-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QDuHT9TfxkTBoAM/d/KnU85pkb8wQX39TvEe1KD8YvsO9QsR0ZcH+/mx1O/SlOye dqg5XpB/lEpvH+d6CPohUA== 0000891554-02-001834.txt : 20020415 0000891554-02-001834.hdr.sgml : 20020415 ACCESSION NUMBER: 0000891554-02-001834 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLUSHING FINANCIAL CORP CENTRAL INDEX KEY: 0000923139 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 113209278 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24272 FILM NUMBER: 02596946 BUSINESS ADDRESS: STREET 1: 144-51 NORTHERN BLVD CITY: FLUSHING STATE: NY ZIP: 11354 BUSINESS PHONE: 7189615400 10-K 1 d50230_10-k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $214,310,000. This figure is based on the closing price on that date on the Nasdaq National Market for a share of the registrant's Common Stock, $0.01 par value, which was $16.90. The number of shares of the registrant's Common Stock outstanding as of February 28, 2002 was 13,356,496 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Stockholders for the year ended December 31, 2001 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 21, 2002 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 ...................................................... 8 Multi-Family Lending ................................................... 8 Commercial Real Estate Lending ......................................... 8 Construction Loans ..................................................... 9 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 ............................. 11 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 .......................................................... 27 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 ..................................................... 29 Investment Powers .............................................................. 29 Real Estate Lending Standards .................................................. 30 Loans-to-One Borrower Limits ................................................... 30 Insurance of Accounts .......................................................... 30 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 USA Patriot Act ................................................................ 37 Prompt Corrective Action ....................................................... 37 Federal Securities Laws ........................................................ 38 Item 2. Properties .......................................................................... 39 Item 3. Legal Proceedings ................................................................... 39 Item 4. Submission of Matters to a Vote of Security Holders ................................. 39 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ............ 40 Item 6. Selected Financial Data ............................................................. 40 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 40 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................... 40 Item 8. Financial Statements and Supplementary Data ......................................... 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40 PART III Item 10. Directors and Executive Officers of the Registrant ................................. 41 Item 11. Executive Compensation ............................................................. 41 Item 12. Security Ownership of Certain Beneficial Owners and Management ..................... 41 Item 13. Certain Relationships and Related Transactions ..................................... 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .................... 42 (a) 1. Financial Statements .................................................... 42 (a) 2. Financial Statement Schedules ........................................... 42 (b) Reports on Form 8-K filed during the last quarter of fiscal 2001 ........... 42 (c) Exhibits Required by Securities and Exchange Commission Regulation S-K .... 43
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, 2001, the Company had total assets of $1.5 billion, deposits of $818.5 million and stockholders' equity of $133.4 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 1,552,500 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 (focusing on mixed-use properties - properties that 1 contain both residential dwelling units and commercial units), multi-family income producing property loans and 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. On July 17, 2001, the Board of Directors of the Company again declared a three-for-two split of the Company's common stock in the form of a 50% stock dividend, which was paid on August 30, 2001. Each stockholder received one additional share for every two shares of the Company's common stock held at the record date, August 10, 2001. With respect to each of these stock dividends, cash was paid in lieu of fractional shares and the dividend was not paid on shares held in treasury. All share and per share data in this Form 10-K have been adjusted to reflect these stock dividends. 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, 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" and "Risk Factors - Local Economic Conditions." There can be no assurance that the stability of these economic factors will continue. The Bank faces intense and increasing competition both in making loans and in attracting deposits. The 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 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 increasing its deposit base and loan portfolios. 2 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, 2001 (the "Annual Report"), incorporated herein by reference. 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, 2001, the Bank had gross loans outstanding of $1,073.0 million (before reserves and net deferred costs), of which $468.4 million, or 43.66%, were one-to-four family residential mortgage loans (including $23.2 million of condominium loans, $6.6 million of co-operative apartment loans and $5.6 million of home equity loans). Of the one-to-four family residential loans outstanding on that date, 43.0% were ARM loans and 57.0% were fixed-rate loans. At December 31, 2001, multi-family loans totaled $369.7 million, or 34.45% of gross loans, commercial real estate loans totaled $214.4 million, or 19.98% of gross loans, construction loans totaled $13.8 million, or 1.29% of gross loans, SBA loans totaled $3.9 million, or 0.36% of gross loans, and consumer and other loans totaled $2.8 million, or 0.26% 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, mixed-use property mortgage loans and home equity loans. Increasingly, the Bank has placed greater 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 (primarily focusing on mixed-use property mortgage loans). From December 31, 2000 to December 31, 2001, one-to-four family residential mortgage loans decreased $7.4 million, or -1.6%, multi-family loans increased $35.3 million, or 10.6%, and commercial real estate loans increased $46.9 million, or 28.0%. 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 could require the Bank to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans 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, and has determined that, at this time, additional provisions are not required. 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, ------------------------------------------------------------------------------------ 2001 2000 1999 -------------------------- ------------------------ ------------------------ Percent Percent Percent Amount of Total Amount of Total Amount of Total ----------- ----------- --------- ----------- --------- ----------- (Dollars in thousands) Mortgage Loans: One-to-four family residential (1) $461,801 43.04% $467,784 47.13% $414,194 46.92% Co-operative apartment (2) 6,601 0.62 8,009 0.81 8,926 1.01 Multi-family real estate 369,651 34.45 334,307 33.68 310,594 35.19 Commercial real estate 214,410 19.98 167,549 16.88 137,072 15.53 Construction 13,807 1.29 8,304 0.84 6,198 0.70 ----------- ----------- --------- ----------- --------- ----------- Gross mortgage loans 1,066,270 99.38 985,953 99.34 876,984 99.35 Small Business Administration Loans 3,911 0.36 2,844 0.29 2,369 0.27 Consumer and other loans 2,814 0.26 3,704 0.37 3,379 0.38 ----------- ----------- --------- ----------- --------- ----------- Gross loans 1,072,995 100.00% 992,501 100.00% 882,732 100.00% =========== =========== ========= =========== Unearned loan fees and deferred costs, net 787 579 (28) Less: Allowance for loan losses (6,585) (6,721) (6,818) ----------- --------- --------- Loans, net $1,067,197 $986,359 $875,886 =========== ========= =========
---------------------------------------------------- 1998 1997 ------------------------ ------------------------ Percent of Percent of Amount Total Amount Total --------- ----------- --------- ----------- (Dollars in thousands) Mortgage Loans: One-to-four family residential (1) $361,786 47.69% $289,28 47.67% Co-operative apartment (2) 10,238 1.35 12,065 1.99 Multi-family real estate 277,437 36.57 230,229 37.95 Commercial real estate 101,401 13.37 68,182 11.24 Construction 3,203 0.42 2,797 0.46 --------- ----------- --------- ----------- Gross mortgage loans 754,065 99.40 602,559 99.31 Small Business Administration Loans 2,616 0.35 2,789 0.46 Consumer and other loans 1,899 0.25 1,385 0.23 --------- ----------- --------- ----------- Gross loans 758,580 100.00% 606,733 100.00% =========== =========== Unearned loan fees and deferred costs, net (1,263) (1,838) Less: Allowance for loan losses (6,762) (6,474) --------- --------- Loans, net $750,555 $598,421 ========= =========
(1) One-to-four family residential loans also include home equity and condominium loans. At December 31, 2001, gross home equity loans totaled $5.6 million and condominium loans totaled $23.2 million. Mixed-use property mortgage loans included in one-to-four family residential loans totaled $109.8 million at December 31, 2001. (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, ---------------------------------------------------- 2001 2000 1999 ---------- -------- -------- (In thousands) Mortgage Loans At beginning of year $985,953 $876,984 $754,065 Mortgage loans originated: One-to-four family residential 81,244 78,128 91,312 Co-operative apartment 136 265 300 Multi-family real estate 70,999 63,813 77,895 Commercial real estate 62,076 41,948 49,744 Construction 8,719 5,078 8,158 ---------- -------- -------- Total mortgage loans originated 223,174 189,232 227,409 ---------- -------- -------- Mortgage loans purchased: One-to-four family residential 876 15,658 15,008 Commercial real estate -- -- 884 ---------- -------- -------- Total mortgage loans purchased 876 15,658 15,892 ---------- -------- -------- Less: Principal reductions 143,614 95,695 120,008 Mortgage loan foreclosures 119 226 374 ---------- -------- -------- At end of year $1,066,270 $985,953 $876,984 ========== ======== ======== SBA, Consumer and Other Loans At beginning of year $6,548 $5,748 $4,515 Loans originated: SBA loans 3,409 3,635 2,376 Small business loans 507 845 2,617 Other loans 2,346 3,021 1,159 ---------- -------- -------- Total other loans originated 6,262 7,501 6,152 ---------- -------- -------- Less: Sales 1,648 2,474 2,280 Repayments 4,296 4,151 2,543 Charge-offs 141 76 96 ---------- -------- -------- At end of year $6,725 $6,548 $5,748 ========== ======== ========
5 Loan Maturity and Repricing. The following table shows the maturity or period to repricing of the Bank's loan portfolio at December 31, 2001. 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 $147.9 million for the year ended December 31, 2001. 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, 2001 --------------------------------------------------------------------------------------- Mortgage Loans Other Loans -------------------------------------------------------- ----------------------------- One-to- Four Co- Multi- Consumer Total Loans Family operative family Commercial Construction SBA and Other Receivable ------ --------- ------ ---------- ------------ --- --------- ---------- (In thousands) Amounts due: Within one year $39,817 $3,299 $29,997 $25,951 $10,808 $3,668 $1,521 $ 115,061 -------- ------ -------- -------- ------- ------ ------ ---------- After one year (1) One to two years 15,843 528 35,147 13,169 2,999 -- 635 68,334 Two to three years 9,122 354 27,813 26,422 -- 126 497 64,334 Three to five years 69,221 641 138,240 73,592 -- 67 161 281,922 Five to ten years 85,306 788 66,534 52,066 -- 50 -- 204,744 Over ten years 242,492 991 71,920 23,210 -- -- -- 338,613 -------- ------ -------- -------- ------- ------ ------ ---------- Total due after one year 421,984 3,302 339,654 188,459 2,999 243 1,293 957,934 -------- ------ -------- -------- ------- ------ ------ ---------- Total amounts due $461,801 $6,601 $369,651 $214,410 $13,807 $3,911 $2,814 $1,072,995 ======== ====== ======== ======== ======= ====== ====== ==========
(1) Of the $957.9 million of loans due after one year, $505.1 million are adjustable rate loans and $452.8 million are fixed-rate loans. One-to-Four Family Mortgage Lending. The Bank offers mortgage loans secured by one-to-four family residences, including mixed-use properties, 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 $468.4 million, or 43.66% of gross loans, at December 31, 2001. During 2001, the Bank focused its origination efforts with respect to one-to-four family mortgage loans on mixed-use properties. These properties contain up to four residential dwelling units and a commercial unit. The primary income producing units of these properties are the residential dwelling units. Mixed-use property mortgage loans generally have a higher interest rate than single family dwellings. Mixed-use property mortgage loans also have a higher degree of risk than single family dwellings, as repayment of the loan is usually dependent on the income produced from renting the residential units and the commercial unit. At December 31, 2001, mixed-use property mortgage loans included in one-to-four family residential mortgage loans amounted to $109.8 million, an increase of $43.8 million from the $66.0 million 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 may, from time-to-time, purchase 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 2001, through these relationships, the Bank purchased $0.9 million in one-to-four family mortgage loans, as compared to $15.7 million in 2000 and $15.0 million during 1999. 6 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 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 $11.1 million, $18.7 million and $37.3 million in loans of this type during 2001, 2000 and 1999, 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 $39.9 million, $11.2 million and $24.2 million of 15-year fixed-rate residential mortgage loans in 2001, 2000 and 1999, respectively. The Bank also originated and purchased $10.7 million, $23.4 million and $47.4 million of 30-year fixed rate residential mortgage loans in 2001, 2000 and 1999, respectively. These loans have been retained to provide flexibility in the management of the Company's interest rate sensitivity position. At December 31, 2001, $267.0 million, or 57.0%, 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 $31.7 million, $59.4 million and $35.0 million during 2001, 2000 and 1999, respectively. At December 31, 2001, $201.4 million, or 43.0%, 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. 7 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 generally granted in amounts from $25,000 to $100,000. The Loan Committee approves loans in excess of $100,000. The underwriting standards for home equity loans are substantially the same as those for residential mortgage loans. At December 31, 2001, home equity loans totaled $5.6 million, or 0.52%, of gross loans. Multi-Family Lending. Loans secured by multi-family income producing properties were $369.7 million, or 34.45% of gross loans, at December 31, 2001, 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 $489,000 at December 31, 2001, and the largest multi-family loan held in the Bank's portfolio had a principal balance of $6.0 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 $214.4 million, or 19.98% of the Bank's gross loans, at December 31, 2001. The Bank's commercial real estate loans are secured by improved properties such as offices, motels, small business facilities, strip shopping centers, warehouses, and religious facilities. At December 31, 2001, 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 $717,100, and the largest of such loans, which was secured by an office building, had a principal balance of $5.9 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. 8 Construction Loans. The Bank's construction loans primarily have been made to finance the construction of one-to-four family residential properties and multi-family residential real estate properties. The Bank's policies provide that construction loans may be made in amounts up to 65% of the estimated value of the developed property and only if the Bank obtains a first lien position on the underlying real estate. In addition, the Bank generally requires firm end-loan commitments, either from the Bank or another financial institution, and personal guarantees on all construction loans. Construction loans are generally made with terms of two years or less and with adjustable interest rates that are tied to a market index. Advances are made as construction progresses and inspection warrants, subject to continued title searches to ensure that the Bank maintains a first lien position. Construction loans outstanding at December 31, 2001 totaled $13.8 million, or 1.29% 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, 2001, SBA loans totaled $3.9 million, representing 0.36% 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, 2001 amounted to $2.8 million, or 0.26% 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. The Bank's Residential Mortgage Lending Policy establishes authorized levels of approval. Residential mortgage loans that do not exceed $500,000 require two signatures for approval, one of which must be from the President, Executive Vice President or a Senior Vice President (collectively, "Authorized Officers") and the other from a Senior Underwriter, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department (collectively, "Loan Officers"). For residential mortgage loans greater than $500,000, three signatures are required for approval, at least two of which must be from the Authorized Officers, and the other one may be a Loan Officer. The Loan Committee, the Executive Committee or the full Board of Directors also must approve 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, 9 all business and consumer loans require two signatures for approval, one of which must be from an Authorized Officer. In addition, for business loans, the approval of the Bank's President and ratification by the Loan Committee of the Board of Directors is required. The Bank's Construction Loan Policy requires that the Loan or Executive Committee or the Board of Directors of the Bank must approve all construction loans. Any loan, regardless of type, that deviates from the Bank's written loan policies must be approved by the Loan or Executive Committee or the Bank's Board of Directors. For all loans originated by the Bank, upon receipt of a completed loan application, a credit report is ordered and certain other financial information is obtained. An appraisal of the real estate intended to secure the proposed loan is required. An independent appraiser designated and approved by the Bank currently performs such appraisals. The Bank's staff appraiser reviews the appraisals. 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, 2001, 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 $8.4 million, $8.1 million and $8.1 million for each of the three borrowers. Loan Servicing. At December 31, 2001, the Bank was servicing $22.1 million of mortgage loans and $7.2 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, 10 regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 2001, the Bank held $5.7 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 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, 2001, 2000 and 1999, the amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $117,000, $79,000 and $208,000, respectively. These amounts were not included in the Bank's interest income for the respective periods.
At December 31, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (Dollars in thousands) Non-accrual loans: One-to-four family residential $1,958 $1,336 $1,349 $1,261 $1,897 Co-operative apartment 20 -- 29 15 -- Multi-family real estate 225 156 -- -- -- Commercial real estate -- -- 1,779 1,280 512 Construction -- -- -- -- -- ------ ------ ------ ------ ------ Total non-accrual mortgage loans 2,203 1,492 3,157 2,556 2,409 Other non-accrual loans 117 126 39 41 49 ------ ------ ------ ------ ------ Total non-accrual loans 2,320 1,618 3,196 2,597 2,458 Loans 90 days or more delinquent and still accruing -- -- -- -- -- ------ ------ ------ ------ ------ Total non-performing loans 2,320 1,618 3,196 2,597 2,458 Foreclosed real estate 93 44 368 77 433 ------ ------ ------ ------ ------ Total non-performing assets $2,413 $1,662 $3,564 $2,674 $2,891 ====== ====== ====== ====== ====== Troubled debt restructurings -- -- -- -- -- ====== ====== ====== ====== ====== Non-performing loans to gross loans 0.22% 0.16% 0.36% 0.34% 0.41% Non-performing assets to total assets 0.16% 0.12% 0.29% 0.23% 0.27%
REO. The Bank aggressively markets its REO properties. At December 31, 2001, the Bank owned one property with a carrying value of $93,000. 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 11 of its loan portfolio and other factors, including historical loan loss experience, changes in the composition and volume of the portfolio, collection policies and experiences, trends in the volume of non-accrual loans and regional and national economic conditions. Management reviews the quality of loans and reports to the Loan Committee of the Board of Directors on a monthly basis. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraised values of collateral, national and regional economic conditions and other factors. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by the 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. Management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions, the composition of its loan portfolio and other available information and the Board of Directors concurs in this belief. Accordingly, the Bank did not record a provision for loan losses for the years ended December 31, 2001 and 2000. The Bank's provision for loan losses was $36,000 for the year ended December 31, 1999. At December 31, 2001, the total allowance for loan losses was $6.6 million, representing 283.85% of non-performing loans and 272.94% of non-performing assets, compared to ratios of 415.32% and 404.28% respectively, at December 31, 2000. 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. 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 could require the Bank to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans that is in excess of the allowance currently maintained by 12 the Bank. Provisions for loan losses are charged against net income. See "--Lending Activities" and "--Asset Quality." 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, ------------------------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------- ------ (Dollars in thousands) Balance at beginning of year $6,721 $6,818 $6,762 $6,474 $5,437 Provision for loan losses -- -- 36 214 104 Provision acquired from New York Federal -- -- -- -- 979 Loans charged-off: One-to-four family 1 4 32 91 85 Co-operative apartment -- -- 2 -- 44 Multi-family real estate 2 2 -- -- -- Commercial real estate -- -- -- -- -- Construction -- -- -- -- -- Other 146 93 99 12 77 ------ ------ ------ ------- ------ Total loans charged-off 149 99 133 103 206 ------ ------ ------ ------- ------ Recoveries: Mortgage loans 6 -- 153 177 155 Other loans 7 2 -- -- 5 ------ ------ ------ ------- ------ Total recoveries 13 2 153 177 160 ------ ------ ------ ------- ------ Balance at end of year $6,585 $6,721 $6,818 $6,762 $6,474 ====== ====== ====== ======= ====== Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the year 0.01% 0.01% 0.00% (0.01)% 0.01% Ratio of allowance for loan losses to gross loans at end of the year 0.61% 0.68% 0.77% 0.89% 1.07% Ratio of allowance for loan losses to non-performing loans at the end of year 283.85% 415.32% 213.29% 260.36% 263.38% Ratio of allowance for loan losses to non-performing assets at the end of year 272.94% 404.28% 191.29% 252.83% 223.94%
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, ------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------- ------------------- ------------------- --------------------- ------------------- Percentage Percentage Percentage Percentage of Percentage of of Loans in of Loans in of Loans in Loans in Loans in Category to Category to Category to Category to Category to Loan Category Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - ------------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- (Dollars in thousands) Mortgage Loans: One-to-four family $1,870 43.04% $1,916 47.13% $1,903 46.92% $2,575 47.69% $1,711 47.67% Co-operative 109 0.62 126 0.81 144 1.01 278 1.35 510 1.99 Multi-family 982 34.45 1,134 33.68 1,216 35.19 1,395 36.57 1,021 37.95 Commercial 3,007 19.98 2,983 16.88 3,003 15.53 1,990 13.37 3,073 11.24 Construction 34 1.29 27 0.84 24 0.70 114 0.42 128 0.46 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total mortgage loans 6,002 99.38 6,186 99.34 6,290 99.35 6,352 99.40 6,443 99.31 Small Business Administration loans 418 0.36 295 0.29 237 0.27 273 0.35 23 0.46 Other Loans 165 0.26 240 0.37 291 0.38 137 0.25 8 0.23 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total loans $6,585 100.00% $6,721 100.00% $6,818 100.00% $6,762 100.00% $6,474 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 (other than unrealized losses considered other than temporary) for available-for-sale securities are excluded from earnings and included in Accumulated Other Comprehensive Income (a separate component of equity), net of taxes. At December 31, 2001, the Company had $305.5 million in securities available for sale which represented 20.54% of total assets. These securities had an aggregate market value at December 31, 2001 that was approximately 2.3 times the amount of the Company's equity at that date. The cumulative balance of unrealized net gains on securities available for sale was $1.8 million, net of taxes, at December 31, 2001. 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, 2001, 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, 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, -------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------------- ----------------------- Amortized Amortized Amortized Cost Market Value Cost Market Value Cost Market 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 Corporate debentures 32,884 32,985 2,835 2,847 -- -- Public utility 8,042 8,132 1,001 1,038 1,001 1,004 -------- -------- -------- -------- -------- -------- Total bonds and other debt securities 40,926 41,117 9,826 9,817 11,989 11,640 -------- -------- -------- -------- -------- -------- Mutual funds 18,899 18,867 3,566 3,593 -- -- -------- -------- -------- -------- -------- -------- Equity securities: Common stock 243 842 243 505 1,655 1,670 Preferred stock 1,641 1,655 2,608 2,679 2,676 2,684 -------- -------- -------- -------- -------- -------- Total equity securities 1,884 2,497 2,851 3,184 4,331 4,354 -------- -------- -------- -------- -------- -------- Mortgage-backed securities: GNMA 132,678 134,125 201,688 200,718 252,626 244,763 FNMA 50,895 51,359 9,516 9,725 14,639 14,602 FHLMC 20,552 20,810 8,527 8,612 9,758 9,657 REMIC and CMO 36,292 36,764 19,493 19,571 -- -- -------- -------- -------- -------- -------- -------- Total mortgage-backed securities 240,417 243,058 239,224 238,626 277,023 269,022 -------- -------- -------- -------- -------- -------- Total securities available for sale 302,126 305,539 255,467 255,220 293,343 285,016 -------- -------- -------- -------- -------- -------- Interest-bearing deposits and 28,367 28,367 12,185 12,185 9,019 9,019 Federal funds sold -------- -------- -------- -------- -------- -------- Total $330,493 $333,906 $267,652 $267,405 $302,362 $294,035 ======== ======== ======== ======== ======== ========
Mortgage-backed securities. At December 31, 2001, the Company had $243.1 million invested in mortgage-backed securities, of which $18.1 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, ---------------------------------------------- 2001 2000 1999 ---------------------------------------------- (In thousands) At beginning of year $238,626 $269,022 $302,421 Purchases of mortgage-backed securities 131,818 22,265 59,059 Amortization of unearned premium, net of accretion of unearned discount (848) (927) (2,064) Net change in unrealized gains (losses) on mortgage-backed securities available for sale 3,239 7,403 (9,792) Sales of mortgage-backed securities (27,484) (23,007) -- Principal repayments received on mortgage-backed securities (102,293) (36,130) (80,602) -------- -------- -------- Net increase (decrease) in mortgage-backed securities 4,432 (30,396) (33,399) -------- -------- -------- At end of year $243,058 $238,626 $269,022 ======== ======== ========
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, 2001. The stratification of balances is based on stated maturities. Equity securities are shown as immediately maturing, except for preferred stocks with stated redemption dates, which are shown in the period they are scheduled to be redeemed. Assumptions for repayments and prepayments are not reflected for mortgage-backed securities. The Company and the Bank carry these investments at their estimated fair value in the consolidated financial statements.
One to Five Five to Ten One Year or Less Years 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: Corporate debt $17,500 6.57% $15,384 6.18% -- -- Public utility 7,041 6.54 1,001 7.96 -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total bonds and other debt securities 25,541 6.57 16,385 6.29 -- ---------- ---------- ---------- ---------- ---------- ---------- Mutual funds 18,899 3.80 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Equity securities: Common stock 243 7.42 -- -- -- -- Preferred stock 735 5.77 -- -- $306 7.33% ---------- ---------- ---------- ---------- ---------- ---------- Total equity securities 978 6.18 -- -- 306 7.33 ---------- ---------- ---------- ---------- ---------- ---------- Mortgage-backed securities: GNMA -- -- -- -- -- -- FNMA -- -- -- -- 18,559 5.74 FHLMC -- -- -- -- -- -- REMIC and CMO -- -- -- -- 3,923 6.26 ---------- ---------- ---------- ---------- ---------- ---------- Total mortgage-backed securities -- -- 22,482 5.83 ---------- ---------- ---------- ---------- ---------- ---------- Interest-bearing deposits and Federal Funds sold 28,367 1.50 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total securities $72,785 3.87% $16,385 6.29% $22,788 5.85% ========== ========== ========== ========== ========== ========== 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: Corporate debt -- -- 1.27 $32,884 $32,985 6.39% Public utility -- -- 1.19 8,042 8,132 6.72 ---------- ---------- ---------- ---------- ---------- ---------- Total bonds and other debt securities -- 1.25 40,926 41,117 6.45 ---------- ---------- ---------- ---------- ---------- ---------- Mutual funds -- -- N/A 18,899 18,867 3.80 ---------- ---------- ---------- ---------- ---------- ---------- Equity securities: Common stock -- -- N/A 243 842 7.42 Preferred stock $600 9.96% 11.14 1,641 1,655 7.59 ---------- ---------- ---------- ---------- ---------- ---------- Total equity securities 600 9.96 11.14 1,884 2,497 7.57 ---------- ---------- ---------- ---------- ---------- ---------- Mortgage-backed securities: GNMA 132,678 7.06 26.71 132,678 134,125 7.06 FNMA 32,336 6.32 13.74 50,895 51,359 6.11 FHLMC 20,552 6.68 20.32 20,552 20,810 6.68 REMIC and CMO 32,369 6.08 21.72 36,292 36,764 6.10 ---------- ---------- ---------- ---------- ---------- ---------- Total mortgage-backed securities 217,935 6.77 22.66 240,417 243,058 6.68 ---------- ---------- ---------- ---------- ---------- ---------- Interest-bearing deposits and Federal Funds sold -- -- N/A 28,367 28,367 1.50 ---------- ---------- ---------- ---------- ---------- ---------- Total securities $218,535 6.78% 19.50 $330,493 $333,906 6.05% ========== ========== ========== ========== ========== ==========
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 maintain competitive 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 2001, the nation's economy slowed, and was generally considered to be in a recession. In response to the slowing economy, the Federal Reserve lowered interest rates throughout the year. The Bank responded by lowering interest rates paid to its depositors. The Bank also saw an increase in its due to depositors of $136.5 million. The new deposits were obtained at rates that were lower than the weighted average interest rate of existing deposits. In addition, certificate of deposit accounts were renewed at interest rates which were lower than was paid on the maturing deposits. As a result, during 2001, the weighted average interest rate paid by the Bank on its deposits declined throughout the year. The cost of deposits declined to 3.71% in the fourth quarter of 2001 from 4.36% in the fourth quarter of 2000. For the year ended December 31, 2001, the cost of deposits was 4.08% compared to 4.17% in 2000. However, it appears the decline in interest rates may have ended in the fourth quarter of 2001. While we are unable to predict the direction of future interest rate changes, it appears interest rates will not go lower. Should interest rates increase during 2002, it 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 $75.2 million, $53.7 million and $43.0 million at December 31, 2001, 2000 and 1999, 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, ------------------------------------------------------------------ 2001 2000 -------------------------------- -------------------------------- Weighted Weighted Percent Average Percent Average of Total Nominal of Total Nominal Amount Deposits Rate Amount Deposits Rate -------- -------- -------- -------- -------- -------- (Dollars in thousands) Passbook accounts (1) $195,855 23.64% 1.73% $186,207 26.99% 2.08% NOW accounts (1) 33,107 4.00 1.01 29,615 4.29 1.92 Demand accounts (1) 28,594 3.45 -- 20,913 3.03 -- Mortgagors' escrow deposits 10,065 1.21 0.53 7,753 1.12 0.65 -------- -------- -------- -------- -------- -------- Total 267,621 32.30 1.41 244,488 35.43 1.84 -------- -------- -------- -------- -------- -------- Money market accounts (1) 93,789 11.32 2.39 43,136 6.25 3.49 Certificate of deposit accounts with original maturities of: 6 Months and less 60,948 7.36 2.77 45,025 6.53 5.38 6 to 12 Months 62,607 7.56 3.64 29,586 4.29 5.40 12 to 30 Months 215,477 25.99 4.88 214,237 31.08 5.76 30 to 48 Months 23,166 2.80 5.18 17,689 2.56 5.85 48 to 72 Months 99,064 11.96 6.24 88,794 12.87 6.50 72 Months or more 5,910 0.71 6.69 6,856 0.99 6.63 -------- -------- -------- -------- -------- -------- Total certificate of deposit accounts 467,172 56.38 4.76 402,187 58.32 5.87 -------- -------- -------- -------- -------- -------- Total deposits (2) $828,582 100.00% 3.41% $689,811 100.00% 4.29% ======== ======== ======== ======== ======== ======== At December 31, ------------------------------ 1999 ------------------------------ Weighted Percent Average of Total Nominal Amount Deposits Rate -------- -------- -------- (Dollars in thousands) Passbook accounts (1) $195,910 29.37% 2.07% NOW accounts (1) 27,463 4.12 1.90 Demand accounts (1) 20,490 3.07 -- Mortgagors' escrow deposits 11,023 1.65 0.79 -------- -------- -------- Total 254,886 38.21 1.83 -------- -------- -------- Money market accounts (1) 40,378 6.05 3.23 Certificate of deposit accounts with original maturities of: 6 Months and less 46,265 6.94 4.36 6 to 12 Months 64,499 9.67 4.73 12 to 30 Months 171,087 25.67 5.42 30 to 48 Months 28,632 4.29 6.07 48 to 72 Months 60,309 9.04 6.24 72 Months or more 885 0.13 6.31 -------- -------- -------- Total certificate of deposit accounts 371,677 55.74 5.35 -------- -------- -------- Total deposits (2) $666,941 100.00% 3.88% ======== ======== ========
(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 $111.8 million, $92.7 million and $86.8 million at December 31, 2001, 2000 and 1999, 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, 2001.
At December 31, 2001 ---------------------------------------------- At December 31, Within One to --------------------------------- One Three There- 2001 2000 1999 Year Years after Total -------- -------- -------- -------- -------- ------- -------- (Dollars in thousands) Certificate of deposit accounts: 2.99 or less $68,945 $621 $370 $61,306 $7,144 $495 $68,945 3.00 to 3.99 97,942 -- 5,717 55,381 41,872 689 97,942 4.00 to 4.99 87,440 30,294 131,874 41,306 32,715 13,419 87,440 5.00 to 5.99 87,143 204,136 172,863 39,390 43,746 4,007 87,143 6.00 to 6.99 102,429 141,608 49,392 53,595 15,389 33,445 102,429 7.00 to 7.99 23,273 25,528 11,461 589 203 22,481 23,273 -------- -------- -------- -------- -------- ------- -------- Total $467,172 $402,187 $371,677 $251,567 $141,069 $74,536 $467,172 ======== ======== ======== ======== ======== ======= ========
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, 2001 and their annualized weighted average interest rates. Amount Weighted Average Rate ------ --------------------- (Dollars in thousands) Maturity Period: Three months or less $11,656 4.64% Over three through six months 8,377 3.98 Over six through 12 months 15,119 4.25 Over 12 months 40,023 5.43 ------- ---- Total 75,175 4.91% ======= ==== The following table presents the deposit activity, including mortgagors' escrow deposits, of the Bank for the periods indicated.
For the Year Ended December 31, -------------------------------- (Dollars in thousands) 2001 2000 1999 -------- -------- -------- Net deposits / (withdrawals) $109,060 ($4,603) ($22,100) Interest credited on deposits 29,711 27,473 24,982 -------- -------- -------- Total increase (decrease) in deposits $138,771 $22,870 $2,882 ======== ======== ========
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, ----------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------------- ------------------------------- ------------------------------- 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 $188,701 25.01% 2.00% $189,852 27.84% 2.07% $200,601 30.19% 2.07% NOW accounts 30,736 4.07 1.64 27,838 4.08 1.90 26,281 3.96 1.90 Demand accounts 26,319 3.49 -- 23,200 3.40 -- 24,624 3.71 -- Mortgagors' escrow deposits 13,013 1.72 0.53 13,177 1.93 0.65 11,718 1.76 0.79 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total 258,769 34.29 1.68 254,067 37.25 1.79 263,224 39.62 1.80 Money market accounts 71,820 9.52 3.21 42,791 6.27 3.36 36,191 5.45 3.05 Certificate of deposit accounts 423,812 56.19 5.44 385,237 56.48 5.58 364,947 54.93 5.24 -------- -------- -------- -------- -------- -------- -------- -------- -------- Total deposits $754,401 100.00% 3.94% $682,095 100.00% 4.03% $664,362 100.00% 3.76% ======== ======== ======== ======== ======== ======== ======== ======== ========
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 average cost of borrowed funds was 5.90%, 6.18% and 6.02% for 2001, 2000 and 1999, respectively. The average balances of borrowed funds were $508.4 million, $478.7 million and $379.3 million for 2001, 2000 and 1999, 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, -------------------------------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Securities Sold with the Agreement to Repurchase Average balance outstanding $156,640 $145,575 $129,945 Maximum amount outstanding at any month end during the period $182,226 $164,382 $145,000 Balance outstanding at the end of period $113,150 $164,382 $135,000 Weighted average interest rate during the period 5.71% 5.81% 5.80% Weighted average interest rate at end of period 5.60% 5.87% 5.75% FHLB-NY Advances Average balance outstanding $351,794 $333,100 $249,314 Maximum amount outstanding at any month end during the period $400,285 $353,119 $316,831 Balance outstanding at the end of period $400,285 $344,457 $316,831 Weighted average interest rate during the period 5.98% 6.34% 6.13% Weighted average interest rate at end of period 5.37% 6.36% 6.13% Total Borrowings Average balance outstanding $508,434 $478,675 $379,259 Maximum amount outstanding at any month end during the period $513,915 $508,839 $451,831 Balance outstanding at the end of period 513,435 $508,839 451,831 Weighted average interest rate during the period 5.90% 6.18% 6.02% Weighted average interest rate at end of period 5.42% 6.20% 6.02%
Subsidiary Activities At December 31, 2001, the Bank had three wholly-owned subsidiaries: FSB Properties, Inc. ("Properties"), Flushing Preferred Funding Corporation ("FPFC") and Flushing Service Corporation. (a) Properties was formed in 1976 under the Bank's New York State leeway investment authority. The original purpose of Properties was to engage in joint venture real estate equity investments. The Bank discontinued these activities in 1986. The last joint venture in which Properties was a partner was dissolved in 1989. The last remaining property acquired by the dissolution of these joint ventures was disposed of in 1998. (b) FPFC was formed in the fourth quarter of 1997 as a real estate investment trust for the purpose of acquiring, holding and managing real estate mortgage assets. FPFC also provides an additional vehicle for access by the Company to the capital markets for future opportunities. (c) Flushing Service Corporation was formed in 1998 to market insurance products and mutual funds. The insurance products and mutual funds sold are products of unrelated insurance and securities firms from which the service corporation earns a commission. Personnel At December 31, 2001, the Bank had 187 full-time employees and 62 part-time employees. None of the Bank's employees are represented by a collective bargaining unit, and the Bank considers its relationship with its employees to be good. 23 RISK FACTORS In addition to the other information contained in this Annual Report on Form 10-K, the following factors and other considerations should be considered carefully in evaluating the Company, the Bank and their business. Effect of Interest Rates Like most financial institutions, the Company's results of operations depends to a large degree on its net interest income. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, a significant increase in market interest rates could adversely affect net interest income. Conversely, a significant decrease in market interest rates could result in increased net interest income. As a general matter, the Company seeks to manage its business to limit its overall exposure to interest rate fluctuations. However, fluctuations in market interest rates are neither predictable nor controllable and may have a material adverse impact on the operations and financial condition of the Company. Additionally, in a rising interest rate environment, a borrower's ability to repay adjustable rate mortgages can be negatively affected as payments increase at repricing dates. Prevailing interest rates also affect the extent to which borrowers prepay and refinance loans. Declining interest rates tend to result in an increased number of loan prepayments and loan refinancings to lower than original interest rates, as well as prepayments of mortgage-backed securities. Such prepayments and refinancings adversely affect the average yield on the Company's loan and mortgage-backed securities portfolio, the value of mortgage loans and mortgage-backed securities in the Company's portfolio, the levels of such assets that are retained by the Company, net interest income and loan servicing income. However, the Bank may receive additional loan fees when existing loans are refinanced, which may partially offset reduced yield on the Bank's loan portfolio resulting from prepayments. In periods of low interest rates, the Bank's level of core deposits also may decline if depositors seek higher yielding instruments or other investments not offered by the Bank, which in turn may increase the Bank's cost of funds and decrease its net interest margin to the extent alternative funding sources are utilized. Significant increases in prevailing interest rates may significantly affect demand for loans and value of bank collateral. See "--Local Economic Conditions." Lending Activities Multi-family and commercial real estate loans, the increased origination of which is part of management's strategy, and construction loans, the level of which remains low but has been increasing, are generally viewed as exposing the lender to a greater risk of loss than fully underwritten one-to-four family residential loans and typically involve higher principal amounts per loan. Repayment of multi-family and commercial real estate loans generally is dependent, in large part, upon sufficient income from the property to cover operating expenses and debt service. Repayment of construction loans is contingent upon the successful completion and operation of the project. Changes in local economic conditions and government regulations, which are outside the control of the borrower or lender, also could affect the value of the security for the loan or the future cash flow of the affected properties. The focus of management's strategy in its originations of one-to-four family mortgage loans is on mixed-use property mortgage loans, and on residential mortgage loans to self-employed individuals within the Bank's local community without verification of the borrower's level of income. Repayment of mixed-use property real estate loans generally is dependent, in large part, upon sufficient income from the property to cover operating expenses and debt service payments. Mortgage loans originated without verifying the borrower's level of income 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. These risks are mitigated by the Bank's policy to limit the amount of one-to-four family residential mortgage loans to 80% of the appraised value or sale price, whichever is less. These loans are not as readily salable in the secondary market as the Bank's other fully underwritten loans, either as whole loans or when pooled or securitized. There can be no assurance that the Bank will be able to successfully implement its business strategies with respect to these higher yielding loans. In assessing the future earnings prospects of the Bank, investors should 24 consider, among other things, the Bank's level of origination of one-to-four family loans (including mixed-use property mortgage loans and loans to self-employed borrowers), the Bank's emphasis on commercial real estate and multi-family loans and the greater risks associated with such loans. See "Business -- Lending Activities". Competition The Bank faces intense and increasing competition both in making loans and in attracting deposits. The Bank's market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than the Bank, and all of which are competitors of the Bank to varying degrees. The future earnings prospects of the Bank will be affected by the Bank's ability to compete effectively with other financial institutions and to implement its business strategies. See "Business -- Market Area and Competition." Local Economic Conditions General economic conditions in the New York City metropolitan area, which had been strong for several years through the year ended December 31, 2000, generally declined in the year ended December 31, 2001. The local economy was further hurt by the September 11, 2001 attacks on New York City's financial district, in particular, the destruction of the World Trade Center buildings. Although this decline in the local economy has not had a significant adverse effect on the Company's financial condition or results of operations to date, there can be no assurance that the decline in the local economy experienced during 2001 will not have such an adverse effect in the future. A decline in the local economy, national economy or metropolitan area real estate market could adversely affect the financial condition and results of operations of the Company, including through decreased demand for loans or increased competition for good loans, increased non-performing loans and loan losses and resulting additional provisions for loan losses and for losses on real estate owned. Although management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions, many factors could require additions to the allowance for loan losses in future periods above those currently revealed. These factors include: (1) adverse changes in economic conditions and changes in interest rates that may affect the ability of borrowers to make payments on loans, (2) changes in the financial capacity of individual borrowers, (3) changes in the local real estate market and the value of the Bank's loan collateral, and (4) future review and evaluation of the Bank's loan portfolio, internally or by regulators. The amount of the allowance for loan losses at any time represents good faith estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions, prevailing interest rates and other factors. See "Business -- Allowance for Loan Losses." Legislation and Proposed Changes From time to time, legislation is enacted or regulations are promulgated that have the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the New York legislature and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Bank or the Company. Certain Anti-Takeover Provisions On September 17, 1996, the Company adopted a Stockholder Rights Plan (the "Rights Plan") designed to preserve long-term values and protect stockholders against stock accumulations and other abusive tactics to acquire control of the Company. Under the Rights Plan, each stockholder of record at the close of business on September 30, 1996 received a dividend distribution of one right to purchase from the Company one two-hundred twenty-fifth of a share of a new series of junior participating preferred stock at a price of $64, subject to certain adjustments. The rights will become exercisable only if any person or 25 group acquires 15% or more of the Company's common stock ("Common Stock") or commences a tender or exchange offer which, if consummated, would result in that person or group owning at least 15% of the Common Stock (the "acquiring person or group"). In such case, all stockholders other than the acquiring person or group will be entitled to purchase, by paying the $64 exercise price, Common Stock (or a common stock equivalent) with a value of twice the exercise price. In addition, at any time after such event, and prior to the acquisition by any person or group of 50% or more of the Common Stock, the Board of Directors may, at its option, require each outstanding right (other than rights held by the acquiring person or group) to be exchanged for one share of Common Stock (or one common stock equivalent). The rights expire on September 30, 2006. The Rights Plan, as well as certain provisions of the Company's Certificate of Incorporation and Bylaws, the Bank's federal Stock Charter and Bylaws, certain federal regulations and provisions of Delaware corporation law, and certain provisions of remuneration plans and agreements applicable to employees and officers of the Bank may have anti-takeover effects by discouraging potential proxy contests and other takeover attempts, particularly those which have not been negotiated with the Board of Directors. The Rights Plan and those other provisions, as well as applicable regulatory restrictions, may also prevent or inhibit the acquisition of a controlling position in the Common Stock and may prevent or inhibit takeover attempts that certain stockholders may deem to be in their or other stockholders' interest or in the interest of the Company or the Bank, or in which stockholders may receive a substantial premium for their shares over then current market prices. The Rights Plan and those other provisions may also increase the cost of, and thus discourage, any such future acquisition or attempted acquisition, and would render the removal of the current Board of Directors or management of the Bank or the Company more difficult. FEDERAL, STATE AND LOCAL TAXATION The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. Federal Taxation General. The Company reports its income using a calendar year and the accrual method of accounting. The Company is subject to the federal tax laws and regulations which apply to corporations generally, including, since the enactment of the Small Business Job Protection Act in 1996 (the "Act"), those governing the Bank's deductions for bad debts, described below. Bad Debt Reserves. Prior to the enactment of the Act, which was signed into law on August 20, 1996, savings institutions which met certain definitional tests primarily relating to their assets and the nature of their business ("qualifying thrifts"), such as the Bank, were allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualifying thrifts could compute deductions for bad debts using either the specific charge off method of Section 166 of the Internal Revenue Code (the "Code") or the reserve method of Section 593 of the Code. Section 1616(a) of the Act repealed the Section 593 reserve method of accounting for bad debts by qualifying thrifts, effective for taxable years beginning after 1995. Qualifying thrifts that are treated as large banks, such as the Bank, are required to use the specific charge off method, pursuant to which the amount of any debt may be deducted only as it actually becomes wholly or partially worthless. A thrift institution required to change its method of computing reserves for bad debt is required to treat such change as a change in the method of accounting, initiated by the taxpayer and having been made with the consent of the Secretary of the Treasury. Section 481(a) of the Code requires certain amounts to be recaptured with respect to such change. Generally, the amount of the thrift institution's "applicable excess reserves" must be included in income ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995. In the case of a thrift institution that is treated as a large bank, such as the Bank, the amount of the institution's applicable excess reserves generally is the excess of (1) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (2) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). The Bank's applicable excess reserves as of December 31, 1995 were approximately $300,000; the recapture of which was completed during the year ended December 31, 2001. 26 Distributions. To the extent that the Bank makes "nondividend distributions" to stockholders that are considered to result in distributions from the pre-1988 reserves or the supplemental reserve for losses on loans ("excess distributions"), then an amount based on the amount distributed will be included in the Bank's taxable income. Nondividend distributions include distributions in excess of the Bank's current and post-1951 accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. The amount of additional taxable income resulting from an excess distribution is an amount that when reduced by the tax attributable to the income is equal to the amount of the excess distribution. Thus, slightly more than one and one-half times the amount of the excess distribution made would be includable in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate. See "Regulation -- Restrictions on Dividends and Capital Distributions" for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends or make non-dividend distributions described above that would result in a recapture of any portion of its pre-1988 bad debt reserves. Corporate Alternative Minimum Tax. The Code imposes an alternative minimum tax on corporations equal to the excess, if any, of 20% of alternative minimum taxable income ("AMTI") over a corporation's regular federal income tax liability. AMTI is equal to taxable income with certain adjustments. Generally, only 90% of AMTI can be offset by net operating loss carryback and carryforwards. Under the recently enacted Job Creation and Worker Assistance Act of 2002, however, a net operating loss deduction attributable to net operating loss carrybacks arising in 2001 and 2002, as well as net operating loss carryforwards to these years, may offset 100% of AMTI. State and Local Taxation New York State and New York City Taxation. The Company is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (1) 8.5% (8.0% effective January 1, 2002) of "entire net income" allocable to New York State during the taxable year or (2) the applicable alternative minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of the value of assets allocable to New York State with certain modifications, (b) 3% of "alternative entire net income" allocable to New York State or (c) $250. Entire net income is similar to federal taxable income, subject to certain modifications, including that net operating losses arising during any taxable year prior to January 1, 2001 cannot be carried back or carried forward, and net operating losses arising during any taxable year beginning on or after January 1, 2001 cannot be carried back. Alternative entire net income is equal to entire net income without certain deductions which are allowable in the calculation of entire net income. The Company also is subject to a similarly calculated New York City tax of 9% on income allocated to New York City (although net operating losses cannot be carried back or carried forward regardless of when they arise) and similar alternative taxes. In addition, the Company is subject to a tax surcharge at a rate of 17% of the New York State Franchise Tax that is attributable to business activity carried on within the Metropolitan Commuter Transportation District. This tax surcharge is assessed as if the New York State Franchise tax is imposed at a 9% rate. Notwithstanding the repeal of the federal income tax provisions permitting bad debt deductions under the reserve method, New York State has enacted legislation maintaining the preferential treatment of additional loss reserves for qualifying real property and non-qualifying loans of qualifying thrifts for both New York State and New York City tax purposes. Calculation of the amount of additions to reserves for qualifying real property loans is limited to the larger of the amount derived by the percentage of taxable income method or the experience method. For these purposes, the applicable percentage to calculate the bad debt deduction under the percentage of taxable income method is 32% of taxable income, reduced by additions to reserves for non-qualifying loans, except that the amount of the addition to the reserve cannot exceed the amount necessary to increase the balance of the reserve for losses on qualifying real property loans at the close of the taxable year to 6% of the balance of the qualifying real property loans outstanding at the end of the taxable year. Under the experience method, the maximum addition to a loan reserve generally equals the amount necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (1) the amount that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or (2) the balance of the bad debt reserve at the close of the "base year," or, if the amount of loans outstanding has declined since the base year, the amount which bears the same ratio to the amount of loans outstanding at the close of the taxable year as the balance of the reserve at the close of the 27 base year. For these purposes, the "base year" is the last taxable year beginning before 1988. The amount of additions to reserves for non-qualifying loans is computed under the experience method. In no event may the additions to reserves for qualifying real property loans be greater than the larger of the amount determined under the experience method or the amount which, when added to the additions to reserves for non-qualifying loans, equal the amount by which 12% of the total deposits or withdrawable accounts of depositors of the Bank at the close of the taxable year exceeds the sum of the Bank's surplus, undivided profits and reserves at the beginning of such year. The legislation also allows an exclusion from entire net income for New York State and New York City tax purposes for any amounts a thrift is required to include in federal taxable income as a recapture of its bad debt reserve as a consequence of the Act. Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. REGULATION General The Company, as a savings and loan holding company, is required to register with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and any non-savings institution subsidiaries it may form or acquire. Among other things, this authority permits the OTS to restrict or prohibit activities that it determines may pose a serious risk to the Bank. As a publicly owned company, the Company is required to file certain reports with the Securities and Exchange Commission ("SEC") under Federal securities laws. The Bank is a member of the FHLB System. The Bank is subject to extensive regulation by the OTS, as its chartering agency, and the FDIC, as the insurer of the Bank's deposits. The Bank is also subject to certain regulations promulgated by the other federal agencies. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. There are periodic examinations by the OTS and the FDIC to examine whether the Bank is in compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily to ensure the safe and sound operation of the Bank for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for possible loan losses for regulatory purposes. Any change in such regulation, whether by the OTS, the FDIC, other federal agencies or the United States Congress, could have a material adverse impact on the Company, the Bank and their operations. The activities of federal savings institutions are governed primarily by the Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the Federal Deposit Insurance Act ("FDIA"). Most regulatory functions relating to deposit insurance and to the administration of conservatorships and receiverships of insured institutions are exercised by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, requires that federal banking regulators intervene promptly when a depository institution experiences financial difficulties, mandated the establishment of a risk-based deposit insurance assessment system, and required imposition of numerous additional safety and soundness operational standards and restrictions. FDICIA and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") each contain provisions affecting numerous aspects of the operations and regulations of federal savings banks, and these laws empower the OTS and the FDIC, among other agencies, to promulgate regulations implementing their provisions. Set forth below is a brief description of certain laws and regulations which relate to the regulation of the Bank and the Company. The description does not purport to be a comprehensive description of applicable laws, rules and regulations and is qualified in its entirety by reference to applicable laws, rules and regulations. 28 Holding Company Regulation The Company is a non-diversified unitary savings and loan holding company within the meaning of the HOLA. As such, the Company is required to register with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and any non-savings institution subsidiaries it may form or acquire. Among other things, this authority permits the OTS to restrict or prohibit activities that it determines may pose a serious risk to the Bank. See "--Restrictions on Dividends and Capital Distributions." HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from (1) acquiring another savings institution or holding company thereof, without prior written approval of the OTS; (2) acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by HOLA; or (3) acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS will consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, and the impact of any competitive factors that may be involved. As a unitary savings and loan holding company, the Company currently is not restricted as to the types of business activities in which it may engage, provided that the Bank continues to meet the qualified thrift lender ("QTL") test. See "--Qualified Thrift Lender Test". Upon any non-supervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Company Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (1) interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. Under New York law, reciprocal interstate acquisitions are authorized for savings and loan holding companies and savings institutions. Certain states do not authorize interstate acquisitions under any circumstances; however, federal law authorizing acquisitions in supervisory cases preempts such state law. Federal law generally provides that no "person" acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days' written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (1) the acquisition would substantially lessen competition; (2) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (3) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. Investment Powers The Bank is subject to comprehensive regulation governing its investments and activities. Among other things, the Bank may invest in (1) residential mortgage loans, mortgage-backed securities, education loans and credit card loans in an unlimited amount, (2) non-residential real estate loans up to 400% of total capital, (3) commercial business loans up to 20% of assets (however, amounts over 10% of total assets must be used only for small business loans) and (4) in general, consumer loans and highly rated commercial paper and corporate debt securities in the 29 aggregate up to 35% of assets. In addition, the Bank may invest up to 3% of its assets in service corporations, an unlimited percentage of its assets in operating subsidiaries (which may only engage in activities permissible for the Bank itself) and under certain conditions may invest in finance subsidiaries. Other than investments in service corporations, operating subsidiaries, finance subsidiaries and certain of government-sponsored enterprises, such as FHLMC and FNMA, the Bank generally is not permitted to make equity investments. See "Business -- Investment Activities." A service corporation in which the Bank may invest is permitted to engage in activities reasonably related to the activities of a federal savings bank as the OTS may approve on a case by case basis, as well as certain activities preapproved by the OTS, which include providing certain support services for the institution; originating, investing in, selling, purchasing, servicing or otherwise dealing with specified types of loans and participations (principally loans that the parent institution could make); specified real estate activities, including limited real estate development; securities brokerage services; certain insurance brokerage activities; and other specified investments and services. Real Estate Lending Standards FDICIA requires each federal banking agency to adopt uniform regulations prescribing standards for extensions of credit which are either (1) secured by real estate, or (2) made for the purpose of financing the construction of improvements on real estate. In prescribing these standards, the banking agencies must consider the risk posed to the deposit insurance funds by real estate loans, the need for safe and sound operation of insured depository institutions and the availability of credit. The OTS and the other federal banking agencies adopted uniform regulations, effective March 19, 1993. The OTS regulation requires each savings association to establish and maintain written internal real estate lending standards consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its real estate lending activities. The policy must also be consistent with accompanying OTS guidelines, which include maximum loan-to-value ratios for the following types of real estate loans: raw land (65%), land development (75%), nonresidential construction (80%), improved property (85%) and one-to-four family residential construction (85%). Owner-occupied one-to-four family mortgage loans and home equity loans do not have maximum loan-to-value ratio limits, but those with a loan-to-value ratio at origination of 90% or greater are to be backed by private mortgage insurance or readily marketable collateral. Institutions are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are appropriately reviewed and justified. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are justified. Loans-to-One Borrower Limits The Bank generally is subject to the same loans-to-one borrower limits that apply to national banks. With certain exceptions, loans and extensions of credit outstanding at one time to one borrower (including certain related entities of the borrower) may not exceed 15% of the Bank's unimpaired capital and surplus, plus an additional 10% of unimpaired capital and surplus for loans fully secured by certain readily marketable collateral. At December 31, 2001, the largest amount the Bank could lend to one borrower was approximately $17.2 million, and at that date, the Bank's largest aggregate amount of loans-to-one borrower was $8.4 million, all of which were performing according to their terms. See "Business -- Lending Activities." Insurance of Accounts The deposits of the Bank are insured up to $100,000 per depositor (as defined by federal law and regulations) by the FDIC. Approximately 93% of the Bank's deposits are presently insured by the FDIC under the Bank Insurance Fund ("BIF"). The remainder are insured by the FDIC under the Savings Association Insurance Fund ("SAIF"). The deposits insured under the SAIF are a result of those acquired in the acquisition of New York Federal. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the insurance funds. The FDIC also has the authority to initiate enforcement actions where the OTS has failed or declined to take such action after receiving a request to do so from the FDIC. 30 The FDIC utilizes a risk-based deposit insurance assessment system. Under this system, the FDIC assigns each institution to one of three capital categories -- "well capitalized," "adequately capitalized" and "undercapitalized" -- which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of FDIA, as discussed below. These three categories are then divided into three subcategories which reflect varying levels of supervisory concern. The matrix so created results in nine assessment risk classifications. As of the date of this Report, the annual FDIC assessment rate for BIF and SAIF member institutions varies between 0.00% to 0.27% per annum. At December 31, 2001, the Bank's annual assessment rate was 0.00%. The Bank's assessment rate in effect from time to time will depend upon the capital category and supervisory subcategory to which the Bank is assigned by the FDIC. In addition, the FDIC is authorized to increase federal deposit insurance assessment rates for BIF and SAIF members to the extent necessary to protect the BIF and SAIF and, under current law, would be required to increase such rates to $0.23 per $100 of deposits if the BIF or SAIF reserve ratio falls below the required 1.25%. Any increase in deposit insurance assessment rates, as a result of a change in the category or subcategory to which the Bank is assigned or the exercise of the FDIC's authority to increase assessment rates generally, could have an adverse effect on the earnings of the Bank. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. On September 30, 1996, as part of an omnibus appropriations bill, the Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted. The Funds Act requires BIF institutions, beginning January 1, 1997, to pay a portion of the interest due on the Finance Corporation ("FICO") bonds issued in connection with the savings and loan association crisis in the late 1980s, and requires BIF institutions to pay their full pro rata share of the FICO payments starting the earlier of January 1, 2000 or the date at which no savings institution continues to exist. The Bank was required, as of January 1, 2000, to pay its full pro rata share of the FICO payments. The FICO assessment rate is subject to change. The Bank paid $134,000, $138,000 and $100,000 for its share of the interest due on FICO bonds in 2001, 2000 and 1999, respectively. Qualified Thrift Lender Test Institutions regulated by the OTS are required to meet a QTL test to avoid certain restrictions on their operations. FDICIA and applicable OTS regulations require such institutions to maintain at least 65% of their portfolio assets (total assets less intangibles, properties used to conduct the institution's business and liquid assets not exceeding 20% of total assets) in "qualified thrift investments" on a monthly average basis in nine of every 12 months. Qualified thrift investments constitute primarily residential mortgage loans and related investments, including certain mortgage-backed and mortgage-related securities. A savings institution that fails the QTL test must either convert to a bank charter or, in general, it will be prohibited from: (1) making an investment or engaging in any new activity not permissible for a national bank, (2) paying dividends not permissible under national bank regulations, (3) obtaining advances from any FHLB, and (4) establishing any new branch office in a location not permissible for a national bank in the institution's home state. One year following the institution's failure to meet the QTL test, any holding company parent of the institution must register and be subject to supervision as a bank holding company. In addition, beginning three years after the institution failed the QTL test, the institution would be prohibited from refinancing any investment or engaging in any activity not permissible for a national bank and would have to repay any outstanding advances from an FHLB as promptly as possible. At December 31, 2001, the Bank had maintained more than 65% of its "portfolio assets" in qualified thrift investments in at least nine of the preceding 12 months. Accordingly, on that date, the Bank had met the QTL test. On September 30, 1996, as part of an omnibus appropriations bill, Congress enacted the Economic Growth and Paperwork Reduction Act of 1996 ("Regulatory Paperwork Reduction Act"), modifying and expanding investment authority under the QTL test. Prior to the enactment of the Regulatory Paperwork Reduction Act, commercial, corporate, business, or agricultural loans were limited in the aggregate to 10% of a thrift's assets and education loans were limited to 5% of a thrift's assets. Further, federal savings associations meeting a different asset test under the Code (the "domestic building and loan association test") were qualified for favorable tax treatment. The amendments permit federal thrifts to invest in, sell, or otherwise deal in education and credit card loans without 31 limitation and raised from 10% to 20% of total assets the aggregate amount of commercial, corporate, business, or agricultural loans or investments that may be made by a thrift, subject to a requirement that amounts in excess of 10% of total assets be used only for small business loans. In addition, the Regulatory Paperwork Reduction Act defines "qualified thrift investment" to include, without limit, education, small business, and credit card loans; and removes the 10% limit on personal, family, or household loans for purposes of the QTL test. The legislation also provides that a thrift meets the QTL test if it qualifies as a domestic building and loan association under the Code. Transactions with Affiliates Transactions between the Bank and any related party or "affiliate" are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is generally any company or entity which controls, is controlled by or is under common control with the Bank, including the Company, the Bank's subsidiaries, and any other qualifying subsidiary of the Bank or the Company that may be formed or acquired in the future. Generally, Sections 23A and 23B (1) limit the extent to which the Bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of the Bank's capital stock and surplus, and impose an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (2) require that all such transactions be on terms substantially the same, or at least as favorable, to the Bank or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. Each loan or extension of credit to an affiliate by the Bank must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of credit extended. In addition, the Bank may not (1) loan or otherwise extend credit to an affiliate, except to any affiliate which engages only in activities which are permissible for bank holding companies under Section 4(c) of the Bank Company Act, or (2) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliates, except subsidiaries of the Bank. In addition, the Bank is subject to Regulation O promulgated under Sections 22(g) and 22(h) of the Federal Reserve Act. Regulation O requires that loans by the Bank to a director, executive officer or to a holder of more than 10% of the Common Stock, and to certain affiliated interests of such insiders, may not, in the aggregate, exceed the Bank's loans-to-one borrower limit. Loans to insiders and their related interests must also be made on terms substantially the same as offered, and follow credit underwriting procedures that are not less stringent than those applied, in comparable transactions to other persons. Prior Board approval is required for certain loans. In addition, the aggregate amount of extensions of credit by the Bank to all insiders cannot exceed the institution's unimpaired capital and surplus. These laws place additional restrictions on loans to executive officers of the Bank. The Bank is in compliance with these regulations. Restrictions on Dividends and Capital Distributions The Bank is subject to OTS limitations on capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other distributions charged to the Bank's capital account. In general, the applicable regulation permits specified levels of capital distributions by a savings institution that meets at least its minimum capital requirements, so long as the OTS is provided with at least 30 days' advance notice and has no objection to the distribution. Under OTS capital distribution regulations, an institution is not required to file an application with, or to provide a notice to, the OTS if neither the institution nor the proposed capital distribution meet any of the criteria for any such application or notice as provided below. An institution will be required to file an application with the OTS if the institution is not eligible for expedited treatment by the OTS; if the total amount of all its capital distributions for the applicable calendar year exceeds the net income for that year to date plus the retained net income (net income less capital distributions) for the preceding two years; if it would not be at least adequately capitalized following the distribution; or if its proposed capital distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS. By contrast, only notice to the OTS is required for an institution that is not required to file an application as provided in the preceding sentence, if it would not be well capitalized following the distribution; if the association's proposed capital distribution would reduce the amount of 32 or retire any part of its common or preferred stock or retire any part of debt instruments such as notes or debentures included in capital under OTS regulations; or if the association is a subsidiary of a savings and loan holding company. The Bank is a subsidiary of a savings and loan holding company and, therefore, is subject to the 30-day advance notice requirement. As of December 31, 2001, the Bank had paid all eligible retained earnings to the Company in the form of cash dividends. Federal Home Loan Bank System In connection with converting to a federal charter, the Bank became a member of the FHLB-NY, which is one of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board. Each FHLB serves as a source of liquidity for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by its Board of Directors. As a member, the Bank is required to purchase and maintain stock in the FHLB-NY in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of total advances. Pursuant to this requirement, at December 31, 2001, the Bank was required to maintain $20.0 million of FHLB-NY stock. The Bank was in compliance with this requirement at that time. Assessments Savings institutions are required by OTS regulations to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a quarterly or semi-annual basis, as determined from time to time by the Director of the OTS, is computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the institution's latest quarterly thrift financial report. Based on the average balance of the Bank's total assets for the year ended December 31, 2001, the Bank's OTS assessments were $235,000 for that period. Branching OTS regulations permit federally chartered savings institutions to branch nationwide to the extent allowed by federal statute. This permits federal savings associations to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. Community Reinvestment Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, the Bank has an obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods located in the community. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution. The methodology used by the OTS for determining an institution's compliance with the CRA focuses on three tests: (a) a lending test, to evaluate the institution's record of making loans in its service areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. The Bank received a CRA rating of "Satisfactory" in its most recent completed CRA examination, which was completed as of March 13, 2000. Institutions that receive less than a satisfactory rating may face difficulties in securing approval for new activities or acquisitions. The CRA requires all institutions to make public disclosure of their CRA ratings. 33 Brokered Deposits The FDIC has promulgated regulations implementing the FDICIA limitations on brokered deposits. Under the regulations, well-capitalized institutions are not subject to brokered deposit limitations, while adequately capitalized institutions are able to accept, renew or roll over brokered deposits only (1) with a waiver from the FDIC and (2) subject to the limitation that they do not pay an effective yield on any such deposit which exceeds by more than 75 basis points (a) the effective yield paid on deposits of comparable size and maturity in such institution's normal market area for deposits accepted in its normal market area or (b) 120 percent for retail deposits and 130 percent for wholesale deposits accepted outside the institution's normal market area, respectively, from the current yield on comparable maturity U.S. Treasury obligations. Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in the institution's normal market area or in the market area in which such deposits are being solicited. Pursuant to the regulation, the Bank, as a well-capitalized institution, may accept brokered deposits. Capital Requirements General. The Bank is required to maintain minimum levels of regulatory capital. Since FIRREA, capital requirements established by the OTS generally must be no less stringent than the capital requirements applicable to national banks. The OTS also is authorized to impose capital requirements in excess of these standards on a case-by-case basis. Any institution that fails any of its applicable capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution's operations and the appointment of a conservator or receiver. The OTS' capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. See "--Prompt Corrective Action." The OTS' capital regulations create three capital requirements: a tangible capital requirement, a leverage and core capital requirement and a risk-based capital requirement. At December 31, 2001, the Bank's capital levels exceeded applicable OTS capital requirements. The three OTS capital requirements are described below. Tangible Capital Requirement. Under current OTS regulations, each savings institution must maintain tangible capital equal to at least 1.50% of its adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. At December 31, 2001, the Bank had intangible assets consisting of $3.9 million in goodwill and no purchased mortgage servicing rights. At that date, the Bank's tangible capital ratio was 7.32%. In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to appropriately account for the investments in and assets of both includable and non-includable subsidiaries. Core Capital Requirement. The current OTS core capital requirement ranges between 3% and 5% of adjusted total assets. Savings institutions that receive the highest supervisory rating for safety and soundness are required to maintain a minimum core capital ratio of 3%, while the capital floor for all other savings institutions generally ranges from 4% to 5%, as determined by the OTS on a case by case basis. Core capital includes common stockholders' equity (including retained income), non-cumulative perpetual preferred stock and related surplus, minority interest in the equity accounts of fully consolidated subsidiaries and (subject to phase-out) qualifying supervisory goodwill. The Bank has no qualifying supervisory goodwill. At December 31, 2001, the Bank's core capital ratio was 7.32%. 34 Effective October 1, 1998, the OTS relaxed regulations limiting the amount of servicing assets, together with purchased credit card receivables, includable in core capital from 50% of such capital to 100% of such capital, subject to limitations on fair value. At December 31, 2001, the Bank had no purchased mortgage servicing rights or purchased credit card receivables. Risk-Based Requirement. The risk-based capital standard adopted by the OTS requires savings institutions to maintain a minimum ratio of total capital to risk-weighted assets of 8%. Total capital consists of core capital, defined above, and supplementary capital but excludes the effect of recognizing deferred taxes based upon future income after one year. Supplementary capital consists of certain capital instruments that do not qualify as core capital, and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only in an amount equal to the amount of core capital. In determining the risk-based capital ratios, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights assigned by the OTS for significant categories of assets are (1) 0% for cash and securities issued by the federal government or unconditionally backed by the full faith and credit of the federal government; (2) 20% for securities (other than equity securities) issued by federal government sponsored agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (3) 50% for prudently underwritten permanent one-to-four family first lien mortgage loans and certain qualifying multi-family mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC; and (4) 100% for all other loans and investments, including consumer loans, home equity loans, commercial loans, and one-to-four family residential real estate loans more than 90 days delinquent, and all repossessed assets or assets more than 90 days past due. At December 31, 2001, the Bank's risk-based capital ratio was 13.58%. Risk-based capital excludes the effect of recognizing deferred taxes based upon future income after one year. In 1993, the OTS adopted a final rule incorporating an interest-rate risk component into the risk-based capital regulation. Under the rule, an institution with a greater than "normal" level of interest rate risk will be subject to a deduction of its interest rate risk component from total capital for purposes of calculating the risk-based capital requirement. As a result, such an institution may be required to maintain additional capital in order to comply with the risk-based capital requirement. An institution with a greater than "normal" interest rate risk is defined as an institution that would suffer a loss of net portfolio value exceeding 2% of the estimated market value of its assets in the event of a 200 basis point increase or decrease (with certain minor exceptions) in interest rates. The interest rate risk component will be calculated, on a quarterly basis, as one-half of the difference between an institution's measured interest rate risk and 2%, multiplied by the market value of its assets. The rule establishes a "lag" time between the reporting date of the data used to calculate an institution's interest rate risk and the effective date of each quarter's interest rate risk component. The rule also authorizes the director of the OTS, or his designee, to waive or defer an institution's interest rate risk component on a case-by-case basis. At December 31, 2001, the Bank did not have more than "normal" interest rate risk and was not subject to any deduction from total capital under this rule. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Interest Rate Risk," included in the Annual Report and incorporated herein by reference. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and checking accounts) and non-personal time deposits. At December 31, 2001, the Bank was in compliance with these requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. Because required reserves must be maintained in the form of vault cash or a non-interest-bearing account at a Federal Reserve Bank directly or through another bank, the effect of this reserve requirement is to reduce an institution's earning assets. The amount of funds necessary to satisfy this requirement has not had a material effect on the Bank's operations. 35 As a creditor and financial institution, the Bank is also subject to additional regulations promulgated by the FRB, including, without limitation, regulations implementing requirements of the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Truth-in-Lending Act. Financial Reporting The Bank is required to submit independently audited annual reports to the FDIC and the OTS. These publicly available reports must include (a) annual financial statements prepared in accordance with generally accepted accounting principles and such other disclosure requirements as required by the FDIC or the OTS and (b) a report, signed by the Bank's chief executive officer and chief financial officer which contains statements about the adequacy of internal controls and compliance with designated laws and regulations, and attestations by independent auditors related thereto. The Bank is required to monitor the foregoing activities through an independent audit committee. Standards for Safety and Soundness The FDIA Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994 ("Community Development Act"), requires each federal bank regulatory agency to establish safety and soundness standards for institutions under its authority. On July 10, 1995, the federal banking agencies, including the OTS, jointly released Interagency Guidelines Establishing Standards for Safety and Soundness and published a final rule establishing deadlines for submission and review of safety and soundness compliance plans. The final rule and the guidelines took effect August 9, 1995. The guidelines, among other things, require savings institutions to maintain internal controls, information systems and internal audit systems that are appropriate to the size, nature and scope of the institution's business. The guidelines also establish general standards relating to loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits. Savings institutions are required to maintain safeguards to prevent the payment of excessive compensation to an executive officer, employee, director or principal shareholder. The OTS may determine that a savings institution is not in compliance with the safety and soundness guidelines and, upon doing so, may require the institution to submit an acceptable plan to achieve compliance with the guidelines. An institution must submit an acceptable compliance plan to the OTS within 30 days of receipt or request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory actions. Management believes that the Bank currently meets the standards adopted in the interagency guidelines. Additionally, under FDICIA, as amended by the Community Development Act, federal banking agencies are required to establish standards relating to asset quality and earnings that the agencies determine to be appropriate. Effective October 1, 1998, the federal banking agencies, including the OTS, adopted guidelines relating to asset quality and earnings which require insured institutions to maintain systems, consistent with their size and the nature and scope of their operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and insure that earnings are sufficient to maintain adequate capital and reserves. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Act (the "Modernization Act") was signed into law on November 12, 1999. Among other things, the Modernization Act permits qualifying bank holding companies to affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or complementary thereto, as determined by the Federal Reserve Board. Subject to certain limitations, a national bank may, through a financial subsidiary, engage in similar activities. The Modernization Act also prohibits the creation or acquisition of new unitary savings and loan holding companies that are affiliated with nonbanking firms, but "grandfathers" existing savings and loan holding companies, such as the Company. Grandfathered companies retain the existing powers available to unitary savings and loan holding companies. See "-- Holding Company Regulation." Certain business combinations which were impermissible prior to the effective date of the Modernization Act are now possible and could lead to further consolidation in the financial services industry and an increase in the service offerings of our competitors. To date, management has not observed significant consolidation in the Bank's market area as a result of 36 the Modernization Act. We cannot assure you, however, that the Modernization Act will not result in changes in the competitive environment in the Bank's market area or otherwise impact the Bank or the Company. The Modernization Act also requires financial institutions to disclose, on ATM machines, any non-customer fees and to disclose to their customers upon the issuance of an ATM card any fees that may be imposed by the institutions on ATM users. For older ATMs, financial institutions will have until December 31, 2004, to provide such notices. In addition, the Modernization Act calls for heightened privacy protection of customer information gathered by financial institutions. The OTS has enacted regulations implementing the privacy protection provisions of the Modernization Act. Under the regulations, each financial institution is to (1) adopt procedures to protect customers' "non-public personal information", (2) disclose its privacy policy, including identifying to customers others with whom it shares "non-public personal information", at the time of establishing the customer relationship and annually thereafter, and (3) provide its customers with the ability to "opt-out" of having the financial institution share their personal information with affiliated third parties. The regulations became effective on November 13, 2000, with compliance voluntary prior to July 1, 2001. Management has reviewed and amended our privacy protection policy and believes we are in compliance with these regulations. USA Patriot Act In light of the September 11 attacks, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the "Patriot Act") on October 26, 2001 to enhance protections against money laundering and criminal laws against terrorist activities, and give law enforcement authorities greater investigative powers. Among other things, the Patriot Act (1) requires financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for foreign persons to establish due diligence policies; (2) prohibits correspondent accounts with foreign shell banks; (3) permits sharing of information among financial institutions, regulators and law enforcement regarding persons engaged in terrorist or money laundering activities; (4) requires financial institutions to verify customer identification at account opening; (5) requires financial institutions to report suspicious activities; and (6) requires financial institutions to establish an anti-money laundering compliance program. Provisions under the Patriot Act become effective at varying times. The U. S. Treasury Department, the Board of Governors of the Federal Reserve System and other federal bank regulatory agencies have issued some regulations implementing provisions of the Patriot Act, and more are to follow. At this time, we are not able to predict with any certainty the impact of compliance with the Patriot Act and regulations thereunder on the operations of the Bank, but because the Bank's business is primarily domestic in nature, we do not anticipate that any such impact will be significant. Prompt Corrective Action Under Section 38 of the FDIA, as added by the FDICIA, each appropriate banking agency is required to take prompt corrective action to resolve the problems of insured depository institutions that do not meet minimum capital ratios. Such action must be accomplished at the least possible long-term cost to the appropriate deposit insurance fund. The federal banking agencies, including the OTS, adopted substantially similar regulations to implement Section 38 of the FDIA. Under the regulations, an institution is deemed to be (1) "well capitalized" if it has total risk-based capital of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage capital ratio of 5% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (2) "adequately capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of "well capitalized," (3) "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage capital ratio that is less than 4% (3% under certain circumstances), (4) "significantly undercapitalized" if it has a total risk-based capital ratio that is 37 less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%, and (5) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). At December 31, 2001, the Bank met the criteria to be considered a "well capitalized" institution. Federal Securities Laws The Company's Common Stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information and reporting requirements, regulations governing proxy solicitations, insider trading restrictions and other requirements applicable to companies whose stock is registered under the Exchange Act. 38 Item 2. Properties. The Bank conducts its business through ten full-service offices. The Bank's main office is located at 144-51 Northern Boulevard, Flushing, New York. The Bank believes that its current facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Company.
Date Leased or Lease Expiration Net Book Value at Office Leased or Owned Acquired Date December 31, 2001 Main Office 144-51 Northern Blvd Flushing, NY 11354 .............................. Owned 1972 NA $1,877,830 Broadway Branch 159-18 Northern Blvd Flushing, NY 11358 .............................. Owned 1962 NA 802,121 Auburndale Branch 188-08 Hollis Court Blvd Flushing, NY 11358 .............................. Owned 1991 NA 1,107,426 Springfield Branch 61-54 Springfield Blvd Bayside, NY 11364 ............................... Leased 1991 11/30/2006 35,303 Bay Ridge Branch 7102 Third Avenue Brooklyn, NY 11209 .............................. Owned 1991 NA 382,257 Irving Place Branch 33 Irving Place New York, NY 10003 .............................. Leased 1991 11/30/2006 332,234 New Hyde Park Branch 661 Hillside Avenue New Hyde Park, NY 11040 ......................... Leased 1971 12/31/2011 54,751 Kissena Branch 44-43 Kissena Boulevard Flushing, NY 11355 .............................. Leased 2000 5/31/2010 633,253 New Hyde Park In-Store Branch 653 Hillside Avenue New Hyde Park, NY 11040 ......................... Leased 1998 6/01/2003 150,409 Co-op City In-Store Branch 713 Co-op City Boulevard Bronx, NY 10475 ................................. Leased 1999 11/10/2004 189,731 Total premises and equipment, net $5,565,315
Item 3. Legal Proceedings. The Bank is involved in various legal actions arising in the ordinary course of its business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and results of operations of the Bank. Item 4. Submission of Matters to a Vote of Security Holders. None 39 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. The information regarding Flushing Financial Corporation common stock and related stockholder matters appears on page 6 of the 2001 Annual Report to Stockholders ("Annual Report") under the caption "Market Price of Common Stock" and is incorporated herein by this reference. Item 6. Selected Financial Data. Information regarding selected financial data appears on pages 5 and 6 of the Annual Report under the caption "Selected Financial Data" and is incorporated herein by this reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information regarding management's discussion and analysis of financial condition and results of operations appears on pages 7 through 19 of the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by this reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information contained in the section captioned "Interest Rate Risk" on page 12 of the Annual Report and in Notes 14 and 15 of the Notes to Consolidated Financial Statements is incorporated herein by this reference. Item 8. Financial Statements and Supplementary Data. Information regarding the financial statements and the Independent Auditor's Report appears on pages 20 through 44 of the Annual Report and is incorporated herein by this reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 40 PART III Item 10. Directors and Executive Officers of the Registrant. Information regarding the directors and executive officers of the Company appears in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held May 21, 2002 ("Proxy Statement") under the captions "Board Nominees", "Continuing Directors" and "Executive Officers Who Are Not Directors" and is incorporated herein by this reference. Item 11. Executive Compensation. Information regarding executive compensation appears in the Proxy Statement under the caption "Executive Compensation" and is incorporated herein by this reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners appears in the Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners" and is incorporated herein by this reference. Information regarding security ownership of management appears in the Proxy Statement under the caption "Stock Ownership of Management" and is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions. Information regarding certain relationships and related transactions appears in the Proxy Statement under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" and is incorporated herein by this reference. 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements The following financial statements are included in the Company's Annual Report to Stockholders for the year ended December 31, 2001 and are incorporated herein by this reference: o Consolidated Statements of Financial Condition at December 31, 2001 and 2000 o Consolidated Statements of Income for each of the three years in the period ended December 31, 2001 o Consolidated Statements of Changes in Stockholders' Equity for each of the three years in the period ended December 31, 2001 o Consolidated Statements of Cash Flow for each of the three years in the period ended December 31, 2001 o Notes to Consolidated Financial Statements o Report of Independent Accountants The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as a part of this report, except as expressly provided herein. 2. Financial Statement Schedules Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto included in the Company's Annual Report to Stockholders for the year ended December 31, 2001 and are incorporated herein by this reference: (b) Reports on Form 8-K filed during the last quarter of fiscal 2001 None. 42 (c) Exhibits Required by Securities and Exchange Commission Regulation S-K Exhibit Number 3.1 Articles of Incorporation of Flushing Financial Corporation (1) 3.2 By-Laws of Flushing Financial Corporation (1) 4.1 Rights Agreement, dated as of September 17, 1996, between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (6) 10.1 Annual Incentive Plan for Selected Officers (1) 10.2 Amended and Restated Employment Agreements between Flushing Savings Bank, FSB and Certain Officers (9) 10.3 Amended and Restated Employment Agreements between Flushing Financial Corporation and Certain Officers (9) 10.4 Amended and Restated Employment Agreement between Flushing Financial Corporation and Michael J. Hegarty (10) 10.5 Amended and Restated Employment Agreement between Flushing Savings Bank, FSBand Michael J. Hegarty (10) 10.6 Employment Agreement between Flushing Financial Corporation and John R. Buran (10) 10.7 Employment Agreement between Flushing Savings Bank, FSB and John R. Buran (10) 10.8 Form of Special Termination Agreement as Amended (9) 10.9 Amended and Restated Employee Severance Compensation Plan of Flushing Savings Bank, FSB (9) 10.10(a) Amended and Restated Outside Director Retirement Plan (9) 10.10(b) Amended and Restated Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (9) 10.11 Restated Flushing Savings Bank, FSB Supplemental Savings Incentive Plan 10.12(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and each Director (On September 29, 1998, an Indemnity Agreement substantially identical in all material respect to the Indemnity Agreement filed as exhibit 10.8(a) to the Company's SEC Form 10-Q for the quarterly period ended September 30, 1996 was also entered into with each of James D. Bennett and Louis C. Grassi) (2) 10.12(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and Certain Officers (An Indemnity Agreement substantially identical in all material respect to the Indemnity Agreement filed as exhibit 10.8(b) to the Company's SEC Form 10-Q for the quarterly period ended September 30, 1996 was also entered into with each of John R. Buran, Robert L. Callicutt, and Francis W. Korzekwinski on January 22, 2001, July 20, 1999, and July 20, 1999, respectively) (2) 10.13 Employee Benefit Trust Agreement (1) 10.13(a) Amendment to the Employee Benefit Trust Agreement (5) 10.14 Loan Document for Employee Benefit Trust (1) 10.15 Guarantee by Flushing Financial Corporation (1) 10.16 Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial Corporation and Gerard P. Tully, Sr. (3) 10.16(a) Amendment to Gerard P. Tully, Sr. Consulting Agreement (5) 10.16(b) Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (7) 10.16(c) Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement (8) 10.16(d) Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement 10.17 1996 Restricted Stock Incentive Plan of Flushing Financial Corporation (as amended through March 19, 2002) 10.18 1996 Stock Option Incentive Plan of Flushing Financial Corporation (as amended through March 19, 2002) 10.19 Agreement and Plan of Merger as of April 24, 1997, by and between Flushing Financial Corporation, Flushing Savings Bank, FSB and New York Federal Savings Bank (4) 13.1 2001 Annual Report to Stockholders 22.1 Subsidiaries information incorporated herein by reference to Part I - Subsidiary Activities 23.1 Consent of Independent Accountants 43 99.1 Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2002, which will be filed with the SEC within 30 days from the date this Form 10-K is filed. - ---------- (1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-96488. (2) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 1996. (3) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1996. (4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended June 30, 1997. (5) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1997. (6) Incorporated by reference to Exhibits filed with Form 8-K filed September 30, 1996. (7) Incorporated by reference to Exhibit filed with the Form 10-K for the year ended December 31, 1998. (8) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1999. (9) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2000. (10) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2000. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Company has duly caused this report, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on March 29, 2002. FLUSHING FINANCIAL CORPORATION By /S/ MICHAEL J. HEGARTY ----------------------------------- Michael J. Hegarty President and CEO POWER OF ATTORNEY We, the undersigned directors and officers of Flushing Financial Corporation (the "Company") hereby severally constitute and appoint Michael J. Hegarty and Monica C. Passick as our true and lawful attorneys and agents, each acting alone and with full power of substitution and re-substitution, to do any and all things in our names in the capacities indicated below which said Michael J. Hegarty or Monica C. Passick may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the report on Form 10-K, or amendment thereto, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the report on Form 10-K, or amendment thereto; and we hereby approve, ratify and confirm all that said Michael J. Hegarty or Monica C. Passick shall do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K, or amendment thereto, has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ MICHAEL J. HEGARTY Director, President (Principal March 29, 2002 - ---------------------------- Executive Officer) Michael J. Hegarty /s/ GERARD P. TULLY, SR. Director, Chairman March 29, 2002 - ---------------------------- Gerard P. Tully, Sr. /s/ MONICA C. PASSICK Treasurer (Principal Financial and March 29, 2002 - ---------------------------- Accounting Officer) Monica C. Passick /s/ JAMES D. BENNETT Director March 29, 2002 - ---------------------------- James D. Bennett /s/ LOUIS C. GRASSI Director March 29, 2002 - ---------------------------- Louis C. Grassi /s/ ROBERT A. MARANI Director March 29, 2002 - ---------------------------- Robert A. Marani
45 /s/ JOHN O. MEAD Director March 29, 2002 - ---------------------------- John O. Mead /s/ VINCENT F. NICOLOSI Director March 29, 2002 - ---------------------------- Vincent F. Nicolosi /s/ FRANKLIN F. REGAN, JR. Director March 29, 2002 - ---------------------------- Franklin F. Regan, Jr. /s/ JOHN E. ROE, SR. Director March 29, 2002 - ---------------------------- John E. Roe, Sr. /s/ MICHAEL J. RUSSO Director March 29, 2002 - ---------------------------- Michael J. Russo
46 FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES EXHIBIT INDEX Exhibit No.Description - ---------- -------------------------------------------------------------------- 10.11 Restated Flushing Savings Bank, FSB Supplemental Savings Incentive Plan 10.16(d) Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement 10.17 1996 Restricted Stock Incentive Plan of Flushing Financial Corporation (as amended through March 19, 2002) 10.18 1996 Stock Option Incentive Plan of Flushing Financial Corporation (as amended through March 19, 2002) 13.1 2001 Annual Report to Stockholders 23.1 Consent of Independent Accountants 47 EX-10.11 3 d50230_ex10-11.txt SUPPLEMENTAL SAVINGS INCENTIVE PLAN Exhibit 10.11 RESTATED FLUSHING SAVINGS BANK, FSB SUPPLEMENTAL SAVINGS INCENTIVE PLAN (Restated as of January 1, 2002) Unless otherwise required by the context, the capitalized terms used herein without definition are defined in the Flushing Savings Bank, FSB 401(k) Savings Plan (the "401(k) Plan") and shall have the same meanings as used therein. DEFINITIONS The following terms shall have the meanings set forth below when used in this Supplemental Savings Incentive Plan (the "Plan"): (a) Deferral Credit - the amount of a Participant's compensation deferred pursuant to the Plan. (b) Matching Credit - the amount credited pursuant to the Plan by Flushing Savings Bank, FSB (the "Bank") on behalf of a Participant equal to 50% of the Participant's Deferral Credit, or such other percentage of the Participant's Deferral Credit as may be determined on a prospective basis by resolution of the Board of the Bank. (c) Supplemental Credit - the amount credited pursuant to the Plan by the Bank equal to the amount that would have been contributed to a Participant's account under the Flushing Financial Corporation Stock-Based Profit Sharing Plan (the "Profit Sharing Plan") but for the limitations imposed by the Internal Revenue Code (the "Code"), including without limitation, Section 401(a)(17), Section 415, and the exclusion from Compensation (as defined in the Profit Sharing Plan) of amounts deferred under this Plan (collectively, the "Code Limitations"). 1. PURPOSE OF THE PLAN The purpose of this Plan is (i) to provide a procedure whereby certain senior officers of the Bank are permitted to defer a portion of their compensation and to receive Matching Credits with respect to such deferrals, and (ii) to provide Supplemental Credits for certain senior officers whose benefits under the Profit Sharing Plan are subject to the Code Limitations. It is intended that the Plan be an unfunded plan of deferred compensation covering a select group of highly compensated or management employees. 2. EFFECTIVE DATE The Plan first became effective on January 1, 1990 and was amended and restated at various times, most recently as of November 26, 1996. This Restatement reflects amendments adopted by the Board of Directors of the Bank on July 18, 2000. 3. ELIGIBILITY All vice presidents or above of the Bank who have completed at least one year of service shall be Participants in the Plan. 4. TYPES OF CREDITS Deferral Credits. Each Participant shall be entitled to defer compensation under this Plan. The maximum amount that a Participant may defer from his compensation for a calendar year shall be equal to 15% of his Actual Compensation, less 6% of his compensation as defined for purposes of the 401(k) Plan. Actual Compensation for this purpose shall mean a Participant's base compensation for a calendar year without reduction for any pre-tax contributions to the 401(k) Plan or to any other pension or welfare plan maintained by the Bank, and without regard to any limitation on 48 compensation imposed by Section 401(a)(17) of the Code. The amount by which a Participant defers his compensation for a calendar year shall be credited by the Bank on behalf of such Participant, and shall be referred to as a Deferral Credit. All deferrals of compensation agreed to by a Participant for a calendar year shall be in writing on a form prepared by the Bank. Each such deferral election shall be entered into before the beginning of the calendar year to which it relates, except that any person who first becomes eligible to participate in the Plan during a calendar year may elect within 30 days of first becoming eligible to defer a portion of his compensation (as provided in this Plan) earned after the date of such election. All elections shall be irrevocable for the duration of the year or the remaining portion of the year for which the election is made. Matching Credits. In addition to a Participant's Deferral Credit, in each calendar year the Bank shall also credit each Participant in the Plan with a Matching Credit in an amount equal to 50% (or such other percentage as determined by the Board on a prospective basis) of such Participant's Deferral Credit for such calendar year. Supplemental Credits. In addition to Deferral Credits and Matching Credits, the Bank shall also credit each Participant in the Plan with a number of phantom shares ("Phantom Shares") of common stock of Flushing Financial Corporation ("Common Stock") equal to the number of shares of Common Stock that would have been credited to the Participant's account under the Profit Sharing Plan but for the Code Limitations, such additional credits to be referred to as Supplemental Credits. 5. TIME OF CREDITING; EARNINGS All Deferral Credits, Matching Credits, and Supplemental Credits (collectively referred to as "Credits") made on behalf of a Participant pursuant to Paragraph 4 above shall be credited by the Bank as an item of indebtedness of the Bank to the Participant. A Participant's Deferral Credit shall be credited to the Participant as a fixed dollar amount on the date that the deferred compensation with respect to which such Credit arises would have been paid by the Bank to the Participant (but for such deferral). Each Matching Credit shall be credited as a fixed dollar amount at the same time as the Deferral Credit to which it relates. Each Supplemental Credit shall be credited at the same time as related contributions are made to the Profit Sharing Plan. Prior to July 1, 1991 all Deferral Credits and Matching Credits accrued interest, compounded from month to month on the basis of the balance of such Credits (plus accrued interest) on the first day of the preceding month at a rate determined by the Board of Trustees of the Flushing Savings Bank (predecessor to the Bank) at the beginning of each calendar year. Effective as of July 1, 1991, all Deferral Credits and Matching Credits, and all accrued interest thereon, shall be deemed to be invested in one or more of the investment funds offered by Retirement System Fund, Inc. or in such other funds as may be specified by the Bank from time to time, in multiples of 10%, as directed from time to time no more frequently than once each calendar quarter by the respective Participant. Supplemental Credits shall be deemed to be invested exclusively in Common Stock, provided, however, that in the event of a transaction described in the first paragraph of Paragraph 13, Supplemental Credits shall be deemed invested in the manner set forth in such paragraph. Participants shall be credited, at least quarterly, with the earnings (or losses) on such deemed investments. 6. VESTING A Participant's Deferral Credits shall be 100% vested. Matching Credits and Supplemental Credits made on behalf of a Participant shall become 100% vested upon the Participant's death while employed by Flushing Financial Corporation (the "Holding Company"), the Bank or any Affiliated Employer, or upon a Change of Control (as defined in Paragraph 13) while employed by the Holding Company, the Bank, or an Affiliated Employer, and otherwise shall vest in accordance with the vesting schedule under the 401(k) Plan or the Profit Sharing Plan, as the 49 case may be, taking into account any service for vesting purposes that is recognized under the 401(k) Plan or the Profit Sharing Plan, as the case may be. If a Participant terminates employment (for reasons other than death, retirement or disability) at a time when he is less than 100% vested in his Matching Credits or Supplemental Credits, the non-vested portion of such Matching Credits and/or Supplemental Credits shall at that time be forfeited, and such forfeiture shall not be restored, irrespective of whether the Participant again becomes an employee of the Holding Company, the Bank or any Affiliated Employer. 7. METHOD OF PAYMENT The aggregate amount of a Participant's Deferral Credits and the vested portion of his Matching Credits and Supplemental Credits (including all earnings credited thereon) shall be paid to the Participant in the form of a cash lump sum within sixty (60) days following his termination of employment with the Holding Company, the Bank or any Affiliated Employer, unless the Bank and the Participant agree otherwise or the Participant elects, at least twelve (12) months prior to such termination of employment, to receive his benefits either (i) in the form of a cash lump sum within sixty (60) days following the last day of the calendar year in which occurs his termination of employment, or (ii) in substantially equal annual installments over a period of five (5) or fewer years commencing within sixty (60) days following the Participant's termination of employment. Such election must be made by written notice delivered to the Bank and shall indicate whether payment of any unpaid benefits shall be made in a lump sum upon the Participant's death. During the period of any installment distribution, the balance of funds owed to such former Participant shall be deemed to be invested by the Bank in accordance with the provisions set forth in Paragraph 5 above as they would be applicable to a Participant who continued to be employed by the Bank. The amount of each installment shall be equal to the total value of a Participant's Deferral Credits and the vested portion of his Matching Credits and Supplemental Credits (including all earnings credited thereon) ten (10) days prior to the relevant installment payment date, divided by the total number of remaining installment payments elected. The Participant's account in the Plan shall be debited by the amount of any payment made to the Participant from his account. Notwithstanding any election by a Participant to defer payment of benefits following termination of employment, in the event that (i) a Participant has a termination of employment (for any reason) within three (3) years after a Change of Control, or (ii) a Change of Control occurs at any time after a Participant's termination of employment, the aggregate amount of the Participant's Deferral Credits and the vested portion of his Matching Credits and Supplemental Credits (including the vested portion of all earnings credited thereon) which have not previously been paid to such Participant shall be paid to the Participant in the form of a cash lump sum within thirty (30) days following the Participant's termination of employment (in the case of clause (i)) or the Change of Control (in the case of clause (ii)). 8. BENEFICIARY Each Participant may, at any time, designate a beneficiary to receive his Deferral Credits and vested Matching Credits and Supplemental Credits under the Plan in the event of his death prior to all such amounts being paid to him. Such designation of beneficiary shall become effective when received by the Bank, and shall be on a form provided by or otherwise acceptable to the Bank. In the event of the death of a Participant either prior to designating a beneficiary pursuant to this Paragraph 8, or concurrent with or after the death of such beneficiary, or in the event of such beneficiary's death before he is paid all of the amounts due to him as a result of the Participant's death, such amounts shall be paid to the estate of the later to die of the Participant or his beneficiary; provided, however, that in the event that the Participant provides for a contingent beneficiary and such contingent beneficiary is surviving at the time of the later of the death of the Participant or his primary beneficiary, such amount shall be paid to such contingent beneficiary. A Participant may designate a trust as a beneficiary. 50 9. NONASSIGNABILITY A Participant's or beneficiary's right to any Credits accumulated hereunder shall not be transferable or assignable, except by reason of the laws of descent and distribution. 10. NO EQUITABLE OR SECURITY RIGHT CREATED The Holding Company or the Bank, by determination of the Board, may at some future date enter into an agreement with another organization to hold the deferred funds and administer the Plan in accordance with the rules and procedures outlined herein. Notwithstanding the foregoing, no Participant or beneficiary entitled to receive Credits (including earnings credited thereon) under this Plan shall have any equitable or security rights in any specific assets of the Holding Company or the Bank, and the rights of Participants or their beneficiaries under this Plan shall not be greater than the rights of unsecured general creditors of the Holding Company or the Bank. All Credits shall constitute general assets of the Holding Company or the Bank and neither a Participant nor any designated beneficiary shall have any rights in or against any amounts held by the Holding Company or the Bank as Credits under this Plan. Credits may not be encumbered or assigned by a Participant or any beneficiary. 11. EFFECT OF DETERMINATION If any amounts deferred pursuant to the Plan are found in a "determination" (within the meaning of Section 1313(a) of the Internal Revenue Code of 1986, as amended) to have been includible in gross income by a Participant prior to payment of such amounts under the Plan, such amounts shall be immediately paid to such Participant, notwithstanding his deferral and payment elections. 12. TAX WITHHOLDING If upon the crediting or payment of any benefits under the Plan, the Bank or any related employer shall be required to withhold any amounts with respect to such benefits by reason of any federal, state or local tax laws, rules or regulations, then the Bank or such employer shall be entitled to deduct and withhold such amounts from any such benefits. In any event, the recipient of such benefits shall make available to the Bank or such employer, promptly when requested by the Bank or the employer, sufficient funds or other property to meet the requirements of any withholding; furthermore, the Bank or such employer shall be entitled to take and authorize such steps as it may deem advisable in order to have the amounts required to be withheld made available to it out of any funds or property payable to the recipient of the benefits, whether under the Plan or otherwise. 13. CHANGE OF CONTROL In the event of a merger, acquisition or other corporate transaction as a result of which the Common Stock is no longer outstanding or the Bank or the Holding Company survives as a subsidiary of another entity, each share of Phantom Stock credited as Supplemental Credits shall be converted to a fixed dollar amount equal to the fair market value of the cash, securities, and/or other property payable in the merger or other transaction to the holder of a share of Common Stock, and thereafter Supplemental Credits shall be deemed to be invested in the same manner as Deferral Credits and Matching Credits. For purposes of this Plan, a "Change of Control" means: (a) the acquisition of all or substantially all of the assets of the Bank or the Holding Company by any person or entity, or by any persons or entities acting in concert; (b) the occurrence of any event if, immediately following such event, a majority of the members of the Board of Directors of the Bank or the Holding Company or of any successor corporation shall consist of persons other than Current Members (for these purposes, a "Current Member" shall mean any member of the Board of Directors of the Bank or the Holding Company as of the 51 effective date of the Bank's conversion from the mutual to the capital stock form of ownership, and any successor of a Current Member whose nomination or election has been approved by a majority of the Current Members then on the Board of Directors); or (c) the acquisition of beneficial ownership, directly or indirectly (as provided in Rule 13d-3 under the Securities Exchange Act of 1934 (the "Act"), or any successor rule), of 25% or more of the total combined voting power of all classes of stock of the Bank or the Holding Company by any person or group deemed a person under Section 13(d)(3) of the Act; or (d) approval by the stockholders of the Bank or the Holding Company of an agreement providing for the merger or consolidation of the Bank or the Holding Company with another corporation where the stockholders of the Bank or the Holding Company, immediately prior to the merger or consolidation, would not beneficially own, directly or indirectly, immediately after the merger or consolidation, shares entitling such stockholders to 50% or more of the total combined voting power of all classes of stock of the surviving corporation. 14. CHOICE OF LAW This Plan shall be construed in accordance with the laws of the State of New York, without reference to conflicts of law principles. 15. MISCELLANEOUS (a) The Plan shall be administered by the Bank's Benefits/Compensation and Insurance Committee. The decision of such Committee with respect to any questions arising as to the interpretation of this Plan, including the severability of any and all of the provisions thereof, shall be final, conclusive and binding. (b) The Bank reserves the right to modify this Plan from time to time or to terminate the Plan entirely by action of the Board; provided, however, that no modification or termination of this Plan shall operate to reduce amounts already credited to a Participant under the Plan, or to reduce the right to future earnings credits as set forth in Paragraph 5, unless the affected Participant consents. (c) No amounts owed hereunder shall be deemed a deposit or a checking or savings account. EX-10.16D 4 d50230_ex10-16d.txt Exhibit 10.16(d) Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement. AMENDMENT TO THE AGREEMENT This Amendment to the Agreement dated as of December 1, 1995 (The "Agreement") is entered into as of December 1, 2001 between Flushing Savings Bank, FSB, (the "Bank"), Flushing Financial Corporation (the "Company"), and Gerard P. Tully, Sr. ("Mr. Tully"). WITNESSETH: WHEREAS, the Bank and Mr. Tully entered into the Agreement as of December 1, 1995 and the Bank and Mr. Tully desire to amend the Agreement to extend the term thereof as set forth herein; NOW, THEREFORE, for good and adequate consideration, the sufficiency of which is hereby acknowledged, the Bank and Mr. Tully agree as follows: 1. Section 1 of the Agreement as previously amended is hereby amended by replacing the date November 30, 2001 with the date November 30, 2004. 2. Section 3 of the Agreement is hereby amended by replacing the aggregate fee per month to be $12,916.67. 3. The amendment set forth in paragraphs 1 and 2 hereof shall be effective December 1, 2001. Except as amended by paragraphs 1 and 2 hereof, the Agreement as previously amended shall remain in effect in accordance with its terms. IN WITNESS WHEREOF, Mr. Tully and the Bank have caused this Amendment to be executed on this 30th day of November, 2001. FLUSHING SAVINGS BANK, FSB By: /s/ Michael J. Hegarty -------------------------- President & CEO FLUSHING FINANCIAL CORPORATION By: /s/ Anna Piacentini ------------------------ Senior Vice President /s/ Gerard P. Tully, Sr. -------------------------- Gerard P. Tully, Sr. EX-10.17D 5 d50230_ex10-17d.txt Exhibit 10.17 1996 RESTRICTED STOCK INCENTIVE PLAN OF FLUSHING FINANCIAL CORPORATION (as amended through March 19, 2002) I. GENERAL 1.1 Purposes of the Plan The 1996 Restricted Stock Incentive Plan (the "Plan") of Flushing Financial Corporation (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing employees of the Company and its subsidiaries and Outside Directors (as defined in Section 1.3(a)) with additional incentives through the award of shares of restricted common stock of the Company ("Restricted Stock"), thereby increasing the personal stake of such employees and Outside Directors in the continued success and growth of the Company and encouraging them to remain in the employ or service of the Company. 1.2 Administration of the Plan (a) The Plan shall be administered by the Board of Directors of the Company (the "Board of Directors"). (b) All awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. Awards granted to participants other than Outside Directors shall be granted by the Board of Directors upon recommendation of the Compensation Committee or such other committee of directors as the Board of Directors shall designate (the "Committee"), which shall consist of not less than two directors. The Board of Directors shall have no authority to grant awards to any employee covering a number of shares in excess of the number recommended by the Committee. (c) With respect to all awards granted under the Plan, the Board of Directors shall have authority (i) to interpret conclusively the provisions of the Plan and any award granted thereunder, (ii) to adopt, amend, and rescind such rules and regulations for carrying out the Plan as it may deem advisable, (iii) to decide conclusively all questions of fact arising in the application of the Plan, (iv) to make grants of awards to eligible employees and to specify the amount and terms of such awards, except that such grants to participants other than Outside Directors shall be made only upon recommendation of the Committee, and (v) to take all other action and to make all other determinations necessary or advisable for the administration of the Plan. All determinations and acts of the Board of Directors shall be final and binding on all persons, including the Company and recipients of awards under the Plan and their heirs and personal representatives. (d) Without limiting its authority and powers, the Board of Directors (upon recommendation of the Committee) shall have the authority with respect to awards granted to participants other than Outside Directors: (i) to determine that amounts equal to the amount of any dividends declared with respect to the number of shares covered by an award (A) will be paid to the employee currently or (B) will be deferred and deemed to be reinvested or (C) will otherwise be credited to the employee, or that the employee has no right with respect to such dividends; (ii) to provide that the shares of Common Stock received as a result of an award shall be subject to a right of first refusal, pursuant to which the employee shall be required to offer first to the Company any shares that the employee wishes to sell, subject to such terms and conditions as the Board of Directors may specify; (iii) to amend the terms of any award, prospectively or retroactively; provided, however, that no amendment shall impair the rights of the award holder without his or her written consent; and 54 (iv) to accelerate the vesting of any award. (e) Determinations by the Board of Directors under the Plan with respect to Restricted Stock awarded to participants other than Outside Directors (including, without limitation, determinations of the persons to receive awards; the form, amount and timing of such awards; the terms and provisions of such awards and the agreements evidencing same; and provisions with respect to termination of employment) need not be uniform and may be made by the Board of Directors (upon recommendation of the Committee) selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. (f) The Board of Directors shall have no discretion to vary the amount or terms of awards to Outside Directors as set forth in Article III, except as provided in Section 1.5(c). 1.3 Eligible Participants (a) All employees, including officers, of the Company and of any subsidiaries, partnerships, joint ventures or other entities in which the Company owns, directly or indirectly, at least a 20% beneficial ownership interest (all of such subsidiaries, partnerships and joint ventures being referred to as "Subsidiaries") shall be eligible to receive awards under the Plan, other than under Article III. Except as provided in Section 1.3(b) and Article III, directors of the Company or any Subsidiary who are not employees of the Company or its Subsidiaries ("Outside Directors") shall not be eligible to receive awards under the Plan. The participants under the Plan other than Outside Directors shall be selected from time to time by the Board of Directors upon recommendation of the Committee, in their discretion, from among those eligible. (b) Awards under Article III of the Plan shall be made solely to Outside Directors. 1.4 Type of Awards Under the Plan Awards under the Plan shall be in the form of shares of Restricted Stock. 1.5 Shares Subject to the Plan (a) The total number of shares of common stock of the Company ("Common Stock") which may be received in the form of Restricted Stock by participants other than Outside Directors shall be 817,125 shares, subject to adjustment as provided in Section 1.5(c). The total number of shares of Common Stock which may be received in the form of Restricted Stock by Outside Directors shall be 262,875 shares, subject to adjustment as provided in Section 1.5(c). Shares distributed pursuant to the Plan may consist of authorized but unissued shares or treasury shares of the Company, as shall be determined from time to time by the Board of Directors. (b) If any shares of Restricted Stock shall be forfeited to the Company, the forfeited shares of Restricted Stock shall again become available for awards under the Plan. Shares of Common Stock which are withheld in order to satisfy federal, state or local tax liability shall not count against the Plan's share limits set forth in Section 1.5(a). (c) In the event of any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), merger, consolidation, reorganization, sale of assets, recapitalization, stock dividend, stock split, spin-off, split-up, split-off, issuance, repurchase or exchange of securities, or other change in corporate structure affecting the Common Stock such that an adjustment is determined by the Board to be appropriate in order to prevent dilution or enlargement of benefits under the Plan, then the Board shall, in its sole discretion, in such a manner as it may deem equitable, adjust any or all of (i) the aggregate number and kind of shares reserved for issuance under the Plan, (ii) the number and kind of shares or other property subject to outstanding awards, and (iii) the amounts to be paid by award holders or the Company, as the case may be, with respect to outstanding awards; provided, however, that no such adjustment shall increase the aggregate value of any outstanding award except in insignificant amounts due to rounding. The Board's determination as to which adjustments shall be made and the extent thereof shall be final, binding and conclusive. 55 1.6 Other Compensation Programs The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its Subsidiaries and the Outside Directors in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. RESTRICTED STOCK FOR EMPLOYEES 2.1 Terms and Conditions of Restricted Stock Awards Subject to the following provisions, all awards of Restricted Stock to participants other than Outside Directors shall be in such form and shall have such terms and conditions as the Board of Directors (upon recommendation of the Committee), in its discretion, may from time to time determine: (a) The Restricted Stock award shall specify the number of shares of Restricted Stock to be awarded, the price, if any, to be paid by the recipient of the Restricted Stock, and the date or dates on which the Restricted Stock will vest, subject to the following: (i) The Restricted Stock shall become vested in full on the date the respective participant terminates his or her employment with the Company or Subsidiary because of his or her death or disability. For these purposes, "disability" shall mean that the participant has been unable to perform the essential functions of his or her employment due to disability or incapacity for 270 consecutive days or such lesser period as may be determined by the Board of Directors (upon recommendation of the Committee) at the time of grant or thereafter; and (ii) The Restricted Stock shall become vested in full on the date the respective participant terminates his or her employment with the Company or Subsidiary because of retirement. For these purposes, "retirement" shall mean termination at a time when the participant is eligible to retire under a retirement program of the Company or one of its Subsidiaries or as otherwise determined by the Committee. (b) Stock certificates representing the Restricted Stock awarded to an employee shall be registered in the employee's name. Such certificates shall either be held by the Company on behalf of the employee, or delivered to the employee bearing a legend to restrict transfer of the certificate until the Restricted Stock has vested, as provided in the grant letter. The grant letter shall state whether the employee shall have the right to vote and/or receive dividends on the Restricted Stock before it has vested. No share of Restricted Stock may be sold, transferred, assigned, or pledged by the employee until such share has vested in accordance with the terms of the Restricted Stock award. Except as may be provided in the grant letter in accordance with Section 2.1(a), in the event of an employee's termination of employment before all of his Restricted Stock has vested, the shares of Restricted Stock which have not vested shall be forfeited and any purchase price paid by the employee (or the fair market value of the Restricted Stock on the date of forfeiture, if lower) shall be paid to the employee. At the time Restricted Stock vests (and, if the employee has been issued legended certificates of Restricted Stock, upon the return of such certificates to the Company), a certificate for such vested shares shall be delivered to the employee (or the beneficiary designated by the employee in the event of death), free of all restrictions. (c) Notwithstanding any other provision of this Section 2.1, all shares of Restricted Stock awarded to participants other than Outside Directors shall vest upon the occurrence of a Change of Control (as defined in Section 4.7) if the holder of such Restricted Stock is an employee or Outside Director of the Company or its Subsidiaries at the time of such Change of Control. 56 III. RESTRICTED STOCK FOR OUTSIDE DIRECTORS 3.1 Terms and Conditions of Restricted Stock Awards Each person who becomes an Outside Director after May 22, 2001 shall be granted, as of the date of his or her first election, an initial award (the "Initial Award") of 5,625 shares of Restricted Stock. As of June 1 of each year, each person then serving as an Outside Director shall be granted an annual award (the "Annual Award") of 1,125 shares of Restricted Stock. If on any date on which Restricted Stock is to be granted under this Section 3.1 the remaining shares reserved for receipt by Outside Directors under the Plan are insufficient to enable each Outside Director to receive an award for the number of shares of Restricted Stock set forth above, each Outside Director shall be awarded his or her pro rata portion of such remaining shares. Notwithstanding the foregoing, no award of Restricted Stock shall be made under this Section 3.1 to any person who has previously received an employee grant under Article II of the Plan unless the Board of Directors expressly authorizes awards for such person. All awards of Restricted Stock under this Article III shall have the following terms and conditions: (a) An Outside Director shall not be required to make any payment to the Company in consideration of the Restricted Stock received by such Outside Director. (b) No Restricted Stock granted under this Article III shall vest until the first anniversary of the date of its grant. Each Initial Award shall vest with respect to 20% of the underlying shares on the first anniversary of the date of grant, and an additional 20% of the underlying shares on each subsequent anniversary thereof, provided that the participant is a Director on each such anniversary date. Each Annual Award shall vest with respect to one-third of the underlying shares on the first anniversary of the date of grant, and an additional one-third of the underlying shares on each subsequent anniversary thereof, provided that the participant is a Director on each such anniversary date. (c) Notwithstanding the provisions of Section 3.1(b), in the event of the Outside Director's death while in service or the termination of the Outside Director's service for disability, all shares of Restricted Stock awarded to the Outside Director under this Section 3.1 shall become fully vested. For purposes of this Section 3.1(c), termination for "disability" shall mean termination on account of the director's inability to perform his or her duties as an Outside Director due to disability or incapacity as determined by the Board of Directors. (d) Notwithstanding the provisions of Section 3.1(b), Restricted Stock shall become vested in full upon an Outside Director's retirement. For purposes of this Section 3.1(d), "retirement" shall mean termination of Board service, other than for Cause, after at least five years of service as an Outside Director. For purposes of this Plan, termination for "Cause" shall mean termination for dishonesty or willful misconduct involving moral turpitude. (e) Stock certificates representing the Restricted Stock awarded to an Outside Director shall be registered in the Outside Director's name and shall be held by the Company on behalf of the Outside Director until it has vested. The Outside Director shall have the right to vote and to receive dividends on the Restricted Stock before it has vested. The Outside Director shall not be entitled to delivery of the stock certificates, and no share of Restricted Stock may be sold, transferred, assigned, or pledged by the Outside Director, until such share has vested in accordance with this Section 3.1. In the event the Outside Director ceases to be a director of the Company or a Subsidiary before all of his or her Restricted Stock has vested, all of such Outside Director's Restricted Stock which has not vested shall be forfeited to the Company and the Company shall not be required to make any payment therefor. At the time Restricted Stock vests, a certificate for such vested shares shall be delivered to the Outside Director (or the heirs or personal representatives of the Outside Director, in the event of death), free of all restrictions. (f) Notwithstanding any other provision of this Section 3.1, all shares of Restricted Stock awarded to Outside Directors shall become vested in full upon the occurrence of a Change of Control if the holder of such Restricted Stock is a Director of the Company or a Subsidiary at the time of such Change of Control. 57 IV. ADDITIONAL PROVISIONS 4.1 General Restrictions Each award under the Plan shall be subject to the requirement that, if at any time the Board of Directors shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities or banking law, rule or regulation) as a condition of, or in connection with, the making of such award or the issuance or delivery of shares of Common Stock thereunder, such award may not be made or stock certificates shall not be issued or delivered in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. 4.2 Amendments (a) The Board of Directors may amend the Plan from time to time. No such amendment shall require approval by the stockholders unless stockholder approval is required by applicable law, regulation, or stock exchange requirement. No amendment shall adversely affect any award previously granted without the award holder's written consent. (b) The Board of Directors (upon recommendation of the Committee) shall have the authority to amend any award to include any provision which, at the time of such amendment, is authorized under the terms of the Plan; provided, however, that no outstanding award may be revoked or altered in a manner unfavorable to the holder without the written consent of the holder. 4.3 Cancellation of Awards Any award granted under the Plan other than an award to an Outside Director may be canceled at any time with the consent of the holder and a new award may be made to such holder in lieu thereof, which award may, in the discretion of the Board of Directors (upon recommendation of the Committee), be on more favorable terms and conditions than the canceled award. 4.4 Tax Withholding (a) Whenever the value of an award first becomes includible in an employee's gross income for applicable tax purposes, the Company shall have the right to require the employee to remit to the Company, or make arrangements satisfactory to the Board of Directors regarding payment of, an amount sufficient to satisfy any federal, state or local withholding tax liability prior to the delivery of any certificate for such shares or the time of such income inclusion. Whenever under the Plan payments by the Company are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. (b) To the extent permitted in the grant letter, and subject to any terms and conditions imposed therein, an employee entitled to receive Common Stock under the Plan may elect to have the federal, state, and local withholding tax liability (or a specified portion thereof) with respect to such Common Stock satisfied by having the Company withhold from the shares otherwise deliverable to the employee shares of Common Stock having a value equal to the amount of the withholding tax liability to be satisfied with respect to the Common Stock or by delivering to the Company shares of unrestricted Common Stock. Alternatively, the grant letter may require that a portion of the shares of Common Stock otherwise deliverable be withheld and applied to satisfy the withholding tax obligations with respect to the award. 58 4.5 Non-Assignability Except as expressly provided in the Plan, no award under the Plan shall be assignable or transferable by the holder thereof except by will or by the laws of descent and distribution. 4.6 No Guarantee of Employment or Service Neither the adoption of the Plan nor the grant of an award under the Plan shall constitute an assurance of continued employment or continued service as an Outside Director for any period. 4.7 Change of Control A "Change of Control" shall be deemed to have occurred upon: (a) the acquisition of all or substantially all of the assets of the Bank or the Company by any person or entity, or by any persons or entities acting in concert; (b) the occurrence of any event if, immediately following such event, a majority of the members of the Board of Directors or the board of directors of the Bank or of any successor corporation shall consist of persons other than Current Members (for these purposes, a "Current Member" shall mean any member of the Board of Directors or the board of directors of the Bank as of the effective date of the conversion of the Bank from the mutual to capital stock form of ownership and any successor of a Current Member whose nomination or election has been approved by a majority of the Current Members then on the respective board of directors); (c) the acquisition of the beneficial ownership, directly or indirectly (as provided in Rule 13d-3 under the Act, or any successor rule), of 25% or more of the total combined voting power of all classes of stock of the Bank or the Company by any person or group deemed a person under Section 13(d)(3) of the Act; or (d) approval by the stockholders of the Bank or the Company of an agreement providing for the merger or consolidation of the Bank or the Company with another corporation where the stockholders of the Bank or the Company, immediately prior to the merger or consolidation, would not beneficially own, directly or indirectly, immediately after the merger or consolidation, shares entitling such stockholders to 50% or more of the total combined voting power of all classes of stock of the surviving corporation. 4.8 Duration and Termination (a) The Plan shall be of unlimited duration. (b) The Board of Directors may discontinue or terminate the Plan at any time. Such action shall not impair any of the rights of any holder of any award outstanding on the date of the Plan's discontinuance or termination without the holder's written consent. 4.9 No Liability No member of the Board of Directors or the Committee, nor any officer or employee of the Company or the Bank acting on behalf of the Board of Directors or the Committee, shall be personally liable for any action, determination or interpretation taken or made with respect to the Plan, and all members of the Board or the Committee and all officers or employees of the Company or the Bank acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. 4.10 Effective Date The Plan became effective upon approval by the Company's stockholders at the 1996 annual meeting. 59 EX-10.18D 6 d50230_ex10-18d.txt Exhibit 10.18 1996 STOCK OPTION INCENTIVE PLAN OF FLUSHING FINANCIAL CORPORATION (as amended through March 19, 2002) I. GENERAL 1.1 Purposes of the Plan The 1996 Stock Option Incentive Plan (the "Plan") of Flushing Financial Corporation (the "Company") is intended to advance the best interests of the Company and its subsidiaries by providing the employees of the Company and its subsidiaries and Outside Directors (as defined in Section 1.3(a)) with additional incentives through the grant of options ("Options") to purchase shares of Common Stock of the Company ("Common Stock"), thereby increasing the personal stake of such employees and Outside Directors in the continued success and growth of the Company and encouraging them to remain in the employ or service of the Company. 1.2 Administration of the Plan (a) The Plan shall be administered by the Board of Directors of the Company (the "Board of Directors"). (b) All awards granted under the Plan shall be on the terms and subject to the conditions hereinafter provided. Awards granted to participants other than Outside Directors shall be granted by the Board of Directors upon recommendation of the Compensation Committee or such other committee of directors as the Board of Directors shall designate (the "Committee"), which shall consist of not less than two directors and which shall satisfy the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") or any successor provision. The Board of Directors shall have no authority to grant awards to any employee covering a number of shares in excess of the number recommended by the Committee. (c) With respect to all awards granted under the Plan, the Board of Directors shall have authority (i) to interpret conclusively the provisions of the Plan and any award granted thereunder, (ii) to adopt, amend, and rescind such rules and regulations for carrying out the Plan as it may deem advisable, (iii) to decide conclusively all questions of fact arising in the application of the Plan, (iv) to make grants of awards to eligible employees and to specify the amount and terms of such awards, the time when such awards will be granted and the manner in which such awards will be exercised, except that such grants to participants other than Outside Directors shall be made only upon recommendation of the Committee, and (v) to take all other action and to make all other determinations necessary or advisable for the administration of the Plan. All determinations and acts of the Board of Directors shall be final and binding on all persons, including the Company and recipients of awards under the Plan and their heirs and personal representatives. (d) Without limiting its authority and powers, the Board of Directors (upon recommendation of the Committee) shall have the authority with respect to awards granted to participants other than Outside Directors: (i) to provide that the shares of Common Stock received as a result of exercise of an Option shall be subject to a right of first refusal, pursuant to which the employee shall be required to offer first to the Company any shares that the employee wishes to sell, subject to such terms and conditions as the Board of Directors may specify; (ii) to amend the terms of any award, prospectively or retroactively; provided, however, that no amendment shall impair the rights of the award holder without his or her written consent; and (iii) to accelerate the exercisability of any awards. 60 (e) Determinations by the Board of Directors under the Plan with respect to awards granted to participants other than Outside Directors (including, without limitation, determinations of the persons to receive awards; the form, amount and timing of such awards; the terms and provisions of such awards; and provisions with respect to termination of employment) need not be uniform and may be made by the Board of Directors (upon recommendation of the Committee) selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. (f) The Board of Directors shall have no discretion to vary the amount or terms of awards granted to Outside Directors as set forth in Article III, except as provided in Section 1.5(c). 1.3 Eligible Participants (a) All employees, including officers, of the Company and of any subsidiaries, partnerships, joint ventures or other entities in which the Company owns, directly or indirectly, at least a 20% beneficial ownership interest (all of such subsidiaries, partnerships and joint ventures being referred to as "Subsidiaries") shall be eligible to be granted awards under the Plan, other than under Article III. Except as provided in Section 1.3(b) and Article III, directors of the Company or any Subsidiary who are not employees of the Company or its Subsidiaries ("Outside Directors") shall not be eligible to be granted awards under the Plan. The participants under the Plan other than Outside Directors shall be selected from time to time by the Board of Directors upon recommendation of the Committee, in their discretion, from among those eligible. (b) Awards shall be granted under Article III of the Plan solely to Outside Directors. 1.4 Type of Awards Under the Plan Awards under the Plan may be in the form of Options to purchase shares of Common Stock (including both incentive stock options within the meaning of Section 422 of the Code ("Incentive Stock Options") and nonstatutory stock options) and stock appreciation rights ("Stock Appreciation Rights") which may be issued only in tandem with Options. 1.5 Shares Subject to the Plan. (a) The total number of shares of Common Stock which may be received upon the exercise of Options (including Stock Appreciation Rights related thereto) by participants other than Outside Directors shall be 2,115,937 shares, subject to adjustment as provided in Section 1.5(c). The total number of shares of Common Stock which may be received upon the exercise of Options (including Stock Appreciation Rights related thereto) by Outside Directors shall be 814,687 shares, subject to adjustment as provided in Section 1.5(c). In no event shall an eligible employee be granted Options in any calendar year with respect to more than 168,750 shares, subject to adjustment as provided in Section 1.5(c). Shares distributed pursuant to the Plan may consist of authorized but unissued shares or treasury shares of the Company, as shall be determined from time to time by the Board of Directors. (b) If any Option under the Plan shall expire, terminate or be canceled (except upon the holder's exercise of a tandem Stock Appreciation Right) for any reason without having been exercised in full, the shares subject to the unexercised Option shall again become available for grants under the Plan. Shares of Common Stock equal in number to any shares surrendered in payment of the option price of an Option, and shares of Common Stock which are withheld in order to satisfy federal, state or local tax liability, shall not count against the Plan's share limits set forth in Section 1.5(a). (c) In the event of any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), merger, consolidation, reorganization, sale of assets, recapitalization, stock dividend, stock split, spin-off, split-up, split-off, issuance, repurchase or exchange of securities, or other change in corporate structure affecting the Common Stock such that an adjustment is determined by the Board to be appropriate in order to prevent dilution or enlargement of benefits under the Plan, then the Board shall, in its sole discretion, in such a manner as it may deem equitable, adjust any or all of (i) the aggregate number and kind of shares reserved for 61 issuance under the Plan, (ii) the number and kind of shares as to which awards may be granted to any individual in any fiscal year, (iii) the number and kind of shares or other property subject to outstanding awards, and (iv) the exercise price of outstanding Options and any other amounts to be paid by award holders or the Company, as the case may be, with respect to outstanding awards; provided, however, that no such adjustment shall increase the aggregate value of any outstanding award except in insignificant amounts due to rounding. In addition, upon any reorganization, merger, or consolidation as a result of which the Company is not the surviving corporation (or survives as a wholly-owned subsidiary of another corporation), or upon a sale of substantially all the assets of the Company, or upon the dissolution or liquidation of the Company, the Board may take such action as it in its discretion deems appropriate to (i) cash out outstanding Options and Stock Appreciation Rights at or immediately prior to the date of such event, or (ii) provide for the assumption of outstanding Options and Stock Appreciation Rights by surviving, successor or transferee corporations. The Board's determination as to which adjustments shall be made and the extent thereof shall be final, binding and conclusive. 1.6 Other Compensation Programs The existence and terms of the Plan shall not limit the authority of the Board of Directors in compensating employees of the Company and its Subsidiaries and the Outside Directors in such other forms and amounts, including compensation pursuant to any other plans as may be currently in effect or adopted in the future, as it may determine from time to time. II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS FOR EMPLOYEES 2.1 Terms and Conditions of Options Subject to the following provisions, all Options granted under the Plan to participants other than Outside Directors shall be in such form and shall have such terms and conditions as the Board of Directors (upon recommendation of the Committee), in its discretion, may from time to time determine. (a) Option Price. The option price per share shall not be less than the fair market value of the Common Stock (as determined by the Board of Directors) on the date the Option is granted. Unless the Board of Directors shall determine otherwise, the fair market value of the Common Stock on a given date shall be the mean between the highest and lowest quoted selling price, regular way, of the Common Stock on the Nasdaq National Market (or the principal exchange upon which the Common Stock is listed) on the day before such date, or, if no such sale of Common Stock occurs on such day, the mean between the highest and lowest quoted selling price on the nearest trading date before such day. (b) Term of Option. The term of an Option shall not exceed ten years from the date of grant, and, notwithstanding any other provision of this Plan, no Option shall be exercised after the expiration of its term. (c) Exercisability of Options. Options shall be exercisable at such time or times and shall be subject to such terms and conditions as shall be specified in the Option grant, subject to the following: (i) An Option shall become exercisable in full on the date the respective option holder terminates his or her employment with the Company or Subsidiary because of his or her death or disability. For these purposes, "disability" shall mean that the option holder has been unable to perform the essential functions of his or her employment due to disability or incapacity for 270 consecutive days or such lesser period as may be determined by the Board of Directors (upon recommendation of the Committee) at the time of grant or thereafter; and (ii) An Option shall become exercisable in full on the date the respective option holder terminates his or her employment with the Company or Subsidiary because of retirement. For these purposes, "retirement" shall mean 62 termination at a time when the option holder is eligible to retire under a retirement program of the Company or one of its Subsidiaries or as otherwise determined by the Committee. (d) Payment for Shares. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided in the Option grant or an amendment thereof. The grant letter may provide that payment may be made in cash (including cash equivalents), by delivery of shares of Common Stock already owned by the option holder for at least six months, by such other instrument as may be acceptable to the Board of Directors (upon recommendation of the Committee) (including a promissory note issued to the Company or Flushing Savings Bank, FSB (the "Bank"), if and to the extent permitted by applicable law, or any instrument required pursuant to any program established by the Company from time to time for the exercise of Options without the requirement of any cash payment by the option holder (a "cashless exercise program")), or by any combination of the foregoing. Shares delivered in payment of the exercise price shall be valued at their fair market value. (e) Shareholder Rights. The holder of an Option shall, as such, have none of the rights of a shareholder. (f) Termination of Employment. Subject to Sections 2.1(b) and 2.1(c) hereof, the Option grant, or an amendment thereof, may contain provisions with respect to the period, not extending beyond the term of the Option, during which the Option may be exercised following the option holder's termination of employment. (g) Change of Control. Notwithstanding any other provision of this Section 2.1, upon the occurrence of a Change of Control (as defined in Section 4.7), all Options and Stock Appreciation Rights that are outstanding and that are held by option holders who are employees or Outside Directors of the Company or its Subsidiaries at the time of such Change of Control shall become immediately exercisable. 2.2 Stock Appreciation Rights in Tandem with Options (a) The Board of Directors (upon recommendation of the Committee) may, either at the time of grant of an Option under Section 2.1 or, with respect to an Option that is not an Incentive Stock Option, at any time during the term of the Option, grant Stock Appreciation Rights to participants other than Outside Directors with respect to all or any portion of the shares of Common Stock covered by such Option. A Stock Appreciation Right may be exercised at any time the Option to which it relates is then exercisable, but only to the extent the Option to which it relates is exercisable and subject to the conditions applicable to such Option. Alternatively, the grant may provide that a Stock Appreciation Right may be exercised only upon the occurrence of a Change of Control, in which case the Stock Appreciation Right shall be exercisable only to the extent the Option to which it relates is exercisable upon such Change of Control. When a Stock Appreciation Right is exercised, the Option to which it relates shall cease to be exercisable to the extent of the number of shares with respect to which the Stock Appreciation Right is exercised. Similarly, when an Option is exercised, the Stock Appreciation Right relating to the shares covered by such Option exercise shall terminate. (b) Upon exercise of a Stock Appreciation Right, the holder shall receive, for each share with respect to which the Stock Appreciation Right is exercised, a cash payment in an amount (the "Appreciation") equal to the amount by which (i) the fair market value of a share of Common Stock on the date of exercise of the Stock Appreciation Right exceeds (ii) the option price per share of the Option to which the Stock Appreciation Right relates. The Appreciation shall be paid to the option holder within 30 days of the exercise of the Stock Appreciation Right. (c) The grant may provide that if a Stock Appreciation Right (other than a Stock Appreciation Right granted in tandem with an Incentive Stock Option) is exercised within 90 days after the occurrence of a Change of Control, in lieu of the amount described in Section 2.2(b), the holder shall receive a payment in cash equal to the amount by which (i) the greater of (A) the highest market price per share of Common Stock during the 90-day period preceding exercise of the Stock Appreciation Right or (B) the highest price per share of Common Stock (or the cash equivalent thereof as determined by the Board of Directors) paid by an acquiring person during the 90-day period preceding a Change of Control, exceeds (ii) the option price per share of the Option to which the Stock Appreciation Right relates. 63 2.3 Statutory Options Subject to the limitations on Option terms set forth in Section 2.1, the Board of Directors (upon recommendation of the Committee) shall have the authority to grant to employees (i) Incentive Stock Options and (ii) Options containing such terms and conditions as shall be required to qualify such Options for preferential tax treatment under the Code as in effect at the time of such grant. Options granted pursuant to this Section 2.3 may contain any other terms and conditions permitted by Article II of this Plan (including, without limitation, provision for Stock Appreciation Rights), to the extent that such terms and conditions do not cause the Options to lose their preferential tax treatment. To the extent the Code and Treasury Regulations promulgated thereunder require a plan to contain specified provisions in order to qualify options for preferential tax treatment, such provisions shall be deemed to be stated in this Plan. III. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS FOR OUTSIDE DIRECTORS 3.1 Terms and Conditions of Options Each person who becomes an Outside Director after May 22, 2001 shall be granted, as of the date of his or her first election, an Option to purchase 11,250 shares of Common Stock (the "Initial Option"). As of June 1 of each year, each person then serving as an Outside Director shall be granted an Option to purchase 9,900 shares of Common Stock (the "Annual Options"). If on any date on which Options are to be granted under this Section 3.1 the remaining shares reserved for receipt by Outside Directors under the Plan are insufficient to enable each Outside Director to receive an Option to purchase the number of shares of Common Stock set forth above, each Outside Director shall be granted an Option to purchase his or her pro rata portion of such remaining shares. Notwithstanding the foregoing, no grant of Options shall be made under this Section 3.1 to any person who has previously received an employee grant under Article II of the Plan unless the Board of Directors expressly authorizes awards for such person. All awards of Options under this Article III shall have the following terms and conditions: (a) Option Price. The option price per share of Common Stock shall be the fair market value of the Common Stock on the date of grant, which shall be equal to the mean between the highest and lowest quoted selling price, regular way, of the Common Stock on the Nasdaq National Market (or the principal exchange upon which the Common Stock is listed) on the day before the date the Option is granted, or, if no such sale of Common Stock occurs on such date, the mean between the highest and lowest quoted selling price on the nearest trading date before such date. (b) Term of Option. The term of an Option shall be ten years from the date of grant, subject to earlier termination in the event of termination of service as an Outside Director as set forth in paragraphs (e), (f), (g) and (i) below. The term "option period" refers to the period after the Option has become exercisable and prior to the earliest date on which the option expires or terminates. (c) Exercisability. No Option granted under this Article III shall become exercisable until the first anniversary of the date of its grant. Each Initial Option shall become exercisable with respect to 20% of the underlying shares on the first anniversary of the date of grant, and an additional 20% of the underlying shares on each subsequent anniversary thereof, provided that the option holder is a Director on each such anniversary date. Each Annual Option shall become exercisable with respect to one-third of the underlying shares on the first anniversary of the date of grant, and an additional one-third of the underlying shares on each subsequent anniversary thereof, provided that the option holder is a Director on each such anniversary date. (d) Method of Exercise. The Options may be exercised in whole or in part (for a whole number of shares) at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment of the purchase price. Payment of the purchase price may, at the election of the Outside Director, be made by delivery of the exercise price in cash (including cash equivalents), by delivery of shares of Common Stock already owned by the Outside Director for at least six months, by delivery of any documents required under any cashless exercise program that the Company may have in effect at the time of 64 such exercise, or by any combination of the foregoing. Shares delivered in payment of the exercise price shall be valued at their fair market value on the date of exercise (determined as provided in Section 3.1(a)). (e) Termination of Service as Outside Director Generally. If an option holder is removed as an Outside Director for Cause, such Outside Director's Option shall terminate on the date of such termination of service. For the purposes of this Plan, removal for "Cause" shall mean removal for dishonesty or willful misconduct involving moral turpitude. If an Outside Director resigns from the Board of Directors or the board of directors of a Subsidiary or does not permit his or her name to be submitted to stockholders for re-election, in each case other than upon his or her Retirement (as defined below), such Outside Director's Option may be exercised only within 60 days of such termination of service and only to the extent such Option was exercisable on the date of such termination of service, provided that in no event shall the exercise period extend beyond the expiration of the Option term. If the Board of Directors or the board of directors of a Subsidiary does not submit an option holder's name to stockholders for re-election or if an option holder's name is submitted to stockholders for re-election but he or she is not re-elected, such Outside Director's Option may be exercised only within six months of the option holder's termination of service and only to the extent such Option was exercisable on the date of such termination of service, provided that in no event shall the exercise period extend beyond the expiration of the Option term. (f) Death or Disability. Notwithstanding the provisions of Section 3.1(c), any Option held by an Outside Director whose service as such is terminated by reason of his or her death or Disability shall become immediately exercisable and may be exercised by such option holder or his or her legal representatives for a period of two years following his or her death or disability, provided that in no event shall the exercise period extend beyond the expiration of the Option term. For purposes of this Section 3.1(f), termination for "disability" shall mean termination on account of the option holder's inability to perform his or her duties as an Outside Director due to disability or incapacity as determined by the Board of Directors. (g) Retirement. Notwithstanding the provisions of Section 3.1(c), any Option held by an Outside Director whose service as such is terminated by reason of his or her retirement shall become immediately exercisable and may be exercised by such option holder for a period of two years following his or her retirement, provided that in no event shall the exercise period extend beyond the expiration of the Option term. For purposes of this Section 3.1(g), termination for "retirement" shall mean termination, other than for Cause, after at least five years of service as an Outside Director. (h) Shareholder Rights. The holder of an Option shall, as such, have none of the rights of a shareholder. (i) Change of Control. Notwithstanding the provisions of Sections 3.1(c) and (e), upon the occurrence of a Change of Control (i) all Options and Stock Appreciation Rights that are outstanding and that are held by option holders who are Directors at the time of such Change of Control shall become immediately exercisable and (ii) any Option and Stock Appreciation Right granted under this Section 3.1 that is or becomes exercisable upon a Change of Control shall expire no sooner than one year after any termination of service following a Change of Control. 3.2 Stock Appreciation Rights in Tandem with Options (a) Each Option grant to an Outside Director under the Plan shall be granted in tandem with Stock Appreciation Rights with respect to all of the shares of Common Stock covered by such Option. The Stock Appreciation Rights may be exercised only within the 90-day period following a Change of Control. When a Stock Appreciation Right is exercised, the Option to which it relates shall cease to be exercisable to the extent of the number of shares with respect to which the Stock Appreciation Right is exercised. Similarly, when an Option is exercised, the Stock Appreciation Rights relating to the shares covered by such Option exercise shall terminate. (b) Upon exercise of a Stock Appreciation Right, the holder shall receive within 30 days after such exercise, for each share with respect to which the Stock Appreciation Right is exercised, a cash payment equal to the amount by which (i) the greater of (A) the highest market price per share of Common Stock during the 90-day period preceding exercise of the Stock Appreciation Right and (B) the highest price per share of Common Stock (or the cash equivalent thereof as determined by the Board of Directors) paid by an acquiring person during the 90-day period 65 preceding a Change of Control exceeds (ii) the option price per share of the Option to which the Stock Appreciation Right relates. 3.3 Nonstatutory Options The Options granted to Outside Directors under this Article III shall be nonstatutory stock options, defined as stock options which do not qualify as Incentive Stock Options. IV. ADDITIONAL PROVISIONS 4.1 General Restrictions Each award under the Plan shall be subject to the requirement that, if at any time the Board of Directors shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the recipient of an award with respect to the disposition of shares of Common Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities or banking law, rule or regulation) as a condition of, or in connection with, the granting of such award or the issuance or delivery of shares of Common Stock thereunder, such award may not be granted or exercised in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. 4.2 Amendments (a) The Board of Directors may amend the Plan from time to time. No such amendment shall require approval by the stockholders unless stockholder approval is required by applicable law, regulation, or stock exchange requirement. No amendment shall adversely affect any award previously granted without the holder's written consent. (b) The Board of Directors (upon recommendation of the Committee) shall have the authority to amend any grant to include any provision which, at the time of such amendment, is authorized under the terms of the Plan; however, no outstanding award may be revoked or altered in a manner unfavorable to the holder without the written consent of the holder. 4.3 Cancellation of Options Any Option granted under the Plan other than an Option granted to an Outside Director may be canceled at any time with the consent of the option holder and a new Option may be granted to such holder in lieu thereof, which Option may, in the discretion of the Board of Directors (upon recommendation of the Committee), be on more favorable terms and conditions than the canceled Option. 4.4 Tax Withholding (a) Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, or whenever the value of an award first becomes includible in an employee's gross income for applicable tax purposes, the Company shall have the right to require the employee to remit to the Company, or make arrangements satisfactory to the Board of Directors regarding payment of, an amount sufficient to satisfy any federal, state or local withholding tax liability prior to the delivery of any certificate for such shares or the time of such income inclusion. Whenever under the Plan payments by the Company are to be made in cash, such payments shall be net of an amount sufficient to satisfy any federal, state or local withholding tax liability. (b) To the extent permitted in the grant letter, and subject to any terms and conditions imposed therein, an employee entitled to receive Common Stock under the Plan may elect to have the federal, state, and local 66 withholding tax liability (or a specified portion thereof) with respect to such Common Stock satisfied by having the Company withhold from the shares otherwise deliverable to the employee shares of Common Stock having a value equal to the amount of the withholding tax liability to be satisfied with respect to the Common Stock or by delivering to the Company shares of unrestricted Common Stock. Alternatively, the grant letter may require that a portion of the shares of Common Stock otherwise deliverable be withheld and applied to satisfy the withholding tax obligations with respect to the Option. 4.5 Non-transferability Unless otherwise provided by the Board of Directors (upon recommendation of the Committee), (i) awards shall not be transferable by the holder other than by will or by the laws of descent and distribution, and (ii) during the award holder's lifetime, all awards shall be exercisable only by such holder. The Board of Directors (upon recommendation of the Committee), in its discretion, may permit awards to be transferred by gift or for estate planning purposes to such transferees and on such terms and conditions as may be determined by it. 4.6 No Guarantee of Employment or Service Neither the adoption of the Plan nor the grant of an award under the Plan shall constitute an assurance of continued employment or continued service as an Outside Director for any period. 4.7 Change of Control A "Change of Control" shall be deemed to have occurred upon: (a) the acquisition of all or substantially all of the assets of the Bank or the Company by any person or entity, or by any persons or entities acting in concert; (b) the occurrence of any event if, immediately following such event, a majority of the members of the Board of Directors or the board of directors of the Bank or of any successor corporation shall consist of persons other than Current Members (for these purposes, a "Current Member" shall mean any member of the Board of Directors or the board of directors of the Bank as of the effective date of the conversion of the Bank from the mutual to capital stock form of ownership and any successor of a Current Member whose nomination or election has been approved by a majority of the Current Members then on the respective board of directors); (c) the acquisition of the beneficial ownership, directly or indirectly (as provided in Rule 13d-3 under the Act, or any successor rule), of 25% or more of the total combined voting power of all classes of stock of the Bank or the Company by any person or group deemed a person under Section 13(d)(3) of the Act; or (d) approval by the stockholders of the Bank or the Company of an agreement providing for the merger or consolidation of the Bank or the Company with another corporation where the stockholders of the Bank or the Company, immediately prior to the merger or consolidation, would not beneficially own, directly or indirectly, immediately after the merger or consolidation, shares entitling such stockholders to 50% or more of the total combined voting power of all classes of stock of the surviving corporation. 4.8 Duration and Termination (a) The Plan shall be of unlimited duration. Notwithstanding the foregoing, no Incentive Stock Option shall be granted under the Plan more than ten years following the effective date of the Plan, but awards granted prior to such date may extend beyond such date, and the terms of this Plan shall continue to apply to all awards granted hereunder. (b) The Board of Directors may discontinue or terminate the Plan at any time. Such action shall not impair any of the rights of any holder of any award outstanding on the date of the Plan's discontinuance or termination without the holder's written consent. 67 4.9 No Liability No member of the Board of Directors or the Committee, nor any officer or employee of the Company or the Bank acting on behalf of the Board of Directors or the Committee, shall be personally liable for any action, determination or interpretation taken or made with respect to the Plan, and all members of the Board of Directors or the Committee and all officers or employees of the Company or the Bank acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. 4.10 Effective Date The Plan became effective upon approval by the Company's stockholders at the 1996 annual meeting. 68 EX-13.1D 7 d50230_ex13-1d.txt ANNUAL REPORT [PHOTO] CORPORATE PROFILE Flushing Financial Corporation, a Delaware corporation, was formed in May 1994 to serve as the holding company for Flushing Savings Bank, FSB, a federally chartered, FDIC-insured savings institution originally organized in 1929. The Bank is a customer-oriented, full-service community bank primarily engaged in attracting deposits from residents and businesses in the local communities of Queens, Nassau, Brooklyn, the Bronx and Manhattan and investing such deposits and other available funds primarily in originations of multi-family mortgage loans, commercial real estate loans and one-to-four family residential loans. Flushing Financial Corporation's common stock is publicly traded on the Nasdaq National Market(R) under the symbol "FFIC." Additional information on Flushing Financial Corporation may be obtained by visiting the Company's web site at http://www.flushingsavings.com. Flushing Financial Corporation 1 2001 ANNUAL REPORT ================================================================================ TO OUR SHAREHOLDERS [PHOTO] ================================================================================ Partnership for Success We are pleased to report that 2001 was another profitable and successful year for Flushing Financial Corporation. We achieved record diluted earnings per share of $1.17, up 20.6% from $0.97 a year earlier. We also continued to grow our balance sheet, increase both net interest income and non-interest income and become more efficient. Credit quality remained strong despite a softening economy. Early in the year, we undertook an analysis of our past successes. With the knowledge we gained, we developed a strategic plan to emphasize our strengths in the markets we serve. We then set to work with a disciplined approach to implement that plan and build upon our areas of expertise. The strategic initiatives that we outlined in 2001 are in our view a blueprint for our growth in the near term. These initiatives fall into several categories: DIVERSIFY LENDING TO EMPHASIZE HIGHER YIELDS In 2001, we accelerated our efforts to further diversify our lending to emphasize higher yielding assets. To effect this change, we reallocated greater resources to several key lending areas including multi-family and commercial real estate lending. While the Federal Reserve Board and the credit markets exerted downward pressure on rates, our approach to high quality niche lending allowed us to grow our loan portfolio with only a slight reduction in yield. Originations in higher yielding multi-family and commercial real estate loans improved over last year. In the residential real estate lending area, we concentrated on changing our mix of originations toward higher yielding mixed-use Flushing Financial Corporation 2 2001 ANNUAL REPORT ================================================================================ ================================================================================ properties (those that contain both residential dwellings and commercial units). Single-family mortgages, while still an important part of our loan portfolio took on lesser significance in our earnings plan as margins in that business continued to narrow. MAINTAIN HIGH ASSET QUALITY While we have continued to search out profitable niches to expand lending, we have also continued to approach underwriting in a traditional manner, primarily focusing on basic housing stock and small commercial properties in the NY Metropolitan area. The loan portfolio has grown to $1.1 billion. At the same time, non-performing assets at December 31, 2001 were $2.4 million, and, although this represents a small increase over the prior year, our ratio of non-performing assets to total assets was a modest 0.16%. GROW CORE DEPOSITS We concentrated heavily on fine-tuning our retail network in our effort to grow lower costing core deposits. We initiated a new sales process, brought on additional talent and, capitalizing on market trends toward increased deposits, experienced unprecedented growth in total deposits of $136 million--more than 20% over year 2000, as more customers chose Flushing for their banking needs. Growth in lower costing core deposits was even more encouraging as those balances increased by $71 million or 26%. We saw an increase in depth of relationship as more Flushing customers chose to open checking and money market accounts with us in addition to their certificates of deposit. INCREASE NON-INTEREST INCOME We further augmented our basic business of deposit gathering and lending with an additional $2.2 million in non-interest income for the year. A leading contributor to the increase for 2001 was the Bank Owned Life Insurance (BOLI) program initiated in late 2000. A gain on sale of securities further contributed to the increase, as did an improvement in loan and deposit fees. CAPITAL MANAGEMENT Our effective management of capital, in addition to strong earnings growth, yielded a record high return on equity of 11.52% for the year. We continued to manage capital to improve shareholder value by repurchasing 639,950 shares of our stock during the year. Since our initial public offering in 1995, we have repurchased approximately 35% of the common shares issued in connection with that offering, thus enhancing the value for the remaining shareholders. Further, our continued financial success prompted us to increase the annual dividend paid in 2001 to $0.31 per share, up from the $0.27 per share paid in the prior year. We also declared a three-for-two stock split in August of 2001 in order to provide additional liquidity in the market for our common stock. Deposits (millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] '97 $655.9 '98 $664.1 '99 $666.9 '00 $689.8 '01 $828.6 Net Loan Portfolio (millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] '97 $ 598.4 '98 $ 750.6 '99 $ 875.9 '00 $ 986.4 '01 $1,067.2 Flushing Financial Corporation 3 2001 ANNUAL REPORT Total Assets (millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] '97 $1,088.5 '98 $1,142.1 '99 $1,249.5 '00 $1,338.1 '01 $1,487.5 STRENGTHEN THE SALES AND SERVICE CULTURE No discussion of long-term strategy or 2001 results would be complete without mentioning the cultural changes that have been initiated and their positive impact on our staff and their performance. Throughout the year, we concentrated on building the skills of our customer contact staff through sales, product knowledge and small business training. In addition, we have recruited new talent to our organization in retail banking, investment sales, loan originations and small business banking. Expectations and responsibilities have been clearly defined to managers and staff and incentive pay structures have been put in place to reward results. Our people have responded well and we believe their increasing knowledge and skill will contribute to our success in the coming years. THE FUTURE We come out of the year 2001 a very strong, well-capitalized institution, with, in our view, a straightforward but effective business model that should continue to deliver shareholder value in the foreseeable future. In 2002, we anticipate a year of continued improvement in financial results, while we make the investments necessary to accomplish our strategic goals. ================================================================================ STRENGTHENING RELATIONSHIPS ================================================================================ We are working hard to build upon our success in targeted lending by enhancing our relationships with our communities, our existing customers and our broker networks. We intend to explore new technologies to streamline processes and make it easier for our customers to transact business with us. We will continue to focus on local businesses and consumers for the sources of our growth. We operate in an active and competitive market yet maintain a strong reputation for both lending and deposit products. By taking an active role in our communities, financing small business and delivering, in a personalized manner, an array of up-to-date financial products, we expect to continue to attract more customers to Flushing in the years to come. We would like to thank the Board for its active guidance, our employees for their commitment to our strategy and our customers for their valued trust. We thank you, our shareholders, for the confidence you have expressed in us through your investment. /S/ Gerard P. Tully, Sr. /S/ Michael J. Hegarty Gerard P. Tully, Sr. Michael J. Hegarty Chairman of the Board President and Chief Executive Officer We are working hard to build upon our success in targeted lending by enhancing our relationships with our communities, our existing customers and our broker networks. Flushing Financial Corporation 4 2001 ANNUAL REPORT ================================================================================ SELECTED FINANCIAL DATA ================================================================================
- ---------------------------------------------------------------------------------------------------------------------------- At or for the year ended December 31, 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) SELECTED FINANCIAL CONDITION DATA Total assets.......................................... $1,487,529 $1,338,092 $1,249,529 $1,142,055 $1,088,476 Loans, net............................................ 1,067,197 986,359 875,886 750,555 598,421 Securities available for sale......................... 305,539 255,220 285,016 326,690 356,712 Real estate owned, net................................ 93 44 368 77 433 Deposits.............................................. 828,582 689,811 666,941 664,059 655,911 Borrowed funds........................................ 513,435 508,839 451,831 335,458 287,187 Stockholders' equity.................................. 133,387 126,737 118,176 132,087 136,443 Book value per share (1) (2).......................... $ 9.89 $ 9.11 $ 8.10 $ 8.08 $ 7.71 SELECTED OPERATING DATA Interest and dividend income.......................... $ 101,899 $ 96,941 $ 87,143 $ 82,846 $ 66,866 Interest expense...................................... 59,702 57,048 47,795 46,702 34,795 ------------------------------------------------------------------- Net interest income................................. 42,197 39,893 39,348 36,144 32,071 Provision for loan losses............................. -- -- 36 214 104 ------------------------------------------------------------------- Net interest income after provision for loan losses. 42,197 39,893 39,312 35,930 31,967 Non-interest income: Net gains (losses) on sales of securities and loans. 321 (651) 252 368 67 Other income........................................ 5,737 4,509 3,622 2,927 2,596 ------------------------------------------------------------------- Total non-interest income......................... 6,058 3,858 3,874 3,295 2,663 Non-interest expense.................................. 24,457 23,797 22,646 23,023 19,324 Income before income tax provision.................... 23,798 19,954 20,540 16,202 15,306 Income tax provision.................................. 8,869 7,532 7,805 6,012 6,775 ------------------------------------------------------------------- Net income........................................ $ 14,929 $ 12,422 $ 12,735 $ 10,190 $ 8,531 ------------------------------------------------------------------- Basic earnings per share (2) (3)...................... $ 1.22 $ 0.99 $ 0.94 $ 0.67 $ 0.53 Diluted earnings per share (2) (3).................... $ 1.17 $ 0.97 $ 0.92 $ 0.65 $ 0.53 Dividends declared per share (2)...................... $ 0.31 $ 0.27 $ 0.21 $ 0.15 $ 0.10 Dividend payout ratio................................. 25.4% 27.3% 22.3% 22.3% 18.9%
Continued (Footnotes on the following page) ========================================================= TABLE OF CONTENTS ========================================================= Selected Financial Data 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Consolidated Financial Statements 20 Notes to Consolidated Financial Statements 26 Report of Independent Accountants 44 Corporate and Shareholder Information 1BC Flushing Financial Corporation and Subsidiaries 5 2001 ANNUAL REPORT ================================================================================ SELECTED FINANCIAL DATA ================================================================================ (continued)
- ---------------------------------------------------------------------------------------------------------------------------- At or for the year ended December 31, 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS AND OTHER DATA Performance ratios: Return on average assets............................ 1.06% 0.96% 1.08% 0.92% 0.96% Return on average equity............................ 11.52 10.48 10.31 7.51 6.41 Average equity to average assets.................... 9.19 9.18 10.49 12.24 15.00 Equity to total assets.............................. 8.97 9.47 9.46 11.57 12.53 Interest rate spread................................ 2.89 2.87 3.05 2.88 3.06 Net interest margin................................. 3.20 3.24 3.49 3.43 3.74 Non-interest expense to average assets.............. 1.74 1.84 1.92 2.08 2.18 Efficiency ratio.................................... 50.06 53.07 51.54 53.44 53.91 Average interest-earning assets to average interest-bearing liabilities...................... 1.07x 1.08x 1.11x 1.12x 1.17x Regulatory capital ratios (4): Tangible capital.................................... 7.32% 8.02% 8.28% 9.46% 9.11% Core capital........................................ 7.32 8.02 8.28 9.46 9.11 Total risk-based capital............................ 13.58 15.77 16.33 19.43 19.76 Asset quality ratios: Non-performing loans to gross loans (5)............. 0.22% 0.16% 0.36% 0.34% 0.41% Non-performing assets to total assets (6)........... 0.16 0.12 0.29 0.23 0.27 Net charge-offs (recoveries) to average loans....... 0.01 0.01 -- (0.01) 0.01 Allowance for loan losses to gross loans............ 0.61 0.68 0.77 0.89 1.07 Allowance for loan losses to total non-performing assets (6)......................... 272.94 404.28 191.29 252.83 223.94 Allowance for loan losses to total non-performing loans (5).......................... 283.85 415.32 213.29 260.36 263.38 Full-service customer facilities...................... 10 10 9 8 7
(1) Calculated by dividing stockholders' equity of $133.4 million and $126.7 million at December 31, 2001 and 2000, respectively, by 13,487,784 and 13,907,881 shares outstanding at December 31, 2001 and 2000, respectively. (2) All per share data has been adjusted for the three-for-two stock split distributed on August 30, 2001 in the form of a stock dividend and the three-for-two stock split distributed on September 30, 1998 in the form of a stock dividend. (3) The shares held in the Company's Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share. Unvested restricted stock awards are not included in basic earnings per share calculations, but are included in diluted earnings per share calculations. (4) The Bank exceeded all minimum regulatory capital requirements during the periods presented. (5) Non-performing loans consist of non-accrual loans and loans delinquent 90 days or more that are still accruing. (6) Non-performing assets consists of non-performing loans and real estate owned. MARKET PRICE OF COMMON STOCK Flushing Financial Corporation Common Stock is traded on the Nasdaq National Market (R) under the symbol "FFIC." As of December 31, 2001 the Company had approximately 760 shareholders of record, not including the number of persons or entities holding stock in nominee or street name through various brokers and banks. The Company's stock closed at $17.80 on December 31, 2001. The following table shows the high and low sales price of the Common Stock during the periods indicated. Such prices do not necessarily reflect retail markups, markdowns or commissions. All price and dividend information has been adjusted for the three-for-two stock split distributed on August 30, 2001 in the form of a stock dividend. See Note 12 of Notes to Consolidated Financial Statements for dividend restrictions.
- --------------------------------------------------------------------------------------------------------- 2001 2000 ---------------------------------------------------------------------- High Low Dividend High Low Dividend - --------------------------------------------------------------------------------------------------------- First Quarter............... $12.54 $11.00 $0.073 $10.17 $ 8.50 $0.067 Second Quarter.............. 16.20 12.17 0.073 10.33 8.33 0.067 Third Quarter............... 17.00 13.71 0.080 11.00 9.79 0.067 Fourth Quarter.............. 18.96 15.44 0.080 11.96 10.04 0.067
Flushing Financial Corporation and Subsidiaries 6 2001 ANNUAL REPORT ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ GENERAL Flushing Financial Corporation ("Holding Company") is the parent holding company for Flushing Savings Bank, FSB ("Bank"), a federally chartered stock savings bank. The following discussion of financial condition and results of operations includes the collective results of the Holding Company and the Bank (collectively the "Company"), but reflects principally the Bank's activities. The Company's principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from operations and borrowings, primarily in (1) originations and purchases of one-to-four family residential mortgage loans (focusing on mixed-use properties--properties that contain both residential dwelling units and commercial units), multi-family income-producing property loans and 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 Company originates certain other loans, including construction loans, Small Business Administration loans and other small business loans. The Company's results of operations depend primarily on net interest income, which is the difference between the interest income earned on its loan and investment portfolios, and its cost of funds, consisting primarily of interest paid on deposit accounts and borrowed funds. Net interest income is the result of the Company's interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, and the average balance of interest-earning assets compared to the average balance of interest-bearing liabilities. The Company also generates non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, late charges and other fees, income earned on Bank Owned Life Insurance ("BOLI"), dividends on Federal Home Bank of NY ("FHLB-NY") stock and net gains and losses on sales of securities and loans. The Company's operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. The Company's results of operations also can be significantly affected by its periodic provision for loan losses and specific provision for losses on real estate owned. Such results also are significantly affected by general economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities. In September 2000, the Bank sold certain lower-yielding mortgage-backed securities and invested the proceeds in $20.0 million of BOLI. The purchase of BOLI, with its tax-advantaged earnings and other benefits, allows the Company to fund a substantial portion of the Company's employee benefit costs. On July 17, 2001, the Board of Directors of the Company declared a three-for-two stock split of the Company's common stock in the form of a 50% stock dividend, which was paid on August 30, 2001. Each stockholder received one additional share for every two shares of the Company's common stock held at the record date, August 10, 2001. Cash was paid in lieu of fractional shares. The Company issued 4,617,270 shares of its common stock, of which 2,120,885 shares had been held as treasury stock. All share and per share amounts in this Annual Report have been restated to reflect this three-for-two stock split paid on August 30, 2001. During the fourth quarter of 2001, the Bank began to: (1) expand its business loan and deposit products, (2) increase its focus on the investment products it offers, and (3) plan for the anticipated introduction in 2002 of a debit card and Internet banking. As part of the Company's strategy to find ways to best utilize its available capital, during 2001 Flushing Financial Corporation continued its stock repurchase programs by repurchasing 639,950 shares of its common stock. The total number of treasury shares, at December 31, 2001 is 364,279 and the total number of outstanding common shares is 13,487,784. At December 31, 2001, 552,450 shares remain to be repurchased under the current stock repurchase program. Statements contained in this ANNUAL REPORT relating to plans, strategies, objectives, economic performance and trends, 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 the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently Flushing Financial Corporation and Subsidiaries 7 2001 ANNUAL REPORT anticipated due to a number of factors, which include, but are not limited to, the factors set forth in the third paragraph of this section, and under captions "Management Strategy" and "Other Trends and Contingencies" below, and elsewhere in this Annual Report and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "forecasts", "potential" or "continue" or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements. FLUSHING SAVINGS BANK, FSB The Bank was organized in 1929 as a New York State chartered mutual savings bank. On May 10, 1994, the Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. As a federal savings bank, the Bank's primary regulator is the Office of Thrift Supervision ("OTS"). The Bank's deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank owns three subsidiaries: (1) Flushing Preferred Funding Corporation ("FPFC")--a real estate investment trust; (2) Flushing Service Corporation ("FSC")--a service corporation which markets insurance products and mutual funds; and (3) FSB Properties, Inc.--a service corporation formed to manage certain real estate properties, which is currently inactive. MANAGEMENT STRATEGY Management's strategy is to continue the Bank's focus as a consumer-oriented institution serving its local markets. In furtherance of this objective, the Company intends to (1) continue its emphasis on the origination of one-to-four family residential mortgage (focusing on mixed-use properties), multi-family real estate and commercial real estate loans, (2) maintain asset quality, (3) manage deposit growth and maintain a low cost of funds, (4) manage interest rate risk, and (5) explore new business opportunities. The Company has in the past increased growth through acquisitions of financial institutions and branches of other financial institutions, and will continue to pursue growth through acquisitions that are, or are expected to be within a reasonable time frame, accretive to earnings. The Company has also opened new branches. There can be no assurance that the Company will be able to effectively implement this strategy. The Company's strategy is subject to change by the Board of Directors. One-to-Four Family, Multi-Family Real Estate and Commercial Real Estate Lending. The Company has traditionally emphasized the origination and acquisition of one-to-four family residential mortgage loans, which include mixed-use property mortgage loans, adjustable rate mortgage ("ARM") loans, fixed rate mortgage loans and home equity loans. Increasingly, the Company has placed greater emphasis on multi-family and commercial real estate loans. The Company expects to continue this emphasis on multi-family and commercial real estate loans as well as on one-to-four family residential mortgage loans. During 2001, loan originations and purchases were $82.3 million for one-to-four family residential mortgage loans, $71.0 million for multi-family real estate loans, $62.1 million for commercial real estate loans and $8.7 million for construction loans. At December 31, 2001, the Company's one-to-four family residential mortgage loans, multi-family real estate loans and commercial real estate loans amounted to $468.4 million (43.7%), $369.7 million (34.5%) and $214.4 million (20.0%), respectively, of gross loans. The Company seeks to increase its originations of one-to-four family residential mortgage, multi-family real estate and commercial real estate loans through aggressive marketing and by maintaining competitive interest rates and origination fees. The Company's marketing efforts includes frequent contacts with mortgage brokers and other professionals who serve as referral sources. From time-to-time, the Company may purchase loans from mortgage bankers. Loans purchased by the Company from these mortgage bankers comply with the Bank's underwriting standards. Fully underwritten one-to-four family residential mortgage loans generally are considered by the banking industry to have less risk than other types of loans. Multi-family income-producing real estate loans and commercial real estate loans generally have higher yields than one-to-four family residential Flushing Financial Corporation and Subsidiaries 8 2001 ANNUAL REPORT mortgage loans and shorter terms to maturity, but typically involve higher principal amounts and generally expose the lender to a greater risk of credit loss than one-to-four family residential mortgage loans. The Company's increased emphasis on multi-family and commercial real estate loans has increased the overall level of credit risk inherent in the Company's loan portfolio. The greater risk associated with multi-family and commercial real estate loans could require the Company to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Company. To date, the Company has not experienced significant losses in its multi-family and commercial real estate loan portfolios, and has determined that, at this time, additional provisions are not required. Maintain Asset Quality. By adherence to its strict underwriting standards the Bank has been able to minimize net losses from impaired loans with net charge-offs of $136,000 and $97,000 for the years ended December 31, 2001 and 2000, respectively. The Company has maintained the strength of its loan portfolio, as evidenced by the Company's ratio of its allowance for loan losses to non-performing loans of 283.85% and 415.32% at December 31, 2001 and 2000, respectively. The Company seeks to maintain its loans in performing status through, among other things, strict collection efforts, and consistently monitors non-performing assets in an effort to return them to performing status. To this end, management reviews the quality of loans and reports to the Loan Committee of the Board of Directors of the Bank on a monthly basis. From time-to-time, the Company has sold and may continue to make sales of non-performing assets. Non-performing assets amounted to $2.4 million and $1.7 million at December 31, 2001 and 2000, respectively. Non-performing assets as a percentage of total assets were 0.16% and 0.12% at December 31, 2001 and 2000, respectively. Managing Deposit Growth and Maintaining Low Cost of Funds. The Company has a relatively stable retail deposit base drawn from its market area through its ten full-service offices. Although the Company seeks to retain existing deposits and maintain depositor relationships by offering quality service and competitive interest rates to its customers, the Company seeks to keep deposit growth within reasonable limits. Management intends to balance its goal to maintain competitive interest rates on deposits while seeking to manage its overall cost of funds to finance its strategies. Historically, the Company has relied on its deposit base as its principal source of funding. The Bank is also a member of the FHLB-NY, which provides it with an additional source of borrowing, which the Company has increasingly utilized to provide funding for asset growth which has increased net interest income. During 2001, the Company realized an increase in due to depositors and borrowed funds of $136.5 million and $4.6 million, respectively. Managing Interest Rate Risk. The Company seeks to manage its interest rate risk by actively reviewing the repricing and maturities of its interest rate sensitive assets and liabilities. The mix of loans originated by the Company (fixed or ARM) is determined in large part by borrowers' preferences and prevailing market conditions. The Company seeks to manage the interest rate risk of the loan portfolio by actively managing its security portfolio and borrowings. By adjusting the mix of fixed and adjustable rate securities, as well as the maturities of the securities, the Company has the ability to manage the combined interest rate sensitivity of its assets. In order to maintain flexibility in managing the Company's interest rate sensitive assets, the majority of fixed rate residential mortgage loans originated by the Company in recent years were made in accordance with Federal National Mortgage Association requirements to facilitate sale in the secondary market. Additionally, the Company seeks to balance the interest rate sensitivity of its assets by managing the maturities of its liabilities. Prevailing interest rates also affect the extent to which borrowers repay and refinance loans. An increasing interest rate environment would tend to extend the lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect net interest income. In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which could adversely affect the Bank's net interest income if rates were to subsequently decline. In a declining interest rate environment, the number of loan prepayments and loan refinancings may increase, as well as prepayments of mortgage-backed securities. Call provisions associated with the Company's investment in U.S. government agency and corporate securities may also adversely affect yield in a declining interest rate environment. Such prepayments Flushing Financial Corporation and Subsidiaries 9 2001 ANNUAL REPORT and calls may adversely affect the yield of the Company's loan portfolio and mortgage-backed and other securities as the Company reinvests the prepaid funds in a lower interest rate environment. However, the Company typically receives additional loan fees when existing loans are refinanced, which partially offset the reduced yield on the Company's loan portfolio resulting from prepayments. In periods of low interest rates, the Company's level of core deposits also may decline if depositors seek higher yielding instruments or other investments not offered by the Company, which in turn may increase the Company's cost of funds and decrease its net interest margin to the extent alternative funding sources are utilized. Additionally, adjustable rate mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount the interest rate can increase or decrease at repricing dates. Exploring New Business Opportunities. As part of the Company's strategy to explore new retailing concepts and products, the Bank opened its first in-store supermarket branch in June 1998 in the neighborhood of New Hyde Park. A second in-store supermarket branch was opened in November 1999 in Co-op City in the Bronx. These supermarket branches can address virtually all of their customers' financial needs, with the added convenience of extended hours and time saving grocery store access. A traditional branch was opened in July 2000 on Kissena Boulevard in Flushing, Queens. During the second quarter of 1998, the Company launched Flushing Service Corporation, which began offering mutual funds, tax-deferred annuities and other investment products, expanding the services offered by the Bank. The Bank intends to place additional emphasis on the sale of these products in 2002 through additional marketing efforts and the licensing of Bank employees allowing them to sell certain of these products. The Bank also established, in June 1998, a Business and Community Development Department. In the Company's demanding and constantly evolving marketplace, this office plays an active role in enhancing the Company's reputation as an essential player in the local economy, and expanding its participation in new business opportunities. In the fourth quarter of 2001, staffing was increased in this department to allow the Bank to further expand these efforts. Management is currently reviewing the profitability potential of various new products to further expand the Company's product lines and market. During 2002, the Bank plans to introduce a debit card and Internet banking, and continue to expand its business loan and deposit products. These initiatives are designed to allow us to continue to be the provider of choice for our current customers and help attract new customers. Interest Rate Sensitivity Analysis A financial institution's exposure to the risks of changing interest rates may be analyzed, in part, by examining the extent to which its assets and liabilities are "interest rate sensitive" and by monitoring the institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-earning assets maturing or repricing exceeds the amount of interest-bearing liabilities maturing or repricing within the same period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within the same period. Accordingly, a positive gap may enhance net interest income in a rising rate environment and reduce net interest income in a falling rate environment. Conversely, a negative gap may enhance net interest income in a falling rate environment and reduce net interest income in a rising rate environment. Flushing Financial Corporation and Subsidiaries 10 2001 ANNUAL REPORT The table below sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2001 which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period was determined in accordance with the earlier of the term to repricing or the contractual terms of the asset or liability. Prepayment assumptions for mortgage-backed securities are based on industry averages. Passbook and Money Market accounts were assumed to have a withdrawal or "run-off" rate of 5%, based on historical experience. Management believes that these assumptions are indicative of actual prepayments and withdrawals experienced by the Company.
Interest Rate Sensitivity Gap Analysis at December 31, 2001 ==================================================================================================================================== More Than More Than More Than More Than Three Three One Year Three Years Five Years Months Months to to Three to Five to Ten More Than and Less One Year Years Years Years Ten Years Total - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS (Dollars in thousands) Mortgage loans ............................... $ 32,243 $ 120,995 $ 331,345 $352,620 $208,002 $ 21,065 $1,066,270 Other loans .................................. 4,697 492 1,258 228 50 -- 6,725 Short-term securities (1) .................... 28,367 -- -- -- -- -- 28,367 Securities available for sale: Mortgage-backed securities ................. 28,702 34,734 64,566 43,184 50,878 20,994 243,058 Other ...................................... 20,459 24,644 16,472 -- 306 600 62,481 ------------------------------------------------------------------------------------ Total interest-earning assets ............ 114,468 180,865 413,641 396,032 259,236 42,659 1,406,901 ------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES Passbook accounts ............................ 2,448 7,344 18,141 16,372 34,285 117,265 195,855 NOW accounts ................................. -- -- -- -- -- 33,107 33,107 Money market accounts ........................ 1,172 3,516 8,687 7,841 16,418 56,155 93,789 Certificate of deposit accounts .............. 90,620 160,947 141,069 69,214 5,322 -- 467,172 Mortgagors' escrow deposits .................. -- -- -- -- -- 10,065 10,065 Borrowed funds ............................... 136,000 49,250 159,000 78,900 90,285 -- 513,435 ------------------------------------------------------------------------------------ Total interest-bearing liabilities (2) ... $ 230,240 $ 221,057 $ 326,897 $172,327 $146,310 $ 216,592 $1,313,423 ------------------------------------------------------------------------------------ Interest-rate sensitivity gap ................ $(115,772) $ (40,192) $ 86,744 $223,705 $112,926 $(173,933) Cumulative interest-rate sensitivity gap ..... $(115,772) $(155,964) $ (69,220) $154,485 $267,411 $ 93,478 Cumulative interest-rate sensitivity gap as a percentage of total assets ............ (7.78)% (10.48)% (4.65)% 10.39% 17.98% 6.28% Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities ................................ 49.72% 65.44% 91.11% 116.25% 124.38% 107.12% - ------------------------------------------------------------------------------------------------------------------------------------
(1) Consists of interest-earning deposits and federal funds sold. (2) Does not include non-interest-bearing demand accounts totaling $28.6 million at December 31, 2001. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar estimated maturities or periods to repricing, they may react in differing degrees to changes in market interest rates and may bear rates that differ in varying degrees from the rates that would apply upon maturity and reinvestment or upon repricing. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in the level of interest rates, prepayments on loans and Flushing Financial Corporation and Subsidiaries 11 2001 ANNUAL REPORT mortgage-backed securities, and deposit withdrawal or "run-off" levels, would likely deviate materially from those assumed in calculating the above table. In the event of an interest rate increase, some borrowers may be unable to meet the increased payments on their adjustable-rate debt. The interest rate sensitivity analysis assumes that the nature of the Company's assets and liabilities remains static. Interest rates may have an effect on customer preferences for deposits and loan products. Finally, the maturity and repricing characteristics of many assets and liabilities as set forth in the above table are not governed by contract but rather by management's best judgement based on current market conditions and anticipated business strategies. INTEREST RATE RISK The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company's interest-earning assets which could adversely affect the Company's results of operations if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company's stockholders' equity, if such securities were retained. The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the "Earnings and Economic Exposure to Changes in Interest Rate" report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company has been calculating the changes in the net interest income and net portfolio value for several years. In 1999, the OTS placed its focus on the net portfolio value ratio. This is the ratio used by the OTS to measure the interest rate sensitivity of the Company. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at December 31, 2001. Various estimates regarding prepayment assumptions are made at each level of rate shock. Actual results could differ significantly from these estimates. The Company is within the guidelines established by the Board of Directors for each interest rate level. Projected Percentage Change In --------------------------------------------- Net Interest Net Portfolio Net Portfolio Change in Interest Rate Income Value Value Ratio - -------------------------------------------------------------------------------- - -300 basis points .............. -4.72% -3.02% 9.76% - -200 basis points .............. -1.11 -1.28 10.13 - -100 basis points .............. 0.17 1.97 10.65 Base interest rate ............. -- -- 10.67 +100 basis points .............. -2.63 -14.47 9.42 +200 basis points .............. -5.89 -28.81 8.10 +300 basis points .............. -9.29 -43.21 6.68 Analysis of Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. Flushing Financial Corporation and Subsidiaries 12 2001 ANNUAL REPORT The following table sets forth certain information relating to the Company's Consolidated Statements of Financial Condition and the Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees that are considered adjustments to yields.
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS (Dollars in thousands) Interest-earning assets: Mortgage loans, net (1) (2) . $1,030,126 $ 83,811 8.14% $ 936,222 $76,094 8.13% $ 800,668 $65,998 8.24% Other loans, net (1) (2) .... 6,405 558 8.71 6,681 686 10.27 5,515 545 9.88 --------------------------------------------------------------------------------------------------- Total loans, net ........ 1,036,531 84,369 8.14 942,903 76,780 8.14 806,183 66,543 8.25 --------------------------------------------------------------------------------------------------- Mortgage-backed securities .. 228,681 14,938 6.53 261,903 18,304 6.99 287,154 18,703 6.51 Other securities ............ 21,640 1,260 5.82 16,504 1,182 7.16 20,331 1,212 5.96 --------------------------------------------------------------------------------------------------- Total securities ........ 250,321 16,198 6.47 278,407 19,486 7.00 307,485 19,915 6.48 --------------------------------------------------------------------------------------------------- Interest-earning deposits and federal funds sold .... 33,810 1,332 3.94 9,542 675 7.07 12,346 685 5.55 --------------------------------------------------------------------------------------------------- Total interest-earning assets . 1,320,662 101,899 7.72 1,230,852 96,941 7.88 1,126,014 87,143 7.74 ------------------ ----------------- ----------------- Other assets .................. 88,237 60,344 52,174 ---------- ---------- ---------- Total assets ............ $1,408,899 $1,291,196 $1,178,188 ========== ========== ========== LIABILITIES AND EQUITY Interest-bearing liabilities: Deposits: Passbook accounts ......... $ 188,701 3,767 2.00 $ 189,852 3,931 2.07 $ 200,601 4,156 2.07 NOW accounts .............. 30,736 504 1.64 27,838 530 1.90 26,281 499 1.90 Money market accounts ..... 71,820 2,309 3.21 42,791 1,438 3.36 36,191 1,105 3.05 --------- Certificate of deposit accounts ................ 423,812 23,062 5.44 385,237 21,488 5.58 364,947 19,130 5.24 Mortgagors' escrow deposits ................ 13,013 69 0.53 13,177 86 0.65 11,718 92 0.79 --------------------------------------------------------------------------------------------------- Total deposits .......... 728,082 29,711 4.08 658,895 27,473 4.17 639,738 24,982 3.91 Other borrowed funds .......... 508,434 29,991 5.90 478,675 29,575 6.18 379,259 22,813 6.02 --------------------------------------------------------------------------------------------------- Total interest-bearing liabilities.................. 1,236,516 59,702 4.83 1,137,570 57,048 5.01 1,018,997 47,795 4.69 ------------------ ----------------- ----------------- Other liabilities (3) ......... 42,845 35,073 35,655 ---------- ---------- ---------- Total liabilities ....... 1,279,361 1,172,643 1,054,652 Equity ........................ 129,538 118,553 123,536 ---------- ---------- ---------- Total liabilities and equity................. $1,408,899 $1,291,196 $1,178,188 ========== ========== ========== Net interest income/net interest rate spread (4) .... $ 42,197 2.89% $39,893 2.87% $39,348 3.05% ================== ================= ================ Net interest-earning assets/net interest margin (5) .................. $ 84,146 3.20% $ 93,282 3.24% $107,017 3.49% ========== ===== ========== ===== ======== ===== Ratio of interest-earning assets to interest-bearing liabilities ................. 1.07x 1.08x 1.11x ===== ===== =====
(1) Average balances include non-accrual loans. (2) Loan interest income includes loan fee income of approximately $321,000, $555,000 and $1,304,000 for the years ended December 31, 2001, 2000 and 1999, respectively. (3) Includes non-interest-bearing demand deposit accounts. (4) Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning assets. Flushing Financial Corporation and Subsidiaries 13 2001 ANNUAL REPORT RATE/VOLUME ANALYSIS The following table presents the impact of changes in interest rates and in the volume of interest-earning assets and interest-bearing liabilities on the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) changes attributable to changes in volume (changes in volume multiplied by the prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by the prior volume) and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Increase (Decrease) in Net Interest Income =========================================================================================================================== Year Ended December 31, 2001 Year Ended December 31, 2000 Compared to Year Ended Compared to Year Ended December 31, 2000 December 31, 1999 - --------------------------------------------------------------------------------------------------------------------------- Due to Due to ----------------- --------------- Volume Rate Net Volume Rate Net - --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Interest-Earning Assets Mortgage loans, net................................. $ 7,623 $ 94 $ 7,717 $10,960 $ (864) $10,096 Other loans......................................... (27) (101) (128) 118 23 141 Mortgage-backed securities.......................... (2,216) (1,150) (3,366) (1,711) 1,312 (399) Other securities.................................... 195 (117) 78 (251) 221 (30) Interest-earning deposits and federal funds sold.... 796 (139) 657 (177) 167 (10) -------------------------------------------------------------------- Total interest-earning assets................... 6,371 (1,413) 4,958 8,939 859 9,798 -------------------------------------------------------------------- Interest-Bearing Liabilities Deposits: Passbook accounts................................. (25) (139) (164) (225) -- (225) NOW accounts...................................... 84 (110) (26) 31 -- 31 Money market accounts............................. 932 (61) 871 214 119 333 Certificate of deposit accounts................... 2,100 (526) 1,574 1,088 1,270 2,358 Mortgagors' escrow deposits....................... (1) (16) (17) 11 (17) (6) Other borrowed funds................................ 1,533 (1,117) 416 6,139 623 6,762 -------------------------------------------------------------------- Total interest-bearing liabilities.............. 4,623 $(1,969) 2,654 7,258 1,995 9,253 -------------------------------------------------------------------- Net change in net interest income................... $ 1,748 $ 556 $ 2,304 $ 1,681 $(1,136) $ 545 ====================================================================
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 General. Diluted earnings per share increased 20.6% to $1.17 for the year ended December 31, 2001 from $0.97 for the year ended December 31, 2000. Net income increased $2.5 million, or 20.2%, to $14.9 million for the year ended December 31, 2001 from $12.4 million for the year ended December 31, 2000. This was due to increases in net interest income and non-interest income of $2.3 million and $2.2 million, respectively, partially offset by an increase in non-interest expense of $0.7 million. As a result of the increased net income before income taxes, there was a $1.3 million increase in income tax expense. The year ended December 31, 2000 included the sale of approximately $20.7 million of mortgage-backed securities in September, which resulted in an after tax loss of $445,000. Excluding this loss on sale of securities, net income for the year ended December 31, 2000 would have been $12.9 million, or $1.01 per diluted share. Interest Income. Interest income increased $5.0 million, or 5.1%, to $101.9 million for the year ended December 31, 2001 from $96.9 million for the year ended December 31, 2000. This increase is due to an increase of $89.8 million in the average balance of interest-earning assets, partially offset by a 16 basis point decline in the yield on interest-earning assets to 7.72% for 2001. Interest and fees on loans increased $7.6 million while interest on interest-earning deposits and federal funds sold increased $0.7 million. These increases were partially offset by a $3.3 million decrease in interest and dividends on investment securities. The increase in interest and fee income from loans is due to a $93.6 million increase in the average balance of loans to $1.04 billion during the year ended December 31, 2001, as the yield of 8.14% remained Flushing Financial Corporation and Subsidiaries 14 2001 ANNUAL REPORT unchanged for 2001 from 2000. A focus on the origination of higher yielding multi-family and commercial real estate mortgage loans, along with the origination of mixed-use property mortgage loans, allowed us to maintain the yield on our loan portfolio despite the declining interest rate environment experienced during the year ended December 31, 2001. The increase in interest on interest-earning deposits and federal funds sold is due to a $24.3 million increase in the average balance of these items, partially offset by a decline in the yield to 3.94% for 2001 from 7.07% for 2000. The decrease in interest and dividend income from investment securities reflects a $28.1 million decrease in the average balances of investment securities during 2001 to $250.3 million, combined with a 53 basis point decline in the yield on investment securities. The decrease in the average balance of investment securities is primarily due to the sale of mortgage-backed securities in the third quarter of 2000 and the reinvestment of the proceeds in BOLI. The investment in BOLI is included in Other Assets in the Consolidated Statements of Financial Condition, and the income earned on BOLI is included in Non-Interest Income in the Consolidated Statements of Income. The income on BOLI amounted to $1.3 million for the year ended December 31, 2001 compared to $0.4 million for the year ended December 31, 2000. Interest Expense. Interest expense increased $2.7 million, or 4.7%, to $59.7 million for the year ended December 31, 2001 from $57.0 million for the year ended December 31, 2000. The increase in interest expense is due to a $98.9 million increase in the average balance of total interest-bearing liabilities during 2001, partially offset by an 18 basis point decline in the cost of interest-bearing liabilities. The average balance for deposits increased $69.2 million to $728.1 million for 2001. The cost of deposits decreased nine basis points to 4.08% during 2001, as decreases in cost were seen in all categories of deposits in the declining interest rate environment experienced during the year. The average balance for borrowed funds increased $29.7 million to $508.4 million for 2001 from $478.7 million for 2000. The cost of borrowed funds decreased 28 basis points to 5.90% during 2001. Net Interest Income. Net interest income for the year ended December 31, 2001 totaled $42.2 million, an increase of $2.3 million from $39.9 million for 2000. The net interest spread improved two basis points to 2.89% for 2001 from 2.87% in 2000, as the yield on interest-earning assets declined 16 basis points while the cost of interest-bearing liabilities declined 18 basis points. However, the net interest margin declined four basis points to 3.20% for the year ended December 31, 2001 from 3.24% for the year ended December 31, 2000. The decline in the net interest margin is primarily due to a decline in the amount by which interest-earning assets exceed interest-bearing liabilities. During 2001, average interest-earning assets exceeded average interest-bearing liabilities by $84.2 million, a decline of $9.1 million from the $93.3 million during 2000. This decline is primarily due to the sale of mortgage-backed securities in September 2000 and the reinvestment of the proceeds in BOLI. Provision for Loan Losses. There was no provision for loan losses for the years ended December 31, 2001 and 2000. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for the years ended December 31, 2001 and 2000. The ratio of non-performing loans to gross loans was 0.22% at December 31, 2001 compared to 0.16% at December 31, 2000. The allowance for loan losses as percentage of non-performing loans was 283.85% and 415.32% at December 31, 2001 and 2000, respectively. The ratio of allowance for loan losses to gross loans was 0.61% and 0.68% at December 31, 2001 and 2000, respectively. The Company experienced net charge-offs of $136,000 and $97,000 for the years ended December 31, 2001 and 2000, respectively. Non-Interest Income. Non-interest income for the year ended December 31, 2001 increased $2.2 million, or 57.0%, to $6.1 million from $3.9 million for the year ended December 31, 2000. The increase is due to net gains on the sale of securities and loans of $0.3 million for the year ended December 31, 2001 compared to net losses on sales of securities and loans of $0.7 million in the year ended December 31, 2000, increased income earned on BOLI, and higher fee income from loan fees and banking services. Non-Interest Expense. Non-interest expense for the year ended December 31, 2001 totaled $24.5 million, representing an increase of $0.7 million, or 2.8%, from the year ended Flushing Financial Corporation and Subsidiaries 15 2001 ANNUAL REPORT December 31, 2000. The increase is primarily attributed to the full year impact of the expenses associated with the operations of the Kissena branch (opened in July 2000) and an increase in salaries and benefits and professional services (which includes advertising) in the fourth quarter of 2001 as the Bank focuses on expanding its current product offerings to enhance its ability to serve its customers. Management continues to closely monitor expenditures, resulting in an efficiency ratio of 50.1% for the year ended December 31, 2001 compared to 53.1% for 2000. Income Tax Provisions. Income tax expense for the year ended December 31, 2001 totaled $8.9 million, compared to $7.5 million for the year ended December 31, 2000. This increase is primarily attributed to the increase of $3.8 million in income before income taxes. The effective tax rate was 37.3% for the year ended December 31, 2001 compared to 37.7% for the year ended December 31, 2000. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 General. Diluted earnings per share increased 6.6% to $0.97 for the year ended December 31, 2000 from $0.92 for the year ended December 31, 1999. Net income decreased $0.3 million, or 2.5%, to $12.4 million for the year ended December 31, 2000 from $12.7 million for the year ended December 31, 1999. An increase in net interest income of $0.6 million was offset by a $1.2 million increase in non-interest expense. As a result of the lower net income before income taxes, there was a $0.3 million decrease in income tax expense. The year ended December 31, 2000 included the sale of approximately $20.7 million of mortgage-backed securities in September, which resulted in an after tax loss of $445,000. The proceeds of this sale were used to purchase $20.0 million of BOLI, which has been included in Other Assets in the Consolidated Statements of Financial Condition. The purchase of the BOLI allows the Company to fund a substantial portion of its employee benefit costs. The tax advantages of the BOLI were immediately accretive to earnings, and allowed the Company to recover this loss within one year. Excluding this loss on sale of securities, net income for the year ended December 31, 2000 would have been $12.9 million, or $1.01 per diluted share. Interest Income. Interest income increased $9.8 million, or 11.2%, to $96.9 million for the year ended December 31, 2000 from $87.1 million for the year ended December 31, 1999. This increase was primarily due to an increase of $10.2 million in interest and fees on loans during 2000, which was partially offset by a $0.4 million decrease in interest and dividends on investment securities. The increase in interest and fee income from loans reflected a $136.7 million increase in the average balance of loans to $942.9 million during 2000, which, however, was partially offset by an 11 basis point decrease in the yield on loans. The decrease in interest and dividend income from investment securities reflected a $29.1 million decrease in the average balances of investment securities during 2000 to $278.4 million, offset in part by a 52 basis point increase in the yield on investment securities. The decrease in the average balance of investment securities was due to the Company investing these funds in higher yielding loans, BOLI and/or utilizing the funds to reduce certain short-term borrowed funds. Interest Expense. Interest expense increased $9.3 million, or 19.4%, to $57.1 million for the year ended December 31, 2000 from $47.8 million for the year ended December 31, 1999. The increase in interest expense was due to a $118.6 million increase in the average balance of total interest-bearing liabilities during 2000, combined with a 32 basis point increase in the cost of interest-bearing liabilities. The increase in the average balance primarily reflected the Bank's increased use of higher costing FHLB-NY advances and repurchase agreements as an alternative source of funding to leverage its highly capitalized balance sheet. The average balance for deposits increased $19.2 million to $658.9 million for 2000. The cost of deposits increased 26 basis points to 4.17% during 2000 as the average balance of higher costing certificates of deposit increased, and certificates of deposit were opened and renewed at higher rates. The average balance for borrowed funds increased $99.4 million to $478.7 million for 2000 from $379.3 million for 1999. In addition, the cost of borrowed funds increased 16 basis to 6.18% during 2000. Net Interest Income. Net interest income for the year ended December 31, 2000 totaled $39.9 million, an increase of $0.6 million from $39.3 million for 1999. The net interest margin declined 25 basis points to 3.24% for the year ended Flushing Financial Corporation and Subsidiaries 16 2001 ANNUAL REPORT December 31, 2000 from 3.49% for the year ended December 31, 1999. The decline in the margin was primarily due to the 32 basis point increase in the average cost of funds to 5.01% for 2000 from 4.69% for 1999, which, however, was partially offset by a 14 basis point improvement in the average yield of interest-earning assets and a $104.8 million increase in the average balance of interest-earning assets. Provision for Loan Losses. There was no provision for loan losses for the year ended December 31, 2000, as compared to $36,000 for the year ended December 31, 1999. The ratio of non-performing loans to gross loans declined to 0.16% at December 31, 2000 from 0.36% at December 31, 1999. The allowance for loan losses as percentage of non-performing loans was 415.32% and 213.29% at December 31, 2000 and 1999, respectively. The ratio of allowance for loan losses to gross loans was 0.68% and 0.77% at December 31, 2000 and 1999, respectively. The Company experienced net charge-offs of $97,000 for the year ended December 31, 2000 compared to net recoveries of $20,000 for the year ended December 31, 1999. Non-Interest Income. Non-interest income for the year ended December 31, 2000 was $3.9 million, the same as that reported for the year ended December 31, 1999. Increases in fee income from mortgage operations and banking services and the quarterly dividends on FHLB-NY stock, along with the income earned on the investment in BOLI, were offset by the net loss on sales of securities and loans. The net loss on sales of securities and loans is primarily related to the loss on the sale of securities in the third quarter of 2000, the proceeds from which were invested in BOLI. Non-Interest Expense. Non-interest expense for the year ended December 31, 2000 totaled $23.8 million, representing an increase of $1.2 million, or 5.1% from the year ended December 31, 1999. The increase was primarily attributed to the operating expenses of the Co-op City branch, opened in November 1999, and the Kissena branch, opened in July 2000. The efficiency ratio was 53.1% for the year ended December 31, 2000 compared to 51.5% for 1999. Income Tax Provisions. Income tax expense for the year ended December 31, 2000 totaled $7.5 million, compared to $7.8 million for the year ended December 31, 1999. This decrease was primarily attributed to the decrease of $0.6 million in income before income taxes. The effective tax rate was 37.7% for the year ended December 31, 2000 compared to 38.0% for the year ended December 31, 1999. LIQUIDITY, REGULATORY CAPITAL AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans, mortgage-backed and other securities, proceeds from sales of securities and, to a lesser extent, proceeds from sales of loans. Deposit flows and mortgage prepayments, however, are greatly influenced by general interest rates, economic conditions and competition. At December 31, 2001, the Bank had an approved overnight line of credit of $50.0 million with the FHLB-NY. In total, as of December 31, 2001, the Bank may borrow up to $443.2 million from the FHLB-NY in Federal Home Loan advances and overnight lines of credit. As of December 31, 2001, the Bank had borrowed $400.3 million in FHLB-NY advances, which limits the funds available under the over-night line of credit to $42.9 million at December 31, 2001. There were no funds outstanding at December 31, 2001 under the overnight line of credit with the FHLB-NY. In addition, the Bank had $113.2 million in repurchase agreements to fund lending and investment opportunities. (See Note 8 of Notes to Consolidated Financial Statements.) The Company's most liquid assets are cash and cash equivalents, which include cash and due from banks, overnight interest-earning deposits and federal funds sold with original maturities of 90 days or less. The level of these assets is dependent on the Company's operating, financing, lending and investing activities during any given period. At December 31, 2001, cash and cash equivalents totaled $38.5 million, an increase of $16.5 million from December 31, 2000. The Company also held marketable securities available for sale with a carrying value of $305.5 million at December 31, 2001. At December 31, 2001, the Company had commitments to extend credit (principally real estate mortgage loans) of $39.0 million and open lines of credit for borrowers (principally construction loan lines of credit) of $12.2 million. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future cash requirements, whereas the amounts of lines of credit may not be indicative of the Company's future cash requirements. The loan commitments generally expire in ninety days, while construction loan lines of credit mature within eighteen Flushing Financial Corporation and Subsidiaries 17 2001 ANNUAL REPORT months. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company's total interest and operating expenses in 2001 were $59.7 million and $24.5 million, respectively. Certificates of deposit accounts which are scheduled to mature in one year or less as of December 31, 2001 totaled $251.6 million. The market value of the assets of the Company's defined benefit pension plan is $9.2 million at December 31, 2001, which is $0.7 million less than the benefit obligation. The underfunding is due to a decline in the market value of pension plan's investments in 2001. The Company does not anticipate a change in the market value of these assets which would have a significant effect on liquidity, capital resources, or results of operations. During 2001, funds provided by the Company's operating activities amounted to $15.2 million. These funds, together with $130.3 million provided by financing activities and $22.0 million available at the beginning of the year, were utilized to fund net investing activities of $128.9 million. Financing activities were primarily provided by a growth in due to depositors of $136.5 million. Principal payments and calls on loans and securities provided additional funds. The primary investment activity of the Company is the origination of loans, and the purchase of mortgage-backed securities. During 2001, the Bank had loan originations and purchases of $230.3 million. Further, during 2001, the Company purchased $189.9 million of mortgage-backed and other securities. At the time of the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, the Bank was required by the OTS to establish a liquidation account which is reduced as and to the extent that eligible account holders reduce their qualifying deposits. The balance of the liquidation account at December 31, 2001 was $7.2 million. In the unlikely event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account. The Bank is not permitted to declare or pay a dividend or to repurchase any of its capital stock if the effect would be to cause the Bank's regulatory capital to be reduced below the amount required for the liquidation account. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the declaration or payment of dividends to its stockholders, although the source of such dividends could depend upon dividend payments from the Bank. The Holding Company is subject, however, to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of its net assets (the amount by which total assets exceed total liabilities) over its stated capital or, if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. Regulatory Capital Position. Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards: tangible capital, core capital and total risk-based capital. Such classifications are used by the OTS and other bank regulatory agencies to determine matters ranging from each institution's semi-annual FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. At December 31, 2001 and 2000, the Bank exceeded each of the three OTS capital requirements. (See Note 13 of Notes to Consolidated Financial Statements.) IMPACT OF NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. The Statement changes the approach to how goodwill and other intangible assets are accounted for subsequent to their recognition. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will be amortized over their useful lives. The Statement provides specific guidance on testing intangible assets that will not be amortized for impairment. As of December 31, 2001, the Company has goodwill with a remaining balance of $3.9 million recorded in connection with its purchase of New York Federal Savings Bank in 1997. Amortization expense for each of the years in the three-year period ended December 31, 2001 was $0.4 million. Effective January 1, 2002, the Company is no longer recording this amortization expense, but rather is required, at least annually, to test the remaining goodwill for impairment. The impairment test performed in connection with the adoption of this Statement in January 2002 did not require an adjustment to the carrying value of the goodwill. Flushing Financial Corporation and Subsidiaries 18 2001 ANNUAL REPORT OTHER TRENDS AND CONTINGENCIES A declining interest rate environment marked the year ended December 31, 2001. This presented significant challenges and opportunities in managing our mortgage loan and investment portfolios. We strategically focused our loan origination efforts in 2001 on multi-family and commercial real estate mortgage loans, and on mixed-use property mortgage loans. Mixed-use properties are those which contain both residential dwelling units and commercial units. These types of loans have higher interest rates than traditional one-to-four family residential mortgage loans. As a result, despite the declining interest-rate environment of 2001, we were able to maintain the yield on our loan portfolio. Due to the availability of lower interest rates, many of our mortgagors chose to refinance their loans. We saw a significant increase in our single-family residential mortgagors refinancing with other institutions and realized a $53.7 million increase in due to depositors during the fourth quarter of 2001. Combining the increase in deposits with higher than anticipated loan prepayments, we experienced an increase in our cash position. Rather than investing these funds in low-yielding long-term investment securities, we invested these funds in shorter-term investment securities in order to provide readily available funding for loan originations in 2002. At December 31, 2001, we had loans in process of approximately $90 million. For the year ended December 31, 2001, we experienced an increase in due to depositors of $136.5 million. The higher costing certificate of deposits increased $65.0 million while other lower costing deposits increased $71.5 million. We seek to maintain our deposits at competitive rates. In recent years, we have increased our utilization of FHLB-NY advances and repurchase agreements as alternative sources of funding. During 2001, as a result of the increase in deposits, we increased our borrowed funds by only $4.6 million, the smallest increase in borrowed funds in over five years. As a result of the declining interest rate environment experienced during 2001, and the increase in lower costing deposits, we experienced a decrease in our cost of funds in each quarter during 2001. The cost of funds declined to 4.47% in the fourth quarter of 2001 from 5.19% in the fourth quarter of 2000. As a result of the declining interest-rate environment during 2001, the yield on our total interest-earning assets declined 16 basis points. This was more than offset by an 18 basis point decline in the cost of our total interest-bearing liabilities. This resulted in an increase of two basis points in the net interest spread. However, the net interest rate margin declined four basis points to 3.20% for the year ended December 31, 2001 from 3.24% for the year ended December 31, 2000. The decline in the margin is primarily due to a decline in the amount by which interest-earning assets exceed interest-bearing liabilities. During 2001, average interest-earning assets exceeded average interest-bearing liabilities by $84.2 million, a decline of $9.1 million from the $93.3 million during 2000. This decline is primarily due to the sale of mortgage-backed securities in September 2000 and the reinvestment of the proceeds in BOLI. The net interest margin improved to 3.34% in the fourth quarter of 2001 from 3.09% in the fourth quarter of 2000. It appears the decline in interest rates may have ended in the fourth quarter of 2001. While we are unable to predict the direction of future interest rate changes, it appears interest rates will not go lower. Should interest rates increase during 2002, we could see an increase in the cost of our existing deposit accounts and in obtaining new funds. However, approximately 55% of the Company's certificates of deposit accounts and borrowed funds do not reprice or mature during the next year. As a result, the average cost of our interest-bearing liabilities may not immediately reflect the full effect of an increasing interest-rate environment. Also, in an increasing interest rate environment, mortgage loans and mortgage-backed securities with lower rates do not usually prepay. This could result in our cost of funds increasing more than the yield on our interest-earning assets. The Company's operating results can also be affected by national and local economic conditions. During 2001, the nation's economy slowed and was generally considered to be in a recession. The local area economy was further hurt by the September 11, 2001 attacks on New York City's financial district, in particular, the destruction of the World Trade Center buildings. The Bank does not have a significant amount of mortgages or other loans to borrowers located in the area that was destroyed or damaged in the attacks of September 11, 2001. A slowing economy can result in borrowers defaulting on their loans, or withdrawing their funds on deposit at the Bank to meet their financial obligations. While we have not seen a significant increase in delinquent loans, and have seen an increase in deposits, we can not predict the effect of a slowing economy on the Company's financial condition or operating results. Flushing Financial Corporation and Subsidiaries 19 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except share data) ASSETS Cash and due from banks ............................................................................... $ 20,008 $ 10,235 Federal funds sold and overnight interest-earning deposits ............................................ 18,500 11,758 Securities available for sale: Mortgage-backed securities .......................................................................... 243,058 238,626 Other securities .................................................................................... 62,481 16,594 Loans ................................................................................................. 1,073,782 993,080 Less: Allowance for loan losses ..................................................................... (6,585) (6,721) -------------------------- Net loans ......................................................................................... 1,067,197 986,359 Interest and dividends receivable ..................................................................... 7,945 7,724 Real estate owned, net ................................................................................ 93 44 Bank premises and equipment, net ...................................................................... 5,565 6,311 Federal Home Loan Bank of New York stock .............................................................. 25,422 24,932 Goodwill .............................................................................................. 3,905 4,272 Other assets .......................................................................................... 33,355 31,237 -------------------------- Total assets .................................................................................... $ 1,487,529 $ 1,338,092 ========================== LIABILITIES Due to depositors: Non-interest-bearing ................................................................................ $ 28,594 $ 20,913 Interest-bearing .................................................................................... 789,923 661,145 Mortgagors' escrow deposits ........................................................................... 10,065 7,753 Borrowed funds, including securities sold under agreements to repurchase of $113,150 and $164,382 at December 31, 2001 and 2000, respectively ................................................ 513,435 508,839 Other liabilities ..................................................................................... 12,125 12,705 -------------------------- Total liabilities ............................................................................... 1,354,142 1,211,355 Commitments and contingencies (Note 14) ............................................................... STOCKHOLDERS' EQUITY Preferred stock, ($0.01 par value, authorized 5,000,000 shares; none issued) .......................... -- -- Common stock, ($0.01 par value, authorized 20,000,000 shares; 13,852,063 and 15,991,638 shares issued at December 31, 2001 and 2000, respectively; 13,487,784 and 13,907,881 shares outstanding at December 31, 2001 and 2000, respectively) ........................................................... 139 114 Additional paid-in capital ............................................................................ 45,280 76,396 Treasury stock, at average cost (364,279 and 2,083,757 shares at December 31, 2001 and 2000, respectively) (5,750) (31,755) Unearned compensation ................................................................................. (7,766) (7,781) Retained earnings ..................................................................................... 99,641 89,896 Accumulated other comprehensive income, net of taxes .................................................. 1,843 (133) -------------------------- Total stockholders' equity ...................................................................... 133,387 126,737 Total liabilities and stockholders' equity ...................................................... $ 1,487,529 $ 1,338,092 ==========================
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 20 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF INCOME ================================================================================
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) INTEREST AND DIVIDEND INCOME Interest and fees on loans ................................................ $ 84,369 $ 76,780 $66,543 Interest and dividends on securities: Interest ................................................................ 15,943 19,214 19,677 Dividends ............................................................... 255 272 238 Other interest income ..................................................... 1,332 675 685 ---------------------------------------------- Total interest and dividend income ...................................... 101,899 96,941 87,143 ---------------------------------------------- INTEREST EXPENSE Deposits .................................................................. 29,711 27,473 24,982 Other interest expense .................................................... 29,991 29,575 22,813 ---------------------------------------------- Total interest expense .................................................. 59,702 57,048 47,795 NET INTEREST INCOME ..................................................... 42,197 39,893 39,348 Provision for loan losses ................................................. -- -- 36 ---------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ..................... 42,197 39,893 39,312 ---------------------------------------------- NON-INTEREST INCOME Other fee income .......................................................... 2,261 2,053 1,916 Net gain (loss) on sales of securities and loans .......................... 321 (651) 252 Other income .............................................................. 3,476 2,456 1,706 ---------------------------------------------- Total non-interest income ............................................... 6,058 3,858 3,874 ---------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits ............................................ 12,679 12,254 11,221 Occupancy and equipment ................................................... 2,368 2,222 1,936 Professional services ..................................................... 2,291 2,245 2,412 Data processing ........................................................... 1,313 1,309 1,285 Depreciation and amortization of premises and equipment ................... 1,065 1,085 1,016 Other operating ........................................................... 4,741 4,682 4,776 ---------------------------------------------- Total non-interest expense .............................................. 24,457 23,797 22,646 ---------------------------------------------- INCOME BEFORE INCOME TAXES ................................................ 23,798 19,954 20,540 ---------------------------------------------- PROVISION FOR INCOME TAXES Federal ................................................................... 7,245 6,195 6,412 State and local ........................................................... 1,624 1,337 1,393 ---------------------------------------------- Total provision for income taxes ........................................ 8,869 7,532 7,805 ---------------------------------------------- NET INCOME ................................................................ $ 14,929 $ 12,422 $12,735 ============================================== Basic earnings per share .................................................. $ 1.22 $ 0.99 $ 0.94 Diluted earnings per share ................................................ $ 1.17 $ 0.97 $ 0.92
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 21 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ================================================================================
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except share data) COMMON STOCK Balance, beginning of year ................................................................ $ 114 $ 114 $ 114 Stock dividend (4,617,270 shares, 2,120,885 shares funded from Treasury) .................. 25 -- -- ------------------------------------- Balance, end of year ...................................................................... $ 139 $ 114 $ 114 ==================================== ADDITIONAL PAID-IN CAPITAL Balance, beginning of year ................................................................ $ 76,396 $ 75,952 $ 75,452 Stock dividend ............................................................................ (33,169) -- -- Award of shares released from Employee Benefit Trust (32,930, 49,480 and 43,227 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ..................... 376 257 253 Restricted stock awards (78,675, 6,900 and 115,125 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... 391 3 8 Stock options exercised (8,250 shares for the year ended December 31, 2001) ............... 5 -- -- Tax benefit of unearned compensation ...................................................... 1,281 184 239 ------------------------------------- Balance, end of year ...................................................................... $ 45,280 $ 76,396 $ 75,952 ==================================== TREASURY STOCK Balance, beginning of year ................................................................ $(31,755) $(25,308) $ (6,949) Purchases of common shares outstanding (639,950, 475,516 and 1,268,900 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................... (10,694) (6,797) (19,844) Stock dividend ............................................................................ 33,142 -- -- Restricted stock award forfeitures (1,400, 1,500 and 5,700 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... (26) (22) (84) Restricted stock awards (52,950, 9,600 and 76,750 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... 821 148 1,177 Repurchase of restricted stock awards (23,757, 23,234 and 19,646 shares for the years ended December 31, 2001, 2000 and 1999, respectively) to satisfy tax obligations ........ (519) (333) (291) Stock options exercised (210,750, 36,600, and 44,662 shares for the years ended December 31, 2001, 2000, and 1999, respectively) ........................................ 3,281 557 683 ------------------------------------- Balance, end of year ...................................................................... $ (5,750) $(31,755) $(25,308) ------------------------------------- UNEARNED COMPENSATION Balance, beginning of year ................................................................ $ (7,781) $ (9,142) $ (9,332) Release of shares from Employee Benefit Trust (76,641, 69,176 and 57,183 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................... 391 354 293 Restricted stock awards (78,675, 14,400 and 115,125 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... (1,212) (145) (1,185) Restricted stock award forfeitures (2,100, 2,250 and 8,550 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... 26 22 84 Restricted stock award expense ............................................................ 810 1,130 998 ------------------------------------- Balance, end of year ...................................................................... $ (7,766) $ (7,781) $ (9,142) ====================================
Continued Flushing Financial Corporation and Subsidiaries 22 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ================================================================================ (continued)
=================================================================================================================================== For the years ended December 31, 2001 2000 1999 (In thousands, except share data) - ----------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year .................................................................. $ 89,896 $ 81,056 $ 71,460 Net income .................................................................................. 14,929 12,422 12,735 Stock options exercised (246,475, 54,900 and 66,993 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ........................................... (1,362) (159) (191) Restricted stock awards (7,500 shares for the year ended December 31, 2000) ................. -- (6) -- Cash dividends declared and paid ............................................................ (3,822) (3,417) (2,948) ----------------------------------- Balance, end of year ........................................................................ $ 99,641 $ 89,896 $ 81,056 =================================== ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES Balance, beginning of year .................................................................. $ (133) $ (4,496) $ 1,342 Change in net unrealized gain (loss), net of taxes of approximately $1,719, $3,434 and $(4,936) for the years ended December 31, 2001, 2000 and 1999, respectively, on securities available for sale .......................................................... 2,035 3,902 (5,794) Less: Reclassification adjustment for losses (gains) included in net income, net of taxes of approximately $35, $(283) and $37 for the years ended December 31, 2001, 2000 and 1999, respectively .................................................................... (59) 461 (44) ----------------------------------- Balance, end of year ........................................................................ $ 1,843 $ (133) $ (4,496) =================================== TOTAL STOCKHOLDERS' EQUITY .................................................................. $ 133,387 $ 126,737 $ 118,176 =================================== COMPREHENSIVE INCOME Net income .................................................................................. $ 14,929 $ 12,422 $ 12,735 Other comprehensive income, net of tax: Unrealized gains (losses) on securities ................................................... 1,976 4,363 (5,838) ----------------------------------- Comprehensive income ........................................................................ $ 16,905 $ 16,785 $ 6,897 ===================================
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 23 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOW ================================================================================
=================================================================================================================================== For the years ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) OPERATING ACTIVITIES Net income ............................................................................. $ 14,929 $ 12,422 $ 12,735 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ............................................................ -- -- 36 Provision for losses on real estate owned ............................................ 4 -- -- Depreciation and amortization of bank premises and equipment ......................... 1,065 1,085 1,016 Amortization of goodwill ............................................................. 367 366 366 Net (gain) loss on sales of securities ............................................... (94) 744 (81) Net gain on sales of loans ........................................................... (227) (93) (171) Net (gain) loss on sales of real estate owned ........................................ (15) (199) 10 Amortization of unearned premium, net of accretion of unearned discount .............. 1,215 1,142 2,157 Amortization of deferred income ...................................................... (309) (544) (1,315) Deferred income tax (benefit) provision .............................................. 132 7 (140) Deferred compensation ................................................................ 469 232 192 Net increase (decrease) in other assets and liabilities ................................ (3,912) (2,709) 645 -------------------------------------- Unearned compensation .................................................................. 1,577 1,741 1,544 -------------------------------------- Net cash provided by operating activities .......................................... 15,201 14,194 16,994 INVESTING ACTIVITIES Purchases of bank premises and equipment ............................................... (319) (1,194) (777) Purchases of Federal Home Loan Bank shares ............................................. (490) (2,340) (5,272) Purchase of Bank Owned Life Insurance .................................................. -- (20,000) -- Purchases of securities available for sale ............................................. (189,858) (28,667) (75,430) Proceeds from sales and calls of securities available for sale ......................... 39,395 28,735 8,547 Proceeds from maturities and prepayments of securities available for sale .............. 102,953 36,130 96,112 Net originations and repayments of loans ............................................... (79,840) (94,312) (108,735) Purchases of loans ..................................................................... (887) (15,783) (15,970) Proceeds from sales of real estate owned ............................................... 106 567 67 -------------------------------------- Net cash used in investing activities .............................................. (128,940) (96,864) (101,458) --------------------------------------
Continued Flushing Financial Corporation and Subsidiaries 24 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOW ================================================================================ (continued)
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) FINANCING ACTIVITIES Net increase (decrease) in non-interest bearing deposits ........................... $ 7,681 $ 423 $ (7,015) Net increase in interest-bearing deposits .......................................... 128,778 25,717 5,437 Net increase (decrease) in mortgagors' escrow deposits ............................. 2,312 (3,270) 4,460 Net increase (decrease) in short-term borrowed funds ............................... (14,232) (5,768) 20,000 Proceeds from long-term borrowings ................................................. 123,000 159,150 181,000 Repayment of long-term borrowings .................................................. (104,172) (96,374) (84,627) Purchases of treasury stock, net ................................................... (9,291) (6,732) (19,643) Cash dividends paid ................................................................ (3,822) (3,417) (2,948) ----------------------------------------- Net cash provided by financing activities .................................... 130,254 69,729 96,664 Net increase (decrease) in cash and cash equivalents ............................... 16,515 (12,941) 12,200 Cash and cash equivalents, beginning of year ....................................... 21,993 34,934 22,734 ----------------------------------------- Cash and cash equivalents, end of year ....................................... $ 38,508 $ 21,993 $ 34,934 ========================================= SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid ...................................................................... $ 59,937 $ 56,227 $ 49,532 Income taxes paid .................................................................. 7,615 7,849 9,723 Non-cash activities: Loans originated as the result of real estate sales .............................. -- 191 -- Loans transferred through the foreclosure of a related mortgage loan to real estate owned .............................................................. 119 235 374
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 25 2001 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ For the years ended December 31, 2001, 2000 and 1999 1 NATURE OF OPERATIONS Flushing Financial Corporation (the "Holding Company"), a Delaware business corporation, is a savings and loan holding company organized at the direction of its subsidiary, Flushing Savings Bank, FSB (the "Bank"), in connection with the Bank's conversion from a mutual to capital stock form of organization. The Holding Company and its direct and indirect wholly-owned subsidiaries, the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation and FSB Properties, Incorporated are collectively herein referred to as the "Company." The Company's principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from operations and borrowings, primarily in (1) originations and purchases of one-to-four family residential mortgage loans (focusing on mixed-use properties--properties that contain both residential dwelling units and commercial units), multi-family income-producing property loans, and 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 Company originates certain other loans, including construction loans, Small Business Administration loans and other small business loans. The Bank conducts its business through ten full-service banking offices, five of which are located in Queens County, two in Nassau County, one in Kings County (Brooklyn), one in Bronx County and one in New York County (Manhattan), New York. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Company follow generally accepted accounting principles ("GAAP") and general practices applicable to the banking industry. The policies which materially affect the determination of the Company's financial position, results of operations and cash flows are summarized below. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Flushing Financial Corporation and its direct and indirect wholly-owned subsidiaries, the Bank, Flushing Preferred Funding Corporation ("FPFC"), Flushing Service Corporation ("FSC") and FSB Properties, Incorporated ("Properties"). FPFC is a real estate investment trust incorporated on November 5, 1997 to hold a portion of the Bank's mortgage loans to facilitate access to capital markets. FSC was formed to market insurance products and mutual funds. Properties is an inactive subsidiary whose purpose was to manage real estate properties and joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Cash and cash equivalents: For the purpose of reporting cash flows, the Company defines cash and due from banks, overnight interest-earning deposits and federal funds sold with original maturities of 90 days or less as cash and cash equivalents. Securities available for sale: Securities are classified as available for sale when management intends to hold the securities for an indefinite period of time or when the securities may be utilized for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Premiums and discounts are amortized or accreted, respectively, using the level-yield method. Realized gains and losses on the sales of securities are determined using the specific identification method. Unrealized gains and losses (other than unrealized losses considered other than temporary) on securities available for sale are excluded from earnings and reported as accumulated other comprehensive income, net of taxes. Loans: Loans are carried at amortized cost. Interest on loans is recognized on the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency of ninety days or more, indicate reasonable doubt as to the timely collectibility of such income. Interest Flushing Financial Corporation and Subsidiaries 26 2001 ANNUAL REPORT previously recognized on non-accrual loans is reversed against interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status after the loan meets certain criteria. Subsequent cash payments received on non-accrual loans that do not meet the criteria are applied first as a reduction of principal until all principal is recovered and then subsequently to interest. The portion of loan origination fees that exceeds the direct costs of underwriting and closing loans is deferred. The deferred fees received in connection with a loan are recognized as an adjustment of the loan's yield over the shorter of the repricing period or the contractual life of the related loan by the interest method, which results in a constant rate of return. The direct costs of underwriting and closing loans that exceed loan origination fees, and premiums on mortgage loans purchased, are deferred and amortized to income over the life of the loans using the level-yield method. Allowance for loan losses: The Company maintains an allowance for loan losses at an amount, which, in management's judgment, is adequate to absorb estimated losses on existing loans that may become uncollectible. Management's judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. A loan is considered impaired when, based upon current information, the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Interest income on impaired loans is recorded on the cash basis. The Company reviews all non-accrual loans for impairment. Real estate owned: Real estate owned consists of property acquired by foreclosure. These properties are carried at the lower of carrying amount or fair value (which is based on appraised value with certain adjustments) less estimated costs to sell (hereinafter defined as fair value). This determination is made on an individual asset basis. If the fair value is less than the carrying amount, the deficiency is recognized as a valuation allowance. Further decreases to fair value will be recorded in this valuation allowance through a provision for losses on real estate owned. The Company utilizes estimates of fair value to determine the amount of its valuation allowance. Actual values may differ from those estimates. Bank premises and equipment: Bank premises and equipment are stated at cost, less depreciation accumulated on a straight-line basis over the estimated useful lives of the related assets (3 to 40 years). Leasehold improvements are amortized on a straight-line basis over the terms of the related leases or the lives of the assets, whichever is shorter. Federal Home Loan Bank Stock: In connection with the Bank's borrowings from the Federal Home Loan Bank of New York ("FHLB-NY"), the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par. Such shares are redeemed by FHLB-NY at par with reductions in the Bank's borrowing levels. The Bank carries this investment at historical cost. Securities sold under agreements to repurchase: Securities sold under agreements to repurchase are accounted for as collateralized financing and are carried at amounts at which the securities will be subsequently reacquired as specified in the respective agreements. Goodwill: Goodwill, prior to January 1, 2002, was amortized using the straight-line method over fifteen years. The Company had periodically reviewed its goodwill for possible impairment. Upon the adoption of SFAS No. 142 on January 1, 2002, the company no longer amortizes goodwill, but rather performs annual tests for impairment. Stock Compensation Plans: Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," establishes a fair value based method of accounting for employee stock compensation plans. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using Flushing Financial Corporation and Subsidiaries 27 2001 ANNUAL REPORT the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue with the accounting methodology in Opinion No. 25. As a result, proforma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied, are provided in the notes to the consolidated financial statements. Earnings per share: Basic earnings per share for the years ended December 31, 2001, 2000 and 1999 was computed by dividing net income by the total weighted average number of common shares outstanding, including only the vested portion of restricted stock awards. Diluted earnings per share includes the additional dilutive effect of stock options outstanding and the unvested portions of restricted stock awards during the period. The shares held in the Company's Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share. Earnings per share has been computed based on the following for the years ended December 31: ================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- (Amounts in thousands, except per share data) Net income ...................................... $14,929 $12,422 $12,735 Divided by: Weighted average common shares outstanding .......................... 12,267 12,565 13,620 Weighted average common stock equivalents ........................... 504 227 293 --------------------------- Total weighted average common shares outstanding & common stock equivalents .................... 12,771 12,792 13,913 Basic earnings per share ........................ $ 1.22 $ 0.99 $ 0.94 Diluted earnings per share ...................... $ 1.17 $ 0.97 $ 0.92 ================================================================================ 3 LOANS The composition of loans is as follows at December 31: ================================================================================ 2001 2000 - -------------------------------------------------------------------------------- (In thousands) One-to-four family residential ......................... $ 461,801 $467,784 Multi-family residential ............................... 369,651 334,307 Commercial real estate ................................. 214,410 167,549 Co-operative apartments ................................ 6,601 8,009 Construction ........................................... 13,807 8,304 Small Business Administration .......................... 3,911 2,844 Consumer and other ..................................... 2,814 3,704 --------------------- Gross loans .......................................... 1,072,995 992,501 Unearned loan fees and deferred costs, net ........................................... 787 579 --------------------- Total loans ........................................ $1,073,782 $993,080 ================================================================================ The total amount of loans on non-accrual status, and loans classified as impaired, at December 31, 2001, 2000 and 1999 was $2,320,000, $1,618,000 and $3,196,000, respectively. The portion of the allowance for loan losses allocated to impaired loans was $541,000 (8.2%), $257,000 (3.8%) and $360,000 (5.3%) at December 31, 2001, 2000 and 1999, respectively. The portion of the impaired loan amount above 100% of the loan-to-value ratio is charged off. The average balance of impaired loans was $2,105,000, $1,692,000 and $4,269,000 for 2001, 2000 and 1999, respectively. The following is a summary of interest foregone on non-accrual loans for the years ended December 31: ================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- (In thousands) Interest income that would have been recognized had the loans performed in accordance with their original terms ................................. $193 $141 $254 Less: Interest income included in the results of operations ...................... 76 62 46 ------------------------ Foregone interest ................................ $117 $ 79 $208 ================================================================================ Flushing Financial Corporation and Subsidiaries 28 2001 ANNUAL REPORT The following are changes in the allowance for loan losses for the years ended December 31: - ------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- (In thousands) Balance, beginning of year ........... $ 6,721 $ 6,818 $ 6,762 Provision for loan losses ............ -- -- 36 Charge-offs .......................... (149) (99) (133) Recoveries ........................... 13 2 153 ------------------------------------ Balance, end of year ............... $ 6,585 $ 6,721 $ 6,818 ================================================================================ 4 REAL ESTATE OWNED The following are changes in the allowance for losses on real estate owned for the years ended December 31: ================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- (In thousands) Balance, beginning of year ............................. $-- $ -- $ -- Provision .............................................. 4 -- -- Reduction due to sales of real estate owned ................................... (4) -- -- --------------------- Balance, end of year ............................... $-- $ -- $ -- ================================================================================ 5 BANK PREMISES AND EQUIPMENT, NET Bank premises and equipment are as follows at December 31: ================================================================================ 2001 2000 - -------------------------------------------------------------------------------- (In thousands) Land ....................................................... $ 801 $ 801 Building and leasehold improvements ........................ 4,231 4,213 Equipment and furniture .................................... 9,162 8,880 ---------------- Total .................................................. 14,194 13,894 Less: Accumulated depreciation and amortization ............................................. 8,629 7,583 ---------------- Bank premises and equipment, net ....................... $ 5,565 $ 6,311 ================================================================================ 6 DEBT AND EQUITY SECURITIES Investments in equity securities that have readily determinable fair values and all investments in debt securities are classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities available for sale and (3) securities held-to-maturity. The Company did not hold any trading securities or securities held-to-maturity during the years ended December 31, 2001, 2000 and 1999. Securities available for sale are recorded at estimated fair value based on dealer quotations where available. Actual values may differ from estimates provided by outside dealers. Securities classified as held-to-maturity would be stated at cost, adjusted for amortization of premium and accretion of discount using the level-yield method. - -------------------------------------------------------------------------------- The amortized cost and estimated fair value of the Company's securities classified as available for sale at December 31, 2001 are as follows:
======================================================================================================================= Gross Gross Amortized Estimated Unrealized Unrealized Cost Fair Value Gains Losses - ----------------------------------------------------------------------------------------------------------------------- (In thousands) Corporate debt securities ....................... $ 32,884 $ 32,985 $ 123 $ 22 Public utility debt securities .................. 8,042 8,132 90 -- Mutual funds .................................... 18,899 18,867 32 64 Other ........................................... 1,884 2,497 614 1 ----------------------------------------------------------- Total other securities ........................ 61,709 62,481 859 87 ----------------------------------------------------------- GNMA ............................................ 132,678 134,125 1,560 113 FNMA ............................................ 50,895 51,359 591 127 FHLMC ........................................... 20,552 20,810 273 15 REMIC and CMO ................................... 36,292 36,764 500 28 ----------------------------------------------------------- Total mortgage-backed securities .............. 240,417 243,058 2,924 283 ----------------------------------------------------------- Total securities available for sale ........... $302,126 $305,539 $3,783 $370 =======================================================================================================================
Flushing Financial Corporation and Subsidiaries 29 2001 ANNUAL REPORT The amortized cost and estimated fair value of the Company's securities, classified as available for sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ================================================================================ Amortized Estimated Cost Fair Value - -------------------------------------------------------------------------------- (In thousands) Due in one year or less .......................... $ 44,418 $ 45,103 Due after one year through five years ............ 16,385 16,472 Due after five years through ten years ........... 306 306 Due after ten years .............................. 600 600 ----------------------- Total other securities ......................... 61,709 62,481 Mortgage-backed securities ....................... 240,417 243,058 ----------------------- Total securities available for sale ............ $302,126 $305,539 ================================================================================ The amortized cost and estimated fair value of the Company's securities classified as available for sale at December 31, 2000 were as follows:
================================================================================================================================ Gross Gross Amortized Estimated Unrealized Unrealized Cost Fair Value Gains Losses - -------------------------------------------------------------------------------------------------------------------------------- (In thousands) U.S. Treasury securities and government agencies ............ $ 5,990 $ 5,932 $ 10 $ 68 Corporate debt securities ................................... 2,835 2,847 12 -- Public utility debt securities .............................. 1,001 1,038 37 -- Mutual funds ................................................ 3,566 3,593 27 -- Other ....................................................... 2,851 3,184 345 12 ---------------------------------------------------------- Total other securities .................................... 16,243 16,594 431 80 ---------------------------------------------------------- GNMA ........................................................ 201,688 200,718 681 1,651 FNMA ........................................................ 9,516 9,725 224 15 FHLMC ....................................................... 8,527 8,612 121 36 REMIC ....................................................... 19,493 19,571 78 -- ---------------------------------------------------------- Total mortgage-backed securities .......................... 239,224 238,626 1,104 1,702 ---------------------------------------------------------- Total securities available for sale ....................... $255,467 $255,220 $1,535 $1,782 ================================================================================================================================
For the year ended December 31, 2001, gross gains of $179,000 and losses of $85,000 were realized on sales of securities available for sale. For the year ended December 31, 2000, gross gains of $205,000 and losses of $949,000 were realized on sales of securities available for sale. For the year ended December 31, 1999, gross gains of $144,000 and losses of $63,000 were realized on sales of securities available for sale. Flushing Financial Corporation and Subsidiaries 30 2001 ANNUAL REPORT 7 DEPOSITS Total deposits at December 31, 2001 and 2000, and the weighted average rate on deposits at December 31, 2001, are as follows:
============================================================================================================================ Weighted Average Rate 2001 2000 2001 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Interest-bearing deposits: Certificate of deposit accounts ................................ $467,172 $402,187 4.76% Passbook savings accounts ...................................... 195,855 186,207 1.73 Money market accounts .......................................... 93,789 43,136 2.39 NOW accounts ................................................... 33,107 29,615 1.01 -------------------------------------------------- Total interest-bearing deposits .............................. 789,923 661,145 Non-interest bearing deposits: Demand accounts ................................................ 28,594 20,913 ------------------------------- Total due to depositors ...................................... 818,517 682,058 Mortgagors' escrow deposits ...................................... 10,065 7,753 0.53 -------------------------------------------------- Total deposits ............................................... $828,582 $689,811 ============================================================================================================================
The aggregate amount of time deposits with denominations of $100,000 or more was $75,175,000 and $53,659,000 at December 31, 2001 and 2000, respectively. Interest expense on deposits is summarized as follows for the years ended December 31:
=============================================================================================== 2001 2000 1999 - ----------------------------------------------------------------------------------------------- (In thousands) Certificate of deposit accounts ................................. $23,062 $21,488 $19,130 Passbook savings accounts ....................................... 3,767 3,931 4,156 Money market accounts ........................................... 2,309 1,438 1,105 NOW accounts .................................................... 504 530 499 --------------------------- Total due to depositors ....................................... 29,642 27,387 24,890 Mortgagors' escrow deposits ..................................... 69 86 92 --------------------------- Total interest expense on deposits ............................ $29,711 $27,473 $24,982 ===============================================================================================
8 BORROWED FUNDS Borrowed funds are summarized as follows at December 31:
==================================================================================================================================== 2001 2000 ------------------------------------------------------------ Weighted Weighted Average Average Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Repurchase agreements--fixed rate: Due in 2001 ............................................. $ -- --% $ 69,232 6.06% Due in 2002 ............................................. 9,250 6.01 9,250 6.01 Due in 2005 ............................................. 10,900 6.36 10,900 6.36 Due in 2006 ............................................. 18,000 4.96 -- -- Due in 2007 ............................................. 50,000 5.64 50,000 5.64 Due in 2009 ............................................. 25,000 5.52 25,000 5.52 ------------------------------------------------------------ Total repurchase agreements ........................... 113,150 5.60 164,382 5.87 ------------------------------------------------------------
Continued Flushing Financial Corporation and Subsidiaries 31 2001 ANNUAL REPORT
==================================================================================================================================== 2001 2000 ---------------------------------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------------------------------------------ Continued (Dollars in thousands) FHLB-NY advances--adjustable rate: Due in 2002 ................................................ $ 25,000 1.95% $ 25,000 6.70% Due in 2003 ................................................ 25,000 5.50 25,000 6.61 Due in 2004 ................................................ 50,000 3.15 -- -- ---------------------------------------------------------- Total FHLB-NY advances--adjustable rate .................. 100,000 3.44 50,000 6.66 FHLB-NY advances--fixed rate: Due in 2001 ................................................ -- -- 49,152 6.40 Due in 2002 ................................................ 76,000 5.93 76,000 5.93 Due in 2003 ................................................ 85,000 6.12 85,000 6.12 Due in 2004 ................................................ 49,000 5.33 19,000 6.55 Due in 2006 ................................................ 25,000 4.99 -- -- Due in 2007 ................................................ 25,000 6.15 25,000 6.15 Due in 2010 ................................................ 40,000 7.30 40,000 7.30 Due in 2011 ................................................ 285 7.34 305 7.34 ---------------------------------------------------------- Total FHLB-NY advances--fixed rate ....................... 300,285 6.01 294,457 6.31 ---------------------------------------------------------- Total FHLB-NY advances ................................... 400,285 5.37 344,457 6.36 ---------------------------------------------------------- Total borrowings ............................................. $513,435 5.42% $508,839 6.20% ===================================================================================================================================
As part of the Company's strategy to finance investment opportunities and manage its cost of funds, the Company 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 consolidated financial statements. The securities underlying the agreements were delivered to the broker-dealers or the FHLB-NY who arranged the transaction. The securities remain registered in the name of the Company and are returned upon the maturity of the agreement. The Company retains the right of substitution of collateral throughout the terms of the agreements. All the repurchase agreements are collateralized by mortgage-backed securities. Information relating to these agreements at or for the years ended December 31 is as follows: - ------------------------------------------------------------------------- 2001 2000 - ------------------------------------------------------------------------- (Dollars in thousands) Book value of collateral ......................... $119,011 $172,533 Estimated fair value of collateral ............... 119,011 172,533 Average balance of outstanding agreements during the year ..................... 156,640 145,575 Maximum balance of outstanding agreements at a month end during the year ...... 182,226 164,382 Average interest rate of outstanding agreements during the year ..................... 5.71% 5.81% - ------------------------------------------------------------------------- All of the repurchase agreements due in 2002 have maturities in excess of ninety days. Pursuant to a blanket collateral agreement with the FHLB-NY, advances are secured by all of the Bank's stock in the FHLB-NY, certain qualifying mortgage loans, mortgage-backed and mortgage-related securities, and other securities not otherwise pledged in an amount at least equal to 110% of the advances outstanding. 9 INCOME TAXES Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of FPFC, which files separate Federal, New York State and New York City income tax returns as a real estate investment trust. A deferred tax liability is recognized on all taxable temporary differences and a deferred tax asset is recognized on all deductible temporary differences and operating losses and tax credit carryforwards. A valuation allowance is recognized to reduce the potential deferred tax asset if it is "more likely than not" that all or some portion of that potential deferred tax asset will not be realized. The Company must also take Flushing Financial Corporation and Subsidiaries 32 2001 ANNUAL REPORT into account changes in tax laws or rates when valuing the deferred income tax amounts it carries on its Consolidated Statements of Financial Condition. The Company's annual tax liability for New York State and New York City was the greater of a tax based on "entire net income," "alternative entire net income," "taxable assets" or a minimum tax. For each of the years ended December 31, 2001, 2000 and 1999, the Company's state and city tax was based on "alternative entire net income." Income tax provisions (benefits) are summarized as follows for the years ended December 31:
====================================================================================== 2001 2000 1999 - -------------------------------------------------------------------------------------- (In thousands) Federal: Current ............................................ $ 7,350 $ 6,387 $ 6,730 Deferred ........................................... (105) (192) (318) ----------------------------- Total federal tax provision ...................... 7,245 6,195 6,412 State and Local: Current ............................................ 1,387 1,138 1,215 Deferred ........................................... 237 199 178 ----------------------------- Total state and local tax provision .................................. 1,624 1,337 1,393 ----------------------------- Total income tax provision ........................... $ 8,869 $ 7,532 $ 7,805 ======================================================================================
The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 37.3%, 37.7% and 38.0% for the years ended December 31, 2001, 2000 and 1999, respectively. The effective rates differ from the statutory federal income tax rate as follows for the years ended December 31:
============================================================================================================================== 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Taxes at federal statutory rate ................................... $ 8,329 35.0% $ 6,984 35.0% $7,189 35.0 Increase (reduction) in taxes resulting from: State and local income tax, net of Federal income tax benefit ... 1,056 4.5 869 4.3 905 4.4 Other ........................................................... (516) (2.2) (321) (1.6) (289) (1.4) -------------------------------------------------------- Taxes at effective rate ......................................... $ 8,869 37.3% $ 7,532 37.7% $ 7,805 38.0% ==============================================================================================================================
The components of the income taxes attributable to income from operations and changes in equity are as follows for the years ended December 31:
==================================================================================================== 2001 2000 1999 - ---------------------------------------------------------------------------------------------------- (In thousands) Income from operations .................... $ 8,869 $ 7,532 $ 7,805 Equity: Change in fair value of securities available for sale .................... (1,684) 3,717 (4,973) Compensation expense for tax purposes in excess of that recognized for financial reporting purposes .................... (1,281) (184) (239) ----------------------------------------------- Total ............................... $ 5,904 $ 11,065 $ 2,593 ====================================================================================================
The components of the net deferred tax asset are as follows at December 31:
================================================================================ 2001 2000 - -------------------------------------------------------------------------------- (In thousands) Deferred tax asset: Postretirement benefits .................................... $3,117 $2,978 Unrealized losses on securities available for sale ....................................... -- 114 Other ...................................................... 907 1,026 --------------- Deferred tax asset ..................................... 4,024 4,118 --------------- Deferred tax liabilities: Unrealized gains on securities available for sale ................................................. 1,570 -- Allowance for loan losses .................................. 545 270 Depreciation ............................................... 192 306 Other ...................................................... 9 18 --------------- Deferred tax liability ................................. 2,316 594 Net deferred tax asset included in other assets .............. $1,708 $3,524 ================================================================================
Flushing Financial Corporation and Subsidiaries 33 2001 ANNUAL REPORT The Company has recorded a net deferred tax asset of $1,708,000. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three years. In management's opinion, in view of the Company's previous, current and projected future earnings trend, it is more likely than not that the net deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the net deferred tax asset at December 31, 2001. 10 BENEFIT PLANS Defined Contribution Plans: The Company maintains a profit-sharing plan and the Bank maintains a 401(k) plan. Both plans are tax-qualified defined contribution plans which cover substantially all employees. Annual contributions are at the discretion of the Company's Board of Directors, but not to exceed the maximum amount allowable under the Internal Revenue Code. Currently, annual matching contributions under the Bank's 401(k) plan equal fifty percent of the employee's contributions, up to a maximum of three percent of the employee's compensation. Contributions to the profit-sharing plan are determined at the end of each year. Contributions by the Bank into the 401(k) plan vest 20% per year over a five-year period beginning after the employee has completed one year of service. Contributions into the profit-sharing plan vest 20% per year over the employee's first five years of service. Compensation expense recorded by the Company for these plans amounted to $619,000, $581,000 and $534,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Employee Benefit Trust: An Employee Benefit Trust ("EBT") has been established to assist the Company in funding its benefit plan obligations. In connection with the Bank's conversion, the EBT borrowed $7,928,000 from the Company and used $7,000 of cash received from the Bank to purchase 1,552,500 shares of the common stock of the Company. The loan will be repaid principally from the Company's discretionary contributions to the EBT and dividend payments received on common stock held by the EBT, or may be forgiven by the Company, over a period of 30 years. At December 31, 2001 the loan had an outstanding balance of $5,913,000, bearing a fixed interest rate of 6.22% per annum. The loan obligation of the EBT is considered unearned compensation and, as such, is recorded as a reduction of the Company's stockholders' equity. Both the loan obligation and the unearned compensation are reduced by the amount of loan repayments made by the EBT or forgiven by the Company. Shares purchased with the loan proceeds are held in a suspense account for contribution to specified benefit plans as the loan is repaid or forgiven. Shares released from the suspense account are used solely for funding matching contributions under the Bank's 401(k) plan and contributions to the Company's profit-sharing plan. Since annual contributions are discretionary with the Company or dependent upon employee contributions, compensation payable under the EBT cannot be estimated. For the years ended December 31, 2001, 2000 and 1999, the Company funded $545,000, $511,000 and $475,000, respectively, of employer contributions to the 401(k) and profit sharing plans from the EBT. The shares held in the suspense account are pledged as collateral and are reported as unallocated EBT shares in stockholders' equity. As shares are released from the suspense account, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The EBT shares are as follows at December 31: - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Shares owned by Employee Benefit Trust, beginning balance ................. 1,279,167 1,328,647 Shares released and allocated .............. 32,930 49,480 ----------------------------- Shares owned by Employee Benefit Trust, ending balance .................... 1,246,237 1,279,167 ----------------------------- Market value of unallocated shares ......... $22,183,019 $15,296,705 ================================================================================ Restricted Stock Plan: The 1996 Restricted Stock Incentive Plan ("Restricted Stock Plan") became effective on May 21, 1996 after adoption by the Board of Directors and approval by shareholders. The aggregate number of shares of common stock which may be issued under the Restricted Stock Plan, as amended, may not exceed 817,125 shares to employees, and may not exceed Flushing Financial Corporation and Subsidiaries 34 2001 ANNUAL REPORT 262,875 shares to Outside Directors, for a total of 1,080,000 shares. Lapsed, forfeited or canceled awards and shares withheld from an award to satisfy tax obligations will not count against these limits, and will be available for subsequent grants. The shares distributed under the Restricted Stock Plan may be shares held in treasury or authorized but unissued shares. The following table summarizes certain activity for the Restricted Stock Plan, after giving effect to the three-for-two common stock split distributed in the form of a stock dividend on August 30, 2001, for the years ended December 31: - ------------------------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- Shares available for future Restricted Stock Awards at beginning of year .................. 238,203 215,502 292,608 Shares authorized for Restricted Stock Awards ....................... 135,000 -- -- Restricted Stock Awards .............. (78,675) (14,400) (115,125) Restricted shares repurchased to satisfy tax obligations .............. 35,221 34,851 29,469 Forfeitures .......................... 2,100 2,250 8,550 ----------------------------------- Shares available for future Restricted Stock Awards at end of year ..................... 331,849 238,203 215,502 =============================================================================== The Board of Directors has discretion to determine the vesting period of all grants. All grants that have been awarded to employees vest 20% per year over a five-year period. Initial grants to Outside Directors vest 20% per year over a five-year period, while subsequent annual grants to Outside Directors vest one-third per year over a three-year period. All grants have full vesting in the event of death, disability, retirement or a change in control. Total restricted stock award expense in 2001, 2000 and 1999 was $810,000, $1,130,000 and $998,000, respectively. Stock Option Plan: The 1996 Stock Option Incentive Plan ("Stock Option Plan") became effective on May 21, 1996 after adoption by the Board of Directors and approval by shareholders. The Stock Option Plan provides for the grant of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code, nonstatutory stock options, and limited stock appreciation rights granted in tandem with such options. The aggregate number of shares of common stock which may be issued under the Stock Option Plan, as amended, with respect to options granted to employees may not exceed 2,115,937 shares, and with respect to options granted to Outside Directors may not exceed 814,687 shares, for a total of 2,930,624 shares. Lapsed, forfeited or canceled options will not count against these limits and will be available for subsequent grants. However, the cancellation of an option upon exercise of a related stock appreciation right will count against these limits. Options with respect to more than 168,750 shares of common stock may not be granted to any employee in any calendar year. The shares distributed under the Stock Option Plan may be shares held in treasury or authorized but unissued shares. The Board of Directors has discretion to determine the vesting period of all grants. All grants that have been awarded to employees vest 20% per year over a five-year period. Initial grants to Outside Directors vest 20% per year over a five-year period, while subsequent annual grants to Outside Directors vest one-third per year over a three-year period. All grants have full vesting in the event of death, disability, retirement or a change in control. The following table summarizes certain information regarding the Stock Option Plan after giving effect to the three-for-two common stock split distributed in the form of a stock dividend on August 30, 2001. - ---------------------------------------------------------------------------- Weighted Shares Average Underlying Exercise Options Price - ---------------------------------------------------------------------------- Balance outstanding December 31, 1998 ......... 1,761,614 $ 7.47 Granted ....................................... 230,250 $10.29 Exercised ..................................... (66,993) $ 7.35 Forfeited ..................................... (22,050) $ 9.79 ------------------------ Balance outstanding December 31, 1999 ......... 1,902,821 $ 7.79 Granted ....................................... 28,800 $10.05 Exercised ..................................... (54,900) $ 7.22 Forfeited ..................................... (36,900) $ 9.71 ------------------------ Balance outstanding December 31, 2000 ......... 1,839,821 $ 7.80 Granted ....................................... 348,600 $15.01 Exercised ..................................... (254,725) $ 7.56 Forfeited ..................................... (5,700) $13.40 ------------------------ Balance Outstanding December 31, 2001 ......... 1,927,996 $ 9.12 Shares available for future stock option awards at December 31, 2001 ................. 557,216 ========================================================================== Flushing Financial Corporation and Subsidiaries 35 2001 ANNUAL REPORT The following table summarizes information about the Stock Option Plan at December 31, 2001:
========================================================================================================================== Options Outstanding Options Exercisable - --------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Number Average Number Average Outstanding at Remaining Exercisable at Exercise Exercise Prices 12/31/01 Contractual Life 12/31/01 Price - -------------------------------------------------------------------------------------------------------------------------- $ 7.22........................................................ 1,216,846 4.4 Years 1,216,846 $ 7.22 $ 8.00-$11.00.................................................... 351,600 7.1 Years 170,010 $ 9.50 $11.01-$14.00.................................................... 103,950 8.7 Years 6,750 $12.22 $14.01-$17.00.................................................... 255,600 9.5 Years -- -- ------------------------------------------------------ $ 7.22=$17.00.................................................... 1,927,996 5.8 Years 1,393,606 $ 7.52 ==========================================================================================================================
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its Stock Option Plan. Accordingly, no compensation cost has been recognized for options granted under the Stock Option Plan. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value at the grant dates, consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been as indicated in the table below. However, the present impact of SFAS No. 123 may not be representative of the effect on income in future years because the options vest over several years and additional option grants may be made each year. ================================================================================ 2001 2000 1999 - -------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Net income: As reported ..................... $ 14,929 $ 12,422 $ 12,735 Pro forma ....................... $ 14,219 $ 11,655 $ 12,015 Diluted earnings per share: As reported ..................... $ 1.17 $ 0.97 $ 0.92 Pro forma ....................... $ 1.11 $ 0.91 $ 0.86 ================================================================================ The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants made in 2001, 2000 and 1999 are as follows:
=============================================================================== 2001 Grants 2000 Grants 1999 Grant - ------------------------------------------------------------------------------- Dividend yield ................... 2.13% 2.65% 2.07% Expected volatility .............. 27.49% 24.37% 25.85% Risk-free interest rate .......... 5.27% 6.08% 6.01% Expected option life ............. 7 Years 7 Years 7 Years ===============================================================================
Pension Plans: The Bank has a defined benefit pension plan covering substantially all of its employees (the "Retirement Plan"). The benefits are based on years of service and the employee's compensation during the three consecutive years out of the final ten years of service that produces the highest average. The Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for the benefits attributed to service to date but also for those expected to be earned in the future. The Bank's Retirement Plan invests in diversified equity and fixed-income funds, which are independently managed by a third party. The components of the net pension expense are as follows for the years ended December 31:
=============================================================================== 2001 2000 1999 - ------------------------------------------------------------------------------- (In thousands) Service cost .................................. $ 396 $ 350 $ 338 Interest cost ................................. 683 621 547 Amortization of past service liability ........ (24) (25) (24) Amortization of unrecognized gain ............. (116) (48) -- Return on plan assets ......................... (986) (823) (730) --------------------------- Net pension expense (benefit) ............... $ (47) $ 75 $ 131 ===============================================================================
Flushing Financial Corporation and Subsidiaries 36 2001 ANNUAL REPORT The following table sets forth, for the Retirement Plan, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
=================================================================================================== 2001 2000 1999 - --------------------------------------------------------------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of year ................................................... $ 8,671 $ 7,998 $ 8,198 Service cost ................................................ 396 350 338 Interest cost ............................................... 683 621 547 Actuarial (gain) loss ....................................... 594 94 (708) Benefits paid ............................................... (417) (392) (377) Plan amendments ............................................. -- -- -- --------------------------------- Benefit obligation at end of year ............................................... 9,927 8,671 7,998 Change in plan assets: Market value of assets at beginning of year ......................................... 11,155 9,871 8,717 Actual return on plan assets ................................ (1,523) 1,676 1,531 Employer contributions ...................................... -- -- -- Benefits paid ............................................... (417) (392) (377) --------------------------------- Market value of plan assets at end of year ................................. 9,215 11,155 9,871 Funded status ................................................. (712) 2,484 1,873 Unrecognized net loss (gain) from past experience different from that assumed and effects of changes in assumptions ...................................... 805 (2,414) (1,703) Prior service cost not yet recognized in periodic pension cost ................................................ (62) (86) (111) --------------------------------- Prepaid (accrued) pension cost included in other assets/liabilities .......................................... $ 31 $ (16) $ 59 =================================================================================================== Assumptions used to develop periodic pension amounts were: =================================================================================================== 2001 2000 1999 - --------------------------------------------------------------------------------------------------- Weighted average discount rate ................................ 7.25% 8.00% 7.75% Rate of increase in future compensation levels ......................................... 4.50% 5.50% 5.00% Expected long-term rate of return on assets ............................................ 9.00% 9.00% 8.50% ===================================================================================================
The Bank has an Outside Director Retirement Plan (the "Directors' Plan"), which provides benefits to each outside director who has at least five years of service as an outside director (including service as a director or trustee of the Bank or any predecessor) and whose years of service as an outside director plus age equal or exceed 55. Benefits are also payable to an outside director whose status as an outside director terminates because of death or disability or who is an outside director upon a change of control (as defined in the Directors' Plan). An eligible director will be paid an annual retirement benefit equal to the last annual retainer paid, plus fees paid to such director for attendance at Board meetings during the twelve-month period prior to retirement. Such benefit will be paid in equal monthly installments for the lesser of the number of months such director served as an outside director or 120 months. In the event of a termination of Board service due to a change of control, an outside director who has completed at least two years of service as an outside director will receive a cash lump sum payment equal to 120 months of benefit, and an outside director with less than two years service will receive a cash lump sum payment equal to a number of months of benefit equal to the number of months of his service as an outside director. In the event of the director's death, the surviving spouse will receive the equivalent benefit. No benefits will be payable to a director who is removed for cause. The Holding Company has guaranteed the payment of benefits under the Directors' Plan. Upon adopting the Directors' Plan, the Bank elected to immediately recognize the effect of adopting the Directors' Plan. Subsequent plan amendments are amortized as a past service liability. The components of the net pension expense for the Directors' Plan are as follows for the years ended December 31:
============================================================================== 2001 2000 1999 - ------------------------------------------------------------------------------ (In thousands) Service cost ............................................ $ 27 $ 20 $ 20 Interest cost ........................................... 11 8 -- Amortization of past service liability .................. 119 109 109 ------------------ Net pension expense ................................... $157 $137 $129 ==============================================================================
The following table sets forth, for the Directors' Plan, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
=================================================================================================================== 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of year .................................. $ 2,043 $ 1,913 $ 1,953 Service cost ............................... 27 20 20 Interest cost .............................. 11 8 -- Actuarial (gain) loss ...................... 465 (24) (38) Benefits paid .............................. (38) (22) (22) Plan amendments ............................ -- 148 -- ----------------------------------------------------- Benefit obligation at end of year .......................... 2,508 2,043 1,913 Change in plan assets: Market value of assets at beginning of year ........................ -- -- -- Employer contributions ..................... 38 22 22 Benefits paid .............................. (38) (22) (22) ----------------------------------------------------- Market value of assets at end of year .......................... -- -- -- ----------------------------------------------------- Funded status ................................ (2,508) (2,043) (1,913) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions ............................. 489 15 39 Prior service cost not yet recognized in periodic pension cost ............................... 782 901 862 ----------------------------------------------------- Accrued pension cost included in other liabilities .......................... $(1,237) $(1,127) $(1,012) ==================================================================================================================
For the years ended December 31, 2001, 2000 and 1999, the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25%, 8.00% and 7.75%, respectively. The level of future retainers and meeting fees was projected to remain constant. 11 POSTRETIREMENT BENEFITS OTHER THAN PENSION The Company sponsors two postretirement benefit plans that cover all retirees who were full-time permanent employees with at least five years of service and their spouses. One plan provides medical benefits through a fifty-percent cost sharing arrangement. Effective January 1, 2000, the spouses of future retirees will be required to pay one hundred percent of the premiums for their coverage. The other plan provides life insurance benefits and is noncontributory. Under these programs, eligible retirees receive lifetime medical and life insurance coverage for themselves and lifetime medical coverage for their spouses. The Company reserves the right to amend or terminate these plans at its discretion. Comprehensive medical plan benefits equal the lesser of the normal plan benefit or the total amount not paid by Medicare. Life insurance benefits for retirees are based on annual compensation and age at retirement. As of December 31, 2001, the Bank has not funded these plans. The following table sets forth for the postretirement plans, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
=============================================================================================================== 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of year ............................... $ 2,227 $ 2,407 $ 3,007 Service cost ............................ 79 82 136 Actuarial gain .......................... (222) (69) (853) Plan amendments ......................... -- (265) -- Interest cost ........................... 174 171 199 Benefits paid ........................... (94) (99) (82) ----------------------------------------------------- Benefit obligation at end of year ....................... 2,164 2,227 2,407 Change in plan assets: Market value of assets at beginning of year ..................... -- -- -- Employer contributions .................. 94 99 82 Benefits paid ........................... (94) (99) (82) ----------------------------------------------------- Market value of assets at end of year .................... -- -- -- ----------------------------------------------------- Funded status ............................. (2,164) (2,227) (2,407) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions .................. (13) 208 282 Prior service cost not yet recognized in periodic expense ................................. (527) (658) (517) ----------------------------------------------------- Accrued postretirement cost included in other liabilities ....................... $(2,704) $(2,677) $(2,642) ===============================================================================================================
Flushing Financial Corporation and Subsidiaries 38 2001 ANNUAL REPORT Assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligations at December 31 are as follows:
================================================================================================================= 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Rate of return on plan assets .......................... NA NA NA Discount rate .......................................... 7.25% 8.00% 7.75% Rate of increase in health care costs: Initial .............................................. 9.00% 6.50% 6.50% Ultimate (year 2007) ................................. 4.50% 5.00% 5.00% Annual rate of salary increases ........................ NA NA NA =================================================================================================================
The health care cost trend rate assumptions have a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 2001 by $179,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for the year then ended by $23,000. The resulting net periodic postretirement benefit expense consisted of the following components for the years ended December 31: =============================================================================== 2001 2000 1999 - ------------------------------------------------------------------------------- (In thousands) Service cost .................................. $ 79 $ 82 $ 136 Interest cost ................................. 174 171 199 Amortization of unrecognized loss ............. -- 4 68 Amortization of past service liability ........ (131) (124) (102) --------------------------- Net postretirement benefit expense .......... $ 122 $ 133 $ 301 =============================================================================== 12 STOCKHOLDERS' EQUITY Dividend Restrictions: In connection with the Bank's conversion from mutual to stock form in November 1995, a special liquidation account was established at the time of conversion, in accordance with the requirements of the Office of Thrift Supervision ("OTS"), which was equal to its capital as of June 30, 1995. The liquidation account is reduced as and to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in deposits do not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. As of December 31, 2001, the Bank's liquidation account was $7.2 million and was presented within retained earnings. In addition to the restriction described above, Federal banking regulations place certain restrictions on dividends paid by the Bank to the Holding Company. The total amount of dividends which may be paid at any date is generally limited to the net income of the Bank for the current year and prior two years, less any dividends previously paid from those earnings. As of December 31, 2001, the Bank had paid all eligible retained earnings to the Holding Company in the form of cash dividends. In addition, dividends paid by the Bank to the Holding Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. Stock Split: The Company declared a three-for-two stock split which was distributed on August 30, 2001 in the form of a stock dividend. This dividend was not paid on shares held in treasury. Shares issued and outstanding for prior years have been restated to reflect this three-for-two stock split. Treasury share amounts have not been restated for prior years, or the current year prior to the record date of the three-for-two stock split (August 10, 2001), as the stock dividend was not paid on these shares. Treasury Stock Transactions: During 2001, the Holding Company repurchased 639,950 shares of its outstanding common stock under its stock repurchase programs. Also during 2001, 2,120,885 shares of Treasury Stock were used to pay the stock dividend discussed above. At December 31, 2001, the Company had 364,279 shares of Treasury Stock which, among other things, could be used to award grants under the Company's Restricted Stock Plan and to satisfy obligations under the Stock Option Plan. Treasury stock is being accounted for using the average cost method. 13 Regulatory Capital The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") imposes a number of mandatory supervisory measures on banks and thrift institutions. Among Flushing Financial Corporation and Subsidiaries 39 2001 ANNUAL REPORT other matters, FDICIA established five capital zones or classifications (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Such classifications are used by the OTS and other bank regulatory agencies to determine matters ranging from each institution's semi-annual FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. As of December 31, 2001, the Bank continues to be categorized as "well-capitalized" by the OTS under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. Set forth below is a summary of the Bank's compliance with OTS capital standards.
===================================================================================================================== December 31, 2001 December 31, 2000 - ---------------------------------------------------------------------------------------------------------------------- Percent Percent Amount of Assets Amount of Assets - ---------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Tangible capital: Capital level ..................... $107,811 7.32% $106,191 8.02% Requirement ....................... 22,081 1.50% 19,858 1.50% Excess ............................ $ 85,730 5.82% $ 86,333 6.52% Core (Tier I) capital: Capital level ..................... $107,811 7.32% $106,191 8.02% Requirement ....................... 44,162 3.00% 39,715 3.00% Excess ............................ $ 63,649 4.32% $ 66,476 5.02% Total risk-based capital: Capital level ..................... $114,396 13.58% $112,912 15.77% Requirement ....................... 67,395 8.00% 57,290 8.00% Excess ............................ $ 47,001 5.58% $ 55,622 7.77% ====================================================================================================================
14 Commitments and Contingencies Commitments: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and lines of credit. The instruments involve, to varying degrees, elements of credit and market risks in excess of the amount recognized in the consolidated financial statements. The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for loan commitments and lines of credit is represented by the contractual amounts of these instruments. Commitments to extend credit (principally real estate mortgages) and lines of credit (principally construction loan lines of credit) amounted to approximately $38,971,000 and $12,187,000, respectively, at December 31, 2001. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future cash requirements, whereas the amounts of lines of credit may not be indicative of the Company's future cash requirements. The loan commitments generally expire in ninety days, while construction loan lines of credit mature within eighteen months. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. As of December 31, 2001, commitments to extend credit for fixed-rate real estate mortgages amounted to $7.6 million, with an average interest rate of 7.77%. Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and require payment of a fee. The Company evaluates each customer's credit worthiness on a case by case basis. Collateral held consists primarily of real estate. Flushing Financial Corporation and Subsidiaries 40 2001 ANNUAL REPORT The Company's minimum annual rental payments for Bank premises due under non-cancelable leases are as follows: ===================================================================== Minimum Rental - --------------------------------------------------------------------- Years ending December 31: (In thousands) 2002.......................................... $ 922 2003.......................................... 924 2004.......................................... 919 2005.......................................... 891 2006.......................................... 880 Thereafter.................................... 2,264 ------- Total minimum payments required............. $6,800 ================================================================== The leases have escalation clauses for operating expenses and real estate taxes. Certain lease agreements provide for increases in rental payments based upon increases in the consumer price index. Rent expense under these leases for the years ended December 31, 2001, 2000 and 1999 was approximately $715,000, $643,000 and $488,000, respectively. Contingencies: The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsels, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. 15 CONCENTRATION OF CREDIT RISK The Company's lending is concentrated in one-to-four family residential real estate, multi-family residential real estate and commercial real estate loans to borrowers in the metropolitan New York area. The Company evaluates each customer's credit worthiness on a case-by-case basis under the Company's established underwriting policies. The collateral obtained by the Company generally consists of first liens on one-to-four family and multi-family residential real estate and commercial income producing real estate. 16 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires that the Company disclose the estimated fair values for certain of its financial instruments. Financial instruments include items such as loans, deposits, securities, commitments to lend and other items as defined in SFAS No. 107. Fair value estimates are supposed to represent estimates of the amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in a forced liquidation. However, in many instances current exchange prices are not available for many of the Company's financial instruments, since no active market generally exists for a significant portion of the Bank's financial instruments. Accordingly, the Company uses other valuation techniques to estimate fair values of its financial instruments such as discounted cash flow methodologies and other methods allowable under SFAS No. 107. Fair value estimates are subjective in nature and are dependent on a number of significant assumptions based on management's judgment regarding future expected loss experience, current economic condition, risk characteristics of various financial instruments, and other factors. In addition, SFAS No. 107 allows a wide range of valuation techniques; therefore, it may be difficult to compare the Company's fair value information to independent markets or to other financial institutions' fair value information. The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale. SFAS No. 107 does not require disclosure about fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes, foreclosed properties and equity. Further, SFAS No. 107 does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying "market" or franchise value of the Company. The estimated fair value of each material class of financial instruments at December 31, 2001 and 2000 and the Flushing Financial Corporation and Subsidiaries 41 2001 ANNUAL REPORT related methods and assumptions used to estimate fair value are as follows: Cash and due from banks, overnight interest-earning deposits and federal funds sold, FHLB-NY stock, interest and dividends receivable, mortgagors' escrow deposits and other liabilities The carrying amounts are a reasonable estimate of fair value. Securities available for sale The estimated fair values of securities available for sale are contained in Note 6 of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. Loans The estimated fair value of loans, with carrying amounts of $1,067,197,000 and $986,359,000 at December 31, 2001 and 2000, respectively, was $1,092,221,000 and $996,042,000 at December 31, 2001 and 2000, respectively. Fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. For non-accruing loans, fair value is generally estimated by discounting management's estimate of future cash flows with a discount rate commensurate with the risk associated with such assets. Due to depositors The estimated fair value of due to depositors, with carrying amounts of $818,517,000 and $682,058,000 at December 31, 2001 and 2000, respectively, was $831,808,000 and $685,748,000 at December 31, 2001 and 2000, respectively. The fair values of demand, passbook savings, NOW and money market deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e., their carrying value). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities. Borrowed funds The estimated fair value of borrowed funds, with carrying amounts of $513,435,000 and $508,839,000 at December 31, 2001 and 2000, respectively, was $527,398,000 and $513,075,000 at December 31, 2001 and 2000, respectively. The fair value of borrowed funds is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements. Other financial instruments The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable). At December 31, 2001 and 2000, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material. 17 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. The Statement changes the approach to how goodwill and other intangible assets are accounted for subsequent to their recognition. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will be amortized over their useful lives. The Statement provides specific guidance on testing intangible assets that will not be amortized for impairment. As of December 31, 2001, the Company has goodwill with a remaining balance of $3.9 million recorded in connection with its purchase of New York Federal Savings Bank in 1997. Amortization expense for each of the years in the three-year period ended December 31, 2001 was $0.4 million. Effective January 1, 2002, the Company is no longer recording this amortization expense, but rather is required, at least annually, to test the remaining goodwill for impairment. The impairment test performed in connection with the adoption of this Statement in January 2002 did not require an adjustment to the carrying value of the goodwill. Flushing Financial Corporation and Subsidiaries 42 2001 ANNUAL REPORT 18 QUARTERLY FINANCIAL DATA (UNAUDITED) Selected unaudited quarterly financial data for the fiscal years ended December 31, 2001 and 2000 is presented below:
==================================================================================================================================== 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ 4th 3rd 2nd 1st 4th 3rd 2nd 1st - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) Quarterly operating data: Interest income .................................. $26,038 $25,583 $25,227 $25,051 $24,702 $24,810 $24,153 $23,276 Interest expense ................................. 14,501 15,042 15,079 15,080 15,099 14,863 13,966 13,120 ----------------------------------------------------------------------------- Net interest income ............................ 11,537 10,541 10,148 9,971 9,603 9,947 10,187 10,156 Provision for loan losses ........................ -- -- -- -- -- -- -- -- Other operating income ........................... 1,417 1,300 1,618 1,723 1,553 264 965 1,076 Other expense .................................... 6,567 5,939 5,984 5,967 6,086 6,013 5,950 5,748 ----------------------------------------------------------------------------- Income before income tax expense ............... 6,387 5,902 5,782 5,727 5,070 4,198 5,202 5,484 Income tax expense ............................... 2,427 2,184 2,140 2,118 1,875 1,596 1,977 2,084 ----------------------------------------------------------------------------- Net income ..................................... $ 3,960 $ 3,718 $ 3,642 $ 3,609 $ 3,195 $ 2,602 $ 3,225 $ 3,400 ============================================================================= Basic earnings per share ......................... $ 0.33 $ 0.30 $ 0.30 $ 0.29 $ 0.26 $ 0.21 $ 0.26 $ 0.27 Diluted earnings per share ....................... $ 0.31 $ 0.29 $ 0.28 $ 0.28 $ 0.25 $ 0.20 $ 0.25 $ 0.26 Dividends per share .............................. $ 0.080 $ 0.080 $ 0.073 $ 0.073 $ 0.067 $ 0.067 $ 0.067 $ 0.067 Average common shares outstanding for: Basic earnings per share ....................... 12,107 12,316 12,284 12,364 12,407 12,505 12,584 12,768 Diluted earnings per share ..................... 12,700 12,882 12,832 12,800 12,677 12,774 12,798 12,957 ====================================================================================================================================
19 PARENT COMPANY-ONLY FINANCIAL INFORMATION Earnings of the Bank are recognized by the Holding Company using the equity method of accounting. Accordingly, earnings of the Bank are recorded as increases in the Holding Company's investment, any dividends would reduce the Holding Company's investment in the Bank, and any changes in the Bank's unrealized gain or loss on securities available for sale, net of taxes, would increase or decrease, respectively, the Holding Company's investment in the Bank. The condensed financial statements for the Holding Company at and for the years ended December 31, 2001 and 2000 are presented below: =============================================================================== 2001 2000 - ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF (Dollars in thousands) FINANCIAL CONDITION Assets: Cash and due from banks .............................. $ 12,679 $ 8,757 Federal funds sold and overnight interest-earning deposit ........................... 924 758 Securities available for sale: Mortgage-backed securities ......................... -- -- Other securities ................................... 6,263 6,776 Interest receivable .................................. 17 33 Investment in Bank ................................... 113,232 110,135 Other assets ......................................... 600 519 ------------------- Total assets ..................................... $133,715 $126,978 ================================================================================ ================================================================================ 2001 2000 Continued (Dollars in thousands) Liabilities: Other liabilities .............................. $ 328 $ 241 - ------------------------------------------------------------------------------- Total liabilities .......................... 328 241 Stockholders' equity: Common stock ................................... 139 114 Additional paid-in capital ..................... 45,280 76,396 Unearned compensation .......................... (7,766) (7,781) Treasury stock ................................. (5,750) (31,755) Retained earnings .............................. 99,641 89,896 Accumulated other comprehensive income, net of taxes ......................... 1,843 (133) ------------------------ Total equity ............................... 133,387 126,737 Total liabilities and equity ............... $ 133,715 $ 126,978 ================================================================================ CONDENSED STATEMENTS OF INCOME Dividends from the Bank .......................... $ 15,000 $ 9,500 Interest income .................................. 438 472 Non-interest income .............................. -- (25) Other operating expenses ......................... (609) (580) ------------------------ Income before taxes and equity in undistributed earnings of subsidiary ......... 14,829 9,367 Income tax benefit ............................... 127 124 ------------------------ Income before equity in undistributed earnings of subsidiary ....................... 14,956 9,491 Excess of dividends over current year earnings .................................. (27) -- Equity in undistributed earnings of the Bank ..... -- 2,931 ------------------------ Net income ................................. $ 14,929 $ 12,422 =============================================================================== Flushing Financial Corporation and Subsidiaries 43 2001 ANNUAL REPORT =============================================================================== 2001 2000 (Dollars in thousands) - ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOW Operating activities: Net income ....................................... $ 14,929 $ 12,422 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of the Bank ................................... 27 (2,931) Net decrease in operating assets and liabilities ............................ (91) (419) Amortization of unearned premium, net of accretion of unearned discount ................................... 8 17 Net loss on sales of securities .............. -- 25 Unearned compensation, net ................... 1,577 1,741 ---------------------- Net cash provided by operating activities ............................. 16,450 10,855 ---------------------- Continued ================================================================================ 2001 2000 - -------------------------------------------------------------------------------- Continued (Dollars in thousands) Investing activities: Purchases of securities available for sale ....... $ (709) $ (3,566) Proceeds from sales and calls of securities available for sale .................. 1,460 3,740 ---------------------- Net cash provided by investing activities ............................. 751 174 ---------------------- Financing activities: Purchase of treasury stock ....................... (9,289) (6,732) Cash dividends paid .............................. (3,824) (3,417) ---------------------- Net cash used in financing activities ............................. (13,113) (10,149) Net increase in cash and cash equivalents .......... 4,088 880 Cash and cash equivalents, beginning of year .......................................... 9,515 8,635 ---------------------- Cash and cash equivalents, end of year ............. $ 13,603 $ 9,515 =============================================================================== ================================================================================ REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ To the Board of Directors and Stockholders of Flushing Financial Corporation: In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, changes in stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Flushing Financial Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PriceWaterhouseCoopers LLP New York, New York January 22, 2002 Flushing Financial Corporation and Subsidiaries 44 2001 ANNUAL REPORT EX-23.1 8 d50230_ex23-1.txt CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-98202, 333-3878 and 333-85639) of Flushing Financial Corporation of our report dated January 22, 2002, relating to the consolidated financial statements, which appears in the Annual Report to Stockholders, which is incorporated in this Annual Report on Form 10-K. /S/ PRICEWATERHOUSECOOPERS LLP New York, New York March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----