Item 1A. Risk Factors
Multi-Family, Commercial Real Estate and Construction Loan Originations Have Increased, Increasing the Risk that Some of Our Loans Will Not Be Paid.
We have expanded our multi-family, commercial real estate and construction lending during the previous five years. Multi-family lending has increased as a percentage of our total loan portfolio from 14.8% at September 30, 2003 to 19.7% at September 30, 2007. Commercial real estate lending has increased as a percentage of our total loan portfolio from 34.3% at September 30, 2003 to 37.5% at September 30, 2007. Construction lending has increased as a percentage of our total loan portfolio from 6.2% at September 30, 2003 to 8.4% at September 30, 2007. Multi-family, commercial real estate loans and construction loans generally expose a lender to greater credit risk than loans secured by one- to four-family real estate. At September 30, 2007, we had $652,000 representing two loans in non-accrual and non-performing status compared to $299,000 representing three loans in non-accrual and non-performing status at September 30, 2006. In addition, our multi-family, commercial real estate and construction loan portfolio is not as seasoned as the loan portfolio of some of our competitors. Should the local real estate market or economy weaken, we may begin to experience higher levels of non-performing loans.
Persons Who Own Our Stock Own a Minority of Brooklyn Federal Bancorp, Inc.’s Common Stock and Will Not Be Able To Exercise Voting Control Over Most Matters Put To a Vote of Stockholders.
Public stockholders own a minority of the outstanding shares of the Company’s common stock. As a result, stockholders other than BFS Bancorp, MHC will not be able to exercise voting control over most matters put to a vote of stockholders. BFS Bancorp, MHC owns a majority of the Company’s common stock and, through its board of directors, is able to exercise voting control over most matters put to a vote of stockholders. The same directors and officers who manage the Company and the Bank also manage BFS Bancorp, MHC. The only matters as to which stockholders other than BFS Bancorp, MHC will be able to exercise voting control include any proposal to implement a recognition and retention stock plan or stock option plan within one year of the offering. In addition, BFS Bancorp, MHC may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium for their shares.
Our Stock Value May be Negatively Affected by Federal Regulations Restricting Takeovers and our Mutual Holding Company Structure.
Federal Regulations Restricting Takeovers. For three years following the offering, Office of Thrift Supervision regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Office of Thrift Supervision. Moreover, current Office of Thrift Supervision policy prohibits the acquisition of a mutual holding company subsidiary by any person or entity other than a mutual holding company or a mutual institution. See “Business - Regulation and Supervision” for a discussion of applicable Office of Thrift Supervision Regulations regarding acquisitions.
The Mutual Holding Company Structure May Impede Takeovers. BFS Bancorp, MHC, as the majority stockholder of the Company, is able to control the outcome of virtually all matters presented to stockholders for their approval, including a proposal to acquire the Company. Accordingly, BFS Bancorp, MHC may prevent the sale of control or merger of the Company or its subsidiaries even if such a transaction were favored by a majority of the public stockholders of the Company.
The Corporate Governance Provisions in Our Charter and Bylaws May Prevent or Impede the Holders of a Minority of Our Common Stock from Obtaining Representation on Our Board of Directors.
Provisions in our charter and bylaws may prevent or impede holders of a minority of our common stock from obtaining representation on our board of directors. For example, our board of directors is divided into three staggered classes. A staggered board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Second, our charter provides that there will not be cumulative voting by stockholders for the election of our directors which means that BFS Bancorp, MHC, as the holder of a majority of the shares eligible to be voted at a meeting of stockholders, may elect all of our directors to be elected at that meeting. Third, our bylaws contain procedures and timetables for a stockholder wanting to make a nomination for the election of directors or a proposal for new business at a meeting of stockholders, the effect of which may be to give our management time to solicit its own proxies in an attempt to defeat any dissident slate of nominations if management thinks it is in the best interests of stockholders generally.
An Increase in Interest Rates Is Expected to Adversely Affect Our Earnings.
Our earnings largely depend on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as mortgage loans and investment securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
The rates we earn on our assets are generally fixed for a contractual period of time. We, like many savings institutions, have liabilities that generally have shorter contractual maturities than our assets or no contractual maturities, such as savings and money market deposits. This imbalance can create significant earnings volatility, because market interest rates change over time. In addition, short-term and long-term interest rates do not necessarily change at the same time or at the same rate.
In a period of rising interest rates, the interest income earned on our assets may not increase as rapidly as the interest paid on our liabilities. We are vulnerable to volatility in our earnings as a result of an increase in interest rates because the majority of our interest-earning assets are long-term, fixed rate assets. In an increasing interest rate environment, our cost of funds is expected to increase more rapidly than the interest earned on our loan portfolio and securities portfolio because our primary source of funds is deposits with generally shorter maturities than the maturities on our loans and investment securities. This could cause our net interest rate spread to compress because the increase in interest income we would earn on our securities and loan portfolios may be less than the increase in the interest expense we would pay on our deposits and borrowings. In addition, the expected duration of our mortgage-backed securities may increase during a rising interest rate environment, thereby lengthening the period during which they would reprice at higher rates.
In a period of decreasing interest rates, prepayments of loans and mortgage-backed securities generally will increase as borrowers refinance their debt in order to reduce their borrowing costs. In a decreasing rate environment we are generally not able to reinvest the proceeds of loan and securities prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. A decreasing interest rate environment would result in a decrease in rates we pay on deposits and borrowings, but the decrease in the cost of our funds may not be as great as the decrease in the yields on our mortgage-backed securities and loan portfolios. This could cause a narrowing of our net interest rate spread and could cause a decrease in our earnings. We are further exposed to interest rate risk due to the large portion of our total deposits that can reprice at any time.
The Bank monitors its interest rate sensitivity through the use of an asset/liability management model which estimates the change in its net portfolio value (defined as the current market value of assets, less the current market value of liabilities, plus or minus the current value of off-balance sheet items) in the event of a range of assumed changes in market interest rates. Our net portfolio value analysis, as calculated by the Office of Thrift Supervision using information as of September 30, 2007, showed that in the event of an immediate and permanent 2.0% increase in interest rates, our net portfolio value would be expected to decrease by 11%.
Strong Competition Within Our Market Area May Limit Our Growth and Profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Most of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. In addition our competition recently has been offering loans with lower fixed rates and loans on more attractive terms than the Bank has been willing to offer. Our profitability depends upon our continued ability to successfully compete in our market area. The greater resources and broader range of deposit and loan products offered by our competition may limit our ability to increase our interest-earning assets and profitability.
If Economic Conditions Deteriorate, Particularly in the Metropolitan New York Area, Our Results of Operations and Financial Condition Could Be Adversely Affected as Borrowers’ Ability to Repay Loans Declines and the Value of the Collateral Securing Our Loans Decreases.
Our financial results may be adversely affected by changes in prevailing economic conditions, particularly in the metropolitan New York area, including decreases in real estate values, changes in interest rates which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the Federal government and other significant external events. At September 30, 2007, loans secured by real estate represented nearly all of our total loans, with substantially all such loans being made in the New York metropolitan area. Decreases in local real estate values would adversely affect the value of property used as collateral for our loans. Adverse changes in the economy also may have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.
If Our Allowance for Loan Losses Is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.
We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance would materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and Regulations.
We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of deposits. Such regulation and supervision govern the activities in which a financial institution and its holding company may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, may have a material impact on our operations.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Properties
The following table provides certain information with respect to our offices as of September 30, 2007:
* Lease payments have been made since August 2007 no capitalized improvements have been made at this time.
The net book value of our premises, land and equipment was approximately $1.0 million at September 30, 2007.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various legal actions and claims arising in the normal course of its business. In the opinion of management, these legal actions and claims are not expected to have a material adverse impact on the Company’s financial condition and results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the year ended September 30, 2007 to a vote of the Company’s stockholders.
PART II.
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company common stock trades on the Nasdaq Global Market under the symbol “BFSB.” Trading in the Company’s common stock commenced on April 6, 2005.
As of September 30, 2007, there were 13,484,210 shares of Company common stock issued and 13,311,483 common shares outstanding and approximately 781 stockholders of record. Of the total outstanding shares 9,257,500 were held by BFS Bancorp, MHC and 4,053,983 were held by other shareholders.
The table below shows the high and low closing prices reported on the Nasdaq Global Market for the Company common stock during the periods indicated. Shares of common stock of the Company were sold in a subscription offering at $10.00 per share in connection with the reorganization of the Bank into the mutual holding company structure completed on April 5, 2005.
Set forth below is information, as of September 30, 2007 regarding equity compensation plans categorized by those plans that have been approved by stockholders and those plans that have not been approved by stockholders.
Stock Performance Graph
Set forth hereunder is a stock performance graph comparing (a) the cumulative total return on the Common Stock between April 5, 2005 (the date the Company completed its initial public offering), September 30, 2006 and September 30, 2007, (b) the cumulative total return on stock included in the SNL Thrift Index over such periods, and (c) the cumulative total return on stocks included in the Russell 2000 Index over such periods. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.
There can be no assurance that the Company’s stock performance will continue in the future with the same or similar trend depicted in the graph. The Company will not make or endorse any predictions as to future stock performance.
Brooklyn Federal
Bancorp, Inc.
If the Company pays dividends to its stockholders, it also would be required to pay dividends to BFS Bancorp, MHC, unless BFS Bancorp, MHC elects to waive the receipt of dividends. We anticipate that BFS Bancorp, MHC would waive any dividends paid by the Company. Any decision to waive dividends will be subject to regulatory approval. BFS Bancorp, MHC received regulatory approval to waive dividends for the fiscal year ended September 30, 2007. Under Office of Thrift Supervision regulations, public stockholders would not be diluted for any dividends waived by BFS Bancorp, MHC in the event BFS Bancorp, MHC converts to stock form.
Dividends are payable at the sole discretion of the Company, and any dividends will depend, in part, upon receipt of dividends from the Bank, because the Company presently has no source of income other than dividends from the Bank, earnings from the investment of offering proceeds it retained and interest on the Company’s loan to the employee stock ownership plan. A regulation of the Office of Thrift Supervision imposes limitations on “capital distributions” by savings institutions such as the Bank. The Company, however, will not be subject to Office of Thrift Supervision regulatory restrictions on the payment of dividends.
The Company repurchased Common Stock in the quarter ending September 30, 2007. On January 16, 2007, the Board of Directors approved a stock repurchase program and authorized the repurchase of up to $1.5 million of the Company’s outstanding shares of common stock. Upon completion of the January 16, 2007, approved stock repurchase program, in August 2007, the Board of Directors approved another Common Stock repurchase of up to $2.0 million of the Company’s outstanding shares of common Stock on August 14, 2007. Stock repurchases will be made from time to time and may be effected through open market purchases, block trades and in privately negotiated transactions. Repurchased stock will be held as treasury stock and will be available for general corporate purposes. As of September 30, 2007, 172,727 shares have been repurchased with repurchases in the quarter described in the following table:
Item 6.
Item 6. Selected Financial Data
The summary information presented below is derived in part from and should be read in conjunction with the consolidated financial statements of the Company presented in Item 8. On April 5, 2005, the Bank completed its reorganization into the mutual holding company structure, and in connection therewith the Company sold 3,967,500 shares of common stock which resulted in $37.9 million of net proceeds of which $20.5 million was utilized to acquire all of the outstanding common stock of the Bank. The Company issued 9,257,500 shares of its common stock to BFS Bancorp, MHC.
(1)
Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.
(2)
Represents net interest income as a percent of average interest-earning assets for the period.
(3)
Represents non-interest expense divided by the sum of net interest income and non-interest income.
(4)
Ratio percentage is less than 0.01%.
(5)
Ratios other than equity to total assets are for the Bank.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our results of operations depend mainly on our net interest income, which is the difference between the interest income earned on our loan and investment portfolios and interest expense paid on our deposits and borrowed funds. Results of operations are also affected by fee income from banking operations, provisions for loan losses, gains (losses) on sales of loans and securities available-for-sale and other miscellaneous income. Our non-interest expenses consist primarily of compensation and employee benefits, office occupancy, technology, marketing, general administrative expenses and income tax expense.
Our results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulations or government policies may materially affect our financial condition and results of operations.
Critical Accounting Policies
We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions 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. 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 the Bank. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.
As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.
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 and external loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.
The analysis of the allowance for loan losses 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 allocations. Actual loan losses may be significantly more than the allowance for loan losses 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. 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. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred 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. A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carryback declines, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense which would adversely affect our operating results.
Business Strategy
Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing quality customer service. Our business strategy historically has been to emphasize one- to four-family residential mortgage lending. While we will continue to engage in this type of lending, management has determined to broaden the range of our products and services to enhance profitability, consistent with safety and soundness. In recent years, we have significantly expanded our multi-family, commercial real estate and construction lending. We have also introduced additional products and services, such as debit cards and internet banking. We cannot assure you that we will successfully implement our business strategy.
Highlights of our business strategy are as follows:
•
Remaining a Community Oriented Institution. We were established in Brooklyn, New York in 1887, and we have been operating continuously since that time. We have been, and continue to be, committed to meeting the financial needs of the communities in which we operate, and we are dedicated to providing quality personal service to our customers. Although historically our principal business activity has been accepting deposits from the public and using those funds to originate one- to four-family mortgage loans, in recent years we have been originating more commercial real estate loan products and a wider variety of residential real estate loan products to meet the needs of our customers. If such loans do not satisfy our criteria for retention in our loan portfolio, they generally can be sold in the secondary market.
•
Continuing to Increase Our Multi-Family, Commercial Real Estate and Construction Lending. Historically, we have emphasized one- to four-family residential lending within our market area. While one- to four-family loan originations remain an important form of loans because of our expertise with this type of lending, in the past five years we have emphasized the origination of loans secured by multi-family properties and commercial real estate and construction loans as a means of increasing our interest and fee income. Multi-family, commercial real estate and construction lending generally expose a lender to greater credit risk than loans secured by one- to four-family real estate. The repayment of multi-family, commercial real estate and construction loans depends upon the business and financial condition of the borrower and, in the case of construction loans, on the economic viability of projects financed. Consequently, we, like other financial institutions, generally charge higher rates of interest for these types of loans compared to one- to four-family residential loans. We have invested in a new loan servicing system and additional personnel to allow us to service these types of loans more efficiently.
•
Increasing Our Real Estate Lending Capacity. The additional capital raised in the stock offering increased our lending capacity by enabling us to originate more loans and loans with larger balances. This permits us to serve borrowers with larger lending needs and to originate larger loans than we have originated in the past.
•
Utilizing the Net Proceeds We Received in the Offering to Better Manage Our Interest Rate Risk and Grow Our Assets. With long-term interest rates at low levels, we have managed our interest rate risk by maintaining a portion of our assets in short-term liquid assets, such as cash and cash equivalents, short-term investment securities and mortgage-related securities that provide significant cash flows. This strategy positioned us to reinvest our short-term liquid assets in higher yielding loans and investments once interest rates began to rise. During the more recent period of decreasing interest rates, we have continued to reduce our security investments and redeploy those funds to pay down borrowings, while still maintaining a high level of short-term liquid assets. Maintaining a high level of short-term liquid assets, however, generates less interest income than would have been generated if we had invested in longer-term loans and investments. At September 30, 2007, $5.4 million, or 1.4% of our assets, was invested in cash or cash equivalents, and $4.0 million, or 1.0% of our assets, was invested in certificates of deposit and securities that mature within three years.
The net proceeds from the stock offering increased our capital and provided management with greater flexibility to manage interest rate risk and increase our interest-earning assets, including our investment in longer-term, higher yielding loans and securities.
•
Facilitate Growth Through De Novo Branching. We have established financial, geographic and other criteria to evaluate potential new branch offices in our market area. While we continue to review potential branch sites, there can be no assurance as to whether or when we will open such offices. The Bank anticipates opening its fifth branch office in Commack, Suffolk County, New York in the second fiscal quarter of 2008.
•
Maintaining High Asset Quality. We have focused on improving and maintaining strong asset quality by following conservative underwriting criteria, and primarily originating loans secured by real estate.
Comparison of Financial Condition At September 30, 2007 and September 30, 2006
Total Assets. Total assets decreased by $17.6 million, or 4.3%, to $390.4 million at September 30, 2007 from $408.0 million at September 30, 2006. This decrease was primarily due to decreases in loans held-for-sale, securities held-to-maturity, investments in certificates of deposit and Federal Home Loan Bank stock, offset by increases in cash and cash equivalents, securities available-for-sale and net loans.
Cash and Cash Equivalents. Cash and cash equivalents increased by $1.3 million, or 32.4%, to $5.4 million at September 30, 2007 from $4.1 million at September 30, 2006.
Investments in Certificates of Deposit. Investments in certificates of deposit decreased by $3.3 million, or 45.7%, to $3.9 million at September 30, 2007 from $7.2 million at September 30, 2006. This decrease was due to maturities of the certificates.
Securities. Securities investments, which represent the available-for-sale and held-to-maturity portfolios, decreased $13.4 million, or 14.7%, to $78.0 million at September 30, 2007, from $91.4 million at September 30, 2006. This decrease was due to repayments in our mortgage-related securities portfolio and repayments of other securities. These funds were redeployed into loan originations and repayments on borrowings. Our holdings of mortgage-backed securities and other debt obligations totaled $73.4 million and $2,000, respectively, at September 30, 2007.
Net Loans. Net loans, before allowance for loan losses, including deferred fees and loans held-for-sale, decreased $1.9 million, or 0.7%, to $286.4 million at September 30, 2007 from $288.3 million at September 30, 2006. Loans held-for-sale decreased by $33.1 million, or 35.9%, to $59.1 at September 30, 2007 from $92.2 million at September 30, 2006, offset by an increase in our loans receivable portfolio of $31.2 million, or 15.9%, to $227.3 million at September 30, 2007 from $196.1 million at September 30, 2006.
Federal Home Loan Bank of New York Stock. FHLB of New York stock decreased by $1.8 million, or 62.9%, to $1.0 million at September 30, 2007, from $2.8 million at September 30, 2006.This decrease is primarily due to a decreased balance in FHLB borrowings, which triggered redemptions of FHLB stock.
Bank Owned Life Insurance, Prepaid Expenses and Other Assets. Bank owned life insurance, prepaid expenses and other assets increased $1.5 million, or 9.1%, to $17.5 million at September 30, 2007, from $16.0 million at September 30, 2006. This increase was primarily due to increases of $357,000 in the cash surrender values of bank-owned life insurance policies to $9.0 million at September 30, 2007; an increase of $755,000 in the net deferred tax asset to $2.2 million at September 30, 2007; and an increase in other assets of approximately $359,000 to approximately $6.4 million at September 30, 2007.
Deposits. Deposits increased by $16.2 million, or 6.0%, to $287.2 million at September 30, 2007, from $271.0 million at September 30, 2006. The increase was attributable to a $10.5 million increase in certificates of deposit and an increase in other interest bearing deposits of $8.6 million, offset in part by a $2.9 million decrease in non-interest bearing deposits. The Bank maintains marketing and promotional efforts in its market area, including efforts to remain competitive in all of its deposit offerings.
Borrowed Funds. Borrowed funds from the Federal Home Loan Bank of New York decreased by $40.1 million, or 81.2%, to $9.3 million at September 30, 2007, from $49.4 million at September 30, 2006. The decrease was primarily due to the uses of the repayments on securities held-to-maturity, the maturities of certificates of deposit investments and the increase in net deposits.
Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased $775,000, or 14.0%, to $6.3 million at September 30, 2007, from $5.5 million at September 30, 2006. The increase was primarily due to increases in accounts payable of $756,000, loan payables of $632,000, accrued Supplemental Executive Retirement Plan (“SERP”) of $291,000, accrued expenses of $203,000, unprocessed banking liabilities of $27,000, offset by a reduction of income taxes payable of $1.1 million.
Stockholders’ Equity. Stockholders’ equity increased by $5.3 million, or 6.6%, to $85.3 million at September 30, 2007, from $80.0 million at September 30, 2006. The primary reasons for the increase is the implementation of the stock-based incentive plan and the result of net income for the period, offset in part by the purchases of treasury stock of approximately $2.5 million pursuant to the Company’s stock repurchase plans.
Comparison of Operating Results for the Years Ended September 30, 2007 and September 30, 2006
Net Income. Net income decreased by $711,000, or 15.6%, to $3.8 million in fiscal year 2007 from $4.6 million in fiscal year 2006. The primary reasons for the decrease in net income were a $3.4 increase in interest expense, a $4.8 million increase in non-interest expense, offset in part by increases in interest income of $5.7 million, a $799,000 increase in non-interest income, a reduction in loan loss provisions of $387,000 and a reduction in the provision for income taxes of $584,000.
Net Interest Income Before Provision for Loan Losses. Net interest income increased by $2.3 million, or 15.9%, to $17.0 million for fiscal year 2007 from $14.7 million for fiscal year 2006. This increase was primarily due to a $35.8 million, or 10.3%, increase in total average interest-earning assets to $384.6 million in fiscal year 2007 from $348.8 million in fiscal year 2006, offset in part by increased average interest-bearing liabilities of $30.4 million, or 11.6%, to $292.7 million in fiscal year 2007 from $262.3 million in fiscal year 2006. The Bank’s interest rate spread was 3.55% and 3.52% for the fiscal years 2007 and 2006, respectively.
Interest Income. Interest income increased by $5.7 million, or 25.9%, to $27.7 million for fiscal year 2007 from $22.0 million for the prior fiscal year. The increase was due to a $6.2 million increase in interest income on first mortgage and other loans, offset in part by reductions in interest income from mortgage-backed securities of $207,000 and other securities and interest-earning assets of $323,000. The yield on the mortgage loan portfolio increased 55 basis points to 8.15% in fiscal 2007 from 7.60% in fiscal 2006. The yield on investment securities and other interest-earning assets increased 48 basis points to 4.40% in fiscal 2007 from 3.92% in fiscal 2006. Average balances of interest-earning assets increased $35.8 million, or 10.3%, to $384.6 million in fiscal year 2007 from $348.8 million in fiscal year 2006. The average yield on total interest-earning assets increased by 89 basis points to 7.21% in fiscal 2007 from 6.32% in fiscal 2006.
Interest Expense. Interest expense increased $3.4 million, or 45.9%, to $10.7 million for fiscal year 2007 from $7.3 million in fiscal year 2006. The increase in interest expense reflected an 86 basis point increase in the cost of interest-bearing liabilities to 3.66% for fiscal year 2007 from 2.80% for fiscal year 2006 as well as a $30.4 million increase in average balances. The increase in interest expense reflected high market interest rates during fiscal year 2007 compared to fiscal year 2006. Interest expense on savings accounts decreased by $159,000, or 19.7%, to $650,000 for fiscal year 2007 from $809,000 for fiscal year 2006, as the average cost on savings accounts remained at 1.00% for fiscal years 2007 and 2006. The average balance of savings accounts decreased $15.9 million, or 19.7%, to $64.9 million for fiscal year 2007 from $80.8 million for fiscal year 2006. Interest expense on Money Market and NOW accounts increased $675,000, or 230.4% to $968,000 in fiscal 2007 from $293,000 in fiscal 2006, as the average cost on these deposits increased 139 basis points while the average balances increased $12.2 million, or 46.1%, to $38.7 million in fiscal 2007 from $26.5 million in fiscal 2006. Interest expense on certificates of deposit increased by $1.9 million, or 35.1%, to $7.5 million for fiscal year 2007 from $5.6 million for fiscal year 2006, as the average cost on certificates of deposit increased by 77 basis points to 4.72% in fiscal year 2007 from 3.95% in fiscal year 2006. The average balance of certificates of deposit increased $18.6 million, or 13.2%, to $159.8 million for fiscal year 2007 from $141.2 million for fiscal year 2006. Interest expense on Federal Home Loan Bank advances increased by $892,000, or 136.4%, to $1.5 million in fiscal year 2007 from $654,000 in fiscal year 2006, as the average Federal Home Loan Bank advances increased by $15.4 million, or 111.6%, to $29.2 million in fiscal year 2007 from $13.8 million in fiscal year 2006. The average cost on these borrowings increased 56 basis points to 5.29% in fiscal 2007 from 4.73% in fiscal 2006.
Provision for Loan Losses. Our provision for loan losses decreased $387,000, or 88.8%, to $49,000 for fiscal year 2007 compared to $436,000 for fiscal year 2006. The decrease is due to the reductions in higher risk loans, offset in part by the originations of lower risk loans, as well as the performance of the loan portfolio. Our non-performing loans in non-accrual status totaled $652,000 and $299,000 at September 30, 2007 and September 30, 2006, respectively. The allowance for loan losses at September 30, 2007 represented 0.63% of total loans, compared to 0.61% of total loans at September 30, 2006. See “Business-Non-Performing Loans and Problem Assets” for a discussion relating to non-performing loans and problem assets.
Non-interest Income. Non-interest income increased by $799,000, or 34.2% to $3.1 million for fiscal year 2007, from $2.3 million for fiscal year 2006. The increase was primarily the result of a $734,000 increase in banking fees and service charges and a $205,000 increase in net gain on sale of loans held-for-sale, offset by a decrease in other income of $140,000. The increase in banking fees and service charges was primarily the result of increased loan syndication and other related loan fees earned of approximately $785,000, partially offset by a reduction in deposit related fees of approximately $51,000. The increase in the net gain on sale of loans reflects the increased dollar amount of loans sold. The decrease in other income was primarily due to reduced rental income from an office building of approximately $102,000, a reduction in depositor related fees of approximately $34,000 which include ATM fees, debit card fees and safe deposit rental income and a reduction in miscellaneous income of approximately $36,000, offset in part by an increase in the cash surrender value of the bank owned life insurance policies of $32,000.
Non-interest Expense. Non-interest expense increased by $4.8 million, or 51.9%, to $14.1 million in fiscal year 2007 compared to $9.3 million in fiscal year 2006. The largest component of the increase was in compensation and fringe benefits. Compensation and fringe benefits increased $4.3 million, or 69.8%, to $10.5 million for fiscal year 2007 from $6.2 million in fiscal year 2006. This increase was primarily due to the stock-based incentive plan expense of $4.1 million, increases in compensation of $291,000, which included general salary increases for officers and employees and hiring of staff, health care expenses of $85,000, ESOP expense of $27,000 and other miscellaneous employee expenses of $40,000, offset in part by reductions in SERP expense of $232,000 and pension expense of $38,000. In addition, other miscellaneous expenses increased approximately $403,000 which is comprised of advertising and public relations, insurance and other expense, professional fees increased $132,000, offset in part by decreases in occupancy and equipment expense of $13,000 and data processing fees of $2,000.
Income Taxes. Income tax expense decreased $584,000, or 21.1%, to $2.2 million for fiscal year 2007, from $2.8 million for fiscal year 2006. This decrease was primarily due to decreased income before taxes. The effective tax rate decreased to 36.2% in fiscal 2007, as compared 37.8% in fiscal year 2006.
Comparison of Financial Condition At September 30, 2006 and September 30, 2005
Total Assets. Total assets increased by $67.1 million, or 19.7%, to $408.0 million at September 30, 2006 from $340.9 million at September 30, 2005. This increase was primarily due to increases in loans held-for-sale and Federal Home Loan Bank stock, offset by decreases in cash and cash equivalents, investments in certificates of deposit, securities held-to-maturity and net loans.
Cash and Cash Equivalents. Cash and cash equivalents decreased by $4.3 million, or 51.4%, to $4.1 million at September 30, 2006 from $8.4 million at September 30, 2005.
Investments in Certificates of Deposit. Investments in certificates of deposit decreased by $2.1 million, or 22.7%, to $7.2 million at September 30, 2006 from $9.3 million at September 30, 2005. This decrease was primarily due to maturities of the certificates.
Securities. Securities investments decreased $12.4 million, or 12.0%, to $91.4 million at September 30, 2006, from $103.8 million at September 30, 2005. This decrease was due to repayments in our mortgage-related securities portfolio and maturities of other securities. These funds were redeployed into loan originations. Our holdings of mortgage-backed securities and other debt obligations totaled $87.0 million and $5,000, respectively, at September 30, 2006.
Net Loans. Net loans, before allowance for loan losses, including deferred fees loans held-for-sale, increased $83.2 million, or 40.5%, to $288.4 million at September 30, 2006 from $205.2 million at September 30, 2005. Loan growth occurred in all product categories, including increases in one- to four-family ($2.1 million), multi-family residential ($26.4 million), commercial real estate ($21.0 million), construction ($10.8 million), land ($23.1 million) and consumer and other loans ($153,000). Loans held-for-sale increased to $92.2 million at September 30, 2006, from $8.6 million September 30, 2005.
Prepaid Expenses and Other Assets. Prepaid expenses and other assets including bank-owned life insurance increased $1.3 million, or 11.0%, to $12.8 million at September 30, 2006, from $11.6 million at September 30, 2005. This increase was primarily due to an increase of $310,000 in the cash surrender values of bank-owned life insurance policies to $8.6 million at September 30, 2006; an increase of $411,000 in the net deferred tax asset to $1.4 million at September 30, 2006; and an increase in branch work in process of approximately $602,000 to $946,000 at September 30, 2006.
Deposits. Deposits increased by $19.4 million, or 7.7%, to $271.0 million at September 30, 2006, from $251.6 million at September 30, 2005. The increase was attributable to a $28.8 million increase in certificates of deposit, offset in part by a $9.4 million decrease in demand deposits. The Bank maintains marketing and promotional efforts in its market area, including efforts to remain competitive in all of its deposit offerings.
Borrowed Funds. Borrowed from the Federal Home Loan Bank of New York increased by $41.3 million, or 509.4%, to $49.4 million at September 30, 2006, from $8.1 million at September 30, 2005. This increase is due to additional borrowings of $44.3 million, offset in part by $3.0 million in payments for maturing advances. These borrowings were primarily used to fund our lending production.
Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased $1.7 million, or 46.0%, to $5.5 million at September 30, 2006, from $3.8 million at September 30, 2005. The increase was primarily due to increases in taxes payable of $1.1 million, SERP liability of $523,000 and other accrued expenses of approximately $100,000.
Stockholders’ Equity. Stockholders’ equity increased by $4.8 million, or 6.3%, to $80.0 million at September 30, 2006, from $75.2 million at September 30, 2005. This increase is primarily the result of net income for the fiscal year ended September 30, 2006.
Comparison of Operating Results for the Years Ended September 30, 2006 and September 30, 2005
Net Income. Net income increased by $778,000, or 20.6%, to $4.6 million in fiscal year 2006 from $3.8 million in fiscal year 2005. The primary reasons for the increase in net income were a $4.7 million increase in interest income, a $196,000 increase in non-interest income, offset in part by increases in interest expense of $2.4 million, loan loss provision of $34,000, non-interest expense of $1.1 million and an increase in the provision for taxes of $594,000.
Net Interest Income Before Provision for Loan Losses. Net interest income increased by $2.3 million, or 18.3%, to $14.7 million for fiscal year 2006 from $12.4 million for fiscal year 2005. This increase was primarily due to a $35.0 million, or 11.2%, increase in total average interest-earning assets to $348.8 million in fiscal year 2006 from $313.8 million in fiscal year 2005, offset in part by increased average interest-bearing liabilities of $17.6 million, or 7.2%, to $262.3 million in fiscal year 2006 from $244.8 million in fiscal year 2005. The Bank’s interest rate spread was 3.52% for the fiscal years 2006 and 2005.
Interest Income. Interest income increased by $4.7 million, or 27.2%, to $22.0 million for fiscal year 2006 from $17.3 million for the prior fiscal year. The increase was due to a $4.3 million increase in interest income on first mortgage and other loans, a $255,000 increase in interest income on other securities and interest-earning assets and $113,000 increase in interest income on mortgage-backed securities. The yield on the mortgage loan portfolio increased 34 basis points to 7.60% in fiscal 2006 from 7.26% in fiscal 2005. The yield on investment securities and other interest-earning assets increased 69 basis points to 3.92% in fiscal 2006 from 3.23% in fiscal 2005. Average balances of interest-earning assets increased to $348.8 million in fiscal year 2006 from $313.8 million in fiscal year 2005, or 11.2%. The average yield on total interest-earning assets increased by 80 basis points to 6.32% in fiscal 2006 from 5.52% in fiscal 2005.
Interest Expense. Interest expense increased $2.4 million, or 49.9%, to $7.3 million for fiscal year 2006 from $4.9 million in fiscal year 2005. The increase in interest expense reflected an 80 basis point increase in the cost of interest-bearing liabilities to 2.80% for fiscal year 2006 from 2.00% for fiscal year 2005. The 80 basis point increase in the average cost of interest-bearing liabilities along with the $17.6 million increase in average balances was responsible for a $2.4 million increase in interest expense. The increase in interest expense reflected high market interest rates during fiscal year 2006 compared to fiscal year 2005. Interest expense on savings accounts decreased by $42,000, or 4.9%, to $809,000 for fiscal year 2006 from $851,000 for fiscal year 2005, as the average cost on savings accounts increased by 7 basis points to 1.00% in fiscal year 2006 from 0.93% in fiscal year 2005. The average balance of savings accounts decreased to $80.8 million for fiscal year 2006 from $91.1 million for fiscal year 2005. Interest expense on Money Market and NOW accounts increased $79,000, or 36.9% to $293,000 in fiscal 2006 from $214,000 in fiscal 2005, as the average cost on these deposits increased 35 basis point while the average balances decreased to $26.5 million in fiscal 2006 from $28.1 million in fiscal 2005. Interest expense on certificates of deposit increased by $2.0 million, or 57.1% to $5.6 million for fiscal year 2006 from $3.6 million for fiscal year 2005, as the average cost on certificates of deposit increased by 89 basis points to 3.95% in fiscal year 2006 from 3.06% in fiscal year 2005. The average balance of certificates of deposit increased to $141.2 million for fiscal year 2006 from $116.2 million for fiscal year 2005. Interest expense on Federal Home Loan Bank advances increased by $377,000, or 136.1%, to $654,000 in fiscal year 2006 from $277,000 in fiscal year 2005, as the average Federal Home Loan Bank advances increased by $4.4 million, or 47.5%, to $13.8 million in fiscal year 2006 from $9.4 million in fiscal year 2005. The average cost on these borrowings increased 177 basis points to 4.73% in fiscal 2006 from 2.96% in fiscal 2005.
Provision for Loan Losses. Our provision for loan losses increased $34,000, or 8.5%, to $436,000 for fiscal year 2006 compared to $402,000 for fiscal year 2005. The increase reflects our emphasis on and increasing volume of multi-family, commercial real estate, construction and land lending, as well as the performance of the loan portfolio. During the fiscal year ended September 30, 2005, a $167,000 specific loss allowance was established for a multi-family loan classified as non-performing and in non-accrual status. Our non-performing loans in non-accrual status totaled $299,000 and $3.5 million at September 30, 2006 and September 30, 2005, respectively. The allowance for loan losses at September 30, 2006 represented 0.61% of total loans, compared to 0.64% of total loans at September 30, 2005. See “Business-Non-Performing Loans and Problem Assets” for a discussion relating to non-performing loans and problem assets.
Non-interest Income. Non-interest income increased by $196,000, or 9.2% to $2.3 million for fiscal year 2006, from $2.1 million for fiscal year 2005. The increase was primarily the result of a $64,000 increase in banking fees and service charges, a $32,000 increase in net gain on sale of loans held-for-sale and an increase in other income of $100,000. The increase in banking fees and service charges was primarily the result of increased loan service fees of approximately $111,000, partially offset by a reduction in deposit related fees of approximately $47,000. The increase in the net gain on sale of loans reflects the increased dollar amount and volume of loans sold. The increase in other income was primarily due to the increased cash surrender value of the bank owned life insurance policies of $140,000, offset in part by reduced rental income of office buildings of approximately $23,000, a reduction in depositor related fees of approximately $6,000 which include ATM fees, debit card fees and safe deposit rental income and a reduction in miscellaneous income of approximately $11,000.
Non-interest Expense. Non-interest expense increased by $1.1 million, or 12.9%, to $9.3 million in fiscal year 2006 compared to $8.2 million in fiscal year 2005. The largest component of the increase was in compensation and fringe benefits. Compensation and fringe benefits increased $868,000, or 16.4%, to $6.2 million for fiscal year 2006 from $5.3 million in fiscal year 2005. This increase was primarily due to increases in compensation of $415,000, which included general salary increases for officers and employees and hiring of staff, SERP expense of $248,000, health care expenses of $94,000, pension expense of $55,000, ESOP expense of $47,000 and other miscellaneous employee expenses of $9,000. In addition, occupancy and equipment expenses increased $165,000, professional fees increased $11,000 and data processing fees increased $31,000, offset in part by a decrease in other miscellaneous expenses of approximately $15,000 in fiscal year 2006.
Income Taxes. Income tax expense increased $594,000, or 27.4%, to $2.8 million for fiscal year 2006, from $2.2 million for fiscal year 2005. This increase was primarily due to increased income before taxes. The effective tax rate increased to 37.8% in fiscal 2006, as compared 36.5% in fiscal year 2005.
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated, as well as balances and average yields and costs as of September 30, 2007. All average balances are daily average balances at and for the years ended September 30, 2007, 2006 and 2005, respectively. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). 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.
Liquidity and Capital Resources
We maintain liquid assets at levels we consider adequate to meet our liquidity needs. We adjust our liquidity levels to fund deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.
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, as well as access to Federal Home Loan Bank advances. 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 September 30, 2007, $5.4 million of our assets were invested in cash and due from banks. 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. Currently, we sell longer-term fixed rate mortgage loans, and we syndicate and sell participation interests in portions of our multi-family, commercial real estate and construction loans. Such activity is expected to continue so long as it meets our operational and financial needs. In addition, we invest excess funds in short-term interest-earning assets and other assets, which provide liquidity to meet our lending requirements. Certificates of deposit and short-term investment securities (maturing in less than three years) totaled $4.0 million at September 30, 2007. As of September 30, 2007, we had $9.3 million in borrowings outstanding from the Federal Home Loan Bank of New York and we have access to additional Federal Home Loan Bank advances of up to $77.4 million.
At September 30, 2007, we had $86.7 million in loan commitments outstanding, which included $20.2 million in undisbursed construction loans, $7.2 million in one- to four-family loans, $9.8 million in commercial real estate lines of credit, $995,000 in unused home equity lines of credit, and $48.5 million to originate primarily multi-family and nonresidential mortgage loans. Certificates of deposit due within one year of September 30, 2007 totaled $119.1 million, or 73.1% of certificates of deposit. The large percentage of certificates of deposits that mature within one year reflects customers’ hesitancy to invest their funds for long periods in the current low interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2008. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
As reported in the consolidated statements of cash flows, our cash flows are classified by source for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by (used in) operating activities was $26.7 million, $(75.4) million, and $(3.5) million for the years ended September 30, 2007, 2006, and 2005, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods, the most significant of which are originations and sales of loans held-for-sale. The net effect of such originations and sales was a cash outflow of $10.6 million, a cash outflow of $81.6 million and a cash outflow of $8.6 million in fiscal years 2007, 2006, and 2005, respectively. Net cash provided by (used in) investing activities was $1.1 million, $10.4 million, and $(23.4) million in fiscal years 2007, 2006 and 2005, respectively, principally reflecting our loan and investment security activities in the respective periods. In fiscal 2007, the cash flows generated from financing activities were utilized primarily for loan originations. Investment securities net cash provided by, (purchases net of sales, principal repayments and maturities), amounted to $13.4 million, $12.3 million and $17.1 million in the years ended September 30, 2007, 2006 and 2005, respectively. Net repayments on FHLB overnight and term advances of $40.1 million and purchase of treasury shares of $2.5 million comprised most of our financing activities which resulted in net cash used of $26.6 million, net proceeds of $41.3 million from FHLB advances and net deposit inflow of $19.4 million comprised most of our financing activities which resulted in net cash provided of $60.7 million in fiscal year 2006 and net proceeds of $37.9 million from our common stock issuance resulted in net cash provided of $27.4 million in fiscal 2005. The net effect of our operating, investing and financing activities was to decrease our cash and cash equivalents from $7.9 million at the beginning of fiscal year 2005 to $5.4 million at the end of fiscal year 2007.
The following table presents our contractual obligations as of September 30, 2007.
In addition, as part of the reorganization and stock offering, the employee stock ownership plan trust borrowed funds from the Company to purchase a number of shares equal to 8% of the common stock issued in the stock offering.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transaction involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see note 13 of the notes to the consolidated financial statements.
For fiscal year 2007, we did not engage in any off-balance-sheet transactions other than loan origination and loan sale commitments in the normal course of our lending activities.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes have been prepared in accordance with United States generally accepted accounting principles (“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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About 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 approved guidelines for managing the interest rate risk inherent in our assets and liabilities, given our business strategy, operating environment, capital, liquidity and performance objectives. Senior management monitors the level of interest rate risk on a regular basis and the audit committee of 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 short-term liquid assets invested in cash and cash equivalents, short-term securities and mortgage-related securities that provide significant cash flows; (ii) generally selling longer-term mortgage loans; and (iii) lengthening the average term of our certificates of deposit. By investing in short-term, liquid 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 periods of declining interest rates, our strategy of investing in liquid instruments has resulted in lower levels of interest income than would have resulted from investing in longer-term loans and investments. The net proceeds from the offering have increased our capital and provided management with greater flexibility to manage our interest rate risk. In particular, management has leveraged the capital we received to increase our interest-earning assets. Management intends to lengthen the maturity of our earning assets as interest rates increase, which in turn should result in a higher yielding portfolio of interest-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 200 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 September 30, 2007, the latest date for which the Office of Thrift Supervision has provided the Bank an interest rate sensitivity report of its net portfolio value and the estimated changes in the Bank’s net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve.
(1)
Assumes an instantaneous uniform change in interest rates at all maturities.
(2)
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)
NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at September 30, 2007, in the event of a 100 basis point decrease in interest rates, we would experience a 3% increase in net portfolio value. In the event of a 200 basis point increase in interest rates, we would experience an 11% decrease in net portfolio value. Our interest rate risk management policy in the low interest rate environment that has existed in recent years has emphasized maintaining a significant percentage of our assets in cash and cash equivalents, shorter-term securities and mortgage-related securities that provide significant cash flows. The effect of this policy has been to reduce our level of net interest income. We have been willing to accept reduced levels of income in low interest rate environments in order to be better positioned to reinvest our assets in longer-term, higher yielding investments as interest rates rise.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires 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 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 our net interest income and will differ from actual results.
Item 8.
Item 8. Financial Statements and Supplementary Data
The following are included in this item:
(a)
Report of Independent Registered Public Accounting Firm
(b)
Consolidated Financial Statements:
1.
Consolidated Statements of Financial Condition as of September 30, 2007 and 2006.
2.
Consolidated Statements of Income for the years ended September 30, 2007, 2006 and 2005.
3.
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2007, 2006 and 2005.
4.
Consolidated Statements of Cash Flows for the years ended September 30, 2007, 2006 and 2005.
5.
Notes to Consolidated Financial Statements.
The supplementary data required by this Item (selected quarterly financial data) is provided in Note 19 of the Notes to Consolidated Financial Statements.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at September 30, 2007 and 2006
Consolidated Statements of Income for the Years Ended September 30, 2007, 2006 and 2005
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended September 30,2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended September 30, 2007, 2006 and
Notes to Consolidated Financial Statements
All schedules are omitted because the required information is not applicable or is included in the consolidated financial statements and related notes.
[BEARD MILLER COMPANY LLP LETTERHEAD]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Brooklyn Federal Bancorp, Inc.
Brooklyn, NY
We have audited the accompanying consolidated statements of financial condition of Brooklyn Federal Bancorp, Inc. and Subsidiary (collectively, the “Company”) as of September 30, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the two year period ended September 30, 2007. 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. The consolidated statements of income, changes in stockholders’ equity and cash flows of Brooklyn Federal Bancorp, Inc. and Subsidiary for the year ended September 30, 2005 were audited by other auditors whose report, dated December 22, 2005 expressed an unqualified opinion on those consolidated financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 provides a reasonable basis for our opinion.
In our opinion, the 2007 and 2006 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brooklyn Federal Bancorp, Inc. and Subsidiary as of September 30, 2007 and 2006 and the results of their operations and cash flows for each of the years in the two year period ended September 30, 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Beard Miller Company LLP
Beard Miller Company LLP
Pine Brook, New Jersey
December 11, 2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Brooklyn Federal Bancorp, Inc.:
We have audited the accompanying consolidated statements of income, changes in stockholders’ equity, and cash flows of Brooklyn Federal Bancorp, Inc. and Subsidiary (the “Company”) for the year ended September 30, 2005. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Brooklyn Federal Bancorp, Inc. and Subsidiary for the year ended September 30, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
December 22, 2005
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 2007 and 2006
(In thousands, except per share amounts and share data)
See accompanying notes to consolidated financial statements.
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended September 30, 2007, 2006 and 2005
(In thousands, except per share amounts and share data)
*
Earnings per common share from date of initial stock offering (April 5, 2005).
See accompanying notes to consolidated financial statements.
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended September 30, 2007, 2006 and 2005
(In thousands, except share data)
See accompanying notes to consolidated financial statements.
BROOKLYN FEDERAL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended September 30, 2007, 2006 and 2005
(In thousands)
See accompanying notes to consolidated financial statements.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(1)
Reorganization and Stock Offering
On April 5, 2005, Brooklyn Federal Savings Bank (the “Bank”) completed its reorganization into a mutual holding company structure (the “Reorganization”). As part of the Reorganization, the Bank converted from a federally-chartered mutual savings bank to a federally-chartered stock savings bank (the “Conversion”). The Bank became the wholly-owned subsidiary of Brooklyn Federal Bancorp, Inc., a federal corporation (the “Company”), which became the majority-owned subsidiary of Brooklyn Bancorp, MHC (the “Mutual Holding Company”). The Company issued a total of 13,225,000 common shares on April 5, 2005, consisting of 3,967,500 shares (30%) sold to the public (the “Offering”) and 9,257,500 shares (70%) issued to the Mutual Holding Company. The gross proceeds from the offering were approximately $39.7 million, less offering costs of approximately $1.8 million.
(2)
Nature of Business and Summary of Significant Accounting Policies
The Bank is a community-oriented savings institution whose business primarily consists of accepting deposits from customers within its market area (Brooklyn, Nassau and Suffolk, New York) and investing those funds principally in mortgage loans secured by one-to-four family residences, multi-family properties and commercial properties, and in mortgage-backed securities. Substantially all of the Bank’s loans are collateralized or dependent on real estate.
Deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s and the Company’s primary regulator is the Office of Thrift Supervision (“OTS”).
(a)
Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles and include the accounts of the Company, the Bank and the Bank’s wholly owned subsidiaries (collectively, the “Company”). The Bank’s wholly-owned subsidiaries are Thrift Investors Service Corporation (“TISCO”), 3D Holding Corp., Inc., and BFS REIT, Inc. (“BFS REIT”), a real estate investment trust formed to hold mortgage-related assets. TISCO’s wholly owned subsidiary, BFS Agency, provides insurance services to the customers of the Bank. 3D Holding Corp., Inc., was formed to hold title to certain properties acquired by the Bank through foreclosure. All significant inter-company balances and transactions are eliminated in consolidation.
The preparation of consolidated financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. An estimate that is particularity susceptible to significant near-term changes is the allowance for loan losses, as discussed below.
Certain prior-year amounts have been reclassified to conform to the current-year presentation.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(b)
Cash and Cash Equivalents
Cash and cash equivalents include cash, due from banks, federal funds sold and term deposits with the Federal Home Loan Bank with original maturities of less than 90 days.
(c)
Securities
The Company reports debt and equity securities in one of the following categories: (i) “held-to-maturity” (management has positive intent and ability to hold debt securities to maturity) which are reported at amortized cost adjusted for the amortization of premiums and accretion of discounts; (ii) “trading” (held for current resale) which are reported at fair value, with unrealized gains and losses included in earnings; or (iii) “available-for-sale” (all other debt and equity securities) which are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of deferred income taxes as a separate component of accumulated other comprehensive income (loss), a component of stockholders’ equity. The Company classifies its securities in one of these categories based upon determinations made at the time of purchase.
Premiums and discounts on debt securities are amortized and accreted to interest income using the level-yield method over the term of the security, adjusted for the effect of actual prepayments in the case of mortgage-backed securities. Gains and losses on the sales of securities are recognized when sold using the specific identification method.
Securities deemed to be other-than-temporarily impaired are written down from their original cost basis to fair value by a charge to current earnings. Management evaluates securities for other-than-temporary impairment on a quarterly basis.
(d)
Federal Home Loan Bank of New York Stock
As a member of the Federal Home Loan Bank (“FHLB”) of New York, the Bank is required by law to hold a certain amount of FHLB stock. The stock is a nonmarketable equity security and, accordingly, is recorded at cost.
(e)
Loan Sales and Syndications
The Company sells whole loans (principally commercial mortgage and residential mortgage loans) and loan participation interests (principally portions of multi-family, commercial mortgage and construction loans). Sales are generally made on a servicing-retained basis, except for certain sales of whole commercial mortgage loans for which servicing is released to the purchaser. These transactions are accounted for as sales based on application of the criteria set forth in Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” These criteria provide that the Company, as transferor, must surrender control over the transferred assets (i.e., the loans sold) in order to record a sale. The criteria specify that (i) the transferred assets have been isolated from the transferor (put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership); (ii) each transferee has the right to pledge or exchange the assets it received; and (iii) the transferor does not maintain effective control over the transferred assets through an agreement to repurchase the assets or an ability to unilaterally cause the holder to return specific assets. For sales of loan participation interests, SFAS No. 140 specifies that the criteria are met if the purchaser has the right to pledge or exchange its participation interests after obtaining the Company’s permission to do so (which permission shall not be unreasonably withheld). All of the Company’s whole loan and loan participation transactions have met the required criteria and, accordingly, have been accounted for as sales. The principal effects of sales accounting are the derecognition of the whole loans and loan participation interests sold, and the recognition of a gain or loss on sale.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
Gains and losses on sales of whole loans and loan participation interests are recognized when the sales proceeds are received, and are measured in accordance with SFAS No. 140 (including consideration of assets obtained and liabilities incurred in the transfer, if any, such as servicing rights and recourse obligations). The cost basis of the loan sold is allocated, based on relative fair values, between the loan sold and the servicing right retained which is included in other assets. All but a minor portion of the Company’s loan sales have been made on a non-recourse basis. Recourse obligations, if any, are determined based on an estimate of probable credit losses over the term of the loans. Servicing assets and recourse liabilities on loan sales through September 30, 2007 have had an immaterial effect on the Company’s financial position and results of operations. Loan servicing income is reported in non-interest income.
The Company also engages in loan syndication transactions, which are not transfers of financial assets under SFAS No. 140. A syndication of a loan is distinguished from a loan participation in that, in a syndication, the other lenders are identified prior to loan closing and are committed to fund a portion of the total loan at closing. In a loan participation, however, the other participants purchase a portion of the total loan from the lead lender after the lead lender has closed and funded the entire loan. As the enterprise managing loan syndications, the Company receives loan syndication fees from the borrower and accounts for such fees in accordance with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Accordingly, syndication fees are recognized in income when the syndication is complete if the yield on the portion of the loan retained by the Company is at least equal to the average yield earned by the other lenders in the syndication. The Company does not assume any recourse obligations on its loan syndications, as each lender’s credit risk is based on its own portion of the loan.
(f)
Loans Held-for-Sale and Related Commitments
Loans held-for-sale represent commercial and other mortgage loans originated for sale. These loans are carried at the lower of cost or estimated fair value, as determined on an aggregate basis. Net unrealized losses are recognized in a valuation allowance by charges to operations. Premiums and discounts and origination fees and costs on loans held-for-sale are deferred and recognized as a component of the gain or loss on sale. Commitments to originate loans that will be held-for-sale and forward commitments to sell such loans are derivative instruments which are required to be recognized as assets or liabilities at fair value. Fair value is determined based solely on the effect of changes in secondary market interest rates and yield requirements from the commitment date to the date of the financial statements. The fair values of these commitments have had an immaterial effect on the Company’s financial position and results of operations.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(g)
Loans Receivable, Net
Loans receivable are stated at unpaid principal balances adjusted for net deferred loan origination fees and the allowance for loan losses. Loan origination fees, net of certain loan origination costs, are deferred and subsequently recognized in interest income as a yield adjustment using the level-yield method over the contractual life of the loan. When loans are prepaid prior to contractual maturity, any remaining deferred amounts are recognized in interest income. Prepayment penalties are also recognized in interest income, at the time of receipt, when the borrower does not refinance with the Company or when the terms (including effective yield) of a refinanced loan are at least as favorable as the terms of comparable loans to other borrowers of similar creditworthiness.
Interest is accrued monthly on the outstanding balance of mortgages and other loans unless management considers collection to be doubtful. Loans are generally placed on non-accrual status when principal or interest payments are in arrears ninety days or more or when other factors indicate that the collection of such amounts is doubtful. When loans are placed on non-accrual status, interest previously accrued but not received is reversed and charged against current income. Income is subsequently recognized only to the extent cash is received and full collectibility of principal is anticipated.
(h)
Allowance for Loan Losses
The allowance for loan losses is established through provisions for losses charged to earnings. Losses on loans (including impaired loans) are charged to the allowance for loan losses when management believes that the collection of principal is unlikely. Recoveries of loans previously charged-off are credited to the allowance when realized.
Loans are charged-off in whole or in part when it has been determined that there has been a loss of principal. For real estate secured loans, this determination is normally made in conjunction with a current appraisal analysis. Initial write-downs on foreclosed assets are also charged-off against the allowance for loan losses.
Factors considered in management’s periodic evaluation of the adequacy of the allowance for loan losses include the Company’s historical loss experience, current economic conditions, delinquency statistics, geographic concentrations, the financial strength of the borrower, the estimated value of underlying collateral and the results of internal and external loan reviews. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The Company considers a loan to be impaired when, based upon current information and events, it is probable that it will be unable to collect all principal and interest contractually due. The Company applies these criteria primarily to its commercial, multi-family and construction loans on at least a quarterly basis. Impairment is measured as the excess of the loan balance over (i) the present value of the loan’s expected future cash flows (including principal and interest) discounted at the loan’s effective interest rate or (ii) the fair value of the underlying collateral if the loan is collateral dependent. These impairments are specific allocations within the allowance for loan losses. Impairment criteria generally do not apply to those smaller-balance homogeneous loans that are collectively evaluated for impairment, such as the Company’s one-to-four family mortgage loans. These collective evaluations result in general allocations within the allowance for loan losses that are determined by applying loss factors to the loan balances in the various portfolio categories. These loss factors are determined by management in consideration of the degree of credit risk involved in each portfolio category, historical loss experience, current economic conditions, delinquency statistics and geographic concentrations.
(i)
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation expense is provided on a straight-line basis over the estimated useful lives of the related assets, which are 50 years for buildings and 3 to 10 years for furniture and equipment. Amortization of leasehold improvements is recognized on a straight-line basis over the shorter of the terms of the related leases or the estimated useful lives of the assets, resulting in amortization periods ranging from 12 to 15 years.
(j)
Bank-Owned and Split-Dollar Life Insurance
The Bank owns life insurance policies on the lives of certain of its officers. The cash surrender value of the policies is recorded as an asset and the change in that value is recorded as non-interest income. Death benefit proceeds received in excess of a policy’s cash surrender value are recognized in income upon receipt. Cash surrender values totaling $8,961,000 and $8,604,000 are reflected in the consolidated statements of financial condition as of September 30, 2007 and 2006, respectively. There are no policy loans offset against the cash surrender values or restrictions on the use of the proceeds.
The Bank has also entered into agreements with certain of its officers with respect to split-dollar life insurance policies owned by the officer. The Bank pays the policy premiums and holds an assignment of policy proceeds payable at death sufficient to repay all premiums. The amount by which any death benefits exceeds a policy’s cash surrender value will be paid to the beneficiary or beneficiaries designated by the Bank officer. Aggregate premiums paid by the Bank of $1,277,000 and $1,241,000 are included in other assets in the consolidated statements of financial condition as of September 30, 2007 and 2006, respectively.
(k)
Income Taxes
Using the asset and liability 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. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(l)
Comprehensive Income
Comprehensive income consists of net income and the change in net unrealized appreciation or depreciation in the fair value of securities available-for-sale, net of taxes.
(m)
Employee Stock Ownership Plan (“ESOP”)
Compensation expense is recognized for the ESOP equal to the fair value of shares that have been allocated or committed to be released for allocation to participants. Any difference between the fair value at that time and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). The cost of ESOP shares that have not yet been allocated or committed to be released for allocation is deducted from stockholders’ equity.
(n)
Stock Compensation Plans
The Company adopted SFAS No. 123(R) upon approval of the Brooklyn Federal Bancorp, Inc. 2006 Stock-Based Incentive Plan on April 11, 2006.
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Accounting Standard (“SFAS”) SFAS No. 123 (revised 2004), “Share-Based payment.” This statement revised the original guidance contained in SFAS No. 123 and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. Under SFAS No. 123 (revised 2004), an entity such as the Company will be required to measure the cost of employee services received in exchange for any award of equity instruments made after June 30, 2006, based on the grant-date fair value of the award (with limited exceptions) and recognize such cost over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). For stock options and similar instruments, grant-date fair value will be estimated using option-pricing models adjusted for the unique characteristics of instruments (unless observable market prices for the same or similar instruments are available). On January 16, 2007 the Board of Directors granted 552,500 options of the 648,025 options available and granted 221,000 shares of restricted stock of the 259,210 available shares of restricted stock, in accordance with the terms of the Brooklyn Federal Bancorp, Inc. 2006 Stock-Based Incentive Plan, which was approved by the Company’s shareholders at the April 11, 2006 annual meeting of stockholders. During the quarter ending March 31, 2007, 10,050 of granted options and 4,000 shares of granted restricted stock were forfeited due to a resignation. The Company expensed, during the quarter ending March 31, 2007, the entire fair value of 365,000 options and 146,000 shares of restricted stock due to the provision in the 2006 Stock-Based Incentive Plan that accelerates the vesting of options and shares of restricted stock upon termination of service following retirement age (as defined in the plan). During the quarter ending June 30, 2007 the Company granted the remainder of 42,210 shares of restricted stock. The Company also expensed, during the quarter ending June 30, 2007, the entire fair value of 36,008 shares of restricted stock due to the provision in the 2006 Stock-Based Incentive Plan that accelerates the vesting of restricted stock upon termination of service following retirement age (as defined in the plan). During the quarter ending September 30, 2007, the Company granted the remaining 105,575 options and the Company expensed the entire fair value of 21,600 options due to the provision in the 2006 Stock-Based Incentive Plan that accelerates the vesting of options upon terminations of service following retirement age (as defined in the plan). In September 2007, 27,500 granted options and 11,096 shares of restricted stock were forfeited due to a resignation. The 11,096 shares of restricted stock were granted and the Company expensed the entire fair value of the 11,096 shares of restricted stock due to the provision in the 2006 Stock-Based Incentive Plan that accelerates the vesting of restricted stock upon termination of service following retirement age (as defined in the plan). The 27,500 options are still available to be granted in the future.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(o)
Earnings Per Share (“EPS”)
Basic EPS is based on the weighted average number of common shares actually outstanding, and is adjusted for Employee Stock Ownership Plan (“ESOP”) shares not yet committed to be released, unvested restricted stock awards and deferred compensation obligations required to be settled in shares of Company stock. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as unvested restricted stock awards and outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable (such as stock awards and options) or which could be converted into common stock, if dilutive, using the treasury stock method. The calculation of diluted EPS for the year ended September 30, 2007, include incremental shares related to outstanding stock options and unvested restricted stock awards of 40,575 and 59,616, respectively. The calculation of diluted EPS for the year ended September 30, 2006, did not include any incremental shares related to outstanding stock options and unvested restricted stock awards because there were no grants of options or restricted stock awards during that period. Shares issued and reacquired during any period are weighted for the portion of the period they were outstanding.
(p)
Segment Information
Public companies are required to report certain financial information about significant revenue-producing segments of the business for which such information is available and utilized by the chief operating decision maker. As a community-oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company’s only operating segment for financial reporting purposes.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(3)
Securities
Investments in securities available-for-sale and held-to-maturity at September 30, 2007 and 2006 are summarized as follows:
All of the Company’s mortgage-backed securities were acquired by purchase (none resulted from retained interests in loans sold or securitized by the Company). Mortgage-backed securities issued by government-sponsored enterprises at September 30, 2007 consist of (i) Freddie Mac securities with an amortized cost of $26,119,000 (compared to $35,989,000 at September 30, 2006) and an estimated fair value of $25,198,000 (compared to $34,562,000 at September 30, 2006) and (ii) Fannie Mae securities with an amortized cost of $14,204,000 (compared to $19,144,000 at September 30, 2006) and an estimated fair value of $13,876,000 (compared to $18,535,000 at September 30, 2006). These are the only securities of individual issuers held by the Company with an aggregate book value exceeding 10% of the Company’s equity at September 30, 2007. Government agency mortgage-backed securities represent securities issued by Ginnie Mae.
There were no proceeds from sales of securities available-for-sale the years ended September 30, 2007, 2006 and 2005, from the sale of mutual fund shares.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
At September 30, 2007, the Bank pledged securities of $35.5 million in amortized cost, with an estimated fair value of $34.5 million, as collateral for advances from the Federal Home Loan Bank of New York (“FHLB-NY”).
There were no sales of securities held-to-maturity during the years ended September 30, 2007, 2006, and 2005.
The following is a summary of the amortized cost and estimated fair values of securities held-to-maturity at September 30, 2007, by remaining term to contractual maturity other than mortgage-backed securities. Actual maturities may differ from these amounts because certain issuers have the right to call or redeem their obligations prior to contractual maturity. The contractual maturities of mortgage-backed securities generally exceed 20 years; however, the effective average life is expected to be substantially shorter due to anticipated prepayments.
The following tables summarize those securities available-for-sale and held-to-maturity at September 30, 2007 and 2006 with gross unrealized losses, segregated by the length of time the securities had been in a continuous loss position:
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The Bank invests primarily in mortgage-backed securities of U.S. government-sponsored enterprises and, to a lesser extent, U.S. Government agency securities and securities of private issuers. Substantially all of the unrealized losses at September 30, 2007 and 2006 relate to mortgage-backed securities and were caused by increases in market yields subsequent to purchase. There were no securities with unrealized losses that were individually significant at September 30, 2007 and 2006. At September 30, 2007, a total of 8 securities were in a continuous unrealized loss position for less than 12 months, and 57 securities for 12 months or longer (compared to 4 securities and 62 securities, respectively, at September 30, 2006). There were no debt securities past due or securities for which the Bank currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security. The Bank has the ability and intent to hold its debt securities to maturity, thereby recovering the investments without realizing a loss. Based on these facts and circumstances, the Bank did not consider any securities to be other-than-temporarily impaired at September 30, 2007 and 2006.
(4)
Loans, Sales and Syndications
Gross loans held-for-sale at September 30, 2007 and 2006 are summarized as follows:
The following is a summary, by type of loan of the principal balances of whole loans and loan participation interests sold during the years ended September 30, 2007, 2006 and 2005.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The portion of loans retained by the Bank on sales of participation interests during the years ended September 30, 2007, 2006 and 2005 were $55,794,000, $24,178,000 and $11,569,000, respectively.
In loan participation transactions, the Bank originates the full loan amount and subsequently identifies participants that purchase participation interests from the Bank. This differs from loan syndication transactions where, prior to closing the loan, the Bank identifies other lenders who agree to fund a portion of the total loan at closing. The Bank records its share of the loan syndication as a loan receivable. The amounts funded by other lenders are not reflected as loan originations and sales in the Bank’s consolidated financial statements.
The following is a summary of loan syndication transactions completed during the years ended September 30, 2007, 2006 and 2005:
The unpaid principal balances of whole loans and loan participation interests sold by the Bank and serviced for others at September 30, 2007, 2006 and 2005 are summarized as follows:
In addition, the Bank serviced syndicated loan balances owned by other lenders totaling $108,201,000, $62,041,000 and $45,895,000 at September 30, 2007, 2006 and 2005, respectively. At September 30, 2007, 2006 and 2005, the Bank serviced one- to four-family loans involving limited recourse of $3,802,000, $4,236,000 and $4,039,000, respectively.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(5)
Loans Receivable, Net
The components of the loan portfolio, excluding loans held-for-sale at September 30, 2007 and 2006, are summarized as follows:
At September 30, 2007 the Bank pledged $28.1 million in mortgage loans as collateral for borrowings from the FHLB - NY.
At September 30, 2007 and 2006, loans receivable in non-accrual status were $652,000 and $2.8 million, respectively. Interest which would have been recorded on these loans had they been accruing was approximately $80,000 in fiscal 2007 and $132,000 in fiscal year 2006. The Company’s total recorded investment in impaired loans, as defined by SFAS No. 114, was $2.3 million and $2.1 million at September 30, 2007 and September 30, 2006, respectively. All of these loans were collateral-dependent loans measured based on the fair value of the collateral. The Company determines the need for an allowance for loan impairment under SFAS No. 114 on a loan-by-loan basis. An impairment allowance was not required at September 30, 2007 and 2006 due to the adequacy of collateral values. The Company’s average recorded investment in impaired loans was $3.5 million during the year ended September 30, 2007, $251,000 during the year ended September 30, 2006, and $393,000 during the year ended September 30, 2005.
The Company’s loan portfolio consists primarily of residential and commercial real estate mortgage loans secured by properties located in the Company’s primary market area of Kings, Nassau and Suffolk Counties of New York. The ability of the Company’s borrowers to make principal and interest payments is dependent upon, among other things, the level of overall economic activity and the real estate market conditions prevailing within the Company’s concentrated lending area. Commercial real estate and construction loans are considered by management to be of somewhat greater credit risk than loans to fund the purchase of a primary residence due to the generally larger loan amounts and dependency on income production or sale of the real estate.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The principal balances of non-accrual loans were as follows:
Activity in the allowance for loan losses for each of the years in the three-year period ended September 30, 2007 is summarized below. There were no charge-offs or recoveries during these years, except for a $1,000 consumer loan charge-off in fiscal year 2005.
(6)
Accrued Interest Receivable
Accrued interest receivable at September 30, 2007 and 2006 is summarized as follows:
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(7)
Deposits
Deposits at September 30, 2007 and 2006 are summarized as follows:
Scheduled maturities of certificates of deposit at September 30, 2007 and 2006 are summarized as follows:
Interest expense on deposits for the years ended September 30, 2007, 2006 and 2005 is summarized as follows:
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The aggregate amount of certificates of deposit with balances equal to or greater than $100,000 was $39,147,000 and $35,771,000 at September 30, 2007 and 2006, respectively. The FDIC generally insures deposit amounts up to $100,000, as defined in the applicable regulations.
(8)
Borrowings
The Bank’s borrowings at September 30, 2007 and 2006 consist of FHLB-NY advances with interest rates and maturity dates as summarized below. None of these advances are callable by the FHLB-NY prior to maturity.
As a member of the FHLB-NY, the Bank may have outstanding FHLB-NY borrowings of up to approximately $86.7 million and $86.2 million at September 30, 2007 and 2006, respectively, in a combination of term advances and overnight funds. The Bank’s unused FHLB-NY borrowing capacity was approximately $77.4 million and $36.7 million at September 30, 2007 and 2006, respectively.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
Borrowings are secured by the Bank’s investment in FHLB-NY stock and by a security agreement. This agreement requires the Bank to maintain as collateral certain qualifying assets (principally securities and residential mortgage loans) not otherwise pledged, with a fair value (as defined) at least equal to 120% of outstanding advances, or $11.1 million as of September 30, 2007. The Bank satisfied its collateral requirement at September 30, 2007 and 2006.
At September 30, 2007 the Bank pledged $28.1 million of its mortgage portfolio and $35.5 million (amortized cost) of its securities portfolio having a fair market value of $34.6 million.
(9)
Federal, State, and Local Taxes
The Bank’s provision (benefit) for income taxes included in the consolidated statements of income for the years ended September 30, 2007, 2006 and 2005 are as follows:
The reconciliation of the Bank’s U.S. statutory rate to the Bank’s effective tax rate for the years ended September 30, 2007, 2006 and 2005 is as follows:
Beginning with the fiscal year ended September 30, 2005, the Company filed a consolidated Federal income tax return on a September 30 fiscal year basis. The Company also filed New York State franchise tax and New York City financial corporation tax returns on a September 30 fiscal year basis. The Company’s annual state and city tax liability for each tax year is the greater of a tax based on entire net income, as defined, taxable assets or an alternative tax based on a specified formula. Further, the Company is subject to a metropolitan transportation business tax surcharge based upon New York State tax liability.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2007 and 2006 are as follows:
Management believes that it is more likely than not that the consolidated results of future operations of the Bank will generate sufficient taxable income to realize the deferred tax assets of the Bank. Therefore, a valuation allowance against the gross deferred tax assets was not considered necessary at September 30, 2007 and 2006.
As a thrift institution, the Bank is subject to special provisions in the tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions are determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves represent the excess of allowable deductions over actual bad debt losses, and include a defined base-year amount. Deferred tax liabilities are recognized with respect to reserves in excess of the base-year amount, as well as any portion of the base-year amount that is expected to become taxable (or “recaptured”) in the foreseeable future.
The Bank’s base-year tax bad debt reserves totaled $1.6 million for Federal tax purposes and $2.6 million for State tax purposes at September 30, 2007 and 2006. Deferred tax liabilities have not been recognized with respect to these reserves, since the Bank does not expect that these amounts will become taxable in the foreseeable future. Under the tax laws, events that would result in taxation of these reserves include failure of the Bank to maintain a specified qualifying assets ratio or meet other thrift definition tests for New York State tax purposes. Federal base-year reserves are subject to recapture if the Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a thrift or bank charter. The unrecognized deferred tax liabilities with respect to the Bank’s base-year reserves totaled approximately $0.8 million at both September 30, 2007 and 2006.
(10)
Defined Contribution Plan and Supplemental Executive Retirement Plan
The Company has a non-contributory defined contribution plan which covers all employees with a minimum of two years of service who are at least twenty-one years of age. Contributions are made annually for each employee based upon a fixed percentage of compensation and were $157,000, $153,000 and $134,000 for the years ended September 30, 2007, 2006 and 2005, respectively.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The Company has also established a Supplemental Executive Retirement Plan, which is a non-qualified plan providing certain executives with supplemental retirement benefits. The periodic pension expense for the supplemental plan amounted to $291,000, $523,000 and $275,000 for the years ended September 30, 2007, 2006 and 2005, respectively. The accrued liability on the supplemental plan was $1.6 million and $1.3 million at September 30, 2007 and 2006, respectively, all of which is unfunded.
(11)
Employee Stock Ownership Plan
In connection with the Reorganization and Offering in April 2005, the Company established an ESOP for eligible employees who meet certain age and service requirements. The ESOP borrowed $3,174,000 from the Company and used the funds to purchase 317,400 shares of common stock as part of the Offering. The Bank makes periodic contributions to the ESOP sufficient to satisfy the debt service requirements of the loan which has a twenty-year term and bears interest at the prime rate set on November 1st of each year. The ESOP uses these contributions, and any dividends received by the ESOP on unallocated shares, to make principal and interest payments on the loan.
ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares over a period not to exceed five years. Any forfeited shares are allocated to other participants in the same proportion as contributions.
ESOP expense was $222,000, $195,000 and $147,000 for the years ended September 30, 2007, 2006 and 2005, respectively. Through September 30, 2007 a cumulative total of 14,548 shares have been committed to be released for allocation and 31,740 shares have been allocated. The cost of ESOP shares that have not yet been allocated to participants or committed to be released for allocation is deducted from stockholders’ equity (271,112 shares with a cost of approximately $2,711,120 and fair value of approximately $3,727,800 at September 30, 2007).
(12)
Stock-Based Incentive Plan
The Company has a stock-based incentive plan that consists of: stock options and restricted stock awards. At the annual meeting held on April 11, 2006, stockholders of the Company approved the Brooklyn Federal Bancorp, Inc. 2006 Stock-Based Incentive Plan. The plan authorizes the award of up to 648,025 shares as stock options and 259,210 shares as restricted stock awards. On January 16, 2007, non-employee directors received in aggregate 137,500 options with an exercise price of $13.30 and 55,000 shares of restricted stock. On January 16, 2007, certain officers of the Company and Bank received in aggregate 415,000 options with an exercise price of $13.30 and 166,000 shares of restricted stock. During the quarter ended March 31, 2007 a resigned officer forfeited 10,050 options and 4,000 restricted stock shares. On June 19, 2007 the remaining 42,210 restricted stock shares were granted to non-employee directors of 9,802 shares, officers and employees of the Company and the Bank of 32,408 shares. On August 21, 2007, 24,506 stock options were granted to a non-employee director and 81,069 were granted to officers and employees of the Company and the Bank at an exercise price of $13.74. During the quarter ended September 30, 2007, 27,500 granted stock options and 11,096 granted restricted stock awards were forfeited due to the resignation of a non-employee director. On September 18, 2007 the 11,096 forfeited restricted stock awards were granted to non-employee directors. The Company adopted SFAS No. 123(R) upon approval of the Plan, and began to expense the fair value of all options over their vesting periods and began to expense the fair value of all restricted stock grants over the requisite vesting periods.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
Employee options and non-employee director options generally vest over a seven-year service period, except in cases where retirement qualifications come into effect, which accelerates the vesting upon granting. Management estimated the fair values relating to all of the fiscal 2007 option grants using the Black-Sholes option-pricing model. Since there was limited historical information on the volatility of the Company’s stock, management based expectations about future volatility on the average volatilities of similar entities for an appropriate period following their initial public offering. Management estimated the expected life of the options assuming that they must be less than the vesting period or seven years, and no greater than their contractual life, ten years, in conjunction with an evaluation of the grantees’ ages and lengths of service. The Treasury yield in effect at the time of the grant provides the risk-free rate for periods within the vesting life of the option. Management recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite vesting and service period of the awards. The weighted-average grant-date fair value of options granted during the year ended September 30, 2007 was $3.57.
Management used the following assumptions to estimate the fair values of options granted:
Restricted shares generally vest in full after five years. The product of the number of shares granted and the grant date market price of the Company’s common stock determine the fair value of restricted shares under the Company’s stock-based incentive plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite vesting or service period of five years. The weighted-average grant-date fair value of restricted stock awards during the year ended September 30, 2007 was $13.68.
During the year ended September 30, 2007, the Company recorded a $4.1 million of stock-based incentive compensation expense, comprised of stock option expense of $1.3 million and $2.8 million of restricted stock expense.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The following is a summary of the Company’s stock option activity and related information for its option plan for the year ended September 30, 2007:
Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares. As of September 30, 2007, the Company has 172,727 shares of treasury stock.
The following is a summary of the status of the Company’s unexercisable options as of September 30, 2007:
As stated above in the table, there were 386,600 options vested during the year ended September 30, 2007. Expected future compensation expense relating to the 233,925 unexercisable options outstanding as of September 30, 2007 is approximately $945,600 over a weighted average period of 9.4 years. As of September 30, 2007, there were 27,500 shares remaining available for future option grants under the plan.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The following is a summary of the status of the Company’s restricted share awards as of September 30, 2007:
During the year ended September 30, 2007, the total fair value of restricted shares that vested during the year was $2.7 million. Expected future compensation expense relating to the 66,000 non-vested restricted shares at September 30, 2007 is $774,000 over a weighted average period of 4.4 years. As of September 30, 2007, there were no shares remaining available for future restricted stock grants under the plan.
(13)
Regulatory Capital
The Bank 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 a bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’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 requires the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I risk-based capital to risk-weighted assets, and of leverage and tangible capital to adjusted total assets. Management believes, as of September 30, 2007 and 2006, that the Bank met all capital adequacy requirements to which it was subject.
As of September 30, 2007, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The Bank’s actual capital amounts and ratios are also presented in the table:
The following is a reconciliation of the Bank’s equity under generally accepted accounting principles and its regulatory capital amounts at September 30, 2007 and 2006:
Dividends
If the Company pays dividends to its stockholders, it also will be required to pay dividends to BFS Bancorp, MHC, unless BFS Bancorp, MHC elects to waive the receipt of dividends. Any decision to waive dividends will be subject to regulatory approval. Under OTS regulations, public stockholders would not be diluted for any dividends waived by BFS Bancorp, MHC in the event BFS Bancorp, MHC converts to stock form.
Dividends from the Company will depend, in part, upon receipt of dividends from the Bank, because the Company presently has no source of income other than dividends from the Bank, earnings from the investment of offering proceeds it retained and interest on the Company’s loan to the employee stock ownership plan. A regulation of the OTS imposes limitations on “capital distributions” by savings institutions such as the Bank. The Company, however, will not be subject to OTS regulatory restrictions on the payment of dividends.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(14)
Commitments and Contingencies
In the ordinary course of the Bank’s business, there are various outstanding legal proceedings. In the opinion of management, after consultation with legal counsel, the outcome of such legal proceedings will not have a material effect on the Bank’s financial position, results of operations or liquidity position.
The principal commitments and contingent liabilities of the Bank are discussed below.
Lease Commitments
At September 30, 2007, the Bank was obligated under noncancelable operating leases on property used for banking purposes. These leases contain escalation clauses, which provide for minimum annual rental payments and payment of real estate taxes and other occupancy expense, that may be increased based upon increases in real estate taxes and in the other occupancy expenses. Rental expense was $369,000, $326,000 and $329,000 for the years ended September 30, 2007, 2006 and 2005, respectively.
The projected minimum rental payments by fiscal year under the terms of the leases at September 30, 2007 are approximately as follows:
Loan Commitments
At September 30, 2007 and 2006, outstanding commitments made by the Bank for commercial and residential mortgages, undisbursed construction loans, and home equity lines of credit approximated $86,747,000 and $76,130,000, respectively. The commitments at September 30, 2007 consisted of adjustable or variable rate commitments of $78,084,000 and fixed-rate commitments of $8,663,000. The fixed-rate commitments carried interest rates ranging from 5.125% to 7.75%. At September 30, 2007 there were $440,000 in commitments to sell whole loans.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
For commitments to originate loans, the Bank’s maximum exposure to credit risk is represented by the contractual amount of those instruments. Commitments represent exposure to credit risk only to the extent that they are subsequently drawn upon by customers. Some commitments have fixed expirations and, consequently, may not represent future cash requirements. The Bank uses the same credit policies and underwriting standards in making loan commitments as it does for on-balance-sheet instruments. For loan commitments, the Bank would generally be exposed to interest rate risk from the time a commitment is issued with a defined contractual interest rate. Since the Bank’s off-balance sheet financial instruments are limited to loan origination commitments that are short term in duration and present nominal credit risk, there was no accrual for credit losses on such instruments at September 30, 2007 and 2006.
(15)
Related Party Transactions
As of September 30, 2007 and 2006, the Bank had approximately $279,000 and $343,000, respectively, of mortgage loans to its officers and related parties, with interest rates varying from 5.00% to 6.50% at both dates. During the year ended September 30, 2007, related party loans repaid approximately $64,000 and there were no new loans or advances. All loans mature within 30 years.
(16)
Financial Instrument Fair Value Disclosures
Fair value disclosures are required for financial instruments for which it is practicable to estimate fair value. The definition of a financial instrument includes many of the assets and liabilities recognized in the Bank’s consolidated statements of financial condition, as well as certain off-balance sheet items. Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation.
Quoted market prices are used to estimate fair values when those prices are available. However, active markets do not exist for many types of financial instruments. Consequently, fair values for these instruments must be estimated by management using techniques such as discounted cash flow analysis and comparison to similar instruments. Estimates developed using these methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that appropriately reflect market and credit risks. Changes in these judgments often have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes. Fair values disclosed do not reflect any premium or discount that could result from the sale of a large volume of a particular financial instrument, nor do they reflect possible tax ramifications or estimated transaction costs.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
The following table summarizes the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2007 and 2006:
The following methods and assumptions were utilized by the Company in estimating the fair values of its financial instruments at September 30, 2007 and 2006:
(a)
Cash and Due from Banks
The estimated fair values of cash and due from banks are assumed to equal the carrying values as these balances are due on demand.
(b)
Certificates of Deposit
The estimated fair values of the investment of certificates of deposit represent contractual cash flows discounted using interest rates that would be currently received on these deposits with similar characteristics and remaining maturities.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(c)
Securities Available-for-Sale and Held-to-Maturity
Estimated fair values were based principally on quoted market prices.
(d)
Loans Held-for-Sale
The estimated fair value of loans held-for-sale is based on current prices established in the secondary market, or for those loans committed to be sold, based upon the price established by the commitment.
(e)
Loans Receivable, Net
The loan portfolio was segregated into various components for valuation purposes in order to group loans based on their significant financial characteristics, such as type of interest rate (adjustable or fixed) and payment status (performing or non-performing).
Fair values were estimated for each component as described below.
The fair values of performing mortgage loans and consumer loans were estimated by discounting the anticipated cash flows from the respective portfolios. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality.
The fair values of non-performing mortgage loans and consumer loans were based on recent collateral appraisals or management’s analysis of estimated cash flows discounted at rates commensurate with the credit risk involved.
(f)
FHLB-NY Stock
The estimated fair value of the Bank’s investment in FHLB-NY stock is deemed to equal its carrying value which represents the price at which it may be redeemed.
(g)
Accrued Interest Receivable
The fair value of accrued interest receivable is estimated to be the carrying value since it is currently due.
(h)
Deposits
The estimated fair value of deposits with no stated maturity, which include NOW, money market, and passbook savings accounts is deemed to be equal to the amount payable on demand at the valuation date. The estimated fair values of certificates of deposit represent contractual cash flows discounted using interest rates currently offered on deposits with similar characteristics and remaining maturities.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
These estimated fair values do not include the intangible value of core deposit relationships which comprise a significant portion of the Bank’s deposit base. Management believes that the Bank’s core deposit relationships provide a relatively stable, low cost funding source which has a substantial intangible value separate from the deposit balances.
(i)
Borrowings
The fair values of borrowings are estimated using a discounted cash flow analysis based on the current incremental borrowing rates for similar types of borrowing arrangements.
(j)
Commitments
Fair values of commitments outstanding are estimated based on the fees that would be charged for similar agreements, considering the remaining term of the agreement, the rate offered and the credit worthiness of the parties. The estimated fair values of commitments outstanding as of September 30, 2007 and 2006 are not considered significant and are not included in the above table.
(17)
Earnings Per Common Share
The following is a summary of the calculation of earnings per share (EPS):
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
Basic EPS is based on the weighted average number of common shares actually outstanding adjusted for Employee Stock Ownership Plan (“ESOP”) shares not yet committed to be released and unvested restricted stock awards. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as unvested restricted stock awards and outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable or which could be converted into common stock, if dilutive, using the treasury stock method. Shares issued and reacquired during any period are weighted for the portion of the period they were outstanding.
(18)
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in the accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
In September 2006, the FASB issued SAFS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles, and expands disclosures about fair value measurements. SAFS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of SAFS No. 157 on our consolidated financial position, results of operations and cash flows.
In September 2006, the FASB’s Emerging Issues Task Force (EITF) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer (who is also the policyholder) has a liability for the benefit it is providing to its employee. As such, if the policyholder has agreed to maintain the insurance policy in force for the employee’s benefit during his or her retirement, then the liability recognized during the employee’s active service period should be based on the future cost of insurance to be incurred during the employee’s retirement. Alternatively, if the policyholder has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS No. 106 or Accounting Principals Board (APB) Opinion No. 12, as appropriate. For transition, an entity can choose to apply the guidance using either of the following approaches: (a) a change in accounting principle through retrospective application to all periods presented or (b) a change in accounting principle through a cumulative-effect adjustment to the balance in retained earnings at the beginning of the year of adoption. EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with early adoption permitted. The Company does not believe that the implementation of this guidance will have a material impact on the Company’s consolidated financial statements.
In September 2006, the Emerging Issues Task Force reached a conclusion on EITF Issue No. 06-5, “Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (“EITF 06-5”). The scope of EITF 06-5 consists of six separate issues relating to accounting for life insurance policies purchased by entities protecting against the loss of “key persons.” The six issues are clarifications of previously issued guidance on FASB Technical Bulletin No. 85-4. EITF 06-5 is effective for fiscal years beginning after December 15, 2006. The Company does not expect it to have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company October 1, 2008. The Company is evaluating the impact that the adoption of SFAS No. 159 will have on our consolidated financial statements.
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of EITF 06-10 on its consolidated financial position and results of operations.
In March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The Company does not expect EITF 06-11 will have a material impact on its financial position, results of operations or cash flows.
In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. We are currently evaluating the impact of adopting FIN 48-1 on our financial statements.
(19)
Condensed Parent Company Financial Statements
Set forth below are the condensed statements of financial condition and related condensed statements of income and cash flows as of September 30, 2007, 2006 and 2005. The related 2005 condensed statements of financial condition, condensed statements of income and condensed statement of cash flows are for the period April 5, 2005 to September 30, 2005 for Brooklyn Federal Bancorp, Inc.:
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
BROOKLYN FEDERAL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 2007, 2006 and 2005
(20) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for the years ended September 30, 2007 and 2006:
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. 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-15(e) under the Exchange Act) as of September 30, 2007 (the “Evaluation Date”). 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 alerting them in a timely manner to material information relating to us or our consolidated subsidiary required to be included in our periodic SEC filings.
Item 9B.
Item 9B. Other Information
None.
PART III.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding director nominees, incumbent directors, executive officers, the Audit Committee of the board of directors, Audit Committee financial experts and procedures by which stockholders may recommend director nominees required by this item is set forth under “Proposal 1-Election of Directors” in the Proxy Statement filed for the Annual Meeting of Stockholders to be held on February 19, 2008 and is incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is set forth under “Proposal 1-Election of Directors” under caption “Ownership Reports by Officers and Directors” in the Proxy Statement filed for the Annual Meeting of Stockholders to be held on February 19, 2008 and is incorporated herein by reference.
The Company had adopted a Code of Business Conduct and Ethics that is applicable to all directors, officers and employees of the Company and the Bank, including the principal executive officer, principal financial officer, principal accounting officer, and all persons performing similar functions. The Code of Business Conduct and Ethics is posted on the Bank’s website at www.brooklynbank.com. Amendments to and waivers from the Code of Business Conduct and Ethics will also be disclosed on the Bank’s website.
Item 11.
Item 11. Executive Compensation
The information required by this item is set forth under “Proposal 1-Election of Directors” under the caption “Director Compensation” and “Executive Officers Compensation”, excluding the information set forth under the captions “Compensation Committee Report”, in the Proxy Statement for the Annual Meeting of Stockholders to be held on February 19, 2008 and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item regarding security ownership of certain beneficial owners and management is set forth under “Security Ownership of Certain Beneficial Owners” and “Proposal I-Election of Directors” in the Proxy Statement filed for the Annual Meeting of Stockholders to be held on February 19, 2008 and is incorporated here by reference.
The information regarding the Company’s compensation plans under which equity securities of the Brooklyn Federal are authorized for issuance as of September 30, 2007 is included under “Proposal I-Election of Directors” under the caption “Benefit Plans and Arrangements” in the Proxy Statement filed for the Annual Meeting of Stockholders to be held on February 19, 2008 and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is set forth under “Proposal I-Election of Directors” under the captions “Transactions With Certain Related Persons” and “Board Independence” in the Proxy Statement filed for the Annual Meeting of Stockholders to be held on February 19, 2008 and is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
The Company’s independent registered public accounting firm for the years ended September 30, 2007 and 2006 was Beard Miller Company LLP (“BMC”).
Audit Fees. The aggregate fees billed to the Company by BMC for professional services rendered by BMC for the audit of the Company’s annual financial statements, review of the financial statements included in the Company’s Quarterly Reports on Form 10-Q and services that are normally provided by BMC in connection with statutory and regulatory filings and engagements was $100,600 and $72,500 during the fiscal years ended September 30, 2007 and 2006, respectively.
Audit Related Fees. There were no fees billed to the Company by BMC for fiscal 2007 or fiscal 2006 for assurance and related services reasonably related to the performance of the audit of and review of the financial statements that are not already reported in “Audit Fees,” above.
Tax Fees. There were no tax fees billed to the Company by BMC for tax compliance, tax advice and tax planning for the fiscal years ended September 30, 2007 and 2006, respectively.
All Other Fees. No other fees were billed to the Company by BMC during the fiscal years ended September 30, 2007 and 2006. The full Audit Committee pre-approves all audit and non-audit services to be performed by the independent registered public accounting firm and the related fees.
PART IV.
Item 15.
Item 15. Exhibits and Financial Statement Schedules
10.5
Employment Agreement by and between Brooklyn Federal Bancorp, Inc., Brooklyn Federal Savings Bank and Ralph Walther**
10.6
Amended and Restated Executive Supplemental Retirement Income Agreement between Brooklyn Federal Savings Bank and Angelo J. Di Lorenzo***
10.7
Amended and Restated Executive Supplemental Retirement Income Agreement between Brooklyn Federal Savings Bank and Richard A. Kielty***
10.8
Amendment to the Split Dollar Insurance Agreement between Brooklyn Federal Savings Bank and Angelo J. Di Lorenzo***
10.9
Amendment to the Split Dollar Insurance Agreement between Brooklyn Federal Savings Bank and Richard A. Kielty***
10.10
Amendment to the Split Dollar Insurance Agreement between Brooklyn Federal Savings Bank and Marilyn Alberici***
10.11
Brooklyn Federal Bancorp, Inc. 2006 Stock-Based Incentive Plan****
Subsidiaries of the Registrant*
23.1
Consent of Beard Miller Company LLP
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
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.
BROOKLYN FEDERAL BANCORP, INC.
By:
/s/ Angelo J. Di Lorenzo
Angelo J. Di Lorenzo
Chief Executive Officer and President
(Duly Authorized Representative)
Signatures
Title
Date
/s/ Angelo J. Di Lorenzo
Chief Executive Officer and
December 31, 2007
President (Principal
Angelo J. Di Lorenzo
Executive Officer)
/s/ Richard A. Kielty
Executive Vice President and
December 31, 2007
Chief Financial Officer
Richard A. Kielty
(Principal Financial and
Accounting Officer)
/s/ John A. Loconsolo
Director
December 31, 2007
John A. Loconsolo
/s/ Vincent E. Caccese
Director
December 31, 2007
Vincent E. Caccese
/s/ John C. Gallin
Director
December 31, 2007
John C. Gallin
/s/ Daniel O. Reich
Director
December 31, 2007
Daniel O. Reich
/s/ Robert J. A. Zito
Director
December 31, 2007
Robert J. A. Zito
/s/ Arthur R. Williams
Director
December 31, 2007
Arthur R. Williams
EXHIBIT INDEX
3.1
Certificate of Incorporation of Brooklyn Federal Bancorp, Inc.*
3.2
Bylaws of Brooklyn Federal Bancorp, Inc.*
4.2
Form of Common Stock Certificate of Brooklyn Federal Bancorp, Inc. *
10.1
Amended and Restated Employment Agreement by and between Brooklyn Federal Bancorp, Inc., Brooklyn Federal Savings Bank and Angelo J. Di Lorenzo**
10.2
Amended and Restated Employment Agreement by and between Brooklyn Federal Bancorp, Inc., Brooklyn Federal Savings Bank and Richard A. Kielty**
10.3
Amended and Restated Employment Agreement by and between Brooklyn Federal Bancorp, Inc., Brooklyn Federal Savings Bank and Marc Leno**
10.4
Amended and Restated Employment Agreement by and between Brooklyn Federal Bancorp, Inc., Brooklyn Federal Savings Bank and Marilyn Alberici**
10.5
Employment Agreement by and between Brooklyn Federal Bancorp, Inc., Brooklyn Federal Savings Bank and Ralph Walther**
10.6
Amended and Restated Executive Supplemental Retirement Income Agreement between Brooklyn Federal Savings Bank and Angelo J. Di Lorenzo***
10.7
Amended and Restated Executive Supplemental Retirement Income Agreement between Brooklyn Federal Savings Bank and Richard A. Kielty***
10.8
Amendment to the Split Dollar Insurance Agreement between Brooklyn Federal Savings Bank and Angelo J. Di Lorenzo***
10.9
Amendment to the Split Dollar Insurance Agreement between Brooklyn Federal Savings Bank and Richard A. Kielty***
10.10
Amendment to the Split Dollar Insurance Agreement between Brooklyn Federal Savings Bank and Marilyn Alberici***
10.11
Brooklyn Federal Bancorp, Inc. 2006 Stock-Based Incentive Plan****
Subsidiaries of the Registrant*
23.1
Consent of Beard Miller Company LLP
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
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
Filed as exhibits to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the SEC (Registration No. 333-121580).
**
Filed as exhibits to the Company’s Current Report on Form 8-K filed on December 20, 2007.
***
Filed as exhibits to the Company’s Current Report on Form 8-K filed on December 6, 2007.
****
Field as exhibit to the Company’s Definitive Proxy Statement filed with the SEC on March 7, 2006.