UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)
11-3209278(I.R.S. Employer Identification No.)
144-51 Northern Boulevard, Flushing, New York 11354(Address of principal executive offices)
(718) 961-5400 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.01 par value.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes __No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). X Yes __No
The number of shares of the registrant’s Common Stock outstanding as of October 24, 2003 was 12,750,896.
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESConsolidated Statements of Financial Condition
The accompanying notes are an integral part of these consolidated financial statements
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESConsolidated Statements of Income and Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESConsolidated Statements of Cash Flows
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESConsolidated Statements of Changes in Stockholders' Equity(Unaudited)
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESNotes 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 Holding Company also owns a special purpose business trust, Flushing Financial Capital Trust I (the "Trust"). The consolidated financial statements presented in this Form 10-Q include the collective results of the Holding Company, the Trust and the Bank, but reflects principally the Bank's activities.
The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such periods of Flushing Financial Corporation and Subsidiaries (the "Company"). Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The interim financial information should be read in conjunction with the Company's 2002 Annual Report on Form 10-K.
2. Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
3. Earnings Per Share
Basic earnings per share for the three and nine month periods ended September 30, 2003 and 2002 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:
Common stock equivalents that are antidilutive are not included in the computation of diluted earnings per share. Options to purchase 600 shares at an average exercise price of $22.05 and 89,100 shares at an average exercise price of $19.00, were not included in the computation of diluted earnings per share for the three months ended September 30, 2003 and 2002, respectively. Unvested restricted stock awards of 300 shares at an average price of $22.05 and 10,125 shares at an average price of $19.00, were not included in the computation of diluted earnings per share for the three months ended September 30, 2003 and 2002, respectively. Options to purchase 178,700 shares at an average exercise price of $20.33 and 274,400 shares at an average exercise price of $18.70 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2003 and 2002, respectively. Unvested restricted stock awards of 54,525 shares at an average price of $20.26 and 68,875 shares at average price of $18.62 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2003 and 2002, respectively.
4. Stock Option Plans
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its Stock Option Plan. Accordingly, no compensation expense has been recognized for options granted under the Stock Option Plan. Compensation expense is recognized in the financial statements for restricted stock awards. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No.123 to all stock-based employee compensation. However, the present impact of SFAS No. 123 may not be representative of the effect on income in future periods because the options vest over several years and additional option grants may be made each year.
There were stock option grants of 600 shares of common stock, at an exercise price of $22.05, and restricted stock grants of 300 shares of common stock, at a price of $22.05, granted in the three-month period ended September 30, 2003. There were no such grants in the three-month period ended September 30, 2002.
There were stock option grants of 178,700 shares of common stock, at an average exercise price of $20.33, and 275,000 shares of common stock, at an average exercise price of $18.70 granted in the nine-month periods ended September 30, 2003 and 2002, respectively. There were restricted stock grants of 54,525 shares of common stock, at an average price of $20.26, and 69,075 shares of common stock, at an average price of $18.62 granted in the nine-month periods ended September 30, 2003 and 2002, respectively.
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESManagement's Discussion and Analysis ofFinancial Condition and Results of Operations
GENERAL
Flushing Financial Corporation, a Delaware corporation (the"Holding Company"), was organized in May 1994 to serve as the holding company for Flushing Savings Bank, FSB (the "Bank"), a federally chartered, FDIC insured savings institution, originally organized in 1929. The Holding Company also owns a special purpose business trust, Flushing Financial Capital Trust I ("Trust"). The Bank is a consumer-oriented savings institution and conducts its business through eleven banking offices located in Queens, Brooklyn, Manhattan, Bronx and Nassau County. Flushing Financial Corporation's common stock is publicly traded on the Nasdaq National Market under the symbol"FFIC". The following discussion of financial condition and results of operations includes the collective results of the Holding Company, the Bank and the Trust (collectively, the"Company"), but reflects principally the Bank's activities.
The Company's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in (1) origination and purchases of one-to-four family residential real estate loans (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family income-producing property loans and commercial real estate loans; (2) mortgage loan surrogates such as mortgage-backed securities; and (3) U.S. government and federal agency securities, corporate fixed-income securities and other marketable securities. To a lesser extent, the Company originates certain other loans, including construction loans, Small Business Administration loans and commercial and consumer loans.
The Company's results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of its interest-bearing liabilities. Net interest income is the result of the Company's interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. The Company also generates non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, 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 October 14, 2003, the Bank opened its 11th branch, which is a traditional full-service branch, on 30th Avenue in Astoria, Queens.
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 2002 Annual Report to Stockholders and its SEC Report on Form 10-K for the year ended December 31, 2002. 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 ENDEDSEPTEMBER 30, 2003 AND 2002
General. Diluted earnings per share increased $0.07, or 17.9%, to $0.46 for the three months ended September 30, 2003 from $0.39 for the three months ended September 30, 2002. Net income increased $0.7 million, or 15.8%, to $5.5 million for the three months ended September 30, 2003 from $4.8 million for the three months ended September 30, 2002. The return on average assets was 1.20% for the three months ended September 30, 2003 and September 30, 2002, while the return on average equity for the three months ended September 30, 2003 increased to 16.28% from 14.87% for the three months ended September 30, 2002.
Interest Income. Total interest and dividend income increased $1.2 million, or 4.7%, to $28.1 million for the three months ended September 30, 2003 from $26.9 million for the three months ended September 30, 2002. This increase was primarily the result of a $242.2 million increase in the average balance of interest-earning assets for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. The average balance of mortgage loans, net and mortgage-backed securities increased $71.9 million and $209.0 million, respectively, for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. These increases were partially offset by an $11.0 million and a $29.2 million decrease in the average balance of other securities and interest earning deposits and federal funds sold, respectively, for the three months ended September 30, 2003 compared to the three months ended September 30, 2002. The yield on interest-earning assets declined 72 basis points to 6.49% for the three months ended September 30, 2003 from 7.21% for the three months ended September 30, 2002. This decrease is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the yield on assets during 2003. We continued our focus on the origination of higher yielding multi-family residential and commercial real estate mortgage loans, along with the origination of mixed-use property one-to-four family residential mortgage loans, which allowed us to maintain a higher yield on our loan portfolio than we would have otherwise experienced. The yield on mortgage loans reflects the high refinancing activity that has occurred during the current year. The Bank's existing borrowers have been refinancing their higher costing mortgage loans at the current lower rates, which has resulted in a decrease on the yield of the mortgage portfolio. This decrease has been partially offset by prepayment penalties that have been collected. However, the increase in the lower-yielding mortgage-backed securities portfolio, while increasing interest income, reduced the yield on total interest-earning assets.
Interest Expense. Interest expense decreased $0.8 million, or 5.9%, to $12.9 million for the three months ended September 30, 2003 from $13.7 million for the three months ended September 30, 2002, primarily due to a 74 basis point decline in the cost of interest-bearing liabilities to 3.16% in the three months ended September 30, 2003 from 3.90% in the three months ended September 30, 2002. This decrease was partially offset by a $229.1 million increase in the average balance of interest-bearing liabilities. The decrease in the cost of funds is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the cost of funds in the third quarter of 2003. This was coupled with an increase in the average balance of lower costing core deposits. This marks the twelfth consecutive quarter that the cost of funds has declined.
Net Interest Income. For the three months ended September 30, 2003, net interest income increased $2.1 million, or 15.8%, to $15.2 million from $13.1 million in the three months ended September 30, 2002. This increase in net interest income is primarily due to a $242.2 million increase in the average balance of interest-earning assets, combined with a two basis point increase in the net interest spread. The net interest margin decreased one basis point to 3.51% for the three months ended September 30, 2003 from 3.52% for the three months ended September 30, 2002. This decline is attributed to the growth in the average balance of interest-earning assets.
Provision for Loan Losses. There was no provision for loan losses for the three-month periods ended September 30, 2003 and 2002. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for either of the three-month periods ended September 30, 2003 and 2002.
Non-Interest Income. Non-interest income increased $0.2 million to $1.7 million for the three months ended September 30, 2003 from $1.5 million for the three months ended September 30, 2002. This increase is primarily attributed to an increase in loan fees and banking service fees.
Non-Interest Expense. Non-interest expense was $7.9 million for the three months ended September 30, 2003, an increase of $1.0 million, or 14.6%, from $6.9 million for the three months ended September 30, 2002. 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. Increases were seen in personnel and other expense areas, as we focused on loan and deposit growth. Management continues to monitor expenditures resulting in efficiency ratios of 47.06% and 47.38% for the three months ended September 30, 2003 and 2002, respectively.
Income before Income Taxes. Income before the provision for income taxes increased approximately $1.2 million to $8.9 million for the three months ended September 30, 2003 as compared to $7.7 million for the three months ended September 30, 2002, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $3.4 million for the three months ended September 30, 2003 compared to $2.9 million for the three months ended September 30, 2002. This increase is due to the $1.2 million increase in income before income taxes. The effective rate was 38.27% for the three months ended September 30, 2003 compared to 38.00% for the three months ended September 30, 2002.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2003 AND 2002
General. Diluted earnings per share increased $0.42, or 45.7%, to $1.34 for the nine months ended September 30, 2003 from $0.92 for the nine months ended September 30, 2002. Net income for the nine months ended September 30, 2003 increased $4.5 million, or 39.8%, to $15.9 million from the $11.3 million reported for the nine months ended September 30, 2002. The return on average assets for the nine months ended September 30, 2003 was 1.19% compared to 0.98% for the nine months ended September 30, 2002, while the return on average equity for the nine months ended September 30, 2003 was 15.70% compared to 11.64% for the nine months ended September 30, 2002. The nine months ended September 30, 2002 included an after-tax writedown of $2.6 million, or $0.22 per diluted share, due to the impairment of the Bank's investment in a WorldCom, Inc. senior note. Excluding this impairment writedown, net income for the nine months ended September 30, 2002 would have been $13.9 million, or $1.14 per diluted share, and diluted earnings per share would have increased 17.5% for the nine months ended September 30, 2003 compared to the comparable prior year period. Return on average assets and return on average equity, excluding the impairment charge, would have been 1.20% and 14.31%, respectively, for the nine months ended September 30, 2002.
Interest Income. Total interest and dividend income increased $3.7 million, or 4.5%, to $83.3 million for the nine months ended September 30, 2003 from $79.6 million for the nine months ended September 30, 2002. This increase was primarily the result of a $205.5 million increase in the average balance of interest-earning assets for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. The average balance of mortgage loans, net, and mortgage-backed securities increased $81.9 million and $158.1 million, respectively, for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. These increases were partially offset by an $18.2 million and an $18.0 million decrease in the average balance of other securities and interest-earning deposits and federal funds sold, respectively, for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. The yield on interest-earning assets declined 62 basis points to 6.68% for the nine months ended September 30, 2003 from 7.30% for the nine months ended September 30, 2002. This decrease is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the yield on assets during the first nine months of 2003. Our focus on the origination of higher yielding multi-family residential and commercial real estate mortgage loans, along with the origination of mixed-use property one-to-four family residential mortgage loans, allowed us to maintain a higher yield on our loan portfolio than we would have otherwise experienced. In addition, the increase in the average balance of the lower-yielding mortgage-backed securities portfolio, while increasing interest income, reduced the yield on total interest-earning assets.
Interest Expense. Interest expense decreased $1.5 million, or 3.7%, to $39.4 million for the nine months ended September 30, 2003 from $40.9 million for the nine months ended September 30, 2002, primarily due to a 64 basis point decline in the cost of interest-bearing liabilities to 3.35% in the nine months ended September 30, 2003 from 3.99% in the nine months ended September 30, 2002. This decrease was partially offset by a $199.7 million increase in the average balance of interest-bearing liabilities. The decrease in the cost of funds is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the cost of funds during the first nine months of 2003. This was coupled with an increase in the average balance of lower costing core deposits.
Net Interest Income. For the nine months ended September 30, 2003, net interest income increased $5.1 million, or 13.2%, to $43.8 million from $38.7 million in the nine months ended September 30, 2002. This increase in net interest income is primarily due to a $205.5 million increase in the average balance of interest-earning assets. The net interest margin decreased three basis points to 3.52% for the nine months ended September 30, 2003 from 3.55% for the nine months ended September 30, 2002, due to the increase in the average balance of interest-earning assets.
Provision for Loan Losses. There was no provision for loan losses for the nine-month periods ended September 30, 2003 and 2002. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for either of the nine-month periods ended September 30, 2003 and 2002.
Non-Interest Income. Non-interest income increased $4.9 million to $4.9 million for the nine months ended September 30, 2003 from a net loss of $34,000 for the nine months ended September 30, 2002. The increase is primarily due to the $4.4 million pretax impairment writedown of the Bank's investment in a WorldCom, Inc. senior note recorded in the nine-month period ended September 30, 2002. Loan fees and banking services fees increased $0.4 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002.
Non-Interest Expense. Non-interest expense was $23.1 million for the nine months ended September 30, 2003, an increase of $2.7 million, or 13.1%, from $20.4 million for the nine months ended September 30, 2002. 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. Increases were seen in personnel and other expense areas, as we focused on loan and deposit growth. Salaries and benefits also increased due to the increase in our stock price, as certain employee compensation is tied to our stock price, which increased approximately 27% in the nine months ended September 30, 2003. Management continues to monitor expenditures resulting in efficiency ratios to 47.31% and 47.38% for the nine months ended September 30, 2003 and 2002, respectively.
Income before Income Taxes. Income before the provision for income taxes increased $7.4 million, or 40.4%, to $25.7 million for the nine months ended September 30, 2003 as compared to $18.3 million for the nine months ended September 30, 2002, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $9.8 million for the nine months ended September 30, 2003 compared to $7.0 million for the nine months ended September 30, 2002. This increase is due to the $7.4 million increase in income before income taxes. The effective rate was 38.25% for the nine months ended September 30, 2003 compared to 38.00% for the nine months ended September 30, 2002.
RECONCILIATION OF NON-GAAP FINANCIAL AMOUNTS AND RATIOS
The preceding discussions include prior year comparable periods that included an after-tax impairment writedown of $2.6 million relating to the Bank's investment in a WorldCom, Inc. senior note. Comparisons of the current year nine-month period to the prior year period were made excluding this writedown in the prior year period. Management believes that this impairment writedown was a one-time event that is not likely to be repeated, and is therefore not indicative of the ongoing operating results of the Company. Excluding this writedown, in our view, presents a better comparison of the Company's ongoing operating results. A reconciliation of amounts and financial ratios of the Company as reported in its financial statements to the adjusted amounts and financial ratios, which exclude this impairment writedown, is shown below.
FINANCIAL CONDITION
Assets. Total assets at September 30, 2003 were $1,849.1 million, a $196.1 million increase from December 31, 2002. During the nine months ended September 30, 2003, loan originations and purchases were $124.4 million for multi-family real estate loans, $72.3 million for commercial real estate loans, $58.4 million for mixed-use property one-to-four family residential real estate loans, $15.2 million for conventional one-to-four family residential real estate loans, and $12.8 million in construction loans. For the first nine months of 2002, loan originations and purchases were $108.4 million for multi-family real estate loans, $57.0 million for commercial real estate loans, $52.1 million for mixed-use property one-to-four family residential real estate loans, $13.3 million for conventional one-to-four family residential real estate loans, and $9.6 million in construction loans. Total loans increased $62.4 million during the nine months ended September 30, 2003 to $1,232.0 million from $1,169.6 million at December 31, 2002. At September 30, 2003, loans in process totaled $210.6 million.
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 $1.7 million at September 30, 2003 compared to $4.3 million at December 31, 2002 and $4.7 million at September 30, 2002. Total non-performing assets as a percentage of total assets were 0.09% at September 30, 2003 compared to 0.26% at December 31, 2002 and 0.29% at September 30, 2002. The ratio of allowance for loan losses to total non-performing loans was 387% at September 30, 2003 compared to 183% at December 31, 2002 and 165% at September 30, 2002.
Mortgage-backed securities increased $139.1 million to $458.4 million at September 30, 2003, while other securities increased $11.0 million to $50.8 million at September 30, 2003. Funds not used during the nine months ended September 30, 2003 for loan originations have been invested in readily marketable mortgage-backed securities and shorter-term investment securities to provide readily available funding for future loan originations. In addition, due to the attractive low rates available for medium-term borrowings, the Company borrowed $60.0 million in June 2003 and invested the proceeds in mortgage-backed securities with an initial spread of approximately 180 basis points. During the three months ended September 30, 2003, the Bank sold its investment in a WorldCom, Inc. senior note. The gain realized on this sale was offset by losses realized on the sale of $35.9 million of lower-yielding mortgage-backed securities. The proceeds from these sales were invested in mortgage-backed securities which provide a higher yield than those sold. Other securities primarily consists of securities issued by government agencies and mutual or bond funds that invest in government and government agency securities.
Liabilities. Total liabilities increased $187.1 million to $1,708.7 million at September 30, 2003 from $1,521.6 million at December 31, 2002. Due to depositors increased $117.0 million as certificate of deposit accounts increased $30.1 million while lower costing core deposits increased $86.9 million. Borrowed funds increased $60.0 million during the nine months ended September 30, 2003.
Equity. Total stockholders' equity increased $9.0 million to $140.4 million at September 30, 2003 from $131.4 million at December 31, 2002. Net income of $15.9 million for the nine months ended September 30, 2003 was partially offset by $6.7 million in treasury shares purchased through the Company's stock repurchase plan, $3.6 million in cash dividends paid during the nine month period and a net after-tax decline of $3.2 million in the market value of securities available for sale. In addition, the exercise of stock options increased stockholders' equity by $5.6 million, including the income tax benefit realized by the Company upon the exercise of stock options. Book value per share was $11.01 per share at September 30, 2003 compared to $10.43 per share at December 31, 2002 and $10.11 at September 30, 2002.
Under its stock repurchase program, the Company repurchased 326,700 shares for the nine months ended September 30, 2003, at a total cost of $6.7 million, or an average of $20.36 per share. At September 30, 2003, 303,300 shares remain to be repurchased under the current stock repurchase program.
Cash flow. During the nine months ended September 30, 2003, funds provided by the Company's operating activities amounted to $20.8 million. These funds, together with $174.1 million provided by financing activities and funds available at the beginning of the year, were utilized to fund net investing activities of $215.7 million. The Company's primary business objective is the origination and purchase of one-to-four family residential (primarily mixed-use properties), multi-family and commercial real estate loans. During the nine months ended September 30, 2003, the net total of loan originations less loan repayments was $65.0 million, and the total amount of real estate loans purchased was $0.8 million. The Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. During the nine months ended September 30, 2003, the Company purchased a total of $366.5 million in securities available for sale. Funds for investment were also provided by $217.7 million in maturities, prepayments, calls and sales of securities available for sale. Additional funds of $5.6 million were provided through the exercise of stock options, including the income tax benefit realized by the Company upon the exercise of stock options. The Company also used funds of $6.7 million for treasury stock repurchases and $3.6 million in dividend payments during the nine months ended September 30, 2003.
INTEREST RATE RISK
The consolidated statements of financial position have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company's interest-earning assets which could adversely affect the Company's results of operation if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company's stockholders' equity, if such securities were retained.
The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the"Earnings and Economic Exposure to Changes In Interest Rate" report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2003. 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.
REGULATORY CAPITAL POSITION
Under Office of Thrift Supervision ("OTS") capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. At September 30, 2003, the Bank exceeded each of the three OTS capital requirements and is categorized as "well-capitalized" by the OTS under the prompt corrective action regulations. Set forth below is a summary of the Bank's compliance with OTS capital standards as of September 30, 2003.
AVERAGE BALANCES
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company's consolidated statements of financial condition and consolidated statements of operations for the three month periods ended September 30, 2003 and 2002, 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.
AVERAGE BALANCES (continued)
The following table sets forth certain information relating to the Company's consolidated statements of financial condition and consolidated statements of operations for the nine month periods ended September 30, 2003 and 2002, 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.
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.
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.
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.
PART I -FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk"
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the quarterly period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2003, the design and operation of these disclosure controls and procedures were effective. During the quarterly period covered by this Quarterly Report, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS.
Exhibit 3.1 Certificate of Incorporation of Flushing Financial Corporation (1)Exhibit 3.2 Certificate of Amendment of Certificate of Incorporation of Flushing Financial Corporation (3)Exhibit 3.3 Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)Exhibit 3.4 By-Laws of Flushing Financial Corporation (1)Exhibit 4.1 Rights Agreement, dated as of September 17, 1996, between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (2)Exhibit 10.18 1996 Stock Option Incentive Plan of Flushing Financial Corporation (as amended through May 20, 2003).Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No. 33-96488.(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 30, 1996.(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
b) REPORTS ON FORM 8-K.
On July 17, 2003, the Company filed an 8-K announcing the release of its second quarter 2003 results of operations and financial condition.
On August 21, 2003, the Company filed an 8-K announcing an increase of 10 percent in its quarterly dividend to $0.11 per common share.
On October 24, 2003, the Company filed an 8-K announcing the release of its third quarter 2003 results of operations and financial condition.
On October 24, 2003, the Company filed an 8-K announcing that Messrs. Michael J. Hegarty, President and CEO, and John R. Buran, Executive Vice President and COO, would be making a presentation to several institutional investors.
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.
-22-