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 March 31, 2004
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
11-3209278
(I.R.S. Employer Identification No.)
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(g) of the Act: Common Stock $0.01 par value.
associated Preferred Stock Purchase Rights).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes __No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). X Yes __No
The number of shares of the registrant’s Common Stock outstanding as of April 30, 2004 was 19,426,696.
TABLE OF CONTENTS
| PAGE | ||
|---|---|---|
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. Financial Statements | ||
| Consolidated Statements of Financial Condition | 1 | |
| Consolidated Statements of Income 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 | 8 | |
| ITEM 3. Quantitative and Qualitative Disclosures About Market Risk | 18 | |
| ITEM 4. Controls and Procedures | 18 | |
| PART II - OTHER INFORMATION | ||
| ITEM 1. Legal Proceedings | 18 | |
| ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 18 | |
| ITEM 3. Defaults Upon Senior Securities | 18 | |
| ITEM 4. Submission of Matters to a Vote of Security Holders | 18 | |
| ITEM 5. Other Information | 18 | |
| ITEM 6. Exhibits and Reports on Form 8-K | 19 | |
| SIGNATURES | 20 |
i
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Financial Condition
|
(Dollars in thousands, except share data)
|
March 31, 2004 |
December 31, 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 22,057 | $ | 20,300 | ||||
| Securities available for sale: | ||||||||
| Mortgage-backed securities | 493,497 | 479,393 | ||||||
| Other securities | 54,244 | 56,316 | ||||||
| Loans: | ||||||||
| Multi-family residential | 566,282 | 541,837 | ||||||
| Commercial real estate | 312,358 | 290,332 | ||||||
| One-to-four family - mixed-use property | 252,873 | 226,225 | ||||||
| One-to-four family - residential | 170,073 | 178,474 | ||||||
| Co-operative apartment | 3,529 | 3,729 | ||||||
| Construction | 26,574 | 23,622 | ||||||
| Small Business Administration | 5,072 | 4,931 | ||||||
| Commercial business and other | 4,919 | 4,894 | ||||||
| Unearned loan fees and deferred costs, net | 2,513 | 2,030 | ||||||
| Allowance for loan losses | (6,547 | ) | (6,553 | ) | ||||
| Net loans | 1,337,646 | 1,269,521 | ||||||
| Interest and dividends receivable | 9,195 | 8,647 | ||||||
| Real estate owned, net | -- | -- | ||||||
| Bank premises and equipment, net | 6,136 | 6,380 | ||||||
| Federal Home Loan Bank of New York stock | 24,712 | 24,462 | ||||||
| Goodwill | 3,905 | 3,905 | ||||||
| Other assets | 43,074 | 41,827 | ||||||
| Total assets | $ | 1,994,466 | $ | 1,910,751 | ||||
| LIABILITIES | ||||||||
| Due to depositors: | ||||||||
| Non-interest bearing | $ | 46,734 | $ | 41,397 | ||||
| Interest-bearing: | ||||||||
| Certificate of deposit accounts | 607,158 | 593,760 | ||||||
| Passbook savings accounts | 217,267 | 216,988 | ||||||
| Money market accounts | 304,024 | 263,621 | ||||||
| NOW accounts | 41,454 | 42,809 | ||||||
| Total interest-bearing deposits | 1,169,903 | 1,117,178 | ||||||
| Mortgagors' escrow deposits | 20,862 | 11,334 | ||||||
| Borrowed funds | 583,755 | 578,142 | ||||||
| Other liabilities | 18,529 | 15,938 | ||||||
| Total liabilities | 1,839,783 | 1,763,989 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued) |
-- | -- | ||||||
| Common stock ($0.01 par value; 40,000,000 shares authorized; 19,419,446 shares issued and 19,374,446 shares outstanding at March 31, 2004; 19,290,601 shares issued and outstanding at December 31, 2003) |
194 | 193 | ||||||
| Additional paid-in capital | 33,930 | 32,783 | ||||||
| Treasury stock, at average cost (45,000 shares and none at March 31, 2004 and December 31, 2003, respectively) |
(835 | ) | -- | |||||
| Unearned compensation | (6,149 | ) | (7,373 | ) | ||||
| Retained earnings | 124,447 | 120,683 | ||||||
| Accumulated other comprehensive income, net of taxes | 3,096 | 476 | ||||||
| Total stockholders' equity | 154,683 | 146,762 | ||||||
| Total liabilities and stockholders' equity | $ | 1,994,466 | $ | 1,910,751 | ||||
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 Income and Comprehensive Income
| For the three months | ||||||||
|---|---|---|---|---|---|---|---|---|
| ended March 31, | ||||||||
| (In thousands, except per share data)
|
2004 |
2003 | ||||||
| (Unaudited) | ||||||||
| Interest and dividend income | ||||||||
| Interest and fees on loans | $ | 23,555 | $ | 23,234 | ||||
| Interest and dividends on securities: | ||||||||
| Interest | 5,423 | 4,091 | ||||||
| Dividends | 87 | 34 | ||||||
| Other interest income | 40 | 85 | ||||||
| Total interest and dividend income | 29,105 | 27,444 | ||||||
| Interest expense | ||||||||
| Deposits | 7,008 | 6,936 | ||||||
| Other interest expense | 5,686 | 6,271 | ||||||
| Total interest expense | 12,694 | 13,207 | ||||||
| Net interest income | 16,411 | 14,237 | ||||||
| Provision for loan losses | -- | -- | ||||||
| Net interest income after provision for loan losses | 16,411 | 14,237 | ||||||
| Non-interest income | ||||||||
| Other fee income | 898 | 822 | ||||||
| Net gain on sales of securities and loans | 92 | 46 | ||||||
| Other income | 486 | 737 | ||||||
| Total non-interest income | 1,476 | 1,605 | ||||||
| Non-interest expense | ||||||||
| Salaries and employee benefits | 5,148 | 3,827 | ||||||
| Occupancy and equipment | 861 | 667 | ||||||
| Professional services | 790 | 691 | ||||||
| Data processing | 529 | 410 | ||||||
| Depreciation and amortization | 357 | 256 | ||||||
| Other operating expenses | 1,604 | 1,398 | ||||||
| Total non-interest expense | 9,289 | 7,249 | ||||||
| Income before income taxes | 8,598 | 8,593 | ||||||
| Provision for income taxes | ||||||||
| Federal | 2,692 | 2,572 | ||||||
| State and local | 661 | 721 | ||||||
| Total provision for income taxes | 3,353 | 3,293 | ||||||
| Net income | $ | 5,245 | $ | 5,300 | ||||
| Other comprehensive income, net of tax | ||||||||
| Unrealized gains (losses) on securities: | ||||||||
| Unrealized holding gains (losses) arising during period | $ | 2,620 | $ | (97 | ) | |||
| Reclassification adjustments for (gains) losses included in income | -- | 15 | ||||||
| Net unrealized holding gains (losses) | 2,620 | (82 | ) | |||||
| Comprehensive net income | $ | 7,865 | $ | 5,218 | ||||
| Basic earnings per share | $ | 0.30 | $ | 0.32 | ||||
| Diluted earnings per share | $ | 0.29 | $ | 0.30 | ||||
| Dividends per share | $ | 0.08 | $ | 0.067 | ||||
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
| For the three months | ||||||||
|---|---|---|---|---|---|---|---|---|
| ended March 31 | ||||||||
| (In thousands) |
2004 |
2003 | ||||||
| (Unaudited) | ||||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | 5,245 | $ | 5,300 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of bank premises and equipment | 357 | 256 | ||||||
| Net loss on sales of securities | -- | 28 | ||||||
| Net gain on sales of loans | (92 | ) | (74 | ) | ||||
| Amortization of unearned premium, net of accretion of unearned discount | 533 | 708 | ||||||
| Deferred income tax benefit | (711 | ) | (120 | ) | ||||
| Deferred compensation | 418 | 153 | ||||||
| Origination of loans held for sale | 941 | 5,016 | ||||||
| Proceeds from sale of loans originated for sale | (941 | ) | (5,016 | ) | ||||
| Net decrease in other assets and liabilities | (521 | ) | (1,174 | ) | ||||
| Unearned compensation | 1,242 | 348 | ||||||
| Net cash provided by operating activities | 6,471 | 5,425 | ||||||
| INVESTING ACTIVITIES | ||||||||
| Purchases of bank premises and equipment | (113 | ) | (241 | ) | ||||
| Net purchases of Federal Home Loan Bank shares | (250 | ) | (250 | ) | ||||
| Purchases of securities available for sale | (45,629 | ) | (131,978 | ) | ||||
| Proceeds from sales and calls of securities available for sale | 12,586 | 72 | ||||||
| Proceeds from maturities and prepayments of securities available for sale | 25,961 | 40,628 | ||||||
| Proceeds from sale of non-performing loans | -- | 3,502 | ||||||
| Net originations and repayment of loans | (68,042 | ) | (17,611 | ) | ||||
| Purchases of loans | -- | (619 | ) | |||||
| Net cash used by investing activities | (75,487 | ) | (106,497 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Net increase in non-interest bearing deposits | 5,337 | 5,742 | ||||||
| Net increase in interest-bearing deposits | 52,725 | 59,385 | ||||||
| Net increase in mortgagors' escrow deposits | 9,528 | 6,287 | ||||||
| Net decrease in short-term borrowed funds | (25,000 | ) | -- | |||||
| Proceeds from long-term borrowed funds | 50,000 | 15,000 | ||||||
| Repayment of long-term borrowed funds | (20,006 | ) | (15,005 | ) | ||||
| Purchases of treasury stock | (1,171 | ) | (776 | ) | ||||
| Proceeds from issuance of common stock upon exercise of stock options | 771 | 358 | ||||||
| Cash dividends paid | (1,411 | ) | (1,140 | ) | ||||
| Net cash provided by financing activities | 70,773 | 69,851 | ||||||
| Net increase (decrease) in cash and cash equivalents | 1,757 | (31,221 | ) | |||||
| Cash and cash equivalents, beginning of period | 20,300 | 47,619 | ||||||
| Cash and cash equivalents, end of period | $ | 22,057 | $ | 16,398 | ||||
| SUPPLEMENTAL CASH FLOW DISCLOSURE | ||||||||
| Interest paid | $ | 12,628 | $ | 13,054 | ||||
| Income taxes paid | 328 | 489 | ||||||
| Non-cash activities: | ||||||||
| Securities purchased not yet settled | -- | 10,000 | ||||||
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 three months ended | |||||
|---|---|---|---|---|---|
| (In thousands, except share data) |
March 31, 2004 | ||||
| Common Stock | |||||
| Balance, beginning of period | $ | 193 | |||
| Issuance upon the exercise of stock options (128,845 common shares) | 1 | ||||
| Balance, end of period | $ | 194 | |||
| Additional Paid-In Capital | |||||
| Balance, beginning of period | $ | 32,783 | |||
| Award of shares released from Employee Benefit Trust (1,172 common shares) | 18 | ||||
| Options exercised (101,625 shares) | 504 | ||||
| Tax benefit from compensation expense in excess of that recognized for financial reporting purposes | 625 | ||||
| Balance, end of period | $ | 33,930 | |||
| Treasury Stock | |||||
| Balance, beginning of period | $ | -- | |||
| Purchases of common shares outstanding (60,079 common shares) | (1,121 | ) | |||
| Repurchase of restricted stock awards (2,701 common shares) | (50 | ) | |||
| Options exercised (17,780 common shares) | 336 | ||||
| Balance, end of period | $ | (835 | ) | ||
| Unearned Compensation | |||||
| Balance, beginning of period | $ | (7,373 | ) | ||
| Restricted stock award expense | 1,082 | ||||
| Release of shares from Employee Benefit Trust (41,788 common shares) | 142 | ||||
| Balance, end of period | $ | (6,149 | ) | ||
| Retained Earnings | |||||
| Balance, beginning of period | $ | 120,683 | |||
| Net income | 5,245 | ||||
| Options exercised (45,000 common shares) | (70 | ) | |||
| Cash dividends declared and paid | (1,411 | ) | |||
| Balance, end of period | $ | 124,447 | |||
| Accumulated Other Comprehensive Income | |||||
| Balance, beginning of period | $ | 476 | |||
| Change in net unrealized gain, net of taxes of approximately $2,231 on securities available for sale | 2,620 | ||||
| Balance, end of period | $ | 3,096 | |||
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 include the collective results of the Holding Company and the Bank, but reflects 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 presentation 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 principles in the United States of America ("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 2003 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 month periods ended March 31, 2004 and 2003 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 | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| (Amounts in thousands, except per share data) |
2004 |
2003 | ||||||
| Net income | $5,245 | $5,300 | ||||||
| Divided by: | ||||||||
| Weighted average common shares outstanding | 17,377 | 16,792 | ||||||
| Weighted average common stock equivalents | 786 | 708 | ||||||
| Total weighted average common shares and common stock equivalents |
18,163 | 17,500 | ||||||
| Basic earnings per share | $0.30 | $0.32 | ||||||
| Diluted earnings per share | $0.29 | $0.30 | ||||||
| Dividends per share | $0.08 | $0.067 | ||||||
| Dividend payout ratio | 26.67 | % | 21.28 | % | ||||
Common stock equivalents that are antidilutive are not included in the computation of diluted earnings per share. There were no common stock equivalents considered antidilutive for the three months ended March 31, 2004. For the three months ended March 31, 2003, options to purchase 409,425 shares, at an average exercise price of $12.47, and unvested restricted stock awards of 102,487 shares, at an average price of $12.41, were not included in the computation of diluted earnings per share.
-5-
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
4. Stock Compensation Plans
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its Stock Option Plan. Accordingly, no compensation expense has been recognized for options granted under the Stock Option Plan. Compensation expense is recognized in the financial statements primarily for restricted stock awards. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No.123 to all stock-based employee compensation. However, the present impact of SFAS No. 123 may not be representative of the effect on income in future periods because the options vest over several years and additional option grants may be made each year.
| Three months ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| (Dollars in thousands, except per share data) |
2004 |
2003 | ||||||
| Net income, as reported | $ | 5,245 | $ | 5,300 | ||||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 656 | 141 | ||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (1,601 | ) | (287 | ) | ||||
| Pro forma net income | $ | 4,300 | $ | 5,154 | ||||
| Basic earnings per share: | ||||||||
| As reported | $ | 0.30 | $ | 0.32 | ||||
| Pro forma | $ | 0.25 | $ | 0.31 | ||||
| Diluted earnings per share: | ||||||||
| As reported | $ | 0.29 | $ | 0.30 | ||||
| Pro forma | $ | 0.24 | $ | 0.29 | ||||
There were no stock option grants in either of the three-month periods ended March 31, 2004 and 2003.
The three months ended March 31, 2004 includes a charge to earnings, on an after-tax basis, of $0.5 million or $0.03 per diluted share, relating to an adjustment of compensation expense for certain of the Company's restricted stock awards to reflect that certain participants under these plans have reached, or are close to reaching, retirement eligibility. This amount is included above in stock-based employee compensation expense.
In addition, the three months ended March 31, 2004 includes, in the deduction for stock-based employee compensation determined under fair value method, a net after-tax charge of $0.8 million, or $0.04 per diluted share, relating to an adjustment of the Company's stock option grants to reflect that certain participants under the plan have reached, or are close to reaching, retirement eligibility.
5. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which established guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity ("VIE"). A VIE exists either when the entity does not have sufficient equity at risk or lacks any one of three characteristics normally associated with a controlling financial interest. If an entity is considered a VIE, judgment and quantitative analysis typically is required to assess whether the company should consolidate the entity as the primary beneficiary. The company is considered the primary beneficiary when it has a variable interest that will absorb a majority of an entity's expected losses, receive a majority of an entity's expected residual returns, or both. In December 2003, the FASB issued a revision to FIN 46, FIN 46R, to address various technical corrections and implementation issues that have arisen since its issuance. The provisions of FIN 46R are effective for the first quarter of 2004.
The Holding Company owns Flushing Financial Capital Trust I (the "Trust"), a special purpose business trust formed to issue capital securities, which is subject to FIN 46 and FIN 46R. Prior to 2004, the Trust was consolidated. Under FIN 46R, the Company has deconsolidated the Trust, effective with the first quarter of 2004. Deconsolidation of the Trust has not had a material impact on the Company's financial statements.
-6-
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
6. Pension and Other Postretirement Benefit Plans
The following table sets forth the components of net expense for the pension and other postretirement benefit plans.
| Three months ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | ||||||||
| 2004 |
2003 | |||||||
| (In thousands) | ||||||||
| Employee Pension Plan: | ||||||||
| Service cost | $ | 155 | $ | 139 | ||||
| Interest cost | 197 | 189 | ||||||
| Amortization of unrecognized loss | 20 | 5 | ||||||
| Amortization of past service liability | (3 | ) | (6 | ) | ||||
| Expected return on plan assets | (292 | ) | (272 | ) | ||||
| Net employee pension expense | $ | 77 | $ | 55 | ||||
| Outside Director Pension Plan: | ||||||||
| Service cost | $ | 19 | $ | 10 | ||||
| Interest cost | 12 | 5 | ||||||
| Amortization of unrecognized loss | 4 | 3 | ||||||
| Amortization of past service liability | 35 | 30 | ||||||
| Net outside director pension expense | $ | 70 | $ | 48 | ||||
| Other Postretirement Benefit Plans: | ||||||||
| Service cost | $ | 41 | $ | 38 | ||||
| Interest cost | 55 | 55 | ||||||
| Amortization of unrecognized loss | 13 | 15 | ||||||
| Amortization of past service liability | (33 | ) | (33 | ) | ||||
| Net other postretirement benefit expense | $ | 76 | $ | 75 | ||||
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003 that it expects to contribute $0.9 million, $0.1 million and $0.1 million to the Employee Pension Plan, Outside Director Pension Plan and Other Post Retirement Benefit Plans, respectively, during the year ended December 31, 2004. As of March 31, 2004, the Company has contributed $25,000 to the Outside Director Plan and $26,000 to the Other Postretirement Benefit Plans. As of March 31, 2004, the Company has not made a contribution to the Employee Pension Plan for the year ending December 31, 2004. As of March 31, 2004, the Company has not revised its expected contributions for the year ending December 31, 2004 for any of these plans.
-7-
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 eleven 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 (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) 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 and consumer 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 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. However, the Company has not recorded a provision for possible loan losses since 1999. 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.
Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth in the 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 Annual Report on Form 10-K for the year ended December 31, 2003. 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.
-8-
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003
General. Diluted earnings per share decreased $0.01, or 3.3%, to $0.29 for the three months ended March 31, 2004 from $0.30 for the three months ended March 31, 2003. Net income decreased $0.1 million, or 1.0%, to $5.2 million for the three months ended March 31, 2004 from $5.3 million for the three months ended March 31, 2003. The return on average assets was 1.07% for the three months ended March 31, 2004 and 1.25% for the three months ended March 31, 2003, while the return on average equity was 14.17% for the three months ended March 31, 2004 and 16.15% for the three months ended March 31, 2003.
The first quarter of 2004 includes a charge to earnings of $1.1 million, $0.7 million on an after-tax basis or $0.04 per diluted share, relating to an adjustment of compensation expense for certain of the Company's restricted stock awards and supplemental retirement benefits to reflect that certain participants under these plans have reached, or are close to reaching, retirement eligibility. Although this adjustment relates to prior periods, the amount of the charge attributable to any prior year would not have been material to the Company's financial condition or results of operations as reported for that year.
Interest Income. Total interest and dividend income increased $1.7 million, or 6.1%, to $29.1 million for the three months ended March 31, 2004 from $27.4 million for the three months ended March 31, 2003. This increase was primarily the result of a $271.7 million increase in the average balance of interest-earning assets for the three months ended March 31, 2004 as compared to the three months ended March 31, 2003. The average balance of each of mortgage loans, net, mortgage-backed securities and other securities increased $121.2 million, $144.8 million and $16.4 million, respectively, for the three months ended March 31, 2004 as compared to the three months ended March 31, 2003. These increases were partially offset by an $11.7 million decrease in the average balance of interest earning deposits and federal funds sold for the three months ended March 31, 2004 compared to the three months ended March 31, 2003. The yield on interest-earning assets declined 66 basis points to 6.28% for the three months ended March 31, 2004 from 6.94% for the three months ended March 31, 2003. This decrease is primarily due to the declining interest rate environment experienced during the past three years, the effect of which further lowered the yield on assets during the first quarter of 2004. We continued our focus on the origination of higher yielding multi-family residential and commercial real estate mortgage loans, along with the origination of one-to-four family mixed-use property mortgage loans, which allowed us to maintain a higher yield on our loan portfolio than we would have otherwise experienced. The yield on mortgage loans reflects the high refinancing activity that has occurred during the current quarter and prior two years. The Bank's existing borrowers have been refinancing their higher costing mortgage loans at lower rates, which has resulted in a decrease on the yield of the mortgage portfolio. This decrease has been partially offset by prepayment penalties that have been collected. However, the increase in the lower-yielding mortgage-backed securities portfolio, while increasing interest income, reduced the yield on total interest-earning assets.
Interest Expense. Interest expense decreased $0.5 million, or 3.9%, to $12.7 million for the three months ended March 31, 2004 from $13.2 million for the three months ended March 31, 2003, primarily due to a 62 basis point decline in the cost of interest-bearing liabilities to 2.91% in the three months ended March 31, 2004 from 3.53% in the three months ended March 31, 2003. This decrease was partially offset by a $250.5 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 the past three years, the effect of which further lowered the cost of funds in the first quarter of 2004. This was coupled with an increase in the average balance of lower costing core deposits. This marks the fourteenth consecutive quarter that the cost of funds has declined.
Net Interest Income. For the three months ended March 31, 2004, net interest income increased $2.2 million, or 15.3%, to $16.4 million from $14.2 million in the three months ended March 31, 2003. This increase in net interest income is primarily due to a $271.7 million increase in the average balance of interest-earning assets, partially offset by a four basis point decrease in the net interest spread. The net interest margin decreased six basis points to 3.54% for the three months ended March 31, 2004 from 3.60% for the three months ended March 31, 2003.
-9-
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Provision for Loan Losses. There was no provision for loan losses for either of the three-month periods ended March 31, 2004 and 2003. 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 March 31, 2004 and 2003.
Non-Interest Income. Non-interest income decreased $0.1 million to $1.5 million for the three months ended March 31, 2004 from $1.6 million for the three months ended March 31, 2003. Loan and banking service fees increased $0.1 million in the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. This increase was more than offset by the reduction in dividends on FHLB-NY stock, which decreased $0.2 million for the quarter ended March 31, 2004 from the quarter ended March 31, 2003.
Non-Interest Expense. Non-interest expense was $9.3 million for the three months ended March 31, 2004, an increase of $2.0 million, or 28.1%, from $7.2 million for the three months ended March 31, 2003. Salaries and employee benefits and other operating expenses increased $0.9 million and $0.2 million, respectively, as a result of the adjustment to amortization of compensation expense for certain of the Company's restricted stock awards and supplemental retirement benefits. The remaining increase from the prior year period is primarily attributable to the Bank's continued focus on expanding its current product offerings to enhance its ability to serve its customers, including increases in personnel to provide these services and, in the fourth quarter of 2003, the opening of a new branch in Astoria, Queens. Management continues to monitor expenditures resulting in efficiency ratios of 51.9% and 45.7% for the three-month periods ended March 31, 2004 and 2003, respectively.
Income before Income Taxes. Income before the provision for income taxes was $8.6 million for each of the three-month periods ended March 31, 2004 and 2003. The increase in net interest income was offset by the increase in non-interest expense.
Provision For Income Taxes. Income tax expense increased $0.1 million to $3.4 million for the three months ended March 31, 2004 compared to $3.3 million for the three months ended March 31, 2003. This increase was primarily due to an increase in the effective rate to 39.0% for the three months ended March 31, 2004 compared to 38.3% for the three months ended March 31, 2003.
-10-
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION
Assets. Total assets at March 31, 2004 were $1,994.5 million, an $83.7 million increase from December 31, 2003. Total loans increased $68.1 million during the three months ended March 31, 2004 to $1,337.6 million from $1,269.5 million at December 31, 2003. At March 31, 2004, loans in process totaled $192.8 million.
The following table shows loan originations and purchases for the periods indicated.
| Three months ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) |
2004 |
2003 | ||||||
| Multi-family residential | $ | 46,957 | $ | 42,306 | ||||
| Commercial real estate | 28,287 | 19,561 | ||||||
| One-to-four family - mixed-use property | 32,445 | 15,463 | ||||||
| One-to-four family - residential | 1,483 | 9,784 | ||||||
| Construction | 5,444 | 3,664 | ||||||
| Co-operative apartment | 105 | -- | ||||||
| Commercial business and other loans | 2,732 | 2,738 | ||||||
| Total | $ | 117,453 | $ | 93,516 | ||||
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 $0.7 million at March 31, 2004 compared to $0.7 million at December 31, 2003 and $2.0 million at March 31, 2003. Total non-performing assets as a percentage of total assets were 0.04% at March 31, 2004 compared to 0.04% at December 31, 2003 and 0.12% at March 31, 2003. The ratio of allowance for loan losses to total non-performing loans was 918% at March 31, 2004 compared to 961% at December 31, 2003 and 501% at March 31, 2003.
During the quarter ended March 31, 2004, mortgage-backed securities increased $14.1 million to $493.5 million, while other securities decreased $2.1 million to $54.2 million. Funds not used during the first quarter of 2004 for loan originations have been invested in readily marketable mortgage-backed securities and shorter-term investment securities to provide readily available funding for loan originations. Other securities primarily consists of securities issued by government agencies and mutual or bond funds that invest in government and government agency securities.
Liabilities. Total liabilities increased $75.8 million to $1,839.8 million at March 31, 2004 from $1,764.0 million at December 31, 2003. During the three months ended March 31, 2004, due to depositors increased $58.1 million as certificate of deposit accounts increased $13.4 million while lower costing core deposits increased $44.7 million. Borrowed funds and mortgagors' escrow deposits increased $5.6 million and $9.5 million, respectively, during the three months ended March 31, 2004.
Equity. Total stockholders' equity increased $7.9 million to $154.7 million at March 31, 2004 from $146.8 million at December 31, 2003. Net income of $5.2 million for the three months ended March 31, 2004, combined with a net after-tax increase of $2.6 million in the market value of securities available for sale, was partially offset by $1.0 million in treasury shares purchased through the Company's stock repurchase program and $1.4 million in cash dividends paid during the three month period. The exercise of stock options increased stockholders' equity by $1.4 million, including the income tax benefit realized by the Company upon the exercise of stock options. In addition, unearned compensation, which is a reduction of stockholders' equity, decreased $1.2 million during the quarter ended March 31, 2004, primarily as a result of the adjustment to amortization of compensation expense previously mentioned. Book value per share was $7.98 per share at March 31, 2004 compared to $7.61 per share at December 31, 2003 and $7.18 at March 31, 2003.
Under its current stock repurchase program, the Company repurchased 55,000 shares during the three months ended March 31, 2004, at a total cost of $1.0 million, at an average of $18.64 per share. At March 31, 2004, 384,950 shares remain to be repurchased under the current stock repurchase program.
-11-
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cash flow. During the three months ended March 31, 2004, funds provided by the Company's operating activities amounted to $6.5 million. These funds, together with $70.8 million provided by financing activities and funds available at the beginning of the year, were utilized to fund net investing activities of $75.5 million. The Company's primary business objective is the origination and purchase of one-to-four family (primarily mixed-use properties), multi-family residential and commercial real estate mortgage loans. During the three months ended March 31, 2004, the net total of loan originations less loan repayments was $68.0 million. The Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. During the three months ended March 31, 2004, the Company purchased a total of $45.6 million in securities available for sale. Funds for investment were also provided by $38.5 million in maturities, prepayments, calls and sales of securities available for sale. Additional funds of $0.8 million were provided through the exercise of stock options. The Company also used funds of $1.2 million for treasury stock repurchases and $1.4 million for dividend payments during the three months ended March 31, 2004.
INTEREST RATE RISK
The consolidated statements of financial position have been prepared in accordance with generally accepted accounting principles in the United States of America, which require 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 March 31, 2004. 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 | ||||||||||
| Change in Interest Rate |
Income |
Net Portfolio Value |
Value Ratio | ||||||||
| -300 Basis points | -23.56 | % | -28.63 | % | 6.88 | % | |||||
| -200 Basis points | -9.12 | -17.35 | 8.01 | ||||||||
| -100 Basis points | -1.54 | -4.68 | 9.33 | ||||||||
| Base interest rate | -- | -- | 9.93 | ||||||||
| +100 Basis points | -3.14 | -7.74 | 9.40 | ||||||||
| +200 Basis points | -8.41 | -18.71 | 8.52 | ||||||||
| +300 Basis points | -13.98 | -31.42 | 7.41 | ||||||||
-12-
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 March 31, 2004, 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 March 31, 2004.
| (Dollars in thousands) |
Amount |
Percent of Assets | ||||||
|---|---|---|---|---|---|---|---|---|
| Tangible Capital: | ||||||||
| Capital level | $ | 140,616 | 7 | .12% | ||||
| Requirement | 29,630 | 1 | .50 | |||||
| Excess | 110,986 | 5 | .62 | |||||
Leverage and Core Capital: | ||||||||
| Capital level | $ | 140,616 | 7 | .12% | ||||
| Requirement | 59,260 | 3 | .00 | |||||
| Excess | 81,356 | 4 | .12 | |||||
Risk-Based Capital: | ||||||||
| Capital level | $ | 147,163 | 13 | .41% | ||||
| Requirement | 87,778 | 8 | .00 | |||||
| Excess | 59,385 | 5 | .41 | |||||
-13-
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 March 31, 2004 and 2003, 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 March 31, |
||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004
|
2003
|
|||||||||||||||||||
| Average | Yield/ | Average | Yield/ | |||||||||||||||||
| Balance
|
Interest
|
Cost
|
Balance
|
Interest
|
Cost
|
|||||||||||||||
| Assets | ||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||
| Mortgage loans, net(1) | $ | 1,288,829 | $ | 23,405 | 7.26 | % | $ | 1,167,631 | $ | 23,090 | 7.91 | % | ||||||||
| Other loans, net(1) | 9,774 | 150 | 6.14 | 8,815 | 144 | 6.53 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total loans, net | 1,298,603 | 23,555 | 7.26 | 1,176,446 | 23,234 | 7.90 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Mortgage-backed securities | 477,061 | 4,972 | 4.17 | 332,239 | 3,766 | 4.53 | ||||||||||||||
| Other securities | 58,825 | 538 | 3.66 | 42,395 | 359 | 3.39 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total securities | 535,886 | 5,510 | 4.11 | 374,634 | 4,125 | 4.40 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Interest-earning deposits and federal funds sold |
19,442 | 40 | 0.82 | 31,136 | 85 | 1.09 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total interest-earning assets | 1,853,931 | 29,105 | 6.28 | 1,582,216 | 27,444 | 6.94 | ||||||||||||||
|
|
|
|
||||||||||||||||||
| Other assets | 100,872 | 110,857 | ||||||||||||||||||
| Total assets | $ | 1,954,803 | $ | 1,693,073 | ||||||||||||||||
| Liabilities and Equity | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Passbook accounts | $ | 217,081 | 270 | 0.50 | $ | 214,143 | 526 | 0.98 | ||||||||||||
| NOW accounts | 41,968 | 52 | 0.50 | 39,205 | 73 | 0.74 | ||||||||||||||
| Money market accounts | 297,281 | 1,490 | 2.00 | 186,479 | 1,070 | 2.30 | ||||||||||||||
| Certificate of deposit accounts | 598,144 | 5,184 | 3.47 | 551,721 | 5,244 | 3.80 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total due to depositors | 1,154,474 | 6,996 | 2.42 | 991,548 | 6,913 | 2.79 | ||||||||||||||
| Mortgagors' escrow accounts | 17,002 | 12 | 0.28 | 12,251 | 23 | 0.75 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total deposits | 1,171,476 | 7,008 | 2.39 | 1,003,799 | 6,936 | 2.76 | ||||||||||||||
| Borrowed funds | 574,719 | 5,686 | 3.96 | 491,883 | 6,271 | 5.10 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
| Total interest-bearing liabilities | 1,746,195 | 12,694 | 2.91 | 1,495,682 | 13,207 | 3.53 | ||||||||||||||
|
|
|
|
||||||||||||||||||
| Non-interest bearing deposits | 40,602 | 33,607 | ||||||||||||||||||
| Other liabilities | 19,968 | 32,481 | ||||||||||||||||||
| Total liabilities | 1,806,765 | 1,561,770 | ||||||||||||||||||
| Equity | 148,038 | 131,303 | ||||||||||||||||||
| Total liabilities and equity | $ | 1,954,803 | $ | 1,693,073 | ||||||||||||||||
| Net interest income/net interest rate spread |
$ | 16,411 | 3.37 | % | $ | 14,237 | 3.41 | % | ||||||||||||
|
|
|
|
||||||||||||||||||
| Net interest-earning assets/ net | ||||||||||||||||||||
| interest margin | $ | 107,736 | 3.54 | % |
$ | 86,534 | 3.60 | % | ||||||||||||
|
|
||||||||||||||||||||
| Ratio of interest-earning assets to | ||||||||||||||||||||
| interest-bearing liabilities | 1.06 | x | 1.06 | x | ||||||||||||||||
|
|
||||||||||||||||||||
(1) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.0 million and $0.9 million for each of the three-month periods ended March 31, 2004 and 2003, respectively.
-14-
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.
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In thousands) |
March 31, 2004 |
March 31, 2003 | ||||||
| Mortgage Loans | ||||||||
| At beginning of period | $ | 1,264,219 | $ | 1,166,192 | ||||
Mortgage loans originated: | ||||||||
| Multi-family residential | 46,957 | 42,306 | ||||||
| Commercial real estate | 28,287 | 19,561 | ||||||
| One-to-four family - mixed-use property | 32,445 | 15,273 | ||||||
| One-to-four family - residential | 1,483 | 9,360 | ||||||
| Construction | 5,444 | 3,664 | ||||||
| Co-operative apartment | 105 | -- | ||||||
| |
| |||||||
| Total mortgage loans originated | 114,721 | 90,164 | ||||||
| |
| |||||||
| Mortgage loans purchased: | ||||||||
| One-to-four family - mixed-use property | -- | 190 | ||||||
| One-to-four family - residential | -- | 424 | ||||||
| |
| |||||||
| Total acquired loans | -- | 614 | ||||||
| |
| |||||||
| Less: | ||||||||
| Principal and other reductions | 47,251 | 68,654 | ||||||
| Sales | -- | 7,501 | ||||||
| Mortgage loan foreclosures | -- | -- | ||||||
| |
| |||||||
| At end of period | $ | 1,331,689 | $ | 1,180,815 | ||||
| |
| |||||||
| Commercial Business and Other Loans | ||||||||
| At beginning of period | $ | 9,825 | $ | 8,486 | ||||
Other loans originated: | ||||||||
| Small Business Administration | 1,245 | 1,934 | ||||||
| Small business | 1,067 | 358 | ||||||
| Other | 420 | 446 | ||||||
| |
| |||||||
| Total other loans originated | 2,732 | 2,738 | ||||||
| |
| |||||||
| Less: | ||||||||
| Sales | 941 | 1,016 | ||||||
| Principal and other reductions | 1,625 | 1,490 | ||||||
| |
| |||||||
| At end of period | $ | 9,991 | $ | 8,718 | ||||
| |
| |||||||
-15-
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) |
March 31, 2004 |
December 31, 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| Non-accrual mortgage loans | $ | 563 | $ | 525 | ||||
| Other non-accrual loans | 150 | 157 | ||||||
| Total non-accrual loans | 713 | 682 | ||||||
Mortgage loans 90 days or more delinquent | ||||||||
| and still accruing | -- | -- | ||||||
| Other loans 90 days or more delinquent | ||||||||
| and still accruing | -- | -- | ||||||
| Total non-performing loans | 713 | 682 | ||||||
Real estate owned (foreclosed real estate) | -- | -- | ||||||
Investment securities | -- | -- | ||||||
| Total non-performing assets | $ | 713 | $ | 682 | ||||
| Non-performing loans to gross loans | 0.05 | % | 0.05 | % | ||||
| Non-performing assets to total assets | 0.04 | % | 0.04 | % | ||||
-16-
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 allowance for loan losses on a quarterly basis.
The following table sets forth the activity in the Bank's allowance for loan losses for the periods indicated.
| Three Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) |
March 31, 2004 |
March 31, 2003 | ||||||
| Balance at beginning of period | $ | 6,553 | $ | 6,581 | ||||
| Provision for loan losses | -- | -- | ||||||
| Loans charged-off: | ||||||||
| Multi-family residential | -- | -- | ||||||
| Commercial real estate | -- | -- | ||||||
| One-to-four family - mixed-use property | -- | -- | ||||||
| One-to-four family - residential | -- | -- | ||||||
| Construction | -- | -- | ||||||
| Co-operative apartment | -- | -- | ||||||
| Commercial business and other loans | (7 | ) | (115 | ) | ||||
| Total loans charged-off | (7 | ) | (115 | ) | ||||
| Recoveries: | ||||||||
| Mortgage loans | 1 | 123 | ||||||
| Other loans | -- | -- | ||||||
| Total recoveries | 1 | 123 | ||||||
| Net (charge-offs) recoveries | (6 | ) | 8 | |||||
| Balance at end of period | $ | 6,547 | $ | 6,589 | ||||
| Ratio of net charge-offs during the period to average loans outstanding during the period | 0.00 | % | 0.00 | % | ||||
| Ratio of allowance for loan losses to loans at end of period | 0.49 | % | 0.55 | % | ||||
| Ratio of allowance for loan losses to non-performing assets at end of period | 918.43 | % | 326.91 | % | ||||
| Ratio of allowance for loan losses to non-performing loans at end of period | 918.43 | % | 500.85 | % | ||||
-17-
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
The Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2004, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The following table sets forth information regarding the shares of common stock repurchased by the Company during the quarter ended March 31, 2004.
| Maximum | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Number | Number of | ||||||||||||||||
| of Shares | Shares that | ||||||||||||||||
| Purchased as | May Yet Be | ||||||||||||||||
| Part of | Purchased | ||||||||||||||||
| Total Number | Average | Publicly | Under the | ||||||||||||||
| of Shares | Price Paid | Announced Plans | Plans or | ||||||||||||||
| Period |
Purchased |
per Share |
or Programs |
Program | |||||||||||||
| January 1 to January 31, 2004 | 2,701 | $18.38 | -- | 439,950 | |||||||||||||
February 1 to February 29, 2004 | 25,079 | $18.89 | 20,000 | 419,950 | |||||||||||||
March 1 to March 31, 2004 | 35,000 | $18.50 | 35,000 | 384,950 | |||||||||||||
| Total | 62,780 | $18.65 | 55,000 | 384,950 | |||||||||||||
During the quarter ended March 31, 2004, the Company purchased 2,701 common shares from employees, at an average cost of $18.38, to satisfy tax obligations due from the employees upon vesting of restricted stock awards. The Company also purchased 5,079 common shares from a director, at an average cost of $18.94, to satisfy the purchase price due upon the exercise of stock options.
The current common stock repurchase program was approved by the Company's Board of Directors on December 17, 2002. This repurchase program authorized the repurchase of 945,000 common shares, as adjusted for the three-for-two common stock split paid in the form of a stock dividend on December 15, 2003. The repurchase program does not have an expiration date or a maximum dollar amount that may be paid to repurchase the common shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Not applicable.
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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 of 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 (4)
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 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
Exhibit 32.1 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 32.2 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.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
b) REPORTS ON FORM 8-K.
On January 29, 2004, the Company filed an 8-K announcing the release of its fourth quarter 2003 results of operations and financial condition.
On February 18, 2004, the Company filed an 8-K announcing an increase of 9 percent in its quarterly dividend to $0.08 per common share.
On February 20, 2004, the Company filed an 8-K announcing that Messrs. Michael J. Hegarty, President and CEO, and John R. Buran, Executive Vice President and COO, would be making a presentation to several institutional and individual investors.
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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: May 7, 2004 | By: | /s/Michael J. Hegarty | ||||||
| Michael J. Hegarty | ||||||||
| President and Chief Executive Officer | ||||||||
| Dated: May 7, 2004 | By: | /s/Monica C. Passick | ||||||
| Monica C. Passick | ||||||||
| Senior Vice President, Treasurer and | ||||||||
| Chief Financial Officer | ||||||||
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