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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, 1998
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3209278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144-51 Northern Boulevard, Flushing, New York 11354
(Address of principal executive offices)
(718) 961-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01
par value.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. _X_ Yes No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
As of February 28, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $153,936,000. This figure is based
on the closing price on the Nasdaq National Market for a share of the
registrant's Common Stock, $0.01 par value, on February 26, 1999, the last
trading date in February 1999, which was $15.25.
The number of shares of the registrant's Common Stock outstanding as of
February 28, 1999 was 10,450,567 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1998 are incorporated herein by reference in Part II, and portions
of the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 1999 are incorporated herein by reference in
Part III.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business..............................................................1
General ............................................................1
Market Area and Competition.........................................3
Lending Activities..................................................4
Loan Portfolio Composition...................................4
Loan Maturity and Repricing..................................7
One-to-Four Family Mortgage Lending..........................7
Home Equity Loans............................................9
Multi-Family Lending.........................................9
Commercial Real Estate Lending..............................10
Construction Loans..........................................10
Small Business Administration Lending.......................10
Consumer and Other Lending..................................11
Loan Approval Procedures and Authority......................11
Loan Concentrations.........................................12
Loan Servicing..............................................12
Asset Quality......................................................12
Loan Collection.............................................12
Delinquent Loans and Non-performing Assets..................12
REO.........................................................14
Allowance for Loan Losses..........................................14
Investment Activities..............................................18
General.....................................................18
Mortgage-backed securities..................................19
Sources of Funds...................................................22
General.....................................................22
Deposits....................................................22
Borrowings..................................................25
Subsidiary Activities..............................................27
Personnel..........................................................27
RISK FACTORS
Effect of Interest Rates...........................................28
Lending Activities.................................................28
Competition........................................................29
Local Economic Conditions..........................................29
Year 2000 Compliance...............................................29
Pending Legislation................................................30
Legislation and Proposed Changes...................................31
Certain Anti-Takeover Provisions...................................31
i
TABLE OF CONTENTS
(Continued)
Page
----
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation...................................................32
General.....................................................32
Bad Debt Reserves...........................................32
Distributions...............................................33
Corporate Alternative Minimum Tax...........................33
State and Local Taxation...........................................33
New York State and New York City Taxation...................33
Delaware State Taxation.....................................34
REGULATION
General ...........................................................34
Investment Powers..................................................35
Real Estate Lending Standards......................................35
Loans-to-One Borrower Limits.......................................36
Insurance of Accounts..............................................36
Liquidity Requirements.............................................37
Qualified Thrift Lender Test.......................................37
Transactions with Affiliates.......................................38
Restrictions on Dividends and Capital Distributions................39
Federal Home Loan Bank System......................................40
Assessments........................................................40
Branching..........................................................40
Community Reinvestment.............................................40
Year 2000 Compliance...............................................41
Brokered Deposits..................................................41
Capital Requirements...............................................42
General.....................................................42
Tangible Capital Requirement................................42
Core Capital Requirement....................................42
Risk-Based Requirement......................................42
Federal Reserve System.............................................43
Financial Reporting................................................44
Standards for Safety and Soundness.................................44
Prompt Corrective Action...........................................44
Pending Legislation................................................45
Company Regulation.................................................45
Federal Securities Laws............................................46
Item 2. Properties...........................................................47
Item 3. Legal Proceedings....................................................47
Item 4. Submission of Matters to a Vote of Security Holders..................47
ii
TABLE OF CONTENTS
(Continued)
Page
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PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters................................................48
Item 6. Selected Financial Data..............................................48
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................48
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..........48
Item 8. Financial Statements and Supplementary Data..........................48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................48
PART III
Item 10. Directors and Executive Officers of the Registrant..................49
Item 11. Executive Compensation..............................................49
Item 12. Security Ownership of Certain Beneficial Owners and Management......49
Item 13. Certain Relationships and Related Transactions......................49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....50
(a) 1. Financial Statements......................................50
(a) 2. Financial Statement Schedules.............................50
(b) Reports on Form 8-K filed during the last quarter
of fiscal 1997............................................50
(c) Exhibits Required by Securities and Exchange Commission
Regulation S-K............................................51
SIGNATURES
POWER OF ATTORNEY
iii
PART I
Statements contained in this Annual Report on Form 10-K relating to plans,
strategies, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking information is inherently
subject to risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, factors discussed under the captions "Business--General",
"Business--Market Area and Competition" and "Risk Factors" below, and elsewhere
in this Form 10-K and in other documents filed by the Company with the
Securities and Exchange Commission from time to time. The Company has no
obligation to update these forward-looking statements.
Item 1. Business.
General
Flushing Financial Corporation (the "Company") is a Delaware corporation
organized in May 1994 at the direction of Flushing Savings Bank, FSB (the
"Bank") for the purpose of acquiring and holding all of the outstanding capital
stock of the Bank issued upon its conversion from a federal mutual savings bank
to a federal stock savings bank (the "Conversion"). The Conversion was completed
on November 21, 1995. In connection with the Conversion, the Company issued
12,937,500 shares of common stock at a price of $7.67 per share to the Bank's
eligible depositors who subscribed for shares, and to an employee benefit trust
established by the Company for the purpose of holding shares for allocation or
distribution under certain employee benefit plans of the Company and the Bank
(the "Employee Benefit Trust"). The Company realized net proceeds of $96.5
million from the sale of its common stock and utilized approximately $48.3
million of such proceeds to purchase 100% of the issued and outstanding shares
of the Bank's common stock. Flushing Financial Corporation's common stock is
traded on the Nasdaq National Market under the symbol "FFIC".
The primary business of the Company is the operation of its wholly-owned
subsidiary, the Bank. In addition to directing, planning and coordinating the
business activities of the Bank, the Company invests primarily in U.S.
government and federal agency securities, federal funds, mortgage-backed
securities, and investment grade corporate obligations. The Company also holds a
note evidencing a loan that it made to the Employee Benefit Trust to enable the
Employee Benefit Trust to acquire 1,035,000 shares, or 8% of the common stock
issued in the Conversion. The Company has in the past increased growth through
acquisition of financial institutions and branches of other financial
institutions, and will pursue growth through acquisitions that are, or are
expected to be within a reasonable time-frame, accretive to earnings, as
opportunities arise. The Company may also organize or acquire, through merger or
otherwise, other financial services related companies. The activities of the
Company are funded by that portion of the proceeds of the sale of common stock
in the Conversion that the Company was permitted by the Office of Thrift
Supervision ("OTS") to retain, and earnings thereon, and by dividends, if any,
received from the Bank.
The Company is a unitary savings and loan holding company, which, under
existing laws, is generally not restricted as to the types of business
activities in which it may engage, provided that the Bank continues to be a
qualified thrift lender. Under regulations of the Office of Thrift Supervision
(the "OTS") the Bank is a qualified thrift lender if its ratio of qualified
thrift investments to portfolio assets ("QTL Ratio") is 65% or more, on a
monthly average basis in nine of every 12 months. At December 31, 1998, the
Bank's QTL Ratio was 88.6%, and the Bank had maintained more than 65% of its
"portfolio assets" in qualified thrift investments in at least nine of the
preceding 12 months. See "Regulation--Qualified Thrift Lender Test" and
"Regulation--Company Regulation."
1
The Company neither owns nor leases any property but instead uses the
premises and equipment of the Bank. At the present time, the Company does not
employ any persons other than certain officers of the Bank who do not receive
any extra compensation as officers of the Company. The Company utilizes the
support staff of the Bank from time to time, as needed. Additional employees may
be hired as deemed appropriate by the management of the Company.
Unless otherwise disclosed, the information presented in the financial
statements and this Form 10-K reflect the financial condition and results of
operations of the Company, the Bank and the Bank's subsidiaries on a
consolidated basis. At December 31, 1998, the Company had total assets of $1.1
billion, deposits of $664.1 million and stockholders' equity of $132.1 million.
The Bank's principal business is attracting retail deposits from the
general public and investing those deposits together with funds generated from
ongoing operations and borrowings, primarily in (i) originations and purchases
of one-to-four-family residential mortgage loans, multi-family income-producing
property loans and commercial real estate loans; (ii) mortgage loan surrogates
such as mortgage-backed securities; and (iii) U.S. government and federal agency
securities, corporate fixed-income securities and other marketable securities.
To a lesser extent, the Bank originates certain other loans, including
construction loans, Small Business Administration ("SBA") loans and other small
business and consumer loans. At December 31, 1998, the Bank had loans
receivable, net of allowance for loan losses and unearned income, of $750.6
million, representing approximately 65.7% of the Company's total assets, and
held mortgage-backed securities with a carrying value of $291.6 million,
representing approximately 25.5% of the Company's total assets. The Bank's
revenues are derived principally from interest on its mortgage and other loans
and mortgage-backed securities portfolio, and interest and dividends on other
investments in its securities portfolio. The Bank's primary sources of funds are
deposits, Federal Home Loan Bank-New York ("FHLB-NY") borrowings, reverse
repurchase agreements, principal and interest payments on loans, mortgage-backed
and other securities, proceeds from sales of securities and, to a lesser extent,
proceeds from sales of loans.
On September 9, 1997, the Company acquired New York Federal Savings Bank
("New York Federal") and merged it with the Bank in a cash transaction valued at
approximately $13 million. This acquisition was immediately accretive to the
Company's earnings and was accounted for under the purchase method of
accounting.
In November of 1997, the Bank established a wholly owned real estate
investment trust subsidiary, Flushing Preferred Funding Corporation ("FPFC"),
and transferred $256.7 million in real estate loans from the Bank to FPFC. On
September 30, 1998, the Bank transferred an additional $69.7 million in real
estate loans from the Bank to FPFC. The assets transferred to FPFC are viewed by
regulators as part of the Bank's assets in consolidation. However, the
establishment of FPFC provides an additional vehicle for access by the Company
to the capital markets for future investment opportunities. In addition, under
current law, all income earned by FPFC distributed to the Bank in the form of a
dividend has the effect of reducing the Company's income tax expense.
In March of 1998, the Bank formed a service corporation, Flushing Service
Corporation, to market insurance products and mutual funds. The insurance
products and mutual funds sold are products of unrelated insurance and
securities firms from which the service corporation earns a commission.
Management is currently reviewing the profitability potential of various new
products to further extend the Bank's product lines and market.
As part of the Company's exploration in new retailing concepts and
products, the Bank opened its first in-store supermarket branch in June 1998 in
the neighborhood of New Hyde Park through an alliance with the Edwards
Supermarket chain. The new supermarket branch can address virtually all of its
customers' financial needs, with the added convenience of extended hours and
time saving grocery store access.
2
On August 18, 1998, the Board of Directors of the Company declared a
three-for-two split of the Company's common stock in the form of a 50% stock
dividend, which was paid on September 30, 1998. Each stockholder received one
additional share for every two shares of the Company's common stock held at the
record date, September 10, 1998. Cash was paid in lieu of fractional shares.
This dividend was not paid on shares held in treasury. All share and per share
amounts in this Annual Report on Form 10-K have been retroactively restated to
reflect the three-for-two split paid on September 30, 1998.
Market Area and Competition
The Bank has been, and intends to continue to be, a community oriented
savings institution offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank is headquartered in Flushing, New
York, located in the Borough of Queens. It currently operates out of its main
office and seven branch offices, located in the New York City Boroughs of
Queens, Brooklyn and Manhattan, and in Nassau County, New York. Substantially
all of the Bank's mortgage loans are secured by properties located in the New
York City metropolitan area. During the last three years, the unemployment and
real estate values in the New York City metropolitan area have been relatively
stable, which has favorably impacted the Bank's asset quality. See "--Asset
Quality." There can be no assurance that the stability of these economic factors
will continue.
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank's market area has a high density of financial
institutions, many of which have greater financial resources, name recognition
and market presence than the Bank, and all of which are competitors of the Bank
to varying degrees. Particularly intense competition exists for deposits and in
all of the lending activities emphasized by the Bank. The Bank's competition for
loans comes principally from commercial banks, other savings banks, savings and
loan associations, mortgage banking companies, insurance companies, finance
companies and credit unions. Management anticipates that competition for
multi-family loans, commercial real estate loans and one-to-four family
residential mortgage loans will continue to increase in the future. Thus, no
assurances can be given that the Bank will be able to maintain or increase its
current level of such loans, as contemplated by management's current business
strategy. The Bank's most direct competition for deposits historically has come
from other savings banks, commercial banks, savings and loan associations and
credit unions. In addition, the Bank faces increasing competition for deposits
from products offered by brokerage firms, insurance companies and other
financial intermediaries, such as money market and other mutual funds and
annuities. Trends toward the consolidation of the banking industry and the
lifting of interstate banking and branching restrictions may make it more
difficult for smaller, community-oriented banks, such as the Bank, to compete
effectively with large, national, regional and super-regional banking
institutions. Notwithstanding the intense competition, the Bank has been
successful in maintaining its deposit base.
For a discussion of the Company's business strategies, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Management Strategy," included in the Annual Report of Stockholders
for the fiscal year ended December 31, 1998 (the "Annual Report"), incorporated
herein by reference.
3
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
conventional fixed-rate residential mortgage loans and adjustable rate mortgage
("ARM") loans secured by one-to-four family residences, mortgage loans secured
by multi-family income producing properties or commercial real estate,
construction loans, SBA loans, other small business loans and consumer loans. At
December 31, 1998, the Bank had gross loans outstanding of $758.6 million
(before reserves and unearned income), of which $372.0 million, or 49.04%, were
one-to-four family residential mortgage loans (including $16.5 million of
condominium loans, and $5.9 million of home equity loans). Of the one-to-four
family residential loans outstanding on that date, 51.52% were ARM loans and
48.48% were fixed-rate loans. At December 31, 1998, multi-family loans totaled
$277.4 million, or 36.57% of gross loans, commercial real estate loans totaled
$101.4 million, or 13.37%, construction loans totaled $3.2 million, or 0.42%,
SBA loans totaled $2.6 million, or 0.35%, and consumer and other loans totaled
$1.9 million, or 0.25% of gross loans.
The Bank has traditionally emphasized the origination and acquisition of
one-to-four family residential mortgage loans, which include ARM loans,
fixed-rate mortgage loans and home equity loans. However, in recent years, the
Bank has also placed emphasis on multi-family and commercial real estate loans.
The Bank expects to continue its emphasis on multi-family and commercial real
estate loans as well as on one-to-four family residential mortgage loans. From
December 31, 1997 to December 31, 1998, one-to-four-family residential mortgage
loans increased $70.7 million, or 23.45%, multi-family loans increased $47.2
million, or 20.50%, and commercial loans increased $33.2 million, or 48.72%.
Fully underwritten one-to-four family residential mortgage loans are considered
by the banking industry to have less risk than other types of loans.
Multi-family income-producing real estate loans and commercial real estate loans
generally have higher yields than one-to-four family loans and shorter terms to
maturity, but typically involve higher principal amounts and generally expose
the lender to greater credit risk than fully underwritten one-to-four family
residential mortgage loans. The Bank's strategy to emphasize multi-family and
commercial real estate loans can be expected to increase the overall level of
credit risk inherent in the Bank's loan portfolio. The greater risk associated
with multi-family and commercial real estate loans may require the Bank to
increase its provisions for loan losses and to maintain an allowance for loan
losses as a percentage of total loans in excess of the allowance currently
maintained by the Bank. To date, the Company has not experienced significant
losses in its multi-family and commercial real estate loan portfolios.
The Bank's lending activities are subject to federal and state laws and
regulations. Interest rates charged by the Bank on loans are affected primarily
by the demand for such loans, the supply of money available for lending
purposes, the rate offered by the Bank's competitors and, in the case of
corporate entities, the creditworthiness of the borrower. Many of those factors
are, in turn, affected by regional and national economic conditions, and the
fiscal, monetary and tax policies of the federal government.
4
The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated.
At December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- -------------------- --------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Mortgage Loans:
One-to-four family (1) $ 361,786 47.69% $ 289,286 47.67% $ 223,273 57.28% $ 155,435 54.20%
Co-operative (2) 10,238 1.35 12,065 1.99 13,245 3.40 14,653 5.11
Multi-family real estate 277,437 36.57 230,229 37.95 104,870 26.91 69,140 24.11
Commercial real estate 101,401 13.37 68,182 11.24 46,698 11.98 45,215 15.77
Construction 3,203 0.42 2,797 0.46 -- -- -- --
--------- ------ --------- ------ --------- ------ --------- ------
Gross mortgage loans 754,065 99.40 602,559 99.31 388,086 99.57 284,443 99.19
Small Business Administration loans 2,616 0.35 2,789 0.46 -- -- -- --
Consumer and other loans 1,899 0.25 1,385 0.23 1,680 0.43 2,328 0.81
--------- ------ --------- ------ --------- ------ --------- ------
Gross loans 758,580 100.00% 606,733 100.00% 389,766 100.00% 286,771 100.00%
====== ====== ====== ======
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (1,263) (1,838) (1,548) (1,335)
Allowance for loan losses (6,762) (6,474) (5,437) (5,310)
--------- --------- --------- ---------
Loans, net $ 750,555 $ 598,421 $ 382,781 $ 280,126
========= ========= ========= =========
At December 31,
------------------------
1994
------------------------
Percent
Amount of Total
------ --------
Mortgage Loans:
One-to-four family (1) $ 133,006 51.39%
Co-operative (2) 16,155 6.24
Multi-family real estate 56,559 21.85
Commercial real estate 49,512 19.13
Construction 364 0.14
--------- ------
Gross mortgage loans 255,596 98.75
Small Business Administration loans -- --
Consumer and other loans 3,231 1.25
--------- ------
Gross loans 258,827 100.00%
======
Less:
Unearned income, unamortized
discounts, and deferred loan
fees, net (1,341)
Allowance for loan losses (5,370)
---------
Loans, net $ 252,116
=========
(1) One-to-four family residential loans also include home equity and
condominium loans. At December 31, 1998, gross home equity loans totaled
$5.9 million and condominium loans totaled $16.5 million.
(2) Consists of loans secured by shares representing interests in individual
co-operative units that are generally owner occupied.
5
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,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
MORTGAGE LOANS
At beginning of year $ 602,559 $ 388,086 $ 284,443
Mortgage loans originated:
One-to-four family 83,051 42,756 51,309
Co-operative 113 475 76
Multi-family 84,328 79,976 43,184
Commercial 52,211 17,121 7,501
Construction 3,332 3,016 --
--------- --------- ---------
Total mortgage loans originated 223,035 143,344 102,070
--------- --------- ---------
Acquired loans:
Loans purchased (1) 27,174 49,965 39,873
Acquired NY Federal 1-4 family loans -- 901 --
Acquired NY Federal multi-family loans -- 62,405 --
Acquired NY Federal commercial loans -- 11,717 --
--------- --------- ---------
Total acquired mortgage loans 27,174 124,988 39,873
--------- --------- ---------
Less:
Principal reductions 98,251 53,416 37,150
Mortgage loan foreclosures 452 443 1,150
--------- --------- ---------
At end of year $ 754,065 $ 602,559 $ 388,086
========= ========= =========
SBA, CONSUMER AND OTHER LOANS
At beginning of year $ 4,174 $ 1,680 $ 2,328
Acquired NY Federal SBA -- 2,029 --
Net Bank activity 341 465 (648)
--------- --------- ---------
At end of year $ 4,515 $ 4,174 $ 1,680
========= ========= =========
(1) For a description of the Bank's loan purchase activity, see "--One-to-Four
Family Mortgage Lending".
6
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of the Bank's loan portfolio at December 31, 1998. Loans
that have adjustable-rates are shown as being due in the period during which the
interest rates are next subject to change. The table does not reflect
prepayments or scheduled principal amortization, which totaled $98.3 million for
the year ended December 31, 1998. Certain adjustable rate loans have features
which limit changes in interest rates on a short-term basis and over the life of
the loan.
At December 31,
-----------------------------------------------------------------------------------------------
Mortgage Loans Other Loans
------------------------------------------------------------ -------------------
One-to- Co- Multi- Total Loans
Four Family operative family Commercial Construction SBA Consumer Receivable
----------- --------- ------ ---------- ------------ -------- -------- ----------
(In thousands)
Amounts due:
Within one year $ 48,668 $ 5,309 $ 16,255 $ 10,122 $ 3,203 -- $ 111 $ 83,668
-------- -------- -------- -------- -------- -------- -------- --------
After one year (1)
One to two years 21,154 1,070 32,067 8,101 -- -- 221 62,613
Two to three years 30,949 828 54,362 14,055 -- -- 819 101,013
Three to five years 33,459 851 82,812 39,914 -- $ 344 748 158,128
Five to ten years 74,246 1,124 49,618 19,997 -- 1,677 -- 146,662
Over ten years 153,310 1,056 42,323 9,212 -- 595 -- 206,496
-------- -------- -------- -------- -------- -------- -------- --------
Total due after
one year 313,118 4,929 261,182 91,279 -- 2,616 1,788 674,912
-------- -------- -------- -------- -------- -------- -------- --------
Total amounts due $361,786 $ 10,238 $277,437 $101,401 $ 3,203 $ 2,616 $ 1,899 $758,580
======== ======== ======== ======== ======== ======== ======== ========
(1) Of the $674.9 million of loans due after one year, $365.0 million are
adjustable rate loans and $309.9 million are fixed-rate loans.
One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured
by one-to-four family residences, including townhouses and condominium units,
located in its primary lending area. For purposes of the description contained
in this section, one-to-four family residential mortgage loans and co-operative
apartment loans are collectively referred to herein as "residential mortgage
loans." The Bank offers both fixed-rate and ARM residential mortgage loans with
maturities of up to 30 years and a general maximum loan amount of $650,000. Loan
originations generally result from applications received from existing or past
customers, persons who respond to Bank marketing efforts and referrals from
mortgage brokers and mortgage bankers.
Partly in response to the intense competition for originations of
one-to-four family residential mortgage loans, the Bank has a program of
correspondent relationships with several mortgage bankers and brokers operating
in the New York metropolitan area. Under this program, the Bank purchases
individual newly originated one-to-four family loans originated by such
correspondents. The loans are underwritten pursuant to the Bank's credit
underwriting standards and each loan is reviewed by Bank personnel prior to
purchase to ensure conformity with such standards. During 1998, through these
relationships, the Bank purchased $27.2 million in one-to-four family mortgage
loans, as compared to $50.0 million in 1997 and $39.9 million during 1996.
The Bank generally originates residential mortgage loans in amounts up to
80% of the appraised value or the sale price, whichever is less. The Bank may
make residential mortgage loans with loan-to-value ratios of up to 95% of the
appraised value of the mortgaged property; however, private mortgage insurance
is required whenever loan-to-value ratios exceed 80% of the appraised value of
the property securing the loan.
7
Traditionally, residential mortgage loans originated by the Bank have been
underwritten to FNMA and other agency guidelines to facilitate securitization
and sale in the secondary market. These guidelines require, among other things,
verification of the loan applicant's income. However, from time to time, and
with increasing frequency, the Bank originates residential mortgage loans to
self-employed individuals within the Bank's local community without verification
of the borrower's level of income, provided that the borrower's stated income is
considered reasonable for the borrower's type of business. These loans involve a
higher degree of risk as compared to the Bank's other fully underwritten
residential mortgage loans as there is a greater opportunity for borrowers to
falsify or overstate their level of income and ability to service indebtedness.
To mitigate this risk, the Bank typically limits the amount of these loans to
80% of the appraised value of the property or the sale price, whichever is less.
These loans also are not as readily salable in the secondary market as the
Bank's other fully underwritten loans, either as whole loans or when pooled or
securitized. FNMA does not purchase such loans. The Bank believes, however, that
its willingness to make such loans is an aspect of its commitment to be a
community-oriented bank. Although there are a number of purchasers for such
loans, there can be no assurance that such purchasers will continue to be active
in the market or that the Bank will be able to sell such loans in the future.
The Bank originated $36.8 million, $26.6 million and $19.0 million in loans of
this type during 1998, 1997 and 1996, respectively.
The Bank's fixed-rate residential mortgage loans typically are originated
for terms of 15 and 30 years and are competitively priced based on market
conditions and the Bank's cost of funds. The Bank charges origination fees of up
to 2%; loans with fees of less than 2% generally carry a higher interest rate.
The Bank originated $44.3 million and $33.8 million of 15-year fixed-rate
residential mortgage loans in 1998 and 1997, respectively. The Bank also
originated $29.9 million and $4.7 million of 30-year fixed rate residential
mortgage loans in 1998 and 1997, respectively. These loans have been retained to
provide flexibility in the management of the Company's interest rate sensitivity
position.
The Bank offers ARM loans with adjustment periods of one, three, five,
seven or ten years. Interest rates on ARM loans currently offered by the Bank
are adjusted at the beginning of each adjustment period based upon a fixed
spread above the average yield on United States treasury securities, adjusted to
a constant maturity which corresponds to the adjustment period of the loan (the
"U.S. Treasury constant maturity index") as published weekly by the Federal
Reserve Board. From time to time, the Bank may originate ARM loans at an initial
rate lower than the U.S. Treasury constant maturity index as a result of a
discount on the spread for the initial adjustment period. ARM loans generally
are subject to limitations on interest rate increases of 2% per adjustment
period and an aggregate adjustment of 6% over the life of the loan. Origination
fees of up to 2% are charged for ARM loans; loans with fees of less than 2%
generally carry a higher interest rate. The Bank originated and purchased
one-to-four family residential ARM loans totaling $23.9 million and $12.7
million, respectively, during 1998 and $21.6 million and $29.8 million,
respectively, during 1997. At December 31, 1998, $191.2 million, or 51.52%, of
the Bank's residential mortgage loans, consisted of ARM loans.
The volume and adjustment periods of ARM loans originated by the Bank have
been affected by such market factors as the level of interest rates, demand for
loans, competition, consumer preferences and the availability of funds. In
general, consumers show a preference for ARM loans in periods of high interest
rates and for fixed-rate loans when interest rates are low. In periods of
declining interest rates, the Bank may experience refinancing activity in ARM
loans, whose interest rates may be fully indexed, to fixed-rate loans.
The retention of ARM loans, as opposed to fixed-rate 30-year loans, in the
Bank's portfolio helps reduce the Bank's exposure to interest rate risks.
However, in an environment of rapidly increasing interest rates as was
experienced in the 1970's, it is possible for the interest rate increase to
exceed the maximum aggregate adjustment on ARM loans and negatively affect the
spread between the Bank's interest income and its cost of funds.
8
ARM loans generally involve credit risks different from those inherent in
fixed-rate loans, primarily because if interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default.
However, this potential risk is lessened by the Bank's policy of originating ARM
loans with annual and lifetime interest rate caps that limit the increase of a
borrower's monthly payment. The Bank has not in the past, nor does it currently
originate ARM loans which provide for negative amortization.
Home Equity Loans. Home equity loans are included in the Bank's portfolio
of one-to-four family residential mortgage loans. These loans are offered as
adjustable-rate "home equity lines of credit" on which interest only is due for
an initial term of 10 years and thereafter principal and interest payments
sufficient to liquidate the loan are required for the remaining term, not to
exceed 20 years. These loans also may be offered as fully amortizing closed-end
fixed-rate loans for terms up to 15 years. All home equity loans are made on
one-to-four family residential and condominium units, which are owner-occupied,
and are subject to a 80% loan-to-value ratio computed on the basis of the
aggregate of the first mortgage loan amount outstanding and the proposed home
equity loan. They are granted in amounts from $25,000 to $100,000. The
underwriting standards for home equity loans are substantially the same as those
for residential mortgage loans. At December 31, 1998, home equity loans totaled
$5.9 million, or .78%, of gross loans.
Multi-Family Lending. Loans secured by multi-family income producing
properties (including mixed-use properties) constituted approximately $277.4
million, or 36.57%, of gross loans at December 31, 1998, all of which were
secured by properties located within the Bank's market area. The Bank's
multi-family loans had an average principal balance of $559,000 at December 31,
1998, and the largest multi-family loan held in the Bank's portfolio had a
principal balance of $5.9 million. Multi-family loans are generally offered at
adjustable rates tied to a market index for terms of five to 10 years with
adjustment periods from one to five years. On a select and limited basis,
multi-family loans may be made at fixed rates for terms of seven, 10 or 15
years. An origination fee of up to 1% is typically charged on multi-family
loans.
In underwriting multi-family loans, the Bank reviews the expected net
operating income generated by the real estate collateral securing the loan, the
age and condition of the collateral, the financial resources and income level of
the borrower and the borrower's experience in owning or managing similar
properties. The Bank typically requires a debt service coverage of at least 125%
of the monthly loan payment. Multi-family loans generally are made up to 70% of
the appraised value of the property securing the loan or the sale price of the
property, whichever is less. The Bank generally obtains personal guarantees from
these borrowers and typically orders an environmental report on the property
securing the loan.
Loans secured by multi-family income producing property generally involve a
greater degree of risk than residential mortgage loans and carry larger loan
balances. The increased credit risk is a result of several factors, including
the concentration of principal in a smaller number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty in evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family income producing
property is typically dependent upon the successful operation of the related
property. If the cash flow from the property is reduced, the borrower's ability
to repay the loan may be impaired. Loans secured by multi-family income
producing property also may involve a greater degree of environmental risk. The
Bank seeks to protect against this risk through obtaining an environmental
report. See "--Asset Quality--REO."
9
Commercial Real Estate Lending. Loans secured by commercial real estate
constituted approximately $101.4 million, or 13.37%, of the Bank's gross loans
at December 31, 1998. The Bank's commercial real estate loans are secured by
improved properties such as offices, motels, small business facilities, strip
shopping centers, warehouses, religious facilities and mixed-use properties. At
December 31, 1998, substantially all of the Bank's commercial real estate loans
were secured by properties located within the Bank's market area. At that date,
the Bank's commercial real estate loans had an average principal balance of
$583,000, and the largest of such loans, which was secured by a hotel, had a
principal balance of $5.5 million. Typically, commercial real estate loans are
originated at a range of $100,000 to $6.0 million. Commercial real estate loans
are generally offered at adjustable rates tied to a market index for terms of
five to 15 years, with adjustment periods from one to five years. On a select
and limited basis, commercial real estate loans may be made at fixed interest
rates for terms of seven, 10 or 15 years. An origination fee of up to 1% is
typically charged on all commercial real estate loans.
In underwriting commercial real estate loans, the Bank employs the same
underwriting standards and procedures as are employed in underwriting
multi-family loans.
Commercial real estate loans generally carry larger loan balances than
one-to-four family residential mortgage loans and involve a greater degree of
credit risk for the same reasons applicable to multi-family loans.
Construction Loans. The Bank's construction loans primarily have been made
to finance the construction of one-to-four family residential properties and
multi-family residential real estate properties. The Bank's policies provide
that construction loans may be made in amounts up to 70% of the estimated value
of the developed property and only if the Bank obtains a first lien position on
the underlying real estate. In addition, the Bank generally requires firm
end-loan commitments and personal guarantees on all construction loans.
Construction loans are generally made with terms of two years or less and with
adjustable interest rates that are tied to a market index. Advances are made as
construction progresses and inspection warrants, subject to continued title
searches to ensure that the Bank maintains a first lien position. Construction
loans outstanding at December 31, 1998 totaled $3.2 million, or 0.42% of gross
loans.
Construction loans involve a greater degree of risk than other loans
because, among other things, the underwriting of such loans is based on an
estimated value of the developed property, which can be difficult to ascertain
in light of uncertainties inherent in such estimations. In addition,
construction lending entails the risk that the project may not be completed due
to cost overruns or changes in market conditions.
Small Business Administration Lending. With the purchase of New York
Federal on September 9, 1997, the Company entered into the SBA market. These
loans are extended to small businesses and are guaranteed by the Small Business
Administration at 80% of the loan balance for loans with balances of $100,000 or
less, and at 75% of the loan balance for loans with balances greater than
$100,000. All SBA loans are underwritten in accordance with SBA Standard
Operating Procedures and the Bank generally obtains personal guarantees and
collateral, where applicable, from SBA borrowers. Typically, SBA loans are
originated at a range of $50,000 to $1.0 million with terms ranging from five to
25 years. SBA loans are generally offered at adjustable rates tied to the prime
rate (as published in the Wall Street Journal) with adjustment periods of one to
three months. The Bank generally sells the guaranteed portion of the SBA loan in
the secondary market and retains the servicing rights on these loans collecting
a fee of approximately 1%. At December 31, 1998, SBA loans totaled $2.6 million,
representing 0.35% of gross loans.
10
Consumer and Other Lending. The Bank originates other loans for business,
personal, or household purposes. Total consumer and other loans outstanding at
December 31, 1998 amounted to $1.9 million, or 0.25%, of gross loans. Business
loans are personally guaranteed by the owners, and may also be secured by
additional collateral, including equipment and inventory. The maximum loan size
for a business loan is $75,000, with a maximum term of five years. Consumer
loans generally consist of passbook loans, overdraft lines of credit, automobile
loans and other personal loans. Generally, unsecured consumer loans are limited
to amounts of $5,000 or less for terms of up to five years. The Bank offers
credit cards to its customers through a third party financial institution and
receives an origination fee and transactional fees for processing such accounts,
but does not underwrite or finance any portion of the credit card receivables.
The underwriting standards employed by the Bank for consumer and other
loans include a determination of the applicant's payment history on other debts
and assessment of the applicant's ability to meet payments on all of his or her
obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the collateral,
if any, to the proposed loan amount. Unsecured loans tend to have higher risk,
and therefore command a higher interest rate.
Loan Approval Procedures and Authority. The Bank's Board-approved lending
policies establish loan approval requirements for its various types of loan
products. Pursuant to the Bank's Residential Mortgage Lending Policy, all
residential mortgage loans require three signatures for approval. Residential
mortgage loans which do not exceed $500,000 must have the approval of the Bank's
Senior Mortgage Officer and two other loan officers. For residential mortgage
loans greater than $500,000, at least one of the approvals must be from the
President, Executive Vice President or a Senior Vice President (collectively,
"Authorized Officers") and the other two may be from the Bank's Senior Mortgage
Officer, Loan Underwriting Manager or Senior Underwriter. Residential mortgage
loans in excess of $650,000 also must be approved by the Loan Committee, the
Executive Committee or the full Board of Directors. Pursuant to the Bank's
Commercial Real Estate Lending Policy, all loans secured by commercial real
estate properties and multi-family income producing properties, must be approved
by the President or the Executive Vice President upon the recommendation of the
Commercial Loan Department Officer. Such loans in excess of $700,000 also
require Loan or Executive Committee or Board approval. In accordance with the
Bank's Business and Consumer Loan Policies, all business and consumer loans
require two signatures for approval, one of which must be from an Authorized
Officer. In addition, for business loans, the approval of the Bank's President
and ratification by the Loan Committee of the Board of Directors is required.
The Bank's Construction Loan Policy requires that all construction loans must be
approved by the Loan or Executive Committee or the Board of Directors of the
Bank. Any loan, regardless of type, that deviates from the Bank's written loan
policies must be approved by the Loan or Executive Committee or the Bank's Board
of Directors.
For all loans originated by the Bank, upon receipt of a completed loan
application, a credit report is ordered and certain other financial information
is obtained. An appraisal of the real estate intended to secure the proposed
loan is required. Such appraisals currently are performed by the Bank's staff
appraiser or an independent appraiser designated and approved by the Bank. The
Bank's Board of Directors annually approves the independent appraisers used by
the Bank and approves the Bank's appraisal policy. It is the Bank's policy to
require borrowers to obtain title insurance and hazard insurance on all real
estate first mortgage loans prior to closing. Borrowers generally are required
to advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes and, in some cases, hazard insurance
premiums.
11
Loan Concentrations. The maximum amount of credit that the Bank can extend
to any single borrower or related group of borrowers generally is limited to 15%
of the Bank's unimpaired capital and surplus. Applicable law and regulations
permit an additional amount of credit to be extended, equal to 10% of unimpaired
capital and surplus, if the loan is secured by readily marketable collateral,
which generally does not include real estate. See "Regulation." However, it is
currently the Bank's policy not to extend such additional credit. At December
31, 1998, the Bank had no loans in excess of the maximum dollar amount of loans
to one borrower that the Bank was authorized to make. At that date, the three
largest concentrations of loans to one borrower consisted of loans secured by
multi-family income producing properties with an aggregate principal balance of
$10.3 million, $7.6 million and $7.4 million for each of the three borrowers.
Loan Servicing. At December 31, 1998, the Bank was servicing loans
aggregating $34.8 million for others. The Bank's policy is to retain the
servicing rights to the mortgage and SBA loans that it sells in the secondary
market. In order to increase revenue, management intends to continue this
policy.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a
loan, the Bank takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to current status. In the case of residential
mortgage loans and consumer loans, the Bank generally sends the borrower a
written notice of non-payment when the loan is first past due. In the event
payment is not then received, additional letters and phone calls generally are
made in order to encourage the borrower to meet with a representative of the
Bank to discuss the delinquency. If the loan still is not brought current and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is delinquent 45 days or more, the Bank may commence foreclosure
proceedings against real property that secures the real estate loan and attempt
to repossess personal or business property that secures an SBA loan, business
loan, consumer loan or co-operative apartment loan. If a foreclosure action is
instituted and the loan is not brought current, paid in full, or refinanced
before the foreclosure sale, the real property securing the loan generally is
sold at foreclosure or by the Bank as soon thereafter as practicable. Decisions
as to when to commence foreclosure actions for multi-family, commercial real
estate and construction loans are made on a case by case basis. Since
foreclosure typically halts the sale of the collateral and may be a lengthy
procedure in the State of New York, the Bank may consider loan work-out
arrangements to work with multi-family or commercial real estate borrowers in an
effort to restructure the loan rather than foreclose, particularly if the
borrower is, in the opinion of management, able to manage the project. In
certain circumstances, on rental properties, the Bank may institute proceedings
to seize the rent.
On mortgage loans or loan participations purchased by the Bank, the Bank
receives monthly reports from its loan servicers with which it monitors the loan
portfolio. Based upon servicing agreements with the servicers of the loans, the
Bank relies upon the servicer to contact delinquent borrowers, collect
delinquent amounts and initiate foreclosure proceedings, when necessary, all in
accordance with applicable laws, regulations and the terms of the servicing
agreements between the Bank and its servicing agents.
Delinquent Loans and Non-performing Assets. The Bank generally discontinues
accruing interest on delinquent loans when a loan is 90 days past due or
foreclosure proceedings have been commenced, whichever first occurs. Loans in
default 90 days or more as to their maturity date but not their payments,
however, continue to accrue interest. With respect to loans on non-accrual
status, previously accrued but unpaid interest is deducted from interest income
six months after the date it becomes past due.
12
The following table sets forth information regarding all non-accrual loans,
loans which are 90 days or more delinquent and still accruing, and real estate
owned ("REO") at the dates indicated. During the years ended December 31, 1998,
1997 and 1996, the amounts of additional interest income that would have been
recorded on non-accrual loans, had they been current, totaled $180,000, $180,000
and $145,000, respectively. These amounts were not included in the Bank's
interest income for the respective periods.
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans:
One-to-four family residential $1,261 $1,897 $1,835 $2,042 $2,375
Co-operative apartment 15 -- 32 109 153
Multi-family residential -- -- 505 2,119 890
Commercial real estate 1,280 512 -- 427 1,452
Construction -- -- -- -- 364
------ ------ ------ ------ ------
Total non-accrual mortgage loans 2,556 2,409 2,372 4,697 5,234
Other non-accrual loans 41 49 36 50 63
------ ------ ------ ------ ------
Total non-accrual loans 2,597 2,458 2,408 4,747 5,297
Mortgage loans 90 days or more delinquent
and still accruing -- -- -- 234 14
Other loans 90 days or more delinquent
and still accruing -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans 2,597 2,458 2,408 4,981 5,311
Foreclosed real estate 77 433 1,218 1,869 3,468
------ ------ ------ ------ ------
Total non-performing assets $2,674 $2,891 $3,626 $6,850 $8,779
====== ====== ====== ====== ======
Troubled debt restructurings -- -- -- -- $3,220
====== ====== ====== ====== ======
Non-performing loans to gross loans (1) 0.34% 0.41% 0.62% 1.74% 2.05%
Non-performing assets to total assets (1) 0.23% 0.27% 0.47% 0.97% 1.48%
(1) Ratios do not include troubled debt restructurings where the loans are
performing in accordance with the agreement.
13
REO. The Bank has been aggressively marketing its REO properties. At
December 31, 1998, the Bank owned one property with a carrying value of $77,000.
The Bank currently obtains environmental reports in connection with the
underwriting of commercial real estate loans, and typically obtains
environmental reports in connection with the underwriting of multi-family loans.
For all other loans, the Bank obtains environmental reports only if the nature
of the current or, to the extent known to the Bank, prior use of the property
securing the loan indicates a potential environmental risk. However, the Bank
may not be aware of such uses or risks in any particular case, and, accordingly,
there is no assurance that real estate acquired by the Bank in foreclosure is
free from environmental contamination or that, if any such contamination or
other violation exists, the Bank will not have any liability therefor.
Allowance for Loan Losses
The Bank has established and maintains on its books an allowance for loan
losses that is designed to provide reserves for estimated losses inherent in the
Bank's overall loan portfolio. The allowance is established through a provision
for loan losses based on management's evaluation of the risk inherent in the
various components of its loan portfolio and other factors, including historical
loan loss experience, changes in the composition and volume of the portfolio,
collection policies and experiences, trends in the volume of non-accrual loans
and regional and national economic conditions. The Company maintains an internal
loan review committee that reviews the quality of loans and reports to the Loan
Committee of the Board of Directors on a monthly basis. The determination of the
amount of the allowance for loan losses includes estimates that are susceptible
to significant changes due to changes in appraisal values of collateral,
national and regional economic conditions and other factors. In connection with
the determination of the allowance, the market value of collateral ordinarily is
evaluated by the Bank's staff appraiser; however, the Bank may from time to time
obtain independent appraisals for significant properties. Current year
charge-offs, charge-off trends, new loan production and current balance by
particular loan categories also are taken into account in determining the
appropriate amount of the allowance.
In assessing the adequacy of the allowance, management reviews the Bank's
loan portfolio by separate categories which have similar risk and collateral
characteristics; e.g. commercial real estate, multi-family real estate,
one-to-four family residential loans, co-operative apartment loans, SBA loans,
business loans and consumer loans. General provisions are established against
performing loans in the Bank's portfolio in amounts deemed prudent from time to
time based on the Bank's qualitative analysis of the factors described above.
The determination of the amount of the allowance for loan losses also includes a
review of loans on which full collectibility is not reasonably assured. The
primary risk element considered by management with respect to each one-to-four
family residential loan, co-operative apartment loan, SBA loan, business loan
and consumer loan is any current delinquency on the loan. The primary risk
elements considered with respect to commercial real estate and multi-family
loans are the financial condition of the borrower, the sufficiency of the
collateral (including changes in the value of the collateral) and the record of
payment.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"), which can require the
establishment of additional general allowances or specific loss allowances or
require charge-offs. Such authorities may require the Bank to make additional
provisions to the allowance based on their judgments about information available
to them at the time of their examination. An OTS policy statement provides
guidance for OTS examiners in determining whether the levels of general
valuation allowances for savings institutions are adequate. The policy statement
requires that if a savings institution's general valuation allowance policies
and procedures are deemed to be inadequate, the general valuation allowance
would be compared to certain ranges of general valuation allowances deemed
acceptable by the OTS depending in part on the savings institution's level of
classified assets.
14
The Bank's provision for loan losses was $214,000, $104,000 and $418,000
for the years ended December 31, 1998, 1997 and 1996, respectively. At December
31, 1998, the total allowance for loan losses was $6.8 million, representing
260.36% of non-performing loans and 252.83% of non-performing assets, compared
to ratios of 263.38% and 223.94% respectively, at December 31, 1997. The Bank
continues to monitor and modify the level of its allowance for loan losses in
order to maintain the allowance at a level which management considers adequate
to provide for probable loan losses based on available information.
Management of the Bank believes that the current allowance for loan losses
is adequate in light of current economic conditions and the composition of its
loan portfolio and other available information and the Board of Directors
concurs in this belief. However, many factors may require additions to the
allowance for loan losses in future periods beyond those currently revealed.
These factors include future adverse changes in economic conditions, changes in
interest rates and changes in the financial capacity of individual borrowers
(any of which may affect the ability of borrowers to make repayments on loans),
changes in the real estate market within the Bank's lending area and the value
of collateral, or a review and evaluation of the Bank's loan portfolio in the
future. The determination of the amount of the allowance for loan losses
includes estimates that are susceptible to significant changes due to changes in
appraisal values of collateral, national and regional economic conditions,
interest rates and other factors. In addition, the Bank's increased emphasis on
commercial real estate and multi-family loans can be expected to increase the
overall level of credit risk inherent in the Bank's loan portfolio. The greater
risk associated with commercial real estate and multi-family loans may require
the Bank to increase its provisions for loan losses and to maintain an allowance
for loan losses as a percentage of total loans that is in excess of the
allowance currently maintained by the Bank. Provisions for loan losses are
charged against net income. See "--Lending Activities" and "--Asset Quality."
15
The following table sets forth the Bank's allowance for loan losses at and
for the dates indicated.
For the Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of year $ 6,474 $ 5,437 $ 5,310 $ 5,370 $ 5,723
Provision for loan losses 214 104 418 496 246
Provision acquired from NY Federal -- 979 -- -- --
Loans charged-off:
One-to-four family 91 85 220 312 341
Co-operative -- 44 162 183 71
Multi-family -- -- 41 251 14
Commercial -- -- 68 260 303
Construction -- -- -- -- --
Other 12 77 44 46 65
------- ------- ------- ------- -------
Total loans charged-off 103 206 535 1,052 794
------- ------- ------- ------- -------
Recoveries:
Mortgage loans 177 155 244 496 195
Other -- 5 -- -- --
------- ------- ------- ------- -------
Total recoveries 177 160 244 496 195
------- ------- ------- ------- -------
Balance at end of year $ 6,762 $ 6,474 $ 5,437 $ 5,310 $ 5,370
======= ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the year
to average loans outstanding during the year (0.01)% 0.01% 0.09% 0.21% 0.24%
Ratio of allowance for loan losses to
gross loans at end of the year 0.89% 1.07% 1.39% 1.85% 2.07%
Ratio of allowance for loan losses to
non-performing loans at the end of year 260.36% 263.38% 225.79% 106.61% 101.11%
Ratio of allowance for loan losses to
non-performing assets at the end of year 252.83% 223.94% 149.94% 77.52% 61.17%
16
The following table sets forth the Bank's allocation of its allowance for
loan losses to the total amount of loans in each of the categories listed at the
dates indicated. The numbers contained in the "Amount" column indicate the
allowance for loan losses allocated for each particular loan category. The
numbers contained in the column entitled "Percentage of Loans in Category to
Total Loans" indicate the total amount of loans in each particular category as a
percentage of the Bank's total loan portfolio.
At December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Percentage Percentage Percentage Percentage Percentage
of of of of of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to to to to to
Loan Category Amount Total Amount Total Amount Total Amount Total Amount Total
- -------------------------------------------------------- ----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
Mortgage Loans:
One-to-four family $2,575 47.69% $1,711 47.67% $1,065 57.28% $1,126 54.20% $1,132 51.39%
Co-operative 278 1.35 510 1.99 458 3.40 407 5.11 125 6.24
Multi-family 1,395 36.57 1,021 37.95 1,456 26.91 1,625 24.11 1,024 21.85
Commercial 1,990 13.37 3,073 11.24 2,434 11.98 2,139 15.77 3,070 19.13
Construction 114 0.42 128 0.46 -- -- -- -- -- 0.14
--------------- --------------- --------------- --------------- ---------------
Total mortgage loans 6,352 99.40 6,443 99.31 5,413 99.57 5,297 99.19 5,351 98.75
Small Business
Administration loans 273 0.35 23 0.46 -- -- -- -- -- --
Other Loans 137 0.25 8 0.23 24 0.43 13 0.81 19 1.25
--------------- --------------- --------------- --------------- ---------------
Total loans $6,762 100.00% $6,474 100.00% $5,437 100.00% $5,310 100.00% $5,370 100.00%
=============== =============== =============== =============== ===============
17
Investment Activities
General. The investment policy of the Company, which is approved by the
Board of Directors, is designed primarily to manage the interest rate
sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement the
Bank's lending activities and to provide and maintain liquidity. In establishing
its investment strategies, the Company considers its business and growth
strategies, the economic environment, its interest rate sensitivity "gap"
position, the types of securities to be held, and other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Management Strategy," included in the Annual Report and incorporated
herein by reference.
Federally chartered savings institutions have authority to invest in
various types of assets, including U.S. government obligations, securities of
various federal agencies, mortgage-backed and mortgage-related securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers acceptances, repurchase agreements, loans of federal funds, and,
subject to certain limits, corporate securities, commercial paper and mutual
funds. All mortgage-backed securities held by the Company and the Bank are
directly or indirectly insured or guaranteed by Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") or the
Government National Mortgage Association ("GNMA").
The Investment Committee of the Bank and the Company meets quarterly to
monitor investment transactions and to establish investment strategy. The Board
of Directors reviews the investment policy on an annual basis and investment
activity on a monthly basis.
The Company classifies its investment securities as available for sale.
Unrealized gains and losses for available-for-sale securities are excluded from
earnings and included in Accumulated Other Comprehensive Income (a separate
component of equity), net of taxes. At December 31, 1998, the Company had $326.7
million in securities available for sale which represented 28.61% of total
assets. These securities had an aggregate market value at that date that was
approximately 2.5 times the amount of the Company's equity at that date. The
cumulative balance of unrealized net gains on securities available for sale was
$1.3 million, net of taxes, at December 31, 1998. As a result of the magnitude
of the Company's holdings of securities available for sale, changes in interest
rates could produce significant changes in the value of such securities and
could produce significant fluctuations in the equity of the Company. See Note 6
of "Notes to Consolidated Financial Statements," included in the Annual Report
and incorporated herein by reference. The Company may from time to time sell
securities and realize a loss if the proceeds of such sale may be reinvested in
loans or other assets offering more attractive yields.
At December 31, 1998, the Company had no investment in a particular
issuer's securities that either alone, or together with any investments in the
securities of any affiliate(s) of such issuer, exceeded 10% of the Company's
equity.
18
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,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
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 $13,213 $13,425 $120,106 $120,123 $150,045 $148,141
Corporate debentures 4,711 4,710 13,149 13,178 37,050 37,433
Public utility 945 944 2,247 2,271 4,305 4,294
-------------------------- -------------------------- --------------------------
Total bonds and other debt securities 18,869 19,079 135,502 135,572 191,400 189,868
-------------------------- -------------------------- --------------------------
Equity securities:
Common stock 2,390 2,776 606 1,187 606 738
Preferred stock 2,309 2,414 2,768 2,843 250 251
-------------------------- -------------------------- --------------------------
Total equity securities 4,699 5,190 3,374 4,030 856 989
-------------------------- -------------------------- --------------------------
Mortgage-backed securities:
FHLMC 14,831 14,894 34,015 34,120 47,217 46,406
FNMA 20,717 21,102 55,559 56,068 83,727 83,756
GNMA 265,089 266,425 125,585 126,922 10,973 10,876
-------------------------- -------------------------- --------------------------
Total mortgage-backed securities 300,637 302,421 215,159 217,110 141,917 141,038
-------------------------- -------------------------- --------------------------
Total securities available for sale 324,205 326,690 354,035 356,712 334,173 331,895
-------------------------- -------------------------- --------------------------
INTEREST-BEARING DEPOSITS AND
FEDERAL FUNDS SOLD 12,008 12,008 84,838 84,838 27,465 27,465
FHLB--NEW YORK STOCK 17,320 17,320 14,356 14,356 4,158 4,158
-------------------------- -------------------------- --------------------------
Total $353,533 $356,018 $453,229 $455,906 $365,796 $363,518
========================== ========================== ==========================
Mortgage-backed securities. All of the mortgage-backed securities currently
held by the Company are issued or guaranteed by FNMA, FHLMC or GNMA. At December
31, 1998, the Company had $302.4 million invested in mortgage-backed securities,
of which $20.7 million was invested in adjustable-rate mortgage-backed
securities. The mortgage loans underlying these adjustable-rate securities
generally are subject to limitations on annual and lifetime interest rate
increases. The Company anticipates that investments in mortgage-backed
securities may continue to be used in the future to supplement mortgage lending
activities. Mortgage-backed securities are more liquid than individual mortgage
loans and may be used more easily to collateralize obligations of the Bank.
19
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,
---------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------
(In thousands)
At beginning of year $217,110 $141,038 $179,300
Purchases of mortgage-backed securities 245,942 136,063 8,415
Amortization of unearned premium, net of
accretion of unearned discount (1,386) (473) (908)
Net change in unrealized gains (losses) on
mortgage-backed securities available for sale (189) 2,830 (2,249)
Sales of mortgage-backed securities (66,136) (33,934) (4,742)
Principal repayments received on
mortgage-backed securities (92,920) (28,414) (38,778)
---------------------------------------------------------------
Net increase (decrease) in mortgage-backed securities 85,311 76,072 (38,262)
---------------------------------------------------------------
At end of year $302,421 $217,110 $141,038
===============================================================
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed and value of such
securities. The Bank held one collateralized mortgage obligation ("CMO") with a
market value of $4.5 million at December 31, 1996 and none at December 31, 1998
and 1997. The Bank does not have any derivative instruments, including CMO's,
with market values that are extremely sensitive to changes in interest rates.
20
The table below sets forth certain information regarding the amortized
cost, estimated fair value, annualized weighted average yields and maturities of
the Company's and the Bank's debt and equity securities at December 31, 1998.
The stratification of balances is based on stated maturities. Assumptions for
repayments and prepayments are not reflected for mortgage-backed securities. The
Company and the Bank carry these investments at their estimated fair value in
the consolidated financial statements.
At December 31, 1998
-------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------------------------ ------------------------ ------------------------
(Dollars in thousands)
SECURITIES AVAILABLE FOR SALE
Bonds and other debt securities:
U.S. government agencies -- -- -- -- $8,213 7.36%
Corporate debt $4,001 5.75% -- -- 242 8.37
Public utility 945 6.31 -- -- -- --
------------------------ ------------------------ ------------------------
Total bonds and other debt securities 4,946 5.86 -- -- 8,455 7.39
------------------------ ------------------------ ------------------------
Equity securities:
Common stock 2,390 1.50 -- -- -- --
Preferred stock 301 7.61 $1,600 8.03 % 308 7.27
------------------------ ------------------------ ------------------------
Total equity securities 2,691 2.18 1,600 8.03 308 7.27
------------------------ ------------------------ ------------------------
Mortgage-backed securities:
FHLMC -- -- 752 7.11 603 8.12
FNMA -- -- 171 7.10 2,153 7.06
GNMA -- -- -- -- 16 7.31
------------------------ ------------------------ ------------------------
Total mortgage-backed securities -- -- 923 7.11 2,772 7.29
------------------------ ------------------------ ------------------------
INTEREST-BEARING DEPOSITS AND FEDERAL
FUNDS SOLD 12,008 4.56 -- -- -- --
FHLB--NEW YORK STOCK 17,320 7.00 -- -- -- --
------------------------ ------------------------ ------------------------
Total securities $36,965 5.70% $2,523 7.69% $11,535 7.36%
======================== ======================== ========================
At December 31, 1998
------------------------------------------------------------------------------
More than Ten Years Total Securities
------------------------ ---------------------------------------------------
Average
Weighted Remaining Weighted
Amortized Average Years to Amortized Estimated Average
Cost Yield Maturity Cost Fair Value Yield
------------------------ ---------------------------------------------------
(Dollars in thousands)
SECURITIES AVAILABLE FOR SALE
Bonds and other debt securities:
U.S. government agencies $5,000 6.68% 9.11 $13,213 $13,425 7.10%
Corporate debt 468 6.07 1.74 4,711 4,710 5.92
Public utility -- -- 0.28 945 944 6.31
------------------------ ---------------------------------------------------
Total bonds and other debt securities 5,468 6.63 6.85 18,869 19,079 6.77
------------------------ ---------------------------------------------------
Equity securities:
Common stock -- -- N/A 2,390 2,776 1.50
Preferred stock 100 11.00 4.49 2,309 2,414 8.00
------------------------ ---------------------------------------------------
Total equity securities 100 11.00 4.49 4,699 5,190 4.70
------------------------ ---------------------------------------------------
Mortgage-backed securities:
FHLMC 13,476 7.45 20.42 14,831 14,894 7.46
FNMA 18,393 7.59 21.15 20,717 21,102 7.53
GNMA 265,073 7.36 28.79 265,089 266,425 7.36
------------------------ ---------------------------------------------------
Total mortgage-backed securities 296,942 7.38 27.85 300,637 302,421 7.38
------------------------ ---------------------------------------------------
INTEREST-BEARING DEPOSITS AND FEDERAL
FUNDS SOLD -- -- N/A 12,008 12,008 4.56
FHLB--NEW YORK STOCK -- -- N/A 17,320 17,320 7.00
------------------------ ---------------------------------------------------
Total securities $302,510 7.36% 24.24 $353,533 $356,018 7.20%
======================== ===================================================
21
Sources of Funds
General. Deposits, FHLB-NY borrowings, principal and interest payments on
loans, mortgage-backed and other securities, and proceeds from sales of loans
and securities are the Company's primary sources of funds for lending, investing
and other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits principally consist of passbook
accounts, money market accounts, demand accounts, NOW accounts and certificates
of deposit. The Bank has a relatively stable retail deposit base drawn from its
market area through its eight full service offices. The Bank seeks to retain
existing depositor relationships by offering quality service and competitive
interest rates, while keeping deposit growth within reasonable limits. It is
management's intention to balance its goal to remain competitive in interest
rates on deposits while seeking to manage its cost of funds to finance its
strategies.
The Bank's core deposits, consisting of passbook accounts, NOW accounts,
money market, and non-interest bearing demand accounts, are typically more
stable and lower cost than other sources of funding. However, the flow of
deposits into a particular type of account is influenced significantly by
general economic conditions, changes in prevailing money market and other
interest rates and competition. During the low interest rate environment of the
past several years, the Bank experienced a shift by depositors from passbook
accounts to higher costing certificate of deposit accounts. Although the Bank
has not had to raise interest rates on its deposit accounts to remain
competitive, it has had to increase borrowing activity. These trends contributed
to the increase in the Company's higher average cost of funds from 4.39% for
1996 to 4.74% for 1997 and to 4.97% for 1998. A continuation of these trends
could result in a further increase in the Company's cost of funds and a
narrowing of the Company's net interest margin.
Included in deposits are certificates of deposit with a balance of $100,000
or greater totaling $30.5 million, $29.9 million and $22.0 million at December
31, 1998, 1997 and 1996, respectively.
22
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,
-----------------------------------------------------------------------------------
1998 1997
----------------------------------------- --------------------------------------
Percent of Weighted Percent of Weighted
Total Average Total Average
Amount Deposits Nominal Rate Amount Deposits Nominal Rate
----------- ----------- ------------ --------- ----------- ------------
(Dollars in thousands)
Passbook accounts (1) $203,949 30.71% 2.29% $201,668 30.75% 2.90%
NOW accounts (1) 26,788 4.03 1.90 23,825 3.63 1.90
Demand accounts (1) 27,505 4.14 -- 19,263 2.94 --
Mortgagors' escrow deposits (1) 6,563 0.99 1.06 4,900 0.75 1.17
----------- ----------- ------------ --------- ----------- ------------
Total 264,805 39.87 1.98 249,656 38.07 2.55
----------- ----------- ------------ --------- ----------- ------------
Money market accounts (1) 28,439 4.28 2.69 23,526 3.59 2.86
Certificate of deposit accounts
with original maturities of:
6 Months and less 54,268 8.17 4.30 61,916 9.44 5.31
6 to 12 Months 81,092 12.21 4.96 75,340 11.49 5.53
12 to 30 Months 139,397 21.00 5.71 130,414 19.87 6.05
30 to 48 Months 41,543 6.26 6.17 56,209 8.57 6.48
48 to 72 Months 50,323 7.58 6.22 54,406 8.29 6.36
72 Months or more 4,192 0.63 6.54 4,444 0.68 6.67
----------- ----------- ------------ --------- ----------- ------------
Total certificate of deposit accounts 370,815 55.85 5.47 382,729 58.34 5.94
----------- ----------- ------------ --------- ----------- ------------
Total deposits (2) $664,059 100.00% 3.96% $655,911 100.00% 4.54%
=========== =========== ============ ========= =========== ============
At December 31,
----------------------------------------------
1996
----------------------------------------------
Percent of Weighted
Total Average
Amount Deposits Nominal Rate
-------------- ------------ ------------
(Dollars in thousands)
Passbook accounts (1) $209,690 35.88% 2.86%
NOW accounts (1) 21,408 3.66 1.90
Demand accounts (1) 10,293 1.76 --
Mortgagors' escrow deposits (1) 3,425 0.59 1.47
-------------- ------------ ------------
Total 244,816 41.89 2.64
-------------- ------------ ------------
Money market accounts (1) 25,180 4.31 2.85
Certificate of deposit accounts
with original maturities of:
6 Months and less 60,207 10.30 5.04
6 to 12 Months 77,881 13.32 5.15
12 to 30 Months 113,108 19.36 6.19
30 to 48 Months 15,307 2.62 6.10
48 to 72 Months 47,079 8.05 6.10
72 Months or more 901 0.15 5.90
-------------- ------------ ------------
Total certificate of deposit accounts 314,483 53.80 5.69
-------------- ------------ ------------
Total deposits (2) $584,479 100.00% 4.29%
============== ============ ============
(1) Weighted average nominal rate as of the year end date equals the stated
rate offered.
(2) Included in the above balances are IRA and Keogh deposits totaling $86.4
million, $85.8 million and $83.9 million at December 31, 1998, 1997 and
1996, respectively.
23
The following table presents by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated and the years
to maturity of the certificate accounts outstanding at December 31, 1998.
At December 31, 1998
-----------------------------------------------
At December 31, Within One to
----------------------------------------- One Three There-
1998 1997 1996 Year Year after Total
-------- -------- -------- -------- ------- ------- --------
(Dollars in thousands)
Certificate of deposit accounts:
2.99 or less $136 $625 $37 $42 $94 -- $136
3.00 to 3.99 22,234 -- -- 22,234 -- -- 22,234
4.00 to 4.99 82,899 21,265 28,283 71,730 10,093 $1,076 82,899
5.00 to 5.99 161,122 220,994 192,557 98,343 45,629 17,150 161,122
6.00 to 6.99 92,038 124,682 59,822 58,905 21,035 12,098 92,038
7.00 to 7.99 12,386 15,163 33,784 1,327 11,059 -- 12,386
-------- -------- -------- -------- ------- ------- --------
Total $370,815 $382,729 $314,483 $252,581 $87,910 $30,324 $370,815
======== ======== ======== ======== ======= ======= ========
The following table presents by various maturity categories the amount of
certificate of deposit accounts with balances of $100,000 or more at December
31, 1998 and their annualized weighted average interest rates.
Amount Weighted Average Rate
------ ---------------------
(Dollars in thousands)
Maturity Period:
Three months or less $5,220 5.53%
Over three through six months 1,871 5.06
Over six through 12 months 5,877 5.15
Over 12 months 17,581 5.88
------- ----
Total $30,549 5.63%
======= ====
The following table presents the deposit activity of the Bank for the
periods indicated.
For the Year Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
(Dollars in thousands)
Net deposits / (withdrawals) (1) $(19,824) $(6,009) $453
Interest credited on deposits 27,972 26,566 24,162
Deposits acquired from New York Federal -- 50,875 --
-------- -------- --------
Total increase in deposits $8,148 $71,432 $24,615
======== ======== ========
(1) Includes mortgagors' escrow deposits.
24
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,
---------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Percent Percent
Average of Total Average Average of Total Average
Balance Deposits Cost Balance Deposits Cost
------------------------------------- -------------------------------------
(Dollars in thousands)