name of registrant as specified in its charter)
or other jurisdiction of incorporation or organization)
Employer Identification No.)
Marcus Avenue, Suite E140, Lake Success, New York 11042
of principal executive offices)
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Stock $0.01 par value (and associated Preferred Stock Purchase Rights).
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. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best of registrants
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes No
As of June 30, 2004, the last business day of the registrants most recently completed second
fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant
was $319,016,000. This figure is based on the closing price on that date on the Nasdaq National Market
for a share of the registrants Common Stock, $0.01 par value, which was $17.65.
The number of shares of the registrants Common Stock outstanding as of February 28, 2005 was
Statements contained in this Annual Report on Form 10-K (this Annual Report) relating to
plans, strategies, economic performance and trends, projections of results of specific activities
or investments and other statements that are not descriptions of historical facts may be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks
and uncertainties, and actual results could differ materially from those currently anticipated due
to a number of factors, which include, but are not limited to, factors discussed under the captions
Business Allowance for Loan Losses, Business Market Area and Competition
and Business Risk Factors in Item 1 below, in Managements Discussion
and Analysis of Financial Condition and Results of Operations Overview in Item 7 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 obligation to update these forward-looking statements.
Flushing Financial Corporation (the Holding Company) is a Delaware corporation organized
in May 1994 at the direction of Flushing Savings Bank, FSB (the Bank). The Bank was organized
in 1929 as a New York State chartered mutual savings bank. In 1994, the Bank converted to a federally
chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings
Bank, FSB. The Bank converted from a federally chartered mutual savings bank to a federally chartered
stock savings bank on November 21, 1995, at which time the Holding Company acquired all of the stock
of the Bank. The primary business of the Holding Company at this time is the operation of its wholly
owned subsidiary, the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation,
Flushing Service Corporation, and FSB Properties Inc. The activities of the Holding Company are primarily
funded by dividends, if any, received from the Bank. Flushing Financial Corporations common
stock is traded on the NASDAQ National Market under the symbol FFIC.
The Holding Company also owns Flushing Financial Capital Trust I (the Trust), a special
purpose business trust formed to issue capital securities. The Trust used the proceeds from the issuance
of these capital securities, and the proceeds from the issuance of its common stock, to purchase
junior subordinated debentures from the Holding Company. Since the Holding Company does not have
sufficient equity at risk, as defined in FASB Interpretation No. 46R, effective January 1, 2004,
the Trust is no longer included in the consolidated financial statements.
Unless otherwise disclosed, the information presented in this Annual Report reflects the financial
condition and results of operations of the Holding Company, the Bank and the Banks subsidiaries
on a consolidated basis (collectively, the Company). At December 31, 2004, the Company
had total assets of $2.1 billion, deposits of $1.3 billion and stockholders equity of $160.7
The Banks principal
business is attracting retail deposits from the general public and investing
those deposits together with funds generated from ongoing operations and
borrowings, primarily in (1) originations and purchases of one-to-four
family (focusing on mixed-use properties properties that contain
both residential dwelling units and commercial units), multi-family residential
and commercial real estate mortgage loans; (2) mortgage loan surrogates
such as mortgage-backed securities; and (3) U.S. government 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 Banks 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 Banks primary sources of funds
are deposits, Federal Home Loan Bank of New York (FHLB-NY)
agreements, principal and interest payments on loans, mortgage-backed
and other securities, proceeds from sales of securities and, to a lesser
extent, proceeds from sales of loans. As a federal savings bank, the Banks
primary regulator is the Office of Thrift Supervision (OTS).
The Banks deposits are insured to the maximum allowable amount by
the Federal Deposit Insurance Corporation (FDIC). Additionally,
the Bank is a member of the Federal Home Loan Bank (FHLB)
In addition to operating the Bank, the Holding Company invests primarily in U.S. government securities,
mortgage-backed securities, and corporate securities. The Holding Company also holds a note evidencing
a loan that it made to an employee benefit trust established by the Holding Company for the purpose
of holding shares for allocation or distribution under certain employee benefit plans of the Holding
Company and the Bank (the Employee Benefit Trust). The funds provided by this loan enabled
the Employee Benefit Trust to acquire 2,328,750 shares, or 8% of the common stock issued in our initial
On November 18, 2003, the Board of Directors declared a three-for-two split of the Holding Companys
common stock in the form of a 50% stock dividend, which was paid on December 15, 2003. Each stockholder
received one additional share for every two shares of common stock held at the record date, December
1, 2003. Cash was paid in lieu of fractional shares and no dividend was paid on shares held in treasury.
Share and per share data for prior years in this Annual Report have been adjusted to reflect this
The Bank is a community oriented savings institution offering a wide variety of financial services
to meet the needs of the communities it serves. The Banks main office is in Flushing, New York,
located in the Borough of Queens. It currently operates out of its main office and nine branch offices,
located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau County, New
York. The Bank maintains its executive offices in Lake Success in Nassau County, New York. Substantially
all of the Banks mortgage loans are secured by properties located in the New York City metropolitan
area. During the last three years, real estate values in the New York City metropolitan area have
been relatively stable or increasing, which has favorably impacted the Banks asset quality.
See Asset Quality and Risk Factors Local Economic Conditions.
There can be no assurance that the stability of these economic factors will continue.
The Bank faces intense and increasing competition both in making loans and in attracting deposits.
The Banks 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 future earnings prospects of the Bank will be
affected by the Banks ability to compete effectively with other financial institutions and
to implement its business strategies. See Risk Factors Competition.
For a discussion of the Companys business strategies, see Managements Discussion
and Analysis of Financial Condition and Results of Operations Overview Management Strategy
included in Item 7 of this Annual Report.
Loan Portfolio Composition. The Banks loan portfolio consists primarily of mortgage loans secured by multi-family residential,
commercial real estate, one-to-four family mixed-use property, one-to-four family residential property,
and construction loans. In addition, the Bank also offers SBA loans, other small business loans and
consumer loans. Substantially all the Banks mortgage loans are secured by properties located
within the Banks market area. At December 31, 2004, the Bank had gross loans outstanding
of $1,518.2 million (before the allowance for loan losses and net deferred costs).
In recent years, the
Bank has emphasized the origination of multi-family residential, commercial
real estate and one-to-four family mixed-use property mortgage loans.
These loans generally have higher yields than one-to-four family residential
properties, and include prepayment penalties that the Bank collects if
the loans pay in full prior to the contractual maturity. From December
31, 2001 to December 31, 2004, multi-family residential mortgage loans
increased $277.3 million, or 75.0%, commercial real estate mortgage loans
increased $119.6 million, or 55.8%, one-to-four family mixed-use property
mortgage loans increased $223.0 million, or 203.1%, while one-to-four
family residential mortgage loans decreased $203.7 million, or 56.8%.
The Bank expects to continue this emphasis through aggressive marketing
and by maintaining competitive interest rates and origination fees. The
marketing efforts include frequent contacts with mortgage brokers and
other professionals who serve as referral sources. From time-to-time,
the Bank may purchase loans from mortgage bankers and other financial
institutions. Loans purchased comply with the Banks underwriting
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 residential, commercial real estate
and one-to-four family mixed-use property mortgage loans generally have higher yields than one-to-four
family residential mortgage 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 Banks increased emphasis on multi-family residential, commercial
real estate and one-to-four family mixed-use property mortgage loans has increased the overall level
of credit risk inherent in the Banks loan portfolio. The greater risk associated with multi-family
residential, commercial real estate and one-to-four family mixed-use property mortgage loans could
require the Bank to increase its provision 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 Bank has not experienced significant losses in its multi-family residential, commercial
real estate and one-to-four family mixed-use property mortgage loan portfolios, and has determined
that, at this time, additional provisions are not required.
The Banks mortgage loan portfolio consists of adjustable rate mortgage (ARM) loans
and fixed-rate mortgage loans. 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 Banks 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.
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, as borrowers show a preference to lock-in the lower rates available
on fixed-rate loans. In the case of ARM loans originated by the Bank, volume and adjustment periods
are affected by the interest rates and other market factors as discussed above as well as consumer
preferences. The Bank has not in the past, nor does it currently originate ARM loans that provide
for negative amortization.
The Banks lending activities are subject to federal and state laws and regulations. See
The following table sets forth the composition of the Banks loan portfolio at the dates indicated.
At December 31,
(Dollars in thousands)
Commercial real estate
Co-operative apartment (2)
Gross mortgage loans
Small Business Administration
Commercial business and other loans
Unearned loan fees and deferred
Less: Allowance for loan losses
One-to-four family residential mortgage loans also include home equity and condominium loans. At December
31, 2004, gross home equity loans totaled $13.3 million and condominium loans totaled $12.1 million.
Consists of loans secured by shares representing interests in individual co-operative units that are
generally owner occupied.
The following table sets forth the Banks loan originations (including the net effect of refinancings)
and the changes in the Banks portfolio of loans, including purchases, sales and principal reductions
for the years indicated:
For the Year Ended December 31,
At beginning of year
Mortgage loans originated:
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Total mortgage loans originated
Mortgage loans purchased:
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Total mortgage loans purchased
Mortgage loan sales
Mortgage loan foreclosures
At end of year
SBA, Commercial Business and Other Loans
At beginning of year
Small business loans
Total other loans originated
At end of year
Loan Maturity and Repricing. The following table shows the maturity of the Banks commercial mortgage loan, construction
loan and non-mortgage loan portfolios at December 31, 2004. Scheduled repayments are shown in
the maturity category in which the payments become due.
Commercial Mortgage Loans
Commercial Business and Other
Amounts due within one year
Amounts due after one year:
One to two years
Two to three years
Three to five years
Over five years
Total due after one year
Total amounts due
Sensitivity of loans to changes in
interest rates loans due
after one year:
Fixed rate loans
Adjustable rate loans
loans due after one year
Multi-Family Residential Lending. Loans secured by multi-family residential properties were $646.9 million, or 42.61% of
gross loans, at December 31, 2004. The Banks multi-family residential mortgage loans had
an average principal balance of $461,000 at December 31, 2004, and the largest multi-family
residential mortgage loan held in the Banks portfolio had a principal balance of $12.8 million.
The Bank offers both fixed-rate and adjustable rate multi-family residential mortgage loans, with
maturities up to 30 years.
In underwriting multi-family residential mortgage 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 borrowers 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 residential mortgage 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, when deemed appropriate, from these borrowers
and typically orders an environmental report after an inspection has been made of the property securing
Loans secured by multi-family residential 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 residential property is typically dependent upon the successful operation of the related
property. If the cash flow from the property is reduced, the borrowers ability to repay the
loan may be impaired. Loans secured by multi-family residential 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.
The Banks fixed-rate multi-family mortgage loans are originated for terms up to 30 years and
are competitively priced based on market conditions and the Banks cost of funds. The Bank originated
and purchased $23.9 million, $57.8 million and $63.3 million of fixed-rate multi-family mortgage
loans in 2004, 2003 and 2002, respectively. At December 31, 2004, $180.3 million, or 27.9%,
of the Banks multi-family mortgage loans consisted of fixed rate loans.
The Bank offers ARM loans with adjustment periods typically of five years and for terms of up to 30
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 FHLB-NY corresponding Regular Advance
Rate or 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 index as a result of a discount on the spread for the initial adjustment
period. Multi-family adjustable-rate mortgage loans generally are not subject to limitations on interest
rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank
originated and purchased multi-family ARM loans totaling $179.8 million, $130.5 million and $73.6
million during 2004, 2003 and 2002, respectively. At December 31, 2004, $466.6 million,
or 72.1%, of the Banks multi-family mortgage loans consisted of ARM loans.
Commercial Real Estate Lending. Loans secured by commercial real estate were $334.0 million, or 22.00% of the Banks
gross loans, at December 31, 2004. The Banks commercial real estate mortgage loans are
secured by improved properties such as offices, motels, nursing homes, small business facilities,
strip shopping centers, warehouses, and, to a lesser extent, religious facilities. At December 31,
2004, the Banks commercial real estate mortgage loans had an average principal balance of $741,000,
and the largest of such loans, which was secured by a multi-tenant shopping center, had a principal
balance of $12.1 million. Commercial real estate mortgage loans are generally originated in
a range of $100,000 to $6.0 million. Commercial real estate mortgage 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. Commercial real estate mortgage loans are also made at fixed interest rates
for terms of seven, 10 or 15 years.
In underwriting commercial real estate mortgage loans, the Bank employs the same underwriting standards
and procedures as are employed in underwriting multi-family residential mortgage loans.
Commercial real estate mortgage 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.
The Banks fixed-rate commercial mortgage loans are originated for terms up to 15 years and are
competitively priced based on market conditions and the Banks cost of funds. The Bank originated
and purchased $22.1 million, $37.0 million and $21.8 million of fixed-rate commercial mortgage loans
in 2004, 2003 and 2002, respectively. At December 31, 2004, $94.5 million, or 28.3%, of the
Banks commercial mortgage loans consisted of fixed rate loans.
The Bank offers ARM loans with adjustment periods of one to five years and for terms of up to 15 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 FHLB-NY corresponding Regular Advance Rate. From time
to time, the Bank may originate ARM loans at an initial rate lower than the index as a result of
a discount on the spread for the initial adjustment period. Commercial adjustable-rate mortgage loans
generally are not subject to limitations on interest rate increases either on an adjustment period
or aggregate basis over the life of the loan. The Bank originated and purchased commercial ARM loans
totaling $70.5 million, $52.1 million and $51.3 million during 2004, 2003 and 2002, respectively.
At December 31, 2004, $239.5 million, or 71.7%, of the Banks commercial mortgage
loans consisted of ARM loans.
One-to-Four Family Mortgage Lending Mixed-Use Properties. The Bank offers mortgage loans secured by one-to-four family mixed-use properties. These properties
contain up to four residential dwelling units and a commercial unit. The Bank offers both fixed-rate
and adjustable-rate one-to-four family mixed-use property 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. One-to-four family mixed-use property mortgage loans
were $332.8 million, or 21.92% of gross loans, at December 31, 2004.
During the three-year
period ended December 31, 2004, the Bank focused its origination efforts
with respect to one-to-four family mortgage loans on mixed-use properties.
The primary income-producing units of these properties are the residential
dwelling units. One-to-four family mixed-use property mortgage loans generally
have a higher interest rate than residential mortgage loans. One-to-four
family mixed-use property mortgage loans also
a higher degree of risk than residential mortgage loans, as repayment
of the loan is usually dependent on the income produced from renting the
residential units and the commercial unit. At December 31, 2004, one-to-four
family mixed-use property mortgage loans amounted to $332.8 million, as
compared to $226.2 million at December 31, 2003, $170.5 million at December
31, 2002, and $109.8 million at December 31, 2001, representing an increase
of $223.0 million during the three-year period.
In underwriting one-to-four family mixed-use property mortgage loans, the Bank employs the same underwriting
standards and procedures as are employed in underwriting multi-family residential mortgage loans.
The Banks fixed-rate one-to-four family mixed-use property mortgage loans typically are originated
for a term of 15 years and are competitively priced based on market conditions and the Banks
cost of funds. The Bank originated and purchased $21.8 million, $26.7 million and $28.1 million of
15-year fixed-rate one-to-four family mixed-use property mortgage loans in 2004, 2003 and 2002, respectively.
At December 31, 2004, $108.2 million, or 32.5%, of the Banks one-to-four family mixed-use
property mortgage loans consisted of fixed rate loans.
The Bank offers ARM loans with adjustment periods typically of five years and for terms of up to 30
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 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. One-to-four family mixed-use property adjustable-rate mortgage loans generally
are not subject to limitations on interest rate increases either on an adjustment period or aggregate
basis over the life of the loan. The Bank originated and purchased one-to-four family mixed-use property
ARM loans totaling $114.4 million, $58.8 million and $43.8 million during 2004, 2003 and 2002, respectively.
At December 31, 2004, $224.7 million, or 67.5%, of the Banks one-to-four family mixed-use
property mortgage loans consisted of ARM loans.
One-to-Four Family Mortgage Lending Residential Properties. The Bank offers mortgage loans secured by one-to-four family residential properties, including townhouses
and condominium units. 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 referrals. Residential mortgage loans were $154.9 million, or 10.21%
of gross loans, at December 31, 2004.
During the three-year period ended December 31, 2004, interest rates on residential mortgage loans
declined, and, at times, were at their lowest levels in over 40 years. These interest rates remained
low at December 31, 2004. As a result of the low interest rates available, the Banks existing
borrowers have been refinancing their higher costing residential mortgage loans at the current lower
rates. The Bank did not actively pursue this refinancing market, but instead focused on higher yielding
mortgage loan products. As a result, the Banks portfolio of residential mortgage loans has
declined over the three-year period.
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 Bank originates residential mortgage loans to self-employed individuals within the Banks
local community without verification of the borrowers level of income, provided that the borrowers
stated income is considered reasonable for the borrowers type of business. These loans involve
a higher degree of risk as compared to the Banks other fully underwritten residential mortgage
loans as there is a greater opportunity for self-employed borrowers to falsify or overstate their
level of income and ability to service indebtedness. This risk is mitigated by the Banks policy
to limit the amount of one-to-four family residential mortgage loans to 80% of the appraised value
of the property or the sale price, whichever is less. The Bank believes that its willingness to make
such loans is an aspect of its commitment to be a community-oriented bank. The Bank originated $2.1
million, $3.4 million and $5.2 million in loans of this type during 2004, 2003 and 2002, respectively.
The Banks 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 Banks cost of funds.
The Bank originated and purchased $3.6 million, $2.7 million and $7.8 million of 15-year fixed-rate
residential mortgage loans in 2004, 2003 and 2002, respectively. The Bank also originated and purchased
$4.1 million and $1.5 million of 30-year fixed rate residential mortgage loans in 2003 and 2002,
respectively. The Bank did not originate or purchase any 30-year fixed rate residential mortgage
loans in 2004. These loans have been retained to provide flexibility in the management of the Companys
interest rate sensitivity position. At December 31, 2004, $95.1 million, or 61.4%, of the Banks
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 the U.S. Treasury constant maturity index as published weekly by the Federal Reserve Board. From
time to time, the Bank may originate ARM loans at an initial rate lower than the U.S. Treasury constant
maturity index as a result of a discount on the spread for the initial adjustment period. ARM loans
generally are subject to limitations on interest rate increases of 2% per adjustment period and an
aggregate adjustment of 6% over the life of the loan. The Bank originated and purchased adjustable
rate residential mortgage loans totaling $14.4 million, $11.3 million and $10.2 million during 2004,
2003 and 2002, respectively. At December 31, 2004, $59.8 million, or 38.6%, of the Banks
residential mortgage loans consisted of ARM loans.
The retention of ARM loans in the Banks portfolio helps reduce the Banks exposure to interest
rate risks. However, in an environment of rapidly increasing interest rates, it is possible for the
interest rate increase to exceed the maximum aggregate adjustment on one-to-four family residential
ARM loans and negatively affect the spread between the Banks interest income and its cost of
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 Banks policy of
originating one-to-four family residential ARM loans with annual and lifetime interest rate caps
that limit the increase of a borrowers monthly payment.
Home equity loans are included in the Banks portfolio of 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 an 80% loan-to-value ratio computed on the basis of the aggregate of the first
mortgage loan amount outstanding and the proposed home equity loan. They are generally granted in
amounts from $25,000 to $300,000. The Loan Committee approves loans in excess of $300,000. The underwriting
standards for home equity loans are substantially the same as those for residential mortgage loans.
At December 31, 2004, home equity loans totaled $13.3 million, or 0.88%, of gross loans.
Construction Loans. The Banks construction loans primarily have been made to finance the construction of one-to-four
family residential properties and multi-family residential properties. The Bank also, to a limited
extent, finances the construction of commercial real estate. The Banks 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. 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, 2004 totaled $31.5 million, or 2.07% 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
Small Business Administration Lending. These loans are extended to small businesses and are guaranteed by the SBA to a maximum of 85% of
the loan balance for loans with balances of $150,000 or less, and to a
maximum of 75% of the loan balance for loans with balances greater than $150,000. The maximum amount
the SBA can guarantee is $750,000. 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 three 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,
2004, SBA loans totaled $5.6 million, representing 0.37% of gross loans.
Commercial Business and Other Lending. The Bank originates other loans for business, personal, or household purposes. Total commercial
business and other loans outstanding at December 31, 2004 amounted to $12.5 million, or 0.82%
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 $500,000, with a maximum term of seven 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 applicants payment history on other debts and assessment of the applicants 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
Loan Approval Procedures and Authority. The Banks Board-approved lending policies establish loan approval requirements for its
various types of loan products. The Banks Residential Mortgage Lending Policy (which applies
to all one-to-four family mortgage loans, including residential and mixed-use property) establishes
authorized levels of approval. One-to-four family mortgage loans that do not exceed $500,000 require
two signatures for approval, one of which must be from the President, Executive Vice President or
a Senior Vice President (collectively, Authorized Officers) and the other from a Senior
Underwriter, Manager, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department
(collectively, Loan Officers). For one-to-four family mortgage loans greater than $500,000,
three signatures are required for approval, at least two of which must be from the Authorized Officers,
and the other one may be a Loan Officer. The Loan Committee, the Executive Committee or the full
Board of Directors also must approve one-to-four family mortgage loans in excess of $650,000. Pursuant
to the Banks Commercial Real Estate Lending Policy, all loans secured by commercial real estate
and multi-family residential 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 Banks
Business Loan Policy, all business loans up to $50,000, and SBA loans up to $500,000, must be approved
by the Business Loan Committee, and by the Management Loan Committee. Business loans in excess of
$50,000 up to $500,000, and SBA loans in excess of $500,000 up to $1,500,000, must be approved by
the Management Loan Committee and the Loan Committee of the Banks Board of Directors. Commercial
business and other loans require two signatures for approval, one of which must be from an Authorized
Officer. The Banks 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 Banks written loan policies must be approved by the Loan or Executive
Committee or the Banks Board of Directors.
For all loans originated by the Bank, upon receipt of a completed loan application, a credit report
is ordered and certain other financial information is obtained. An appraisal of the real estate intended
to secure the proposed loan is required. An independent appraiser designated and approved by the
Bank currently performs such appraisals. The Banks staff appraiser reviews the appraisals.
The Banks Board of Directors annually approves the independent appraisers used by the Bank
and approves the Banks appraisal policy. It is the Banks policy to require borrowers
to obtain title insurance and hazard insurance on all real estate first mortgage loans prior to closing.
Borrowers generally are required to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which the Bank makes disbursements for items
such as real estate taxes and, in some cases, hazard insurance premiums.
Loan Concentrations. The maximum amount of credit that the Bank can extend to any single borrower or related group
of borrowers generally is limited to 15% of the Banks 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 Banks policy
not to extend such additional credit. At December 31, 2004, 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 $20.0 million, $19.2 million and $14.2 million for each of the three borrowers, respectively.
Loan Servicing. At December 31, 2004, the Bank was servicing $13.0 million of mortgage loans
and $11.0 million of SBA loans for others. The Banks 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.
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 mortgage loans, we personally contact the borrower after the loan becomes 30 days delinquent.
At that time we attempt to make arrangements with the borrower to either bring the loan to current
status or begin making payments according to an agreed upon schedule. For the majority of delinquent
loans, the borrower is able to bring the loan current within a reasonable time. When the borrower
has indicated that he/she will be unable to bring the loan current, or due to other circumstances
which, in our opinion, indicate the borrower will be unable to bring the loan current within a reasonable
time, or if we deem the collateral value to have been impaired, we classify the loan as non-performing.
All loans classified as non-performing, which includes all loans past due ninety days or more, are
classified as non-accrual unless there is, in managements opinion, compelling evidence the
borrower will bring the loan current in the immediate future.
Each non-performing loan is reviewed on an individual basis. Upon classifying a loan as non-performing,
we review available information and conditions that relate to the status of the loan, including the
estimated value of the loans collateral and any legal considerations that may affect the borrowers
ability to continue to make payments to the Bank. We then decide, based upon the available information,
if we will consider the sale of the loan or retention of the loan. If we retain the loan, we may
continue to work with the borrower to collect the amounts due or start foreclosure proceedings. 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.
Once we decide to sell a loan, we determine what we would consider to be adequate consideration to
be obtained when that loan is sold, based on the facts and circumstances related to that loan. We
will then contact investors and brokers, seeking interest in purchasing the loan. We have been successful
in finding buyers for our non-performing loans offered for sale that are willing to pay what we consider
to be adequate consideration. Terms of the sale include cash due upon closing of the sale, no contingencies
or recourse to the Bank, servicing is released to the buyer and time is of the essence. These sales
usually close within a reasonably short time period
We implemented this strategy of selling non-performing loans during 2003. This has allowed the Bank
to optimize its return by quickly converting its non-performing loans to cash, which can then be
reinvested in earning assets. This strategy also allows the Bank to avoid lengthy and costly legal
proceedings that may occur with non-performing loans. The Bank sold eleven delinquent mortgage loans
totaling $4.3 million and sixteen delinquent mortgage loans totaling $6.1 million during the years
ended December 31, 2004 and 2003, respectively. The Bank did not realize a gain or loss on any of
these mortgage loan sales. There can be no assurances that the Bank will continue this strategy in
future periods, or if continued, we will be able to find buyers to pay adequate consideration.
On mortgage loans or loan participations purchased by the Bank, for which the seller retains the servicing
rights, 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, 2004, the Bank held $0.4 million of loans that were
serviced by others.
In the case of commercial business or other 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 attempt to repossess personal or business property that
secures an SBA loan, commercial business loan or consumer loan.
Delinquent Loans and Non-performing Assets. The Bank generally discontinues accruing interest on delinquent loans when a loan is 90 days past
due or foreclosure proceedings have been commenced, whichever first occurs. At that time, previously
accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to
their maturity date but not their payments, however, continue to accrue interest as long as the borrower
continues to remit monthly payments.
The following table sets forth information regarding all non-accrual loans and loans which are 90 days
or more delinquent and still accruing, at the dates indicated. During the years ended December 31,
2004, 2003 and 2002, the amounts of additional interest income that would have been recorded on non-accrual
loans, had they been current, totaled $50,000, $34,000 and $222,000, respectively. These amounts
were not included in the Banks interest income for the respective periods.
Real Estate Owned (REO). The Bank aggressively markets any REO properties, when and if, they are acquired through foreclosure.
At December 31, 2004, the Bank did not own any such properties.
Environmental Concerns Relating to Loans. 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.
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 Banks overall loan portfolio. The allowance
is established through a provision for loan losses based on managements 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.
Management reviews the quality of loans and reports to the Loan Committee of the Board of Directors
on a monthly basis. The determination of the amount of the allowance for loan losses includes estimates
that are susceptible to significant changes due to changes in appraised values of collateral, national
and regional economic conditions and other factors. In connection with the determination of the allowance,
the market value of collateral ordinarily is evaluated by the Banks 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.
The determination of the amount of the allowance for loan losses 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, co-operative apartment, SBA, commercial business
and consumer loan is any current delinquency on the loan. The primary risk elements considered with
respect to commercial real estate, multi-family residential and one-to-four family mixed-use property
mortgage 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.
In assessing the adequacy of the allowance, management also reviews the Banks loan portfolio
by separate categories which have similar risk and collateral characteristics; e.g. multi-family
residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential,
co-operative apartment, SBA, commercial business and consumer loans. General provisions are established
against performing loans in the Banks portfolio in amounts deemed prudent from time to time
based on the Banks qualitative analysis of the factors, including the historical loss experience
and regional economic conditions. During the five-year period ended December 31, 2004, the Bank incurred
total net charge-offs of $285,000. This reflects a significant improvement over the loss experience
of the 1990s. In addition, the regional economy has improved since 2001, including significant increases
in real estate values. As a result of these improvements, and despite the increase in the loan portfolio
and shift to loans with greater risk, the Bank has not considered it necessary to provide a provision
for loan losses during any of the years in the five-year period ended December 31, 2004. Management
has concluded that, during this time period, the allowance was sufficient to absorb losses inherent
in the loan portfolio.
The Banks determination as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS and the FDIC, which can require the establishment of additional
general allowances or specific loss allowances or require charge-offs. Such authorities may require
the Bank to make additional provisions to the allowance based on their judgments about information
available to them at the time of their examination. An OTS policy statement provides guidance for
OTS examiners in determining whether the levels of general valuation allowances for savings institutions
are adequate. The policy statement requires that if a savings institutions 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 institutions level of classified assets.
Management of the Bank believes that the current allowance for loan losses is adequate in light of
current economic conditions, the composition of its loan portfolio and other available information
and the Board of Directors concurs in this belief. Accordingly, the Bank did not record a provision
for loan losses for the years ended December 31, 2004, 2003 and 2002. At December 31, 2004,
the total allowance for loan losses was $6.5 million, representing 717.29% of each of non-performing
loans and non-performing assets, compared to 960.86% for both of these ratios at December 31, 2003.
The Bank continues to monitor and, as necessary, modify the level of its allowance for loan losses
in order to maintain the allowance at a level which management considers adequate to provide for
probable loan losses based on available information.
Many factors may require
additions to the allowance for loan losses in future periods beyond those
currently revealed. These factors include future adverse changes in economic
conditions, changes in interest rates and changes in the financial capacity
of individual borrowers (any of which may affect the ability of borrowers
repayments on loans), changes in the real estate market within the Banks
lending area and the value of collateral, or a review and evaluation of
the Banks loan portfolio in the future. The determination of the
amount of the allowance for loan losses includes estimates that are susceptible
to significant changes due to changes in appraised values of collateral,
national and regional economic conditions, interest rates and other factors.
In addition, the Banks increased emphasis on multi-family residential,
commercial real estate and one-to-four family mixed-use property mortgage
loans can be expected to increase the overall level of credit risk inherent
in the Banks loan portfolio. The greater risk associated with these
loans, as well as construction loans, could require the Bank to increase
its provisions for loan losses and to maintain an allowance for loan losses
as a percentage of total loans that is in excess of the allowance currently
maintained by the Bank. Provisions for loan losses are charged against
net income. See Lending Activities and Asset
The following table sets forth changes in, and the balance of, the Banks allowance for loan losses
at and for the dates indicated.
At and For the Year Ended December 31,
(Dollars in thousands)
Balance at beginning of year
Provision for loan losses
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Total loans charged-off
Balance at end of year
Ratio of net charge-offs during the year
to average loans outstanding during the year
Ratio of allowance for loan losses to
gross loans at end of the year
Ratio of allowance for loan losses to
non-performing loans at the end of year
Ratio of allowance for loan losses to
non-performing assets at the end of year
The following table sets forth the Banks 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 Banks loan portfolio.
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 Banks
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 Managements Discussion and Analysis of Financial Condition
and Results of Operations OverviewManagement Strategy in Item 7 of this Annual Report.
Federally chartered savings institutions have authority to invest in various types of assets, including
U.S. government obligations, securities of various federal agencies, mortgage-backed and mortgage-related
securities, certain certificates of deposit of insured banks and savings institutions, certain bankers
acceptances, reverse repurchase agreements, loans of federal funds, and, subject to certain limits,
corporate securities, commercial paper and mutual funds. The Company primarily invests in mortgage-backed
securities issued by, or backed by underlying securities which were issued by, FNMA, GNMA and FHLMC,
U. S. government obligations, and mutual funds which purchase these same instruments. These types
of investments are generally viewed by the investment community as having a limited credit risk.
The Investment Committee of the Bank and the Company meets quarterly to monitor investment transactions
and to establish investment strategy. The Board of Directors reviews the investment policy on an
annual basis and investment activity on a monthly basis.
The Company classifies its investment securities as available for sale. Unrealized gains and losses
(other than unrealized losses considered other than temporary) for available-for-sale securities
are excluded from earnings and included in Accumulated Other Comprehensive Income (a separate component
of equity), net of taxes. At December 31, 2004, the Company had $435.7 million in securities
available for sale which represented 21.17% of total assets. These securities had an aggregate market
value at December 31, 2004 that was approximately 2.7 times the amount of the Companys equity
at that date. The cumulative balance of unrealized net losses on securities available for sale was
$0.7 million, net of taxes, at December 31, 2004. As a result of the magnitude of the Companys
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 5 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual
Report. 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, 2004, the Companys investment in Shay Assets Management, Inc. mutual funds
was $20.6 million, or 12.8% of the Companys equity. There are no other issuers securities,
excluding government agencies, that either alone, or together with any investments in the securities
of any affiliate(s) of such issuer, exceeded 10% of the Companys equity.
The table below sets forth certain information regarding the amortized cost and market values of the
Companys and Banks securities portfolio, interest bearing deposits and federal funds,
at the dates indicated. Securities available for sale are recorded at market value. See Note 5
of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report.
At December 31,
( In thousands)
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies
bonds and other securities
Total equity securities
REMIC and CMO
Total mortgage-backed securities
Total securities available for sale
Interest-bearing deposits and
Federal funds sold
Mortgage-backed securities. At December 31, 2004, the Company had $397.2 million invested in mortgage-backed securities, of which
$68.9 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.
The following table sets forth the Companys mortgage-backed securities purchases, sales and principal
repayments for the years indicated:
For the Year Ended December 31,
At beginning of year
Purchases of mortgage-backed securities
Amortization of unearned premium, net of
accretion of unearned discount
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale
Sales of mortgage-backed securities
Principal repayments received on
Net (decrease) increase in mortgage-backed securities
At end of year
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
Company does not own any derivative instruments that are extremely sensitive to changes in interest
The table below sets forth certain information regarding the amortized cost, estimated fair value,
annualized weighted average yields and maturities of the Companys debt and equity securities
at December 31, 2004. The stratification of balances is based on stated maturities. Equity securities
are shown as immediately maturing, except for preferred stocks with stated redemption dates, which
are shown in the period they are scheduled to be redeemed. Assumptions for repayments and prepayments
are not reflected for mortgage-backed securities. The Company carries these investments at their
estimated fair value in the consolidated financial statements.
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 Companys
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
Banks deposits principally consist of passbook accounts, money market accounts, demand accounts,
NOW accounts and certificates of deposit. The Bank has a relatively stable retail deposit base drawn
from its market area through its ten full service offices. The Bank seeks to retain existing depositor
relationships by offering quality service and competitive interest rates, while keeping deposit growth
within reasonable limits. It is managements intention to balance its goal to maintain competitive
interest rates on deposits while seeking to manage its cost of funds to finance its strategies.
The Banks 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. The Bank has seen an increase in its deposits in each of the past three years.
During 2002 and 2001, it is generally believed that investors continued to withdraw funds from the
stock market and deposit these funds in banks. During 2003, the nations economy began to expand,
with the growth continuing in 2004. Despite the improvement in the stock market during 2003 and 2004,
the Bank saw an increase in its due to depositors during 2004 of $117.7 million. The Federal Reserve
began increasing short-term interest rates in the second half of 2004 from the low rates it charged
throughout 2003 and the first half of 2004. The Bank has responded by increasing interest rates paid
on certain of its longer term certificates of deposit. While new deposits were obtained at rates
that were higher than the weighted average cost of existing deposits, the Bank believes that by extending
the term of new deposits it is better protected against future interest rate increases. The cost
of deposits increased to 2.48% in the fourth quarter of 2004 from 2.42% in the fourth quarter of
2003. While we are unable to predict the direction of future interest rate changes, if interest rates
continue to rise during 2005, the result will be continued increases in the Companys cost of
deposits, and could result in narrowing the Companys net interest margin.
Included in deposits are certificates of deposit with a balance of $100,000 or more totaling $165.6
million, $124.2 million and $100.9 million at December 31, 2004, 2003 and 2002, respectively.
The following table sets forth the distribution of the Banks deposit accounts at the dates indicated
and the weighted average nominal interest rates on each category of deposits presented.
At December 31,
(Dollars in thousands)
Passbook accounts (1)
NOW accounts (1)
Demand accounts (1)
Mortgagors escrow deposits
Money market accounts (1)
Certificate of deposit accounts
with original maturities of:
Less than 6 Months
6 to less than 12 Months
12 to less than 30 Months
30 to less than 48 Months
48 to less than 72 Months
72 Months or more
certificate of deposit
Total deposits (2)
Weighted average nominal rate as of the year end date equals the stated rate offered.
Included in the above balances are IRA and Keogh deposits totaling $162.9 million, $144.3 million and
$131.0 million at December 31, 2004, 2003 and 2002, respectively.
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, 2004.
At December 31, 2004
At December 31,
(Dollars in thousands)
1.99% or less
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99%
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%
The following table presents by remaining maturity categories the amount of certificate of deposit
accounts with balances of $100,000 or more at December 31, 2004 and their annualized weighted
average interest rates.
(Dollars in thousands)
Three months or less
Over three through six months
Over six through 12 months
Over 12 months
The following table presents the deposit activity, including mortgagors escrow deposits, of the
Bank for the periods indicated.
For the Year Ended December 31,
Interest credited on deposits
Net increase in deposits
The following table sets forth the distribution of the Banks 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,
(Dollars in thousands)
Certificate of deposit
Borrowings. Although deposits are the Banks primary source of funds, the Bank also uses 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 Banks mortgage portfolio and the Banks investment
in the stock of the FHLB-NY. In addition, the Bank may pledge mortgage-backed securities to obtain
advances from the FHLB-NY. See Regulation Federal Home Loan Bank System.
The maximum amount that the FHLB-NY will advance for purposes other than for meeting withdrawals
fluctuates from time to time in accordance with the policies of the FHLB-NY. The Bank also enters
into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as
financing transactions and the obligations to repurchase are reflected as a liability in the Companys
consolidated financial statements. In addition, the Trust issued $20.0 million of floating rate capital
securities in July 2003, which were also reflected as a liability in the Companys consolidated
financial statements through December 31, 2003. The Trust had invested the proceeds of the issuance
of the capital securities and its common stock in $20.6 million of junior subordinated debentures
issued by the Holding Company. Effective January 1, 2004, the Trust was deconsolidated, and the consolidated
financial statements include the junior subordinated debentures from that date forward. The average
cost of borrowed funds was 4.01%, 4.70% and 5.30% for 2004, 2003 and 2002, respectively. The average
balances of borrowed funds were $580.6 million, $524.9 million and $497.0 million for the same years, respectively.
The following table sets forth certain information regarding the Companys borrowed funds at or
for the periods ended on the dates indicated.
At December 31, 2004, the Holding Company had two wholly owned subsidiaries: the Bank and the Trust.
In addition, 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 Banks New York State leeway investment authority. The original purpose of Properties
was to engage in joint venture real estate equity investments. The Bank discontinued these activities
in 1986. The last joint venture in which Properties was a partner was dissolved in 1989. The last
remaining property acquired by the dissolution of these joint ventures was disposed of in 1998.
(b) FPFC was formed in the fourth
quarter of 1997 as a real estate investment trust for the purpose of acquiring, holding and managing
real estate mortgage assets. FPFC also provides an additional vehicle for access by the Company to
the capital markets for future opportunities.
(c) Flushing Service Corporation was
formed in 1998 to market insurance products and mutual funds.
At December 31, 2004, the Bank had 191 full-time employees and 59 part-time employees. None of
the Banks employees are represented by a collective bargaining unit, and the Bank considers
its relationship with its employees to be good. At the present time, the Holding Company does not
employ any persons other than certain officers of the Bank who do not receive any extra compensation
as officers of the Holding Company.
The Company has two stock-based compensation plans: The 1996 Restricted Stock Incentive Plan (Restricted
Stock Plan) and the 1996 Stock Option Incentive Plan (Stock Option Plan), both
of which became effective on May 21, 1996 after adoption by the Board of Directors and approval by
the stockholders, and have been amended from time to time.
The Restricted Stock Plan provides for the grant of shares of restricted stock and restricted stock
units payable in shares of common stock. The aggregate number of shares of common stock which may
be issued under the Restricted Stock Plan, as amended, may not exceed 1,225,687 shares to employees,
and may not exceed 394,312 shares to outside directors, for a total of 1,619,999 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 Board
of Directors has discretion to determine the vesting period of all grants to employees. All grants
that have been awarded to employees vest 20% per year over a five-year period. Initial grants to
outside directors vest 20% per year over a five-year period, while subsequent annual grants to outside
directors vest one-third per year over a three-year period. All grants have full vesting in the event
of death, disability, retirement or a change in control.
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, non-statutory 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 3,623,905 shares, and with respect to options granted to outside
directors may not exceed 1,672,030 shares, for a total of 5,295,935 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 253,125 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. The Board of Directors has discretion
to determine the vesting period of all grants to employees. Initial grants to outside directors vest
20% per year over a five-year period, while subsequent annual grants to outside directors vest one-third
per year over a three-year period. All grants have full vesting in the event of death, disability,
retirement or a change in control.
For additional information concerning these plans, see Note 9 of Notes to Consolidated Financial
Statements in Item 8 of this Annual Report.
In addition to the other information contained in this Annual Report, the following factors and other
considerations should be considered carefully in evaluating the Holding Company, the Bank and their
Like most financial institutions, the Companys results of operations depends to a large degree
on its net interest income. When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets, a significant increase in market interest rates could adversely affect net
interest income. Conversely, a significant decrease in market interest rates could result in increased
net interest income. As a general matter, the Company seeks to manage its business to limit its overall
exposure to interest rate fluctuations. However, fluctuations in market interest rates are neither
predictable nor controllable and may have a material adverse impact on the operations and financial
condition of the Company. Additionally, in a rising interest rate environment, a borrowers
ability to repay adjustable rate mortgages can be negatively affected as payments increase at repricing dates.
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 Companys investment
in U.S. government agency and corporate securities may also adversely
affect yield in a declining interest rate environment. Such prepayments
adversely affect the yield of the Companys 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 Companys loan portfolio resulting from prepayments.
In periods of low interest rates, the Companys 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
Companys 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 average lives of lower yielding
fixed rate mortgages and mortgage-backed securities, which could adversely
affect net interest income. In addition, depositors tend to open longer
term, higher costing certificate of deposit accounts which could adversely
affect the Banks net interest income if rates were to subsequently
decline. Additionally, adjustable rate mortgage loans and mortgage-backed
securities generally contain interim and lifetime caps that limit the
amount the interest rate can increase or decrease at repricing dates.
Significant increases in prevailing interest rates may significantly affect
demand for loans and the value of bank collateral. See Local
Multi-family residential, commercial real estate and one-to-four family mixed use property mortgage
loans, the increased origination of which is part of managements strategy, and construction
loans, are generally viewed as exposing the lender to a greater risk of loss than fully underwritten
one-to-four family residential mortgage loans and typically involve higher principal amounts per
loan. Repayment of multi-family residential, commercial real estate and one-to-four family mixed-use
property mortgage 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.
In addition, the Bank, from time-to-time, originates mortgage loans without verifying the borrowers
level of income. These loans involve a higher degree of risk as compared to the Banks other
fully underwritten one-to-four family residential mortgage loans as there is a greater opportunity
for self-employed borrowers to falsify or overstate their level of income and ability to service
indebtedness. These risks are mitigated by the Banks policy to limit the amount of one-to-four
family residential mortgage loans to 80% of the appraised value or sale price, whichever is less.
These loans are not as readily saleable in the secondary market as the Banks other fully underwritten
loans, either as whole loans or when pooled or securitized.
There can be no assurance that the Bank will be able to successfully implement its business strategies
with respect to these higher yielding loans. In assessing the future earnings prospects of the
Bank, investors should consider, among other things, the Banks level of origination of one-to-four
family residential mortgage loans (including loans originated without verifying the borrowers income),
the Banks emphasis on multi-family residential, commercial real estate and one-to-four family
mixed-use property mortgage loans, and the greater risks associated with such loans. See Business
The Bank faces intense
and increasing competition both in making loans and in attracting deposits.
The Banks 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 Banks
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 mortgage loans will continue to increase in the future.
The Banks most direct competition for deposits historically has
come from other savings banks, commercial banks, savings and loan associations
and credit unions. In addition, the Bank faces competition for deposits
from products offered by brokerage firms, insurance companies and other
financial intermediaries, such as money market and other mutual funds
and annuities. Consolidation in the banking industry and the lifting of
interstate banking and branching restrictions have made it more difficult
for smaller, community-oriented banks, such as the Bank, to compete effectively
with large, national, regional and super-regional banking institutions.
Notwithstanding the intense competition, the Bank has been successful
in increasing its loan portfolios and deposit base. However, no assurances
can be given that the Bank will be able to continue to increase its loan
portfolios and deposit base, as contemplated by managements current
The Companys operating results are affected by national and local economic and competitive conditions,
including changes in market interest rates, the strength of the local economy, government policies
and actions of regulatory authorities. During 2004, the nations economy was generally considered
to be expanding. Yet world events, particularly the War on Terror and the U. S. dollars
decline against other currencies, continued to have an effect on the economic recovery. These economic
conditions can result in borrowers defaulting on their loans, or withdrawing their funds on deposit
at the Bank to meet their financial obligations. While we have not seen a significant increase in
delinquent loans, and have seen an increase in deposits, we cannot predict the effect of these economic
conditions on the Companys financial condition or operating results.
A decline in the local economy, national economy or metropolitan area real estate market could adversely
affect the financial condition and results of operations of the Company, including through decreased
demand for loans or increased competition for good loans, increased non-performing loans and loan
losses and resulting additional provisions for loan losses and for losses on real estate owned. Although
management of the Bank believes that the current allowance for loan losses is adequate in light of
current economic conditions, many factors could require additions to the allowance for loan losses
in future periods above those currently maintained. These factors include: (1) adverse changes
in economic conditions and changes in interest rates that may affect the ability of borrowers
to make payments on loans, (2) changes in the financial capacity of individual borrowers, (3) changes
in the local real estate market and the value of the Banks loan collateral, and (4) future
review and evaluation of the Banks 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 General Allowance for Loan Losses.
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. For a discussion of regulations affecting the Company, see Regulation
and Federal, State and Local Taxation.
On September 17, 1996, the Holding 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 Holding 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 Holding Company one-three-hundred-thirty-seventh-and-one-half of a share
of a new series of junior participating preferred stock at a price of $64, subject to certain adjustments.
The rights will become exercisable only if any person or group acquires 15% or more of the Holding
Companys 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 Holding Companys certificate of
incorporation and bylaws, the Banks 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 Holding Company, 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
any such future acquisition or attempted acquisition, and would render
the removal of the current Board of Directors or management of the Holding
Company more difficult.
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,
as well as, since the enactment of the Small Business Job Protection Act of 1996 (the Act),
those governing the Banks deductions for bad debts, described below.
Bad Debt Reserves. Prior to the enactment of the Act, which was signed into law on August 20, 1996, savings institutions
which met certain definitional tests primarily relating to their assets and the nature of their business
(qualifying thrifts), such as the Bank, were allowed deductions for bad debts under methods
more favorable than those granted to other taxpayers. Qualifying thrifts could compute deductions
for bad debts using either the specific charge off method of Section 166 of the Internal Revenue
Code (the Code) or the reserve method of Section 593 of the Code. Section 1616(a) of
the Act repealed the Section 593 reserve method of accounting for bad debts by qualifying thrifts,
effective for taxable years beginning after 1995. Qualifying thrifts that are treated as large banks,
such as the Bank, are required to use the specific charge off method, pursuant to which the amount
of any debt may be deducted only as it actually becomes wholly or partially worthless.
Distributions. To the extent that the Bank makes non-dividend distributions to stockholders
that are considered to result in distributions from its 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 Banks taxable income. Non-dividend distributions include distributions
in excess of the Banks 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 corporations regular federal income
tax liability. AMTI is equal to taxable income with certain adjustments. Generally, only 90% of AMTI
can be offset by net operating loss carrybacks and carryforwards.
New York State and
New York City Taxation. The Company is subject to
the New York State Franchise Tax on Banking Corporations in an annual
amount equal to the greater of (1) 7.5% of entire net income
allocable to New York State during the taxable year or (2) the applicable
alternative minimum tax. The alternative minimum tax is generally the
greater of (a) 0.01% of the value of assets allocable to New York
State with certain modifications, (b) 3% of alternative entire
net income allocable to New York State or (c) $250. Entire
net income is similar to federal taxable income, subject to certain modifications,
including that net operating losses arising during any taxable year prior
to January 1, 2001 cannot be carried back or carried forward, and net
operating losses arising during any taxable year beginning on or after
January 1, 2001 cannot be carried back. Alternative entire net income
is equal to entire net income without certain deductions which are allowable
in the calculation of entire net income. The Company also is subject to
a similarly calculated New York City tax of 9% on income allocated to
New York City (although net operating losses cannot be carried back or
carried forward regardless of when they arise) and similar alternative
taxes. In addition, the Company is subject to a tax surcharge at a rate
of 17% of the New York State Franchise Tax that is attributable to business
activity carried on within the Metropolitan Commuter Transportation District.
This tax surcharge is assessed as if the New York State Franchise tax
is imposed at a 9% rate.
repeal of the federal income tax provisions permitting bad debt deductions
under the reserve method, New York State has enacted legislation maintaining
the preferential treatment of additional loss reserves for qualifying
real property and non-qualifying loans of qualifying thrifts for both
New York State and New York City tax purposes. Calculation of the amount
of additions to reserves for qualifying real property loans is limited
to the larger of the amount derived by the percentage of taxable income
method or the experience method. For these purposes, the applicable percentage
to calculate the bad debt deduction under the percentage of taxable income
method is 32% of taxable income, reduced by additions to reserves for
non-qualifying loans, except that the amount of the addition to the reserve
cannot exceed the amount necessary to increase the balance of the reserve
for losses on qualifying real property loans at the close of the taxable
year to 6% of the balance of the qualifying real property loans outstanding
at the end of the taxable year. Under the experience method, the maximum
addition to a loan reserve generally equals the amount necessary to increase
the balance of the bad debt reserve at the close of the taxable year to
the greater of (1) the amount that bears the same ratio to loans outstanding
at the close of the taxable year as the total net bad debts sustained
during the current and five preceding taxable years bears to the sum of
the loans outstanding at the close of those six years, or (2) the balance
of the bad debt reserve at the close of the base year, or,
if the amount of loans outstanding has declined since the base year, the
amount which bears the same ratio to the amount of loans outstanding at
the close of the taxable year as the balance of the reserve at the close
of the base year. For these purposes, the base year is the
last taxable year beginning before 1988. The amount of additions to reserves
for non-qualifying loans is computed under the experience method. In no
event may the additions to reserves for qualifying real property loans
be greater than the larger of the amount determined under the experience
method or the amount which, when added to the additions to reserves for
non-qualifying loans, equal the amount by which 12% of the total deposits
or withdrawable accounts of depositors of the Bank at the close of the
taxable year exceeds the sum of the Banks surplus, undivided profits
and reserves at the beginning of such year.
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.
The Holding Company is registered with the OTS as a savings and loan holding company and is subject
to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and any non-savings institution subsidiaries it may form or
acquire. Among other things, this authority permits the OTS to restrict or prohibit activities that
it determines may pose a serious risk to the Bank. As a publicly owned company, the Company is required
to file certain reports with the Securities and Exchange Commission (SEC) under federal
securities laws. The Bank is a member of the FHLB System. The Bank is subject to extensive regulation
by the OTS, as its chartering agency, and the FDIC, as the insurer of the Banks deposits. The
Bank is also subject to certain regulations promulgated by the other federal agencies. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial condition, in addition
to obtaining regulatory approvals prior to entering into certain transactions such as mergers with
or acquisitions of other savings institutions. The Bank is subject to periodic examinations by the
OTS and the FDIC to examine whether the Bank is in compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of activities in which an institution
can engage and is intended primarily to ensure the safe and sound operation of the Bank for the protection
of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and the establishment of
an adequate allowance for possible loan losses for regulatory purposes. Any change in such regulation,
whether by the OTS, the FDIC, other federal agencies or the United States Congress, could have a
material adverse impact on the Company, the Bank and their operations.
The activities of federal
savings institutions are governed primarily by the Home Owners Loan
Act, as amended (HOLA) and, in certain respects, the Federal
Deposit Insurance Act (FDIA). Most regulatory functions relating
to deposit insurance and to the administration of conservatorships and
receiverships of insured institutions are exercised by the FDIC. The Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
among other things, requires that federal banking regulators intervene
promptly when a depository institution experiences financial difficulties,
mandated the establishment of a risk-based deposit insurance assessment
system, and required imposition of numerous additional safety and soundness
operational standards and restrictions. FDICIA and the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA) each
contain provisions affecting numerous aspects of
and regulations of federal savings banks, and these laws empower the OTS
and the FDIC, among other agencies, to promulgate regulations implementing
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.
The Company is a unitary savings and loan holding company within the meaning of the HOLA. As such,
the Company is required to register with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company
and any non-savings institution subsidiaries it may form or acquire. Among other things, this authority
permits the OTS to restrict or prohibit activities that it determines may pose a serious risk to
the Bank. See Restrictions on Dividends and Capital Distributions.
HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries,
from (1) acquiring another savings institution or holding company thereof, without prior written
approval of the OTS; (2) acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary
savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities
other than those permitted by HOLA; or (3) acquiring or retaining control of a depository institution
that is not federally insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS will consider the financial and managerial resources and future prospects of
the company and institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community, and the impact of any competitive factors that
may be involved.
As a unitary savings and loan holding company, the Company currently is not restricted as to the types
of business activities in which it may engage, provided that the Bank continues to meet the qualified
thrift lender (QTL) test. See Qualified Thrift Lender Test. Upon any
non-supervisory acquisition by the Company of another savings association or savings bank, 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 Holding Company Act, subject to the prior approval of
the OTS, and activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan
holding company controlling savings institutions in more than one state, subject to two exceptions:
(1) emergency acquisitions authorized by the FDIC and (2) the acquisition of a savings
institution in another state if the laws of the state of the target savings institution specifically
permit such acquisitions. Under New York law, reciprocal interstate acquisitions are authorized for
savings and loan holding companies and savings institutions. Certain states do not authorize interstate
acquisitions under any circumstances; however, federal law authorizing acquisitions in supervisory
cases preempts such state law.
Federal law generally provides that no person acting directly or indirectly or through
or in concert with one or more other persons, may acquire control, as that term is defined
in OTS regulations, of a federally insured savings institution without giving at least 60 days
written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other things, that (1)
the acquisition would substantially lessen competition; (2) the financial condition of the acquiring
person might jeopardize the financial stability of the savings institution or prejudice the interests
of its depositors; or (3) the competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
The Bank is subject
to comprehensive regulation governing its investments and activities.
Among other things, the Bank may invest in (1) residential mortgage loans,
mortgage-backed securities, education loans and credit card loans in an
unlimited amount, (2) non-residential real estate loans up to 400% of
total capital, (3) commercial business loans up to 20% of total assets
(however, amounts over 10% of total assets must be used only for small
business loans) and (4) in general, consumer loans and highly rated commercial
paper and corporate debt securities in the aggregate up to 35% of total
assets. In addition, the Bank may invest up to 3% of its total assets
in service corporations, an unlimited percentage of its assets in operating
subsidiaries (which may only engage in activities permissible for the
certain conditions may invest in finance subsidiaries. Other than investments
in service corporations, operating subsidiaries, finance subsidiaries
and certain government-sponsored enterprises, such as FHLMC and FNMA,
the Bank generally is not permitted to make equity investments. See
General Investment Activities. A service corporation in which
the Bank may invest is permitted to engage in activities that a federal
savings bank make conduct directly, other than taking deposits, as well
as certain activities pre-approved by the OTS, which include providing
certain support services for the institution; originating, investing in,
selling, purchasing, servicing or otherwise dealing with specified types
of loans and participations (principally loans that the parent institution
could make); specified real estate activities, including limited real
estate development; securities brokerage services; certain insurance brokerage
activities; and other specified investments and services.
FDICIA requires each federal banking agency to adopt uniform regulations prescribing standards for
extensions of credit which are either (1) secured by real estate, or (2) made for the purpose of
financing the construction of improvements on real estate. In prescribing these standards, the banking
agencies must consider the risk posed to the deposit insurance funds by real estate loans, the need
for safe and sound operation of insured depository institutions and the availability of credit. The
OTS and the other federal banking agencies adopted uniform regulations, effective March 19, 1993.
The OTS regulation requires each savings association to establish and maintain written internal real
estate lending standards consistent with safe and sound banking practices and appropriate to the
size of the institution and the nature and scope of its real estate lending activities. The policy
must also be consistent with accompanying OTS guidelines, which include maximum loan-to-value ratios
for the following types of real estate loans: raw land (65%), land development (75%), nonresidential
construction (80%), improved property (85%) and one-to-four family residential construction (85%).
Owner-occupied one-to-four family mortgage loans and home equity loans do not have maximum loan-to-value
ratio limits, but those with a loan-to-value ratio at origination of 90% or greater are to be backed
by private mortgage insurance or readily marketable collateral. Institutions are also permitted to
make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long
as such exceptions are appropriately reviewed and justified. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standard are justified.
The Bank generally is subject to the same loans-to-one borrower limits that apply to national banks.
With certain exceptions, total loans and extensions of credit outstanding at one time to one borrower
(including certain related entities of the borrower) may not exceed, for loans not fully secured,
15% of the Banks unimpaired capital and unimpaired surplus, plus, for loans fully secured by
readily marketable collateral, an additional 10% of the Banks unimpaired capital and unimpaired
surplus. At December 31, 2004, the largest amount the Bank could lend to one borrower was approximately
$24.2 million, and at that date, the Banks largest aggregate amount of loans-to-one borrower
was $20.0 million, all of which were performing according to their terms. See General
The deposits of the Bank are insured up to $100,000 per depositor (as defined by federal law and regulations)
by the FDIC. Approximately 93.17% of the Banks deposits are presently insured by the FDIC under
the Bank Insurance Fund (BIF). The remainder is insured by the FDIC under the Savings
Association Insurance Fund (SAIF). The deposits insured under the SAIF are a result of
those acquired in the acquisition of New York Federal Savings Bank in 1997. 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. As of the date of this
Annual Report, the annual FDIC assessment rate for BIF and SAIF member
institutions varies between 0% to 0.27% per annum per $100 of deposits.
At December 31, 2004, the Banks annual assessment rate was 0.00%.
The Banks 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
BIF and SAIF members to the extent necessary to protect the BIF and SAIF
and, under current law, would be required to increase such rates to $0.23
per $100 of deposits if the BIF or SAIF reserve ratio falls below the
required 1.25%. Any increase in deposit insurance assessment rates, as
a result of a change in the category or subcategory to which the Bank
is assigned or the exercise of the FDICs authority to increase assessment
rates generally, could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation that might lead to termination
of deposit insurance.
On September 30, 1996, as part of an omnibus appropriations bill, the Deposit Insurance Funds Act of
1996 (the Funds Act) was enacted. The Funds Act requires BIF institutions, beginning
January 1, 1997, to pay a portion of the interest due on the Finance Corporation (FICO)
bonds issued in connection with the savings and loan association crisis in the late 1980s, and requires
BIF institutions to pay their full pro rata share of the FICO payments starting the earlier of January
1, 2000 or the date at which no savings institution continues to exist. The Bank was required, as
of January 1, 2000, to pay its full pro rata share of the FICO payments. The FICO assessment rate
is subject to change. The Bank paid $178,000, $166,000 and $147,000 for its share of the interest
due on FICO bonds in 2004, 2003 and 2002, respectively.
Institutions regulated by the OTS are required to meet a QTL test to avoid certain restrictions on
their operations. FDICIA and applicable OTS regulations require such institutions to maintain at
least 65% of their portfolio assets (total assets less intangibles, properties used to conduct the
institutions business and liquid assets not exceeding 20% of total assets) in qualified
thrift investments on a monthly average basis in nine of every 12 months. Qualified thrift
investments constitute primarily residential mortgage loans and related investments, including certain
mortgage-backed and mortgage-related securities. A savings institution that fails the QTL test must
either convert to a bank charter or, in general, it will be prohibited from: (1) making an investment
or engaging in any new activity not permissible for a national bank, (2) paying dividends not permissible
under national bank regulations and (3) establishing any new branch office in a location not permissible
for a national bank in the institutions home state. One year following the institutions
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 retaining any investment or engaging
in any activity not permissible for a national bank. At December 31, 2004, 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.
Under the Economic Growth and Paperwork Reduction Act of 1996 (Regulatory Paperwork Reduction
Act), Congress modified and expanded investment authority under the QTL test. The Regulatory
Paperwork Reduction Act amendments permit federal thrifts to invest in, sell, or otherwise deal in
education and credit card loans without limitation and raised from 10% to 20% of total assets the
aggregate amount of commercial, corporate, business, or agricultural loans or investments that may
be made by a thrift, subject to a requirement that amounts in excess of 10% of total assets be used
only for small business loans. In addition, the Regulatory Paperwork Reduction Act defines qualified
thrift investment to include, without limit, education, small business, and credit card loans;
and removes the 10% limit on personal, family, or household loans for purposes of the QTL test. The
legislation also provides that a thrift meets the QTL test if it qualifies as a domestic building
and loan association under the Code.
the Bank and any related party or affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate is generally
any company or entity which controls, is controlled by or is under common
control with the Bank, including the Company, the Trust, the Banks
subsidiaries, and any other qualifying subsidiary of the Bank or the Company
that may be formed or acquired in the future. Generally, Sections 23A
and 23B (1) limit the extent to which the Bank or its subsidiaries may
engage in covered transactions with any one affiliate to an
amount equal to 10% of the Banks capital stock and surplus, and
impose an aggregate limit on all such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus, and (2) require
that all such transactions be on terms substantially the same, or at least
as favorable, to the Bank or subsidiary as those provided to a non-affiliate.
The term covered transaction includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions. Each loan or extension of credit to an affiliate by the
Bank must be secured by collateral with a market value ranging from 100%
to 130% (depending on the type of collateral) of the amount of credit
the Bank may not (1) loan or otherwise extend credit to an affiliate,
except to any affiliate which engages only in activities which are permissible
for bank holding companies under Section 4(c) of the Bank Company Act,
or (2) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliates, except subsidiaries of the Bank.
In addition, the Bank is subject to Regulation O promulgated under Sections 22(g) and 22(h) of the
Federal Reserve Act. Regulation O requires that loans by the Bank to a director, executive officer
or to a holder of more than 10% of the Common Stock, and to certain affiliated interests of any such
insider, may not, in the aggregate, exceed the Banks loans-to-one borrower limit. Loans to
insiders and their related interests must also be made on terms substantially the same as offered,
and follow credit underwriting procedures that are not less stringent than those applied, in comparable
transactions to other persons. Prior Board approval is required for certain loans. In addition, the
aggregate amount of extensions of credit by the Bank to all insiders cannot exceed the institutions
unimpaired capital and unimpaired surplus. These laws place additional restrictions on loans to executive
officers of the Bank.
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 some
other distributions charged to the Banks capital account. In general, the applicable regulation
permits specified levels of capital distributions by a savings institution that meets at least its
minimum capital requirements, so long as the OTS is provided with at least 30 days advance
notice and has no objection to the distribution.
Under OTS capital distribution regulations, an institution is not required to file an application with,
or to provide a notice to, the OTS if neither the institution nor the proposed capital distribution
meets any of the criteria for any such application or notice as provided below. An institution will
be required to file an application with the OTS if the institution is not eligible for expedited
treatment by the OTS; if the total amount of all its capital distributions for the applicable calendar
year exceeds the net income for that year to date plus the retained net income (net income less capital
distributions) for the preceding two years; if it would not be at least adequately capitalized following
the distribution; or if its proposed capital distribution would violate a prohibition contained in
any applicable statute, regulation, or agreement between the association and the OTS. By contrast,
only notice to the OTS is required for an institution that is not required to file an application
as provided in the preceding sentence, if it would not be well capitalized following the distribution;
if the associations 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 the association is a subsidiary of a savings and
loan holding company. The Bank is a subsidiary of a savings and loan holding company and, therefore,
is subject to the 30-day advance notice requirement. As of December 31, 2004, the Bank had $45.8
million in retained earnings available to distribute to the Holding Company in the form of cash dividends.
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
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, 2004, the Bank was required to maintain $22.3 million of FHLB-NY stock. The
Bank was in compliance with this requirement at that time.
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 semi-annual basis, as determined from time to time
by the Director of the OTS, is computed upon the savings institutions total assets, including
consolidated subsidiaries, as reported in the institutions latest quarterly thrift financial
report. Based on the average balance of the Banks total assets for the year ended December
31, 2004, the Banks OTS assessments were $330,000 for that period.
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.
Under the Community Reinvestment Act (CRA), as implemented by OTS regulations, the Bank
has an obligation, consistent with its safe and sound operation, to help meet the credit needs of
its entire community, including low and moderate income neighborhoods located in the community. The
CRA does not establish specific lending requirements or programs for financial institutions nor does
it limit an institutions 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 institutions record
of meeting the credit needs of its community and to take such record into account in its evaluation
of certain applications by the institution. The methodology used by the OTS for determining an institutions
compliance with the CRA focuses on three tests: (a) a lending test, to evaluate the institutions
record of making loans in its service areas; (b) an investment test, to evaluate the institutions
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 range
of the institutions services and the delivery of services through its branches, ATMs, and other
offices. The Bank received a CRA rating of Satisfactory in its most recent completed
CRA examination, which was completed as of November 5, 2004. Institutions that receive less than
a satisfactory rating may face difficulties in securing approval for new activities or acquisitions.
The CRA requires all institutions to make public disclosure of their CRA ratings.
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
with a waiver from the FDIC and subject to restrictions on the interest rate which can be paid on
such deposits. 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 institutions
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.
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 institutions operations
and the appointment of a conservator or receiver. The OTS capital regulation provides that
such actions, through enforcement proceedings or otherwise, could require one or more of a variety
of corrective actions. See Prompt Corrective Action.
The OTS capital regulations create three capital requirements: a tangible capital requirement,
a leverage and core capital requirement and a risk-based capital requirement. At December 31,
2004, the Banks capital levels exceeded applicable OTS capital requirements. The three
OTS capital requirements are described below.
Tangible Capital Requirement. Under current OTS regulations, each savings institution must maintain tangible capital equal
to at least 1.50% of its adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders equity and retained income, and certain non-cumulative 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,
2004, the Bank had intangible assets consisting of $3.9 million in goodwill and $0.9 million related
to a pension plan. The Bank had no purchased mortgage servicing rights. At that date, the Banks
tangible capital ratio was 7.89%.
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.
Leverage and Core Capital Requirement. The current OTS requirement for leverage and core capital (commonly referred to as core capital)
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
and (subject to phase-out) qualifying supervisory goodwill. The Bank has no qualifying supervisory
goodwill. At December 31, 2004, the Banks core capital ratio was 7.89%.
OTS regulations limit the amount of servicing assets, together with purchased credit card receivables,
includable in core capital to 100% of such capital, subject to limitations on fair value. At December 31,
2004, the Bank had no purchased mortgage servicing rights or purchased credit card receivables.
Risk-Based Requirement. The risk-based capital standard adopted by the OTS requires savings institutions to maintain
a minimum ratio of total capital to risk-weighted assets of 8%. Total capital consists of core capital,
defined above, and supplementary capital but excludes the effect of recognizing deferred taxes based
upon future income after one year. Supplementary capital consists of certain capital instruments
that do not qualify as core capital, and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based
requirement only in an amount equal to the amount of core capital. In determining the risk-based
capital ratios, total assets, including certain off-balance sheet items, are multiplied by a risk
weight based on the risks inherent in the type of assets. The risk weights assigned by the OTS for
significant categories of assets are (1) 0% for cash and securities issued by the federal government
or unconditionally backed by the full faith and credit of the federal government; (2) 20% for securities
(other than equity securities) issued by federal government sponsored agencies and mortgage-backed
securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC,
except for those classes with residual characteristics or stripped mortgage-related securities; (3)
50% for prudently underwritten permanent one-to-four family first lien mortgage loans and certain
qualifying multi-family mortgage loans not more than 90 days delinquent and having a loan-to-value
ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by
the FNMA or the FHLMC; and (4) 100% for all other loans and investments, including consumer loans,
home equity loans, commercial loans, and one-to-four family residential real estate loans more than
90 days delinquent, and all repossessed assets or assets more than 90 days past due. At December 31,
2004, the Banks risk-based capital ratio was 14.01%. Risk-based capital excludes the effect
of recognizing deferred taxes based upon future income after one year.
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,
2004, 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 institutions earning
assets. The amount of funds necessary to satisfy this requirement has not had a material effect on
the Banks 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.
The Bank is required to submit independently audited annual reports to the FDIC and the OTS. These
publicly available reports must include (a) annual financial statements prepared in accordance with
generally accepted accounting principles and such other disclosure requirements as required by the
FDIC or the OTS and (b) a report, signed by the Banks 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.
The FDIA, as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement
Act of 1994 (the 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 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 institutions business. The guidelines
also establish general standards relating to loan documentation, credit underwriting, interest rate
risk exposure, asset growth, and compensation, fees and benefits. Savings institutions are required
to maintain safeguards to prevent the payment of excessive compensation to an executive officer,
employee, director or principal shareholder. The OTS may determine that a savings institution is
not in compliance with the safety and soundness guidelines and, upon doing so, may require the institution
to submit an acceptable plan to achieve compliance with the guidelines. An institution must submit
an acceptable compliance plan to the OTS within 30 days of receipt or request for such a plan. Failure
to submit or implement a compliance plan may subject the institution to regulatory actions. Management
believes that the Bank currently meets the standards adopted in the interagency guidelines.
Additionally, under FDICIA, as amended by the Community Development Act, federal banking agencies are
required to establish standards relating to asset quality and earnings that the agencies determine
to be appropriate. Effective October 1, 1998, the federal banking agencies, including the OTS, adopted
guidelines relating to asset quality and earnings which require insured institutions to maintain
systems, consistent with their size and the nature and scope of their operations, to identify problem
assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and
insure that earnings are sufficient to maintain adequate capital and reserves.
The Gramm-Leach-Bliley Act (the Modernization Act) was signed into law on November 12,
1999. Among other things, the Modernization Act permits qualifying bank holding companies to affiliate
with securities firms and insurance companies and engage in other activities that are financial in
nature or complementary thereto, as determined by the Federal Reserve Board. Subject to certain limitations,
a national bank may, through a financial subsidiary, engage in similar activities. The Modernization
Act also prohibits the creation or acquisition of new unitary savings and loan holding companies
that are affiliated with non-banking firms, but grandfathers existing savings and loan
holding companies, such as the Company. Grandfathered companies retain the existing powers available
to unitary savings and loan holding companies. See Holding Company Regulation. Certain business combinations which were impermissible prior
to the effective date of the Modernization Act are now possible. Management believes the Modernization
Act has led to some consolidation in the financial services industry and could lead to further consolidation,
which, if completed, would likely result in an increase in the service offerings of our competitors.
We cannot assure you that the Modernization Act will not result in changes in the competitive environment
in the Banks market area or otherwise impact the Bank or the Holding Company.
In addition, the Modernization Act calls for heightened privacy protection of customer information
gathered by financial institutions. The OTS has enacted regulations implementing the privacy protection
provisions of the Modernization Act. Under the regulations, each financial institution is to (1)
adopt procedures to protect customers non-public personal information, (2) disclose
personal information, at the time of establishing the customer relationship and annually thereafter,
and (3) provide its customers with the ability to opt-out of having the financial institution
share their personal information with affiliated third parties. The regulations became effective
on November 13, 2000, with compliance voluntary prior to July 1, 2001. Management has reviewed and
amended our privacy protection policy and believes we are in compliance with these regulations.
On October 26, 2001,
following the September 11, 2001 attacks, President Bush signed the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the Patriot Act)
to enhance protections against money laundering and criminal laws against
terrorist activities, and give law enforcement authorities greater investigative
powers. Among other things, the Patriot Act (1) requires financial institutions
that administer, maintain or manage private bank accounts or correspondent
accounts for foreign persons to establish due diligence policies; (2)
prohibits correspondent accounts with foreign shell banks; (3) permits
sharing of information among financial institutions, regulators and law
enforcement regarding persons engaged
or money laundering activities; (4) requires financial institutions to
verify customer identification at account opening; (5) requires financial
institutions to report suspicious activities; and (6) requires financial
institutions to establish an anti-money laundering compliance program.
Provisions under the Patriot Act became effective at varying times. The U. S. Treasury Department,
the Federal Reserve and other federal bank regulatory agencies have issued regulations implementing
the provisions of the Patriot Act. Management believes we are in compliance with these regulations.
Under Section 38 of the FDIA, as added by the FDICIA, each appropriate banking agency is required to
take prompt corrective action to resolve the problems of insured depository institutions that do
not meet minimum capital ratios. Such action must be accomplished at the least possible long-term
cost to the appropriate deposit insurance fund.
The federal banking agencies, including the OTS, adopted substantially similar regulations to implement
Section 38 of the FDIA. Under the regulations, an institution is deemed to be (1) well capitalized
if it has total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of
6% or more, has a leverage capital ratio of 5% or more and is not subject to any order or final capital
directive to meet and maintain a specific capital level for any capital measure, (2) adequately
capitalized if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital
ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and
does not meet the definition of well capitalized, (3) undercapitalized if
it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that
is less than 4% or a leverage capital ratio that is less than 4% (3% under certain circumstances),
(4) significantly undercapitalized if it has a total risk-based capital ratio that is
less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio
that is less than 3%, and (5) critically undercapitalized if it has a ratio of tangible
equity to total assets that is equal to or less than 2%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which a federal banking agency may reclassify
a well capitalized institution as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized). At December 31, 2004, the Bank met the criteria to be
considered a well capitalized institution.
The Companys 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.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the 2002 Act), enacted on July 30, 2002, aims to increase
the reliability of financial information by, among other things, (1) heightening accountability of
Chief Executive Officers and Chief Financial Officers to issue accurate financial statements, (2)
increasing the authority and independence of corporate audit committees, (3) creating a new regulatory
entity to oversee the activities of accountants that audit public companies, (4) prohibiting activities
and relationships that may compromise the independence of auditors, (5) increasing required financial
statement disclosures, and (6) providing tough new penalties for issuing noncompliant financial statements
and for other violations related to securities laws.
In furtherance of the 2002 Act, the SEC has issued new rules. Compliance with these new rules, and
the related corporate governance rules adopted by NASDAQ with the approval of the SEC, has, and will
continue to, increase costs to the Company, including, but not limited to, fees to our independent
accountants, consultants, legal fees and Board service fees, and may require additions to staff.
During 2004, the Company recorded approximately $0.4 million of expenses to third parties to comply
with provisions of the 2002 Act. We cannot assure you that compliance with the 2002 Act and its regulations
will not have a material effect on the business or operations of the Company in the future.
We make available free of charge on or through our web site at www.flushingsavings.com our annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
as soon as reasonably practicable after we electronically file such material with, or furnish it
to, the SEC.
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, results of operations and cash flows of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
Flushing Financial Corporation Common Stock is traded on the NASDAQ National Market® under the symbol FFIC. As of December 31, 2004, the Company had approximately 713 shareholders
of record, not including the number of persons or entities holding stock in nominee or street name
through various brokers and banks. The Companys stock closed at $20.06 on December 31, 2004.
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. Price and dividend
information for the year ended December 31, 2003 has been adjusted for the three-for-two stock split
distributed on December 15, 2003 in the form of a stock dividend. See Note 11 of Notes to Consolidated Financial
Statements in Item 8 of this Annual Report for dividend restrictions.
During the quarter ended December 31, 2004, the Company purchased 156 common shares from employees,
at an average cost of $20.33, to satisfy tax obligations due from the employees upon vesting of restricted
stock awards. The Company also purchased 2,491 common shares from an employee, at an average cost
of $20.58, to satisfy the purchase price due upon the exercise of stock options.
The current common stock repurchase program was approved by the Companys Board of Directors on
August 17, 2004. This repurchase program authorized the repurchase of 1,000,000 common shares. The
repurchase program does not have an expiration date or a maximum dollar amount that may be paid to
repurchase the common shares. Stock repurchases under this program will be made from time to time,
on the open market or in privately negotiated transactions, at the discretion of the management of