| FLUSHING FINANCIAL CORP Item 1A Risk Factors |
| In addition to the other information contained in this Annual Report, the following factors and other considerations should be considered carefully in evaluating the Holding Company, the Bank and their business |
| Effect of Interest Rates Like most financial institutions, the Company’s results of operations depends to a large degree on its net interest income |
| When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, a significant increase in market interest rates could adversely affect net interest income |
| Conversely, a significant decrease in market interest rates could result in increased net interest income |
| As a general matter, the Company seeks to manage its business to limit its overall exposure to interest rate fluctuations |
| However, fluctuations in market interest rates are neither predictable nor controllable and may have a material adverse impact on the operations and financial condition of the Company |
| Additionally, in a rising interest rate environment, a borrower’s ability to repay adjustable rate mortgages can be negatively affected as payments increase at repricing dates |
| Prevailing interest rates also affect the extent to which borrowers repay and refinance loans |
| In a declining interest rate environment, the number of loan prepayments and loan refinancings may increase, as well as prepayments of mortgage-backed securities |
| Call provisions associated with the Company’s investment in US government agency and corporate securities may also adversely affect yield in a declining interest rate environment |
| Such prepayments and calls may adversely affect the yield of the Company’s loan portfolio and mortgage-backed and other securities as the Company reinvests the prepaid funds in a lower interest rate environment |
| However, the Company typically receives additional loan fees when existing loans are refinanced, which partially offset the reduced yield on the Company’s loan portfolio resulting from prepayments |
| In periods of low interest rates, the Company’s level of core deposits also may decline if depositors seek higher-yielding instruments or other investments not offered by the Company, which in turn may increase the Company’s cost of funds and decrease its net interest margin to the extent alternative funding sources are utilized |
| An increasing interest rate environment would tend to extend the average lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect net interest income |
| In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which could adversely affect the Bank’s net interest income if rates were to subsequently decline |
| Additionally, adjustable rate mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount the interest rate can increase or decrease at repricing dates |
| Significant increases in prevailing interest rates may significantly affect demand for loans and the value of bank collateral |
| ” Lending Activities Multi-family residential, commercial real estate and one-to-four family mixed use property mortgage loans, the increased origination of which is part of management’s strategy, and construction loans, are generally viewed as exposing the lender to a greater risk of loss than fully underwritten one-to-four family residential mortgage loans and typically involve higher principal amounts per loan |
| Repayment of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans generally is dependent, in large part, upon sufficient income from the property to cover operating expenses and debt service |
| Repayment of construction loans is contingent upon the successful completion and operation of the project |
| Changes in local economic conditions and government regulations, 35 _________________________________________________________________ which are outside the control of the borrower or lender, also could affect the value of the security for the loan or the future cash flow of the affected properties |
| In addition, the Bank, from time-to-time, originates one-to-four family residential mortgage loans without verifying the borrower’s level of income |
| These loans involve a higher degree of risk as compared to the Bank’s other fully underwritten one-to-four family residential mortgage loans |
| These risks are mitigated by the Bank’s policy to limit the amount of one-to-four family residential mortgage loans to 80prca of the appraised value or sale price, whichever is less, as well as charging a higher interest rate than when the borrower’s income is verified |
| These loans are not as readily saleable in the secondary market as the Bank’s other fully underwritten loans, either as whole loans or when pooled or securitized |
| There can be no assurance that the Bank will be able to successfully implement its business strategies with respect to these higher-yielding loans |
| In assessing the future earnings prospects of the Bank, investors should consider, among other things, the Bank’s level of origination of one-to-four family residential mortgage loans (including loans originated without verifying the borrowers income), the Bank’s emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans, and the greater risks associated with such loans |
| See “Business — Lending Activities” in Item 1 of this Annual Report |
| Competition The Bank faces intense and increasing competition both in making loans and in attracting deposits |
| The Bank’s market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than the Bank, and all of which are competitors of the Bank to varying degrees |
| Particularly intense competition exists for deposits and in all of the lending activities emphasized by the Bank |
| The Bank’s competition for loans comes principally from commercial banks, other savings banks, savings and loan associations, mortgage banking companies, insurance companies, finance companies and credit unions |
| Management anticipates that competition for mortgage loans will continue to increase in the future |
| The Bank’s most direct competition for deposits historically has come from other savings banks, commercial banks, savings and loan associations and credit unions |
| In addition, the Bank faces competition for deposits from products offered by brokerage firms, insurance companies and other financial intermediaries, such as money market and other mutual funds and annuities |
| Consolidation in the banking industry and the lifting of interstate banking and branching restrictions have made it more difficult for smaller, community-oriented banks, such as the Bank, to compete effectively with large, national, regional and super-regional banking institutions |
| Notwithstanding the intense competition, the Bank has been successful in increasing its loan portfolios and deposit base |
| However, no assurances can be given that the Bank will be able to continue to increase its loan portfolios and deposit base, as contemplated by management’s current business strategy |
| Local Economic Conditions The Company’s operating results are affected by national and local economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities |
| During 2005, the nation’s economy was generally considered to be expanding |
| Yet world events, particularly the “War on Terror” and the level of oil prices, continued to have an effect on the economic recovery |
| These economic conditions can result in borrowers defaulting on their loans, or withdrawing their funds on deposit at the Bank to meet their financial obligations |
| While we have not seen a significant increase in delinquent loans, and have seen an increase in deposits, we cannot predict the effect of these economic conditions on the Company’s financial condition or operating results |
| A decline in the local economy, national economy or metropolitan area real estate market could adversely affect the financial condition and results of operations of the Company, including through decreased demand for loans or increased competition for good loans, increased non-performing loans and loan losses and resulting additional provisions for loan losses and for losses on real estate owned |
| Although management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions, many factors could require additions to the allowance for loan losses in future periods above those currently maintained |
| These factors include: (1) adverse changes in economic conditions and changes in interest rates that may affect the ability of borrowers to make payments on loans, (2) changes in the financial capacity of individual borrowers, (3) changes in the local real estate market and the value of the Bank’s loan collateral, and (4) future review and evaluation of the Bank’s loan portfolio, internally or by regulators |
| The amount of the allowance for loan losses at any time represents good faith estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions, prevailing interest rates and other factors |
| 36 _________________________________________________________________ Legislation and Proposed Changes From time to time, legislation is enacted or regulations are promulgated that have the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions |
| Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the New York legislature and before various bank regulatory agencies |
| No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Bank or the Company |
| For a discussion of regulations affecting the Company, see “Business —Regulation” and “Business—Federal, State and Local Taxation” in Item 1 of this Annual Report |
| Certain Anti-Takeover Provisions On September 17, 1996, the Holding Company adopted a Stockholder Rights Plan (the “Rights Plan”) designed to preserve long-term values and protect stockholders against stock accumulations and other abusive tactics to acquire control of the Holding Company |
| Under the Rights Plan, each stockholder of record at the close of business on September 30, 1996 received a dividend distribution of one right to purchase from the Holding Company one-three-hundred-thirty-seventh-and-one-half of a share of a new series of junior participating preferred stock at a price of dlra64, subject to certain adjustments |
| The rights will become exercisable only if any person or group acquires 15prca or more of the Holding Company’s common stock (“Common Stock”) or commences a tender or exchange offer which, if consummated, would result in that person or group owning at least 15prca of the Common Stock (the “acquiring person or group”) |
| In such case, all stockholders other than the acquiring person or group will be entitled to purchase, by paying the dlra64 exercise price, Common Stock (or a common stock equivalent) with a value of twice the exercise price |
| In addition, at any time after such event, and prior to the acquisition by any person or group of 50prca or more of the Common Stock, the Board of Directors may, at its option, require each outstanding right (other than rights held by the acquiring person or group) to be exchanged for one share of Common Stock (or one common stock equivalent) |
| The rights expire on September 30, 2006 |
| The Rights Plan, as well as certain provisions of the Holding Company’s certificate of incorporation and bylaws, the Bank’s federal stock charter and bylaws, certain federal regulations and provisions of Delaware corporation law, and certain provisions of remuneration plans and agreements applicable to employees and officers of the Bank may have anti-takeover effects by discouraging potential proxy contests and other takeover attempts, particularly those which have not been negotiated with the Board of Directors |
| The Rights Plan and those other provisions, as well as applicable regulatory restrictions, may also prevent or inhibit the acquisition of a controlling position in the Common Stock and may prevent or inhibit takeover attempts that certain stockholders may deem to be in their or other stockholders’ interest or in the interest of the Holding Company, or in which stockholders may receive a substantial premium for their shares over then current market prices |
| The Rights Plan and those other provisions may also increase the cost of, and thus discourage, any such future acquisition or attempted acquisition, and would render the removal of the current Board of Directors or management of the Holding Company more difficult |