-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PrzE2vKLwJDpnCY4NB4efmRqm/RAOq7TmIHYoy3Uq8Wr1onIevjy6qBse/QuEnL0 LuF+/2nRiWNY6Uq+gDROZQ== 0000891554-00-000866.txt : 20000331 0000891554-00-000866.hdr.sgml : 20000331 ACCESSION NUMBER: 0000891554-00-000866 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLUSHING FINANCIAL CORP CENTRAL INDEX KEY: 0000923139 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 113209278 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24272 FILM NUMBER: 586030 BUSINESS ADDRESS: STREET 1: 144-51 NORTHERN BLVD CITY: FLUSHING STATE: NY ZIP: 11354 BUSINESS PHONE: 7189615400 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 000-24272 FLUSHING FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 11-3209278 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 144-51 Northern Boulevard, Flushing, New York 11354 (Address of principal excutive offices) (718) 961-5400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 29, 2000, the aggregate market value of the voting stock held by non-affiliates of the registrant was $129,191,000. This figure is based on the closing price on the Nasdaq National Market for a share of the registrant's Common Stock, $0.01 par value, on February 29, 2000, the last trading date in February 2000, which was $14.00. The number of shares of the registrant's Common Stock outstanding as of February 29, 2000 was 9,615,471 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1999 are incorporated herein by reference in Part II, and portions of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2000 are incorporated herein by reference in Part III. TABLE OF CONTENTS Page ---- PART I Item 1. Business........................................................... 1 General.......................................................... 1 Market Area and Competition...................................... 3 Lending Activities............................................... 4 Loan Portfolio Composition................................ 4 Loan Maturity and Repricing............................... 7 One-to-Four Family Mortgage Lending....................... 7 Home Equity Loans......................................... 9 Multi-Family Lending...................................... 9 Commercial Real Estate Lending............................10 Construction Loans........................................10 Small Business Administration Lending.....................10 Consumer and Other Lending................................11 Loan Approval Procedures and Authority....................11 Loan Concentrations.......................................12 Loan Servicing............................................12 Asset Quality....................................................12 Loan Collection...........................................12 Delinquent Loans and Non-performing Assets................12 REO.......................................................14 Allowance for Loan Losses........................................14 Investment Activities............................................18 General...................................................18 Mortgage-backed securities................................19 Sources of Funds.................................................22 General...................................................22 Deposits..................................................22 Borrowings................................................25 Subsidiary Activities............................................27 Personnel........................................................27 RISK FACTORS Effect of Interest Rates.........................................28 Lending Activities...............................................28 Competition......................................................29 Local Economic Conditions........................................29 Legislation and Proposed Changes.................................29 Certain Anti-Takeover Provisions.................................29 FEDERAL, STATE AND LOCAL TAXATION Federal Taxation.................................................31 General...................................................31 Bad Debt Reserves.........................................31 Distributions.............................................32 i TABLE OF CONTENTS (Continued) Page ---- Corporate Alternative Minimum Tax.........................32 State and Local Taxation.........................................32 New York State and New York City Taxation.................32 Delaware State Taxation...................................33 REGULATION General..........................................................33 Investment Powers................................................34 Real Estate Lending Standards....................................34 Loans-to-One Borrower Limits.....................................34 Insurance of Accounts............................................35 Liquidity Requirements...........................................36 Qualified Thrift Lender Test.....................................36 Transactions with Affiliates.....................................37 Restrictions on Dividends and Capital Distributions..............37 Federal Home Loan Bank System....................................38 Assessments......................................................38 Branching........................................................38 Community Reinvestment...........................................38 Brokered Deposits................................................39 Capital Requirements.............................................39 General...................................................39 Tangible Capital Requirement..............................40 Core Capital Requirement..................................40 Risk-Based Requirement....................................40 Federal Reserve System...........................................41 Financial Reporting..............................................41 Standards for Safety and Soundness...............................41 Prompt Corrective Action.........................................42 Recently Enacted Legislation and Proposed Changes................42 Company Regulation...............................................43 Federal Securities Laws..........................................44 Item 2. Properties.........................................................45 Item 3. Legal Proceedings..................................................45 Item 4. Submission of Matters to a Vote of Security Holders................45 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................................................46 Item 6. Selected Financial Data............................................46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................46 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........46 Item 8. Financial Statements and Supplementary Data........................46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................................46 ii TABLE OF CONTENTS (Continued) Page ---- PART III Item 10. Directors and Executive Officers of the Registrant................47 Item 11. Executive Compensation............................................47 Item 12. Security Ownership of Certain Beneficial Owners and Management....47 Item 13. Certain Relationships and Related Transactions....................47 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................................48 (a) 1. Financial Statements....................................48 (a) 2. Financial Statement Schedules...........................48 (b) Reports on Form 8-K filed during the last quarter of fiscal 1997..............................................48 (c) Exhibits Required by Securities and Exchange Commission Regulation S-K...................................49 SIGNATURES POWER OF ATTORNEY iii PART I Statements contained in this Annual Report on Form 10-K relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed under the captions "Business--Allowance for Loan Losses", "Business--Market Area and Competition" and "Risk Factors" below, and elsewhere in this Form 10-K and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "forecasts", "potential" or "continue" or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements. Item 1. Business. General Flushing Financial Corporation (the "Company") is a Delaware corporation organized in May 1994 at the direction of Flushing Savings Bank, FSB (the "Bank") for the purpose of acquiring and holding all of the outstanding capital stock of the Bank issued upon its conversion from a federal mutual savings bank to a federal stock savings bank (the "Conversion"). The Conversion was completed on November 21, 1995. In connection with the Conversion, the Company issued 12,937,500 shares of common stock at a price of $7.67 per share to the Bank's eligible depositors who subscribed for shares, and to an employee benefit trust established by the Company for the purpose of holding shares for allocation or distribution under certain employee benefit plans of the Company and the Bank (the "Employee Benefit Trust"). The Company realized net proceeds of $96.5 million from the sale of its common stock and utilized approximately $48.3 million of such proceeds to purchase 100% of the issued and outstanding shares of the Bank's common stock. Flushing Financial Corporation's common stock is traded on the Nasdaq National Market under the symbol "FFIC". The primary business of the Company is the operation of its wholly-owned subsidiary, the Bank. In addition to directing, planning and coordinating the business activities of the Bank, the Company invests primarily in U.S. government and federal agency securities, federal funds, mortgage-backed securities, and investment grade corporate obligations. The Company also holds a note evidencing a loan that it made to the Employee Benefit Trust to enable the Employee Benefit Trust to acquire 1,035,000 shares, or 8% of the common stock issued in the Conversion. The Company has in the past increased growth through acquisition of financial institutions and branches of other financial institutions, and will pursue growth through acquisitions that are, or are expected to be within a reasonable time-frame, accretive to earnings, as opportunities arise. The Bank also seeks increased growth through the opening of new branches. The Company may also organize or acquire, through merger or otherwise, other financial services related companies. The activities of the Company are funded by that portion of the proceeds of the sale of common stock in the Conversion that the Company was permitted by the Office of Thrift Supervision ("OTS") to retain, and earnings thereon, and by dividends, if any, received from the Bank. The Company is a unitary savings and loan holding company, which, under existing laws, is generally not restricted as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender. Under regulations of the OTS, the Bank is a qualified thrift lender if its ratio of qualified thrift investments to portfolio assets ("QTL Ratio") is 65% or more, on a monthly average basis in nine of every 12 months. At December 31, 1999, the Bank's QTL Ratio was 85.0%, and the Bank had 1 maintained more than 65% of its "portfolio assets" in qualified thrift investments in at least nine of the preceding 12 months. See "Regulation--Qualified Thrift Lender Test" and "Regulation--Company Regulation." The Company neither owns nor leases any property but instead uses the premises and equipment of the Bank. At the present time, the Company does not employ any persons other than certain officers of the Bank who do not receive any extra compensation as officers of the Company. The Company utilizes the support staff of the Bank from time to time, as needed. Additional employees may be hired as deemed appropriate by the management of the Company. Unless otherwise disclosed, the information presented in the financial statements and this Form 10-K reflect the financial condition and results of operations of the Company, the Bank and the Bank's subsidiaries on a consolidated basis. Management views the Company and its subsidiaries as operating as a single unit, a community savings bank. Therefore, segment information is not provided. At December 31, 1999, the Company had total assets of $1.25 billion, deposits of $666.9 million and stockholders' equity of $118.2 million. Also, at December 31, 1999, loans receivable, net of the allowance for loan losses and unearned income, totaled $875.9 million, representing approximately 70.1% of the Company's total assets, and mortgage-backed securities with a carrying value of $269.0 million, represented approximately 21.5% of the Company's total assets. The Bank's principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (i) originations and purchases of one-to-four family residential mortgage loans, multi-family income producing property loans and commercial real estate loans; (ii) mortgage loan surrogates such as mortgage-backed securities; and (iii) U.S. government and federal agency securities, corporate fixed-income securities and other marketable securities. To a lesser extent, the Bank originates certain other loans, including construction loans, Small Business Administration ("SBA") loans and other small business and consumer loans. The Bank's revenues are derived principally from interest on its mortgage and other loans and mortgage-backed securities portfolio, and interest and dividends on other investments in its securities portfolio. The Bank's primary sources of funds are deposits, Federal Home Loan Bank-New York ("FHLB-NY") borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, proceeds from sales of securities and, to a lesser extent, proceeds from sales of loans. On September 9, 1997, the Company acquired New York Federal Savings Bank ("New York Federal") and merged it with the Bank in a cash transaction valued at approximately $13 million. This acquisition was immediately accretive to the Company's earnings and was accounted for under the purchase method of accounting. In November of 1997, the Bank established a wholly owned real estate investment trust subsidiary, Flushing Preferred Funding Corporation ("FPFC"). The Bank has transferred, in the aggregate, $326.4 million in real estate loans to FPFC. The assets transferred to FPFC are viewed by regulators as part of the Bank's assets in consolidation. However, the establishment of FPFC provides an additional vehicle for access by the Company to the capital markets for future investment opportunities. In March of 1998, the Bank formed a service corporation, Flushing Service Corporation, to market insurance products and mutual funds. The insurance products and mutual funds sold are products of unrelated insurance and securities firms from which the service corporation earns a commission. Management is currently reviewing the profitability potential of various new products to further extend the Bank's product lines and market. As part of the Company's exploration in new retailing concepts and products, the Bank opened its first in-store supermarket branch in June 1998 in the neighborhood of New Hyde Park through an alliance with the 2 Edwards Supermarket chain. In November 1999, the Bank opened its second supermarket branch in Co-op City in the Bronx through an alliance with the Edwards Supermarket chain. These supermarket branches can address virtually all of their customers' financial needs, with the added convenience of extended hours and time saving grocery store access. A traditional branch is scheduled to open in the second quarter of 2000 at a new location in Flushing, Queens. On August 18, 1998, the Board of Directors of the Company declared a three-for-two split of the Company's common stock in the form of a 50% stock dividend, which was paid on September 30, 1998. Each stockholder received one additional share for every two shares of the Company's common stock held at the record date, September 10, 1998. Cash was paid in lieu of fractional shares. This dividend was not paid on shares held in treasury. Market Area and Competition The Bank has been, and intends to continue to be, a community oriented savings institution offering a wide variety of financial services to meet the needs of the communities it serves. The Bank is headquartered in Flushing, New York, located in the Borough of Queens. It currently operates out of its main office and eight branch offices, located in the New York City Boroughs of Queens, Brooklyn, Manhattan, and the Bronx, and in Nassau County, New York. Substantially all of the Bank's mortgage loans are secured by properties located in the New York City metropolitan area. During the last three years, the unemployment and real estate values in the New York City metropolitan area have been relatively stable, which has favorably impacted the Bank's asset quality. See "--Asset Quality." There can be no assurance that the stability of these economic factors will continue. The Bank faces intense and increasing competition both in making loans and in attracting deposits. The Bank's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than the Bank, and all of which are competitors of the Bank to varying degrees. Particularly intense competition exists for deposits and in all of the lending activities emphasized by the Bank. The Bank's competition for loans comes principally from commercial banks, other savings banks, savings and loan associations, mortgage banking companies, insurance companies, finance companies and credit unions. Management anticipates that competition for multi-family loans, commercial real estate loans and one-to-four family residential mortgage loans will continue to increase in the future. Thus, no assurances can be given that the Bank will be able to maintain or increase its current level of origination of such loans, as contemplated by management's current business strategy. The Bank's most direct competition for deposits historically has come from other savings banks, commercial banks, savings and loan associations and credit unions. In addition, the Bank faces increasing competition for deposits from products offered by brokerage firms, insurance companies and other financial intermediaries, such as money market and other mutual funds and annuities. Trends toward the consolidation of the banking industry and the lifting of interstate banking and branching restrictions may make it more difficult for smaller, community-oriented banks, such as the Bank, to compete effectively with large, national, regional and super-regional banking institutions. Notwithstanding the intense competition, the Bank has been successful in maintaining its deposit base. For a discussion of the Company's business strategies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Management Strategy," included in the Annual Report of Stockholders for the fiscal year ended December 31, 1999 (the "Annual Report"), incorporated herein by reference. 3 Lending Activities Loan Portfolio Composition. The Bank's loan portfolio consists primarily of conventional fixed-rate mortgage loans and adjustable rate mortgage ("ARM") loans secured by one-to-four family residences, mortgage loans secured by multi-family income producing properties or commercial real estate, construction loans, SBA loans, other small business loans and consumer loans. At December 31, 1999, the Bank had gross loans outstanding of $882.7 million (before reserves and unearned income), of which $423.1 million, or 47.93%, were one-to-four family residential mortgage loans (including $18.0 million of condominium loans, $8.9 million of co-operative apartment loans and $5.4 million of home equity loans). Of the one-to-four family residential loans outstanding on that date, 43.87% were ARM loans and 56.13% were fixed-rate loans. At December 31, 1999, multi-family loans totaled $310.6 million, or 35.19% of gross loans, commercial real estate loans totaled $137.1 million, or 15.53% of gross loans, construction loans totaled $6.2 million, or 0.70% of gross loans, SBA loans totaled $2.4 million, or 0.27% of gross loans, and consumer and other loans totaled $3.4 million, or 0.38% of gross loans. The Bank has traditionally emphasized the origination and acquisition of one-to-four family residential mortgage loans, which include ARM loans, fixed-rate mortgage loans and home equity loans. However, in recent years, the Bank has also placed emphasis on multi-family and commercial real estate loans. The Bank expects to continue its emphasis on multi-family and commercial real estate loans as well as on one-to-four family residential mortgage loans. From December 31, 1998 to December 31, 1999, one-to-four family residential mortgage loans increased $51.1 million, or 13.7%, multi-family loans increased $33.2 million, or 12.0%, and commercial real estate loans increased $35.7 million, or 35.2%. Fully underwritten one-to-four family residential mortgage loans are considered by the banking industry to have less risk than other types of loans. Multi-family income producing real estate loans and commercial real estate loans generally have higher yields than one-to-four family residential loans and shorter terms to maturity, but typically involve higher principal amounts and generally expose the lender to greater credit risk than fully underwritten one-to-four family residential mortgage loans. The Bank's strategy to emphasize multi-family and commercial real estate loans can be expected to increase the overall level of credit risk inherent in the Bank's loan portfolio. The greater risk associated with multi-family and commercial real estate loans may require the Bank to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Company has not experienced significant losses in its multi-family and commercial real estate loan portfolios. The Bank's lending activities are subject to federal and state laws and regulations. Interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rate offered by the Bank's competitors and, in the case of corporate entities, the creditworthiness of the borrower. Many of those factors are, in turn, affected by regional and national economic conditions, and the fiscal, monetary and tax policies of the federal government. 4 The following table sets forth the composition of the Bank's loan portfolio at the dates indicated.
At December 31, -------------------------------------------------------------------------- 1999 1998 1997 -------------------- -------------------- -------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total -------- -------- -------- -------- -------- -------- (Dollars in thousands) Mortgage Loans: One-to-four family residential(1) $414,194 46.92% $361,786 47.69% $289,286 47.67% Co-operative apartment (2) 8,926 1.01 10,238 1.35 12,065 1.99 Multi-family real estate 310,594 35.19 277,437 36.57 230,229 37.95 Commercial real estate 137,072 15.53 101,401 13.37 68,182 11.24 Construction 6,198 0.70 3,203 0.42 2,797 0.46 -------- -------- -------- -------- -------- -------- Gross mortgage loans 876,984 99.35 754,065 99.40 602,559 99.31 Small Business Administration loans 2,369 0.27 2,616 0.35 2,789 0.46 Consumer and other loans 3,379 0.38 1,899 0.25 1,385 0.23 -------- -------- -------- -------- -------- -------- Gross loans 882,732 100.00% 758,580 100.00% 606,733 100.00% ======== ======== ======== Less: Unearned income, unamortized discounts, and deferred loan fees, net (28) (1,263) (1,838) Allowance for loan losses (6,818) (6,762) (6,474) -------- -------- -------- Loans, net $875,886 $750,555 $598,421 ======== ======== ======== At December 31, ----------------------------------------------- 1996 1995 -------------------- ---------------------- Percent Percent Amount of Total Amount of Total -------- --------- ---------- ----------- Mortgage Loans: One-to-four family residential(1) $223,273 57.28% $155,435 54.20% Co-operative apartment (2) 13,245 3.40 14,653 5.11 Multi-family real estate 104,870 26.91 69,140 24.11 Commercial real estate 46,698 11.98 45,215 15.77 Construction -- -- -- -- -------- -------- -------- ------- Gross mortgage loans 388,086 99.57 284,443 99.19 Small Business Administration loans -- -- -- -- Consumer and other loans 1,680 0.43 2,328 0.81 -------- ------- -------- ------- Gross loans 389,766 100.00% 286,771 100.00% ======== ======= Less: Unearned income, unamortized discounts, and deferred loan fees, net (1,548) (1,335) Allowance for loan losses (5,437) (5,310) -------- -------- Loans, net $382,781 $280,126 ======== ========
- ---------- (1) One-to-four family residential loans also include home equity and condominium loans. At December 31, 1999, gross home equity loans totaled $5.4 million and condominium loans totaled $18.0 million. (2) Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied. 5 The following table sets forth the Bank's loan originations (including the net effect of refinancings) and the changes in the Bank's portfolio of loans, including purchases, sales and principal reductions for the years indicated:
For the Year Ended December 31, -------------------------------------------------------- 1999 1998 1997 ------------------ ----------------- ----------------- (In thousands) Mortgage Loans At beginning of year $754,065 $602,559 $388,086 Mortgage loans originated: One-to-four family 91,312 83,051 42,756 Co-operative 300 113 475 Multi-family 77,895 84,328 79,976 Commercial 49,744 52,211 17,121 Construction 8,158 3,332 3,016 ------------------ ----------------- ----------------- Total mortgage loans originated 227,409 223,035 143,344 ------------------ ----------------- ----------------- Acquired loans: 1-4 family loans purchased 15,008 27,174 49,965 Commercial mortgages purchased 884 -- -- Acquired NY Federal 1-4 family loans -- -- 901 Acquired NY Federal multi-family loans -- -- 62,405 Acquired NY Federal commercial loans -- -- 11,717 ------------------ ------------------ ----------------- Total acquired mortgage loans 15,892 27,174 124,988 ------------------ ------------------ ----------------- Less: Principal reductions 120,008 98,251 53,416 Mortgage loan foreclosures 374 452 443 ------------------ ------------------ ----------------- At end of year $876,984 $754,065 $602,559 ================== ================= ================= SBA, Consumer and Other Loans At beginning of year $4,515 $4,174 $1,680 Loans originated: SBA loans 2,376 3,741 1,328 Acquired NY Federal SBA -- -- 2,029 Small business loans 2,617 1,316 -- Other loans 1,159 1,467 1,803 ------------------ ----------------- ------------------ Total loans originated 6,152 6,524 5,160 ------------------ ----------------- ----------------- Less: Sales 2,280 2,918 80 Repayments 2,543 3,265 2,586 Charge-offs 96 -- -- ------------------ ----------------- ----------------- At end of year $5,748 $4,515 $4,174 ================== ================= =================
6 Loan Maturity and Repricing. The following table shows the maturity or period to repricing of the Bank's loan portfolio at December 31, 1999. Loans that have adjustable-rates are shown as being due in the period during which the interest rates are next subject to change. The table does not reflect prepayments or scheduled principal amortization, which totaled $120.0 million for the year ended December 31, 1999. Certain adjustable rate loans have features which limit changes in interest rates on a short-term basis and over the life of the loan.
At December 31, 1999 ---------------------------------------------------------------------------------------------------------- Mortgage Loans Other Loans -------------------------------------------------------------------- -------------------------- Total One-to- Consumer Loans Four Family Co-operative Multi-family Commercial Construction SBA and Other Receivable ----------- ------------ ------------ ---------- ------------ -------- --------- ---------- (In thousands) Amounts due: Within one year $39,118 $4,277 $11,939 $13,316 $6,198 $ -- $579 $75,427 ----------- ------------ ------------ ---------- ------------ -------- --------- ---------- After one year (1) One to two years 29,894 844 44,949 11,190 -- 11 625 87,513 Two to three years 20,299 1,193 34,570 15,152 -- 4 1,418 72,636 Three to five 20,428 294 64,007 41,526 -- 419 750 127,424 years Five to ten years 83,519 1,122 100,215 35,694 -- 1,557 7 222,114 Over ten years 220,936 1,196 54,914 20,194 -- 378 -- 297,618 ----------- ------------ ------------ ---------- ------------ -------- --------- ---------- Total due after One year 375,076 4,649 298,655 123,756 -- 2,369 2,800 807,305 ----------- ------------ ------------ ---------- ------------ -------- --------- ---------- Total amounts due $414,194 $8,926 $310,594 $137,072 $ 6,198 $ 2,369 $3,379 $882,732 =========== ============ ============ ========== ============ ======== ========= ==========
(1) Of the $807.3 million of loans due after one year, $435.1 million are adjustable rate loans and $372.2 million are fixed-rate loans. One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured by one-to-four family residences, including townhouses and condominium units, located in its primary lending area. For purposes of the description contained in this section, one-to-four family residential mortgage loans and co-operative apartment loans are collectively referred to herein as "residential mortgage loans." The Bank offers both fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and a general maximum loan amount of $650,000. Loan originations generally result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and persons who respond to Bank marketing efforts and referrals. Residential mortgage loans were $423.1 million, or 47.93% of gross loans, at December 31, 1999. Partly in response to the intense competition for originations of one-to-four family residential mortgage loans, the Bank has a program of correspondent relationships with several mortgage bankers and brokers operating in the New York metropolitan area. Under this program, the Bank purchases individual newly originated one-to-four family loans originated by such correspondents. The loans are underwritten pursuant to the Bank's credit underwriting standards and each loan is reviewed by Bank personnel prior to purchase to ensure conformity with such standards. During 1999, through these relationships, the Bank purchased $15.0 million in one-to-four family mortgage loans, as compared to $27.2 million in 1998 and $50.0 million during 1997. The Bank generally originates residential mortgage loans in amounts up to 80% of the appraised value or the sale price, whichever is less. The Bank may make residential mortgage loans with loan-to-value ratios of up to 95% of the appraised value of the mortgaged property; however, private mortgage insurance is required whenever loan-to-value ratios exceed 80% of the appraised value of the property securing the loan. 7 Traditionally, residential mortgage loans originated by the Bank have been underwritten to FNMA and other agency guidelines to facilitate securitization and sale in the secondary market. These guidelines require, among other things, verification of the loan applicant's income. However, from time to time, and with increasing frequency, the Bank originates residential mortgage loans to self-employed individuals within the Bank's local community without verification of the borrower's level of income, provided that the borrower's stated income is considered reasonable for the borrower's type of business. These loans involve a higher degree of risk as compared to the Bank's other fully underwritten residential mortgage loans as there is a greater opportunity for borrowers to falsify or overstate their level of income and ability to service indebtedness. To mitigate this risk, the Bank typically limits the amount of these loans to 80% of the appraised value of the property or the sale price, whichever is less. These loans also are not as readily salable in the secondary market as the Bank's other fully underwritten loans, either as whole loans or when pooled or securitized. FNMA does not purchase such loans. The Bank believes, however, that its willingness to make such loans is an aspect of its commitment to be a community-oriented bank. Although there are a number of purchasers for such loans, there can be no assurance that such purchasers will continue to be active in the market or that the Bank will be able to sell such loans in the future. The Bank originated $37.3 million, $36.8 million and $26.6 million in loans of this type during 1999, 1998 and 1997, respectively. The Bank's fixed-rate residential mortgage loans typically are originated for terms of 15 and 30 years and are competitively priced based on market conditions and the Bank's cost of funds. The Bank charges origination fees of up to 2%; loans with fees of less than 2% generally carry a higher interest rate. The Bank originated and purchased $24.2 million, $44.3 million and $32.9 million of 15-year fixed-rate residential mortgage loans in 1999, 1998 and 1997, respectively. The Bank also originated and purchased $47.4 million, $30.8 million and $8.0 million of 30-year fixed rate residential mortgage loans in 1999, 1998 and 1997, respectively. These loans have been retained to provide flexibility in the management of the Company's interest rate sensitivity position. At December 31, 1999, $237.5 million, or 56.13%, of the Bank's residential mortgage loans consisted of fixed rate loans. The Bank offers ARM loans with adjustment periods of one, three, five, seven or ten years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the average yield on United States treasury securities, adjusted to a constant maturity which corresponds to the adjustment period of the loan (the "U.S. Treasury constant maturity index") as published weekly by the Federal Reserve Board. From time to time, the Bank may originate ARM loans at an initial rate lower than the U.S. Treasury constant maturity index as a result of a discount on the spread for the initial adjustment period. ARM loans generally are subject to limitations on interest rate increases of 2% per adjustment period and an aggregate adjustment of 6% over the life of the loan. Origination fees of up to 2% are charged for ARM loans; loans with fees of less than 2% generally carry a higher interest rate. The Bank originated and purchased one-to-four family residential ARM loans totaling $35.0 million, $35.2 million and $52.3 million during 1999, 1998 and 1997, respectively. At December 31, 1999, $185.6 million, or 43.87%, of the Bank's residential mortgage loans consisted of ARM loans. The volume and adjustment periods of ARM loans originated by the Bank have been affected by such market factors as the level of interest rates, demand for loans, competition, consumer preferences and the availability of funds. In general, consumers show a preference for ARM loans in periods of high interest rates and for fixed-rate loans when interest rates are low. In periods of declining interest rates, the Bank may experience refinancing activity in ARM loans, whose interest rates may be fully indexed, to fixed-rate loans. The retention of ARM loans in the Bank's portfolio helps reduce the Bank's exposure to interest rate risks. However, in an environment of rapidly increasing interest rates as was experienced in the 1970's, it is possible for the interest rate increase to exceed the maximum aggregate adjustment on ARM loans and negatively affect the spread between the Bank's interest income and its cost of funds. 8 ARM loans generally involve credit risks different from those inherent in fixed-rate loans, primarily because if interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. However, this potential risk is lessened by the Bank's policy of originating ARM loans with annual and lifetime interest rate caps that limit the increase of a borrower's monthly payment. The Bank has not in the past, nor does it currently originate ARM loans which provide for negative amortization. Home Equity Loans. Home equity loans are included in the Bank's portfolio of one-to-four family residential mortgage loans. These loans are offered as adjustable-rate "home equity lines of credit" on which interest only is due for an initial term of 10 years and thereafter principal and interest payments sufficient to liquidate the loan are required for the remaining term, not to exceed 20 years. These loans also may be offered as fully amortizing closed-end fixed-rate loans for terms up to 15 years. All home equity loans are made on one-to-four family residential and condominium units, which are owner-occupied, and are subject to a 80% loan-to-value ratio computed on the basis of the aggregate of the first mortgage loan amount outstanding and the proposed home equity loan. They are granted in amounts from $25,000 to $100,000. The underwriting standards for home equity loans are substantially the same as those for residential mortgage loans. At December 31, 1999, home equity loans totaled $5.4 million, or 0.61%, of gross loans. Multi-Family Lending. Loans secured by multi-family income producing properties (including mixed-use properties) were $310.6 million, or 35.19% of gross loans, at December 31, 1999, all of which were secured by properties located within the Bank's market area. The Bank's multi-family loans had an average principal balance of $532,751 at December 31, 1999, and the largest multi-family loan held in the Bank's portfolio had a principal balance of $6.3 million. Multi-family loans are generally offered at adjustable rates tied to a market index for terms of five to 10 years with adjustment periods from one to five years. On a select and limited basis, multi-family loans may be made at fixed rates for terms of seven, 10 or 15 years. An origination fee of up to 1% is typically charged on multi-family loans. In underwriting multi-family loans, the Bank reviews the expected net operating income generated by the real estate collateral securing the loan, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower's experience in owning or managing similar properties. The Bank typically requires debt service coverage of at least 125% of the monthly loan payment. Multi-family loans generally are made up to 75% of the appraised value of the property securing the loan or the sale price of the property, whichever is less. The Bank generally obtains personal guarantees from these borrowers and typically orders an environmental report on the property securing the loan. Loans secured by multi-family income producing property generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. The increased credit risk is a result of several factors, including the concentration of principal in a smaller number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family income producing property is typically dependent upon the successful operation of the related property. If the cash flow from the property is reduced, the borrower's ability to repay the loan may be impaired. Loans secured by multi-family income producing property also may involve a greater degree of environmental risk. The Bank seeks to protect against this risk through obtaining an environmental report. See "--Asset Quality--REO." 9 Commercial Real Estate Lending. Loans secured by commercial real estate were $137.1 million, or 15.53% of the Bank's gross loans, at December 31, 1999. The Bank's commercial real estate loans are secured by improved properties such as offices, motels, small business facilities, strip shopping centers, warehouses, religious facilities and mixed-use properties. At December 31, 1999, substantially all of the Bank's commercial real estate loans were secured by properties located within the Bank's market area. At that date, the Bank's commercial real estate loans had an average principal balance of $649,629, and the largest of such loans, which was secured by a hotel, had a principal balance of $5.4 million. Typically, commercial real estate loans are originated at a range of $100,000 to $6.0 million. Commercial real estate loans are generally offered at adjustable rates tied to a market index for terms of five to 15 years, with adjustment periods from one to five years. On a select and limited basis, commercial real estate loans may be made at fixed interest rates for terms of seven, 10 or 15 years. An origination fee of up to 1% is typically charged on all commercial real estate loans. In underwriting commercial real estate loans, the Bank employs the same underwriting standards and procedures as are employed in underwriting multi-family loans. Commercial real estate loans generally carry larger loan balances than one-to-four family residential mortgage loans and involve a greater degree of credit risk for the same reasons applicable to multi-family loans. Construction Loans. The Bank's construction loans primarily have been made to finance the construction of one-to-four family residential properties and multi-family residential real estate properties. The Bank's policies provide that construction loans may be made in amounts up to 65% of the estimated value of the developed property and only if the Bank obtains a first lien position on the underlying real estate. In addition, the Bank generally requires firm end-loan commitments, either from the Bank or another financial institution, and personal guarantees on all construction loans. Construction loans are generally made with terms of two years or less and with adjustable interest rates that are tied to a market index. Advances are made as construction progresses and inspection warrants, subject to continued title searches to ensure that the Bank maintains a first lien position. Construction loans outstanding at December 31, 1999 totaled $6.2 million, or 0.70% of gross loans. Construction loans involve a greater degree of risk than other loans because, among other things, the underwriting of such loans is based on an estimated value of the developed property, which can be difficult to ascertain in light of uncertainties inherent in such estimations. In addition, construction lending entails the risk that the project may not be completed due to cost overruns or changes in market conditions. Small Business Administration Lending. With the purchase of New York Federal on September 9, 1997, the Company entered into the SBA market. These loans are extended to small businesses and are guaranteed by the Small Business Administration at 80% of the loan balance for loans with balances of $100,000 or less, and at 75% of the loan balance for loans with balances greater than $100,000. All SBA loans are underwritten in accordance with SBA Standard Operating Procedures and the Bank generally obtains personal guarantees and collateral, where applicable, from SBA borrowers. Typically, SBA loans are originated at a range of $50,000 to $1.0 million with terms ranging from five to 25 years. SBA loans are generally offered at adjustable rates tied to the prime rate (as published in the Wall Street Journal) with adjustment periods of one to three months. The Bank generally sells the guaranteed portion of the SBA loan in the secondary market and retains the servicing rights on these loans collecting a servicing fee of approximately 1%. At December 31, 1999, SBA loans totaled $2.4 million, representing 0.27% of gross loans. 10 Consumer and Other Lending. The Bank originates other loans for business, personal, or household purposes. Total consumer and other loans outstanding at December 31, 1999 amounted to $3.4 million, or 0.38% of gross loans. Business loans are personally guaranteed by the owners, and may also be secured by additional collateral, including equipment and inventory. The maximum loan size for a business loan is $75,000, with a maximum term of five years. Consumer loans generally consist of passbook loans and overdraft lines of credit. Generally, unsecured consumer loans are limited to amounts of $5,000 or less for terms of up to five years. The Bank offers credit cards to its customers through a third party financial institution and receives an origination fee and transactional fees for processing such accounts, but does not underwrite or finance any portion of the credit card receivables. The underwriting standards employed by the Bank for consumer and other loans include a determination of the applicant's payment history on other debts and assessment of the applicant's ability to meet payments on all of his or her obligations. In addition to the creditworthiness of the applicant, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Unsecured loans tend to have higher risk, and therefore command a higher interest rate. Loan Approval Procedures and Authority. The Bank's Board-approved lending policies establish loan approval requirements for its various types of loan products. Pursuant to the Bank's Residential Mortgage Lending Policy, all residential mortgage loans require three signatures for approval. Residential mortgage loans that do not exceed $500,000 must have the approval of the Bank's Senior Mortgage Officer and two other loan officers. For residential mortgage loans greater than $500,000, at least one of the approvals must be from the President, Executive Vice President or a Senior Vice President (collectively, "Authorized Officers") and the other two may be from the Bank's Senior Mortgage Officer, Loan Underwriting Manager or Senior Underwriter. The Loan Committee, the Executive Committee or the full Board of Directors also must approve residential mortgage loans in excess of $650,000. Pursuant to the Bank's Commercial Real Estate Lending Policy, all loans secured by commercial real estate properties and multi-family income producing properties, must be approved by the President or the Executive Vice President upon the recommendation of the Commercial Loan Department Officer. Such loans in excess of $700,000 also require Loan or Executive Committee or Board approval. In accordance with the Bank's Business and Consumer Loan Policies, all business and consumer loans require two signatures for approval, one of which must be from an Authorized Officer. In addition, for business loans, the approval of the Bank's President and ratification by the Loan Committee of the Board of Directors is required. The Bank's Construction Loan Policy requires that the Loan or Executive Committee or the Board of Directors of the Bank must approve all construction loans. Any loan, regardless of type, that deviates from the Bank's written loan policies must be approved by the Loan or Executive Committee or the Bank's Board of Directors. For all loans originated by the Bank, upon receipt of a completed loan application, a credit report is ordered and certain other financial information is obtained. An appraisal of the real estate intended to secure the proposed loan is required. Such appraisals currently are performed by the Bank's staff appraiser or an independent appraiser designated and approved by the Bank. The Bank's Board of Directors annually approves the independent appraisers used by the Bank and approves the Bank's appraisal policy. It is the Bank's policy to require borrowers to obtain title insurance and hazard insurance on all real estate first mortgage loans prior to closing. Borrowers generally are required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and, in some cases, hazard insurance premiums. 11 Loan Concentrations. The maximum amount of credit that the Bank can extend to any single borrower or related group of borrowers generally is limited to 15% of the Bank's unimpaired capital and surplus. Applicable law and regulations permit an additional amount of credit to be extended, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. See "Regulation." However, it is currently the Bank's policy not to extend such additional credit. At December 31, 1999, the Bank had no loans in excess of the maximum dollar amount of loans to one borrower that the Bank was authorized to make. At that date, the three largest concentrations of loans to one borrower consisted of loans secured by a combination of commercial real estate and multi-family income producing properties with an aggregate principal balance of $11.4 million, $8.5 million and $8.1 million for each of the three borrowers. Loan Servicing. At December 31, 1999, the Bank was servicing $32.7 million of mortgage loans and $5.9 million of SBA loans for others. The Bank's policy is to retain the servicing rights to the mortgage and SBA loans that it sells in the secondary market. In order to increase revenue, management intends to continue this policy. Asset Quality Loan Collection. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. In the case of residential mortgage loans and consumer loans, the Bank generally sends the borrower a written notice of non-payment when the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made in order to encourage the borrower to meet with a representative of the Bank to discuss the delinquency. If the loan still is not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent 45 days or more, the Bank may commence foreclosure proceedings against real property that secures the real estate loan and attempt to repossess personal or business property that secures an SBA loan, business loan, consumer loan or co-operative apartment loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure or by the Bank as soon thereafter as practicable. Decisions as to when to commence foreclosure actions for multi-family, commercial real estate and construction loans are made on a case by case basis. Since foreclosure typically halts the sale of the collateral and may be a lengthy procedure in the State of New York, the Bank may consider loan work-out arrangements to work with multi-family or commercial real estate borrowers in an effort to restructure the loan rather than foreclose, particularly if the borrower is, in the opinion of management, able to manage the project. In certain circumstances, on rental properties, the Bank may institute proceedings to seize the rent. On mortgage loans or loan participations purchased by the Bank, for which the seller retains the servicing, the Bank receives monthly reports with which it monitors the loan portfolio. Based upon servicing agreements with the servicers of the loans, the Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 1999, the Bank did not have any loans that were serviced by others. Delinquent Loans and Non-performing Assets. The Bank generally discontinues accruing interest on delinquent loans when a loan is 90 days past due or foreclosure proceedings have been commenced, whichever first occurs. At that time, previously accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to their maturity date but not their payments, however, continue to accrue interest as long as the borrower continues to remit monthly payments. 12 The following table sets forth information regarding all non-accrual loans, loans which are 90 days or more delinquent and still accruing, and real estate owned ("REO") at the dates indicated. During the years ended December 31, 1999, 1998 and 1997, the amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $208,000, $180,000 and $180,000, respectively. These amounts were not included in the Bank's interest income for the respective periods.
At December 31, ---------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (Dollars in thousands) Non-accrual loans: One-to-four family residential $1,349 $1,261 $1,897 $1,835 $2,042 Co-operative apartment 29 15 -- 32 109 Multi-family residential -- -- -- 505 2,119 Commercial real estate 1,779 1,280 512 -- 427 Construction -- -- -- -- -- ------ ------ ------ ------ ------ Total non-accrual mortgage loans 3,157 2,556 2,409 2,372 4,697 Other non-accrual loans 39 41 49 36 50 ------ ------ ------ ------ ------ Total non-accrual loans 3,196 2,597 2,458 2,408 4,747 Loans 90 days or more delinquent and still accruing -- -- -- -- 234 ------ ------ ------ ------ ------ Total non-performing loans 3,196 2,597 2,458 2,408 4,981 Foreclosed real estate 368 77 433 1,218 1,869 ------ ------ ------ ------ ------ Total non-performing assets $3,564 $2,674 $2,891 $3,626 $6,850 ====== ====== ====== ====== ====== Troubled debt restructurings -- -- -- -- -- ====== ====== ====== ====== ====== Non-performing loans to gross loans 0.36% 0.34% 0.41% 0.62% 1.74% Non-performing assets to total assets 0.29% 0.23% 0.27% 0.47% 0.97%
13 REO. The Bank has been aggressively marketing its REO properties. At December 31, 1999, the Bank owned four properties with a carrying value of $368,000. The Bank currently obtains environmental reports in connection with the underwriting of commercial real estate loans, and typically obtains environmental reports in connection with the underwriting of multi-family loans. For all other loans, the Bank obtains environmental reports only if the nature of the current or, to the extent known to the Bank, prior use of the property securing the loan indicates a potential environmental risk. However, the Bank may not be aware of such uses or risks in any particular case, and, accordingly, there is no assurance that real estate acquired by the Bank in foreclosure is free from environmental contamination or that, if any such contamination or other violation exists, the Bank will not have any liability therefor. Allowance for Loan Losses The Bank has established and maintains on its books an allowance for loan losses that is designed to provide reserves for estimated losses inherent in the Bank's overall loan portfolio. The allowance is established through a provision for loan losses based on management's evaluation of the risk inherent in the various components of its loan portfolio and other factors, including historical loan loss experience, changes in the composition and volume of the portfolio, collection policies and experiences, trends in the volume of non-accrual loans and regional and national economic conditions. The Company maintains an internal loan review committee that reviews the quality of loans and reports to the Loan Committee of the Board of Directors on a monthly basis. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by the Bank's staff appraiser; however, the Bank may from time to time obtain independent appraisals for significant properties. Current year charge-offs, charge-off trends, new loan production and current balance by particular loan categories also are taken into account in determining the appropriate amount of the allowance. In assessing the adequacy of the allowance, management reviews the Bank's loan portfolio by separate categories which have similar risk and collateral characteristics; e.g. commercial real estate, multi-family real estate, one-to-four family residential loans, co-operative apartment loans, SBA loans, business loans and consumer loans. General provisions are established against performing loans in the Bank's portfolio in amounts deemed prudent from time to time based on the Bank's qualitative analysis of the factors described above. The determination of the amount of the allowance for loan losses also includes a review of loans on which full collectibility is not reasonably assured. The primary risk element considered by management with respect to each one-to-four family residential loan, co-operative apartment loan, SBA loan, business loan and consumer loan is any current delinquency on the loan. The primary risk elements considered with respect to commercial real estate and multi-family loans are the financial condition of the borrower, the sufficiency of the collateral (including changes in the value of the collateral) and the record of payment. The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS and the Federal Deposit Insurance Corporation ("FDIC"), which can require the establishment of additional general allowances or specific loss allowances or require charge-offs. Such authorities may require the Bank to make additional provisions to the allowance based on their judgments about information available to them at the time of their examination. An OTS policy statement provides guidance for OTS examiners in determining whether the levels of general valuation allowances for savings institutions are adequate. The policy statement requires that if a savings institution's general valuation allowance policies and procedures are deemed to be inadequate, the general valuation allowance would be compared to certain ranges of general valuation allowances deemed acceptable by the OTS depending in part on the savings institution's level of classified assets. 14 The Bank's provision for loan losses was $36,000, $214,000 and $104,000 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the total allowance for loan losses was $6.8 million, representing 213.29% of non-performing loans and 191.29% of non-performing assets, compared to ratios of 260.36% and 252.83% respectively, at December 31, 1998. The Bank continues to monitor and modify the level of its allowance for loan losses in order to maintain the allowance at a level which management considers adequate to provide for probable loan losses based on available information. Management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions and the composition of its loan portfolio and other available information and the Board of Directors concurs in this belief. However, many factors may require additions to the allowance for loan losses in future periods beyond those currently revealed. These factors include future adverse changes in economic conditions, changes in interest rates and changes in the financial capacity of individual borrowers (any of which may affect the ability of borrowers to make repayments on loans), changes in the real estate market within the Bank's lending area and the value of collateral, or a review and evaluation of the Bank's loan portfolio in the future. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions, interest rates and other factors. In addition, the Bank's increased emphasis on commercial real estate and multi-family loans can be expected to increase the overall level of credit risk inherent in the Bank's loan portfolio. The greater risk associated with commercial real estate, multi-family loans and construction loans may require the Bank to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans that is in excess of the allowance currently maintained by the Bank. Provisions for loan losses are charged against net income. See "--Lending Activities" and "--Asset Quality." 15 The following table sets forth changes in, and the balance of, the Bank's allowance for loan losses at and for the dates indicated.
At and For the Year Ended December 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------- ------- ------- ------- (Dollars in thousands) Balance at beginning of year 6,762 $ 6,474 $ 5,437 $ 5,310 $ 5,370 Provision for loan losses 36 214 104 418 496 Provision acquired from NY Federal -- -- 979 -- -- Loans charged-off: One-to-four family 32 91 85 220 312 Co-operative 2 -- 44 162 183 Multi-family -- -- -- 41 251 Commercial -- -- -- 68 260 Construction -- -- -- -- -- Other 99 12 77 44 46 ------ ------- ------- ------- ------- Total loans charged-off 133 103 206 535 1,052 ------ ------- ------- ------- ------- Recoveries: Mortgage loans 153 177 155 244 496 Other -- -- 5 -- -- ------ ------- ------- ------- ------- Total recoveries 153 177 160 244 496 ------ ------- ------- ------- ------- Balance at end of year 6,818 $ 6,762 $ 6,474 $ 5,437 $ 5,310 ====== ======= ======= ======= ======= Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year (0.00)% (0.01)% 0.01% 0.09% 0.21% Ratio of allowance for loan losses to gross loans at end of the year 0.77% 0.89% 1.07% 1.39% 1.85% Ratio of allowance for loan losses to non-performing loans at the end of year 213.29% 260.36% 263.38% 225.79% 106.61% Ratio of allowance for loan losses to non-performing assets at the end of year 191.29% 252.83% 223.94% 149.94% 77.52%
16 The following table sets forth the Bank's allocation of its allowance for loan losses to the total amount of loans in each of the categories listed at the dates indicated. The numbers contained in the "Amount" column indicate the allowance for loan losses allocated for each particular loan category. The numbers contained in the column entitled "Percentage of Loans in Category to Total Loans" indicate the total amount of loans in each particular category as a percentage of the Bank's total loan portfolio.
At December 31, ----------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- --------------------- Percentage Percentage Percentage of Loans in of Loans in of Loans in Category to Category to Category to Loan Category Amount Total Loans Amount Total Loans Amount Total Loans - ------------------------------------------------------------------- ------------------- --------------------- (Dollars in thousands) Mortgage Loans: One-to-four family $1,903 46.92% $2,575 47.69% $1,711 47.67% Co-operative 144 1.01 278 1.35 510 1.99 Multi-family 1,216 35.19 1,395 36.57 1,021 37.95 Commercial 3,003 15.53 1,990 13.37 3,073 11.24 Construction 24 0.70 114 0.42 128 0.46 ------------------ ------------------ ------------------- Total mortgage loans 6,290 99.35 6,352 99.40 6,443 99.31 Small Business Administration loans 237 0.27 273 0.35 23 0.46 Other Loans 291 0.38 137 0.25 8 0.23 ------------------ ------------------ ------------------- Total loans $6,818 100.00% $6,762 100.00% $6,474 100.00% ================== ================== =================== At December 31, ------------------------------------------- 1996 1995 ------------------- -------------------- Percentage Percentage of Loans in of Loans in Category to Category to Loan Category Amount Total Loans Amount Total Loans - ------------------------------------------------------------------- -------------------- Mortgage Loans: One-to-four family $1,065 57.28% $1,126 54.20% Co-operative 458 3.40 407 5.11 Multi-family 1,456 26.91 1,625 24.11 Commercial 2,434 11.98 2,139 15.77 Construction -- -- -- -- ------------------------ ------------------- Total mortgage loans 5,413 99.57 5,297 99.19 Small Business Administration loans -- -- -- -- Other Loans 24 0.43 13 0.81 ------------------------ ------------------- Total loans $5,437 100.00% $5,310 100.00% ======================== ===================
17 Investment Activities General. The investment policy of the Company, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of its overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement the Bank's lending activities and to provide and maintain liquidity. In establishing its investment strategies, the Company considers its business and growth strategies, the economic environment, its interest rate risk exposure, its interest rate sensitivity "gap" position, the types of securities to be held, and other factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Management Strategy," included in the Annual Report and incorporated herein by reference. Federally chartered savings institutions have authority to invest in various types of assets, including U.S. government obligations, securities of various federal agencies, mortgage-backed and mortgage-related securities, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, reverse repurchase agreements, loans of federal funds, and, subject to certain limits, corporate securities, commercial paper and mutual funds. All mortgage-backed securities held by the Company and the Bank are directly or indirectly insured or guaranteed by Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") or the Government National Mortgage Association ("GNMA"). The Investment Committee of the Bank and the Company meets quarterly to monitor investment transactions and to establish investment strategy. The Board of Directors reviews the investment policy on an annual basis and investment activity on a monthly basis. The Company classifies its investment securities as available for sale. Unrealized gains and losses for available-for-sale securities are excluded from earnings and included in Accumulated Other Comprehensive Income (a separate component of equity), net of taxes. At December 31, 1999, the Company had $285.0 million in securities available for sale which represented 22.81% of total assets. These securities had an aggregate market value at that date that was approximately 2.4 times the amount of the Company's equity at that date. The cumulative balance of unrealized net losses on securities available for sale was $4.5 million, net of taxes, at December 31, 1999. As a result of the magnitude of the Company's holdings of securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant fluctuations in the equity of the Company. See Note 6 of "Notes to Consolidated Financial Statements," included in the Annual Report and incorporated herein by reference. The Company may from time to time sell securities and realize a loss if the proceeds of such sale may be reinvested in loans or other assets offering more attractive yields. At December 31, 1999, the Company had no investment in a particular issuer's securities that either alone, or together with any investments in the securities of any affiliate(s) of such issuer, exceeded 10% of the Company's equity. 18 The table below sets forth certain information regarding the amortized cost and market values of the Company's and Bank's securities portfolio, interest bearing deposits and federal funds, and FHLB-NY stock at the dates indicated. Securities available for sale are recorded at market value. See Note 6 of Notes to Consolidated Financial Statements, included in the Annual Report, incorporated herein by reference.
At December 31, ------------------------------------------------------------------------------ 1999 1998 1997 ---------------------- ---------------------- ---------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value ---------------------- ---------------------- ---------------------- (In thousands) Securities available for sale Bonds and other debt securities: U.S. government and agencies $ 10,988 $ 10,636 $ 13,213 $ 13,425 $120,106 $120,123 Corporate debentures -- -- 4,711 4,710 13,149 13,178 Public utility 1,001 1,004 945 944 2,247 2,271 ---------------------- ---------------------- ---------------------- Total bonds and other debt securities 11,989 11,640 18,869 19,079 135,502 135,572 ---------------------- ---------------------- ---------------------- Equity securities: Common stock 1,655 1,670 2,390 2,776 606 1,187 Preferred stock 2,676 2,684 2,309 2,414 2,768 2,843 ---------------------- ---------------------- ---------------------- Total equity securities 4,331 4,354 4,699 5,190 3,374 4,030 ---------------------- ---------------------- ---------------------- Mortgage-backed securities: FHLMC 9,758 9,657 14,831 14,894 34,015 34,120 FNMA 14,639 14,602 20,717 21,102 55,559 56,068 GNMA 252,626 244,763 265,089 266,425 125,585 126,922 ---------------------- ---------------------- ---------------------- Total mortgage-backed securities 277,023 269,022 300,637 302,421 215,159 217,110 ---------------------- ---------------------- ---------------------- Total securities available for sale 293,343 285,016 324,205 326,690 354,035 356,712 ---------------------- ---------------------- ---------------------- Interest-bearing deposits and Federal funds sold 9,019 9,019 12,008 12,008 84,838 84,838 FHLB--New York stock 22,592 22,592 17,320 17,320 14,356 14,356 ---------------------- ---------------------- ---------------------- Total $324,954 $316,627 $353,533 $356,018 $453,229 $455,906 ====================== ====================== ======================
Mortgage-backed securities. All of the mortgage-backed securities currently held by the Company are issued or guaranteed by FNMA, FHLMC or GNMA. At December 31, 1999, the Company had $269.0 million invested in mortgage-backed securities, of which $13.7 million was invested in adjustable-rate mortgage-backed securities. The mortgage loans underlying these adjustable-rate securities generally are subject to limitations on annual and lifetime interest rate increases. The Company anticipates that investments in mortgage-backed securities may continue to be used in the future to supplement mortgage lending activities. Mortgage-backed securities are more liquid than individual mortgage loans and may be used more easily to collateralize obligations of the Bank. 19 The following table sets forth the Company's mortgage-backed securities purchases, sales and principal repayments for the years indicated:
For the Year Ended December 31, ------------------------------------------ 1999 1998 1997 ------------------------------------------ (In thousands) At beginning of year $ 302,421 $ 217,110 $ 141,038 Purchases of mortgage-backed securities 59,059 245,942 136,063 Amortization of unearned premium, net of accretion of unearned discount (2,064) (1,386) (473) Net change in unrealized gains (losses) on mortgage-backed securities available for sale (9,792) (189) 2,830 Sales of mortgage-backed securities -- (66,136) (33,934) Principal repayments received on mortgage-backed securities (80,602) (92,920) (28,414) ------------------------------------------ Net increase(decrease) in mortgage-backed securities (33,399) 85,311 76,072 ------------------------------------------ At end of year $ 269,022 $ 302,421 $ 217,110 ==========================================
While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and value of such securities. The Bank held no collateralized mortgage obligations ("CMO") at December 31, 1999, 1998 and 1997. The Bank does not have any derivative instruments, including CMO's, with market values that are extremely sensitive to changes in interest rates. 20 The table below sets forth certain information regarding the amortized cost, estimated fair value, annualized weighted average yields and maturities of the Company's and the Bank's debt and equity securities at December 31, 1999. The stratification of balances is based on stated maturities. Equity securities and the FHLB-New York stock are shown as immediately maturing, except for preferred stocks with stated redemption dates, which are shown in the period they are scheduled to be redeemed. Assumptions for repayments and prepayments are not reflected for mortgage-backed securities. The Company and the Bank carry these investments at their estimated fair value in the consolidated financial statements.
At December 31, 1999 ------------------------------------------------------------------------------ Five to Ten More than Ten One Year or Less One to Five Years Years Years ----------------- ------------------ ----------------- ----------------- Weighted Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield ----------------- ------------------ ----------------- ----------------- (Dollars in thousands) Securities available for sale Bonds and other debt securities: U.S. government agencies -- -- -- -- $5,988 7.83% $5,000 6.68% Public utility -- -- 1,001 7.96 -- -- -- -- ----------------- ----------------- ----------------- ----------------- Total bonds and other debt securities -- -- -- -- 6,989 7.85 5,000 6.68 ----------------- ----------------- ----------------- ----------------- Equity securities: Common stock $ 1,655 1.50% -- -- -- -- -- -- Preferred stock 835 8.84 $1,533 8.08% 308 7.29 -- -- ----------------- ----------------- ----------------- ----------------- Total equity securities 2,490 3.96 1,533 8.08 308 7.29 -- -- ----------------- ----------------- ----------------- ----------------- Mortgage-backed securities: FHLMC 427 7.11 -- -- 1,298 8.09 8,033 7.52 FNMA 52 7.10 -- -- 2,657 6.79 11,930 7.75 GNMA -- -- -- -- 11 7.31 252,615 7.37 ----------------- ----------------- ----------------- ----------------- Total mortgage-backed securities 479 7.11 -- -- 3,966 7.22 272,578 7.39 ----------------- ----------------- ----------------- ----------------- Interest-bearing deposits and Federal Funds sold 9,019 4.05 -- -- -- -- -- -- FHLB--New York stock 22,592 6.75 -- -- -- -- -- -- ------------------ ----------------- ----------------- ----------------- Total securities $34,580 5.85% $1,533 8.08% $11,264 7.61% $277,578 7.38% ================= ================= ================= ================= At December 31, 1999 ------------------------------------------ Total Securities ------------------------------------------ Average Remaining Weighted Years to Amortized Estimated Average Maturity Cost Fair Value Yield ------------------------------------------ Securities available for sale Bonds and other debt securities: U.S. government agencies 10.01 $10,988 $10,636 7.31% Public utility 8.81 1,001 1,004 7.96 ------------------------------------------ Total bonds and other debt securities 9.91 11,989 11,640 7.36 ------------------------------------------ Equity securities: Common stock N/A 1,655 1,670 1.50 Preferred stock 1.91 2,676 2,684 8.23 ------------------------------------------ Total equity securities 1.19 4,331 4,354 5.66 ------------------------------------------ Mortgage-backed securities: FHLMC 19.46 9,758 9,657 7.58 FNMA 20.13 14,639 14,602 7.57 GNMA 28.12 252,626 244,763 7.37 ------------------------------------------ Total mortgage-backed securities 27.39 277,023 269,022 7.39 ------------------------------------------ Interest-bearing deposits and Federal Funds sold N/A 9,019 9,019 4.05 FHLB--New York stock N/A 22,592 22,592 6.75 ------------------------------------------ Total securities 26.44 $324,954 $316,627 7.23% ==========================================
21 Sources of Funds General. Deposits, FHLB-NY borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, and proceeds from sales of loans and securities are the Company's primary sources of funds for lending, investing and other general purposes. Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank's deposits principally consist of passbook accounts, money market accounts, demand accounts, NOW accounts and certificates of deposit. The Bank has a relatively stable retail deposit base drawn from its market area through its nine full service offices. The Bank seeks to retain existing depositor relationships by offering quality service and competitive interest rates, while keeping deposit growth within reasonable limits. It is management's intention to balance its goal to remain competitive in interest rates on deposits while seeking to manage its cost of funds to finance its strategies. The Bank's core deposits, consisting of passbook accounts, NOW accounts, money market accounts, and non-interest bearing demand accounts, are typically more stable and lower costing than other sources of funding. However, the flow of deposits into a particular type of account is influenced significantly by general economic conditions, changes in prevailing money market and other interest rates, and competition. Certificate of deposit accounts opened with the Bank during the past several years were generally opened at rates which were lower than the weighted average rate paid by the Bank on its certificate of deposit accounts, and, maturing certificate of deposit accounts were generally reinvested by depositors in new certificate of deposit accounts which paid a lower rate than was paid on the maturing deposit. As a result, the Bank saw the cost of its certificate of deposit accounts decline to 5.24% in 1999 from 5.61% in 1998 and 5.68% in 1997. The decline in the cost of certificate of deposit accounts, coupled with a reduced rate paid on passbook accounts, resulted in the Bank's cost of interest-bearing deposits declining to 3.96% in 1999 from 4.43% in 1998 and 4.44% in 1997. During the second half of 1999, as interest rates began to increase, the Bank raised interest rates on its certificate of deposit accounts to remain competitive. The interest rates paid on certificate of deposit accounts opened during the later part of 1999 were generally at levels that were above the Bank's weighted average cost of existing certificate of deposit accounts. A continuation of increasing interest rates, or of rates on new certificate of deposit accounts at levels above the overall cost of funds being paid at year end, could result in an increase in the Company's cost of deposits and a narrowing of the Company's net interest margin. Included in deposits are certificates of deposit with a balance of $100,000 or greater totaling $43.0 million, $30.5 million and $29.9 million at December 31, 1999, 1998 and 1997, respectively. 22 The following table sets forth the distribution of the Bank's deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented.
At December 31, --------------------------------------------------------------------- 1999 1998 ---------------------------------- ---------------------------------- Percent Weighted Percent Weighted of Average of Average Total Nominal Total Nominal Amount Deposits Rate Amount Deposits Rate ----------- -------- --------- ----------- -------- ---------- (Dollars in thousands) Passbook accounts (1) $195,910 29.37% 2.07% $203,949 30.71% 2.29% NOW accounts (1) 27,463 4.12 1.90 26,788 4.03 1.90 Demand accounts (1) 20,490 3.07 -- 27,505 4.14 -- Mortgagors' escrow deposits 11,023 1.65 0.79 6,563 0.99 1.06 ----------- -------- --------- ----------- -------- ---------- Total 254,886 38.21 1.83 264,805 39.87 1.98 ----------- ------- --------- ----------- -------- ---------- Money market accounts (1) 40,378 6.05 3.23 28,439 4.28 2.69 Certificate of deposit accounts with original maturities of: 6 Months and less 46,265 6.94 4.36 54,268 8.17 4.30 6 to 12 Months 64,499 9.67 4.73 81,092 12.21 4.96 12 to 30 Months 171,087 25.67 5.42 139,397 21.00 5.71 30 to 48 Months 28,632 4.29 6.07 41,543 6.26 6.17 48 to 72 Months 60,309 9.04 6.24 50,323 7.58 6.22 72 Months or more 885 0.13 6.31 4,192 0.63 6.54 ----------- --------- --------- ----------- -------- ---------- Total certificate of deposit accounts 371,677 55.74 5.36 370,815 55.85 5.47 ----------- --------- --------- ----------- -------- ---------- Total deposits (2) $666,941 100.00% 3.88% $664,059 100.00% 3.96% =========== ========= ========= =========== ======== ========== At December 31, -------------------------------------- 1997 ------------------------------------- Percent Weighted of Average Total Nominal Amount Deposits Rate -------------- --------- ---------- Passbook accounts (1) $201,668 30.75% 2.90% NOW accounts (1) 23,825 3.63 1.90 Demand accounts (1) 19,263 2.94 -- Mortgagors' escrow deposits 4,900 0.75 1.17 -------------- --------- ---------- Total 249,656 38.07 2.55 -------------- --------- ---------- Money market accounts (1) 23,526 3.59 2.86 Certificate of deposit accounts with original maturities of: 6 Months and less 61,916 9.44 5.31 6 to 12 Months 75,340 11.49 5.53 12 to 30 Months 130,414 19.87 6.05 30 to 48 Months 56,209 8.57 6.48 48 to 72 Months 54,406 8.29 6.36 72 Months or more 4,444 0.68 6.67 -------------- --------- ---------- Total certificate of deposit accounts 382,729 58.34 5.94 -------------- --------- ---------- Total deposits (2) $655,911 100.00% 4.54% ============== ========= ==========
- ---------- (1) Weighted average nominal rate as of the year end date equals the stated rate offered. (2) Included in the above balances are IRA and Keogh deposits totaling $86.8 million, $86.4 million and $85.8 million at December 31, 1999, 1998 and 1997, respectively. 23 The following table presents by various rate categories, the amount of certificate of deposit accounts outstanding at the dates indicated and the years to maturity of the certificate accounts outstanding at December 31, 1999.
At December 31, 1999 At December 31, ------------------------------------------------------ ----------------------------------------- Within One One to Three There- 1999 1998 1997 Year Year after Total ------------ ------------ -------------- ------------- ------------- ------------- ------------ (Dollars in thousands) Certificate of deposit accounts: 2.99 or less $370 $136 $625 $275 $95 -- $370 3.00 to 3.99 5,717 22,234 -- 5,717 -- -- 5,717 4.00 to 4.99 131,874 82,899 21,265 122,392 7,755 $1,727 131,874 5.00 to 5.99 172,863 161,122 220,994 62,027 92,959 17,877 172,863 6.00 to 6.99 49,392 92,038 124,682 15,019 23,781 10,592 49,392 7.00 to 7.99 11,461 12,386 15,163 7,363 4,098 -- 11,461 ----------- ------------ ------------- ------------ ------------ ----------- ------------ Total $371,677 $370,815 $382,729 $212,793 $128,688 $30,196 $371,677 =========== ============ ============= ============ ============ =========== ============
The following table presents by various maturity categories the amount of certificate of deposit accounts with balances of $100,000 or more at December 31, 1999 and their annualized weighted average interest rates.
Amount Weighted Average Rate -------------- --------------------- (Dollars in thousands) Maturity Period: Three months or less $10,578 5.11% Over three through six months 5,399 5.18 Over six through 12 months 7,242 5.53 Over 12 months 19,773 5.90 ---------- ------------ Total $42,992 5.55% ========== ============
The following table presents the deposit activity of the Bank for the periods indicated.
For the Year Ended December 31, ----------------------------------------- 1999 1998 1997 ------------ ------------ ----------- Net deposits/withdrawals) (1) $(22,100) $(19,824) $(6,009) Interest credited on deposits 24,982 27,972 26,566 Deposits acquired from New York Federal -- -- 50,875 ------------ ------------ ----------- Total increase (decrease) in deposits $ 2,882 $8,148 $71,432 ============ ============ ===========
- ---------- (1) Includes mortgagors' escrow deposits. 24 The following table sets forth the distribution of the Bank's average deposit accounts for the years indicated, the percentage of total deposit portfolio, and the average interest cost of each deposit category presented. Average balances for all years shown are derived from daily balances.
For The Year Ended December 31, ------------------------------------------------------------------------------- 1999 1998 -------------------------------------- -------------------------------------- Percent of Percent of Average Total Average Average Total Average Balance Deposits Cost Balance Deposits Cost -------------------------------------- -------------------------------------- (Dollars in thousands) Passbook accounts $200,601 30.19% 2.07% $202,291 30.53% 2.74% NOW accounts 26,281 3.96 1.90 24,375 3.68 1.91 Demand accounts 24,624 3.71 -- 26,177 3.95 -- Mortgagors' escrow deposits 11,718 1.76 0.79 6,724 1.01 1.06 -------------------------------------- -------------------------------------- Total 263,224 39.62 1.80 259,567 39.17 2.34 Money market accounts 36,191 5.45 3.05 26,240 3.96 2.95 Certificate of deposit accounts 364,947 54.93 5.24 376,787 56.87 5.61 -------------------------------------- -------------------------------------- Total deposits $664,362 100.00% 3.76% $662,594 100.00% 4.22% ====================================== ====================================== For The Year Ended December 31, -------------------------------------- 1997 -------------------------------------- Percent of Average Total Average Balance Deposits Cost -------------------------------------- Passbook accounts $206,196 33.56% 2.85% NOW accounts 22,679 3.69 1.90 Demand accounts 12,306 2.00 -- Mortgagors' escrow deposits 6,044 0.98 1.17 -------------------------------------- Total 247,225 40.23 2.58 Money market accounts 24,367 3.97 2.84 Certificate of deposit accounts 342,898 55.80 5.68 -------------------------------------- Total deposits $614,490 100.00% 4.32% ======================================
Borrowings. Although deposits are the Bank's primary source of funds, the Bank has increased utilization of borrowings as an alternative and cost effective source of funds for lending, investing and other general purposes. The Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such advances generally are secured by a blanket lien against the Bank's mortgage portfolio and the Bank's investment in the stock of the FHLB-NY. In addition, the Bank may pledge mortgage-backed securities to obtain advances from the FHLB-NY. See "Regulation -- Federal Home Loan Bank System". The maximum amount that the FHLB-NY will advance for purposes other than for meeting withdrawals fluctuates from time to time in accordance with the policies of the FHLB-NY. The Bank also enters into repurchase agreements with the FHLB-NY. These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the Company's consolidated financial statements. The cost of borrowed funds was 6.02%, 6.16% and 6.22% for 1999, 1998 and 1997, respectively. The average balances of borrowed funds were $379.3 million, $303.6 million and $132.3 million for 1999, 1998 and 1997, respectively. 25 The following table sets forth certain information regarding the Bank's borrowed funds at or for the periods ended on the dates indicated.
At or For the Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 ----------------- ----------------- --------------- (Dollars in thousands) Securities Sold with the Agreement to Repurchase Average balance outstanding $118,849 $110,274 $6,904 Maximum amount outstanding at any month end during the period $120,000 $130,000 $100,000 Balance outstanding at the end of period $110,000 $120,000 $100,000 Weighted average interest rate during the period 5.83% 5.81% 5.84% Weighted average interest rate at end of period 5.81% 5.83% 5.83% FHLB-NY Advances Average balance outstanding $260,410 $193,299 $125,295 Maximum amount outstanding at any month end during the period $341,831 $216,406 $187,112 Balance outstanding at the end of period $341,831 $215,458 $187,112 Weighted average interest rate during the period 6.11% 6.36% 6.34% Weighted average interest rate at end of period 6.09% 6.26% 6.34% Other Borrowings Average balance outstanding -- -- $75 Maximum amount outstanding at any month end during the period -- -- $75 Balance outstanding at the end of period -- -- $75 Weighted average interest rate during the period -- -- -- Weighted average interest rate at end of period -- -- -- Total Borrowings Average balance outstanding $379,259 $303,573 $132,274 Maximum amount outstanding at any month end during the period $451,831 $346,406 $287,187 Balance outstanding at the end of period $451,831 $335,458 $287,187 Weighted average interest rate during the period 6.02% 6.16% 6.22% Weighted average interest rate at end of period 6.02% 6.11% 6.16%
26 Subsidiary Activities At December 31, 1999, the Bank had three wholly-owned subsidiaries: FSB Properties, Inc. ("Properties"), Flushing Preferred Funding Corporation ("FPFC") and Flushing Service Corporation. (a) Properties was formed in 1976 under the Bank's New York State leeway investment authority. The original purpose of Properties was to engage in joint venture real estate equity investments. The Bank discontinued these activities in 1986. The last joint venture in which Properties was a partner was dissolved in 1989. The last remaining property acquired by the dissolution of these joint ventures was disposed of in 1998. (b) FPFC was formed in the fourth quarter of 1997 as a real estate investment trust for the purpose of acquiring, holding and managing real estate mortgage assets. (c) Flushing Service Corporation was formed in 1998 to market insurance products and mutual funds. The insurance products and mutual funds sold are products of unrelated insurance and securities firms from which the service corporation earns a commission. Personnel At December 31, 1999, the Bank had 178 full-time employees and 57 part-time employees. None of the Bank's employees are represented by a collective bargaining unit, and the Bank considers its relationship with its employees to be good. 27 RISK FACTORS In addition to the other information contained in this Annual Report on Form 10-K, the following factors and other considerations should be considered carefully in evaluating the Company, the Bank and their business. Effect of Interest Rates Like most financial institutions, the Company's results of operations depends to a large degree on its net interest income. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, a significant increase in market interest rates could adversely affect net interest income. Conversely, under such circumstances, a significant decrease in market interest rates could result in increased net interest income. As a general matter, the Company seeks to manage its business to limit its overall exposure to interest rate fluctuations. However, fluctuations in market interest rates are neither predictable nor controllable and may have a material adverse impact on the operations and financial condition of the Company. Prevailing interest rates also affect the extent to which borrowers prepay and refinance loans. Declining interest rates tend to result in an increased number of loan prepayments and loan refinancings to lower than original interest rates, as well as prepayments of mortgage-backed securities. Such prepayments and refinancings adversely affect the average yield on the Company's loan and mortgage-backed securities portfolio, the value of mortgage loans and mortgage-backed securities in the Company's portfolio, the levels of such assets that are retained by the Company, net interest income and loan servicing income. However, the Bank may receive additional loan fees when existing loans are refinanced, which may partially offset reduced yield on the Bank's loan portfolio resulting from prepayments. In periods of low interest rates, the Bank's level of core deposits also may decline if depositors seek higher yielding instruments or other investments not offered by the Bank, which in turn may increase the Bank's cost of funds and decrease its net interest margin to the extent alternative funding sources are utilized. Significant increases in prevailing interest rates may significantly affect demand for loans and value of bank collateral. See "--Local Economic Conditions." Lending Activities Multi-family and commercial real estate loans, the increased origination of which is part of management's strategy, and construction loans, the level of which remains low but has been increasing, are generally viewed as exposing the lender to a greater risk of loss than fully underwritten one-to-four family residential loans and typically involve higher principal amounts per loan. Repayment of multi-family and commercial real estate loans generally is dependent, in large part, upon sufficient income from the property to cover operating expenses and debt service. Repayment of construction loans is contingent upon the successful completion and operation of the project. Changes in local economic conditions and government regulations, which are outside the control of the borrower or lender, also could affect the value of the security for the loan or the future cash flow of the affected properties. As a result of management's strategy to increase its originations of one-to-four family mortgage loans through more aggressive marketing, and the Bank's commitment to be a community-oriented bank, the Bank increased substantially the origination of residential mortgage loans to self-employed individuals within the Bank's local community without verification of the borrower's level of income. These loans involve a higher degree of risk as compared to the Bank's other fully underwritten residential mortgage loans as there is a greater opportunity for borrowers to falsify or overstate their level of income and ability to service indebtedness. To mitigate this risk, the Bank typically limits the amount of these loans to 80% of the appraised value or sale price, whichever is less. These loans are not as readily salable in the secondary market as the Bank's other fully underwritten loans, either as whole loans or when pooled or securitized. 28 There can be no assurance that the Bank will be able to successfully implement its business strategies. In assessing the future earnings prospects of the Bank, investors should consider, among other things, the Bank's level of origination of one-to-four family loans, the Bank's emphasis on commercial real estate and multi-family loans and the greater risks associated with such loans. See "Business -- Lending Activities". Competition The Bank faces intense and increasing competition both in making loans and in attracting deposits. The Bank's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than the Bank, and all of which are competitors of the Bank to varying degrees. The future earnings prospects of the Bank will be affected by the Bank's ability to compete effectively with other financial institutions and to implement its business strategies. See "Business - Market Area and Competition." Local Economic Conditions Although general economic conditions in the New York City metropolitan area have improved since the early 1990's, there can be no assurance that the local economy will continue to improve or remain at current conditions. A decline in the local economy, national economy or metropolitan area real estate market could adversely affect the financial condition and results of operations of the Company, including through decreased demand for loans or increased competition for good loans, increased non-performing loans and loan losses and resulting additional provisions for loan losses and for losses on real estate owned. Although management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions, many factors may require additions to the allowance for loan losses in future periods above those currently revealed. These factors include: (i) adverse changes in economic conditions and changes in interest rates that may affect the ability of borrowers to make payments on loans, (ii) changes in the financial capacity of individual borrowers, (iii) changes in the local real estate market and the value of the Bank's loan collateral, and (iv) future review and evaluation of the Bank's loan portfolio, internally or by regulators. The amount of the allowance for loan losses at any time represents good faith estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions, prevailing interest rates and other factors. See "Business - Allowance for Loan Losses." Legislation and Proposed Changes From time to time, legislation is enacted or regulations are promulgated that have the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the New York legislature and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Bank or the Company. Certain Anti-Takeover Provisions On September 17, 1996, the Company adopted a Stockholder Rights Plan (the "Rights Plan") designed to preserve long-term values and protect stockholders against stock accumulations and other abusive tactics to acquire control of the Company. Under the Rights Plan, each stockholder of record at the close of business on September 30, 1996 received a dividend distribution of one right to purchase from the Company one one-hundredth-fiftieth of a share of a new series of junior participating preferred stock at a price of $64, 29 subject to certain adjustments. The rights will become exercisable only if any person or group acquires 15% or more of the Company's common stock ("Common Stock") or commences a tender or exchange offer which, if consummated, would result in that person or group owning at least 15% of the Common Stock (the "acquiring person or group"). In such case, all stockholders other than the acquiring person or group will be entitled to purchase, by paying the $64 exercise price, Common Stock (or a common stock equivalent) with a value of twice the exercise price. In addition, at any time after such event, and prior to the acquisition by any person or group of 50% or more of the Common Stock, the Board of Directors may, at its option, require each outstanding right (other than rights held by the acquiring person or group) to be exchanged for one share of Common Stock (or one common stock equivalent). The rights expire on September 30, 2006. The Rights Plan, as well as certain provisions of the Company's Certificate of Incorporation and Bylaws, the Bank's federal Stock charter and Bylaws, certain federal regulations and provisions of Delaware corporation law, and certain provisions of remuneration plans and agreements applicable to employees and officers of the Bank may have anti-takeover effects by discouraging potential proxy contests and other takeover attempts, particularly those which have not been negotiated with the Board of Directors. The Rights Plan and those other provisions, as well as applicable regulatory restrictions, may also prevent or inhibit the acquisition of a controlling position in the Common Stock and may prevent or inhibit takeover attempts that certain stockholders may deem to be in their or other stockholders' interest or in the interest of the Company or the Bank, or in which stockholders may receive a substantial premium for their shares over then current market prices. The Rights Plan and those other provisions may also increase the cost of, and thus discourage, any such future acquisition or attempted acquisition, and would render the removal of the current Board of Directors or management of the Bank or the Company more difficult. 30 FEDERAL, STATE AND LOCAL TAXATION The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. Federal Taxation General. The Company reports its income using a calendar year and the accrual method of accounting. The Company is subject to the federal tax laws and regulations which apply to corporations generally; including, since the enactment of the Small Business Job Protection Act in 1996 (the "Act"), those governing the Bank's deductions for bad debts, described below. Bad Debt Reserves. Prior to the enactment of the Act, which was signed into law on August 20, 1996, savings institutions which met certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts"), such as the Bank, were allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualifying thrifts could compute deductions for bad debts using either the specific charge off method of Section 166 of the Internal Revenue Code (the "Code") or the reserve method of Section 593 of the Code. Prior to its modification by the Act, Section 593 permitted a qualifying thrift to establish a reserve for bad debts and to make annual additions thereto, which, within specified formula limits, could be deducted in arriving at its taxable income. A qualifying thrift could elect annually to compute its allowable deduction to bad debt reserves for "qualifying real property loans," generally loans secured by certain interests in real property, under either (i) the "percentage of taxable income" method applicable only to thrift institutions, or (ii) the "experience" method that also was available to small banks. Under the "percentage of taxable income" method, subject to certain limitations, a qualifying thrift generally was allowed a deduction for an addition to its bad debt reserve equal to 8% of its taxable income (determined without regard to this deduction and with additional adjustments). Under the experience method, a qualifying thrift was generally allowed a deduction for an addition to its bad debt reserve equal to the greater of (i) an amount based on its actual average experience for losses in the current and five preceding taxable years, or (ii) an amount necessary to restore the reserve to its balance as of the close of the base year, defined as the last taxable year beginning before January 1, 1988. The Bank's deduction for additions to its bad debt reserve with respect to non-qualifying loans had to be computed under the experience method. Any deduction for the addition to the reserve for non-qualifying loans reduced the maximum permissible addition to the reserve for qualifying real property loans calculated under the percentage of taxable income method. Section 1616(a) of the Act repealed the Section 593 reserve method of accounting for bad debts by qualifying thrifts, effective for taxable years beginning after 1995. Qualifying thrifts that are treated as large banks, such as the Bank, are required to use the specific charge off method, pursuant to which the amount of any debt may be deducted only as it actually becomes wholly or partially worthless. A thrift institution required to change its method of computing reserves for bad debt is required to treat such change as a change in the method of accounting, initiated by the taxpayer and having been made with the consent of the Secretary of the Treasury. Section 481(a) of the Code requires certain amounts to be recaptured with respect to such change. Generally, the amount of the thrift institution's "applicable excess reserves" must be included in income ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995. In the case of a thrift institution that is treated as a large bank, such as the Bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (ii) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). The Bank's applicable 31 excess reserves as of December 31, 1995 were approximately $300,000; of which $120,000 remains to be included in future taxable income as of December 31, 1999. Distributions. To the extent that the Bank makes "nondividend distributions" to shareholders that are considered to result in distributions from the pre-1988 reserves or the supplemental reserve for losses on loans ("excess distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and post-1951 accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. The amount of additional taxable income resulting from an excess distribution is an amount that when reduced by the tax attributable to the income is equal to the amount of the excess distribution. Thus, slightly more than one and one-half times the amount of the excess distribution made would be includable in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate. See "Regulation--Restrictions on Dividends and Capital Distributions" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends or make non-dividend distributions described above that would result in a recapture of any portion of its pre-1988 bad debt reserves. Corporate Alternative Minimum Tax. The Code imposes an alternative minimum tax on corporations equal to the excess, if any, of 20% of alternative minimum taxable income ("AMTI") over a corporation's regular federal income tax liability. AMTI is equal to taxable income with certain adjustments. Only 90% of AMTI can be offset by net operating loss carryforwards. State and Local Taxation New York State and New York City Taxation. The Company is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 9% of "entire net income" allocable to New York State during the taxable year or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of the value of assets allocable to New York State with certain modifications, (b) 3% of "alternative entire net income" allocable to New York State or (c) $250. Entire net income is similar to federal taxable income, subject to certain modifications (including that net operating losses cannot be carried back or carried forward), and alternative entire net income is equal to entire net income without certain deductions which are allowable in the calculation of entire net income. The Bank also is subject to a similarly calculated New York City tax of 9% on income allocated to New York City and similar alternative taxes. In addition, the Bank is subject to a temporary Metropolitan Transportation Business Tax Surcharge for tax years ending before December 31, 2001, at a rate of 17% of the New York State Franchise Tax. Notwithstanding the repeal of the federal income tax provisions permitting bad debt deductions under the reserve method, New York State has enacted legislation maintaining the preferential treatment of additional loss reserves for qualifying real property and non-qualifying loans of qualifying thrifts for both New York State and New York City tax purposes. Calculation of the amount of additions to reserves for qualifying real property loans is limited to the larger of the amount derived by the percentage of taxable income method or the experience method. For these purposes, the applicable percentage to calculate the bad debt deduction under the percentage of taxable income method is 32% of taxable income, reduced by additions to reserves for non-qualifying loans, except that the amount of the addition to the reserve cannot exceed the amount necessary to increase the balance of the reserve for losses on qualifying real property loans at the close of the taxable year to 6% of the balance of the qualifying real property loans outstanding at the end of the taxable year. Under the experience method, the maximum addition to a loan reserve generally equals the amount necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (i) the amount that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or (ii) the balance of the bad debt reserve at the close of the "base year," or, if the amount of 32 loans outstanding has declined since the base year, the amount which bears the same ratio to the amount of loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year. For these purposes, the "base year" is the last taxable year beginning before 1988. The amount of additions to reserves for non-qualifying loans is computed under the experience method. The aggregate amount of additions to reserves for losses on qualifying real property and reserves for losses on non-qualifying loans cannot exceed the amount by which 12% of the amount of the total deposits or withdrawable accounts of depositors of the Bank at the close of the taxable year exceeds the sum of the Bank's surplus, undivided profits and reserves at the beginning of such year. The new legislation also allows an exclusion from entire net income for New York State and New York City tax purposes for any amounts a thrift is required to include in federal taxable income as a recapture of its bad debt reserve as a consequence of the Act. Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. REGULATION General On May 10, 1994, the Bank converted from a New York State chartered mutual savings bank to a federally chartered mutual savings bank pursuant to Section 5(o) of the Home Owners' Loan Act, as amended ("HOLA"). On that date, the OTS replaced the New York State Banking Department (the "Banking Department") as the Bank's chartering authority and the FDIC as the Bank's primary federal regulator. Although the FDIC is no longer the primary federal regulator of the Bank, the Bank remains subject to regulation and examination by the FDIC as its deposit insurer. The Bank's deposits are insured up to the applicable limits permitted by law. See "--Insurance of Accounts." The Bank is also subject to certain regulations promulgated by the Federal Reserve Board. Moreover, in connection with converting to a federal charter, the Bank became a member of the FHLB-NY. The activities of federal savings institutions are governed by HOLA and, in certain respects, the Federal Deposit Insurance Act ("FDIA"). Most regulatory functions relating to deposit insurance and to conservatorships and receiverships of insured institutions are exercised by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, requires that federal banking regulators intervene promptly when a depository institution experiences financial difficulties, mandated the establishment of a risk-based deposit insurance assessment system and required imposition of numerous additional safety and soundness operational standards and restrictions. FDICIA and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") each contain provisions affecting numerous aspects of the operations and regulations of federal savings banks and empowers the OTS and the FDIC, among other agencies, to promulgate regulations implementing its provisions. The OTS has extensive authority over the operations of the Bank. As part of this authority, the Bank is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS and back-up examinations by the FDIC. The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the applicable rules and regulations of, the OTS. The Company also is subject to regulation under the federal securities laws. Set forth below is a brief description of certain laws and regulations which relate to the regulation of the Bank and the Company. The description does not purport to be a comprehensive description of applicable laws, rules and regulations and is qualified in its entirety by reference to applicable laws, rules and regulations. 33 Investment Powers The Bank is subject to comprehensive regulation governing its investments and activities. Among other things, the Bank may invest in (i) residential mortgage loans, education loans and credit card loans in an unlimited amount, (ii) non-residential real estate loans up to 400% of total capital, (iii) commercial business loans up to 20% of assets (however, amounts over 10% of total assets must be used only for small business loans) and (iv) in general, consumer loans and highly rated commercial paper and corporate debt securities in the aggregate up to 35% of assets. In addition, the Bank may invest up to 3% of its assets in service corporations, an unlimited percentage of its assets in operating subsidiaries (which may only engage in activities permissible for the Bank itself) and under certain conditions may invest in finance subsidiaries. Other than investments in service corporations, operating subsidiaries, finance subsidiaries and stock of government-sponsored agencies, such as FHLMC and FNMA, the Bank generally is not permitted to make equity investments. See "Business--Investment Activities." A service corporation in which the Bank may invest is permitted to engage in activities reasonably related to the activities of a federal savings bank as the OTS may approve on a case by case basis and certain activities preapproved by the OTS, which, among other things, include providing certain support services for the institution; originating, investing in, selling, purchasing, servicing or otherwise dealing with specified types of loans and participations (principally loans that the parent institution could make); specified real estate activities, including limited real estate development, securities brokerage services; certain insurance brokerage activities, and other specified investments and services. Real Estate Lending Standards FDICIA requires each federal banking agency to adopt uniform regulations prescribing standards for extensions of credit (i) secured by real estate, or (ii) made for the purpose of financing the construction of improvements on real estate. In prescribing these standards, the banking agencies must consider the risk posed to the deposit insurance funds by real estate loans, the need for safe and sound operation of insured depository institutions and the availability of credit. The OTS and the other federal banking agencies adopted uniform regulations, effective March 19, 1993. The OTS regulation requires each savings association to establish and maintain written internal real estate lending standards consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its real estate lending activities. The policy must also be consistent with accompanying OTS guidelines, which include maximum loan-to-value ratios for the following types of real estate loans: raw land (65%), land development (75%), nonresidential construction (80%), improved property (85%) and one-to-four family residential construction (85%). Owner-occupied one-to-four family mortgage loans and home equity loans do not have maximum loan-to-value ratio limits, but those with a loan-to-value ratio at origination of 90% or greater are to be backed by private mortgage insurance or readily marketable collateral. Institutions are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are appropriately reviewed and justified. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are justified. Loans-to-One Borrower Limits The Bank generally is subject to the same loans-to-one borrower limits that apply to national banks. With certain exceptions, loans and extensions of credit outstanding at one time to one borrower (including certain related entities of the borrower) may not exceed 15% of the Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus for loans fully secured by certain readily marketable collateral. At December 31, 1999, the largest amount the Bank could lend to one borrower was approximately $15.8 million, and at that date, the Bank's largest aggregate amount of loans-to-one borrower was $11.4 million, all of which was performing according to its terms. See "Business--Lending Activities." 34 Insurance of Accounts The deposits of the Bank are insured up to $100,000 per depositor (as defined by law and regulations) by the FDIC. Approximately 97% of the Bank's deposits are presently insured by the FDIC under the BIF. The remainder are insured by the FDIC under the SAIF. The deposits insured under the SAIF are those acquired in the acquisition of New York Federal. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the insurance funds. The FDIC also has the authority to initiate enforcement actions where the OTS has failed or declined to take such action after receiving a request to do so from the FDIC. The FDIC utilizes a risk-based deposit insurance assessment system. Under this system, the FDIC assigns each institution to one of three capital categories -- "well capitalized," "adequately capitalized" and "undercapitalized" -- which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of FDIA, as discussed below. These three categories are then divided into three subcategories which reflect varying levels of supervisory concern. The matrix so created results in nine assessment risk classifications. Assessment rates during most of 1995 ranged from $0.23 per $100 of deposits for an institution in the highest category to $0.31 of deposits for an institution in the lowest category. On August 8, 1995, the FDIC amended its regulation on assessments to establish a new assessment rate schedule for the BIF ranging from $0.04 per $100 of deposits for an institution in the highest category to $0.31 per $100 of deposits for an institution in the lowest category. The FDIC's new rate schedule for the BIF was made effective with the first day of the month following the month in which the BIF achieved full capitalization to the statutory required 1.25% reserve ratio, which occurred in the second half of 1995. As a result of the lowering of BIF rates in August 1995, the Bank paid $824,000 in deposit insurance premiums for the year ended December 31, 1995. Thereafter, the FDIC voted to reduce the BIF assessment schedule even further so that most BIF members, including the Bank, paid a statutory minimum annual assessment rate of $2,000 for 1996. Deposit insurance for SAIF members was revised to the same schedule as BIF members effective January 1, 1997. As of the date of this Report, the annual FDIC assessment rate for BIF and SAIF member institutions varies between 0.00% to 0.27% per annum. At December 31, 1999, the Bank's annual assessment rate was 0.00%. The Bank's assessment rate in effect from time to time will depend upon the capital category and supervisory subcategory to which the Bank is assigned by the FDIC. In addition, the FDIC is authorized to increase federal deposit insurance assessment rates for BIF and SAIF members to the extent necessary to protect the BIF and SAIF and, under current law, would be required to increase such rates to $0.23 per $100 of deposits if the BIF or SAIF reserve ratio again falls below the required 1.25%. Any increase in deposit insurance assessment rates, as a result of a change in the category or subcategory to which the Bank is assigned or the exercise of the FDIC's authority to increase assessment rates generally, could have an adverse effect on the earnings of the Bank. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. On September 30, 1996, as part of an omnibus appropriations bill, the Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted. The Funds Act eliminated the deposit insurance premium disparity that existed since the second half of 1995 between banks insured by the BIF and thrifts insured by the SAIF. The 35 Act (i) required SAIF institutions to pay a one-time special assessment to bring the SAIF's reserve ratio up to 1.25%, (ii) requires BIF institutions, beginning January 1, 1997, to pay a portion of the interest due on the Finance Corporation ("FICO") bonds issued in connection with the savings and loan association crisis in the late 1980s, and (iii) requires BIF institutions to pay their full pro rata share of the FICO payments starting the earlier of January 1, 2000 or the date at which no savings institution continues to exist. The Bank was required, as of January 1, 2000, to pay its full pro rata share of the FICO payments. The FICO assessment rate for the first quarter of 2000 was $0.0212 per $100 of deposits for both BIF and SAIF institutions. For the second quarter of 2000, the rate is set at $0.0208 per $100 of deposits for both BIF and SAIF institutions. These rates are subject to change. The Bank paid $100,000, $102,000 and $87,000 for its share of the interest due on FICO bonds in 1999, 1998 and 1997, respectively. Liquidity Requirements The Bank is subject to OTS regulations that require maintenance of an average daily balance of liquid assets (cash and certain securities with detailed maturity limitations and marketability requirements) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. The OTS may vary the amount of the liquidity requirement by regulation, but only within pre-established statutory limits of no less than 4% and no greater than 10%. For the greater part of 1997, OTS regulation set the liquidity requirement at 5%, with a 1% short-term liquidity requirement. Amendments to OTS regulations, effective November 27, 1997, reduced the liquidity requirement from 5% to 4% and removed the 1% short-term liquidity requirement. In addition, these amendments eliminated the requirement that obligations of FNMA, GNMA and FHLMC must have five years or less remaining until maturity to qualify as a liquid asset. At December 31, 1999, the Bank's liquidity ratio, computed in accordance with the OTS requirements, as amended, was 9.72%. Unlike the Bank, the Company is not subject to OTS regulatory requirements on the maintenance of minimum levels of liquid assets. Qualified Thrift Lender Test Institutions regulated by the OTS are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. FDICIA and applicable OTS regulations require such institutions to maintain at least 65% of its portfolio assets (total assets less intangibles, properties used to conduct the institution's business and liquid assets not exceeding 20% of total assets) in "qualified thrift investments" on a monthly average basis in nine of every 12 months. Qualified thrift investments constitute primarily residential mortgage loans and related investments, including certain mortgage-backed and mortgage-related securities. A savings institution that fails the QTL test must either convert to a bank charter or, in general, it will be prohibited from: (i) making an investment or engaging in any new activity not permissible for a national bank, (ii) paying dividends not permissible under national bank regulations, (iii) obtaining advances from any FHLB, and (iv) establishing any new branch office in a location not permissible for a national bank in the institution's home state. One year following the institution's failure to meet the QTL test, any holding company parent of the institution must register and be subject to supervision as a bank holding company. In addition, beginning three years after the institution failed the QTL test, the institution would be prohibited from refinancing any investment or engaging in any activity not permissible for a national bank and would have to repay any outstanding advances from an FHLB as promptly as possible. At December 31, 1999, the Bank had maintained more than 65% of its "portfolio assets" in qualified thrift investments in at least nine of the preceding 12 months. Accordingly, on that date, the Bank had met the QTL test. On September 30, 1996, as part of the omnibus appropriations bill, Congress enacted the Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory Paperwork Reduction Act"), modifying and expanding investment authority under the QTL test. Prior to the enactment of the Regulatory Paperwork Reduction Act, commercial, corporate, business, or agricultural loans were limited in the aggregate to 10% of a thrift's assets and education loans were limited to 5% of a thrift's assets. Further, federal savings associations meeting a different asset test under the Code (the "domestic building and loan association test") 36 were qualified for favorable tax treatment. The amendments permit federal thrifts to invest in, sell, or otherwise deal in education and credit card loans without limitation and raise from 10% to 20% of total assets the aggregate amount of commercial, corporate, business, or agricultural loans or investments that may be made by a thrift, subject to a requirement that amounts in excess of 10% of total assets be used only for small business loans. In addition, the legislation defines "qualified thrift investment" to include, without limit, education, small business, and credit card loans; and removes the 10% limit on personal, family, or household loans for purposes of the QTL test. The legislation also provides that a thrift meets the QTL test if it qualifies as a domestic building and loan association under the Code. Transactions with Affiliates Transactions between the Bank and any related party or "affiliate" are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is any company or entity which controls, is controlled by or is under common control with the Bank, including the Company, the Bank's subsidiaries, and any other subsidiary of the Bank or the Company that may be formed or acquired in the future. Generally, Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of the Bank's capital stock and surplus, and impose an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the Bank or subsidiary as those provided to a non-affiliate. Each loan or extension of credit to an affiliate by the Bank must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of credit extended. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. In addition, the Bank may not (i) loan or otherwise extend credit to an affiliate, except to any affiliate which engages only in activities which are permissible for bank holding companies under Section 4(c) of the Bank Company Act, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliates, except subsidiaries of the Bank. In addition, the Bank is subject to Regulation O promulgated under Sections 22(g) and 22(h) of the Federal Reserve Act. Regulation O requires that loans by the Bank to a director, executive officer or to a holder of more than 10% of the Common Stock, and to certain affiliated interests of such insiders, may not, in the aggregate, exceed the Bank's loans-to-one borrower limit. Loans to insiders and their related interests must also be made on terms substantially the same as offered, and follow credit underwriting procedures that are not less stringent than those applied, in comparable transactions to other persons, with prior Board approval required for certain loans. In addition, the aggregate amount of extensions of credit by the Bank to all insiders cannot exceed the institution's unimpaired capital and surplus. Section 22(g) places additional restrictions on loans to executive officers of the Bank. The Bank is in compliance with these regulations. Restrictions on Dividends and Capital Distributions The Bank is subject to OTS limitations on capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other distributions charged to the Bank's capital account. In general, the applicable regulation permits specified levels of capital distributions by a savings institution that meets at least its minimum capital requirements, so long as the OTS is provided with at least 30 days' advance notice and has no objection to the distribution. Under OTS capital distribution regulations which became effective April 1, 1999, an institution is not required to file an application with, or to provide a notice to, the OTS if neither the institution nor the proposed capital distribution meet any of the criteria for any such application or notice as provided below. An institution will be required to file an application with the OTS if the institution is not eligible for expedited treatment by 37 the OTS, if the total amount of all its capital distributions for the applicable calendar year exceeds the net income for that year to date plus the retained net income (net income less capital distributions) for the preceding two years, if it would not be at least adequately capitalized following the distribution, or if its proposed capital distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS. By contrast, only notice to the OTS is required for an institution that is not otherwise required to file an application as provided in the preceding sentence, if it would not be well capitalized following the distribution, if the association's proposed capital distribution would reduce the amount of or retire any part of its common or preferred stock or retire any part of debt instruments such as notes or debentures included in capital under OTS regulations, or if it is a subsidiary of a savings and loan holding company. The Bank is a subsidiary of a savings and loan holding company and, therefore, is subject to the 30-day advance notice requirement. At December 31, 1999, the Bank's allowable capital distribution was approximately $13.5 million. Federal Home Loan Bank System In connection with converting to a federal charter, the Bank became a member of the FHLB-NY, which is one of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board. Each FHLB serves as a source of liquidity for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by its Board of Directors. As a member, the Bank is required to purchase and maintain stock in the FHLB-NY in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of total advances. Pursuant to this requirement, at December 31, 1999, the Bank was required to maintain $22.6 million of FHLB-NY stock. The Bank was in compliance with this requirement at that time. Assessments Savings institutions are required by OTS regulations to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a quarterly or semi-annual basis, as determined from time to time by the Director of the OTS, is computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the institution's latest quarterly thrift financial report. Based on the average balance of the Bank's total assets for the year ended December 31, 1999, the Bank's OTS assessments were $200,000 for that period. Branching OTS regulations permit federally chartered savings institutions to branch nationwide to the extent allowed by federal statute. This permits federal savings associations to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. Community Reinvestment Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, the Bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take 38 such record into account in its evaluation of certain applications by the institution. The methodology used by the OTS for determining an institution's compliance with the CRA focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its service areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. The Bank received a CRA rating of "2" in its most recent completed CRA examination which was completed by the OTS in July 1997. The OTS commenced a CRA examination in March 2000, which has not yet been completed. Under OTS regulations, a CRA rating of "2" is the second highest rating available on a scale from "1" to "4" with "1" being assigned to institutions that have an outstanding record of meeting community credit needs and "4" being assigned to institutions that are in substantial noncompliance in meeting community credit needs. An institution that receives a "2" is considered to have a satisfactory record of meeting community credit needs. Institutions that receive unsatisfactory ratings (i.e., "3" or "4") may face difficulties in securing approval for new activities or acquisitions. The CRA requires all institutions to make public disclosure of their CRA ratings. Brokered Deposits The FDIC has promulgated regulations implementing the FDICIA limitations on brokered deposits. Under the regulations, well-capitalized institutions are not subject to brokered deposit limitations, while adequately capitalized institutions are able to accept, renew or roll over brokered deposits only (i) with a waiver from the FDIC and (ii) subject to the limitation that they do not pay an effective yield on any such deposit which exceeds by more than (a) 75 basis points the effective yield paid on deposits of comparable size and maturity in such institution's normal market area for deposits accepted in its normal market area or (b) 120 basis points for retail deposits and 130 basis points for wholesale deposits accepted outside the institution's normal market area, respectively, from the current yield on comparable maturity U.S. Treasury obligations. Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in the institution's normal market area or in the market area in which such deposits are being solicited. Pursuant to the regulation, the Bank, as a well-capitalized institution, may accept brokered deposits. Capital Requirements General. The Bank is required to maintain minimum levels of regulatory capital. Since FIRREA, capital requirements established by the OTS generally must be no less stringent than the capital requirements applicable to national banks. The OTS also is authorized to impose capital requirements in excess of these standards on a case-by-case basis. Any institution that fails any of its applicable capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution's operations and the appointment of a conservator or receiver. The OTS' capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. See "--Prompt Corrective Action." The OTS' capital regulations create three capital requirements: a tangible capital requirement, a leverage or core capital requirement and a risk-based capital requirement. At December 31, 1999, the Bank's capital levels exceeded applicable OTS capital requirements. The three OTS capital requirements are described below. 39 Tangible Capital Requirement. Under current OTS regulations, each savings institution must maintain tangible capital equal to at least 1.50% of its adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. At December 31, 1999, the Bank had intangible assets consisting of $4.6 million in goodwill and no purchased mortgage servicing rights. At that date, the Bank's tangible capital ratio was 8.28%. In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to appropriately account for the investments in and assets of both includable and non-includable subsidiaries. Core Capital Requirement. The current OTS core capital requirement ranges between 3% and 5% of adjusted total assets. Savings institutions that receive the highest supervisory rating for safety and soundness are required to maintain a minimum core capital ratio of 3%, while the capital floor for all other savings institutions generally ranges from 4% to 5%, as determined by the OTS on a case by case basis. Core capital includes common stockholders' equity (including retained income), non-cumulative perpetual preferred stock and related surplus, minority interest in the equity accounts of fully consolidated subsidiaries and (subject to phase-out) qualifying supervisory goodwill. The Bank has no qualifying supervisory goodwill. At December 31, 1999, the Bank's core capital ratio was 8.28%. Effective October 1, 1998, the OTS relaxed regulations limiting the amount of servicing assets, together with purchased credit card receivables, includable in core capital from 50% of such capital to 100% of such capital, subject to limitations on fair value. At December 31, 1999, the Bank had no purchased mortgage servicing rights or purchased credit card receivables. Risk-Based Requirement. The risk-based capital standard adopted by the OTS requires savings institutions to maintain a minimum ratio of total capital to risk-weighted assets of 8%. Total capital consists of core capital, defined above, and supplementary capital but excludes the effect of recognizing deferred taxes based upon future income after one year. Supplementary capital consists of certain capital instruments that do not qualify as core capital, and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only in an amount equal to the amount of core capital. In determining the risk-based capital ratios, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights assigned by the OTS for significant categories of assets are (i) 0% for cash and securities issued by the federal government or unconditionally backed by the full faith and credit of the federal government; (ii) 20% for securities (other than equity securities) issued by federal government sponsored agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (iii) 50% for prudently underwritten permanent one-to-four family first lien mortgage loans and certain qualifying multi-family mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC; and (iv) 100% for all other loans and investments, including consumer loans, home equity loans, commercial loans, and one-to-four family residential real estate loans more than 90 days delinquent, and all repossessed assets or assets more than 90 days past due. At December 31, 1999, the Bank's risk-based capital ratio was 16.33%. Risk-based capital excludes the effect of recognizing deferred taxes based upon future income after one year. In 1993, the OTS adopted a final rule incorporating an interest-rate risk component into the risk-based capital regulation. Under the rule, an institution with a greater than "normal" level of interest rate risk will be subject to a deduction of its interest rate risk component from total capital for purposes of calculating the risk-based capital requirement. As a result, such an institution may be required to maintain additional capital in 40 order to comply with the risk-based capital requirement. An institution with a greater than "normal" interest rate risk is defined as an institution that would suffer a loss of net portfolio value exceeding 2% of the estimated market value of its assets in the event of a 200 basis point increase or decrease (with certain minor exceptions) in interest rates. The interest rate risk component will be calculated, on a quarterly basis, as one-half of the difference between an institution's measured interest rate risk and 2%, multiplied by the market value of its assets. The rule establishes a "lag" time between the reporting date of the data used to calculate an institution's interest rate risk and the effective date of each quarter's interest rate risk component. The rule also authorizes the director of the OTS, or his designee, to waive or defer an institution's interest rate risk component on a case-by-case basis. At December 31, 1999, the Bank did not have more than "normal" interest rate risk and was not subject to any deduction from total capital under this rule. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Interest Rate Risk," included in the Annual Report to Shareholders and incorporated herein by reference. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and checking accounts) and non-personal time deposits. At December 31, 1999, the Bank was in compliance with these requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. Because required reserves must be maintained in the form of vault cash or a non-interest-bearing account at a Federal Reserve Bank directly or through another bank, the effect of this reserve requirement is to reduce an institution's earning assets. The amount of funds necessary to satisfy this requirement has not had a material effect on the Bank's operations. As a creditor and financial institution, the Bank is also subject to additional regulations promulgated by the FRB, including, without limitation, regulations implementing requirements of the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Truth-in-Lending Act. Financial Reporting The Bank is required to submit independently audited annual reports to the FDIC and the OTS. These publicly available reports must include (a) annual financial statements prepared in accordance with GAAP and such other disclosure requirements as required by the FDIC or the OTS and (b) a report, signed by the Bank's chief executive officer and chief financial officer which contains statements about the adequacy of internal controls and compliance with designated laws and regulations, and attestations by independent auditors related thereto. The Bank is required to monitor the foregoing activities through an independent audit committee. Standards for Safety and Soundness The FDIA Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994 ("Community Development Act"), requires each federal bank regulatory agency to establish safety and soundness standards for institutions under its authority. On July 10, 1995, the federal banking agencies, including the OTS, jointly released Interagency Guidelines Establishing Standards for Safety and Soundness and published a final rule establishing deadlines for submission and review of safety and soundness compliance plans. The final rule and the guidelines took effect August 9, 1995. The guidelines, among other things, require savings institutions to maintain internal controls, information systems and internal audit systems that are appropriate to the size, nature and scope of the institution's business. The guidelines also establish general standards relating to loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits. Savings institutions are required to maintain safeguards to prevent the payment of excessive compensation to an executive officer, employee, director or principal shareholder. The OTS may determine that a savings institution is not in compliance with the safety and 41 soundness guidelines and, upon doing so, may require the institution to submit an acceptable plan to achieve compliance with the guidelines. An institution must submit an acceptable compliance plan to the OTS within 30 days of receipt or request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory actions. Management believes that the Bank currently meets the standards adopted in the interagency guidelines. Additionally, under FDICIA, as amended by the Community Development Act, federal banking agencies are required to establish standards relating to asset quality and earnings that the agencies determine to be appropriate. Effective October 1, 1998, the federal banking agencies, including the OTS, adopted guidelines relating to asset quality and earnings which require insured institutions to maintain systems, consistent with their size and the nature and scope of their operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and insure that earnings are sufficient to maintain adequate capital and reserves. Prompt Corrective Action Under Section 38 of the FDIA, as added by the FDICIA, each appropriate agency and the FDIC is required to take prompt corrective action to resolve the problems of insured depository institutions that do not meet minimum capital ratios. Such action must be accomplished at the least possible long-term cost to the appropriate deposit insurance fund. The federal banking agencies, including the OTS, adopted substantially similar regulations to implement Section 38 of the FDIA. Under the regulations, an institution is deemed to be (i) "well capitalized" if it has total risk-based capital of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a Tier 1 leverage capital ratio of 5% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a Tier 1 leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a Tier 1 leverage capital ratio that is less than 4% (3% under certain circumstances), (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a Tier 1 leverage capital ratio that is less than 3%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). At December 31, 1999, the Bank met the criteria to be considered a "well capitalized" institution. Recently Enacted Legislation and Proposed Changes On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act (the "Modernization Act"). Among other things, the Modernization Act permits qualifying bank holding companies to affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or complementary thereto, as determined by the Federal Reserve Board. Subject to certain limitations, a national bank may, through a financial subsidiary, engage in similar activities. The Modernization Act also prohibits the creation or acquisition of new unitary savings and loan holding companies that are affiliated with nonbanking firms, but "grandfathers" existing savings and loan holding companies, such as the Company. Grandfathered companies retain the existing powers available to unitary savings and loan holding companies. See "--Company Regulation." Certain business combinations which were impermissible prior to the effective date of the Modernization Act are now possible and could lead to further consolidation in the financial services 42 industry and an increase in the service offerings of our competitors. We cannot predict at this time, however, the resulting changes in the competitive environment in the Bank's market area or the impact, if any, of such changes on the Bank or the Company. The Modernization Act also requires financial institutions to disclose, on ATM machines, any non-customer fees and to disclose to their customers upon the issuance of an ATM card any fees that may be imposed by the institutions on ATM users. For older ATMs, financial institutions will have until December 31, 2004, to provide such notices. In addition, the Modernization Act calls for heightened privacy protection of customer information gathered by financial institutions. The OTS has recently proposed regulations implementing the privacy protection provisions of the Modernization Act. Under the proposed regulations, each financial institution is to (i) adopt procedures to protect customers' "non-public personal information", (ii) disclose its privacy policy, including identifying to customers others with whom it shares "non-public personal information", at the time of establishing the customer relationship and annually thereafter, and (iii) provide its customers with the ability to "opt-out" of having the financial institution share their personal information with affiliated third parties. The proposed regulations suggest an effective date of November 13, 2000. This date may be changed in the final regulations. We intend to review our current privacy protection policy for compliance with these regulations when they are adopted in final form and to amend that policy as needed. Company Regulation The Company is a non-diversified unitary savings and loan holding company within the meaning of HOLA, is required to register with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and any non-savings institution subsidiaries it later forms or acquires. Among other things, this authority permits the OTS to restrict or prohibit activities that it determines pose a serious risk to the Bank. See "--Restrictions on Dividends and Capital Distributions." HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by HOLA; or acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS will consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. As a unitary savings and loan holding company, the Company currently is not restricted as to the types of business activities in which it may engage, provided that the Bank continues to meet the QTL test. See "--Qualified Thrift Lender Test". Upon any non-supervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Company Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition 43 of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. Under New York law, reciprocal interstate acquisitions are authorized for savings and loan holding companies and savings institutions. Certain states do not authorize interstate acquisitions under any circumstances; however, federal law authorizing acquisitions in supervisory cases preempts such state law. Federal law generally provides that no "person" acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days' written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. Federal Securities Laws The Company's Common Stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information and reporting requirements, regulations governing proxy solicitations, insider trading restrictions and other requirements applicable to companies whose stock is registered under the Exchange Act. 44 Item 2. Properties. The Bank conducts its business through nine full-service offices. The Bank's main office is located at 144-51 Northern Boulevard, Flushing, New York. The Bank believes that its current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.
Date Leased or Lease Expiration Net Book Value at Office Leased or Owned Acquired Date December 31, 1999 ------ --------------- -------- ---- ----------------- Main Office 144-51 Northern Blvd. Flushing, NY 11354............. owned 1972 NA $2,548,492 Broadway Branch 159-18 Northern Blvd. Flushing, NY 11358............. owned 1962 NA 958,824 Auburndale Branch 188-08 Hollis Court Blvd. Flushing, NY 11358............. owned 1991 NA 1,212,743 Springfield Branch 61-54 Springfield Blvd. Bayside, NY 11364.............. leased 1991 11/30/2001 31,492 Bay Ridge Branch 7102 Third Avenue Brooklyn, NY 11209............. owned 1991 NA 414,919 Irving Place Branch 33 Irving Place New York, NY 10003............. leased 1991 11/30/2001 441,406 New Hyde Park Branch 661 Hillside Avenue New Hyde Park, NY 11040........ leased 1971 12/31/2011 51,793 Supermarket Branch 653 Hillside Avenue New Hyde Park, NY 11040........ leased 1998 6/01/2003 236,247 Supermarket Branch 713 Coop City Boulevard Bronx, NY 10475................ leased 1999 11/10/2004 306,449 Total premises and equipment, net $6,202,365
Item 3. Legal Proceedings. The Bank is involved in various legal actions arising in the ordinary course of its business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and results of operations of the Bank. Item 4. Submission of Matters to a Vote of Security Holders. None 45 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. The information regarding Flushing Financial Corporation common stock and related stockholder matters appears on page 6 of the 1999 Annual Report to Shareholders ("Annual Report") under the caption "Market Price of Common Stock" and is incorporated herein by this reference. Item 6. Selected Financial Data. Information regarding selected financial data appears on pages 5 and 6 of the Annual Report under the caption "Selected Financial Data" and is incorporated herein by this reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information regarding management's discussion and analysis of financial condition and results of operations appears on pages 7 through 17 of the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by this reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information contained in the section captioned "Interest Rate Risk" on page 11 of the Annual Report and in Notes 14 and 15 of the Notes to Consolidated Financial Statements is incorporated herein by this reference. Item 8. Financial Statements and Supplementary Data. Information regarding the financial statements and the Independent Auditor's Report appears on pages 18 through 42 of the Annual Report and is incorporated herein by this reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 46 PART III Item 10. Directors and Executive Officers of the Registrant. Information regarding the directors and executive officers of the Company appears in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2000 under the captions "Board Nominees", "Continuing Directors" and "Executive Officers Who Are Not Directors" and is incorporated herein by this reference. Item 11. Executive Compensation. Information regarding executive compensation appears in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2000 under the caption "Executive Compensation" and is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners appears in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2000 under the caption "Stock Ownership of Certain Beneficial Owners" and is incorporated herein by this reference. Information regarding security ownership of management appears in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2000 under the caption "Stock Ownership of Management" and is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions appears in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2000 under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" and is incorporated herein by this reference. 47 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)1. Financial Statements The following financial statements are included in the Company's Annual Report to Shareholders for the year ended December 31, 1999 and are incorporated herein by this reference: o Consolidated Statements of Condition at December 31, 1999 and 1998 o Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1999 o Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1999 o Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1999 o Notes to Consolidated Financial Statements o Report of Independent Accountants The remaining information appearing in the Annual Report to Shareholders is not deemed to be filed as a part of this report, except as expressly provided herein. 2. Financial Statement Schedules Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto included in the Company's Annual Report to Shareholders for the year ended December 31, 1999 and are incorporated herein by this reference: (b) Reports on Form 8-K filed during the last quarter of fiscal 1999 None 48 (c) Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit Number - ------ 3.1 Articles of Incorporation of Flushing Financial Corporation (1) 3.2 By-Laws of Flushing Financial Corporation (1) 4.1 Rights Agreement, dated as of September 17, 1996, between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (10) 10.1 Annual Incentive Plan for Selected Officers (1) 10.2 Employment Agreements between Flushing Savings Bank, FSB and Certain Officers (1)(6) 10.3 Employment Agreements between Flushing Financial Corporation and Certain Officers (2)(6) 10.3(a) Amendment No. 1 to Employment Agreement between Flushing Financial Corporation and Michael J. Hegarty (3) 10.3(b) Amendment to Employment Agreement between Flushing Financial Corporation and Certain Officers (including Michael J. Hegarty) (3) 10.3(c) Amendment No. 3 to Employment Agreement between Flushing Financial Corporation and Michael J. Hegarty, and Amendment No. 2 to Employment Agreement between Flushing Savings Bank, FSB and Michael J. Hegarty (4) 10.4 Special Termination Agreements (2) 10.5 Employee Severance Compensation Plan of Flushing Savings Bank, FSB (1) 10.6(a) Amended and Restated Outside Director Retirement Plan (9) 10.6(b) Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (2) 10.7 Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (1) 10.8 Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and each Director (1) 10.8(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and each Director (3) 10.8(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and Certain Officers (3)(6) 10.9 Employee Benefit Trust Agreement (1) 10.9(a) Amendment to the Employee Benefit Trust Agreement (9) 10.10 Loan Document for Employee Benefit Trust (1) 10.11 Guarantee by Flushing Financial Corporation (1) 10.12 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial Corporation and Gerard P. Tully, Sr. (4) 10.12(a) Amendment to Gerard P. Tully, Sr. Consulting Agreement (9) 10.12(b) Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (12) 10.12(c) Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement 10.13 Flushing Financial Corporation 1996 Restricted Stock Incentive Plan (7) 10.14 Flushing Financial Corporation 1996 Stock Option Incentive Plan (7) 10.15 Amendments to 1996 Restricted Stock Incentive Plan (8) 10.16 Amendments to 1996 Stock Option Incentive Plan (8) 10.17 Agreement and Plan of Merger as of April 24, 1997, by and between Flushing Financial Corporation, Flushing Savings Bank, FSB and New York Federal Savings Bank (5) 10.18 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial Corporation and James F. McConnell (11) 10.19 Retirement Agreement between Flushing Savings Bank, FSB, Flushing Financial Corporation and James F. McConnell (11) 13.1 1999 Annual Report to Shareholders
49
Exhibit Number - ------ 22.1 Subsidiaries information incorporated herein by reference to Part I - Subsidiary Activities 23.1 Consent of Independent Accountants 27 Financial Data Schedule 99.1 Proxy Statement for the Annual Meeting of Shareholders to be held on May 16, 2000, which will be filed with the SEC within 30 days from the date this Form 10-K is filed.
- ---------- (1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-96488. (2) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 1996. (4) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1996. (5) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended June 30, 1997. (6) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 1997. (7) Incorporated by reference to Exhibits filed with the Proxy Statement for the Annual Meeting of Stockholders held May 21, 1996. (8) Incorporated by reference to Exhibits filed with the Proxy Statements for the Annual Meetings of Stockholders held April 29, 1997 and May 20, 1998. (9) Incorporated by reference to Exhibits filed with the Form 10-K for the year ended December 31, 1997. (10) Incorporated by reference to Exhibit filed with Form 8-K filed September 30, 1996. (11) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended March 31, 1998. (12) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1998. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Company has duly caused this report, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on March 29, 2000. FLUSHING FINANCIAL CORPORATION By: /s/ MICHAEL J. HEGARTY ----------------------------------- Michael J. Hegarty President and CEO POWER OF ATTORNEY We, the undersigned directors and officers of Flushing Financial Corporation (the "Company") hereby severally constitute and appoint Michael J. Hegarty and Monica C. Passick as our true and lawful attorneys and agents, each acting alone and with full power of substitution and re-substitution, to do any and all things in our names in the capacities indicated below which said Michael J. Hegarty or Monica C. Passick may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the report on Form 10-K, or amendment thereto, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the report on Form 10-K, or amendment thereto; and we hereby approve, ratify and confirm all that said Michael J. Hegarty or Monica C. Passick shall do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K, or amendment thereto, has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /S/ MICHAEL J. HEGARTY Director, President (Principal Executive Officer) March 29, 2000 - ---------------------------------- Michael J. Hegarty /S/ GERARD P. TULLY, SR. Director, Chairman March 29, 2000 - ---------------------------------- Gerard P. Tully, Sr. /S/ MONICA C. PASSICK Treasurer (Principal Financial and Accounting Officer) March 29, 2000 - ---------------------------------- Monica C. Passick /S/ JAMES D. BENNETT Director March 29, 2000 - ---------------------------------- James D. Bennett /S/ JOHN M. GLEASON Director March 29, 2000 - ---------------------------------- John M. Gleason
51
/S/ LOUIS C. GRASSI Director March 29, 2000 - ---------------------------------- Louis C. Grassi /S/ ROBERT A. MARANI Director March 29, 2000 - ---------------------------------- Robert A. Marani /S/ JOHN O. MEAD Director March 29, 2000 - ---------------------------------- John O. Mead /S/ VINCENT F. NICOLOSI Director March 29, 2000 - ---------------------------------- Vincent F. Nicolosi /S/ FRANKLIN F. REGAN, JR. Director March 29, 2000 - ---------------------------------- Franklin F. Regan, Jr. /S/ JOHN E. ROE, SR. Director March 29, 2000 - ---------------------------------- John E. Roe, Sr. /S/ MICHAEL J. RUSSO Director March 29, 2000 - ---------------------------------- Michael J. Russo
52 EX-10.12(C) 2 AMENDMENT TO CONSULTING AGREEMENT 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 EX-13 3 ANNUAL REPORT Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC SELECTED FINANCIAL DATA FLUSHING ================================================================= FINANCIAL CORP.
==================================================================================================================================== At or for the year ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share data) 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% --
(Footnotes on the following page) 5 sustaining growth/securing opportunities Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC SELECTED FINANCIAL DATA FLUSHING ================================================================= FINANCIAL CORP.
==================================================================================================================================== At or for the year ended December 31, 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ 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
(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.
=============================================================================================== 1999 1998 ---------------------------------------------------------------- High Low Dividend High Low Dividend ================================================================ 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
6 Flushing Financial Corporation 1999 annual report 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 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 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 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.
---------------------------------------------------------------------------------------- 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) 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%
(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 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.
Projected Percentage Change In ----------------------------------------- Net Portfolio Change in Interest Rate Net Interest Income Net Portfolio Value Value Ratio ========================================================================================= - -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
11 sustaining growth/securing opportunities 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.
=============================================================================================================================== For the years ended December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost =============================================================================================================================== (Dollars in thousands) 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 ===== ===== ===================================================================================== For the years ended December 31, 1997 - ------------------------------------------------------------------------------------- Average Average Yield/ Balance Interest Cost ===================================================================================== 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 ========
(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 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.
------------------------------------------------------------------------- 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) 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 ====================================================================================================================================
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 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 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 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 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 Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC CONSOLIDATED STATEMENTS FLUSHING OF FINANCIAL CONDITION FINANCIAL CORP.=================================================================
==================================================================================================================================== December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except share data) 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 ==================================
The accompanying notes are an integral part of these consolidated financial statements. 18 Flushing Financial Corporation 1999 annual report Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC CONSOLIDATED STATEMENTS OF INCOME FLUSHING ================================================================= FINANCIAL CORP.
====================================================================================================================== For the years ended December 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) 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
The accompanying notes are an integral part of these consolidated financial statements. 19 sustaining growth/securing opportunities Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC CONSOLIDATED STATEMENTS OF FLUSHING CHANGES IN STOCKHOLDERS' EQUITY FINANCIAL CORP.=================================================================
==================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except share data) 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) ===========================================
Continued 20 Flushing Financial Corporation 1999 annual report Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC CONSOLIDATED STATEMENTS OF FLUSHING CHANGES IN STOCKHOLDERS' EQUITY FINANCIAL CORP. (continued) =================================================================
==================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except share data) 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 ================================================
The accompanying notes are an integral part of these consolidated financial statements. 21 sustaining growth/securing opportunities Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC CONSOLIDATED STATEMENTS FLUSHING OF CASH FLOW FINANCIAL CORP.=================================================================
==================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 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) ------------------------------------------
Continued 22 Flushing Financial Corporation 1999 annual report Flushing Financial Corporation and Subsidiaries [LOGO] ================================================================= FFC CONSOLIDATED STATEMENTS FLUSHING OF CASH FLOW FINANCIAL CORP. (continued) =================================================================
==================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 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
The accompanying notes are an integral part of these consolidated financial statements. 23 sustaining growth/securing opportunities 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 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:
================================================================================================== (Amounts in thousands, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
25 sustaining growth/securing opportunities 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 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:
---------------------------------------------------- Gross Gross Amortized Estimated Unrealized Unrealized (In thousands) Cost Fair Value Gains Losses ============================================================================================================ 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 ============================================================================================================
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 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:
------------------------------------------------------ Gross Gross Amortized Estimated Unrealized Unrealized (In thousands) Cost Fair Value Gains Losses ============================================================================================================== 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 ==============================================================================================================
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:
=============================================================================================== Weighted Average Cost (Dollars in thousands) 1999 1998 1999 - ---------------------------------------------------------------------------------------------- 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 ===============================================================================================
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 Flushing Financial Corporation and Subsidiaries 8. BORROWED FUNDS Borrowed funds as of December 31, 1999 and 1998, respectively, are summarized as follows:
===================================================================================================================== 1999 1998 ----------------------------------------------------------------- Weighted Weighted At December 31, Amount Average Rate Amount Average Rate - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 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% =====================================================================================================================
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:
============================================================================================================= (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------------------------------------- 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% =============================================================================================================
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 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:
=================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 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% ===================================================================================================================================
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:
==================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 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 ====================================================================================================================================
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 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:
================================================================================================== December 31, 1999 1998 - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
31 sustaining growth/securing opportunities 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.
==================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
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.
--------------------------- Shares Weighted Underlying Average Options Exercise Price ================================================================================================================== 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 ==================================================================================================================
32 Flushing Financial Corporation 1999 annual report Flushing Financial Corporation and Subsidiaries The following table summarizes information about the Stock Option Plan at December 31, 1999:
--------------------------------------------------------------------- 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 =============================================================================================================== $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 ==============================================================================================================
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 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.
==================================================================================================================================== For the years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 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 ====================================================================================================================================
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 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:
=================================================================================================================== December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- (In thousands) 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) ===================================================================================================================
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:
=================================================================================================================== December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- (In thousands) 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) ===================================================================================================================
35 sustaining growth/securing opportunities 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 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 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 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 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:
==================================================================================================================================== 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ 4th 3rd 2nd 1st 4th 3rd 2nd 1st - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) 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 ====================================================================================================================================
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:
================================================================================================== 1999 1998 - -------------------------------------------------------------------------------------------------- (In thousands) 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 ==================================================================================================
Continued 40 Flushing Financial Corporation 1999 annual report Flushing Financial Corporation and Subsidiaries 19. PARENT COMPANY ONLY FINANCIAL INFORMATION (continued)
============================================================================================================================= 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) 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 =============================================================================================================================
41 sustaining growth/securing opportunities ================================================================================ 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 EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS 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 EX-27 5 FINANCIAL DATA SCHEDULE
9 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. 1,000 DEC-31-1999 JAN-01-1999 DEC-31-1999 12-MOS 29,059 5,875 0 0 285,016 0 0 882,704 6,818 1,249,529 666,941 116,174 12,581 335,657 0 0 114 118,062 1,249,529 66,543 19,915 685 87,143 24,982 47,795 39,348 36 81 22,646 20,540 20,540 0 0 12,735 1.40 1.37 7.74 3,196 0 0 0 6,762 133 153 6,818 6,818 0 0
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