Corporate Information Flushing Financial Corporation
dependable yesterday. stronger today. ready for tomorrow .
Annual Report 2008
Dear Shareholder,
2008 was a challenging and difficult year for the banking indus-
try and the economy as a whole. The nation’s economy has been
in a recession since December 2007. We have seen the restruc-
turing and demise of some of the largest institutions in the
nation. The banking industry as a whole lost money in 2008.
While our share price reflected the nationwide economic weak-
ness, our Company’s profitability remained strong and stable.
Our earnings have grown significantly, despite the negative
environment. We have remained a profitable, “well capitalized”
institution. Core earnings for 2008 were $24.9 mil lion, an
increase of $3.6 million or 14.4% from the prior year. Consistent
with many in the industry, we had to take charges to income for
some of our investment holdings; during the year, however,
earnings under GAAP exceeded last year as well. Our strong
performance for 2008 was primarily driven by an increase of
$16.8 million in net interest income, as our cost of funds
declined throughout the year. This reduction in our funding
costs was directly attributable to initiatives we put in place over
and the continued growth of earnings has enabled the Bank to
continue to be “well capitalized” with tangible and risk rated
capital ratios of 7.92% and 13.02%, respectively.
Throughout our history as a public company, Flushing Financial
has remained profitable and “well capitalized,” so it was not
without significant consideration that we elected to participate
in the Treasury’s Capital Purchase Program. We did so because
our historically strong ability to grow deposits and make quality
loans enables the bank to put this capital to good work. We will
use it to lend and increase assets thus improving returns to our
Our earnings have grown significantly…We have remained a profitable, “well
capitalized” institution. Core earnings for 2008 were $24.9 mil lion, an increase
of $3.6 million or 14.4% from the prior year.
shareholders. It is our intention to repay
this capital infusion when it is deemed in
the best interests of the Company and its
shareholders to do so.
In July of this year our longtime friend and
valued director Franklin Regan announced
the past several years coupled with recent interest rate reductions
by the Fed. Low cost deposit growth in our iGObanking.com
internet bank, our government banking initiative and newer
transaction accounts contributed significantly to our success
in this area. Notably, we have increased the balances of our
transaction accounts by $195.3 million or 139% during the year,
as more business, consumer and municipal customers chose
Flushing products for their needs. These successes come as we
continue to implement key elements of our strategic plan and
his retirement. “Pete,” as he is known to his friends and close
business associates, had been a director since November 1969
but his association with the Flushing Savings Bank goes back
many years prior as his father was onetime President. Pete was
an attorney in private practice for many years before joining
the law firm of Cullen and Dykman in July, 2001. The Board will
miss his insightful counsel and good humor. We wish him well
in his retirement.
work towards transitioning to a more “commercial-like” bank.
Flushing Savings Bank is proud to celebrate 80 years of sound,
Loan and asset growth were strong during the year as we
continued to add to the balance sheet. Total loans, net increased
$258.5 million, or 9.6%, during 2008 to $3.0 billion. We are ever
mindful of asset quality and capital requirements, so while we
have seen an increase in delinquent loans due to the deteriorat-
ing economy of the last year, we have taken a proactive approach
to managing delinquent loans, including conducting site
examinations and encouraging borrowers to meet with a Bank
representative. When deemed appropriate, we have been devel-
oping short-term payment plans that enable borrowers to bring
their loans current, generally within six to nine months. As a
result, net charge-offs of loans during 2008 were $1.2 million,
or 0.04% of average loans, a level far better than local and
nationwide peer groups. Our attention to credit management
secure community banking. It is with sincere appreciation that
we thank our Board of Directors and Advisory Boards for their
support and vision. We thank our employees for their dedica-
tion and commitment and our customers for their trust and loy-
alty. These elements are what enable us to provide long term
value for our community and shareholders.
Gerard P. Tully, Sr.
Chairman of the Board
John R. Buran
President and
Chief Executive Officer
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, 2008
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
11-3209278
(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).
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act: None.
NASDAQ Global Select Market
(Name of exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the
Securities Act. 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. 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 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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer," "accelerated filer"
and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ___
Non-accelerated filer____
Accelerated filer X
Smaller reporting company __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes X No
As of June 30, 2008, 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
$389,340,000. This figure is based on the closing price on that date on the NASDAQ Global Select Market for
a share of the registrant’s Common Stock, $0.01 par value, which was $18.95.
The number of shares of the registrant’s Common Stock outstanding as of February 28, 2009 was
21,715,809 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 19, 2009 are incorporated herein by reference in Part III.
TABLE OF CONTENTS
PART I
Page
Item 1. Business. .................................................................................................................................... 1
GENERAL
Overview................................................................................................................................ 1
Market Area and Competition ............................................................................................... 3
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
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 ................................................................................................................ 25
Subsidiary Activities ............................................................................................................ 26
Personnel.............................................................................................................................. 27
Omnibus Incentive Plan ....................................................................................................... 27
FEDERAL, STATE AND LOCAL TAXATION
Federal Taxation .................................................................................................................. 27
General ...................................................................................................................... 27
Bad Debt Reserves .................................................................................................... 27
Distributions .............................................................................................................. 27
Corporate Alternative Minimum Tax ........................................................................ 28
State and Local Taxation ..................................................................................................... 28
New York State and New York City Taxation .......................................................... 28
Delaware State Taxation ............................................................................................ 28
i
REGULATION
General ................................................................................................................................. 28
Holding Company Regulation ............................................................................................. 29
Investment Powers ............................................................................................................... 30
Real Estate Lending Standards ............................................................................................ 30
Loans-to-One Borrower Limits ........................................................................................... 30
Insurance of Accounts ......................................................................................................... 31
Qualified Thrift Lender Test ................................................................................................ 32
Transactions with Affiliates ................................................................................................. 32
Restrictions on Dividends and Capital Distributions ........................................................... 33
Federal Home Loan Bank System ....................................................................................... 33
Assessments ......................................................................................................................... 33
Branching ............................................................................................................................. 34
Community Reinvestment ................................................................................................... 34
Brokered Deposits ............................................................................................................... 34
Capital Requirements ........................................................................................................... 34
General ...................................................................................................................... 34
Tangible Capital Requirement ................................................................................... 34
Leverage and Core Capital Requirement ................................................................... 35
Risk-Based Requirement ........................................................................................... 35
Federal Reserve System ....................................................................................................... 35
Financial Reporting ............................................................................................................. 35
Standards for Safety and Soundness .................................................................................... 36
Gramm-Leach-Bliley Act .................................................................................................... 36
USA Patriot Act ................................................................................................................... 36
Prompt Corrective Action .................................................................................................... 37
Emergency Economic Stabilization Act of 2008 ................................................................. 37
The American Recovery and Reinvestment Act of 2009 .................................................... 39
Federal Securities Laws ....................................................................................................... 39
Available Information .......................................................................................................... 39
Item 1A. Risk Factors .......................................................................................................................... 40
Changes in Interest Rates May Significantly Impact Our Financial Condition and
Results of Operations ...................................................................................................... 40
Our Lending Activities Involve Risks that May Be Exacerbated Depending on the
Mix of Loan Types ......................................................................................................... 40
The Markets in Which We Operate Are Highly Competitive .............................................. 41
Our Results of Operations May Be Adversely Affected by Changes in National
and/or Local Economic Conditions ................................................................................ 41
Changes in Laws and Regulations Could Adversely Affect Our Business .......................... 41
Certain Anti-Takeover Provisions May Increase the Costs to or Discourage an
Acquiror .......................................................................................................................... 42
We May Not Be Able To Successfully Implement Our New Commercial Business
Banking Initiative ........................................................................................................... 42
The U.S. Government’s Plan To Purchase Large Amounts Of Illiquid, Mortgage-
Backed And Other Securities From Financial Institutions May Not Be Effective
And/Or It May Not Be Available To Us ......................................................................... 42
We May Not Pay Dividends On Your Common Stock. ...................................................... 43
Our Participation In The U.S. Treasury’s Capital Purchase Program Restricts Our
Ability To Declare Or Pay Dividends And Repurchase Shares and Access The
Capital Markets. .............................................................................................................. 43
Our Participation In The U.S. Treasury’s Capital Purchase Program Places
Restrictions On Executive Compensation. ..................................................................... 43
ii
There Can Be No Assurance That The Emergency Economic Stabilization Act of
2008 And Other Recently Enacted Government Programs Will Help Stabilize
the U.S. Financial System. .............................................................................................. 43
Item 1B. Unresolved Staff Comments ................................................................................................. 44
Item 2. Properties ................................................................................................................................. 44
Item 3. Legal Proceedings ................................................................................................................... 44
Item 4. Submission of Matters to a Vote of Security Holders ............................................................. 44
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ........................................................................... 45
Item 6. Selected Financial Data ........................................................................................................... 47
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations ....................................................................................................................... 49
General ................................................................................................................................. 49
Overview.............................................................................................................................. 50
Interest Rate Sensitivity Analysis ........................................................................................ 54
Interests Rate Risk ............................................................................................................... 56
Analysis of Net Interest Income .......................................................................................... 56
Rate/Volume Analysis ......................................................................................................... 58
Comparison of Operating Results for the Years Ended December 31, 2008 and 2007 ....... 58
Comparison of Operating Results for the Years Ended December 31, 2007 and 2006 ....... 60
Liquidity, Regulatory Capital and Capital Resources .......................................................... 62
Participation in the U.S. Treasury’s Troubled Asset Relief Program .................................. 63
Critical Accounting Policies ................................................................................................ 64
Contractual Obligations ....................................................................................................... 65
Impact of New Accounting Standards ................................................................................. 66
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................................. 69
Item 8. Financial Statements and Supplementary Data ....................................................................... 70
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................................................................................... 117
Item 9A. Controls and Procedures ..................................................................................................... 117
Item 9B. Other Information ............................................................................................................... 117
PART III
Item 10. Directors, Executive Officers and Corporate Governance .................................................. 118
Item 11. Executive Compensation ..................................................................................................... 118
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters .............................................................................................. 118
Item 13. Certain Relationships and Related Transactions, and Director Independence .................... 119
Item 14. Principal Accounting Fees and Services .............................................................................. 119
PART IV
Item 15. Exhibits, Financial Statement Schedules ............................................................................. 119
(a) 1. Financial Statements ........................................................................................................ 119
(a) 2. Financial Statement Schedules ........................................................................................ 119
(a) 3. Exhibits Required by Securities and Exchange Commission Regulation S-K ............. 120
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. We have no obligation to update these forward-looking
statements.
As used in this Annual Report on Form 10-K, the words “we,” “us,” “our” and the “Company” are used to refer to
Flushing Financial Corporation and our consolidated subsidiaries, including Flushing Savings Bank, FSB (the “Savings
Bank”) and Flushing Commercial Bank (the “Commercial Bank”), collectively, the “Banks.”
PART I
Item 1. Business.
Overview
GENERAL
We are a Delaware corporation organized in May 1994 at the direction of the Savings Bank. The Savings Bank
was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Savings Bank converted to a
federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank,
FSB. The Savings Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings
bank on November 21, 1995, at which time Flushing Financial Corporation acquired all of the stock of the Savings
Bank. The primary business of Flushing Financial Corporation at this time is the operation of its wholly owned
subsidiary, the Savings Bank. The Savings Bank owns four subsidiaries: Flushing Commercial Bank, Flushing Preferred
Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. In November, 2006, the Savings Bank
launched an internet branch, iGObanking.com®. The activities of Flushing Financial Corporation are primarily funded by
dividends, if any, received from the Savings Bank, issuances of junior subordinated debt, and issuances of equity
securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the
symbol “FFIC.”
Flushing Financial Corporation also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust
III, and Flushing Financial Capital Trust IV (the “Trusts”), special purpose business trusts formed during 2007 to issue a
total of $60.0 million of capital securities and $1.9 million of common securities (which are the only voting securities).
Flushing Financial Corporation owns 100% of the common securities of the Trusts. The Trusts used the proceeds from
the issuance of these securities to purchase junior subordinated debentures from Flushing Financial Corporation. In
accordance with the requirements of FASB Interpretation No. 46R, the Trusts are not included in our consolidated
financial statements. Flushing Financial Corporation previously owned Flushing Financial Capital Trust I (the “Trust I”),
which was a special purpose business trust formed in 2002 similar to the Trusts discussed above. The Trust called its
outstanding capital securities during July 2007, and was then liquidated.
Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and
results of operations of Flushing Financial Corporation, the Savings Bank and the Savings Bank’s subsidiaries on a
consolidated basis (collectively, the “Company”). At December 31, 2008, the Company had total assets of $3.9 billion,
deposits of $2.5 billion and stockholders’ equity of $301.5 million.
Our 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),
1
multi-family residential and commercial real estate mortgage loans; (2) construction loans, primarily for 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. We also originate certain other consumer loans. Our revenues are derived principally from
interest on our mortgage and other loans and mortgage-backed securities portfolio, and interest and dividends on other
investments in our securities portfolio. Our 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 Savings Bank’s primary regulator is the Office of Thrift Supervision (“OTS”). Deposits are insured to
the maximum allowable amount by the Federal Deposit Insurance Corporation (“FDIC”). Additionally, the Banks are
members of the Federal Home Loan Bank (“FHLB”) system.
We also hold a note evidencing a loan that we made to an employee benefit trust we established for the purpose
of holding shares for allocation or distribution under certain employee benefit plans of the Company (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, we 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 $42.5 million, which consisted of $14.7 million of cash, common stock valued at $26.6
million, and $1.3 million assigned to the fair value of Atlantic Liberty’s outstanding stock options. 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, we issued 1.6
million shares of common stock, the value of which was determined based on the closing price of our common stock on
the announcement date of December 21, 2005, and two days prior to and after the announcement date. We acquired
$186.9 million in assets, $116.2 million in net loans and assumed $106.8 million in deposits. This acquisition provided
us with presences on Montague Street and on Avenue J in Brooklyn, two highly attractive markets.
During 2006, the Savings Bank established a business banking unit. Our 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 Savings Bank launched an internet branch, iGObanking.com®, as a new division
which provides us access to markets outside our geographic locations. Accounts can be opened online at
www.iGObanking.com or by mail.
During 2007, the Savings Bank formed a wholly owned subsidiary, Flushing Commercial Bank, a New York
State chartered commercial bank, for the limited purpose of providing banking services to public entities including
counties, cities, towns, villages, school districts, libraries, fire districts and the various courts throughout the New York
metropolitan area. The Commercial Bank was formed in response to New York State law, which requires that municipal
deposits and state funds must be deposited into a bank or trust company as defined in New York State law. The Savings
Bank is not considered an eligible bank or trust company for this purpose.
On December 19, 2008 we entered into a Letter Agreement (including the Securities Purchase Agreement –
Standard Terms incorporated by reference therein, the “Purchase Agreement”) with the U.S. Treasury pursuant to which
we issued and sold to the U.S. Treasury (i) 70,000 shares of the our Fixed Rate Cumulative Perpetual Preferred Stock
Series B having a liquidation preference of $1,000 per share (the “Series B Preferred Stock”), and (ii) a ten-year warrant
(the “Warrant”) to purchase up to 751,611 shares of the our common stock, par value $0.01 per share, at an initial price
of $13.97 per share, for an aggregate purchase price of $70.0 million in cash. The Series B Preferred Stock qualifies as
Tier I capital under the risk-based capital guidelines of the OTS (“Tier 1 Capital”) and will pay cumulative dividends at a
rate of 5% per annum for the first five years following issuance, and 9% per annum thereafter. Dividends are payable on
the Series B Preferred Stock quarterly and are payable on February 15, May 15, August 15 and November 15 of each
year. If we fail to pay a total of six dividend payments on the Series B Preferred Stock, whether or not consecutive,
holders of the Series B Preferred Stock will have the right to elect two directors to our board of directors until we have
paid all such dividends that we had failed to pay. The Series B Preferred Stock has no maturity date and ranks senior to
the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation and
winding up of the Company. The Warrant expires ten years from the issuance date and is immediately exercisable and
transferable. The Purchase Agreement contains limitations on the payment of dividends on and the repurchase of the
2
Common Stock and certain preferred stock. The Purchase Agreement also requires that, until such time as the U.S.
Treasury ceases to own any securities acquired from us thereunder, we will take all necessary action to ensure that
benefit plans with respect to senior executive officers comply with Section 111(b) of EESA as implemented by any
guidance or regulation under Section 111(b) of EESA that has been issued and is in effect as of the date of issuance of
the Series B Preferred Stock and the Warrant and not adopt any benefit plans with respect to, or which cover, senior
executive officers that do not comply with EESA. Our senior executive officers have consented to the foregoing.
Market Area and Competition
We are a community oriented savings institution offering a wide variety of financial services to meet the needs
of the communities we serve. Our main office is in Flushing, New York, located in the Borough of Queens. At
December 31, 2008, the Savings Bank operated out of 14 full-service offices, located in the New York City Boroughs of
Queens, Brooklyn, and Manhattan, and in Nassau County, New York, and the Commercial Bank operated out of one
office in Nassau County, New York, an office its shares with the Savings Bank. In January 2009, the Savings Bank
opened its fifteenth full-service office, which is located in Nassau County, a branch office that is shared with the
Commercial Bank. In addition, the Commercial Bank began operating a branch in Brooklyn in January 2009 in a
location that is shared with an existing branch of the Savings Bank. We also operate an internet branch,
iGObanking.com®. We maintain our executive offices in Lake Success in Nassau County, New York. Substantially all of
our mortgage loans are secured by properties located in the New York City metropolitan area.
We face intense competition both in making loans and in attracting deposits. Our market area has a high density
of financial institutions, many of which have greater financial resources, name recognition and market presence, and all
of which are competitors to varying degrees. Particularly intense competition exists for deposits and in all of the lending
activities we emphasize. The internet banking arena also has many larger financial institutions which have greater
financial resources, name recognition and market presence. Our future earnings prospects will be affected by our ability
to compete effectively with other financial institutions and to implement our business strategies. See “Risk Factors – The
Markets in Which We Operate Are Highly Competitive” included in Item 1A of this Annual Report.
For a discussion of our 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. Our 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, we also offer SBA loans, other small business loans and consumer loans. Substantially all
of our mortgage loans are secured by properties located within our market area. At December 31, 2008, we had gross
loans outstanding of $2,954.6 million (before the allowance for loan losses and net deferred costs).
In recent years, we have focused on 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 we collect if the loans pay in full prior to the contractual
maturity. We expect to continue this emphasis through marketing and by maintaining competitive interest rates and
origination fees. Our marketing efforts include frequent contacts with mortgage brokers and other professionals who
serve as referral sources. From time-to-time, we may purchase loans from mortgage bankers and other financial
institutions. Loans purchased comply with our 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. Our 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 our 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 us to
increase our provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in
excess of the allowance we currently maintain. We continually review the composition of our mortgage loan portfolio to
manage the risk in the portfolio. To date, we have not experienced significant losses in our multi-family residential,
commercial real estate and one-to-four family mixed-use property mortgage loan portfolios.
3
Our mortgage loan portfolio consists of adjustable rate mortgage (“ARM”) loans and fixed-rate mortgage loans.
Interest rates we charge on loans are affected primarily by the demand for such loans, the supply of money available for
lending purposes, the rate offered by our 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 state and local governments.
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, we 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 we
originated, volume and adjustment periods are affected by the interest rates and other market factors as discussed above
as well as consumer preferences. We have not in the past, nor do we currently, originate ARM loans that provide for
negative amortization.
In recent years, we have grown our construction loan portfolio. During 2007, we began to deemphasize
construction loans, as originations of new construction loans declined. This continued in 2008 as we further reduced
originations and reduced the balance in the construction loan portfolio. We obtain a first lien position on the underlying
collateral, and generally obtain personal guarantees on construction loans. These loans generally have a term 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 us to increase our provision for loan losses, and to maintain an allowance for loan losses
as a percentage of total loans in excess of the allowance we currently maintain. To date, we have not incurred significant
losses in our construction loan portfolio.
The business banking unit was formed in 2006 to focus on loans to businesses located within our 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 us a higher rate of return, also present a higher level of risk. The greater risk associated with business
loans could require us to increase our provision for loan losses, and to maintain an allowance for loan losses as a
percentage of total loans in excess of the allowance we currently maintain. To date, we have not incurred significant
losses in our business loan portfolio.
Our lending activities are subject to federal and state laws and regulations. See “— Regulation.”
4
The following table sets forth the composition of our loan portfolio at the dates indicated.
2008
Amount
Percent
of Total
2007
Amount
Percent
of Total
At December 31,
2006
Percent
of Total
Amount
(Dollars in thousands)
2005
Amount
Percent
of Total
2004
Amount
Percent
of Total
$
999,185
752,120
%
33.81
25.46
$
964,455
625,843
%
35.79
23.23
$
870,912
519,552
%
37.52
22.38
$
788,071
399,081
%
41.92
21.23
$
646,922
334,048
%
42.61
22.00
751,952
25.45
686,921
25.49
588,092
25.33
477,775
25.42
332,805
21.92
238,711
6,566
103,626
2,852,160
8.08
0.22
3.51
96.53
161,666
7,070
119,745
2,565,700
6.01
0.26
4.44
95.22
161,889
8,059
104,488
2,252,992
6.98
0.35
4.50
97.06
134,641
2,161
49,522
1,851,251
7.17
0.11
2.63
98.48
151,737
3,132
31,460
1,500,104
10.00
0.21
2.07
98.81
19,671
0.67
18,922
0.70
17,521
0.75
9,239
0.49
5,633
0.37
82,738
2,954,569
2.80
100.00
%
110,046
2,694,668
4.08
100.00
%
50,899
2,321,412
2.19
100.00
%
19,362
1,879,852
1.03
100.00
%
12,505
1,518,242
0.82
100.00
%
17,121
(11,028)
2,960,662
$
14,083
(6,633)
2,702,118
$
10,393
(7,057)
2,324,748
$
8,409
(6,385)
1,881,876
$
4,798
(6,533)
1,516,507
$
Mortgage Loans:
Multi-family residential
Commercial real estate
One-to-four family -
mixed-use property
One-to-four family -
residential (1)
Co-operative apartment (2)
Construction
Gross mortgage loans
Small Business Administration
loans
Commercial business and other
loans
Gross loans
Unearned loan fees and deferred
costs, net
Less: Allowance for loan losses
Loans, net
(1)
(2)
One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2008, gross home equity loans totaled $66.0 million and condominium loans
totaled $10.3 million.
Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied.
5
The following table sets forth our loan originations (including the net effect of refinancing) and the changes in
our portfolio of loans, including purchases, sales and principal reductions for the years indicated:
(In thousands)
Mortgage Loans
At beginning of year
Mortgage loans originated:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartment
Construction
Total mortgage loans originated
Mortgage loans purchased:
Multi-family residential
Commercial real estate
One-to-four family residential
Construction
Acquisition of Atlantic Liberty loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartment
Construction
Total mortgage loans purchased/acquired
Less:
Principal reductions
Mortgage loan sales
Charge-offs
Mortgage loan foreclosures
For the years ended December 31,
2007
2006
2008
$
2,565,700
$
2,252,992
$
1,851,251
153,023
179,857
118,270
57,292
800
30,673
539,915
-
2,500
62,330
-
-
-
-
-
-
-
64,830
304,049
13,641
470
125
222,625
165,440
159,331
36,397
828
54,151
638,772
8,717
2,902
-
-
-
-
-
-
-
-
11,619
284,608
53,075
-
-
166,744
150,804
154,456
13,786
125
73,107
559,022
-
3,087
-
1,980
16,299
31,914
9,333
51,033
6,665
13,781
134,092
270,416
20,957
-
-
At end of year
$
2,852,160
$
2,565,700
$
2,252,992
SBA, Commercial Business & Other Loans
At beginning of year
Loans originated:
SBA loans
Commercial business loans (1)
Other loans
Total other loans originated
SBA, Commercial Business & Other Loans purchased:
SBA loans
Less:
Sales of SBA loans
Repayments (1)
Charge-offs
At end of year
$
128,968
$
68,420
$
28,601
9,880
49,934
2,618
62,432
423
2,988
85,644
782
12,840
92,240
1,953
107,033
-
4,925
41,090
470
19,914
49,909
1,671
71,494
-
7,477
24,116
82
$
102,409
$
128,968
$
68,420
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 our commercial mortgage loan, construction
loan and non-mortgage loan portfolios at December 31, 2008. Scheduled repayments are shown in the maturity category
in which the payments become due.
(In thousands)
Amounts due within one year
Amounts due after one year:
One to two years
Two to three years
Three to five years
Over five years
Total due after one year
Total amounts due
Sensitivity of loans to changes in
interest rates - loans due
after one year:
Fixed rate loans
Adjustable rate loans
Total loans due after one year
Commercial
Mortgage
Loans
Construction
SBA
Commercial
Business and
Other
Total
$
86,938
$
91,629
$
4,203
$
53,258
$
236,028
64,730
63,869
129,080
407,503
665,182
752,120
$
11,997
-
-
-
11,997
103,626
$
3,068
3,035
4,519
4,846
15,468
19,671
$
12,182
7,382
7,121
2,795
29,480
82,738
$
91,977
74,286
140,720
415,144
722,127
958,155
$
$
$
$
$
112,753
552,429
665,182
473
11,524
11,997
-
$
15,468
15,468
$
17,133
12,347
29,480
130,359
591,768
722,127
$
$
$
$
Multi-Family Residential Lending. Loans secured by multi-family residential properties were $999.2 million, or
33.81% of gross loans, at December 31, 2008. Our multi-family residential mortgage loans had an average principal
balance of $479,000 at December 31, 2008, and the largest multi-family residential mortgage loan held in our portfolio
had a principal balance of $7.0 million. We offer both fixed-rate and adjustable- rate multi-family residential mortgage
loans, with maturities of up to 30 years.
In underwriting multi-family residential mortgage loans, we review 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. We typically
require debt service coverage of at least 125% of the monthly loan payment. During 2008, we increased the required
debt service coverage ratio for multi-family residential loans with ten units or less. We generally originate these loans up
to only 75% of the appraised value or the purchase price of the property, whichever is less. Any loan with a final loan-to-
value ratio in excess of 75% must be approved by either the Board of Directors, its Loan Committee or its Executive
Committee as an exception to policy. We generally rely 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.
We typically order an environmental report on our multi-family 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.
We seek to protect against this risk through obtaining an environmental report. See “—Asset Quality — Environmental
Concerns Relating to Loans.”
Our fixed-rate multi-family mortgage loans are generally originated for terms up to 15 years and are
competitively priced based on market conditions and our cost of funds. We originated and purchased $36.6 million,
$72.1 million and $47.0 million of fixed-rate multi-family mortgage loans in 2008, 2007 and 2006, respectively. At
December 31, 2008, $219.5 million, or 22.0%, of our multi-family mortgage loans consisted of fixed rate loans.
We offer 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 us 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, we may originate ARM loans at
7
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. We originated and purchased multi-family ARM loans totaling $116.4
million, $159.3 million and $119.8 million during 2008, 2007 and 2006, respectively. At December 31, 2008,
$779.7 million, or 78.0%, of our multi-family mortgage loans consisted of ARM loans.
Commercial Real Estate Lending. Loans secured by commercial real estate were $752.1 million, or 25.46% of
the Bank’s gross loans, at December 31, 2008. Our 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, 2008, our commercial real estate mortgage loans
had an average principal balance of $791,000, and the largest of such loans, which was secured by a multi-tenant
shopping center, had a principal balance of $11.4 million. Commercial real estate mortgage loans are generally
originated in a range of $100,000 to $6.0 million.
In underwriting commercial real estate mortgage loans, we employ 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.
Our fixed-rate commercial mortgage loans are generally originated for terms up to 20 years and are
competitively priced based on market conditions and our cost of funds. We originated and purchased $57.3 million,
$28.4 million and $20.5 million of fixed-rate commercial mortgage loans in 2008, 2007 and 2006, respectively. At
December 31, 2008, $144.7 million, or 19.24%, of our commercial mortgage loans consisted of fixed- rate loans.
We offer ARM loans with adjustment periods of one to five years and generally for terms of up to 15 years.
Interest rates on ARM loans currently offered by us 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, we 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. We originated and purchased commercial ARM loans
totaling $125.1 million, $140.0 million and $133.4 million during 2008, 2007 and 2006, respectively. At December 31,
2008, $607.4 million, or 80.76%, of our commercial mortgage loans consisted of ARM loans.
One-to-Four Family Mortgage Lending – Mixed-Use Properties. We offer mortgage loans secured by one-to-
four family mixed-use properties. These properties contain up to four residential dwelling units and a commercial unit.
We offer 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 $1,000,000. Loan originations primarily result from applications
received from mortgage brokers and mortgage bankers, existing or past customers, and persons who respond to our
marketing efforts and referrals. One-to-four family mixed-use property mortgage loans were $752.0 million, or 25.45%
of gross loans, at December 31, 2008.
During the three-year period ended December 31, 2008, we focused our 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, 2008, one-to-four family mixed-use property mortgage loans
amounted to $752.0 million, as compared to $686.9 million at December 31, 2007, $588.1 million at December 31,
2006, and $477.8 million at December 31, 2005, representing an increase of $274.2 million during the three-year period.
In underwriting one-to-four family mixed-use property mortgage loans, we employ the same underwriting
standards as are employed in underwriting multi-family residential mortgage loans.
Our fixed-rate one-to-four family mixed-use property mortgage loans are originated for terms of up to 30 years
and are competitively priced based on market conditions and the Bank’s cost of funds. We originated and purchased
$21.7 million, $33.7 million and $30.8 million of fixed-rate one-to-four family mixed-use property mortgage loans in
2008, 2007 and 2006, respectively. At December 31, 2008, $175.0 million, or 23.27%, of our one-to-four family mixed-
use property mortgage loans consisted of fixed- rate loans.
We offer 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
8
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, we 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. We originated and purchased one-to-four family mixed-use property ARM loans
totaling $96.6 million, $125.7 million and $123.7 million during 2008, 2007 and 2006, respectively. At December 31,
2008, $576.9 million, or 76.73%, of our one-to-four family mixed-use property mortgage loans consisted of ARM loans.
One-to-Four Family Mortgage Lending – Residential Properties. We offer 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.” We offer both fixed-rate and adjustable-rate
residential mortgage loans with maturities of up to 30 years and a general maximum loan amount of $1,000,000. Loan
originations generally result from applications received from mortgage brokers and mortgage bankers, existing or past
customers, and referrals. Residential mortgage loans were $245.3 million, or 8.30% of gross loans, at December 31,
2008.
We generally originate residential mortgage loans in amounts up to 80% of the appraised value or the sale price,
whichever is less. We 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.
In addition to income verified loans, we originate residential mortgage loans to self-employed individuals
within our local community based on stated income and verifiable assets that allows us to assess repayment ability,
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 our 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 our 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. We believe that our willingness to make
such loans is an aspect of our commitment to be a community-oriented bank. We originated and purchased $9.8 million,
$2.4 million and $0.9 million of these first mortgage loans during 2008, 2007 and 2006, respectively. We also extended
$34.4 million and $43.0 million in home equity lines of credit during 2008 and 2007, respectively with various levels of
income verification.
Our fixed-rate residential mortgage loans typically are originated for terms of 15 and 30 years and are
competitively priced based on market conditions and our cost of funds. We originated and purchased $12.4 million and
$0.4 million in 15-year fixed-rate residential mortgages in 2008 and 2006, respectively. We did not originate or purchase
any 15-year fixed-rate residential mortgage loans in 2007. We originated and purchased $50.0 million and $0.5 million
of 30-year fixed-rate mortgages in 2008 and 2007, respectively. We did not originate or purchase any 30-year fixed rate
residential mortgages in 2006. At December 31, 2008, $114.2 million, or 46.54%, of our residential mortgage loans
consisted of fixed- rate loans.
We offer ARM loans with adjustment periods of three, five, seven or ten years. Interest rates on ARM loans
currently offered by us 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, we 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. We originated and purchased adjustable rate residential mortgage loans totaling $58.1
million, $36.8 million and $13.5 million during 2008, 2007 and 2006, respectively. At December 31, 2008,
$131.1 million, or 53.46%, of our residential mortgage loans consisted of ARM loans.
The retention of ARM loans in our portfolio helps us reduce our 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 our interest
income and our 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 our 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.
9
Home equity loans are included in our 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 adjustable “home equity lines of credit” may include a “floor” and/or a “ceiling” on the interest rate that we
charge for these loans. 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-four 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 underwriting standards for home equity loans have
substantially been the same as those for residential mortgage loans. During 2008, the underwriting standards for home
equity loans were modified to focus on the repayment ability of the borrower and the current declining housing market.
At December 31, 2008, home equity loans totaled $66.0 million, or 2.23%, of gross loans.
Construction Loans. Our construction loans primarily have been made to finance the construction of one-to-
four family residential properties, multi-family residential properties and residential condominiums. We also, to a limited
extent, finance the construction of commercial real estate. Our policies provide that construction loans may be made in
amounts up to 70% of the estimated value of the developed property and only if we obtain a first lien position on the
underlying real estate. However, we generally limit construction loans to 60% of the estimated value of the developed
property. In addition, we generally require 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 we maintain a first lien position. We made advances on construction
loans of $30.7 million, $54.2 million and $75.1 million during 2008, 2007 and 2006, respectively. Construction loans
outstanding at December 31, 2008 totaled $103.6 million, or 3.51%, 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. We also provide term loans and lines of credit up
to $350,000 under the SBA Express Program, on which the SBA provides a 50% guaranty. The maximum loan size
under the SBA guarantee program is $2,000,000, with a maximum loan guarantee of $1,500,000. All SBA loans are
underwritten in accordance with SBA Standard Operating Procedures and we generally obtain personal guarantees and
collateral, where applicable, from SBA borrowers. Typically, SBA loans are originated at a range of $25,000 to $2.0
million with terms ranging from three to 25 years. SBA loans are generally offered at adjustable rates tied to the prime
rate (as published in the Wall Street Journal) with adjustment periods of one to three months. We generally sell the
guaranteed portion of certain SBA term loans in the secondary market, realizing a gain at the time of sale, and retain the
servicing rights on these loans, collecting a servicing fee of approximately 1%. We originated and purchased $10.3
million, $12.8 million, and $19.9 million of SBA loans during 2008, 2007, and 2006, respectively. At December 31,
2008, SBA loans totaled $19.7 million, representing 0.67% of gross loans.
Commercial Business and Other Lending. We originate other loans for business, personal, or household
purposes. Total commercial business and other loans outstanding at December 31, 2008 amounted to $82.7 million, or
2.80% of gross loans. Business loans are personally guaranteed by the owners, and may also be secured by additional
collateral, including equipment and inventory. Included in commercial business loans are loans made to owners of New
York City taxi medallions. These loans, which totaled $13.0 million at December 31, 2008, are secured through liens on
the taxi medallions. We originate taxi medallion loans up to 80% of the value of the taxi medallion. The maximum loan
size for a business loan is $5,000,000, with a maximum term of 25 years. We originated $49.9 million, $92.2 million,
and $49.9 million of commercial business loans during 2008, 2007, and 2006 respectively. Consumer loans generally
consist of passbook loans and overdraft lines of credit. Generally, unsecured consumer loans are limited to amounts of
$5,000 or less for terms of up to five years. We offer credit cards to our customers through a third-party financial
institution and receive an origination fee and transactional fees for processing such accounts, but do not underwrite or
finance any portion of the credit card receivables.
The underwriting standards employed by us 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
10
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. Our Board of Directors approved lending policies establish loan
approval requirements for our various types of loan products. Our 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 either 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 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 our 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 appropriate Senior Vice President. Such
loans in excess of $1,000,000 also require Loan or Executive Committee or Board approval. In accordance with our
Business Loan Policy, all business and SBA loans up to $1,000,000, and commercial and industrial loans/professional
mortgage loans up to $1,500,000 must be approved by the Business Loan Committee and ratified by the Management
Loan Committee. Business and SBA loans in excess of $1,000,000 up to $2,000,000, and commercial and industrial
loans/professional mortgage loans in excess of $1,500,000 up to $2,500,000, must be approved by the Management Loan
Committee and ratified by the Loan Committee of the Savings Bank’s Board of Directors. Commercial business and
other loans require two signatures for approval, one of which must be from an Authorized Officer. Our Construction
Loan Policy requires that the Loan Committee or the Board of Directors of the Savings Bank must approve all
construction loans. Any loan, regardless of type, that deviates from our written loan policies must be approved by the
Loan Committee or the Savings Bank’s Board of Directors.
For all loans originated by us, 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 us currently performs such appraisals. Our staff
appraiser reviews all appraisals for properties of $1,500,000 or greater. The Savings Bank’s Board of Directors annually
approves the independent appraisers used by the Savings Bank and approves the Savings Bank’s appraisal policy. It is
our 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 we make disbursements for items such as real estate
taxes and, in some cases, hazard insurance premiums.
Loan Concentrations. The maximum amount of credit that the Savings Bank can extend to any single borrower
or related group of borrowers generally is limited to 15% of the Savings Bank’s unimpaired capital and surplus.
Applicable laws 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 our policy not to extend such additional credit. At December 31, 2008, there
were no loans in excess of the maximum dollar amount of loans to one borrower that the Savings 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 $34.0
million, $22.9 million and $22.6 million for each of the three borrowers, respectively.
Loan Servicing. At December 31, 2008, we were servicing $20.0 million of mortgage loans and $17.1 million
of SBA loans for others. Our policy is to retain the servicing rights to the mortgage and SBA loans that we sell 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, we take 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. We take a proactive approach to managing delinquent loans, including conducting site examinations and
encouraging borrowers to meet with one of our representatives. When deemed appropriate, short-term payment plans
have been developed that enable borrowers to bring their loans current, generally within six to nine months. When the
borrower has indicated that he/she will be unable to bring the loan current, or due to other circumstances which, in our
opinion, indicate the borrower will be unable to bring the loan current within a reasonable time, or if the collateral value
11
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 our opinion, compelling
evidence the borrower will bring the loan current in the immediate future. At December 31, 2008, there were seven
loans, which total $1.3 million, 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, we
review 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. Based
upon the available information, we will consider the sale of the loan or retention of the loan. If the loan is retained, we
may continue to work with the borrower to collect the amounts due or start foreclosure proceedings. If a foreclosure
action is initiated and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real
property securing the loan is sold at foreclosure or by us as soon thereafter as practicable.
Once the decision to sell a loan is made, we determine what we would consider 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. We have been successful in finding buyers for some of our non-
performing loans offered for sale that are willing to pay what we consider to be adequate consideration. Terms of the sale
include cash due upon closing of the sale, no contingencies or recourse to us, 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 us to optimize
our return by quickly converting our non-performing loans to cash, which can then be reinvested in earning assets. This
strategy also allows us to avoid lengthy and costly legal proceedings that may occur with non-performing loans. We sold
32 delinquent mortgage loans totaling $13.6 million, 45 delinquent mortgage loans totaling $33.9 million, and 35
delinquent mortgage loans totaling $12.2 million during the years ended December 31, 2008, 2007 and 2006,
respectively. We did not record any charges to the allowance for loan losses for the non-performing loans that were sold.
We realized gross gains of $74,000 and gross losses of $224,000 on the sale of these mortgage loans for the year ended
December 31, 2008. We realized gross gains of $332,000 and no gross losses on the sale of these mortgage loans for the
year ended December 31, 2007. We 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. There can be no assurances that we will continue this strategy in
future periods, or if continued, we will be able to find buyers to pay adequate consideration.
On mortgage loans or loan participations purchased by us for which the seller retains the servicing rights, we
receive monthly reports with which we monitor the loan portfolio. Based upon servicing agreements with the servicers
of the loans, we rely 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 us and our servicing agents. The servicers are required to submit monthly reports on their
collection efforts on delinquent loans. At December 31, 2008, we held $66.0 million of loans that were serviced by
others.
In the case of commercial business or other loans, we generally send 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 one of our representatives to discuss the
delinquency. If the loan still is not brought current and it becomes necessary for us to take legal action, which typically
occurs after a loan is delinquent 90 days or more, we 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. We generally discontinue 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, 2008, 2007 and 2006, the
amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled
$1.6 million, $0.3 million and $0.1 million, respectively. These amounts were not included in our interest income for the
respective periods.
(Dollars in thousands)
Non-accrual loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Construction
Total non-accrual mortgage loans
Other non-accrual loans
Total non-accrual loans
Loans 90 days or more delinquent
and still accruing
Total non-performing loans
Foreclosed real estate
Investment securities
2008
2007
At December 31,
2006
2005
2004
$
12,011
7,409
10,639
1,121
4,457
35,637
3,021
38,658
$
2,477
90
-
2,204
-
4,771
369
5,140
$
1,957
349
-
608
-
2,914
212
3,126
$
861
-
-
960
-
1,821
101
1,922
$
-
-
-
659
-
659
252
911
1,314
39,972
125
607
40,704
753
5,893
-
-
5,893
-
3,126
-
-
3,126
530
2,452
-
-
2,452
$
$
$
-
911
-
-
911
$
Total non-performing assets
$
Troubled debt restructurings
$
-
$
-
$
-
$
-
$
-
Non-performing loans to gross loans
Non-performing assets to total assets
1.35%
1.03%
0.22%
0.18%
0.13%
0.11%
0.13%
0.10%
0.06%
0.04%
Real Estate Owned (REO). We aggressively market any REO properties, when and if, they are acquired
through foreclosure. At December 31, 2008, we owned one property with a carrying value of $125,000. At December 31,
2007 and 2006, we did not own any such properties.
Environmental Concerns Relating to Loans. We currently obtain environmental reports in connection with the
underwriting of commercial real estate loans, and typically obtain environmental reports in connection with the
underwriting of multi-family loans. For all other loans, we obtain environmental reports only if the nature of the current
or, to the extent known to us, prior use of the property securing the loan indicates a potential environmental risk.
However, we may not be aware of such uses or risks in any particular case, and, accordingly, there is no assurance that
real estate acquired by us in foreclosure is free from environmental contamination or that, if any such contamination or
other violation exists, whether we will have any liability.
Allowance for Loan Losses
We have established and maintain on our books an allowance for loan losses that is designed to provide a
reserve against estimated losses inherent in our 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 the 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. We review our loan portfolio by separate categories with similar risk and
collateral characteristics. Impaired loans are segregated and reviewed separately. All non-accrual loans are classified
impaired. Impaired loans secured by collateral are reviewed based on their collateral and the estimated time to recover
our investment in the loan, and the estimate of the recovery anticipated. Specific reserves allocated to impaired loans
were $5.6 million and $0.6 million at December 31, 2008 and 2007, 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 our staff appraiser; however, we may from time to time obtain independent appraisals for significant
13
properties. Current year charge-offs, charge-off trends, new loan production and current balance by particular loan
categories are also taken into account in determining the appropriate amount of allowance. 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, we also review our 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, taxi
medallion and consumer loans. General provisions are established against performing loans in our portfolio in amounts
deemed prudent based on our qualitative analysis of the factors, including the historical loss experience and regional
economic conditions. During the five-year period ended December 31, 2008, we incurred total net charge-offs of $1.9
million. The national and regional economy has generally been considered to be in a recession since December 2007,
with the national and regional economy deteriorating further throughout 2008. This has resulted in increased
unemployment and declining property values, although the property value declines in the New York metropolitan area
have not been as great as many other areas of the country. This deterioration in the economy resulted in an increase in
our non-performing loans during 2008, with non-performing loans totaling $40.0 million at December 31, 2008
compared to non-performing loans totaling $5.9 million at December 31, 2007. Our underwriting standards generally
require a loan-to-value ratio of 75% at a time the loan is originated. The average current outstanding principal balance of
our non-performing loans is less than 60% of the appraised value of the supporting collateral at the time of the loans’
origination. We have not been affected by the recent increase in defaults of sub-prime mortgages as we do not originate,
or hold in portfolio, sub-prime mortgages. While we have not incurred significant losses on mortgage loans in recent
years, we recorded a provision of $5.6 million during 2008 for possible loan losses primarily due to the increase in non-
performing loans. We had not recorded a provision for loan losses in the previous four years. Management has
concluded, and the Board of Directors has concurred, that at December 31, 2008, the allowance was sufficient to absorb
losses inherent in our loan portfolio.
Our determination as to the classification of our assets and the amount of our valuation allowance 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 us 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
materiality of any error in the reported amount of the allowance.
Management believes that our current allowance for loan losses is adequate in light of current economic
conditions, the composition of our loan portfolio and other available information and the Board of Directors concurs in
this belief. In 2006, due to the acquisition of Atlantic Liberty, the allowance for loan losses was increased by Atlantic
Liberty’s allowance of $753,000. We recorded a provision for loan losses of $5.6 million for the year ended December
31, 2008. We did not record any additional provision for loan losses for the years ended December 31, 2007 and 2006.
At December 31, 2008, the total allowance for loan losses was $11.0 million, representing 27.59% of non-performing
loans and 27.09% of non-performing assets, compared to 112.57% for both of these ratios at December 31, 2007. We
continue to monitor and, as necessary, modify the level of our allowance for loan losses in order to maintain the
allowance at a level which we consider 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 further 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 our lending area and the value of collateral, or a review and evaluation of
our 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, our 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 our loan portfolio. The greater risk associated with these loans, as well as construction loans and
business loans, could require us to increase our 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 we currently maintain. 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, our allowance for loan losses.
(Dollars in thousands)
Balance at beginning of year
Acquisition of Atlantic Liberty
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
Commercial business and other loans
Total loans charged-off
Recoveries:
Mortgage loans
SBA, commercial business and other loans
Total recoveries
Net charge-offs
At and for the years ended December 31,
2006
2005
2007
2008
2004
$
6,633
$
7,057
$
6,385
$
6,533
$
6,553
-
5,600
(496)
-
-
-
-
-
(759)
(36)
(1,291)
-
86
86
-
-
-
-
-
-
-
-
(470)
(2)
(472)
29
19
48
753
-
-
-
-
-
-
-
(57)
(36)
(93)
2
10
12
-
-
-
-
-
-
-
-
(144)
(20)
(164)
3
13
16
-
-
-
-
-
-
-
-
(28)
-
(28)
3
5
8
(1,205)
(424)
(81)
(148)
(20)
Balance at end of year
$
11,028
$
6,633
$
7,057
$
6,385
$
6,533
Ratio of net charge-offs during the year
to average loans outstanding during the year
0.04%
0.02%
0.00%
0.01%
0.00%
Ratio of allowance for loan losses to
gross loans at end of the year
Ratio of allowance for loan losses to
0.37%
0.25%
0.30%
0.34%
0.43%
non-performing loans at the end of the year
27.59%
112.57%
225.72%
260.39%
717.29%
Ratio of allowance for loan losses to
non-performing assets at the end of the year
27.09%
112.57%
225.72%
260.39%
717.29%
15
The following table sets forth our allocation of the 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 our loan portfolio.
2008
Percent
of Loans in
Category to
Total loans
2007
Percent
of Loans in
Category to
Total loans
Amount
At December 31,
2006
Percent
of Loans in
Category to
Total loans
Amount
(Dollars in thousands)
2005
Percent
of Loans in
Category to
Total loans
Amount
2004
Percent
of Loans in
Category to
Total loans
Amount
Loan Category
Amount
Mortgage Loans:
Multi-family residential
$
3,233
33.81
%
$
1,644
35.79
%
$
1,122
37.52
%
$
1,216
41.92
%
$
1,010
42.61
%
Commercial real estate
1,360
25.46
933
23.23
2,904
25.45
1,223
25.49
One-to-four family
mixed-use property
One-to-four family
residential
Co-operative apartment
Construction
393
9
910
8.08
0.22
3.51
Gross mortgage loans
8,809
96.53
Small Business Administration
loans
Commercial business and other
loans
464
1,755
0.67
2.80
251
15
1,172
5,238
373
1,022
6.01
0.26
4.44
95.22
0.70
4.08
668
661
80
10
851
3,392
1,895
1,770
22.38
1,272
21.23
1,715
22.00
25.33
1,544
25.42
1,494
21.92
6.98
0.35
4.50
524
161
64
7.17
0.11
2.63
718
207
55
97.06
4,781
98.48
5,199
0.75
2.19
964
640
0.49
1.03
663
671
10.00
0.21
2.07
98.81
0.37
0.82
Total loans
$
11,028
100.00
%
$
6,633
100.00
%
$
7,057
100.00
%
$
6,385
100.00
%
$
6,533
100.00
%
16
Investment Activities
General. Our investment policy, which is approved by the Board of Directors, is designed primarily to manage
the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue
interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing
our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate
risk exposure, our 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. We primarily invest in mortgage-backed securities, U. S. government obligations, and mutual funds that purchase
these same instruments.
Our Investment Committee 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.
We classify our investment securities as available for sale. We carry some of our investments under the fair
value option of Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB No.115.” Unrealized gains and losses for investments
carried under the fair value option of SFAS No. 159 are included in our Consolidated Statements of Income. Unrealized
gains and losses on the remaining investment portfolio, other than unrealized losses considered other than temporary, are
excluded from earnings and included in Accumulated Other Comprehensive Income (a separate component of equity),
net of taxes. At December 31, 2008, we had $747.3 million in securities available for sale, which represented 18.92% of
total assets. These securities had an aggregate market value at December 31, 2008 that was approximately 2.5 times the
amount of our equity at that date. At December 31, 2008, the balance of unrealized net losses on securities available for
sale was $15.2 million, net of taxes. This impairment was deemed to be temporary based on the direct relationship of the
decline in fair value to: (1) movements in interest rates; (2) widening of credit spreads; and (3) the effect of illiquid
markets. Based on our intent and ability to hold these securities until they recover their unrealized loss, which may not be
until maturity, we deemed these declines in market value to be temporary. During 2008, we recorded other-than-
temporary impairment charges of $27.6 million on our investments in preferred shares of Fannie Mae and Freddie Mac.
We concluded that these securities were other-than-temporarily impaired based on the significant decline in their fair
value subsequent to their being placed in conservatorship. As a result of the magnitude of our 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 our operating results and equity. See Notes 4 and 15 of Notes to Consolidated
Financial Statements, included in Item 8 of this Annual Report.
17
The table below sets forth certain information regarding the amortized cost and market values of our securities
portfolio, interest bearing deposits and federal funds sold, at the dates indicated. Securities available for sale are
recorded at market value. See Notes 4 and 15 of Notes to Consolidated Financial Statements, included in Item 8 of this
Annual Report.
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies
Municipal securities
Corporate debentures
Total bonds and other debt securities
Mutual funds
Equity securities:
Common stock
Preferred stock
Total equity securities
Mortgage-backed securities:
FNMA
REMIC and CMO
FHLMC
GNMA
Total mortgage-backed securities
2008
At December 31,
2007
2006
Amortized
Cost
Market
Value
Amortized
Cost
Market
Value
Amortized
Cost
Market
Value
(In thousands)
$
12,616
17,652
2,268
32,536
$
12,658
17,811
2,268
32,737
$
4,406
-
2,643
7,049
$
4,406
-
2,643
7,049
$
15,016
-
-
15,016
$
15,004
-
-
15,004
19,114
19,114
21,752
21,752
21,224
20,645
994
25,709
26,703
165,375
330,767
47,815
152,350
696,307
994
19,652
20,646
167,592
304,511
48,108
154,553
674,764
1,838
46,732
48,570
123,121
182,609
45,511
11,464
362,705
1,838
46,732
48,570
122,770
182,730
45,566
11,663
362,729
619
5,685
6,304
135,458
100,165
53,440
7,199
296,262
619
5,468
6,087
131,192
98,652
51,733
7,274
288,851
Total securities available for sale
774,660
747,261
440,076
440,100
338,806
330,587
Interest-earning deposits and
Federal funds sold
21,901
21,901
5,758
5,758
4,670
4,670
Total
$
796,561
$
769,162
$
445,834
$
445,858
$
343,476
$
335,257
Mortgage-backed securities. At December 31, 2008, we had $674.8 million invested in mortgage-backed
securities, of which $41.4 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. We anticipate 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 our obligations, including collateralizing of our governmental deposits of the
Commercial Bank. However, during 2008, the market for privately issued mortgage-backed securities became somewhat
illiquid. As a result, we may not be able to use privately issued mortgage-backed securities to collateralize our
obligations.
18
The following table sets forth our mortgage-backed securities purchases, sales and principal repayments for the
years indicated:
2008
For the years ended December 31,
2007
(In thousands)
2006
Balance at beginning of year
$
362,729
$
288,851
$
301,194
Acquired with Atlantic Liberty
-
-
Purchases of mortgage-backed securities
473,891
117,408
30,844
43,897
Amortization of unearned premium, net of
accretion of unearned discount
(86)
(193)
(560)
Net change in unrealized gains (losses) on mortgage-backed
securities available for sale
(21,567)
1,695
435
Net realized gains recorded on mortgage-backed
securities carried at fair value
Net change in interest due on securities carried at fair value
Sales of mortgage-backed securities
Principal repayments received on
mortgage-backed securities
339
(69)
(87,461)
2,685
515
-
-
-
(36,220)
(53,012)
(48,232)
(50,739)
Net increase (decrease) in mortgage-backed securities
312,035
73,878
(12,343)
Balance at end of year
$
674,764
$
362,729
$
288,851
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. We do 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, fair value, annualized weighted average yields and maturities of our investment in debt
and equity securities at December 31, 2008. 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. We carry 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
(Dollars in thousands)
Amortized
Cost
Weighted
Average
Yield
Average
Remaining
Years to
Maturity
Amortized
Cost
Estimated Weighted
Average
Yield
Fair
Value
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies
Municipal securities
Corporate debentures
Total bonds and other debt securities
Mutual funds
Equity securities:
Common stock
Preferred stock
Total equity securities
Mortgage-backed securities:
FNMA
REMIC and CMO
FHLMC
GNMA
Total mortgage-backed securities
-
$
17,652
-
17,652
19,114
-
-
-
415
-
-
-
415
Interest-bearing deposits
21,901
-
2.64
-
2.64
4.66
-
-
-
5.00
-
-
-
5.00
0.21
%
$
3,962
-
2,268
6,230
-
-
4,990
4,990
2,709
-
9,414
-
12,123
-
4.15
-
6.44
4.98
-
-
3.28
3.28
5.09
-
4.16
-
4.37
-
%
$
8,654
-
-
8,654
-
-
-
-
32,688
17,280
-
-
49,968
-
6.49
-
-
6.49
-
-
-
-
4.59
4.07
-
-
4.41
-
%
$
-
-
-
-
%
-
-
-
-
994
20,719
21,713
13.17
7.72
7.97
129,563
313,487
38,401
152,350
633,801
-
5.09
5.26
5.19
5.57
5.30
-
8.05
0.56
3.62
3.68
N/A
N/A
N/A
N/A
19.44
23.57
18.58
22.82
22.08
$
12,616
17,652
2,268
32,536
$
12,658
17,811
2,268
32,737
19,114
19,114
%
5.76
2.64
6.44
4.11
4.66
994
25,709
26,703
165,375
330,767
47,815
152,350
696,307
994
19,652
20,646
13.17
6.86
7.08
167,592
304,511
48,108
154,553
674,764
4.99
5.20
4.99
5.57
5.22
0.21
N/A
21,901
21,901
Total securities
$
59,082
2.41
%
$
23,343
4.30
%
$
58,622
4.72
%
$
655,514
5.38
%
21.26
$
796,561
$
769,162
5.08
%
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 our primary sources of funds
for lending, investing and other general purposes.
Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. Our deposits
principally consist of savings accounts, money market accounts, demand accounts, NOW accounts and certificates of
deposit. We have a relatively stable retail deposit base drawn from its market area through our 15 full service offices. We
seek 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, we launched “iGObanking.com®”, an internet branch, which currently offers savings,
money market and checking accounts, and certificates of deposit. This allows us 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. At December 31, 2008, total deposits for the internet branch were $217.7 million.
In 2007, the Savings Bank formed a new wholly owned subsidiary, Flushing Commercial Bank, a New York
State chartered commercial bank, for the limited purpose of providing banking services to public entities including
counties, cities, towns, villages, school districts, libraries, fire districts, and the various courts throughout the New York
metropolitan area. The Commercial Bank offers a full range of deposit products to these entities similar to the products
currently being offered by the Savings Bank. At December 31, 2008, total deposits for the Commercial Bank were
$211.8 million.
Our core deposits, consisting of savings 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. We saw an increase in our deposits in each of the past
three years, including an increase in due to depositors during 2008 of $434.7 million. The Federal Reserve’s Federal
Open Market Committee (“FOMC”) began increasing short-term interest rates in the second half of 2004, and continued
increasing short-term rates through June 2006. The FOMC held the short-term interest rates through September 2007,
and then lowered short-term interest rates to a range of 0.25% to 0.00% at December 31, 2008. We responded by
increasing interest rates paid on savings, money market and certificate of deposit accounts during 2005 and 2006. We
held rates through most of 2007, before being able to lower rates near the end of 2007 and throughout 2008. This
resulted in our cost of funds declining in 2008 after increasing in 2007. The cost of deposits decreased to 3.41% in the
fourth quarter of 2008 from 4.31% in the fourth quarter of 2007, after increasing from 3.97% in the fourth quarter of
2006. While we are unable to predict the direction of future interest rate changes, if interest rates rise during 2009, the
result could be an increase in our cost of deposits, which could reduce our net interest margin. Similarly, if interest rates
remain at their current level or decline in 2009, we could see a decline in our cost of deposits, which could increase our
net interest margin.
Included in deposits are certificates of deposit with a balance of $100,000 or more totaling $413.7 million,
$318.5 million and $298.9 million at December 31, 2008, 2007 and 2006, respectively.
We utilize brokered deposits as an additional funding source. Brokered deposits are marketed through national
brokerage firms to their customers in $1,000 increments. We maintain 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 us at a lower operating cost since we only have one account to maintain versus several
accounts with multiple interest and maturity checks. We seek to obtain brokered deposits primarily when the interest rate
on these deposits is below the prevailing interest rate in its market, or when obtaining them allows us to extend the
maturities of our deposits at favorable rates.
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
21
mental incompetence, of the depositor. This allows us to better manage the maturity of its deposits. Currently, the rates
offered by us for brokered deposits are comparable to that offered for retail certificates of deposit of similar size and
maturity.
We also offer access to $50 million per customer in FDIC insurance coverage through a Certificate of Deposit
Account Registry Service (“CDARS®”). CDARS® is a deposit placement service. We belong to a network which
arranges for placement of funds into certificate of deposit accounts issued by other member banks of the network in
increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC deposit insurance.
This allows us to accept deposits in excess of $100,000 from a depositor, and place the deposits through the network to
other member banks to provide full FDIC deposit insurance coverage. We may receive deposits from other member
banks in exchange for the deposits we place into the network. We may also obtain deposits from other network member
banks without placing deposits into the network, or place deposits with other member banks without receiving deposits
from other member banks. Depositors are allowed to withdraw funds, with a penalty, from these accounts at one or more
of the member banks that hold the deposits. The Emergency Economic Stabilization Act of 2008 increased the deposit
insurance limit to $250,000 through December 31, 2009. As a result, the placement of funds through CDARS® can be
made for each depositor in an amount up to $250,000 for maturities on or before December 31, 2009.
Brokered deposits and funds obtained through the CDARS® network are classified as brokered deposits for
financial reporting purposes. At December 31, 2008, we had $384.9 million classified as brokered deposits, with $251.6
million obtained through brokers and $133.3 million obtained through the CDARS® network.
22
The following table sets forth the distribution of our deposit accounts at the dates indicated and the weighted average nominal interest rates on each
category of deposits presented.
2008
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
At December 31,
2007
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
(Dollars in thousands)
Amount
%
14.57
10.76
2.82
1.26
29.41
12.41
1.76
10.51
26.05
0.43
17.47
1.96
58.18
1.84
2.26
-
0.16
1.75
2.58
2.27
3.24
3.86
3.95
4.54
4.77
3.94
%
$
354,746
70,817
69,299
22,492
517,354
340,694
6,090
303,894
421,568
58,424
326,184
51,239
1,167,399
%
17.51
3.50
3.42
1.11
25.54
16.82
0.30
15.00
20.82
2.88
16.11
2.53
57.64
2.82
2.16
-
0.23
2.24
3.18
4.32
5.07
4.82
4.07
4.69
4.79
4.81
Amount
%
$
262,980
47,181
80,061
19,755
409,977
251,197
2,704
166,622
441,616
65,698
368,000
58,336
1,102,976
2006
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
%
14.91
2.67
4.54
1.12
23.24
14.24
0.15
9.44
25.03
3.72
20.87
3.31
62.52
%
1.70
0.44
-
0.22
1.15
4.06
0.66
4.91
4.65
3.74
4.66
4.92
4.64
Amount
$
359,595
265,762
69,624
31,225
726,206
306,178
43,472
259,444
643,044
10,732
431,312
48,446
1,436,450
Savings accounts
NOW accounts
Demand accounts
Mortgagors' escrow deposits
Total
Money market accounts
Certificate of deposit accounts
with original maturities of:
Less than 6 Months (2)
6 to less than 12 Months (3)
12 to less than 30 Months (4)
30 to less than 48 Months (5)
48 to less than 72 Months (6)
72 Months or more
Total certificate of deposit accounts
Total deposits (1)
$
2,468,834
100.00
%
3.12
%
$
2,025,447
100.00
%
3.88
%
$
1,764,150
100.00
%
3.75
%
(1)
(2)
(3)
(4)
(5)
(6)
Included in the above balances are IRA and Keogh deposits totaling $171.1 million, $173.2 million and $177.0 million at December 31, 2008, 2007 and 2006, respectively.
Includes brokered deposits of $7.0 million and $3.0 million at December 31, 2008 and 2007, respectively.
Includes brokered deposits of $46.3 million and $3.2 million at December 31, 2008 and 2007, respectively.
Includes brokered deposits of $171.7 million and $21.7 million at December 31, 2008 and 2007, respectively.
Includes brokered deposits of $101.0 million, $69.7 million and $46.4 million at December 31, 2008, 2007 and 2006, respectively.
Includes brokered deposits of $59.0 million, $104.1 million and $98.5 million at December 31, 2008, 2007 and 2006, respectively.
23
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, 2008.
2008
At December 31,
2007
2006
Within
One Year
(In thousands)
At December 31, 2008
One to
Three Years
Thereafter
Total
Interest rate:
1.99% or less
(1)
2.00% to 2.99% (2)
3.00% to 3.99% (3)
4.00% to 4.99%
(4)
5.00% to 5.99% (5)
6.00% to 6.99% (6)
7.00% to 7.99%
Total
33,006
173,754
533,434
458,418
237,838
-
-
1,436,450
$
$
$
$
$
$
$
9,931
5,009
94,249
399,921
657,558
94
637
1,167,399
49,953
9,630
114,487
382,060
542,524
302
4,020
1,102,976
30,807
157,984
366,675
252,297
86,731
-
-
894,494
1,487
12,001
141,071
186,660
128,289
-
-
469,508
712
3,769
25,688
19,461
22,818
-
-
72,448
33,006
173,754
533,434
458,418
237,838
-
-
1,436,450
$
$
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
(6)
Includes brokered deposits of $4.8.million at December 31, 2008.
Includes brokered deposits of $48.5 million at December 31, 2008.
Includes brokered deposits of $142.8 million and $0.3 million at December 31, 2008, and 2007, respectively.
Includes brokered deposits of $54.4 million, $65.0 million and $51.0 million at December 31, 2008, 2007 and 2006 respectively.
Includes brokered deposits of $134.5 million, $136.3 million and $93.9 million at December 31, 2008, 2007 and 2006, respectively
Includes brokered deposits of $0.1 million at December 31, 2007.
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, 2008 and their annualized weighted average interest rates.
Amount
Weighted
Average Rate
(Dollars in thousands)
Maturity Period:
Three months or less
Over three through six months
Over six through 12 months
Over 12 months
Total
$
$
110,690
53,710
127,702
121,645
413,747
3.29
3.50
3.89
4.30
3.80
%
%
The above table does not include brokered deposits of $384.9 million with a weighted average rate of 4.05%.
The following table presents the deposit activity, including mortgagors’ escrow deposits, for the periods
indicated.
Net deposits
Acquired with Atlantic Liberty
Amortization of premiums, net
Interest on deposits
Net increase in deposits
$
2008
$
366,633
-
789
75,965
443,387
For the year ended December 31,
2007
(In thousands)
183,280
$
-
855
77,162
261,297
$
2006
$
$
133,240
106,766
464
56,393
296,863
24
The following table sets forth the distribution of our 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.
2008
Percent
of Total
Deposits
Average
Balance
Average
Cost
For the years ended December 31,
2007
Percent
of Total
Deposits
Average
Cost
Average
Balance
2006
Percent
of Total
Deposits
Average
Balance
Average
Cost
(Dollars in thousands)
Savings accounts
$
365,885
16.63
%
2.13
%
$
310,457
16.09
%
2.44
%
$
265,421
16.23
%
1.52
%
NOW accounts
Demand accounts
Mortgagors' escrow
deposits
Total
Money market
accounts
Certificate of deposit
147,003
71,613
6.68
3.26
35,465
1.61
619,966
28.18
303,776
13.81
accounts
1,275,964
58.01
2.51
-
0.19
1.86
3.19
4.35
57,915
65,508
3.00
3.40
32,403
1.68
466,283
24.17
294,402
15.26
1,168,620
60.57
1.58
-
0.23
1.84
4.22
4.88
43,052
60,991
2.63
3.73
29,275
1.79
398,739
24.38
235,642
14.41
1,001,438
61.21
0.47
-
0.22
1.08
3.74
4.37
Total deposits
$
2,199,706
100.00
%
3.49
%
$
1,929,305
100.00
%
4.04
%
$
1,635,819
100.00
%
3.48
%
Borrowings. Although deposits are our primary source of funds, we also use borrowings as an alternative and cost
effective source of funds for lending, investing and other general purposes. The Banks are members of, and are eligible
to obtain advances from, the FHLB-NY. Such advances generally are secured by a blanket lien against the Banks’
mortgage portfolio and the Banks’ investment in the stock of the FHLB-NY. In addition, the Banks 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 Banks may also enter 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 our consolidated financial statements. In addition, we issued junior
subordinated debentures with a total par of $61.8 million in June and July 2007. These junior subordinated debentures
are carried at fair value in the consolidated statement of financial position. The average cost of borrowed funds was
4.71%, 4.97% and 4.73% for the years ended December 31, 2008, 2007 and 2006, respectively. The average balances of
borrowed funds were $1,107.6 million, $897.8 million and $715.3 million for the same years, respectively.
25
The following table sets forth certain information regarding our borrowed funds at or for the periods ended
on the dates indicated.
2008
At or for the years ended December 31,
2007
(Dollars in thousands)
2006
Securities Sold with the Agreement to Repurchase
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
FHLB-NY Advances
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
Other Borrowings
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
Total Borrowings
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
Subsidiary Activities
$
222,688
$
229,544
$
207,955
223,191
222,657
4.50
4.52
%
272,693
222,824
5.04
4.71
%
238,900
223,900
4.70
4.91
%
$
829,955
$
625,035
$
486,750
883,240
883,240
4.56
4.16
%
788,499
788,499
4.77
4.70
%
587,894
587,894
4.56
4.63
%
$
54,991
$
43,242
$
20,619
63,643
33,052
7.88
13.20
%
63,651
61,228
7.43
7.03
%
20,619
20,619
9.00
9.02
%
$
1,107,634
$
897,821
$
715,324
1,138,949
1,138,949
4.71
4.49
%
1,075,705
1,072,551
4.97
4.83
%
832,413
832,413
4.73
4.81
%
At December 31, 2008, Flushing Financial Corporation had four wholly owned subsidiaries: the Savings Bank
and the Trusts. In addition, the Savings Bank had four wholly owned subsidiaries: the Commercial Bank, FSB
Properties, Inc. (“Properties”), Flushing Preferred Funding Corporation (“FPFC”), and Flushing Service Corporation.
(a)
The Commercial Bank was formed in response to a New York State Finance Law which requires that
municipal deposits and state funds be deposited into a bank or trust company designated by the New York State
Comptroller. It was formed for the limited purpose of providing banking services to public entities including counties,
cities, towns, villages, school districts, libraries, fire districts and the various courts throughout the New York
metropolitan area.
(b)
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.
(c)
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.
(d)
Flushing Service Corporation was formed in 1998 to market insurance products and mutual funds.
26
Personnel
At December 31, 2008, we had 298 full-time employees and 45 part-time employees. None of our employees
are represented by a collective bargaining unit, and we consider our relationship with our employees to be good. At the
present time, Flushing Financial Corporation only employs certain officers of the Banks. These employees do not receive
any extra compensation as officers of Flushing Financial Corporation.
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, 2008, there are
435,747 shares available under the full value award plan and 319,008 shares under the non-full value plan. We have
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. We will continue to
maintain separate pools of available shares for full value as opposed to non-full value awards, except that shares can be
moved from the non-full value pool to the full value pool on a 3-for-1 basis. In April 2007 we removed 399,999 shares
from the non-full value pool and moved those shares to the full value pool on a 3-for-1 basis resulting in 133,333 shares
being added to the full value pool. In May 2008, the Company’s stockholders approved an additional 350,000 shares for
the full value pool and 250,000 shares for the non-full value pool. The exercise price per share of a stock option grant
may not be less than the fair market value of the common stock of the Company on the date of grant, and may not be
repriced without the approval of the Company’s stockholders. Options, stock appreciation rights, restricted stock,
restricted stock units and other stock based awards granted under the Omnibus Plan are generally subject to a minimum
vesting period of three years.
For additional information concerning this plan, see “Note 9 of Notes to Consolidated Financial Statements” in
Item 8 of this Annual Report.
FEDERAL, STATE AND LOCAL TAXATION
The following discussion of tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Company.
Federal Taxation
General. We report our income using a calendar year and the accrual method of accounting. We are subject to
the federal tax laws and regulations which apply to corporations generally, and, since the enactment of the Small
Business Job Protection Act of 1996 (the “Act”), those laws and regulations governing the Savings Bank’s deductions
for bad debts, described below.
Bad Debt Reserves. Prior to the enactment of the Act, which was signed into law on August 20, 1996, savings
institutions which met certain definitional tests primarily relating to their assets and the nature of their business
(“qualifying thrifts”), such as the Savings Bank, were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualifying thrifts could compute deductions for bad debts using either the specific
charge off method of Section 166 of the Internal Revenue Code (the “Code”) or the reserve method of Section 593 of the
Code. Section 1616(a) of the Act repealed the Section 593 reserve method of accounting for bad debts by qualifying
thrifts, effective for taxable years beginning after 1995. Qualifying thrifts that are treated as large banks, such as the
Savings Bank, are required to use the specific charge off method, pursuant to which the amount of any debt may be
deducted only as it actually becomes wholly or partially worthless.
Distributions. To the extent that the Savings Bank makes “non-dividend distributions” to stockholders that are
considered to result in distributions from its pre-1988 reserves or the supplemental reserve for losses on loans (“excess
distributions”), then an amount based on the amount distributed will be included in the Savings Bank’s taxable income.
Non-dividend distributions include distributions in excess of the Savings Bank’s current and post-1951 accumulated
earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions
in partial or complete liquidation. The amount of additional taxable income resulting from an excess distribution is an
amount that when reduced by the tax attributable to the income is equal to the amount of the excess distribution. Thus,
slightly more than one and one-half times the amount of the excess distribution made would be includable in gross
income for federal income tax purposes, assuming a 35% federal corporate income tax rate. See “Regulation ⎯
Restrictions on Dividends and Capital Distributions” for limits on the payment of dividends by the Bank. The Savings
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Bank does not intend to pay dividends or make non-dividend distributions described above that would result in a
recapture of any portion of its pre-1988 bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes an alternative minimum tax on corporations equal to
the excess, if any, of 20% of alternative minimum taxable income (“AMTI”) over a corporation’s regular federal income
tax liability. AMTI is equal to taxable income with certain adjustments. Generally, only 90% of AMTI can be offset by
net operating loss carrybacks and carryforwards.
State and Local Taxation
New York State and New York City Taxation. We are subject to the New York State Franchise Tax on Banking
Corporations in an annual amount equal to the greater of (1) 7.1% (7.5% for 2006) of “entire net income” allocable to
New York State during the taxable year or (2) the applicable alternative minimum tax. The alternative minimum tax is
generally the greater of (a) 0.01% of the value of assets allocable to New York State with certain modifications, (b) 3%
of “alternative entire net income” allocable to New York State or (c) $250. Entire net income is similar to federal
taxable income, subject to certain modifications, including that net operating losses arising during any taxable year prior
to January 1, 2001 cannot be carried back or carried forward, and net operating losses arising during any taxable year
beginning on or after January 1, 2001 cannot be carried back. Alternative entire net income is equal to entire net income
without certain deductions that are allowable in the calculation of entire net income. We are also subject to a similarly
calculated New York City tax of 9% on income allocated to New York City (although net operating losses cannot be
carried back or carried forward regardless of when they arise) and similar alternative taxes. In addition, we are subject to
a tax surcharge at a rate of 17% of the New York State Franchise Tax that is attributable to business activity carried on
within the Metropolitan Commuter Transportation District.
Notwithstanding the repeal of the federal income tax provisions permitting bad debt deductions under the
reserve method, New York State has enacted legislation maintaining the preferential treatment of additional loss reserves
for qualifying real property and non-qualifying loans of qualifying thrifts for both New York State and New York City
tax purposes. Calculation of the amount of additions to reserves for qualifying real property loans is limited to the larger
of the amount derived by the percentage of taxable income method or the experience method. For these purposes, the
applicable percentage to calculate the bad debt deduction under the percentage of taxable income method is 32% of
taxable income, reduced by additions to reserves for non-qualifying loans, except that the amount of the addition to the
reserve cannot exceed the amount necessary to increase the balance of the reserve for losses on qualifying real property
loans at the close of the taxable year to 6% of the balance of the qualifying real property loans outstanding at the end of
the taxable year. Under the experience method, the maximum addition to a loan reserve generally equals the amount
necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (1) the amount
that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during
the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or
(2) the balance of the bad debt reserve at the close of the “base year,” or, if the amount of loans outstanding has declined
since the base year, the amount which bears the same ratio to the amount of loans outstanding at the close of the taxable
year as the balance of the reserve at the close of the base year. For these purposes, the “base year” is the last taxable year
beginning before 1988. The amount of additions to reserves for non-qualifying loans is computed under the experience
method. In no event may the additions to reserves for qualifying real property loans be greater than the larger of the
amount determined under the experience method or the amount which, when added to the additions to reserves for non-
qualifying loans, equal the amount by which 12% of the total deposits or withdrawable accounts of depositors of the
Savings Bank at the close of the taxable year exceeds the sum of the Savings Bank’s surplus, undivided profits and
reserves at the beginning of such year.
Delaware State Taxation. As a Delaware holding company not earning income in Delaware, we are exempt
from Delaware corporate income tax but are required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
General
REGULATION
Flushing Financial Corporation is registered with the OTS as a savings and loan holding company and is subject
to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement
authority over Flushing Financial Corporation and any non-savings institution subsidiaries it may form or acquire.
Among other things, this authority permits the OTS to restrict or prohibit activities that it determines may pose a serious
risk to the Savings Bank. As a publicly owned company, we are required to file certain reports with the Securities and
Exchange Commission (“SEC”) under federal securities laws. The Banks are a member of the FHLB System. The
Savings Bank is subject to extensive regulation by the OTS, as its chartering agency, and the FDIC, as the insurer of the
Savings Bank’s deposits. The Savings Bank is also subject to certain regulations promulgated by the other federal
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agencies. The Savings Bank must file reports with the OTS and the FDIC concerning its activities and financial
condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. The Savings Bank is subject to periodic examinations by the OTS and the
FDIC to examine whether the Savings Bank is in compliance with various regulatory requirements. The Commercial
Bank is subject to extensive regulations promulgated by the FDIC and the New York State Banking Department, similar
to those imposed on the Savings Bank. This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily to ensure the safe and sound operation of the
Banks for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the establishment of an adequate allowance for possible
loan losses for regulatory purposes. Any change in such regulation, whether by the OTS, the FDIC, other federal
agencies, the New York State Banking Department, or the United States Congress, could have a material adverse impact
on us and our operations.
The activities of federal savings institutions are governed primarily by the Home Owners’ Loan Act, as
amended (“HOLA”) and, in certain respects, the Federal Deposit Insurance Act (“FDIA”). Most regulatory functions
relating to deposit insurance and to the administration of conservatorships and receiverships of insured institutions are
exercised by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other
things, requires that federal banking regulators intervene promptly when a depository institution experiences financial
difficulties, mandated the establishment of a risk-based deposit insurance assessment system, and required imposition of
numerous additional safety and soundness operational standards and restrictions. FDICIA and the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) each contain provisions affecting numerous aspects of the
operations and regulations of federal savings banks, and these laws empower the OTS and the FDIC, among other
agencies, to promulgate regulations implementing their provisions.
Set forth below is a brief description of certain laws and regulations which relate to the regulation of the Banks
and the Company. The description does not purport to be a comprehensive description of applicable laws, rules and
regulations and is qualified in its entirety by reference to applicable laws, rules and regulations.
Holding Company Regulation
Flushing Financial Corporation is a unitary savings and loan holding company within the meaning of the
HOLA. As such, we are required to register with the OTS and are subject to OTS regulations, examinations, supervision
and reporting requirements. In addition, the OTS has enforcement authority over us and any non-savings institution
subsidiaries we may form or acquire. Among other things, this authority permits the OTS to restrict or prohibit activities
that it determines may pose a serious risk to the Banks. See “—Restrictions on Dividends and Capital Distributions.”
HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more
subsidiaries, from (1) acquiring another savings institution or holding company thereof, without prior written approval of
the OTS; (2) acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-
subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by HOLA; or
(3) acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by
holding companies to acquire savings institutions, the OTS will consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community, and the impact of any competitive factors that may be involved.
As a unitary savings and loan holding company, Flushing Financial Corporation currently is not restricted as to
the types of business activities in which it may engage, provided that the Savings Bank continues to meet the qualified
thrift lender (“QTL”) test. See “—Qualified Thrift Lender Test.” Upon any non-supervisory acquisition by the Company
of another savings association or savings bank, Flushing Financial Corporation would become a multiple savings and
loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive
limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple savings
and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and
activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding
company controlling savings institutions in more than one state, subject to two exceptions: (1) emergency acquisitions
authorized by the FDIC and (2) the acquisition of a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. Under New York law, reciprocal interstate acquisitions are
authorized for savings and loan holding companies and savings institutions. Certain states do not authorize interstate
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acquisitions under any circumstances; however, federal law authorizing acquisitions in supervisory cases preempts such
state law.
Federal law generally provides that no “person” acting directly or indirectly or through or in concert with one or
more other persons, may acquire “control,” as that term is defined in OTS regulations, of a federally insured savings
institution without giving at least 60 days’ written notice to the OTS and providing the OTS an opportunity to disapprove
the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that
(1) the acquisition would substantially lessen competition; (2) the financial condition of the acquiring person might
jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (3) the
competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the acquisition of control by such person.
Investment Powers
The Savings Bank is subject to comprehensive regulation governing its investments and activities. Among other
things, the Savings Bank may invest in (1) residential mortgage loans, mortgage-backed securities, education loans and
credit card loans in an unlimited amount, (2) non-residential real estate loans up to 400% of total capital, (3) commercial
business loans up to 20% of total assets (however, amounts over 10% of total assets must be used only for small business
loans) and (4) in general, consumer loans and highly rated commercial paper and corporate debt securities in the
aggregate up to 35% of total assets. In addition, the Savings Bank may invest up to 3% of its total assets in service
corporations, an unlimited percentage of its assets in operating subsidiaries (which may only engage in activities
permissible for the Savings Bank itself) and under certain conditions may invest in finance subsidiaries. Other than
investments in service corporations, operating subsidiaries, finance subsidiaries and certain government-sponsored
enterprises, such as FHLMC and FNMA, the Savings Bank generally is not permitted to make equity investments. See
“— General — Investment Activities.” A service corporation in which the Savings Bank may invest is permitted to
engage in activities that a federal savings bank may conduct directly, other than taking deposits, as well as certain
activities pre-approved by the OTS, which include providing certain support services for the institution; originating,
investing in, selling, purchasing, servicing or otherwise dealing with specified types of loans and participations
(principally loans that the parent institution could make); specified real estate activities, including limited real estate
development; securities brokerage services; certain insurance brokerage activities; and other specified investments and
services.
Real Estate Lending Standards
FDICIA requires each federal banking agency to adopt uniform regulations prescribing standards for extensions
of credit which are either (1) secured by real estate, or (2) made for the purpose of financing the construction of
improvements on real estate. In prescribing these standards, the banking agencies must consider the risk posed to the
deposit insurance funds by real estate loans, the need for safe and sound operation of insured depository institutions and
the availability of credit. The OTS and the other federal banking agencies adopted uniform regulations, effective March
19, 1993. The OTS regulation requires each savings association to establish and maintain written internal real estate
lending standards consistent with safe and sound banking practices and appropriate to the size of the institution and the
nature and scope of its real estate lending activities. The policy must also be consistent with accompanying OTS
guidelines, which include maximum loan-to-value ratios for the following types of real estate loans: raw land (65%),
land development (75%), nonresidential construction (80%), improved property (85%) and one-to-four family residential
construction (85%). Owner-occupied one-to-four family mortgage loans and home equity loans do not have maximum
loan-to-value ratio limits, but owner-occupied one-to-four family mortgage loans with a loan-to-value ratio at origination
of 90% or greater are to be backed by private mortgage insurance or readily marketable collateral. Institutions are also
permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as
such exceptions are appropriately reviewed and justified. The guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
Loans-to-One Borrower Limits
The Savings Bank generally is subject to the same loans-to-one borrower limits that apply to national banks.
With certain exceptions, total loans and extensions of credit outstanding at one time to one borrower (including certain
related entities of the borrower) may not exceed, for loans not fully secured, 15% of the Savings Bank’s unimpaired
capital and unimpaired surplus, plus, for loans fully secured by readily marketable collateral, an additional 10% of the
Savings Bank’s unimpaired capital and unimpaired surplus. At December 31, 2008, the largest amount the Savings Bank
could lend to one borrower was approximately $46.9 million, and at that date, the Savings Bank’s largest aggregate
amount of loans-to-one borrower was $34.0 million, all of which were performing according to their terms. The
Commercial Bank does not originate loans. See “— General — Lending Activities.”
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Insurance of Accounts
The deposits of the Banks are insured up to $100,000 per depositor, excluding retirement accounts, which are
insured up to $250,000 per depositor, (as defined by federal law and regulations) by the FDIC. The Emergency
Economic Stabilization Act of 2008 (“EESA”) increased this coverage, effective October 3, 2008, for all accounts in an
amount up to $250,000 through December 31, 2009. In addition, the FDIC has implemented a Temporary Liquidity
Guarantee Program (“TLGP”), under which, effective October 14, 2008 and through December 31, 2009, transaction
accounts that earn interest at a rate of no more than 0.50% are insured for 100% of their balance. The TLGP was
provided at no cost to banks through November 12, 2008. Banks had the option to opt out of this program no later than
November 12, 2008. Banks which did not opt out of the TLGP will pay additional deposit insurance at an annual rate of
0.10% for balances in covered deposit accounts in excess of $250,000. Both the Savings Bank and the Commercial Bank
have opted to remain in the TLGP. All of the Banks’ deposits are presently insured by the FDIC under the Deposit
Insurance Fund (“DIF”). Previously, the majority of the Savings Bank’s deposits were insured by the Bank Insurance
Fund (“BIF”), and the remainder by the Savings Association Insurance Fund (“SAIF”). As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured
institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the
insurance fund. The FDIC also has the authority to initiate enforcement actions where the OTS has failed or declined to
take such action after receiving a request to do so from the FDIC.
On February 8, 2006, as part of the Deficit Reduction Act of 2005, the Federal Deposit Insurance Reform Act of
2005 (“Deposit Act”) was enacted. The Deposit Act required the FDIC to merge the BIF and SAIF into a new insurance
fund, the DIF, no later than July 1, 2006. The funds were merged on March 31, 2006. The FDIC was also required to
propose regulations to implement the Deposit Act’s provisions. These regulations have been finalized and became
effective January 1, 2007. Other major provisions of the Deposit Act include: (1) maintaining basic deposit insurance
coverage at $100,000, and increasing deposit insurance coverage to $250,000 for certain retirement accounts, with
increases for inflation each five years beginning in 2011, (2) giving the FDIC flexibility to manage the insurance fund by
setting the designated reserve ratio between 1.15% and 1.50% (thereby eliminating the 1.25% trigger), (3) requiring all
banks to be assessed premiums, (4) providing a one-time assessment credit of $4.7 billion to banks and savings
institutions in existence on December 31, 1996, that capitalized the FDIC in the 1990s to offset future premiums under a
new risk-based assessment system, and (5) imposing a cap on the growth of the insurance fund by requiring a premium
dividend to institutions when certain levels of the DIF are exceeded.
The FDIC utilizes a risk-based deposit insurance assessment system. Through December 31, 2006, under this
system, the FDIC assigned each institution to one of three capital categories — “well capitalized,” “adequately
capitalized” and “undercapitalized” — which are defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of FDIA, as discussed below. These three categories were then divided into
three subcategories which reflect varying levels of supervisory concern. The matrix so created resulted in nine
assessment risk classifications. Effective January 1, 2007, the FDIC revised their risk-based deposit insurance
assessment system, and placed institutions into four risk categories based upon supervisory and capital evaluations. Risk
Category 1 is further subdivided based upon supervisory ratings and other risk measures to differentiate risk. Due to the
insurance fund falling below its required reserve ratio of 1.15% during 2008, effective January 1, 2009, the FDIC
increased rates uniformly by seven basis points for the first quarter of 2009 to replenish the insurance fund within five
years. The FDIC subsequently adopted additional changes to its risk categories effective April 1, 2009, and extended the
period to replenish the insurance fund to seven years. Effective April 1, 2009, the FDIC will continue to utilize four risk
categories, but to determine initial base assessment rates, the FDIC will: (1) introduce a new financial ratio into the
financial ratios method applicable to most Risk Category I institutions to include brokered deposits above a threshold
that are used to fund rapid asset growth; (2) for a large Risk Category I institution with long-term debt issuer ratings,
combine weighted average CAMELS component ratings, the debt issuer ratings, and the financial ratios method
assessment rate; and (3) use a new uniform amount and pricing multipliers for each method. The FDIC is also
introducing three adjustments that could be made to an institution’s initial base assessment rate: (1) a decrease for long-
term unsecured debt, and, for small institutions, a portion of Tier 1 capital; (2) an increase for secured liabilities above a
threshold amount; and (3) for non-Risk Category I institutions, an increase for brokered deposits above a threshold
amount. At December 31, 2008, the Banks’ annual assessment rate was 0.05%. This assessment rate for the first quarter
of 2009 has been increased to a range of 0.12% to 0.14%. This base assessment beginning in the second quarter of 2009
will be in a range of 0.12% to 0.16%, The Savings Bank will also see a further increase in its deposit insurance premium
beginning in the second quarter of 2009 since it has seen an increase in its secured liabilities above the threshold level
defined by the FDIC. The FDIC has also proposed a 20 basis point emergency special assessment to be collected on
September 30, 2009 based on deposit balances as of June 30, 2009. The interim rule also provides that, after June 30,
2009, if the reserve ratio of the DIF is estimated to fall to a level that the Board of the FDIC believes would adversely
affect public confidence or to a level which shall be close to zero or negative at the end of a calendar quarter, an
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emergency special assessment of up to 10 basis points may be imposed by a vote of the Board of the FDIC on all insured
depository institutions for the corresponding assessment period. The Savings Bank was provided a one-time assessment
credit of $1.1 million, which was used to offset the FDIC assessment. During 2007, the Savings Bank utilized $1.0
million of this credit to offset the FDIC assessment, and utilized the remaining credit in 2008 to offset its FDIC
assessment. The Savings Bank’s assessment rate in effect from time to time will depend upon the risk category to which
it is assigned. In addition, the FDIC is authorized to increase federal deposit insurance assessment rates to the extent
necessary to protect the fund under current law. Any increase in deposit insurance assessment rates, as a result of a
change in the category or subcategory to which the Banks are assigned or the exercise of the FDIC’s authority to increase
assessment rates generally, could have an adverse effect on the earnings of the Banks.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or
violation that might lead to termination of deposit insurance.
On September 30, 1996, as part of an omnibus appropriations bill, the Deposit Insurance Funds Act of 1996 (the
“Funds Act”) was enacted. The Funds Act required BIF institutions, beginning January 1, 1997, to pay a portion of the
interest due on the Finance Corporation (“FICO”) bonds issued in connection with the savings and loan association crisis
in the late 1980s, and required BIF institutions to pay their full pro rata share of the FICO payments starting the earlier of
January 1, 2000 or the date at which no savings institution continues to exist. We were required, as of January 1, 2000, to
pay our full pro rata share of the FICO payments. The FICO assessment rate is subject to change. The Banks paid
$238,000, $224,000 and $191,000 for their share of the interest due on FICO bonds in 2008, 2007 and 2006,
respectively.
Qualified Thrift Lender Test
Institutions regulated by the OTS are required to meet a QTL test to avoid certain restrictions on their
operations. FDICIA and applicable OTS regulations require such institutions to maintain at least 65% of their portfolio
assets (total assets less intangibles, properties used to conduct the institution’s business and liquid assets not exceeding
20% of total assets) in “qualified thrift investments” on a monthly average basis in nine of every 12 months. Qualified
thrift investments constitute primarily residential mortgage loans and related investments, including certain mortgage-
backed and mortgage-related securities. A savings institution that fails the QTL test must either convert to a bank charter
or, in general, it will be prohibited from: (1) making an investment or engaging in any new activity not permissible for a
national bank, (2) paying dividends not permissible under national bank regulations and (3) establishing any new branch
office in a location not permissible for a national bank in the institution’s home state. One year following the institution’s
failure to meet the QTL test, any holding company parent of the institution must register and be subject to supervision as
a bank holding company. In addition, beginning three years after the institution failed the QTL test, the institution would
be prohibited from retaining any investment or engaging in any activity not permissible for a national bank. At
December 31, 2008 the Savings Bank had maintained more than 65% of its “portfolio assets” in qualified thrift
investments in at least nine of the preceding 12 months. Accordingly, on that date, the Savings Bank had met the QTL
test.
Under the Economic Growth and Paperwork Reduction Act of 1996 (“Regulatory Paperwork Reduction Act”),
Congress modified and expanded investment authority under the QTL test. The Regulatory Paperwork Reduction Act
amendments permit federal thrifts to invest in, sell, or otherwise deal in education and credit card loans without
limitation and raised from 10% to 20% of total assets the aggregate amount of commercial, corporate, business, or
agricultural loans or investments that may be made by a thrift, subject to a requirement that amounts in excess of 10% of
total assets be used only for small business loans. In addition, the Regulatory Paperwork Reduction Act defines
“qualified thrift investment” to include, without limit, education, small business, and credit card loans; and removes the
10% limit on personal, family, or household loans for purposes of the QTL test. The legislation also provides that a
thrift meets the QTL test if it qualifies as a domestic building and loan association under the OTS regulations.
Transactions with Affiliates
Transactions between the Savings Bank and any related party or “affiliate” are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate is generally any company or entity which controls, is controlled by or is
under common control with the Savings Bank, including Flushing Financial Corporation, the Commercial Bank, the
Trusts, the Savings Bank’s subsidiaries, and any other qualifying subsidiary of the Savings Bank or Flushing Financial
Corporation that may be formed or acquired in the future. Generally, Sections 23A and 23B: (1) limit the extent to which
the Savings Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to
10% of the Savings Bank’s capital stock and surplus, and impose an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (2) require that all such transactions be on
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terms substantially the same, or at least as favorable, to the Savings Bank or subsidiary as those provided to a non-
affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. Each loan or extension of credit to an affiliate by the Savings Bank must be secured
by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of
credit extended. In addition, the Savings Bank may not: (1) loan or otherwise extend credit to an affiliate, except to any
affiliate which engages only in activities which are permissible for bank holding companies under Section 4(c) of the
Bank Company Act, or (2) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliates, except subsidiaries of the Savings Bank.
In addition, the Savings Bank is subject to Regulation O promulgated under Sections 22(g) and 22(h) of the
Federal Reserve Act. Regulation O requires that loans by the Savings Bank to a director, executive officer or to a holder
of more than 10% of the Common Stock, and to certain affiliated interests of any such insider, may not, in the aggregate,
exceed the Savings Bank’s loans-to-one borrower limit. Loans to insiders and their related interests must also be made
on terms substantially the same as offered, and follow credit underwriting procedures that are not less stringent than
those applied, in comparable transactions to other persons. Prior Board approval is required for certain loans. In addition,
the aggregate amount of extensions of credit by the Savings Bank to all insiders cannot exceed the institution’s
unimpaired capital and unimpaired surplus. These laws place additional restrictions on loans to executive officers of the
Bank. The Savings Bank is in compliance with these regulations.
Restrictions on Dividends and Capital Distributions
The Savings Bank is subject to OTS limitations on capital distributions, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and some other distributions
charged to the Savings Bank’s capital account. In general, the applicable regulation permits specified levels of capital
distributions by a savings institution that meets at least its minimum capital requirements, so long as the OTS is provided
with at least 30 days’ advance notice and has no objection to the distribution.
Under OTS capital distribution regulations, an institution is not required to file an application with, or to
provide a notice to, the OTS if neither the institution nor the proposed capital distribution meets any of the criteria for
any such application or notice as provided below. An institution will be required to file an application with the OTS if
the institution is not eligible for expedited treatment by the OTS; if the total amount of all its capital distributions for the
applicable calendar year exceeds the net income for that year to date plus the retained net income (net income less capital
distributions) for the preceding two years; if it would not be at least adequately capitalized following the distribution; or
if its proposed capital distribution would violate a prohibition contained in any applicable statute, regulation, or
agreement between the association and the OTS. By contrast, only notice to the OTS is required for an institution that is
not required to file an application as provided in the preceding sentence, if it would not be well capitalized following the
distribution; if the association’s proposed capital distribution would reduce the amount of or retire any part of its
common or preferred stock or retire any part of debt instruments such as notes or debentures included in capital under
OTS regulations; or if the association is a subsidiary of a savings and loan holding company. The Savings Bank is a
subsidiary of a savings and loan holding company and, therefore, is subject to the 30-day advance notice requirement. As
of December 31, 2008, the Savings Bank had $34.4 million in retained earnings available to distribute to the Holding
Company in the form of cash dividends.
Federal Home Loan Bank System
In connection with converting to a federal charter, the Savings Bank became a member of the FHLB-NY, which
is one of 12 regional FHLB’s governed and regulated by the Federal Housing Finance Board. The Commercial Bank is
also a member of the FHLB-NY. Each FHLB serves as a source of liquidity for its members within its assigned region. It
is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans
to members (i.e., advances) in accordance with policies and procedures established by its Board of Directors.
As members, the Banks are mandated to purchase and maintain membership stock in the FHLB-NY based on
their respective asset sizes. In addition, for all borrowing activity, the Banks are required to purchase or redeem shares of
FHLB-NY non-marketable capital stock at par. Pursuant to this requirement, at December 31, 2008, the Savings Bank
was required to maintain $47.7 million of FHLB-NY stock, and the Commercial Bank was required to maintain $10,500
of FHLB-NY stock. The Banks were in compliance with these requirements at that time.
Assessments
Savings institutions are required by OTS regulations to pay assessments to the OTS to fund the operations of the
OTS. The general assessment, paid on a semi-annual basis, as determined from time to time by the Director of the OTS,
is computed upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s
latest quarterly thrift financial report. Based on the average balance of the Savings Bank’s total assets for the year ended
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December 31, 2008, the Savings Bank’s OTS assessments were $0.6 million for that period. The Commercial Bank is a
New York State chartered commercial bank, and as such is required by the New York State Banking Department to pay
an annual assessment. For the year ended December 31, 2008, the Commercial Bank paid an assessment of $12,000.
Branching
OTS regulations permit federally chartered savings institutions to branch nationwide to the extent allowed by
federal statute. This permits federal savings associations to geographically diversify their loan portfolios and lines of
business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), as implemented by OTS regulations, the Savings Bank has
an obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community,
including low and moderate income neighborhoods located in the community. The CRA does not establish specific
lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the
types of products and services that it believes are best suited to its particular community, consistent with the CRA. The
CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution’s record of
meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by
the institution. The methodology used by the OTS for determining an institution’s compliance with the CRA focuses on
three tests: (a) a lending test, to evaluate the institution’s record of making loans in its service areas; (b) an investment
test, to evaluate the institution’s record of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the range of
the institution’s services and the delivery of services through its branches, ATMs, and other offices. The Bank received a
CRA rating of “Satisfactory” in its most recent completed CRA examination, which was completed as of March 5, 2007.
Institutions that receive less than a satisfactory rating may face difficulties in securing approval for new activities or
acquisitions. The CRA requires all institutions to make public disclosures of their CRA ratings. As a special purpose
commercial bank, the Commercial Bank is not required to comply with the CRA.
Brokered Deposits
The FDIC has promulgated regulations implementing the FDICIA limitations on brokered deposits. Under the
regulations, well-capitalized institutions are not subject to brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to
restrictions on the interest rate that can be paid on such deposits. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield that exceeds by more than 75 basis points
the prevailing effective yields on insured deposits of comparable maturity in the institution’s normal market area or in
the market area in which such deposits are being solicited. Pursuant to the regulation, the Savings Bank, as a well-
capitalized institution, may accept brokered deposits. At December 31, 2008, the Savings Bank had $384.9 million in
brokered deposit accounts.
Capital Requirements
General. The Savings Bank is required to maintain minimum levels of regulatory capital. Since FIRREA,
capital requirements established by the OTS generally must be no less stringent than the capital requirements applicable
to national banks. The OTS also is authorized to impose capital requirements in excess of these standards on a case-by-
case basis.
Any institution that fails any of its applicable capital requirements is subject to possible enforcement actions by
the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the
establishment of restrictions on the institution’s operations and the appointment of a conservator or receiver. The OTS’
capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more
of a variety of corrective actions. See “—Prompt Corrective Action.”
The OTS’ capital regulations create three capital requirements: a tangible capital requirement, a leverage and
core capital requirement and a risk-based capital requirement. At December 31, 2008, the Savings Bank’s capital levels
exceeded applicable OTS capital requirements. The three OTS capital requirements are described below.
Tangible Capital Requirement. Under current OTS regulations, each savings institution must maintain tangible
capital equal to at least 1.50% of its adjusted total assets (as defined by regulation). Tangible capital generally includes
common stockholders’ equity and retained income, and certain non-cumulative perpetual preferred stock and related
income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be
deducted from tangible capital. Tangible capital also excludes adjustments to accumulated other comprehensive income
recorded for postretirement benefits. At December 31, 2008, the Savings Bank had $13.9 million in goodwill and $2.3
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million in a core deposit intangible which were classified as intangible assets, and no purchased mortgage servicing
rights. At that date, the Savings Bank’s tangible capital ratio was 7.92%.
In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain
assets from capital and to appropriately account for the investments in and assets of both includable and non-includable
subsidiaries.
Leverage and Core Capital Requirement. The current OTS requirement for leverage and core capital
(commonly referred to as core capital) ranges between 3% and 5% of adjusted total assets. Savings institutions that
receive the highest supervisory rating for safety and soundness are required to maintain a minimum core capital ratio of
3%, while the capital floor for all other savings institutions generally ranges from 4% to 5%, as determined by the OTS
on a case-by-case basis. Core capital includes common stockholders’ equity (including retained income), non-cumulative
perpetual preferred stock and related surplus. At December 31, 2008, the Savings Bank’s core capital ratio was 7.92%.
OTS regulations limit the amount of servicing assets, together with purchased credit card receivables,
includable in core capital to 100% of such capital, subject to limitations on fair value. At December 31, 2008, the
Savings Bank had $0.2 million in capitalized servicing rights and no purchased credit card receivables.
Risk-Based Requirement. The risk-based capital standard adopted by the OTS requires savings institutions to
maintain a minimum ratio of total capital to risk-weighted assets of 8%. Total capital consists of core capital, defined
above, and supplementary capital, but excludes the effect of recognizing deferred taxes based upon future income after
one year. Supplementary capital consists of certain capital instruments that do not qualify as core capital, and general
valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may
be used to satisfy the risk-based requirement only in an amount equal to the amount of core capital. In determining the
risk-based capital ratios, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on
the risks inherent in the type of assets. The risk weights assigned by the OTS for significant categories of assets are
(1) 0% for cash and securities issued by the federal government or unconditionally backed by the full faith and credit of
the federal government; (2) 20% for securities (other than equity securities) issued by federal government sponsored
agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the
FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (3) 50% for
prudently underwritten permanent one-to-four family first lien mortgage loans and certain qualifying multi-family
mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or the FHLMC; and (4) 100% for all other loans and
investments, including consumer loans, home equity loans, commercial loans, and one-to-four family residential real
estate loans more than 90 days delinquent, and all repossessed assets or assets more than 90 days past due. At
December 31, 2008, the Savings Bank’s risk-based capital ratio was 13.02%.
The Commercial Bank is required to maintain minimum levels of regulatory capital, which are similar to those
of the Savings Bank. At December 31, 2008, the Commercial Bank exceeded the regulatory capital requirements to be
considered well capitalized, with tangible, leverage and core, and risk-based capital ratios of 10.41%, 10.41%, and
64.87%, respectively.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction
accounts (primarily NOW and checking accounts) and non-personal time deposits. At December 31, 2008, the Banks
were in compliance with these requirements.
The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy liquidity requirements imposed by the OTS. Because required reserves must be maintained in the form of vault
cash or an account at a Federal Reserve Bank directly or through another bank, the effect of this reserve requirement is to
reduce an institution’s earning assets. Effective October 9, 2008, the Federal Reserve Bank pays interest on deposits
maintained at its bank at a rate that approximates the overnight federal funds rate. The amount of funds necessary to
satisfy this requirement has not had a material effect on the Banks’ operations.
As a creditor and financial institution, the Savings Bank is also subject to additional regulations promulgated by
the FRB, including, without limitation, regulations implementing requirements of the Truth in Savings Act, the
Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Truth in Lending Act.
Financial Reporting
The Savings Bank is required to submit independently audited annual reports to the FDIC and the OTS. These
publicly available reports must include (a) annual financial statements prepared in accordance with accounting principles
generally accepted in the United States and such other disclosures as required by the FDIC or the OTS and (b) a report,
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signed by the Savings Bank’s Chief Executive Officer and Chief Financial Officer which contains statements about the
adequacy of internal controls and compliance with designated laws and regulations, and an opinion by independent
auditors related thereto. The Commercial Bank is required to submit independently audited annual reports to the FDIC
and New York State Banking Department. The Banks are each required to monitor the foregoing activities through
independent audit committees.
Standards for Safety and Soundness
The FDIA, as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement
Act of 1994 (the “Community Development Act”), requires each federal bank regulatory agency to establish safety and
soundness standards for institutions under its authority. On July 10, 1995, the federal banking agencies, including the
OTS, jointly released Interagency Guidelines Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness compliance plans. The guidelines, among other
things, require savings institutions to maintain internal controls, information systems and internal audit systems that are
appropriate to the size, nature and scope of the institution’s business. The guidelines also establish general standards
relating to loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, fees and
benefits. Savings institutions are required to maintain safeguards to prevent the payment of excessive compensation to
an executive officer, employee, director or principal shareholder. The OTS may determine that a savings institution is not
in compliance with the safety and soundness guidelines and, upon doing so, may require the institution to submit an
acceptable plan to achieve compliance with the guidelines. An institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt or request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory actions. Management believes that the Bank currently meets the standards adopted in
the interagency guidelines.
Additionally, under FDICIA, as amended by the Community Development Act, federal banking agencies are
required to establish standards relating to asset quality and earnings that the agencies determine to be appropriate.
Effective October 1, 1998, the federal banking agencies, including the OTS, adopted guidelines relating to asset quality
and earnings which require insured institutions to maintain systems, consistent with their size and the nature and scope of
their operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor
earnings and insure that earnings are sufficient to maintain adequate capital and reserves.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (the “Modernization Act”) was signed into law on November 12, 1999. Among
other things, the Modernization Act permits qualifying bank holding companies to affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature or complementary thereto, as determined
by the Federal Reserve Board. Subject to certain limitations, a national bank may, through a financial subsidiary, engage
in similar activities. The Modernization Act also prohibits the creation or acquisition of new unitary savings and loan
holding companies that are affiliated with non-banking firms, but “grandfathers” existing savings and loan holding
companies, such as the Company. Grandfathered companies retain the existing powers available to unitary savings and
loan holding companies. See “⎯ Holding Company Regulation.” Certain business combinations which were
impermissible prior to the effective date of the Modernization Act are now possible. Management believes the
Modernization Act has led to some consolidation in the financial services industry and could lead to further
consolidation, which, if completed, would likely result in an increase in the service offerings of our competitors. We
cannot assure you that the Modernization Act will not result in further changes in the competitive environment in our
market area or otherwise impact us.
In addition, the Modernization Act calls for heightened privacy protection of customer information gathered by
financial institutions. The OTS has enacted regulations implementing the privacy protection provisions of the
Modernization Act. Under the regulations, each financial institution is to (1) adopt procedures to protect customers’
“non-public personal information,” (2) disclose its privacy policy, including identifying to customers others with whom
it shares “non-public personal information,” at the time of establishing the customer relationship and annually thereafter,
and (3) provide its customers with the ability to “opt-out” of having the financial institution share their personal
information with affiliated third parties. The regulations became effective on November 13, 2000, with compliance
voluntary prior to July 1, 2001. Management has reviewed and amended our privacy protection policy and believes we
are in compliance with these regulations.
USA Patriot Act
On October 26, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the “Patriot Act”) was signed into law. The purpose of
the Patriot Act is to enhance protections against money laundering and criminal laws against terrorist activities, and give
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law enforcement authorities greater investigative powers. Among other things, the Patriot Act (1) requires financial
institutions that administer, maintain or manage private bank accounts or correspondent accounts for foreign persons to
establish due diligence policies; (2) prohibits correspondent accounts with foreign shell banks; (3) permits sharing of
information among financial institutions, regulators and law enforcement regarding persons engaged in terrorist or
money laundering activities; (4) requires financial institutions to verify customer identification at account opening; (5)
requires financial institutions to report suspicious activities; and (6) requires financial institutions to establish an anti-
money laundering compliance program. Management believes we are in compliance with the Patriot Act.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the FDICIA, each appropriate banking agency is required to take
prompt corrective action to resolve the problems of insured depository institutions that do not meet minimum capital
ratios. Such action must be accomplished at the least possible long-term cost to the appropriate deposit insurance fund.
The federal banking agencies, including the OTS and the FDIC, adopted substantially similar regulations to
implement Section 38 of the FDIA. Under the regulations, an institution is deemed to be (1) “well capitalized” if it has
total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage capital
ratio of 5% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level
for any capital measure, (2) “adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-
based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does
not meet the definition of “well capitalized,” (3) “undercapitalized” if it has a total risk-based capital ratio that is less
than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage capital ratio that is less than 4% (3% under
certain circumstances), (4) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a
Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%, and (5) “critically
undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Section 38 of the
FDIA and the regulations promulgated thereunder also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or
an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). At December 31,
2008, each of the Banks met the criteria to be considered a “well capitalized” institution.
Emergency Economic Stabilization Act of 2008
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law.
The EESA’s stated purpose is to provide the Secretary of the U.S. Treasury (the “Secretary”) with the authority and
facilities to restore liquidity and stability to the United States financial system and to ensure that such authority and
facilities are used to protect home values, college funds, retirement accounts and life savings, preserve homeownership
and promote jobs and economic growth, maximize overall returns to U.S. taxpayers and provide accountability for the
Secretary’s exercise of such authority.
The EESA includes a federal program to purchase troubled mortgages and financial instruments from financial
institutions, the Troubled Asset Relief Program (“TARP”). The EESA also includes provisions that place limits on
executive pay practices by institutions participating in the TARP, measures to facilitate acquisitions of financial
institutions with troubled assets without government assistance, temporary enhancements to the federal deposit insurance
program, enhanced tax benefits for losses incurred in the sale of certain assets, possible relief from fair value accounting,
and an acceleration of the date on which the Board of Governors of the Federal Reserve System (“FRB”) can pay interest
to banks on reserves on deposit with the FRB. On October 6, 2008, the FRB stated that it will begin paying interest on
both excess and required reserves on October 9, 2008. The Banks each maintain funds on deposit at the Federal Reserve
Bank of New York, and each has received interest on these deposits since October 9, 2008.
The Secretary has utilized his authority under the TARP to invest in preferred stocks of financial institutions
under a Capital Purchase Program (“CPP”). Under the CPP, we were eligible to submit an application for between $23
million and $70 million. We submitted an application for $70.0 million, for which we received preliminary approval on
December 3, 2008.
On December 19, 2008, as part of the CPP, we entered into a Letter Agreement (including the Securities
Purchase Agreement – Standard Terms incorporated by reference therein, the “Purchase Agreement”) with the U.S.
Treasury pursuant to which we issued and sold to the U.S. Treasury (i) 70,000 shares of the our Fixed Rate Cumulative
Perpetual Preferred Stock Series B having a liquidation preference of $1,000 per share (the “Series B Preferred Stock”),
and (ii) a ten-year warrant (the “Warrant”) to purchase up to 751,611 shares of the our common stock, par value $0.01
per share (“Common Stock”), at an initial price of $13.97 per share, for an aggregate purchase price of $70.0 million in
cash.
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The Series B Preferred Stock qualifies as Tier I capital under the risk-based capital guidelines of the OTS (“Tier
1 Capital”) and will pay cumulative dividends at a rate of 5% per annum for the first five years following issuance, and
9% per annum thereafter. Dividends are payable on the Series B Preferred Stock quarterly and are payable on February
15, May 15, August 15 and November 15 of each year. If we fail to pay a total of six dividend payments on the Series B
Preferred Stock, whether or not consecutive, holders of the Series B Preferred Stock will have the right to elect two
directors to our board of directors until we have paid all such dividends that we had failed to pay. The Series B Preferred
Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends and
distributions and amounts payable upon liquidation and winding up of the Company.
We may redeem the Series B Preferred in whole or in part at any time following February 15, 2012. Prior to that
date, the Series B Preferred Stock may be redeemed in whole or in part only with the proceeds of a Qualified Equity
Offering (as defined below) that results in proceeds to us of not less than $17.5 million. A “Qualified Equity Offering” is
the sale by us for cash, following the date of issuance of the Series B Preferred Stock, of Common Stock or perpetual
preferred stock that qualifies as Tier 1 Capital. Any redemption of the Series B Preferred Stock, whether before or after
February 15, 2012, is subject to the consent of the OTS.
The Warrant expires ten years from the issuance date and is immediately exercisable and transferable. If, on or
prior to December 31, 2009, we receive from one or more Qualified Equity Offerings gross proceeds of at least $70.0
million, one-half of the Warrants will be retired unexercised. The U.S. Treasury has agreed not to transfer one-half of the
Warrant prior to the earlier of the date of closing of such Qualified Equity Offering and December 31, 2009. The U.S.
Treasury has also agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise
of the Warrant.
The Purchase Agreement contains limitations on the payment of dividends on and the repurchase of the
Common Stock and certain preferred stock. The Purchase Agreement also requires that, until such time as the U.S.
Treasury ceases to own any securities acquired from us thereunder, we will take all necessary action to ensure that
benefit plans with respect to senior executive officers comply with Section 111(b) of EESA as implemented by any
guidance or regulation under Section 111(b) of EESA that has been issued and is in effect as of the date of issuance of
the Series B Preferred Stock and the Warrant and not adopt any benefit plans with respect to, or which cover, senior
executive officers that do not comply with EESA. Our senior executive officers have consented to the foregoing.
The Series B Preferred Stock and the Warrant were issued in a private placement exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended. We agreed to register the resale of the Series B
Preferred Stock and the Warrant, and the issuance of Common Stock upon exercise of the Warrant, as soon as
practicable. We have registered these securities with the SEC, with the registration statement being declared effective on
February 20, 2009.
The EESA immediately raised the FDIC insurance limit from $100,000 to $250,000 to be effective through
December 31, 2009.
The EESA also provides that gains or losses from the sale or exchange of Fannie Mae and Freddie Mac
preferred stocks by an applicable institution (which includes banks, thrifts and their holding companies) shall be treated
as ordinary gains or losses. Previously, these gains or losses were treated as capital gains or losses. This provision will
allow us to deduct losses we may realize on the sale of the preferred stocks of Fannie Mae and Freddie Mac that we hold.
Prior to the passage of the Act, the tax deductibility of these losses for us was limited to offset capital gains. Due to the
provisions of the tax code, we have a limited ability to realize capital gains other than from the sale of our facilities.
The EESA also reaffirms the authority of the SEC to suspend the application of SFAS No. 157, which governs
fair value accounting. The Act also requires the SEC to conduct a study on fair value accounting and to consider, at a
minimum, the effects of such accounting standards on a financial institution’s balance sheet, the impacts of such
accounting on bank failures in 2008, and alternative accounting standards to those provided in SFAS No. 157. In
response to this provision of the Act, the SEC and FASB have issued additional guidance of fair value accounting in an
inactive market.
The FDIC adopted the TLGP to free up credit markets and maintain confidence in uninsured transaction
accounts. The FDIC will guarantee senior unsecured debt issued between October 14, 2008 and October 31, 2009. The
insurance will run through June 30, 2012. The annualized guarantee fee will be a 75 basis point charge of the debt issued.
All FDIC-insured institutions will be eligible for the program, except “troubled” institutions and a small number of
grandfathered savings and loan holding companies with commercial owners. The FDIC will also provide full insurance
coverage for non-interest bearing transaction accounts at insured institutions through December 31, 2009. The cost will
be a 10 basis point annualized charge on amounts in excess of $250,000. Both programs had no cost for the first 30 days.
After that, institutions remained in the program unless they notified the FDIC that they were opting out of one or both
programs by December 12, 2008. For those institutions that opted out of the program, they will not be allowed to opt
38
back in. Participating banks in both programs will be subject to enhanced supervisory oversight to prevent rapid growth
or excessive risk-taking. If the costs of the programs are not covered by the special fees, all FDIC-insured institutions
will be assessed even if they did not participate in the programs. The Banks have each opted to participate in these
programs. We are unable to estimate the costs, if any, of these programs to the Banks.
The American Recovery and Reinvestment Act of 2009
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “Stimulus Act”) was signed
into law. The purpose of the Stimulus Act is to provide stimulus for the U.S. economy The Stimulus Act provides
additional restrictions and standards throughout the period during which our obligations under the CPP Purchase
Agreement remain outstanding, including:
•
•
•
•
•
•
•
•
•
Limits on compensation incentives for risk taking by senior executive officers;
Recovery of any compensation paid based on inaccurate financial information;
Prohibition on “Golden Parachute Payments”;
Prohibition on compensation plans that would encourage manipulation of reported earnings to
enhance the compensation of employees;
Publicly registered TARP recipients must establish a board compensation committee comprised
entirely of independent directors, for the purpose of reviewing employee compensation plans;
Prohibition on bonuses, retention awards, or incentive compensation, except for payments of long
term restricted stock;
Limitation on luxury expenditures;
TARP recipients may be required to permit a separate shareholder vote to approve the
compensation of executives, as disclosed pursuant to the SEC’s compensation disclosure rules;
and
The chief executive officer and chief financial officer of each TARP recipient will be required to
provide a written certification of compliance with these standards to the SEC.
The Stimulus Act requires the Secretary to issue additional regulations governing executive compensation at institutions
participating in the CPP, such as us. At this time, since the Secretary has not issued the new regulations, we are unable to
determine the impact of these regulations, if any, on our operations.
Federal Securities Laws
Our Common Stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). We are subject to the information and reporting requirements, regulations governing
proxy solicitations, insider trading restrictions and other requirements applicable to companies whose stock is registered
under the Exchange Act.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “2002 Act”), enacted on July 30, 2002,
aims to increase the reliability of financial information by, among other things, (1) heightening accountability of Chief
Executive Officers and Chief Financial Officers to issue accurate financial statements, (2) increasing the authority and
independence of corporate audit committees, (3) creating a new regulatory entity to oversee the activities of accountants
that audit public companies, (4) prohibiting activities and relationships that may compromise the independence of
auditors, (5) increasing required financial statement disclosures, and (6) providing tough new penalties for issuing
noncompliant financial statements and for other violations related to securities laws.
In furtherance of the 2002 Act, the SEC has issued rules. Compliance with these rules, and the related corporate
governance rules adopted by NASDAQ with the approval of the SEC, has, and will continue to, increase costs to the
Company, including, but not limited to, fees to our independent accountants, consultants, legal fees and Board service
fees, and may require additions to staff. To date, compliance with the 2002 Act has not had a material effect on our
results of operations. We cannot assure you that compliance with the 2002 Act and its regulations will not have a
material effect on our business or operations in the future.
Available Information
We are a reporting company and file annual, quarterly and current reports, proxy statements and other
information with the SEC. We make available free of charge on or through our web site at www.flushingsavings.com
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC filings are also
available to the public free of charge over the Internet at the SEC’s web site at http://www.sec.gov.
39
You may also read and copy any document we file at the SEC’s public reference room located at 100 F. Street,
N.E., Room 1580, Washington, D.C. 20549. You may request copies of these documents by writing to the SEC and
paying a fee for the copying cost.
Item 1A. Risk Factors.
In addition to the other information contained in this Annual Report, the following factors and other
considerations should be considered carefully in evaluating us and our business.
Changes in Interest Rates May Significantly Impact Our Financial Condition and Results of Operations
Like most financial institutions, our results of operations depend to a large degree on our net interest income.
When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, a significant increase in
market interest rates could adversely affect net interest income. Conversely, a significant decrease in market interest rates
could result in increased net interest income. As a general matter, we seek to manage our business to limit our overall
exposure to interest rate fluctuations. However, fluctuations in market interest rates are neither predictable nor
controllable and may have a material adverse impact on our operations and financial condition. Additionally, in a rising
interest rate environment, a borrower’s ability to repay adjustable rate mortgages can be negatively affected as payments
increase at repricing dates.
Prevailing interest rates also affect the extent to which borrowers repay and refinance loans. In a declining
interest rate environment, the number of loan prepayments and loan refinancing may increase, as well as prepayments of
mortgage-backed securities. Call provisions associated with our investment in U.S. government agency and corporate
securities may also adversely affect yield in a declining interest rate environment. Such prepayments and calls may
adversely affect the yield of our loan portfolio and mortgage-backed and other securities as we reinvest the prepaid funds
in a lower interest rate environment. However, we typically receive additional loan fees when existing loans are
refinanced, which partially offset the reduced yield on our loan portfolio resulting from prepayments. In periods of low
interest rates, our level of core deposits also may decline if depositors seek higher-yielding instruments or other
investments not offered by us, which in turn may increase our cost of funds and decrease our net interest margin to the
extent alternative funding sources are utilized. An increasing interest rate environment would tend to extend the average
lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect net interest
income. In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which could
adversely affect our net interest income if rates were to subsequently decline. Additionally, adjustable rate mortgage
loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount the interest rate
can increase or decrease at repricing dates. Significant increases in prevailing interest rates may significantly affect
demand for loans and the value of bank collateral. See “— Local Economic Conditions.”
Our Lending Activities Involve Risks that May Be Exacerbated Depending on the Mix of Loan Types
Multi-family residential, commercial real estate and one-to-four family mixed use property mortgage loans and
commercial business loans (the increased origination of which is part of management’s strategy), and construction loans,
are generally viewed as exposing the lender to a greater risk of loss than fully underwritten one-to-four family residential
mortgage loans and typically involve higher principal amounts per loan. Repayment of multi-family residential,
commercial real estate and one-to-four family mixed-use property mortgage loans generally is dependent, in large part,
upon sufficient income from the property to cover operating expenses and debt service. Repayment of commercial
business loans is contingent on the successful operation of the related business. Repayment of construction loans is
contingent upon the successful completion and operation of the project. Changes in local economic conditions and
government regulations, which are outside the control of the borrower or lender, also could affect the value of the
security for the loan or the future cash flow of the affected properties. We continually review the composition of our
mortgage loan portfolio to manage the risk in the portfolio.
In addition, from time-to-time, we originate one-to-four family residential mortgage loans without verifying the
borrower’s level of income. These loans involve a higher degree of risk as compared to our other fully underwritten one-
to-four family residential mortgage loans. These risks are mitigated by our policy to generally limit the amount of one-
to-four family residential mortgage loans to 80% of the appraised value or sale price, whichever is less, as well as
charging a higher interest rate than when the borrower’s income is verified. These loans are not as readily saleable in the
secondary market as our other fully underwritten loans, either as whole loans or when pooled or securitized.
There can be no assurance that we will be able to successfully implement our business strategies with respect to
these higher-yielding loans. In assessing our future earnings prospects, investors should consider, among other things,
our level of origination of one-to-four family residential mortgage loans (including loans originated without verifying the
borrowers income), our emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use
40
property mortgage loans, and commercial business and construction loans, and the greater risks associated with such
loans. See “Business — Lending Activities” in Item 1 of this Annual Report.
The Markets in Which We Operate Are Highly Competitive
We face intense and increasing competition both in making loans and in attracting deposits. Our market area has
a high density of financial institutions, many of which have greater financial resources, name recognition and market
presence than us, and all of which are our competitors to varying degrees. Particularly intense competition exists for
deposits and in all of the lending activities we emphasize. Our competition for loans comes principally from commercial
banks, other savings banks, savings and loan associations, mortgage banking companies, insurance companies, finance
companies and credit unions. Management anticipates that competition for mortgage loans will continue to increase in
the future. Our most direct competition for deposits historically has come from other savings banks, commercial banks,
savings and loan associations and credit unions. In addition, we face competition for deposits from products offered by
brokerage firms, insurance companies and other financial intermediaries, such as money market and other mutual funds
and annuities. Consolidation in the banking industry and the lifting of interstate banking and branching restrictions have
made it more difficult for smaller, community-oriented banks, such as us, to compete effectively with large, national,
regional and super-regional banking institutions. In November 27, 2006, we launched an internet branch,
“iGObanking.com®” a division of the Savings Bank, to provide us with access to markets outside our geographic
locations. The internet banking arena also has many larger financial institutions which have greater financial resources,
name recognition and market presence than we do.
Notwithstanding the intense competition, we have been successful in increasing our loan portfolios and deposit
base. However, no assurances can be given that we will be able to continue to increase our loan portfolios and deposit
base, as contemplated by management’s current business strategy.
Our Results of Operations May Be Adversely Affected by Changes in National and/or Local Economic
Conditions
Our operating results are affected by national and local economic and competitive conditions, including
changes in market interest rates, the strength of the local economy, government policies and actions of regulatory
authorities. During 2008, the national and local economy continued the slowdown that was seen at the end of 2007, with
the national gross domestic product being negative in the third and fourth quarters of 2008, resulting in a consensus that
the nation’s economy is in a recession. The housing market in the United States continued to see a significant slowdown
during 2008, and foreclosures of single family homes rose to levels not seen in the prior five years. These economic
conditions can result in borrowers defaulting on their loans, or withdrawing their funds on deposit at the Banks to meet
their financial obligations. While we have seen an increase in deposits, we have also seen a significant increase in
delinquent loans, resulting in an increase in our provision for possible loan losses in 2008. We cannot predict the effect
of these economic conditions on our financial condition or operating results.
A decline in the local economy, national economy or metropolitan area real estate market could adversely affect
our financial condition and results of operations, including through decreased demand for loans or increased competition
for good loans, increased non-performing loans and loan losses and resulting additional provisions for loan losses and for
losses on real estate owned. Although management believes that the current allowance for loan losses is adequate in
light of current economic conditions, many factors could require additions to the allowance for loan losses in future
periods above those currently maintained. These factors include: (1) adverse changes in economic conditions and
changes in interest rates that may affect the ability of borrowers to make payments on loans, (2) changes in the financial
capacity of individual borrowers, (3) changes in the local real estate market and the value of our loan collateral, and (4)
future review and evaluation of our loan portfolio, internally or by regulators. The amount of the allowance for loan
losses at any time represents good faith estimates that are susceptible to significant changes due to changes in appraisal
values of collateral, national and regional economic conditions, prevailing interest rates and other factors. See “Business
— General — Allowance for Loan Losses” in Item 1 of this Annual Report.
These same factors have caused delinquencies to increase for the mortgages which are the collateral for the
mortgage-backed securities we hold in our investment portfolio. Combining the increased delinquencies with liquidity
problems in the market has resulted in a decline in the market value of our investments in mortgage-backed securities.
There can be no assurance that the decline in the market value of these investments will not result in an other-than-
temporary impairment charge being recorded in our financial statements.
Changes in Laws and Regulations Could Adversely Affect Our Business
From time to time, legislation is enacted or regulations are promulgated that have the effect of increasing the
cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks
and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of
41
banks and other financial institutions are frequently made in Congress, in the New York legislature and before various
bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such
changes might have on us. For a discussion of regulations affecting us, see “Business —Regulation” and “Business—
Federal, State and Local Taxation” in Item 1 of this Annual Report.
Certain Anti-Takeover Provisions May Increase the Costs to or Discourage an Acquiror
On September 5, 2006, the Board of Directors renewed our Stockholder Rights Plan, (the “Rights Plan”), which
was originally adopted on and had been in place since September 17, 1996 and had been scheduled to expire on
September 30, 2006. The Rights Plan was designed to preserve long-term values and protect stockholders against
inadequate offers and other unfair tactics to acquire control of us. Under the Rights Plan, each stockholder of record at
the close of business on September 30, 2006 received a dividend distribution of one right to purchase from the Company
one one-hundredth of a share of Series A junior participating preferred stock at a price of $65. The rights will become
exercisable only if a person or group acquires 15% or more of our common stock or commences a tender or exchange
offer which, if consummated, would result in that person or group owning at least 15% of the Common Stock (the
“acquiring person or group”). In such case, all stockholders other than the acquiring person or group will be entitled to
purchase, by paying the $65 exercise price, Common Stock (or a common stock equivalent) with a value of twice the
exercise price. In addition, at any time after such event, and prior to the acquisition by any person or group of 50% or
more of the Common Stock, the Board of Directors may, at its option, require each outstanding right (other than rights
held by the acquiring person or group) to be exchanged for one share of Common Stock (or one common stock
equivalent). If a person or group becomes an acquiring person and we are acquired in a merger or other business
combination or sell more than 50% of our assets or earning power, each right will entitle all other holders to purchase, by
payment of $65 exercise price, common stock of the acquiring company with a value of twice the exercise price. The
renewed rights plan expires on September 30, 2016.
The Rights Plan, as well as certain provisions of our certificate of incorporation and bylaws, the Savings Bank’s
federal stock charter and bylaws, certain federal regulations and provisions of Delaware corporation law, and certain
provisions of remuneration plans and agreements applicable to employees and officers of the Bank may have anti-
takeover effects by discouraging potential proxy contests and other takeover attempts, particularly those which have not
been negotiated with the Board of Directors. The Rights Plan and those other provisions, as well as applicable
regulatory restrictions, may also prevent or inhibit the acquisition of a controlling position in the Common Stock and
may prevent or inhibit takeover attempts that certain stockholders may deem to be in their or other stockholders’ interest
or in our interest, or in which stockholders may receive a substantial premium for their shares over then current market
prices. The Rights Plan and those other provisions may also increase the cost of, and thus discourage, any such future
acquisition or attempted acquisition, and would render the removal of the current Board of Directors or management of
the Company more difficult.
We May Not Be Able To Successfully Implement Our Commercial Business Banking Initiative
Our strategy includes a transition to a more “commercial-like” banking institution. We have developed a
complement of deposit, loan and cash management products to support this initiative, and intend to expand these product
offerings. A business banking unit has been established to build relationships in order to obtain lower-costing deposits,
generate fee income, and originate commercial business loans. The success of this initiative is dependent on developing
additional product offerings, and building relationships to obtain the deposits and loans. There can be no assurance that
we will be able to successfully implement our business strategy with respect to this initiative.
The U.S. Government’s Plan To Purchase Large Amounts Of Illiquid, Mortgage-Backed And Other Securities
From Financial Institutions May Not Be Effective And/Or It May Not Be Available To Us.
In response to the financial crises affecting the banking system and financial markets and the going concern
threats to the ability of investment banks and other financial institutions, the U.S. Congress has recently adopted the
EESA. One of the features of the EESA is the establishment of a TARP, under which the U.S. Treasury Department
may purchase up to $700 billion of troubled assets, including mortgage-backed and other securities, from financial
institutions for the purpose of stabilizing the financial markets. There can be no assurance as to what impact it will have
on the financial markets, including the extreme levels of volatility currently being experienced. The failure of the
U.S. government to execute this program expeditiously could have a material adverse effect on the financial markets,
which in turn could materially and adversely affect our business, financial condition and results of operations. It is
unclear what effects, if any, the TARP will have. On November 12, 2008, U.S. Treasury Department Secretary Henry
Paulson stated that the government will not use any of the $700 billion that Congress granted under the EESA to
purchase troubled assets. This decision is currently under review by the new administration, and may be subject to
significant revision.
42
We May Not Pay Dividends On Our Common Stock.
Holders of shares of our common stock are only entitled to receive such dividends as our board of directors may
declare out of funds legally available for such payments. Although we have historically declared cash dividends on our
common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. This
could adversely affect the market price of our common stock. Also, participation in the CPP limits our ability to increase
our dividend or to repurchase our common stock for so long as any securities issued under the CPP remain outstanding,
as discussed in greater detail below.
Our Participation In The U.S. Treasury’s Capital Purchase Program Restricts Our Ability To Declare Or Pay
Dividends And Repurchase Shares and Access The Capital Markets.
On December 19, 2008, pursuant to a Purchase Agreement, we issued to the U.S. Treasury for aggregate
consideration of $70.0 million (i) 70,000 shares of Series B preferred stock, par value $0.01 per share and liquidation
preference $1,000 per share, and (ii) a Warrant to purchase up to 751,611 shares of the Company’s common stock, par
value $0.01 per share, at an initial price of $13.97 per share. Pursuant to the terms of the Purchase Agreement, our
ability to declare or pay dividends on any of our shares is limited. Specifically, we are unable to declare dividend
payments on common, junior preferred or pari passu preferred shares if we are in arrears on the dividends on the Series B
Preferred Stock. Further, we are not permitted to increase dividends on our common stock above the amount of the last
quarterly cash dividend per share declared prior to October 14, 2008 without the U.S. Treasury’s approval until the third
anniversary of the investment unless all of the Series B Preferred Stock has been redeemed or transferred. In addition,
our ability to repurchase our common shares is restricted. U.S. Treasury consent generally is required for any stock
repurchase until the third anniversary of the investment by the U.S. Treasury unless all of the Series B Preferred Stock
has been redeemed or transferred. Further, common, junior preferred or pari passu preferred shares may not be
repurchased if we are in arrears on the Series B Preferred Stock dividends. Finally, if the U.S. Treasury were to transfer
our securities to a third party, it is likely that the agreement providing for such transfer would grant the new holders of
such securities certain registration rights which, in certain circumstances, impose lock-up periods during which we
would be unable to issue equity securities.
Our Participation In The U.S. Treasury’s Capital Purchase Program Places Restrictions On Executive
Compensation
Pursuant to the terms of the Purchase Agreement, we adopted the U.S. Treasury’s standards for executive
compensation and corporate governance for the period during which the U.S. Treasury holds the equity issued pursuant
to the Purchase Agreement, including the common stock that may be issued pursuant to the Warrant. These standards
generally apply to the Company’s Chief Executive Officer, Chief Financial Officer and the three next most highly
compensated executive officers. The standards include (1) ensuring that incentive compensation for senior executives
does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required
clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or
other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to
senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for
each senior executive. In particular, the change to the deductibility limit on executive compensation will likely increase
the overall cost of our compensation programs in future periods. Since the Warrant has a ten-year term, we could
potentially be subject to the executive compensation and corporate governance restrictions for a ten-year time period.
Depending upon the limitations placed on incentive compensation by the final regulations issued under the Stimulus Act,
it is possible that we may be unable to create a compensation structure that permits us to retain our highest performing
employees. If this were to occur, our businesses and results of operations could be adversely affected, perhaps materially.
There Can Be No Assurance That The Emergency Economic Stabilization Act Of 2008 And Other Recently
Enacted Government Programs Will Help Stabilize The U.S. Financial System.
There are no assurances as to what impact the EESA, the Stimulus Act, and similar programs will have on the
financial markets, including the extreme levels of volatility and limited credit availability currently being experienced.
The failure of the EESA, the Stimulus Act and other programs to stabilize the financial markets and a continuation or
worsening of current financial market conditions could materially and adversely affect our businesses, financial
condition, results of operations, access to credit or the trading price of our common stock. The EESA, the Stimulus Act
and similar programs are relatively new initiatives and, as such, are subject to change and evolving interpretation. There
can be no assurances as to the effects that any further changes will have on the effectiveness of the government’s efforts
to stabilize the credit markets or on our businesses, financial condition or results of operations.
43
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At December 31, 2008, the Savings Bank conducted its business through 14 full-service offices and its internet
branch, “iGObanking.com®”. The Commercial Bank conducted its business through one full-service branch office which
it shares with the Savings Bank. The Company’s executive offices are located in Lake Success, in Nassau County, NY.
In January 2009, the Savings Bank opened its fifteenth full-service office, a branch office that is shared with the
Commercial Bank. In addition, the Commercial Bank began operating a branch in Brooklyn in a location that is shared
with an existing branch of the Savings Bank in January 2009.
Flushing Financial Corporation neither owns nor leases any property but instead uses the premises and
equipment of the Savings Bank.
Item 3. Legal Proceedings.
We are involved in various legal actions arising in the ordinary course of our business which, in the aggregate,
involve amounts which are believed by management to be immaterial to our financial condition, results of operations and
cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
44
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Flushing Financial Corporation Common Stock is traded on the NASDAQ Global Select Market® under the
symbol “FFIC.” As of December 31, 2008, we had approximately 779 shareholders of record, not including the number
of persons or entities holding stock in nominee or street name through various brokers and banks. Our stock closed at
$11.96 on December 31, 2008. The following table shows the high and low sales price of the Common Stock during the
periods indicated. Such prices do not necessarily reflect retail markups, markdowns, or commissions. See Note 11 of
Notes to Consolidated Financial Statements in Item 8 of this Annual Report for dividend restrictions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$
18.54
20.31
21.50
17.70
$
2008
Low
12.51
16.30
14.39
10.88
Dividend
0.13
$
0.13
0.13
0.13
High
$
17.77
17.20
18.68
17.88
$
2007
Low
15.30
15.51
14.41
14.88
Dividend
0.12
$
0.12
0.12
0.12
As a condition of the Company's participation in the U.S. Treasury's CPP, our ability to declare or pay
dividends on any of our shares is limited. Specifically, we are unable to declare dividend payments on common, junior
preferred or pari passu preferred shares if we are in arrears on the dividends on the Series B Preferred Stock. Further, we
are not permitted to increase dividends on our common stock above the amount of the last quarterly cash dividend per
share declared prior to October 14, 2008 without the U.S. Treasury’s approval until the third anniversary of the
investment unless all of the Series B Preferred Stock has been redeemed or transferred.
The following table sets forth information regarding the shares of common stock repurchased by us during the
quarter ended December 31, 2008.
Total
Number
of Shares
Purchased
Average Price
Paid per Share
-
-
-
-
$
$
-
-
-
-
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
-
-
-
-
Maximum
Number of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
362,050
362,050
362,050
Period
October 1 to October 31, 2008
November 1 to November 30, 2008
December 1 to December 31, 2008
Total
Our current common stock repurchase program was approved by the Company’s Board of Directors on August
17, 2004. This repurchase program authorized the repurchase of 1,000,000 common shares. The repurchase program
does not have an expiration date or a maximum dollar amount that may be paid to repurchase the common shares. Stock
repurchases under this program will be made from time to time, on the open market or in privately negotiated
transactions, at the discretion of the management of the Company. As a condition of the Company's participation in the
U.S. Treasury's CPP, shares may not be repurchased for the next three years without approval of the U.S. Treasury
unless the preferred shares are redeemed or transferred to a third party. The Company has not requested approval from
the U.S. Treasury to repurchase shares.
45
Stock Performance Graph
The following graph shows a comparison of cumulative total stockholder return on the Company’s common
stock since December 31, 2003 with the cumulative total returns of a broad equity market index as well as two published
industry indices. The broad equity market index chosen was the Nasdaq Composite. The published industry indices
chosen were the SNL Thrift Index and SNL Mid-Atlantic Thrift Index. The SNL Mid-Atlantic Thrift Index has been
included in the Company’s Stock Performance Graph because the Company believes it provides valuable comparative
information reflecting the Company’s geographic peer group. The SNL Thrift Index has been included in the Stock
Performance because it uses a broader group of thrifts and therefore more closely reflects the Company’s size. The
Company believes that both geographic area and size are important factors in analyzing the Company’s performance
against its peers. The graph below reflects historical performance only, which is not indicative of possible future
performance of the common stock.
Total Return Performance
Flushing Financial Corporation
NASDAQ Composite
SNL Thrift
SNL Mid-Atlantic Thrift
175
150
125
100
75
50
25
e
u
l
a
V
x
e
d
n
I
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
The total return assumes $100 invested on December 31, 2003 and all dividends reinvested through the end of
the Company’s fiscal year ended December 31, 2008. The performance graph above is based upon closing prices on the
trading date specified.
Index
Flushing Financial Corporation
NASDAQ Composite
SNL Thrift Index
SNL Mid-Atlantic Thrift Index
12/31/03
100.00
100.00
100.00
100.00
12/31/04
111.82
108.59
111.42
103.03
12/31/05
88.83
110.08
115.35
100.46
12/31/06
99.96
120.56
134.46
117.15
12/31/07
96.83
132.39
80.67
96.45
12/31/08
74.55
78.72
51.34
79.93
Period Ending
46
Item 6. Selected Financial Data.
At or for the years ended December 31,
2008
2007
2006
2005
2004
(Dollars in thousands, except per share data)
Selected Financial Condition Data
Total assets
Loans, net
Securities available for sale
Deposits
Borrowed funds
Total stockholders' equity
Common stockholders' equity
Book value per common share (1)
Selected Operating Data
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Non-interest income:
Net gains (losses) on sales of securities
and loans
Other-than-temporary impairment charge
on securities
Net gain from fair value adjustments
Other income
Total non-interest income
Non-interest expense
Income before income tax provision
Income tax provision
Net income
$
$
$
$
$
3,949,471
2,960,662
747,261
2,468,834
1,138,949
301,492
231,492
10.70
3,354,519
2,702,118
440,100
2,025,447
1,072,551
233,654
233,654
10.96
2,836,521
2,324,748
330,587
1,764,150
832,413
218,415
218,415
10.34
2,353,208
1,881,876
337,761
1,467,287
689,710
176,467
176,467
9.07
2,058,044
1,516,507
435,745
1,292,797
584,736
160,653
160,653
8.35
$
$
$
$
$
$
216,701
128,972
87,729
5,600
$
193,562
122,624
70,938
-
$
158,384
90,680
67,704
-
$
132,439
64,229
68,210
-
$
118,724
52,233
66,491
-
82,129
70,938
67,704
68,210
66,491
354
700
813
(45)
206
(27,575)
20,090
14,099
6,968
54,781
34,316
12,057
22,259
$
(4,710)
2,685
11,578
10,253
50,076
31,115
10,930
20,185
$
-
-
8,982
9,795
42,742
34,757
13,118
21,639
-
-
6,692
6,647
36,264
38,593
15,051
23,542
$
$
-
-
5,737
5,943
35,389
37,045
14,396
22,649
$
Basic earnings per common share (2)
Diluted earnings per common share (2)
Dividends declared per common share (2)
Dividend payout ratio
$
$
$
1.11
1.10
0.52
46.9%
$
$
$
1.03
1.02
0.48
46.6%
$
$
$
1.16
1.14
0.44
37.9%
$
$
$
1.34
1.31
0.40
29.9%
$
$
$
1.30
1.25
0.35
26.9%
(Footnotes on the following page)
47
At or for the years ended December 31,
2008
2007
2006
2005
2004
Selected Financial Ratios and Other Data
Performance ratios:
Return on average assets
Return on average equity
Average equity to average assets
Equity to total assets
Interest rate spread
Net interest margin
Non-interest expense to average assets
Efficiency ratio
Average interest-earning assets to average
interest-bearing liabilities
Regulatory capital ratios: (3)
Tangible capital
Core capital
Total risk-based capital
Asset quality ratios:
Non-performing loans to gross loans (4)
Non-performing assets to total assets (5)
Net charge-offs to average loans
Allowance for loan losses to gross loans
Allowance for loan losses to total
non-performing assets (5)
Allowance for loan losses to total
non-performing loans (4)
Full-service customer facilities
%
0.62
9.55
6.54
7.63
2.43
2.60
1.54
58.40
%
0.66
9.15
7.19
6.97
2.23
2.44
1.63
60.20
%
0.84
11.14
7.58
7.70
2.54
2.78
1.67
55.21
%
1.07
14.27
7.47
7.50
3.03
3.24
1.64
48.03
%
1.13
14.97
7.56
7.81
3.30
3.49
1.77
48.79
1.04
x
1.05
x
1.06
x
1.07
x
1.07
x
%
%
7.92
7.92
13.02
1.35
1.03
0.04
0.37
27.09
27.59
14
%
%
7.27
7.27
11.20
0.22
0.18
0.02
0.25
%
%
6.91
6.91
10.99
0.13
0.11
-
0.30
%
%
7.14
7.14
12.12
0.13
0.10
0.01
0.34
%
%
7.89
7.89
14.01
0.06
0.04
-
0.43
112.57
225.72
260.39
717.29
112.57
225.72
260.39
717.29
14
12
9
10
(1) Calculated by dividing common stockholders’ equity of $231.5 million and $233.7 million at December 31, 2008 and 2007, respectively, by
21,625,709 and 21,321,564 shares outstanding at December 31, 2008 and 2007, respectively. Common stockholders’ equity is total stockholders’
equity less the liquidation preference value of preferred shares outstanding.
(2) The shares held in the Company’s Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share.
Unvested restricted stock and unvested restricted stock unit awards are not included in basic earnings per share calculations, but are included in
diluted earnings per share calculations.
(3) Represents Flushing Savings Bank’s capital ratios, which exceeded all minimum regulatory capital requirements during the periods presented.
(4) Non-performing loans consist of non-accrual loans and loans delinquent 90 days or more that are still accruing.
(5) Non-performing assets consist of non-performing loans, real estate owned and non-performing investment securities.
48
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this discussion and analysis, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing
Financial Corporation and our consolidated subsidiaries, including Flushing Savings Bank, FSB (the “Savings Bank”)
and Flushing Commercial Bank (the “Commercial Bank”), collectively, the “Banks.”
General
We are a Delaware corporation organized in May 1994 at the direction of the Savings Bank. The Savings Bank
was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Savings Bank converted to a
federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank,
FSB. The Savings Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings
bank in 1995. As a federal savings bank, the Savings Bank’s primary regulator is the Office of Thrift Supervision
(“OTS”). The Banks’ deposits are insured to the maximum allowable amount by the Federal Deposit Insurance
Corporation (“FDIC”). The Savings Bank owns four subsidiaries: Flushing Commercial Bank, Flushing Preferred
Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.
Flushing Financial Corporation also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust
III, and Flushing Financial Capital Trust IV (the “Trusts”), special purpose business trusts formed during 2007 to issue a
total of $60.0 million of capital securities, and $1.9 million of common securities (which are the only voting securities).
Flushing Financial Corporation owns 100% of the common securities of the Trusts. The Trusts used the proceeds from
the issuance of these securities to purchase junior subordinated debentures from Flushing Financial Corporation.
Flushing Financial Corporation previously owned Flushing Financial Capital Trust I (“Trust I”), which was a special
purpose business trust formed in 2002 similar to the Trusts discussed above. Trust I called its outstanding capital
securities during July 2007, and was then liquidated. In accordance with the requirements of FASB Interpretation No.
46R, the Trusts and Trust I are not included in our consolidated financial statements.
The following discussion of financial condition and results of operations includes the collective results of the
Flushing Financial Corporation and its subsidiaries (collectively, the “Company”), but reflects principally the Savings
Bank’s activities. Management views the Company as operating as a single unit, a community savings bank. Therefore,
segment information is not provided.
On June 30, 2006, we 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 $42.5 million, which consisted of $14.7 million of cash, common stock valued at $26.6
million, and $1.3 million assigned to the fair value of Atlantic Liberty’s outstanding stock options. 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 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, we issued 1.6 million shares of
common stock, the value of which was determined based on the closing price of our common stock on the announcement
date of December 21, 2005, and two days prior to and after the announcement date. We acquired two branches in prime
areas of Brooklyn, New York, with $186.9 million in assets, $116.2 million in net loans and assumed $106.8 million in
deposits.
On November 27, 2006, we launched a new internet branch, iGObanking.com®, a division of the Savings
Bank. iGObanking.com® provides access to markets outside our geographic locations.
During 2007, the Savings Bank formed a wholly owned subsidiary, Flushing Commercial Bank, a New York
State chartered commercial bank, for the limited purpose of providing banking services to public entities including
counties, cities, towns, villages, school districts, libraries, fire districts and the various courts throughout the New York
metropolitan area. The Commercial Bank was formed in response to New York State law, which requires that municipal
deposits and state funds must be deposited into a bank or trust company as defined in New York State law. The Savings
Bank is not considered an eligible bank or trust company for this purpose.
On December 19, 2008 we entered into a Letter Agreement (including the Securities Purchase Agreement –
Standard Terms incorporated by reference therein, the “Purchase Agreement”) with the U.S. Treasury pursuant to which
we issued and sold to the U.S. Treasury (i) 70,000 shares of the our Fixed Rate Cumulative Perpetual Preferred Stock
Series B having a liquidation preference of $1,000 per share (the “Series B Preferred Stock”), and (ii) a ten-year warrant
(the “Warrant”) to purchase up to 751,611 shares of the our common stock, par value $0.01 per share, at an initial price
of $13.97 per share, for an aggregate purchase price of $70.0 million in cash. The Series B Preferred Stock qualifies as
Tier I capital under the risk-based capital guidelines of the OTS (“Tier 1 Capital”) and will pay cumulative dividends at a
rate of 5% per annum for the first five years following issuance, and 9% per annum thereafter. Dividends are payable on
the Series B Preferred Stock quarterly and are payable on February 15, May 15, August 15 and November 15 of each
49
year. If we fail to pay a total of six dividend payments on the Series B Preferred Stock, whether or not consecutive,
holders of the Series B Preferred Stock will have the right to elect two directors to our board of directors until we have
paid all such dividends that we had failed to pay. The Series B Preferred Stock has no maturity date and ranks senior to
the Common Stock with respect to the payment of dividends and distributions and amounts payable upon liquidation and
winding up of the Company. The Warrant expires ten years from the issuance date and is immediately exercisable and
transferable. The Purchase Agreement contains limitations on the payment of dividends on and the repurchase of the
Common Stock and certain preferred stock. The Purchase Agreement also requires that, until such time as the U.S.
Treasury ceases to own any securities acquired from us thereunder, we will take all necessary action to ensure that
benefit plans with respect to senior executive officers comply with Section 111(b) of EESA as implemented by any
guidance or regulation under Section 111(b) of EESA that has been issued and is in effect as of the date of issuance of
the Series B Preferred Stock and the Warrant and not adopt any benefit plans with respect to, or which cover, senior
executive officers that do not comply with EESA. Our senior executive officers have consented to the foregoing.
Overview
Our 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 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. We also originate certain other consumer loans.
Our results of operations depend primarily on net interest income, which is the difference between the income
earned on its interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our
interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average
cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as
compared to the average balance of interest-bearing liabilities. We also generate non-interest income from loan fees,
service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life
Insurance (“BOLI”), dividends on Federal Home Bank of New York (“FHLB-NY”) stock and net gains and losses on
sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits,
occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of
operations also can be significantly affected by our periodic provision for loan losses and specific provision for losses on
real estate owned.
Management Strategy. Our strategy is to continue our focus on being an institution serving consumers,
businesses, and governmental units in our local markets. In furtherance of this objective, we intend to: (1) continue our
emphasis on the origination of multi-family residential, commercial real estate and one-to-four family mixed-use
property mortgage loans, (2) transition from a traditional thrift to a more ‘commercial-like’ banking institution, (3)
increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens,
(4) maintain asset quality, (5) manage deposit growth and maintain a low cost of funds, utilizing the internet to grow
deposits, (6) cross sell to lending and deposit customers, (7) actively pursue deposits from local area government units,
(8) manage interest rate risk, (9) explore new business opportunities, and (10) manage capital. There can be no assurance
that we will be able to effectively implement this strategy. The Company’s strategy is subject to change by the Board of
Directors.
Multi-Family Residential, Commercial Real Estate and One-to-Four Family Lending. In recent years,
we have emphasized the origination of higher-yielding multi-family residential, commercial real estate and one-
to-four family mixed-use property mortgage loans. We expect to continue this emphasis on higher-yielding
mortgage loan products.
50
The following table shows loan originations and purchases during 2008, and loan balances as of
December 31, 2008.
Loan
Originations and
Purchases
Loan Balances
December 31,
2008
(Dollars in thousands)
Multi-family residential
Commercial real estate
One-to-four family ― mixed-use property
One-to-four family ― residential
Co-operative apartment
Construction
Small Business Administration
Taxi Medallion
Commercial Business and Other
$
153,023
182,357
118,270
119,622
800
30,673
10,303
7,101
45,451
$
999,185
752,120
751,952
238,711
6,566
103,626
19,671
12,979
69,759
Percent of
Gross Loans
%
33.81
25.46
25.45
8.08
0.22
3.51
0.67
0.44
2.36
Total
$
667,600
$
2,954,569
100.00
%
Our 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 our loan portfolio.
The greater risk associated with multi-family, commercial real estate and one-to-four family mixed-use property
mortgage loans could require us to increase our provisions for loan losses and to maintain an allowance for loan
losses as a percentage of total loans in excess of the allowance currently maintained. To date, we have not
experienced significant losses in our multi-family residential, commercial real estate and one-to-four family
mixed-use property mortgage loan portfolios, though we have increased our provisions for loan losses based on
our evaluation of losses inherent in the loan portfolio, which have increased due to the national and local
economic downturn in 2008.
Transition to a More ‘Commercial-like’ Banking Institution. We established a business banking unit
during 2006 staffed with a team of experienced commercial bankers. We have developed a complement of
deposit, loan and cash management products to support this initiative, and expanded these product offerings
during 2007. The business banking unit is responsible for building business relationships in order to obtain
lower-costing deposits, generate fee income, and originate commercial business loans. Building these business
relationships could provide us with a lower-costing source of funds and higher-yielding adjustable-rate loans,
which would help us manage our interest-rate risk. Commercial business loans are generally viewed as having a
higher risk than real estate loans, and could require us to maintain an allowance for loan losses as a percentage
of total loans in excess of the allowance currently maintained. To date, we have not experienced significant
losses in our commercial business loan portfolio, and have determined that, at this time, additional provisions
are not required.
Increase Our Commitment to the Multi-Cultural Marketplace, with a Particular Focus on the Asian
Community in Queens. We serve many diverse communities in the metropolitan area. Branches are staffed with
employees from their local neighborhoods who speak over 35 different languages, enabling residents of these
neighborhoods to speak to our banking specialists in the language they are familiar with and the customs they
are used to. We are active in many community organizations. We have an Asian Advisory Board to help
broaden our link to the community by providing guidance and fostering awareness of our active role in the local
community.
Maintain Asset Quality. By adherence to our strict underwriting standards, we have been able to
minimize net losses from impaired loans with net charge-offs of $1.2 million and $0.4 million for the years
ended December 31, 2008 and 2007, respectively. We seek to maintain our loans in performing status through,
among other things, strict collection efforts, and consistently monitoring non-performing assets in an effort to
return them to performing status. To this end, we review the quality of our loans and report to the Loan
Committee of the Board of Directors of the Savings Bank on a monthly basis. We have sold and may continue
to sell delinquent mortgage loans. We sold 32 delinquent mortgage loans totaling $13.6 million and 45
delinquent mortgage loans totaling $33.9 million during the years ended December 31, 2008 and 2007,
respectively. The terms of these loan sales included cash due upon closing of the sale, no contingencies or
recourse to us, servicing is released to the buyer and time is of the essence. We realized gross gains of $74,000
and gross losses of $224,000 on the sale of these loans in 2008. We realized gross gains of $332,000 and no
51
gross losses on the sale of these loans in 2007. There can be no assurances that we will continue this strategy in
future periods, or if continued, that we will be able to find buyers to pay adequate consideration. Non-
performing assets amounted to $40.7 million and $5.9 million at December 31, 2008 and 2007, respectively.
Non-performing assets as a percentage of total assets were 1.03% and 0.18% at December 31, 2008 and 2007,
respectively.
Manage Deposit Growth and Maintain Low Cost of Funds, Utilizing the Internet to Grow Deposits.
We have a relatively stable retail deposit base drawn from our market area through our full-service offices.
Although we seek to retain existing deposits and maintain depositor relationships by offering quality service
and competitive interest rates to our customers, we also seek to keep deposit growth within reasonable limits
and our strategic plan. In November 2006, we launched an internet branch, “iGObanking.com®” a division of
the Savings Bank, to compete for deposits from sources outside the geographic footprint of our full-service
offices. During 2007, the Savings Bank formed a 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 as an additional
source of deposits. We also obtain deposits through brokers and the CDARS® network. Management intends to
balance its goal to maintain competitive interest rates on deposits while seeking to manage its overall cost of
funds to finance its strategies. We generally rely on our deposit base as our principal source of funding. In
creating “iGObanking.com®”, our strategy is to reduce our reliance on wholesale borrowings. In addition, the
Banks are members of the FHLB-NY, which provides us with a source of borrowing. We also utilize reverse
purchase agreements, established with other financial institutions. These borrowings help us fund asset growth
and increase net interest income. During 2008, we realized an increase in due to depositors of $434.7 million
and an increase in borrowed funds of $66.4 million.
Cross Sell to Lending and Deposit Customers. A significant portion of our lending and deposit
customers do not have both their loans and deposits with us. We intend to focus on obtaining additional deposits
from our lending customers and originating additional loans to our deposit customers. Product offerings were
expanded in the past three years and are expected to be further expanded in 2009 to accommodate perceived
customer demands. In addition, specific employees are assigned responsibilities of generating these additional
deposits and loans by coordinating efforts between lending and deposit gathering departments.
Actively Pursue Deposits From Local Area Governmental Units. During 2007, we formed a 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 offers a full range of deposit products to
municipalities and New York State, similar to the products currently being offered by the Savings Bank, but
does not make loans. At December 31, 2008, the Commercial Bank had $211.8 million of deposits.
Manage Interest Rate Risk. We seek to manage our interest rate risk by actively reviewing the
repricing and maturities of our interest rate sensitive assets and liabilities. The mix of loans we originate (fixed
or ARM) is determined in large part by borrowers’ preferences and prevailing market conditions. We seek to
manage the interest rate risk of our loan portfolio by actively managing our security portfolio and borrowings.
By adjusting the mix of fixed and adjustable rate securities, as well as the maturities of the securities, we have
the ability to manage the combined interest rate sensitivity of our assets. See “- Interest Rate Sensitivity
Analysis.” Additionally, we seek to balance the interest rate sensitivity of our assets by managing the maturities
of our liabilities. During 2008, we extended the maturity of our borrowings as they matured, and focused on
attracting longer-term certificates of deposit and brokered deposits. In addition, management’s expectation is
that the new deposits generated from our internet branch, “iGObanking.com®,” will help to lessen our long
standing dependency on wholesale borrowings.
Explore New Business Opportunities. We have in the past increased growth through acquisitions of
financial institutions and branches of other financial institutions, and will continue to pursue growth through
acquisitions that are, or are expected to be within a reasonable time frame, accretive to earnings, as well as
evaluating the feasibility of opening additional branches. We have in the past opened new branches. In 2006,
the Company completed the acquisition of Atlantic Liberty Savings and opened a branch in Bayside, Queens.
Two branches were also opened in Queens in the first quarter of 2007, and one branch has been opened in
Nassau County in the first quarter of 2009. We plan to continue to seek and review potential acquisition
opportunities that complement our current business, are consistent with our strategy to build a bank that is
focused on the unique personal and small business banking needs of the multi-ethnic communities we serve,
and will be accretive to earnings.
52
Manage Capital. The Savings Bank faces several minimum capital requirements imposed by the OTS.
These requirements limit the dividends the Savings Bank is allowed to pay to Flushing Financial Corporation,
and can limit the annual growth of the Savings Bank. As part of the strategy to find ways to best utilize our
available capital, we have, in the past, repurchased shares of our common stock. We did not repurchase any of
our common stock during 2008. At December 31, 2008, 362,050 shares remain to be repurchased under the
current stock repurchase program. We had no shares held in treasury and had 21,625,709 shares outstanding at
December 31, 2008.
Trends and Contingencies. Our operating results are significantly affected by national and local economic and
competitive conditions, including changes in market interest rates, the strength of the local economy, government
policies and actions of regulatory authorities. As short-term interest rates rose during the first half of 2006, remained at
those levels throughout most of 2007, and declined throughout 2008, we remained strategically focused on the
origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage
loans. As a result of this strategy, we were able to continue to achieve a higher yield on our mortgage portfolio than we
would have otherwise experienced. We also established a business banking unit during the second half of 2006, and
launched an internet branch in November 2006.
Prevailing interest rates affect the extent to which borrowers repay and refinance loans. In a declining interest
rate environment, the number of loan prepayments and loan refinancing tends to increase, as do prepayments of
mortgage-backed securities. Call provisions associated with our investments in U.S. government agency and corporate
securities may also adversely affect yield in a declining interest rate environment. Such prepayments and calls may
adversely affect the yield of our loan portfolio and mortgage-backed and other securities as we reinvest the prepaid funds
in a lower interest rate environment. However, we typically receive additional loan fees when existing loans are
refinanced, which partially offsets the reduced yield on our loan portfolio resulting from prepayments. In periods of low
interest rates, our level of core deposits also may decline if depositors seek higher-yielding instruments or other
investments not offered by us, which in turn may increase our cost of funds and decrease our net interest margin to the
extent alternative funding sources are utilized. By contrast, an increasing interest rate environment would tend to extend
the average lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect
net interest income. In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which
could adversely affect our net interest income if rates were to subsequently decline. Additionally, adjustable rate
residential mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the
amount the interest rate can increase at re-pricing dates.
During the first half of 2006, the Federal Reserve’s Federal Open Market Committee (“FOMC”) increased short
term interest rates through their meeting in June, while longer-term interest rates remained relatively stable. As a result,
the yield curve flattened to the point where there was little difference between the rate on overnight funds and the rate on
ten year bonds. During the second half of 2006 and through September 2007, the FOMC maintained the overnight rate,
while longer term rates declined, resulting in an inverted yield curve. As a result, our net interest margin declined as the
spread between the rate we received on loans originated narrowed compared to the rate paid on new deposits. The
FOMC began lowering the overnight interest rate in the fourth quarter of 2007, and the treasury yield curve returned to a
more normal slope by the end of 2007. The FOMC continued to lower the overnight interest rate throughout 2008, and
the treasury yield curve remained positively sloped throughout 2008. Since demand remained strong for our higher-
yielding loan products, we grew our loan portfolio $258.5 million in 2008. We funded this growth with principal
payments received on our securities portfolio, deposit growth, and borrowings. At December 31, 2008, we had loan
applications in process of $185.4 million.
During the year ended December 31, 2008, certificates of deposit increased $269.1 million, while lower-costing
core deposits increased $165.6 million. To fund the strong demand for our loan products and the growth in our securities
portfolio, the growth in deposits was augmented by an increase in borrowed funds. The total increase in borrowed funds
during 2008 was $66.4 million. The cost of funds declined to 3.85% in the fourth quarter of 2008 from 4.54% in the
fourth quarter of 2007.
As a result of our balance sheet growth, net interest income increased $16.8 million to $87.7 million in 2008
from $70.9 million in 2007. The net interest rate spread increased 20 basis points to 2.43% for 2008 as compared to
2.23% for 2007. The net interest margin increased 16 basis points to 2.60% for 2008 as compared to 2.44% for 2007.
The net interest margin increased to 2.55% in the fourth quarter of 2008 as compared to 2.31% in the fourth quarter of
2007.
We are unable to predict the direction of future interest rate changes. However, the FOMC reduced short-term
interest rates from September 2007 through December 2008, and the treasury yield curve has returned to a more normal
slope. Approximately 46% of our certificates of deposit accounts and borrowed funds reprice or mature during the next
53
year, which could result in a decrease in the cost of our interest-bearing liabilities. Also, in a decreasing interest rate
environment, mortgage loans and mortgage-backed securities with higher rates tend to prepay, which could result in a
reduction in the yield on our interest-earning assets.
During 2008, the nation’s economy was generally considered to be in a recession. The housing market in the
United States saw a significant slowdown during 2008 and 2007, and foreclosures of single family homes rose from the
levels seen in the prior five years. Commercial vacancies started to increase in the second half of 2008. The national and
regional unemployment rates increased during 2008. These economic conditions can result in borrowers defaulting on
their loans, or withdrawing their funds on deposit to meet their financial obligations. We saw an increase in our non-
performing loans to $40.0 million at December 31, 2008, and we recorded a $5.6 million provision for possible loan
losses in 2008. However, we also saw an increase in our loan portfolio and deposits in 2008. We cannot predict the effect
of these economic conditions on the Company’s future financial condition or operating results.
Interest Rate Sensitivity Analysis
A financial institution’s exposure to the risks of changing interest rates may be analyzed, in part, by examining
the extent to which its assets and liabilities are “interest rate sensitive” and by monitoring the institution’s interest rate
sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive when the amount of interest-earning assets
maturing or repricing exceeds the amount of interest-bearing liabilities maturing or repricing within the same period. A
gap is considered negative when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the same period. Accordingly, a positive gap may enhance net
interest income in a rising rate environment and reduce net interest income in a falling rate environment. Conversely, a
negative gap may enhance net interest income in a falling rate environment and reduce net interest income in a rising rate
environment.
54
The table below sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2008 which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each
of the future time periods shown. Except as stated below, the amount of assets and liabilities shown that reprice or
mature during a particular period was determined in accordance with the earlier of the term to repricing or the
contractual terms of the asset or liability. Prepayment assumptions for mortgage loans and mortgage-backed securities
are based on our experience and industry averages, which generally range from 6% to 40%, depending on the contractual
rate of interest and the underlying collateral. Money market accounts and savings accounts were assumed to have a
withdrawal or “run-off” rate of 13% and 22%, respectively, based on our experience. While management bases these
assumptions on actual prepayments and withdrawals experienced by us, there is no guarantee that these trends will
continue in the future.
Interest Rate Sensitivity Gap Analysis at December 31, 2008
Three
Months
And Less
More Than
Three
Months To
One Year
More Than
One Year
To Three
Years
More Than More Than
Five Years
Three Years
To Ten
To Five
Years
Years
(Dollars in thousands)
More Than
Ten Years
Total
$
315,397
69,025
21,901
$
485,723
11,379
-
$
1,006,718
11,936
-
$
738,556
4,387
-
$
264,705
5,682
-
$
41,061
-
-
$
2,852,160
102,409
21,901
66,225
19,114
491,662
129,092
17,810
644,004
310,260
-
1,328,914
98,994
11,258
853,195
45,844
8,668
324,899
24,349
15,647
81,057
674,764
72,497
3,723,731
19,778
-
9,951
291,466
-
153,300
474,495
$
59,334
-
29,853
603,028
-
140,757
832,972
$
158,224
-
79,608
469,508
-
417,313
1,124,653
$
61,130
-
79,608
52,369
-
259,579
452,686
$
61,129
-
107,158
20,079
-
168,000
356,366
$
-
265,762
-
-
31,225
-
296,987
$
359,595
265,762
306,178
1,436,450
31,225
1,138,949
3,538,159
$
$
$
17,167
17,167
$
$
(188,968)
(171,801)
$
$
204,261
32,460
$
$
400,509
432,969
$
$
(31,467)
401,502
$
$
(215,930)
185,572
$
185,572
0.43%
-4.35%
0.82%
10.96%
10.17%
4.70%
103.62%
86.86%
101.33%
115.01%
112.39%
105.24%
Interest-Earning Assets
Mortgage loans
Other loans
Short-term securities (1)
Securities available for sale:
Mortgage-backed securities
Other
Total interest-earning assets
Interest-Bearing Liabilities
Savings accounts
NOW accounts
Money market accounts
Certificate of deposit accounts
Mortgagors' escrow deposits
Borrowed funds
Total interest-bearing liabilities (2)
Interest rate sensitivity gap
Cumulative interest-rate sensitivity gap
Cumulative interest-rate sensitivity gap
as a percentage of total assets
Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities
(1) Consists of interest-earning deposits.
(2) Does not include non-interest bearing demand accounts totaling $69.6 million at December 31, 2008.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example,
although certain assets and liabilities may have similar estimated maturities or periods to repricing, they may react in
differing degrees to changes in market interest rates and may bear rates that differ in varying degrees from the rates that
would apply upon maturity and reinvestment or upon repricing. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates
on a short-term basis and over the life of the asset. Further, in the event of a significant change in the level of interest
rates, prepayments on loans and mortgage-backed securities, and deposit withdrawal or “run-off” levels, would likely
deviate materially from those assumed in calculating the above table. In the event of an interest rate increase, some
borrowers may be unable to meet the increased payments on their adjustable-rate debt. The interest rate sensitivity
analysis assumes that the nature of the Company’s assets and liabilities remains static. Interest rates may have an effect
55
on customer preferences for deposits and loan products. Finally, the maturity and repricing characteristics of many assets
and liabilities as set forth in the above table are not governed by contract but rather by management’s best judgment
based on current market conditions and anticipated business strategies.
Interest Rate Risk
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, which requires the measurement of financial position and operating results in
terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest
rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in
interest rates. As a result, increases in interest rates could result in decreases in the fair value of our interest-earning
assets which could adversely affect our results of operations if such assets were sold, or, in the case of securities
classified as available for sale, decreases in our stockholders’ equity if such securities were retained.
We manage the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize
return and adjust our exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and
Economic Exposure to Changes in Interest Rate” report for review by the Board of Directors, as summarized below. This
report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down
(shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The OTS currently
places its focus on the net portfolio value ratio, focusing on a rate shock up or down of 200 basis points. The OTS uses
the change in Net Portfolio Value Ratio to measure the interest rate sensitivity of the Company. Net portfolio value is
defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is
determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to
the market value of assets. All changes in income and value are measured as percentage changes from the projected net
interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest
rates at December 31, 2008. Various estimates regarding prepayment assumptions are made at each level of rate shock.
Actual results could differ significantly from these estimates. At December 31, 2008, we are within the guidelines
established by the Board of Directors for each interest rate level.
Change in Interest Rate
-200 basis points
-100 basis points
Base interest rate
+100 basis points
+200 basis points
Projected Percentage Change In
Net Interest Income
2008
2007
0.27 %
0.37
―
-3.38
-9.25
0.45 %
1.62
―
-4.56
-10.32
Net Portfolio Value
2008
2007
16.42 %
12.57 %
10.29
8.70
―
―
-9.55
-13.31
-21.14
-28.59
Net Portfolio
Value Ratio
2008
2007
10.10 %
9.89
9.26
8.20
6.93
8.12 %
7.82
7.23
6.68
5.96
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-
bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
The following table sets forth certain information relating to our Consolidated Statements of Financial
Condition and Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006, and reflects
the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average daily balances. The yields include amortization of fees that are considered
adjustments to yields.
56
2008
Average
Balance
Interest
Yield/
Cost
For the year ended December 31,
2007
Average
Balance
Interest
Yield/
Cost
(Dollars in thousands)
2006
Average
Balance
t
Interes
Yield/
Cost
$
2,731,823
110,110
2,841,933
$
182,832
7,172
190,004
420,815
82,351
503,166
21,836
4,267
26,103
6.69
6.51
6.69
5.19
5.18
5.19
%
$
2,438,479
95,771
2,534,250
$
167,537
7,450
174,987
300,196
51,767
351,963
14,945
2,923
17,868
6.87
7.78
6.90
4.98
5.65
5.08
%
$
2,035,145
47,500
2,082,645
$
138,524
3,566
142,090
302,527
38,113
340,640
13,865
1,757
15,622
%
6.81
7.51
6.82
4.58
4.61
4.59
32,350
594
1.84
15,222
707
4.64
14,533
672
4.62
3,377,449
184,377
3,561,826
$
216,701
6.42
193,562
6.67
2,901,435
164,966
3,066,401
$
158,384
6.50
2,437,818
125,906
2,563,724
$
$
365,885
147,003
303,776
1,275,964
2,092,628
7,793
3,688
9,704
55,501
76,686
2.13
2.51
3.19
4.35
3.66
$
310,457
57,915
294,402
1,168,620
1,831,394
7,574
913
12,425
57,029
77,941
2.44
1.58
4.22
4.88
4.26
$
265,421
43,052
235,642
1,001,438
1,545,553
4,031
202
8,804
43,757
56,794
1.52
0.47
3.74
4.37
3.67
35,465
68
0.19
32,403
76
0.23
29,275
63
0.22
2,128,093
1,107,634
76,754
52,218
3.61
4.71
1,863,797
897,821
78,017
44,607
4.19
4.97
1,574,828
715,324
56,857
33,823
3.61
4.73
3,235,727
128,972
3.99
2,761,618
122,624
4.44
2,290,152
90,680
3.96
71,613
21,413
3,328,753
233,073
65,508
18,668
2,845,794
220,607
60,991
18,345
2,369,488
194,236
$
3,561,826
$
3,066,401
$
2,563,724
$
87,729
2.43
%
$
70,938
2.23
%
$
67,704
2.54
%
$
141,722
2.60
%
$
139,817
2.44
%
$
147,666
2.78
%
1.04
X
1.05
X
1
.06
X
Interest-earning assets:
Mortgage loans, net (1)(2)
Other loans, net (1)(2)
Total loans, net
Mortgage-backed
securities
Other securities
Total securities
Interest-earning deposits
and federal funds sold
Total interest-earning
assets
Other assets
Total assets
Interest-bearing liabilities:
Deposits:
Savings accounts
NOW accounts
Money market accounts
Certificate of deposit
accounts
Total due to depositors
Mortgagors' escrow
accounts
Total interest-bearing
deposits
Borrowed funds
Total interest-bearing
liabilities
Non interest-bearing
demand deposits
Other liabilities
Total liabilities
Equity
Total liabilities and
equity
Net interest income /
net interest rate spread (3)
Net interest-earning assets /
net interest margin (4)
Ratio of interest-earning
assets to interest-bearing
liabilities
(1) Average balances include non-accrual loans.
(2) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of
approximately $3.7 million, $3.7 million and $3.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
(3)
(4) Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning assets.
57
Rate/Volume Analysis
The following table presents the impact of changes in interest rates and in the volume of interest-earning assets
and interest-bearing liabilities on the Company’s interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (1) changes attributable to changes in volume (changes in
volume multiplied by the prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by the prior
volume) and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Increase (Decrease) in Net Interest Income
Year Ended December 31, 2008
Compared to
Year Ended December 31, 2007
Due to
Volume
Rate
Year Ended December 31, 2007
Compared to
Year Ended December 31, 2006
Due to
Net
(Dollars in thousands)
Volume
Rate
Net
Interest-Earning Assets:
Mortgage loans, net
Other loans, net
Mortgage-backed securities
Other securities
Interest-earning deposits and
federal funds sold
Total interest-earning assets
Interest-Bearing Liabilities:
Deposits:
Savings accounts
NOW accounts
Money market accounts
Certificate of deposit accounts
Mortgagors' escrow accounts
Other borrowed funds
Total interest-bearing liabilities
$
19,768
1,031
6,237
1,604
$
(4,473)
(1,309)
654
(260)
$
15,295
(278)
6,891
1,344
$
27,778
3,752
(109)
716
$
1,235
132
1,189
450
$
29,013
3,884
1,080
1,166
481
29,121
(594)
(5,982)
(113)
23,139
32
32,169
3
3,009
35
35,178
1,252
2,007
386
4,976
6
10,033
18,660
(1,033)
768
(3,107)
(6,504)
(14)
(2,422)
(12,312)
219
2,775
(2,721)
(1,528)
(8)
7,611
6,348
776
91
2,391
7,812
9
8,995
20,074
2,767
620
1,230
5,460
4
1,789
11,870
3,543
711
3,621
13,272
13
10,784
31,944
Net change in net interest income
$
10,461
$
6,330
$
16,791
$
12,095
$
(8,861)
$
3,234
Comparison of Operating Results for the Years Ended December 31, 2008 and 2007
General. Diluted earnings per share increased 7.8% to $1.10 for the year ended December 31, 2008 from $1.02
for the year ended December 31, 2007. Net income for the year ended December 31, 2008 was $22.3 million, an increase
of $2.1 million, or 10.3%, from the $20.2 million earned in the year ended December 31, 2007. The years ended
December 31, 2008 and 2007 include after-tax other-than-temporary impairment charges of $15.3 million, or $0.76 per
diluted share, and $2.6 million, or $0.13 per diluted share, respectively, related to the Company’s investments in
preferred stock of Freddie Mac and Fannie Mae. The years ended December 31, 2008 and 2007 also include net after-
tax gains attributed to changes in fair value of financial assets and financial liabilities carried at fair value under SFAS
No. 159 of $11.2 million, or $0.55 per diluted share, and $1.5 million, or $0.08 per diluted share, respectively. Net
interest income for the year ended December 31, 2008 was $87.7 million, an increase of $16.8 million, or 23.7% from
$70.9 million for the year ended December 31, 2007. Non-interest income decreased $3.3 million, or 32.0%, as
increases seen in most sources of income were more than offset by the other-than-temporary impairment charge. Non-
interest expense increased $4.7 million, or 9.4%, primarily due to expenditures related to our growth and expansion, and
an increase in deposit insurance expense.
Return on average assets decreased to 0.62% for the year ended December 31, 2008 from 0.66% for the year
ended December 31, 2007. Return on average equity increased to 9.55% for the year ended December 31, 2008 from
9.15% for the year ended December 31, 2007.
Interest Income. Interest income increased $23.1 million, or 12.0%, to $216.7 million for the year ended
December 31, 2008 from $193.6 million for the year ended December 31, 2007. This is the result of a $476.0 million
increase in the average balance of interest-earning assets during 2008 compared to 2007, partially offset by a 25 basis
point decrease in the yield of interest-earning assets during 2008 compared to 2007. The decline in the yield of interest-
58
earning assets was primarily due to a 21 basis point reduction in the yield of the loan portfolio combined with a $168.3
million increase in the combined average balances of the lower yielding securities portfolio and interest-earning deposits,
with each having a lower yield than the average yield of total interest-earning assets. The 21 basis point reduction in the
yield of the loan portfolio to 6.69% for the year ended December 31, 2008 from 6.90% for the year ended December 31,
2007 was primarily the result of adjustable rate loans adjusting downward, as rates declined throughout 2008.
Additionally, an increase in non-accrual loans has reduced the yield of the loan portfolio. The yield was positively
impacted by the average rate on mortgage loans originated during the past twelve months being higher than the average
rate of both the existing loan portfolio and mortgage loans that were paid-in-full during the period. The yield on the
mortgage loan portfolio declined 18 basis points to 6.69% for the year ended December 31, 2008 from 6.87% for the
year ended December 31, 2007. The yield on the mortgage loan portfolio, excluding prepayment penalty income,
declined 17 basis points to 6.55% for the year ended December 31, 2008 from 6.72% for the year ended December 31,
2007. The decline in the yield of interest-earning assets was partially offset by an increase of $307.7 million in the
average balance of the loan portfolio to $2,841.9 million for the year ended December 31, 2008.
Interest income from securities increased $8.2 million, as the average balance increased $151.2 million for the
year ended December 31, 2008 to $503.2 million, combined with an 11 basis point increase in the yield to 5.19% during
2008 from 5.08% during 2007. The increase in the average balance of the securities portfolios was primary to support the
activities of Flushing Commercial Bank. Interest income from interest-bearing deposits and federal funds sold decreased
$0.1 million as an increase in the average balance of $17.1 million for the year ended December 31, 2008 to $32.4
million was more than offset by a decrease in the yield to 1.84% during 2008 from 4.64% during 2007.
Interest Expense. Interest expense increased $6.3 million, or 5.2%, to $129.0 million for the year ended
December 31, 2008 from $122.6 million for the year ended December 31, 2007. An increase of $474.1 million in the
average balance of interest-bearing liabilities was partly offset by a 45 basis point decrease in the cost of interest-bearing
liabilities to 3.99% for the year ended December 31, 2008 from 4.44% for the year ended December 31, 2007. The
decrease in the cost of interest-bearing liabilities is primarily attributed to the FOMC lowering the overnight interest rate
to a range of 0.00% to 0.25% as of December 31, 2008. Certificates of deposit, money market accounts and saving
accounts decreased 53 basis points, 103 basis points and 31 basis points respectively, for the year ended December 31,
2008 compared to the year ended December 31, 2007. NOW accounts increased 93 basis points for the year ended
December 31, 2008 compared to the year ended December 31, 2007 due to the introduction and promotion of new
products which, although carrying a higher rate than other products in these types of accounts, had a lower rate during
the year ended December 31, 2008 than the average cost of deposits. This resulted in a decrease in the cost of due to
depositors of 60 basis points to 3.66% for the year ended December 31, 2008 compared to 4.26% for the year ended
December 31, 2007. The cost of borrowed funds also decreased 26 basis points to 4.71% for the year ended December
31, 2008 compared to 4.97% for the year ended December 31, 2007. The average balance of higher-costing certificates
of deposit and borrowed funds increased $107.3 million and $209.8 million, respectively, for the year ended December
31, 2008 compared to the prior year period. In addition, the combined average balances of lower-costing savings, money
market and NOW accounts increased a total of $153.9 million for the year ended December 31, 2008 compared to the
prior year period.
Net Interest Income. Net interest income for the year ended December 31, 2008 totaled $87.7 million, an
increase of $16.8 million, or 23.7%, from $70.9 million for 2007. The net interest spread increased 20 basis points to
2.43% for 2008 from 2.23% in 2007. The yield on interest-earning assets decreased 25 basis points to 6.42% for the year
ended December 31, 2008 from 6.67% for the year ended December 31, 2007. However, this was more than offset by a
decline in the cost of funds of 45 basis points to 3.99% for the year ended December 31, 2008 from 4.44% for the
comparable prior year period. The net interest margin improved 16 basis points to 2.60% for the year ended December
31, 2008 from 2.44% for the year ended December 31, 2007. Excluding prepayment penalty income, the net interest
margin would have been 2.48% and 2.32% for the years ended December 31, 2008 and 2007, respectively.
Provision for Loan Losses. A provision for loan losses of $5.6 million was recorded for the year ended
December 31, 2008. There was no provision for loan losses for the year ended December 31, 2007. In assessing the
adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience,
recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans,
changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. The
provision for loan losses recorded in 2008 was primarily due to an increase in non-performing loans. This increase in
non-performing loans primarily consists of mortgage loans that are located in the New York City metropolitan market.
Historically, we have not incurred losses on mortgage loans, primarily due to our conservative underwriting standards
that include, among other things, a loan to value ratio of 75% or less and a debt coverage ratio of at least 125%.
However, given the increase in non-performing loans and current economic uncertainties, management, as a result of the
59
regular quarterly analyses of the allowance for loans losses, deemed it necessary to record additional provisions for
possible loan losses in the year ended December 31, 2008. The ratio of non-performing loans to gross loans was 1.35%
and 0.22% at December 31, 2008 and 2007, respectively. The allowance for loan losses as percentage of non-performing
loans was 28% and 113% at December 31, 2008 and 2007, respectively. The ratio of allowance for loan losses to gross
loans was 0.37% and 0.25% at December 31, 2008 and 2007, respectively. The Company experienced net charge-offs of
$1.2 million and $0.4 million for the years ended December 31, 2008 and 2007, respectively.
Non-Interest Income. Non-interest income decreased $3.3 million, or 32.0%, for the year ended December 31,
2008 to $7.0 million, as compared to $10.3 million for the year ended December 31, 2007. Increases of $17.4 million in
the net gain attributed to changes in fair value of financial assets and financial liabilities carried at fair value under SFAS
No. 159, $0.2 million in dividends received from FHLB-NY stock, and $0.5 million in income from Bank Owned Life
Insurance were more than offset by a $0.5 million decrease in fee income and a $22.9 million increase in other-than-
temporary impairment charges recorded during the year ended December 31, 2008 as compared to the year ended
December 31, 2007. The net gain in fair value of financial assets and financial liabilities carried at fair value under SFAS
No. 159 was primarily the result of widening credit spreads in credit markets on trust preferred securities and the related
junior subordinated debentures. The other-than-temporary impairment charges in both years were on the preferred stock
issues of Freddie Mac and Fannie Mae, two government sponsored entities. These preferred shares have been written
down to their market value of $0.6 million at December 31, 2008. The year ended December 31, 2008 includes income
of $2.4 million representing a partial recovery of a loss sustained in 2002, on a WorldCom, Inc. senior note. This amount
was received as a result of a class action litigation settlement, and was included in Other Income.
Non-Interest Expense. Non-interest expense was $54.8 million for the year ended December 31, 2008, an
increase of $4.7 million, or 9.4%, from $50.1 million for the year ended December 31, 2007. The increase from the
comparable prior year period is primarily attributed to increases of: $2.6 million in employee salary and benefits, $0.6
million in professional services and $0.4 million in data processing expense, each of which is primarily attributed to the
growth of the Bank over the past twelve months. Additionally, other operating expense increased $1.2 million, primarily
due to an increase in deposit insurance expense. The efficiency ratio was 58.4% and 60.2% for the years ended
December 31, 2008 and 2007, respectively.
Income Tax Provisions. Income tax expense for the year ended December 31, 2008 increased $1.1 million to
$12.1 million, compared to $10.9 million for the year ended December 31, 2007. This increase is primarily attributed to
the increase of $3.2 million in income before income taxes. The effective tax rate was 35.1% for the year ended
December 31, 2008, the same as that for the year ended December 31, 2007.
Comparison of Operating Results for the Years Ended December 31, 2007 and 2006
General. Diluted earnings per share decreased 10.5% to $1.02 for the year ended December 31, 2007 from
$1.14 for the year ended December 31, 2006. Net income for the year ended December 31, 2007 was $20.2 million, a
decrease of $1.5 million, or 6.7%, from the $21.6 million earned in the year ended December 31, 2006. The year ended
December 31, 2007 included an after-tax other-than-temporary impairment charge of $2.6 million, or $0.13 per diluted
share, related to the Company’s investments in preferred stock of Freddie Mac and Fannie Mae. Net interest income for
the year ended December 31, 2007 was $70.9 million, an increase of $3.2 million, or 4.8% from $67.7 million for the
year ended December 31, 2006. Non-interest income increased $0.5 million, or 4.7%, as increases seen in most sources
of income were partially offset by the other-than-temporary impairment charge. Non-interest expense increased $7.3
million, or 17.2%, primarily due to expenditures related to our growth and expansion.
Return on average assets decreased to 0.66% for the year ended December 31, 2007 from 0.84% for the year
ended December 31, 2006. Return on average equity declined to 9.15% for the year ended December 31, 2007 from
11.14% for the year ended December 31, 2006.
Interest Income. Interest income increased $35.2 million, or 22.2%, to $193.6 million for the year ended
December 31, 2007 from $158.4 million for the year ended December 31, 2006. This was the result of a $463.6 million
increase in the average balance of interest-earning assets during 2007 compared to 2006, combined with a 17 basis point
increase in the yield of interest-earning assets during 2007 compared to 2006. The increase in the yield of interest-
earning assets was primarily due to an increase of $451.6 million in the average balance of the higher-yielding loan
portfolio to $2,534.3 million. The yield on the mortgage loan portfolio increased six basis points to 6.87% for the year
ended December 31, 2007 from 6.81% for the year ended December 31, 2006. The yield on the mortgage loan portfolio,
excluding prepayment penalty income, increased nine basis points for the year ended December 31, 2007 compared to
the year ended December 31, 2006. This increase was due to the average rate of 7.13% on new mortgage loans
originated during the year ended December 31, 2007 being above the average rate on both the loan portfolio and loans
60
that were paid-in-full during the year. Excluding prepayment penalties from interest income, the yield on loans would
have been 6.76% and 6.65%, and the yield on total interest-earning assets would have been 6.55% and 6.35%, in each
case, for the years ended December 31, 2007 and 2006, respectively.
Interest income from securities increased $2.2 million, as the average balance increased $11.3 million for the
year ended December 31, 2007 to $352.0 million, combined with a 49 basis point increase in the yield to 5.08% during
2007 from 4.59% during 2006. The increase in the average balance of the securities portfolios was the result of several
leverage transactions during the second half of 2007 that were completed to increase net interest income.
Interest Expense. Interest expense increased $31.9 million to $122.6 million, or 35.2%, for the year ended
December 31, 2007, from $90.7 million for the year ended December 31, 2006. An increase of $471.5 million in the
average balance of interest-bearing liabilities was combined with a 48 basis point rise in the cost of interest-bearing
liabilities to 4.44% for the year ended December 31, 2007 from 3.96% for the year ended December 31, 2006. The
increase in the cost of interest-bearing liabilities is primarily attributed to the Federal Reserve having raised the overnight
interest rate at seventeen consecutive meetings through June 2006. Although the Federal Reserve had reduced the
overnight rate by 100 basis points between September and December 2007, the prior increases resulted in an increase in
our cost of funds, as new deposits were obtained at average rates higher than the average rate on existing deposits. The
cost of certificate of deposits, savings accounts and money market accounts increased 51 basis points, 92 basis points and
48 basis points, respectively, for the year ended December 31, 2007 compared to the year ended December 31, 2006,
resulting in an increase in the cost of due to depositors of 59 basis points for the year ended December 31, 2007
compared to the year ended December 31, 2006. The cost of borrowed funds also increased 24 basis points to 4.97% for
the year ended December 31, 2007 as compared to the year ended December 31, 2006.
Net Interest Income. Net interest income for the year ended December 31, 2007 totaled $70.9 million, an
increase of $3.2 million, or 4.8%, from $67.7 million for 2006. The net interest spread declined 31 basis points to 2.23%
for 2007 from 2.54% in 2006, as the yield on interest-earning assets increased 17 basis points while the cost of interest-
bearing liabilities increased 48 basis points. The net interest margin decreased 34 basis points to 2.44% for the year
ended December 31, 2007 from 2.78% for the year ended December 31, 2006. Excluding prepayment penalty income,
the net interest margin would have been 2.32% and 2.63% for the years ended December 31, 2007 and 2006,
respectively.
Provision for Loan Losses. There was no provision for loan losses for the years ended December 31, 2007 and
2006. In assessing the adequacy of the Company's allowance for loan losses, management considered the Company's
historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of
non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national
economic conditions. In recent years, we had seen a significant improvement in our loss experience, and an improvement
in local economic conditions and real estate values. As a result of these improvements, and despite the growth in the loan
portfolio, primarily in multi-family residential, commercial, and one-to-four family mixed-use property mortgage loans,
no adjustment to the allowance for loan losses was deemed necessary for the years ended December 31, 2007 and 2006.
The ratio of non-performing loans to gross loans was 0.22% and 0.13% at December 31, 2007 and 2006, respectively.
The allowance for loan losses as percentage of non-performing loans was 113% and 226% at December 31, 2007 and
2006, respectively. The ratio of allowance for loan losses to gross loans was 0.25% and 0.30% at December 31, 2007
and 2006, respectively. The Company experienced net charge-offs of $424,000 and $81,000 for the years ended
December 31, 2007 and 2006, respectively.
Non-Interest Income. Non-interest income increased $0.5 million, or 4.7%, for the year ended December
31, 2007 to $10.3 million, as compared to $9.8 million for the year ended December 31, 2006. This was primarily
attributed to increases of $0.2 million on BOLI due to the purchase of additional BOLI, $1.0 million in dividends
received on FHLB-NY stock, $1.1 million in Other Income, and $2.7 million attributed to changes in fair value of
financial assets and financial liabilities carried at fair value under SFAS No. 159, which were partially offset by the
other-than-temporary impairment charge of $4.7 million to reduce the carrying amount of investments in preferred stock
issues of Freddie Mac and Fannie Mae, two government sponsored entities, to the securities market value of $28.2
million at December 31, 2007.
Non-Interest Expense. Non-interest expense was $50.1 million for the year ended December 31, 2007, an
increase of $7.3 million, or 17.2%, from $42.7 million for the year ended December 31, 2006. The increase from the
comparable prior year period was primarily attributed to increases of: $3.2 million in employee salary and benefit
expenses related to additional employees for the additional branches, business banking initiative and the internet banking
division, $1.0 million in occupancy and equipment costs primarily related to increased rental expense, $0.8 million in
depreciation primarily due to additional locations, $1.1 million in professional services, $1.0 million in data processing
61
expense, and $0.3 million in other operating expenses primarily related to the additional branches and employees. The
efficiency ratio was 60.2% and 55.2% for the years ended December 31, 2007 and 2006, respectively.
Income Tax Provisions. Income tax expense for the year ended December 31, 2007 decreased $2.2 million
to $10.9 million, compared to $13.1 million for the year ended December 31, 2006. This decrease was primarily
attributed to the decrease of $3.6 million in income before income taxes. The effective tax rate decreased to 35.1% for
the year ended December 31, 2007 from 37.7% for the year ended December 31, 2006. The decrease in the effective tax
rate was due to the increased impact on income from tax preference items, primarily BOLI income.
Liquidity, Regulatory Capital and Capital Resources
Our primary sources of funds are deposits, borrowings, principal and interest payments on loans, mortgage-
backed and other securities, and proceeds from sales of securities and loans. Deposit flows and mortgage prepayments,
however, are greatly influenced by general interest rates, economic conditions and competition. At December 31, 2008,
the Savings Bank had an approved overnight line of credit of $100.0 million with the FHLB-NY. In total, as of
December 31, 2008, the Savings Bank may borrow up to $1,184.4 million from the FHLB-NY in Federal Home Loan
advances and overnight lines of credit. As of December 31, 2008, the Savings Bank had $854.9 million in FHLB-NY
advances and $28.3 million in overnight lines of credit outstanding. In addition, Flushing Financial Corporation has
junior subordinated debentures with a face amount of $61.9 million and a carrying amount of $33.1 million (which are
included in Borrowed Funds) and the Savings Bank had $222.7 million in repurchase agreements to fund lending and
investment opportunities. (See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)
Management believes its available sources of funds are sufficient to fund current operations.
Our most liquid assets are cash and cash equivalents, which include cash and due from banks, overnight
interest-earning deposits and federal funds sold with original maturities of 90 days or less. The level of these assets is
dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2008,
cash and cash equivalents totaled $30.4 million, a decrease of $5.7 million from December 31, 2007. We also held
marketable securities available for sale with a carrying value of $747.3 million at December 31, 2008.
At December 31, 2008, we had commitments to extend credit (principally real estate mortgage loans) of $66.8
million and open lines of credit for borrowers (principally construction loan and home equity loan lines of credit) of
$92.9 million. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments
approximate future cash requirements, whereas the amounts of lines of credit may not be indicative of our future cash
requirements. The loan commitments generally expire in 90 days, while construction loan lines of credit mature within
18 months and home equity loan lines of credit mature within 10 years. We use the same credit policies in making
commitments and conditional obligations as we do for on-balance-sheet instruments.
Our total interest and operating expenses in 2008 were $129.0 million and $54.8 million, respectively.
Certificate of deposit accounts that are scheduled to mature in one year or less as of December 31, 2008 totaled $894.5
million.
We maintain three postretirement defined benefit plans for our employees: a noncontributory defined benefit
pension plan which was frozen as of September 30, 2006, a contributory medical plan, and a noncontributory life
insurance plan. We also maintain a noncontributory defined benefit plan for certain of our non-employee directors. The
employee pension plan is the only plan that we have funded. During 2008, we did not make a contribution to the
employee pension plan, and incurred cash expenditures of $0.1 million for the medical and life insurance plans and $0.1
million for the non-employee director plan. We expect to pay similar amounts for these plans in 2009. (See Note 10 of
Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)
The amounts reported in our financial statements are obtained from reports prepared by independent actuaries,
and are based on significant assumptions. The most significant assumption is the discount rate used to determine the
accumulated postretirement benefit obligation (“APBO”) for these plans. The APBO is the present value of projected
benefits that employees and retirees have earned to date. The discount rate is a single rate at which the liabilities of the
plans are discounted into today’s dollars and could be effectively settled or eliminated. The discount rate used is based
on the Citigroup Pension Liability Index, and reflects a rate that could be earned on bonds over a similar period that we
anticipate the plans’ liabilities will be paid. An increase in the discount rate would reduce the APBO, while a reduction
in the discount rate would increase the APBO. During the past several years, when interest rates have been at historically
low levels, the discount rate used for our plans has declined from 7.25% for 2001 to 5.87% for 2008. This decline in the
discount rate has resulted in an increase in our APBO.
The Company’s actuaries use several other assumptions that could have a significant impact on our APBO and
periodic expense for these plans. These assumptions include, but are not limited to, the rate of increase in future
compensation levels, expected rate of return on plan assets, future increases in medical and life insurance premiums,
turnover rates of employees, and life expectancy. The accounting standards for postretirement plans involve mechanisms
62
that serve to limit the volatility of earnings by allowing changes in the value of plan assets and benefit obligations to be
amortized over time when actual results differ from the assumptions used, there are changes in the assumptions used, or
there are plan amendments. At December 31, 2008, our employee pension plan has a $9.1 million unrecognized loss.
The non-employee director plan, and the medical and life insurance plans have a $0.4 million and $0.1 million
unrecognized gain, respectively, due to experience different from what had been estimated and changes in actuarial
assumptions. The employee pension plan’s unrecognized loss is primarily attributed to the reduction in the discount rate
over the past several years and the net decline in the market value of the pension plan’s investments during 2008, which
was the result of the decline in the major stock markets. The medical and insurance plans’ unrecognized gain is attributed
to a reduction in medical premiums. In addition, the non-employee director pension plan and the medical and life
insurance plans have unrecognized past service liabilities of $0.4 million and $0.1 million, respectively, due to plan
amendments in prior years. The net after tax effect of the unrecognized gains and losses associated with these plans has
been recorded in accumulated other comprehensive income in stockholders’ equity, resulting in a reduction of
stockholders’ equity of $5.1 million as of December 31, 2008.
The change in the discount rate, the reduction in medical premiums, and the freezing of the employee defined
benefit pension plan are the only significant changes made to the assumptions used for these plans for each of the years
in the three years ended December 31, 2008. During the first two years in this time period, the actual return on the
employee pension plan’s assets has approximated the assumed return used to determine the periodic pension expense.
During 2008, the return on the pension plan’s assets was negative due to the decline in the major stock markets. Our
actuaries had assumed a positive return on the plan’s assets for 2008.
The market value of the assets of our employee pension plan is $11.1 million at December 31, 2008, which is
$4.8 million less than the projected benefit obligation. We do not anticipate a change in the market value of these assets
which would have a significant effect on liquidity, capital resources, or results of operations.
During 2008, funds provided by our operating activities amounted to $29.3 million. These funds, together with
$599.3 million provided by financing activities, were utilized to fund net investing activities of $634.4 million. Funds
provided by financing activities were primarily the result of growth in due to depositors of $433.9 million and net
borrowings of $94.5 million. Principal payments and calls on loans and securities provided additional funds. Our
primary investment activity is the origination of loans, and the purchase of mortgage-backed securities. During 2008, we
had loan originations and purchases of $667.6 million. In addition during 2008, we purchased $510.2 million of
mortgage-backed and other securities.
At the time of the Savings Bank’s conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank, the Savings Bank was required by the OTS to establish a liquidation account which is
reduced as and to the extent that eligible account holders reduce their qualifying deposits. The balance of the liquidation
account at December 31, 2008 was $2.5 million. In the unlikely event of a complete liquidation of the Savings Bank,
each eligible account holder will be entitled to receive a distribution from the liquidation account. The Savings Bank is
not permitted to declare or pay a dividend or to repurchase any of its capital stock if the effect would be to cause the
Savings Bank’s regulatory capital to be reduced below the amount required for the liquidation account. Unlike the
Savings Bank, Flushing Financial Corporation is not subject to OTS regulatory restrictions on the declaration or payment
of dividends to its stockholders, although the source of such dividends could depend upon dividend payments from the
Savings Bank. Flushing Financial Corporation is subject, however, to the requirements of Delaware law, which generally
limit dividends to an amount equal to the excess of its net assets (the amount by which total assets exceed total liabilities)
over its stated capital or, if there is no such excess, to its net profits for the current and/or immediately preceding fiscal
year. Due to our participation in the U.S. Treasury’s Capital Purchase Program, Flushing Financial Corporation will not
be able to increase its dividend payments per common share above the amount paid for the fourth quarter of 2008
without first obtaining approval from the U.S. Treasury.
Regulatory Capital Position. Under applicable regulatory capital regulations, the Banks are required to comply
with each of three separate capital adequacy standards: tangible capital, leverage and core capital and total risk-based
capital. Such classifications are used by the OTS and other bank regulatory agencies to determine matters ranging from
each institution’s semi-annual FDIC deposit insurance premium assessments, to approvals of applications authorizing
institutions to grow their asset size or otherwise expand business activities. At December 31, 2008 and 2007, each of the
Banks exceeded each of their three regulatory capital requirements. (See Note 12 of Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report.)
Participation in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program
Throughout this recessionary environment, we have remained a profitable, “well capitalized” institution, so it
was not without significant consideration that we elected to participate in the U.S. Treasury’s (“Treasury”) Capital
Purchase Program. On December 19, 2008, we issued 70,000 shares of the preferred stock (with a liquidation preference
value of $1,000 per share) and a warrant to purchase 751,611 shares of the Company’s common stock at $13.97 per
63
share to the Treasury for an aggregate purchase price of $70.0 million. We did so because our historically strong ability
to grow deposits and make quality loans enables the Savings Bank to put this additional capital to good work. Our job as
a community bank will be to use these funds to help generate economic activity and provide a positive financial return
for the U.S. taxpayer and our shareholders. Since we received this investment, we have expanded our efforts in the multi-
family lending business at note rates below those we normally charge to provide some relief to these borrowers and help
support this part of the housing industry which is vital to the markets we serve. We have also expanded our efforts in the
taxi medallion business at note rates below those we normally charge to provide some relief to these operators and help
support an industry which is vital to the local economy. Since obtaining this additional capital, we have also purchased
$162.3 million of mortgage-backed securities issued by GNMA, FNMA or FHLMC. This expansion of lending and
purchase of securities should provide a return to support the additional capital and eventually redeem this investment,
while at the same time providing a return for our current shareholders.
Critical Accounting Policies
The Company’s accounting policies are integral to understanding the results of operations and statement of
financial condition. These policies are described in the Notes to Consolidated Financial Statements. Several of these
policies require management’s judgment to determine the value of the Company’s assets and liabilities. The Company
has established detailed written policies and control procedures to ensure consistent application of these policies. The
Company has identified four accounting policies that require significant management valuation judgment: the allowance
for loan losses, fair value of financial instruments, goodwill impairment and income taxes.
Allowance for Loan Losses. An allowance for loan losses is provided to absorb probable estimated losses
inherent in the loan portfolio. Management reviews the adequacy of the allowance for loan losses by reviewing all
impaired loans on an individual basis. The remaining portfolio is evaluated based on the Company's historical loss
experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing
loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions.
Judgment is required to determine how many years of historical loss experience are to be included when reviewing
historical loss experience. A full credit cycle must be used, or loss estimates may be inaccurate. This evaluation is
inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes
available.
Notwithstanding the judgment required in assessing the components of the allowance for loan losses, the
Company believes that the allowance for loan losses is adequate to cover losses inherent in the loan portfolio. The policy
has been applied on a consistent basis for all periods presented in the Consolidated Financial Statements.
Fair Value of Financial Instruments. Effective January 1, 2007, we adopted SFAS No. 157, “Fair Value
Measurements”, and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an
Amendment of FASB No. 115.” (See Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual
Report.) SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date, and establishes a framework for
measuring fair value. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other
items at fair value. Management selected the fair value option for certain investment securities, primarily mortgage-
backed securities, and certain borrowed funds. Changes in the fair value of financial instruments for which the fair value
election is made are recorded in the consolidated statements of income. Management selected, as of January 1, 2007,
financial assets and financial liabilities with fair values of $160.7 million and $120.1 million, respectively, for the fair
value option. We elected to measure at fair value junior subordinated debt (commonly known as trust preferred
securities) with a face amount of $61.8 million that was issued during 2007. We also elected to measure at fair value
securities that were purchased during 2007 at a cost of $21.4 million.
The securities portfolio also consists of mortgage-backed and other securities for which the fair value election
was not selected. These securities are classified as Available for Sale and are carried at fair value in the consolidated
statements of financial position, with changes in fair value recorded in Accumulated Other Comprehensive Income. If
any decline in fair value for these securities is deemed other-than-temporary, the security is written down to a new cost
basis with the resulting loss recorded in the consolidated statements of income. During 2008 and 2007, we recorded
other-than-temporary impairment charges of $27.6 million and $4.7 million, respectively, for certain preferred stocks.
Financial assets and financial liabilities reported at fair value are required to be measured based on the
following alternatives: (1) quoted prices in active markets for identical financial instruments (level 1), (2) significant
other observable inputs (level 2), or (3) significant unobservable inputs (level 3). Judgment is required in selecting the
appropriate level to be used to determine fair value. The majority of financial assets and financial liabilities for which the
64
fair value election was made, and the majority of investments classified as Available for Sale, were measured using level
2 inputs, which requires judgment to determine the fair value. The trust preferred securities held in the investment
portfolio, and the Company’s junior subordinated debentures, were measured using Level 3 inputs due to the inactive
market for these securities. The preferred stocks for which other-than-temporary impairment charges were recorded in
2008 and 2007 were valued using a level 1 input.
Goodwill Impairment. Goodwill is presumed to have an indefinite life and is tested for impairment, rather than
amortized, on at least an annual basis. For the purpose of goodwill impairment testing, management has concluded that
the Company has one reporting unit. If the estimated fair value of the reporting unit exceeds its carrying amount, there is
no impairment of goodwill. However, if the fair value of the reporting unit is less than its carrying amount, further
evaluation is required to determine if a write down of goodwill is required.
According to SFAS No. 142, “Goodwill and Other Intangible Assets,” quoted market prices in active markets
are the best evidence of fair value and are to be used as the basis for measurement, when available. Other acceptable
valuation methods include an asset approach, which determines a fair value based upon the value of assets net of
liabilities, an income approach, which determines fair value using one or more methods that convert anticipated
economic benefits into a present single amount, and a market approach, which determines a fair value based on the
similar businesses that have been sold.
The Company conducts its annual impairment testing of goodwill as of December 31. The impairment testing as
of December 31, 2008 and 2007 did not show an impairment of goodwill based on the fair value of the Company.
Income Taxes. The Company estimates its income taxes payable based on the amounts it expects to owe to the
various taxing authorizes (i.e. federal, state and local). In estimating income taxes, management assesses the relative
merits and risks of the tax treatment of transactions, taking into account statutory, judicial and regulatory guidance in the
context of the Company’s tax position. Management also relies on tax opinions, recent audits, and historical experience.
The Company also recognizes deferred tax assets and liabilities for the future tax consequences of differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A
valuation allowance is required for deferred tax assets that the Company estimates are more likely than not to be
unrealizable, based on evidence available at the time the estimate is made. These estimates can be effected by changes to
tax laws, statutory tax rates, and future income levels.
Contractual Obligations
Borrowed funds
Deposits
Loan commitments
Capital lease obligations
Operating lease obligations
Purchase obligations
Pension and other postretirement
benefits
Deferred compensation plans
Payments Due By Period
Total
$
1,138,949
2,468,834
159,713
-
25,093
12,269
Less Than
1 Year
$
284,057
1,926,878
159,713
-
2,928
3,433
1 - 3
Years
(In thousands)
603,313
$
469,508
-
-
5,815
4,418
3 - 5
Years
More
Than
5 Years
$
251,579
52,369
-
-
4,330
4,418
-
$
20,079
-
-
12,020
-
11,594
3,851
415
299
904
598
970
532
9,305
2,422
Total
$
3,820,303
$
2,377,723
$
1,084,556
$
314,198
$
43,826
We have significant obligations that arise in the normal course of business. We finance our assets with deposits
and borrowed funds. We also use borrowed funds to manage our interest-rate risk. We have the means to refinance these
borrowings as they mature through its financing arrangements with the FHLB-NY and our ability to arrange repurchase
agreements with broker-dealers and the FHLB-NY. (See Notes 6 and 7 of Notes to Consolidated Financial Statements in
Item 8 of this Annual Report.)
We focus our balance sheet growth on the origination of mortgage loans. At December 31, 2008, we had
commitments to extend credit and lines of credit of $159.7 million for mortgage and other loans. These loans will be
65
funded through principal and interest payments received on existing mortgage loans and mortgage-backed securities,
growth in customer deposits, and, when necessary, additional borrowings. (See Note 13 of Notes to Consolidated
Financial Statements in Item 8 of this Annual Report.)
At December 31, 2008, the Savings Bank had fourteen branches, eight of which are leased, and the Commercial
Bank utilized space within one of the Savings Bank’s branch offices. The Savings Bank leases its branch locations
primarily when it is not the sole tenant. Whether the Savings Bank will purchase its future branch locations will depend
in part on the availability of suitable locations and the availability of properties. In addition, we lease our executive
offices.
We currently outsource our data processing, loan servicing and check processing functions. We believe that this
is the most cost effective method for obtaining these services. These arrangements are usually volume dependent and
have varying terms. The contracts for these services usually include annual increases based on the increase in the
consumer price index. The amounts shown above for purchase obligations represent the current term and volume of
activity of these contracts. We expect to renew these contracts as they expire.
The amounts shown for pension and other postretirement benefits reflect our employee and directors’ pension
plans, the supplemental retirement benefits of our president, and amounts due under its plan for medical and life
insurance benefits for retired employees. The amount shown in the “Less Than 1 Year” column represents our current
estimate for these benefits, some of which are based on information supplied by actuaries. The amounts shown in
columns reflecting periods over one year represent our current estimate based on the past year’s actual disbursements
and information supplied by actuaries. The amounts do not include an increase for possible future retirees or increases in
health plan costs. The amount shown in the “More Than 5 Years” column represents the amount required to increase the
total amount to the projected benefit obligation of the directors’ plan and the medical and life insurance benefit plans,
since these are unfunded plans and the underfunded portion of the employee pension plan. (See Note 10 of Notes to
Consolidated Financial Statements in Item 8 of this Annual Report.)
We currently provide a non-qualified deferred compensation plan for officers who have achieved the level of at
least senior vice president (certain officers who had achieved the level of at least vice president are included in this plan
under previously existing guidelines). In addition to the amounts deferred by the officers, we match 50% of their
contributions, generally up to a maximum of 5% of the officer’s salary. These plans generally require the deferred
balance to be credited with earnings at a rate earned by certain mutual funds. Employees do not receive a distribution
from these plans until their employment is terminated. The amounts shown in the columns for less than five years
represent the estimate of the amounts we will contribute to a rabbi trust with respect to matching contributions under
these plans, and the amounts to be paid from the rabbi trust to two executives who have retired. The amount shown in the
“More Than 5 Years” column represents the current accrued liability for these plans, adjusted for the activity in the
columns for less than five years. This expense is provided in the Consolidated Statements of Income, and the liability has
been provided in the Consolidated Statements of Financial Condition.
Impact of New Accounting Standards
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes: an interpretation of SFAS No. 109.” FIN 48 clarifies Statement of
Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” by defining a criterion that an
individual tax position would have to meet for some or all of the benefit of that position to be recognized in an entity’s
financial statements. Entities should evaluate a tax position to determine if it is more likely than not that a position will
be sustained on examination by taxing authorities. FIN 48 defines more likely than not as “a likelihood of more than 50
percent.” FIN 48 also requires certain disclosures, including the amount of unrecognized tax benefits that if recognized
would change the effective tax rate, information concerning tax positions for which a significant increase or decrease in
the unrecognized tax benefit liability is reasonably possible in the next 12 months, a tabular reconciliation of the
beginning and ending balances of unrecognized tax benefits, and tax years that remain open for examination by major
jurisdictions. FIN 48 was effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not
have a material effect on the Company’s results of operations or financial condition.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.”
The Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No.
140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The Statement
also resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to
Beneficial Interest in Securitized Financial Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain as embedded derivative requiring bifurcation, and clarifies that
66
concentrations of credit risk in the form of subordination are not embedded derivatives. The Statement eliminates the
interim guidance in SFAS No. 133 Implementation Issue No. D1, which provided that beneficial interests in securitized
financial assets are not subject to the provisions of SFAS No. 133. The Statement was effective for all financial
instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.
The adoption of SFAS No. 155 did not have a material effect on the Company’s results of operations or financial
condition.
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” The Statement is effective
for all financial statements issued for fiscal years beginning after November 15, 2007, with earlier adoption permitted.
The Statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The early adoption of SFAS No. 159 required the early
adoption of SFAS No. 157. Adoption of SFAS No. 157 did not have a material impact on the Company’s results of
operations or financial condition.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans.” The Statement requires an employer that is a business entity and sponsors one or more
single-employer defined benefit plans to: (1) recognize the funded status of a benefit plan – measured as the difference
between plan assets at fair value and the benefit obligation – in its statement of financial position, with the corresponding
credit or charge, net of taxes, upon initial adoption to Accumulated Other Comprehensive Income; (2) recognized as a
component of Accumulated Other Comprehensive Income, net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS
No. 87, “Employers’ Accounting for Pensions,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions,” (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year
end; and (4) expand disclosures in the notes to the financial statements about certain effects on net periodic benefit cost.
The Statement also amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans for Termination Benefits.” An employer who has publicly traded equity securities, such as the
Company, is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the
required disclosures as of the end of its fiscal year ending after December 15, 2006. For the Company, this is for the year
ended December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the
employer’s fiscal year end is effective for fiscal years ending after December 15, 2008. The adoption of this statement
resulted in a charge to Accumulated Other Comprehensive Income, and a corresponding reduction of stockholders’
equity, of $1.2 million, net of taxes, at December 31, 2006.
In February 2007, the FASB Issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB No. 115.” This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is effective for the beginning of the first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the beginning of an entity’s fiscal year prior
to the effective date, provided the election is made prior to the issuance of financial statements for that year or portion
thereof, and the election is made within 120 days of the beginning of that fiscal year. Early adoption of SFAS No. 159
also requires the early adoption of SFAS No. 157. The impact of adopting this statement on the Company’s consolidated
financial statements is discussed in Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual
Report.
In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue No.
06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements.” The consensus reached in Issue No. 06-4 requires the accrual of a liability for the cost of the
insurance policy during postretirement periods in accordance with SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” or APB Opinion 12, “Omnibus Opinion”, when an employer has
effectively agreed to maintain a life insurance policy during the employee’s retirement. At December 31, 2007 the
Company had endorsement split-dollar life insurance arrangements with forty-seven present or former employees, which
currently provides approximately $7.9 million of life insurance benefits to these employees. The amount of the benefit
for each employee is based on the employee’s salary when their employment terminates. Issue No. 06-4 was effective for
fiscal years beginning after December 15, 2007. The adoption of Issue No. 06-4 resulted in a $1.1 million charge to
stockholders’ equity.
In September 2006, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements.” SAB 108 was issued to address diversity in practice in quantifying financial statement
misstatements and the potential under current practice for the build up of improper amounts on the balance sheet, and to
67
provide consistency between how registrants quantify financial statement misstatements. The techniques most commonly
used in practice to accumulate and quantify misstatements are generally referred to as the “roll-over” and “iron curtain”
approaches. The roll-over approach quantifies a misstatement based on the amount of the error originating in the current
year statement. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of when the misstatement originated. SAB 108
requires a “dual approach” that requires quantification of errors under both the roll-over and iron curtain methods. SAB
108 was effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material
effect on the Company’s results of operations or financial condition.
In December 2007, the FASB issue SFAS No. 141R (revised 2007), “Business Combinations.” This statement
replaces SFAS No. 141, “Business Combinations,” but retains the fundamental requirements in SFAS No. 141 that the
acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each
business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in
the business combination and establishes the acquisition date as the date that the acquirer achieves control. This
statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This statement
also requires that costs incurred to complete the acquisition, including restructuring costs, are to be recognized separately
from the acquisition. This statement also requires an acquirer to recognize assets or liabilities arising from all other
contingencies as of the acquisition date, measured at their acquisition-date fair values, only if they meet the definition of
as asset or liability in FASB Concepts Statement No. 6, “Elements of Financial Statements.” This statement also
provides specific guidance on the subsequent accounting for assets and liabilities arising from contingencies acquired or
assumed in a business combination. SFAS No. 141R is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption
is not permitted. Since this statement is effective for business combinations for which the Company is the acquirer that
occur after December 31, 2008, the Company is unable, at this time, to determine the impact of this statement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51.” This statement requires that ownership interests in subsidiaries held by
parties other than the parent company be clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity. This statement also requires the amount of
consolidated net income attributable to the parent company and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. Adoption of
SFAS No. 160 on January 1, 2008 did not have a material impact on the Company’s results of operations or financial
condition.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” – an amendment of FASB Statement No. 133.” The statement requires enhanced disclosures about an entity’s
derivative and hedging activities, including information about (a) how and why an entity uses derivative instruments, (b)
how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. The Statement is effective for all financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with earlier adoption permitted. Adoption of SFAS No. 161 on
January 1, 2008 did not have a material impact on the Company’s results of operations or financial condition.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.
The statement identifies the sources of accounting principles and the framework for selecting principles used in the
preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted
accounting principles ("GAAP") in the United States (the "GAAP hierarchy"). The Statement became effective 60 days
following the SEC's approval, on September 16, 2008, of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.
Adoption of SFAS No. 162 did not have a material impact on the Company’s results of operations or financial condition.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.” This FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (“EPS”) under the two-class method described in SFAS No. 128, “Earnings
per Share.” The FSP concluded that unvested share-based payment awards that contain nonforfeitable rights to dividends
or dividend equivalents are participating securities and shall be included in the computations of EPS pursuant to the two-
class method. Our restricted stock awards are considered participating securities under this FSP. This FSP is effective for
fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data
68
presented shall be adjusted retrospectively to conform with the provisions of this FSP. Early application is not permitted.
Adoption of this FSP is not expected to have a material impact on our computation of EPS.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.” This FSP applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. The FSP clarifies the
application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not active. The FSP permits, in
determining fair value for a financial asset in a dislocated market, the use of a reporting entity’s own assumptions about
future cash flows and appropriately risk-adjusted discount rates are acceptable when relevant observable inputs are not
available. This FSP was effective upon issuance. The impact of adopting this FSP on the Company’s consolidated
financial statements is discussed in Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual
Report.
In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit
Plan Assets,” This FSP amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits.” The FSP provides guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan. The FSP clarifies that the objectives of the disclosures about plan assets in an
employer’s defined benefit pension or other postretirement plan are to provide users of financial statements with an
understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the categories of plan assets; (3) the inputs and valuation
techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within
plan assets. The FSP also expands the disclosures related to these objectives. The disclosures about plan assets required
by this FSP are effective for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this
FSP are not required for earlier periods that are presented for comparative purposes, although application of the
provisions of the FSP to prior periods is permitted. Early adoption is not permitted.
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue
No. 99-20.” This FSP amended EITF Issue No. 99-20 to align the impairment guidance in Issue 99-20 with that in
paragraph 16 of SFAS No. 115 and related implementation guidance. The FSP was effective for reporting periods ending
after December 15, 2008, and is applied prospectively. Adoption of FSP EITF 99-20-1 did not have a material impact on
the Company’s results of operations or financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
This information is contained in the section captioned “Interest Rate Risk” on page 56 and in Notes 13 and 14
of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report.
69
Item 8.
Financial Statements and Supplementary Data.
Consolidated Statements of Financial Condition
Assets
Cash and due from banks
Securities available for sale:
Mortgage-backed securities (including assets pledged of $549,339 and
$302,446 at December 31, 2008 and 2007, respectively; $110,833 and
$133,051 at fair value pursuant to the fair value option at
December 31, 2008 and 2007, respectively)
Other securities ($28,688 and $30,986 at fair value pursuant to the fair
value option at December 31, 2008 and 2007, respectively)
Loans
Less: Allowance for loan losses
Net loans
Interest and dividends receivable
Bank premises and equipment, net
Federal Home Loan Bank of New York stock
Bank owned life insurance
Goodwill
Core deposit intangible, net
Other assets
Total assets
Liabilities
Due to depositors:
Non-interest bearing
Interest-bearing
Mortgagors' escrow deposits
Borrowed funds ($107,689 and $135,621 at fair value pursuant to the
fair value option at December 31, 2008 and 2007, respectively)
Securities sold under agreements to repurchase ($25,757 and $25,924 at
fair value pursuant to the fair value option at December 31, 2008
and 2007, respectively)
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders' Equity
Preferred stock ($0.01 par value; 5,000,000 shares authorized; 70,000 shares
issued and outstanding at December 31, 2008; none at December 31, 2007;
liquidation preference value of $70,000)
Common stock ($0.01 par value; 40,000,000 shares authorized; 21,625,709 shares
issued and outstanding at December 31, 2008; 21,321,564 shares issued and
outstanding at December 31, 2007)
Additional paid-in capital
Treasury stock, at average cost (none at December 31, 2008 and 2007)
Unearned compensation
Retained earnings
Accumulated other comprehensive loss, net of taxes
Total stockholders' equity
December 31,
2008
December 31,
2007
(Dollars in thousands, except per share data)
$
30,404
$
36,148
$
$
674,764
362,729
72,497
2,971,690
(11,028)
2,960,662
18,473
22,806
47,665
57,499
16,127
2,342
46,232
3,949,471
69,624
2,367,985
31,225
$
$
77,371
2,708,751
(6,633)
2,702,118
15,768
23,936
42,669
52,260
16,127
2,810
22,583
3,354,519
69,299
1,933,656
22,492
916,292
849,727
222,657
40,196
3,647,979
222,824
22,867
3,120,865
1
-
216
150,662
-
(1,300)
172,216
(20,303)
301,492
213
74,861
-
(2,110)
161,598
(908)
233,654
Total liabilities and stockholders' equity
$
3,949,471
$
3,354,519
The accompanying notes are an integral part of these consolidated financial statements.
70
Consolidated Statements of Income
Interest and dividend income
Interest and fees on loans
Interest and dividends on securities:
Interest
Dividends
Other interest income
Total interest and dividend income
Interest expense
Deposits
Other interest expense
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Loan fee income
Banking services fee income
Net gain on sale of loans held for sale
Net (loss) gain on sale of loans
Net gain on sale of securities
Other-than-temporary impairment charge on securities
Net gain from fair value adjustments
Federal Home Loan Bank of New York stock dividends
Bank owned life insurance
Other income
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy and equipment
Professional services
Data processing
Depreciation and amortization of premises and equipment
Other operating expenses
Total non-interest expense
Income before income taxes
Provision for income taxes
Federal
State and local
Total provision for income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
2008
For the years ended December 31,
2007
(In thousands, except per share data)
2006
$
190,004
$
174,987
$
142,090
23,363
2,740
594
216,701
76,754
52,218
128,972
87,729
5,600
82,129
2,585
1,638
151
(151)
354
(27,575)
20,090
2,863
2,239
4,774
6,968
26,160
6,528
5,828
3,958
2,407
9,900
54,781
34,316
9,769
2,288
12,057
16,687
1,181
707
193,562
78,017
44,607
122,624
70,938
-
70,938
3,171
1,566
359
341
-
(4,710)
2,685
2,654
1,743
2,444
10,253
23,564
6,527
5,220
3,605
2,417
8,743
50,076
31,115
9,272
1,658
10,930
15,302
320
672
158,384
56,857
33,823
90,680
67,704
-
67,704
2,938
1,462
550
182
81
-
-
1,695
1,553
1,334
9,795
20,356
5,542
4,170
2,591
1,655
8,428
42,742
34,757
10,729
2,389
13,118
$
22,259
$
20,185
$
21,639
$1.11
$1.10
$1.03
$1.02
$1.16
$1.14
The accompanying notes are an integral part of these consolidated financial statements.
71
Consolidated Statements of Changes in Stockholders’ Equity
Preferred Stock
Balance, beginning of year
Preferred shares issued (70,000 preferred shares for the year ended
December 31, 2008)
Balance, end of year
Common Stock
Balance, beginning of year
Issuance upon the exercise of stock options (210,710, 127,499 and
71,278 common shares for the years ended December 31,
2008, 2007 and 2006, respectively)
Shares issued upon vesting of restricted stock unit awards (93,435,
29,013 and 4,500 common shares for the years ended December 31, 2008,
2007 and 2006, respectively)
Shares issued in connection with acquisition of Atlantic Liberty
(1,622,380 common shares in 2006)
Balance, end of year
Additional Paid-In Capital
Balance, beginning of year
Preferred shares issued (70,000 preferred shares for the year ended
December 31, 2008)
Amortization of preferred stock issuance costs
Award of common shares released from Employee Benefit Trust
(85,422, 6,783 and 52,809 common shares for the years ended
December 31, 2008, 2007 and 2006, respectively)
Cumulative adjustment related to adoption of SFAS No. 123R
Shares issued upon vesting of restricted stock unit awards
(95,925, 65,068 and 40,191 common shares for the years ended
December 31, 2008, 2007 and 2006, respectively)
Forfeiture of restricted stock awards (690 and 2,685 common
shares for the years ended December 31, 2007 and 2006, respectively)
Options exercised (210,710, 127,499 and 86,728 common shares
for the years ended December 31, 2008, 2007 and 2006, respectively)
Stock-based compensation activity, net
Stock-based income tax benefit
Issuance of common stock warrants (751,611 common stock warrants
for the year ended December 31, 2008)
Adjustment to the purchase price of Atlantic Liberty
Shares issued in connections with acquisition of Atlantic Liberty
(1,622,380 common shares for the year ended December 31, 2006)
Balance, end of year
For the years ended December 31,
2008
2007
2006
(Dollars in thousands, except per share data)
$
-
$
-
$
-
1
1
213
2
1
-
216
74,861
68,579
9
882
-
1,587
-
2,370
303
677
1,394
-
-
150,662
-
-
212
1
-
-
213
-
-
195
1
-
16
212
71,079
39,635
-
-
88
-
500
8
1,124
315
439
-
1,308
-
74,861
-
-
734
847
62
28
529
1,224
1,479
-
-
26,541
71,079
Continued
The accompanying notes are an integral part of these consolidated financial statements.
72
Consolidated Statements of Changes in Stockholders’ Equity (continued)
Treasury Stock
Balance, beginning of year
Purchases of common shares outstanding (38,000 and 374,600
shares for the years ended December 31, 2007 and 2006,
respectively)
Issuance upon exercise of stock options (8,493, 39,986 and 341,386
common shares for the years ended December 31, 2008, 2007
and 2006, respectively)
Repurchase of restricted stock awards to satisfy tax obligations
(22,303, 25,785 and 20,705 common shares for the years ended
December 31, 2008, 2007 and 2006, respectively
Forfeiture of restricted stock awards (690 and 2,685 common
shares for the years ended December 31, 2007 and 2006,
respectively)
Shares issued upon vesting of restricted stock unit awards (13,810,
71,216 and 60,186 common shares for the years ended December 31,
2008, 2007 and 2006, respectively)
Purchase of common shares to fund options exercised
(12,949 and 36,310 common shares for the years ended December 31,
2007 and 2006, respectively)
Balance, end of year
Unearned Compensation
Balance, beginning of year
Cumulative adjustment related to the adoption of SFAS No. 123R
Release of shares from Employee Benefit Trust (237,702, 231,341 and
218,941 common shares for the years ended December 31, 2008,
2007 and 2006, respectively)
Balance, end of year
Retained Earnings
Balance, beginning of year
Cumulative adjustment related to the adoption of SFAS No. 159
Net income
Stock options exercised (8,493, 39,986 and 325,936 common
shares for the years ended December 31, 2008, 2007 and 2006,
respectively)
Shares issued upon vesting of restricted stock unit awards (11,320,
35,161, 24,495 common shares for the years ended December 31,
2008, 2007 and 2006, respectively)
Cumulative adjustment related to the adoption of Emerging Issues
Task Force Issue No. 06-4
Cash dividends declared and paid ($0.52, $0.48 and $0.44 per common
share for the years ended December 31, 2008, 2007 and 2006,
respectively)
For the years ended December 31,
2008
2006
2007
(Dollars in thousands, except per share data)
$
-
$
(592)
$
(12)
-
151
(627)
(6,249)
673
5,646
(409)
(429)
(344)
-
258
-
-
(2,110)
-
810
(1,300)
161,598
-
22,259
(66)
(34)
(1,119)
(8)
(28)
1,198
1,014
(215)
-
(2,897)
-
787
(2,110)
(619)
(592)
(4,159)
516
746
(2,897)
156,879
(5,811)
20,185
146,068
-
21,639
(224)
(2,582)
(30)
-
(66)
-
(10,383)
(9,401)
(8,180)
Continued
The accompanying notes are an integral part of these consolidated financial statements.
73
Consolidated Statements of Changes in Stockholders’ Equity (continued)
Retained Earnings (continued)
Effects of changing the pension plan measurement date pursuant to
SFAS No. 158:
Service cost, interest cost, and expected return on plan assets
for October 1 - December 31, 2007, net of taxes of approximately $13
Amortization of net actuarial losses for October 1 - December 31, 2007,
net of taxes of approximately $7
Amortization of prior service costs for October 1 - December 31, 2007,
net of taxes of approximately $3
Amortization of preferred stock issuance costs
Balance, end of year
Accumulated Other Comprehensive Loss, Net of Taxes
Balance, beginning of year
Cumulative adjustment related to the adoption of SFAS No. 159, net
of taxes ($2,875)
Adjustment required for initial application of SFAS No. 158 for deferred
costs for the postretirement plans, net of taxes of approximately $975
for the year ended December 31, 2006
Effects of changing the pension plan measurement date pursuant to
SFAS No. 158:
Amortization of net actuarial losses for October 1 - December 31, 2007,
net of taxes of approximately ($7)
Amortization of prior service costs for October 1 - December 31, 2007,
net of taxes of approximately ($3)
Amortization of prior service costs, net of taxes of ($11) and ($65) for the
years ended December 31, 2008 and 2007, respectively
Amortization of net actuarial losses, net of taxes of ($30) and ($56) for the
years ended December 31, 2008 and 2007, respectively
Unrecognized actuarial (losses) gains, net of taxes $3,427 and ($386) for
years ended December 31, 2008 and 2007, respectively
Change in net unrealized (losses) gains on securities available for sale, net of
taxes of approximately $24,238, $1,444 and ($207) for the years ended
December 31, 2008, 2007 and 2006, respectively
Less: Reclassification adjustment for losses (gains) included in net
income, net of taxes of approximately ($12,113), ($2,078) and $32 for the
years ended December 31, 2008, 2007 and 2006, respectively
Balance, end of year
For the years ended December 31,
2006
2007
2008
(Dollars in thousands, except per share data)
$
(17)
$
-
$
-
(9)
-
-
(4)
(9)
172,216
-
-
161,598
-
-
156,879
(908)
(6,266)
(5,260)
-
-
9
4
14
37
(4,259)
3,636
-
-
-
-
70
61
492
(1,241)
-
-
-
-
-
(30,360)
(1,533)
284
15,160
(20,303)
2,632
(908)
(49)
(6,266)
Total Stockholders' Equity
$
301,492
$
233,654
$
218,415
Comprehensive Income
Net income
Other comprehensive income, net of tax
Unrecognized actuarial (losses) gains
Amortization of actuarial losses
Amortization of prior service costs
Unrealized (losses) gains on securities
Comprehensive income
$
22,259
$
20,185
$
21,639
(4,259)
37
14
(15,200)
2,851
$
492
61
70
1,099
21,907
$
-
-
-
235
21,874
$
The accompanying notes are an integral part of these consolidated financial statements.
74
Consolidated Statements of Cash Flows
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses
Depreciation and amortization of premises and equipment
Origination of loans held for sale
Proceeds from sale of loans held for sale
Net gain on sales of loans held for sale
Net loss (gain) on sales of loans
Net gain on sales of securities
Other-than-temporary impairment charge on securities
Amortization of premium, net of accretion of discount
Fair value adjustment for financial assets and financial liabilities
Income from bank owned life insurance
Stock based compensation expense
Deferred compensation
Amortization of core deposit intangibles
Excess tax benefits from stock-based payment arrangements
Deferred income tax provision (benefit)
Increase (decrease) in other liabilities
(Increase) decrease in other assets
Net cash provided by operating activities
Investing Activities
Purchases of premises and equipment
Net purchase of Federal Home Loan Bank-NY shares
Purchases of securities available for sale
Proceeds from sales and calls of securities available for sale
Proceeds from maturities and prepayments of
securities available for sale
Net originations and repayments of loans
Purchases of loans
Proceeds from sale of loans
Proceeds from sale of delinquent loans
Purchase of bank owned life insurance
Cash used to acquire Atlantic Liberty Financial Corporation
Cash acquired in acquisition of Atlantic Liberty Financial Corporation
Net cash used in investing activities
For the years ended December 31,
2007
2008
2006
(In thousands)
$
22,259
$
20,185
$
21,639
5,600
2,407
(2,988)
3,126
(151)
151
(354)
27,575
2,205
(20,090)
(2,239)
2,158
(751)
468
(677)
(6,357)
598
(3,599)
29,341
(1,277)
(4,996)
(510,245)
96,950
53,482
(213,672)
(65,253)
-
13,641
(3,000)
-
-
(634,370)
-
2,417
(22,026)
22,237
(359)
(341)
-
4,710
1,402
(2,685)
(1,743)
2,008
(652)
469
(439)
(848)
4,043
(2,841)
25,537
(3,311)
(6,509)
(204,606)
5,501
90,130
(401,232)
(11,619)
2,050
33,996
(10,000)
-
-
(505,600)
-
1,655
(7,477)
8,108
(550)
(182)
(81)
-
1,506
-
(1,553)
2,307
(392)
234
(1,479)
484
(311)
6,430
30,338
(8,362)
(4,846)
(55,284)
45,547
51,735
(342,495)
(5,074)
8,695
12,314
(10,000)
(14,663)
3,401
(319,032)
Continued
The accompanying notes are an integral part of these consolidated financial statements.
75
Consolidated Statements of Cash Flows (continued)
2008
For the years ended December 31,
2007
(In thousands)
2006
Financing Activities
Net (decrease) increase in non-interest bearing deposits
Net increase in interest bearing deposits
Net increase (decrease) in mortgagors' escrow deposits
Net proceeds (repayments) of short-term borrowed funds
Proceeds from long-term borrowings
Repayment of long-term borrowings
Purchases of treasury stock
Excess tax benefits from stock-based payment arrangements
Proceeds from issuance of common stock upon exercise
of stock options
Net proceeds from issuance of preferred stock and common stock warrant
Cash dividends paid
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
$
325
433,540
8,730
28,300
275,203
(209,035)
(409)
677
$
(10,762)
268,467
2,737
-
470,757
(235,547)
(1,056)
439
$
17,673
173,078
(1,118)
(10,000)
250,000
(128,079)
(6,593)
1,479
2,363
69,974
(10,383)
599,285
(5,744)
36,148
1,326
-
(9,401)
2,931
-
(8,180)
486,960
291,191
6,897
29,251
2,497
26,754
Cash and cash equivalents, end of year
$
30,404
$
36,148
$
29,251
Supplemental Cash Flow Disclosure
Interest paid
Income taxes paid
Taxes paid if excess tax benefits on stock-based compensation
were not tax deductible
Fair value of assets acquired
Fair value of liabilities assumed
Common shares issued in exchange for Atlantic Liberty common shares
Non-cash activities:
Securities purchase transaction, not yet settled
$
125,935
17,899
$
119,977
11,874
$
87,577
8,653
18,576
-
-
-
10,097
12,313
1,309
-
-
-
10,132
185,599
144,379
26,557
-
The accompanying notes are an integral part of these consolidated financial statements.
76
Notes to Consolidated Financial Statements
For the years ended December 31, 2008, 2007 and 2006
1. Nature of Operations
Flushing Financial Corporation (the “Holding Company”), a Delaware business corporation, is a savings and loan
holding company organized at the direction of its subsidiary, Flushing Savings Bank, FSB (the “Bank”), in connection
with the Bank’s conversion from a mutual to capital stock form of organization. The Holding Company and its direct and
indirect wholly-owned subsidiaries, the Bank, Flushing Commercial Bank, Flushing Preferred Funding Corporation,
Flushing Service Corporation, and FSB Properties Inc., are collectively herein referred to as the “Company.”
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 primarily
conducts its business through fourteen full-service banking offices, nine of which are located in Queens County, one in
Nassau County, three in Kings County (Brooklyn), and one in New York County (Manhattan), New York. The Bank
also operates “iGObanking.com®”, an internet branch, offering checking, savings and certificates of deposit accounts.
2. Summary of Significant Accounting Policies
The accounting and reporting policies of the Company follow generally accepted accounting principles in the United
States of America (“GAAP”) and general practices within the banking industry. The policies which materially affect the
determination of the Company’s financial position, results of operations and cash flows are summarized below.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of the Holding Company and the following
direct and indirect wholly-owned subsidiaries of the Holding Company: the Bank, Flushing Commercial Bank (“FCB”),
Flushing Preferred Funding Corporation (“FPFC”), Flushing Service Corporation (“FSC”), and FSB Properties Inc.
(“Properties”). FCB is a limited-purpose commercial bank formed to accept municipal deposits and state funds,
including certain court ordered funds from New York State Courts, in the State of New York. FPFC is a real estate
investment trust formed to hold a portion of the Bank’s mortgage loans to facilitate access to capital markets. FSC was
formed to market insurance products and mutual funds. Properties is an inactive subsidiary whose purpose was to
manage real estate properties and joint ventures. All intercompany transactions and accounts are eliminated in
consolidation. The Holding Company currently has three unconsolidated subsidiaries in the form of wholly-owned
statutory business trusts, which were formed to issue guaranteed capital debentures (“capital securities”). Please see Note
7, “Borrowed Funds and Securities Sold Under Agreements to Repurchase,” for additional information regarding these
trusts.
Use of estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual
results could differ from these estimates.
Cash and cash equivalents:
For the purpose of reporting cash flows, the Company defines cash and due from banks, overnight interest-earning
deposits and federal funds sold with original maturities of 90 days or less as cash and cash equivalents. The Bank and
FCB are required to maintain cash reserves equal to a percentage of certain deposits. The combined reserve requirements
totaled $14.6 million and $11.0 million at December 31, 2008 and 2007, respectively.
Securities available for sale:
Securities are classified as available for sale when management intends to hold the securities for an indefinite period of
time or when the securities may be utilized for tactical asset/liability purposes and may be sold from time to time to
effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Premiums and discounts are
amortized or accreted, respectively, using the level-yield method. Realized gains and losses on the sales of securities are
determined using the specific identification method. Unrealized gains and losses (other than unrealized losses considered
other-than-temporary which are recognized in the Consolidated Statements of Income) on securities available for sale are
excluded from earnings and reported as accumulated other comprehensive income, net of taxes. In estimating other-than-
77
temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of the issuer, if applicable, and (3) the intent and
ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
Goodwill:
Goodwill is presumed to have an indefinite life and is tested annually, or when certain conditions are met, for
impairment, rather than amortized. If the fair value of the reporting unit is greater than the goodwill amount, no further
evaluation is required. If the fair value of the reporting unit is less than the goodwill amount, further evaluation would be
required to compare the fair value of the reporting unit to the goodwill amount and determine if a write down is required.
At December 31, 2008, the annual impairment tests did not result in recognizing an impairment of goodwill.
Loans:
Loans are reported at their principal outstanding balance net of any unearned income, charge-offs, deferred loan fees and
costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is recognized on
the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency
of ninety days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest
previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual
status. A non-accrual loan can be returned to accrual status after the loan meets certain criteria. Subsequent cash
payments received on non-accrual loans that do not meet the criteria are applied first as a reduction of principal until all
principal is recovered and then subsequently to interest. Loan fees and certain loan origination costs are deferred. Net
loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the
contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior
to their scheduled maturity are included in interest income.
Allowance for loan losses:
The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to
absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of
the allowance is based on evaluations of the collectability of loans. This evaluation is inherently subjective, as it requires
estimates that are susceptible to significant revisions as more information becomes available. In assessing the adequacy
of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent
trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in
the composition and volume of the gross loan portfolio, and local and national economic conditions. The Board of
Directors reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly
basis.
A loan is considered impaired when, based upon current information, the Company believes it is probable that it will be
unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan. Impaired
loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective
interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.
Interest income on impaired loans is recorded on the cash basis. The Company reviews all non-accrual loans for
impairment.
The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses.
Increases and decreases in the allowance other than charge-offs and recoveries are included in the provision for loan
losses. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance, and subsequent recoveries, if any, are credited to the allowance.
Loans held for sale:
Loans held for sale are initially recorded at the principal amount outstanding net of deferred origination costs and fees
and any premiums or discounts. Loans held for sale are carried at the lower of adjusted cost or market, which is
computed by the aggregate method (unrealized losses are offset by unrealized gains). Net unrealized losses are
recognized through a valuation allowance by charges to income. The Company did not have any loans held for sale as of
December 31, 2008 and 2007.
Bank owned life insurance:
Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided
positive consent allowing the Bank to be the beneficiary of such policies. BOLI is carried in the consolidated statements
of financial position at its cash surrender value. Increases in the cash value of the policies, as well as proceeds received,
are recorded in other non-interest income, and are not subject to income taxes.
78
Real estate owned:
Real estate owned consists of property acquired by foreclosure. These properties are carried at the lower of carrying
amount or fair value (which is based on appraised value with certain adjustments) less estimated costs to sell (hereinafter
defined as fair value). This determination is made on an individual asset basis. If the fair value is less than the carrying
amount, the deficiency is recognized as a valuation allowance. Further decreases to fair value will be recorded in this
valuation allowance through a provision for losses on real estate owned. The Company utilizes estimates of fair value to
determine the amount of its valuation allowance. Actual values may differ from those estimates. The Company obtained
one real estate owned property during the year ended December 31, 2008, which is included in Other Assets at its fair
value of $0.1 million at December 31, 2008, and had no real estate owned as of or during the years ended December 31,
2007 and 2006.
Bank premises and equipment:
Bank premises and equipment are stated at cost, less depreciation accumulated on a straight-line basis over the estimated
useful lives of the related assets (3 to 40 years). Leasehold improvements are amortized on a straight-line basis over the
term of the related leases or the lives of the assets, whichever is shorter. Maintenance, repairs and minor improvements
are charged to non-interest expense in the period incurred.
Federal Home Loan Bank Stock:
The Federal Home Loan Bank of New York (“FHLB-NY”) has assigned to the Bank a mandated membership stock
purchase, based on the Bank’s asset size. In addition, for all borrowing activity, the Bank is required to purchase shares
of FHLB-NY non-marketable capital stock at par. Such shares are redeemed by FHLB-NY at par with reductions in the
Bank’s borrowing levels. The Bank carries this investment at historical cost, as it does not consider the value of this
investment to be impaired.
Securities sold under agreements to repurchase:
Securities sold under agreements to repurchase are accounted for as collateralized financing and are carried at amounts at
which the securities will be subsequently reacquired as specified in the respective agreements. Interest incurred under
these agreements is included in other interest expense.
Income Taxes:
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this
method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between
book and tax bases of the various balance sheet assets and liabilities, and gives current recognition to changes in tax rates
and laws.
Stock compensation plans:
The Company accounts for its stock based compensation in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 123R, “Share-Based Payment.” SFAS No. 123R establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires a fair-value-based measurement method in
accounting for share-based payment transactions with employees. It also requires measurement of the cost of employee
services received in exchange for an award of an equity instrument based on the grant date fair value of the award. That
cost is recognized over the period during which an employee is required to provide service in exchange for the award.
The requisite service period is usually the vesting period.
Segment Reporting:
Management views the Company as operating as a single unit, a community savings bank. Therefore, segment
information is not provided.
Advertising Expense:
Costs associated with advertising are expensed as incurred. The Company recorded advertising expenses of $2.0 million,
$1.7 million, and $0.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Earnings per common share:
Basic earnings per common share for the years ended December 31, 2008, 2007 and 2006 were computed by dividing
net income available to common shareholders by the total weighted average number of common shares outstanding,
including only the vested portion of restricted stock and restricted stock unit awards. Diluted earnings per common share
includes the additional dilutive effect of stock warrants and stock options outstanding and the unvested portions of
restricted stock and restricted stock unit awards during the period. The shares held in the Company’s Employee Benefit
Trust are not included in shares outstanding for purposes of calculating earnings per common share.
79
Earnings per common share have been computed based on the following, for the years ended December 31:
2008
2007
(In thousands, except per share data)
2006
Net income, as reported
Preferred dividends and amortization of issuance costs
Net income available to common shareholders
Divided by:
Weighted average common shares outstanding
Weighted average common stock equivalents
Total weighted average common shares outstanding and
common stock equivalents
Basic earnings per common share
Diluted earnings per common share
$
$
22,259
(126)
22,133
$
$
20,185
-
20,185
$
$
21,639
-
21,639
20,000
171
20,171
$1.11
$1.10
19,625
236
19,861
$1.03
$1.02
18,639
293
18,932
$1.16
$1.14
Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per share. A
Warrant to purchase 751,611 shares at an average exercise price of $13.97 is not included in the computation of diluted
earnings per common share for the year ended December 31, 2008. Options to purchase 535,250 shares, at an average
exercise price of $17.75, 483,475 shares, at an average exercise price of $17.47 and 275,750 shares, at an average
exercise price of $18.05 were not included in the computation of diluted earnings per common share for 2008, 2007 and
2006, respectively. Unvested restricted stock and restricted stock unit awards of 186,238 shares, at an average market
price on the date of grant of $18.24, 149,272 shares, at an average market price on the date of grant of $17.11 and 73,529
shares, at an average market price on the date of grant of $18.10, were not included in the computation of diluted
earnings per share for 2008, 2007 and 2006, respectively.
3. Loans
The composition of loans is as follows at December 31:
Multi-family residential
Commercial real estate
One-to-four family ― mixed-use property
One-to-four family ― residential
Co-operative apartments
Construction
Small Business Administration
Taxi medallion
Commercial business and other
Gross loans
Unearned loan fees and deferred costs, net
Total loans
2008
2007
(In thousands)
$
999,185
752,120
751,952
238,711
6,566
103,626
19,671
12,979
69,759
$
964,455
625,843
686,921
161,666
7,070
119,745
18,922
68,250
41,796
2,954,569
17,121
2,694,668
14,083
$
2,971,690
$
2,708,751
The total amount of loans on non-accrual status was $38.7 million, $5.1 million and $3.1 million, at December 31, 2008,
2007 and 2006, respectively. The total amount of loans classified as impaired was $40.1 million, $5.9 million and $3.1
million at December 31, 2008, 2007 and 2006, respectively. The portion of the allowance for loan losses allocated to
impaired loans was $5.6 million (50.9%), $0.6 million (9.1%) and $0.3 million (4.5%) at December 31, 2008, 2007 and
2006, respectively. The portion of the impaired loan amount above 100% of the loan-to-value ratio is charged off. The
average balance of impaired loans was $40.1 million, $5.1 million and $2.7 million for 2008, 2007 and 2006,
respectively.
80
The following is a summary of interest foregone on non-accrual loans for the years ended December 31:
2007
(In thousands)
2008
2006
Interest income that would have been recognized had the loans performed
in accordance with their original terms
Less: Interest income included in the results of operations
Foregone interest
$
2,556
997
$
1,559
$
341
85
$
227
83
$
256
$
144
The following are changes in the allowance for loan losses for the years ended December 31:
Balance, beginning of year
Provision for loan losses
Allowance from Atlantic Liberty acquisition
Charge-offs
Recoveries
Balance, end of year
4. Debt and Equity Securities
2008
2007
(In thousands)
2006
$
6,633
5,600
-
(1,291)
86
$
7,057
-
-
(472)
48
$
6,385
-
753
(93)
12
$
11,028
$
6,633
$
7,057
Investments in equity securities that have readily determinable fair values and all investments in debt securities are
classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities
available for sale and (3) securities held-to-maturity.
The Company did not hold any trading securities or securities held-to-maturity during the years ended December 31,
2008 and 2007. Securities available for sale are recorded at fair value. Securities classified as held-to-maturity would be
stated at cost, adjusted for amortization of premium and accretion of discount using the level-yield method. Trading
securities would be carried at fair value.
The amortized cost and fair value of the Company’s securities, classified as available for sale at December 31, 2008 are
as follows:
U.S. government agencies
Other
Mutual funds
Total other securities
REMIC and CMO
GNMA
FNMA
FHLMC
Total mortgage-backed securities
Amortized
Cost
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
$
12,616
46,623
19,114
78,353
$
12,658
40,725
19,114
72,497
$
42
169
-
211
-
$
6,067
-
6,067
330,767
152,350
165,375
47,815
696,307
304,511
154,553
167,592
48,108
674,764
3,386
2,270
2,341
293
8,290
29,642
67
124
-
29,833
Total securities available for sale
$
774,660
$
747,261
$
8,501
$
35,900
81
The following table shows the Company’s available for sale securities’ with gross unrealized losses and their fair value,
aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at
December 31, 2008.
Total
Less than 12 months
12 months or more
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(In thousands)
Other
Total other securities
$
7,733
7,733
$
6,067
6,067
$
7,733
7,733
$
6,067
6,067
-
$
-
-
$
-
REMIC and CMO
GNMA
FNMA
Total mortgage-backed
securities
Total securities
available for sale
92,659
12,187
17,151
29,642
67
124
74,970
12,187
9,999
19,475
67
101
17,689
-
7,152
10,167
-
23
121,997
29,833
97,156
19,643
24,841
10,190
$
129,730
$
35,900
$
104,889
$
25,710
$
24,841
$
10,190
The Company conducts periodic reviews of each investment that has an unrealized loss. An unrealized loss exists when
the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale
securities that are deemed to be temporary are recorded, net of tax, in accumulated other comprehensive loss. Unrealized
losses that are considered other-than-temporary are charged against earnings in the Consolidated Statement of Income.
The unrealized losses in Other securities at December 31, 2008 were primarily caused by market interest volatility, a
significant widening of credit spreads across markets for these securities, and illiquidity and uncertainty in the financial
markets. These securities consist of two single issuer trust preferred securities and three pooled trust preferred issues.
The Company evaluates these securities using an impairment model that is applied to debt securities. This review
included evaluating the financial condition of each counter party. Each of these securities is performing according to its
terms, and, in the opinion of management, will continue to perform according to their terms. Because the Company has
the ability and intent to hold these securities until a recovery of their fair value, which may be at maturity, the Company
did not consider these investments to be other-than-temporarily impaired at December 31, 2008.
The unrealized losses in REMIC and CMO securities at December 31, 2008 were primarily caused by market interest
volatility, a significant widening of credit spreads across markets for these securities, and illiquidity and uncertainty in
the financial markets. These securities consist of three issues that were issued by each of GNMA, FNMA and FHLMC,
and 10 private issues.
The unrealized losses on the REMIC and CMO securities issued by GNMA, FNMA and FHLMC were primarily caused
by movements in interest rates rather than credit risk. It is not anticipated that these securities would be settled at a price
that is less than the amortized cost of the Company’s investment. Because the Company has the ability and intent to hold
these securities until a recovery of their fair value, which may be at maturity, the Company did not consider these
investments to be other-than-temporarily impaired at December 31, 2008.
The unrealized losses on REMIC and CMO securities issued by private issuers were primarily caused by movements in
interest rates, a significant widening of credit spreads across markets for these securities, and illiquidity and uncertainty
in the financial markets. Each of these securities has some level of credit enhancements, and none are collateralized by
sub-prime loans. Management periodically reviews the characteristics of these securities, including delinquency and
foreclosure levels, projected losses at various severity levels, and credit enhancement and coverage. Based on these
reviews, it is not anticipated that these securities would be settled at a price that is less than the amortized cost of the
Company’s investment. Because the Company has the ability and intent to hold these securities until a recovery of their
fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily
impaired at December 31, 2008.
The unrealized losses on GNMA (one security) and FNMA (five securities) mortgage-backed securities were primarily
caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than
the amortized cost of the Company’s investment. Because the Company has the ability and intent to hold these securities
until a recovery of their fair value, which may be at maturity, the Company did not consider these investments to be
other-than-temporarily impaired at December 31, 2008.
The Company elected to carry $139.5 million and $164.0 million of its securities at fair value under SFAS No. 159 at
December 31, 2008 and 2007, respectively. (See Note 15 of Notes to Consolidated Financial Statements). Since these
82
securities are carried at fair value, they do not have any unrealized gains or losses as of December 31, 2008 and
December 31, 2007.
The amortized cost and estimated fair value of the Company’s securities, classified as available for sale at December 31,
2008, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total other securities
Mortgage-backed securities
Amortized
Cost
Fair Value
(In thousands)
$
36,766
11,220
8,654
21,713
$
36,924
11,258
8,668
15,647
78,353
696,307
72,497
674,764
Total securities available for sale
$
774,660
$
747,261
The amortized cost and fair value of the Company’s securities classified as available for sale at December 31, 2007 were
as follows:
U.S. government agencies
Mutual funds
Other
Total other securities
REMIC and CMO
FNMA
FHLMC
GNMA
Total mortgage-backed securities
Amortized
Cost
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
$
4,406
21,752
51,213
77,371
$
4,406
21,752
51,213
77,371
-
$
-
-
-
-
$
-
-
-
182,609
123,121
45,511
11,464
362,705
182,730
122,770
45,566
11,663
362,729
761
493
151
199
1,604
640
844
96
-
1,580
Total securities available for sale
$
440,076
$
440,100
$
1,604
$
1,580
The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value,
aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at
December 31, 2007.
Total
Less than 12 months
12 months or more
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(In thousands)
FNMA
REMIC and CMO
FHLMC
$
43,407
93,903
4,926
$
844
640
96
$
144
88,481
-
-
$
603
-
$
43,263
5,422
4,926
$
844
37
96
Total mortgage-backed
securities
$
142,236
$
1,580
$
88,625
$
603
$
53,611
$
977
The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate increases.
These securities were either issued by a U.S. government agency (GNMA), a government sponsored entity (FNMA or
FHLMC) or were privately issued and carried a rating of AAA. It was expected that the securities would not be settled at
83
a price less than the amortized cost of the Company’s investment. Because the decline in market value was attributable to
changes in interest rates and not credit quality, and because the Company had the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, the Company did not consider these investments to be
other-than-temporarily impaired at December 31, 2007.
For the year ended December 31, 2008, there were $0.5 million in gross gains and $0.1 million in gross losses realized
on sales of securities available for sale. Gross gains of $3.6 million and gross losses of $11.5 million were recognized as
net gain from fair value adjustments for the year ended December 31, 2008. In addition, other-than-temporary
impairment write-downs of $27.6 million were recorded during the year ended December 31, 2008 to reduce the carrying
amount of investments in preferred stock issues of FNMA and FHLMC to the securities market value of $0.6 million at
December 31, 2008. For the year ended December 31, 2007, there were no gross gains or losses realized on sales of
securities available for sale. Gross gains of $3.0 million and gross losses of $0.1 million were recognized as net gain
from fair value adjustments for the year ended December 31, 2007. In addition, an other-than-temporary impairment
write-down of $4.7 million was recorded during the year ended December 31, 2007 to reduce the carrying amount of
investments in preferred stock issues of FNMA and FHLMC to the securities market value of $28.2 million at December
31, 2007. For the year ended December 31, 2006, gross gains of $0.1 million were realized on sales of securities
available for sale; there were no losses realized on the sales of securities available for sale.
5. Bank Premises and Equipment, Net
Bank premises and equipment are as follows at December 31:
Land
Building and leasehold improvements
Equipment and furniture
Total
Less: Accumulated depreciation and amortization
Bank premises and equipment, net
2008
2007
(In thousands)
$
3,551
19,276
16,752
39,579
16,773
$
3,551
18,807
15,944
38,302
14,366
$
22,806
$
23,936
84
6. Deposits
Total deposits at December 31, 2008 and 2007, and the weighted average rate on deposits at December 31, 2008, are as
follows:
Interest-bearing deposits:
Certificate of deposit accounts
Savings accounts
Money market accounts
NOW accounts
Total interest-bearing deposits
Non-interest bearing demand deposits
Total due to depositors
Mortgagors' escrow deposits
Total deposits
2008
2007
(Dollars in thousands)
$
$
1,436,450
359,595
306,178
265,762
2,367,985
69,624
2,437,609
31,225
2,468,834
1,167,399
354,746
340,694
70,817
1,933,656
69,299
2,002,955
22,492
2,025,447
$
$
Weighted
Average
Rate
2008
%
3.94
1.84
2.58
2.26
0.16
At December 31, 2008, there were $273.3 million in mortgaged-backed securities pledged as collateral for $211.8
million in deposits at FCB.
The aggregate amount of time deposits with denominations of $100,000 or more (excluding brokered deposits) was
$413.7 million and $318.5 million at December 31, 2008 and 2007, respectively. The aggregate amount of brokered
deposits was $384.9 million and $201.7 million at December 31, 2008 and 2007, respectively.
Interest expense on deposits is summarized as follows for the years ended December 31:
2008
2007
(In thousands)
2006
Certificate of deposit accounts
Savings accounts
Money market accounts
NOW accounts
Total due to depositors
Mortgagors' escrow deposits
Total interest expense on deposits
$
$
$
55,501
7,793
9,704
3,688
76,686
68
76,754
57,029
7,574
12,425
913
77,941
76
78,017
43,757
4,031
8,804
202
56,794
63
56,857
$
$
$
Scheduled remaining maturities of certificate of deposit accounts are summarized as follows for the years ended
December 31:
2008
2007
(In thousands)
Within 12 months
More than 12 months to 24 months
More than 24 months to 36 months
More than 36 months to 48 months
More than 48 months to 60 months
More than 60 months
Total certificate of deposit accounts
85
$
$
894,494
376,567
92,941
22,730
29,639
20,079
1,436,450
715,966
173,125
158,115
83,210
13,832
23,151
1,167,399
$
$
7. Borrowed Funds and Securities Sold Under Agreements to Repurchase
Borrowed funds and securities sold under agreements to repurchase are summarized as follows at December 31:
2008
2007
Repurchase agreements - adjustable rate:
Due in 2009
Due in 2010
Due in 2013
Total repurchase agreements - adjustable rate
Repurchase agreements - fixed rate:
Due in 2008
Due in 2009
Due in 2010
Due in 2011
Due in 2012
Due in 2013
Due in 2016
Due in 2017
Total repurchase agreements - fixed rate
Total repurchase agreements
FHLB-NY advances - fixed rate:
Due in 2008
Due in 2009
Due in 2010
Due in 2011
Due in 2012
Due in 2013
Due in 2017
Total FHLB-NY advances - fixed rate
Total FHLB-NY advances
Junior subordinated debentures - adjustable rate
Due in 2037
Total borrowings
Amount
$
10,000
10,000
-
20,000
-
35,757
10,900
10,000
18,000
40,000
30,000
58,000
202,657
222,657
-
238,300
254,790
141,623
136,000
32,527
80,000
883,240
883,240
Weighted
Average
Rate
Weighted
Average
Rate
Amount
(Dollars in thousands)
3.93
4.01
-
3.97
-
5.08
4.86
4.87
4.71
3.97
4.98
4.32
4.57
4.52
-
2.94
5.01
4.49
4.37
3.51
4.41
4.16
4.16
%
$
10,000
10,000
20,000
40,000
20,000
35,924
10,900
10,000
18,000
-
30,000
58,000
182,824
222,824
188,973
130,000
222,393
93,133
74,000
-
80,000
788,499
788,499
%
5.46
5.54
4.69
5.09
3.89
4.95
4.86
4.87
4.71
-
4.98
4.38
4.62
4.71
4.18
4.46
5.09
5.05
5.10
-
4.41
4.70
4.70
7.03
33,052
13.20
61,228
$
1,138,949
4.49
%
$
1,072,551
4.83
%
86
Borrowed funds which have call provisions are summarized as follows at December 31, 2008:
Amount
Rate
Maturity Date
Call Date
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
FHLB-NY advances - fixed rate
FHLB-NY advances - fixed rate
FHLB-NY advances - fixed rate
FHLB-NY advances - fixed rate
FHLB-NY advances - fixed rate
$
25,000
18,000
10,000
20,000
20,000
18,000
20,000
10,000
10,000
10,000
10,000
10,000
20,000
30,000
(Dollars in thousands)
5.52
%
4.71
4.89
4.25
4.26
4.48
5.02
2.81
2.91
4.32
4.15
4.13
4.43
4.60
7/22/2009
4/19/2012
7/28/2016
9/19/2017
9/21/2017
10/18/2017
7/28/2016
5/7/2013
8/7/2013
9/18/2017
9/18/2017
9/18/2017
10/10/2017
10/10/2017
On Demand
4/19/2010
7/28/2010
9/19/2010
9/21/2010
10/18/2010
7/28/2011
5/7/2011
8/7/2011
9/17/2011
9/18/2010
9/17/2010
10/9/2011
10/9/2012
As part of the Company’s strategy to finance investment opportunities and manage its cost of funds, the Company enters
into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as financing
transactions and the obligations to repurchase are reflected as a liability in the consolidated financial statements. The
securities underlying the agreements were delivered to the broker-dealers or the FHLB-NY who arranged the transaction.
The securities remain registered in the name of the Company and are returned upon the maturity of the agreement. The
Company retains the right of substitution of collateral throughout the terms of the agreements. All the repurchase
agreements are collateralized by mortgage-backed securities. Information relating to these agreements at or for the years
ended December 31 is as follows:
Book value of collateral
Estimated fair value of collateral
Average balance of outstanding agreements during the year
Maximum balance of outstanding agreements at a month end during the year
Average interest rate of outstanding agreements during the year
2008
2007
(Dollars in thousands)
$
276,024
276,024
222,688
223,191
4.50%
$
302,446
302,446
229,544
272,693
5.04%
Pursuant to a blanket collateral agreement with the FHLB-NY, advances are secured by all of the Bank’s stock in the
FHLB-NY and certain qualifying mortgage loans in an amount at least equal to 110% of the advances outstanding. The
Bank may also pledge mortgage-backed and mortgage-related securities, and other securities not otherwise pledged.
The Holding Company has three trusts formed under the laws of the State of Delaware for the purpose of issuing capital
and common securities, and investing the proceeds thereof in junior subordinated debentures of the Holding Company.
Each of these trusts issued $20.6 million of securities with a fixed-rate for the first five years, after which they will reset
quarterly based on a spread over 3-month LIBOR. The securities are first callable at par after five years, and pay
cumulative dividends. The Holding Company has guaranteed the payment of these trusts’ obligations under their capital
securities. The terms of the junior subordinated debentures are the same as those of the capital securities issued by the
trusts. The junior subordinated debentures issued by the Holding Company are carried at fair value in the consolidated
financial statements. The table below shows the terms of the securities issued by the trusts.
Issue Date
Initial Rate
First Reset Date
Spread over 3-month LIBOR
Maturity Date
Flushing Financial
Capital Trust II
Flushing Financial
Capital Trust III
Flushing Financial
Capital Trust IV
June 20, 2007
7.14%
September 1, 2012
1.41%
September 1, 2037
June 21, 2007
6.89%
June 15, 2012
1.44%
September 15, 2037
July 3, 2007
6.85%
July 30,2012
1.42%
July 30, 2037
87
The Holding Company also had a trust formed under the laws of the State of Delaware for the purpose of issuing capital
and common securities and investing the proceeds thereof in $20.6 million of junior subordinated debentures of the
Holding Company. On July 11, 2002, the trust issued $20.0 million of floating rate capital securities, which had a
floating per annum rate of interest, reset quarterly, equal to 3.65% over 3-month LIBOR. The capital securities had a
maturity date of October 7, 2032, and were first callable at par on July 7, 2007, at which time they were redeemed. The
Holding Company had guaranteed the payment of the trust’s obligations under its capital securities. The terms of the
junior subordinated debentures were the same as those of the capital securities issued by the trust.
The consolidated financial statements do not include the securities issued by the trusts, but rather include the junior
subordinated debentures of the Holding Company.
8. Income Taxes
Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax
returns with its subsidiaries, with the exception of the trusts, which file separate Federal income tax returns as trusts. The
Company remains subject to examination for its Federal income tax returns for the years ending on or after December
31, 2004, and for its New York State and New York City income tax returns for years ending on or after December 31,
2005. A deferred tax liability is recognized on all taxable temporary differences and a deferred tax asset is recognized on
all deductible temporary differences and operating losses and tax credit carry-forwards. A valuation allowance is
recognized to reduce the potential deferred tax asset if it is “more likely than not” that all or some portion of that
potential deferred tax asset will not be realized. The Company must also take into account changes in tax laws or rates
when valuing the deferred income tax amounts it carries on its Consolidated Statements of Financial Condition.
The Company’s annual tax liability for New York State and New York City was the greater of a tax based on “entire net
income,” “alternative entire net income,” “taxable assets” or a minimum tax. For the year ended December 31, 2008, the
Company’s state and city tax was based on “entire net income.” For the year ended December 31, 2007, the Company’s
state tax was based on “alternative entire net income,” with the city tax based on “entire net income.” For the year ended
December 31, 2006, the Company’s state and city tax were based on “alternative entire net income.”
Income tax provisions (benefits) are summarized as follows for the years ended December 31:
2008
2007
(In thousands)
2006
$
15,153
(5,384)
9,769
$
10,151
(879)
9,272
$
10,826
(97)
10,729
Federal:
Current
Deferred
Total federal tax provision
State and Local:
Current
Deferred
Total state and local tax provision
Total income tax provision
$
3,261
(973)
2,288
12,057
1,627
31
1,658
10,930
1,808
581
2,389
13,118
$
$
The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 35.1%,
35.1% and 37.7% for the years ended December 31, 2008, 2007 and 2006, respectively. The effective rates differ from
the statutory federal income tax rate as follows for the years ended December 31:
Taxes at federal statutory rate
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal
2008
2007
(Dollars in thousands)
2006
$
12,011
35.0
%
$
10,890
35.0
%
$
12,165
35.0
%
income tax benefit
Other
Taxes at effective rate
1,487
(1,441)
12,057
$
4.3
(4.2)
35.1
%
1,078
(1,038)
10,930
$
3.4
(3.3)
35.1
%
1,553
(600)
13,118
$
4.5
(1.8)
37.7
%
88
The components of the income taxes attributable to income from operations and changes in equity are as follows for the
years ended December 31:
Income from operations
Equity:
Change in fair value of securities available for sale
Adjustment required to recognize funded status of
postretirement pension plans
Current year actuarial (losses) gains of postretirement plans
Amortization of net actuarial losses and prior service costs
Effect of change in measurement date of postretirement plans
Cumulative adjustment related to the adoption
of SFAS No. 159
Compensation expense for tax purposes in excess of that
recognized for financial reporting purposes
Total income taxes
2008
$
12,057
2007
(In thousands)
$
10,930
2006
$
13,118
(12,225)
-
(3,427)
41
(13)
634
-
386
121
-
-
(1,721)
175
(975)
-
-
-
-
(677)
(4,244)
$
(439)
9,911
$
(1,479)
10,839
$
The components of the net deferred tax asset are as follows at December 31:
Deferred tax asset:
Postretirement benefits
Stock based compensation
Depreciation
Unrealized losses on securities available for sale
Fair value adjustment on financial assets carried
at fair value
Fair value adjustment on financial liabilities carried
at fair value
Other-than-temporary impairment charges
Adjustment required to recognize funded status of
postretirement pension plans
Other
Deferred tax asset
Deferred tax liability:
Allowance for loan losses
Depreciation
Core deposit intangibles
Valuation differences resulting from acquired
assets and liabilities
Fair value adjustment on financial liabilities carried
at fair value
Unrealized gains on securities available for sale
Other
Deferred tax liability
2008
2007
(In thousands)
$
2,929
1,727
331
12,217
$
2,388
1,686
-
-
5,260
-
14,368
4,106
1,246
42,184
700
-
1,042
3,132
10,906
-
1,774
17,554
1,475
1,583
2,078
730
462
10,402
1,704
39
1,240
3,236
-
8
1,526
7,753
Net deferred tax asset included in other assets
$
24,630
$
2,649
The Company has recorded a net deferred tax asset of $24.6 million. This represents the anticipated net federal, state and
local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising
this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three
years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, it is
89
more likely than not that the net deferred tax asset will be fully realized. Accordingly, no valuation allowance was
deemed necessary for the net deferred tax asset at December 31, 2008 and 2007.
The Company adopted the provisions of FASB Interpretation No.48 (FIN 48), “Accounting for Uncertainty in Income
Taxes,” on January 1, 2007. The Company does not have uncertain tax positions that are deemed material, and did not
recognize any adjustments for unrecognized tax benefits upon adoption of FIN 48. The Company’s policy is to recognize
interest and penalties on income taxes in operating expenses. During the three years ended December 31, 2008, the
Company did not recognize any material amounts of interest or penalties on income taxes.
9. Stock Based Compensation
The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based Payment.”
For the years ended December 31, 2008, 2007 and 2006, the Company’s net income, as reported, includes $2.3 million,
$2.1 million and $2.4 million, respectively, of stock-based compensation costs and $0.8 million, $0.7 million and $0.9
million of income tax benefits related to the stock-based compensations plans.
The Company estimates the fair value of stock options using the Black-Scholes valuation model that uses the
assumptions noted in the table below. Key assumptions used to estimate the fair value of stock options include the
exercise price of the award, the expected option term, the expected volatility of the Company’s stock price, the risk-free
interest rate over the options’ expected term and the annual dividend yield. The Company uses the fair value of the
common stock on the date of award to measure compensation cost for restricted stock and restricted stock unit awards.
Compensation cost is recognized over the vesting period of the award, using the straight line method. There were 88,100,
95,200 and 133,475 stock options granted for the years ended December 31, 2008, 2007 and 2006, respectively. There
were 128,570, 110,950 and 121,425 restricted stock units granted for the years ended December 31, 2008, 2007 and
2006, respectively.
The following are the significant weighted assumptions relating to the valuation of the Company’s stock options granted
for the periods indicated and exclude the Atlantic Liberty stock options, for the years ended December 31:
Dividend yield
Expected volatility
Risk-free interest rate
Expected option life (years)
2008 Grants
2007 Grants
2006 Grants
3.38%
28.91%
3.82%
7 years
3.60%
28.75%
5.03%
7 years
3.38%
29.31%
5.10%
7 years
Holders of Atlantic Liberty stock options had the election to convert their options to Holding Company options or
receive cash for the difference between their option price and $24.00. Holders of 148,734 Atlantic Liberty options, with
an exercise price of $18.50, elected to receive 212,687 Holding Company options with an exercise price of $12.94. This
is considered a modification under SFAS 123R. No additional expense was recognized as the fair value of these options
after this modification is less than the fair value before the modification, as the time period in which they can be
exercised, and therefore their expected life, was reduced. The following are the significant assumptions relating to the
valuation of the Atlantic Liberty stock options upon modification at the merger date.
Dividend yield
Expected volatility
Risk-free interest rate
Expected option life (years)
2006 Grants
3.71%
29.31%
5.13%
3 years
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. The Company has applied the shares
previously authorized by stockholders under the 1996 Restricted Stock Incentive Plan and the 1996 Stock Option
Incentive Plan for use as full value awards and non-full value awards, respectively, for future awards under the Omnibus
Plan. On May 20, 2008 stockholders approved an amendment to the Omnibus Plan authorizing an additional 600,000
shares for the Omnibus Plan, of which 350,000 shares are available for use for full value awards and 250,000 shares are
available for use for non-full value awards. As of December 31, 2008, there are 435,747 shares available for full value
awards and 319,008 shares available for non-full value awards. To satisfy stock option exercises or fund restricted stock
90
and restricted stock unit awards, shares are issued from treasury stock, if available, otherwise new shares are issued. All
grants and awards under the 1996 Restricted Stock Incentive Plan and the 1996 Stock Option Incentive Plan prior to the
effective date of the Omnibus Plan are still outstanding as issued. The Company will maintain separate pools of available
shares for full value as opposed to non-full value awards, except that shares can be moved from the non-full value pool
to the full value pool on a 3-for-1 basis. During the year ended December 31, 2007, 399,999 shares were transferred from
the non-full value pool to the full value pool, which increased the full value pool by 133,333 shares. The exercise price
per share of a stock option grant may not be less than the fair market value of the common stock of the Company, as
defined in the Omnibus Plan, on the date of grant, and may not be repriced without the approval of the Company’s
stockholders. Options, stock appreciation rights, restricted stock, restricted stock units and other stock based awards
granted under the Omnibus Plan are generally subject to a minimum vesting period of three years with stock options
having a 10-year contractual term. Other awards do not have a contractual term of expiration. Restricted stock unit
awards include participants who have reached or are close to reaching retirement eligibility, at which time such awards
fully vest. These amounts are included in stock-based compensation expense.
Full Value Awards: The first pool is available for full value awards, such as restricted stock unit awards. The pool will
be decreased by the number of shares granted as full value awards. The pool will be increased from time to time by the
number of shares that are returned to or retained by the Company as a result of the cancellation, expiration, forfeiture or
other termination of a full value award (under the Omnibus Plan or the 1996 Restricted Stock Incentive Plan); the
settlement of such an award in cash; the delivery to the award holder of fewer shares than the number underlying the
award, including shares which are withheld from full value awards; or the surrender of shares by an award holder in
payment of the exercise price or taxes with respect to a full value award. The Omnibus Plan will allow the Company to
transfer shares from the non-full value pool to the full value pool on a 3-for-1 basis, but does not allow the transfer of
shares from the full value pool to the non-full value pool.
The following table summarizes the Company’s full value awards at or for the year ended December 31, 2008:
Full Value Awards
Non-vested at December 31, 2007
Granted
Vested
Forfeited
Non-vested at December 31, 2008
Shares
186,566
128,570
(101,738)
(2,240)
211,158
Weighted-Average
Grant-Date
Fair Value
$
16.88
19.46
17.77
16.75
18.02
$
Vested but unissued at December 31, 2008
65,755
$
18.10
As of December 31, 2008, there was $3.1 million of total unrecognized compensation cost related to non-vested full
value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of
3.2 years. The total fair value of awards vested for the year ended December 31, 2008, 2007 and 2006 were $2.0 million,
$1.8 million and $1.9 million, respectively. The vested but unissued full value awards consist of awards made to
employees and directors who are eligible for retirement. According to the terms of the Omnibus Plan, these employees
and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting dates.
Non-Full Value Awards: The second pool is available for non-full value awards, such as stock options. The pool
will be increased from time to time by the number of shares that are returned to or retained by the Company as a result of
the cancellation, expiration, forfeiture or other termination of a non-full value award (under the Omnibus Plan or the
1996 Stock Option Incentive Plan). The second pool will not be replenished by shares withheld or surrendered in
payment of the exercise price or taxes, retained by the Company as a result of the delivery to the award hold of fewer
shares than the number underlying the award, or the settlement of the award in cash.
91
The following table summarizes certain information regarding the non-full value awards, all of which have been granted
as stock options, at or for the year ended December 31, 2008:
Non-Full Value Awards
Shares
Weighted-
Average
Exercise
Price
Weighted-Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
($000) *
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Exercisable shares at December 31, 2008
Vested but unexercisable shares at
December 31, 2008
1,563,056
88,100
(219,203)
(3,920)
1,428,033
$
$
13.45
18.98
10.79
17.92
14.18
1,198,208
$
13.52
5.3 years
4.7 years
$
768
$
768
6,390
$
17.15
8.4 years
$
-
* The intrinsic value of a stock option is the difference between the market value of the underlying stock and the exercise
price of the option.
As of December 31, 2008, there was $0.9 million of total unrecognized compensation cost related to unvested non-full
value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of
3.3 years. The vested but unexercisable non-full value awards were made to employees and directors who are eligible
for retirement. According to the terms of the Omnibus Plan, these employees and directors have no risk of forfeiture.
These shares will be exercisable at the original contractual vesting dates.
Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised, and the weighted
average grant date fair value for options granted, during the years ended December 31, 2008, 2007 and 2006 are
provided in the following table:
(In thousands, except grant date fair value)
Proceeds from stock options exercised
Fair value of shares received upon exercise of stock options
Tax benefit related to stock options exercised
Intrinsic value of stock options exercised
Weighted average fair value on grant date
2008
2007
2006
$
$
2,363
-
502
1,752
4.66
$
1,385
155
435
1,243
4.30
2,931
619
1,428
3,434
5.52
Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit
sharing plan for officers who have achieved the level of Vice President and above and completed one year of service.
Awards are made under this plan on certain compensation not eligible for awards made under the profit sharing plan, due
to the terms of the profit sharing plan and the Internal Revenue Code. Employees receive awards under this plan
proportionate to the amount they would have received under the profit sharing plan, but for limits imposed by the profit
sharing plan and the Internal Revenue Code. The awards are made as cash awards, and then converted to common stock
equivalents (phantom shares) at the then current market value of the Company’s common stock. Dividends are credited
to each employee’s account in the form of additional phantom shares each time the Company pays a dividend on its
common stock. In the event of a change of control (as defined in this plan), an employee’s interest is converted to a fixed
dollar amount and deemed to be invested in the same manner as his interest in the Bank’s non-qualified deferred
compensation plan. Employees vest under this plan 20% per year for 5 years. Employees also become 100% vested upon
a change of control. Employees receive their vested interest in this plan in the form of a cash lump sum payment or
installments, as elected by the employee, after termination of employment. The Company adjusts its liability under this
plan to the fair value of the shares at the end of each period.
92
Phantom Stock Plan
Shares
Fair Value
Outstanding at December 31, 2007
Granted
Forfeited
Distributions
Outstanding at December 31, 2008
14,046
3,107
(14)
(1,379)
15,760
$
$
16.05
13.84
16.41
15.71
11.96
Vested at December 31, 2008
15,544
$
11.96
10. Pension and Other Postretirement Benefit Plans
The Company sponsors qualified pension, 401(k), and profit sharing plans for its employees. The Company also
sponsors postretirement health care and life insurance benefits plans for its employees, a non-qualified deferred
compensation plan for officers who have achieved the level of at least vice president, and a non-qualified pension plan
for its outside directors.
Effective December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans.” The Statement requires recognition of the funded status of a benefit plan –
measured as the difference between plan assets at fair value and the benefit obligation – in the statement of financial
condition, with the unrecognized credits and charges recognized, net of taxes, as a component of accumulated other
comprehensive income. These credits or charges arose as a result of gains or losses and prior service costs or credits that
arose during prior periods but were not recognized as components of net periodic benefit cost pursuant to SFAS No. 87,
“Employers’ Accounting for Pensions,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other
Than Pensions.” The amounts recognized in accumulated other comprehensive income, on a pre-tax basis, consist of the
following, as of December 31:
Net Actuarial
loss (gain)
2007
2006
2008
Employee Retirement Plan
Other Postretirement Benefit Plans
Atlantic Liberty Retirement Plan
Outside Directors Plan
Total
$
$
$
9,100
(80)
96
(370)
8,746
1,872
(251)
(52)
(429)
1,140
$
$
$
2,789
(614)
10
(41)
2,144
2008
2006
Prior Service Cost
2007
(In thousands)
$
-
95
-
419
514
$
$
-
81
-
560
641
$
$
-
111
-
369
480
$
2008
Total
2007
2006
$
$
$
9,100
31
96
(1)
9,226
1,872
(156)
(52)
(10)
1,654
$
$
$
2,789
(533)
10
519
2,785
Amounts in accumulated other comprehensive income to be recognized as components of net periodic expense for these
plans in 2009 are as follows:
Employee Retirement Plan
Other Postretirement Benefit Plans
Atlantic Liberty Retirement Plan
Outside Directors Plan
Net Actuarial
loss (gain)
$
Prior Service
Cost
(In thousands)
$
-
8
-
40
48
$
317
-
6
(21)
302
Total
$
317
8
6
19
350
$
$
Employee Retirement Plan:
The Bank has a funded noncontributory defined benefit retirement plan covering substantially all of its salaried
employees who were hired before September 1, 2005 (the “Retirement Plan”). The benefits are based on years of service
and the employee’s compensation during the three consecutive years out of the final ten years of service that produces
the highest average. The Bank’s funding policy is to contribute annually the amount recommended by the Retirement
Plan’s actuary. The Bank’s Retirement Plan invests in diversified equity and fixed-income funds, which are
independently managed by a third party. Effective September 30, 2006, the Bank’s Retirement Plan was frozen so that
no employee may become a participant in the Retirement Plan on or after that date and no further benefits will accrue to
any participants under the Retirement Plan after that date. As a result, the Company did not make a contribution to the
Retirement Plan during the years ended December 31, 2008 and 2007. Freezing the Retirement Plan resulted in a
curtailment gain of $1.7 million. This curtailment gain was not recognized in the Consolidated Statements of Income, but
93
was instead used to reduce the unrecognized net loss from past experience different from that assumed and effects of
changes in assumptions for the Retirement Plan. Effective October 1, 2006, the Bank added a new program to its 401(k)
Plan to replace the Retirement Plan. The Retirement Plan was frozen to reduce annual operating expense. The Company
used a December 31 and a September 30 measurement date for the Retirement Plan for the years ended December 31,
2008 and 2007, respectively.
The following table sets forth, for the Retirement Plan, the change in benefit obligation and assets, and for the Company,
the amounts recognized in the Consolidated Statements of Financial Position at December 31:
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Adjustment for measurement date change
Actuarial loss
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Market value of assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Market value of plan assets at end of year
2008
2007
(In thousands)
$
15,002
-
914
228
866
(1,051)
15,959
$
14,817
-
868
-
33
(716)
15,002
16,977
(4,796)
-
(1,051)
11,130
15,595
2,098
-
(716)
16,977
(Accrued) prepaid pension cost included in other (liabilities) assets
$
(4,829)
$
1,975
Assumptions used to determine the Retirement Plan’s benefit obligations were:
Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets
2008
2007
5.87%
NA
8.50%
6.25%
NA
8.50%
The accumulated benefit obligation for the Retirement Plan was $16.0 million and $15.0 million at December 31,
2008 and 2007, respectively.
94
The components of the net pension expense for the Retirement Plan are as follows for the years ended December 31:
Service cost
Interest cost
Amortization of unrecognized loss
Expected return on plan assets
Net pension expense
SFAS No. 158 recognition of deferred costs
Current year actuarial loss
Amortization of actuarial loss due to measurement date change
Amortization of actuarial loss
Total recognized in other comprehensive income
Total recognized in net pension expense and other
2008
-
$
914
97
(1,350)
(339)
2007
(In thousands)
$
-
868
135
(1,284)
(281)
2006
$
646
884
325
(1,302)
553
-
7,349
(24)
(97)
7,228
-
(782)
-
(135)
(917)
2,789
-
-
-
2,789
comprehensive income
$
6,889
$
(1,198)
$
3,342
Assumptions used to develop periodic pension benefit expense for the Retirement Plan for the years ended December 31
were:
Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets
2008
2007
2006
5.87%
NA
8.50%
6.00%
NA
8.50%
5.63%
3.00%
8.50%
The long-term rate-of-return on assets assumption was set based on historical returns earned by equities and fixed
income securities, adjusted to reflect expectations of future returns as applied to the Retirement Plan’s target allocation
of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 5-9% and
2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are
applied to the Retirement Plan’s target allocation, the expected rate of return is determined to be 8.50%, which is roughly
the midpoint of the range of expected return.
The Retirement Plan’s weighted average asset allocations at December 31, by asset category, were:
Equity securities
Debt securities
2008
59%
41%
2007
70%
30%
Retirement Plan assets are invested in diversified investment funds of the RSI Retirement Trust (the “RSI Trust”), a
series of no-load private placement funds. The investment funds include equity funds and bond funds, each with its own
investment objectives, investment strategies and risks, as detailed in the Private Placement Memorandum. The RSI Trust
has been given discretion by the Plan Sponsor to determine the appropriate strategic asset allocation versus plan
liabilities, as governed by the RSI Trust’s Statement of Investment Objectives and Guidelines (the “Guidelines”).
The long-term investment objective is to be invested 65% in equity securities (equity mutual funds) and 35% in debt
securities (bond mutual funds). If the plan is underfunded under the Guidelines, the bond fund portion may be
temporarily increased up to 50% in order to lessen asset value volatility. When the plan is no longer underfunded, the
bond fund portion will be decreased back to 35%. Asset rebalancing is performed at least annually, with interim
adjustments made when the investment mix varies more than 10% from the target (i.e., a 20% target range).
The investment goal is to achieve investment results that will contribute to the proper funding of the Retirement Plan by
exceeding the rate of inflation over the long-term. In addition, investment managers for the RSI Trust are expected to
provide above average performance when compared to their peers. Performance volatility is also monitored.
Risk/volatility is further managed by the distinct investment objectives of each of the RSI Trust’s funds and the
diversification within each fund.
Due to recent changes in pension funding law and declines in market asset values the Bank has not been able to
determine if it will make a contribution to the Retirement Plan in 2009.
95
The following benefit payments, which reflect expected future service, are expected to be paid by the Retirement Plan:
For the years ending December 31:
2009
2010
2011
2012
2013
2014 – 2018
Future
Benefit
Payments
(In thousands)
$ 875
897
910
913
968
5,287
In connection with the Company’s acquisition of Atlantic Liberty Savings on June 30, 2006, the Company acquired The
Retirement Plan of Atlantic Liberty Savings, F.A. (“Atlantic Liberty Plan”), a non-contributory defined benefit pension
plan, which was frozen effective as of June 30, 2006. As of that date, no employee will be permitted to commence
participation and no further benefits will accrue to participants. No contributions were made to the Atlantic Liberty Plan
during 2008, 2007 and 2006. The Atlantic Liberty Plan has not been merged with the Retirement Plan and is not material
in amount.
Other Postretirement Benefit Plans:
The Company sponsors two unfunded postretirement benefit plans (the “Postretirement Plans”) that cover all retirees who were
full-time permanent employees with at least five years of service, and their spouses. One plan provides medical benefits
through a 50% cost sharing arrangement. Effective January 1, 2000, the spouses of future retirees will be required to pay
100% of the premiums for their coverage. The other plan provides life insurance benefits and is noncontributory. Under
these programs, eligible retirees receive lifetime medical and life insurance coverage for themselves and lifetime medical
coverage for their spouses. The Company reserves the right to amend or terminate these plans at its discretion.
Comprehensive medical plan benefits equal the lesser of the normal plan benefit or the total amount not paid by
Medicare. Life insurance benefits for retirees are based on annual compensation and age at retirement. As of December
31, 2008, the Company has not funded these plans. The Company used a December 31 and a September 30 measurement
date for these plans for the years ended December 31, 2008 and 2007, respectively.
The following table sets forth, for the Postretirement Plans, the change in benefit obligation and assets, and for the
Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Adjustment for measurement date change
Actuarial loss
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Market value of assets at beginning of year
Employer contributions
Benefits paid
Market value of plan assets at end of year
2008
2007
(In thousands)
$
3,425
158
211
91
171
(97)
3,959
$
2,895
123
170
-
338
(101)
3,425
-
97
(97)
-
-
101
(101)
-
Accrued pension cost included in other liabilities
$
(3,959)
$
(3,425)
The accumulated benefit obligation for the Postretirement Plans was $4.0 million and $3.4 million at December 31, 2008
and 2007, respectively.
96
Assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligations at
December 31 are as follows:
Rate of return on plan assets
Discount rate
Rate of increase in health care costs
2008
2007
N/A
5.87%
N/A
6.25%
Initial
Ultimate (year 2011)
Annual rate of salary increase for life insurance
7.75%
4.50%
4.00%
The resulting net periodic postretirement benefit expense consisted of the following components for the years ended
December 31:
7.75%
4.50%
4.00%
Service cost
Interest cost
Amortization of unrecognized (gain) loss
Amortization of past service liability
Net postretirement benefit expense
SFAS No. 158 recognition of deferred credits
Current year actuarial loss
Amortization of actuarial gain
Amortization of prior service liability due to
measurement date change
Amortization of prior service liability
Total recognized in other comprehensive income
Total recognized in net postretirement (benefit) expense
2008
$
158
211
-
(14)
355
2007
(In thousands)
$
123
170
(26)
(14)
253
2006
$
113
145
(25)
(29)
204
-
171
-
3
13
187
-
337
26
-
14
377
(533)
-
-
-
-
(533)
and other comprehensive income
$
542
$
630
$
(329)
Assumptions used to develop periodic postretirement benefit expense for the Postretirement Plans for the years ended
December 31 were:
Rate of return on plans assets
Discount rate
Rate of increase in health care costs
Initial
Ultimate (year 2011)
Annual rate of salary increases for life insurance
2008
2007
2006
NA
5.87%
7.75%
4.50%
4.00%
NA
6.00%
9.00%
4.50%
3.50%
NA
5.63%
9.50%
4.50%
3.00%
The health care cost trend rate assumptions have a significant effect on the amounts reported. A one percentage point
change in assumed health care trend rates would have the following effects:
Effect on postretirement benefit obligation
Effect on total service and interest cost
The Company expects to pay benefits of $154,000 under its Postretirement Plans in 2009.
Increase
Decrease
(In thousands)
$296
37
$(240)
(29)
97
The following benefit payments under the Postretirement Plan, which reflect expected future service, are expected to be
paid
For the years ending December 31:
2009
2010
2011
2012
2013
2014 - 2018
Future Benefit
Payments
(In thousands)
$ 154
168
174
185
198
1,213
Defined Contribution Plans:
The Holding Company maintains a profit sharing plan and the Bank maintains a 401(k) plan. Both plans are tax-qualified
defined contribution plans which cover substantially all salaried employees who have one year of service. Currently,
annual matching contributions under the Bank’s 401(k) plan equal 50% of the employee’s contributions, up to a
maximum of 3% of the employee’s compensation. Effective October 1, 2006, the Bank added a program to the 401(k)
plan, called the Defined Contribution Retirement Plan, under which the Bank contributes an amount equal to 4% of an
eligible employee’s compensation. Contributions to the profit sharing plan are determined by the Holding Company’s
board of directors in its discretion at or after the end of each year. Annual contributions under these plans are subject to
the limits imposed under the Internal Revenue Code. Contributions by the Company into the 401(k) plan and profit
sharing plan vest 20% per year over the employee's first five years of service. Contributions to these plans also 100%
vest upon a change of control (as defined in the applicable plan). Compensation expense recorded by the Company for
these plans amounted to $1.6 million, $1.3 million and $1.0 million for the years ended December 31, 2008, 2007 and
2006, respectively.
As a result of the Atlantic Liberty acquisition, the Atlantic Liberty 401(k) Savings Plan was frozen effective June 30,
2006. As of that date, a participant no longer was permitted to commence participation or establish a compensation
reduction agreement under this plan. In addition, as of the freeze date, all future before-tax, discretionary employer,
matching, catch-up and rollover contributions ceased.
The Bank provides a non-qualified deferred compensation plan as an incentive for officers who have achieved the level
of at least vice president and have at least one year of service. In addition to the amounts deferred by the officers, the
Bank matches 50% of their contributions, generally up to a maximum of 5% of the officers’ salary. Matching
contributions under this plan vest 20% per year for five years. They also become 100% vested upon a change of control
(as defined in the plan). The Bank had also provided an additional non-contributory deferred compensation plan for its
former president in the amount of 10% of his salary. Compensation expense recorded by the Company for these plans
amounted to $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
Employee Benefit Trust:
An Employee Benefit Trust (“EBT”) has been established to assist the Company in funding its benefit plan obligations.
In connection with the Bank’s conversion to a federal stock savings bank in 1995, the EBT borrowed $7,928,000 from
the Company and used $7,000 of cash received from the Bank to purchase 2,328,750 shares of the common stock of the
Company. The loan will be repaid principally from the Company’s discretionary contributions to the EBT and dividend
payments received on common stock held by the EBT, or may be forgiven by the Company, over a period of 30 years.
At December 31, 2008, the loan had an outstanding balance of $1.3 million, bearing a fixed interest rate of 6.22% per
annum. The loan obligation of the EBT is considered unearned compensation and, as such, is recorded as a reduction of
the Company’s stockholders’ equity. Both the loan obligation and the unearned compensation are reduced by the amount
of loan repayments made by the EBT or forgiven by the Company. Shares purchased with the loan proceeds are held in a
suspense account for contribution to specified benefit plans as the loan is repaid or forgiven. Shares released from the
suspense account are used solely for funding matching contributions under the Bank’s 401(k) plan, contributions to the
401(k) plan for the Defined Contribution Retirement Program, and contributions to the Company’s profit-sharing plan.
Since annual contributions are discretionary with the Company or dependent upon employee contributions,
compensation payable under the EBT cannot be estimated. For the years ended December 31, 2008, 2007 and 2006, the
Company funded $1.2 million, $0.1 million and $0.9 million, respectively, of employer contributions to the 401(k) and
profit sharing plans from the EBT. For the years ended December 31, 2008 and 2007 Company contributions to the
Defined Contribution Retirement Program and the Company’s profit-sharing plan were made the following year, prior to
2007 contributions were made before year end.
98
Upon a change of control (as defined in the EBT), the EBT will terminate and any trust assets remaining after repayment
of the Company’s loan to the EBT and certain benefit plan contributions will be distributed to all full-time employees of
the Company with at least one year of service, in proportion to their compensation over the four most recently completed
calendar years plus the portion of the current year prior to the termination of the EBT.
The shares held in the suspense account are pledged as collateral and are reported as unallocated EBT shares in
stockholders’ equity. As shares are released from the suspense account, the Company reports compensation expense
equal to the current market price of the shares, and the shares become outstanding for earnings per share computations.
The EBT shares are as follows at December 31:
Shares owned by Employee Benefit Trust, beginning balance
Shares released and allocated
Shares owned by Employee Benefit Trust, ending balance
2008
2007
1,637,474
(85,422)
1,552,052
1,644,257
(6,783)
1,637,474
Market value of unallocated shares.
$
18,562,542
$
26,281,458
Outside Director Retirement Plan:
The Bank has an unfunded noncontributory defined benefit Outside Director Retirement Plan (the “Directors’ Plan”),
which provides benefits to each non-employee director who became a non-employee director before January 1, 2004,
who has at least five years of service as a non-employee director and whose years of service as a non-employee director
plus age equals or exceeds 55. Benefits are also payable to a non-employee director who became a non-employee
director before January 1, 2004 and whose status as a non-employee director terminates because of death or disability or
who is a non-employee director upon a change of control (as defined in the Directors’ Plan). Any person who becomes
a non-employee director after January 1, 2004 is not eligible to participate in the Directors’ Plan. An eligible director
who terminates after November 22, 2005 will be paid an annual retirement benefit equal to $48,000. Such benefit will
be paid in equal monthly installments for the lesser of the number of months such director served as a non-employee
director or 120 months. In the event of a termination of Board service due to a change of control, a non-employee director who
has completed at least two years of service as a non-employee director will receive a cash lump sum payment equal to 120
months of benefit, and a non-employee director with less than two years service will receive a cash lump sum payment equal to
a number of months of benefit equal to the number of months of his service as a non-employee director. In the event of the
director’s death, the surviving spouse will receive the equivalent benefit. No benefits will be payable to a director who
is removed for cause. The Holding Company has guaranteed the payment of benefits under the Directors’ Plan. Upon
adopting the Directors’ Plan, the Bank elected to immediately recognize the effect of adopting the Directors’ Plan.
Subsequent plan amendments are amortized as a past service liability. The Bank used a December 31 and a September
30 measurement date for the Directors’ Plan for the years ended December 31, 2008 and 2007, respectively.
The following table sets forth, for the Directors’ Plan, the change in benefit obligation and assets, and for the Company,
the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Adjustment for measurement date change
Actuarial loss (gain)
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Market value of assets at beginning of year
Employer contributions
Benefits paid
Market value of plan assets at end of year
2008
2007
(In thousands)
$
2,276
56
139
49
20
(84)
2,456
$
2,558
54
149
-
(388)
(97)
2,276
-
84
(84)
-
-
97
(97)
-
Accrued pension cost included in other liabilities
$
(2,456)
$
(2,276)
99
The accumulated benefit obligation for the Directors’ Plan was $2.5 million and $2.3 million at December 31, 2008 and
2007, respectively.
The components of the net pension expense for the Directors’ Plan are as follows for the years ended December 31:
Service cost
Interest cost
Amortization of unrecognized (gain) loss
Amortization of past service liability
Net pension expense
SFAS No. 158 recognition of deferred costs
Reverse effect of additional minimum liability
Current actuarial (loss) gain
Amortization of actuarial loss due to measurement
date change
Amortization of prior service cost due to measurement
date change
Amortization of actuarial loss
Amortization of prior service cost
Total recognized in other comprehensive income
Total recognized in net pension expense and other
2008
$
56
139
(31)
40
204
2007
(In thousands)
$
54
149
-
141
344
2006
$
92
68
17
148
325
-
-
20
8
(10)
31
(40)
9
-
-
(388)
-
-
-
(141)
(529)
519
(572)
-
-
-
-
-
(53)
comprehensive income
$
213
$
(185)
$
272
Assumptions used to determine benefit obligations and periodic pension benefit expense for the Directors’ Plan for the
years ended December 31 were:
2008
2007
2006
Weighted average discount rate for the benefit obligation
Weighted average discount rate for periodic pension benefit expense
Rate of increase in future compensation levels
6.00%
5.63%
NA
The following benefit payments under the Directors’ Plan, which reflect expected future service, are expected to be paid:
6.25%
6.00%
NA
5.87%
5.87%
NA
For the years ending December 31:
2009
2010
2011
2012
2013
2014 – 2018
Future Benefit
Payments
(In thousands)
$ 211
231
231
231
256
1,396
The Bank expects to make payments of $211,000 under its Directors’ Plan in 2009.
11. Stockholders’ Equity
Preferred Stock and Dividend Restrictions on the Company:
On December 19, 2008, pursuant to a Purchase Agreement, the Company issued to the U.S. Treasury for aggregate
consideration of $70.0 million (i) 70,000 shares of The Company’s Fixed Rate Cumulative Perpetual Preferred Stock
Series B (the “Series B Preferred Stock”), par value $0.01 per share and liquidation preference $1,000 per share, and
(ii) a Warrant to purchase up to 751,611 shares of the Company’s common stock, par value $0.01 per share, at an initial
price of $13.97 per share. Pursuant to the terms of the Purchase Agreement, the Company’s ability to declare or pay
dividends on any of its shares is limited. Specifically, the Company is unable to declare dividend payments on common,
junior preferred or pari passu preferred shares if it is in arrears on the dividends on the Series B Preferred Stock. Further,
the Company may not increase dividends on its common stock above the amount of the last quarterly cash dividend per
share declared prior to October 14, 2008, or $0.13 per common share, without the U.S. Treasury’s approval until the
100
third anniversary of the investment unless all of the Series B Preferred Stock has been redeemed or transferred. In
addition, the Company’s ability to repurchase its common shares is restricted. U.S. Treasury consent generally is
required for any stock repurchase until the third anniversary of the investment by the U.S. Treasury unless all of the
Series B Preferred Stock has been redeemed or transferred. Further, common, junior preferred or pari passu preferred
shares may not be repurchased if the Company is in arrears on the Series B Preferred Stock dividends.
The proceeds from issuance of these securities were allocated to the Series B Preferred Stock and to the Warrant based
on their relative fair values, which resulted in an initial book value of $68.6 million for the Series B Preferred Stock and
$1.4 million for the Warrant. The resulting discount for the Series B Preferred Stock will be accreted over five years
through retained earnings as a preferred stock dividend. The Warrant will remain in additional paid-in-capital at its initial
book value until it is exercised or expires.
Other Dividend Restrictions on the Bank:
In connection with the Bank’s conversion from mutual to stock form in November 1995, a special liquidation account
was established at the time of conversion, in accordance with the requirements of the Office of Thrift Supervision
(“OTS”), which was equal to its capital as of June 30, 1995. The liquidation account is reduced as and to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent increases in deposits do not restore an
eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held. As of December 31, 2008, the Bank’s liquidation
account was $2.5 million, and was presented within retained earnings.
In addition to the restriction described above, Federal banking regulations place certain restrictions on dividends paid by
the Bank to the Holding Company. The total amount of dividends which may be paid at any date is generally limited to
the net income of the Bank for the current year and prior two years, less any dividends previously paid from those
earnings. As of December 31, 2008, the Bank had $34.4 million in retained earnings available to distribute to the
Holding Company in the form of cash dividends.
In addition, dividends paid by the Bank to the Holding Company would be prohibited if the effect thereof would cause
the Bank’s capital to be reduced below applicable minimum capital requirements.
Stockholder Rights Plan:
The Holding Company has adopted a Shareholder Rights Plan under which each stockholder has one right to purchase
from the Holding Company, for each share of common stock owned, one one-hundredth of a share of Series A junior
participating preferred stock at a price of $65. The rights will become exercisable only if a person or group acquires 15%
or more of the Holding Company’s common stock or commences a tender or exchange offer which, if consummated,
would result in that person or group owning at least 15% of the Common Stock (the “acquiring person or group”). In
such case, all stockholders other than the acquiring person or group will be entitled to purchase, by paying the $65
exercise price, Common Stock (or a common stock equivalent) with a value of twice the exercise price. In addition, at
any time after such event, and prior to the acquisition by any person or group of 50% or more of the Common Stock, the
Board of Directors may, at its option, require each outstanding right (other than rights held by the acquiring person or
group) to be exchanged for one share of Common Stock (or one common stock equivalent). If a person or group
becomes an acquiring person and the Holding Company is acquired in a merger or other business combination or sells
more than 50% of its assets or earning power, each right will entitle all other holders to purchase, by payment of $65
exercise price, common stock of the acquiring company with a value of twice the exercise price. The rights plan expires
on September 30, 2016.
Treasury Stock Transactions:
The Holding Company did not repurchase any shares in 2008, and repurchased 38,000 shares in 2007, of its outstanding
common stock on the open market under its stock repurchase programs. In 2004, the Company approved a stock
repurchase program, which authorized the purchase of an additional 1,000,000 shares. At December 31, 2008, 362,050
shares remain to be repurchased under this plan. Stock repurchases under this program will be made from time to time,
on the open market or in privately negotiated transactions, at the discretion of the management of the Company. As a
condition of the Company's participation in the U.S. Treasury's Capital Purchase Program, shares may not be
repurchased for the next three years without approval of the Treasury unless the preferred shares are redeemed or
transferred to a third party. The Company has not requested approval from the Treasury to repurchase shares. At
December 31, 2008 and 2007 there were no shares held as Treasury Stock.
101
Accumulated Other Comprehensive Loss:
The components of accumulated other comprehensive loss at December 31, 2008 and 2007 and the changes during the
year ended December 31, 2008 are as follows:
December 31,
2007
Effect of
Changing
Measurement
Date
Other
Comprehensive
Income (Loss)
December 31,
2008
$
17
$
-
$
(15,200)
$
(15,183)
(In thousands)
(638)
(287)
(908)
$
9
4
13
$
(4,222)
(4,851)
14
(19,408)
$
(269)
(20,303)
$
Net unrealized loss on securities
available for sale
Net actuarial loss on pension plans and
other postretirement benefits
Prior service cost on pension plans and
other postretirement benefits
Accumulated other comprehensive loss
Shelf Registration Statement:
On November 26, 2008, the Company filed a shelf registration statement which allows the Company to
periodically offer and sell, individually or in any combination, preferred stock, common stock, warrants to
purchase preferred or common stock, and debt securities, up to a total of $170.0 million. The shelf registration was
declared effective on January 8, 2009. The Company’s ability to issue debt or equity under this shelf registration is
subject to market conditions and its capital needs. The preferred shares and warrants to purchase common stock the
Company issued to the U.S. Treasury have been registered under this shelf registration.
12. Regulatory Capital
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) imposes a number of mandatory
supervisory measures on banks and thrift institutions. Among other matters, FDICIA established five capital zones or
classifications (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized). Such classifications are used by the OTS and other bank regulatory agencies to determine matters
ranging from each institution’s semi-annual FDIC deposit insurance premium assessments, to approvals of applications
authorizing institutions to grow their asset size or otherwise expand business activities. Under OTS capital regulations,
the Bank is required to comply with each of three separate capital adequacy standards. As of December 31, 2008, the
Bank continues to be categorized as “well-capitalized” by the OTS under the prompt corrective action regulations and
continues to exceed all regulatory capital requirements.
Set forth below is a summary of the Bank’s compliance with OTS capital standards.
Tangible capital:
Capital level
Requirement
Excess
Leverage and Core (Tier I) capital:
Capital level
Requirement
Excess
Total risk-based capital:
Capital level
Requirement
Excess
December 31, 2008
December 31, 2007
Amount
Percent of
Assets
Amount
Percent of
Assets
(Dollars in thousands)
$312,966
59,297
253,669
$312,966
118,594
194,372
$323,995
199,115
124,880
%
%
%
7.92
1.50
6.42
7.92
3.00
4.92
13.02
8.00
5.02
102
$241,503
49,810
191,693
$241,503
99,620
141,883
$248,136
179,603
68,533
%
%
%
7.27
1.50
5.77
7.27
3.00
4.27
11.20
8.00
3.20
FCB is subject to identical capital standards. At December 31, 2008, FCB’s tangible, leverage and core, and risk-based
capital ratios were 10.41%, 10.41%, and 64.87%, respectively. FCB was categorized “well-capitalized” under regulatory
guidelines at December 31, 2008.
13. Commitments and Contingencies
Commitments:
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and lines of credit.
The instruments involve, to varying degrees, elements of credit and market risks in excess of the amount recognized in
the consolidated financial statements.
The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument
for loan commitments and lines of credit is represented by the contractual amounts of these instruments.
Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally construction loans
and home equity lines of credit) amounted to $66.8 million and $92.9 million, respectively, at December 31, 2008.
Included in these commitments were $34.0 million of fixed-rate commitments at a weighted average rate of 7.58%, and
$125.7 million of adjustable-rate commitments with a weighted average rate, as of December 31, 2008, of 4.53%. Since
generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future
cash requirements, whereas the amounts of lines of credit may not be indicative of the Company’s future cash
requirements. The loan commitments generally expire in ninety days, while construction loan lines of credit mature
within eighteen months and home equity lines of credit mature within ten years. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates and require payment of a fee.
The Company evaluates each customer’s creditworthiness on a case-by-case basis. Collateral held consists primarily of
real estate.
The Trusts issued capital securities in June and July 2007 with a par value of $61.9 million. The Holding Company has
guaranteed the payment of the Trusts’ obligations under these capital securities.
The Company’s minimum annual rental payments for Bank premises due under non-cancelable leases are as follows:
Minimum Rental
(In thousands)
Years ended December 31:
2009
2010
2011
2012
2013
Thereafter
Total minimum payments required
$
2,928
2,921
2,894
2,167
2,163
12,020
25,093
$
The leases have escalation clauses for operating expenses and real estate taxes. Certain lease agreements provide for
increases in rental payments based upon increases in the consumer price index. Rent expense under these leases for the
years ended December 31, 2008, 2007 and 2006 was approximately $2.9 million, $2.9 million and $2.3 million,
respectively.
Contingencies:
The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal
counsel, believes that the resolution of these various matters will not result in any material adverse effect on the
Company’s consolidated financial condition, results of operations or cash flows.
14. Concentration of Credit Risk
The Company’s lending is concentrated in the metropolitan New York area. The Company evaluates each customer’s
creditworthiness on a case-by-case basis under the Company’s established underwriting policies. The collateral obtained
by the Company generally consists of first liens on one-to-four family residential, multi-family residential, and
commercial real estate. At December 31, 2008, the largest amount the Savings Bank could lend to one borrower was
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approximately $46.9 million, and at that date, the Savings Bank’s largest aggregate amount of loans to one borrower was
$34.0 million, all of which were performing according to their terms.
15. Disclosures About Fair Value of Financial Instruments
SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires that the Company disclose the
estimated fair values for certain of its financial instruments. Financial instruments include items such as loans, deposits,
securities, commitments to lend and other items as defined in SFAS No. 107.
Effective January 1, 2007, the Company adopted SFAS No. 157, “Fair Value Measurements,” and SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB No. 115.” SFAS No.
157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. Management selected the fair value option for certain investment
securities, primarily mortgage-backed securities, and certain borrowed funds. These financial instruments were chosen as
the yield on the financial assets was a below-market yield, while the rate on the financial liabilities was an above-market
rate. Management also considered the average duration of these instruments, which, for investment securities, was longer
than the average for the portfolio of securities, and, for borrowings, primarily represented the longer-term borrowings of
the Company. Choosing these instruments for the fair value option adjusted the carrying value of these financial assets
and financial liabilities to their current fair value, and more closely aligns the financial performance of the Company
with the economic value of these financial instruments. Management selected, as of January 1, 2007, financial assets and
financial liabilities with fair values of $160.7 million and $120.1 million, respectively, for the fair value option. The
selection of these financial assets and financial liabilities reduced the Company’s one year interest-rate gap position,
thereby reducing the Company’s interest-rate risk position. Management believes that electing the fair value option
allows them to better react to changes in interest rates. Management did not elect the fair value option for investment
securities and borrowings with shorter duration, adjustable rates, and yields that approximated the then current market
rate, as management believes that these financial assets and financial liabilities approximated their economic value. On a
going-forward basis, the Company currently plans to carry the financial assets and financial liabilities which replace the
above noted items at fair value, and will evaluate other purchases of investments and acquisition of new debt to
determine if they should be carried at cost or fair value. The Company elected to measure at fair value junior
subordinated debt (commonly known as trust preferred securities) with a face amount of $61.9 million that was issued
during 2007. The Company also elected to measure at fair value securities with a cost of $5.0 million and $21.4 million
that were purchased during the years ended December 31, 2008 and 2007, respectively.
The effect on the financial assets and financial liabilities selected for the fair value option as of January 1, 2007 is shown
in the following table:
After
Adoption
$
139,415
21,289
-
-
(94,487)
(25,581)
-
Prior to
Adoption
$
138,881
21,270
547
561
(90,619)
(25,000)
(1,108)
Net
Gain (Loss)
upon
Adoption
(in thousands)
$
534
19
(547)
(561)
(3,868)
(581)
1,108
(3,896)
1,721
(2,175)
(3,636)
$
(5,811)
Mortgage-backed securities
Other securities
Accrued interest receivable
Other assets
Borrowed funds
Securities sold under agreements to repurchase
Other liabilities
Pretax cumulative effect of adoption
Increase in deferred tax asset
Cumulative effect on stockholders' equity
Reclassification from accumulated other comprehensive loss
Cumulative effect on retained earnings
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The following table presents the financial assets and financial liabilities reported at fair value pursuant to the election of
the fair value option under SFAS No. 159 in the Consolidated Statement of Financial Condition, and the changes in fair
value included in the Consolidated Statement of Income, at or for the years ended December 31, 2008, and 2007:
Description
(Dollars in thousands)
Mortgage-backed securities
Other securities
Borrowed funds
Securities sold under
agreements to repurchase
Net gain from fair value adjustments
Fair Value
Measurements
at December 31,
2008
Fair Value
Measurements
at December 31,
2007
Changes in Fair Values For Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
For the year ended
December 31, 2008
For the year ended
December 31, 2007
$
110,833
28,688
107,689
$
133,051
30,986
135,621
$
239
(8,243)
27,931
$
2,876
57
91
25,757
25,924
$
163
20,090
$
(339)
2,685
Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued
interest receivable or payable for the related instrument. The Company continues to accrue, and report as interest income
or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial
instruments selected for the fair value option at their respective contractual rates.
The borrowed funds and securities sold under agreements to repurchase have contractual principal amounts of $131.9
million, and $25.0 million, respectively, at both December 31, 2008 and 2007. The fair value of borrowed funds and
securities sold under agreements to repurchase include accrued interest payable of $0.8 million and $0.3 million,
respectively at both December 31, 2008 and 2007.
The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its
liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market
information. These estimates do not reflect any premium or discount that could result from offering for sale at one time
the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and
prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale.
Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial
instrument or certain other financial instruments specifically excluded from its requirements. These items include core
deposit intangibles and other customer relationships, premises and equipment, leases, income taxes, foreclosed properties
and equity.
Further, fair value disclosure does not attempt to value future income or business. These items may be material and
accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent,
the underlying “market” or franchise value of the Company.
Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted
prices in active markets for identical financial instruments (level 1), (2) significant other observable inputs (level 2), or
(3) significant unobservable inputs (level 3).
A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets
and liabilities that are carried at fair value on a recurring basis are as follows:
Level 1 – where quoted market prices are available in an active market. At December 31, 2008 and 2007, Level 1
includes preferred stock issued by Fannie Mae and Freddie Mac. During the years ended December 31, 2008 and 2007,
other-than-temporary impairment write-downs of $27.6 million and $4.7 million, respectively, were recorded to reduce
the carrying amount of investments in these preferred stock issues.
Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar
financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair
value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-
based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates,
equity or debt prices, and credit spreads. In addition to observable market information, models also incorporate maturity
and cash flow assumptions. At December 31, 2008, Level 2 includes mortgage related securities, corporate debt,
105
securities sold under agreements to repurchase and FHLB-NY advances. At December 31, 2007 Level 2 included
mortgage related securities, corporate debt, trust preferred securities, junior subordinated debentures issued by the
Company, securities sold under agreements to repurchase and FHLB-NY advances.
Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are
classified as Level 3. At December 31, 2008 Level 3 includes trust preferred securities owned by and junior
subordinated debentures issued by the Company. At December 31, 2007 there were no financial instruments carried at
fair value that were valued using Level 3. During 2008, certain financial instruments previously classified as Level 2
were reclassified to Level 3.
The methods described above may produce fair values that may not be indicative of net realizable value or reflective of
future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other
market participants, the use of different methodologies, assumptions, and models to determine fair value of certain
financial instruments could produce different estimates of fair value at the reporting date.
The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis,
classified within Level 3 of the valuation hierarchy for the year ended December 31, 2008:
Beginning balance
Transfer into Level 3
Net loss from fair value adjustment of financial assets
Net gain from fair value adjustments of financial liabilities
Change in unrealized losses included in other comprehensive loss
Ending balance
Trust preferred
securities
Junior subordinated
debentures
(In thousands)
-
$
11,594
(202)
-
(693)
10,699
$
-
$
37,079
-
(4,027)
-
33,052
$
The financial assets and financial liabilities that were transferred to Level 3 during 2008 were transferred due to an
inactive market for these financial instruments. In valuing these financial instruments, trust preferred securities owned by
the Company and the Company’s junior subordinated debentures, the determination of fair value required models which
take into consideration market spread data for similar instruments and other contractual features. The Company used an
independent third party to model these assumptions.
106
The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, and
the method that was used to determine their fair value, at December 31, 2008 and 2007:
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
2008
2007
2008
2007
Significant Other
Unobservable Inputs
(Level 3)
2008
2007
Assets:
Securities available for sale
Mortgage-backed
securities
Other securities
$
-
607
$
-
28,179
$
674,764
61,191
$
362,729
49,192
$
-
10,699
$
-
-
Total assets
$
607
$
28,179
$
735,955
$
411,921
$
10,699
$
-
Liabilities:
Borrowed funds
Securities sold under
$
-
$
-
$
74,637
$
135,621
$
33,052
$
-
agreements to repurchase
-
-
25,757
25,924
-
-
Total liabilities
$
-
$
-
$
100,394
$
161,545
$
33,052
$
-
Total carried at fair value
on a recurring basis
2008
2007
Assets:
Securities available for sale
Mortgage-backed
securities
Other securities
$
674,764
72,497
$
362,729
77,371
Total assets
$
747,261
$
440,100
Liabilities:
Borrowed funds
Securities sold under
$
107,689
$
135,621
agreements to repurchase
25,757
25,924
Total liabilities
$
133,446
$
161,545
The estimated fair value of each material class of financial instruments at December 31, 2008 and 2007 and the related
methods and assumptions used to estimate fair value are as follows:
Cash and due from banks, overnight interest-earning deposits and federal funds sold, FHLB-NY stock, bank
owned life insurance, interest and dividends receivable, mortgagors’ escrow deposits and other liabilities:
The carrying amounts are a reasonable estimate of fair value.
Securities available for sale:
The estimated fair values of securities available for sale are contained in Note 4 of Notes to Consolidated Financial
Statements. Fair value is based upon quoted market prices (level 1 input), where available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between
the quoted instrument and the instrument being valued (level 2 input). When there is limited activity or less transparency
around inputs to the valuation, securities are classified as (level 3 input).
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Loans:
The estimated fair value of loans, with carrying amounts of $2,971.7 million and $2,708.8 million at December 31, 2008
and 2007, respectively, was $3,060.1 million and $2,731.0 million at December 31, 2008 and 2007, respectively.
Fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and remaining maturities (level 2 input).
For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows
with a discount rate commensurate with the risk associated with such assets (level 2 input).
Due to depositors:
The estimated fair value of due to depositors, with carrying amounts of $2,437.6 million and $2,003.0 million at
December 31, 2008 and 2007, respectively, was $2,457.7 million and $2,015.4 million at December 31, 2008 and 2007,
respectively.
The fair values of demand, passbook savings, NOW and money market deposits are, by definition, equal to the amount
payable on demand at the reporting dates (i.e. their carrying value). The fair value of fixed-maturity certificates of
deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of
similar remaining maturities (level 2 input).
Borrowed funds:
The estimated fair value of borrowed funds, with carrying amounts of $1,138.9 million and $1,072.6 million at December 31,
2008 and 2007, respectively, was $1,136.0 million and $1,087.7 million at December 31, 2008 and 2007, respectively.
The fair value of borrowed funds is estimated by discounting the contractual cash flows using interest rates in effect for
borrowings with similar maturities and collateral requirements (level 2 input) or using a market-standard model (level 3 input) .
Other financial instruments:
The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into
similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the
counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date.
For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of
interest rates and committed rates (where applicable).
At December 31, 2008 and 2007, the fair values of the above financial instruments approximate the recorded amounts of
the related fees and were not considered to be material.
16. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes: an interpretation of SFAS No. 109.” FIN 48 clarifies Statement of
Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” by defining a criterion that an
individual tax position would have to meet for some or all of the benefit of that position to be recognized in an entity’s
financial statements. Entities should evaluate a tax position to determine if it is more likely than not that a position will
be sustained on examination by taxing authorities. FIN 48 defines more likely than not as “a likelihood of more than 50
percent.” FIN 48 also requires certain disclosures, including the amount of unrecognized tax benefits that if recognized
would change the effective tax rate, information concerning tax positions for which a significant increase or decrease in
the unrecognized tax benefit liability is reasonably possible in the next 12 months, a tabular reconciliation of the
beginning and ending balances of unrecognized tax benefits, and tax years that remain open for examination by major
jurisdictions. FIN 48 was effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not
have a material effect on the Company’s results of operations or financial condition.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.”
The Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS
No.140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The
Statement also resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133
to Beneficial Interest in Securitized Financial Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or
that are hybrid financial instruments that contain as embedded derivative requiring bifurcation, and clarifies that
concentrations of credit risk in the form of subordination are not embedded derivatives. The Statement eliminates the
108
interim guidance in SFAS No. 133 Implementation Issue No. D1, which provided that beneficial interests in securitized
financial assets are not subject to the provisions of SFAS No. 133. The Statement was effective for all financial
instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.
The adoption of SFAS No. 155 did not have a material effect on the Company’s results of operations or financial
condition.
In September 2006 the FASB issued SFAS No. 157, “Fair Value Measurements.” The Statement is effective
for all financial statements issued for fiscal years beginning after November 15, 2007, with earlier adoption permitted.
The Statement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The early adoption of SFAS No. 159 required the early
adoption of SFAS No. 157. Adoption of SFAS No. 157 did not have a material impact on the Company’s results of
operations or financial condition.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans.” The Statement requires an employer that is a business entity and sponsors one or more
single-employer defined benefit plans to: (1) recognize the funded status of a benefit plan – measured as the difference
between plan assets at fair value and the benefit obligation – in its statement of financial position, with the corresponding
credit or charge, net of taxes, upon initial adoption to Accumulated Other Comprehensive Income; (2) recognized as a
component of Accumulated Other Comprehensive Income, net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS
No. 87, “Employers’ Accounting for Pensions,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions;” (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year
end; and (4) expand disclosures in the notes to the financial statements about certain effects on net periodic benefit cost.
The Statement also amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” and SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans for Termination Benefits.” An employer who has publicly traded equity securities, such as the
Holding Company, is required to initially recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of its fiscal year ending after December 15, 2006. For the Holding
Company, this is for the year ended December 31, 2006. The requirement to measure plan assets and benefit obligations
as of the date of the employer’s fiscal year end is effective for fiscal years ending after December 15, 2008. The adoption
of this statement resulted in a charge to Accumulated Other Comprehensive Income, and a corresponding reduction of
stockholders’ equity, of $1.2 million, net of taxes, at December 31, 2006.
In February 2007, the FASB Issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB No. 115.” This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is effective for the beginning of the first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the beginning of an entity’s fiscal year prior
to the effective date, provided the election is made prior to the issuance of financial statements for that year or portion
thereof, and the election is made within 120 days of the beginning of that fiscal year. Early adoption of SFAS No. 159
also requires the early adoption of SFAS No. 157. The impact of adopting this statement on the Company’s consolidated
financial statements is discussed in Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual
Report.
In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue No.
06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements.” The consensus reached in Issue No. 06-4 requires the accrual of a liability for the cost of the
insurance policy during postretirement periods in accordance with SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” or APB Opinion 12, “Omnibus Opinion,” when an employer has
effectively agreed to maintain a life insurance policy during the employee’s retirement. At December 31, 2007 the
Company had endorsement split-dollar life insurance arrangements with forty-seven present or former employees, which
currently provides approximately $7.9 million of life insurance benefits to these employees. The amount of the benefit
for each employee is based on the employee’s salary when their employment terminates. Issue No. 06-4 was effective for
fiscal years beginning after December 15, 2007. The adoption of Issue No. 06-4 resulted in a $1.1 million charge to
stockholders’ equity.
In September 2006, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements.” SAB 108 was issued to address diversity in practice in quantifying financial statement
misstatements and the potential under current practice for the build up of improper amounts on the balance sheet, and to
provide consistency between how registrants quantify financial statement misstatements. The techniques most commonly
109
used in practice to accumulate and quantify misstatements are generally referred to as the “roll-over” and “iron curtain”
approaches. The roll-over approach quantifies a misstatement based on the amount of the error originating in the current
year statement. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of when the misstatement originated. SAB 108
requires a “dual approach” that requires quantification of errors under both the roll-over and iron curtain methods. SAB
108 was effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material
effect on the Company’s results of operations or financial condition.
In December 2007, the FASB issue SFAS No. 141R (revised 2007), “Business Combinations.” This statement
replaces SFAS No. 141, “Business Combinations,” but retains the fundamental requirements in SFAS No. 141 that the
acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each
business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in
the business combination and establishes the acquisition date as the date that the acquirer achieves control. This
statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This statement
also requires that costs incurred to complete the acquisition, including restructuring costs, are to be recognized separately
from the acquisition. This statement also requires an acquirer to recognize assets or liabilities arising from all other
contingencies as of the acquisition date, measured at their acquisition-date fair values, only if they meet the definition of
as asset or liability in FASB Concepts Statement No. 6, “Elements of Financial Statements.” This statement also
provides specific guidance on the subsequent accounting for assets and liabilities arising from contingencies acquired or
assumed in a business combination. SFAS No. 141R is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption
is not permitted. Since this statement is effective for business combinations for which the Company is the acquirer that
occur after December 31, 2008, the Company is unable, at this time, to determine the impact of this statement.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51.” This statement requires that ownership interests in subsidiaries held by
parties other than the parent company be clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity. This statement also requires the amount of
consolidated net income attributable to the parent company and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of income. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is not permitted. Adoption of
SFAS No. 160 on January 1, 2009 did not have a material impact on the Company’s results of operations or financial
condition.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities” – an amendment of FASB Statement No. 133”. The statement requires enhanced disclosures about an entity’s
derivative and hedging activities, including information about (a) how and why an entity uses derivative instruments, (b)
how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. The Statement is effective for all financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with earlier adoption permitted. Adoption of SFAS No. 161 on
January 1, 2009 did not have a material impact on the Company’s results of operations or financial condition.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”
The statement identifies the sources of accounting principles and the framework for selecting principles used in the
preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted
accounting principles ("GAAP") in the United States (the "GAAP hierarchy"). The Statement became effective 60 days
following the SEC's approval, on September 16, 2008, of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.
Adoption of SFAS No. 162 did not have a material impact on the Company’s results of operations or financial condition.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.” This FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share (“EPS”) under the two-class method described in SFAS No. 128, “Earnings
per Share.” The FSP concluded that unvested share-based payment awards that contain nonforfeitable rights to dividends
or dividend equivalents are participating securities and shall be included in the computations of EPS pursuant to the two-
class method. Our restricted stock awards are considered participating securities under this FSP. This FSP is effective for
fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data
110
presented shall be adjusted retrospectively to conform with the provisions of this FSP. Early application is not permitted.
Adoption of this FSP is not expected to have a material impact on our computation of EPS.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active”. This FSP applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. The FSP clarifies the
application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not active. The FSP permits, in
determining fair value for a financial asset in a dislocated market, the use of a reporting entity’s own assumptions about
future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not
available. This FSP was effective upon issuance. The impact of adopting this FSP on the Company’s consolidated
financial statements is discussed in Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual
Report.
In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit
Plan Assets,” This FSP amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits.” The FSP provides guidance on an employer’s disclosures about plan assets of a defined benefit
pension or other postretirement plan. The FSP clarifies that the objectives of the disclosures about plan assets in an
employer’s defined benefit pension or other postretirement plan are to provide users of financial statements with an
understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the categories of plan assets; (3) the inputs and valuation
techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant
unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within
plan assets. The FSP also expands the disclosures related to these objectives. The disclosures about plan assets required
by this FSP are effective for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this
FSP are not required for earlier periods that are presented for comparative purposes, although application of the
provisions of the FSP to prior periods is permitted. Early adoption is not permitted.
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue
No. 99-20”. This FSP amended EITF Issue No. 99-20 to align the impairment guidance in Issue 99-20 with that in
paragraph 16 of SFAS No. 115 and related implementation guidance. The FSP was effective for reporting periods ending
after December 15, 2008, and is applied prospectively. Adoption of FSP EITF 99-20-1 did not have a material impact on
the Company’s results of operations or financial condition.
111
17. Quarterly Financial Data (unaudited)
Selected unaudited quarterly financial data for the fiscal years ended December 31, 2008 and 2007 is presented below:
2008
2007
4th
3rd
2nd
1st
4th
3rd
2nd
1st
(In thousands, except per share data)
Quarterly operating data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Other operating income (loss)
Other operating expense
Income before income
tax expense
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Dividends per share
$
55,708
32,917
22,791
2,000
2,917
13,625
10,083
3,604
6,479
$
$0.32
$0.31
$0.13
Average common shares outstanding for:
Basic earnings per share
Diluted earnings per share
20,131
20,220
$
54,204
32,074
22,130
3,000
(2,662)
13,615
$
53,362
31,269
22,093
300
2,741
14,324
$
53,427
32,712
20,715
300
3,972
13,217
$
52,404
34,177
18,227
-
69
12,168
$
48,996
31,660
17,336
-
3,790
12,106
$
47,371
29,301
18,070
-
2,743
13,279
$
44,791
27,486
17,305
-
3,651
12,523
$
2,853
723
2,130
$0.11
$0.11
$0.13
10,210
3,711
6,499
$
11,170
4,019
7,151
$
$
$0.33
$0.32
$0.13
$0.36
$0.36
$0.13
6,128
1,837
4,291
$0.22
$0.22
$0.12
9,020
3,293
5,727
$
7,534
2,753
4,781
$
$
$0.29
$0.29
$0.12
$0.24
$0.24
$0.12
8,433
3,047
5,386
$0.28
$0.27
$0.12
20,110
20,273
19,953
20,199
19,802
19,987
19,722
19,931
19,674
19,891
19,553
19,790
19,549
19,807
18. Acquisition of Atlantic Liberty Financial Corporation
On June 30, 2006, the Company acquired 100 percent 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 $42.5 million, which included $14.7 million of cash, common stock valued
at $26.6 million, and $1.3 million assigned to the fair value of Atlantic Liberty’s outstanding stock options. The fair
value assigned to the outstanding stock options was recorded as an adjustment in 2007. 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 acquisition was accounted for as a purchase. The Company recorded goodwill (the excess of cost over the fair value
of net assets acquired) of $12.2 million in the transaction. In accordance with the provisions of SFAS No. 142, goodwill
is not being amortized in connection with this transaction. The Company estimates that none of the goodwill will be
deductible for income tax purposes. The Company also recorded a core deposit intangible asset of $3.5 million, which is
being amortized using the straight-line method over 7.5 years, resulting in an annual expense of $0.5 million. The results
of Atlantic Liberty’s operations have been included in the consolidated statement of income subsequent to June 30, 2006.
The purchase price has been allocated to the assets acquired and liabilities assumed using fair values as of the acquisition
date. The Company acquired $186.9 million in assets, which includes $3.4 million of cash, $116.2 million in net loans,
$34.9 million in securities, $9.1 million in fixed assets and $23.3 million in other assets, and assumed $144.4 million in
liabilities, which includes $106.8 million in deposits, $30.5 million in borrowed funds and $7.1 in other liabilities.
As a result of the acquisition, the Bank now has branches on Montague Street and Avenue J in Brooklyn, two highly
attractive markets.
Had the acquisition of Atlantic Liberty taken place on January 1, 2006, the Company’s pro forma net income (unaudited)
for the year ended December 31, 2006 would have been $18.3 million, or $0.93 per diluted share. Included in Atlantic
Liberty’s financial results were merger related expenses of $3.4 million, on an after-tax basis. Excluding these merger
related expenses, the Company’s pro forma net income would have been $21.7 million, or $1.10 per diluted share. These
results, which do not reflect cost savings that may be achieved, are not necessarily indicative of the actual results that
would have occurred had the acquisition taken place on January 1, 2006.
112
19. Parent Company Only Financial Information
Earnings of the Bank are recognized by the Holding Company using the equity method of accounting. Accordingly,
earnings of the Bank are recorded as increases in the Holding Company’s investment, any dividends would reduce the
Holding Company’s investment in the Bank, and any changes in the Bank’s unrealized gain or loss on securities
available for sale, net of taxes, would increase or decrease, respectively, the Holding Company’s investment in the Bank.
The condensed financial statements for the Holding Company are presented below:
Condensed Statements of Financial Condition
Assets:
Cash and due from banks
Securities available for sale:
Other securities ($3,633 and $5,164 at fair value pursuant to
the fair value option at December 31, 2008 and 2007, respectively)
Interest receivable
Investment in subsidiaries
Goodwill
Other assets
Total assets
Liabilities:
Borrowings ( at fair value pursuant to the fair value option at
December 31, 2008 and 2007)
Other liabilities
Total liabilities
Stockholders' Equity:
Preferred stock
Common stock
Additional paid-in capital
Treasury stock
Unearned compensation
Retained earnings
Accumulated other comprehensive loss, net of taxes
Total equity
Total liabilities and equity
Condensed Statements of Income
Dividends from the Bank
Interest income
Interest expense
Gain on sale of securities
Other-than-temporary impairment charge on securities
Net gain from fair value adjustments
Other operating expenses
Income before taxes and equity in undistributed
earnings of subsidiary
Income tax (expense) benefit
Income before equity in undistributed earnings of subsidiary
Equity in undistributed earnings of the Bank
Net income
113
December 31,
2008
December 31,
2007
(In thousands)
$
25,609
$
24,628
4,229
13
307,717
2,185
6,169
345,922
$
6,165
12
257,347
2,185
4,583
294,920
$
$
33,052
11,378
44,430
$
61,228
38
61,266
1
216
150,662
-
(1,300)
172,216
(20,303)
301,492
-
213
74,861
-
(2,110)
161,598
(908)
233,654
$
345,922
$
294,920
2008
-
$
1,018
(4,328)
-
(197)
26,504
(997)
22,000
(9,863)
12,137
10,122
22,259
$
2007
(In thousands)
-
$
1,213
(3,210)
-
(34)
1,212
(1,262)
(2,081)
898
(1,183)
21,368
20,185
$
2006
$
20,000
501
(1,855)
-
-
-
(1,126)
17,520
1,160
18,680
2,959
21,639
$
Condensed Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the Bank
Amortization of unearned (discount) premium, net
Other-than-temporary impairment charge on securities
Deferred income tax provision
Fair value adjustments for financial assets and
financial liabilities
Stock based compensation expense
Net increase in operating assets and liabilities
Net cash (used in) provided by operating activities
Investing activities:
Purchases of securities available for sale
Proceeds from sales and calls of securities available for sale
Cash used to acquire Atlantic Liberty Financial Corporation
Cash acquired in acquisition of Atlantic Liberty
Financial Corporation
Investment in subsidiary
Net cash used in investing activities
Financing activities:
Purchase of treasury stock
Cash dividends paid
Issuance of preferred stock
Proceeds from long-term borrowings
Repayments of long-term borrowings
Stock options exercised
Net cash provided by (used in) financing activities
2008
2007
(In thousands)
2006
$
22,259
$
20,185
$
21,639
(10,122)
-
197
11,709
(26,504)
2,209
(173)
(425)
(139)
-
-
-
(60,000)
(60,139)
(409)
(10,383)
69,974
-
-
2,363
61,545
(21,368)
-
34
-
(1,212)
2,016
17
(328)
(2,021)
769
-
-
(30,000)
(31,252)
(1,056)
(9,401)
-
61,857
(20,619)
1,326
32,107
(2,959)
(4)
-
-
-
2,278
2,247
23,201
(156)
2,383
(14,663)
1,981
-
(10,455)
(6,593)
(8,180)
-
-
-
2,931
(11,842)
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
981
24,628
25,609
527
24,101
24,628
$
904
23,197
24,101
$
$
114
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Flushing Financial Corporation
We have audited the accompanying consolidated statements of financial condition of Flushing Financial Corporation (a
Delaware Corporation) and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Flushing Financial Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 16 to the consolidated financial statements, the Company has adopted Emerging Issues Task Force
on Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-
Dollar Life Insurance Arrangements in 2008. Also, as discussed in Note 15 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Statement (FASB) No. 157, Fair Value Measurements and
FASB No.159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB
No. 115 as of January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Flushing Financial Corporation and subsidiaries’ internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 16, 2009 expressed an unqualified
opinion.
/S/Grant Thornton LLP
New York, New York
March 16, 2009
115
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Flushing Financial Corporation
We have audited Flushing Financial Corporation (a Delaware Corporation) and subsidiaries’ internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Flushing Financial
Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on Flushing Financial Corporation and subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Flushing Financial Corporation and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated statements of financial condition of Flushing Financial Corporation and subsidiaries as of
December 31, 2008 and 2007 and the related consolidated statements of income, changes in stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2008, and our report dated March 16, 2009
expressed an unqualified opinion.
/S/Grant Thornton LLP
New York, New York
March 16, 2009
116
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company carried out, under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this Annual Report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31, 2008, the design and operation of
these disclosure controls and procedures were effective. During the period covered by this Annual Report, there have
been no changes in the Company's internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting,
and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31,
2008. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management performed an assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008 based upon criteria in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment,
management concluded that the Company’s internal control over financial reporting was effective as of December 31,
2008 based on those criteria issued by COSO.
Grant Thornton, LLP, the Company’s independent registered public accounting firm that audited the
Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, as stated in their
report which appears on page 116.
Dated March 16, 2009
Item 9B. Other Information.
None.
117
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Other than the disclosures below, information regarding the directors and executive officers of the Company
appears in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2009 (“Proxy
Statement”) under the captions “Board Nominees,” “Continuing Directors,” “Executive Officers Who Are Not
Directors” and “Meeting and Committees of the Board of Directors – Audit Committee” and is incorporated herein by
this reference. Information regarding Section 16(a) beneficial ownership appears in the Company’s Proxy Statement
under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by this
reference.
Code of Ethics. The Company has adopted a Code of Business Conduct and Ethics that applies to all of its directors,
officers and employees. This code is publicly available on the Company’s website at:
http://www.snl.com/Cache/1500017426.PDF?D=&O=PDF&IID=102398&Y=&T=&FID=1500017426
Any substantive amendments to the code and any grant of a waiver from a provision of the code requiring disclosure
under applicable SEC or NASDAQ rules will be disclosed in a report on Form 8-K.
Audit Committee Financial Expert. The Board of Directors of the Company has determined that Louis C.
Grassi, the Chairman of the Audit Committee, is an “audit committee financial expert” as defined under Item 401(h) of
Regulation S-K, and that he is independent as defined under applicable NASDAQ listing standards. Mr. Grassi is a
certified public accountant and a certified fraud examiner.
Item 11. Executive Compensation.
Information regarding executive compensation appears in the Proxy Statement under the caption “Executive
Compensation” and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information regarding security ownership of certain beneficial owners appears in the Proxy Statement under the
caption “Stock Ownership of Certain Beneficial Owners” and is incorporated herein by this reference.
Information regarding security ownership of management appears in the Proxy Statement under the caption
“Stock Ownership of Management” and is incorporated herein by this reference.
The following table sets forth securities authorized for issuance under all equity compensation plans of the
Company at December 31, 2008:
( a )
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
( b )
Weighted-average
exercise price of
outstanding options,
warrants and rights
( c )
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
1,428,033
$14.18
754,755(1)
⎯
1,428,033
⎯
$14.18
⎯
754,755 (1)
(1) Consists of 319,008 shares available for future non-full value awards and 435,747 shares available for future full value awards.
118
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions and directors independence, appears in the
Proxy Statement under the captions “Compensation Committee Interlocks and Insider Participation” and “Related Party
Transactions” and is incorporated herein by this reference.
Item 14. Principal Accounting Fees and Services.
Information regarding fees paid to the Company’s independent auditor appears in the Proxy Statement under the
caption “Schedule of Fees to Independent Auditors” and is hereby incorporated by this reference.
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements
PART IV
The following financial statements are included in Item 8 of this Annual Report and are incorporated herein by
this reference:
• Consolidated Statements of Financial Condition at December 31, 2008 and 2007
• Consolidated Statements of Income for each of the three years in the period ended December 31, 2008
• Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period
ended December 31, 2008
• Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2008
• Notes to Consolidated Financial Statements
• Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto included in Item 8 of this Annual Report and are
incorporated herein by this reference.
119
3. Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number
Description
2.1
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12
Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation
and Atlantic Liberty Financial Corp. (10)
Certificate of Incorporation of Flushing Financial Corporation (1)
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial
Corporation (6)
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing
Financial Corporation (13)
By-Laws of Flushing Financial Corporation (1)
Certificate of Designation relating to the Fixed Rate Cumulative Perpetual Preferred Stock Series B (15)
Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation. and Computershare
Trust Company N.A., as Rights Agent, which includes the form of Certificate of Increase of Shares Designated
as Series A Junior Participating Preferred Stock as Exhibit A, form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Preferred Stock as Exhibit C (12)
Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of
Flushing Financial Corporation’s total assets; therefore, copies of constituent instruments defining the rights of
the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt
will be furnished to the Securities and Exchange Commission upon request.
Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock Series B (15)
Warrant for Purchase of Shares of Common Stock (15)
Form of Amended and Restated Employment Agreements between Flushing Savings Bank, FSB and
Certain Officers
Form of Amended and Restated Employment Agreements between Flushing Financial Corporation and
Certain Officers
Amended and Restated Employment Agreement between Flushing Financial Corporation and John R.
Buran
Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and John R. Buran
Amended and Restated Employment Agreement between Flushing Financial Corporation and Maria A. Grasso
Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and Maria A. Grasso
Flushing Savings Bank Assistant Vice President and Vice President Change in Control Severance Policy
Amended and Restated Employee Severance Compensation Plan of Flushing Savings Bank, FSB (4)
Amended and Restated Outside Director Retirement Plan (11)
Amended and Restated Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (4)
Amended and Restated Flushing Savings Bank, FSB Supplemental Savings Incentive Plan
Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and each
Director (2)
10.13
Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
Certain Officers (2)
Employee Benefit Trust Agreement (1)
Amendment to the Employee Benefit Trust Agreement (3)
Loan Document for Employee Benefit Trust (1)
Guarantee by Flushing Financial Corporation (1)
Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial
Corporation and Gerard P. Tully, Sr.
1996 Restricted Stock Incentive Plan of Flushing Financial Corporation (8)
1996 Stock Option Incentive Plan of Flushing Financial Corporation (7)
Description of Outside Director Fee Arrangements
Form of Outside Director Restricted Stock Award Letter (9)
Form of Outside Director Restricted Stock Unit Award Letter (9)
Form of Outside Director Stock Option Grant Letter (9)
Form of Employee Restricted Stock Award Letter (9)
Form of Employee Restricted Stock Unit Award Letter (9)
Form of Employee Stock Option Award Letter (9)
120
10.28*
10.29*
10.30*
10.31
21.1
23.1
31.1
31.2
32.1
32.2
Amended and Restated 2005 Omnibus Incentive Plan
Annual Incentive Plan for Executives and Senior Officers (14)
Form of Waiver executed by each of John R. Buran, Maria A. Grasso, David W. Fry, Francis W. Korzekwinski
and Theresa Kelly (15)
Letter Agreement dated December 19, 2008 between Flushing Financial Corporation and the United States
Department of the Treasury, including the Securities Purchase Agreement – Standard Terms, with respect to the
issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock Series B and the Warrant (15)
Subsidiaries information incorporated herein by reference to Part I – Subsidiary Activities
Consent of Independent Registered Public Accounting Firm
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
Certification Pursuant to 18 U.S.C, Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
Certification Pursuant to 18 U.S.C, Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
*Indicates compensatory plan or arrangement.
______________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-96488.
Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 1996.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1997.
Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2000.
Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002
Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2003.
Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2004.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2004.
Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.
Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended March 31, 2006.
Incorporated by reference to Exhibit filed with Form 8-K filed September 1, 2006.
Incorporated by reference to Exhibit filed with Form 8-K filed September 26, 2006.
Incorporated by reference to Exhibit filed with Form 8-K filed March 1, 2007.
Incorporated by reference to Exhibits filed with Form 8-K filed December 23, 2008.
121
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Company has duly
caused this report, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, in
New York, New York, on March 16, 2009.
SIGNATURES
FLUSHING FINANCIAL CORPORATION
By
/S/JOHN R. BURAN
John R. Buran
President and CEO
POWER OF ATTORNEY
We, the undersigned directors and officers of Flushing Financial Corporation (the “Company”) hereby severally
constitute and appoint John R. Buran and David W. Fry as our true and lawful attorneys and agents, each acting alone
and with full power of substitution and re-substitution, to do any and all things in our names in the capacities indicated
below which said John R. Buran or David W. Fry may deem necessary or advisable to enable the Company to comply
with the Securities Exchange Act of 1934, and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the report on Form 10-K, or amendment thereto, including specifically, but not limited
to, power and authority to sign for us in our names in the capacities indicated below the report on Form 10-K, or
amendment thereto; and we hereby approve, ratify and confirm all that said John R. Buran or David W. Fry shall do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K, or amendment
thereto, has been signed by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/S/JOHN R. BURAN
John R. Buran
/S/GERARD P. TULLY, SR.
Gerard P. Tully, Sr.
/S/DAVID W. FRY
David W. Fry
/S/JAMES D. BENNETT
James D. Bennett
Director, President (Principal Executive
Officer)
March 10, 2009
Director, Chairman
March 10, 2009
Treasurer (Principal Financial and
Accounting Officer)
March 10, 2009
Director
March 10, 2009
122
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
March 10, 2009
/S/STEVEN J. D'IORIO
Steven J. D'Iorio
/S/LOUIS C. GRASSI
Louis C. Grassi
/S/SAM HAN
Sam Han
/S/MICHAEL J. HEGARTY
Michael J. Hegarty
/S/JOHN J. MCCABE
John J. McCabe
/S/VINCENT F. NICOLOSI
Vincent F. Nicolosi
/S/DONNA M. O'BRIEN
Donna M. O'Brien
/S/JOHN E. ROE, SR.
John E. Roe, Sr.
/S/MICHAEL J. RUSSO
Michael J. Russo
Director
Director
Director
Director
Director
Director
Director
Director
Director
123
100
80
60
40
20
0
4000
3500
3000
2500
2000
1500
1000
500
0
financial highlights
$87.7
$66.5
$68.2
$67.7
$70.9
$3,950
$3,355
$2,837
$2,961
$2,702
$2,325
$2,469
$2,025
$1,764
$2,353
$2,058
$1,882
$1,517
$1,467
$1,293
3000
2500
2000
1500
1000
500
0
2500
2000
1500
1000
500
0
Net Interest Income
Total Assets
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
Net Loan porfolio
deposits
Net Interest Income
(in millions)
Total Assets
(in millions)
Net Loan Portfolio
(in millions)
Deposits
(in millions)
Need Financing? We’re Lending.
Over $600 million in loans last year.
Mixed-use. Multi-family. Business. Consumer.
Call 1.800.581.2889
MEMBER
FDIC
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Corporate Information Flushing Financial Corporation
Corporate Headquarters
Executive Management
Flushing Savings Bank, FSB
1979 Marcus Avenue—Suite E140
Lake Success, New York 11042
718-961-5400
facsimile 516-358-4385
www.flushingsavings.com
Retail Branch Locations
Flushing
144-51 Northern Boulevard
159-18 Northern Boulevard
188-08 Hollis Court Boulevard
44-43 Kissena Boulevard
136-41 Roosevelt Avenue
Astoria
31-16 30th Avenue
Bayside
61-54 Springfield Boulevard
42-11 Bell Boulevard
Brooklyn
7102 Third Avenue
186 Montague Street
1402 Avenue J
Forest Hills
107-11 Continental Avenue
Manhattan
33 Irving Place
New Hyde Park
661 Hillside Avenue
Garden City
1122 Franklin Avenue
Real Estate Lending
Flushing Savings Bank, FSB
144-51 Northern Boulevard
Flushing, New York
718-961-5400
Business Banking Division
33 Irving Place
New York, New York
212-477-9424
iGObanking.com®
42-11 Bell Boulevard
Bayside, New York
888-432-5890
www.iGObanking.com
Flushing Commercial Bank
A Wholly Owned Subsidiary of Flushing
Savings Bank
661 Hillside Avenue
New Hyde Park, New York 11040
Gerard P. Tully, Sr.
Chairman of the Board
John R. Buran
Allen Brewer
Senior Vice President &
Chief Information Officer
President & Chief Executive Officer
Astrid Burrowes
Senior Vice President &
Controller
Theresa Kelly
Senior Vice President &
Director of Business Banking
Robert Kiraly
Senior Vice President &
Chief Auditor
David W. Fry
Executive Vice President,
Treasurer & Chief Financial Officer
Maria A. Grasso
Executive Vice President,
Chief Operating Officer &
Corporate Secretary
Francis W. Korzekwinski
Executive Vice President &
Chief of Real Estate Lending
Barbara Beckmann
Senior Vice President &
Director of Operations
Board of Directors
Gerard P. Tully, Sr.
Chairman
Real Estate Development
and Management
John R. Buran
President & Chief Executive Officer
James D. Bennett
Attorney in Nassau County,
New York
Steven J. D’Iorio
Vice President of Real Estate for
Time Warner
Louis C. Grassi
Managing Partner of
Grassi & Co., CPAs, P.C.
Ruth Filiberto
Senior Vice President &
Director of Human Resources
Patricia Mezeul
Senior Vice President &
Director of Government Banking
Ronald M. Hartmann
Senior Vice President,
Commercial Real Estate Lending
Jeoung Yun Jin
Senior Vice President,
Residential & Mixed-Use Lending
Charlie Suh
Senior Vice President &
Director of Asian Markets
W. Jeffrey Weichsel
Senior Vice President &
Chief Investment Officer
Sam Han
Franklin F. Regan, Jr. (retired)
Founder of the Korean Channel, Inc.
Attorney in Flushing, New York
Michael J. Hegarty
Former President &
Chief Executive Officer
John J. McCabe
Chief Investment Strategist for
Shay Assets Management
Vincent F. Nicolosi
Attorney in Manhasset, New York
Donna M. O’Brien
President, Community Healthcare
Strategies, LLC
John E. Roe, Sr.
Chairman of City Underwriting
Agency, Inc.
Insurance Brokers
Michael J. Russo
Consulting Engineer, President
and Director of Operations for
Northeastern Aviation Corp.
Shareholder Information Flushing Financial Corporation and Subsidiaries
Annual Meeting
The Annual Meeting of Shareholders
of Flushing Financial Corporation
will be held at 2:00 PM, May 19,
2009, at the La Guardia Marriott
located at 102-05 Ditmars Boulevard,
East Elmhurst, New York 11369.
Transfer Agent and Registrar
Computershare Trust Company NA
P.O. Box 43078
Providence, Rhode Island
02940-3078
800-426-5523
www.Computershare.com
Stock Listing
NASDAQ Global Select Market SM
Symbol “FFIC”
Independent Registered
Public Accounting Firm
Grant Thornton LLP
60 Broad Street
New York, New York 10004
212-422-1000
Legal Counsel
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
212-837-6000
Shareholder Relations
David W. Fry
718-961-5400
002CS-18431