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, 2006

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
incorporation or organization)

 

(I.R.S. Employer Identification No.)


 

1979 Marcus Avenue, Suite E140, Lake Success, New York 11042


(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:

 

Common Stock $0.01 par value (and associated Preferred Stock Purchase Rights).

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

None.

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act.  o Yes   x No

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  o Yes   x No

          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   o No

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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.  o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

          Large accelerated filer o          Accelerated filer x          Non-accelerated filer o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  o Yes   x No

          As of June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was $359,005,000. 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 $17.96.

          The number of shares of the registrant’s Common Stock outstanding as of February 28, 2007 was 21,151,945 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2007 are incorporated herein by reference in Part III.




TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

 

 

 


 

 

 

 

PART I

 

 

Item 1.

Business

1

GENERAL

 

Overview

1

Market Area and Competition

2

Lending Activities

3

Loan Portfolio Composition

3

Loan Maturity and Repricing

7

Multi-Family Residential Lending

7

Commercial Real Estate Lending

8

One-to-Four Family Mortgage Lending – Mixed-Use Properties

8

One-to-Four Family Mortgage Lending – Residential Properties

9

Construction Loans

10

Small Business Administration Lending

10

Commercial Business and Other Lending

10

Commercial Business and Other Lending

10

Loan Approval Procedures and Authority

11

Loan Concentrations

11

Loan Servicing

11

Asset Quality

11

Loan Collection

11

Delinquent Loans and Non-performing Assets

12

Real Estate Owned

13

Environmental Concerns Relating to Loans

13

Allowance for Loan Losses

13

Investment Activities

17

General

17

Mortgage-backed securities

18

Sources of Funds

21

General

21

Deposits

21

Borrowings

24

Subsidiary Activities

25

Personnel

26

Omnibus Incentive Plan

26

 

FEDERAL, STATE AND LOCAL TAXATION

 

 

Federal Taxation

26

General

26

Bad Debt Reserves

26

Distributions

26

Corporate Alternative Minimum Tax

27

State and Local Taxation

27

New York State and New York City Taxation

27

Delaware State Taxation

27

i



 

 

 

 

REGULATION

 

 

General

27

Holding Company Regulation

28

Investment Powers

29

Real Estate Lending Standards

29

Loans-to-One Borrower Limits

29

Insurance of Accounts

29

Qualified Thrift Lender Test

30

Transactions with Affiliates

31

Restrictions on Dividends and Capital Distributions

31

Federal Home Loan Bank System

32

Assessments

32

Branching

32

Community Reinvestment

32

Brokered Deposits

32

Capital Requirements

32

General

32

Tangible Capital Requirement

33

Leverage and Core Capital Requirement

33

Risk-Based Requirement

33

Federal Reserve System

33

Financial Reporting

34

Standards for Safety and Soundness

34

Gramm-Leach-Bliley Act

34

USA Patriot Act

35

Prompt Corrective Action

35

Federal Securities Laws

35

Available Information

36

Item 1A.

Risk Factors

36

Changes in Interest Rates May Significantly Impact the Company’s Financial Condition and Results of Operations

36

The Bank’s Lending Activities Involve Risks that May Be Exacerbated Depending on the Mix of Loan Types

36

The Markets in Which the Bank Operates Are Highly Competitive

37

The Company’s Results of Operations May Be Adversely Affected by Changes in National and/or Local Economic Conditions

37

Changes in Laws and Regulations Could Adversely Affect Our Business

37

Certain Anti-Takeover Provisions May Increase the Costs to or Discourage an Acquiror

38

The Bank May Not Be Able To Successfully Implement Its New Commercial Business Banking Initiative

38

Item 1B.

Unresolved Staff Comments

38

Item 2.

Properties

39

Item 3.

Legal Proceedings

40

Item 4.

Submission of Matters to a Vote of Security Holders

40

ii



 

 

 

 

PART II

 

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

40

Item 6.

Selected Financial Data

42

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

44

General

44

Overview

44

Interest Rate Sensitivity Analysis

48

Interests Rate Risk

50

Analysis of Net Interest Income

50

Rate/Volume Analysis

52

Comparison of Operating Results for the Years Ended December 31, 2005 and 2004

52

Comparison of Operating Results for the Years Ended December 31, 2005 and 2004

54

Liquidity, Regulatory Capital and Capital Resources

56

Critical Accounting Policies

57

Contractual Obligations

58

Impact of New Accounting Standards

59

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

61

Item 8.

Financial Statements and Supplementary Data

62

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

101

Item 8.

Financial Statements and Supplementary Data

 

101

Item 9A.

Controls and Procedures

102

Item 9B.

Other Information

102

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Goverance

103

Item 11.

Executive Compensation

103

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

103

Item 13.

Certain Relationships and Related Transactions, and Directors Independence

104

Item 14.

Principal Accounting Fees and Services

104

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

104

(a) 1. Financial Statements

104

(a) 2. Financial Statement Schedules

104

(a) 3. Exhibits Required by Securities and Exchange Commission Regulation S-K

 

105

SIGNATURES

POWER OF ATTORNEY

iii



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

          Statements contained in this Annual Report on Form 10-K (this “Annual Report”) relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed under the captions “Business — General — Allowance for Loan Losses” and “Business — General — Market Area and Competition” in Item 1 below, “Risk Factors” in Item 1A below, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” in Item 7 below, and elsewhere in this Annual Report and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.

PART I

Item 1. Business.

GENERAL

Overview

          Flushing Financial Corporation (the “Holding Company”) is a Delaware corporation organized in May 1994 at the direction of Flushing Savings Bank, FSB (the “Bank”). The Bank was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank on November 21, 1995, at which time the Holding Company acquired all of the stock of the Bank. The primary business of the Holding Company at this time is the operation of its wholly owned subsidiary, the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank has also filed an application with the New York State Banking Department to form a limited purpose commercial bank, “Flushing Commercial Bank”, for the purpose of accepting municipal deposits and state funds, including certain court ordered funds from New York State courts. This application was approved March 1, 2007. In November, 2006, the Bank launched an internet branch, iGObanking.comTM. The activities of the Holding Company are primarily funded by dividends, if any, received from the Bank. Flushing Financial Corporation’s common stock is traded on the NASDAQ National Market under the symbol “FFIC.”

          The Holding Company also owns Flushing Financial Capital Trust I (the “Trust”), a special purpose business trust formed to issue capital securities. The Trust used the proceeds from the issuance of these capital securities, and the proceeds from the issuance of its common stock, to purchase junior subordinated debentures from the Holding Company. Prior to 2004, the Trust was included in the consolidated financial statements of the Company. Effective January 1, 2004, in accordance with the requirements of FASB Interpretation No. 46R, the Trust was deconsolidated.

          Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and results of operations of the Holding Company, the Bank and the Bank’s subsidiaries on a consolidated basis (collectively, the “Company”). At December 31, 2006, the Company had total assets of $2.8 billion, deposits of $1.8 billion and stockholders’ equity of $218.4 million.

          The Bank’s principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of one-to-four family (focusing on mixed-use properties – properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) construction loans, primarily for multi-family residential properties; (3) Small Business Administration (“SBA”) loans and other small business loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. The Bank also originates certain other consumer loans. The Bank’s revenues are derived principally from interest on its mortgage and other loans and mortgage-backed securities portfolio,

1



and interest and dividends on other investments in its securities portfolio. The Bank’s primary sources of funds are deposits, Federal Home Loan Bank of 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.

          In addition to operating the Bank, the Holding Company invests primarily in U.S. government securities, mortgage-backed securities, and corporate securities. The Holding Company also holds a note evidencing a loan that it made to an employee benefit trust established by the Holding Company for the purpose of holding shares for allocation or distribution under certain employee benefit plans of the Holding Company and the Bank (the “Employee Benefit Trust”). The funds provided by this loan enabled the Employee Benefit Trust to acquire 2,328,750 shares, or 8% of the common stock issued in our initial public offering.

          On June 30, 2006, the Company acquired all of the outstanding common stock of Atlantic Liberty Financial Corporation (“Atlantic Liberty”), the parent holding company for Atlantic Liberty Savings, F.A., based in Brooklyn, New York. The aggregate purchase price was $41.2 million, which consisted of $14.7 million of cash and common stock valued at $26.6 million. Under the terms of the Agreement and Plan of Merger, dated December 20, 2005, Atlantic Liberty’s shareholders received $24.00 in cash, 1.43 Holding Company shares per Atlantic Liberty share owned, or a combination thereof, subject to aggregate allocation to all Atlantic Liberty’s shareholders of 65% stock / 35% cash. In connection with the merger, the Company issued 1.6 million shares of common stock, the value of which was determined based on the closing price of the Company’s common stock on the announcement date of December 21, 2005, and two days prior to and after the announcement date. The Company acquired $185.6 million in assets, $116.2 million in net loans and assumed $106.8 million in deposits. This acquisition provided the Bank a presence on Montague Street and on Avenue J in Brooklyn, two highly attractive markets.

          During 2006, the Bank established a business banking unit. The Bank’s business plan includes a transition from a traditional thrift to a more ‘commercial like’ banking institution by focusing on the development of a full complement of commercial business deposit, loan and cash management products.

          On November 27, 2006, the Bank launched an internet branch, iGObanking.com™, as a new division which provides the Bank access to markets outside its geographic locations. Accounts can be opened online at www.iGObanking.com or by mail.

          The Bank has filed an application to form a new wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of accepting municipal deposits and state funds, including certain court ordered funds from New York State Courts, in the State of New York. The Commercial Bank was formed in response to a New York State Finance Law that requires that municipal deposits and state funds must be deposited into a bank or trust company designated by the New York State Comptroller. The Bank is not considered a bank or trust company for this purpose. The commercial bank will offer a full range of deposit products to municipalities and New York State, similar to the products currently being offered by the Bank, but will not make loans. The application was approved on March 1, 2007.

Market Area and Competition

          The Bank is a community oriented savings institution offering a wide variety of financial services to meet the needs of the communities it serves. The Bank’s main office is in Flushing, New York, located in the Borough of Queens. At December 31, 2006, the Bank operated out of its main office and eleven branch offices, located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau County, New York. The Bank opened two new branches in the Borough of Queens in the first quarter of 2007. The Bank maintains its executive offices in Lake Success 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 stable or increasing, which has favorably impacted the Bank’s asset quality. See “— Asset Quality” and “Risk Factors – Local Economic Conditions” included in Item 1A of this Annual Report. 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

2



competition exists for deposits and in all of the lending activities emphasized by the Bank. The internet banking arena, which the Bank entered in November 2006, also has many larger financial institutions which have greater financial resources, name recognition and market presence than the Bank. 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 “Risk Factors – Competition” included in Item 1A of this Annual Report.

          For a discussion of the Company’s business strategies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Management Strategy” included in Item 7 of this Annual Report.

Lending Activities

          Loan Portfolio Composition. The Bank’s loan portfolio consists primarily of mortgage loans secured by multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential property, and construction loans. In addition, the Bank also offers SBA loans, other small business loans and consumer loans. Substantially all the Bank’s mortgage loans are secured by properties located within the Bank’s market area. At December 31, 2006, the Bank had gross loans outstanding of $2,321.4 million (before the allowance for loan losses and net deferred costs).

          Beginning in late 2001, the Bank shifted its focus from originating one-to-four family residential property mortgage loans to the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. These loans generally have higher yields than one-to-four family residential properties, and include prepayment penalties that the Bank collects if the loans pay in full prior to the contractual maturity. From December 31, 2001 to December 31, 2006, multi-family residential mortgage loans increased $501.3 million, or 135.6%, commercial real estate mortgage loans increased $305.1 million, or 142.3%, one-to-four family mixed-use property mortgage loans increased $478.3 million, or 435.6%, while one-to-four family residential property mortgage loans decreased $190.1 million, or 54.1%. The Bank expects to continue this emphasis through marketing and by maintaining competitive interest rates and origination fees. The Bank’s marketing efforts include frequent contacts with mortgage brokers and other professionals who serve as referral sources. From time-to-time, the Bank may purchase loans from mortgage bankers and other financial institutions. Loans purchased comply with the 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 residential, commercial real estate and one-to-four family mixed-use property mortgage loans generally have higher yields than one-to-four family residential property 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 property mortgage loans. The Bank’s increased emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans has increased the overall level of credit risk inherent in the Bank’s loan portfolio. The greater risk associated with multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans could require the Bank to increase its provision for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Bank has not experienced significant losses in its multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loan portfolios, and has determined that, at this time, additional provisions are not required.

          The Bank’s mortgage loan portfolio consists of adjustable rate mortgage (“ARM”) loans and fixed-rate mortgage loans. Interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rate offered by the Bank’s competitors and the creditworthiness of the borrower. Many of those factors are, in turn, affected by regional and national economic conditions, and the fiscal, monetary and tax policies of the federal government.

          In general, consumers show a preference for ARM loans in periods of high interest rates and for fixed-rate loans when interest rates are low. In periods of declining interest rates, the Bank may experience refinancing activity in ARM loans, as borrowers show a preference to lock-in the lower rates available on fixed-rate loans. In the case of ARM loans originated by the Bank, volume and adjustment periods are affected by the interest rates and other market factors as discussed above as well as consumer preferences. The Bank has not in the past, nor does it currently, originate ARM loans that provide for negative amortization.

          In recent years, the Bank has grown its construction loan portfolio. The Bank obtains a first lien position on the underlying collateral, and generally obtains personal guarantees on construction loans. These loans generally have a term

3



of two years or less. 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. The greater risk associated with construction loans could require the Bank to increase its provision for loan losses, and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Bank has not incurred significant losses in its construction loan portfolio.

          The business banking unit was formed in 2006 to focus on loans to businesses located within the Bank’s market area. These loans are generally personally guaranteed by the owners, and may be secured by the assets of the business. The interest rate on these loans is generally an adjustable rate based on a published index, usually the prime rate. These loans, while providing a higher rate of return to the Bank, also present a higher level of risk. The greater risk associated with business loans could require the Bank to increase its provision for loan losses, and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Bank has not incurred significant losses in its business loan portfolio.

          The Bank’s lending activities are subject to federal and state laws and regulations. See “— Regulation.”

4



          The following table sets forth the composition of the Bank’s loan portfolio at the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 


 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 


 


 


 


 


 

 

 

Amount

 

Percent
of Total

 

Amount

 

Percent
of Total

 

Amount

 

Percent
of Total

 

Amount

 

Percent
of Total

 

Amount

 

Percent
of Total

 

 

 


 


 


 


 


 

 

 

(Dollars in thousands)

 

Mortgage Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

$

870,912

 

 

37.52

%

$

788,071

 

 

41.92

%

$

646,922

 

 

42.61

%

$

541,837

 

 

42.53

%

$

452,663

 

 

38.54

%

Commercial real estate

 

 

519,552

 

 

22.38

 

 

399,081

 

 

21.23

 

 

334,048

 

 

22.00

 

 

290,332

 

 

22.79

 

 

257,054

 

 

21.88

 

One-to-four family -mixed-use property

 

 

588,092

 

 

25.33

 

 

477,775

 

 

25.42

 

 

332,805

 

 

21.92

 

 

226,225

 

 

17.76

 

 

170,499

 

 

14.51

 

One-to-four family -residential (1)

 

 

161,889

 

 

6.98

 

 

134,641

 

 

7.17

 

 

151,737

 

 

10.00

 

 

178,474

 

 

14.01

 

 

262,944

 

 

22.38

 

Co-operative apartment (2)

 

 

8,059

 

 

0.35

 

 

2,161

 

 

0.11

 

 

3,132

 

 

0.21

 

 

3,729

 

 

0.29

 

 

5,205

 

 

0.44

 

Construction

 

 

104,488

 

 

4.50

 

 

49,522

 

 

2.63

 

 

31,460

 

 

2.07

 

 

23,622

 

 

1.85

 

 

17,827

 

 

1.52

 

 

 






 






 






 






 






 

Gross mortgage loans

 

 

2,252,992

 

 

97.06

 

 

1,851,251

 

 

98.48

 

 

1,500,104

 

 

98.81

 

 

1,264,219

 

 

99.23

 

 

1,166,192

 

 

99.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Administration loans

 

 

17,521

 

 

0.75

 

 

9,239

 

 

0.49

 

 

5,633

 

 

0.37

 

 

4,931

 

 

0.39

 

 

4,301

 

 

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business and other loans

 

 

50,899

 

 

2.19

 

 

19,362

 

 

1.03

 

 

12,505

 

 

0.82

 

 

4,894

 

 

0.38

 

 

4,185

 

 

0.36

 

 

 






 






 






 






 






 

Gross loans

 

 

2,321,412

 

 

100.00

%

 

1,879,852

 

 

100.00

%

 

1,518,242

 

 

100.00

%

 

1,274,044

 

 

100.00

%

 

1,174,678

 

 

100.00

%

 

 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

Unearned loan fees and deferred costs, net

 

 

10,393

 

 

 

 

 

8,409

 

 

 

 

 

4,798

 

 

 

 

 

2,030

 

 

 

 

 

1,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Allowance for loan losses

 

 

(7,057

)

 

 

 

 

(6,385

)

 

 

 

 

(6,533

)

 

 

 

 

(6,553

)

 

 

 

 

(6,581

)

 

 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

Loans, net

 

$

2,324,748

 

 

 

 

$

1,881,876

 

 

 

 

$

1,516,507

 

 

 

 

$

1,269,521

 

 

 

 

$

1,169,560

 

 

 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 


 

 

(1)

One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2006, gross home equity loans totaled $15.6 million and condominium loans totaled $10.1 million.

 

 

(2)

Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied.


5



          The following table sets forth the Bank’s loan originations (including the net effect of refinancings) and the changes in the Bank’s portfolio of loans, including purchases, sales and principal reductions for the years indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31,

 

 

 



(In thousands)

 

2006

 

2005

 

2004

 









Mortgage Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of year

 

$

1,851,251

 

$

1,500,104

 

$

1,264,219

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans originated:

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

 

166,744

 

 

222,065

 

 

203,741

 

Commercial real estate

 

 

150,804

 

 

103,090

 

 

92,526

 

One-to-four family mixed-use property

 

 

154,456

 

 

186,700

 

 

136,804

 

One-to-four family residential

 

 

13,786

 

 

13,186

 

 

17,699

 

Co-operative apartment

 

 

125

 

 

 

 

302

 

Construction

 

 

73,107

 

 

46,414

 

 

25,923

 

 

 



 



 



 

Total mortgage loans originated

 

 

559,022

 

 

571,455

 

 

476,995

 

 

 



 



 



 

Mortgage loans purchased:

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

 

 

 

1,009

 

 

 

Commercial real estate

 

 

3,087

 

 

 

 

 

Construction

 

 

1,980

 

 

 

 

 

 

Acquisition of Atlantic Liberty loans:

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

 

16,299

 

 

 

 

 

Commercial real estate

 

 

31,914

 

 

 

 

 

One-to-four family mixed-use property

 

 

9,333

 

 

 

 

 

One-to-four family residential

 

 

51,033

 

 

 

 

 

Co-operative apartment

 

 

6,665

 

 

 

 

 

Construction

 

 

13,781

 

 

 

 

 

 

 



 



 



 

Total mortgage loans purchased/acquired

 

 

134,092

 

 

1,009

 

 

 

 

 



 



 



 

Less:

 

 

 

 

 

 

 

 

 

 

Principal reductions

 

 

270,416

 

 

217,199

 

 

233,327

 

Mortgage loan sales

 

 

20,957

 

 

4,118

 

 

7,783

 

Mortgage loan foreclosures

 

 

 

 

 

 

 

 

 



 



 



 

At end of year

 

$

2,252,992

 

$

1,851,251

 

$

1,500,104

 

 

 



 



 



 

SBA, Commercial Business & Other Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At beginning of year

 

$

28,601

 

$

18,138

 

$

9,825

 

 

 

 

 

 

 

 

 

 

 

 

Loans originated:

 

 

 

 

 

 

 

 

 

 

SBA loans

 

 

19,914

 

 

12,249

 

 

4,781

 

Small business loans (1)

 

 

49,909

 

 

12,410

 

 

11,642

 

Other loans

 

 

1,671

 

 

1,537

 

 

2,172

 

 

 



 



 



 

Total other loans originated

 

 

71,494

 

 

26,196

 

 

18,595

 

 

 



 



 



 

Less:

 

 

 

 

 

 

 

 

 

 

Sales

 

 

7,477

 

 

6,630

 

 

2,472

 

Repayments (1)

 

 

24,116

 

 

8,940

 

 

7,794

 

Charge-offs

 

 

82

 

 

163

 

 

16

 

 

 



 



 



 

At end of year

 

$

68,420

 

$

28,601

 

$

18,138

 

 

 



 



 



 

1) 2006 includes an $11.5 million loan to Atlantic Liberty prior to the merger.

6



Loan Maturity and Repricing. The following table shows the maturity of the Bank’s commercial mortgage loan, construction loan and non-mortgage loan portfolios at December 31, 2006. Scheduled repayments are shown in the maturity category in which the payments become due.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Commercial
Mortgage
Loans

 

Construction

 

SBA

 

Commercial
Business and
Other

 

Total

 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts due within one year

 

$

25,481

 

$

96,812

 

$

5,540

 

$

25,423

 

$

153,256

 

 

 
















Amounts due after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One to two years

 

 

21,363

 

 

7,676

 

 

1,485

 

 

14,250

 

 

44,774

 

Two to three years

 

 

20,045

 

 

 

 

1,416

 

 

7,349

 

 

28,810

 

Three to five years

 

 

36,405

 

 

 

 

2,390

 

 

1,788

 

 

40,583

 

Over five years

 

 

416,258

 

 

 

 

6,690

 

 

2,089

 

 

425,037

 

 

 
















Total due after one year

 

 

494,071

 

 

7,676

 

 

11,981

 

 

25,476

 

 

539,204

 

 

 
















Total amounts due

 

$

519,552

 

$

104,488

 

$

17,521

 

$

50,899

 

$

692,460

 

 

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sensitivity of loans to changes in interest rates - loans due after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate loans

 

$

116,983

 

$

7,676

 

$

44

 

$

21,043

 

$

145,746

 

Adjustable rate loans

 

 

377,088

 

 

 

 

11,937

 

 

4,433

 

 

393,458

 

 

 
















Total loans due after one year

 

$

494,071

 

$

7,676

 

$

11,981

 

$

25,476

 

$

539,204

 

 

 
















          Multi-Family Residential Lending. Loans secured by multi-family residential properties were $870.9 million, or 37.52% of gross loans, at December 31, 2006. The Bank’s multi-family residential mortgage loans had an average principal balance of $477,000 at December 31, 2006, and the largest multi-family residential mortgage loan held in the Bank’s portfolio had a principal balance of $8.5 million. The Bank offers both fixed-rate and adjustable rate multi-family residential mortgage loans, with maturities up to 30 years.

          In underwriting multi-family residential mortgage loans, the Bank reviews the expected net operating income generated by the real estate collateral securing the loan, the age and condition of the collateral, the financial resources and income level of the borrower and the 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 residential mortgage loans can be made up to 80% of the appraised value or the purchase price of the property, whichever is less. The Bank generally originates these loans up to only 75% of the appraised value or the purchase price of the property, whichever is less. The Bank generally relies on the income generated by the property as the primary means by which the loan is repaid. However, personal guarantees may be obtained for additional security from these borrowers. The Bank typically orders an environmental report on its multifamily and commercial real estate loans.

          Loans secured by multi-family residential property generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. The increased credit risk is a result of several factors, including the concentration of principal in a smaller number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential property is typically dependent upon the successful operation of the related property. If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. Loans secured by multi-family residential property also may involve a greater degree of environmental risk. The Bank seeks to protect against this risk through obtaining an environmental report. See “—Asset Quality — REO.”

          The Bank’s fixed-rate multi-family mortgage loans are originated for terms up to 15 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $47.0 million, $44.3 million and $23.9 million of fixed-rate multi-family mortgage loans in 2006, 2005 and 2004, respectively. At December 31, 2006, $208.8 million, or 24.0%, of the Bank’s multi-family mortgage loans consisted of fixed rate loans.

          The Bank offers ARM loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may

7



originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. Multi-family adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased multi-family ARM loans totaling $119.8 million, $178.8 million and $179.8 million during 2006, 2005 and 2004, respectively. At December 31, 2006, $662.1 million, or 76.0%, of the Bank’s multi-family mortgage loans consisted of ARM loans.

          Commercial Real Estate Lending. Loans secured by commercial real estate were $519.6 million, or 22.38% of the Bank’s gross loans, at December 31, 2006. The Bank’s commercial real estate mortgage loans are secured by improved properties such as office buildings, hotels/motels, nursing homes, small business facilities, strip shopping centers, warehouses, and, to a lesser extent, religious facilities. At December 31, 2006, the Bank’s commercial real estate mortgage loans had an average principal balance of $728,000, and the largest of such loans, which was secured by a multi-tenant shopping center, had a principal balance of $11.7 million. Commercial real estate mortgage loans are generally originated in a range of $100,000 to $6.0 million. Commercial real estate mortgage loans are generally offered at adjustable rates tied to a market index for terms of five to 15 years, with adjustment periods from one to five years. Commercial real estate mortgage loans are also made at fixed interest rates for terms of seven, 10 or 15 years.

          In underwriting commercial real estate mortgage loans, the Bank employs the same underwriting standards and procedures as are employed in underwriting multi-family residential mortgage loans.

          Commercial real estate mortgage loans generally carry larger loan balances than one-to-four family residential mortgage loans and involve a greater degree of credit risk for the same reasons applicable to multi-family loans.

          The Bank’s fixed-rate commercial mortgage loans are originated for terms up to 20 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $20.5 million, $17.7 million and $22.1 million of fixed-rate commercial mortgage loans in 2006, 2005 and 2004, respectively. At December 31, 2006, $132.7 million, or 25.5%, of the Bank’s commercial mortgage loans consisted of fixed rate loans.

          The Bank offers ARM loans with adjustment periods of one to five years and for terms of up to 15 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. Commercial adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased commercial ARM loans totaling $133.4 million, $85.4 million and $70.5 million during 2006, 2005 and 2004, respectively. At December 31, 2006, $386.8 million, or 74.5%, of the Bank’s commercial mortgage loans consisted of ARM loans.

          One-to-Four Family Mortgage Lending – Mixed-Use Properties. The Bank offers mortgage loans secured by one-to-four family mixed-use properties. These properties contain up to four residential dwelling units and a commercial unit. The Bank offers both fixed-rate and adjustable-rate one-to-four family mixed-use property mortgage loans with maturities of up to 30 years and a general maximum loan amount of $750,000. Loan originations primarily result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and persons who respond to Bank marketing efforts and referrals. One-to-four family mixed-use property mortgage loans were $588.1 million, or 25.33% of gross loans, at December 31, 2006.

          During the three-year period ended December 31, 2006, the Bank focused its origination efforts with respect to one-to-four family mortgage loans on mixed-use properties. The primary income-producing units of these properties are the residential dwelling units. One-to-four family mixed-use property mortgage loans generally have a higher interest rate than residential mortgage loans. One-to-four family mixed-use property mortgage loans also have a higher degree of risk than residential mortgage loans, as repayment of the loan is usually dependent on the income produced from renting the residential units and the commercial unit. At December 31, 2006, one-to-four family mixed-use property mortgage loans amounted to $588.1 million, as compared to $477.8 million at December 31, 2005, $332.8 million at December 31, 2004 and $226.2 million at December 31, 2003, representing an increase of $361.9 million during the three-year period.

          In underwriting one-to-four family mixed-use property mortgage loans, the Bank employs the same underwriting standards as are employed in underwriting multi-family residential mortgage loans.

          The Bank’s fixed-rate one-to-four family mixed-use property mortgage loans are originated for a term of 30 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $30.8 million, $39.4 million and $22.4 million of fixed-rate one-to-four family mixed-use property mortgage

8



loans in 2006, 2005 and 2004, respectively. At December 31, 2006, $151.6 million, or 25.8%, of the Bank’s one-to-four family mixed-use property mortgage loans consisted of fixed rate loans.

          The Bank offers adjustable-rate one-to-four family mixed-use property mortgage loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. One-to-four family mixed-use property adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased one-to-four family mixed-use property ARM loans totaling $123.7 million, $147.3 million and $114.4 million during 2006, 2005 and 2004, respectively. At December 31, 2006, $436.5 million, or 74.2%, of the Bank’s one-to-four family mixed-use property mortgage loans consisted of ARM loans.

          One-to-Four Family Mortgage Lending – Residential Properties. The Bank offers mortgage loans secured by one-to-four family residential properties, including townhouses and condominium units. For purposes of the description contained in this section, one-to-four family residential mortgage loans, co-operative apartment loans and home equity 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 $750,000. Loan originations generally result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and referrals. Residential mortgage loans were $169.9 million, or 7.33% of gross loans, at December 31, 2006.

          During the three-year period ended December 31, 2006, interest rates on residential mortgage loans declined, and, at times, were at their lowest levels in over 40 years. As a result of the low interest rates available, the Bank’s existing borrowers have been refinancing their higher costing residential mortgage loans at the current lower rates. The Bank did not actively pursue this refinancing market, but instead focused on higher-yielding mortgage loan products. As a result, the Bank’s portfolio of residential mortgage loans has declined over the three-year period.

          The Bank generally originates residential mortgage loans in amounts up to 70% 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 90% 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.

          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 $0.9 million and $2.1 million of these loans on 2006 and 2004, respectively. The Bank did not originate any of these loans during 2005.

          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 $0.4 million, $0.1 million and $3.6 million of 15-year fixed-rate residential mortgage loans in 2006, 2005 and 2004, respectively. The Bank also originated and purchased $0.1 million of 30-year fixed rate residential mortgage loans in 2004. The Bank did not originate or purchase any 30-year fixed rate residential mortgages in 2006 and 2005. These loans have been retained to provide flexibility in the management of the Company’s interest rate sensitivity position. At December 31, 2006, $86.2 million, or 50.7%, 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 the U.S. Treasury constant maturity index as published weekly by the Federal Reserve Board. From time to time, the Bank may originate ARM loans at an initial rate lower than the U.S. Treasury constant maturity index as a result of a discount on the spread for the initial adjustment period. ARM loans generally are subject to limitations on interest rate increases of 2% per adjustment period and an aggregate adjustment of 6% over the life of the loan. The Bank originated and purchased adjustable rate residential mortgage loans totaling $13.5 million, $13.1 million and $14.4 million during 2006, 2005 and 2004, respectively. At December 31, 2006, $83.8 million, or 49.3%, of the Bank’s residential mortgage loans consisted of ARM loans.

9



          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 one-to-four family residential 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 one-to-four family residential ARM loans with annual and lifetime interest rate caps that limit the increase of a borrower’s monthly payment.

          Home equity loans are included in the Bank’s portfolio of residential mortgage loans. These loans are offered as adjustable-rate “home equity lines of credit” on which interest only is due for an initial term of 10 years and thereafter principal and interest payments sufficient to liquidate the loan are required for the remaining term, not to exceed 30 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 one-to-our family mixed-use properties, and are subject to an 80% loan-to-value ratio computed on the basis of the aggregate of the first mortgage loan amount outstanding and the proposed home equity loan. They are generally granted in amounts from $25,000 to $300,000. The Loan Committee approves loans in excess of $300,000. The underwriting standards for home equity loans are substantially the same as those for residential mortgage loans. At December 31, 2006, home equity loans totaled $15.6 million, or 0.67%, of gross loans.

          Construction Loans. The Bank’s construction loans primarily have been made to finance the construction of one-to-four family residential properties, multi-family residential properties and residential condominiums. The Bank also, to a limited extent, finances the construction of commercial real estate. The Bank’s policies provide that construction loans may be made in amounts up to 70% of the estimated value of the developed property and only if the Bank obtains a first lien position on the underlying real estate. In addition, the Bank generally requires personal guarantees on all construction loans. Construction loans are generally made with terms of two years or less. Advances are made as construction progresses and inspection warrants, subject to continued title searches to ensure that the Bank maintains a first lien position. The Bank made advances on construction loans of $75.1 million, $46.4 million and $25.9 million during 2006, 2005 and 2004, respectively. Construction loans outstanding at December 31, 2006 totaled $104.5 million, or 4.50%, 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 up 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 $1,500,000. All SBA loans are underwritten in accordance with SBA Standard Operating Procedures and the Bank generally obtains personal guarantees and collateral, where applicable, from SBA borrowers. Typically, SBA loans are originated at a range of $50,000 to $1.5 million with terms ranging from three to 25 years. SBA loans are generally offered at adjustable rates tied to the prime rate (as published in the Wall Street Journal) with adjustment periods of one to three months. The Bank generally sells the guaranteed portion of the SBA loan in the secondary market and retains the servicing rights on these loans, collecting a servicing fee of approximately 1%. The Bank originated $19.9 million, $12.2 million, and $4.8 million of SBA loans during 2006, 2005, and 2004, respectively. At December 31, 2006, SBA loans totaled $17.5 million, representing 0.75% of gross loans.

          Commercial Business and Other Lending. The Bank originates other loans for business, personal, or household purposes. Total commercial business and other loans outstanding at December 31, 2006 amounted to $50.9 million, or 2.19% 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 $2,000,000, with a maximum term of 25 years. Consumer loans generally consist of passbook loans and overdraft lines of credit. The Bank originated $49.9 million, $12.4 million, and $11.6 million of commercial business loans during 2006, 2005, and 2004 respectively. 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. At December 31, 2006, commercial business and other loans totaled $50.9 million, representing 2.19% of gross loans.

10



          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 (which applies to all one-to-four family mortgage loans, including residential and mixed-use property) establishes authorized levels of approval. One-to-four family mortgage loans that do not exceed $750,000 require two signatures for approval, one of which must be from the President, Executive Vice President or a Senior Vice President (collectively, “Authorized Officers”) and the other from a Senior Underwriter, Manager, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department (collectively, “Loan Officers”). For one-to-four family mortgage loans from $750,000 to $1,000,000, three signatures are required for approval, at least two of which must be from the Authorized Officers, and the other one may be a Loan Officer. The Loan Committee, the Executive Committee or the full Board of Directors also must approve one-to-four family mortgage loans in excess of $1,000,000. Pursuant to the Bank’s Commercial Real Estate Lending Policy, all loans secured by commercial real estate and multi-family residential properties, must be approved by the President or the Executive Vice President upon the recommendation of the Commercial Loan Department Officer. Such loans in excess of $1,000,000 also require Loan or Executive Committee or Board approval. In accordance with the Bank’s Business Loan Policy, all business loans up to $500,000, SBA loans up to $1,000,000, taxi medallion loans up to $650,000 and commercial and industrial loans up to $1,000,000 must be approved by the Business Loan Committee, and ratified by the Management Loan Committee. Business loans in excess of $500,000 up to $1,000,000, and SBA loans in excess of $1,000,000 up to $2,000,000, must be approved by the Management Loan Committee and ratified by the Loan Committee of the Bank’s Board of Directors. Commercial business and other loans require two signatures for approval, one of which must be from an Authorized Officer. The Bank’s Construction Loan Policy requires that the Loan 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 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, 2006, 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 $29.1 million, $23.3 million and $18.6 million for each of the three borrowers, respectively.

          Loan Servicing. At December 31, 2006, the Bank was servicing $16.9 million of mortgage loans and $17.5 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 mortgage loans, personal contact is made with the borrower after the loan becomes 30 days delinquent. At that time, the Bank attempts to make arrangements with the borrower to either bring the loan to current status or begin making payments according to an agreed upon schedule. For the majority of delinquent loans, the

11



borrower is able to bring the loan current within a reasonable time. When the borrower has indicated that he/she will be unable to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time, or if the collateral value is deemed to have been impaired, the loan is classified as non-performing. All loans classified as non-performing, which includes all loans past due ninety days or more, are classified as non-accrual unless there is, in management’s opinion, compelling evidence the borrower will bring the loan current in the immediate future. At December 31, 2006, there were no loans past due 90 days or more and still accruing interest.

          Each non-performing loan is reviewed on an individual basis. Upon classifying a loan as non-performing, management reviews available information and conditions that relate to the status of the loan, including the estimated value of the loan’s collateral and any legal considerations that may affect the borrower’s ability to continue to make payments to the Bank. Based upon the available information, management will consider the sale of the loan or retention of the loan. If the loan is retained, the Bank may continue to work with the borrower to collect the amounts due or start foreclosure proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure or by the Bank as soon thereafter as practicable.

          Once the decision to sell a loan is made, management determines what would be considered adequate consideration to be obtained when that loan is sold, based on the facts and circumstances related to that loan. Investors and brokers are then contacted to seek interest in purchasing the loan. The Bank has been successful in finding buyers for its non-performing loans offered for sale that are willing to pay what it considers to be adequate consideration. Terms of the sale include cash due upon closing of the sale, no contingencies or recourse to the Bank, servicing is released to the buyer and time is of the essence. These sales usually close within a reasonably short time period.

          This strategy of selling non-performing loans was implemented during 2003. This has allowed the Bank to optimize its return by quickly converting its non-performing loans to cash, which can then be reinvested in earning assets. This strategy also allows the Bank to avoid lengthy and costly legal proceedings that may occur with non-performing loans. The Bank sold thirty-five delinquent mortgage loans totaling $12.2 million, eleven delinquent mortgage loans totaling $3.1 million, and eleven delinquent mortgage loans totaling $4.3 million during the years ended December 31, 2006, 2005 and 2004, respectively. The Bank did not record any charges to the allowance for loan losses for the non-performing loans which were sold. The Bank realized gross gains of $169,000 and gross losses of $14,000 on the sale of these mortgage loans for the year ended December 31, 2006. The Bank did not realize any gross gains or losses on the sale of these mortgage loans for the years ending December 31, 2005 and 2004. There can be no assurances that the Bank will continue this strategy in future periods, or if continued, it will be able to find buyers to pay adequate consideration.

          On mortgage loans or loan participations purchased by the Bank, for which the seller retains the servicing rights, the Bank receives monthly reports with which it monitors the loan portfolio. Based upon servicing agreements with the servicers of the loans, the Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 2006, the Bank held $12.7 million of loans that were serviced by others.

          In the case of commercial business or other loans, the Bank generally sends the borrower a written notice of non-payment when the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made in order to encourage the borrower to meet with a representative of the Bank to discuss the delinquency. If the loan still is not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent 90 days or more, the Bank may attempt to repossess personal or business property that secures an SBA loan, commercial business loan or consumer loan.

          Delinquent Loans and Non-performing Assets. The Bank generally discontinues accruing interest on delinquent loans when a loan is 90 days past due or foreclosure proceedings have been commenced, whichever first occurs. At that time, previously accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to their maturity date but not their payments, however, continue to accrue interest as long as the borrower continues to remit monthly payments.

12



          The following table sets forth information regarding all non-accrual loans and loans which are past due 90 days or more and still accruing, at the dates indicated. During the years ended December 31, 2006, 2005 and 2004, the amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $144,000, $103,000 and $50,000, respectively. These amounts were not included in the Bank’s interest income for the respective periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 



(Dollars in thousands)

 

2006

 

2005

 

2004

 

2003

 

2002

 













Non-accrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

$

1,957

 

$

861

 

$

 

$

 

$

 

Commercial real estate

 

 

349

 

 

 

 

 

 

 

 

2,537

 

One-to-four family mixed-use property

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

 

 

608

 

 

960

 

 

659

 

 

525

 

 

816

 

Co-operative apartment

 

 

 

 

 

 

 

 

 

 

20

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 
















Total non-accrual mortgage loans

 

 

2,914

 

 

1,821

 

 

659

 

 

525

 

 

3,373

 

Other non-accrual loans

 

 

212

 

 

101

 

 

252

 

 

157

 

 

219

 

 

 
















Total non-accrual loans

 

 

3,126

 

 

1,922

 

 

911

 

 

682

 

 

3,592

 

Loans 90 days or more delinquent and still accruing

 

 

 

 

530

 

 

 

 

 

 

 

 

 
















Total non-performing loans

 

 

3,126

 

 

2,452

 

 

911

 

 

682

 

 

3,592

 

Foreclosed real estate

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

 

 

 

 

 

 

 

 

700

 

 

 
















Total non-performing assets

 

$

3,126

 

$

2,452

 

$

911

 

$

682

 

$

4,292

 

 

 
















 

Troubled debt restructurings

 

$

 

$

 

$

 

$

 

$

 

 

 
















 

Non-performing loans to gross loans

 

 

0.13

%

 

0.13

%

 

0.06

%

 

0.05

%

 

0.31

%

Non-performing assets to total assets

 

 

0.11

%

 

0.10

%

 

0.04

%

 

0.04

%

 

0.26

%

          Real Estate Owned (REO). The Bank aggressively markets any REO properties, when and if, they are acquired through foreclosure. At December 31, 2006, 2005 and 2004, the Bank did not own any such properties.

          Environmental Concerns Relating to Loans. The Bank currently obtains environmental reports in connection with the underwriting of commercial real estate loans, and typically obtains environmental reports in connection with the underwriting of multi-family loans. For all other loans, the Bank obtains environmental reports only if the nature of the current or, to the extent known to the Bank, prior use of the property securing the loan indicates a potential environmental risk. However, the Bank may not be aware of such uses or risks in any particular case, and, accordingly, there is no assurance that real estate acquired by the Bank in foreclosure is free from environmental contamination or that, if any such contamination or other violation exists, the Bank will not have any liability therefor.

Allowance for Loan Losses

          The Bank has established and maintains on its books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in the Bank’s overall loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risk inherent in the various components of its loan portfolio and other factors, including historical loan loss experience (which is updated at least annually), changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional and national economic conditions. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. Management reviews the Bank’s loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-performing loans are classified impaired. Impaired loans secured by collateral are reviewed based on their collateral and the estimated time to recover the Bank’s investment in the loan, and the estimate of the recovery anticipated. Specific reserves allocated to impaired loans were $316,000 and $231,000 at December 31, 2006 and 2005, respectively. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. Specific reserves are allocated to impaired loans based on this review. 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

13



current balance by particular loan categories are also taken into account in determining the appropriate amount of allowance. The loans acquired in the acquisition of Atlantic Liberty, along with the increase in the allowance due to the acquisition, were included in management’s analysis of the adequacy of the allowance for loan losses as of December 31, 2006. The Board of Directors reviews and approves the adequacy of the allowance for loan losses on a quarterly basis.

          In assessing the adequacy of the allowance, management also reviews the Bank’s loan portfolio by separate categories which have similar risk and collateral characteristics; e.g. multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential, co-operative apartment, construction, SBA, commercial business 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, including the historical loss experience and regional economic conditions. During the five-year period ended December 31, 2006, the Bank incurred total net charge-offs of $281,000. This reflects a significant improvement over the loss experience of the 1990s. In addition, the regional economy has improved since 2001, including significant increases in real estate values. The Bank’s underwriting standards generally require a loan-to-value ratio of 75% at a time the loan is originated. Since real estate values have increased significantly since 2001, the loan-to-value ratios for loans originated in prior years have declined below the original 75% level. The rate at which mortgagors have been defaulting on their loans has declined, as the mortgagor’s equity in the property has increased. As a result, the Bank has not incurred losses on mortgage loans in recent years. As a result of these improvements, and despite the increase in the loan portfolio and shift to loans with greater risk, the Bank has not considered it necessary to provide a provision for loan losses during any of the years in the five-year period ended December 31, 2006. Management has concluded, and the Board of Directors has concurred, that, during this time period, the allowance was sufficient to absorb losses inherent in the loan portfolio.

          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, recommendations for correcting deficiencies, including any examiner concerns regarding the level of the allowance, should be noted in the report of examination. Additional supervisory action may also be taken based on the magnitude of the observed shortcomings in the allowance process, including the materially of any error in the reported amount of the allowance.

          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. Due to the acquisition of Atlantic Liberty, the allowance for loan losses was increased by Atlantic Liberty’s allowance of $753,000. The Bank however did not record any additional provision for loan losses for the years ended December 31, 2006, 2005 and 2004. At December 31, 2006, the total allowance for loan losses was $7.1 million, representing 225.72% of each of non-performing loans and non-performing assets, compared to 260.39% for both of these ratios at December 31, 2005. The Bank continues to monitor and, as necessary, modify the level of its allowance for loan losses in order to maintain the allowance at a level which management considers adequate to provide for probable loan losses based on available information.

          Many factors may require additions to the allowance for loan losses in future periods beyond those currently revealed. These factors include future adverse changes in economic conditions, changes in interest rates and changes in the financial capacity of individual borrowers (any of which may affect the ability of borrowers 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 multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans can be expected to increase the overall level of credit risk inherent in the Bank’s loan portfolio. The greater risk associated with these loans, as well as construction loans and business loans, could require the Bank to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans that is in excess of the allowance currently maintained by the Bank. Provisions for loan losses are charged against net income. See “—Lending Activities” and “—Asset Quality.”

14



          The following table sets forth changes in, and the balance of, the Bank’s allowance for loan losses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At and for the years ended December 31,

 

 

 



(Dollars in thousands)

 

2006

 

2005

 

2004

 

2003

 

2002

 













Balance at beginning of year

 

$

6,385

 

$

6,533

 

$

6,553

 

$

6,581

 

$

6,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition of Atlantic Liberty

 

 

753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans charged-off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

One-to-four family mixed-use property

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

 

 

 

 

 

 

 

 

 

 

 

Co-operative apartment

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

SBA

 

 

(57

)

 

(144

)

 

(28

)

 

(111

)

 

(8

)

Commercial business and other loans

 

 

(36

)

 

(20

)

 

 

 

(44

)

 

(4

)

 

 
















Total loans charged-off

 

 

(93

)

 

(164

)

 

(28

)

 

(155

)

 

(12

)

 

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

 

2

 

 

3

 

 

3

 

 

125

 

 

3

 

SBA, commercial business and other loans

 

 

10

 

 

13

 

 

5

 

 

2

 

 

5

 

 

 
















Total recoveries

 

 

12

 

 

16

 

 

8

 

 

127

 

 

8

 

 

 
















 

Net charge-offs

 

 

(81

)

 

(148

)

 

(20

)

 

(28

)

 

(4

)

 

 
















 

Balance at end of year

 

$

7,057

 

$

6,385

 

$

6,533

 

$

6,553

 

$

6,581

 

 

 
















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net charge-offs during the year to average loans outstanding during the year

 

 

0.00

%

 

0.01

%

 

0.00

%

 

0.00

%

 

0.00

%

Ratio of allowance for loan losses to gross loans at end of the year

 

 

0.30

%

 

0.34

%

 

0.43

%

 

0.51

%

 

0.56

%

Ratio of allowance for loan losses to non-performing loans at the end of the year

 

 

225.72

%

 

260.39

%

 

717.29

%

 

960.86

%

 

183.23

%

Ratio of allowance for loan losses to non-performing assets at the end of the year

 

 

225.72

%

 

260.39

%

 

717.29

%

 

960.86

%

 

153.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15



          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 loan portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 


 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 


 


 


 


 


 

Loan Category

 

Amount

 

Percent
of Loans in
Category to
Total loans

 

Amount

 

Percent
of Loans in
Category to
Total loans

 

Amount

 

Percent
of Loans in
Category to
Total loans

 

Amount

 

Percent
of Loans in
Category to
Total loans

 

Amount

 

Percent
of Loans in
Category to
Total loans

 























 

 

(Dollars in thousands)

 

Mortgage Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family residential

 

$

1,122

 

 

37.52

%

$

1,216

 

 

41.92

%

$

1,010

 

 

42.61

%

$

1,251

 

 

42.53

%

$

1,286

 

 

38.54

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

668

 

 

22.38

 

 

1,272

 

 

21.23

 

 

1,715

 

 

22.00

 

 

2,740

 

 

22.79

 

 

2,807

 

 

21.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to-four family mixed-use property

 

 

661

 

 

25.33

 

 

1,544

 

 

25.42

 

 

1,494

 

 

21.92

 

 

803

 

 

17.76

 

 

550

 

 

14.51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to-four family residential

 

 

80

 

 

6.98

 

 

524

 

 

7.17

 

 

718

 

 

10.00

 

 

684

 

 

14.01

 

 

965

 

 

22.38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Co-operative apartment

 

 

10

 

 

0.35

 

 

161

 

 

0.11

 

 

207

 

 

0.21

 

 

127

 

 

0.29

 

 

119

 

 

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

851

 

 

4.50

 

 

64

 

 

2.63

 

 

55

 

 

2.07

 

 

56

 

 

1.85

 

 

52

 

 

1.52

 

 

 






























 

Gross mortgage loans

 

 

3,392

 

 

97.06

 

 

4,781

 

 

98.48

 

 

5,199

 

 

98.81

 

 

5,661

 

 

99.23

 

 

5,779

 

 

99.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Administration loans

 

 

1,895

 

 

0.75

 

 

964

 

 

0.49

 

 

663

 

 

0.37

 

 

553

 

 

0.39

 

 

499

 

 

0.37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business and other loans

 

 

1,770

 

 

2.19

 

 

640

 

 

1.03

 

 

671

 

 

0.82

 

 

339

 

 

0.38

 

 

303

 

 

0.36

 

 

 































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

7,057

 

 

100.00

%

$

6,385

 

 

100.00

%

$

6,533

 

 

100.00

%

$

6,553

 

 

100.00

%

$

6,581

 

 

100.00

%

 

 
































16



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 Operations — Overview—Management Strategy” in Item 7 of this Annual Report.

          Federally chartered savings institutions have authority to invest in various types of assets, including U.S. government obligations, securities of various federal agencies, mortgage-backed and mortgage-related securities, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, reverse repurchase agreements, loans of federal funds, and, subject to certain limits, corporate securities, commercial paper and mutual funds. The Company primarily invests in mortgage-backed securities, U. S. government obligations, and mutual funds which purchase these same instruments.

          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, 2006, the Company had $330.6 million in securities available for sale which represented 11.7% of total assets. These securities had an aggregate market value at December 31, 2006 that was approximately 1.5 times the amount of the Company’s equity at that date. The cumulative balance of unrealized net losses on securities available for sale was $4.7 million, net of taxes, at December 31, 2006. 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 5 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report. The Company may from time to time sell securities and realize a loss if the proceeds of such sale may be reinvested in loans or other assets offering more attractive yields.

          At December 31, 2006, there are no 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.

17



          The table below sets forth certain information regarding the amortized cost and market values of the Company’s securities portfolio, interest bearing deposits and federal funds sold, at the dates indicated. Securities available for sale are recorded at market value. See Note 5 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 


 

 

 

2006

 

2005

 

2004

 

 

 


 


 


 

 

 

Amortized
Cost

 

Market
Value

 

Amortized
Cost

 

Market
Value

 

Amortized
Cost

 

Market
Value

 

 

 


 


 


 

 

 

(In thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds and other debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

15,016

 

$

15,004

 

$

10,942

 

$

10,911

 

$

12,866

 

$

12,868

 

Corporate debentures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 






 






 

Total bonds and other debt securities

 

 

15,016

 

 

15,004

 

 

10,942

 

 

10,911

 

 

12,866

 

 

12,868

 

 

 






 






 






 

 

Mutual funds

 

 

21,224

 

 

20,645

 

 

20,296

 

 

19,767

 

 

20,600

 

 

20,352

 

 

 






 






 






 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

619

 

 

619

 

 

619

 

 

619

 

 

779

 

 

1,416

 

Preferred stock

 

 

5,685

 

 

5,468

 

 

5,493

 

 

5,270

 

 

5,600

 

 

5,480

 

 

 






 






 






 

Total equity securities

 

 

6,304

 

 

6,087

 

 

6,112

 

 

5,889

 

 

6,379

 

 

6,896

 

 

 






 






 






 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

 

135,458

 

 

131,192

 

 

152,412

 

 

147,802

 

 

217,278

 

 

215,657

 

REMIC and CMO

 

 

100,165

 

 

98,652

 

 

91,369

 

 

89,561

 

 

89,416

 

 

89,164

 

FHLMC

 

 

53,440

 

 

51,733

 

 

57,470

 

 

55,735

 

 

78,453

 

 

78,094

 

GNMA

 

 

7,199

 

 

7,274

 

 

7,789

 

 

8,096

 

 

12,043

 

 

12,714

 

 

 






 






 






 

Total mortgage-backed securities

 

 

296,262

 

 

288,851

 

 

309,040

 

 

301,194

 

 

397,190

 

 

395,629

 

 

 






 






 






 

 

Total securities available for sale

 

 

338,806

 

 

330,587

 

 

346,390

 

 

337,761

 

 

437,035

 

 

435,745

 

 

 






 






 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits and Federal funds sold

 

 

4,670

 

 

4,670

 

 

4,396

 

 

4,396

 

 

1,186

 

 

1,186

 

 

 






 






 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

343,476

 

$

335,257

 

$

350,786

 

$

342,157

 

$

438,221

 

$

436,931

 

 

 






 






 






 

          Mortgage-backed securities. At December 31, 2006, the Company had $288.9 million invested in mortgage-backed securities, of which $17.2 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.

18



          The following table sets forth the Company’s mortgage-backed securities purchases, sales and principal repayments for the years indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31,

 

 

 


 

 

 

2006

 

2005

 

2004

 

 

 


 


 


 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

301,194

 

$

395,629

 

$

479,393

 

 

 

 

 

 

 

 

 

 

 

 

Acquired with Atlantic Liberty

 

 

30,844

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of mortgage-backed securities

 

 

43,897

 

 

29,627

 

 

53,649

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unearned premium, net of accretion of unearned discount

 

 

(560

)

 

(1,219

)

 

(1,851

)

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains (losses) on mortgage-backed securities available for sale

 

 

435

 

 

(6,285

)

 

(1,716

)

 

 

 

 

 

 

 

 

 

 

 

Sales of mortgage-backed securities

 

 

(36,220

)

 

(28,643

)

 

(15,634

)

 

 

 

 

 

 

 

 

 

 

 

Principal repayments received on
mortgage-backed securities

 

 

(50,739

)

 

(87,915

)

 

(118,212

)

 

 



 



 



 

Net decrease increase in mortgage-backed securities

 

 

(12,343

)

 

(94,435

)

 

(83,764

)

 

 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of year

 

$

288,851

 

$

301,194

 

$

395,629

 

 

 



 



 



 

          While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and value of such securities. The Company does not own any derivative instruments that are extremely sensitive to changes in interest rates.

19



          The table below sets forth certain information regarding the amortized cost, estimated fair value, annualized weighted average yields and maturities of the Company’s debt and equity securities at December 31, 2006. The stratification of balances is based on stated maturities. Equity securities are shown as immediately maturing, except for preferred stocks with stated redemption dates, which are shown in the period they are scheduled to be redeemed. Assumptions for repayments and prepayments are not reflected for mortgage-backed securities. The Company carries these investments at their estimated fair value in the consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or Less

 

One to Five Years

 

Five to Ten Years

 

More than Ten Years

 

Total Securities

 

 

 


 


 


 


 


 

 

 

Amortized
Cost

 

Weighted
Average
Yield

 

Amortized
Cost

 

Weighted
Average
Yield

 

Amortized
Cost

 

Weighted
Average
Yield

 

Amortized
Cost

 

Weighted
Average
Yield

 

Average
Remaining
Years to
Maturity

 

Amortized
Cost

 

Estimated
Fair
Value

 

Weighted
Average
Yield

 

 

 


 


 


 


 




 

 

 

(Dollars in thousands)

 

Securities available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds and other debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

 

$

5,283

 

4.84

$

 

 

%

$

9,733

 

 

5.05

%

$

 

 

%

 

4.99

 

$

15,016

 

$

15,004

 

 

4.98

%

 

 




































Total bonds and other debt securities

 

 

5,283

 

4.84

 

 

 

 

 

 

9,733

 

 

5.05

 

 

 

 

 

 

4.99

 

 

15,016

 

 

15,004

 

 

4.98

 

 

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

 

21,224

 

4.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

21,224

 

 

20,645

 

 

4.95

 

 

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

619

 

9.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

619

 

 

619

 

 

9.02

 

Preferred stock

 

 

4,885

 

5.78

 

 

 

 

 

 

 

 

 

 

800

 

 

8.72

 

 

N/A

 

 

5,685

 

 

5,468

 

 

6.19

 

 

 




































Total equity securities

 

 

5,504

 

6.14

 

 

 

 

 

 

 

 

 

 

800

 

 

8.72

 

 

N/A

 

 

6,304

 

 

6,087

 

 

6.47

 

 

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FNMA

 

 

 

 

 

5,699

 

 

5.04

 

 

3,652

 

 

5.80

 

 

126,107

 

 

4.91

 

 

16.18

 

 

135,458

 

 

131,192

 

 

4.94

 

REMIC and CMO

 

 

 

 

 

 

 

 

 

14,886

 

 

4.11

 

 

85,279

 

 

5.11

 

 

19.88

 

 

100,165

 

 

98,652

 

 

4.96

 

FHLMC

 

 

 

 

 

9,982

 

 

4.01

 

 

596

 

 

5.93

 

 

42,862

 

 

4.69

 

 

14.39

 

 

53,440

 

 

51,733

 

 

4.58

 

GNMA

 

 

 

 

 

 

 

 

 

 

 

 

 

7,199

 

 

6.08

 

 

26.91

 

 

7,199

 

 

7,274

 

 

6.08

 

 

 




































Total mortgage-backed securities

 

 

 

 

 

15,681

 

 

4.38

 

 

19,134

 

 

4.49

 

 

261,447

 

 

4.97

 

 

17.37

 

 

296,262

 

 

288,851

 

 

4.90

 

 

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

4,670

 

4.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N/A

 

 

4,670

 

 

4,670

 

 

4.92

 

 

 




































 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

 

$

36,681

 

5.11

$

15,681

 

 

4.38

%

$

28,867

 

 

4.68

%

$

262,247

 

 

4.98

%

 

16.78

 

$

343,476

 

$

335,257

 

 

4.94

%

 

 





































20



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 savings 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 twelve 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.

          In November, 2006, the Bank launched “iGObanking.comTM”, an internet branch, offering savings accounts and certificates of deposit. This will allow the Bank to compete on a national scale without the geographical constraints of physical locations. Since the number of U.S. households with accounts at Web-only banks has grown more than tenfold in the past six years, our strategy was to join the market place by creating a branch that offers clients the simplicity and flexibility of a virtual online bank, which is a division of a stable, traditional bank, that was established in 1929.

          In December, 2006, the Bank filed an application with the New York State Banking Department to form a new wholly owned subsidiary, Flushing Commercial Bank, a New York State chartered commercial bank, for the limited purpose of accepting municipal deposits and state funds in the State of New York. The commercial bank will offer a full range of deposit products to municipalities and the State of New York, similar to the products currently being offered by the Bank. The application was approved on March 1, 2007.

          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. The Bank has seen an increase in its deposits in each of the past three years. The nation’s economy continued to expand in 2005 and 2006. Despite the improvement in the stock market during 2006, the Bank saw an increase in it’s due to depositors during 2006 of $296.5 million. The Federal Reserve began increasing short-term interest rates in the second half of 2004, and continued increasing short-term rates through June 2006. The Bank has responded by increasing interest rates paid on savings, money market and certificate of deposit accounts. While new deposits were obtained at rates that were higher than the weighted average cost of existing deposits, the Bank believes that by extending the term of new deposits it is better protected against future interest rate increases. The cost of deposits increased to 3.97% in the fourth quarter of 2006 from 2.95% in the fourth quarter of 2005. While we are unable to predict the direction of future interest rate changes, if interest rates rise during 2007, the result will be continued increases in the Company’s cost of deposits, which could reduce the Company’s net interest margin.

          Included in deposits are certificates of deposit with a balance of $100,000 or more totaling $298.9 million, $255.3 million and $165.6 million at December 31, 2006, 2005 and 2004, respectively.

          The Bank utilizes brokered deposits as an additional funding source, with $144.9 million at December 31, 2006. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. The Bank maintains only one account for the total deposit amount, while the detailed records of owners are maintained by the brokerage firms. The Depository Trust Company is used as the clearing house, maintaining each deposit under the name of CEDE & Co. The deposits are transferable just like a stock or bond investment and the customer can open the account with only a phone call, just like buying a stock or bond. This provides a large deposit for the Bank at a lower operating cost since the Bank only has one account to maintain versus several accounts with multiple interest and maturity checks. The Bank seeks to obtain brokered deposits primarily when the interest rate on these deposits is below the prevailing interest rate in its market.

          Unlike non-brokered deposits, where the deposit amount can be withdrawn with a penalty for any reason, including increasing interest rates, a brokered deposit can only be withdrawn in the event of the death, or court declared mental incompetence, of the depositor. This allows the Bank to better manage the maturity of its deposits. Currently, the rates offered by the Bank for brokered deposits are comparable to that offered for retail certificates of deposit of similar size and maturity.

21



          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,

 

 

 


 

 

 

2006

 

2005

 

2004

 

 

 


 


 


 

 

 

Amount

 

Percent
of Total
Deposits

 

Weighted
Average
Nominal
Rate

 

Amount

 

Percent
of Total
Deposits

 

Weighted
Average
Nominal
Rate

 

Amount

 

Percent
of Total
Deposits

 

Weighted
Average
Nominal
Rate

 

 

 


 


 


 


 


 


 


 


 


 

 

 

(Dollars in thousands)

 

 

Savings accounts

 

$

262,980

 

 

14.91

%

 

1.70

%

$

273,753

 

 

18.66

%

 

1.45

%

$

216,772

 

 

16.77

%

 

0.50

%

NOW accounts

 

 

47,181

 

 

2.67

 

 

0.44

 

 

42,029

 

 

2.87

 

 

0.50

 

 

48,463

 

 

3.75

 

 

0.50

 

Demand accounts

 

 

80,061

 

 

4.54

 

 

 

 

58,678

 

 

4.00

 

 

 

 

49,540

 

 

3.83

 

 

 

Mortgagors’ escrow deposits

 

 

19,755

 

 

1.12

 

 

0.22

 

 

19,423

 

 

1.32

 

 

0.21

 

 

16,473

 

 

1.27

 

 

0.24

 

 

 



 



 



 



 



 



 



 



 



 

Total

 

 

409,977

 

 

23.24

 

 

1.15

 

 

393,883

 

 

26.85

 

 

1.07

 

 

331,248

 

 

25.62

 

 

0.41

 

 

 



 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

 

251,197

 

 

14.24

 

 

4.06

 

 

175,247

 

 

11.94

 

 

2.47

 

 

258,235

 

 

19.98

 

 

1.88

 

 

 



 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit accounts with original maturies of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 6 Months

 

 

2,704

 

 

0.15

 

 

0.66

 

 

2,684

 

 

0.18

 

 

0.74

 

 

5,302

 

 

0.41

 

 

0.75

 

6 to less than 12 Months

 

 

166,622

 

 

9.44

 

 

4.91

 

 

66,965

 

 

4.56

 

 

3.20

 

 

35,147

 

 

2.72

 

 

1.24

 

12 to less than 30 Months

 

 

441,616

 

 

25.03

 

 

4.65

 

 

412,527

 

 

28.11

 

 

3.50

 

 

312,173

 

 

24.15

 

 

2.60

 

30 to less than 48 Months (2)

 

 

65,698

 

 

3.72

 

 

3.74

 

 

59,623

 

 

4.06

 

 

3.41

 

 

72,499

 

 

5.61

 

 

3.36

 

48 to less than 72 Months (3)

 

 

368,000

 

 

20.87

 

 

4.66

 

 

292,380

 

 

19.94

 

 

4.52

 

 

224,491

 

 

17.36

 

 

4.89

 

72 Months or more

 

 

58,336

 

 

3.31

 

 

4.92

 

 

63,978

 

 

4.36

 

 

4.95

 

 

53,702

 

 

4.15

 

 

4.96

 

 

 



 



 



 



 



 



 



 



 



 

Total certificate of deposit accounts

 

 

1,102,976

 

 

62.52

 

 

4.64

 

 

898,157

 

 

61.21

 

 

3.90

 

 

703,314

 

 

54.40

 

 

3.51

 

 

 



 



 



 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits (1)

 

$

1,764,150

 

 

100.00

%

 

3.75

%

$

1,467,287

 

 

100.00

%

 

2.97

%

$

1,292,797

 

 

100.00

%

 

2.39

%

 

 



 



 



 



 



 



 



 



 



 


 

 

(1)

Included in the above balances are IRA and Keogh deposits totaling $177.0 million, $170.9 million and $162.9 million at December 31, 2006, 2005 and 2004, respectively.

 

 

(2)

Includes brokered deposits of $46.4 million and $11.5 million at December 31, 2006 and 2005, respectively.

 

 

(3)

Includes brokered deposits of $98.5 million and $19.8 million at December 31, 2006 and 2005, respectively.

22



          The following table presents by various rate categories, the amount of time deposit accounts outstanding at the dates indicated, and the years to maturity of the certificate accounts outstanding at December 31, 2006.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2006

 

 

 

At December 31,

 


 

 

 


 

Within
One Year

 

One to
Three Years

 

Thereafter

 

Total

 

 

 

2006

 

2005

 

2004

 

 

 

 

 

 

 


 


 


 


 


 


 


 

 

 

(In thousands)

 

Interest rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.99% or less

 

$

49,953

 

$

70,762

 

$

121,676

 

$

43,271

 

$

6,682

 

$

 

$

49,953

 

2.00% to 2.99%

 

 

9,630

 

 

20,044

 

 

62,457

 

 

4,739

 

 

4,714

 

 

177

 

 

9,630

 

3.00% to 3.99%

 

 

114,487

 

 

336,757

 

 

297,300

 

 

38,660

 

 

61,215

 

 

14,612

 

 

114,487

 

4.00% to 4.99% (1)

 

382,060

 

 

379,327

 

 

118,212

 

 

192,743

 

 

85,651

 

 

103,666

 

 

382,060

 

5.00% to 5.99% (2)

 

542,524

 

 

83,925

 

 

42,772

 

 

342,653

 

 

57,683

 

 

142,188

 

 

542,524

 

6.00% to 6.99%

 

 

302

 

 

3,007

 

 

35,874

 

 

302

 

 

 

 

 

 

302

 

7.00% to 7.99%

 

 

4,020

 

 

4,335

 

 

25,023

 

 

3,388

 

 

632

 

 

 

 

4,020

 

 

 



 



 



 



 



 



 



 

Total

 

$

1,102,976

 

$

898,157

 

$

703,314

 

$

625,756

 

$

216,577

 

$

260,643

 

$

1,102,976

 

 

 



 



 



 



 



 



 



 


 

 

(1)

Includes brokered deposits of $51.0 million and $31.3 million at December 31, 2006 and 2005, respectively.

 

 

(2)

Includes brokered deposits of $93.9 million at December 31, 2006.

          The following table presents by remaining maturity categories the amount of certificate of deposit accounts with balances of $100,000 or more at December 31, 2006 and their annualized weighted average interest rates.

 

 

 

 

 

 

 

 

 

 

Amount

 

Weighted
Average Rate

 

 

 


 


 

 

 

(Dollars in thousands)

 

Maturity Period:

 

 

 

 

 

 

 

Three months or less

 

$

63,667

 

 

4.95

%

Over three through six months

 

 

75,271

 

 

4.90

 

Over six through 12 months

 

 

71,158

 

 

4.86

 

Over 12 months

 

 

88,834

 

 

4.63

 

 

 



 



 

Total

 

$

298,930

 

 

4.82

%

 

 



 



 

The above table does not include brokered deposits of $144.9 million with a weighted average rate of 4.98%.

          The following table presents the deposit activity, including mortgagors’ escrow deposits, of the Bank for the periods indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31,

 

 

 


 

 

 

2006

 

2005

 

2004

 

 

 


 


 


 

 

 

(In thousands)

 

Net deposits

 

$

133,240

 

$

139,833

 

$

93,916

 

Acquired with Atlantic Liberty

 

 

106,766

 

 

 

 

 

Amortization of premiums, net

 

 

464

 

 

 

 

 

Interest on deposits

 

 

56,393

 

 

34,657

 

 

28,972

 

 

 



 



 



 

Net increase in deposits

 

$

296,863

 

$

174,490

 

$

122,888

 

 

 



 



 



 

23



          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 years ended December 31,

 

 

 



 

 

2006

 

2005

 

2004

 

 

 




























 

 

Average
Balance

 

Percent
of Total
Deposits

 

Average
Cost

 

Average
Balance

 

Percent
of Total
Deposits

 

Average
Cost

 

Average
Balance

 

Percent
of Total
Deposits

 

Average
Cost

 

 

 




























 

 

(Dollars in thousands)

 

 

Savings accounts

 

$

265,421

 

 

16.23

%

 

1.52

%   

$

241,121

 

 

17.98

%

 

0.92

%  

$

218,336

 

 

17.43

%

 

0.50

%

 

NOW accounts

 

 

43,052

 

 

2.63

 

 

0.47

 

 

43,133

 

 

3.22

 

 

0.50

 

 

44,103

 

 

3.52

 

 

0.50

 

 

Demand accounts

 

 

60,991

 

 

3.73

 

 

 

 

52,017

 

 

3.88

 

 

 

 

45,093

 

 

3.60

 

 

 

 

Mortgagors’ escrow deposits

 

 

29,275

 

 

1.79

 

 

0.22

 

 

27,337

 

 

2.04

 

 

0.21

 

 

20,482

 

 

1.64

 

 

0.24

 

 

 




























Total

 

 

398,739

 

 

24.38

 

 

1.08

 

 

363,608

 

 

27.12

 

 

0.69

 

 

328,014

 

 

26.19

 

 

0.42

 

 

Money market accounts

 

 

235,642

 

 

14.41

 

 

3.74

 

 

228,818

 

 

17.06

 

 

2.27

 

 

279,952

 

 

22.36

 

 

1.83

 

 

Certificate of deposit accounts

 

 

1,001,438

 

 

61.21

 

 

4.37

 

 

748,747

 

 

55.82

 

 

3.60

 

 

644,328

 

 

51.45

 

 

3.49

 

 

 




























 

Total deposits

 

$

1,635,819

 

 

100.00

%

 

3.48

%

$

1,341,173

 

 

100.00

%

 

2.58

%

$

1,252,294

 

 

100.00

%

 

2.31

%

 

 




























Borrowings. Although deposits are the Bank’s primary source of funds, the Bank also uses borrowings as an alternative and cost effective source of funds for lending, investing and other general purposes. The Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such advances generally are secured by a blanket lien against the 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. In addition, the Holding Company issued $20.6 million of junior subordinated debentures in July 2003. The average cost of borrowed funds was 4.73%, 4.33% and 4.01% for the years ended December 31, 2006, 2005 and 2004, respectively. The average balances of borrowed funds were $715.3 million, $683.0 million and $580.6 million for the same years, respectively.

24



          The following table sets forth certain information regarding the Company’s borrowed funds at or for the periods ended on the dates indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

At or for the years ended December 31,

 

 

 


 

 

 

2006

 

2005

 

2004

 

 

 


 


 


 

 

 

(Dollars in thousands)

 

Securities Sold with the Agreement to Repurchase

 

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

$

207,955

 

$

210,174

 

$

194,610

 

Maximum amount outstanding at any month end during the period

 

 

238,900

 

 

213,900

 

 

213,900

 

Balance outstanding at the end of period

 

 

223,900

 

 

178,900

 

 

213,900

 

Weighted average interest rate during the period

 

 

4.70

%

 

4.25

%

 

4.23

%

Weighted average interest rate at end of period

 

 

4.91

 

 

4.43

 

 

4.22

 

 

 

 

 

 

 

 

 

 

 

 

FHLB-NY Advances

 

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

$

486,750

 

$

452,246

 

$

365,321

 

Maximum amount outstanding at any month end during the period

 

 

587,894

 

 

524,198

 

 

399,240

 

Balance outstanding at the end of period

 

 

587,894

 

 

490,191

 

 

350,217

 

Weighted average interest rate during the period

 

 

4.56

%

 

4.23

%

 

3.82

%

Weighted average interest rate at end of period

 

 

4.63

 

 

4.40

 

 

3.90

 

 

 

 

 

 

 

 

 

 

 

 

Other Borrowings

 

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

$

20,619

 

$

20,619

 

$

20,619

 

Maximum amount outstanding at any month end during the period

 

 

20,619

 

 

20,619

 

 

20,619

 

Balance outstanding at the end of period

 

 

20,619

 

 

20,619

 

 

20,619

 

Weighted average interest rate during the period

 

 

9.00

%

 

7.21

%

 

5.13

%

Weighted average interest rate at end of period

 

 

9.02

 

 

7.80

 

 

5.72

 

 

 

 

 

 

 

 

 

 

 

 

Total Borrowings

 

 

 

 

 

 

 

 

 

 

Average balance outstanding

 

$

715,324

 

$

683,039

 

$

580,550

 

Maximum amount outstanding at any month end during the period

 

 

832,413

 

 

758,717

 

 

614,749

 

Balance outstanding at the end of period

 

 

832,413

 

 

689,710

 

 

584,736

 

Weighted average interest rate during the period

 

 

4.73

%

 

4.33

%

 

4.01

%

Weighted average interest rate at end of period

 

 

4.81

 

 

4.51

 

 

4.08

 

Subsidiary Activities

          At December 31, 2006, the Holding Company had two wholly owned subsidiaries: the Bank and the Trust. In addition, the Bank had three wholly owned subsidiaries: FSB Properties, Inc. (“Properties”), Flushing Preferred Funding Corporation (“FPFC”), and Flushing Service Corporation.

          (a) Properties was formed in 1976 under the 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 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.

25



Personnel

          At December 31, 2006, the Bank had 260 full-time employees and 64 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. At the present time, the Holding Company only employs certain officers of the Bank. These employees do not receive any extra compensation as officers of the Holding Company.

Omnibus Incentive Plan

          The 2005 Omnibus Incentive Plan (“Omnibus Plan”) became effective on May 17, 2005 after adoption by the Board of Directors and approval by the stockholders. The Omnibus Plan authorizes the Compensation Committee to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can be structured so as to comply with Section 162(m) of the Internal Revenue Code. As of December 31, 2006, there are 129,566 shares available under the full value award plan and 632,152 shares under the non-full value plan. The Company has applied the shares previously authorized by stockholders under the 1996 Stock Option Incentive Plan and the 1996 Restricted Stock Incentive Plan for use under the non-full value and full value plans, respectively, for future awards under the Omnibus Plan. All grants and awards under the 1996 Stock Option Incentive Plan and 1996 Restricted Stock Incentive Plan prior to the effective date of the Omnibus Plan remain outstanding as issued. The Company will continue to maintain separate pools of available shares for full value as opposed to non-full value