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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3209278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144-51 Northern Boulevard, Flushing, New York 11354
(Address of principal executive offices)
(718) 961-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01
par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of February 28, 2001, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $157,933,000. This figure is based
on the closing price on the Nasdaq National Market for a share of the
registrant's Common Stock, $0.01 par value, on February 28, 2001, the last
trading date in February 2001, which was $17.875.
The number of shares of the registrant's Common Stock outstanding as of
February 28, 2001 was 9,277,190 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 2000 are incorporated herein by reference in Part II, and portions
of the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 22, 2001 are incorporated herein by reference in
Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business..............................................................1
General ............................................................1
Market Area and Competition.........................................2
Lending Activities..................................................3
Loan Portfolio Composition...................................3
Loan Maturity and Repricing..................................6
One-to-Four Family Mortgage Lending..........................6
Home Equity Loans............................................7
Multi-Family Lending.........................................8
Commercial Real Estate Lending...............................8
Construction Loans...........................................8
Small Business Administration Lending........................9
Consumer and Other Lending...................................9
Loan Approval Procedures and Authority.......................9
Loan Concentrations.........................................10
Loan Servicing..............................................10
Asset Quality......................................................10
Loan Collection.............................................10
Delinquent Loans and Non-performing Assets..................10
REO.........................................................11
Allowance for Loan Losses..........................................11
Investment Activities..............................................15
General.....................................................15
Mortgage-backed securities..................................16
Sources of Funds...................................................19
General.....................................................19
Deposits....................................................19
Borrowings..................................................22
Subsidiary Activities..............................................23
Personnel..........................................................23
RISK FACTORS
Effect of Interest Rates...........................................24
Lending Activities.................................................24
Competition........................................................25
Local Economic Conditions..........................................25
Legislation and Proposed Changes...................................25
Certain Anti-Takeover Provisions...................................25
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation...................................................26
General.....................................................26
Bad Debt Reserves...........................................26
Distributions...............................................26
Corporate Alternative Minimum Tax...........................27
State and Local Taxation...........................................27
New York State and New York City Taxation...................27
Delaware State Taxation.....................................28
i
REGULATION
General 28
Holding Company Regulation.........................................28
Investment Powers..................................................29
Real Estate Lending Standards......................................30
Loans-to-One Borrower Limits.......................................30
Insurance of Accounts..............................................30
Liquidity Requirements.............................................31
Qualified Thrift Lender Test.......................................31
Transactions with Affiliates.......................................32
Restrictions on Dividends and Capital Distributions................32
Federal Home Loan Bank System......................................33
Assessments........................................................33
Branching..........................................................33
Community Reinvestment.............................................33
Brokered Deposits..................................................34
Capital Requirements...............................................34
General.....................................................34
Tangible Capital Requirement................................34
Core Capital Requirement....................................34
Risk-Based Requirement......................................35
Federal Reserve System.............................................35
Financial Reporting................................................36
Standards for Safety and Soundness.................................36
Gramm-Leach-Bliley Act.............................................36
Prompt Corrective Action...........................................37
Federal Securities Laws............................................37
Item 2. Properties...........................................................38
Item 3. Legal Proceedings....................................................38
Item 4. Submission of Matters to a Vote of Security Holders..................38
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters................................................39
Item 6. Selected Financial Data..............................................39
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........39
Item 8. Financial Statements and Supplementary Data..........................39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................39
PART III
Item 10. Directors and Executive Officers of the Registrant..................40
Item 11. Executive Compensation..............................................40
Item 12. Security Ownership of Certain Beneficial Owners and Management......40
Item 13. Certain Relationships and Related Transactions......................40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....41
(a) 1. Financial Statements.....................................41
2. Financial Statement Schedules............................41
(b) Reports on Form 8-K filed during the last quarter
of fiscal 2000...............................................41
(c) Exhibits Required by Securities and Exchange Commission
Regulation S-K...............................................42
SIGNATURES
POWER OF ATTORNEY
ii
PART I
Statements contained in this Annual Report on Form 10-K 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 "Risk Factors" below, and
elsewhere in this Form 10-K and in other documents filed by the Company with the
Securities and Exchange Commission from time to time. Forward-looking statements
may be identified by terms such as "may", "will", "should", "could", "expects",
"plans", "intends", "anticipates", "believes", "estimates", "predicts",
"forecasts", "potential" or "continue" or similar terms or the negative of these
terms. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. The Company has no obligation
to update these forward-looking statements.
Item 1. Business.
General
Flushing Financial Corporation (the "Company") is a Delaware corporation
organized in May 1994 at the direction of Flushing Savings Bank, FSB (the
"Bank"). 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. The Company acquired all of the stock of the Bank upon its
conversion from a federal mutual savings bank to a federal stock savings bank on
November 21, 1995. The primary business of the Company at this time is the
operation of its wholly-owned subsidiary, the Bank. At December 31, 2000, the
Company had total assets of $1.3 billion, deposits of $682.1 million and
stockholders' equity of $126.7 million. Flushing Financial Corporation's common
stock is traded on the Nasdaq National Market under the symbol "FFIC".
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company.
Unless otherwise disclosed, the information presented in the financial
statements and this Form 10-K reflect the financial condition and results of
operations of the Company, the Bank and the Bank's subsidiaries on a
consolidated basis. Management views the Company and its subsidiaries as
operating as a single unit, a community savings bank. Therefore, segment
information is not provided.
In addition to operating the Bank, the Company invests primarily in U.S.
government and federal agency securities, federal funds, mortgage-backed
securities, and corporate securities. The Company also holds a note evidencing a
loan that it made to an employee benefit trust established by the Company for
the purpose of holding shares for allocation or distribution under certain
employee benefit plans of the Company and the Bank (the "Employee Benefit
Trust"). The funds provided by this loan enabled the Employee Benefit Trust to
acquire 1,035,000 shares, or 8% of the common stock issued in our initial public
offering. The Company has in the past increased growth through acquisition of
financial institutions and branches of other financial institutions, and will
pursue growth through acquisitions that are, or are expected to be within a
reasonable time frame, accretive to earnings, as opportunities arise. The Bank
also seeks increased growth through the opening of new branches. The Company may
also organize or acquire, through merger or otherwise, other financial services
related companies. The activities of the Company are primarily funded by
dividends, if any, received from the Bank.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits together with funds generated from
ongoing operations and borrowings, primarily in (1) originations and purchases
of one-to-four family residential mortgage loans, multi-family income producing
property loans and
1
commercial real estate loans; (2) mortgage loan surrogates such as
mortgage-backed securities; and (3) U.S. government and federal agency
securities, corporate fixed-income securities and other marketable securities.
To a lesser extent, the Bank originates certain other loans, including
construction loans, Small Business Administration ("SBA") loans and other small
business and consumer loans. The Bank's revenues are derived principally from
interest on its mortgage and other loans and mortgage-backed securities
portfolio, and interest and dividends on other investments in its securities
portfolio. The Bank's primary sources of funds are deposits, Federal Home Loan
Bank-New York ("FHLB-NY") borrowings, repurchase agreements, principal and
interest payments on loans, mortgage-backed and other securities, proceeds from
sales of securities and, to a lesser extent, proceeds from sales of loans. As a
federal savings bank, the Bank's primary regulator is the Office of Thrift
Supervision ("OTS"). The Bank's deposits are insured to the maximum allowable
amount by the Federal Deposit Insurance Corporation ("FDIC"). Additionally, the
Bank is a member of the Federal Home Loan Bank ("FHLB") system.
On September 9, 1997, the Company acquired New York Federal Savings Bank
("New York Federal") and merged it with the Bank in a cash transaction valued at
approximately $13 million. This acquisition was immediately accretive to the
Company's earnings and was accounted for under the purchase method of
accounting.
On August 18, 1998, the Board of Directors of the Company declared a
three-for-two split of the Company's common stock in the form of a 50% stock
dividend, which was paid on September 30, 1998. Each stockholder received one
additional share for every two shares of the Company's common stock held at the
record date, September 10, 1998. Cash was paid in lieu of fractional shares.
This dividend was not paid on shares held in treasury.
Market Area and Competition
The Bank has been, and intends to continue to be, a community oriented
savings institution offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank is headquartered in Flushing, New
York, located in the Borough of Queens. It currently operates out of its main
office and nine branch offices, located in the New York City Boroughs of Queens,
Brooklyn, Manhattan, and Bronx, and in Nassau County, New York. Substantially
all of the Bank's mortgage loans are secured by properties located in the New
York City metropolitan area. During the last three years, the unemployment and
real estate values in the New York City metropolitan area have been relatively
stable, which has favorably impacted the Bank's asset quality. See "--Asset
Quality." There can be no assurance that the stability of these economic factors
will continue.
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. Particularly intense competition exists for deposits and in
all of the lending activities emphasized by the Bank. The Bank's competition for
loans comes principally from commercial banks, other savings banks, savings and
loan associations, mortgage banking companies, insurance companies, finance
companies and credit unions. Management anticipates that competition for
multi-family loans, commercial real estate loans and one-to-four family
residential mortgage loans will continue to increase in the future. Thus, no
assurances can be given that the Bank will be able to maintain or increase its
current level of origination of such loans, as contemplated by management's
current business strategy. The Bank's most direct competition for deposits
historically has come from other savings banks, commercial banks, savings and
loan associations and credit unions. In addition, the Bank faces increasing
competition for deposits from products offered by brokerage firms, insurance
companies and other financial intermediaries, such as money market and other
mutual funds and annuities. Trends toward the consolidation of the banking
industry and the lifting of interstate banking and branching restrictions 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 maintaining its deposit base and increasing its loan portfolios.
For a discussion of the Company's business strategies, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy," included in the Annual Report to Stockholders
for the fiscal year ended December 31, 2000 (the "Annual Report"), incorporated
herein by reference.
2
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional fixed-rate mortgage loans and adjustable rate mortgage ("ARM")
loans secured by one-to-four family residences, mortgage loans secured by
multi-family income producing properties, or commercial real estate,
construction loans, SBA loans, other small business loans and consumer loans. At
December 31, 2000, the Bank had gross loans outstanding of $992.5 million
(before reserves and net deferred costs), of which $475.8 million, or 47.94%,
were one-to-four family residential mortgage loans (including $23.0 million of
condominium loans, $8.0 million of co-operative apartment loans and $5.7 million
of home equity loans). Of the one-to-four family residential loans outstanding
on that date, 45.76% were ARM loans and 54.24% were fixed-rate loans. At
December 31, 2000, multi-family loans totaled $334.3 million, or 33.68% of gross
loans, commercial real estate loans totaled $167.6 million, or 16.88% of gross
loans, construction loans totaled $8.3 million, or 0.84% of gross loans, SBA
loans totaled $2.8 million, or 0.29% of gross loans, and consumer and other
loans totaled $3.7 million, or 0.37% of gross loans.
The Bank has traditionally emphasized the origination and acquisition of
one-to-four family residential mortgage loans, which include ARM loans,
fixed-rate mortgage loans and home equity loans. However, for several years, the
Bank has also placed emphasis on multi-family and commercial real estate loans.
The Bank expects to continue its emphasis on multi-family and commercial real
estate loans as well as on one-to-four family residential mortgage loans. From
December 31, 1999 to December 31, 2000, one-to-four family residential mortgage
loans increased $52.7 million, or 12.4%, multi-family loans increased $23.7
million, or 7.6%, and commercial real estate loans increased $30.5 million, or
22.2%. Fully underwritten one-to-four family residential mortgage loans are
considered by the banking industry to have less risk than other types of loans.
Multi-family income producing real estate loans and commercial real estate loans
generally have higher yields than one-to-four family residential loans and
shorter terms to maturity, but typically involve higher principal amounts and
generally expose the lender to greater credit risk than fully underwritten
one-to-four family residential mortgage loans. The Bank's strategy to emphasize
multi-family and commercial real estate loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with multi-family and commercial real estate loans may require
the Bank to increase its provisions for loan losses and to maintain an allowance
for loan losses as a percentage of total loans in excess of the allowance
currently maintained by the Bank. To date, the Company has not experienced
significant losses in its multi-family and commercial real estate loan
portfolios.
The Bank's lending activities are subject to federal and state laws and
regulations. Interest rates charged by the Bank on loans are affected primarily
by the demand for such loans, the supply of money available for lending
purposes, the rate offered by the Bank's competitors and, in the case of
corporate entities, the creditworthiness of the borrower. Many of those factors
are, in turn, affected by regional and national economic conditions, and the
fiscal, monetary and tax policies of the federal government.
3
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
At December 31,
-----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
--------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage Loans:
One-to-four family residential(1)
$467,784 47.13% $414,194 46.92% $361,786 47.69% $289,286 47.67% $223,273 57.28%
Co-operative apartment (2) 8,009 0.81 8,926 1.01 10,238 1.35 12,065 1.99 13,245 3.40
Multi-family real estate 334,307 33.68 310,594 35.19 277,437 36.57 230,229 37.95 104,870 26.91
Commercial real estate 167,549 16.88 137,072 15.53 101,401 13.37 68,182 11.24 46,698 11.98
Construction 8,304 0.84 6,198 0.70 3,203 0.42 2,797 0.46 -- --
------- ------ -------- ------ -------- -------- -------- -------- -------- --------
Gross mortgage loans 985,953 99.34 876,984 99.35 754,065 99.40 602,559 99.31 388,086 99.57
Small Business Administration
loans 2,844 0.29 2,369 0.27 2,616 0.35 2,789 0.46 -- --
Consumer and other loans 3,704 0.37 3,379 0.38 1,899 0.25 1,385 0.23 1,680 0.43
------- ------ -------- ------ -------- -------- -------- -------- -------- --------
Gross loans 992,501 100.00% 882,732 100.00% 758,580 100.00% 606,733 100.00% 389,766 100.00%
====== ====== ====== ====== ======
Unearned loan fees and deferred
costs, net 579 (28) (1,263) (1,838) (1,548)
Less: Allowance for loan losses (6,721) (6,818) (6,762) (6,474) (5,437)
------- ------- ------- ------- -------
Loans, net $986,359 $875,886 $750,555 $598,421 $382,781
======== ======== ======== ======== ========
(1) One-to-four family residential loans also include home equity and
condominium loans. At December 31, 2000, gross home equity loans totaled
$5.7 million and condominium loans totaled $23.0 million.
(2) Consists of loans secured by shares representing interests in individual
co-operative units that are generally owner occupied.
4
The following table sets forth the Bank's loan originations (including the
net effect of refinancings) and the changes in the Bank's portfolio of loans,
including purchases, sales and principal reductions for the years indicated:
For the Year Ended December 31,
-------------------- ------------------ ------------------
2000 1999 1998
-------------------- ------------------ ------------------
(In thousands)
Mortgage Loans
At beginning of year $876,984 $754,065 $602,559
Mortgage loans originated:
One-to-four family residential 78,128 91,312 83,051
Co-operative apartment 265 300 113
Multi-family real estate 63,813 77,895 84,328
Commercial real estate 41,948 49,744 52,211
Construction 5,078 8,158 3,332
-------- -------- --------
Total mortgage loans originated 189,232 227,409 223,035
-------- -------- --------
Mortgage loans purchased:
One-to-four family residential 15,658 15,008 27,174
Commercial real estate -- 884 --
-------- -------- --------
Total mortgage loans purchased 15,658 15,892 27,174
-------- -------- --------
Less:
Principal reductions 95,695 120,008 98,251
Mortgage loan foreclosures 226 374 452
-------- -------- --------
At end of year $985,953 $876,984 $754,065
======== ======== ========
SBA, Consumer and Other Loans
At beginning of year $5,748 $4,515 $4,174
Loans originated:
SBA loans 3,635 2,376 3,741
Small business loans 845 2,617 1,316
Other loans 3,021 1,159 1,467
======== ======== ========
Total other loans originated 7,501 6,152 6,524
======== ======== ========
Less:
Sales 2,474 2,280 2,918
Repayments 4,151 2,543 3,265
Charge=offs 76 96 --
======== ======== ========
At end of year $6,548 $5,748 $4,515
======== ======== ========
5
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of the Bank's loan portfolio at December 31, 2000. Loans
that have adjustable-rates are shown as being due in the period during which the
interest rates are next subject to change. The table does not reflect
prepayments or scheduled principal amortization, which totaled $99.8 million for
the year ended December 31, 2000. Certain adjustable rate loans have features
that limit changes in interest rates on a short-term basis and over the life of
the loan.
At December 31, 2000
---------------------------------------------------------------------------------------------
Mortgage Loans Other Loans
------------------------------------------------------------- ------------------
One-to- Total
Four Co- Multi- Consumer Loans
Family operative family Commercial Construction SBA and Other Receivable
--------- --------- ---------- ----------- ------------ ----- --------- -----------
(In thousands)
Amounts due:
Within one year $ 42,593 $3,721 $ 36,910 $ 15,092 $7,064 $2,789 $ 2,082 $110,251
-------- ------ -------- -------- ------ ------ ------- --------
After one year (1)
One to two years 19,359 1,252 32,630 12,854 1,240 1,010 68,345
Two to three years 19,588 367 36,674 12,342 -- -- 495 69,466
Three to five years 46,860 522 72,779 59,184 -- 45 117 179,507
Five to ten years 100,162 936 93,742 53,319 -- 10 -- 248,169
Over ten years 239,222 1,211 61,572 14,758 -- -- -- 316,763
-------- ------ -------- -------- ------ ------ ------- --------
Total due after
one year 425,191 4,288 297,397 152,457 1,240 55 1,622 882,250
-------- ------ -------- -------- ------ ------ ------- --------
Total amounts due $467,784 $8,009 $334,307 $167,549 $8,304 $2,844 $ 3,704 $992,501
======== ====== ======== ======== ====== ====== ======= ========
(1) Of the $882.3 million of loans due after one year, $494.0 million are
adjustable rate loans and $388.3 million are fixed-rate loans.
One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured
by one-to-four family residences, including townhouses and condominium units,
located in its primary lending area. For purposes of the description contained
in this section, one-to-four family residential mortgage loans and co-operative
apartment loans are collectively referred to herein as "residential mortgage
loans." The Bank offers both fixed-rate and adjustable-rate residential mortgage
loans with maturities of up to 30 years and a general maximum loan amount of
$650,000. Loan originations generally result from applications received from
mortgage brokers and mortgage bankers, existing or past customers, and persons
who respond to Bank marketing efforts and referrals. Residential mortgage loans
were $475.8 million, or 47.94% of gross loans, at December 31, 2000.
Partly in response to the intense competition for originations of
one-to-four family residential mortgage loans, the Bank has a program of
correspondent relationships with several mortgage bankers and brokers operating
in the New York metropolitan area. Under this program, the Bank purchases
individual newly originated one-to-four family loans originated by such
correspondents. The loans are underwritten pursuant to the Bank's credit
underwriting standards and each loan is reviewed by Bank personnel prior to
purchase to ensure conformity with such standards. During 2000, through these
relationships, the Bank purchased $15.7 million in one-to-four family mortgage
loans, as compared to $15.0 million in 1999 and $27.2 million during 1998.
The Bank generally originates residential mortgage loans in amounts up to
80% of the appraised value or the sale price, whichever is less. The Bank may
make residential mortgage loans with loan-to-value ratios of up to 95% of the
appraised value of the mortgaged property; however, private mortgage insurance
is required whenever loan-to-value ratios exceed 80% of the appraised value of
the property securing the loan.
Residential mortgage loans originated by the Bank have generally been
underwritten to FNMA and other agency guidelines to facilitate securitization
and sale in the secondary market. These guidelines require, among other things,
verification of the loan applicant's income. However, from time to time, and
with increasing frequency, the Bank originates residential mortgage loans to
self-employed individuals within the Bank's local community
6
without verification of the borrower's level of income, provided that the
borrower's stated income is considered reasonable for the borrower's type of
business. These loans involve a higher degree of risk as compared to the Bank's
other fully underwritten residential mortgage loans as there is a greater
opportunity for self-employed borrowers to falsify or overstate their level of
income and ability to service indebtedness. This risk is mitigated by the Bank's
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 $18.7 million,
$37.3 million and $36.8 million in loans of this type during 2000, 1999 and
1998, respectively.
The Bank's fixed-rate residential mortgage loans typically are originated
for terms of 15 and 30 years and are competitively priced based on market
conditions and the Bank's cost of funds. The Bank originated and purchased $11.2
million, $24.2 million and $44.3 million of 15-year fixed-rate residential
mortgage loans in 2000, 1999 and 1998, respectively. The Bank also originated
and purchased $23.4 million, $47.4 million and $30.8 million of 30-year fixed
rate residential mortgage loans in 2000, 1999 and 1998, respectively. These
loans have been retained to provide flexibility in the management of the
Company's interest rate sensitivity position. At December 31, 2000, $258.1
million, or 54.24%, of the Bank's residential mortgage loans consisted of fixed
rate loans.
The Bank offers ARM loans with adjustment periods of one, three, five,
seven or ten years. Interest rates on ARM loans currently offered by the Bank
are adjusted at the beginning of each adjustment period based upon a fixed
spread above the average yield on United States treasury securities, adjusted to
a constant maturity which corresponds to the adjustment period of the loan (the
"U.S. Treasury constant maturity index") as published weekly by the Federal
Reserve Board. From time to time, the Bank may originate ARM loans at an initial
rate lower than the U.S. Treasury constant maturity index as a result of a
discount on the spread for the initial adjustment period. ARM loans generally
are subject to limitations on interest rate increases of 2% per adjustment
period and an aggregate adjustment of 6% over the life of the loan. The Bank
originated and purchased one-to-four family residential ARM loans totaling $59.4
million, $35.0 million and $35.2 million during 2000, 1999 and 1998,
respectively. At December 31, 2000, $217.7 million, or 45.76%, of the Bank's
residential mortgage loans consisted of ARM loans.
The volume and adjustment periods of ARM loans originated by the Bank have
been affected by such market factors as the level of interest rates, demand for
loans, competition, consumer preferences and the availability of funds. In
general, consumers show a preference for ARM loans in periods of high interest
rates and for fixed-rate loans when interest rates are low. In periods of
declining interest rates, the Bank may experience refinancing activity in ARM
loans, whose interest rates may be fully indexed, to fixed-rate loans.
The retention of ARM loans in the Bank's portfolio helps reduce the Bank's
exposure to interest rate risks. However, in an environment of rapidly
increasing interest rates, it is possible for the interest rate increase to
exceed the maximum aggregate adjustment on ARM loans and negatively affect the
spread between the Bank's interest income and its cost of funds.
ARM loans generally involve credit risks different from those inherent in
fixed-rate loans, primarily because if interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default.
However, this potential risk is lessened by the Bank's policy of originating ARM
loans with annual and lifetime interest rate caps that limit the increase of a
borrower's monthly payment. The Bank has not in the past, nor does it currently
originate ARM loans which provide for negative amortization.
Home Equity Loans. Home equity loans are included in the Bank's portfolio
of one-to-four family residential mortgage loans. These loans are offered as
adjustable-rate "home equity lines of credit" on which interest only is due for
an initial term of 10 years and thereafter principal and interest payments
sufficient to liquidate the loan are required for the remaining term, not to
exceed 20 years. These loans also may be offered as fully amortizing closed-end
fixed-rate loans for terms up to 15 years. All home equity loans are made on
one-to-four family residential and condominium units, which are owner-occupied,
and are subject to a 80% loan-to-value ratio computed on the basis of the
aggregate of the first mortgage loan amount outstanding and the proposed home
equity loan. They are granted in amounts from $25,000 to $100,000. The
underwriting standards for home equity loans are
7
substantially the same as those for residential mortgage loans. At December 31,
2000, home equity loans totaled $5.7 million, or 0.58%, of gross loans.
Multi-Family Lending. Loans secured by multi-family income producing
properties (including mixed-use properties) were $334.3 million, or 33.68% of
gross loans, at December 31, 2000, all of which were secured by properties
located within the Bank's market area. The Bank's multi-family loans had an
average principal balance of $496,741 at December 31, 2000, and the largest
multi-family loan held in the Bank's portfolio had a principal balance of $6.1
million. Multi-family loans are generally offered at adjustable rates tied to a
market index for terms of five to 10 years with adjustment periods from one to
five years. On a select and limited basis, multi-family loans may be made at
fixed rates for terms of seven, 10 or 15 years. An origination fee of up to 1%
is typically charged on multi-family loans.
In underwriting multi-family loans, the Bank reviews the expected net
operating income generated by the real estate collateral securing the loan, the
age and condition of the collateral, the financial resources and income level of
the borrower and the borrower's experience in owning or managing similar
properties. The Bank typically requires debt service coverage of at least 125%
of the monthly loan payment. Multi-family loans generally are made up to 75% of
the appraised value of the property securing the loan or the sale price of the
property, whichever is less. The Bank generally obtains personal guarantees from
these borrowers and typically orders an environmental report after an inspection
has been made of the property securing the loan.
Loans secured by multi-family income producing property generally involve a
greater degree of risk than residential mortgage loans and carry larger loan
balances. The increased credit risk is a result of several factors, including
the concentration of principal in a smaller number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty in evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family income producing
property is typically dependent upon the successful operation of the related
property. If the cash flow from the property is reduced, the borrower's ability
to repay the loan may be impaired. Loans secured by multi-family income
producing property also may involve a greater degree of environmental risk. The
Bank seeks to protect against this risk through obtaining an environmental
report. See "--Asset Quality -- REO."
Commercial Real Estate Lending. Loans secured by commercial real estate
were $167.5 million, or 16.88% of the Bank's gross loans, at December 31, 2000.
The Bank's commercial real estate loans are secured by improved properties such
as offices, motels, small business facilities, strip shopping centers,
warehouses, religious facilities and mixed-use properties. At December 31, 2000,
substantially all of the Bank's commercial real estate loans were secured by
properties located within the Bank's market area. At that date, the Bank's
commercial real estate loans had an average principal balance of $646,906, and
the largest of such loans, which was secured by a hotel, had a principal balance
of $5.3 million. Typically, commercial real estate loans are originated at a
range of $100,000 to $6.0 million. Commercial real estate loans are generally
offered at adjustable rates tied to a market index for terms of five to 15
years, with adjustment periods from one to five years. On a select and limited
basis, commercial real estate loans may be made at fixed interest rates for
terms of seven, 10 or 15 years. An origination fee of up to 1% is typically
charged on all commercial real estate loans.
In underwriting commercial real estate loans, the Bank employs the same
underwriting standards and procedures as are employed in underwriting
multi-family loans.
Commercial real estate loans generally carry larger loan balances than
one-to-four family residential mortgage loans and involve a greater degree of
credit risk for the same reasons applicable to multi-family loans.
Construction Loans. The Bank's construction loans primarily have been made
to finance the construction of one-to-four family residential properties and
multi-family residential real estate properties. The Bank's policies provide
that construction loans may be made in amounts up to 65% of the estimated value
of the developed property and only if the Bank obtains a first lien position on
the underlying real estate. In addition, the Bank generally requires firm
end-loan commitments, either from the Bank or another financial institution, and
personal guarantees on all construction loans. Construction loans are generally
made with terms of two years or less and with adjustable
8
interest rates that are tied to a market index. Advances are made as
construction progresses and inspection warrants, subject to continued title
searches to ensure that the Bank maintains a first lien position. Construction
loans outstanding at December 31, 2000 totaled $8.3 million, or 0.84% of gross
loans.
Construction loans involve a greater degree of risk than other loans
because, among other things, the underwriting of such loans is based on an
estimated value of the developed property, which can be difficult to ascertain
in light of uncertainties inherent in such estimations. In addition,
construction lending entails the risk that the project may not be completed due
to cost overruns or changes in market conditions.
Small Business Administration Lending. 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 $1.0 million. All SBA loans are underwritten in accordance
with SBA Standard Operating Procedures and the Bank generally obtains personal
guarantees and collateral, where applicable, from SBA borrowers. Typically, SBA
loans are originated at a range of $50,000 to $1.0 million with terms ranging
from five to 25 years. SBA loans are generally offered at adjustable rates tied
to the prime rate (as published in the Wall Street Journal) with adjustment
periods of one to three months. The Bank generally sells the guaranteed portion
of the SBA loan in the secondary market and retains the servicing rights on
these loans collecting a servicing fee of approximately 1%. At December 31,
2000, SBA loans totaled $2.8 million, representing 0.29% of gross loans.
Consumer and Other Lending. The Bank originates other loans for business,
personal, or household purposes. Total consumer and other loans outstanding at
December 31, 2000 amounted to $3.7 million, or 0.37% of gross loans. Business
loans are personally guaranteed by the owners, and may also be secured by
additional collateral, including equipment and inventory. The maximum loan size
for a business loan is $75,000, with a maximum term of five years. Consumer
loans generally consist of passbook loans and overdraft lines of credit.
Generally, unsecured consumer loans are limited to amounts of $5,000 or less for
terms of up to five years. The Bank offers credit cards to its customers through
a third party financial institution and receives an origination fee and
transactional fees for processing such accounts, but does not underwrite or
finance any portion of the credit card receivables.
The underwriting standards employed by the Bank for consumer and other
loans include a determination of the applicant's payment history on other debts
and assessment of the applicant's ability to meet payments on all of his or her
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the collateral,
if any, to the proposed loan amount. Unsecured loans tend to have higher risk,
and therefore command a higher interest rate.
Loan Approval Procedures and Authority. The Bank's Board-approved lending
policies establish loan approval requirements for its various types of loan
products. Pursuant to the Bank's Residential Mortgage Lending Policy, all
residential mortgage loans require three signatures for approval. Residential
mortgage loans that do not exceed $500,000 must have the approval of the Bank's
Senior Mortgage Officer and two other loan officers. For residential mortgage
loans greater than $500,000, at least one of the approvals must be from the
President, Executive Vice President or a Senior Vice President (collectively,
"Authorized Officers") and the other two may be from the Bank's Senior Mortgage
Officer, Loan Underwriting Manager or Senior Underwriter. The Loan Committee,
the Executive Committee or the full Board of Directors also must approve
residential mortgage loans in excess of $650,000. Pursuant to the Bank's
Commercial Real Estate Lending Policy, all loans secured by commercial real
estate properties and multi-family income producing properties, must be approved
by the President or the Executive Vice President upon the recommendation of the
Commercial Loan Department Officer. Such loans in excess of $700,000 also
require Loan or Executive Committee or Board approval. In accordance with the
Bank's Business and Consumer Loan Policies, all business and consumer loans
require two signatures for approval, one of which must be from an Authorized
Officer. In addition, for business loans, the approval of the Bank's President
and ratification by the Loan Committee of the Board of Directors is required.
The Bank's Construction Loan Policy requires that the Loan or Executive
Committee or the Board of Directors of the Bank must approve all construction
loans. Any loan, regardless of type, that deviates from the Bank's written loan
policies must be approved by the Loan or Executive Committee or the Bank's Board
of Directors.
9
For all loans originated by the Bank, upon receipt of a completed loan
application, a credit report is ordered and certain other financial information
is obtained. An appraisal of the real estate intended to secure the proposed
loan is required. Such appraisals currently are performed by the Bank's staff
appraiser or an independent appraiser designated and approved by the Bank. The
Bank's Board of Directors annually approves the independent appraisers used by
the Bank and approves the Bank's appraisal policy. It is the Bank's policy to
require borrowers to obtain title insurance and hazard insurance on all real
estate first mortgage loans prior to closing. Borrowers generally are required
to advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and, in some cases, hazard insurance
premiums.
Loan Concentrations. The maximum amount of credit that the Bank can extend
to any single borrower or related group of borrowers generally is limited to 15%
of the Bank's unimpaired capital and surplus. Applicable law and regulations
permit an additional amount of credit to be extended, equal to 10% of unimpaired
capital and surplus, if the loan is secured by readily marketable collateral,
which generally does not include real estate. See "Regulation." However, it is
currently the Bank's policy not to extend such additional credit. At December
31, 2000, the Bank had no loans in excess of the maximum dollar amount of loans
to one borrower that the Bank was authorized to make. At that date, the three
largest concentrations of loans to one borrower consisted of loans secured by a
combination of commercial real estate and multi-family income producing
properties with an aggregate principal balance of $11.2 million, $8.8 million
and $8.4 million for each of the three borrowers.
Loan Servicing. At December 31, 2000, the Bank was servicing $27.2 million
of mortgage loans and $7.4 million of SBA loans for others. The Bank's policy is
to retain the servicing rights to the mortgage and SBA loans that it sells in
the secondary market. In order to increase revenue, management intends to
continue this policy.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Bank generally sends the borrower a
written notice of non-payment when the loan is first past due. In the event
payment is not then received, additional letters and phone calls generally are
made in order to encourage the borrower to meet with a representative of the
Bank to discuss the delinquency. If the loan still is not brought current and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is delinquent 45 days or more, the Bank may commence foreclosure
proceedings against real property that secures the real estate loan and attempt
to repossess personal or business property that secures an SBA loan, business
loan, consumer loan or co-operative apartment loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan generally is
sold at foreclosure or by the Bank as soon thereafter as practicable. Decisions
as to when to commence foreclosure actions for multi-family, commercial real
estate and construction loans are made on a case by case basis. Since
foreclosure typically halts the sale of the collateral and may be a lengthy
procedure, the Bank may consider loan work-out arrangements to work with
multi-family or commercial real estate borrowers in an effort to restructure the
loan rather than foreclose, particularly if the borrower is, in the opinion of
management, able to manage the project. In certain circumstances, on rental
properties, the Bank may institute proceedings to seize the rent.
On mortgage loans or loan participations purchased by the Bank, for which
the seller retains the servicing, the Bank receives monthly reports with which
it monitors the loan portfolio. Based upon servicing agreements with the
servicers of the loans, the Bank relies upon the servicer to contact delinquent
borrowers, collect delinquent amounts and initiate foreclosure proceedings, when
necessary, all in accordance with applicable laws, regulations and the terms of
the servicing agreements between the Bank and its servicing agents. At December
31, 2000, the Bank held $6.6 million of loans that were serviced by others.
Delinquent Loans and Non-performing Assets. The Bank generally discontinues
accruing interest on delinquent loans when a loan is 90 days past due or
foreclosure proceedings have been commenced, whichever first occurs. At that
time, previously accrued but uncollected interest is reversed from income. Loans
in default 90 days
10
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,
loans which are 90 days or more delinquent and still accruing, and real estate
owned ("REO") at the dates indicated. During the years ended December 31, 2000,
1999 and 1998, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totaled $79,000, $208,000
and $180,000, respectively. These amounts were not included in the Bank's
interest income for the respective periods.
At December 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------ ------------
(Dollars in thousands)
Non-accrual loans:
One-to-four family residential $1,336 $1,349 $1,261 $1,897 $1,835
Co-operative apartment -- 29 15 -- 32
Multi-family real estate 156 -- -- -- 505
Commercial real estate -- 1,779 1,280 512 --
Construction -- -- -- -- --
------ ------ ------ ------ ------
Total non-accrual mortgage loans 1,492 3,157 2,556 2,409 2,372
Other non-accrual loans 126 39 41 49 36
------ ------ ------ ------ ------
Total non-accrual loans 1,618 3,196 2,597 2,458 2,408
Loans 90 days or more delinquent
and still accruing -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 1,618 3,196 2,597 2,458 2,408
Foreclosed real estate 44 368 77 433 1,218
------ ------ ------ ------ ------
Total non-performing assets $1,662 $3,564 $2,674 $2,891 $3,626
====== ====== ====== ====== ======
Troubled debt restructurings -- -- -- -- --
====== ====== ====== ====== ======
Non-performing loans to gross loans 0.16% 0.36% 0.34% 0.41% 0.62%
Non-performing assets to total assets 0.12% 0.29% 0.23% 0.27% 0.47%
REO. The Bank has been aggressively marketing its REO properties. At
December 31, 2000, the Bank owned one property with a carrying value of $44,000.
The Bank currently obtains environmental reports in connection with the
underwriting of commercial real estate loans, and typically obtains
environmental reports in connection with the underwriting of multi-family loans.
For all other loans, the Bank obtains environmental reports only if the nature
of the current or, to the extent known to the Bank, prior use of the property
securing the loan indicates a potential environmental risk. However, the Bank
may not be aware of such uses or risks in any particular case, and, accordingly,
there is no assurance that real estate acquired by the Bank in foreclosure is
free from environmental contamination or that, if any such contamination or
other violation exists, the Bank will not have any liability therefor.
Allowance for Loan Losses
The Bank has established and maintains on its books an allowance for loan
losses that is designed to provide reserves for estimated losses inherent in the
Bank's overall loan portfolio. The allowance is established through a provision
for loan losses based on management's evaluation of the risk inherent in the
various components of its loan portfolio and other factors, including historical
loan loss experience, changes in the composition and volume of the portfolio,
collection policies and experiences, trends in the volume of non-accrual loans
and regional and national economic conditions. 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,
11
the market value of collateral ordinarily is evaluated by the Bank's staff
appraiser; however, the Bank may from time to time obtain independent appraisals
for significant properties. Current year charge-offs, charge-off trends, new
loan production and current balance by particular loan categories also are taken
into account in determining the appropriate amount of the allowance.
In assessing the adequacy of the allowance, management reviews the Bank's
loan portfolio by separate categories which have similar risk and collateral
characteristics; e.g. commercial real estate, multi-family real estate,
one-to-four family residential loans, co-operative apartment loans, SBA loans,
business loans and consumer loans. General provisions are established against
performing loans in the Bank's portfolio in amounts deemed prudent from time to
time based on the Bank's qualitative analysis of the factors described above.
The determination of the amount of the allowance for loan losses also includes a
review of loans on which full collectibility is not reasonably assured. The
primary risk element considered by management with respect to each one-to-four
family residential loan, co-operative apartment loan, SBA loan, business loan
and consumer loan is any current delinquency on the loan. The primary risk
elements considered with respect to commercial real estate and multi-family
loans are the financial condition of the borrower, the sufficiency of the
collateral (including changes in the value of the collateral) and the record of
payment.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the FDIC,
which can require the establishment of additional general allowances or specific
loss allowances or require charge-offs. Such authorities may require the Bank to
make additional provisions to the allowance based on their judgments about
information available to them at the time of their examination. An OTS policy
statement provides guidance for OTS examiners in determining whether the levels
of general valuation allowances for savings institutions are adequate. The
policy statement requires that if a savings institution's general valuation
allowance policies and procedures are deemed to be inadequate, the general
valuation allowance would be compared to certain ranges of general valuation
allowances deemed acceptable by the OTS depending in part on the savings
institution's level of classified assets.
The Bank did not record a provision for loan losses for the year ended
December 31, 2000. The Bank's provision for loan losses was $36,000 and $214,000
for the years ended December 31, 1999 and 1998, respectively. At December 31,
2000, the total allowance for loan losses was $6.7 million, representing 415.32%
of non-performing loans and 404.28% of non-performing assets, compared to ratios
of 213.29% and 191.29% respectively, at December 31, 1999. The Bank continues to
monitor and modify the level of its allowance for loan losses in order to
maintain the allowance at a level which management considers adequate to provide
for probable loan losses based on available information.
Management of the Bank believes that the current allowance for loan losses
is adequate in light of current economic conditions and the composition of its
loan portfolio and other available information and the Board of Directors
concurs in this belief. However, many factors may require additions to the
allowance for loan losses in future periods beyond those currently revealed.
These factors include future adverse changes in economic conditions, changes in
interest rates and changes in the financial capacity of individual borrowers
(any of which may affect the ability of borrowers to make repayments on loans),
changes in the real estate market within the Bank's lending area and the value
of collateral, or a review and evaluation of the Bank's loan portfolio in the
future. The determination of the amount of the allowance for loan losses
includes estimates that are susceptible to significant changes due to changes in
appraised values of collateral, national and regional economic conditions,
interest rates and other factors. In addition, the Bank's increased emphasis on
commercial real estate and multi-family loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with commercial real estate, multi-family loans and construction
loans may require the Bank to increase its provisions for loan losses and to
maintain an allowance for loan losses as a percentage of total loans that is in
excess of the allowance currently maintained by the Bank. Provisions for loan
losses are charged against net income. See "--Lending Activities" and "--Asset
Quality."
12
The following table sets forth changes in, and the balance of, the
Bank's allowance for loan losses at and for the dates indicated.
At and For the Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
----------- --------- --------- ----------- ---------
(Dollars in thousands)
Balance at beginning of year $ 6,818 $ 6,762 $ 6,474 $ 5,437 $ 5,310
Provision for loan losses 36 214 104 418
Provision acquired from New York Federal -- -- -- 979 --
Loans charged-off:
One-to-four family 4 32 91 85 220
Co-operative apartment -- 2 -- 44 162
Multi-family real estate 2 -- -- -- 41
Commercial real estate -- -- -- -- 68
Construction -- -- -- -- --
Other 93 99 12 77 44
------- ------- ------- ------- -------
Total loans charged-off 99 133 103 206 535
------- ------- ------- ------- -------
Recoveries:
Mortgage loans -- 153 177 155 244
Other loans 2 -- -- 5 --
------- ------- -------
Total recoveries 2 153 177 160 244
------- ------- -------
Balance at end of year $ 6,721 $ 6,818 $ 6,762 $ 6,474 $ 5,437
======= ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the year
to average loans outstanding during the year 0.01% 0.00% (0.01)% 0.01% 0.09%
Ratio of allowance for loan losses to
gross loans at end of the year 0.68% 0.77% 0.89% 1.07% 1.39%
Ratio of allowance for loan losses to
non-performing loans at the end of year 415.32% 213.29% 260.36% 263.38% 225.79%
Ratio of allowance for loan losses to
non-performing assets at the end of year 404.28% 191.29% 252.83% 223.94% 149.94%
13
The following table sets forth the Bank's allocation of its allowance for
loan losses to the total amount of loans in each of the categories listed at the
dates indicated. The numbers contained in the "Amount" column indicate the
allowance for loan losses allocated for each particular loan category. The
numbers contained in the column entitled "Percentage of Loans in Category to
Total Loans" indicate the total amount of loans in each particular category as a
percentage of the Bank's total loan portfolio.
At December 31,
---------------------------------------------------------------------------------------------
2000 1999 1998
Percentage of Percentage of Percentage of
Loans in Loans in Loans in
Category to Category to Category to
Loan Category Amount Total Loans Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage Loans:
One-to-four family $1,916 47.13% $1,903 46.92% $2,575 47.69%
Co-operative 126 0.81 144 1.01 278 1.35
Multi-family 1,134 33.68 1,216 35.19 1,395 36.57
Commercial 2,983 16.88 3,003 15.53 1,990 13.37
Construction 27 0.84 24 0.70 114 0.42
---------------------- ------------------------ ---------------------
Total mortgage loans 6,186 99.34 6,290 99.35 6,352 99.40
Small Business
Administration loans 295 0.29 237 0.27 273 0.35
Other Loans 240 0.37 291 0.38 137 0.25
---------------------- ------------------------ ---------------------
Total loans $6,721 100.00% $6,818 100.00% $6,762 100.00%
====================== ======================== =====================
At December 31,
---------------------------------------------------------------
1997 1996
Percentage of Percentage of
Loans in Loans in
Category to Category to
Loan Category Amount Total Loans Amount Total Loans
- -----------------------------------------------------------------------------------------------
Mortgage Loans:
One-to-four family $1,711 47.67% $1,065 57.28%
Co-operative 510 1.99 458 3.40
Multi-family 1,021 37.95 1,456 26.91
Commercial 3,073 11.24 2,434 11.98
Construction 128 0.46 -- --
--------------------- -------------------
Total mortgage loans 6,443 99.31 5,413 99.57
Small Business
Administration loans 23 0.46 -- --
Other Loans 8 0.23 24 0.43
--------------------- -------------------
Total loans $6,474 100.00% $5,437 100.00%
===================== ===================
14
Investment Activities
General. The investment policy of the Company, which is approved by the
Board of Directors, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity. In establishing
its investment strategies, the Company considers its business and growth
strategies, the economic environment, its interest rate risk exposure, its
interest rate sensitivity "gap" position, the types of securities to be held,
and other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Management Strategy," included in the
Annual Report and incorporated herein by reference.
Federally chartered savings institutions have authority to invest in
various types of assets, including U.S. government obligations, securities of
various federal agencies, mortgage-backed and mortgage-related securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers acceptances, reverse repurchase agreements, loans of federal
funds, and, subject to certain limits, corporate securities, commercial paper
and mutual funds.
The Investment Committee of the Bank and the Company meets quarterly to
monitor investment transactions and to establish investment strategy. The Board
of Directors reviews the investment policy on an annual basis and investment
activity on a monthly basis.
The Company classifies its investment securities as available for sale.
Unrealized gains and losses for available-for-sale securities are excluded from
earnings and included in Accumulated Other Comprehensive Income (a separate
component of equity), net of taxes. At December 31, 2000, the Company had $255.2
million in securities available for sale which represented 19.07% of total
assets. These securities had an aggregate market value at that date that was
approximately 2.0 times the amount of the Company's equity at that date. The
cumulative balance of unrealized net losses on securities available for sale was
$0.1 million, net of taxes, at December 31, 2000. As a result of the magnitude
of the Company's holdings of securities available for sale, changes in interest
rates could produce significant changes in the value of such securities and
could produce significant fluctuations in the equity of the Company. See Note 6
of Notes to Consolidated Financial Statements, included in the Annual Report and
incorporated herein by reference. The Company may from time to time sell
securities and realize a loss if the proceeds of such sale may be reinvested in
loans or other assets offering more attractive yields.
At December 31, 2000, the Company had no investment in a particular
issuer's 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 Company's equity.
15
The table below sets forth certain information regarding the amortized cost
and market values of the Company's and Bank's securities portfolio, interest
bearing deposits and federal funds, and FHLB-NY stock at the dates indicated.
Securities available for sale are recorded at market value. See Note 6 of Notes
to Consolidated Financial Statements, included in the Annual Report,
incorporated herein by reference.
At December 31,
---------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------------------- ---------------------- ---------------------
(In thousands)
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies $5,990 $5,932 $10,988 $10,636 $13,213 $13,425
Corporate debentures 2,835 2,847 -- -- 4,711 4,710
Public utility 1,001 1,038 1,001 1,004 945 944
------------------------ ---------------------- ------------------------
Total bonds and other debt
securities 9,826 9,817 11,989 11,640 18,869 19,079
------------------------ ---------------------- ------------------------
Mutual funds 3,566 3,593 -- -- -- --
------------------------ ---------------------- ------------------------
Equity securities:
Common stock 243 505 1,655 1,670 2,390 2,776
Preferred stock 2,608 2,679 2,676 2,684 2,309 2,414
------------------------ ---------------------- ------------------------
Total equity securities 2,851 3,184 4,331 4,354 4,699 5,190
------------------------ ---------------------- ------------------------
Mortgage-backed securities:
GNMA 201,688 200,718 252,626 244,763 265,089 266,425
FNMA 9,516 9,725 14,639 14,602 20,717 21,102
FHLMC 8,527 8,612 9,758 9,657 14,831 14,894
REMIC 19,493 19,571 -- -- -- --
------------------------ ---------------------- ------------------------
Total mortgage-backed securities 239,224 238,626 277,023 269,022 300,637 302,421
------------------------ ---------------------- ------------------------
Total securities available for sale 255,467 255,220 293,343 285,016 324,205 326,690
------------------------ ---------------------- ------------------------
Interest-bearing deposits and
Federal funds sold 12,185 12,185 9,019 9,019 12,008 12,008
FHLB--New York stock 24,932 24,932 22,592 22,592 17,320 17,320
------------------------ ---------------------- ------------------------
Total $292,584 $292,337 $324,954 $316,627 $353,533 $356,018
======================== ====================== ========================
Mortgage-backed securities. At December 31, 2000, the Company had $238.6
million invested in mortgage-backed securities, of which $30.6 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.
16
The following table sets forth the Company's mortgage-backed securities
purchases, sales and principal repayments for the years indicated:
For the Year Ended December 31,
-----------------------------------------
2000 1999 1998
-----------------------------------------
(In thousands)
At beginning of year $269,022 $302,421 $217,110
Purchases of mortgage-backed securities 22,265 59,059 245,942
Amortization of unearned premium, net of
accretion of unearned discount (927) (2,064) (1,386)
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale 7,403 (9,792) (189)
Sales of mortgage-backed securities (23,007) -- (66,136)
Principal repayments received on
mortgage-backed securities (36,130) (80,602) (92,920)
-----------------------------------------
Net increase (decrease) in mortgage-backed securities (30,396) (33,399) 85,311
-----------------------------------------
At end of year $238,626 $269,022 $302,421
=========================================
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. Neither the Company nor the Bank has any derivative instruments that
are extremely sensitive to changes in interest rates.
17
The table below sets forth certain information regarding the amortized
cost, estimated fair value, annualized weighted average yields and maturities of
the Company's and the Bank's debt and equity securities at December 31, 2000.
The stratification of balances is based on stated maturities. Equity securities
and the FHLB-NY stock are shown as immediately maturing, except for preferred
stocks with stated redemption dates, which are shown in the period they are
scheduled to be redeemed. Assumptions for repayments and prepayments are not
reflected for mortgage-backed securities. The Company and the Bank carry these
investments at their estimated fair value in the consolidated financial
statements.
Five to Ten
One Year or Less One to Five Years Years
--------------------- ------------------ -----------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------------------- ------------------ --------------------
Securities available for sale
Bonds and other debt securities:
U.S. government agencies -- -- $990 6.92% -- --
Corporate debt -- -- 2,835 7.50 -- --
Public utility -- -- 1,001 7.96 -- --
--------------------- ------------------ -----------------
Total bonds and other debt
securities -- -- 4,826 7.48 -- --
--------------------- ------------------ -----------------
Mutual funds $3,566 6.63% -- -- -- --
--------------------- ------------------ -----------------
Equity securities:
Common stock 243 3.29 -- -- -- --
Preferred stock 2,201 8.27 -- -- $307 7.31%
--------------------- ------------------ -----------------
Total equity securities 2,444 7.78 -- -- 307 7.31
--------------------- ------------------ -----------------
Mortgage-backed securities:
GNMA -- -- 6 7.33 -- --
FNMA -- -- -- -- 281 7.53
FHLMC -- -- -- -- -- --
REMIC -- -- -- -- -- --
--------------------- ------------------ -----------------
Total mortgage-backed securities -- -- 6 7.33 281 7.53
--------------------- ------------------ -----------------
Interest-bearing deposits and Federal
Funds sold 12,185 6.37 -- -- -- --
FHLB--NY stock 24,932 7.32 -- -- -- --
--------------------- ------------------ -----------------
Total securities $43,127 7.02% $4,832 7.48% $588 7.42%
===================== ================== =================
More Than Ten
Years Total Securities
-------------------- ------------------------------------------------
Average
Weighted Remaining Weighted
Amortized Average Years to Amortized Estimated Average
Cost Yield Maturity Cost Fair Value Yield
-------------------- ------------------------------------------------
(Dollars in thousands)
Securities available for sale
Bonds and other debt securities:
U.S. government agencies $5,000 6.68% 9.25 $5,990 $5,932 6.72%
Corporate debt -- -- 1.66 2,835 2,847 7.50
Public utility -- -- 3.80 1,001 1,038 7.96
-------------------- -------------------------------------------
Total bonds and other debt
securities 5,000 6.68 6.51 9,826 9,817 7.07
-------------------- -------------------------------------------
Mutual funds -- -- N/A 3,566 3,593 6.63
-------------------- -------------------------------------------
Equity securities:
Common stock -- -- N/A 243 505 3.29
Preferred stock 100 11.00 2.30 2,608 2,679 8.26
-------------------- -------------------------------------------
Total equity securities 100 11.00 2.30 2,851 3,184 7.84
-------------------- -------------------------------------------
Mortgage-backed securities:
GNMA 201,682 7.38 27.16 201,688 200,718 7.38
FNMA 9,235 8.09 21.89 9,516 9,725 8.07
FHLMC 8,527 7.75 23.36 8,527 8,612 7.75
REMIC 19,493 7.88 29.62 19,493 19,571 7.88
-------------------- -------------------------------------------
Total mortgage-backed securities 238,937 7.46 27.02 239,224 238,626 7.46
-------------------- -------------------------------------------
Interest-bearing deposits and Federal
Funds sold -- -- N/A 12,185 12,185 6.37
FHLB--NY stock -- -- N/A 24,932 24,932 7.32
-------------------- -------------------------------------------
Total securities $244,037 7.45% 25.96 $292,584 $292,337 7.39%
==================== ===========================================
18
Sources of Funds
General. Deposits, FHLB-NY borrowings, repurchase agreements, principal and
interest payments on loans, mortgage-backed and other securities, and proceeds
from sales of loans and securities are the Company's primary sources of funds
for lending, investing and other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits principally consist of passbook
accounts, money market accounts, demand accounts, NOW accounts and certificates
of deposit. The Bank has a relatively stable retail deposit base drawn from its
market area through its 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
management's intention to balance its goal to remain competitive in interest
rates on deposits while seeking to manage its cost of funds to finance its
strategies.
The Bank's core deposits, consisting of passbook accounts, NOW accounts,
money market accounts, and non-interest bearing demand accounts, are typically
more stable and lower costing than other sources of funding. However, the flow
of deposits into a particular type of account is influenced significantly by
general economic conditions, changes in prevailing money market and other
interest rates, and competition. During the second half of 1999, as interest
rates began to increase, the Bank raised interest rates on its certificate of
deposit accounts to remain competitive. The interest rates paid on certificate
of deposit accounts opened during 2000 and the later part of 1999 were generally
at levels that were above the Bank's weighted average cost of existing
certificate of deposit accounts. In addition, maturing certificate of deposit
accounts were generally reinvested by depositors in new certificate of deposit
accounts which paid a higher rate than was paid on the maturing deposit. During
the first half of 1999 and all of 1998, certificate of deposit accounts were
generally opened at rates which were lower than the weighted average rate paid
by the Bank on its certificate of deposit accounts, and, maturing certificate of
deposit accounts were generally reinvested by depositors in new certificate of
deposit accounts which paid a lower rate than was paid on the maturing deposit.
As a result, the Bank saw the cost of its certificate of deposit accounts
increase to 5.58% in 2000 from 5.24% in 1999, which had decreased from 5.61% in
1998. In addition, the Bank's cost of interest-bearing deposits increased to
4.17% in 2000 from 3.91% in 1999, which had declined from 4.40% in 1998. A
continuation of a high interest rate environment, or of rates on new certificate
of deposit accounts at levels above the overall cost of funds being paid at year
end, could result in an increase in the Company's cost of deposits and a
narrowing of the Company's net interest margin.
Included in deposits are certificates of deposit with a balance of $100,000
or more totaling $53.7 million, $43.0 million and $30.5 million at December 31,
2000, 1999 and 1998, respectively.
19
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented.
At December 31,
--------------------------------------------------------------------------------
2000 1999
--------------------------------------- -------------------------------------
Percent Weighted Percent Weighted
of Average of Average
Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate
------------ --------- ---------- ---------- --------- ----------
(Dollars in thousands)
Passbook accounts (1) $186,207 26.99% 2.08% $195,910 29.37% 2.07%
NOW accounts (1) 29,615 4.29 1.92 27,463 4.12 1.90
Demand accounts (1) 20,913 3.03 -- 20,490 3.07 --
Mortgagors' escrow deposits 7,753 1.12 0.65 11,023 1.65 0.79
------------ --------- ---------- ---------- --------- --------
Total 244,488 35.43 1.84 254,886 38.21 1.83
------------ --------- ---------- ---------- --------- --------
Money market accounts (1) 43,136 6.25 3.49 40,378 6.05 3.23
Certificate of deposit accounts
with original maturities of:
6 Months and less 45,025 6.53 5.38 46,265 6.94 4.36
6 to 12 Months 29,586 4.29 5.40 64,499 9.67 4.73
12 to 30 Months 214,237 31.08 5.76 171,087 25.67 5.42
30 to 48 Months 17,689 2.56 5.85 28,632 4.29 6.07
48 to 72 Months 88,794 12.87 6.50 60,309 9.04 6.24
72 Months or more 6,856 0.99 6.63 885 0.13 6.31
------------ --------- ---------- ---------- --------- --------
Total certificate of deposit accounts 402,187 58.32 5.87 371,677 55.74 5.35
------------ --------- ---------- ---------- --------- --------
Total deposits (2) $689,811 100.00% 4.29% $666,941 100.00% 3.88%
============ ========= ========== ========== ========= ========
At December 31,
----------------------------------------
1998
----------------------------------------
Percent Weighted
of Average
Total Nominal
Amount Deposits Rate
---------- --------- ----------
Passbook accounts (1) $203,949 30.71% 2.29%
NOW accounts (1) 26,788 4.03 1.90
Demand accounts (1) 27,505 4.14 --
Mortgagors' escrow deposits 6,563 0.99 1.06
--------- --------- -------
Total 264,805 39.87 1.98
--------- --------- -------
Money market accounts (1) 28,439 4.28 2.69
Certificate of deposit accounts
with original maturities of:
6 Months and less 54,268 8.17 4.30
6 to 12 Months 81,092 12.21 4.96
12 to 30 Months 139,397 21.00 5.71
30 to 48 Months 41,543 6.26 6.17
48 to 72 Months 50,323 7.58 6.22
72 Months or more 4,192 0.63 6.54
--------- --------- -------
Total certificate of deposit accounts 370,815 55.85 5.47
--------- --------- -------
Total deposits (2) $664,059 100.00% 3.96%
========= ========= =======
(1) Weighted average nominal rate as of the year end date equals the stated
rate offered.
(2) Included in the above balances are IRA and Keogh deposits totaling $92.7
million, $86.8 million and $86.4 million at December 31, 2000, 1999 and
1998, respectively.
20
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, 2000.
At December 31, 2000
-------------------------------------------------
At December 31, Within One to
------------------------------------ One Three There-
2000 1999 1998 Year Years after Total
------------ ----------- ----------- ------------ ----------- ----------- ------------
(Dollars in thousands)
Certificate of deposit accounts:
2.99 or less $ 621 $ 370 $ 136 $ 258 $ 172 $ 191 $ 621
3.00 to 3.99 -- 5,717 22,234 -- -- -- --
4.00 to 4.99 30,294 131,874 82,899 28,723 939 632 30,294
5.00 to 5.99 204,136 172,863 161,122 174,762 26,652 2,722 204,136
6.00 to 6.99 141,608 49,392 92,038 46,645 55,535 39,428 141,608
7.00 to 7.99 25,528 11,461 12,386 4,006 787 20,735 25,528
-------- -------- -------- -------- -------- -------- --------
Total $402,187 $371,677 $370,815 $254,394 $84,085 $63,708 $402,187
======== ======== ======== ======== ======== ======== ========
The following table presents by various maturity categories the amount of
certificate of deposit accounts with balances of $100,000 or more at December
31, 2000 and their annualized weighted average interest rates.
Amount Weighted Average Rate
---------- ---------------------
(Dollars in thousands)
Maturity Period:
Three months or less $13,145 5.63%
Over three through six months 9,370 5.70
Over six through 12 months 8,060 5.95
Over 12 months 23,084 6.44
------- ----
Total $53,659 6.04%
------- ----
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Year Ended December 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Net deposits/(withdrawals) (1) ($4,603) ($22,100) ($19,824)
Interest credited on deposits 27,473 24,982 27,972
-------- -------- --------
Total increase (decrease) in deposits $22,870 $2,882 $8,148
-------- -------- --------
(1) Includes mortgagors' escrow deposits.
21
The following table sets forth the distribution of the Bank's average
deposit accounts for the years indicated, the percentage of total deposit
portfolio, and the average interest cost of each deposit category presented.
Average balances for all years shown are derived from daily balances.
For The Year Ended December 31,
----------------------------- ------------------------------- ------------------------------
2000 1999 1998
----------------------------- ------------------------------- ------------------------------
Percent Percent Percent
Average of Total Average Average of Total Average Average of Total Average
Balance Deposits Cost Balance Deposits Cost Balance Deposits Cost
----------------------------- ------------------------------- ------------------------------
(Dollars in thousands)
Passbook accounts $189,852 27.84% 2.07% $200,601 30.19% 2.07% $202,291 30.53% 2.74%
NOW accounts 27,838 4.08 1.90 26,281 3.96 1.90 24,375 3.68 1.91
Demand accounts 23,200 3.40 -- 24,624 3.71 -- 26,177 3.95 --
Mortgagors' escrow
Deposits 13,177 1.93 0.65 11,718 1.76 0.79 6,724 1.01 1.06
---------------------------- ---------------------------- ----------------------------
Total 254,067 37.25 1.79 263,224 39.62 1.80 259,567 39.17 2.34
Money market
Accounts 42,791 6.27 3.36 36,191 5.45 3.05 26,240 3.96 2.95
Certificate of
deposit
Accounts 385,237 56.48 5.58 364,947 54.93 5.24 376,787 56.87 5.61
---------------------------- ---------------------------- ----------------------------
Total deposits $682,095 100.00% 4.03% $664,362 100.00% 3.76% $662,594 100.00% 4.22%
============================ ============================ ============================
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank has increased utilization of borrowings as an alternative and cost
effective source of funds for lending, investing and other general purposes. The
Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such
advances generally are secured by a blanket lien against the Bank's mortgage
portfolio and the Bank's investment in the stock of the FHLB-NY. In addition,
the Bank may pledge mortgage-backed securities to obtain advances from the
FHLB-NY. See "Regulation -- Federal Home Loan Bank System". The maximum amount
that the FHLB-NY will advance for purposes other than for meeting withdrawals
fluctuates from time to time in accordance with the policies of the FHLB-NY. The
Bank also enters into repurchase agreements with 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 Company's consolidated financial
statements. The cost of borrowed funds was 6.18%, 6.02% and 6.16% for 2000, 1999
and 1998, respectively. The average balances of borrowed funds were $478.7
million, $379.3 million and $303.6 million for 2000, 1999 and 1998,
respectively.
22
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated.
At or For the Year Ended December 31,
-------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
(Dollars in thousands)
Securities Sold with the Agreement to Repurchase
Average balance outstanding $145,575 $129,945 $110,274
Maximum amount outstanding at any month
end during the period $164,382 $145,000 $130,000
Balance outstanding at the end of period $164,382 $135,000 $120,000
Weighted average interest rate during the period 5.81% 5.80% 5.81%
Weighted average interest rate at end of period 5.87% 5.75% 5.83%
FHLB-