FLATBUSH FEDERAL BANCORP INC - 10KSB - 20040329 - PART_I
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This Annual Report contains certain "forward-looking statements" which may
be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, commercial and
other loans, real estate values, competition, changes in accounting principles,
policies, or guidelines, changes in legislation or regulation, and other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing products and services.
FLATBUSH FEDERAL BANCORP, INC.
Flatbush Federal Bancorp, Inc. is a federal corporation which was organized
in 2003 as part of the mutual holding company reorganization of Flatbush Federal
Savings & Loan Association. Our principal asset is our investment in Flatbush
Federal Savings & Loan Association. We are a majority owned subsidiary of
Flatbush Federal Bancorp, MHC, a federally chartered mutual holding company. In
connection with the reorganization, we sold 1,087,756 shares of our common stock
and issued 1,226,619 shares to our mutual holding company parent. The net
proceeds from our stock offering totaled $7.1 million. At December 31, 2003,
Flatbush Federal Bancorp, Inc. had consolidated assets of $142.9 million,
deposits of $126.0 million and shareholders' equity of $15.6 million. Our
executive office is located at 2146 Nostrand Avenue, Brooklyn, New York 112101
and our telephone number is (718) 859-6800.
FLATBUSH FEDERAL SAVINGS & LOAN ASSOCIATION
GENERAL
Our principal business consists of attracting retail deposits from the
general public in the areas surrounding our three locations in Brooklyn, New
York and investing those deposits, together with funds generated from
operations, primarily in one- to four-family residential mortgage loans,
commercial real estate loans, construction loans and loans guaranteed by the
Small Business Administration, and in investment securities. Our revenues are
derived principally from the interest on loans, securities, loan origination and
servicing fees, and service charges and fees collected on deposit accounts. Our
primary sources of funds are deposits and principal and interest payments on
loans and securities.
COMPETITION
We face intense competition within our market area both in making loans and
attracting deposits. The New York City area has a high concentration of
financial institutions including large money center and regional banks,
community banks and credit unions. Some of our competitors offer products and
services that we currently do not offer, such as trust services and private
banking. As of December 31, 2003, our market share of deposits represented less
than one half of one percent of deposits in Kings County.
2
Our competition for loans and deposits comes principally from commercial
banks, savings institutions, mortgage banking firms and credit unions. We face
additional competition for deposits from short-term money market funds,
brokerage firms, mutual funds and insurance companies. Our primary focus is to
build and develop profitable customer relationships across all lines of business
while maintaining our role as a community bank.
MARKET AREA
We operate in an urban market area that has a stable population and
household base. During the past 11 years, the population and number of
households in Kings County increased by approximately 8%. In 2003, per capita
income for Kings County was $19,305 and the median household income was $35,504.
Our primary lending area is concentrated in Brooklyn, Queens and Long Island,
New York. One- to four-family residential real estate in our market area is
characterized by a large number of attached and semi-detached houses, including
a number of two-and three-family homes and cooperative apartments. Most of our
deposit customers are residents of the greater New York metropolitan area. The
economy of our market area is characterized by a large number of small retail
establishments. Our customer base is comprised of middle-income households, and
to a lesser extent low-to-moderate-income households. The median household
income for Brooklyn is below the national and New York state median household
income. In addition, the unemployment rate in the market area served by us is
higher than in the surrounding suburbs.
LENDING ACTIVITIES
Historically, our principal lending activity has been the origination of
first mortgage loans for the purchase or refinancing of one- to four-family
residential real property. Historically, we retained all loans that we
originated. However, beginning in 2002 we sold a limited number of our one- to
four-family loans, on a servicing retained basis, to the Federal Home Loan Bank
of New York. Loan sales totaled $300,000 for the year ended December 31, 2003.
One- to four-family residential real estate mortgage loans represented $79.7
million, or 86.83%, of our loan portfolio at December 31, 2003. We also offer
commercial real estate loans and construction loans secured by single family
properties. Commercial real estate loans totaled $4.9 million, or 5.31% of the
total loan portfolio at December 31, 2003. Construction loans totaled $5.2
million, or 5.66% of the total loan portfolio at December 31, 2003. Multi-family
real estate loans totaled $877,000, or 0.96%, of the total loan portfolio at
December 31, 2003. On a limited basis, we originate loans that are not secured
by real estate.
3
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of our loan portfolio by type of loan as of the dates indicated, including a
reconciliation of gross loans receivable after consideration of loans in
process, the allowance for loan losses and net deferred fees.
AT DECEMBER 31,
------------------------------------------------------
2003 2002
------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One- to four-family......... $ 79,687 86.83% $ 79,169 85.78%
Multi-family................ 877 0.96 1,539 1.67
Commercial.................. 4,870 5.31 5,613 6.08
Construction................ 5,197 5.66 4,858 5.26
----------- ---------- ----------- ----------
Total real estate loans... 90,631 98.75 91,179 98.79
----------- ---------- ----------- ----------
OTHER LOANS:
Small Business
Administration........... 940 1.02% 785 0.84
Consumer loans:
Passbook or certificate.... 89 0.10 159 0.17
Home equity................ 68 0.07 116 0.13
Student education.......... 5 0.01 6 0.01
Secured credit cards....... 44 0.05 51 0.06
----------- ---------- ----------- ----------
Total other loans......... 1,146 1.25 1,117 1.21
----------- ---------- ----------- ----------
Total loans...... 91,777 100.00% 92,296 100.00%
----------- ========== ----------- ==========
LESS:
Loans in process............ 647 1,774
Allowance for loan losses... 180 174
Deferred loan fees (costs).. 379 72
----------- -----------
1,206 2,020
----------- -----------
Total loans receivable, net. $ 90,571 $ 90,276
=========== ===========
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MATURITY OF LOAN PORTFOLIO. The following table shows the remaining
contractual maturity of our loans at December 31, 2003. The table does not
include the effect of possible prepayments or due on sale clause payments.
AT DECEMBER 31, 2003
-------------------------------------------------------------------------------------
SMALL
ONE- TO COMMERCIAL BUSINESS PASSBOOK OR
FOUR-FAMILY MULTI-FAMILY REAL ESTATE CONSTRUCTION ADMINISTRATION CERTIFICATE
----------- ------------ ----------- ------------ -------------- -----------
(IN THOUSANDS)
One year or less.............. $ 86 $ -- $ 32 $ 2,897 $ 15 $ --
---------- ---------- ---------- ---------- ---------- ----------
After one year:
More than 1 to 3 years........ 67 -- -- 2,300 81 --
More than 3 to 5 years........ 1,458 -- 86 -- 306 --
More than 5 to 10 years....... 6,576 262 1,971 -- 445 89
More than 10 to 20 years...... 40,306 615 2,571 -- -- --
More than 20 years............ 31,194 -- 210 -- 93 --
---------- ---------- ---------- ---------- ---------- ----------
Total due after one year...... 79,601 877 4,838 2,300 925 89
---------- ---------- ---------- ---------- ---------- ----------
Total loans............... $ 79,687 $ 877 $ 4,870 $ 5,197 $ 940 $ 89
========== ========== ========== ========== ========== ==========
Less:
Loans in process..............
Allowance for loan loses......
Deferred loan fees (costs)....
Total loans receivable, net...
(CONTINUED)
AT DECEMBER 31, 2003
-----------------------------------------------------
STUDENT
HOME EQUITY EDUCATION CREDIT CARDS TOTAL
----------- --------- ------------ ----------
(IN THOUSANDS)
One year or less.............. $ -- $ -- $ 44 $ 3,074
---------- ---------- ---------- ----------
After one year:
More than 1 to 3 years........ 38 -- -- 2,486
More than 3 to 5 years........ 30 5 -- 1,885
More than 5 to 10 years....... -- -- -- 9,343
More than 10 to 20 years...... -- -- -- 43,492
More than 20 years............ -- -- -- 31,497
---------- ---------- ---------- ----------
Total due after one year...... 68 5 -- 88,703
---------- ---------- ---------- ----------
Total loans............... $ 68 $ 5 $ 44 $ 91,777
========== ========== ========== ==========
Less:
Loans in process.............. $ 647
Allowance for loan loses...... 180
Deferred loan fees (costs).... 379
----------
Total loans receivable, net... $ 90,571
==========
5
The total amount of loans due after December 31, 2004 that have fixed
interest rates is $72.8 million, and the total amount of loans due after such
date which have floating or adjustable interest rates is $15.9 million.
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
that are primarily secured by properties located in Brooklyn, Queens and Long
Island, New York. At December 31, 2003, approximately $79.7 million, or 86.83%
of our loan portfolio, consisted of one- to-four family residential loans.
Generally, one- to four-family residential mortgage loans are originated in
amounts up to 80% of the lesser of the appraised value or purchase price of the
property, with private mortgage insurance required on loans with a loan-to-value
ratio in excess of 80%. We will not make loans with a loan-to-value ratio in
excess of 95% for loans secured by single family homes and 90% for loans secured
by two-to four-family properties. Fixed-rate loans are originated for terms of
15 and 30 years. At December 31, 2003, our largest loan secured by one- to
four-family real estate had a principal balance of $500,000 and was secured by a
three- family residence. This loan was performing in accordance with its terms.
We also offer adjustable-rate mortgage loans with a one, two and three year
adjustment periods based on changes in a designated United States Treasury
index. During the year ended December 31, 2003, we originated five adjustable
rate mortgages totaling $1.7 million. Our adjustable rate mortgage loans provide
for maximum rate adjustments of 200 basis points per adjustment, with a lifetime
maximum adjustment of 600 basis points. Our adjustable rate mortgage loans
amortize over terms of up to 30 years.
Adjustable rate mortgage loans decrease the risk associated with changes in
market interest rates by periodically repricing, but involve other risks
because, as interest rates increase, the underlying payments by the borrower
increase, thus increasing the potential for default by the borrower. At the same
time, the marketability of the underlying collateral may be adversely affected
by higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the maximum periodic and lifetime interest rate adjustments
permitted by our loan documents, and therefore, is potentially limited in
effectiveness during periods of rapidly rising interest rates. At December 31,
2003, $6.0 million, or 7.53% of our one- to four-family residential loans had
adjustable rates of interest.
All one- to four-family residential mortgage loans that we originate
include "due-on-sale" clauses, which give us the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal of the property at the time the loan is originated. For all loans, we
utilize outside independent appraisers approved by the board of directors. All
borrowers are required to obtain title insurance. We also require homeowner's
insurance and fire and casualty insurance and, where circumstances warrant,
flood insurance on properties securing real estate loans.
MULTI-FAMILY REAL ESTATE LOANS. Loans secured by multi-family real estate
totaled approximately $877,000, or 0.96%, of the total loan portfolio at
December 31, 2003. Multi-family real estate loans generally are secured by
rental properties (including walk-up apartments). Substantially all multi-family
real estate loans are secured by properties located within our lending area. At
December 31, 2003, we had six multi-family loans with an average principal
balance of $146,000, and the largest multi-family real estate loan had a
principal balance of $247,000. All of our loans secured by multi-family real
estate loans are performing in accordance with their terms. Multi-family real
estate loans generally are offered with adjustable interest rates that adjust
after one or three years. Multi-family loans are originated
6
for terms of up to 15 years. Multi-family real estate loans adjustments are tied
to the prime rate as reported in THE WALL STREET JOURNAL.
We consider a number of factors in originating multi-family real estate
loans. We evaluate the qualifications and financial condition of the borrower
(including credit history), profitability and expertise, as well as the value
and condition of the mortgaged property securing the loan. When evaluating the
qualifications of the borrower, we consider the financial resources of the
borrower, the borrower's experience in owning or managing similar property and
the borrower's payment history with us and other financial institutions. In
evaluating the property securing the loan, the factors we consider include the
net operating income of the mortgaged property before debt service and
depreciation, the debt service coverage ratio (the ratio of net operating income
to debt service) to ensure that it is at least 125% of the monthly debt service
and the ratio of the loan amount to the appraised value of the mortgaged
property. Multi-family real estate loans are originated in amounts up to 70% of
the appraised value of the mortgaged property securing the loan. All
multi-family loans are appraised by outside independent appraisers approved by
the board of directors. Personal guarantees are obtained from multi-family real
estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate typically depends upon the successful operation of the real estate
property securing the loan. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
COMMERCIAL REAL ESTATE LOANS. At December 31, 2003, $4.9 million, or 5.31%
of our total loan portfolio consisted of commercial real estate loans.
Commercial real estate loans are secured by office buildings, mixed use
properties and other commercial properties. We generally originate adjustable
rate commercial real estate loans with maximum terms of up to 15 years. The
maximum loan-to-value ratio of commercial real estate loans is 70%. At December
31, 2003, we had 27 commercial real estate loans with an average outstanding
balance of $180,000. At December 31, 2003, our largest loan secured by
commercial real estate consisted of a $615,000 participation in a $1.3 million
loan secured by a mixed use property. At December 31, 2003 this loan was
performing in accordance with its terms. At December 31, 2003 all of our loans
secured by commercial real estate were performing in accordance with their
terms.
We consider a number of factors in originating commercial real estate
loans. We evaluate the qualifications and financial condition of the borrower
(including credit history), profitability and expertise, as well as the value
and condition of the mortgaged property securing the loan. When evaluating the
qualifications of the borrower, we consider the financial resources of the
borrower, the borrower's experience in owning or managing similar property and
the borrower's payment history with us and other financial institutions. In
evaluating the property securing the loan, the factors we consider include the
net operating income of the mortgaged property before debt service and
depreciation, the debt service coverage ratio (the ratio of net operating income
to debt service) to ensure that it is at least 125% of the monthly debt service,
and the ratio of the loan amount to the appraised value of the mortgaged
property. Commercial real estate loans are originated in amounts up to 70% of
the appraised value of the mortgaged property securing the loan. All commercial
loans are appraised by outside independent appraisers approved by the board of
directors. Personal guarantees are obtained from commercial real estate
borrowers.
7
Loans secured by commercial real estate generally are larger than one- to
four-family residential loans and involve greater credit risk. Commercial real
estate loans often involve large loan balances to single borrowers or groups of
related borrowers. Repayment of these loans depends to a large degree on the
results of operations and management of the properties securing the loans or the
businesses conducted on such property, and may be affected to a greater extent
by adverse conditions in the real estate market or the economy in general.
Accordingly, the nature of these loans makes them more difficult for management
to monitor and evaluate.
CONSTRUCTION LOANS. At December 31, 2003, $5.2 million, or 5.66% of our
total loan portfolio consisted of construction loans. Our construction loans are
originated by a mortgage brokerage company or another financial institution,
which makes the initial contact with the potential borrower and forwards to us a
completed loan application which we review to determine whether the applicant
satisfies our underwriting criteria. If we accept the loan, the loan is closed
in the name of the mortgage broker who simultaneously assigns the mortgage to
us. We then fund the construction loan in accordance with its terms. We
currently offer adjustable- rate residential construction loans for the
construction of owner-occupied, single-family residences. These loans generally
are offered to borrowers who have a contract for construction of a single family
residence on property they own at the time of the loan origination. Construction
loans are occasionally structured to become permanent mortgage loans once the
construction is completed; however, in all instances permanent financing must be
in place at the time the construction loan is originated. At December 31, 2003,
our largest construction loan was $1.3 million of which $1.3 million was
advanced. The loan was performing in accordance with its terms. Construction
loans do not have a set term, but are generally repaid within eighteen months.
These loans have interest rates that adjust monthly. Construction loans require
the payment of interest only during the construction period. Construction loans
will generally be made in amounts of up to 75% of the appraisal value of the
property, or the actual cost of the improvements. Funds are disbursed in
accordance with a schedule reflecting the completion of portions of the project.
At December 31, 2003 our construction loans are secured by properties located on
Long Island and Brooklyn.
Construction loans generally involve a greater degree of credit risk than
one- to four-family residential mortgage loans. The risk of loss on a
construction loan depends upon the accuracy of the initial estimate of the value
of the property at completion of construction compared to the estimated cost of
construction. If the estimated cost of construction is inaccurate we may have to
advance funds beyond the original amount committed in order to protect the value
of the property.
OTHER LOANS. We offer a variety of loans secured by property other than
real estate. These loans include loans guaranteed by the Small Business
Administration, loans secured by deposits, home equity loans, student education
loans and credit cards secured by deposit accounts. At December 31, 2003, these
other loans totaled $1.1 million, or 1.25% of the total loan portfolio.
ORIGINATION AND SERVICING OF LOANS. Historically, we have originated
mortgage loans pursuant to underwriting standards that generally conform with
the Fannie Mae and Freddie Mac guidelines. Loan origination activities are
primarily concentrated in Brooklyn, Queens and Long Island, New York and
properties securing our real estate and construction loans are primarily located
on Long Island. New loans are generated primarily from walk-in customers,
customer referrals, a network of mortgage brokers, and other parties with whom
we do business, and from the efforts of employees and advertising. Loan
applications are underwritten and processed at our main office. We service all
loans that we originate.
8
The following table shows our loan origination purchases, sales and
repayment activities for the periods indicated.
YEARS ENDED DECEMBER 31,
2003 2002
---------- ----------
(IN THOUSANDS)
Beginning of period................... $ 90,276 $ 100,173
---------- ----------
ORIGINATIONS BY TYPE:
Real estate:
One- to four-family.............. 25,133 13,939
Multi-family..................... 250 --
Commercial....................... 710 1,014
Construction..................... 3,163 2,962
Other loans:
Small Business Administration.... 445 450
Passbook or certificate.......... 39 98
Home equity...................... 35 78
Student education................ -- --
Secured credit cards............. 216 235
---------- ----------
Total originations............. 29,991 18,776
---------- ----------
PURCHASES:
Real estate:
Commercial....................... 650 --
Construction..................... 2,300 --
---------- ----------
Total purchases................ 2,950 --
SALES AND REPAYMENTS:
Real estate:
One- to four-family.............. 300 717
---------- ----------
Total sales.................... 300 717
---------- ----------
Principal repayments............. 32,328 27,821
---------- ----------
Total reductions............... 32,628 28,538
---------- ----------
Increase (decrease) in other
items, net....................... (313) 135
----------- ----------
Net increase (decrease).......... 295 (9,897)
---------- ----------
Ending balance................... $ 90,571 $ 90,276
========== ==========
LOAN APPROVAL PROCEDURES AND AUTHORITY. The loan approval process is
intended to assess the borrower's ability to repay the loan, the viability of
the loan, and the adequacy of the value of the property that will secure the
loan. To assess the borrower's ability to repay, we review the employment and
credit history and information on the historical and projected income and
expenses of mortgagors. All loans up to $400,000 may be approved by either our
Senior Vice President of Lending or our Vice President of Lending. All loans in
excess of $400,000 must be approved by the board of directors. In addition, the
board of directors ratifies all loans approved by management.
We require appraisals of all real property securing loans. Appraisals are
performed by independent licensed appraisers. All appraisers are approved by the
board of directors annually. We require fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan.
NON-PERFORMING AND PROBLEM ASSETS
After a mortgage loan becomes 10 days delinquent, we deliver a computer
generated delinquency notice to the borrower. A second delinquency notice is
sent once the loan becomes 16 days delinquent. When a loan becomes 30 days
delinquent, we send an additional delinquency notice to the borrower and attempt
to make personal contact with the borrower by letter from the head of the
collection department or telephone to establish an acceptable repayment
schedule. When a mortgage loan is 90 days delinquent and no acceptable
resolution has been reached, we send the borrower a 30 day demand letter. After
90
9
days, we will generally refer the matter to our attorney who is authorized to
commence foreclosure proceedings. Management is authorized to begin foreclosure
proceedings on any loan after determining that it is prudent to do so.
Mortgage loans are reviewed on a regular basis and such loans, with the
exception of loans guaranteed by the Federal Housing Administration, are placed
on non-accrual status when they become delinquent 90 days or more. When loans
are placed on a non-accrual status, unpaid accrued interest is fully reserved,
and further income is recognized only to the extent received.
NON-PERFORMING LOANS. At December 31, 2003, $49,400 or 0.05% of our total
loans were non-performing loans.
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. Delinquent loans
that are 90 days or more past due are generally considered non-performing
assets. During the periods presented, we did not have any troubled debt
restructurings within the meaning of SFAS No. 15.
AT DECEMBER 31,
2003 2002
------- -------
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One- to four-family.................... $ -- $ 328
Small Business Administration.......... 40 --
Student education...................... -- 2
Secured credit cards................... 2 --
------- -------
Total................................ 42 330
------- -------
Accruing loans delinquent 90 days or more:
One- to four-family (1)................ 5 8
Multi-family........................... -- --
Secured credit cards................... -- 4
Student education...................... 2 --
------- -------
Total................................ 7 12
------- -------
Total non-performing loans................ $ 49 $ 342
======= =======
Total as a percentage of total assets..... 0.03% 0.24%
======= =======
Total as a percent of total loans......... 0.05% 0.37%
======= =======
---------------
(1) Consists of loans guaranteed or insured by the Federal Housing
Administration.
For the year ended December 31, 2003, gross interest income which would
have been recorded had our non-accruing loans been current in accordance with
their original terms amounted to $3,000. Interest income recognized on such
loans for the year ended December 31, 2003 was $1,000.
10
DELINQUENT LOANS. The following table sets forth our loan delinquencies by
type, by amount and by percentage of type at the dates indicated.
AT DECEMBER 31, 2003 AT DECEMBER 31, 2002
---------------------------------------------- ----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
---------------------- ---------------------- ---------------------- ----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER- BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One-to-four- family............ 2 $ 8 4 $ 5 3 $ 15 5 $ 336
Multi-family................... -- -- -- -- -- -- -- --
Commercial real estate......... -- -- -- -- -- -- -- --
Construction................... -- -- -- -- -- -- -- --
------- ------- ----- ------- ------- ------- ----- -------
Total........................ 2 8 4 5 3 15 5 336
------- ------- ----- ------- ------- ------- ----- -------
OTHER LOANS:
Small Business Administration.. -- -- 1 40 -- -- -- --
Passbook or certificate........ -- -- -- -- -- -- -- --
Home equity.................... -- -- -- -- -- -- -- --
Student education.............. -- -- 1 2 -- -- 1 2
Secured credit cards........... -- -- 1 2 2 1 3 4
------- ------- ----- ------- ------- ------- ----- -------
Total other loans......... -- -- 3 44 2 1 4 6
------- ------- ----- ------- ------- ------- ----- -------
Total delinquent loans... 2 $ 8 7 $ 49 5 $ 16 9 $ 342
======= ======= ===== ======= ======= ======= ===== =======
Delinquent loans to total loans 0.009% 0.05% 0.02% 0.37%
======= ======= ======= =======
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CLASSIFIED ASSETS. Office of Thrift Supervision regulations and our Asset
Classification Policy provide that loans and other assets considered to be of
lesser quality be classified as "substandard," "doubtful" or "loss" assets. An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the institution will sustain "some loss" if the deficiencies
are not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. We classify an asset
as "special mention" if the asset has a potential weakness that warrants
management's close attention. While such assets are not impaired, management has
concluded that if the potential weakness in the asset is not addressed, the
value of the asset may deteriorate, adversely affecting the repayment of the
asset.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
losses associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the Office of Thrift Supervision which can
order the establishment of additional general or specific loss allowances.
On the basis of management's review of its assets, at December 31, 2003 we
had classified $3,000 in student loans as doubtful and $82,000 of our assets,
consisting of residential FHA Loans and SBA Loans, were classified as special
mention.
The loan portfolio is reviewed on a regular basis to determine whether any
loans require classification in accordance with applicable regulations. Not all
classified assets constitute non-performing assets.
ALLOWANCE FOR LOAN LOSSES
Our allowance for loan losses is maintained at a level necessary to absorb
loan losses which are both probable and reasonably estimable. Management, in
determining the allowance for loan losses, considers the losses inherent in its
loan portfolio and changes in the nature and volume of loan activities, along
with the general economic and real estate market conditions. We utilize a
two-tier approach: (1) identification of impaired loans and establishment of
specific loss allowances on such loans; and (2) establishment of general
valuation allowances on the remainder of our loan portfolio. We maintain a loan
review system, which allows for a periodic review of our loan portfolio and the
early identification of potential impaired loans. Such system takes into
consideration, among other things, delinquency status, size of loans, type and
market value of collateral and financial condition of the borrowers. Specific
loan loss allowances are established for identified losses based on a review of
such information. A loan evaluated for impairment is considered to be impaired
when, based on current information and events, it is probable that we will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. All loans identified as impaired are evaluated independently. We do
not aggregate such loans for evaluation purposes. Loan impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. General loan loss
12
allowances are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of the loan portfolio, current
economic conditions, management's judgment and losses which are probable and
reasonably estimable. The allowance is increased through provisions charged
against current earnings and recoveries of previously charged-off loans. Loans
which are determined to be uncollectible are charged against the allowance.
While management uses available information to recognize probable and reasonably
estimable loan losses, future loss provisions may be necessary based on changing
economic conditions. Payments received on impaired loans are applied first to
accrued interest receivable and then to principal. The allowance for loan losses
as of December 31, 2003 is maintained at a level that represents management's
best estimate of losses inherent in the loan portfolio, and such losses were
both probable and reasonably estimable.
In addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our allowance for loan losses. The OTS
may require that we recognize additions to the allowance based on its evaluation
of information available to it at the time of the examination.
ALLOWANCE FOR LOAN LOSSES. The following table analyzes changes in the
allowance for the periods presented.
YEARS ENDED DECEMBER 31,
2003 2002
---------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................... $ 174 $ 212
Charge-offs:
Small Business Administration................. -- 39
Student education............................. -- --
Secured credit cards.......................... 3 2
---------- ---------
Total charge-offs............................ 3 41
---------- ---------
Recoveries:
Small Business Administration................. -- --
---------- ----------
Total recoveries............................ -- --
---------- ----------
Net charge-offs.................................. 3 41
Additions charged to operations.................. 9 3
---------- ---------
Ending balance................................... $ 180 $ 174
========== =========
Ratio of non-performing assets to total assets
at the end of period............................. 0.03% 0.24%
========== =========
Ratio of net charge-offs during the period to
loans outstanding during the period........... 0.003% 0.04%
========== =========
Ratio of allowance for loan losses to loans
outstanding.................................. 0.20% 0.19%
========== =========
13
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table presents an
analysis of the allocation of the allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
AT DECEMBER 31,
----------------------------------------------------------------------
2003 2002
---------------------------------- ----------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
LOAN IN EACH LOAN IN EACH
AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY
LOAN LOSS BY TO TOAL LOAN LOSS BY TO TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCE CATEGORY LOANS
----------- ---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
One- to four-family $ 80 $79,687 86.83% $ 113 $79,169 85.78%
Multi-family 2 877 0.96 4 1,539 1.67
Commercial 13 4,870 5.31 14 5,613 6.08
Construction 23 5,197 5.66 5 4,858 5.26
Small Business
Administration 20 940 1.02 11 785 0.84
Passbook or certificate -- 89 0.10 -- 159 0.17
Home equity 1 68 0.07 2 116 0.13
Student education 1 5 0.01 1 6 0.01
Secured credit cards 3 44 0.05 5 51 0.06
Unallocated 37 -- -- 19 -- --
------- ------- ------ ------- ------- ------
Total $ 180 $91,777 100.00% $ 174 $92,296 100.00%
======= ======= ====== ======= ======= ======
Each quarter, management evaluates the total balance of the allowance for
loan losses based on several factors that are not loan specific, but are
reflective of the inherent losses in the loan portfolio. This process includes,
but is not limited to, a periodic review of loan collectibility in light of
historical experience, the nature and volume of loan activity, conditions that
may affect the ability of the borrower to repay, underlying value of collateral,
if applicable, and economic conditions in our immediate market area. First, we
group loans by delinquency status. All loans 90 days or more delinquent are
evaluated individually, based primarily on the value of the collateral securing
the loan. Specific loss allowances are established as required by this analysis.
All loans for which a specific loss allowance has not been assigned are
segregated by type and delinquency status and a loss allowance is established by
using loss experience data and management's judgment concerning other matters it
considers significant. The allowance is allocated to each category of loan based
on the results of the above analysis. Small differences between the allocated
balances and recorded allowances are reflected as unallocated to absorb losses
resulting from the inherent imprecision involved in the loss analysis process.
This analysis process is inherently subjective, as it requires us to make
estimates that are susceptible to revisions as more information becomes
available. Although we believe that we have established the allowance at levels
to absorb probable and estimable losses, future additions may be necessary if
economic or other conditions in the future differ from the current environment.
INVESTMENTS
INVESTMENTS AND MORTGAGE-BACKED SECURITIES. Our investment portfolio at
December 31, 2003 consisted of $14.2 million in United States Government and
agency securities, all of which are classified as held to maturity, $827,000 in
Federal Home Loan Bank of New York stock and $24.8 million in other interest
earning assets, consisting of deposits at other financial institutions and
federal funds sold. Our investment policy objectives are to maintain liquidity
within the guidelines established by the board of directors.
14
The following table sets forth the carrying value of our investment
portfolio at the dates indicated. Our Federal Home Loan Bank stock has no stated
maturity, and our interest-bearing deposits with other institutions are payable
on demand.
AT DECEMBER 31,
---------------------------------------------------
2003 2002
----------------------- -----------------------
CARRYING CARRYING
VALUE % OF TOTAL VALUE % OF TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity (1):
United States Government
securities................... $ -- --% $ 29,911 69.30%
Federal agency obligations...... 14,212 35.53 3,944 9.14
----------- --------- ----------- ----------
Total investment securities 14,212 35.53 33,855 78.44
----------- --------- ----------- ----------
FHLB stock......................... 827 2.07 975 2.26
----------- --------- ----------- ----------
Total investment securities and
FHLB stock.................. $ 15,039 37.60% $ 34,830 80.70%
----------- --------- ----------- ----------
Other interest-earning assets:
Interest-earning deposits....... $ 11,958 29.90 $ 2,134 4.94
Federal funds sold.............. 13,000 32.50 6,200 14.36
----------- --------- ----------- ----------
Total interest-earning assets. $ 24,958 62.40% $ 8,334 19.30%
----------- --------- ----------- ----------
Total......................... $ 39,997 100.00% $ 43,164 100.00%
=========== ========= =========== ==========
-----------------------
(1) Securities classified as held to maturity are reported at amortized cost.
The following table sets forth the composition of our mortgage-backed
securities at the dates indicated.
AT DECEMBER 31,
---------------------------------------------------
2003 2002
----------------------- -----------------------
CARRYING CARRYING
VALUE % OF TOTAL VALUE % OF TOTAL
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities held to
maturity (1):
Ginnie Mae........................ $ 5,331 96.56% $ 1,585 79.21%
Fannie Mae........................ 190 3.44 369 18.44
Freddie Mac....................... -- -- 47 2.35
----------- --------- ----------- ----------
Total:....................... $ 5,521 100.00% $ 2,001 100.00%
=========== ========= =========== ==========
(1) Mortgage-backed securities classified as held to maturity are reported at
amortized cost.
We also invest in mortgage-backed securities, which are classified as held
to maturity. At December 31, 2003, our mortgage-backed securities portfolio
totaled $5.5 million, or 3.86% of total assets, and consisted of $4.8 million in
fixed-rate mortgage-backed securities guaranteed by Ginnie Mae, and $683,000 in
adjustable rate mortgage-backed securities guaranteed by Ginnie Mae or Fannie
Mae.
15
The composition and maturities of the investment and mortgage backed
securities portfolio as of December 31, 2003, excluding Federal Home Loan Bank
of New York stock, are indicated in the following table.
DUE
------------------------------------------------------------------------
LESS THAN 1 TO 5 5 TO 10 OVER
1 YEAR YEARS YEARS 10 YEARS TOTAL INVESTMENT SECURITIES
------------------ ----------------- ----------------- ----------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE MARKET
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE
-------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Federal agency obligations... $ -- --% $ 1,998 2.88% 6,214 2.59$ 6,000 6.20% $ 14,212 4.15% $ 14,271
Mortgage-backed securities... -- -- 28 9.00 110 9.08 5,383 5.11 5,521 5.20 5,527
-------- -------- ------- -------- -------- --------
Total investment securities.. $ -- --% $ 2,026 $ 6,324 $ 11,383 $ 19,733 $ 19,798
======== ======== ======= ======== ======== ========
16
The following table shows mortgage-backed and related securities purchase
and repayment activities of Flatbush Federal for the periods indicated. Flatbush
Federal did not sell any mortgage-backed and related securities during the
periods indicated.
YEARS ENDED DECEMBER 31,
2003 2002
--------- ----------
(IN THOUSANDS)
PURCHASES:
Adjustable-rate............. $ -- $ --
Fixed-rate.................. 4,393 --
--------- ---------
Total purchases........... 4,393 --
Principal repayments........... 880 814
Other items, net............... (6) (4)
--------- ---------
Net increase (decrease)... $ 3,519 $ (810)
========= =========
SOURCES OF FUNDS
GENERAL. Deposits have traditionally been the primary source of funds for
use in lending and investment activities. In addition to deposits, funds are
derived from scheduled loan payments, investment maturities, loan prepayments,
retained earnings and income on earning assets. While scheduled loan payments
and income on earning assets are relatively stable sources of funds, deposit
inflows and outflows can vary widely and are influenced by prevailing interest
rates, market conditions and levels of competition. Borrowings from the Federal
Home Loan Bank of New York may be used in the short-term to compensate for
reductions in deposits and to fund loan growth; however, in recent years we have
not utilized borrowings.
DEPOSITS. Deposits are not actively solicited outside of the New York City
metropolitan area, and substantially all of our depositors are persons who work
or reside in Brooklyn, New York. We offer a selection of deposit instruments,
including demand deposits consisting of non-interest bearing and NOW accounts,
passbook savings and club accounts, and fixed-term certificates of deposit.
Deposit account terms vary, with the principal differences being the minimum
balance required, the amount of time the funds must remain on deposit and the
interest rate. We do not accept brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established on a periodic basis. Deposit rates and terms are based primarily
on current operating strategies and market rates, liquidity requirements, rates
paid by competitors and growth goals. Personalized customer service and
long-standing relationships with customers are relied upon to attract and retain
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts offered allows us to be competitive
in obtaining funds and responding to changes in consumer demand. Based on
experience, management believes the deposits in Flatbush Federal are relatively
stable. However, the ability to attract and maintain certificates of deposit,
and the rates paid on these deposits, have been and will continue to be
significantly affected by market conditions. At December 31, 2003, $69.9
million, or 55.5% of our deposit accounts were certificates of deposit, of which
$43.9 million have maturities of one year or less.
17
DEPOSIT ACCOUNTS. The following table sets forth the dollar amount of
deposits in the various types of deposit programs we offered as of the dates
indicated.
DEPOSIT ACTIVITY. The following table sets forth the deposit activities for
the periods indicated.
YEARS ENDED DECEMBER 31,
2003 2002
--------- ---------
(DOLLARS IN THOUSANDS)
Beginning of period..................... $ 131,338 $ 120,839
Net deposits (withdrawals).............. (7,577) 7,695
Interest credited on deposit accounts... 2,271 2,804
--------- ---------
Ending balance....................... $ 126,032 $ 131,338
========= =========
Net increase (decrease)................. (5,306) 10,499
Percent increase (decrease)............. (4.04)% 8.69%
LARGE CERTIFICATES OF DEPOSITS. The following table indicates the amount of
Certificates of Deposit as of December 31, 2003, by time remaining until
maturity.
OVER THREE OVER SIX
THREE MONTHS MONTHS TO SIX MONTHS TO OVER TWELVE
OR LESS MONTHS TWELVE MONTHS MONTHS TOTAL
------------ ------------- ------------- ------------ ------------
(IN THOUSANDS)
Certificates of deposit:
Less than $100,000......... $ 14,219 $ 11,484 $ 10,753 $ 20,635 $ 57,091
$100,000 or more........... 4,188 1,269 2,021 5,390 12,868
------------ ------------ ------------ ------------ ------------
Total................. $ 18,407 $ 12,753 $ 12,774 $ 26,025 $ 69,959
============ ============ ============ ============ ============
18
TIME DEPOSIT MATURITY SCHEDULE. The following table presents, by rate
category, the remaining period to maturity of time deposit accounts outstanding
as of December 31, 2003.
1.00% TO 2.01% TO 3.01 % TO 4.01% TO 5.01% TO 6.01% TO
QUARTER ENDING 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% TOTAL
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
March 31, 2004............... 16,409 975 20 93 707 203 18,407
June 30, 2004................ 11,408 686 120 166 206 166 12,752
September 30, 2004........... 5,203 355 649 306 160 123 6,796
December 31, 2004............ 4,526 894 54 -- 276 228 5,978
March 31, 2005............... 1,059 788 317 -- 140 295 2,599
June 30, 2005................ 1,063 302 355 106 325 411 2,562
September 30, 2005........... 685 213 34 107 276 28 1,343
December 31, 2005............ 190 62 237 -- 99 142 730
Thereafter................... 1 733 2,533 10,495 5,030 -- 18,792
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total................... $ 40,544 $ 5,008 $ 4,319 $ 11,273 $ 7,219 $ 1,596 $ 69,959
========== ========== ========== ========== ========== ========== ==========
Percentage of total.......... 57.95% 7.16% 6.17% 16.11% 10.32% 2.28% 100.00%
19
BORROWINGS. We may obtain advances from the Federal Home Loan Bank of New
York upon the security of the common stock we own in the Federal Home Loan Bank
and our qualifying residential mortgage loans and mortgage-backed securities,
provided certain standards related to creditworthiness are met. These advances
are made pursuant to several credit programs, each of which has its own interest
rate and range of maturities. We had no borrowings during the year ended
December 31, 2003.
SUBSIDIARY ACTIVITIES
Office of Thrift Supervision regulations permit federal savings
associations to invest in the capital stock, obligations or other specified
types of securities of subsidiaries (referred to as "service corporations") and
to make loans to such subsidiaries and joint ventures in which such subsidiaries
are participants in an aggregate amount not exceeding 2% of the association's
assets, plus an additional 1% of assets if the amount over 2% is used for
specified community or inner-city development purposes. In addition, federal
regulations permit associations to make specified types of loans to such
subsidiaries (other than special purpose finance subsidiaries) in which the
association owns more than 10% of the stock, in an aggregate amount not
exceeding 50% of the association's regulatory capital if the association's
regulatory capital is in compliance with applicable regulations.
Flatbush Federal has one active subsidiary, Flatbush REIT, Inc. Flatbush
REIT, Inc. was incorporated in 2001 as a special purpose real estate investment
trust under New York law. In recent periods, Flatbush Federal's city and state
income tax liability has been minimal. Consequently, the impact of Flatbush
REIT, Inc. on Flatbush Federal's results of operations has been immaterial.
Flatbush REIT, Inc. holds a portion of our mortgage related assets. At December
31, 2003, Flatbush REIT, Inc. held $7.3 million in loans.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. Flatbush Federal Bancorp, Inc. and Flatbush Federal are subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. Flatbush Federal's tax returns have not been
audited during the past five years. The following discussion of federal taxation
is intended only to summarize certain pertinent federal income tax matters and
is not a comprehensive description of the tax rules applicable to Flatbush
Federal Bancorp, Inc. or Flatbush Federal.
METHOD OF ACCOUNTING. For Federal income tax purposes, Flatbush Federal
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns.
BAD DEBT RESERVES. Prior to the Small Business Protection Act of 1996 (the
"1996 Act"), Flatbush Federal was permitted to establish a reserve for bad debts
and to make annual additions to the reserve. These additions could, within
specified formula limits, be deducted in arriving at our taxable income.
Flatbush Federal was required to use the specific charge off method in computing
its bad debt deduction beginning with its 1996 federal tax return. Savings
institutions were required to recapture any excess reserves over those
established as of December 31, 1987 (base year reserve). Flatbush Federal had
approximately $3.4 million of pre-1988 bad debt reserves that are subject to
recapture.
As more fully discussed below, Flatbush Federal files a New York State
franchise tax return. New York State and New York City enacted legislation in
1996, which among other things, decoupled the Federal tax laws regarding thrift
bad debt
20
deductions and permits the continued use of the bad debt provisions that applied
under federal law prior to the enactment of the 1996 Act. Provided Flatbush
Federal continues to satisfy certain definitional tests and other conditions,
for New York State and New York City income tax purposes it is permitted to
continue to use a reserve method for bad debt deductions. The deductible annual
addition to such reserves may be computed using a specific formula based on an
institution's loss history (the "experience method") or a statutory percentage
equal to 32% of its New York State and New York City taxable income (the
"percentage method") before bad debt deduction.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income if Flatbush Federal failed to meet certain thrift asset and definitional
tests. Federal legislation has eliminated these thrifts related recapture rules.
At December 31, 2003, our total federal pre-1988 base year reserve was
approximately $3.4 million. Under current law, pre-1988 base year reserves
remain subject to recapture if Flatbush Federal makes certain non-dividend
distributions, repurchases any of its stock, pays dividends in excess of tax
earnings and profits, or ceases to maintain a bank charter. In addition, New
York State and New York City reserves for loan losses in the amount of
$4,939,000 and $4,988,000, respectively are also subject to similar recapture.
ALTERNATIVE MINIMUM TAX. The Internal Revenue Code of 1986, as amended (the
"Code") imposes an alternative minimum tax ("AMT") at a rate of 20% on a base of
regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in
excess of an exemption amount and the AMT exceeds the regular income tax. Net
operating losses can offset no more than 90% of AMTI. Certain payments of AMT
may be used as credits against regular tax liabilities in future years. Flatbush
Federal has not been subject to the AMT and has no AMT payments available as
credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At December 31, 2003, Flatbush Federal had no net
operating loss carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Flatbush Federal Bancorp, Inc. may
exclude from its income 100% of dividends received from Flatbush Federal as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf.
STATE TAXATION
NEW YORK STATE TAXATION. Flatbush Federal Bancorp, Inc. and Flatbush
Federal will report income on a calendar year basis to New York State. New York
State franchise tax on corporations is imposed in an amount equal to the greater
of (a) 8.0% (for 2002) and 7.5% (for 2003 and forward) of "entire net income"
allocable to New York State, (b) 3% of "alternative entire net income" allocable
to New York State, (c) 0.01% of the average value of assets allocable to New
York State, or (d) nominal minimum tax. Entire net income is based on Federal
taxable income, subject to certain modifications. Alternative entire net income
is equal to entire net income without certain modifications.
21
PERSONNEL
As of December 31, 2003, we had 44 full-time employees and nine part-time
employees. Our employees are not represented by any collective bargaining group.
Management believes that we have good relations with our employees.
SUPERVISION AND REGULATION
GENERAL
Flatbush Federal is examined and supervised by the Office of Thrift
Supervision and subject to the regulation of the Federal Deposit Insurance
Corporation. This regulation and supervision establishes a comprehensive
framework of activities in which an institution may engage and is intended
primarily for the protection of the Federal Deposit Insurance Corporation's
deposit insurance funds and depositors. Under this system of federal regulation,
financial institutions are periodically examined to ensure that they satisfy
applicable standards with respect to their capital adequacy, assets, management,
earnings, liquidity and sensitivity to market interest rates. Following
completion of its examination, the federal agency critiques the institution's
operations and assigns its rating (known as an institution's CAMELS rating).
Under federal law, an institution may not disclose its CAMELS rating to the
public. Flatbush Federal also is a member of and owns stock in the Federal Home
Loan Bank of New York, which is one of the twelve regional banks in the Federal
Home Loan Bank System. Flatbush Federal also is regulated to a lesser extent by
the Board of Governors of the Federal Reserve System, governing reserves to be
maintained against deposits and other matters. The Office of Thrift Supervision
examines Flatbush Federal and prepares reports for the consideration of its
board of directors on any operating deficiencies. Flatbush Federal's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in matters concerning the
ownership of deposit accounts and the form and content of Flatbush Federal's
mortgage documents.
Any change in these laws or regulations, whether by the Federal Deposit
Insurance Corporation, Office of Thrift Supervision or Congress, could have a
material adverse impact on Flatbush Federal Bancorp, Inc. and Flatbush Federal
and their operations.
FEDERAL BANKING REGULATION
BUSINESS ACTIVITIES. A federal savings association derives its lending and
investment powers from the Home Owners' Loan Act, as amended, and the
regulations of the Office of Thrift Supervision. Under these laws and
regulations, Flatbush Federal may invest in mortgage loans secured by
residential and commercial real estate, commercial business and consumer loans,
certain types of debt securities and certain other assets. Certain types of
lending, such as commercial and consumer loans, are subject to an aggregate
limit calculated as a specified percentage of Flatbush Federal's capital or
assets. Flatbush Federal also may establish subsidiaries that may engage in
activities not otherwise permissible for Flatbush Federal, including real estate
investment and securities and insurance brokerage.
CAPITAL REQUIREMENTS. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage ratio (3% for associations receiving the highest
rating on the CAMELS rating system) and an 8% risk-based capital ratio. The
prompt corrective action standards discussed below, in effect, establish a
minimum 2% tangible capital standard.
The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at
22
least 4% and 8%, respectively. In determining the amount of risk-weighted
assets, all assets, including certain off-balance sheet assets, are multiplied
by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift
Supervision based on the risks believed inherent in the type of asset. Core
capital is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45%
of net unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
At December 31, 2003, Flatbush Federal's capital exceeded all applicable
requirements.
LOANS-TO-ONE BORROWER. A federal savings association generally may not make
a loan or extend credit to a single or related group of borrowers in excess of
15% of unimpaired capital and surplus. An additional amount may be loaned, equal
to 10% of unimpaired capital and surplus, if the loan is secured by readily
marketable collateral, which generally does not include real estate. As of
December 31, 2003, Flatbush Federal was in compliance with the loans-to-one
borrower limitations.
QUALIFIED THRIFT LENDER TEST. As a federal savings association, Flatbush
Federal is subject to a qualified thrift lender, or "QTL," test. Under the QTL
test, Flatbush Federal must maintain at least 65% of its "portfolio assets" in
"qualified thrift investments" in at least nine of the most recent 12 month
period. "Portfolio assets" generally means total assets of a savings
institution, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the
conduct of the savings association's business.
"Qualified thrift investments" includes various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans.
Flatbush Federal also may satisfy the QTL test by qualifying as a "domestic
building and loan association" as defined in the Internal Revenue Code.
A savings association that fails the QTL test must either convert to a bank
charter or operate under specified restrictions. At December 31, 2003, Flatbush
Federal maintained approximately 86% of its portfolio assets in qualified thrift
investments.
CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the capital
account. A savings association must file an application for approval of a
capital distribution if:
o the total capital distributions for the applicable calendar year
exceed the sum of the association's net income for that year to date
plus the association's retained net income for the preceding two
years;
o the association would not be at least adequately capitalized following
the distribution;
23
o the distribution would violate any applicable statute, regulation,
agreement or Office of Thrift Supervision-imposed condition; or
o the association is not eligible for expedited treatment of its
filings.
Even if an application is not otherwise required, every savings association
that is a subsidiary of a holding company must still file a notice with the
Office of Thrift Supervision at least 30 days before the board of directors
declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application if:
o the association would be undercapitalized following the distribution;
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained in any
statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured
depository institution shall not make any capital distribution, if after making
such distribution the institution would be undercapitalized.
LIQUIDITY. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. All savings associations
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a federal savings association, the Office of
Thrift Supervision is required to assess the association's record of compliance
with the Community Reinvestment Act. In addition, the Equal Credit Opportunity
Act and the Fair Housing Act prohibit lenders from discriminating in their
lending practices on the basis of characteristics specified in those statutes.
An association's failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in denial of certain corporate
applications such as branches or mergers, or restrictions on its activities. The
failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act
could result in enforcement actions by the Office of Thrift Supervision, as well
as other federal regulatory agencies and the Department of Justice. Flatbush
Federal received a satisfactory Community Reinvestment Act rating in its most
recent federal examination.
TRANSACTIONS WITH RELATED PARTIES. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act (the "FRA"). The term "affiliates" for these purposes generally
means any company that controls, is controlled by, or is under common control
with an institution. Flatbush Federal Bancorp, Inc. is an affiliate of Flatbush
Federal. In general, transactions with affiliates must be on terms that are as
favorable to the association as comparable transactions with non-affiliates. In
addition, certain types of these transactions are restricted to an aggregate
percentage of the association's capital. Collateral in specified amounts must
usually be provided by affiliates in order to receive loans from the
association. In addition, Office of Thrift Supervision regulations prohibit a
savings association from lending to any of its affiliates that are engaged in
activities that are not permissible for bank holding companies and from
purchasing the securities of any affiliate, other than a subsidiary.
24
Flatbush Federal's authority to extend credit to its directors, executive
officers and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the Federal Reserve Board. Among other things,
these provisions require that extensions of credit to insiders (i) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features, and (ii) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of Flatbush Federal's capital. In addition, extensions of credit in
excess of certain limits must be approved by Flatbush Federal's board of
directors.
ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over federal savings institutions and has the authority to bring
enforcement action against all "institution-affiliated parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institution, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the association's capital:
o well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based
capital and 10% total risk-based capital);
o adequately capitalized (at least 4% leverage capital, 4% Tier 1
risk-based capital and 8% total risk-based capital);
25
o undercapitalized (less than 8% total risk-based capital, 4% Tier 1
risk-based capital or 3% leverage capital);
o significantly undercapitalized (less than 6% total risk-based capital,
3% Tier 1 risk-based capital or 3% leverage capital); and
o critically undercapitalized (less than 2% tangible capital).
Generally, the banking regulator is required to appoint a receiver or
conservator for an association that is "critically undercapitalized" within
specific time frames. The regulations also provide that a capital restoration
plan must be filed with the Office of Thrift Supervision within 45 days of the
date an association receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized," the
performance of which must be guaranteed by any company controlling the
association up to specified limits. In addition, numerous mandatory supervisory
actions become immediately applicable to the association, including, but not
limited to, restrictions on growth, investment activities, capital distributions
and affiliate transactions. The Office of Thrift Supervision may also take any
one of a number of discretionary supervisory actions against undercapitalized
associations, including the issuance of a capital directive and the replacement
of senior executive officers and directors.
At December 31, 2003, Flatbush Federal met the criteria for being
considered "well-capitalized."
INSURANCE OF DEPOSIT ACCOUNTS. Deposit accounts in Flatbush Federal are
insured by the Federal Deposit Insurance Corporation, generally up to a maximum
of $100,000 per separately insured depositor. Flatbush Federal's deposits
therefore are subject to Federal Deposit Insurance Corporation deposit insurance
assessments. The Federal Deposit Insurance Corporation has adopted a risk-based
system for determining deposit insurance assessments. The Federal Deposit
Insurance Corporation is authorized to raise the assessment rates as necessary
to maintain the required ratio of reserves to insured deposits of 1.25%. In
addition, all Federal Deposit Insurance Corporation-insured institutions must
pay assessments to the Federal Deposit Insurance Corporation at an annual rate
of approximately .02% of insured deposits to fund interest payments on bonds
maturing in 2017 issued by a federal agency to recapitalize the predecessor to
the Savings Association Insurance Fund.
PROHIBITIONS AGAINST TYING ARRANGEMENTS. Federal savings associations are
prohibited, subject to some exceptions, from extending credit to or offering any
other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or its affiliates or not obtain services of a
competitor of the institution.
FEDERAL HOME LOAN BANK SYSTEM. Flatbush Federal is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions. As a member, Flatbush Federal is required to acquire
and hold shares of capital stock in the Federal Home Loan Bank of New York in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is
greater. As of December 31, 2003, Flatbush Federal was in compliance with this
requirement.
The dividend yield from FHLB stock was 1.45% at December 31, 2003. Due to
significant losses in its investment portfolio, the FHLB of New York did not pay
any dividends to its members for the quarter ended September 30, 2003, however
dividends were paid for the quarter ended December 31, 2003. No assurance can be
given that it will pay any dividends in the future.
26
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings associations to
maintain non-interest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At December 31,
2003, Flatbush Federal was in compliance with these reserve requirements.
THE USA PATRIOT ACT
In response to the events of September 11, 2001, Congress enacted in 2001
the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the "USA PATRIOT Act", was
signed into law on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing
and broadened anti-money laundering requirements.
SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 (the "Act") contains a range of corporate
accounting and reporting reforms that are intended to address corporate and
accounting fraud. In addition to the establishment of a new accounting oversight
board that will enforce auditing, quality control and independence standards and
will be funded by fees from all publicly traded companies, the Act places
certain restrictions on the scope of services that may be provided by accounting
firms to their public company audit clients. Any non-audit services being
provided to a public company audit client will require preapproval by the
company's audit committee. In addition, the Act makes certain changes to the
requirements for audit partner rotation after a period of time. The Act requires
chief executive officers and chief financial officers, or their equivalent, to
certify to the accuracy of periodic reports filed with the Securities and
Exchange Commission, subject to civil and criminal penalties if they knowingly
or willingly violate this certification requirement. In addition, under the Act,
counsel will be required to report evidence of a material violation of the
securities laws or a breach of fiduciary duty by a company to its chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives who
violate federal securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restatement of a company's financial statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change.
27
The Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm." Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the issuer. In addition, companies must disclose
whether at least one member of the committee is a "financial expert" (as such
term will be defined by the Securities and Exchange Commission) and if not, why
not. Under the Act, a company's registered public accounting firm will be
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. The Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent accountant engaged in the audit of the company's
financial statements for the purpose of rendering the financial statements
materially misleading. The Act also requires the Securities and Exchange
Commission to prescribe rules requiring inclusion of any internal control report
and assessment by management in the annual report to shareholders. The Act
requires the company's registered public accounting firm that issues the audit
report to attest to and report on management's assessment of the company's
internal controls.
Management does not expect that compliance with the Sarbanes-Oxley Act will
have a material impact on our results of operations or financial condition.
HOLDING COMPANY REGULATION
GENERAL. Flatbush Federal Bancorp, MHC and Flatbush Federal Bancorp, Inc.
are nondiversified savings and loan holding companies within the meaning of the
Home Owners' Loan Act. As such, Flatbush Federal Bancorp, MHC and Flatbush
Federal Bancorp, Inc. are registered with the Office of Thrift Supervision and
are subject to Office of Thrift Supervision regulations, examinations,
supervision and reporting requirements. In addition, the Office of Thrift
Supervision has enforcement authority over Flatbush Federal Bancorp, Inc. and
Flatbush Bancorp MHC, and their subsidiaries. Among other things, this authority
permits the Office of Thrift Supervision to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution. As
federal corporations, Flatbush Federal Bancorp, Inc. and Flatbush Federal
Bancorp, MHC are generally not subject to state business organization laws.
PERMITTED ACTIVITIES. Pursuant to Section 10(o) of the Home Owners' Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company and a federally chartered mid-tier holding company such as Flatbush
Federal Bancorp, Inc. may engage in the following activities: (i) investing in
the stock of a savings association; (ii) acquiring a mutual association through
the merger of such association into a savings association subsidiary of such
holding company or an interim savings association subsidiary of such holding
company; (iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director of the Office of Thrift Supervision, by regulation, prohibits or limits
any such activity for savings and loan holding companies; or (B) in which
multiple savings and loan holding companies were authorized (by regulation) to
directly engage on March 5, 1987;
28
(x) any activity permissible for financial holding companies under Section 4(k)
of the Bank Holding Company Act, including securities and insurance
underwriting; and (xi) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (xi) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
including Flatbush Federal Bancorp, Inc. and Flatbush Federal Bancorp, MHC,
directly or indirectly, or through one or more subsidiaries, from acquiring more
than 5% of another savings institution or holding company thereof, without prior
written approval of the Office of Thrift Supervision. It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary company engaged in activities other than those permitted by the
Home Owners' Loan Act; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the Office of Thrift Supervision must consider the
financial and managerial resources, future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision 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: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY FLATBUSH FEDERAL BANCORP, MHC. Office of Thrift
Supervision regulations require Flatbush Federal Bancorp, MHC to notify the
Office of Thrift Supervision of any proposed waiver of its receipt of dividends
from Flatbush Federal Bancorp, Inc. The Office of Thrift Supervision reviews
dividend waiver notices on a case-by-case basis, and, in general, does not
object to any such waiver if: (i) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members; (ii) for as long as
the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company is
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations. We anticipate that Flatbush Federal Bancorp, MHC will
waive dividends paid by Flatbush Federal Bancorp, Inc. Under Office of Thrift
Supervision regulations, our public stockholders would not be diluted because of
any dividends waived by Flatbush Federal Bancorp, MHC (and waived dividends
would not be considered in determining an appropriate exchange ratio) in the
event Flatbush Federal Bancorp, MHC converts to stock form.
CONVERSION OF FLATBUSH FEDERAL BANCORP, MHC TO STOCK FORM. Office of Thrift
Supervision regulations permit Flatbush Federal Bancorp, MHC to convert from the
mutual form of organization to the capital stock form of organization (a
"Conversion Transaction"). There can be no assurance when, if
29
ever, a Conversion Transaction will occur, and the Board of Directors has no
current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to Flatbush
Federal Bancorp, Inc. (the "New Holding Company"), Flatbush Federal Bancorp,
MHC's corporate existence would end, and certain depositors of Flatbush Federal
would receive the right to subscribe for additional shares of the New Holding
Company. In a Conversion Transaction, each share of common stock held by
stockholders other than Flatbush Federal Bancorp, MHC ("Minority Stockholders")
would be automatically converted into a number of shares of common stock of the
New Holding Company determined pursuant an exchange ratio that ensures that
Minority Stockholders own the same percentage of common stock in the New Holding
Company as they owned in Flatbush Federal Bancorp, Inc. immediately prior to the
Conversion Transaction. Under Office of Thrift Supervision regulations, Minority
Stockholders would not be diluted because of any dividends waived by Flatbush
Federal Bancorp, MHC (and waived dividends would not be considered in
determining an appropriate exchange ratio), in the event Flatbush Federal
Bancorp, MHC converts to stock form. The total number of shares held by Minority
Stockholders after a Conversion Transaction also would be increased by any
purchases by Minority Stockholders in the stock offering conducted as part of
the Conversion Transaction.
FEDERAL SECURITIES LAWS
Flatbush Federal Bancorp, Inc.'s common stock is registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
Flatbush Federal Bancorp, Inc. is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Securities Exchange Act of 1934.
Flatbush Federal Bancorp, Inc. common stock held by persons who are
affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
EXECUTIVE OFFICERS OF THE COMPANY
Listed below is information, as of December 31, 2003, concerning the
Company's executive officers. There are no arrangements or understandings
between the Company and any of the persons named below with respect to which he
was or is to be selected as an officer.
Name Age Position and Term
---- --- -----------------
Anthony J. Monteverdi 70 President and Chief Executive Officer
Jesus R. Adia 50 Executive Vice President
John S. Lotardo 42 Chief Financial Officer and Controller
AVAILABILITY OF ANNUAL REPORT ON FORM 10-KSB
Our Annual Report on Form 10-KSB may be accessed on our website at
www.flatbush.com.
30
ITEM 2. PROPERTIES
PROPERTIES
The following table provides certain information with respect to our
offices as of December 31, 2003:
LEASED YEAR ACQUIRED NET BOOK VALUE OF
LOCATION OR OWNED OR LEASED REAL PROPERTY
-------- -------- --------- -------------
(IN THOUSANDS)
Main Office Owned 1963 $ 761
2146 Nostrand Avenue Brooklyn,
NY 11210
Branch Office Leased 1974 $ 18
6410 18th Avenue
Brooklyn, NY 11204
Branch Office Leased 1976 $ 183
518 Brighton Beach Avenue
Brooklyn, NY 11235
The net book value of our premises, land and equipment was approximately
$962,000 at December 31, 2003.
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of our business. At December 31,
2003, we were not involved in any legal proceedings, the outcome of which would
be material to our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded on the over-the-counter
bulletin board under the symbol "FLTB."
31
The following table sets forth the range of the high and low bid prices of
the Company's Common Stock since its initial trading day of October 21, 2003,
and is based upon information provided by Wall Street City. The Company has not
paid any dividends since the completion of its initial public offering on
October 17, 2003.
PRICES OF COMMON STOCK
------------------------------------
HIGH LOW
-------------- --------------
CALENDAR QUARTER ENDED (1)
December 31, 2003....................... $16.00 $11.96
-----------------
(1) The Company's common stock began trading on October 21, 2003.
As of December 31, 2003, the Company had 1,810 stockholders of record.
(b) On August 13, 2003, the Company's Registration Statement on
Form SB-2 went effective with the Securities and Exchange Commission for the
registration of 1,087,756 shares of its common stock, par value $.01 per share.
The net proceeds to both Flatbush Federal Bancorp and Flatbush Federal from this
offering were $7.1 million. At December 31, 2003, we have used these proceeds to
make loans and investments in the ordinary course of business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to our
Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements identified in Item 13(a)(1) hereof are
incorporated by reference hereunder.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us (or our consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) Changes in internal controls.
32
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics may be accessed on the Company's website at www.flatbush.com.
Information concerning Directors of the Company is incorporated herein by
reference from our definitive Proxy Statement (the "Proxy Statement"),
specifically the section captioned "Proposal I--Election of Directors." In
addition, see "Executive Officers of the Company" in Item 1 for information
concerning our executive officers.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from our Proxy Statement, specifically the section captioned
"Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain owners and management
is incorporated herein by reference from our Proxy Statement, specifically the
section captioned "Voting Securities and Principal Holder Thereof."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from our Proxy Statement, specifically the section captioned
"Transactions with Certain Related Persons."
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part
of this Form 10-KSB are as follows:
(a)(1) FINANCIAL STATEMENTS
o Management Responsibility Statement
o Independent Auditor's Report
o Consolidated Statements of Financial Condition at December
31, 2003 and 2002
o Consolidated Statements of Income for the Years Ended
December 31, 2003 and 2002
o Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2003 and 2002
o Consolidated Statements of Cash Flows for the Years Ended
Years Ended December 31, 2003 and 2002
o Notes to Consolidated Financial Statements.
33
(a)(2) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the
consolidated financial statements or related notes.
(a)(3) EXHIBITS
3.1 Federal Stock Charter of Flatbush Federal Bancorp, Inc.*
3.2 Bylaws of Flatbush Federal Bancorp, Inc.*
4 Form of common stock certificate of Flatbush Federal
Bancorp, Inc.*
10.1 Deferred Compensation Plan for Anthony J. Monteverdi*
10.2 Flatbush Federal Savings & Loan Association Directors
Retirement Plan*
10.3 Employee Stock Ownership Plan*
13 Annual Report to Stockholders
14 Code of Ethics
21 Subsidiaries of the Registrant
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Incorporated by reference to the Registration Statement on Form SB-2 of
Flatbush Federal Bancorp, Inc. (file no. 333-106557), originally filed
with the Securities and Exchange Commission on June 27, 2003.
(b) REPORTS ON FORM 8-K
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is
incorporated herein by reference from our Proxy Statement, specifically the
section captioned "Proposal II-Ratification of Appointment of Auditors."
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FLATBUSH FEDERAL BANCORP, INC.
Date: March 25, 2004 By: /s/ Anthony J. Monteverdi
-----------------------------------------------------
Anthony J. Monteverdi, Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Anthony J. Monteverdi By: /s/ Jesus R. Adia
------------------------------------------------- -----------------------------------------------------
Anthony J. Monteverdi, Chairman, President and Jesus R. Adia
Chief Executive Officer Executive Vice President and Director
(Principal Executive Officer)
Date: March 25, 2004 Date: March 25, 2004
By: /s/ John S. Lotardo By: /s/ D. John Antoniello
------------------------------------------------- -----------------------------------------------------
John S. Lotardo, Chief Financial Officer and D. John Antoniello
Controller Director
(Principal Accounting Officer)
Date: March 25, 2004 Date: March 25, 2004
By: /s/ John F. Antoniello By: /s/ Patricia A. Mckinley
------------------------------------------------- -----------------------------------------------------
John F. Antoniello Patricia A. McKinley
Director Director
Date: March 25, 2004 Date: March 25, 2004
By: /s/ Alfred S. Pantaleone By: /s/ Anthony V. Rumolo
------------------------------------------------- -----------------------------------------------------
Alfred S. Pantaleone Anthony V. Rumolo
Director Director
Date: March 25, 2004 Date: March 25, 2004
By: /s/ Charles J. Vorbach
-------------------------------------------------
Charles J. Vorbach
Director
Date: March 25, 2004
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FLATBUSH FEDERAL
BANCORP, INC.
2003 Annual Report
ART WORK OMITTED
CONTENTS
Letter from the President ................................................. 1
Selected Consolidated Financial Information And Other Data ................ 2
Management Discussion and Analysis ........................................ 4
Management Responsibility Statement ....................................... 12
Independent Auditors' Report .............................................. 13
Financial Statements
Consolidated Statements of Financial Condition ...................... 14
Consolidated Statements of Income ................................... 15
Consolidated Statements of Changes in
Stockholders' Equity ................................................ 16
Consolidated Statements of Cash Flows ............................... 17
Notes to Consolidated Financial Statements .......................... 18
Directors and Executive Officers .......................................... 37
Shareholder Information ................................................... 38
Market Information ........................................................ 39
VISIT OUR WEBSITE AT WWW.FLATBUSH.COM
FLATBUSH FEDERAL BANCORP, INC.
DEAR SHAREHOLDER:
[PHOTO OMITTED]
I am pleased to welcome you into the Flatbush Federal Bancorp family. Working
together, we can better serve our community and make our individual dreams of a
better tomorrow come true.
Our first Annual Report follows:
Senior management presented your Board of Directors with several strategic goals
in early 2003, one of which was to consider alternative ownership strategies as
a means of financing corporate growth. After lengthy deliberations, concepts
solidified and the Board decided to reorganize into a mutual holding company and
to offer our depositors an opportunity to invest in our future. The
reorganization and our initial public offering were completed on October 21,
2003, and the Company began trading on the Over-the-Counter Bulletin Board. Some
$7.1 million was added to capital in net proceeds from the offering, and
Flatbush Federal Bancorp, Inc. now trades under the symbol "FLTB". This
reorganization both strengthened our competitive position by providing
additional capital to support Flatbush Federal's lending activities - and
hopefully broadened our customer base.
Flatbush Federal's outstanding employee team is the key to its success.
Accordingly, I wish to acknowledge the performance of our officers and staff who
take special pride in providing our local neighborhoods with the high levels of
personal services expected from a community bank. This motivation to perform
well is fueled by their ownership position in "FLTB" through participation in
our Employee Stock Ownership Plan that was created in the reorganization. Thus,
we all have a common interest in increasing the value of the Flatbush Federal
Bancorp franchise.
There was no pause in our R&D activities during this transitional period between
the change in our form of ownership. Our in-house development group continues to
conduct Beta Testing on new services such as internet banking, debit cards and
traditional credit cards, and we will consider bringing these new products to
market if economic conditions appear favorable later this year.
While the Company's common stock was initially offered at $8.00 per share, it
quickly moved upward to the $16.00 level before settling back to a $13.10
closing price on the first day of trading. As of fiscal year-end December 31,
2003, our common stock closed at the $12.75 per share level, a 59.4% increase
from the original offering price.
Your Directors are committed to pursue a business plan that will continue to
deliver value to our shareholders, while adding to the franchise value of our
company. As we move on into our initial year as a public corporation, our
mission will remain focused on fostering a sense of community pride through
personal service, local decision making, and continued participation with our
neighbors in community activities. In doing so, we plan to prudently utilize the
capital our shareholders have committed to our care as we seek to expand our
core business.
Our Directors, management and staff thank you for your support and confidence in
our new venture. Both are appreciated.
Sincerely,
/s/ Anthony J. Monteverdi
Anthony J. Monteverdi
PRESIDENT & CEO
1 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The following information is derived from the audited consolidated financial
statements of Flatbush Federal Bancorp, Inc. For additional information about
Flatbush Federal Bancorp, Inc. and Flatbush Federal Savings and Loan
Association, a more detailed presentation is made in the "Management's
Discussion and Analysis", the Consolidated Financial Statements of Flatbush
Federal Bancorp, Inc. and other related notes included in this Annual Report.
(1) NET OF ALLOWANCE FOR LOAN LOSSES AND DEFERRED LOAN FEES
(2) MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES ARE CLASSIFIED AS HELD
TO MATURITY
SELECTED OPERATING DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Year Ended
December 31,
---------------------------------
2003 2002
------- -------
Total Interest Income .............................................. $ 6,723 $ 7,646
Total Interest Expense ............................................. 2,271 2,804
------- ------
Net Interest Income ............................................. 4,452 4,842
Provision for loan losses .......................................... (8) (3)
Non-interest Income ................................................ 284 310
Non-interest Expense ............................................... 4,570 4,559
Income Taxes ....................................................... 77 260
------- ------
Net Income ......................................................... $ 81 $ 330
------- ------
Net Income per Share ............................................... $ 0.04 N/A
======= ======
N/A -- NOT APPLICABLE
2
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
SELECTED FINANCIAL RATIOS AND OTHER DATA:
At or for the Year
Ended December 31,
-------------------------------
2003 2002
----- ------
PERFORMANCE RATIOS:
Return on average assets (1) ............................................. 0.05% 0.25%
Return on average equity ................................................. 0.78% 3.89%
Net yield on average interest-earning assets ............................. 4.68% 5.98%
Net interest rate spread (2) ............................................. 2.85% 3.61%
Net interest margin (3) .................................................. 3.10% 3.79%
Average interest-earning assets to average interest-
bearing liabilities ................................................... 1.16x 1.08x
CAPITAL RATIOS:
Average retained earnings to average assets .............................. 6.96% 6.39%
Tier 1 core ratio (to adjusted total assets) ............................. 10.23% 5.92%
Total risk based capital ratio ........................................... 24.27% 15.53%
ASSET QUALITY RATIOS:
Allowance for loan losses to gross loan outstanding ...................... 0.20% 0.19%
Non-performing loans to total assets ..................................... 0.03% 0.24%
OTHER DATA:
Number of full-service offices ........................................... 3 3
(1) RATIO OF NET INCOME TO AVERAGE TOTAL ASSETS.
(2) THE DIFFERENCE BETWEEN THE YIELD ON AVERAGE INTEREST-EARNING ASSETS AND THE
COST OF AVERAGE INTEREST-BEARING LIABILITIES.
(3) NET INTEREST INCOME DIVIDED BY AVERAGE INTEREST-EARNING ASSETS.
3 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
Flatbush Federal Bancorp, Inc. is a federal corporation, which was organized in
2003 as part of the mutual holding company reorganization of Flatbush Federal
Savings & Loan Association. Our principal asset is our investment in Flatbush
Federal Savings & Loan Association. We are a majority owned subsidiary of
Flatbush Federal Bancorp, MHC, a federally chartered mutual holding company. In
connection with the reorganization, we sold 1,087,756 shares of our common stock
and issued 1,226,619 shares to our mutual holding company parent. The net
proceeds from our stock offering totaled $7.1 million. At December 31, 2003,
Flatbush Federal Bancorp, Inc. had consolidated assets of $142.9 million,
deposits of $126.0 million and shareholders' equity of $15.6 million.
GENERAL
Our results of operations depend primarily on our net interest income. Net
interest income is the difference between the interest income we earn on our
interest-earning assets, consisting primarily of loans, investment securities,
mortgage-backed securities and other interest-earning assets (primarily cash and
cash equivalents), and the interest we pay on our interest-bearing liabilities,
consisting of NOW accounts, passbook and club accounts, savings accounts and
time deposits. Our results of operations also are affected by our provisions for
loan losses, non-interest income and non-interest expense. Non-interest income
currently consists primarily of fees and service charges, gains on the sale of
loans and miscellaneous other income (consisting of fees charged on loans
guaranteed by the Small Business Administration, minimum balances, dormant
deposit accounts, fees charged to third parties for document requests and sale
of money orders and travelers checks). Non-interest expense currently consists
primarily of salaries and employee benefits, equipment, occupancy costs, data
processing and deposit insurance premiums, other insurance premiums, and other
operating expenses (consisting of legal fees, director compensation, postage,
stationery, professional fees and other operational expenses). Our results of
operations also may be affected significantly by general and local economic and
competitive conditions, changes in market interest rates, governmental policies
and actions of regulatory authorities.
CRITICAL ACCOUNTING POLICIES
We consider accounting policies involving significant judgments and assumptions
by management that have, or could have, a material impact on the carrying value
of certain assets or on income to be critical accounting policies. We consider
the following to be our critical accounting policies: Allowance for loan losses
and deferred income taxes.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is the estimated amount
considered necessary to cover credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for
loan losses which is charged against income. In determining the allowance for
loan losses, management makes significant estimates and has identified this
policy as one of the most critical for Flatbush Federal.
Management performs a quarterly evaluation of the adequacy of the allowance for
loan losses. Consideration is given to a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change.
The analysis has two components: specific and general allocations. Specific
allocations are made for loans that are determined to be impaired. Impairment is
measured by determining the present value of expected future cash flows or, for
collateral-dependent loans, the fair value of the collateral adjusted for market
conditions and selling expenses. The general allocation is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history. We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry concentrations.
This analysis establishes factors that are applied to the loan groups to
determine the amount of the general reserve. Actual loan losses may be
significantly more than the reserves we have established which could have a
material negative effect on our financial results.
DEFERRED INCOME TAXES. We use the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. If current available information raises doubt as to
the realization of the deferred tax assets, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We exercise significant
judgment in evaluating the amount and timing of
4
MANAGEMENT DISCUSSION AND ANALYSIS
recognition of the resulting tax liabilities and assets, including projections
of future taxable income. These judgments and estimates are reviewed on a
continual basis as regulatory and business factors change.
COMPARISON OF FINANCIAL CONDITION AT
DECEMBER 31, 2003 AND 2002
The Company's assets as of December 31, 2003 were $142.9 million, an increase of
$1.5 million or 1% from $141.4 million at December 31, 2002. Net loans
receivable increased 0.30% to $90.6 million at December 31, 2003 from $90.3
million at December 31, 2002. Mortgage-backed securities increased $3.5 million
to $5.5 million at December 31, 2003 from $2 million in 2002. Investment
securities decreased by $19.7 million, or 58% to $14.2 million in 2003 from
$33.9 million in 2002. In 2003, the Association experienced high volumes of
prepayments from investments and loans, which resulted in cash and cash
equivalents increasing by $17 million to $29.2 million at December 31, 2003, up
from $12.2 million at December 31, 2002. Net proceeds of $7.1 million from the
reorganization and offering also contributed to the increase in cash and cash
equivalents. During the period of historically low interest rates in 2003,
management opted to maintain a high level of its assets in liquid investments
rather than in long-term investments and loans.
Total deposits decreased $5.3 million to $126.0 million at December 31, 2003
from $131.3 million as of December 31, 2002. $2.3 million of the decline
represented deposits that were used to purchase common stock in our offering.
Total stockholders' equity increased $7.2 million to $15.6 million at December
31, 2003 from $8.4 million at December 31, 2002. The increase primarily reflects
net proceeds from the offering of $7.1 million, a decrease in other
comprehensive loss by $145,000 and net income of $81,000.
COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 2003 AND 2002
GENERAL. Net income decreased by $249,000, or 75.45% to $81,000 for the year
ended December 31, 2003 from $330,000 for the year ended December 31, 2002. The
declining interest rate environment significantly affected the Association's net
interest income as long-term, higher yielding investments repaid and repriced
downward and loans originated or refinanced at lower rates.
INTEREST INCOME. Interest income decreased by $923,000, or 12.07% to $6.7
million for the year ended December 31, 2003, from $7.6 million for the year
ended December 31, 2002. The decrease in interest income resulted primarily from
the decrease of $1.1 million in interest income from loans, partially offset by
increases of $171,000 from investment securities, $24,000 from mortgage-backed
securities and $18,000 from other interest earning assets. The decrease in
interest income was attributable to a 130 basis point decrease in the average
yield on interest earning assets to 4.68% for the year ended December 31, 2003
from 5.98% for the year ended December 31, 2002. Partially offsetting the
decrease in the average yield was a $15.9 million, or 12.40% increase in the
average balance of interest-earning assets to $143.8 million from $127.9
million.
Interest income from loans receivable decreased $1.1 million, or 16.49% to $5.8
million for the year ended December 31, 2003 from $6.9 million for the year
ended December 31, 2002. The decrease was due to a $7.5 million decrease in the
average balance of loans receivable during 2003 to $86.7 million from $94.2
million, as well as a decrease in the average yield to 6.64% from 7.31%.
Interest income for investment securities increased $171,000, or 59.38% to
$459,000 for the year ended December 31, 2003, from $288,000 for the year ended
December 31, 2002. The increase resulted from the higher average balance in
investment securities to $19.8 million at an average yield of 2.32% from $11.9
million at an average yield of 2.40%. Interest income from mortgage-backed
securities increased by $24,000, or 14.91% to $185,000 for the year ended
December 31, 2003 from $161,000 for the year ended December 31, 2002. The
increase resulted from a higher average balance of $3.4 million with an average
yield of 5.46% in 2003 from an average balance of $2.4 million with an average
yield of 6.67% in 2002. Income from other interest earning assets increased by
$19,000, or 6.25% to $323,000 for the year ended December 31, 2003 from $304,000
for the year ended December 31, 2002. The increase was due to a higher average
balance of $33.8 million with an average yield of 0.95% in 2003 from an average
balance of $19.2 million with an average yield of 1.58% in 2002. The decrease in
average yields reflect the significant decline in market interest rates during
2003. In addition, we continue to maintain a significant portion of our earning
assets in lower yielding but more liquid assets.
INTEREST EXPENSE. Total interest expense decreased $533,000, or 19% to $2.3
million for 2003 from $2.8 million for 2002. The decrease in interest expense
resulted from a decrease in the average cost of deposits to 1.83% from 2.37%,
reflecting lower market interest rates during 2003, which was partially offset
by a $5.9 million increase in the average balance of interest bearing
liabilities. The average balance on certificates of deposit
5 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
increased by $6 million to $77 million with an average cost of 2.62% in 2003, as
compared with an average balance of $71 million with an average cost of 3.22% in
2002. The average balance for savings and club accounts remained unchanged at
$47 million. However, the average cost of such deposits decreased to 0.55% in
2003 from 1.10% in 2002. The average balance of interest bearing demand deposits
increased to $500,000 with an average cost of 0.40% in 2003 from $406,000 with
an average cost of 0.99% in 2002.
NET INTEREST INCOME. Net interest income decreased $391,000, or 8.08% to $4.4
million for 2003 from $4.8 million for 2002. The decline was primarily the
result of more rapid repricing of interest earning assets as compared to the
decline in the cost of our interest bearing liabilities in the current low
interest rate environment. In addition, a significant portion of our earning
assets are invested in lower yielding but more liquid assets. Our interest rate
spread decreased by 76 basis points to 2.85% in 2003 from 3.61% in 2002. Our
interest margin decreased by 69 basis points to 3.10% in 2003 from 3.79% in
2002.
PROVISION FOR LOAN LOSSES. We establish provisions for loan losses, which are
charged to operations, at a level necessary to absorb known and inherent losses
that are both probable and reasonably estimable at the date of the financial
statements. In evaluating the level of the allowance for loan losses, management
considers historical loss experience, the types of loans and the amount of loans
in the loan portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, peer group
information, and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available or as future events change. Based on our
evaluation of these factors, management made a provision of $8,000 for the year
ended December 31, 2003, as compared to a provision of $3,000 for the year ended
December 31, 2002. Our provision for loan losses was established to address
probable and estimable losses in our SBA and credit card loan portfolio. We used
the same methodology and generally similar assumptions in assessing the
allowance for both years. The allowance for loan losses was $180,000, or 0.19%
of loans outstanding at December 31, 2003, as compared with $174,000, or 0.19%
of loans outstanding at December 31, 2002. The level of the allowance is based
on estimates, and the ultimate losses may vary from the estimates.
Management assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses as necessary in order to maintain the adequacy of the
allowance. Although we believe that we use the best information available to
establish the allowance for loan losses, future additions to the allowance may
be necessary based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors. In addition, the Office of
Thrift Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. The Office of Thrift Supervision may
require us to make adjustments to the allowance based on its judgments about
information available to it at the time of its examination.
NON-INTEREST INCOME. Non-interest income decreased by $26,000, or 8.39% to
$284,000 in 2003 from $310,000 in 2002. The decline was partially caused by the
$12,000 decrease in the gain on sale of loans. In 2003, the Association
experienced diminished activity in fee generating transactions resulting in a
decrease of $14,000 in fees, service charges and miscellaneous non-interest
income.
NON-INTEREST EXPENSE. Non-interest expense increased by $10,000 to $4.57 million
in 2003 from $4.56 million in 2002. Salary and benefits increased by $110,000 to
$2.7 million in 2003 from $2.6 million in 2002. The increase included a $14,000
ESOP expense for year ended 2003. Occupancy expenses increased by $34,000 to
$475,000 from $441,000, director compensation increased $1,000 to $135,000 from
$134,000 and insurance premiums increased $5,000 to $161,000 from $156,000. As
an offset, legal expenses decreased by $121,000 to $2,000 in 2003 from $123,000
in 2002, equipment expenses decreased $13,000 to $602,000 from $615,000 and
other non-interest expenses decreased $10,000 to $502,000 from $512,000.
INCOME TAX EXPENSE. The provision for income taxes decreased to $77,000 in 2003
from $260,000 in 2002. The decrease in the income tax expense is primarily due
to our lower level of income before taxes of $158,000 in 2003 compared with
$590,000 in 2002.
AVERAGE BALANCE SHEET
The following table presents for the periods indicated the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield. The amortization of loan
fees is included in computing interest income; however, such fees are not
material.
(1) LOANS RECEIVABLE ARE NET OF THE ALLOWANCE FOR LOAN LOSSES.
(2) NONE OF THE REPORTED INCOME IS EXEMPT FROM FEDERAL INCOME TAXES. THERE IS A
PARTIAL EXEMPTION FROM STATE AND CITY INCOME TAXES FOR 22.5% OF INCOME
DERIVED FROM UNITED STATES GOVERNMENT SECURITIES.
(3) INCLUDES STOCK IN FEDERAL HOME LOAN BANK OF NEW YORK.
(4) NET INTEREST RATE SPREAD REPRESENTS THE DIFFERENCE BETWEEN THE YIELD ON
INTEREST EARNING ASSETS AND THE AVERAGE COST OF INTEREST BEARING
LIABILITIES.
(5) NET INTEREST MARGIN REPRESENTS NET INTEREST INCOME AS A PERCENTAGE OF
INTEREST EARNING ASSETS.
7 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
changes in outstanding balances and those due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Years Ended December 31,
-----------------------------------------------
2003 vs. 2002
-----------------------------------------------
Increase/(Decrease)
Due to Total
------------------------- Increase
Volume Rate (Decrease)
------ ----- ----------
(IN THOUSANDS)
Interest income:
Loans receivable ................................ $ (531) $(606) $(1137)
Mortgage-backed securities ...................... 57 (33) 24
Investment securities ........................... 181 (10) 171
Other interest-earning assets ................... 171 (152) 19
------ ----- ------
Total interest income ......................... (122) (801) (923)
------ ----- ------
Interest expense:
Demand deposits ................................. 1 (3) (2)
Passbook and club accounts ...................... (2) (259) (261)
Certificates of deposits ........................ 183 (453) (270)
------ ----- ------
Total interest expense ........................ 182 (715) (533)
------ ----- ------
Net interest income ................................ $ (304) $ (86) $ (390)
====== ===== ======
MANAGEMENT OF MARKET RISK
GENERAL. The majority of our assets and liabilities are monetary in nature.
Consequently, our most significant form of market risk is interest rate risk.
Our assets, consisting primarily of mortgage loans, have longer maturities than
our liabilities, consisting primarily of deposits. As a result, a principal part
of our business strategy is to manage interest rate risk and reduce the exposure
of our net interest income to changes in market interest rates. Accordingly, our
board of directors has established an Asset/Liability Management Committee which
is responsible for evaluating the interest rate risk inherent in our assets and
liabilities, for determining the level of risk that is appropriate given our
business strategy, operating environment, capital, liquidity and performance
objectives, and for managing this risk consistent with the guidelines approved
by the board of directors. Senior management monitors the level of interest rate
risk on a regular basis and the Asset/Liability Management Committee, which
consists of senior management operating under a policy adopted by the board of
directors, meets as needed to review our asset/liability policies and interest
rate risk position.
We have sought to manage our interest rate risk in order to minimize the
exposure of our earnings and capital to changes in interest rates. During the
low interest rate environment that has existed in recent years, we have
implemented the following strategies to manage our interest rate risk: (i)
maintaining a high level of liquid interest-earning assets invested in cash and
cash equivalents and short-term United States Treasury securities; and (ii)
offering a variety of adjustable rate loan products, including one year
adjustable rate mortgage loans, construction loans, home equity loans and Small
Business Administration loans. By investing in short-term, liquid
8
MANAGEMENT DISCUSSION AND ANALYSIS
instruments, we believe we are better positioned to react to increases in market
interest rates. However, investments in shorter-term securities and cash and
cash equivalents generally bear lower yields than longer term investments. Thus,
during the recent sustained period of declining interest rates, our strategy of
investment in liquid instruments has resulted in lower levels of interest income
than would have been obtained by investing in longer-term loans and investments.
The net proceeds from the offering will increase our capital and provide
management with greater flexibility to manage its interest rate risk. In
particular, management intends to leverage the capital Flatbush Federal receives
to increase its earnings assets. Management intends to lengthen the maturity of
its earning assets, which in turn should result in a higher yielding portfolio
of earning assets.
NET PORTFOLIO VALUE. The Office of Thrift Supervision requires the computation
of amounts by which the net present value of an institution's cash flow from
assets, liabilities and off balance sheet items (the institution's net portfolio
value or "NPV") would change in the event of a range of assumed changes in
market interest rates. The Office of Thrift Supervision provides all
institutions that file a Consolidated Maturity/Rate Schedule as a part of their
quarterly Thrift Financial Report with an interest rate sensitivity report of
net portfolio value. The Office of Thrift Supervision simulation model uses a
discounted cash flow analysis and an option-based pricing approach to measuring
the interest rate sensitivity of net portfolio value. Historically, the Office
of Thrift Supervision model estimated the economic value of each type of asset,
liability and off-balance sheet contract under the assumption that the United
States Treasury yield curve increases or decreases instantaneously by 100 to 300
basis points in 100 basis point increments. However, given the current low level
of market interest rates, we did not receive a NPV calculation for an interest
rate decrease of greater than 100 basis points. A basis point equals
one-hundredth of one percent, and 100 basis points equals one percent. An
increase in interest rates from 3% to 4% would mean, for example, a 100 basis
point increase in the "Change in Interest Rates" column below. The Office of
Thrift Supervision provides us the results of the interest rate sensitivity
model, which is based on information we provide to the Office of Thrift
Supervision to estimate the sensitivity of our net portfolio value.
The table below sets forth, as of December 31, 2003 an interest rate sensitivity
report of net portfolio value and the estimated changes in our net portfolio
value that would result from the designated instantaneous changes in the United
States Treasury yield curve.
Net Portfolio Value as a Percentage
Net Portfolio Value of Present Value of Assets
Change in -------------------------------------------------- ----------------------------------
Interest Rates Estimated Amount of Percent of Change in Basis
(basis points) NPV Change Change NPV Ratio Points
--------------- --------- --------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
+300 14,445 (7,000) (33%) 10.25% -395 basis points
+200 16,901 (4,543) (21%) 11.70% -249 basis points
+100 19,291 (2,154) (10%) 13.05% -115 basis points
0 21,445 -- -- 14.20% --
-100 22,609 1,164 5% 14.74% +55 basis points
The table above indicates that at December 31, 2003, in the event of a 100 basis
point decrease in interest rates, we would experience a 5% increase in net
portfolio value. In the event of a 200 basis point increase in interest rates,
we would experience a 21% decrease in net portfolio value. During recent years
our interest rate risk management policy has emphasized maintaining a
significant percentage of our assets in highly liquid, interest-earning assets
and shorter-term securities. The effects of this policy has been to reduce our
level of net interest income. We have been willing to accept reduced levels of
income in order to position Flatbush Federal to be able to reinvest our assets
in longer-term, high yielding investments once interest rates begin to rise.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurement. Modeling changes in net portfolio value require making
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the net portfolio value table presented assumes that the
9 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS
composition of our interest-sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value table provides an
indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on its net interest income and
will differ from actual results.
LIQUIDITY. We maintain liquid assets at levels we consider adequate to meet our
liquidity needs. Our liquidity ratio averaged 35.23 % for the year ended
December 31, 2003. We adjust our liquidity levels to fund deposit outflows, pay
real estate taxes on mortgage loans, fund loan commitments and take advantage of
investment opportunities. As appropriate, we also adjust liquidity to meet asset
and liability management objectives. At December 31, 2003, cash and cash
equivalents totaled $29.3 million.
Our primary sources of liquidity are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by market interest rates, economic conditions, and rates
offered by our competition. We set the interest rates on our deposits to
maintain a desired level of total deposits. In addition, we invest excess funds
in short-term interest-earning assets, which provide liquidity to meet lending
requirements.
A significant portion of our liquidity consists of cash and cash equivalents,
which are a product of our operating, investing and financing activities. At
December 31, 2003, $29.3 million of our assets were invested in cash and cash
equivalents. Our primary sources of cash are principal repayments on loans,
proceeds from the calls and maturities of investment securities, principal
repayments of mortgage-backed securities and increases in deposit accounts. As
of December 31, 2003, there were no short-term investment securities.
Deposit flows are generally affected by the level of interest rates, the
interest rates and products offered by local competitors, and other factors.
Total deposits decreased $5.3 million to $126.0 million at December 31, 2003
from $131.3 million as of December 31, 2002. $2.3 million of the decline were
deposits that were used to purchase common stock in our offering. An additional
$3 million deposit outflow was attributed to competitive rates and other
factors.
Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of New York which
provide an additional source of funds. At December 31 2003, we had no advances
from the Federal Home Loan Bank of New York, but we had an available borrowing
limit of $59.1 million.
At December 31, 2003, we had outstanding commitments to originate loans of $2.4
million. At December 31, 2003, certificates of deposit scheduled to mature in
less than one year totaled $43.9 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with us,
although there can be no assurance that this will be the case. In the event a
significant portion of our deposits are not retained by us, we will have to
utilize other funding sources, such as Federal Home Loan Bank of New York
advances in order to maintain our level of assets. Alternatively, we would
reduce our level of liquid assets, such as our cash and cash equivalents. In
addition, the cost of such deposits may be significantly higher if market
interest rates are higher at the time of renewal. We intend to utilize our high
levels of liquidity to fund our lending activities.
The tables below set forth, as of December 31, 2003, outstanding loan
commitments and maturities of certificates of deposits:
Schedule of Loan
Commitments
DECEMBER 31, 2003
(IN THOUSANDS)
-----------------
One year or less ................ $ 2,400
After one to three years ........ 0
After three years ............... 0
-------
Total ........................... $ 2,400
=======
Schedule of Maturities
of Certificates of Deposit
DECEMBER 31, 2003
(IN THOUSANDS)
--------------------------
One year or less ............. $43,933
After one to three years ..... 9,737
After three years ............ 16,289
-------
Total ........................ $69,959
=======
10
MANAGEMENT DISCUSSION AND ANALYSIS
At December 31, 2003, the minimum rental commitments under all noncancellable
leases with initial or remaining terms of one year or more are as follows:
Schedule of Lease
Commitments
DECEMBER 31, 2003
(IN THOUSANDS)
------------------
Rent
--------------------
One year or less ................ $ 157
After one to three years ........ 278
After three years ............... 209
-----
Total ........................... $ 644
=====
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related notes of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). GAAP generally requires the measurement of financial position
and operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary
in nature. As a result, changes in market interest rates have a greater impact
on performance than the effects of inflation.
11 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
--------------------------------------------------------------------------------
FEBRUARY 26, 2004
MANAGEMENT RESPONSIBILITY STATEMENT
Management of Flatbush Federal Bancorp, Inc. and subsidiaries is responsible for
the preparation of the consolidated financial statements and all other financial
information included in this report. Consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America applied on a consistent basis. All financial
information included in the report agrees with the financial statements. In
preparing the financial statements, management makes informed estimates and
judgments with consideration given to materiality, about the expected results of
various events and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of internal control and the benefits derived.
Management reviews and modifies its systems of accounting and internal control
in light of changes in condition and operations as well as in response to
recommendations from the independent certified public accountants. Management
believes the accounting and internal control systems provide reasonable
assurance that assets are safeguarded and financial information is reliable.
The Board of Directors is responsible for determining that management fulfills
its responsibilities in the preparation of consolidated financial statements and
the control of operation. The Board appoints the independent certified public
accountants.
The Board meets with management and the independent certified public accountants
to approve the overall scope of audit work and related fee arrangements, and
reviews audit reports and findings.
Sincerely,
/s/ Anthony J. Monteverdi, /s/ Jesus R. Adia, Jr.,
Anthony J. Monteverdi, Jesus R. Adia, Jr.,
PRESIDENT & C.E.O. EXEC. VICE PRESIDENT
12
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
Flatbush Federal Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Flatbush Federal Bancorp, Inc. (the "Company") and Subsidiaries as of
December 31, 2003 and 2002, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of Flatbush Federal Bancorp, Inc. and Subsidiaries as of
December 31, 2003 and 2002, and the consolidated results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Radics & Co., LLP
February 26, 2004
Pine Brook, New Jersey
13 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
--------------------------------
Notes 2003 2002
-------- ------------ ------------
ASSETS
Cash and amounts due from depository institutions .............. $ 4,468,212 $ 3,895,516
Interest-earning deposits in other banks ....................... 11,791,493 2,134,379
Federal funds sold ............................................. 13,000,000 6,200,000
------------ ------------
Cash and cash equivalents .............................. 2 and 15 29,259,705 12,229,895
Investment securities held to maturity ......................... 2, 3 and 15 14,211,578 33,854,980
Mortgage-backed securities held to maturity .................... 2, 4 and 15 5,521,094 2,001,684
Loans receivable ............................................... 2, 5 and 15 90,571,304 90,275,839
Premises and equipment ......................................... 2, 7 and 13 961,813 941,248
Federal Home Loan Bank of New York stock ....................... 827,200 975,000
Accrued interest receivable .................................... 2, 8 and 15 570,228 508,878
Other assets ................................................... 2, 11 and 12 1,013,945 686,643
------------ ------------
Total assets ........................................... $142,936,867 $141,474,167
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ....................................................... 6, 9 and 15 $126,032,492 $131,337,582
Advance payments by borrowers for taxes and insurance .......... 202,616 375,121
Other liabilities .............................................. 11 1,076,542 1,390,494
------------ ------------
Total liabilities ...................................... 127,311,650 133,103,197
------------ ------------
Commitments and contingencies .................................. 6, 10, 13, 14 and 15 -- --
STOCKHOLDERS' EQUITY ........................................... 1, 6, 10, 12 and 16
Preferred stock $0.01 par value, 1,000,000 shares
authorized; none issued and outstanding ..................... -- --
Common stock $0.01 par value, 9,000,000 shares
authorized; 2,314,375 issued and outstanding at
December 31, 2003 ........................................... 23,144 --
Additional paid in capital ..................................... 7,791,924 --
Retained earnings-- substantially restricted ................... 8,752,708 8,771,553
Unearned employees' stock ownership plan
("ESOP") shares ............................................. (687,456) --
Accumulated other comprehensive (loss)-- minimum
pension liability adjustment, net of income tax benefit ..... (255,103) (400,583)
------------ ------------
Total stockholders' equity ............................. 15,625,217 8,370,970
------------ ------------
Total liabilities and stockholders' equity ............. $142,936,867 $141,474,167
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-------------------------------
Notes 2003 2002
--------- ----------- -----------
Interest income:
Loans ............................................................. 2 and 5 $ 5,756,446 $ 6,892,952
Investment securities held to maturity ............................ 2 459,164 288,404
Mortgage-backed securities held to maturity ....................... 2 184,621 160,506
Other interest-earning assets ..................................... 322,537 304,157
----------- -----------
Total interest income ........................................ 6,722,768 7,646,019
Interest expense on deposits ......................................... 9 2,271,379 2,804,219
----------- -----------
Net interest income .................................................. 4,451,389 4,841,800
Provision for loan losses ............................................ 2 and 5 8,343 2,695
----------- -----------
Net interest income after provision for loan losses .................. 4,443,046 4,839,105
----------- -----------
Non-interest income:
Fees and service charges .......................................... 241,963 251,226
Gain on sale of loans ............................................. 2 8,195 19,729
Other ............................................................. 34,182 39,191
----------- -----------
Total non-interest income .................................... 284,340 310,146
----------- -----------
Non-interest expenses:
Salaries and employee benefits .................................... 11 2,691,375 2,577,921
Net occupancy expense of premises ................................. 2 and 13 475,195 440,999
Equipment ......................................................... 2 602,151 614,998
Directors compensation ............................................ 11 135,094 133,994
Legal fees ........................................................ 1,713 123,233
Other insurance premiums .......................................... 161,266 156,179
Other ............................................................. 502,709 512,359
----------- -----------
Total non-interest expenses ................................. 4,569,503 4,559,683
----------- -----------
Income before income taxes ........................................... 157,883 589,568
Income taxes ......................................................... 2 and 12 76,728 259,710
----------- -----------
Net income ........................................................... $ 81,155 $ 329,858
=========== ===========
Net income per common shares--
Basic and diluted ................................................. 2 $ 0.04 N/A(1)
=========== ===========
Weighted average number of shares outstanding--
Basic and diluted ................................................. 2 2,227,808 N/A(1)
=========== ===========
(1) FLATBUSH FEDERAL BANCORP, INC. CONVERTED TO STOCK FORM ON OCTOBER 17, 2003.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Accumulated
Additional Earnings-- Unearned Other
Common Paid-In Substantially ESOP Comprehensive
Stock Capital Restricted Shares (Loss) Total
------- ---------- ------------ --------- ------------- -----------
Balance -- December 31, 2001 ........... $ -- $ -- $8,441,695 $ -- $(168,076) $ 8,273,619
-----------
Net income for the year ended
December 31, 2002 ................... -- -- 329,858 -- -- 329,858
Other comprehensive loss--
minimum pension liability
adjustment, net of income taxes
(benefit) of $195,447 ............... -- -- -- -- (232,507) (232,507)
-----------
Comprehensive income ................... -- -- -- -- -- 97,351
------- ---------- ---------- --------- --------- -----------
Balance-- December 31, 2002 ............ -- -- 8,771,553 -- (400,583) 8,370,970
Net proceeds from initial
public offering ..................... 23,144 7,786,604 -- -- -- 7,809,748
Common stock acquired by ESOP .......... -- -- -- (696,160) -- (696,160)
ESOP shares committed to be
released ............................ -- 5,320 -- 8,704 -- 14,024
Capitalization of mutual holding
company ............................. -- -- (100,000) -- -- (100,000)
-----------
Net income for the year ended
December 31, 2003 ................... -- -- 81,155 -- -- 81,155
Other comprehensive income--
minimum pension liability
adjustment, net of income taxes
of $122,439 ......................... -- -- -- -- 145,480 145,480
-----------
Comprehensive income ................... 226,635
------- ---------- ---------- --------- --------- -----------
Balance -- December 31, 2003 ........... $23,144 $7,791,924 $8,752,708 $(687,456) $(255,103) $15,625,217
======= ========== ========== ========= ========= ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
16
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------
2003 2002
---------- ----------
Cash flows from operating activities:
Net income ...................................................................... $ 81,155 $ 329,858
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization of premises and equipment ...................... 165,502 179,297
Net amortization of premiums, discounts
and deferred loan fees and costs .......................................... (187,253) (55,808)
Deferred income taxes ........................................................ 13,807 60,102
Loans originated for sale .................................................... (297,950) (714,971)
Proceeds from sale of loans originated for sale .............................. 306,145 734,700
(Gain) on sales of loans originated for sale ................................. (8,195) (19,729)
Provision for loan losses .................................................... 8,343 2,695
(Increase) decrease in accrued interest receivable ........................... (61,350) 109,015
(Increase) decrease in other assets .......................................... (463,548) 286,122
(Decrease) increase in other liabilities ..................................... (46,033) 96,010
ESOP shares committed to be released ......................................... 14,024 --
------------- -------------
Net cash (used in) provided by operating activities ....................... (475,353) 1,007,291
------------- -------------
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities held to maturity .... 88,249,806 5,800,000
Purchases of investment securities held to maturity ............................. (68,458,495) (34,140,389)
Principal repayment on mortgage-backed securities held to maturity .............. 880,149 813,512
Purchases of mortgage-backed securities held to maturity ........................ (4,392,344) --
Purchase of loan participation interest ......................................... (2,950,000) --
Net decrease in loans receivable ................................................ 2,678,321 9,866,984
Additions to premises and equipment ............................................. (186,067) (38,607)
Redemption of Federal Home Loan Bank of New York stock .......................... 147,800 85,000
------------- -------------
Net cash provided by (used in) investing activities ....................... 15,969,170 (17,613,500)
------------- -------------
Cash flows from financing activities:
Net (decrease) increase in deposits ............................................. (2,963,701) 10,498,246
(Decrease) in advance payments by borrowers for taxes and insurance ............. (172,505) (234,669)
Net proceeds from issuance of common stock ...................................... 5,468,359 --
Common stock acquired by ESOP ................................................... (696,160) --
Capitalization of Mutual Holding Company ........................................ (100,000) --
------------- -------------
Net cash provided by financing activities ................................. 1,535,993 10,263,577
------------- -------------
Net increase (decrease) in cash and cash equivalents ................................ 17,029,810 (6,342,632)
Cash and cash equivalents-- beginning ............................................... 12,229,895 18,572,527
------------- -------------
Cash and cash equivalents-- ending .................................................. $ 29,259,705 $ 12,229,895
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ..................................................................... $ 2,271,379 $ 2,808,068
============= =============
Income taxes ................................................................. $ 251,416 $ 90,455
============= =============
Supplemental disclosure of noncash activities:
Issuance of common stock in exchange for deposits ............................... $ 2,341,389 $ --
============= =============
See notes to consolidated financial statements.
17 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REORGANIZATION AND STOCK OFFERING
The Flatbush Federal Savings and Loan Association of Brooklyn (the
"Association") completed its reorganization into a mutual holding company
structure (the "Reorganization") on October 17, 2003. As a part of the
Reorganization, the Association converted from a federally chartered mutual
savings and loan association to a federally-chartered stock savings association.
The Association became a wholly-owned subsidiary of Flatbush Federal Bancorp,
Inc. (the "Company"), which became a majority-owned subsidiary of Flatbush
Federal MHC, a mutual holding company.
The Company issued a total of 2,314,375 shares of common stock on October 17,
2003, consisting of 1,226,619 shares (53%) issued to Flatbush Federal MHC and
the sale of 87,020 shares to the ESOP and 1,000,736 shares to eligible account
holders of the mutual association. The net proceeds from the sale of shares
amounted to $7,809,748, net of reorganization expenses of $892,300.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF FINANCIAL
STATEMENT PRESENTATION
The consolidated financial statements include accounts of the Company, the
Association and the Association's subsidiary, Flatbush REIT, Inc. (the "REIT"),
a corporation principally engaged in investing in loans secured by real estate.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company's primary business is the ownership and operation of the
Association. The Association's principal business consists of attracting retail
deposits from the general public in the areas surrounding its various locations
in Brooklyn, New York and investing those deposits, together with funds
generated from operations and borrowings, primarily in one-to four-family
residential mortgage loans, real estate construction loans and various
securities. One-to four family residential real estate in the Association's
market areas is characterized by a large number of attached and semi-detached
houses, including a number of two-and three-family homes and cooperative
apartments. Revenues are derived principally from interest on loans and
securities, loan origination and servicing fees, and service charges and fees
collected on deposit accounts. The primary sources of funds are deposits and
principal and interest payments on loans and securities.
The Association's lending area is concentrated in the neighborhoods surrounding
the Association's office locations in Brooklyn, New York. Most of the deposit
customers are residents of the greater New York metropolitan area.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated statements of financial
condition and revenues and expenses for the periods then ended. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the amount of
deferred taxes which are more likely than not to be realized. Management
believes that the allowance for loan losses is adequate and that all deferred
taxes are more likely than not to be realized. While management uses available
information to recognize losses on loans, future additions to the allowance for
loan losses may be necessary based on changes in economic conditions in the
market area. The assessment of the amount of deferred tax assets more likely
than not to be realized is based upon projected future taxable income, which is
subject to continual revisions for updated information.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits in other banks and term deposits with
original maturities of three months or less, and federal funds sold. Generally,
federal funds are sold for one-day periods.
18
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONT'D.)
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investments in debt securities that the Association has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized holding gains and
losses included in earnings. Debt and equity securities not classified as
trading securities nor as held-to-maturity securities are classified as
available for sale securities and reported at fair value, with unrealized
holding gains or losses, net of deferred income taxes, reported in the
accumulated other comprehensive income component of retained earnings.
Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest income on securities, which includes amortization of
premiums and accretion of discounts, is recognized in the consolidated financial
statements when earned. The adjusted cost basis of an identified security sold
or called is used for determining security gains and losses recognized in the
consolidated statements of income.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale, primarily to the Federal Home
Loan Bank of New York ("FHLB") under the Mortgage Partnership Finance Program,
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by a charge to
income. At December 31, 2003 and 2002, there were no loans held for sale.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan origination fees and costs. The Association
defers loan origination fees and certain direct loan origination costs and
accretes/amortizes such amounts as an adjustment of yield over the contractual
lives of the related loans.
Interest is calculated by use of the actuarial method. An allowance for
uncollectible interest on loans is maintained based on management's evaluation
of collectibility. The allowance is established by a charge to interest income.
Income is subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is probable, in which case the loan is
returned to an accrual status.
ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level necessary to absorb loan
losses which are both probable and reasonably estimable. Management, in
determining the allowance for loan losses, considers the losses inherent in its
loan portfolio and changes in the nature and volume of its loan activities,
along with general economic and real estate market conditions. The Association
utilizes a two tier approach: (1) identification of impaired loans and
establishment of specific loss allowances on such loans; and (2) establishment
of general valuation allowances on the remainder of its loan portfolio. The
Association maintains a loan review system which allows for a periodic review of
its loan portfolio and the early identification of potential impaired loans.
Such system takes into consideration, among other things, delinquency status,
size of loans, types of collateral and financial condition of the borrowers.
Specific loan loss allowances are established for identified loans based on a
review of such information. A loan evaluated for impairment is deemed to be
impaired when, based on current information and events, it is probable that the
Association will be unable to collect all amounts due according to the
contractual terms of the loan agreement. All loans identified as impaired are
evaluated independently. The Association does not aggregate such loans for
evaluation purposes. Loan impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. General loan loss
allowances are based upon a combination of factors including, but not limited
to, actual loan loss experience, composition of the loan portfolio, current
economic conditions and management's judgment. The allowance is increased
through provisions charged against current earnings and recoveries of previously
charged off loans. Loans which are determined to be uncollectible are charged
against the allowance. Although management believes that specific and general
loan loss allowances are established to absorb losses which are both probable
and reasonably estimable, actual losses are dependent
19 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONT'D.)
ALLOWANCE FOR LOAN LOSSES (CONT'D.)
upon future events and, as such, further additions to the level of specific and
general loan loss allowances may be necessary. Payments received on impaired
loans are applied first to accrued interest receivable and then to principal.
CONCENTRATION OF RISK
The Association's real estate and lending activities are concentrated in real
estate and loans secured by real estate located in the State of New York.
PREMISES AND EQUIPMENT
Premises and equipment are comprised of land, at cost, and a building, building
improvements, leasehold improvements and furniture, fixtures and equipment, at
cost, less accumulated depreciation and amortization computed on the
straight-line method over the following estimated useful lives:
Building and improvements ...... 50 years
Leasehold improvements ......... Shorter of term of lease
or useful life
Furniture, fixtures
and equipment .................. 5 to 10 years
Significant renewals and betterments are charged to the premises and equipment
account. Maintenance and repairs are charged to expense in the year incurred.
Rental income is netted against occupancy expense in the consolidated statements
of income.
INCOME TAXES
The Company and the Association file consolidated federal income tax returns.
Federal income taxes are allocated to the Company and the Association based upon
the contribution of their respective income or loss to the consolidated return.
The REIT files a separate federal income tax return and pays its own taxes. The
Company, the Association and the REIT file separate state and city income tax
returns.
Federal, state and city income taxes have been provided on the basis of reported
income. The amounts reflected on the income tax returns differ from these
provisions due principally to temporary differences in the reporting of certain
items for financial reporting and tax reporting purposes. Deferred income taxes
are recorded to recognize such temporary differences. The realization of
deferred tax assets is assessed and a valuation allowance provided, when
necessary, for that portion of the asset which more likely than not will not be
realized. Management believes, based upon current facts, that it is more likely
than not that there will be sufficient taxable income in future years to realize
all deferred tax assets.
INTEREST-RATE RISK
The Association is principally engaged in the business of attracting deposits
from the general public and using these deposits, together with other funds, to
make loans secured by real estate and, to a lesser extent, to purchase
investment and mortgage-backed securities. The potential for interest-rate risk
exists as a result of the generally shorter duration of interest-sensitive
liabilities compared to the generally longer duration of interest-sensitive
assets. In a rising rate environment, liabilities will reprice faster than
assets, thereby reducing net interest income. For this reason, management
regularly monitors the maturity structure of the Association's interest-earning
assets and interest-bearing liabilities in order to measure its level of
interest-rate risk and to plan for future volatility.
NET INCOME PER COMMON SHARE
Net income per common share was computed in 2003 by dividing net income for year
ended December 31, 2003 by weighted average number of common stock outstanding
adjusted for unearned shares of the ESOP. Such amounts were based upon income
for the entire year 2003, although the Association converted to stock form on
October 17, 2003, and the weighted average number of shares outstanding since
October 17, 2003, as if such shares were outstanding during the entire year
2003. Diluted net income per common share did not differ from basic net income
per common share as there were no contracts or securities exercisable or which
could be converted into common stock.
RECLASSIFICATION
Certain amounts as of and for the year ended December 31, 2002, have been
reclassified to conform to the current year's presentation.
20
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES HELD TO MATURITY
December 31, 2003
---------------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
----------- -------- ------- -----------
U.S. Government (including agencies):
Due after one year through five years .......... $ 1,997,985 $ 6,699 $ -- $ 2,004,684
Due after five years through ten years ......... 6,213,593 58,526 50,509 6,221,610
Due after ten years ............................ 6,000,000 82,271 -- 6,082,271
----------- -------- ------- -----------
$14,211,578 $147,496 $50,509 $14,308,565
=========== ======== ======= ===========
December 31, 2002
---------------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
----------- -------- ------- -----------
U.S. Government (including agencies):
Maturity within one year ....................... $29,911,269 $ 7,348 $11,006 $29,907,611
Due after five years through ten years ......... 3,943,711 87,423 -- 4,031,134
----------- -------- ------- -----------
$33,854,980 $ 94,771 $11,006 $33,938,745
=========== ======== ======= ===========
There were no sales of investment securities held to maturity during the years
ended December 31, 2003 and 2002. At December 31, 2003, securities callable
within one year amounted to $9,000,000.
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
December 31, 2003
---------------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
----------- -------- ------- -----------
Government National Mortgage Association ............. $ 5,330,686 $106,303 $ -- $ 5,436,989
Federal National Mortgage Association ................ 190,408 1,253 -- 191,661
----------- -------- ------- -----------
$ 5,521,094 $107,556 $ -- $ 5,628,650
=========== ======== ======= ===========
December 31, 2002
---------------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
----------- -------- ------- -----------
Government National Mortgage Association ............. $ 1,585,117 $ 85,607 $ -- $ 1,670,724
Federal National Mortgage Association ................ 369,675 10,884 -- 380,559
Federal Home Loan Mortgage Corporation ............... 46,892 1,252 -- 48,144
----------- -------- ------- -----------
$ 2,001,684 $ 97,743 $ -- $ 2,099,427
=========== ======== ======= ===========
The unamortized cost and estimated fair value of mortgage-backed securities at
December 31, 2003, by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers generally have the
right to prepay obligations.
21 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY (CONT'D.)
Amortized Estimated
Cost Fair Value
---------- -----------
Due after one year through five years ........................... $ 27,989 $ 30,540
Due after five years through ten years .......................... 109,691 120,998
Due after ten years ............................................. 5,383,414 5,477,112
---------- ----------
$5,521,094 $5,628,650
========== ==========
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 2003 and 2002.
5. LOANS RECEIVABLE
December 31,
----------------------------------------------
2003 2002
----------- -----------
Real estate mortgage:
One to four family ................................................ $79,686,878 $79,168,791
Multi family ...................................................... 877,070 1,539,433
Commercial ........................................................ 4,870,120 5,612,768
----------- -----------
85,434,068 86,320,992
----------- -----------
Real estate construction .............................................. 5,196,400 4,858,150
----------- -----------
Small Business Administration guaranteed .............................. 940,194 784,998
----------- -----------
Consumer:
Home equity loans ................................................. 68,040 116,415
Passbook or certificate ........................................... 88,502 159,197
Student education guaranteed
by the State of New York ........................................ 5,359 5,446
Credit cards ...................................................... 44,601 50,989
----------- -----------
206,502 332,047
----------- -----------
Total loans ................................................. 91,777,164 92,296,187
----------- -----------
Less: Loans in process ................................................ 646,900 1,773,900
Allowance for loan losses ...................................... 179,961 174,249
Deferred loan fees, net ........................................ 378,999 72,199
----------- -----------
1,205,860 2,020,348
----------- -----------
$90,571,304 $90,275,839
=========== ===========
At December 31, 2003 and 2002, nonaccrual loans for which the accrual of
interest had been discontinued totaled approximately $42,000 and $330,000,
respectively. During the years ended December 31, 2003 and 2002, the Association
recognized interest income of approximately $1,000 and $35,000, respectively, on
these loans. Interest income that would have been recorded, had the loans been
on the accrual status, would have amounted to $3,000 and $20,000 for the years
ended December 31, 2003 and 2002, respectively. The Association is not committed
to lend additional funds to borrowers whose loans have been placed on nonaccrual
status.
22
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS RECEIVABLE (CONT'D.)
The following is an analysis of the allowance for loan losses:
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows:
December 31,
--------------------------------------------
2003 2002
-------- --------
Loans without recorded allowances .................................. $ -- $ --
------- --------
Loans with recorded allowances ..................................... 40,386 --
Related allowance for loan losses .................................. 6,272 --
------- --------
34,114 --
------- --------
Net impaired loans ................................................. $34,114 $ --
======= ========
During the years ended December 31, 2003 and 2002, the average investment in
impaired loans was $41,000 and $51,000, respectively. Interest income of $1,000
and $ -0- was collected on these loans during the years ended December 31, 2003
and 2002.
The Association has granted loans to its directors and officers and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. The aggregate dollar amount of these loans was
$386,000 and $159,000 at December 31, 2003 and 2002, respectively. During the
year December 31, 2003, new loans of $390,000 were added and $163,000 of
repayments were made.
6. LOAN SERVICING
The Association originated loans held for sale and sold them, with servicing
retained, to the Federal Home Loan Bank of New York ("FHLB") under the Mortgage
Partnership Finance Program. The conditions for sale include a credit
enhancement liability as determined at the time of sale. The FHLB pays the
Association a fee for credit enhancement as the loans are paid down. At December
31, 2003 and 2002, the contingent liability for credit enhancement, net of
enhancement fees received, amounted to $84,000 and $73,000, respectively, which
are not recorded in the consolidated financial statements. The total loans
serviced under this program amounted to approximately $978,000 and $715,000 at
December 31, 2003 and 2002, respectively, which amounts are also not included in
the consolidated financial statements. In accordance with guidelines for
regulatory capital computations, the contingent liability has been subtracted to
compute regulatory capital (see note 10 to consolidated financial statements).
Custodial escrow balances maintained in connection with loans serviced under
this program amounted to approximately $1,100 and $600 at December 31, 2003 and
2002, respectively, and are included in the consolidated statements of financial
condition as demand deposits.
23 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PREMISES AND EQUIPMENT
Year Ended December 31,
-------------------------------------------
2003 2002
-------- --------
Land ................................................................... $319,753 $319,753
-------- --------
Building and improvements .............................................. 922,493 922,493
Less accumulated depreciation .......................................... 555,867 505,362
-------- --------
366,626 417,131
-------- --------
Leasehold improvements ................................................. 172,035 18,015
Less accumulated amortization .......................................... 12,776 18,015
-------- --------
159,259 --
-------- --------
Furniture, fixtures and equipment ...................................... 926,941 913,611
Less accumulated depreciation .......................................... 810,766 709,247
-------- --------
116,175 204,364
-------- --------
$961,813 $941,248
======== ========
8. ACCRUED INTEREST RECEIVABLE
Year Ended December 31,
-------------------------------------------
2003 2002
-------- --------
Loans, net of allowance for uncollected
interest of $700 and $4,000, respectively ............................... $426,075 $475,035
Investment securities held to maturity ..................................... 118,176 21,046
Mortgage-backed securities held to maturity ................................ 25,977 12,797
-------- --------
$570,228 $508,878
======== ========
9. DEPOSITS
December 31,
-------------------------------------------------------------
2003 2002
--------------------------- -------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
--------- ------------ -------- ------------
Demand deposits:
Non-interest bearing ................................. 0.00% $ 5,635,461 0.00% $ 6,196,349
NOW .................................................. 0.30% 551,487 0.99% 443,699
------------ ------------
0.03% 6,186,948 0.07% 6,640,048
Passbook and club accounts .............................. 0.31% 49,886,596 0.89% 50,152,935
Certificates of deposit ................................. 2.51% 69,958,948 3.14% 74,544,599
------------ ------------
Total ................................................ 1.51% $126,032,492 2.13% $131,337,582
============ ============
24
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DEPOSITS (CONT'D.)
The scheduled maturities of certificates of deposit are as follows (in
thousands):
December 31,
------------------------------------------
2003 2002
------- -------
One year or less ................................................... $43,933 $48,981
After one to three years ........................................... 9,737 10,094
After three years .................................................. 16,289 15,470
------- -------
$69,959 $74,545
======= =======
Certificates of deposit with denominations of $100,000 or more totaled
approximately $12,868,000 and $12,774,000 at December 31, 2003 and 2002,
respectively.
Interest expense on deposits is summarized as follows:
Year Ended December 31,
---------------------------------------------
2003 2002
---------- ----------
Demand ............................................................. $ 2,375 $ 4,294
Passbook, club ..................................................... 257,705 517,563
Certificates of deposit ............................................ 2,011,299 2,282,362
---------- ----------
$2,271,379 $2,804,219
========== ==========
10. REGULATORY CAPITAL
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Association. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Association must meet
specific capital guidelines that involve quantitative measures of Association's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of Total and Tier
1 capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to adjusted total assets (as defined). The following
tables present a reconciliation of capital per GAAP and regulatory capital and
information as to the Association's capital levels at the dates presented:
December 31,
------------------------------------------
2003 (IN THOUSANDS) 2002
------- -------
GAAP, Core (Tier 1) and Tangible capital .............................. $14,621 $8,371
Add: general valuation allowance ...................................... 173 174
Less: low-level recourse adjustment ................................... (84) (73)
------- ------
Total regulatory capital ............................................ $14,710 $8,472
======= ======
25 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. REGULATORY CAPITAL (CONT'D.)
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Actions Provisions
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2003
Total Capital
(to risk-weighted assets) .. $14,710 24.27% $4,850 8.00% $6,062 10.00%
Tier 1 Capital
(to risk-weighted assets) .. 14,621 24.12% -- -- 3,637 6.00%
Core (Tier 1) Capital
(to adjusted total assets) . 14,621 10.23% 5,717 4.00% 7,147 5.00%
Tangible Capital
(to adjusted total assets) . 14,621 10.23% 2,144 1.50% -- --
DECEMBER 31, 2002
Total Capital
(to risk-weighted assets) .. $ 8,472 15.53% $4,363 8.00% $5,454 10.00%
Tier 1 Capital
(to risk-weighted assets) .. 8,371 15.35% -- -- 3,272 6.00%
Core (Tier 1) Capital
(to adjusted total assets) . 8,371 5.92% 5,662 4.00% 7,077 5.00%
Tangible Capital
(to adjusted total assets) . 8,371 5.92% 2,123 1.50% -- --
As of May 28, 2002, the most recent notification from the Office of Thrift
Supervision ("OTS"), the Association was categorized as well-capitalized under
the regulatory framework for prompt corrective action.
At September 30, 2003, as a result of the over subscription of the stock
offering, the Association failed to meet its minimum capital requirements, which
was cured on October 20, 2003 with the refund of excess subscriptions in the
amount of $79.2 million. As a result of the Association's failure to meet its
minimum capital requirements, the Federal Deposit Insurance Corporation
increased the SAIF insurance premium for the first quarter of 2004 by
approximately $60,000. The Association is appealing this additional assessment
of the SAIF insurance premium. There are no other conditions existing or other
events which have occurred since notification that management believes have
changed the Association's category.
11. BENEFIT PLANS
PENSION PLAN
The Association maintains a defined benefit pension plan (the "Plan") covering
all employees who have met the Plan's eligibility requirements. The
Association's policy is to fund the Plan annually with the minimum contribution
deductible for federal income tax purposes.
26
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (CONT'D.)
PENSION PLAN (CONT'D.)
The Plan's investment policy permits investments in Bank Certificates of Deposit
or Equity Mutual Funds approved by the Board of Directors of the Association.
Investments in individual stock and/or mutual funds "inconsistent with its
conservative objective" are prohibited.
Percentages of total fair value of assets by category follows:
December 31,
-------------------------------------------
2003 2002
-------- -------
Equity/mutual funds .................................................. 53.73% 69.29%
Certificates of deposit .............................................. 46.26% 30.61%
Other (non-interest bearing checking accounts) ....................... 0.01% 0.10%
-------- -------
Total ................................................................ 100.00% 100.00%
======== =======
The expected rate of return on Plan assets was based on the Plan Sponsor's
average yield from its mortgage portfolio. As of October 2003 this yield was
6.18%.
The minimum required contribution for 2004, under Internal Revenue Code Section
412, is estimated to be $387,000, and this amount will be contributed during the
Plan year ending December 31, 2004. Additional discretionary contributions of
$418,000, though not required, may be made in 2004. It is planned that
contributions will be made in cash.
The following table sets forth the Plan's funded status:
December 31,
---------------------------------------------
2003 2002
---------- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation-- beginning .................................... $2,600,619 $2,068,965
Service cost ................................................... 196,766 187,991
Interest cost .................................................. 169,040 134,483
Actuarial loss/(gain) .......................................... (80,349) 210,268
Settlements .................................................... (1,162) (1,088)
---------- ----------
Benefit obligation-- ending ....................................... $2,884,914 $2,600,619
========== ==========
CHANGE IN PLAN ASSETS
Fair value of assets-- beginning .................................. $1,577,413 $1,391,878
Actual return on plan assets ................................... 218,231 (296,377)
Settlements .................................................... (1,162) (1,088)
Contributions .................................................. 640,189 483,000
---------- ----------
Fair value of assets-- ending ..................................... $2,434,671 $1,577,413
========== ==========
27 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (CONT'D.)
PENSION PLAN (CONT'D.)
December 31,
----------------------------------------------
2003 2002
----------- -----------
RECONCILIATION OF FUNDED STATUS
Accumulated benefit obligation .................................. $(2,216,632) $(1,933,108)
----------- -----------
Projected benefit obligation .................................... (2,884,914) (2,600,619)
Fair value of assets ............................................ 2,434,671 1,577,413
----------- -----------
Funded status ................................................... (450,243) (1,023,206)
Unrecognized transition (asset) ................................. (33,001) (44,001)
Unrecognized net loss ........................................... 1,170,679 1,448,827
Additional minimum liability .................................... (469,396) (737,315)
----------- -----------
Prepaid (accrued) pension cost included in
other assets (liabilities) ..................................... $ 218,039 $ (355,695)
=========== ===========
VALUATION ASSUMPTIONS
Discount rate ................................................... 6.50% 6.50%
Rate of return on long term assets .............................. 6.00% 6.00%
Salary increase rate ............................................ 5.00% 5.00%
Year Ended December 31,
----------------------------------------------
2003 2002
----------- -----------
NET PERIODIC PENSION EXPENSE
Service cost .................................................... 196,766 187,991
Interest cost ................................................... 169,040 134,483
Expected return on assets ....................................... (94,645) (83,513)
Amortization of unrecognized transition (asset) ................. (11,000) (11,000)
Amortization of unrecognized net loss ........................... 74,213 40,878
-------- --------
Total net periodic pension expense .............................. $334,374 $268,839
======== ========
VALUATION ASSUMPTIONS
Discount rate ................................................... 6.50% 6.50%
Rate of return on long term assets .............................. 6.00% 6.00%
Salary increase rate ............................................ 5.00% 5.00%
28
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (CONT.'D)
POSTRETIREMENT BENEFITS
The Association provides certain health care and life insurance benefits to
employees retired as of January 1, 1995. The following tables set forth the
Plan's funded status and the components of net postretirement benefit cost:
December 31,
--------------------------------------------
2003 2002
--------- ----------
CHANGES IN BENEFIT OBLIGATION
Benefit obligation-- beginning ...................................... $ (74,113) $ (72,554)
Interest cost ....................................................... (11,706) (14,562)
Unrecognized net loss amortization .................................. -- (757)
Amortization of unrecognized transition obligation .................. (17,167) (17,167)
Settlements ......................................................... 25,014 30,927
--------- ---------
Benefit obligation-- ending ......................................... $ (77,972) $ (74,113)
========= =========
RECONCILIATION OF FUNDED STATUS
Accumulated benefit obligation ...................................... (171,196) (167,231)
Unrecognized transition obligation being amortized
over 13.264 years ................................................. 73,204 90,371
Unrecognized net loss ............................................... 20,020 2,747
--------- ---------
Postretirement benefit obligation included in
other liabilities ................................................. $ (77,972) $ (74,113)
========= =========
December 31,
--------------------------------------------
2003 2002
--------- ---------
Service cost ........................................................ $ -- $ --
Unrecognized net loss amortization .................................. -- 757
Interest cost on accumulated
postretirement benefit obligation .................................. 11,706 14,562
Amortization of unrecognized transition obligation .................. 17,167 17,167
--------- ---------
Net postretirement benefit cost included in salaries
and employee benefits ............................................... $ 28,873 $ 32,486
========= =========
The Plan is unfunded. It is estimated that contributions of approximately
$26,000 will be made during the year ending December 31, 2004.
29 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (CONT.'D)
POSTRETIREMENT BENEFITS (CONT'D.)
At and for the years ended December 31, 2003 and 2002, a medical cost trend rate
of 6.50% was estimated. Increasing the assumed medical cost trend by one percent
in each year would increase the accumulated postretirement benefit obligation as
of December 31, 2003 and 2002, by $10,000 and $10,000, respectively, and the
aggregate of the service and interest components of net periodic postretirement
benefit cost for the years ended December 31, 2003 and 2002, by $700 and $1,000,
respectively.
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ("SERP")
The Association provides an unfunded SERP for its president. The SERP commenced
in August of 1999 and requires the president to work for five additional years
at which time the president will collect $93,000 per year for each of the
succeeding ten years. Expense for the years ended December 31, 2003 and 2002,
was $134,000 and $132,000, respectively. The SERP obligation, which is
discounted at seven percent, was $574,000 and $440,000 at December 31, 2003 and
2002, respectively.
RETIREMENT PLAN FOR DIRECTORS
The Association maintains a non-tax qualified Retirement Plan for Directors that
provides outside directors who retire after five years of service on the Board
and attainment of age 65 with a monthly retirement benefit of sixty percent of
monthly directors' fees for 60 months. In the event of the director's death or
disability prior to retirement, the director or his surviving spouse will be
entitled to a benefit under the plan if the director had otherwise satisfied the
age and service requirements prior to death or disability. In the event of a
director's death while receiving benefits but before all benefits have been paid
to the director, the director's surviving spouse will receive the remaining
benefits payments due. If the surviving spouse dies prior to receiving the
remaining payments, all obligations of the Association to the director or his
spouse will terminate. For the years ended December 31, 2003 and 2002, the cost
of the directors' retirement plan to the Association was $30,000 and $30,000,
respectively. Accrued retirement plan liability at December 31, 2003 and 2002
was $107,000 and $93,000, respectively.
ESOP
Effective upon conversion, an ESOP was established for all eligible employees.
The ESOP used $696,160 of proceeds from a term loan from the Company to purchase
87,020 shares of Company common stock in the initial offering. The term loan
from the Company to the ESOP is payable over 20 years. Interest on the term loan
is payable monthly, commencing on November 1, 2003, at the prime rate. The
Association intends to make discretionary contributions to the ESOP which will
be equal to principal and interest payments required from the ESOP on the term
loan. Shares purchased with the loan proceeds are initially pledged as
collateral for the term loan and are held in a suspense account for future
allocation among participants. Contributions to the ESOP and shares released
from the suspense account will be allocated among the participants on the basis
of compensation, as described by the ESOP, in the year of allocation. During the
year ended December 31, 2003, the Association made cash contributions of $14,000
to the ESOP, of which $7,000 was applied to loan principal. At December 31,
2003, the loan had an outstanding balance of $689,000.
The ESOP is accounted for in accordance with Statement of Position 93-6
"Accounting for Employee Stock Ownership Plans", which was issued by the
American Institute of Certified Public Accountants. Accordingly, the ESOP shares
pledged as collateral are reported as unearned ESOP shares in the consolidated
statements of financial condition. As shares are committed to be released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for net income per common
share computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings. Contributions equivalent to dividends on
unallocated ESOP shares are recorded as a reduction of debt. ESOP compensation
expense was $14,000 for the year ended December 31, 2003.
The ESOP shares are summarized as follows:
Unreleased shares ............................ 85,932
Shares committed to be released .............. 1,088
----------
Total ........................................ 87,020
==========
Fair value of unreleased shares .............. $1,095,633
==========
30
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES
The Association qualifies as a savings and loan association under the provisions
of the Internal Revenue Code and, therefore, was permitted, prior to January 1,
1996, to deduct from taxable income an allowance for bad debts based on eight
percent of taxable income before such deduction, less certain adjustments,
subject to certain limitations. Beginning January 1, 1996, the Association must
calculate its tax bad debt deduction using either the experience or the specific
charge off method. Retained earnings at December 31, 2003, include approximately
$3,368,000 of such bad debt deductions for which income taxes have not been
provided. In addition, deferred New York State and New York City taxes have not
been provided on bad debt allowances in the amount of $4,939,000 and $4,988,000,
respectively. If such amount is used for purposes other than to absorb bad
debts, including distributions in liquidation, it will be subject to income
taxes at the then current rate.
The components of income taxes are summarized as follows:
Year Ended December 31,
--------------------------------------------
2003 2002
--------- --------
Current income tax expense (benefit):
Federal ............................................................... $ 25,219 $167,868
State and city ........................................................ 37,702 31,740
--------- --------
62,921 199,608
--------- --------
Deferred income tax (benefit):
Federal ............................................................... (1,653) 28,157
State and city ........................................................ 15,460 31,945
--------- --------
13,807 60,102
--------- --------
$ 76,728 $259,710
========= ========
The following table presents a reconciliation between reported income taxes and
the income taxes which would be computed by applying the applicable federal
income tax rate of 34% to consolidated income before income taxes:
Year Ended December 31,
---------------------------------------------
2003 2002
--------- --------
Federal income tax expense ......................................... $ 53,680 $205,453
Increases in income taxes resulting from:
New York State and City taxes,
net of federal income tax effect ................................ 35,087 42,032
Surtax exemption ................................................. (13,750) --
Other items 1,711 12,225
--------- --------
Effective income tax ............................................... $ 76,728 $259,710
========= ========
31 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (CONT.'D)
The income tax effects of existing temporary differences that give rise to
significant portions of the deferred income tax assets and deferred income tax
liabilities are as follows:
December 31,
-------------------------------------------
2003 2002
-------- --------
DEFERRED INCOME TAX ASSETS
Allowances for loan losses ........................................ $ 83,389 $ 49,492
Depreciation ...................................................... 35,788 10,872
Minimum pension liability adjustment .............................. 214,293 336,732
Deferred compensation ............................................. 282,254 225,434
Other ............................................................. 27,795 1,893
-------- --------
643,519 624,423
-------- --------
DEFERRED INCOME TAX LIABILITIES
Pension and postretirement plan expense ........................... 242,411 87,069
-------- --------
242,411 87,069
-------- --------
Net deferred income tax asset included in other assets ............ $401,108 $537,354
======== ========
13. COMMITMENTS
The Association 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 involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract or notional amounts of those instruments reflect the extent of
involvement the Association has in particular classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are 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 or other termination clauses and may
require payment of a fee. The total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Association upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
primarily includes residential and income-producing real estate.
The Association has outstanding various commitments to originate loans as
follows:
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS (CONT'D.)
At December 31, 2003, the outstanding mortgage loan commitments included
$1,035,000 for adjustable rate loans with initial rates ranging from 5.25% to
6.00% and a commitment to purchase $1,200,000 of adjustable rate multi-family
loans with an initial rate of 7.25%. Secured credit card commitments were for
loans at a fixed rate of 21.00%.
At December 31, 2002, the outstanding mortgage loan commitments consisted of
$2,579,000 for fixed rate loans with interest rates ranging from 5.50% to 7.47%.
Secured credit card commitments were for loans at a fixed rate of 21.00%.
Rentals, including related expenses, under long-term operating leases for
certain branch offices amounted to approximately $158,000 and $154,000 for the
years ended December 31, 2003 and 2002, respectively. At December 31, 2003, the
minimum rental commitments under all noncancellable leases with initial or
remaining terms of more than one year are as follows:
The Company and the Association also have, in the normal course of business,
commitments for services and supplies. Management does not anticipate losses on
any of these transactions.
14. CONTINGENCIES
The Company and the Association are parties to litigation which arises primarily
in the ordinary course of business. In the opinion of management, the ultimate
disposition of such litigation should not have a material effect on the
consolidated financial position or operations of the Company.
15. ESTIMATED FAIR VALUE OF
FINANCIAL INSTRUMENTS
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Significant estimations were used for
the purposes of this disclosure. Estimated fair values have been determined by
the Association using the best available data and estimation methodology
suitable for each category of financial instruments. Fair value estimates,
methods and assumptions are set forth below for the financial instruments.
CASH AND CASH EQUIVALENTS AND ACCRUED
INTEREST RECEIVABLE
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value because they mature in three months or less.
SECURITIES
The fair value of mortgage-backed and investment securities held to maturity are
based on quoted market or dealer prices, if available. If quoted market or
dealer prices are not available, fair value is estimated using quoted market
prices for similar securities.
LOANS RECEIVABLE
Fair value is estimated by discounting future cash flows, using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities, of such loans.
DEPOSITS
The fair value of demand deposit, passbook and club accounts is equal to the
amount payable on demand at the reporting date. The fair value of certificates
of deposit is estimated using rates currently offered for deposits of similar
remaining maturities. The fair value estimates do not include the benefit that
results from the low-cost funding provided by deposit liabilities compared to
the cost of borrowing funds in the market.
33 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT.'D)
DEPOSITS (CONT'D.)
The fair value of commitments is estimated using fees currently charged to enter
into similar agreements taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed
rate loan commitments, fair value also considers the difference between current
levels of interest and the committed rates.
The carrying values and estimated fair values of financial instruments are as
follows:
December 31,
--------------------------------------------------------------
2003 2002
---------------------------- --------------------------
(IN THOUSANDS)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- -------- ----------
FINANCIAL ASSETS
Cash and cash equivalents .......................... $ 29,260 $ 29,260 $ 12,230 $ 12,230
Investment securities held to maturity ............. 14,212 14,309 33,855 33,939
Mortgage-backed securities held to maturity ........ 5,521 5,629 2,002 2,099
Loans receivable ................................... 90,571 93,534 90,276 92,592
Accrued interest receivable ........................ 570 570 509 509
FINANCIAL LIABILITIES
Deposits ........................................... 126,032 128,047 131,338 132,552
COMMITMENTS
To originate and purchase loans .................... 2,415 2,415 2,773 2,773
To fund loans in process ........................... 647 647 1,774 1,774
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
In addition, fair value estimates are based on existing on-and-off balance sheet
financial instruments, without attempting to estimate the value of anticipated
future business, and exclude the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities that
are not considered financial assets and liabilities include premises and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
34
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. PARENT ONLY FINANCIAL INFORMATION
The Company operates its wholly owned subsidiary, the Association. The earnings
of the Association are recognized by the Company under the equity method of
accounting. The following are the condensed financial statements for the Company
(Parent Company only) as of and for the period ended December 31, 2003. The
Company had no earnings prior to October 17, 2003.
CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31,
2003
ASSETS
Cash and cash equivalents ............... $ 318,201
Investment in the Association ........... 14,620,714
ESOP loan receivable .................... 689,352
-----------
Total assets ......................... $15,628,267
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable .................... $ 3,050
Stockholders' equity .................... 15,625,217
-----------
Total liabilities and
stockholders' equity .............. $15,628,267
===========
CONDENSED STATEMENT OF INCOME
From Inception
October 17, 2003 to
December 31, 2003
--------------------
Interest .......................... $ 7,553
Equity in undistributed earnings
of Association ................. 38,034
--------
Income before income taxes ........ 45,587
Income taxes ...................... 3,050
---------
Net income ........................ $ 42,537
=========
CONDENSED STATEMENT OF CASH FLOWS
From Inception
October 17, 2003 to
December 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................... $ 42,537
Equity in earnings of Association .. (38,034)
Increase in other liabilities ...... 3,050
-----------
Net cash provided by
operating activities ......... 7,553
-----------
INVESTING ACTIVITIES
Net increase in loan receivable
from ESOP ....................... (689,352)
Purchase of 100% of the outstanding
stock of the Association ........ (6,809,748)
-----------
Net cash (used) in
investing activities ......... (7,499,100)
-----------
FINANCING ACTIVITIES
Net proceeds from sale of
common stock .................... 7,809,748
-----------
Net cash provided by
financing activities ......... 7,809,748
-----------
Net increase in cash and
cash equivalents ................ 318,201
Cash and cash equivalents--
beginning ....................... --
-----------
Cash and cash equivalents--
ending .......................... $ 318,201
===========
Supplemental disclosure of non-cash activities:
Equity of Association
at inception .................... $ 8,309,588
===========
35 [ART WORK OMITTED]
--------------------------------------------------------------------------------
FLATBUSH FEDERAL BANCORP, INC.
FLATBUSH FEDERAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTER FINANCIAL DATA (UNAUDITED)
YEAR ENDED DECEMBER 31, 2003
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income .................................... $ 1,726 $ 1,665 $ 1,611 $ 1,720
Interest expense ................................... 643 579 532 517
------- --------- ------- -------
Net interest income .............................. 1,083 1,086 1,079 1,203
------- --------- ------- -------
Provision for loan losses .......................... -- 1 7 --
Non-interest income ................................ 78 76 74 57
Non-interest expense ............................... 1,126 1,141 1,112 1,191
Income taxes ....................................... 17 12 21 27
------- --------- ------- -------
Net income ......................................... $ 18 $ 8 $ 13 $ 42
======= ========= ======= ======
Net income per common
share: Basic/diluted ............................. N/A (1) N/A (1) N/A (1) $ 0.02
======= ========= ======= ======
YEAR ENDED DECEMBER 31, 2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- --------- --------
(IN THOUSANDS)
Interest income .................................... $ 1,992 $ 1,930 $ 1,908 $ 1,816
Interest expense ................................... 766 673 665 700
------- --------- ------- -------
Net interest income .............................. 1,226 1,257 1,243 1,116
------- --------- ------- -------
Provision for loan losses .......................... 1 1 -- 1
Non-interest income ................................ 65 71 81 93
Non-interest expense ............................... 1,103 1,125 1,130 1,201
Income taxes ....................................... 82 113 89 (24)
------- --------- ------- -------
Net income ......................................... $ 105 $ 89 $ 105 $ 31
======= ========= ======= =======
Net income per common
share: Basic/diluted ............................ N/A(1) N/A(1) N/A(1) N/A(1)
======= ========= ======= =======
(1) FLATBUSH FEDERAL BANCORP, INC. CONVERTED TO STOCK FORM ON OCTOBER 17, 2003.
36
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
Anthony J. Monteverdi
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
FLATBUSH FEDERAL BANCORP, INC. AND
FLATBUSH FEDERAL SAVINGS AND LOAN ASSOCIATION
Jesus R. Adia
EXECUTIVE VICE PRESIDENT,
FLATBUSH FEDERAL BANCORP, INC. AND
FLATBUSH FEDERAL SAVINGS AND LOAN ASSOCIATION
D. John Antoniello
PRESIDENT OF ANBRO SUPPLY COMPANY, AN
INDUSTRIAL SUPPLY COMPANY
John F. Antoniello
RETIRED, FORMER PRESIDENT OF ANBRO SUPPLY COMPANY
Patricia Ann McKinley
VICE PRESIDENT OF TNS INTERSEARCH, A MARKET
RESEARCH COMPANY
Alfred S. Pantaleone
RETIRED, FORMERLY DEPUTY EXECUTIVE DIRECTOR OF
THE NEW YORK CITY BOARD OF ELECTIONS
ANTHONY V. RUMOLO
SELF EMPLOYED PENSION AND BUSINESS CONSULTANT
Charles J. Vorbach
PRESIDENT OF JOHN L. VORBACH CO., INC., AN INSURANCE
BROKERAGE AND CONSULTING BUSINESS
EXECUTIVE OFFICERS
Anthony J. Monteverdi
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Jesus R. Adia
EXECUTIVE VICE PRESIDENT
John S. Lotardo
CHIEF FINANCIAL OFFICER AND CONTROLLER
37 [ART WORK OMITTED]
FLATBUSH FEDERAL BANCORP, INC.
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 2146 Nostrand Avenue,
Brooklyn, NY 11210 on April 29, 2004 at 11:00 a.m.
STOCK LISTING
Over-the-Counter Bulletin Board under the symbol "FLTB"
SPECIAL COUNSEL
Luse Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, NW, Suite 400
Washington, D.C. 20015
INDEPENDENT AUDITORS
Radics & Co., LLC
55 US Highway 46 East
Pine Brook, NJ 07058
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
Please contact our transfer agent directly for assistance in changing your
address, elimination of duplicate mailing, transferring stock, or replacing
lost, stolen or destroyed stock certificates.
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Form 10-KSB for the fiscal year ended December 31, 2003
as filed with the Securities and Exchange Commission is available without charge
to shareholders by written request to the Company. It may also be accessed on
our website at: WWW.FLATBUSH.COM
38
MARKET INFORMATION
The Company's Common Stock is traded on the over-the-counter bulletin board
under the symbol "FLTB."
The following table sets forth the range of the high and low bid prices of the
Company's Common Stock since its initial trading day of October 21, 2003, and is
based upon information provided by Wall Street City. The Company has not paid
any dividends since the completion of its initial public offering on October 17,
2003.
PRICES OF COMMON STOCK
-------------------------
HIGH LOW
------- -------
CALENDAR QUARTER ENDED (1)
December 31, 2003 .............................. $16.00 $11.96
----------------
(1) THE COMPANY'S COMMON STOCK BEGAN TRADING ON OCTOBER 21, 2003.
As of December 31, 2003, the Company had 1,810 stockholders of record.
On August 13, 2003, the Company's Registration Statement on Form SB-2 went
effective with the Securities and Exchange Commission for the registration of
1,087,756 shares of its common stock, par value $.01 per share. The net proceeds
to both Flatbush Federal Bancorp and Flatbush Federal from this offering were
$7.1 million.
39 [ART WORK OMITTED]
NOTES
[BLANK PAGE]
FLATBUSH FEDERAL
BANCORP, INC.
2146 NOSTRAND AVENUE
BROOKLYN, NY 11210
EXHIBIT 14
CODE OF ETHICS
CODE OF ETHICS
FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS
OF FLATBUSH FEDERAL BANCORP, INC.
It is the policy of Flatbush Federal Bancorp, Inc. (the "Company") that
the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") adhere
to and advocate the following principles governing their professional and
ethical conduct in the fulfillment of their responsibilities:
1. Act with honesty and integrity, avoiding actual or apparent
conflicts between his or her personal, private interests and the
interests of the Company, including receiving improper personal
benefits as a result of his or her position.
2. Perform responsibilities with a view to causing periodic reports
and other documents filed with the SEC to contain information
which is accurate, complete, fair and understandable.
3. Comply with laws of federal, state and local governments
applicable to the Company, and the rules and regulations of
private and public regulatory agencies having jurisdiction over
the Company.
4. Act in good faith, responsibly, with due care, and diligence,
without misrepresenting or omitting material facts or allowing
independent judgment to be compromised.
5. Respect the confidentiality of information acquired in the
course of the performance of his or her responsibilities except
when authorized or otherwise legally obligated to disclose. Do
not use confidential information acquired in the course of the
performance of his or her responsibilities for personal
advantage.
6. Proactively promote ethical behavior among subordinates and
peers.
7. Use corporate assets and resources employed or entrusted in a
responsible manner.
8. Do not use corporate information, corporate assets, corporate
opportunities or one's position with the Company for personal
gain. Do not compete directly or indirectly with the Company.
9. Comply in all respects with the Company's Code of Business
Conduct and Ethics.
10. Advance the Company's legitimate interests when the opportunity
arises.
11. Promptly report violations of this Code of Ethics to the CEO,
CFO or the Company's Board of Directors.
The Board of Directors shall have the sole and absolute discretionary
authority to approve any deviation or waiver of any provision of the
Code of Ethics. Any waiver shall be promptly disclosed through a filing
with the SEC on Form 8-K. Any changes to the Code of Ethics shall be
promptly disclosed. It is also the Policy of Flatbush Federal Bancorp,
Inc. that the CEO and CFO of the Company acknowledge and certify to the
foregoing annually and file a copy of such certification with each of
the Audit Committee and the Board of Directors.
2
FLATBUSH FEDERAL BANCORP, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
SECTION 1 - OVERVIEW
1.1 PURPOSE OF THE CODE
This Code of Business Conduct and Ethics ("Code") is intended to deter
wrongdoing and promote:
o Honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
o Full, fair, accurate timely and understandable disclosure in
documents the Company files with, or submits to, the Securities
and Exchange Commission and in all public communications made by
the Company'
o Compliance with applicable governmental laws, rules and
regulations;
o Prompt internal reporting to designated persons of violations of
the Code; and
o Accountability for adherence to the Code.
1.2 APPLICATION OF THE CODE
The Code applies to all directors (where applicable), officers and employees of
Flatbush Federal Bancorp, Inc. and its affiliates (the "Company"). The Code
applies to all employee decisions and activities within the scope of employment,
or when representing the Company in any capacity. A COPY OF THE CODE WILL BE
INCLUDED IN THE ORIENTATION PACKAGE PROVIDED TO NEW EMPLOYEES. Following review
of the Code, new employees will be asked to sign a written confirmation that
they have reviewed the Code in its entirety, and agree to adhere to its
provisions. Existing employees will be asked to review the Code each time it is
revised, and will periodically receive training on the Code from the Corporate
Training Department. All Bank managers should be familiar with the requirements
of the Code, and should encourage employees to apply the Code to their daily
activities and decisions, and to seek guidance from the appropriate individuals
when additional information or explanation is needed. Each executive officer and
director shall affirm annually to the entire board of directors that the
executive officer or director has read and complied with the Code, and that they
do not know of any unreported violations of the Code.
1.3 OBTAINING GUIDANCE
If you need additional explanation regarding a particular provision of the Code,
or if you need guidance in a specific situation, please contact you immediate
supervisor. If you are uncomfortable speaking to you immediate supervisor, or if
you require additional guidance after
having consulted with you supervisor, you are encouraged to contact any of the
following individuals:
COMPLIANCE OFFICER
ROBERT CARRANO (718) 677-4412 (EMAIL: RCARRANO@FLATBUSHFED.COM)
HUMAN RESOURCES
DONNA BUENCAMINO (718) 677-4417 (EMAIL: DONNAB@FLATBUSHFED.COM)
You may contact any manager or the Human Resources Department for guidance on
any sensitive personal matter, such as possible discrimination or harassment.
1.4 REPORTING VIOLATIONS OF THE CODE
Acting with the highest standard of ethics and integrity is critical to the
success of our Bank, and must be reflected in our daily decisions and actions.
It is the duty and responsibility of each employee and director to understand
and adhere to the principles provided in the Code so that potential issues may
be effectively and efficiently resolved and the valuable reputation of the
Company preserved. Any known or suspected violation of the Code must be promptly
reported. This includes violations or possible violations involving you, another
employee, including managers, or an agent acting on behalf of the Company. Any
violation of law, rule or regulation applicable to the Company and/or corporate
policy is also a violation of this Code. Violations of the Code may result in
disciplinary action including, in severe situations, immediate termination of
employment.
If you know of or suspect a violation of the Code, including actions or failures
to act, immediately report the matter to your manager, the compliance designee
of you business unit, or any of the persons listed in Section 1.3. Concerns or
complaints regarding accounting, internal accounting controls or auditing
matters that arise in the ordinary course of business and that cannot be
resolved with your immediate supervisor should be directed to the Compliance
Officer at the number and e-mail, address in Section 1.3. If you are not
comfortable reporting a known or suspected violation in person you may contact
ROBERT CARRANO AT (718) 677-4412 OR DONNA BUENCAMINO AT (718) 677-4417 to leave
a confidential message.
In addition, concerns regarding questionable accounting, internal accounting
controls or auditing matters may be made directly to the Chairman of the Audit
Committee by calling ANTHONY RUMOLO AT 1-(732) 842-3430.
All concerns or complaints will be promptly investigated and appropriate action
taken. No person expressing concerns or complaints will be subject to any
disciplinary or other adverse action by the Company absent a knowingly false
report. All concerns or complaints may be made anonymously and will remain
confidential. Please provide sufficient information to allow parties to properly
investigate your concerns or complaints. The Company will retain a record of all
concerns and complaints, and the results of its investigations, for five years.
2
SECTION 2 - CONFIDENTIALITY OF INFORMATION
2.1 GENERAL
Every employee has a strict responsibility to safeguard all confidential Bank
information entrusted to (or known by) him or her. Each employee must respect
and maintain confidentiality regarding the transactions and affairs of the
Company.
A customer's financial or personal information is strictly confidential and must
never be used or disclosed in an improper or inappropriate manner. This
information may not be used as a basis for personal investment decisions.
Employees must treat confidential customer information in accordance with the
provisions of the Code as well as FLATBUSH FEDERAL'S PRIVACY POLICY.
Financial information about the Company is not to be given to persons outside
the Company unless it has been reported to the shareholders or has otherwise
been made available to the public. Exceptions to this general policy include
disclosure to attorneys, accountants and other professionals working on behalf
of the Company, as well as regulatory examiners. Any and all subpoenas of or for
information received by an employee shall be forwarded to the President and
Chief Executive Officer for review and response.
All employees must also comply with the provisions of the Company's Insider
Trading Policy, which details the responsibilities of all employees of the
Company arising from the Company's status as a public company under the federal
securities laws and the federal deposit insurance corporation. Employees
possessing information that could influence decisions regarding the purchase or
sale of Bank stock must take precautions to ensure that this information is not
inappropriately shared with others, including other employees. Employees with
material nonpublic information cannot buy or sell Bank stock. For a more
detailed explanation of your obligations, please refer to the Company's Insider
Trading Policy.
This section also applies to information inadvertently received by employees,
including e-mails, facsimile transmissions, all types of mail, including
inter-office mail, and all other forms of written, verbal or electronic
communications.
2.2 EXAMPLES OF CONFIDENTIAL INFORMATION
o The identity of customers and potential customers and their
personal, business and financial information;
o Non-public business and financial information of the Company;
o Personal information regarding any employee of the Company;
o Personal or non-public business information regarding any
supplier, vendor or agent of the Company;
o Information related to, including the identity of, potential
candidates for mergers and acquisitions;
o Information regarding the Company's business strategies, plans
or proposals;
o Information related to computer software programs, whether
proprietary or standard'
3
o Information related to documentation systems, information
databases, customized hardware or other information systems and
technological developments;
o Manuals, processes, policies, procedures, compositions, opinion
letters, ideas, innovations, inventions, formulas and other
proprietary information belonging to the Company or related to
the Company' activities;
o Security information, including without limitation, policies and
procedures, passwords, personal identification numbers (PINs)
and electronic assess keys'
o Communications by, to and from regulatory agencies;
o Certain communications with or from attorneys for the Company,
whether internal or external; and
o Any other information which may be deemed confidential, or which
may be protected according to the Company's Privacy Policy.
2.3 EXAMPLES OF MATERIAL INSIDE INFORMATION
Generally material inside information is defined as any information that is
confidential in nature, and that a reasonable investor would likely consider
important in deciding whether to buy, sell, or hold the Company's stock. The
following types of information, if not generally known or publicly announced,
should be considered material inside information and treated according to the
provisions of this Code and the Company's Insider Trading Policy:
o Proposals or plans for mergers and acquisitions;
o Earnings estimates or results, whether for the month, quarter or
year;
o Determinations as to cash or stock dividends to be paid by the
Company;
o New product innovation, development or implementation;
o Major litigation, adverse regulatory proceeding or material
threat of either event;
o Significant operational issues, including changes reserves for
losses and loss adjustment expenses;
o Significant expansion of operations, whether geographic or
otherwise, or the curtailment of current or future planned
operations; and
o Any other information which, if known, would likely influence
the decisions of investors
SECTION 3 - CONFLICTS OF INTEREST
3.1 GENERAL
Our ability to act fairly and with integrity is critical in maintaining the
trust we have established with our customers, our shareholders, our suppliers
and vendors, our regulators and the communities we serve. Everyone must avoid
any action or situation that conflicts with the interests of the Company or its
customers, or which gives the appearance of a conflict. The appearance of a
conflict can at times be as damaging as an actual conflict, and can diminish the
valuable relationships we have developed with others. We should consistently
conduct ourselves in the best interests of the Company's its customers,
shareholders and employees, and should avoid situations, which have the
potential to impair or affect independence and objective judgment. Any potential
conflict of interest must be approved in advance by the Company's
4
COMPLIANCE OFFICER listed in Section 1.3. If it involves a director or executive
officer, the matter must be approved in advance by the board of directors.
3.2 PERSONAL OR RELATED BUSINESS OPPORTUNITIES
Directors and employees must avoid conflicts involving business opportunities
which may arise as a result of their service or employment with the Company.
These conflicts not only damage the Company's reputation but also may constitute
criminal violations of federal law. The following are brief guidelines regarding
improper business opportunities or relationships that must be reported. These
guidelines are not intended to be the only business situations that may involve
a conflict of interest.
o Accepting a business opportunity from someone doing business
with or wanting to do business with the Company that (1) is not
available to other individuals on similar terms; or (2) is made
available to you because of your position with the Company.
o Personally accepting a business opportunity that belongs to the
Company.
o Engaging in a business opportunity that competes with the
Company, whether directly or indirectly.
o Engaging in a business opportunity with the Company through an
entity in which the employee or director has an undisclosed
interest.
Employees and directors must disclose to the COMPLIANCE OFFICER if a relative or
business associate of the employee or the director provides or is seeking to
provide goods or services to the Company.
3.3 EMPLOYMENT OUTSIDE OF THE COMPANY
Outside employment may compromise an employee's judgment or impede the
employee's ability to act in the Company's best interest. Accordingly, full-time
employees may not work full-time for another employer. A part-time employee may
work for another employer, and a full-time employee may work part-time for
another employer WITH THE WRITTEN APPROVAL OF HIS/HER CURRENT SUPERVISOR
provided that such employment does not place the employee in a position of
competition with the Company, whether direct or indirect.
3.4 PREFERENTIAL TREATMENT IN PROVIDING SERVICES
Every customer and employee is entitled to respect, courtesy and equality.
Employees must provide the highest level of professionalism and service on a
consistent and equal basis. The following are guidelines on how to avoid
referential treatment of certain individuals or businesses.
5
o Employees must avoid favoring the interests of certain
customers, suppliers or other employees. All standard practices,
policies and procedures apply to all similarly situated
individuals and the general public.
o Employees must avoid giving preferential treatment to a
director, employee, customer, supplier or others because of a
personal relationship.
o Employees must avoid the appearance of, or actual preferential
treatment for themselves, relatives, friends or business
associates. Employees may not be involved in Bank matters
regarding their own business or the business of their relatives,
friends or business associates. In these situations, employees,
should have an unrelated employee handle the matter.
3.5 GIFTS TO AND FROM DIRECTORS AND EMPLOYEES
Directors and employees are discouraged from accepting gifts of any kind in
their capacity as a representative or an employee of the Company. Soliciting or
accepting anything of value in connection with a business transaction may be a
violation of law, with penalties including both monetary fines and imprisonment.
A director or employee, however, is permitted to accept gifts of nominal value,
except if the gift would affect, or may be perceived to affect, the judgment or
objectivity of that individual of where there is an intention to influence or
reward any business decision or transaction, whether before or after the
decision is discussed or consummated. GIFTS EXCEEDING $100.00 IN VALUE MUST BE
REPORTED TO THE COMPLIANCE OFFICER WITHIN TEN (10) DAYS OF RECEIPT.
We recognize the following exceptions to the prohibition on accepting of gifts,
which are listed below and which would not violate this Code:
o MEALS AND ENTERTAINMENT. Employees may periodically give or
receive meals, refreshments, or other forms of entertainment,
including tickets to sporting events, etc., if:
o The items are of reasonable value;
o The purpose of the meeting or attendance at the event is
business related; and
o The expense would be paid by the Company as a reasonable
business expense if not provided by another party.
o ADVERTISING AND PROMOTIONAL MATERIALS. Employees may
occasionally accept or give advertising or promotional materials
of nominal value, such as pens, pencils, notepads, calendars,
etc. Gifts of promotional and advertising materials should not
exceed $100.00 in value.
o CASH AND PERSONAL GIFTS. Gifts to employees from customers
generally are intended as sincere expressions of friendship and
appreciation based on the personal relationships that often
develop in the normal conduct of business. GIFTS OF CASH, IN ANY
AMOUNT, and any other gifts valued in excess of $100.00, whether
6
in the form of food, merchandise, unusual discounts,
entertainment or the use of customer or supplier facilities,
SHOULD BE COURTEOUSLY DECLINED as contrary to Bank policy.
Properly handled, this can be done without offense. GIFTS OF
CASH INCLUDE CASH EQUIVALENTS SUCH AS GIFT CERTIFICATES, CHECKS,
MONEY ORDERS, SECURITIES OR OTHER ITEMS THAT MAY READILY BE
CONVERTED TO CASH. Acceptance of gifts, gratuities, amenities or
favors based on obvious family or personal relationships (such
as those between the parents, children or spouse of a
corporation official) where the circumstances make it clear that
those relationships, rather than the business of the
corporation, are the motivating factor are acceptable.
o GIFTS REWARDING SERVICE OR ACCOMPLISHMENT. Employees may accept
gifts from a civic, charitable or religious organization
specifically related to the employee's service or
accomplishment.
o DISCOUNTS OR REBATES. Employees may take advantage of discounts
on the Company's products or services if they are offered to all
employees generally. Employees may also periodically accept
discounts or rebates on merchandise or services from a customer
or supplier, provided that such discounts or rebates are offered
with the same terms and conditions to all other employees, and
the value of such discounts or rebates does not exceed $100.00.
This limitation does not apply to discounts or rebates widely
available to the general public.
3.6 GIFTS TO GOVERNMENT OFFICIALS.
Various laws and regulations impose certain restrictions on giving anything of
value (including office space, meals, transportation, etc.) to elected and
appointed officials, including employees of the Company's regulatory agencies.
Registered lobbyists are subject to additional restrictions. Employees should
consult CFO, JOHN LOTARDO AT (718) 677-4411 before entertaining or providing
goods or services to these individuals.
3.7 MEMBERSHIPS ON CORPORATE BOARDS OR ADVISORY COMMITTEES
If you are considering accepting an invitation to serve as a board member of an
outside company, advisory board, committee or agency, you must first obtain
appropriate approval from CHAIRMAN, PRESIDENT AND C.E.O. ANTHONY J. MONTEVERDI.
The Company's consent is not required for membership on the boards of charitable
or community organizations, as long as such activity does not conflict or
interfere with your duties as a Bank employee and does not reflect negatively on
the Company.
In general, it is permissible to serve as a director (or in a substantially
similar capacity) of another company only under the following circumstances:
o The other company must not be a competitor of the Company or be
engaged in a business that enhances the marketability of or
otherwise supports the products or services of a competitor of
the Company.
7
o If the company is one in which the Company has invested, the
prior consent of the President and Chief Executive Office of the
Company must be obtained.
o You must not make, participate in or influence decisions on
behalf of the Company that relate to the Company's relationship
with the other company.
o The company's business must not be illegal, immoral or otherwise
reflect negatively on the Company.
3.8 OTHER POTENTIAL CONFLICTS OF INTEREST
No statement of policy can address all situations that may present a conflict of
interest for employees. The Company must rely on the character, integrity and
judgment of its employees to avoid those situations that may create a conflict
of interest, or the appearance of a conflict. In situations not specifically
addressed in this Code, or in instances in which employees need additional
guidance or explanation regarding a particular situation, employees are
encouraged to consult their immediate supervisor, or to contact one of the
individuals referenced in Section 1.3 of this Code.
SECTION 4 - USE OF BANK PROPERTY AND BANK TIME
4.1 GENERAL
In order to maintain our efficient operation, all Bank property should be
closely protected and used primarily for business-related purposes. This
limitation includes, but is not limited to, the following:
o Employees' use of Bank technology, including voicemail,
electronic mail, facsimiles, internet and other electronic
communication should be primarily for business-related purposes,
and should be used in a manner that does not adversely affect
the Company's reputation or that of its employees:
o Employees should exercise caution in safeguarding all electronic
programs and technology, date and communications, including any
and all information accessed inadvertently or in error;
o Employees should exercise a reasonable amount of caution in
ensuring the physical security of Bank property, including
laptop computers, mobile telephones, pagers and other mobile
equipment belonging to the Company, especially when such
property is used off Bank premises;
o Employees should not use, modify or provide access to Bank
property, including facilities, records technology, data and
documentation, except as authorized in the course of employment;
and
o Employees are prohibited from creating or using unlicensed
copies of computer software programs, whether proprietary or
standard.
8
4.2 USE OF INTELLECTUAL PROPERTY
Any and all innovations created by a Bank employee in his/her capacity as an
employee become the exclusive property of the Company, and cannot be used for
any other purpose without the express prior written consent of the Company.
These innovations are generally considered "intellectual property," which belong
exclusively to the Company, and include, but are not limited to, the following
examples:
o Innovations in products and services, whether actually developed
and implemented during the employee's tenure with the Company;
o All forms of expression prepared by employees of the Company in
the course of employment, including those committed to paper,
e-mail, facsimile transmissions, computer memory, audio, video
or other tangible medium;
o Any work product of any employee created or developed in the
course of employment which qualifies as an invention for patent
protection;
o All confidential information such as computer software programs,
manuals, handbooks, documentation, customer lists or databases,
client profiles or marketing strategies and plans; and
o All Bank names, trademarks, servicemarks, product names, program
names and other forms of identification.
4.3 REMOVAL OF BANK PROPERTY
The improper removal of Bank property from the premises is prohibited. This
includes unauthorized disclosure or transmittal of Bank information or Bank
records or materials to outside parties. Upon termination of employment with the
Company, employees are required to return all Bank property to the Company. This
includes intellectual property, described in Section 4.2 above, all hard copy
and computer stored information data and documentation, whether originals or
copies, customer lists and databases, computer hardware and software,
statistical or other scientific analysis, product pricing information, including
formulas and models, financial data and analysis, cellular telephones and
pagers, corporate credit cards and telephone access cards, facilities access
cards and keys and any other Bank information or property obtained or acquired
during an employee's tenure with the Company. To the extent permitted by
applicable law, the Company reserves the right to withhold compensation or other
payments from employees until all property has been returned.
4.4 USE OF BANK TIME
During working hours and during any period of time that any employee is
utilizing Bank facilities or equipment, employees should devote substantially
all of the employee's time to his/her employment duties.
9
4.5 REBATES OR REFUNDS TO BANK
Payments to or by employees in the nature of a bribe or kickback are strictly
prohibited. Any rebate, refund or any form of compensation not specifically
provided by or authorized by the Company, received either directly or through a
third party and paid either to or by employees are prohibited. Bank policy
permits employees to retain miles or points earned from airlines, hotels, car
rental agencies, etc., for personal use, and therefore miles or points are
excluded from the requirements of this provision.
4.6 ACCOUNTING PRACTICES
All employees are expected to observe and comply with generally accepted
accounting principles, the system of internal controls and disclosure controls
and procedures established by the Company and provisions of the federal
securities laws requiring that corporate books and records accurately and fairly
reflect in reasonable detail the financial condition and results of operations
of the Company. Bank policies reflect in reasonable detail the financial
condition and results of operations of the Company. Bank policies are intended
to promote full, fair, accurate, timely and understandable disclosure in reports
and documents filed with, or submitted to the SEC and in the Company's public
statements. In furtherance of these requirements, employees must practice the
following;
o No false, misleading or artificial entries shall be made on
corporate books, records and reports for any reason;
o No undisclosed or unrecorded corporate funds or assets shall be
established for any purpose; and
o No payments from corporate funds or other assets shall be
approved or be made with the intention or understanding that any
part of such payment will be used for any purpose other than
that described by the documents supporting the payment. All
payments must be supported with appropriately approved purchase
orders, invoices or receipts, expense reports or other customary
documents, all in accordance with established policy.
In accordance with the rules promulgated by the SEC under the Sarbanes-Oxley Act
of 2002, it is unlawful for any officer or director of the Company or any other
person acting under the direction of such person, to take any action to
fraudulently influence, coerce, manipulate, or mislead any independent public or
certified accountant engaged in the performance of any audit of the Company's
financial statements for the purpose of rendering such financial statements
materially misleading.
10
SECTION 5 - POLITICAL, GOVERNMENTAL AND NON-PROFIT CONTRIBUTIONS AND ACTIVITIES
5.1 GENERAL
Employees are encouraged to actively participate in our government and political
processes. However, participation must be in the employees and agents of the
Company who have been formally engaged to act on behalf of the Company may
participate in political activities in that capacity.
No employee may make a contribution on behalf of the Company, or offer the use
of Bank facilities, equipment or personnel in connection with any political
party, candidate or election, whether partisan or non-partisan.
5.2 HOLDING PUBLIC OFFICE
Generally, state and local governments have specific rules governing the
employment of individuals seeking or holding public office. Employees may be
permitted to serve in either an elected or appointed capacity for a political or
governmental office so long as those duties do not conflict with the employee's
duties and responsibilities with the Company. Employees who wish to run for an
elected political office or be appointed to a government position must obtain
approval of the Company. If approval is granted, the following guidelines will
apply:
o Any employee also serving as a public official will not be
reimbursed by the Company for any expense incurred in seeking or
holding public office.
o Any employee also serving as a public official may not use the
Company's facilities or resources, including Bank time, to
perform any activity related to the employee's public office,
including activities related to election and campaigning; and
o Any employee also serving as a public official, or seeking to be
elected or appointed to any public position, must exercise
reasonable care and judgment in avoiding the appearance of
sponsorship or endorsement by the Company's names, trademarks or
servicemarks, in advertising or campaign materials, or in any
other form of communication or correspondence.
5.3 PARTICIPATION IN NON-PROFIT ORGANIZATIONS
Employees are encouraged to actively participate in non-profit organizations
that support the communities and customers served by the Company. The Company
provides many opportunities for its employees to participate in non-profit
services and events, and also encourages employees to participate in activities
beyond those sponsored or promoted by the Company.
In instances in which an individual participates in non-profit activities or
services in their capacity as an employee of the Company, employees must do so
with the same level of ethics,
11
professionalism and integrity exercised in the workplace. This includes a duty
to avoid situations that may present a conflict of interest or the appearance of
a conflict. Employees must not represent that they are making decisions on
behalf of the Company. Any pledge or gesture of the Company's support or
participation in a non-profit organization must receive advance approval from
JESUS ADIA AT (718) 677-4425 or by e-mail at JADIA@FLATBUSHFED.COM.
SECTION 6 - PERSONAL CONDUCT
6.1 GENERAL
Employees are the Company's most valuable asset, and the proper conduct of
employees is essential to the success of the Company. It is imperative that all
employees conduct their daily activities, transactions and interactions with
customers, fellow employees, our regulators and others with the highest standard
of integrity and professionalism. Employees should act in a courteous and
considerate manner at all times, and should be respectful of the rights of
others. Employees are expected to refrain from any dishonest or inappropriate
act in connection with their employment. The Company at its discretion, is the
sole determiner of what types of conduct are improper, and what, if any, action
will be taken in instances in which employees exhibit improper or inappropriate
behavior. Inappropriate behavior includes any activity through which an employee
reduces or destroys his or her effectiveness, the effectiveness of a fellow
employee, or the ability of the Company to serve its customers.
Employees are required to maintain eligibility for coverage under the Company's
fidelity bond under federal law and as a condition of employment. Employees are
also expected to exhibit appropriate behavior outside of the workplace, as
improper behavior beyond the confines of one's employment may also reflect
negatively on the Company.
6.2 CORPORATE POLICIES
All directors and employees are required to comply with the requirements of all
policies of the Company. Directors and employees must also comply with the
procedures implementing and effectuating the provisions of these policies.
This section applies to all Bank policies, including, but not limited to, human
resource policies, legal and compliance policies, privacy and security policies,
corporate governance guidelines, as well as this Code. Failure to comply with
Bank policies and procedures (including this Code) may result in disciplinary
action including, in severe situations, immediate termination of employment.
SECTION 7 - ADMINISTRATION AND WAIVERS
7.1 ADMINISTRATION
This Code will be administered and monitored by the Company's Compliance
Officer. General questions and requests for additional information on this Code
should be directed to this department at the telephone number and e-mail address
in Section 1.3.
12
7.2 WAIVERS AND AMENDMENTS
Any requests for waivers of the Code for employees who are not executive
officers must be directed through your supervisor to the COMPLIANCE OFFICER.
Requests for waivers for directors and executive officers must be directed to
the Board of Directors. Only the Board of Directors may waive the applicability
of the Code for a director or executive officer. Any waiver granted to directors
or executive officers, including the principal executive officer and the
principal accounting officer, and the reasons for granting the waiver, and any
change in the Code applicable to directors and executive officers, including the
principal executive officer and the principal accounting officer, must be
promptly disclosed to the public as required by law or by the listing rules of
the Nasdaq.
Any amendments to the Code must be approved by the board of directors of the
Company.
7.3 MISCELLANEOUS
It is the Company's intention that this Code of Business Conduct and Ethics be
the written code of ethics under Section 406 of the Sarbanes-Oxley Act of 2002,
complying with the standards set forth in SEC Regulation S-K Item 406.
13
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES OF THE REGISTRANT
Subsidiary Ownership State of Incorporation
---------- --------- ----------------------
Flatbush Federal Savings and Loan 100% Federal
Association
EXHIBITS 31.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Anthony J. Monteverdi, Chairman, President and Chief Executive
Officer, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Flatbush Federal
Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter
(the small business issuer's fourth quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small
business issuer's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small
business issuer's internal control over financial reporting.
March 25, 2004 /s/ Anthony J. Monteverdi
-------------- -------------------------------------------------
Date Anthony J. Monteverdi
Chairman, President and Chief Executive Officer
EXHIBITS 31.2
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John S. Lotardo, Chief Financial Officer and Controller, certify
that:
1. I have reviewed this Annual Report on Form 10-KSB of Flatbush Federal
Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred
during the small business issuer's most recent fiscal quarter
(the small business issuer's fourth quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the small
business issuer's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small
business issuer's internal control over financial reporting.
March 25, 2004 /s/ John S. Lotardo
-------------- -------------------------------------------
Date John S. Lotardo
Chief Financial Officer and Controller
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Anthony J. Monteverdi, Chairman, President and Chief Executive Officer and John
S. Lotardo, Chief Financial Officer and Controller of Flatbush Federal Bancorp,
Inc. (the "Company") each certify in his capacity as an officer of the Company
that he has reviewed the annual report of the Company on Form 10-KSB for the
fiscal year ended December 31, 2003 and that to the best of his knowledge:
(1) the report fully complies with the requirements of Sections
13(a) of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all
material respects, the financial condition and results of
operations.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
March 25, 2004 /s/ Anthony J. Monteverdi
-------------- ---------------------------------------------------
Date Anthony J. Monteverdi
Chairman, President and Chief Executive Officer
March 25, 2004 s/ John S. Lotardo
-------------- ---------------------------------------------------
Date John S. Lotardo
Chief Financial Officer and Controller
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