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, 2004
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION(Exact name of registrant as specified in its charter)
Delaware(State or other jurisdiction of incorporation or organization)
11-3209278(I.R.S. Employer Identification No.)
1979 Marcus Avenue, Suite E140, Lake Success, New York 11042(Address of principal executive offices)
(718) 961-5400(Registrant's telephone number, including area code)
144-51 Northern Boulevard Flushing, New York 11354(Former address if changed since last report)
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 (and associated Preferred Stock Purchase Rights).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). X Yes No
The number of shares of the registrant's Common Stock outstanding as of October 29, 2004 was 19,186,859.
TABLE OF CONTENTS
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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.-1-
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESConsolidated Statements of Income and Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.-2-
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESConsolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.-3-
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESConsolidated Statements of Changes in Stockholders' Equity(Unaudited)
The accompanying notes are an integral part of these consolidated financial statements.-4-
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESNotes to Consolidated Financial Statements
1. Basis of Presentation
The primary business of Flushing Financial Corporation (the "Holding Company") is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the "Bank"). The consolidated financial statements presented in this Form 10-Q include the collective results of the Holding Company and the Bank, but 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 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 conformity with generally accepted accounting principles in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The interim financial information should be read in conjunction with the Company's 2003 Annual Report on Form 10-K.
2. Use of Estimates
The preparation of the consolidated 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, 2004 and 2003 was computed by dividing net income by the total weighted average number of common shares outstanding, including only the vested portion of restricted stock and restricted stock unit awards. Diluted earnings per share includes the additional dilutive effect of stock options outstanding and the unvested portion of restricted stock and restricted stock unit 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. There were no common stock equivalents that were considered antidilutive for the three- and nine-month periods ended September 30, 2004. Options to purchase 900 shares, at an average exercise price of $14.70, and unvested restricted stock awards of 450 shares, at an average market price on date of grant of $14.70, were not included in the computation of diluted earnings per share for the three months ended September 30, 2003. Options to purchase 268,050 shares, at an average exercise price of $13.55, and unvested restricted stock awards of 81,787 shares, at an average market price on date of grant of $13.51, were not included in the computation of diluted earnings per share for the nine months ended September 30, 2003.
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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 and restricted stock unit 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 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 no grants of stock options, restricted stock awards, or restricted stock unit awards in the three-month period ended September 30, 2004. There were stock option grants of 900 shares of common stock, at an average exercise price of $14.70, and restricted stock awards of 450 shares of common stock, at an average market price on date of grant of $14.70, in the three-month period ended September 30, 2003.
There were stock option grants of 201,700 shares of common stock, at an average exercise price of $17.36, and 268,050 shares of common stock, at an average exercise price of $13.55, in the nine-month periods ended September 30, 2004 and 2003, respectively. There were restricted stock and restricted stock unit awards of 73,783 shares of common stock, at an average market price on date of grant of $16.95, and 81,783 shares of common stock, at an average market price on date of grant of $13.51, in the nine-month periods ended September 30, 2004 and 2003, respectively.
The nine-month period ended September 30, 2004 includes a charge to earnings, on an after-tax basis, of $0.2 million or $0.01 per diluted share, recorded in the second quarter of 2004, related to certain restricted stock unit awards in June 2004. In addition to the previously mentioned charge, the nine-month period ended September 30, 2004 includes a charge to earnings (recorded during the three months ended March 31, 2004), on an after-tax basis, of $0.5 million or $0.03 per diluted share, related to an adjustment of compensation expense for certain restricted stock awards made in prior periods. These charges reflect that certain participants under these plans have reached, or are close to reaching, retirement eligibility, at which time such awards will be fully vested. These amounts are included above in stock-based compensation expense.
In addition, the nine-month period ended September 30, 2004 includes, in the deduction for stock-based compensation determined under fair value method, a net after tax charge of $0.4 million or $0.02 per diluted share, related to certain stock option grants awarded in June 2004. In addition to the previously mentioned deduction, the nine-month period ended September 30, 2004 includes, in the deduction for stock-based compensation determined under the fair value method, a net after tax deduction of $0.8 million or $0.04 per diluted share, related to an adjustment of compensation expense using the fair value method for stock option grants awarded during prior periods. These deductions reflect that certain participants under these plans have reached, or are close to reaching, retirement eligibility, at which time such awards will be fully vested.
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5. Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which established guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity ("VIE"). A VIE exists either when the entity does not have sufficient equity at risk or lacks any one of three characteristics normally associated with a controlling financial interest. If an entity is considered a VIE, judgment and quantitative analysis typically is required to assess whether the company should consolidate the entity as the primary beneficiary. The company is considered the primary beneficiary when it has a variable interest that will absorb a majority of an entity's expected losses, receive a majority of an entity's expected residual returns, or both. In December 2003, the FASB issued a revision to FIN 46, FIN 46R, to address various technical corrections and implementation issues that have arisen since its issuance. The provisions of FIN 46R were effective beginning in the first quarter of 2004.
The Holding Company owns Flushing Financial Capital Trust I (the "Trust"), a special purpose business trust formed to issue capital securities, which is subject to FIN 46 and FIN 46R. Prior to 2004, the Trust was consolidated. Since the Holding Company does not have sufficient equity at risk, as defined in FIN 46R, the Trust was deconsolidated, effective with the first quarter of 2004. Deconsolidation of the Trust has not had a material impact on the Company's financial statements.
6. Stock Split
On November 18, 2003, the Board of Directors of the Holding Company declared a three-for-two split of the Holding Company's common stock to be paid in the form of a 50% stock dividend, payable on December 15, 2003. Each stockholder received one additional share for every two shares of the Holding Company's common stock held at the record date, December 1, 2003. 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 in the form of a stock dividend on December 15, 2003.
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7. Pension and Other Postretirement Benefit Plans
The following table sets forth the components of net expense for the pension and other postretirement benefit plans.
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003 that it expects to contribute $0.9 million, $0.1 million and $0.1 million to the Employee Pension Plan, Outside Director Pension Plan and Other Post Retirement Benefit Plans, respectively, during the year ended December 31, 2004. As of September 30, 2004, the Company has contributed $859,000 to the Employee Pension Plan, $75,000 to the Outside Director Plan, and $70,000 to the Other Postretirement Benefit Plans. As of September 30, 2004, the Company has not revised its expected contributions for the year ending December 31, 2004 for any of these plans.
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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 Bank is a consumer-oriented savings institution and conducts its business through eleven banking offices located in Queens, Brooklyn, Manhattan, Bronx and Nassau County. The Bank has taken steps to close the banking office located in the Bronx during the fourth quarter of 2004. Upon completion, this closing will reduce the number of branches to ten, and the deposits held at this location will be transferred to the main branch in Flushing, Queens. The Holding Company does not anticipate that the closing of this branch will have a material effect on its financial condition or results of operations. Flushing Financial Corporation's common stock is publicly traded on the Nasdaq National Market under the symbol "FFIC". The following discussion of financial condition and results of operations includes the collective results of the Holding Company and the Bank (collectively, the "Company"), but reflects principally the Bank's activities.
The Company's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in (1) origination and purchases of one-to-four family (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) mortgage loan surrogates such as mortgage-backed securities; and (3) U.S. government and federal agency securities, corporate fixed-income securities and other marketable securities. To a lesser extent, the Company originates certain other loans, including construction loans, Small Business Administration loans and other small business and consumer loans.
The Company's results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of its interest-bearing liabilities. Net interest income is the result of the Company's interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. The Company also generates non-interest income from loan fees, service charges on deposit accounts and other fees, income earned on Bank Owned Life Insurance, dividends on Federal Home Loan Bank of NY ("FHLB-NY") stock and net gains and losses on sales of securities and loans. The Company's operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. The Company's results of operations also can be significantly affected by its periodic provision for loan losses and specific provision for losses on real estate owned. However, the Company has not recorded a provision for possible loan losses since 1999. Such results also are significantly affected by general economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities.
Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth in the preceding paragraph and elsewhere in this Quarterly Report, and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Forward-looking statements may be identified by terms such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "forecasts", "potential" or "continue" or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.
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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
General. Diluted earnings per share increased $0.04, or 12.9%, to $0.35 for the three months ended September 30, 2004 from $0.31 for the three months ended September 30, 2003. Net income increased $0.7 million, or 13.4%, to $6.3 million for the three months ended September 30, 2004 from $5.5 million for the three months ended September 30, 2003. The return on average assets for the three months ended September 30, 2004 increased to 1.25% compared to 1.20% for the three months ended September 30, 2003, while the return on average equity for the three months ended September 30, 2004 increased to 16.57% from 16.28% for the three months ended September 30, 2003.
Interest Income. Total interest and dividend income increased $1.9 million, or 6.7%, to $30.0 million for the three months ended September 30, 2004 from $28.1 million for the three months ended September 30, 2003. This increase was primarily the result of a $181.3 million increase in the average balance of interest-earning assets for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003. The average balance of higher-yielding mortgage loans, net increased $194.0 million while the average balance of lower-yielding mortgage-backed securities and other securities decreased $18.8 million and $2.8 million, respectively, for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003. The yield on interest-earning assets declined 22 basis points to 6.27% for the three months ended September 30, 2004 from 6.49% for the three months ended September 30, 2003. This decrease is primarily due to the declining interest rate environment experienced during the past three years, the effect of which further lowered the yield on assets during the third quarter of 2004. However, short-term rates have now increased approximately 75 basis points since the first quarter of 2004. Long-term rates, after rising briefly, have returned to their levels at the beginning of the year. We continued our focus on the origination of higher yielding multi-family residential and commercial real estate mortgage loans, along with the origination of one-to-four family mixed-use property mortgage loans, which allowed us to maintain a higher yield on our loan portfolio than we would have otherwise experienced. The yield on mortgage loans reflects the high refinancing activity that has taken place during the current quarter and preceding two years. The Bank's existing borrowers have been refinancing their higher costing mortgage loans at lower rates, which have resulted in a reduction on the yield of the mortgage portfolio. However, this decrease has been partially offset by prepayment penalties that have been collected. In addition, the Bank's current strategy includes moving funds from the lower-yielding mortgage-backed securities and other securities portfolios into the higher-yielding mortgage loan portfolio.
Interest Expense. Interest expense increased $0.2 million, or 1.7%, to $13.2 million for the three months ended September 30, 2004 from $12.9 million for the three months ended September 30, 2003, primarily due to a $153.2 million increase in the average balance of interest-bearing liabilities. This was partially offset by a 22 basis point decline in the cost of interest-bearing liabilities to 2.94% in the three months ended September 30, 2004 from 3.16% in the three months ended September 30, 2003. The decrease in the cost of funds is primarily due to the declining interest rate environment experienced during the past three years, the effect of which further lowered the cost of funds in the third quarter of 2004.
Net Interest Income. For the three months ended September 30, 2004, net interest income increased $1.7 million, or 11.0%, to $16.9 million from $15.2 million in the three months ended September 30, 2003. This increase in net interest income is primarily due to a $181.3 million increase in the average balance of interest-earning assets, as the net interest spread was 3.33% for the three months ended September 30, 2004, the same as that for the three months ended September 30, 2003. The net interest margin increased 2 basis points to 3.53% for the three months ended September 30, 2004 from 3.51% for the three months ended September 30, 2003, due an increase of $28.1 million in the amount by which average interest-earning assets exceeds average interest-bearing liabilities. However, the net interest margin of 3.53% for the three months ended September 30, 2004 remained the same as that for the three months ended June 30, 2004.
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Provision for Loan Losses. There was no provision for loan losses for the three-month periods ended September 30, 2004 and 2003. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for either of the three-month periods ended September 30, 2004 and 2003.
Non-Interest Income. Non-interest income was $1.5 million for the three months ended September 30, 2004, a decrease of $0.1 million from the $1.7 million for the three months ended September 30, 2003. This decrease is attributable to the reduction in dividends on Federal Home Loan Bank of New York ("FHLB-NY") stock, which decreased $0.2 million for the three months ended September 30, 2004 from the three months ended September 30, 2003.
Non-Interest Expense. Non-interest expense was $8.1 million for the three months ended September 30, 2004, an increase of $0.2 million, or 2.8%, from $7.9 million for the three months ended September 30, 2003. The increase from the prior year period is primarily attributable to the Bank's continued focus on expanding its current product offerings to enhance its ability to serve its customers, including increases in personnel to provide these services, and, in the fourth quarter of 2003, the opening of a new branch in Astoria, Queens. Management continues to monitor expenditures resulting in efficiency ratios of 44.3% and 47.1% for the three months ended September 30, 2004 and 2003, respectively.
Income before Income Taxes. Income before the provision for income taxes increased $1.3 million, or 14.8%, to $10.3 million for the three months ended September 30, 2004 as compared to $8.9 million for the three months ended September 30, 2003, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $4.0 million for the three months ended September 30, 2004 compared to $3.4 million for the three months ended September 30, 2003. This increase is primarily due to the $1.3 million increase in income before income taxes, combined with a slight increase in the effective tax rate. The effective tax rate was 39.00% for the three months ended September 30, 2004 compared to 38.27% for the three months ended September 30, 2003.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
General. Diluted earnings per share increased 7.8% to $0.97 for the nine months ended September 30, 2004 from $0.90 for the nine months ended September 30, 2003. Net income for the nine months ended September 30, 2004 increased $1.7 million, or 10.9%, to $17.6 million from the $15.9 million reported for the nine months ended September 30, 2003. The return on average assets for the nine months ended September 30, 2004 was 1.18% compared to 1.19% for the nine months ended September 30, 2003, while the return on average equity for the nine months ended September 30, 2004 was 15.67% compared to 15.70% for the nine months ended September 30, 2003.
The nine-month period ended September 30, 2004 includes a charge to earnings of $1.1 million, $0.7 million on an after-tax basis or $0.04 per diluted share, relating to an adjustment of compensation expense for certain of the Company's restricted stock awards and supplemental retirement benefits to reflect that certain participants under these plans have reached, or are close to reaching, retirement eligibility, at which time such awards will be fully vested. This charge was recorded in the first quarter of 2004. Although this adjustment relates to prior periods, the amount of the charge attributable to any prior year would not have been material to the Company's financial condition or results of operations as reported for that year.
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Interest Income. Total interest and dividend income increased $5.4 million, or 6.5%, to $88.7 million for the nine months ended September 30, 2004 from $83.3 million for the nine months ended September 30, 2003. This increase was primarily the result of a $231.6 million increase in the average balance of interest-earning assets for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. The average balance of total loans, net, mortgage-backed securities and other securities increased $163.5 million, $63.2 million and $7.4 million, respectively, for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003. These increases were partially offset by a $2.6 million decrease in the average balance of interest-earning deposits and federal funds sold for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. The yield on interest-earning assets declined 43 basis points to 6.25% for the nine months ended September 30, 2004 from 6.68% for the nine months ended September 30, 2003. This decrease is primarily due to the declining interest rate environment experienced during the past three years, the effect of which further lowered the yield on assets during the first nine months of 2004. However, short-term rates have now increased approximately 75 basis points since the first quarter of 2004. Long-term rates, after rising briefly, have returned to their levels at the beginning of the year. Our focus on the origination of higher yielding multi-family residential and commercial real estate mortgage loans, along with the origination of one-to-four family mixed-use property mortgage loans, 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 taken place during the nine month period ended September 30, 2004 and the preceding two years. The Bank's existing borrowers have been refinancing their higher costing mortgage loans at lower rates, which have resulted in a reduction on the yield of the mortgage portfolio. However, this decrease has been partially offset by prepayment penalties that have been collected. In addition, the increase in the average balance of the securities portfolio, while increasing interest income, reduced the yield on total interest-earning assets. The Bank's current strategy includes reducing the lower-yielding mortgage-backed securities portfolio and shifting these funds to the higher-yielding mortgage loan portfolio.
Interest Expense. Interest expense decreased $0.9 million, or 2.2%, to $38.5 million for the nine months ended September 30, 2004 from $39.4 million for the nine months ended September 30, 2003, primarily due to a 46 basis point decline in the cost of interest-bearing liabilities to 2.89% in the nine months ended September 30, 2004 from 3.35% in the nine months ended September 30, 2003. This decrease was partially offset by a $206.7 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 three years, the effect of which further lowered the cost of funds during the first nine months of 2004. 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, 2004, net interest income increased $6.3 million, or 14.4%, to $50.1 million from $43.8 million in the nine months ended September 30, 2003. This increase in net interest income is primarily due to a $231.6 million increase in the average balance of interest-earning assets, combined with a three basis point improvement in the net interest spread and an increase of $24.9 million in the amount by which average interest-earning assets exceed average interest-bearing liabilities. The net interest margin increased one basis point to 3.53% for the nine months ended September 30, 2004 from 3.52% for the nine months ended September 30, 2003, due to the increase in the net interest spread and the increase in the amount by which average interest-earning assets exceeds average interest-bearing liabilities, partially offset by 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, 2004 and 2003. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for either of the nine-month periods ended September 30, 2004 and 2003.
Non-Interest Income. Non-interest income decreased $0.3 million, or 6.0%, to $4.6 million for the nine months ended September 30, 2004 from $4.9 million for the nine months ended September 30, 2003. Loan fees and banking services fees increased $0.3 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This was more than offset by the reduction in dividends on Federal Home Loan Bank of New York ("FHLB-NY") stock, which decreased $0.6 million for the nine months ended September 30, 2004 from the nine months ended September 30, 2003.
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Non-Interest Expense. Non-interest expense was $25.9 million for the nine months ended September 30, 2004, an increase of $2.9 million, or 12.5%, from $23.1 million for the nine months ended September 30, 2003. Salaries and employee benefits and other operating expenses increased $0.9 million and $0.2 million, respectively, as a result of the adjustment to amortization of compensation expense for certain of the Company's restricted stock awards and supplemental retirement benefits during the first quarter of 2004, and the expensing of certain restricted stock unit awards at the time of grant during the second quarter of 2004 to reflect that certain participants under these plans have reached, or are close to reaching, retirement eligibility, at which time such awards will be fully vested. The nine months ended September 30, 2004 also includes increased professional service fees due to costs incurred to comply with the Sarbanes-Oxley Act. The remaining increase from the prior year period is primarily attributable to the Bank's continued focus on expanding its current product offerings to enhance its ability to serve its customers, including increases in personnel to provide these services, and, in the fourth quarter of 2003, the opening of a new branch in Astoria, Queens. Management continues to monitor expenditures resulting in an efficiency ratio of 47.4% and 47.3% for the nine-month periods ended September 30, 2004 and 2003, respectively.
Income before Income Taxes. Income before the provision for income taxes increased $3.1 million, or 12.2%, to $28.8 million for the nine months ended September 30, 2004 as compared to $25.7 million for the nine months ended September 30, 2003, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $11.2 million for the nine months ended September 30, 2004 an increase of $1.4 million, or 14.4%, compared to $9.8 million for the nine months ended September 30, 2003. This increase is primarily due to the $3.1 million increase in income before income taxes, combined with a slight increase in the effective tax rate. The effective tax rate was 39.00% for the nine months ended September 30, 2004 compared to 38.25% for the nine months ended September 30, 2003.
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Assets. Total assets at September 30, 2004 were $2,038.0 million, a $127.2 million increase from December 31, 2003. Total loans, net increased $191.2 million during the nine months ended September 30, 2004 to $1,460.7 million from $1,269.5 million at December 31, 2003.
The following table shows loan originations and purchases for the period indicated.
As the Company continues to increase its loan portfolio, management continues to adhere to the Bank's strict underwriting standards. As a result, the Company has been able to minimize charge-offs of losses from impaired loans and maintain asset quality. Non-performing assets were $4.5 million at September 30, 2004 compared to $0.7 million at December 31, 2003 and $1.7 million at September 30, 2003. The increase in non-performing assets at September 30, 2004 is attributed to two mortgages secured by commercial properties. The borrower is negotiating the sale of these properties. The Company believes it has a secure position in these two loans, and does not anticipate a significant loss, if any, will be incurred. Total non-performing assets as a percentage of total assets were 0.22% at September 30, 2004, 0.04% at December 31, 2003, and 0.09% at September 30, 2003. The ratio of allowance for loan losses to total non-performing loans was 146% at September 30, 2004 compared to 961% at December 31, 2003 and 387% at September 30, 2003.
During the first nine months of 2004, mortgage-backed securities decreased $58.4 million to $421.0 million while other securities decreased $14.9 million to $41.4 million. The funds obtained from the repayment and sale of mortgage-backed securities and other securities have been used to originate higher yielding mortgage loans. Other securities primarily consists of securities issued by government agencies and mutual or bond funds that invest in government and government agency securities. At September 30, 2004, loans in process totaled $174.1 million.
Liabilities. Total liabilities increased $117.5 million to $1,881.5 million at September 30, 2004 from $1,764.0 million at December 31, 2003. Due to depositors increased $107.3 million as certificate of deposit accounts increased $97.8 million while lower costing core deposits increased $9.5 million. Borrowed funds decreased $3.4 million during the nine months ended September 30, 2004, as asset growth was funded by deposit growth.
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Equity. Total stockholders' equity increased $9.7 million to $156.4 million at September 30, 2004 from $146.8 million at December 31, 2003. Net income of $17.6 million for the nine months ended September 30, 2004 was partially offset by $7.9 million in treasury shares purchased through the Company's stock repurchase programs, a net after-tax decrease of $1.5 million in the market value of securities available for sale, and $4.6 million in cash dividends paid during the nine month period. In addition, the exercise of stock options increased stockholders' equity by $5.1 million, including the income tax benefit realized by the Company upon the exercise of stock options. Book value per share was $8.16 at September 30, 2004 compared to $7.61 per share at December 31, 2003 and $7.34 per share at September 30, 2003.
Under its stock repurchase programs, the Company repurchased 448,600 shares during the nine months ended September 30, 2004, at a total cost of $7.9 million, or an average of $17.67 per share. During the third quarter of 2004, the Company completed its eleventh stock repurchase program and announced the approval of a new stock repurchase program authorizing the purchase of an additional 1,000,000 shares. At September 30, 2004, 991,350 shares remain to be repurchased under the current stock repurchase program. Through September 30, 2004, the Company had repurchased approximately 46% of the common shares issued in connection with the Company's initial public offering at a cost of $107.8 million.
Cash flow. During the nine months ended September 30, 2004, funds provided by the Company's operating activities amounted to $22.6 million. These funds, together with $102.3 million provided by financing activities and funds available at the beginning of the year, were utilized to fund net investing activities of $118.1 million. The Company's primary business objective is the origination and purchase of one-to-four family (primarily mixed-use properties), multi-family and commercial real estate loans. During the nine months ended September 30, 2004, the net total of loan originations less loan repayments was $193.4 million. The Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. During the nine months ended September 30, 2004, the Company purchased a total of $102.2 million in securities available for sale. Funds for investment were also provided by $174.6 million in maturities, prepayments, calls and sales of securities available for sale. Additional funds of $2.5 million were provided through the exercise of stock options. The Company also used funds of $8.4 million for treasury stock purchases and $4.6 million in dividend payments during the nine months ended September 30, 2004.
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INTEREST RATE RISK
The consolidated statements of financial condition have been prepared in conformity with generally accepted accounting principles in the United States of America, which require the measurement of financial condition 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, 2004. Various estimates regarding prepayment assumptions are made at each level of rate shock. Actual results could differ significantly from these estimates. The Company is within the guidelines set forth by the Board of Directors for each interest rate level.
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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, 2004, the Bank exceeded each of the three OTS capital requirements and is categorized as "well-capitalized" by the OTS under the prompt corrective action regulations. Set forth below is a summary of the Bank's compliance with OTS capital standards as of September 30, 2004.
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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, 2004 and 2003, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.
(1) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.6 million and $1.4 million for the three-month periods ended September 30, 2004 and 2003, respectively.-18-
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, 2004 and 2003, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.
(2) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $3.8 million and $3.1 million for the nine-month periods ended September 30, 2004 and 2003, respectively.-19-
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.
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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.
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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.
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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk".
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2004, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations and cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table sets forth information regarding the shares of common stock repurchased by the Company during the quarter ended September 30, 2004.
The above table includes 1,912 common shares the Company withheld from employees, valued at an average price per share of $17.25, to satisfy tax withholding obligations due upon vesting of restricted stock awards.
The current common stock repurchase program was approved by the Company's Board of Directors on August 17, 2004. This repurchase program authorized the repurchase of 1,000,000 common shares. The repurchase program does not have an expiration date or a maximum dollar amount that may be paid to repurchase the common shares. Stock repurchases under this program will be made from time to time, on the open market or in privately negotiated transactions, at the discretion of the management of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
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ITEM 6. EXHIBITS.
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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESSIGNATURES
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.
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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIESEXHIBIT INDEX
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