FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 April 20, 2001 was 9,195,990 shares.
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............................................. 6 ITEM 3. Qualitative and Quantitative Disclosures About Market Risk........ 16 PART II. - OTHER INFORMATION ITEM 1. Legal Proceedings................................................. 16 ITEM 2. Changes in Securities and Use of Proceeds ........................ 16 ITEM 3. Defaults Upon Senior Securities................................... 16 ITEM 4. Submission of Matters To A Vote of Security Holders............... 16 ITEM 5. Other Information................................................. 16 ITEM 6. Exhibits and Reports on Form 8-K.................................. 16 SIGNATURES................................................................. 17
PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES Consolidated Statements of Financial Condition (Dollars in thousands, except share data) March 31, 2001 December 31, 2000 -------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) ------ Cash and due from banks $11,627 $10,235 Federal funds sold and overnight interest-earning deposits 19,630 11,758 Securities available for sale: Mortgage-backed securities 233,658 238,626 Other securities 15,752 16,594 Loans: 1-4 Family residential mortgage loans 472,778 467,784 Multi-family mortgage loans 338,080 334,307 Commercial real estate loans 188,344 167,549 Co-operative apartment loans 7,488 8,009 Construction loans 8,184 8,304 Small Business Administration loans 2,884 2,844 Consumer and other loans 2,610 3,704 Net unamortized premiums and unearned loan fees 665 579 Allowance for loan losses (6,724) (6,721) -------------- -------------- Net loans 1,014,309 986,359 Interest and dividends receivable 7,593 7,724 Real estate owned, net 51 44 Bank premises and equipment, net 6,088 6,311 Federal Home Loan Bank of New York stock 24,932 24,932 Goodwill 4,180 4,272 Other assets 30,661 31,237 -------------- -------------- Total assets $1,368,481 $1,338,092 ============== ============== LIABILITIES ----------- Due to depositors: Non-interest bearing $23,588 $20,913 Interest-bearing 680,869 661,145 Mortgagors' escrow deposits 15,142 7,753 Borrowed funds 504,727 508,839 Other liabilities 14,936 12,705 -------------- -------------- Total liabilities 1,239,262 1,211,355 -------------- -------------- STOCKHOLDERS' EQUITY -------------------- Preferred stock ($0.01 par value; 5,000,000 shares authorized) - - Common stock ($0.01 par value; 20,000,000 shares authorized; 11,355,678 shares issued; 9,195,990 and 9,271,921 shares outstanding at March 31, 2001 and December 31, 2000, respectively) 114 114 Additional paid-in capital 76,458 76,396 Treasury stock, at average cost (2,159,688 and 2,083,757 shares at March 31, 2001 and December 31, 2000, respectively) (33,163) (31,755) Unearned compensation (7,583) (7,781) Retained earnings 92,550 89,896 Accumulated other comprehensive income, net of taxes 843 (133) -------------- -------------- Total stockholders' equity 129,219 126,737 -------------- -------------- Total liabilities and stockholders' equity $1,368,481 $1,338,092 ============== ============== 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 ended March 31, --------------------------- (In thousands, except per share data) 2001 2000 - ---------------------------------------------------------------------------------------------- (Unaudited) INTEREST AND DIVIDEND INCOME - ---------------------------- Interest and fees on loans $20,443 $18,036 Interest and dividends on securities: Interest 4,046 4,991 Dividends 56 67 Other interest income 506 182 ------------- ------------- Total interest and dividend income 25,051 23,276 ------------- ------------- INTEREST EXPENSE - ---------------- Deposits 7,364 6,420 Other interest expense 7,716 6,700 ------------- ------------- Total interest expense 15,080 13,120 ------------- ------------- NET INTEREST INCOME 9,971 10,156 Provision for loan losses - - ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,971 10,156 ------------- ------------- NON-INTEREST INCOME - ------------------- Other fee income 561 524 Net gain on sales of securities and loans 212 35 Other income 950 517 ------------- ------------- Total non-interest income 1,723 1,076 ------------- ------------- NON-INTEREST EXPENSE - -------------------- Salaries and employee benefits 3,132 2,954 Occupancy and equipment 577 517 Professional services 543 592 Data processing 345 331 Depreciation and amortization 272 264 Other operating expenses 1,098 1,090 ------------- ------------- Total non-interest expense 5,967 5,748 ------------- ------------- INCOME BEFORE INCOME TAXES 5,727 5,484 ------------- ------------- PROVISION FOR INCOME TAXES - -------------------------- Federal 1,808 1,675 State and local 310 409 ------------- ------------- Total taxes 2,118 2,084 ------------- ------------- NET INCOME $3,609 $3,400 ============= ============= COMPREHENSIVE INCOME, NET OF TAX - -------------------------------- Unrealized net gains on securities: Unrealized holding gains arising during period $1,038 $163 Less: reclassification adjustments for gains included in income (62) - ------------- ------------- Net unrealized holding gains 976 163 ------------- ------------- Comprehensive net income $4,585 $3,563 ============= ============= BASIC EARNINGS PER SHARE $0.44 $0.40 DILUTED EARNINGS PER SHARE $0.42 $0.39 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 three months ended March 31, ---------------------------- (In thousands) 2001 2000 - ------------------------------------------------------------------------------------------------------------ (Unaudited) CASH FLOWS PROVIDED BY OPERATING ACTIVITIES - ------------------------------------------- Net income $3,609 $3,400 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses - - Depreciation and amortization of bank premises and equipment 272 264 Amortization of goodwill 92 92 Net gain on sales of securities (99) - Net gain on sales of loans (113) (35) Net loss (gain) on sales of real estate owned 4 (110) Amortization of unearned premium, net of accretion of unearned discount 241 397 Amortization of deferred income (132) (216) Deferred income tax provision (benefit) (205) 106 Deferred compensation 110 41 Net increase in other assets and liabilities 2,233 1,040 Unearned compensation 383 372 ------------ ------------ Net cash provided by operating activities 6,395 5,351 ------------ ------------ CASH FLOWS USED BY INVESTING ACTIVITIES - --------------------------------------- Purchases of bank premises and equipment (49) (164) Purchases of Federal Home Loan Bank shares - (496) Purchases of securities available for sale (39,686) (2,286) Proceeds from sales and calls of securities available for sale 28,583 - Proceeds from maturities and prepayments of securities available for sale 18,608 8,989 Net originations and repayment of loans (27,474) (23,351) Purchases of loans (314) (6,361) Proceeds from sales of real estate owned 40 418 ------------ ------------ Net cash used by investing activities (20,292) (23,251) ------------ ------------ CASH FLOWS PROVIDED BY FINANCING ACTIVITIES - ------------------------------------------- Net increase in non-interest bearing deposits 2,675 2,302 Net increase (decrease) in interest-bearing deposits 19,724 (849) Net increase in mortgagors' escrow deposits 7,389 4,119 Net decrease in short-term borrowed funds (6,775) (20,000) Proceeds from long-term borrowed funds 18,000 40,000 Repayment of long-term borrowed funds (15,337) (10,078) Purchases of treasury stock, net (1,589) (2,004) Cash dividends paid (926) (872) ------------ ------------ Net cash provided by financing activities 23,161 12,618 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,264 (5,282) Cash and cash equivalents, beginning of period 21,993 34,934 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $31,257 $29,652 ============ ============ SUPPLEMENTAL CASH FLOW DISCLOSURE - --------------------------------- Interest paid $14,860 $12,719 Income taxes paid 305 79 Non-cash activities: Loans transferred through the foreclosure of a related mortgage loan to real estate owned 47 - Purchase of securities not yet settled - 9,988 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 (Dollars in thousands) March 31, 2001 ----------------------------------------------------------------------------------------------- COMMON STOCK ------------ Balance, beginning of period $114 No activity - --------------- Balance, end of period $114 =============== ADDITIONAL PAID-IN CAPITAL -------------------------- Balance, beginning of period $76,396 Award of shares released from Employee Benefit Trust (945 common shares) 10 Restricted stock awards (10,000 common shares) 23 Tax benefit of unearned compensation 29 --------------- Balance, end of period $76,458 =============== TREASURY STOCK -------------- Balance, beginning of period $(31,755) Purchases of common shares outstanding (91,200 common shares) (1,638) Stock options exercised (6,500 common shares) 99 Repurchase of restricted stock awards (1,231 common shares) to satisfy tax obligations (21) Restricted stock awards (10,000 common shares) 152 --------------- Balance, end of period $(33,163) =============== UNEARNED COMPENSATION --------------------- Balance, beginning of period $(7,781) Restricted stock award expense 279 Restricted stock award (10,000 common shares) (175) Release of shares from Employee Benefit Trust (12,237 common shares) 94 --------------- Balance, end of period $(7,583) =============== RETAINED EARNINGS ----------------- Balance, beginning of period $89,896 Net income 3,609 Options exercised (6,500 common shares) (29) Cash dividends declared and paid (926) --------------- Balance, end of period $92,550 =============== ACCUMULATED OTHER COMPREHENSIVE INCOME -------------------------------------- Balance, beginning of period $(133) Change in net unrealized gain, net of taxes of approximately $869 on securities available for sale 1,038 Less: Reclassification adjustment for gains included in net income, net of taxes of approximately $37 (62) --------------- Balance, end of period $843 =============== The accompanying notes are an integral part of these consolidated financial statements. -4-
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESNotes to Consolidated Statements
1. Basis of Presentation
The primary business of Flushing Financial Corporation 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 2000 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 quarters ended March 31, 2001 and 2000 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:
March 31, ----------------- (Amounts in thousands except per share data) 2001 2000 - ----------------------------------------------------------------------------------- Net income ....................................................... $3,609 $3,400 Divided by: Weighted average common shares outstanding .................. 8,242 8,512 Weighted average common stock equivalents ................... 292 126 Total weighted average common shares and common stock equivalents 8,534 8,638 Basic earnings per share ......................................... $0.44 $0.40 Diluted earnings per share ....................................... $0.42 $0.39 Dividends paid per share ......................................... $0.11 $0.10 Dividend payout ratio ............................................ 25.0% 25.0%
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESManagement's Discussion and Analysis ofFinancial Condition and Results of Operations
GENERAL
Flushing Financial Corporation, a Delaware corporation, 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 include the collective results of Flushing Financial Corporation 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 mortgage loans, 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 interest income earned on its loan and securities portfolios, and its cost of funds, consisting primarily of interest paid on deposit accounts and borrowed funds. 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, and the average balance of interest-earning assets 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 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.
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 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 2000 Annual Report to Shareholders and the SEC Report on Form 10-K for the year ended December 31, 2000. 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 ENDEDMARCH 31, 2001 AND 2000
GENERAL. Diluted earnings per share increased 7.7% to $0.42 for the quarter ended March 31, 2001 from $0.39 for the quarter ended March 31, 2000. Net income increased 6.1% to $3.6 million for the quarter ended March 31, 2001 from $3.4 million for the quarter ended March 31, 2000. The return on average assets for the first quarter of 2001 was 1.06% compared to 1.10% for the comparable 2000 period, while the return on average equity for the first quarter of 2001 was 11.40% compared to 11.71% for the comparable 2000 period.
INTEREST INCOME. Total interest and dividend income increased $1.8 million, or 7.6%, to $25.1 million for the three months ended March 31, 2001 from $23.3 million for the three months ended March 31, 2000. This increase was primarily the result of a $81.9 million increase in the average balance of interest-earning assets for the quarter ended March 31, 2001 as compared to the quarter ended March 31, 2000. The average balance of mortgage loans, net increased $108.0 million in the first quarter of 2001 as compared to the first quarter of 2000, which was partially offset by a $49.7 million decrease in the average balance of mortgage-backed securities for the first quarter of 2001 compared to the first quarter of 2000. The decrease in the average balance of mortgage-backed securities reflects the sale in the third quarter of 2000 of lower-yielding mortgage-backed securities and the reinvestment of $20.0 million in Bank Owned Life Insurance ("BOLI" ). The investment in BOLI is included in Other Assets in the Consolidated Statement of Financial Condition. The yield on interest-earning assets increased five basis points to 7.88% for the first quarter of 2001 from 7.83% for the first quarter of 2000. The improvement in the yield on interest-earning assets is primarily attributed to the increase in the average balance of the higher-yielding mortgage loan portfolio.
INTEREST EXPENSE. Interest expense increased $2.0 million, or 14.9%, to $15.1 million for the three months ended March 31, 2001 from $13.1 million for the three months ended March 31, 2000. This increase is due to a $98.3 million increase in the average balance of interest-bearing liabilities, combined with a 26 basis point increase in the cost of interest-bearing liabilities. The cost of interest-bearing liabilities increased to 5.07% for the quarter ended March 31, 2001 from 4.81% for the quarter ended March 31, 2000 as both certificate of deposit accounts and borrowed funds renewed at higher rates. In addition, the average balance of the higher costing certificate of deposit accounts and borrowed funds increased to fund asset growth. However, the cost of interest-bearing liabilities declined in each of the three months in the quarter ended March 31, 2001. Should this trend continue, the Company would realize a decrease in its cost of interest-bearing liabilities in the next quarter.
NET INTEREST INCOME. For the three months ended March 31, 2001, net interest income decreased $0.2 million, or 1.8%, to $10.0 million from $10.2 million in the three months ended March 31, 2000. The decrease in net interest income is primarily due to the above mentioned sale of lower-yielding mortgage-backed securities in the third quarter of 2000 and the reinvestment of the proceeds in BOLI. The income on BOLI is included in Other Income, and amounted to $0.3 million for the quarter ended March 31, 2001. The net interest margin declined 28 basis points to 3.14% for the three months ended March 31, 2001 from 3.42% for the comparable 2000 period. However, the net interest margin of 3.14% for the quarter ended March 31, 2001 reflects a five basis point improvement over the 3.09% level for the prior quarter ended December 31, 2000.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the three months ended March 31, 2001 or 2000. The level of the allowance for loan losses reflects the Bank's evaluation of current economic conditions, the overall trend of non-performing loans in the loan portfolio (see Asset Section), its analysis of specific loan situations, and the size and composition of the loan portfolio.
NON-INTEREST INCOME. Total non-interest income increased by 60.1% to $1.7 million for the three months ended March 31, 2001 from $1.1 million for the three months ended March 31, 2000. The increase is due to the income earned on BOLI, an increase in gain on sales of securities and loans, an increase in dividends received on Federal Home Loan Bank of New York stock, and higher income from loan fees and banking services.
NON-INTEREST EXPENSE. Non-interest expense increased by $0.3 million, or 3.8%, to $6.0 million for the three months ended March 31, 2001 as compared to $5.7 million for the three months ended March 31, 2000. Management continues to monitor expenditures resulting in efficiency ratios of 50.7% and 51.2% for the three months ended March 31, 2001 and 2000, respectively.
INCOME BEFORE INCOME TAXES. Income before provision for income taxes increased $0.2 million, or 4.4%, to $5.7 million for the three months ended March 31, 2001 as compared to $5.5 million for the three months ended March 31, 2000, primarily due to the increase in other income.
PROVISION FOR INCOME TAXES. Income tax expense was $2.1 million for the three months ended March 31, 2001 and 2000. The effective rate was 37.0% for the quarter ended March 31, 2001 compared to 38.0% for the quarter ended March 31, 2000.
FINANCIAL CONDITION
ASSETS. Total assets at March 31, 2001 were $1.37 billion, an increase of $30.4 million from December 31, 2000. During the first quarter of 2001, loan originations and purchases were $18.1 million for 1-4 family residential mortgage loans, $10.6 million for multi-family real estate loans, $23.6 million for commercial real estate loans and $2.1 million in construction loans. During the first quarter of 2000, loan originations and purchases were $26.7 million for 1-4 family residential mortgage loans, $16.5 million for multi-family real estate loans, $8.6 million for commercial real estate loans and $0.8 million in construction loans. Total loans, net, increased $27.9 million during the first quarter of 2001 to $1,014.3 million from $986.4 million at December 31, 2000.
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 $1.8 million at March 31, 2001 compared to $1.7 million at December 31, 2000 and $2.0 million at March 31, 2000. Total non-performing assets as a percentage of total assets were 0.13% at March 31, 2001 compared to 0.12% at December 31, 2000 and 0.16% at March 31, 2000. The ratio of allowance for loan losses to total non-performing loans was 394.72% at March 31, 2001 compared to 415.32% at December 31, 2000 and 348.66% at March 31, 2000.
LIABILITIES. Total liabilities increased $27.9 million to $1.24 billion at March 31, 2001 from $1.21 billion at December 31, 2000. Deposits increased $22.4 million, with increases in non-interest bearing deposits of $2.7 million, money market accounts of $9.7 million, and certificate of deposit accounts of $9.8 million. In addition, mortgagors' escrow deposits increased $7.4 million. These increases were partially offset by a $4.1 million decrease in borrowed funds.
EQUITY. Total stockholders' equity increased $2.5 million to $129.2 million at March 31, 2001 from $126.7 million at December 31, 2000. The increase is primarily due to $3.6 million in net income and an increase of $1.0 million in the net unrealized after tax gain in the market value of securities available for sale, partially offset by $1.6 million in treasury shares purchased through the Company's stock repurchase plans, and $0.9 million in cash dividends paid during the current quarter. Quarterly dividends per share were increased to $0.11 per share for the first quarter of 2001 from $0.10 per share in the fourth quarter of 2000. Book value per share improved to $14.05 per share at March 31, 2001 from $13.67 per share at December 31, 2000 and $12.45 at March 31, 2000.
Under its stock repurchase programs, the Company repurchased 91,200 shares during the quarter, leaving 287,800 shares to be repurchased under the current stock repurchase program at March 31, 2001.
LIQUIDITY. The Bank, as a federal savings bank, is subject to Office of Thrift Supervision ("OTS") guidelines regarding liquidity requirements. Pursuant to these requirements, the Bank is required to maintain an average daily balance of liquid assets (cash and certain securities with detailed maturity limitations and marketability requirements) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. Monetary penalties may be imposed by the OTS for failure to meet these liquidity requirements. At March 31, 2001 and December 31, 2000, the Bank's liquidity ratio, computed in accordance with the OTS requirement was 10.76% and 11.14%, respectively. Management anticipates that the Bank will continue to meet OTS liquidity requirements. Unlike the Bank, Flushing Financial Corporation is not subject to OTS regulatory requirements on the maintenance of minimum levels of liquid assets.
CASH FLOW. During the first quarter of 2001, funds provided by the Company's operating activities amounted to $6.4 million. These funds, together with $23.2 million provided by financing activities and funds available at the beginning of the quarter, were utilized to fund net investing activities of $20.3 million. The Company's primary business objective is the origination and purchase of residential, multi-family and commercial real estate loans. During the quarter ended March 31, 2001, the net total of loan originations less loan repayments was $27.5 million, and the total amount of real estate loans purchased was $0.3 million. The Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. During the quarter ended March 31, 2001, the Company purchased a total of $39.7 million in securities available for sale. Funds for investment were also provided by $47.2 million in sales, calls, maturities, and prepayments of securities available for sale. The Company also used funds of $1.6 million for treasury stock repurchases and $0.9 million in dividend payments during the quarter ended March 31, 2001.
INTEREST RATE RISK
The Consolidated Financial Statements 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 March 31, 2001. 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 6.47% -4.58% 10.48% - -200 Basis points 4.81 -2.40 10.94 - -100 Basis points 2.31 0.93 11.52 Base interest rate - - 11.66 +100 Basis points -5.19 -13.39 10.43 +200 Basis points -10.98 -28.34 8.94 +300 Basis points -17.43 -42.60 7.41
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, 2001, 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, 2001.
(Dollars in thousands) Amount Percent of Assets - ------------------------------------------------------------------------------ Tangible Capital: Capital level $109,924 8.12% Requirement 20,314 1.50 Excess 89,610 6.62 Core Capital: Capital level $109,924 8.12% Requirement 40,629 3.00 Excess 69,295 5.12 Risk-Based Capital: Capital level $116,648 15.62% Requirement 59,746 8.00 Excess 56,902 7.62
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 months ended March 31, 2001 and 2000, 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, --------------------------------------------------------------- 2001 2000 ------------------------------- ------------------------------ Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost - ---------------------------------------------------------------------------------------------------------- ASSETS - ------ Interest-earning assets: Mortgage loans, net ................... $ 990,160 $20,323 8.21% $ 882,135 $17,884 8.11% Other loans ........................... 5,944 120 8.08 5,816 152 10.45 Mortgage-backed securities ............ 223,618 3,829 6.85 273,288 4,770 6.98 Other securities ...................... 15,663 273 6.97 16,319 288 7.06 Interest-earning deposits and federal funds sold .................. 35,690 506 5.67 11,573 182 6.29 ------------------------------ ------------------------------ Total interest-earning assets ... 1,271,075 25,051 7.88 1,189,131 23,276 7.83 ------------------ ------------------ Non-interest earning assets ............. 87,095 51,671 ----------- ----------- Total assets ..................... $1,358,170 $1,240,802 =========== =========== LIABILITIES AND EQUITY - ---------------------- Interest-bearing liabilities: Passbook accounts ..................... $ 186,254 950 2.04 $ 193,718 1,000 2.06 NOW accounts .......................... 29,856 140 1.88 26,823 127 1.89 Money market accounts ................. 45,216 368 3.26 41,606 339 3.26 Certificate of deposit accounts ....... 407,644 5,885 5.77 371,447 4,944 5.32 Mortgagors' escrow deposits ........... 11,268 21 0.75 12,582 10 0.32 Borrowed funds ........................ 508,744 7,716 6.07 444,555 6,700 6.03 ------------------------------ ------------------------------ Total interest-bearing liabilities 1,188,982 15,080 5.07 1,090,731 13,120 4.81 ------------------ ------------------ Other liabilities ....................... 42,507 33,949 ----------- ----------- Total liabilities ................ 1,231,489 1,124,680 Equity .................................. 126,681 116,122 ----------- ----------- Total liabilities and equity ..... $1,358,170 $1,240,802 =========== =========== Net interest income/Interest rate spread $9,971 2.81% $10,156 3.02% ================== ================== Net interest-earning assets / Net interest margin ................. $82,093 3.14% $98,400 3.42% =========== ========= =========== ========= Ratio of interest-earning assets to interest-bearing liabilities ........ 1.07x 1.09x ========= =========
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, 2001 March 31, 2000 - -------------------------------------------------------------------------------- MORTGAGE LOANS - -------------- At beginning of period $985,953 $876,984 Mortgage loans originated: One-to-four family 17,759 20,378 Cooperative 56 65 Multi-family real estate 10,649 16,545 Commercial real estate 23,605 8,560 Construction 2,143 846 -------------- ------------- Total mortgage loans originated 54,212 46,394 -------------- ------------- Acquired loans: Loans purchased 310 6,295 -------------- ------------- Total acquired loans 310 6,295 -------------- ------------- Less: Principal reductions 25,554 23,348 Mortgage loans sold - - Mortgage loan foreclosures 47 - -------------- ------------- At end of period $1,014,874 $906,325 ============== ============= OTHER LOANS - ----------- At beginning of period $6,548 $5,748 Other loans originated: Small Business Administration 300 700 Small business loans 110 140 Other loans 166 273 -------------- ------------- Total other loans originated 576 1,113 -------------- ------------- Less: Sales 150 - Principal reductions 1,480 756 Charge-offs - 25 -------------- ------------- At end of period $5,494 $6,080 ============== =============
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, 2001 December 31, 2000 - -------------------------------------------------------------------------------- Non-accrual mortgage loans $1,530 $1,492 Other non-accrual loans 173 126 ----------- ----------- Total non-accrual loans 1,703 1,618 Mortgage loans 90 days or more delinquent and still accruing - - Other loans 90 days or more delinquent and still accruing - - ----------- ----------- Total non-performing loans 1,703 1,618 Real estate owned (foreclosed real estate) 51 44 ----------- ----------- Total non-performing assets $1,754 $1,662 =========== =========== Non-performing loans to gross loans 0.17% 0.16% Non-performing assets to total assets 0.13% 0.12%
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.
Three Months Ended --------------------------------------- (Dollars in thousands) March 31, 2001 March 31, 2000 - -------------------------------------------------------------------------------- Balance at beginning of period $6,721 $6,818 Provision for loan losses - - Loans charged-off: One-to-four family - 3 Co-operative - - Multi-family 2 - Commercial - - Construction - - Other 2 25 --------- --------- Total loans charged-off 4 28 --------- --------- Recoveries: Mortgage loans - - Other loans 7 - --------- --------- Total recoveries 7 - --------- --------- Balance at end of period $6,724 $6,790 ========= ========= Ratio of net charge-offs (recoveries) during the year to average loans outstanding during the period 0.00% 0.00% Ratio of allowance for loan losses to loans at end of period 0.66% 0.74% Ratio of allowance for loan losses to non-performing assets at end of period 383.25% 338.23% Ratio of allowance for loan losses to non-performing loans at end of period 394.72% 348.66%
ITEM 3. QUALITATIVE AND QUANTITATIVE 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 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.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
During the quarter ended March 31, 2001, the Board of Directors approved an increase of 10% in the quarterly common stock dividend from $0.10 per share in the fourth quarter of 2000 to $0.11 per share in the first quarter of 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBIT.
b) REPORTS ON FORM 8-K.
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: April 27, 2001 By: /s/ Michael J. Hegarty ------------------------------------ Michael J. Hegarty President and Chief Executive Officer Dated: April 27, 2001 By: /s/ Monica C. Passick ------------------------------------ Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer