UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-3209278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144-51 NORTHERN BOULEVARD, FLUSHING, NEW YORK 11354
(Address of principal executive offices)
(718) 961-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.01
PAR VALUE.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
The number of shares of the registrant's Common Stock outstanding as of
October 31, 2002 was 12,741,897.
TABLE OF CONTENTS
PAGE
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition .........................................1
Consolidated Statements of Operations and Comprehensive Income .........................2
Consolidated Statements of Cash Flows ..................................................3
Consolidated Statements of Changes in Stockholders' Equity .............................4
Notes to Consolidated Statements .......................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ..............................................................7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................20
ITEM 4. CONTROLS AND PROCEDURES ...........................................................20
PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................................20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ...................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............................20
ITEM 5. OTHER INFORMATION .................................................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..................................................21
SIGNATURES .................................................................................22
CERTIFICATIONS..............................................................................23
i
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data) September 30, 2000 December 31, 2001
- ---------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Cash and due from banks $ 28,074 $ 20,008
Federal funds sold and overnight interest-earning deposits 28,000 18,500
Securities available for sale:
Mortgage-backed securities 266,455 243,058
Other securities 49,996 62,481
Loans:
One-to-four family residential real estate loans 443,980 461,801
Multi-family real estate loans 443,400 369,651
Commercial real estate loans 251,494 214,410
Co-operative apartment loans 5,532 6,601
Construction loans 19,046 13,807
Small Business Administration loans 5,301 3,911
Consumer and other loans 3,575 2,814
Net unamortized premiums and unearned loan fees 1,378 787
Allowance for loan losses (6,581) (6,585)
-------------- --------------
Net loans 1,167,125 1,067,197
Interest and dividends receivable 8,674 7,945
Real estate owned, net -- 93
Bank premises and equipment, net 5,441 5,565
Federal Home Loan Bank of New York stock 22,964 25,422
Goodwill 3,905 3,905
Other assets 32,493 33,355
-------------- --------------
Total assets $ 1,613,127 $ 1,487,529
============== ==============
LIABILITIES
Due to depositors:
Non-interest bearing $ 31,161 $ 28,594
Interest-bearing:
Certificate of deposit accounts 535,428 467,172
Passbook savings accounts 211,828 195,855
Money market accounts 146,968 93,789
NOW accounts 36,753 33,107
-------------- --------------
Total interest-bearing deposits 930,977 789,923
Mortgagors' escrow deposits 14,558 10,065
Borrowed funds 493,170 513,435
Other liabilities 14,679 12,125
-------------- --------------
Total liabilities 1,484,545 1,354,142
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized) -- --
Common stock ($0.01 par value; 40,000,000 shares authorized; 13,852,063
shares issued; 12,721,897 and 13,487,784 shares outstanding at
September 30, 2002 and December 31, 2001, respectively) 139 139
Additional paid-in capital 46,389 45,280
Treasury stock, at average cost (1,130,166 and 364,279 shares at
September 30, 2002 and December 31, 2001, respectively) (19,690) (5,750)
Unearned compensation (8,159) (7,766)
Retained earnings 106,276 99,641
Accumulated other comprehensive income, net of taxes 3,627 1,843
-------------- --------------
Total stockholders' equity 128,582 133,387
-------------- --------------
Total liabilities and stockholders' equity $ 1,613,127 $ 1,487,529
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months For the nine months
ended September 30, ended September 30,
--------------------- ---------------------
(In thousands, except per share data) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 22,858 $ 21,368 $ 67,173 $ 62,750
Interest and dividends on securities:
Interest 3,775 3,960 11,899 11,838
Dividends 36 51 107 163
Other interest income 186 204 467 1,110
---------- --------- ---------- ---------
Total interest and dividend income 26,855 25,583 79,646 75,861
---------- --------- ---------- ---------
INTEREST EXPENSE
Deposits 7,084 7,507 20,901 22,424
Other interest expense 6,648 7,535 20,027 22,777
---------- --------- ---------- ---------
Total interest expense 13,732 15,042 40,928 45,201
---------- --------- ---------- ---------
NET INTEREST INCOME 13,123 10,541 38,718 30,660
Provision for loan losses -- -- -- --
---------- --------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,123 10,541 38,718 30,660
---------- --------- ---------- ---------
NON-INTEREST INCOME
Other fee income 742 496 2,122 1,680
Net gain (loss) on sales of securities and loans 84 36 (4,175) 254
Other income 650 768 2,019 2,707
---------- --------- ---------- ---------
Total non-interest income 1,476 1,300 (34) 4,641
---------- --------- ---------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,583 3,128 10,549 9,419
Occupancy and equipment 694 581 2,023 1,733
Professional services 551 566 1,944 1,647
Data processing 377 300 1,126 947
Depreciation and amortization 263 264 778 803
Other operating expenses 1,445 1,100 3,967 3,341
---------- --------- ---------- ---------
Total non-interest expense 6,913 5,939 20,387 17,890
---------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 7,686 5,902 18,297 17,411
---------- --------- ---------- ---------
PROVISION FOR INCOME TAXES
Federal 2,203 1,782 5,609 5,264
State and local 718 402 1,344 1,178
Total taxes 2,921 2,184 6,953 6,442
---------- --------- ---------- ---------
NET INCOME $ 4,765 $ 3,718 $ 11,344 $ 10,969
========== ========= ========== =========
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period $ 496 $ 2,310 $ (574)$ 3,301
Reclassification adjustments for (gains) losses included in income -- 3 2,358 (59)
---------- --------- ---------- ---------
Net unrealized holding gains 496 2,313 1,784 3,242
---------- --------- ---------- ---------
COMPREHENSIVE NET INCOME $ 5,261 $ 6,031 $ 13,128 $ 14,211
========== ========= ========== =========
Basic earnings per share $0.41 $0.30 $0.97 $0.89
Diluted earnings per share $0.39 $0.29 $0.92 $0.86
The accompanying notes are an integral part of these consolidated
financial statements.
-2-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended
September 30,
-------------------------------
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 11,344 $ 10,969
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses -- --
Depreciation and amortization of bank premises and equipment 778 803
Amortization of goodwill -- 275
Net (gain) loss on sales of securities 4,366 (94)
Net gain on sales of loans (191) (160)
Net gain on sales of real estate owned (4) (11)
Amortization of unearned premium, net of accretion of unearned discount 2,273 797
Amortization of deferred income (168) (279)
Deferred income tax provision 897 123
Deferred compensation 250 350
Net increase (decrease) in other assets and liabilities (4,028) 45
Unearned compensation 907 973
-------------- --------------
Net cash provided by operating activities 16,424 13,791
-------------- --------------
INVESTING ACTIVITIES
Purchases of bank premises and equipment (654) (219)
Redemptions (purchases) of Federal Home Loan Bank shares 2,458 (490)
Purchases of securities available for sale (138,990) (113,928)
Proceeds from sales and calls of securities available for sale 30,969 38,595
Proceeds from maturities and prepayments of securities available for sale 99,002 73,481
Net originations and repayment of loans (89,722) (80,049)
Purchases of loans (10,106) (887)
Proceeds from sales of real estate owned 97 106
-------------- --------------
Net cash used by investing activities (106,946) (83,391)
-------------- --------------
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits 2,567 5,248
Net increase in interest-bearing deposits 141,054 77,493
Net increase in mortgagors' escrow deposits 4,493 5,682
Net decrease in short-term borrowed funds -- (14,232)
Proceeds from long-term borrowed funds 50,000 78,000
Repayment of long-term borrowed funds (70,265) (68,689)
Purchases of treasury stock, net (16,560) (6,868)
Cash dividends paid (3,201) (2,843)
-------------- --------------
Net cash provided by financing activities 108,088 73,791
-------------- --------------
Net increase in cash and cash equivalents 17,566 4,191
Cash and cash equivalents, beginning of period 38,508 21,993
-------------- --------------
Cash and cash equivalents, end of period $ 56,074 $ 26,184
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 40,562 $ 45,006
Income taxes paid 8,005 4,892
Non-cash activities:
Securities purchased not yet settled 5,000 --
Loans transferred through foreclosure of a related mortgage loan to real estate owned -- 47
The accompanying notes are an integral part of these consolidated
financial statements.
-3-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
For the nine months ended
(In thousands, except share data) September 30, 2002
- ------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of period $ 139
No activity --
--------------------------
Balance, end of period $ 139
==========================
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period $ 45,280
Award of shares released from Employee Benefit Trust (3,327 common shares) 42
Restricted stock awards (69,075 common shares) 146
Tax benefit of unearned compensation 921
--------------------------
Balance, end of period $ 46,389
==========================
TREASURY STOCK
Balance, beginning of period $ (5,750)
Purchases of common shares outstanding (985,400 common shares) (17,526)
Repurchase of restricted stock awards (12,862 common shares) (248)
Restricted stock awards (69,075 common shares) 1,140
Forfeiture of restricted stock awards (2,180 common shares) (28)
Options exercised (165,480 common shares) 2,722
--------------------------
Balance, end of period $ (19,690)
==========================
UNEARNED COMPENSATION
Balance, beginning of period $ (7,766)
Restricted stock award expense 529
Restricted stock awards (69,075 common shares) (1,286)
Forfeiture of restricted stock awards (2,180 common shares) 28
Release of shares from Employee Benefit Trust (65,791 common shares) 336
--------------------------
Balance, end of period $ (8,159)
==========================
RETAINED EARNINGS
Balance, beginning of period $ 99,641
Net income 11,344
Options exercised (165,480 common shares) (1,508)
Cash dividends declared and paid (3,201)
--------------------------
Balance, end of period $ 106,276
==========================
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period $ 1,843
Change in net unrealized gain, net of taxes of approximately $489 on securities
available for sale (574)
Less: Reclassification adjustment for losses included in net income, net of
taxes of approximately $2,009 2,358
--------------------------
Balance, end of period $ 3,627
==========================
The accompanying notes are an integral part of these consolidated
financial statements.
-4-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The primary business of Flushing Financial Corporation (the "Holding Company")
is the operation of its wholly- owned subsidiary, Flushing Savings Bank, FSB
(the "Bank"). The consolidated financial statements presented in this Form 10-Q
reflect principally the Bank's activities.
The information furnished in these interim statements reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for such periods of Flushing Financial Corporation and Subsidiaries (the
"Company"). Such adjustments are of a normal recurring nature, unless otherwise
disclosed in this Form 10-Q. The results of operations in the interim statements
are not necessarily indicative of the results that may be expected for the full
year.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principals
("GAAP") have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). The interim financial
information should be read in conjunction with the Company's 2001 Annual Report
on Form 10-K.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
3. EARNINGS PER SHARE
Basic earnings per share for the three and nine month periods ended September
30, 2002 and 2001 was computed by dividing net income by the total weighted
average number of common shares outstanding, including only the vested portion
of restricted stock awards. Diluted earnings per share includes the additional
dilutive effect of stock options outstanding and the unvested portion of
restricted stock awards during the period. Earnings per share has been computed
based on the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
(Amounts in thousands, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------
Net income $4,765 $3,718 $11,344 $10,969
Divided by:
Weighted average common shares outstanding 11,491 12,316 11,715 12,321
Weighted average common stock equivalents 579 566 560 484
Total weighted average common shares & common stock equivalents 12,070 12,882 12,275 12,805
Basic earnings per share $0.41 $0.30 $0.97 $0.89
Diluted earnings per share $0.39 $0.29 $0.92 $0.86
Dividends per share $0.09 $0.08 $0.27 $0.23
Dividend payout ratio 21.95% 26.67% 27.84% 25.84%
-5-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ISSUANCE OF TRUST PREFERRED SECURITIES
On July 11, 2002, the Holding Company, through a subsidiary business trust
(Flushing Financial Capital Trust I) issued 20,000 shares, liquidation amount
$1,000 per share, of floating rate capital securities. Gross proceeds from the
sale of these trust preferred securities were $20.0 million, and, together with
the proceeds from the sale of the trust's common securities, were used to
purchase approximately $20.6 million aggregate principal amount of the Holding
Company's floating rate junior subordinated debt securities due 2032.
Underwriting costs of the transaction were $600,000. The trust preferred
securities are redeemable quarterly at the option of the Company beginning on or
after July 7, 2007 and have a mandatory redemption date of October 7, 2032. Cash
distributions on the trust preferred securities are cumulative and are payable
at a floating rate per annum (reset quarterly) equal to 3.65% over 3-month
LIBOR, with an initial rate of 5.51387%. A rate cap of 12.50% is effective
through October 7, 2007. The Holding Company has guaranteed the obligations of
its subsidiary business trust to the trust's capital security holders. The trust
preferred securities are included in Borrowed Funds in the Consolidated
Statements of Financial Condition.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets",
which is effective for fiscal years beginning after December 15, 2001. The
Statement changes the approach to how goodwill and other intangible assets are
accounted for subsequent to their recognition. Goodwill and intangible assets
that have indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. Intangible assets that have finite
useful lives will be amortized over their useful lives. The Statement provides
specific guidance on testing intangible assets that will not be amortized for
impairment. As of December 31, 2001, the Company had goodwill with a remaining
balance of $3.9 million recorded in connection with its purchase of New York
Federal Savings Bank in 1997. Annual amortization expense had been $0.4 million.
Effective January 1, 2002, the Company is no longer recording this amortization
expense, but rather is required, at least annually, to test the remaining
goodwill for impairment. The impairment test performed in connection with the
adoption of this Statement in January 2002 did not require an adjustment to the
carrying value of the goodwill.
-6-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Flushing Financial Corporation, a Delaware corporation (the "Holding Company"),
was organized in May 1994 to serve as the holding company for Flushing Savings
Bank, FSB (the "Bank"), a federally chartered, FDIC insured savings institution,
originally organized in 1929. The Bank is a consumer-oriented savings
institution and conducts its business through ten banking offices located in
Queens, Brooklyn, Manhattan, Bronx and Nassau County. Flushing Financial
Corporation's common stock is publicly traded on the Nasdaq National Market
under the symbol "FFIC". The following discussion of financial condition and
results of operations includes the collective results of the Holding Company and
the Bank (collectively, the "Company"), but reflects principally the Bank's
activities.
The Company's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations and borrowings, primarily in (1) origination and purchases of one-to-
four family residential real estate loans (focusing on mixed-use properties -
properties that contain both residential dwelling units and commercial units),
multi-family income-producing property loans and commercial real estate loans;
(2) mortgage loan surrogates such as mortgage-backed securities; and (3) U.S.
government and federal agency securities, corporate fixed-income securities and
other marketable securities. To a lesser extent, the Company originates certain
other loans, including construction loans, Small Business Administration loans
and other small business loans.
The Company's results of operations depend primarily on net interest income,
which is the difference between the income earned on its interest-earning assets
and the cost of its interest-bearing liabilities. Net interest income is the
result of the Company's interest rate margin, which is the difference between
the average yield earned on interest- earning assets and the average cost of
interest-bearing liabilities, adjusted for the difference in the average balance
of interest-earning assets as compared to the average balance of
interest-bearing liabilities. The Company also generates non-interest income
from loan fees, service charges on deposit accounts, mortgage servicing fees,
late charges and other fees, income earned on Bank Owned Life Insurance,
dividends on Federal Home Loan Bank of NY ("FHLB-NY") stock and net gains and
losses on sales of securities and loans. The Company's operating expenses
consist principally of employee compensation and benefits, occupancy and
equipment costs, other general and administrative expenses and income tax
expense. The Company's results of operations also can be significantly affected
by its periodic provision for loan losses and specific provision for losses on
real estate owned. Such results also are significantly affected by general
economic and competitive conditions, including changes in market interest rates,
the strength of the local economy, government policies and actions of regulatory
authorities.
On July 11, 2002, the Holding Company, through a subsidiary business trust,
Flushing Financial Capital Trust I, issued 20,000 shares, liquidation amount
$1,000 per share, of floating rate capital securities (See Note 4 of Notes to
Consolidated Financial Statements). Gross proceeds from the sale of these trust
preferred securities were $20.0 million, and, together with the proceeds from
the sale of the trust's common securities, were used to purchase approximately
$20.6 million aggregate principal amount of the Holding Company's floating rate
junior subordinated debt securities due 2032. The Holding Company has guaranteed
the obligations of its subsidiary business trust to the trust's capital security
holders. The Holding Company intends to use the proceeds from the issuance of
the trust preferred securities for general corporate purposes, which may include
the repurchase of its common stock or investments in or advances to its existing
or future subsidiaries. The Company also may use a portion of these proceeds to
fund future acquisitions, although the Company presently does not have any
agreement or understanding with respect to any such acquisition. The Company
will be able to recognize a deduction of its interest cost for income tax
purposes and the Bank, to the extent that it retains its current year earnings
and is not required to distribute funds to the Holding Company, will increase
its regulatory capital.
-7-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this Quarterly Report relating to plans, strategies,
objectives, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking information is inherently
subject to risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, the factors set forth in the second preceding paragraph and
elsewhere in this Quarterly Report, and in other documents filed by the Company
with the Securities and Exchange Commission from time to time, including,
without limitation, the Company's 2001 Annual Report to Stockholders and its SEC
Report on Form 10-K for the year ended December 31, 2001. Forward-looking
statements may be identified by terms such as "may", "will", "should", "could",
"expects", "plans", "intends", "anticipates", "believes", "estimates",
"predicts", "forecasts", "potential" or "continue" or similar terms or the
negative of these terms. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. The Company has no
obligation to update these forward-looking statements.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
GENERAL. Diluted earnings per share increased 34.5% to $0.39 for the three
months ended September 30, 2002 from $0.29 for the three months ended September
30, 2001. Net income increased $1.1 million, or 28.2%, to $4.8 million for the
three months ended September 30, 2002 from $3.7 million for the three months
ended September 30, 2001. The return on average assets for the three months
ended September 30, 2002 increased to 1.20% compared to 1.05% for the three
months ended September 30, 2001, while the return on average equity for the
three months ended September 30, 2002 increased to 14.87% from 11.34% for the
three months ended September 30, 2001.
INTEREST INCOME. Total interest and dividend income increased $1.3 million, or
5.0%, to $26.9 million for the three months ended September 30, 2002 from $25.6
million for the three months ended September 30, 2001. This increase was
primarily the result of a $162.0 million increase in the average balance of
interest-earning assets for the three months ended September 30, 2002 as
compared to the three months ended September 30, 2001. The average balance of
mortgage loans, net, mortgage-backed securities, other securities, and interest
earning deposits and federal funds sold increased $86.0 million, $10.0 million,
$41.8 million, and $23.2 million, respectively, for the three months ended
September 30, 2002 as compared to the three months ended September 30, 2001. The
yield on interest-earning assets declined 49 basis points to 7.21% for the three
months ended September 30, 2002 from 7.70% for the three months ended September
30, 2001. This decrease is primarily due to the declining interest rate
environment experienced during 2001, the effect of which further lowered the
yield on assets and the cost of funds in 2002. These declines were partially
offset by the increase in the average balance of the higher yielding mortgage
loan portfolio.
INTEREST EXPENSE. Interest expense decreased $1.3 million, or 8.7%, to $13.7
million for the three months ended September 30, 2002 from $15.0 million for the
three months ended September 30, 2001, primarily due to a 94 basis point decline
in the cost of interest-bearing liabilities to 3.90% in the three months ended
September 30, 2002 from 4.84% in the three months ended September 30, 2001. This
decrease was partially offset by a $164.8 million increase in the average
balance of interest-bearing liabilities. The decrease in the cost of funds is
primarily due to the declining interest rate environment experienced during
2001, the effect of which further lowered the yield on assets and the cost of
funds in 2002. This was coupled with an increase in the average balance of lower
costing core deposits. This marks the eighth consecutive quarter that the cost
of funds has declined.
-8-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME. For the three months ended September 30, 2002, net interest
income increased $2.6 million, or 24.5%, to $13.1 million from $10.5 million in
the three months ended September 30, 2001. This increase in net interest income
is primarily due to a 45 basis point increase in the net interest spread and a
$162.0 million increase in the average balance of interest-earning assets. The
net interest margin increased 35 basis points to 3.52% for the three months
ended September 30, 2002 from 3.17% for the three months ended September 30,
2001.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the
three-month periods ended September 30, 2002 and 2001. In assessing the adequacy
of the Company's allowance for loan losses, management considers the Company's
historical loss experience, recent trends in losses, collection policies and
collection experience, trends in the volume of non-performing loans, changes in
the composition and volume of the gross loan portfolio, and local and national
economic conditions. Based on these reviews, no provision for loan losses was
deemed necessary for either of the three-month periods ended September 30, 2002
and 2001.
NON-INTEREST INCOME. Total non-interest income increased $0.2 million to $1.5
million for the three months ended September 30, 2002 from $1.3 million for the
three months ended September 30, 2001. Higher income from loan fees and banking
services were partially offset by reduced dividends received on FHLB-NY stock.
NON-INTEREST EXPENSE. Non-interest expense was $6.9 million for the three months
ended September 30, 2002, an increase of $1.0 million, or 16.4%, from $5.9
million for the three months ended September 30, 2001. The increase from the
prior year period is attributable to the Bank's continued focus on expanding its
current product offerings to enhance its ability to serve its customers. This
resulted in increases in salaries and benefits and professional services, which
includes advertising. Management continues to monitor expenditures resulting in
an improvement in the efficiency ratio to 47.4% for the three months ended
September 30, 2002 from 49.4% for the three months ended September 30, 2001.
INCOME BEFORE INCOME TAXES. Total income before the provision for income taxes
increased $1.8 million, or 30.2%, to $7.7 million for the three months ended
September 30, 2002 as compared to $5.9 million for the three months ended
September 30, 2001, for the reasons stated above.
PROVISION FOR INCOME TAXES. Income tax expense increased $0.7 million to $2.9
million for the three months ended September 30, 2002 as compared to $2.2
million for the three months ended September 30, 2001 This increase is due to
the $1.8 million increase in income before income taxes, and an increase in the
effective rate to 38% for the three months ended September 30, 2002 from 37% for
the three months ended September 30, 2001.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
GENERAL. Diluted earnings per share increased 7.0% to $0.92 for the nine months
ended September 30, 2002 from $0.86 for the nine months ended September 30,
2001. Net income for the nine months ended September 30, 2002 increased $0.3
million, or 3.4%, to $11.3 million from the $11.0 million reported for the nine
months ended September 30, 2001. The return on average assets for the nine
months ended September 30, 2002 was 0.98% compared to 1.05% for the nine months
ended September 30, 2001, while the return on average equity for the nine months
ended September 30, 2002 was 11.64% compared to 11.37% for the nine months ended
September 30, 2001. Excluding the $2.6 million, or $0.22 per diluted share,
after-tax writedown due to the impairment of the Bank's investment in a
WorldCom, Inc. senior note, recorded during the second quarter of 2002, net
income for the nine months ended September 30, 2002 would have been $13.9
million, or $1.14 per diluted share, an increase of $0.28 per diluted share, or
32.6%, from the nine months ended September 30, 2001. Return on average assets
and return on average equity, excluding the impairment charge, would have been
1.2% and 14.3%, respectively, for the nine months ended September 30, 2002.
-9-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST INCOME. Total interest and dividend income increased $3.8 million, or
5.0%, to $79.6 million for the nine months ended September 30, 2002 from $75.8
million for the nine months ended September 30, 2001. This increase was
primarily the result of a $155.4 million increase in the average balance of
interest-earning assets for the nine months ended September 30, 2002 as compared
to the nine months ended September 30, 2001. The average balance of mortgage
loans, net, mortgage-backed securities, other securities, and interest-earning
deposits and federal funds sold increased $84.3 million, $12.6 million, $51.3
million, and $6.5 million, respectively, for the nine months ended September 30,
2002 as compared to the nine months ended September 30, 2001. The yield on
interest-earning assets declined 48 basis points to 7.30% for the nine months
ended September 30, 2002 from 7.78% for the nine months ended September 30,
2001. This decrease is primarily due to the declining interest rate environment
experienced during 2001, the effect of which further lowered the yield on assets
and the cost of funds in 2002. These declines were partially offset by the
increase in the average balance of the higher yielding mortgage loan portfolio.
INTEREST EXPENSE. Interest expense decreased $4.3 million, or 9.5%, to $40.9
million for the nine months ended September 30, 2002 from $45.2 million for the
nine months ended September 30, 2001, primarily due to a 97 basis point decline
in the cost of interest-bearing liabilities to 3.99% in the nine months ended
September 30, 2002 from 4.96% in the nine months ended September 30, 2001. This
decrease was partially offset by a $153.5 million increase in the average
balance of interest-bearing liabilities. The decrease in the cost of funds is
primarily due to the declining interest rate environment experienced during
2001, the effect of which further lowered the yield on assets and the cost of
funds in 2002. This was coupled with an increase in the average balance of lower
costing core deposits.
NET INTEREST INCOME. For the nine months ended September 30, 2002, net interest
income increased $8.0 million, or 26.3%, to $38.7 million from $30.7 million in
the nine months ended September 30, 2001. This increase in net interest income
is primarily due to a 49 basis point increase in the net interest spread and a
$155.4 million increase in the average balance of interest-earning assets. The
net interest margin increased 40 basis points to 3.55% for the nine months ended
September 30, 2002 from 3.15% for the nine months ended September 30, 2001.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the
nine-month periods ended September 30, 2002 and 2001. In assessing the adequacy
of the Company's allowance for loan losses, management considers the Company's
historical loss experience, recent trends in losses, collection policies and
collection experience, trends in the volume of non-performing loans, changes in
the composition and volume of the gross loan portfolio, and local and national
economic conditions. Based on these reviews, no provision for loan losses was
deemed necessary for either of the nine-month periods ended September 30, 2002
and 2001.
NON-INTEREST INCOME. Total non-interest income decreased $4.7 million to a net
loss of $34,000 for the nine months ended September 30, 2002 from $4.6 million
for the nine months ended September 30, 2001. The decrease is primarily due to
the $4.4 million pretax impairment writedown of the Bank's investment in a
WorldCom, Inc. senior note during the second quarter of 2002. Excluding the
impairment writedown, non-interest income would have been $4.4 million for the
nine months ended September 30, 2002, a decrease of $0.2 million, or 5.3%, from
the nine months ended September 30, 2001. In addition, higher income from loan
fees and banking services were offset by reduced dividends received on FHLB-NY
stock.
-10-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-INTEREST EXPENSE. Non-interest expense was $20.4 million for the nine months
ended September 30, 2002, an increase of $2.5 million, or 14.0%, from $17.9
million for the nine months ended September 30, 2001. The increase from the
prior year period is attributable to the Bank's continued focus on expanding its
current product offerings to enhance its ability to serve its customers. This
resulted in increases in salaries and benefits and professional services, which
includes advertising. Management continues to monitor expenditures resulting in
an improvement in the efficiency ratio to 47.4% for the nine months ended
September 30, 2002 from 50.1% for the nine months ended September 30, 2001.
INCOME BEFORE INCOME TAXES. Total income before the provision for income taxes
increased $0.9 million, or 5.1%, to $18.3 million for the nine months ended
September 30, 2002 as compared to $17.4 million for the nine months ended
September 30, 2001, as the increase in net interest income was partially offset
by the impairment writedown and an increase in non-interest expense.
PROVISION FOR INCOME TAXES. Income tax expense was $7.0 million for the nine
months ended September 30, 2002 compared to $6.4 million for the nine months
ended September 30, 2001. This increase is due to the $0.9 million increase in
income before income taxes, and an increase in the effective rate to 38% for the
nine months ended September 30, 2002 from 37% for the nine months ended
September 30, 2001.
FINANCIAL CONDITION
ASSETS. Total assets at September 30, 2002 were $1,613.1 million, a $125.6
million increase from December 31, 2001. During the nine months ended September
30, 2002, loan originations and purchases were $65.4 million for 1-4 family
residential real estate loans ($52.1 million in mixed-use), $108.4 million for
multi-family real estate loans, $57.0 million for commercial real estate loans
and $9.6 million in construction loans. During the nine months ended September
30, 2001, loan originations and purchases were $67.6 million for 1-4 family
residential real estate loans ($36.1 million in mixed-use), $45.1 million for
multi-family real estate loans, $50.8 million for commercial real estate loans
and $4.6 million in construction loans. Total loans, net, increased $99.9
million during the nine months ended September 30, 2002 to $1,167.1 million from
$1,067.2 million at December 31, 2001.
As the Company continues to increase its loan portfolio, management continues to
adhere to the Bank's strict underwriting standards. As a result, the Company has
been able to minimize charge-offs of losses from impaired loans and maintain
asset quality. Non-performing assets were $4.7 million at September 30, 2002
compared to $2.4 million at December 31, 2001 and $2.6 million at September 30,
2001. The increase in non-performing assets is primarily attributed to one
borrower. None of the loan-to-value ratios for each of this borrower's three
loans is greater than 65%. Therefore, management believes the Bank will recover
its investment in these loans. Total non- performing assets as a percentage of
total assets were 0.29% at September 30, 2002 compared to 0.16% at December 31,
2001 and 0.18% at September 30, 2001. The ratio of allowance for loan losses to
total non- performing loans was 165% at September 30, 2002 compared to 284% at
December 31, 2001 and 254% at September 30, 2001.
LIABILITIES. Total liabilities increased $130.4 million to $1,484.5 million at
September 30, 2002 from $1,354.1 million at December 31, 2001. During the nine
months ended September 30, 2002, due to depositors increased $143.6 million as
certificate of deposit accounts increased $68.3 million while lower costing core
deposits increased $75.3 million. Notwithstanding the increase in borrowed funds
due to the issuance of $20.0 million of trust preferred securities, as a result
of the increase in deposits, borrowed funds were reduced by a net amount of
$20.3 million.
-11-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EQUITY. Total stockholders' equity decreased $4.8 million to $128.6 million at
September 30, 2002 from $133.4 million at December 31, 2001. Net income of $11.3
million for the nine months ended September 30, 2002 and an increase of $1.8
million in the net unrealized gains in the market value of securities available
for sale were offset by $17.5 million in treasury shares purchased through the
Company's stock repurchase plans and $3.2 million in cash dividends paid during
the nine month period. In addition, the exercise of stock options increased
stockholders' equity by $1.2 million. Book value per share was $10.11 at
September 30, 2002 compared to $9.89 per share at December 31, 2001 and $9.79 at
September 30, 2001.
Under its stock repurchase program, the Company repurchased 985,400 shares for
the nine months ended September 30, 2002, leaving 217,000 shares to be
repurchased under the current stock repurchase program.
CASH FLOW. During the nine months ended September 30, 2002, funds provided by
the Company's operating activities amounted to $16.4 million. These funds,
together with $108.1 million provided by financing activities, which includes
the issuance of the trust preferred securities, and funds available at the
beginning of the year, were utilized to fund net investing activities of $106.9
million. The Company's primary business objective is the origination and
purchase of 1-4 family residential, multi-family and commercial real estate
loans. During the nine months ended September 30, 2002, the net total of loan
originations less loan repayments was $89.7 million, and the total amount of
real estate loans purchased was $10.1 million. The Company also invests in other
securities including mortgage loan surrogates such as mortgage-backed
securities. During the nine months ended September 30, 2002, the Company
purchased a total of $139.0 million in securities available for sale. Funds for
investment were also provided by $99.0 million in maturities and prepayments of
securities available for sale. The Company also used funds of $16.6 million for
net treasury stock repurchases and $3.2 million in dividend payments during the
nine months ended September 30, 2002.
-12-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST RATE RISK
The consolidated statements of financial position have been prepared in
accordance with generally accepted accounting principles, which requires the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in fair value of certain investments due
to changes in interest rates. Generally, the fair value of financial investments
such as loans and securities fluctuates inversely with changes in interest
rates. As a result, increases in interest rates could result in decreases in the
fair value of the Company's interest-earning assets which could adversely affect
the Company's results of operation if such assets were sold, or, in the case of
securities classified as available-for-sale, decreases in the Company's
stockholders' equity, if such securities were retained.
The Company manages the mix of interest-earning assets and interest-bearing
liabilities on a continuous basis to maximize return and adjust its exposure to
interest rate risk. On a quarterly basis, management prepares the "Earnings and
Economic Exposure to Changes In Interest Rate" report for review by the Board of
Directors, as summarized below. This report quantifies the potential changes in
net interest income and net portfolio value should interest rates go up or down
(shocked) 300 basis points, assuming the yield curves of the rate shocks will be
parallel to each other. Net portfolio value is defined as the market value of
assets net of the market value of liabilities. The market value of assets and
liabilities is determined using a discounted cash flow calculation. The net
portfolio value ratio is the ratio of the net portfolio value to the market
value of assets. All changes in income and value are measured as percentage
changes from the projected net interest income and net portfolio value at the
base interest rate scenario. The base interest rate scenario assumes interest
rates at September 30, 2002. Various estimates regarding prepayment assumptions
are made at each level of rate shock. Actual results could differ significantly
from these estimates. The Company is within the guidelines set forth by the
Board of Directors for each interest rate level.
Projected Percentage Change In
Net Interest Net Portfolio Net Portfolio
Change in Interest Rate Income Value Value Ratio
- ----------------------------------------------------------------------------------------
- -300 Basis points -4.04% 1.61% 9.49%
- -200 Basis points -0.93 -0.17 9.54
- -100 Basis points -0.49 -0.79 9.68
Base interest rate -- -- 9.95
+100 Basis points -0.56 -2.70 9.89
+200 Basis points -3.42 -14.23 8.99
+300 Basis points -8.00 -23.37 7.64
-13-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REGULATORY CAPITAL POSITION
Under Office of Thrift Supervision ("OTS") capital regulations, the Bank is
required to comply with each of three separate capital adequacy standards. At
September 30, 2002, the Bank exceeded each of the three OTS capital requirements
and is categorized as "well-capitalized" by the OTS under the prompt corrective
action regulations. Set forth below is a summary of the Bank's compliance with
OTS capital standards as of September 30, 2002.
(Dollars in thousands) Amount Percent of Assets
- -------------------------------------------------------------------------------------
Tangible Capital:
Capital level $120,324 7.59%
Requirement 23,794 1.50
Excess 96,530 6.09
Core Capital:
Capital level $120,324 7.59%
Requirement 47,588 3.00
Excess 72,736 4.59
Risk-Based Capital:
Capital level $126,906 13.58%
Requirement 74,750 8.00
Excess 52,156 5.58
-14-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AVERAGE BALANCES
Net interest income represents the difference between income on interest-earning
assets and expense on interest- bearing liabilities. Net interest income depends
upon the relative amount of interest-earning assets and interest- bearing
liabilities and the interest rate earned or paid on them. The following table
sets forth certain information relating to the Company's consolidated statements
of financial condition and consolidated statements of operations for the
three-month periods ended September 30, 2002 and 2001, and reflects the average
yield on assets and average cost of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average daily balances. The yields include
amortization of fees which are considered adjustments to yields.
For the three months ended September 30,
---------------------------------------------------------------
2002 2001
------------------------------ ------------------------------
Average Interest Average Average Interest Average
(Dollars in thousands) Balance Yield/Cost Balance Yield/Cost
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Mortgage loans, net $1,136,716 $22,717 7.99% $1,050,748 $21,222 8.08%
Other loans, net 7,878 141 7.16 6,753 146 8.65
----------------------------- -----------------------------
Total loans, net 1,144,594 22,858 7.99 1,057,501 21,368 8.08
----------------------------- -----------------------------
Mortgage-backed securities 242,663 3,268 5.39 232,671 3,763 6.47
Other securities 58,176 543 3.73 16,410 248 6.05
----------------------------- -----------------------------
Total securities 300,839 3,811 5.07 249,081 4,011 6.44
----------------------------- -----------------------------
Interest-earning deposits and
federal funds sold 45,353 186 1.64 22,196 204 3.68
----------------------------- -----------------------------
Total interest-earning asssets 1,490,786 26,855 7.21 1,328,778 25,583 7.70
------------------ ------------------
Other assets 102,726 87,173
---------- ----------
Total assets $1,593,512 $1,415,951
========== ==========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Passbook accounts $211,960 753 1.42 $189,297 957 2.02
NOW accounts 36,379 75 0.82 30,776 133 1.73
Money market accounts 125,857 727 2.31 83,814 746 3.56
Certificate of deposit account 521,154 5,520 4.24 417,736 5,654 5.41
----------------------------- -----------------------------
Total due to depositors 895,350 7,075 3.16 721,623 7,490 4.15
Mortgagors' escrow deposits 12,653 9 0.28 11,940 17 0.57
----------------------------- -----------------------------
Total deposits 908,003 7,084 3.12 733,563 7,507 4.09
Borrowed funds 500,943 6,648 5.31 510,600 7,535 5.90
----------------------------- -----------------------------
Total interest-bearing liabilities 1,408,946 13,732 3.90 1,244,163 15,042 4.84
------------------ ------------------
Other liabilities 56,362 40,667
---------- ----------
Total liabilities 1,465,308 1,284,830
Equity 128,204 131,121
---------- ----------
Total liabilities and equity $1,593,512 $1,415,951
========== ==========
Net interest income/net interest spread $13,123 3.31% $10,541 2.86%
================== ==================
Net interest-earning assets /
net interest margin $81,840 3.52% $84,615 3.17%
========== ======== ========== ========
Ratio of interest-earning assets to
interest-bearing liabilities 1.06x 1.07x
======== ========
-15-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AVERAGE BALANCES (continued)
The following table sets forth certain information relating to the Company's
consolidated statements of financial condition and consolidated statements of
operations for the nine-month periods ended September 30, 2002 and 2001, and
reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods shown. Average balances are derived from average daily balances. The
yields include amortization of fees which are considered adjustments to yields.
For the nine months ended September 30,
---------------------------------------------------------------
2002 2001
------------------------------ ------------------------------
Average Interest Average Average Interest Average
(Dollars in thousands) Balance Yield/Cost Balance Yield/Cost
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Mortgage loans, net $1,104,739 $66,795 8.06% $1,020,475 $62,328 8.14%
Other loans, net 7,039 378 7.16 6,272 422 8.97
----------------------------- -----------------------------
Total loans, net 1,111,778 67,173 8.06 1,026,747 62,750 8.15
----------------------------- -----------------------------
Mortgage-backed securities 238,263 10,019 5.61 225,642 11,214 6.63
Other securities 67,494 1,987 3.93 16,218 787 6.47
----------------------------- -----------------------------
Total securities 305,757 12,006 5.24 241,860 12,001 6.62
----------------------------- -----------------------------
Interest-earning deposits and
federal funds sold 37,685 467 1.65 31,209 1,110 4.74
----------------------------- -----------------------------
Total interest-earning asssets 1,455,220 79,646 7.30 1,299,816 75,861 7.78
------------------ ------------------
Other assets 93,092 86,796
---------- ----------
Total assets $1,548,312 $1,386,612
========== ==========
LIABILITIES AND EQUITY
Interest-bearing liabilities:
Passbook accounts $206,791 2,498 1.61 $187,503 2,872 2.04
NOW accounts 35,340 248 0.94 30,371 418 1.84
Money market accounts 113,682 2,000 2.35 64,476 1,708 3.53
Certificate of deposit account 495,525 16,114 4.34 413,414 17,376 5.60
----------------------------- -----------------------------
Total due to depositors 851,338 20,860 3.27 695,764 22,374 4.29
Mortgagors' escrow deposits 14,548 41 0.38 13,157 50 0.51
----------------------------- -----------------------------
Total deposits 865,886 20,901 3.22 708,921 22,424 4.22
Borrowed funds 503,317 20,027 5.31 506,796 22,777 5.99
----------------------------- -----------------------------
Total interest-bearing liabilities 1,369,203 40,928 3.99 1,215,717 45,201 4.96
------------------ ------------------
Other liabilities 49,199 42,240
---------- ----------
Total liabilities 1,418,402 1,257,957
Equity 129,910 128,655
---------- ----------
Total liabilities and equity $1,548,312 $1,386,612
========== ==========
Net interest income/net interest spread $38,718 3.31% $30,660 2.82%
================== ==================
Net interest-earning assets /
net interest margin $86,017 3.55% $84,099 3.15%
========== ======== ========== ========
Ratio of interest-earning assets to
interest-bearing liabilities 1.06x 1.07x
======== ========
-16-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOANS
The following table sets forth the Company's loan originations (including the
net effect of refinancing) and the changes in the Company's portfolio of loans,
including purchases, sales and principal reductions for the periods indicated.
Nine Months Ended
------------------------------------------------
(In thousands) September 30, 2002 September 30, 2001
- ------------------------------------------------------------------------------------------------------
MORTGAGE LOANS
At beginning of period $1,066,270 $985,953
Mortgage loans originated:
One-to-four family residential real estate 64,236 66,588
Co-operative apartment 354 136
Multi-family real estate 108,350 45,107
Commercial real estate 47,707 50,804
Construction 9,625 4,555
--------------------- ---------------------
Total mortgage loans originated 230,272 167,190
--------------------- ---------------------
Mortgage loans purchased:
One-to-four family residential real estate 786 876
Commercial real estate 9,315 --
--------------------- ---------------------
Total acquired loans 10,101 876
--------------------- ---------------------
Less:
Principal and other reductions 143,191 87,121
Mortgage loan foreclosures -- 47
--------------------- ---------------------
At end of period $1,163,452 $1,066,851
===================== =====================
OTHER LOANS
At beginning of period $6,725 $6,548
Other loans originated:
Small Business Administration 4,908 2,568
Small business loans 1,596 438
Other loans 1,040 1,232
--------------------- ---------------------
Total other loans originated 7,544 4,238
--------------------- ---------------------
Less:
Sales 2,799 1,348
Principal and other reductions 2,594 2,996
--------------------- ---------------------
At end of period $8,876 $6,442
===================== =====================
-17-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-PERFORMING ASSETS
The Company reviews loans in its portfolio on a monthly basis to determine
whether any problem loans require classification in accordance with internal
policies and applicable regulatory guidelines. The following table sets forth
information regarding all non-accrual loans, loans which are 90 days or more
delinquent, and real estate owned at the dates indicated.
(Dollars in thousands) September 30, 2002 December 31, 2001
- ----------------------------------------------------------------------------------------------
Non-accrual mortgage loans $3,831 $2,203
Other non-accrual loans 165 117
--------------------- ----------------------
Total non-accrual loans 3,996 2,320
Mortgage loans 90 days or more delinquent
and still accruing -- --
Other loans 90 days or more delinquent
and still accruing -- --
--------------------- ----------------------
Total non-performing loans 3,996 2,320
Real estate owned (foreclosed real estate) -- 93
Investment securities 700 --
--------------------- ----------------------
Total non-performing assets $4,696 $2,413
===================== ======================
Non-performing loans to gross loans 0.34% 0.22%
Non-performing assets to total assets 0.29% 0.16%
-18-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALLOWANCE FOR LOAN LOSSES
The Company has established and maintains on its books an allowance for loan
losses that is designed to provide a reserve against estimated losses inherent
in the Company's overall loan portfolio. The allowance is established through a
provision for loan losses based on management's evaluation of the risk inherent
in the various components of its loan portfolio and other factors, including
historical loan loss experience, changes in the composition and volume of the
portfolio, collection policies and experience, trends in the volume of
non-accrual loans and regional and national economic conditions. The
determination of the amount of the allowance for loan losses includes estimates
that are susceptible to significant changes due to changes in appraisal values
of collateral, national and regional economic conditions and other factors. In
connection with the determination of the allowance, the market value of
collateral ordinarily is evaluated by the Company's staff appraiser; however,
the Company may from time to time obtain independent appraisals for significant
properties. Current year charge- offs, charge-off trends, new loan production
and current balance by particular loan categories are also taken into account in
determining the appropriate amount of allowance. The Board of Directors reviews
and approves the adequacy of the loan loss reserves on a quarterly basis.
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods indicated.
Nine Months Ended
--------------------------------------------------
(Dollars in thousands) September 30, 2002 September 30, 2001
- -----------------------------------------------------------------------------------------------------------------
Balance at beginning of period $6,585 $6,721
Provision for loan losses -- --
Loans charged-off:
One-to-four family residential real estate -- 1
Co-operative apartment -- --
Multi-family real estate -- 2
Commercial estate -- --
Construction -- --
Other 10 130
---------------------- ---------------------
Total loans charged-off 10 133
---------------------- ---------------------
Recoveries:
Mortgage loans 2 6
Other loans 4 7
---------------------- ---------------------
Total recoveries 6 13
---------------------- ---------------------
Balance at end of period $6,581 $6,601
====================== =====================
Ratio of net charge-offs during the year to
average loans outstanding during the period 0.00% 0.01%
Ratio of allowance for loan losses to loans at end of period 0.56% 0.62%
Ratio of allowance for loan losses to non-performing
assets at end of period 140.13% 253.59%
Ratio of allowance for loan losses to non-performing
loans at end of period 164.68% 253.59%
-19-
PART I -- FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the qualitative and quantitative disclosures about market
risk, see the information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate Risk".
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, the Company carried
out, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a- 14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures are effective as of such
date. No significant changes were made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a defendant in various lawsuits. Management of the Company, after
consultation with outside legal counsel, believes that the resolution of these
various matters will not result in any material adverse effect on the Company's
consolidated financial condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 11, 2002, the Holding Company's subsidiary business trust, Flushing
Financial Capital Trust I ("Cap Trust I"), issued $20.0 million in floating rate
capital securities in an offering exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Act"). (See Note 4 of Notes to
Consolidated Financial Statements) The underwriter of the transaction was
Sandler O'Neill & Partners, L.P. The aggregate offering price of the capital
securities was $20.0 million. The aggregate commission paid to the underwriter
was $600,000. In exchange for the proceeds from the offering of the capital
securities and the proceeds of the sale of Cap Trust I's common securities, the
Holding Company issued approximately $20.6 million aggregate principal amount of
floating rate junior subordinated debt securities due 2032 in an offering exempt
from registration under Section 4(2) of the Act. Under the terms of the
indenture relating to the floating rate junior subordinated debt securities, in
the event of default (as defined in the indenture), the Holding Company may not
declare or pay any dividends or distributions on, or redeem, purchase, acquire,
or make a liquidation payment with respect to, any of its capital stock, or make
any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Holding Company that rank pari
passu in all respects with or junior in interest to the floating rate junior
subordinated debt securities, with some limited exceptions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
-20-
PART II -- OTHER INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS.
Exhibit 3.1 Certificate of Incorporation of Flushing Financial Corporation (1)
Exhibit 3.2 Certificate of Amendment to Certificate of Incorporation of Flushing
Financial Corporation (3)
Exhibit 3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock of Flushing Financial Corporation
Exhibit 3.4 By-Laws of Flushing Financial Corporation (1)
Exhibit 4.1 Rights Agreement,dated as of September 17, 1996, between
Flushing Financial Corporation and State Street Bank and Trust Company, as
Rights Agent (2)
Exhibit 4.2 Form of Capital Security Certificate of Flushing Financial Capital
Trust I (incorporated by reference to Exhibit A-1 to Exhibit 4.6).
Exhibit 4.3 Form of Common Security of Flushing Financial Capital Trust I
(incorporated by reference to Exhibit A-2 to Exhibit 4.6).
Exhibit 4.4 Form of Floating Rate Junior Subordinated Debt Security of Flushing
Financial Corporation (incorporated by reference to Exhibit A of Exhibit 4.5).
Exhibit 4.5 Indenture dated July 11, 2002 relating to Floating Rate Junior
Subordinated Debt Securities due 2032 between Flushing Financial Corporation
and Wilmington Trust Company.
Exhibit 4.6 Amended and Restated Declaration of Trust of Flushing Financial
Capital Trust I among Flushing Financial Corporation, Wilmington Trust Company,
the Administrators named therein and the holders of undivided beneficial
interests in the assets of the Trust to be issued pursuant to the Declaration.
Exhibit 4.7 Guarantee Agreement dated July 11, 2002 between Flushing Financial
Corporation and Wilmington Trust Company.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief
Financial Officer.
(1) Incorporated by reference to Exhibits filed with the Registration Statement
on Form S-1, Registration No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September
30, 1996.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31,
2002.
b) REPORTS ON FORM 8-K.
On July 11, 2002, the Company filed Form 8-K to report the Company had issued
$20.0 million of floating rate capital securities through a newly created
special purpose trust formed by the Company.
-21-
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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.
Flushing Financial Corporation,
Dated: November 14, 2002 By: /s/Michael J. Hegarty
-------------------------------------
Michael J. Hegarty
President and Chief Executive Officer
Dated: November 14, 2002 By: /s/Monica C. Passick
-------------------------------------
Monica C. Passick
Senior Vice President, Treasurer and
Chief Financial Officer
-22-
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CERTIFICATIONS
I, Michael J. Hegarty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flushing Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4.The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 By: /s/Michael J. Hegarty
-------------------------------------
Michael J. Hegarty
President and Chief Executive Officer
-23-
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CERTIFICATIONS
I, Monica C. Passick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flushing Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 By: /s/Monica C. Passick
------------------------------------
Monica C. Passick
Senior Vice President, Treasurer and
Chief Financial Officer
-24-