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 June 30, 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)
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 July 31, 2005 was 19,316,243.
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 ..............................................................................................
9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................
22
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..........................................................................
23
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................
ITEM 5. Other Information...............................................................................................
ITEM 6. Exhibits..................................................................................................................
24
SIGNATURES......................................................................................................................
25
i
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
June 30,
December 31,
(Dollars in thousands, except per share data)
2005
2004
ASSETS
Cash and due from banks
$
14,025
14,661
Securities available for sale:
Mortgage-backed securities
351,304
395,629
Other securities
39,069
40,116
Loans:
Multi-family residential
738,702
646,922
Commercial real estate
374,561
334,048
One-to-four family – mixed-use property
405,965
332,805
One-to-four family – residential
146,559
151,737
Co-operative apartments
2,454
3,132
Construction
39,340
31,460
Small Business Administration
8,377
5,633
Commercial business and other
16,897
12,505
Net unamortized premiums and unearned loan fees
6,864
4,798
Allowance for loan losses
(6,535)
(6,533)
Net loans
1,733,184
1,516,507
Interest and dividends receivable
9,956
8,868
Bank premises and equipment, net
7,383
7,558
Federal Home Loan Bank of New York stock
29,160
22,261
Bank owned life insurance
25,963
25,399
Goodwill
3,905
Other assets
25,038
23,140
Total assets
2,238,987
2,058,044
LIABILITIES
Due to depositors:
Non-interest bearing
58,018
49,540
Interest-bearing:
Certificate of deposit accounts
725,860
703,314
Passbook savings accounts
238,692
216,772
Money market accounts
238,932
258,235
NOW accounts
43,316
48,463
Total interest-bearing deposits
1,246,800
1,226,784
Mortgagors' escrow deposits
21,898
16,473
Borrowed funds
722,723
584,736
Other liabilities
20,906
19,858
Total liabilities
2,070,345
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 June 30, 2005
and December 31, 2004; 19,275,807 shares and
19,232,248 shares outstanding at June 30,2005
and December 31, 2004, respectively)
195
Additional paid-in capital
38,011
37,187
Treasury stock (180,889 shares and 224,448 shares at
June 30, 2005 and December 31, 2004, respectively)
(3,190)
(3,893)
Unearned compensation
(4,641)
(5,117)
Retained earnings
140,062
133,290
Accumulated other comprehensive loss, net of taxes
(1,795)
(1,009)
Total stockholders' equity
168,642
160,653
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
-1-
Consolidated Statements of Income and Comprehensive Income
For the three months
For the six months
ended June 30,
Interest and dividend income
Interest and fees on loans
28,236
24,291
54,501
47,846
Interest and dividends on securities:
Interest
4,160
5,162
8,522
10,585
Dividends
81
85
162
172
Other interest income
17
63
Total interest and dividend income
32,486
29,561
63,202
58,666
Interest expense
Deposits
8,088
6,939
15,771
13,947
Other interest expense
7,236
5,761
13,396
11,447
Total interest expense
15,324
12,700
29,167
25,394
Net interest income
17,162
16,861
34,035
33,272
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Loan fee income
607
557
1,137
1,014
Banking services fee income
353
387
736
828
Net gain on loans held for sale
142
88
180
Net gain on sale of loans
19
Net loss on sale of securities
(16)
Federal Home Loan Bank of New York stock dividends
268
96
432
189
285
291
564
580
Other income
206
212
346
316
Total non-interest income
1,861
1,615
3,376
3,091
Non-interest expense
Salaries and employee benefits
4,413
4,358
8,691
9,506
Occupancy and equipment
1,011
783
1,974
1,644
Professional services
839
910
1,779
1,700
Data processing
534
474
1,069
1,003
Depreciation and amortization
398
368
801
725
Other operating expenses
2,165
1,616
3,649
3,220
Total non-interest expense
9,360
8,509
17,963
17,798
Income before income taxes
9,663
9,967
19,448
18,565
Provision for income taxes
Federal
2,991
2,919
5,985
5,611
State and local
778
968
1,600
1,629
Total taxes
3,769
3,887
7,585
7,240
Net income
5,894
6,080
11,863
11,325
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period
2,574
(7,738)
(786)
(5,118)
Less: reclassification adjustments for losses included in income
Net unrealized holding gains (losses)
(7,729)
(5,109)
Comprehensive net income
8,468
(1,649)
11,077
6,216
Basic earnings per share
0.34
0.35
0.68
0.65
Diluted earnings per share
0.33
0.66
0.62
Dividends per share
0.10
0.09
0.20
0.17
-2-
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
(142)
(180)
Net gain on sales of loans
(19)
16
Amortization of unearned premium, net of accretion of unearned discount
840
1,180
Deferred income tax expense (benefit)
40
(577)
Deferred compensation
(155)
786
Origination of loans held for sale
(1,837)
(4,385)
Proceeds from sale of loans originated for sale
1,979
4,565
Net (decrease) increase in other assets and liabilities
(436)
1,473
502
2,036
Net cash provided by operating activities
13,436
16,964
INVESTING ACTIVITIES
Purchases of bank premises and equipment
(626)
(905)
(Purchases) redemptions of Federal Home Loan Bank of New York shares
(6,899)
700
Purchases of securities available for sale
(326)
(85,855)
Proceeds from sales and calls of securities available for sale
30
22,600
Proceeds from maturities and prepayments of securities available for sale
43,625
68,406
Proceeds from sale of non-performing loans
1,658
1,980
Net originations and repayment of loans
(219,230)
(127,617)
Proceeds from sale of loans
1,030
Net cash used by investing activities
(180,738)
(120,691)
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits
8,478
8,701
Net increase in interest-bearing deposits
20,016
52,127
Net increase in mortgagors' escrow deposits
5,425
4,662
Proceeds from short-term borrowed funds
38,000
Repayment of short-term borrowed funds
(15,000)
(25,000)
Proceeds from long-term borrowed funds
135,000
100,000
Repayment of long-term borrowed funds
(20,013)
(39,012)
Purchases of treasury stock
(2,829)
(4,153)
Proceeds from issuance of common stock upon exercise of stock options
1,083
1,395
Cash dividends paid
(3,494)
(2,984)
Net cash provided by financing activities
166,666
95,736
Net decrease in cash and cash equivalents
(636)
(7,991)
Cash and cash equivalents, beginning of period
20,300
Cash and cash equivalents, end of period
12,309
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid
28,456
25,243
Income taxes paid
7,004
5,881
Non-cash activities:
Securities purchased not yet settled
9,728
Securities sold not yet settled
15,717
-3-
Consolidated Statements of Changes in Stockholders’ Equity
For the six months ended
June 30, 2005
Common Stock
Balance, beginning of period
No activity
Balance, end of period
Additional Paid-In Capital
Award of shares released from Employee Benefit Trust (2,530 common shares)
36
Forfeiture of restricted stock awards (750 common shares)
(1)
Tax benefit from compensation expense in excess of that recognized for financial
reporting purposes
789
Treasury Stock
Purchases of common shares outstanding (133,000 common shares)
(2,384)
Repurchase of restricted stock awards to satisfy tax obligations
(24,806 common shares)
(445)
(9)
Issuance upon exercise of stock options (138,039 common shares)
2,415
Shares issued upon vesting of restricted stock unit awards (64,076 common shares)
1,126
Unearned Compensation
Restricted stock award expense
118
10
Release of shares from Employee Benefit Trust (102,326 common shares)
348
Retained Earnings
Cash dividends declared and paid
Stock options exercised (138,039 common shares)
(1,332)
(265)
Accumulated Other Comprehensive Income
Change in net unrealized loss, net of taxes of approximately $584, 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.
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
2.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
3.
Earnings Per Share
Basic earnings per share for the three and six-month periods ended June 30, 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 have been computed based on the following:
Three months ended
Six months ended
(In thousands, except per share data)
Divided by:
Weighted average common shares outstanding
17,487
17,439
17,483
17,408
Weighted average common stock equivalents
450
654
487
713
Total weighted average common shares and
common stock equivalents
17,937
18,093
17,970
18,121
Dividend payout ratio
29.41
%
25.71
26.15
-5-
Common stock equivalents that are antidilutive are not included in the computation of diluted earnings per share. Options to purchase 169,400 shares at an average exercise price of $18.14 and 133,650 shares at an average exercise price of $17.66, were not included in the computation of diluted earnings per share for the three months ended June 30, 2005 and 2004, respectively. Unvested restricted stock and restricted stock unit awards totaling 18,999 shares at an average market price on date of grant of $19.81, and 1,687 unvested restricted stock unit awards at an average market price on date of grant of $17.66 were not included in the computation of diluted earnings per share for the three months ended June 30, 2005 and 2004, respectively. Options to purchase 35,750 shares at an average exercise price of $19.94 were not included in the computation of diluted earnings per share for the six months ended June 30, 2005. Unvested restricted stock and restricted stock unit awards totaling 17,874 shares at an average market price on date of grant of $19.94 were not included in the computation of diluted earnings per share for the six months ended June 30, 2005. There were no common stock equivalents that were considered antidilutive for the six months ended June 30, 2004.
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 options grants under its 1996 Stock Option Incentive Plan and 2005 Omnibus Incentive Plan. Accordingly, no compensation expense has been recognized for options granted under the Company’s stock option plans. 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.
(Dollars in thousands, except share data)
Net income, as reported
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
466
362
535
1,018
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
(584)
(890)
(735)
(2,491)
Pro forma net income
5,776
5,552
11,663
9,852
Basic earnings per share:
As reported
Pro forma
0.32
0.67
0.57
Diluted earnings per share:
0.31
0.54
There were stock option grants of 123,725 shares of common stock, at an average exercise price of $17.88, and 201,700 shares of common stock, at an average exercise price of $17.36 granted in the three- and six-month periods ended June 30, 2005 and 2004, respectively. There were restricted stock unit grants of 121,675 shares, at an average market price on date of grant of $17.64, and 73,783 shares, at an average market price on date of grant of $16.95 granted in the three- and six-month periods ended June 30, 2005 and 2004, respectively. All of the above mentioned grants and awards were made in the second quarter of each respective year.
-6-
The 2005 Omnibus Incentive Plan, approved at the annual stockholders’ meeting, increased annual grants to each non-employee director to 3,600 restricted stock units, while eliminating grants of stock options for non-employee directors. Prior to the approval of the 2005 Omnibus Incentive Plan, non-employee directors were annually granted 1,687 restricted stock unit awards and 14,850 stock options. This change is expected to provide an expense benefit in future years when we will be required to expense stock option grants.
The three- and six-month periods ended June 30, 2005 include a charge to earnings on an after-tax basis of $0.3 million or $0.02 per diluted share for restricted stock unit awards granted in June 2005. The three- and six-month periods ended June 30, 2004, include a charge to earnings on an after-tax basis of $0.2 million or $0.01 per diluted share for restricted stock unit awards granted in June 2004. The six-month period ended June 30, 2004 includes, in addition to the previously mentioned charge, 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 reached, or were close to reaching, retirement eligibility, at which time such awards fully vest. These amounts are included above in stock-based compensation expense.
In addition, the three-month period ended June 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. The six-month period ended June 30, 2004 includes, in the deduction for stock-based compensation determined under the fair value method, in addition to the previously mentioned deduction, 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 reached, or were close to reaching, retirement eligibility, at which time such awards fully vest. For each of the three- and six-month period ended June 30, 2005, there was no significant net after tax impact from awards granted in this period.
5. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (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 that the effect on annual diluted earnings per share will be in the range of $0.03 to $0.04 per diluted share.
-7-
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
292
310
Interest cost
211
197
422
394
Amortization of unrecognized loss
21
80
41
Amortization of past service liability
(3)
(6)
Expected return on plan assets
(309)
(291)
(618)
(583)
Net employee pension expense
79
176
156
Outside Director Pension Plan:
18
42
37
13
6
7
74
71
Net outside director pension expense
70
158
140
Other Postretirement Benefit Plans:
39
78
83
62
55
124
110
12
32
(32)
(18)
(65)
Net other postretirement benefit expense
108
77
216
153
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 June 30, 2005, the Company has contributed $73,000 to the Outside Director Pension Plan and $87,000 to the Other Postretirement Benefit Plans. As of June 30, 2005, the Company has not made a contribution to the Employee Pension Plan for the year ending December 31, 2005. As of June 30, 2005, the Company has not revised its expected contributions for the year ending December 31, 2005 for any of these plans.
-8-
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.
-9-
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
JUNE 30, 2005 AND 2004
General. Diluted earnings per share decreased $0.01, or 2.9%, to $0.33 for the three months ended June 30, 2005 from $0.34 for the three months ended June 30, 2004. Net income decreased $0.2 million, or 3.1%, to $5.9 million for the three months ended June 30, 2005 from $6.1 million for the three months ended June 30, 2004. The return on average assets was 1.08% for the three months ended June 30, 2005 and 1.22% for the three months ended June 30, 2004, while the return on average equity was 14.54% for the three months ended June 30, 2005 and 16.25% for the three months ended June 30, 2004.
Interest Income. Total interest and dividend income increased $2.9 million, or 9.9%, to $32.5 million for the three months ended June 30, 2005 from $29.6 million for the three months ended June 30, 2004. The increase in interest income is primarily attributed to the growth in the average balance of interest-earning assets, which increased $168.2 million to $2,076.6 million. The yield on interest-earning assets increased six basis points to 6.26% for the three months ended June 30, 2005 from 6.20% in the three months ended June 30, 2004, which is primarily due to the increase of $309.6 million in the average balance of the loan portfolio to $1,669.9 million, combined with a $131.4 million decrease in the average balance of the lower-yielding securities portfolio. However, the yield on the mortgage loan portfolio decreased 38 basis points from the three months ended June 30, 2004 to 6.77% for the three months ended June 30, 2005. This decline reflects the effect of the high refinancing activity that had occurred during the previous three years. The Bank’s existing borrowers had been refinancing their higher costing mortgage loans at the then current lower rates, which has resulted in a decrease in the yield of the mortgage portfolio. This decrease has been partially offset by prepayment penalties that have been collected. There also was a decrease of $10.0 million in the average balance of interest earning-deposits and Federal funds sold for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. In an effort to increase the yield on interest-earning assets, we have shifted funds from the lower-yielding securities portfolio to the higher-yielding mortgage loan portfolio. We continued our focus on the origination of multi-family residential, commercial real estate, and 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 achieved.
Interest Expense. Interest expense increased $2.6 million, or 20.7%, to $15.3 million for the three months ended June 30, 2005 from $12.7 million for the three months ended June 30, 2004, primarily due to an increase of $153.3 million in the average balance of interest-bearing liabilities. This was combined with a 32 basis point rise in the cost of interest-bearing liabilities to 3.16% for the three months ended June 30, 2005 from 2.84% for the three months ended June 30, 2004. The average balance of certificates of deposit increased by $101.7 million, while borrowed funds average balance increased by $84.3 million. In addition, there was a decline in the combined average balances of lower-costing passbook, money market and NOW accounts totaling $40.6 million. The cost of due to depositors increased by 26 basis points and borrowed funds increased by 39 basis points in the three months ended June 30, 2005 compared to the three months ended June 30, 2004. The increase in the cost of funds is primarily attributed to the increase in the average balances of higher costing certificates of deposit and borrowed funds.
Net Interest Income. For the three months ended June 30, 2005, net interest income increased $0.3 million, or 1.8%, to $17.2 million from $16.9 million for the three months ended June 30, 2004. The increase in net interest income is attributed to the growth in the average balance of interest-earning assets, which increased $168.2 million to $2.08 billion, while the net interest spread declined 26 basis points to 3.10% for the quarter ended June 30, 2005, as compared to 3.36% in the same period in 2004. The net interest margin decreased 22 basis points to 3.31% for the three months ended June 30, 2005 from 3.53% for the three months ended June 30, 2004. Excluding prepayment penalty income, the net interest margin would have been 3.11% and 3.30% for the three month periods ended June 30, 2005 and 2004, respectively.
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Provision for Loan Losses. There was no provision for loan losses for either of the three-month periods ended June 30, 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 net recoveries of $2,000 and none for the three months ended June 30, 2005 and 2004, respectively. 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 real estate, 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 June 30, 2005 and 2004.
Non-Interest Income. Non-interest income increased $0.2 million, or 15.2%, to $1.9 million for the three months ended June 30, 2005 from $1.6 million for the three months ended June 30, 2004. This was primarily attributed to an increase of $0.2 million in dividends on Federal Home Loan Bank of New York (“FHLB-NY”) stock.
Non-Interest Expense. Non-interest expense was $9.4 million for the three months ended June 30, 2005, an increase of $0.9 million, or 10.0%, from $8.5 million for the three months ended June 30, 2004. The increase from the prior year period is primarily attributed to increases of: $0.2 million in occupancy and equipment primarily due to the relocation of the Bank’s headquarters in the third quarter of 2004 and non-recurring maintenance and repairs in the current period; $0.1 million in employee benefit expenses; $0.2 million for the cost of certain restricted stock unit awards granted in the current period as the participants have no risk of forfeiture; $0.1 million in board of director fees due to the increase in the size of the board of directors and the number of meetings; $0.1 million of non-recurring expenditures related to the retirement of the Company’s President. The increased cost of restricted stock units in the current period compared to the prior period is due to the increased level of these awards to non-employee directors. The 2005 Omnibus Incentive Plan, approved at the annual stockholders meeting, increased annual grants to each non-employee director to 3,600 restricted stock units, while eliminating grants of stock options for non-employee directors. Prior to the approval of the 2005 Omnibus Incentive Plan, each non-employee director received an annual grant of 1,687 restricted stock units and 14,850 stock options. This change will provide an expense benefit in future years when we will be required to expense the fair value of stock option grants, as discussed in Note 5, Recent Accounting Pronouncements for FASB Statement No. 123, (revised 2004) “Share-based Payments”. Management continues to monitor expenditures resulting in efficiency ratios of 49.2% and 46.0% for the three-month periods ended June 30, 2005 and 2004, respectively.
Income before Income Taxes. Income before the provision for income taxes decreased $0.3 million, or 3.1%, to $9.7 million for the three months ended June 30, 2005, as compared to $10.0 million for the three months ended June 30, 2004, for the reasons discussed above.
Provision for Income Taxes. Income tax expense decreased $0.1 million to $3.8 million for the three months ended June 30, 2005 compared to $3.9 million for the three months ended June 30, 2004. This decrease was due to lower income for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. The effective tax rate was 39.0% for each of the three-month periods ended June 30, 2005 and 2004.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED
General. Diluted earnings per share increased 6.5% to $0.66 for the six months ended June 30, 2005 from $0.62 for the six months ended June 30, 2004. Net income for the six months ended June 30, 2005 increased $0.5 million, or 4.8%, to $11.9 million from the $11.3 million reported for the six months ended June 30, 2004. The return on average assets for the six months ended June 30, 2005 was 1.12% compared to 1.15% for the six months ended June 30, 2004, while the return on average equity for the six months ended June 30, 2005 was 14.75% compared to 15.22% for the six months ended June 30, 2004.
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The first half of 2005 saw an increase in net income of $0.5 million to $11.9 million as compared to $11.3 million in the first half 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 $4.5 million, or 7.7%, to $63.2 million for the six months ended June 30, 2005 from $58.7 million for the six months ended June 30, 2004. The increase in interest income is primarily attributed to the growth in the average balance of interest-earning assets, which increased $144.3 million to $2,025.5 million. The yield on interest-earning assets was 6.24% for each of the six-month periods ended June 30, 2005 and 2004. This was due to an increase of $278.4 million in the average balance of the higher-yielding loan portfolio to $1,607.9 million for the six months ended June 30, 2005 from $1,329.5 million for the six months ended June 30, 2004, combined with a decline of $120.2 million in the average balance of the lower-yielding securities portfolio. The yield on the mortgage loan portfolio declined 42 basis points to 6.79% for the six months ended June 30, 2005 from 7.21% for the six months ended June 30, 2004. This decline reflects the effect of the high refinancing activity that had occurred during the previous three years. The Bank’s existing borrowers had been refinancing their higher costing mortgage loans at the current lower rates, which has resulted in a decrease in the yield on the mortgage portfolio. This decrease has been partially offset by prepayment penalties that have been collected. In an effort to increase the yield on interest-earning assets, we have shifted funds from the lower-yielding securities portfolio into the higher-yielding mortgage loan portfolio. There also was a decrease of $14.0 million in the average balance of interest earning-deposits and Federal funds sold for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. We continued our focus on the origination of multi-family residential, commercial real estate, and 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 achieved.
Interest Expense. Interest expense increased $3.8 million, or 14.9%, to $29.2 million for the six months ended June 30, 2005 from $25.4 million for the six months ended June 30, 2004, primarily due to an increase of $125.7 million in the average balance of interest-bearing liabilities. This was combined with a 21 basis point rise in the cost of interest-bearing liabilities to 3.08% for the six months ended June 30, 2005 from 2.87% for the six months ended June 30, 2004. The average balance of certificates of deposit increased by $105.2 million, while borrowed funds average balance increased by $54.3 million. In addition, there was a decline in the combined average balances of lower-costing passbook, money market and NOW accounts totaling $40.9 million. The cost of due to depositors increased 18 basis points and borrowed funds increased 27 basis points in the six months ended June 30, 2005 compared to the six months ended June 30, 2004. The increase in the cost of funds is primarily attributed to the increase in the average balances of higher costing certificates of deposit and borrowed funds.
Net Interest Income. For the six months ended June 30, 2005, net interest income increased $0.8 million, or 2.3%, to $34.0 million from $33.3 million for the six months ended June 30, 2004. The increase in net interest income is attributed to the growth in the average balance of interest-earning assets which increased $144.3 million to $2.03 billion, while the net interest spread declined 21 basis points to 3.16% for the six months ended June 30, 2005, as compared to 3.37% in the same period in 2004. The net interest margin also decreased 18 basis points to 3.36% for the six months ended June 30, 2005 from 3.54% for the six months ended June 30, 2004. Excluding prepayment penalty income, the net interest margin would have been 3.17% and 3.32% for the six-month periods ended June 30, 2005 and 2004, respectively.
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Provision for Loan Losses. There was no provision for loan losses for either of the six-month periods ended June 30, 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. For the six months ended June 30, 2005, the Bank had net recoveries of $2,000, and for the six months ended June 30, 2004, the Bank had net charge offs of $6,000. 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 six-month periods ended June 30, 2005 and 2004.
Non-Interest Income. Non-interest income increased by $0.3 million, or 9.2%, to $3.4 million for the six months ended June 30, 2005, as compared to $3.1 million for same period in 2004. This was primarily attributed to an increase of $0.2 million in dividends on FHLB-NY stock.
Non-Interest Expense. Non-interest expense was $18.0 million for the six months ended June 30, 2005, an increase of $0.2 million, or 0.9 %, from $17.8 million for the six months ended June 30, 2004. The increase from the prior year period is attributed to increases of: $0.3 million in occupancy and equipment and $0.1 million in depreciation primarily due to the relocation of the Bank’s headquarters in the third quarter of 2004 and non-recurring maintenance and repairs in the current period; $0.2 million in employee benefit expenses; $0.2 million for the cost of certain restricted stock unit awards granted in the current period as the participants have no risk of forfeiture; $0.1 million in board of director fees due to the increase in the size of the board of directors and the number of meetings; $0.1 million in professional fees related to the initial compliance with the Sarbanes-Oxley Act; and $0.1 million of non-recurring expenditures related to the retirement of the Company’s President. The increased cost of restricted stock units in the current period compared to the prior period is due to the increased level of the awards to non-employee directors. The 2005 Omnibus Incentive Plan, approved at the annual stockholders meeting, increased annual grants to each non-employee director to 3,600 restricted stock units, while eliminating grants of stock options for non-employee directors. Prior to the approval of the 2005 Omnibus Incentive Plan, each non-employee director received an annual grant of 1,687 restricted stock units and 14,850 stock options. This will provide an expense benefit in future years when we will be required to expense the fair value of stock option grants, as discussed in Note 5, Recent Accounting Pronouncements for FASB Statement No. 123, (revised 2004) “Share-Based Payments”. These increases were offset by decreases in salaries and employee benefits and other operating expenses of $0.9 million and $0.2 million, respectively, due to the 2004 adjustment to amortization of compensation expense for certain of the Company’s restricted stock awards and supplemental retirement benefits. Management continues to monitor expenditures resulting in efficiency ratios of 48.0 % and 48.9 % for six-month periods ended June 30, 2005 and 2004, respectively.
Income before Income Taxes. Income before the provision for income taxes increased $0.9 million, or 4.8%, to $19.4 million for the six months ended June 30, 2005 as compared to $18.6 million for the six months ended June 30, 2004, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $7.6 million for the six months ended June 30, 2005 an increase of $0.3 million, or 4.8%, compared to $7.2 million for the six months ended June 30, 2004. This increase is due to the $0.9 million increase in income before income taxes. The effective tax rate was 39.0% for each of the six- month periods ended June 30, 2005 and 2004.
-13-
FINANCIAL CONDITION
Assets. Total assets at June 30, 2005 were $2.24 billion, a $180.9 million increase from December 31, 2004. Total loans, net increased $216.7 million during the six months ended June 30, 2005 to $1.73 billion from $1.52 billion at December 31, 2004. At June 30, 2005, loans in process totaled $222.5 million.
The following table shows loan originations and purchases for the period indicated.
62,921
53,048
136,844
100,005
32,171
20,661
56,497
48,948
56,133
35,287
93,798
67,732
5,302
6,759
7,424
8,242
9,369
4,873
16,354
10,317
122
227
Commercial business and other loans
8,810
5,290
12,716
8,022
Total
174,706
126,040
323,633
243,493
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 $1.6 million at June 30, 2005 compared to $0.9 million at December 31, 2004 and $4.3 million at June 30, 2004. Total non-performing assets as a percentage of total assets were 0.07% at June 30, 2005 compared to 0.04% at December 31, 2004 and 0.21% at June 30, 2004. The ratio of allowance for loan losses to total non-performing loans was 414% at June 30, 2005 compared to 717% at December 31, 2004 and 152% at June 30, 2004.
During the six months ended June 30, 2005, mortgage-backed securities decreased $44.3 million to $351.3 million, while other securities decreased $1.0 million to $39.1 million. As funds became available from principal reductions on the securities portfolio during the first six months 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 $173.0 million to $2.07 billion at June 30, 2005 from $1.90 billion at December 31, 2004. During the six months ended June 30, 2005, due to depositors increased $28.5 million to $1,304.8 million, primarily as a result of increased marketing to attract deposits in this highly competitive market. Certificate of deposit accounts increased $22.5 million, while lower-costing deposits increased $5.9 million. Borrowed funds increased $138.0 million during the six months ended June 30, 2005 to partially fund the growth in the loan portfolio. Mortgagors’ escrow deposits increased $5.4 million during the six months ended June 30, 2005.
Equity. Total stockholders’ equity increased $8.0 million to $168.6 million at June 30, 2005, from $160.7 million at December 31, 2004. Net income of $11.9 million for the six months ended June 30, 2005 was partially offset by $2.4 million in treasury shares purchased through the Company’s stock repurchase program, a net after tax decrease of $0.8 million on the market value of securities available for sale, and $3.5 million of cash dividends paid. The exercise of stock options increased stockholders’ equity by $1.7 million, including the income tax benefit realized by the Company upon the exercise of the options. Book value per share was $8.75 at June 30, 2005 compared to $8.35 per share at December 31, 2004 and $7.80 per share at June 30, 2004.
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Under its current stock repurchase program, the Company repurchased 133,000 shares during the six months ended June 30, 2005, at a total cost of $2.4 million, or an average of $17.93 per share. At June 30, 2005, 786,350 shares remain to be repurchased under the current stock repurchase program. Through June 30, 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 six months ended June 30, 2005, funds provided by the Company's operating activities amounted to $13.4 million. These funds, together with $166.7 million provided by financing activities, were utilized to fund net investing activities of $180.7 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 six months ended June 30, 2005, the net total of loan originations less loan repayments was $219.2 million. Net borrowings of $138.0 million and $28.5 million of customer deposits were used to fund this activity. Funds were also provided by $43.6 million in maturities and prepayments of securities available for sale. Additional funds of $1.1 million were provided through the exercise of stock options. The Company also used funds of $2.8 million for treasury stock repurchases and $3.5 million for dividend payments during the six months ended June 30, 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 June 30, 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.
Projected Percentage Change In
Net Interest
Net Portfolio
Change in Interest Rate
Income
Value
Value Ratio
-300 Basis points
5.50
12.26
10.13
-200 Basis points
4.45
7.74
9.91
-100 Basis points
4.07
4.80
9.82
Base interest rate
9.59
+100 Basis points
(7.27)
(9.79)
8.87
+200 Basis points
(9.52)
(18.28)
8.24
+300 Basis points
(11.33)
(26.09)
7.64
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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 June 30, 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 June 30, 2005.
(Dollars in thousands)
Amount
Percent of Assets
Tangible Capital:
Capital level
174,406
7.84
Requirement
33,374
1.50
Excess
141,032
6.34
Leverage and Core Capital:
66,747
3.00
107,659
4.84
Risk-Based Capital:
180,942
13.52
107,028
8.00
73,914
5.52
-16-
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 June 30, 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.
For the three months ended June 30,
Average
Yield/
Balance
Cost
Assets
Interest-earning assets:
Mortgage loans, net (1)
1,647,295
27,877
6.77
1,350,029
24,128
7.15
Other loans, net (1)
22,628
359
6.35
10,277
163
Total loans, net
1,669,923
6.76
1,360,306
7.14
365,713
3,876
4.24
469,289
4,731
4.03
39,346
365
3.71
67,186
516
3.07
Total securities
405,059
4,241
4.19
536,475
5,247
3.91
Interest-earning deposits and
federal funds sold
1,605
2.24
11,620
0.79
Total interest-earning assets
2,076,587
6.26
1,908,401
6.20
101,707
92,890
2,178,294
2,001,291
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Passbook accounts
223,348
343
0.61
220,319
274
0.50
44,865
0.49
44,208
56
0.51
247,808
1,423
2.30
292,069
1,286
1.76
716,701
6,254
3.49
615,018
5,311
3.45
Total due to depositors
1,232,722
8,075
2.62
1,171,614
6,927
2.36
Mortgagors' escrow accounts
31,324
23,435
Total deposits
1,264,046
2.56
1,195,049
2.32
678,495
4.27
594,212
3.88
Total interest-bearing liabilities
1,942,541
3.16
1,789,261
2.84
Non interest-bearing deposits
53,841
45,708
19,820
16,659
2,016,202
1,851,628
Equity
162,092
149,663
Total liabilities and equity
Net interest income /
net interest rate spread
3.10
3.36
Net interest-earning assets /
net interest margin
134,046
3.31
119,140
3.53
Ratio of interest-earning assets to
interest-bearing liabilities
1.07
X
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.0 million and $1.2 million for each of the three-month periods ended June 30, 2005 and 2004, respectively.
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AVERAGE BALANCES (continued)
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 six month periods ended June 30, 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.
For the six months ended June 30,
Mortgage loans, net (2)
1,587,005
53,854
6.79
1,319,429
47,533
7.21
Other loans, net (2)
20,875
647
10,026
313
6.24
1,607,880
6.78
1,329,455
7.20
376,484
7,968
4.23
473,175
9,703
4.10
39,513
716
3.62
63,005
1,054
3.35
415,997
8,684
4.18
536,180
10,757
4.01
1,573
2.16
15,531
0.81
2,025,450
1,881,166
99,377
96,881
2,124,827
1,978,047
219,714
610
0.56
218,700
544
45,510
112
43,088
250,380
2,634
2.10
294,675
2,776
1.88
711,764
12,388
3.48
606,581
10,495
3.46
1,227,368
15,744
2.57
1,163,044
13,923
2.39
27,231
27
20,218
0.24
1,254,599
2.51
1,183,262
638,809
584,465
3.92
1,893,408
3.08
1,767,727
2.87
51,103
43,155
19,419
18,315
1,963,930
1,829,197
160,897
148,850
3.37
132,042
113,439
3.54
1.06
(2)
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.9 million and $2.2 million for each of the six-month periods ended June 30, 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
310,917
235,471
Less:
Principal and other reductions
100,752
109,107
Sales
2,688
5,424
Mortgage loan foreclosures
At end of period
1,707,581
1,385,159
Commercial Business and Other Loans
18,138
9,825
Other loans originated:
5,459
2,021
Small business
6,587
4,800
Other
670
1,201
Total other loans originated
3,743
3,713
1,837
941
25,274
13,193
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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.
December 31, 2004
Non-accrual mortgage loans
1,232
659
Other non-accrual loans
345
252
Total non-accrual loans
1,577
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
0.06
Non-performing loans to total assets
0.07
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:
(8)
Total loans charged-off
Recoveries:
Mortgage loans
Other loans
Total recoveries
Net recoveries (charge-offs)
Balance at end of period
6,535
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
0.38
0.47
Ratio of allowance for loan losses to non-performing
assets at end of period
414.33
152.14
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 June 30, 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 June 30, 2005.
Maximum
Total Number of
Number of
Shares Purchased
Shares That May
Number
as Part of Publicly
Yet Be Purchased
of Shares
Average Price
Announced Plans
Under the Plans
Period
Purchased
Paid per Share
or Programs
April 1 to April 30, 2005
786,350
May 1 to May 31, 2005
June 1 to June 30, 2005
2,744
17.52
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 June 30, 2005, the Company purchased 2,744 common shares from employees, at an average cost of $17.52, to satisfy tax obligations due from the employees upon vesting of restricted stock awards.
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DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company’s annual meeting of stockholders held on May 17, 2005, as contemplated by the Company’s definitive proxy material for the meeting, certain matters were submitted to a vote of stockholders. The following table summarizes the results of voting with respect to each matter.
Number of shares voted
For
Against/ Withheld
Abstain
Election of Directors (four directors were elected to serve until the 2008 annual meeting of stockholders and until their successors were elected and qualified).
Michael J. Hegarty
16,926,006
969,425
John J. McCabe
16,194,023
1,701,408
Donna M. O'Brien
16,981,324
914,107
Michael J. Russo
16,900,137
995,294
Approval of the Company's 2005 Omnibus Incentive Plan
12,079,917
2,013,720
3,801,794
Ratification of the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the Company
17,685,517
177,236
32,678
ITEM 5.
OTHER INFORMATION.
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ITEM 6.
EXHIBITS.
a)
Exhibit No.
Description
3.1
Certificate of Incorporation of Flushing Financial Corporation (1)
3.2
Certificate of Amendment of Certificate of Incorporation of Flushing Financial Corporation (3)
3.3
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
3.4
By-Laws of Flushing Financial Corporation (1)
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)
10.6
Amended and Restated Employment Agreement between Flushing Financial Corporation and John R. Buran, dated as of July 1, 2005 (5)
10.7
Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and John R. Buran, dated as of July 1, 2005 (5)
10.8
Form of Outside Director Restricted Stock Unit Award Letter
10.9
Form of Employee Restricted Stock Unit Award Letter
10.10
Form of Employee Stock Option Award Letter
10.28
2005 Omnibus Incentive Plan (6)
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
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
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.
(5) Incorporated by reference to Exhibits filed with Form 8-K/A filed July 5, 2005.
(6) Incorporated by reference to Exhibit A to the Company's definitive proxy statement on
Schedule 14A filed on March 31, 2005 for the Company's annual meeting of stockholders.
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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: August 4, 2005
By: /s/John R. Buran
John R. Buran
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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EXHIBIT INDEX
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