UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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)
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 April 29, 2005 was 19,222,465.
TABLE OF CONTENTS
PAGE
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Financial Condition..............................................................
1
Consolidated Statements of Income and Comprehensive Income ..................................
2
Consolidated Statements of Cash Flows ..........................................................................
3
Consolidated Statements of Changes in Stockholders’ Equity ........................................
4
Notes to Consolidated Statements ...................................................................................
5
ITEM 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations .......................................................................................
8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................
18
ITEM 4. Controls and Procedures.....................................................................................
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings...............................................................................................
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds..........................
ITEM 3. Defaults Upon Senior Securities..........................................................................
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................
19
ITEM 5. Other Information...............................................................................................
ITEM 6. Exhibits................................................................................................................
SIGNATURES......................................................................................................................
20
i
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except share data)
March 31, 2005
December 31, 2004
ASSETS
Cash and due from banks
$
13,460
14,661
Securities available for sale:
Mortgage-backed securities
368,718
395,629
Other securities
39,378
40,116
Loans:
Multi-family residential
696,150
646,922
Commercial real estate
351,838
334,048
One-to-four family – mixed-use property
361,443
332,805
One-to-four family – residential
147,883
151,737
Co-operative apartments
2,695
3,132
Construction
35,748
31,460
Small Business Administration
5,985
5,633
Commercial business and other
14,081
12,505
Net unamortized premiums and unearned loan fees
5,601
4,798
Allowance for loan losses
(6,533)
Net loans
1,614,891
1,516,507
Interest and dividends receivable
9,271
8,868
Bank premises and equipment, net
7,623
7,558
Federal Home Loan Bank of New York stock
25,461
22,261
Bank owned life insurance
25,678
25,399
Goodwill
3,905
Other assets
27,156
23,140
Total assets
2,135,541
2,058,044
LIABILITIES
Due to depositors:
Non-interest bearing
52,006
49,540
Interest-bearing:
Certificate of deposit accounts
710,997
703,314
Passbook savings accounts
215,457
216,772
Money market accounts
252,612
258,235
NOW accounts
45,191
48,463
Total interest-bearing deposits
1,224,257
1,226,784
Mortgagors' escrow deposits
27,626
16,473
Borrowed funds
648,730
584,736
Other liabilities
22,186
19,858
Total liabilities
1,974,805
1,897,391
STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)
-
Common stock ($0.01 par value; 40,000,000 shares authorized; 19,456,696
shares issued at March 31, 2005 and December 31, 2004; 19,204,465
shares and 19,232,248 shares outstanding at March 31, 2005 and
December 31, 2004, respectively)
195
Additional paid-in capital
37,707
37,187
Treasury stock (252,231 shares and 224,448 shares at March 31, 2005
and December 31, 2004, respectively)
(4,440)
(3,893)
Unearned compensation
(4,875)
(5,117)
Retained earnings
136,518
133,290
Accumulated other comprehensive loss, net of taxes
(4,369)
(1,009)
Total stockholders' equity
160,736
160,653
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
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Consolidated Statements of Income and Comprehensive Income
For the three months
ended March 31,
(In thousands, except share data)
2005
2004
Interest and dividend income
Interest and fees on loans
26,265
23,555
Interest and dividends on securities:
Interest
4,362
5,423
Dividends
81
87
Other interest income
40
Total interest and dividend income
30,716
29,105
Interest expense
Deposits
7,683
7,008
Other interest expense
6,160
5,686
Total interest expense
13,843
12,694
Net interest income
16,873
16,411
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Loan fee income
530
457
Banking services fee income
383
441
Net gain on loans held for sale
92
Net gain on sale of loans
Federal Home Loan Bank stock dividends
164
93
279
289
Other income
140
104
Total non-interest income
1,515
1,476
Non-interest expense
Salaries and employee benefits
4,278
5,148
Occupancy and equipment
963
861
Professional services
940
790
Data processing
535
529
Depreciation and amortization
403
357
Other operating expenses
1,484
1,604
Total non-interest expense
8,603
9,289
Income before income taxes
9,785
8,598
Provision for income taxes
Federal
2,994
2,692
State and local
822
661
Total taxes
3,816
3,353
Net income
5,969
5,245
Other comprehensive income, net of tax
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period
(3,360)
2,620
Net unrealized holding (losses) gains
Comprehensive net income
2,609
7,865
Basic earnings per share
0.34
0.30
Diluted earnings per share
0.33
0.29
Dividends per share
0.10
0.08
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Consolidated Statements of Cash Flows
(In thousands)
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment
Net gain on sales of loans
(19)
(92)
Amortization of unearned premium, net of accretion of unearned discount
326
533
Deferred income tax benefit
(25)
(711)
Deferred compensation
(36)
418
Origination of loans held for sale
(941)
Proceeds from sale of loans originated for sale
1,033
Net increase (decrease) in other assets and liabilities
685
(521)
250
1,242
Net cash provided by operating activities
7,553
6,563
INVESTING ACTIVITIES
Purchases of bank premises and equipment
(468)
(113)
Net purchases of Federal Home Loan Bank shares
(3,200)
(250)
Purchases of securities available for sale
(153)
(45,629)
Proceeds from sales and calls of securities available for sale
12,586
Proceeds from maturities and prepayments of securities available for sale
21,594
25,961
Proceeds from sale of non-performing loans
751
Net originations and repayment of loans
(100,080)
(68,134)
Proceeds from sale of loans
1,030
Net cash used by investing activities
(80,526)
(75,579)
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits
2,466
5,337
Net (decrease) increase in interest-bearing deposits
(2,527)
52,725
Net increase in mortgagors' escrow deposits
11,153
9,528
Proceeds from short-term borrowed funds
4,000
Repayment of short-term borrowed funds
(15,000)
(25,000)
Proceeds from long-term borrowed funds
85,000
50,000
Repayment of long-term borrowed funds
(10,006)
(20,006)
Purchases of treasury stock
(2,436)
(1,171)
Proceeds from issuance of common stock upon exercise of stock options
867
771
Cash dividends paid
(1,745)
(1,411)
Net cash provided by financing activities
71,772
70,773
Net (decrease) increase in cash and cash equivalents
(1,201)
1,757
Cash and cash equivalents, beginning of period
20,300
Cash and cash equivalents, end of period
22,057
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid
13,450
12,628
Income taxes paid
427
328
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Consolidated Statements of Changes in Stockholders’ Equity
For the three months ended
Common Stock
Balance, beginning of period
No activity
Balance, end of period
Additional Paid-In Capital
Award of shares released from Employee Benefit Trust (1,239 common shares)
Forfeiture of restricted stock awards (750 common shares)
(1)
Tax benefit from compensation expense in excess of that recognized
for financial reporting purposes
503
Treasury Stock
Purchases of common shares outstanding (133,000 common shares)
(2,384)
Repurchase of restricted stock awards to satisfy tax obligations
(2,732 common shares)
(52)
(9)
Issuance upon exercise of stock options (104,199 common shares)
1,820
Shares issued upon vesting of restricted stock unit awards (4,500 common shares)
78
Unearned Compensation
Restricted stock award expense
58
10
Release of shares from Employee Benefit Trust (51,182 common shares)
174
Retained Earnings
Cash dividends declared and paid
Stock options exercised (104,199 common shares)
(953)
(43)
Accumulated Other Comprehensive Income
Change in net unrealized loss, net of taxes of approximately $2,494, on
securities available for sale
-4-
Notes to Consolidated Financial Statements
1.
Basis of Presentation
The primary business of Flushing Financial Corporation (the “Holding Company”) is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the “Bank”). The consolidated financial statements presented in this Form 10-Q include the collective results of the Holding Company and the Bank, but reflect principally the Bank’s activities.
The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods of Flushing Financial Corporation and Subsidiaries (the “Company”). Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.
Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting 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 2004 Annual Report on Form 10-K.
2.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
3.
Earnings Per Share
Basic earnings per share for the three-month periods ended March 31, 2005 and 2004 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 and restricted stock unit awards during the period. Earnings per share has been computed based on the following:
For the three months ended March 31,
(In thousands, except per share data)
Divided by:
Weighted average common shares outstanding
17,478
17,377
Weighted average common stock equivalents
526
786
Total weighted average common shares and common stock equivalents
18,004
18,163
Dividend payout ratio
29.41
%
26.67
Common stock equivalents that are antidilutive are not included in the computation of diluted earnings per share. For the three months ended March 31, 2005, options to purchase 35,750 shares, at an average price of $19.94 and unvested restricted stock and restricted stock unit awards for 17,874 shares, at an average price of $19.94, were not included in the computation of diluted earnings per share. There were no common stock equivalents considered antidilutive for the three months ended March 31, 2004.
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4.
Stock Compensation Plans
As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company has chosen to apply APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations in accounting for its Stock Option Plan. Accordingly, no compensation expense has been recognized for options granted under the Stock Option Plan. Compensation expense is recognized in the financial statements primarily for restricted stock 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 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 generally vest over several years and additional option grants may be made each year. As discussed in Note 5 below, the Company will begin recording an expense in the financial statements in the quarter ending March 31, 2006 for stock options granted.
Net income, as reported
Add: Stock-based employee compensation expense included in reported
net income, net of related tax effects
69
656
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects
(151)
(1,601)
Pro forma net income
5,887
4,300
Basic earnings per share:
As reported
Pro forma
0.25
Diluted earnings per share:
0.24
There were no stock option grants in either of the three-month periods ended March 31, 2005 and 2004.
The three months ended March 31, 2004 includes a charge to earnings, on an after-tax basis, of $0.5 million or $0.03 per diluted share, relating to an adjustment of compensation expense for certain of the Company's restricted stock awards to reflect that certain participants under these plans had reached, or were close to reaching, retirement eligibility. This amount is included above in stock-based employee compensation expense.
In addition, the three months ended March 31, 2004 includes, in the deduction for stock-based employee compensation determined under fair value method, a net after-tax charge of $0.8 million, or $0.04 per diluted share, relating to an adjustment of the Company’s stock option grants to reflect that certain participants under the plan had reached, or were close to reaching, retirement eligibility.
-6-
5. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R (revised 2004), “Share Based Payment.” This statement revises FASB Statement No. 123, “Accounting for Stock Based Compensation”, and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees. It requires that a public entity measure the cost of employee services received in exchange for an award of an equity instrument based on the grant date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The requisite service period is usually the vesting period. The provisions of this statement are effective for the first interim or annual reporting period that begins after June 15, 2005. On April 12, 2005, the U.S. Securities and Exchange Commission issued a release which changed the implementation date to the beginning of the next fiscal year after June 15, 2005. The effect on future earnings as a result of the adoption of this statement will primarily be dependent on the level of future grants of stock options awarded by the Company. While management is unable to determine the actual effect the adoption of this statement will have on its diluted earnings per share, management estimates, based on prior year grants, that the effect on annual diluted earnings per share will be in the range of $0.04 to $0.06 per diluted share.
6.
Pension and Other Postretirement Benefit Plans
The following table sets forth the components of net expense for the pension and other postretirement benefit plans.
Employee Pension Plan:
Service cost
146
155
Interest cost
211
197
Amortization of unrecognized loss
Amortization of past service liability
(3)
Expected return on plan assets
(309)
(292)
Net employee pension expense
88
77
Outside Director Pension Plan:
21
12
37
35
Net outside director pension expense
79
70
Other Postretirement Benefit Plans:
39
41
62
55
16
13
(33)
Net other postretirement benefit expense
108
76
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2004 that it expects to contribute $0.9 million, $0.1 million and $0.2 million to the Employee Pension Plan, Outside Director Pension Plan and Other Post Retirement Benefit Plans, respectively, during the year ended December 31, 2005. As of March 31, 2005, the Company has contributed $37,000 to the Outside Director Plan and $66,000 to the Other Postretirement Benefit Plans. As of March 31, 2005, the Company has not made a contribution to the Employee Pension Plan for the year ending December 31, 2005. As of March 31, 2005, the Company has not revised its expected contributions for the year ending December 31, 2005 for any of these plans.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
Flushing Financial Corporation, a Delaware corporation (the “Holding Company”), was organized in May 1994 to serve as the holding company for Flushing Savings Bank, FSB (the “Bank”), a federally chartered, FDIC insured savings institution, originally organized in 1929. The Bank is a consumer-oriented savings institution and conducts its business through ten banking offices located in Queens, Brooklyn, Manhattan and Nassau County. Flushing Financial Corporation’s common stock is publicly traded on the NASDAQ National Market under the symbol “FFIC”. The following discussion of financial condition and results of operations includes the collective results of the Holding Company and the Bank (collectively, the “Company”), but reflects principally the Bank’s activities.
The Company’s principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in (1) origination and purchases of one-to-four family (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) mortgage loan surrogates such as mortgage-backed securities; and (3) U.S. government and federal agency securities, corporate fixed-income securities and other marketable securities. To a lesser extent, the Company originates certain other loans, including construction loans, Small Business Administration loans and other small business and consumer loans.
The Company’s results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of its interest-bearing liabilities. Net interest income is the result of the Company’s interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. The Company also generates non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees and other fees, income earned on Bank Owned Life Insurance, dividends on Federal Home Loan Bank of NY (“FHLB-NY”) stock and net gains 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, 2004. 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
MARCH 31, 2005 AND 2004
General. Diluted earnings per share increased $0.04, or 13.8%, to $0.33 for the three months ended March 31, 2005 from $0.29 for the three months ended March 31, 2004. Net income increased $0.7 million, or 13.8%, to $6.0 million for the three months ended March 31, 2005 from $5.2 million for the three months ended March 31, 2004. The return on average assets was 1.15% for the three months ended March 31, 2005 and 1.07% for the three months ended March 31, 2004, while the return on average equity was 14.95% for the three months ended March 31, 2005 and 14.17% for the three months ended March 31, 2004.
The first quarter of 2005 saw an increase in net income of $0.7 million to $6.0 million as compared to $5.2 million in the first quarter of 2004. This is primarily the result of the 2004 adjustment of compensation expense for certain of the Company's restricted stock awards and supplemental retirement benefits. This adjustment, which was related to prior periods, was a charge to earnings in the first quarter of 2004 of $1.1 million, $0.7 million on an after-tax basis or $0.04 per diluted share.
Interest Income. Total interest and dividend income increased $1.6 million, or 5.5%, to $30.7 million for the three months ended March 31, 2005 from $29.1 million for the three months ended March 31, 2004. This increase was primarily the result of a $119.8 million increase in the average balance of interest-earning assets for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. The average balance of mortgage loans, net, increased $237.2 million, while the average balances for mortgage-backed securities and other securities decreased $89.7 million and $19.1 million, respectively, for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. The average balance of interest-earning deposits and Federal funds sold decreased $17.9 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The yield on interest-earning assets declined 6 basis points to 6.22% for the three months ended March 31, 2005 from 6.28% for the three months ended March 31, 2004. This decrease is primarily due to the declining interest rate environment experienced during the past three years. However, short term rates began to rise in the third quarter of 2004 and have continued into the first quarter of 2005. 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 occurred during the previous three years. The Bank’s existing borrowers had been refinancing their higher-costing mortgage loans at lower rates, which has resulted in a decrease on the yield of the mortgage portfolio. This decrease has been partially offset by prepayment penalties that have been collected. In an effort to increase the yield on its interest earning assets, the Bank has continued its strategy of moving funds from the lower-yielding mortgage-backed securities and other securities portfolio into the higher-yielding mortgage loan portfolio.
Interest Expense. Interest expense increased $1.1 million, or 9.1%, to $13.8 million for the three months ended March 31, 2005 from $12.7 million for the three months ended March 31, 2004, primarily due to an increase of $97.5 million in the average balance of interest-bearing liabilities. This was combined with a 9 basis point increase in the cost of interest-bearing liabilities to 3.00% for the three months ended March 31, 2005 from 2.91% for the three months ended March 31, 2004. The average balance of certificates of deposit increased $108.6 million while the average balance of borrowed funds increased $24.0 million. These increases were partially offset by decreases in the average balance of lower-costing passbook, money market and NOW accounts totaling $41.1 million. The cost of total deposits increased 8 basis points and borrowed funds increased 16 basis points in the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The increase in the cost of funds is due to the increasing interest rate environment beginning in the third quarter of 2004, which has continued in the first quarter of 2005, combined with an increase in the average balance of the higher-costing certificate of deposit accounts.
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Net Interest Income. For the three months ended March 31, 2005, net interest income increased $0.5 million, or 2.8%, to $16.9 million from $16.4 million for the three months ended March 31, 2004. The increase in net interest income is attributed to the growth in the average balance of interest-earning assets which increased $119.8 million to $1.974 billion, while the net interest spread declined 15 basis points to 3.22% for the quarter ended March 31, 2005, as compared to 3.37% in the same period in 2004. The net interest margin decreased 12 basis points to 3.42% for the three months ended March 31, 2005 from 3.54% for the three months ended March 31, 2004. However the net interest margin increased 7 basis points to 3.42% for the three months ended March 31, 2005 compared to 3.35% for the three months ended December 31, 2004. Excluding prepayment penalty income, the net interest margin would have been 3.24% and 3.34% for the three month periods ended March 31, 2005 and 2004, respectively.
Provision for Loan Losses. There was no provision for loan losses for either of the three-month periods ended March 31, 2005 and 2004. 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. In recent years, the Bank has seen a significant improvement in its loss experience. By adherence to its strict underwriting standards the Bank has been able to minimize net losses from impaired loans with no net charge-offs for the three months ended March 31, 2005, and net charge-offs of $6,000 for the three months ended March 31, 2004. There has also been an improvement in local economic conditions and real estate values in recent years. As a result of these improvements, and despite the growth in the loan portfolio, primarily in multi-family residential, commercial, and one-to-four family mixed-use property mortgage loans, no provision for loan losses was deemed necessary for either of the three-month periods ended March 31, 2005 and 2004.
Non-Interest Income. Non-interest income remained constant at $1.5 million for each of the three-month periods ended March 31, 2005 and 2004. There was an increase of $0.1 million in dividends on Federal Home Loan Bank of New York (“FHLB-NY”) stock, which was offset by the reduction of $0.1 million from the gain on sale of loans for the quarter ended March 31, 2005 from the quarter ended March 31, 2004.
Non-Interest Expense. Non-interest expense was $8.6 million for the three months ended March 31, 2005, a reduction of $0.7 million, or 7.4%, from $9.3 million for the three months ended March 31, 2004. Salaries and employee benefits and other operating expenses decreased $0.9 million and $0.2 million, respectively, as a result of the 2004 adjustment to amortization of compensation expense for certain of the Company’s restricted stock awards and supplemental retirement benefits. These decreases were offset by an increase in occupancy and equipment of $0.1 million in 2005 primarily due to the relocation of the Bank’s headquarters in the third quarter of 2004 and an increase of $0.2 million in professional fees, of which $0.1 million was related to initial compliance with the Sarbanes-Oxley Act. Management continues to monitor expenditures resulting in efficiency ratios of 46.8% and 51.9% for three-month periods ended March 31, 2005 and 2004, respectively.
Income before Income Taxes. Income before the provision for income taxes increased $1.2 million, or 13.8%, to $9.8 million for the three months ended March 31, 2005, as compared to $8.6 million for the three months ended March 31, 2004, for the reasons discussed above.
Provision for Income Taxes. Income tax expense increased $0.5 million to $3.8 million for the three months ended March 31, 2005 compared to $3.4 million for the three months ended March 31, 2004. This increase was due to an increase in income for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The effective tax rate was 39.0% for the three months ended March 31, 2005 and 2004.
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FINANCIAL CONDITION
Assets. Total assets at March 31, 2005 were $2.14 billion, a $77.5 million increase from December 31, 2004. Total loans increased $98.4 million during the three months ended March 31, 2005 to $1.61 billion from $1.52 billion at December 31, 2004. At March 31, 2005, loans in process totaled $229.9 million.
Loan originations and purchases were as follows for the three months ended March 31:
73,923
46,957
24,326
28,287
37,665
32,445
2,122
1,483
6,985
5,444
105
Commercial business and other loans
3,906
2,732
Total
148,927
117,453
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 $1.2 million at March 31, 2005 compared to $0.9 million at December 31, 2004 and $0.7 million at March 31, 2004. Total non-performing assets as a percentage of total assets were 0.05% at March 31, 2005 compared to 0.04% at both December 31, 2004 and March 31, 2004. The ratio of allowance for loan losses to total non-performing loans was 568% at March 31, 2005 compared to 717% at December 31, 2004 and 918% at March 31, 2004.
During the quarter ended March 31, 2005, mortgage-backed securities decreased $26.9 million to $368.7 million, while other securities decreased $0.7 million to $39.4 million. As funds became available from principle reductions on the securities portfolio during the first quarter of 2005, they have been reinvested in higher yielding loans. 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 $77.4 million to $1.97 billion at March 31, 2005 from $1.90 billion at December 31, 2004. During the three months ended March 31, 2005, due to depositors remained unchanged at $1.28 billion, primarily as a result of the increased competition in our market for deposits. Certificate of deposit accounts increased $7.7 million, while lower-costing deposits decreased $7.7 million. As a result of due to depositors remaining unchanged, borrowed funds increased $64.0 million during the quarter ended March 31, 2005 to partially fund the growth in the loan portfolio. Mortgagors’ escrow deposits increased $11.2 million during the quarter ended March 31, 2005.
Equity. Total stockholders' equity was $160.7 million at March 31, 2005 and December 31, 2004. Net income of $6.0 million for the quarter ended March 31, 2005 was more than offset by $2.4 million in treasury shares purchased through the Company’s stock repurchase program, a net after-tax decrease of $3.4 million on the market value of securities available for sale, and $1.7 million of cash dividends paid. The exercise of stock options increased stockholder’s equity by $1.3 million. Book value per share was $8.37 at March 31, 2005 compared to $8.35 per share at December 31, 2004 and $7.98 per share at March 31, 2004.
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Under its current stock repurchase program, the Company repurchased 133,000 shares during the quarter ended March 31, 2005, at a total cost of $2.4 million, or an average of $17.93 per share. At March 31, 2005, 786,350 shares remain to be repurchased under the current stock repurchase program. Through March 31, 2005, the Company had repurchased approximately 47% of the common shares issued in connection with the Company’s initial public offering at a cost of $111.6 million.
Cash flow. During the three months ended March 31, 2005, funds provided by the Company's operating activities amounted to $7.6 million. These funds, together with $71.8 million provided by financing activities and funds available at the beginning of the year, were utilized to fund net investing activities of $80.5 million. The Company's primary business objective is the origination and purchase of one-to-four family (primarily mixed-use properties), multi-family residential and commercial real estate mortgage loans. During the three months ended March 31, 2005, the net total of loan originations less loan repayments was $100.1 million. The net borrowings of $64.0 million were used to fund this activity. Funds were also provided by $21.6 million in maturities and prepayments of securities available for sale. Additional funds of $0.9 million were provided through the exercise of stock options. The Company also used funds of $2.4 million for treasury stock repurchases and $1.7 million for dividend payments during the three months ended March 31, 2005.
INTEREST RATE RISK
The consolidated statements of financial position have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company's interest-earning assets which could adversely affect the Company's results of operation if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company's stockholders' equity, if such securities were retained.
The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes In Interest Rate” report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at March 31, 2005. 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.
Net Interest
Net Portfolio
Change in Interest Rate
Income
Value
Value Ratio
-300 Basis points
-12.77
-9.27
9.02
-200 Basis points
-4.08
-2.12
9.83
-100 Basis points
0.26
1.71
10.37
Base interest rate
0.00
10.40
+100 Basis points
-3.20
-8.69
9.74
+200 Basis points
-8.36
-19.68
8.81
+300 Basis points
-13.89
-30.85
7.80
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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 March 31, 2005, the Bank exceeded each of the three OTS capital requirements and is categorized as "well-capitalized" by the OTS under the prompt corrective action regulations. Set forth below is a summary of the Bank's compliance with OTS capital standards as of March 31, 2005.
(Dollars in thousands)
Amount
Percent of Assets
Tangible Capital:
Capital level
167,930
7.91
Requirement
31,853
1.50
Excess
136,077
6.41
Leverage and Core Capital:
63,706
3.00
104,224
4.91
Risk-Based Capital:
174,463
13.86
100,723
8.00
73,740
5.86
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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 March 31, 2005 and 2004, 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
Yield/
Balance
Cost
Assets
Interest-earning assets:
Mortgage loans, net (1)
1,526,045
25,977
6.81
1,288,829
23,405
7.26
Other loans, net (1)
19,102
288
6.03
9,774
150
6.14
Total loans, net
1,545,147
6.80
1,298,603
387,376
4,092
4.23
477,061
4,972
4.17
39,682
351
3.54
58,825
538
3.66
Total securities
427,058
4,443
4.16
535,886
5,510
4.11
Interest-earning deposits and
federal funds sold
1,540
2.08
19,442
0.82
Total interest-earning assets
1,973,745
6.22
1,853,931
6.28
97,021
100,872
2,070,766
1,954,803
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Passbook accounts
216,040
267
0.49
217,081
270
0.50
46,161
57
41,968
52
252,981
1,211
1.91
297,281
1,490
2.00
706,772
6,134
3.47
598,144
5,184
Total due to depositors
1,221,954
7,669
2.51
1,154,474
6,996
2.42
Mortgagors' escrow accounts
23,092
14
17,002
0.28
Total deposits
1,245,046
2.47
1,171,476
2.39
598,682
4.12
574,719
3.96
Total interest-bearing liabilities
1,843,728
1,746,195
2.91
Non interest-bearing deposits
48,335
40,602
19,013
19,968
1,911,076
1,806,765
Equity
159,690
148,038
Total liabilities and equity
Net interest income /
net interest rate spread
3.22
3.37
Net interest-earning assets /
net interest margin
130,017
3.42
107,736
Ratio of interest-earning assets to
interest-bearing liabilities
1.07
X
1.06
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.9 million and $1.0 million for each of the three-month periods ended March 31, 2005 and 2004, respectively.
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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.
Mortgage Loans
At beginning of period
1,500,104
1,264,219
Mortgage loan originated:
Total mortgage loans originated
145,021
114,721
Less:
Principal and other reductions
47,587
47,251
Sales
1,781
Mortgage loan foreclosures
At end of period
1,595,757
1,331,689
Commercial Business and Other Loans
18,138
9,825
Other loans originated:
782
1,245
Small business
2,924
1,067
Other
200
420
Total other loans originated
1,978
1,625
941
20,066
9,991
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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.
Non-accrual mortgage loans
839
659
Other non-accrual loans
311
252
Total non-accrual loans
1,150
911
Mortgage loans 90 days or more delinquent
and still accruing
Other loans 90 days or more delinquent
Total non-performing loans
Real estate owned (foreclosed real estate)
Investment securities
Total non-performing assets
Non-performing loans to gross loans
0.07
0.06
Non-performing assets to total assets
0.05
0.04
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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 allowance for loan losses on a quarterly basis.
The following table sets forth the activity in the Bank's allowance for loan losses for the periods indicated.
Balance at beginning of period
6,533
6,553
Loans charged-off:
(7)
Total loans charged-off
Recoveries:
Mortgage loans
Other loans
Total recoveries
Net recoveries (charge-offs)
(6)
Balance at end of period
6,547
Ratio of net charge-offs during the period to
average loans outstanding during the period
Ratio of allowance for loan losses to loans at end of period
0.40
Ratio of allowance for loan losses to non-performing
assets at end of period
568.04
918.43
loans at end of period
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."
ITEM 4.
CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2005, 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 March 31, 2005.
Maximum
Total Number of
Number of
Shares Purchased
Shares That May
Total Number
as Part of Publicly
Yet Be Purchased
Of Shares
Average Price
Announced Plans
Under the Plans
Period
Purchased
Paid per Share
or Programs
January 1 to January 31, 2005
920
$19.27
919,350
February 1 to February 28, 2005
117,000
$17.92
802,350
March 1 to March 31, 2005
16,000
$18.00
786,350
133,920
$17.94
133,000
The current common stock repurchase program was approved by the Company’s Board of Directors on August 17, 2004 and 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.
Amounts shown in the above column titled “Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs” do not reflect shares which may be repurchased from employees to satisfy tax withholding obligations under equity compensation plans. During the quarter ended March 31, 2005, the Company purchased 920 common shares from employees, at an average cost of $19.27, to satisfy tax obligations due from the employees upon vesting of restricted stock awards.
DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5.
OTHER INFORMATION.
ITEM 6.
EXHIBITS.
a)
Exhibit 3.1 Certificate of Incorporation of Flushing Financial Corporation (1)
Exhibit 3.2 Certificate of Amendment of Certificate of Incorporation of Flushing Financial Corporation (3)
Exhibit 3.3 Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing
Financial Corporation (4)
Exhibit 3.4 By-Laws of Flushing Financial Corporation (1)
Exhibit 4.1 Rights Agreement, dated as of September 17, 1996, between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (2)
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive
Officer.
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration
No. 33-96488.
(2) Incorporated by reference to Exhibits filed with Form 8-K filed September 30, 1996.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Flushing Financial Corporation,
Dated: May 5, 2005
By: /s/Michael J. Hegarty
Michael J. Hegarty
President and Chief Executive Officer
By: /s/David W. Fry
David W. Fry
Senior Vice President, Treasurer and
Chief Financial Officer
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