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, 2002 Commission file number 000-24272 FLUSHING FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 11-3209278 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 144-51 Northern Boulevard, Flushing, New York 11354 (Address of principal executive offices) (718) 961-5400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No The number of shares of the registrant's Common Stock outstanding as of April 19, 2002 was 13,100,946.
<TABLE> <CAPTION> TABLE OF CONTENTS PAGE <S> <C> PART I -- FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Financial Condition .............................................................1 Consolidated Statements of Operations and Comprehensive Income .............................................2 Consolidated Statements of Cash Flows ......................................................................3 Consolidated Statements of Changes in Stockholders' Equity .................................................4 Notes to Consolidated Statements ...........................................................................5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................................................................................7 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................17 PART II. -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS......................................................................................17 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS .............................................................17 ITEM 3. DEFAULTS UPON SENIOR SECURITIES .......................................................................17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................................17 ITEM 5. OTHER INFORMATION .....................................................................................17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................................................................17 SIGNATURES .....................................................................................................18 </TABLE> i
<TABLE> <CAPTION> PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) March 31, 2002 December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------ ASSETS (Unaudited) <S> <C> <C> Cash and due from banks $ 10,720 $ 20,008 Federal funds sold -- 18,500 Securities available for sale: Mortgage-backed securities 241,524 243,058 Other securities 80,570 62,481 Loans: 1-4 Family residential mortgage loans 450,726 461,801 Multi-family mortgage loans 398,833 369,651 Commercial real estate loans 223,989 214,410 Co-operative apartment loans 6,204 6,601 Construction loans 15,433 13,807 Small Business Administration loans 4,280 3,911 Consumer and other loans 2,295 2,814 Net unamortized premiums and unearned loan fees 919 787 Allowance for loan losses (6,586) (6,585) ------------------ ------------------ Net loans 1,096,093 1,067,197 Interest and dividends receivable 8,701 7,945 Real estate owned, net 93 93 Bank premises and equipment, net 5,475 5,565 Federal Home Loan Bank of New York stock 23,964 25,422 Goodwill 3,905 3,905 Other assets 33,885 33,355 ------------------ ------------------ Total assets $ 1,504,930 $ 1,487,529 ================== ================== LIABILITIES Due to depositors: Non-interest bearing $ 30,154 $ 28,594 Interest-bearing: Certificate of deposit accounts 480,195 467,172 Passbook savings accounts 203,927 195,855 Money market accounts 107,022 93,789 NOW accounts 34,573 33,107 ------------------ ------------------ Total interest-bearing deposits 825,717 789,923 Mortgagors' escrow deposits 16,541 10,065 Borrowed funds 487,430 513,435 Other liabilities 15,462 12,125 ------------------ ------------------ Total liabilities 1,375,304 1,354,142 ------------------ ------------------ STOCKHOLDERS' EQUITY Preferred stock ($0.01 par value; 5,000,000 shares authorized) -- -- Common stock ($0.01 par value; 20,000,000 shares authorized; 13,852,063 shares issued; 13,098,196 and 13,487,784 shares outstanding at March 31, 2002 and December 31, 2001, respectively) 139 139 Additional paid-in capital 45,422 45,280 Treasury stock, at average cost (753,867 and 364,279 shares at March 31, 2002 and December 31, 2001, respectively) (12,229) (5,750) Unearned compensation (7,504) (7,766) Retained earnings 102,872 99,641 Accumulated other comprehensive income, net of taxes 926 1,843 Total stockholders' equity 129,626 133,387 ------------------ ------------------ Total liabilities and stockholders' equity $ 1,504,930 $ 1,487,529 ================== ================== <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE> -1-
<TABLE> <CAPTION> 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) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 21,801 $ 20,443 Interest and dividends on securities: Interest 4,096 4,046 Dividends 36 56 Other interest income 180 506 ------------------ ---------------- Total interest and dividend income 26,113 25,051 ------------------ ---------------- INTEREST EXPENSE Deposits 6,863 7,364 Other interest expense 6,839 7,716 ------------------ ---------------- Total interest expense 13,702 15,080 ------------------ ---------------- NET INTEREST INCOME 12,411 9,971 Provision for loan losses -- -- ------------------ ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,411 9,971 ------------------ ---------------- NON-INTEREST INCOME Other fee income 699 561 Net gain on sales of securities and loans 20 212 Other income 667 950 ------------------ ---------------- Total non-interest income 1,386 1,723 ------------------ ---------------- NON-INTEREST EXPENSE Salaries and employee benefits 3,429 3,132 Occupancy and equipment 655 577 Professional services 696 543 Data processing 373 345 Depreciation and amortization 257 272 Other operating expenses 1,091 1,098 ------------------ ---------------- Total non-interest expense 6,501 5,967 ------------------ ---------------- INCOME BEFORE INCOME TAXES 7,296 5,727 ------------------ ---------------- PROVISION FOR INCOME TAXES Federal 2,263 1,808 State and local 495 310 ------------------ ---------------- Total provision for income taxes 2,758 2,118 ------------------ ---------------- NET INCOME $ 4,538 $ 3,609 ================== ================ OTHER COMPREHENSIVE INCOME, NET OF TAX Unrealized (losses) gains on securities: Unrealized holding gains (losses) arising during period $ (917) $ 1,038 Less: reclassification adjustments for gains (losses) included in net income -- (62) ------------------ ---------------- Net unrealized holding gains (losses) (917) 976 ------------------ ---------------- COMPREHENSIVE NET INCOME $ 3,621 $ 4,585 ================== ================ Basic earnings per share (1) $0.38 $0.29 Diluted earnings per share (1) $0.36 $0.28 <FN> (1) 2001 per share information is restated to reflect the three-for-two split of the Company's common stock paid in the form of a dividend on August 30, 2001. The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE> -2-
<TABLE> <CAPTION> PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, --------------------------------------- (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------ (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 4,538 $ 3,609 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses -- -- Depreciation and amortization of bank premises and equipment 257 272 Amortization of goodwill -- 92 Net gain on sales of securities -- (99) Net gain on sales of loans (20) (113) Net loss on sales of real estate owned -- 4 Amortization of unearned premium, net of accretion of unearned discount 712 241 Accretion of deferred income (46) (132) Deferred income tax benefit (107) (205) Deferred compensation 119 110 Net increase in other assets and liabilities 2,965 2,233 Unearned compensation 274 383 ------------------ ----------------- Net cash provided by operating activities 8,692 6,395 ------------------ ----------------- INVESTING ACTIVITIES Purchases of bank premises and equipment (167) (49) Redemptions of Federal Home Loan Bank shares 1,458 -- Purchases of securities available for sale (49,306) (39,686) Proceeds from sales and calls of securities available for sale -- 28,583 Proceeds from maturities and repayments of securities available for sale 30,434 18,608 Net originations and repayment of loans (18,944) (27,474) Purchases of loans (9,994) (314) Proceeds from sales of real estate owned -- 40 ------------------ ----------------- Net cash used by investing activities (46,519) (20,292) ------------------ ----------------- FINANCING ACTIVITIES Net increase in non-interest bearing deposits 1,560 2,675 Net increase in interest-bearing deposits 35,794 19,724 Net increase in mortgagors' escrow deposits 6,476 7,389 Net decrease in short-term borrowed funds -- (6,775) Proceeds from long-term borrowed funds 10,000 18,000 Repayment of long-term borrowed funds (36,005) (15,337) Purchases of treasury stock, net (6,698) (1,589) Cash dividends paid (1,088) (926) ------------------ ----------------- Net cash provided by financing activities 10,039 23,161 ------------------ ----------------- Net increase (decrease) in cash and cash equivalents (27,788) 9,264 Cash and cash equivalents, beginning of period 38,508 21,993 ------------------ ----------------- Cash and cash equivalents, end of period $ 10,720 $ 31,257 ================== ================= SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 13,620 $ 14,860 Income taxes paid 209 305 Non-cash activities: Loans transferred through foreclosure of a related mortgage loan to real estate owned -- 47 <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE> -3-
<TABLE> <CAPTION> 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, 2002 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> COMMON STOCK Balance, beginning of period $ 139 No activity -- ------------------------------- Balance, end of period $ 139 =============================== ADDITIONAL PAID-IN CAPITAL Balance, beginning of period $ 45,280 Award of shares released from Employee Benefit Trust (1,093 common shares) 12 Tax benefit of unearned compensation 130 ------------------------------- Balance, end of period $ 45,422 =============================== TREASURY STOCK Balance, beginning of period $ (5,750) Purchases of common shares outstanding (414,400 common shares) (6,871) Repurchase of restricted stock awards (638 common shares) (11) Options exercised (25,450 common shares) 403 ------------------------------- Balance, end of period $ (12,229) =============================== UNEARNED COMPENSATION Balance, beginning of period $ (7,766) Restricted stock award expense 150 Release of shares from Employee Benefit Trust (21,951 common shares) 112 ------------------------------- Balance, end of period $ (7,504) =============================== RETAINED EARNINGS Balance, beginning of period $ 99,641 Net income 4,538 Options exercised (25,450 common shares) (219) Cash dividends declared and paid (1,088) ------------------------------- Balance, end of period $ 102,872 =============================== ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES Balance, beginning of period $ 1,843 Change in net unrealized gain, net of taxes of approximately $781 on securities available for sale (917) ------------------------------- Balance, end of period $ 926 =============================== <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE> -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 is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the "Bank"). The consolidated financial statements presented in this Form 10-Q reflect principally the Bank's activities. The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods of Flushing Financial Corporation and Subsidiaries (the "Company"). Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The interim financial information should be read in conjunction with the Company's 2001 Annual Report on Form 10-K. 2. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. <TABLE> <CAPTION> 3. EARNINGS PER SHARE Basic earnings per share for each of the three-month periods ended March 31, 2002 and 2001 was computed by dividing net income by the total weighted average number of common shares outstanding, including only the vested portion of restricted stock awards. Diluted earnings per share includes the additional dilutive effect of stock options outstanding and the unvested portion of restricted stock awards during the respective periods. Earnings per share has been computed based on the following: Three months ended March 31, --------------------------------------- (Amounts in thousands, except per share data) 2002 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Net income $4,538 $3,609 Divided by: Weighted average common shares outstanding 11,970 12,364 Weighted average common stock equivalents 571 436 Total weighted average common shares & common stock equivalents 12,541 12,800 Basic earnings per share $0.38 $0.29 Diluted earnings per share $0.36 $0.28 Dividends per share $0.090 $0.073 Dividend payout ratio 23.68% 25.17% </TABLE> -5-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. STOCK SPLIT On July 17, 2001, the Board of Directors of the Company declared a three-for-two split of the Company's common stock in the form of a 50% stock dividend, payable on August 30, 2001. Each shareholder received one additional share for every two shares of the Company's common stock held at the record date, August 10, 2001. Cash was paid in lieu of fractional shares. All historical share and per share amounts reported in this Form 10-Q have been restated to reflect the three-for-two stock split paid on August 30, 2001. 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. The Statement changes the approach to how goodwill and other intangible assets are accounted for subsequent to their recognition. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will be amortized over their useful lives. The Statement provides specific guidance on testing intangible assets that will not be amortized for impairment. As of December 31, 2001, the Company had goodwill with a remaining balance of $3.9 million recorded in connection with its purchase of New York Federal Savings Bank in 1997. Annual amortization expense had been $0.4 million. Effective January 1, 2002, the Company is no longer recording this amortization expense, but rather is required, at least annually, to test the remaining goodwill for impairment. The impairment test performed in connection with the adoption of this Statement in January 2002 did not require an adjustment to the carrying value of the goodwill. -6-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Flushing Financial Corporation, a Delaware corporation, was organized in May 1994 to serve as the holding company for Flushing Savings Bank, FSB (the "Bank"), a federally chartered, FDIC insured savings institution, originally organized in 1929. The Bank is a consumer-oriented savings institution and conducts its business through ten banking offices located in Queens, Brooklyn, Manhattan, Bronx and Nassau County. Flushing Financial Corporation's common stock is publicly traded on the Nasdaq National Market under the symbol "FFIC". The following discussion of financial condition and results of operations includes the collective results of 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 (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family income-producing property loans and commercial real estate loans; (2) mortgage loan surrogates such as mortgage-backed securities; and (3) U.S. government and federal agency securities, corporate fixed-income securities and other marketable securities. To a lesser extent, the Company originates certain other loans, including construction loans, Small Business Administration loans and other small business loans. The Company's results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of its interest-bearing liabilities. Net interest income is the result of the Company's interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. The Company also generates non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, late charges and other fees, income earned on Bank Owned Life Insurance, dividends on Federal Home Loan Bank of NY ("FHLB-NY") stock and net gains and losses on sales of securities and loans. The Company's operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. The Company's results of operations also can be significantly affected by its periodic provision for loan losses and specific provision for losses on real estate owned. Such results also are significantly affected by general economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities. On July 17, 2001, the Board of Directors of the Company declared a three-for-two split of the Company's common stock in the form of a 50% stock dividend, payable on August 30, 2001. Each shareholder received one additional share for every two shares of the Company's common stock held at the record date, August 10, 2001. Cash was paid in lieu of fractional shares. All historical share and per share amounts reported in this Form 10-Q have been restated to reflect the three-for-two stock split paid on August 30, 2001. Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth in the second preceding paragraph and elsewhere in this Quarterly Report, and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company's 2001 Annual Report to Stockholders and its SEC Report on Form 10-K for the year ended December 31, 2001. Forward-looking statements may be identified by terms such as "may", "will", "should", -7-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "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-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 GENERAL. Diluted earnings per share increased 28.6% to $0.36 for the three months ended March 31, 2002 from $0.28 for the three months ended March 31, 2001. Net income increased $0.9 million, or 25.7%, to $4.5 million for the three months ended March 31, 2002 from $3.6 million for the three months ended March 31, 2001. The return on average assets for the three months ended March 31, 2002 increased to 1.20% from 1.06% for the three months ended March 31, 2001, while the return on average equity for the three months ended March 31, 2002 increased to 13.75% from 11.40% for the three months ended March 31, 2001. INTEREST INCOME. Total interest and dividend income increased $1.1 million, or 4.2%, to $26.1 million for the three months ended March 31, 2002 from $25.0 million for the three months ended March 31, 2001. This increase was primarily the result of a $152.4 million increase in the average balance of interest-earning assets for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001. The average balance of mortgage loans, net, and other securities increased $79.0 million and $51.2 million, respectively, for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001. The yield on interest- earning assets declined 54 basis points to 7.34% for the three months ended March 31, 2002 from 7.88% for the three months ended March 31, 2001. This decrease is primarily due to the declining interest rate environment experienced during 2001, as the yields on short term and adjustable rate investments declined. These declines were partially offset by the increase in the average balance of the higher yielding mortgage loan portfolio. INTEREST EXPENSE. Interest expense decreased $1.4 million, or 9.1%, to $13.7 million for the three months ended March 31, 2002 from $15.1 million for the three months ended March 31, 2001, primarily due to a 97 basis point decrease in the average cost of interest-bearing liabilities to 4.10% in the three months ended March 31, 2002 from 5.07% in the three months ended March 31, 2001. This decrease was partially offset by a $147.9 million increase in the average balance of interest-bearing liabilities. The decrease in the cost of funds is primarily due to the declining interest rate environment experienced during 2001, coupled with an increase in the average balance of lower costing core deposits. This marks the fifth consecutive quarter that the cost of funds has declined. -8-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET INTEREST INCOME. For the three months ended March 31, 2002, net interest income increased $2.4 million, or 24.5%, to $12.4 million from $10.0 million in the three months ended March 31, 2001. This increase in net interest income is primarily due to a 43 basis point increase in the net interest spread and a $152.4 million increase in the average balance of interest-earning assets. The net interest margin increased 35 basis points to 3.49% in the 2002 first quarter from 3.14% in the comparable 2001 quarter. PROVISION FOR LOAN LOSSES. There was no provision for loan losses for the three-month periods ended March 31, 2002 or 2001. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for either of the three-month periods ended March 31, 2002 and 2001. NON-INTEREST INCOME. Total non-interest income decreased by $0.3 million, or 19.6%, to $1.4 million for the three months ended March 31, 2002 from $1.7 million for the three months ended March 31, 2001. Higher fee income from loan fees and banking services was more than offset by reduced net gains on the sale of securities and loans and reduced dividends on FHLB-NY stock. NON-INTEREST EXPENSE. Non-interest expense was $6.5 million for the three months ended March 31, 2002, an increase of $0.5 million, or 8.9%, as compared to $6.0 million for the three months ended March 31, 2001, but comparable to the quarter ended December 31, 2001. The increase from the prior year period is attributable to the Bank's continued focus on expanding its current product offerings to enhance its ability to serve its customers. This resulted in increases in salaries and benefits and professional services, which includes advertising. Management continues to monitor expenditures resulting in an improvement in the efficiency ratio to 47.1% for the three months ended March 31, 2002 from 50.7% for the three months ended March 31, 2001. INCOME BEFORE INCOME TAXES. Total income before the provision for income taxes increased $1.6 million, or 27.4%, to $7.3 million for the three months ended March 31, 2002 as compared to $5.7 million for the three months ended March 31, 2001, for the reasons stated above. PROVISION FOR INCOME TAXES. Income tax expense increased $0.7 million to $2.8 million for the three months ended March 31, 2002 as compared to $2.1 million for the three months ended March 31, 2001. This increase is due to the $1.6 million increase in income before taxes. FINANCIAL CONDITION ASSETS. Total assets at March 31, 2002 were $1,504.9 million, a $17.4 million increase from December 31, 2001. During the three months ended March 31, 2002, loan originations and purchases were $23.2 million for 1-4 family residential mortgage loans ($17.3 million in mixed-use), $37.9 million for multi-family real estate loans, $15.4 million for commercial real estate loans and $4.0 million in construction loans. During the three months ended March 31, 2001, loan originations and purchases were $18.1 million for 1-4 family residential mortgage loans ($11.2 million in mixed-use), $10.6 million for multi-family real estate loans, $23.6 million for commercial real estate loans and $2.1 million in construction loans. Total loans, net, increased $28.9 million during the three months ended March 31, 2002 to $1,096.1 million from $1,067.2 million at December 31, 2001. -9-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $2.1 million at March 31, 2002 as compared to $2.4 million at December 31, 2001 and $1.8 million at March 31, 2001. Total non-performing assets as a percentage of total assets were 0.14% at March 31, 2002 as compared to 0.16% at December 31, 2001 and 0.13% at March 31, 2001. The ratio of allowance for loan losses to total non-performing loans was 327% at March 31, 2002 as compared to 284% at December 31, 2001 and 395% at March 31, 2001. LIABILITIES. Total liabilities increased $21.2 million to $1,375.3 million at March 31, 2002 from $1,354.1 million at December 31, 2001. Due to depositors increased $37.4 million as certificate of deposit accounts increased $13.0 million while lower costing core deposits, primarily money market deposit accounts, increased $24.4 million. Borrowed funds declined $26.0 million to $487.4 million at March 31, 2002. EQUITY. Total stockholders' equity decreased $3.8 million to $129.6 million at March 31, 2002 from $133.4 million at December 31, 2001. The $4.5 million in net income for the three months ended March 31, 2002 was offset by a decline of $0.9 million in the net after tax unrealized gain in the market value of securities available for sale, $6.9 million in treasury shares purchased through the Company's stock repurchase plans and $1.1 million in cash dividends paid during the three month period. Quarterly dividends per share were increased to $0.09 per share for the first quarter of 2002 from $0.08 per share in the fourth quarter of 2001. Book value per share was $9.90 per share at March 31, 2002 compared to $9.89 per share at December 31, 2001 and $9.37 at March 31, 2001. Under its stock repurchase program, the Company repurchased 414,000 shares for the three months ended March 31, 2002, leaving 138,000 shares to be repurchased under the current stock repurchase program. CASH FLOW. During the three months ended March 31, 2002, funds provided by the Company's operating activities amounted to $8.7 million. These funds, together with $10.0 million provided by financing activities and $38.5 million available at the beginning of the year, were utilized to fund net investing activities of $46.5 million. The Company's primary business objective is the origination and purchase of 1-4 family residential, multi-family and commercial real estate loans. During the three months ended March 31, 2002, the net total of loan originations less loan repayments was $18.9 million, and the total amount of real estate loans purchased was $10.0 million. The Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities, and corporate debt securities. During the three months ended March 31, 2002, the Company purchased a total of $49.3 million in securities available for sale. Funds for investment were also provided by $30.4 million in repayments of securities available for sale. The Company also used funds of $6.7 million for net treasury stock repurchases and $1.1 million in dividend payments during the three months ended March 31, 2002. -10-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations INTEREST RATE RISK The consolidated statements of financial position have been prepared in accordance with generally accepted accounting principles, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company's interest-earning assets which could adversely affect the Company's results of operation if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company's stockholders' equity, if such securities were retained. The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the "Earnings and Economic Exposure to Changes In Interest Rate" report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at March 31, 2002. Various estimates regarding prepayment assumptions are made at each level of rate shock. Actual results could differ significantly from these estimates. The Company is within the guidelines set forth by the Board of Directors for each interest rate level. <TABLE> <CAPTION> Projected Percentage Change In Net Interest Net Portfolio Net Portfolio Change in Interest Rate Income Value Value Ratio - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> - -300 Basis points -4.66% 1.61% 10.32% - -200 Basis points -0.77 2.04 10.58 - -100 Basis points 0.41 3.72 10.95 Base interest rate -- -- 10.81 +100 Basis points -3.05 -14.78 9.51 +200 Basis points -6.87 -29.27 8.15 +300 Basis points -10.88 -44.00 6.67 </TABLE> -11-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <TABLE> <CAPTION> 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, 2002, the Bank exceeded each of the three OTS capital requirements and is categorized as "well-capitalized" by the OTS under the prompt corrective action regulations. Set forth below is a summary of the Bank's compliance with OTS capital standards as of March 31, 2002. (Dollars in thousands) Amount Percent of Assets - -------------------------------------------------------------------------------------------------------- <S> <C> <C> TANGIBLE CAPITAL: Capital level $112,528 7.55% Requirement 22,369 1.50 Excess 90,159 6.05 CORE CAPITAL: Capital level $112,528 7.55% Requirement 44,738 3.00 Excess 67,790 4.55 RISK-BASED CAPITAL: Capital level $119,114 13.45% Requirement 70,826 8.00 Excess 48,288 5.45 </TABLE> -12-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <TABLE> <CAPTION> 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, 2002 and 2001, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields. For the three months ended March 31, ------------------------------------------------------------------------------ 2002 2001 -------------------------------------- ------------------------------------- Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost - ---------------------------------------------------------------------------------------------------------------------------- ASSETS <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Mortgage loans, net $1,069,122 $21,692 8.12% $990,160 $20,323 8.21% Other loans 6,295 109 6.93 5,944 120 8.08 -------------------------------------- ------------------------------------- Total loans, net 1,075,417 21,801 8.11 996,104 20,443 8.21 -------------------------------------- ------------------------------------- Mortgage-backed securities 237,049 3,435 5.80 223,618 3,829 6.85 Other securities 66,831 697 4.17 15,663 273 6.97 -------------------------------------- ------------------------------------- Total securities 303,880 4,132 5.44 239,281 4,102 6.86 -------------------------------------- ------------------------------------- Interest-earning deposits and federal funds sold 44,211 180 1.63 35,690 506 5.67 -------------------------------------- ------------------------------------- Total interest-earning assets 1,423,508 26,113 7.34 1,271,075 25,051 7.88 ------------------------- ------------------------- Other assets 90,201 87,095 ------------- ------------ Total assets $1,513,709 $1,358,170 ============= ============ LIABILITIES AND EQUITY Interest-bearing liabilities: Passbook accounts $199,939 850 1.70 $186,254 950 2.04 NOW accounts 33,655 83 0.99 29,856 140 1.88 Money market accounts 100,920 592 2.35 45,216 368 3.26 Certificate of deposit accounts 474,484 5,320 4.48 407,644 5,885 5.77 -------------------------------------- ------------------------------------- Total due to depositors 808,998 6,845 3.38 668,970 7,343 4.39 Mortgagors' escrow deposits 12,959 18 0.56 11,268 21 0.75 -------------------------------------- ------------------------------------- Total deposits 821,957 6,863 3.34 680,238 7,364 4.33 Borrowed funds 514,877 6,839 5.31 508,744 7,716 6.07 -------------------------------------- ------------------------------------- Total interest-bearing liabilities 1,336,834 13,702 4.10 1,188,982 15,080 5.07 ------------------------- ------------------------- Other liabilities 44,904 42,507 ------------- ------------ Total liabilities 1,381,738 1,231,489 Equity 131,971 126,681 ------------- ------------ Total liabilities and equity $1,513,709 $1,358,170 ============= ============ Net interest income/Interest rate spread $12,411 3.24% $9,971 2.81% ========================= ========================= Net interest-earning assets / Net interest margin $86,674 3.49% $82,093 3.14% ============= ============= ============ ============ Ratio of interest-earning assets to interest-bearing liabilities 1.06x 1.07x ============= ============ </TABLE> -13-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <TABLE> <CAPTION> 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, 2002 March 31, 2001 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> MORTGAGE LOANS At beginning of period $1,066,270 $985,953 Mortgage loans originated: One-to-four family 22,389 17,759 Cooperative 150 56 Multi-family real estate 37,892 10,649 Commercial real estate 6,040 23,605 Construction 4,053 2,143 --------------------------- -------------------------- Total mortgage loans originated 70,524 54,212 --------------------------- -------------------------- Mortgage loans purchased: One-to-four family 674 310 Commercial real estate 9,315 -- --------------------------- -------------------------- Total acquired loans 9,989 310 --------------------------- -------------------------- Less: Principal and other reductions 51,598 25,554 Mortgage loan foreclosures -- 47 --------------------------- -------------------------- At end of period $1,095,185 $1,014,874 =========================== ========================== OTHER LOANS At beginning of period $6,725 $6,548 Other loans originated: Small Business Administration 1,424 300 Small business loans 7 110 Other loans 228 166 --------------------------- -------------------------- Total other loans originated 1,659 576 --------------------------- -------------------------- Less: Sales 964 150 Principal and other reductions 845 1,480 --------------------------- -------------------------- At end of period $6,575 $5,494 =========================== ========================== </TABLE> -14 -
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <TABLE> <CAPTION> 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, 2002 December 31, 2001 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Non-accrual mortgage loans $1,880 $2,203 Other non-accrual loans 133 117 --------------------------- ---------------------------- Total non-accrual loans 2,013 2,320 Mortgage loans 90 days or more delinquent and still accruing -- -- Other loans 90 days or more delinquent and still accruing -- -- --------------------------- --------------------------- Total non-performing loans 2,013 2,320 Real estate owned (foreclosed real estate) 93 93 --------------------------- --------------------------- Total non-performing assets $2,106 $2,413 =========================== =========================== Non-performing loans to gross loans 0.18% 0.22% Non-performing assets to total assets 0.14% 0.16% </TABLE> -15-
PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS <TABLE> <CAPTION> 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, 2002 March 31, 2001 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Balance at beginning of period $6,585 $6,721 Provision for loan losses -- -- Loans charged-off: One-to-four family -- -- Co-operative -- -- Multi-family -- 2 Commercial -- -- Construction -- -- Other 4 2 -------------------------- -------------------------- Total loans charged-off 4 4 -------------------------- -------------------------- Recoveries: Mortgage loans 1 -- Other loans 4 7 -------------------------- -------------------------- Total recoveries 5 7 -------------------------- -------------------------- Balance at end of period $6,586 $6,724 ========================== ========================== Ratio of net charge-offs 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 0.60% 0.66% Ratio of allowance for loan losses to non-performing assets at end of period 312.73% 383.25% Ratio of allowance for loan losses to non-performing loans at end of period 327.14% 394.72% </TABLE> -16-
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". PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations and cash flows. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBIT. None b) REPORTS ON FORM 8-K. None. -17-
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: April 24, 2002 By: /s/Michael J. Hegarty - ------------------------ ------------------------------------- Michael J. Hegarty President and Chief Executive Officer Dated: April 24, 2002 By: /s/Monica C. Passick - ------------------------ ------------------------------------- Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer -18-