation 1999 annual report
<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, 1999 Year Ended December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 December 31, 1997
-------------------------------------------------------------------------
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.................................... $12,057 $(2,869) $ 9,188 $14,351 $ 624 $14,975
Other loans............................................ 257 (88) 169 101 48 149
Mortgage-backed securities............................. (1,828) (356) (2,184) 9,385 (1,149) 8,236
Other securities....................................... (1,646) (167) (1,813) (7,349) (48) (7,397)
Interest-earning deposits and federal funds sold....... (1,069) 6 (1,063) 49 (32) 17
-------------------------------------------------------------------------
Total interest-earning assets........................ 7,771 (3,474) 4,297 16,537 (557) 15,980
-------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits:
Passbook accounts.................................... (46) (1,347) (1,393) (111) (224) (335)
NOW accounts......................................... 36 (3) 33 32 2 34
Money market accounts................................ 294 38 332 53 28 81
Certificate of deposit accounts...................... (664) (1,334) (1,998) 1,925 (284) 1,641
Mortgagors' escrow deposits.......................... 53 (32) 21 8 (8) --
Other borrowed funds................................... 4,662 (564) 4,098 10,655 (169) 10,486
-------------------------------------------------------------------------
Total interest-bearing liabilities................... 4,335 (3,242) 1,093 12,562 (655) 11,907
-------------------------------------------------------------------------
Net change in net interest income...................... $ 3,436 $ (232) $ 3,204 $ 3,975 $ 98 $ 4,073
====================================================================================================================================
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
General. Net income increased $2.5 million, or 25.0%, to $12.7 million, or $1.37
per common share, for the year ended December 31, 1999 from $10.2 million, or
$0.98 per common share, for the year ended December 31, 1998. This is due to an
increase of $3.2 million in net interest income, an increase of $579,000 in
non-interest income, and a decrease of $377,000 in non-interest expense, which
were partially offset by an increase of $1.8 million in income tax expense due
to the higher income level.
Interest Income. Interest income increased $4.3 million, or 5.2%, to $87.1
million for the year ended December 31, 1999 from $82.8 million for the year
ended December 31, 1998. This increase was primarily due to an increase of $9.4
million in interest and fees on loans during 1999, which was partially offset by
a decrease of $4.0 million in interest and dividends on investment securities
and a $1.1 million decrease in other interest income. The increase in interest
and fee income from loans reflects a $142.4 million increase in the average
balance of loans to $806.2 million during 1999, which, however, was partially
offset by a 37 basis point decrease in the yield on loans, as loans were
originated at rates below the average earning rate of the loan portfolio and
higher rate mortgages were refinanced at lower rates. The decrease in interest
and dividend income from investment securities reflects a $51.8 million decrease
in the average balances of investment securities during 1999 to $307.5 million,
coupled with an 18 basis point decline in the yield on investment securities.
The decrease in other interest income is due to a $19.4 million decline in the
average balance of money market investments. The decrease in the average balance
of investment securities and money market investments is due to the Company
investing these funds in higher yielding loans and/or utilizing the funds to
reduce certain short-term borrowed funds.
13
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
Interest Expense. Interest expense increased $1.1 million, or 2.3%, to $47.8
million for the year ended December 31, 1999 from $46.7 million for the year
ended December 31, 1998. The increase in interest expense is due to a $79.0
million increase in the average balance of total interest-bearing liabilities to
$1,019.0 million during 1999, partially offset by a 28 basis point decrease in
the cost of interest-bearing liabilities. The increase in the average balance
reflects the Bank's increased use of FHLB-NY advances as an alternative source
of funding to leverage its highly capitalized balance sheet.
The average balance for deposits increased $3.3 million to $639.7 million for
1999. The cost of deposits declined 49 basis points to 3.91% during 1999 as
certificates of deposit renewed at lower rates and the rate paid on passbook
accounts was reduced. The average balance for borrowed funds increased $75.7
million to $379.3 million for 1999 from $303.6 million for 1998, the effect of
which, however, was partially offset by a decline in the cost of borrowed funds
of fourteen basis to 6.02% during 1999.
Net Interest Income. Net interest income for the year ended December 31, 1999
totaled $39.3 million, an increase of $3.2 million from $36.1 million for 1998.
The net interest margin improved six basis points to 3.49% for the year ended
December 31, 1999 from 3.43% for the year ended December 31, 1998. The
improvement in the margin is primarily due to a 28 basis point decline in the
average cost of funds to 4.69% for 1999 from 4.97% for 1998, which, however, was
partially offset by an eleven basis point decline in the average yield of
interest-earning assets.
Provision for Loan Losses. Provision for loan losses for the year ended December
31, 1999 was $36,000 as compared to $214,000 for the year ended December 31,
1998. 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 remained steady at 0.36% at December 31,
1999 from 0.34% at December 31, 1998. The allowance for loan losses as
percentage of non-performing loans was 213.29% and 260.36% at December 31, 1999
and 1998, respectively. The ratio of allowance for loan losses to gross loans
was 0.77% and 0.89% at December 31, 1999 and 1998, respectively. The Company
experienced net recoveries of $20,000 and $74,000 for the years ended December
31, 1999 and 1998, respectively.
Non-Interest Income. Non-interest income for the year ended December 31, 1999
totaled $3.9 million, an increase of $579,000, or 17.6%, from $3.3 million over
the same period in 1998. The increase is due to increased fee income from
mortgage operations and banking services and an increase in dividends on FHLB-NY
stock, partially offset by decreased gains on sales of securities and loans.
Non-Interest Expense. Non-interest expense for the year ended December 31, 1999
totaled $22.6 million, representing a decrease of $0.4 million, or 1.6% from the
year ended December 31, 1998. Salaries and employee benefits expense decreased
$1.2 million, which is primarily attributable to one-time, non-recurring
compensation expenses recorded during 1998. This decrease was partially offset
by increases in professional services and other operating expense. Closely
monitoring our resources management, we were able to improve our efficiency
ratio to 51.5% for 1999 compared to 53.4% for 1998.
Income Tax Provisions. Income tax expense for the year ended December 31, 1999
totaled $7.8 million, compared to $6.0 million for the year ended December 31,
1998. This increase is primarily attributed to the increase of $4.3 million in
income before income taxes. The effective tax rate was 38.0% for the year ended
December 31, 1999 compared to 37.1% for the year ended December 31, 1998.
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 was 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 reflected 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 reflected 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.
14
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
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 was 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 reflected the Bank's use of higher costing FHLB-NY advances as an
alternative source of funding.
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 reflected 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 was 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.
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 was 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 was 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 represented 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 reflected 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,
1999, the Bank had an approved overnight line of credit of $50.0 million with
the FHLB-NY. In total, as of December 31, 1999, the Bank may borrow up to $372.1
million from the FHLB-NY in Federal Home Loan advances and over-night lines of
credit. As of December 31, 1999, the Bank had borrowed $341.8 million in FHLB-NY
advances. There were no funds outstanding at December 31, 1999 under the
over-night line of credit with the FHLB-NY. In addition, the Bank had $110.0
million in repurchase agreements with the FHLB-NY to fund lending and investment
opportunities. (See Note 8 of Notes to Consolidated Financial Statements.)
15
sustaining growth/securing opportunities
<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%. The
current OTS liquidity requirement is 4%. At December 31, 1999 and 1998 the
Bank's liquidity ratio, computed in accordance with the OTS requirement, was
9.72% and 18.28%, 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, 1999, cash and cash
equivalents totaled $34.9 million, an increase of $12.2 million from December
31, 1998. The Company also held marketable securities available for sale with a
carrying value of $285.0 million at December 31, 1999.
At December 31, 1999, the Company had outstanding loan commitments of $30.4
million, open lines of credit for borrowers of $2.2 million and commitments to
purchase mortgage loans of $10.6 million. The Company's total interest and
operating expenses in 1999 were $47.8 million and $22.6 million, respectively.
Certificates of deposit accounts which are scheduled to mature in one year or
less as of December 31, 1999 totaled $212.8 million.
During 1999, funds provided by the Company's operating activities amounted to
$17.0 million. These funds, together with $96.7 million provided by financing
activities and $22.7 million available at the beginning of the year, were
utilized to fund net investing activities of $101.5 million. Financing
activities were primarily provided by FHLB-NY borrowings with original
maturities greater than one year. 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 1999, the Bank had loan originations of
$233.6 million and purchased $15.9 million of loans. Further, during 1999, the
Company purchased $75.4 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, 1999 was $10.3 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, 1999 and 1998, the Bank
exceeded each of the three OTS capital requirements. (See Note 13 of Notes to
Consolidated Financial Statements.)
16
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
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 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.
This Pronouncement was scheduled to be effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. In June of 1999, FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of SFAS No. 133", which amends SFAS No. 133 to delay the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. 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 improved six basis points to 3.49% for
the year ended December 31, 1999 from 3.43% for the year ended December 31,
1998. This improvement was due primarily to a 47 basis point decrease in the
average cost of deposits, partially offset by increased utilization of higher
costing borrowed funds, and an eleven basis point decrease in the yield on
average interest-earning assets.
Comparing 1999 to 1998, the Company experienced an increase in the average
balance of deposits of $3.3 million. The average balance of higher costing
certificates of deposits decreased $11.8 million while other lower costing
deposits increased $15.2 million. The Company seeks to maintain its deposits at
competitive rates. Starting in 1996, the Company increased its utilization of
FHLB-NY advances as an alternative source of funding. Borrowed funds averaged
$379.3 million for 1999 with an average cost of 6.02% as compared to an average
balance of $303.6 million for 1998 with an average cost of 6.16%. These factors
contributed to the decrease in the Company's average cost of funds to 4.69% for
the year ended December 31, 1999 from 4.97% for the year ended December 31,
1998. However, during the second half of 1999, the Company experienced an
increase in its cost of funds due to an increasing interest rate environment. A
continuation of the present, or an increasing, interest rate environment could
result in a further increase in the Company's cost of funds and could result in
a narrowing of the Company's net interest margin.
YEAR 2000 COMPLIANCE
The widespread use of computer programs that rely on two-digit dates to perform
computations and decision making functions may have caused computer systems to
malfunction prior to or in the year 2000 ("Y2K"), and may have lead to
significant business delays and disruptions in the United States and
internationally. We have completed our program to identify and mitigate Y2K
risks. To date, we have not encountered any disruptions related to the Y2K
issue. We cannot provide assurances, however, that our suppliers and vendors
have not been, or will not be, affected in a manner that is not yet apparent. As
a result, we will continue to monitor our own Y2K compliance and that of our
suppliers and vendors. Nevertheless, based on the actions described above, we do
not expect to encounter any significant disruptions in the future.
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.
Y2K costs have been expensed as incurred, except those costs directly related to
the replacement of systems requiring upgrades in the ordinary course of
business, which have been capitalized. The total costs of the Y2K program were
less than $100,000.
17
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC CONSOLIDATED STATEMENTS
FLUSHING OF FINANCIAL CONDITION
FINANCIAL CORP.=================================================================
<TABLE>
<CAPTION>
====================================================================================================================================
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data)
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................ $ 29,059 $ 11,934
Federal funds sold and overnight interest-earning deposits ............................. 5,875 10,800
Securities available for sale:
Mortgage-backed securities ........................................................... 269,022 302,421
Other securities ..................................................................... 15,994 24,269
Loans .................................................................................. 882,704 757,317
Less: Allowance for loan losses ...................................................... (6,818) (6,762)
----------------------------------
Net loans ............................................................................ 875,886 750,555
Interest and dividends receivable ...................................................... 6,812 7,120
Real estate owned, net ................................................................. 368 77
Bank premises and equipment, net ....................................................... 6,202 6,441
Federal Home Loan Bank of New York stock ............................................... 22,592 17,320
Goodwill ............................................................................... 4,638 5,004
Other assets ........................................................................... 13,081 6,114
----------------------------------
Total assets ......................................................................... $ 1,249,529 $ 1,142,055
==================================
LIABILITIES
Due to depositors:
Non-interest bearing ................................................................. $ 20,490 $ 27,505
Interest-bearing ..................................................................... 635,428 629,991
Mortgagors' escrow deposits ............................................................ 11,023 6,563
Borrowed funds, including securities sold under agreements to repurchase
of $110,000 and $120,000 at December 31, 1999 and 1998, respectively ................. 451,831 335,458
Other liabilities ...................................................................... 12,581 10,451
----------------------------------
Total liabilities .................................................................... 1,131,353 1,009,968
----------------------------------
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 shares issued; 9,725,971 and 10,898,805 shares
outstanding at December 31, 1999 and 1998, respectively) ............................. 114 114
Additional paid-in capital ............................................................. 75,952 75,452
Treasury stock, at average cost (1,629,707 and 456,873 shares at
December 31, 1999 and 1998, respectively) ............................................ (25,308) (6,949)
Unearned compensation .................................................................. (9,142) (9,332)
Retained earnings ...................................................................... 81,056 71,460
Accumulated other comprehensive income, net of taxes ................................... (4,496) 1,342
----------------------------------
Total stockholders' equity ........................................................... 118,176 132,087
----------------------------------
Total liabilities and stockholders' equity ........................................... $ 1,249,529 $ 1,142,055
==================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC CONSOLIDATED STATEMENTS OF INCOME
FLUSHING =================================================================
FINANCIAL CORP.
<TABLE>
<CAPTION>
======================================================================================================================
For the years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans ......................................... $66,543 $57,186 $42,062
Interest and dividends on securities:
Interest ......................................................... 19,677 23,688 22,826
Dividends ........................................................ 238 224 247
Other interest income .............................................. 685 1,748 1,731
---------------------------------------------
Total interest and dividend income ............................... 87,143 82,846 66,866
---------------------------------------------
INTEREST EXPENSE
Deposits ........................................................... 24,982 27,987 26,566
Other interest expense ............................................. 22,813 18,715 8,229
---------------------------------------------
Total interest expense ........................................... 47,795 46,702 34,795
---------------------------------------------
NET INTEREST INCOME ............................................ 39,348 36,144 32,071
Provision for loan losses .......................................... 36 214 104
---------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ............ 39,312 35,930 31,967
---------------------------------------------
NON-INTEREST INCOME
Other fee income ................................................... 1,916 1,386 1,190
Net gain on sales of securities and loans .......................... 252 368 67
Other income ....................................................... 1,706 1,541 1,406
---------------------------------------------
Total non-interest income ........................................ 3,874 3,295 2,663
---------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits ..................................... 11,221 12,454 10,213
Occupancy and equipment ............................................ 1,936 1,943 1,908
Professional services .............................................. 2,412 1,943 1,583
Data processing .................................................... 1,285 1,231 873
Depreciation and amortization of premises and equipment ............ 1,016 984 804
Other operating .................................................... 4,776 4,468 3,943
---------------------------------------------
Total non-interest expense ....................................... 22,646 23,023 19,324
---------------------------------------------
INCOME BEFORE INCOME TAXES ......................................... 20,540 16,202 15,306
---------------------------------------------
PROVISION FOR INCOME TAXES
Federal ............................................................ 6,412 5,044 4,491
State and local .................................................... 1,393 968 2,284
---------------------------------------------
Total provision for income taxes ................................. 7,805 6,012 6,775
---------------------------------------------
NET INCOME ......................................................... $12,735 $10,190 $ 8,531
=============================================
Basic earnings per share ........................................... $ 1.40 $ 1.00 $ 0.80
Diluted earnings per share ......................................... $ 1.37 $ 0.98 $ 0.79
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC CONSOLIDATED STATEMENTS OF
FLUSHING CHANGES IN STOCKHOLDERS' EQUITY
FINANCIAL CORP.=================================================================
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year........................................................... $ 114 $ 89 $ 89
Stock dividend (3,785,168 shares, 1,339,590 shares funded from Treasury)............. -- 25 --
-------------------------------------------
Balance, end of year............................................................. $ 114 $ 114 $ 89
===========================================
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year........................................................... $ 75,452 $101,717 $101,278
Stock dividend....................................................................... -- (26,914) --
Award of shares released from Employee Benefit Trust (28,818, 29,220 and 27,060
shares for the years ended December 31, 1999, 1998 and 1997, respectively)......... 253 238 204
Restricted stock awards (76,750 and 45,750 shares for the years ended
December 31, 1999 and 1997, respectively).......................................... 8 -- 104
Tax benefit of unearned compensation................................................. 239 411 131
-------------------------------------------
Balance, end of year............................................................. $ 75,952 $ 75,452 $101,717
===========================================
TREASURY STOCK
Balance, beginning of year........................................................... $ (6,949) $(19,666) $(12,065)
Purchases of common shares outstanding (1,268,900, 757,146 and 420,477 shares
for the years ended December 31, 1999, 1998 and 1997, respectively)................ (19,844) (14,239) (8,247)
Stock dividend....................................................................... -- 26,889 --
Restricted stock award forfeitures (5,700, 20,900 and 3,300 shares
for the years ended December 31, 1999, 1998 and 1997, respectively)................ (84) (410) (54)
Restricted stock awards (76,750, 25,000 and 30,500 shares for the years
ended December 31, 1999, 1998 and 1997, respectively).............................. 1,177 520 560
Repurchase of restricted stock awards (19,646 and 21,112 shares for the years
ended December 31, 1999 and 1998, respectively) to satisfy tax obligations......... (291) (484) --
Options exercised (44,662, 23,175, and 7,400 shares for the years
ended December 31, 1999, 1998 and 1997, respectively).............................. 683 441 140
-------------------------------------------
Balance, end of year............................................................. $(25,308) $ (6,949) $(19,666)
===========================================
UNEARNED COMPENSATION
Balance, beginning of year........................................................... $ (9,332) $(10,922) $(11,660)
Release of shares from Employee Benefit Trust (38,122, 29,220 and 27,060 shares
for the years ended December 31, 1999, 1998 and 1997, respectively)................ 293 248 240
Restricted stock awards (76,750, 25,000 and 45,750 shares for the years ended
December 31, 1999, 1998 and 1997, respectively).................................... (1,185) (470) (665)
Restricted stock award forfeitures (5,700, 20,900 and 4,950 shares for the
years ended December 31, 1999, 1998 and 1997, respectively)........................ 84 410 54
Restricted stock award expense....................................................... 998 1,402 1,109
-------------------------------------------
Balance, end of year............................................................. $ (9,142) $ (9,332) $(10,922)
===========================================
</TABLE>
Continued
20
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC CONSOLIDATED STATEMENTS OF
FLUSHING CHANGES IN STOCKHOLDERS' EQUITY
FINANCIAL CORP. (continued)
=================================================================
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
RETAINED EARNINGS
Balance, beginning of year...................................................... $ 71,460 $ 63,766 $ 56,869
Net income...................................................................... 12,735 10,190 8,531
Stock options exercised (44,662, 23,175 and 11,100 shares for the
years ended December 31, 1999, 1998 and 1997, respectively)................... (191) (66) (19)
Restricted stock awards (25,000 shares)......................................... -- (50) --
Cash dividends declared and paid................................................ (2,948) (2,380) (1,615)
------------------------------------------------
Balance, end of year........................................................ $ 81,056 $ 71,460 $ 63,766
================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance, beginning of year...................................................... $ 1,342 $ 1,459 $ (1,230)
Change in net unrealized gain (loss), net of taxes of approximately
$(4,936), $(38) and $2,290 for the years ended December 31, 1999,
1998 and 1997, respectively, on securities available for sale................. (5,794) (52) 2,717
Less: Reclassification adjustment for gains included in net income,
net of taxes of approximately $37, $37 and $24 for the years ended
December 31, 1999, 1998 and 1997 respectively................................. (44) (65) (28)
------------------------------------------------
Balance, end of year........................................................ $ (4,496) $ 1,342 $ 1,459
================================================
Total stockholders' equity...................................................... $118,176 $132,087 $136,443
================================================
COMPREHENSIVE INCOME
Net income...................................................................... $ 12,735 $ 10,190 $ 8,531
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities....................................... (5,838) (117) 2,689
------------------------------------------------
Comprehensive income............................................................ $ 6,897 $ 10,073 $ 11,220
================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC CONSOLIDATED STATEMENTS
FLUSHING OF CASH FLOW
FINANCIAL CORP.=================================================================
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ......................................................................... $ 12,735 $ 10,190 $ 8,531
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ........................................................ 36 214 104
Provision for losses on real estate owned ........................................ -- 33 --
Depreciation and amortization of bank premises and equipment ..................... 1,016 984 804
Amortization of goodwill ......................................................... 366 366 122
Net gain on sales of securities .................................................. (81) (102) (52)
Net gain on sales of loans ....................................................... (171) (266) (15)
Net loss on sales of real estate owned ........................................... 10 14 109
Amortization of unearned premium, net of accretion of unearned discount .......... 2,157 2,315 653
Amortization of deferred income .................................................. (1,315) (832) (858)
Deferred income tax (benefit) provision .......................................... (133) 523 (155)
Deferred compensation ............................................................ 192 210 164
Net increase (decrease) in other assets and liabilities ............................ 638 4,392 (748)
Unearned compensation .............................................................. 1,544 1,888 1,029
------------------------------------------
Net cash provided by operating activities ...................................... 16,994 19,929 9,688
------------------------------------------
INVESTING ACTIVITIES
Purchases of bank premises and equipment ........................................... (777) (932) (1,501)
Purchases of Federal Home Loan Bank shares ......................................... (5,272) (2,964) (8,938)
Purchases of securities available for sale ......................................... (75,430) (251,575) (168,527)
Proceeds from sales and calls of securities available for sale ..................... 8,547 186,370 108,060
Proceeds from maturities and prepayments of securities available for sale .......... 96,112 93,010 40,198
Net originations and repayments of loans ........................................... (108,735) (123,743) (91,786)
Purchases of loans ................................................................. (15,970) (28,020) (124,988)
Proceeds from sales of real estate owned ........................................... 67 616 489
Acquisition of New York Federal, net of cash and cash equivalents .................. -- -- (5,171)
------------------------------------------
Net cash used in investing activities .......................................... (101,458) (127,238) (252,164)
------------------------------------------
</TABLE>
Continued
22
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC CONSOLIDATED STATEMENTS
FLUSHING OF CASH FLOW
FINANCIAL CORP. (continued)
=================================================================
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits ............ $ (7,015) $ 8,242 $ 11,797
Net increase (decrease) in interest-bearing deposits ................ 5,437 (1,757) 60,985
Net increase (decrease) in mortgagors' escrow deposits .............. 4,460 1,663 (1,350)
Net increase (decrease) in short-term borrowed funds ................ (20,000) (30,000) 5,000
Increases in long-term borrowed funds ............................... 96,373 78,271 231,187
Purchases of treasury stock, net .................................... (19,643) (14,348) (7,601)
Cash dividends paid ................................................. (2,948) (2,380) (1,615)
----------------------------------------------------
Net cash provided by financing activities ....................... 96,664 39,691 298,403
----------------------------------------------------
Net increase (decrease) in cash and cash equivalents ................ 12,200 (67,618) 55,927
Cash and cash equivalents, beginning of year ........................ 22,734 90,352 34,425
----------------------------------------------------
Cash and cash equivalents, end of year .......................... $ 34,934 $ 22,734 $ 90,352
====================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid ....................................................... $ 49,532 $ 45,394 $ 33,254
Income taxes paid ................................................... 9,723 4,976 6,532
Non-cash activities:
Loans originated as the result of real estate sales ............... -- 40 637
Loans transferred through the foreclosure of a related
mortgage loan to real estate owned .............................. 374 420 374
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
[LOGO] =================================================================
FFC NOTES TO CONSOLIDATED
FLUSHING FINANCIAL STATEMENTS
FINANCIAL CORP. For the years ended December 31, 1999, 1998 and 1997
=================================================================
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, Small Business Administration loans and other small business
loans. The Bank conducts its business through nine full-service banking offices,
four of which are located in Queens County, two in Nassau County, one in Kings
County (Brooklyn), one in Bronx County 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 direct and indirect wholly-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.
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.
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.
24
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
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:
Goodwill 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, 1999, 1998 and 1997
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.
Earnings per share has been computed based on the following:
<TABLE>
<CAPTION>
==================================================================================================
(Amounts in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................................ $12,735 $10,190 $ 8,531
Divided by:
Weighted average common shares outstanding .......... 9,080 10,194 10,660
Weighted average common stock equivalents ........... 195 241 156
--------------------------------------
Total weighted average common shares
outstanding & common stock equivalents ............. 9,275 10,435 10,816
Basic earnings per share .............................. $ 1.40 $ 1.00 $ 0.80
Diluted earnings per share ............................ $ 1.37 $ 0.98 $ 0.79
==================================================================================================
</TABLE>
25
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
3. LOANS
The composition of loans as of December 31, 1999 and 1998 are as follows:
================================================================================
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
One-to-four family residential ............. $414,194 $361,786
Multi-family residential ................... 310,594 277,437
Commercial real estate ..................... 137,072 101,401
Co-operative apartments .................... 8,926 10,238
Construction ............................... 6,198 3,203
Small Business Administration .............. 2,369 2,616
Consumer and other ......................... 3,379 1,899
--------------------------
Gross loans .............................. 882,732 758,580
Less: Unearned income ...................... 28 1,263
--------------------------
Total loans .............................. $882,704 $757,317
================================================================================
The total amount of loans on non-accrual status as of December 31, 1999, 1998
and 1997 was $3,196,000, $2,597,000 and $2,458,000, respectively. Impaired loans
totaled $3,196,000, $2,597,000 and $2,771,000 at December 31, 1999, 1998 and
1997, respectively. The portion of the allowance for loan losses allocated to
impaired loans was $360,000 (5.3%), $137,000 (2.0%) and $330,000 (5.1%) at
December 31, 1999, 1998 and 1997, respectively. 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 $4,269,000, $3,094,000 and $2,637,000
for 1999, 1998 and 1997, respectively.
The following is a summary of interest foregone on non-accrual loans:
================================================================================
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Interest income that would have been recognized
had the loans performed in accordance with their
original terms ................................... $254 $222 $180
Less: Interest income included in the
results of operations ............................ 46 42 --
------------------------
Foregone interest ................................ $208 $180 $180
================================================================================
The following are changes in the allowance for loan losses:
================================================================================
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Balance, beginning of year ........... $ 6,762 $ 6,474 $ 5,437
Provision for loan losses ............ 36 214 104
Additional allowance acquired
with the purchase of New
York Federal ......................... -- -- 979
Charge-offs .......................... (133) (103) (206)
Recoveries ........................... 153 177 160
------------------------------------
Balance, end of year ............... $ 6,818 $ 6,762 $ 6,474
================================================================================
4. REAL ESTATE OWNED
The following are changes in the allowance for losses on real estate owned:
================================================================================
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Balance, beginning of year ...................... $ -- $ 74 $ 281
Provision ....................................... -- 33 --
Reduction due to sales of real estate owned ..... -- (107) (207)
--------------------------
Balance, end of year .......................... $ -- $ -- $ 74
================================================================================
26
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
5. BANK PREMISES AND EQUIPMENT, NET
Bank premises and equipment at December 31, 1999 and 1998 are as follows:
================================================================================
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
Land ................................................... $ 801 $ 801
Building and leasehold improvements .................... 3,703 3,483
Equipment and furniture ................................ 8,655 8,101
-------------------
Total ................................................ 13,159 12,385
Less: Accumulated depreciation and amortization ........ 6,957 5,944
-------------------
Bank premises and equipment, net ..................... $ 6,202 $ 6,441
================================================================================
6. 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, 1999, 1998 and 1997. 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, 1999 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 ... $ 10,988 $ 10,636 $ -- $ 352
Public utility debt securities ..................... 1,001 1,004 3 --
Other .............................................. 4,331 4,354 286 263
---------------------------------------------------
Total other securities ........................... 16,320 15,994 289 615
Mortgage-backed securities ......................... 277,023 269,022 305 8,306
---------------------------------------------------
Total securities available for sale .............. $293,343 $285,016 $ 594 $ 8,921
============================================================================================================
</TABLE>
The amortized cost and estimated fair value of the Company's securities,
classified as available for sale at December 31, 1999, 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.
-------------------------
Estimated
Amortized Fair
(In thousands) Cost Value
===============================================================================
Due in one year or less ......................... $ -- $ --
Due after one year through five years ........... 3,522 3,441
Due after five years through ten years .......... 5,308 5,239
Due after ten years ............................. 7,490 7,314
-----------------------
Total other securities ........................ 16,320 15,994
Mortgage-backed securities ...................... 277,023 269,022
-----------------------
Total securities available for sale ........... $293,343 $285,016
===============================================================================
27
sustaining growth/securing opportunities
<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, 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>
For the year ended December 31, 1999, gross gains of $144,000 and losses of
$63,000 were realized on sales of securities available for sale. 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.
7. DEPOSITS
Total deposits as of December 31, 1999 and 1998, and the weighted average rate
on deposits at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
===============================================================================================
Weighted
Average Cost
(Dollars in thousands) 1999 1998 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing deposits:
Certificate of deposit accounts ........... $371,677 $370,815 5.36%
Passbook savings accounts ................. 195,910 203,949 2.07
Money market accounts ..................... 40,378 28,439 3.23
NOW accounts .............................. 27,463 26,788 1.90
-------------------------
Total interest-bearing deposits ......... 635,428 629,991
Non-interest bearing deposits:
Demand accounts ........................... 20,490 27,505
-------------------------
Total due to depositors ................. 655,918 657,496
Mortgagors' escrow deposits ................. 11,023 6,563 0.79
-------------------------
Total deposits .......................... $666,941 $664,059
===============================================================================================
</TABLE>
The aggregate amount of time deposits with denominations greater than $100,000
was $42,992,000 and $30,549,000 at December 31, 1999 and 1998, respectively.
Interest expense on deposits, for the years ended December 31, 1999, 1998 and
1997, respectively, is summarized as follows:
================================================================================
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Certificate of deposit accounts ......... $19,130 $21,128 $19,487
Passbook savings accounts ............... 4,156 5,549 5,884
Money market accounts ................... 1,105 773 692
NOW accounts ............................ 499 466 432
---------------------------------
Total due to depositors ............... 24,890 27,916 26,495
Mortgagors' escrow deposits ............. 92 71 71
---------------------------------
Total deposit expense ................. $24,982 $27,987 $26,566
================================================================================
28
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
8. BORROWED FUNDS
Borrowed funds as of December 31, 1999 and 1998, respectively, are summarized as
follows:
<TABLE>
<CAPTION>
=====================================================================================================================
1999 1998
-----------------------------------------------------------------
Weighted Weighted
At December 31, Amount Average Rate Amount Average Rate
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Repurchase agreements:
Due in 1999 .............................. $ -- --% $ 10,000 6.06%
Due in 2001 .............................. 60,000 5.95 60,000 5.95
Due in 2007 .............................. 50,000 5.64 50,000 5.64
-----------------------------------------------------------------
Total repurchase agreements ............ 110,000 5.81 120,000 5.83
-----------------------------------------------------------------
FHLB-NY advances:
Due in 1999 .............................. -- -- 74,325 6.21
Due in 2000 .............................. 116,174 6.27 71,288 6.37
Due in 2001 .............................. 44,334 6.38 24,505 6.54
Due in 2002 .............................. 76,000 5.93 10,000 6.39
Due in 2003 .............................. 70,000 6.03 35,000 5.89
Due in 2004 .............................. 10,000 5.56 -- --
Due in 2009 .............................. 25,000 5.52 -- --
Due in 2011 .............................. 323 7.34 340 7.34
-----------------------------------------------------------------
Total FHLB-NY advances ................. 341,831 6.09 215,458 6.26
-----------------------------------------------------------------
Total borrowings ........................... $451,831 6.02% $335,458 6.11%
=====================================================================================================================
</TABLE>
As part of the Company's strategy to finance investment opportunities and manage
its cost of funds, the Company enters into 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, who may sell, loan or
otherwise dispose of such securities to other parties in the normal course of
their operations. The FHLB-NY 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
repurchase agreements are collateralized by mortgage-backed securities.
Information relating to these agreements at or for the years ended December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
=============================================================================================================
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Book value of collateral ......................................................... $125,681 $135,555
Estimated fair value of collateral ............................................... 125,681 135,555
Average balance of outstanding agreements during the year ........................ 118,849 110,274
Maximum balance of outstanding agreements at a month end during the year ......... 120,000 130,000
Average interest rate of outstanding agreements during the year .................. 5.83% 5.81%
=============================================================================================================
</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. 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. The 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 years ended December 31, 1999 and
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 year ended
December 31, 1997 was based on "entire net income".
29
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
Income tax provisions (benefits) for the years ended December 31, 1999, 1998 and
1997, are summarized as follows:
================================================================================
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Federal:
Current .................................. $ 6,730 $ 5,532 $ 5,148
Deferred ................................. (318) (488) (657)
--------------------------------
Total federal tax provision ............ 6,412 5,044 4,491
--------------------------------
State and Local:
Current .................................. 1,215 (43) 1,782
Deferred ................................. 178 1,011 502
--------------------------------
Total state and local tax provision .... 1,393 968 2,284
--------------------------------
Total income tax provision ............. $ 7,805 $ 6,012 $ 6,775
================================================================================
The income tax provision in the Consolidated Statements of Income has been
provided at effective rates of 38%, 37% and 44% for the years ended December 31,
1999, 1998 and 1997, respectively. The effective rates differ from the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
===================================================================================================================================
For the years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxes at federal statutory rate ............................... $ 7,189 35% $ 5,671 35% $ 5,357 35%
Increase (reduction) in taxes resulting from:
State & local income tax, net of Federal income tax benefit . 905 4 629 4 1,485 10
Other ....................................................... (289) (1) (288) (2) (67) (1)
-----------------------------------------------------------------
Taxes at effective rate ....................................... $ 7,805 38% $ 6,012 37% $ 6,775 44%
===================================================================================================================================
</TABLE>
The components of the income taxes for the years ended December 31, 1999, 1998
and 1997; attributable to income from operations and changes in equity are as
follows:
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income from operations ....................................................... $ 7,805 $ 6,012 $ 6,775
Equity:
Change in fair value of securities available for sale ...................... (4,973) (75) 2,266
Compensation expense for tax purposes in excess of that
recognized for financial reporting purposes ............................. (239) (411) (131)
--------------------------------------------
Total .................................................................... $ 2,593 $ 5,526 $ 8,910
====================================================================================================================================
</TABLE>
The components of the net deferred tax asset as of December 31, 1999 and 1998
are as follows:
================================================================================
For the years ended December 31, 1999 1998
- --------------------------------------------------------------------------------
(In thousands)
Deferred tax asset:
Postretirement benefits ................................ $2,913 $2,683
Allowance for loan losses .............................. 8 267
Unrealized losses on securities available for sale ..... 3,830 --
Other .................................................. 957 870
-----------------
Deferred tax asset ................................... 7,708 3,820
-----------------
Deferred tax liabilities:
Unrealized gains on securities available for sale ...... -- 1,143
Depreciation ........................................... 458 542
Other .................................................. 17 11
-----------------
Deferred tax liability ............................... 475 1,696
-----------------
Net deferred tax asset included in other assets .... $7,233 $2,124
================================================================================
30
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
The Company has recorded a net deferred tax asset of $7,233,000. 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. In management's
opinion, in view of the Company's previous, current and projected future
earnings trend, it is more likely than not that the net deferred tax asset will
be fully realized. Accordingly, no valuation allowance was deemed necessary for
the net deferred tax asset at December 31, 1999.
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. Contributions to
the profit-sharing plan are determined at the end of each year. 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 beginning after the
employee has completed one year of service. Annual contributions by the Bank
into the profit-sharing plan for employees vests 20% per year over the employees
first five years of service. Compensation expense recorded by the Company for
these plans amounted to $534,000, $526,000 and $469,000 for the years ended
December 31, 1999, 1998 and 1997, 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, 1999 the loan had an outstanding balance of $6,657,000, 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, 1999, 1998 and 1997, the Company funded $475,000, $463,000 and
$411,000, 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
==================================================================================================
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares owned by Employee Benefit Trust, beginning balance ....... 914,583 943,803
Shares released and allocated ................................... 28,818 29,220
----------------------------
Shares owned by Employee Benefit Trust, ending balance .......... 885,765 914,583
============================
Market value of unallocated shares .............................. $13,120,394 $14,462,000
==================================================================================================
</TABLE>
31
sustaining growth/securing opportunities
<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, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares available for future Restricted Stock Awards at beginning of year ........... 195,072 58,390 77,775
Shares authorized for Restricted Stock Awards ...................................... -- 112,500 --
Restricted Stock Awards ............................................................ (76,750) (32,000) (45,750)
Restricted shares repurchased to satisfy tax obligations ........................... 19,646 28,132 21,415
Forfeitures ........................................................................ 5,700 28,050 4,950
----------------------------------------
Shares available for future Restricted Stock Awards at end of year ................. 143,668 195,072 58,390
====================================================================================================================================
</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 1999, 1998 and 1997 was $998,000, $1,402,000 and
$1,109,000, 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 limited 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>
---------------------------
Shares Weighted
Underlying Average
Options Exercise 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
Granted ........................................................................ 153,500 $15.44
Exercised ...................................................................... (44,662) $11.03
Forfeited ...................................................................... (14,700) $14.69
---------------------------
Balance Outstanding December 31, 1999 .......................................... 1,268,550 $11.68
===========================
Shares available for future stock option awards at December 31, 1999 ........... 234,675
==================================================================================================================
</TABLE>
32
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
The following table summarizes information about the Stock Option Plan at
December 31, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Number Weighted Average Number
Outstanding at Remaining Exercisable at Weighted Average
Exercise Prices 12/31/99 Contractual Life 12/31/99 Exercise Price
===============================================================================================================
<S> <C> <C> <C> <C>
$10.83................................... 992,550 6.4 Years 632,850 $10.83
$12.00-$15.00............................ 103,500 7.9 Years 55,740 $13.28
$15.01-$19.00............................ 172,500 9.4 Years 5,000 $16.76
--------------------------------------------------------------------
$10.83-$19.00............................ 1,268,550 6.9 Years 693,590 $11.07
==============================================================================================================
</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 indicated in the table below. However, the present
impact of 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.
================================================================================
(Dollars in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income:
As reported .................................. $12,735 $10,190 $8,531
Pro forma .................................... $12,015 $ 9,540 $8,101
Diluted earnings per share:
As reported .................................. $ 1.37 $ 0.98 $ 0.79
Pro forma .................................... $ 1.30 $ 0.91 $ 0.75
================================================================================
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 1999, 1998 and 1997 are as follows:
================================================================================
1999 Grants 1998 Grants 1997 Grants
- --------------------------------------------------------------------------------
Dividend yield.......................... 2.07% 1.50% 1.21%
Expected volatility..................... 25.85% 35.22% 28.55%
Risk-free interest rate................. 6.01% 4.38% 6.08%
Expected option life.................... 7 Years 7 Years 7 Years
================================================================================
Pension Plans:
The Bank 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 Bank'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:
================================================================================
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Service cost .................................. $ 338 $ 341 $ 298
Interest cost ................................. 547 517 487
Amortization of transition asset .............. -- -- (2)
Amortization of past service liability ........ (24) (24) (24)
Amortization of unrecognized gain ............. -- (34) --
Return on plan assets ......................... (730) (701) (581)
----------------------------
Net pension expense ......................... $ 131 $ 99 $ 178
================================================================================
33
sustaining growth/securing opportunities
<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, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
====================================================================================================================================
For the years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ......................................... $ 8,198 $ 7,270 $ 6,077
Service cost .................................................................... 338 341 298
Interest cost ................................................................... 547 517 487
Actuarial (gain) loss ........................................................... (708) 189 619
Benefits paid ................................................................... (377) (218) (211)
Plan amendments ................................................................. -- 99 --
------------------------------------------
Benefit obligation at end of year ............................................... 7,998 8,198 7,270
------------------------------------------
Change in plan assets:
Market value of assets at beginning of year ..................................... 8,717 8,863 7,255
Actual return on plan assets .................................................... 1,531 20 1,626
Employer contributions .......................................................... -- 52 193
Benefits paid ................................................................... (377) (218) (211)
------------------------------------------
Market value of plan assets at end of year ...................................... 9,871 8,717 8,863
------------------------------------------
Funded status ................................................................... 1,873 519 1,593
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions ...................... (1,703) (194) (1,144)
Prior service cost not yet recognized in periodic pension cost .................. (111) (134) (159)
------------------------------------------
Prepaid pension cost included in other assets ................................... $ 59 $ 191 $ 290
====================================================================================================================================
</TABLE>
Assumptions used in 1999, 1998 and 1997 to develop periodic pension amounts
were:
================================================================================
1999 1998 1997
- --------------------------------------------------------------------------------
Weighted average discount rate ................ 7.75% 6.75% 7.25%
Rate of increase in future compensation levels 5.00% 4.00% 5.00%
Expected long-term rate of return on assets ... 8.50% 8.50% 8.00%
================================================================================
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:
================================================================================
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
Service cost ..................................... $ 20 $-- $ 9
Interest cost .................................... -- -- --
Amortization of past service liability ........... 109 83 83
------------------------
Net pension expense .............................. $129 $ 83 $ 92
================================================================================
34
Flushing Financial Corporation 1999 annual report
<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, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
===================================================================================================================
December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year .............................. $ 1,953 $ 1,654 $ 1,641
Service cost ......................................................... 20 -- 9
Actuarial (gain) loss ................................................ (38) 97 22
Benefits paid ........................................................ (22) (22) (18)
Plan amendments ...................................................... -- 224 --
------------------------------------------
Benefit obligation at end of year .................................... 1,913 1,953 1,654
------------------------------------------
Change in plan assets:
Market value of assets at beginning of year .......................... -- -- --
Employer contributions ............................................... 22 22 18
Benefits paid ........................................................ (22) (22) (18)
------------------------------------------
Market value of assets at end of year ................................ -- -- --
------------------------------------------
Funded status ........................................................ (1,913) (1,953) (1,654)
Unrecognized net loss (gain) from past experience different
from that assumed and effects of changes in assumptions ........... 39 79 (18)
Prior service cost not yet recognized in periodic pension cost ....... 862 969 828
------------------------------------------
Accrued pension cost included in other liabilities ................... $(1,012) $ (905) $ (844)
===================================================================================================================
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the weighted average
discount rate used in determining the actuarial present value of the projected
benefit obligation was 7.75%, 6.75% and 7.25%, 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. The Company reserves
the right to amend or terminate these plans at its discretion.
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, 1999,
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, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year .............................. $ 3,007 $ 1,660 $ 1,304
Service cost ......................................................... 136 118 69
Actuarial (gain) loss ................................................ (853) 1,153 243
Interest cost ........................................................ 199 188 110
Benefits paid ........................................................ (82) (112) (66)
------------------------------------------
Benefit obligation at end of year .................................... 2,407 3,007 1,660
------------------------------------------
Change in plan assets:
Market value of assets at beginning of year .......................... -- -- --
Employer contributions ............................................... 82 112 66
Benefits paid ........................................................ (82) (112) (66)
------------------------------------------
Market value of assets at end of year ................................ -- -- --
------------------------------------------
Funded status ........................................................ (2,407) (3,007) (1,660)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions ................ 282 1,202 113
Prior service cost not yet recognized in periodic expense ............ (517) (619) (722)
------------------------------------------
Accrued postretirement cost included in other liabilities ............ $(2,642) $(2,424) $(2,269)
===================================================================================================================
</TABLE>
35
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
Assumptions used in determining the actuarial present value of the accumulated
postretirement benefit obligations as of December 31, 1999, 1998 and 1997 are as
follows:
================================================================================
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Rate of return on plan assets........................... NA NA NA
Discount rate........................................... 7.75% 6.75% 7.25%
Rate of increase in health care costs:
Initial............................................... 6.50% 6.75% 7.50%
Ultimate (year 2003).................................. 5.00% 5.00% 5.00%
Annual rate of salary increases......................... NA NA NA
================================================================================
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, 1999 by $196,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit costs for the year then ended by $45,000.
For the years ended December 31, 1999, 1998 and 1997, the resulting net periodic
postretirement benefit expense consisted of the following components:
===============================================================================
For the years ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------
(In thousands)
Service cost............................................ $ 136 $ 118 $ 69
Interest cost........................................... 199 188 110
Amortization of unrecognized loss....................... 68 63 --
Amortization of past service liability.................. (102) (102) (102)
----------------------
Net postretirement benefit expense...................... $ 301 $ 267 $ 77
===============================================================================
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, 1999, the Bank's liquidation account was $10.3 million and was
presented within retained earnings.
In addition to the restriction described above, Federal banking regulations
place certain restrictions on dividends paid by the Bank to the Holding Company.
The total amount of dividends which may be paid at any date is generally limited
to the net income of the Bank for the current year and prior two years, less any
dividends previously paid from those earnings. At December 31, 1999, the Bank's
retained earnings available for the payment of dividends was $13,500,000.
In addition, dividends paid by the Bank to the Holding Company would be
prohibited if the effect thereof would cause the Bank's capital to be reduced
below applicable minimum capital 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 1999, the Holding Company repurchased 1,268,900 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, 1999, the Company had
1,629,707 shares of Treasury stock which, among other things, could be used to
award grants under the Company's Restricted Stock Plan and to satisfy
obligations under the Stock Option Plan. Treasury stock is being accounted for
using the average cost method.
36
Flushing Financial Corporation 1999 annual report
<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, 1999, 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, 1999 and 1998:
================================================================================
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Percent of Percent of
(Dollars in thousands) Amount Assets Amount Assets
================================================================================
Tangible capital:
Capital level................. $102,709 8.28% $105,535 9.46%
Requirement................... 18,605 1.50% 16,729 1.50%
Excess........................ $ 84,104 6.78% $ 88,806 7.96%
Core (Tier I) capital:
Capital level................. $102,709 8.28% $105,535 9.46%
Requirement................... 49,612 4.00% 44,611 4.00%
Excess........................ $ 53,097 4.28% $ 60,924 5.46%
Total risk-based capital:
Capital level................. $109,527 16.33% $112,297 19.43%
Requirement................... 53,671 8.00% 46,238 8.00%
Excess........................ $ 55,856 8.33% $ 66,059 11.43%
================================================================================
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 $30,437,000, $10,615,000 and $2,191,000, respectively,
at December 31, 1999. 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, 1999, commitments to extend credit for fixed-rate real estate
mortgages amounted to $8.4 million, with an average interest rate of 8.50%.
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
sustaining growth/securing opportunities
<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:
2000.............................................................. $ 625
2001.............................................................. 665
2002.............................................................. 343
2003.............................................................. 360
2004.............................................................. 373
Thereafter........................................................ 1,833
------
Total minimum payments required................................... $4,199
================================================================================
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, 1999, 1998 and 1997 was approximately $488,000,
$451,000 and $449,000, 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.
38
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
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.
The estimated fair value of each material class of financial instruments as of
December 31, 1999 and 1998 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 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, with carrying amounts of $875,886,000 and
$750,555,000 as of December 31, 1999 and 1998, respectively, was $883,196,000
and $777,715,000 as of December 31, 1998 and 1998, 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 due to depositors, with carrying amounts of
$655,918,000 and $657,496,000 as of December 31, 1999 and 1998, respectively,
was $656,670,000 and $661,494,000 at December 31, 1999 and 1998, 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 dates
(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.
Borrowed funds:
The estimated fair value of borrowed funds, with carrying amounts of
$451,831,000 and $335,458,000 as of December 31, 1999 and 1998, respectively,
was $440,159,000 and $340,060,000 at December 31, 1999 and 1998, respectively.
The fair value of borrowed funds is estimated by discounting the contractual
cash flows using interest rates in effect for borrowings with similar maturities
and collateral requirements.
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, 1999 and 1998, 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 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.
This Pronouncement was scheduled to be effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. In June of 1999, FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of SFAS No. 133", which amends SFAS No. 133 to delay the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. Adoption of this Pronouncement is not expected to have a material impact
on the Company's financial position or the results of operations.
39
sustaining growth/securing opportunities
<PAGE>
Flushing Financial Corporation and Subsidiaries
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the fiscal years ended December
31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
====================================================================================================================================
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
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............................ $22,730 $22,199 $21,458 $20,756 $20,989 $20,829 $20,531 $20,497
Interest expense........................... 12,799 12,258 11,452 11,286 12,003 11,968 11,302 11,429
--------------------------------------------------------------------------------------
Net interest income...................... 9,931 9,941 10,006 9,470 8,986 8,861 9,229 9,068
Provision for loan losses.................. -- -- 12 24 41 15 42 116
Other operating income..................... 1,069 896 919 990 803 962 770 760
Other expense.............................. 5,718 5,626 5,696 5,606 5,395 6,032 5,660 5,936
--------------------------------------------------------------------------------------
Income before income tax expense........... 5,282 5,211 5,217 4,830 4,353 3,776 4,297 3,776
Income tax expense......................... 2,007 1,980 2,007 1,811 1,589 1,317 1,555 1,551
--------------------------------------------------------------------------------------
Net income............................... $ 3,275 $ 3,231 $ 3,210 $ 3,019 $ 2,764 $ 2,459 $ 2,742 $ 2,225
======================================================================================
Basic earnings per share................... $ 0.38 $ 0.36 $ 0.35 $ 0.32 $ 0.28 $ 0.24 $ 0.26 $ 0.21
Diluted earnings per share................. $ 0.37 $ 0.35 $ 0.34 $ 0.31 $ 0.27 $ 0.24 $ 0.25 $ 0.21
Dividends per share........................ $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.06 $ 0.06 $ 0.05 $ 0.05
Average common shares outstanding for:
Basic earnings per share................. 8,705 8,957 9,161 9,509 9,919 10,209 10,436 10,419
Diluted earnings per share............... 8,910 9,186 9,330 9,707 10,119 10,454 10,725 10,670
====================================================================================================================================
</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, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
==================================================================================================
1999 1998
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash and due from banks .......................................... $ 7,760 $ 463
Federal funds sold and overnight interest-earning deposit ........ 875 3,500
Securities available for sale:
Mortgage-backed securities ..................................... 2,215 10,850
Other securities ............................................... 4,354 6,193
Interest receivable .............................................. 46 108
Investment in Bank ............................................... 102,885 111,602
Other assets ..................................................... 155 425
---------------------------
Total assets ................................................... $ 118,290 $ 133,141
===========================
Liabilities:
Other liabilities ................................................ $ 114 $ 1,054
---------------------------
Total liabilities .............................................. 114 1,054
---------------------------
Stockholders' equity:
Common stock ..................................................... 114 114
Additional paid-in capital ....................................... 75,952 75,452
Unearned compensation ............................................ (9,142) (9,332)
Treasury stock ................................................... (25,308) (6,949)
Retained earnings ................................................ 81,056 71,460
Accumulated other comprehensive income, net of taxes ............. (4,496) 1,342
---------------------------
Total equity ................................................... 118,176 132,087
---------------------------
Total liabilities and equity ................................... $ 118,290 $ 133,141
==================================================================================================
</TABLE>
Continued
40
Flushing Financial Corporation 1999 annual report
<PAGE>
Flushing Financial Corporation and Subsidiaries
19. PARENT COMPANY ONLY FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
=============================================================================================================================
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CONDENSED STATEMENTS OF INCOME
Dividends from Bank .......................................................................... $ 16,000 $ --
Interest income .............................................................................. 719 1,831
Non-interest income .......................................................................... 46 --
Other operating expenses ..................................................................... (568) (500)
--------------------------
Income before taxes and equity in undistributed earnings of subsidiary ..................... 16,197 1,331
Income tax expense ........................................................................... (32) (545)
--------------------------
Income before equity in undistributed earnings of subsidiary ............................... 16,165 786
Excess of dividends over current year earnings ............................................... (3,430) --
Equity in undistributed earnings of the Bank ................................................. -- 9,404
--------------------------
Net income ................................................................................. $ 12,735 $ 10,190
==========================
CONDENSED STATEMENTS OF CASH FLOW
Operating activities:
Net income ................................................................................. $ 12,735 $ 10,190
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of the Bank ............................................. 3,430 (9,404)
Net increase (decrease) in operating assets and liabilities .............................. (341) 451
Amortization of unearned premium, net of accretion of unearned discount .................. 74 118
Net gain on sales of securities .......................................................... (45) (8)
Unearned compensation, net ............................................................... 1,544 1,888
--------------------------
Net cash provided by operating activities .............................................. 17,397 3,235
--------------------------
Investing activities:
Purchases of securities available for sale ................................................. (9,765) (26,835)
Proceeds from sales and calls of securities available for sale ............................. 19,631 37,548
--------------------------
Net cash provided by investing activities .............................................. 9,866 10,713
--------------------------
Financing activities:
Purchase of treasury stock ................................................................. (19,643) (14,348)
Cash dividends paid ........................................................................ (2,948) (2,380)
--------------------------
Net cash used in financing activities .................................................. (22,591) (16,728)
--------------------------
Net increase (decrease) in cash and cash equivalents ......................................... 4,672 (2,780)
Cash and cash equivalents, beginning of year ................................................. 3,963 6,743
--------------------------
Cash and cash equivalents, end of year ....................................................... $ 8,635 $ 3,963
=============================================================================================================================
</TABLE>
41
sustaining growth/securing opportunities
<PAGE>
================================================================================
REPORT 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,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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, 2000
42
Flushing Financial Corporation 1999 annual report
Exhibit 23.1
Consent of Independent Accountants
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-98202, 333-3878 and 333-85639) of Flushing
Financial Corporation of our report dated January 26, 2000, relating to the
consolidated financial statements, which appears in the Annual Report to
Shareholders, which is incorporated in this Annual Report on Form 10-K.
/s/PricewaterhouseCoopers LLP
New York, New York
March 29, 2000
54
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1999 and the
Consolidated Statement of Income for the twelve months ended December 31, 1999,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> 12-MOS
<CASH> 29,059
<INT-BEARING-DEPOSITS> 5,875
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 285,016
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 882,704
<ALLOWANCE> 6,818
<TOTAL-ASSETS> 1,249,529
<DEPOSITS> 666,941
<SHORT-TERM> 116,174
<LIABILITIES-OTHER> 12,581
<LONG-TERM> 335,657
0
0
<COMMON> 114
<OTHER-SE> 118,062
<TOTAL-LIABILITIES-AND-EQUITY> 1,249,529
<INTEREST-LOAN> 66,543
<INTEREST-INVEST> 19,915
<INTEREST-OTHER> 685
<INTEREST-TOTAL> 87,143
<INTEREST-DEPOSIT> 24,982
<INTEREST-EXPENSE> 47,795
<INTEREST-INCOME-NET> 39,348
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 81
<EXPENSE-OTHER> 22,646
<INCOME-PRETAX> 20,540
<INCOME-PRE-EXTRAORDINARY> 20,540
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,735
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 7.74
<LOANS-NON> 3,196
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,762
<CHARGE-OFFS> 133
<RECOVERIES> 153
<ALLOWANCE-CLOSE> 6,818
<ALLOWANCE-DOMESTIC> 6,818
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
