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 September 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 October 31, 2005 was 19,328,008.
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)
September 30,
December 31,
(Dollars in thousands, except per share data)
2005
2004
ASSETS
Cash and due from banks
$
17,431
14,661
Securities available for sale:
Mortgage-backed securities
321,812
395,629
Other securities
38,430
40,116
Loans:
Multi-family residential
767,289
646,922
Commercial real estate
388,184
334,048
One-to-four family – mixed-use property
450,400
332,805
One-to-four family – residential
139,373
151,737
Co-operative apartments
2,241
3,132
Construction
51,648
31,460
Small Business Administration
7,756
5,633
Commercial business and other
18,402
12,505
Net unamortized premiums and unearned loan fees
7,629
4,798
Allowance for loan losses
(6,459)
(6,533)
Net loans
1,826,463
1,516,507
Interest and dividends receivable
10,092
8,868
Bank premises and equipment, net
7,277
7,558
Federal Home Loan Bank of New York stock
30,960
22,261
Bank owned life insurance
26,251
25,399
Goodwill
3,905
Other assets
23,409
23,140
Total assets
2,306,030
2,058,044
LIABILITIES
Due to depositors:
Non-interest bearing
56,150
49,540
Interest-bearing:
Certificate of deposit accounts
767,573
703,314
Passbook savings accounts
263,454
216,772
Money market accounts
203,961
258,235
NOW accounts
40,335
48,463
Total interest-bearing deposits
1,275,323
1,226,784
Mortgagors' escrow deposits
27,052
16,473
Borrowed funds
758,717
584,736
Other liabilities
17,366
19,858
Total liabilities
2,134,608
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 September 30,
2005 and December 31, 2004; 19,336,708 shares
and 19,232,248 shares outstanding at September 30,
2005 and December 31, 2004, respectively)
195
Additional paid-in capital
38,307
37,187
Treasury stock (119,988 shares and 224,448 shares at
September 30, 2005 and December 31, 2004, respectively)
(2,116)
(3,893)
Unearned compensation
(4,401)
(5,117)
Retained earnings
143,719
133,290
Accumulated other comprehensive loss, net of taxes
(4,282)
(1,009)
Total stockholders' equity
171,422
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 nine months
ended September 30,
Interest and dividend income
Interest and fees on loans
30,102
25,077
84,603
72,923
Interest and dividends on securities:
Interest
3,888
4,800
12,410
15,385
Dividends
82
84
244
256
Other interest income
26
61
43
124
Total interest and dividend income
34,098
30,022
97,300
88,688
Interest expense
Deposits
8,873
7,247
24,644
21,194
Other interest expense
8,086
5,903
21,482
17,350
Total interest expense
16,959
13,150
46,126
38,544
Net interest income
17,139
16,872
51,174
50,144
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Loan fee income
484
533
1,621
1,547
Banking services fee income
350
378
1,086
1,206
Net gain on sale of loans held for sale
400
47
542
227
Net gain on sale of loans
19
Net gain (loss) on sale of securities
(11)
Federal Home Loan Bank of New York stock dividends
336
125
768
314
288
294
852
874
Other income
231
146
577
462
Total non-interest income
2,089
1,528
5,465
4,619
Non-interest expense
Salaries and employee benefits
4,384
4,114
13,075
13,620
Occupancy and equipment
996
931
2,970
2,575
Professional services
1,441
791
3,220
2,491
Data processing
563
465
1,632
1,468
Depreciation and amortization
379
371
1,180
1,096
Other operating expenses
1,670
1,470
5,319
4,690
Total non-interest expense
9,433
8,142
27,396
25,940
Income before income taxes
9,795
10,258
29,243
28,823
Provision for income taxes
Federal
3,020
2,969
9,005
8,580
State and local
800
1,032
2,400
2,661
Total taxes
3,820
4,001
11,405
11,241
Net income
5,975
6,257
17,838
17,582
Other comprehensive income, net of tax
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during the period
(2,487)
3,613
(3,273)
(1,505)
Less: reclassification adjustments for (gains)losses included in income
(3)
6
Net unrealized holding gains (losses)
3,610
(1,499)
Comprehensive net income
3,488
9,867
14,565
16,083
Basic earnings per share
0.34
0.36
1.02
1.01
Diluted earnings per share
0.33
0.35
0.99
0.97
Dividends per share
0.10
0.09
0.30
0.26
-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
(542)
(227)
Net gain on sales of loans
(19)
Net loss on sale of securities
11
Amortization of unearned premium, net of accretion of unearned discount
1,309
1,610
Deferred income tax expense (benefit)
1,938
(189)
Deferred compensation
(2,554)
1,138
Origination of loans held for sale
(6,141)
(4,962)
Proceeds from sale of loans originated for sale
6,667
5,189
Net decrease in other assets and liabilities
(64)
(773)
755
2,396
Net cash provided by operating activities
20,367
22,871
INVESTING ACTIVITIES
Purchases of bank premises and equipment
(899)
(1,902)
(Purchases) redemptions of Federal Home Loan Bank of New York shares
(8,699)
2,701
Purchases of securities available for sale
(511)
(102,186)
Proceeds from sales and calls of securities available for sale
30
78,822
Proceeds from maturities and prepayments of securities available for sale
69,274
95,794
Proceeds from sale of non-performing loans
3,088
1,980
Net originations and repayment of loans
(314,087)
(193,582)
Proceeds from sale of loans
1,030
Net cash used by investing activities
(250,774)
(118,373)
FINANCING ACTIVITIES
Net increase in non-interest bearing deposits
6,610
7,582
Net increase in interest-bearing deposits
48,539
99,726
Net increase in mortgagors' escrow deposits
10,579
9,438
Net proceeds (repayment)of short-term borrowed funds
4,000
(25,000)
Proceeds from long-term borrowed funds
190,000
110,000
Repayment of long-term borrowed funds
(20,019)
(89,018)
Purchases of treasury stock
(2,900)
(8,360)
Proceeds from issuance of common stock upon exercise of stock options
1,622
2,484
Cash dividends paid
(5,254)
(4,554)
Net cash provided by financing activities
233,177
102,298
Net decrease in cash and cash equivalents
2,770
6,796
Cash and cash equivalents, beginning of period
20,300
Cash and cash equivalents, end of period
27,096
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid
44,984
38,417
Income taxes paid
10,433
8,835
Non-cash activities:
Securities purchased not yet settled
2,800
-3-
Consolidated Statements of Changes in Stockholders’ Equity
For the nine months ended
September 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 (3,968 common shares)
56
Forfeiture of restricted stock awards (1,350 common shares)
(2)
Tax benefit from compensation expense in excess of that recognized for
financial reporting purposes
1,066
Treasury Stock
Purchases of common shares outstanding (133,000 common shares)
(2,384)
Repurchase of restricted stock awards to satisfy tax obligations
(28,495 common shares)
(516)
(15)
Issuance upon exercise of stock options (198,324 common shares)
3,479
Shares issued upon vesting of restricted stock unit awards (68,981 common shares)
1,213
Unearned Compensation
Restricted stock award expense
177
17
Release of shares from Employee Benefit Trust (153,429 common shares)
522
Retained Earnings
Cash dividends declared and paid
Stock options exercised (198,324 common shares)
(1,857)
(298)
Accumulated Other Comprehensive Income
Change in net unrealized loss, net of taxes of approximately $2,429, 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 nine-month periods ended September 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 and restricted stock unit awards. Diluted earnings per share includes the additional dilutive effect of stock options outstanding and the unvested portion of restricted stock and restricted stock unit awards during the period. Earnings per share have been computed based on the following:
Three months ended
Nine months ended
(In thousands, except per share data)
Divided by:
Weighted average common shares outstanding
17,581
17,458
17,516
17,424
Weighted average common stock equivalents
453
593
475
673
Total weighted average common shares and
common stock equivalents
18,034
18,051
17,991
18,097
Dividend payout ratio
29.41
%
25.00
25.74
-5-
Common stock equivalents that are antidilutive are not included in the computation of diluted earnings per share. Options to purchase 159,475 shares at an average exercise price of $18.34 were not included in the computation of diluted earnings per share for the three- and nine-month periods ended September 30, 2005. Unvested restricted stock and restricted stock unit awards totaling 96,024 shares at an average market price on date of grant of $18.27, were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2005. There were no common stock equivalents that were considered antidilutive for the three- and nine-month periods ended September 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 option 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
206
139
741
1,158
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
(445)
(306)
(1,180)
(2,798)
Pro forma net income
5,736
6,090
17,399
15,942
Basic earnings per share:
As reported
Pro forma
0.91
0.32
0.88
There were no stock option grants awarded in the three-month periods ended September 30, 2005 and 2004.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 nine-month periods ended September 30, 2005 and 2004, respectively.
There were restricted stock unit awards of 3,525 shares, at an average market price on date of grant of $18.60, granted in the three-month period ended September 30, 2005. There was no restricted stock unit awards in the three- month period ended September 30, 2004. There were restricted stock unit grants of 125,200 shares, at an average market price on date of grant of $17.67, and 73,783 shares, at an average market price on date of grant of $16.95, granted in the nine-month periods ended September 30, 2005 and 2004, respectively.
-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 nine-month period ended September 30, 2005 includes a charge to earnings on an after-tax basis of $0.4 million or $0.02 per diluted share for restricted stock unit awards granted in 2005. The nine-month period ended September 30, 2004, includes a charge to earnings on an after-tax basis of $0.2 million or $0.01 per diluted share for restricted stock unit awards granted in 2004. The nine month period ended September 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 nine-month period ended September 30, 2004 includes, in the deduction for stock-based compensation determined under fair value method, a net after tax charge of $0.4 million, or $0.02 per diluted share, related to certain stock option grants awarded in June 2004. The nine-month period ended September 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 nine-month periods ended September 30, 2005, there was no significant net after tax impact from awards granted in these periods.
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
156
438
466
Interest cost
211
197
633
591
Amortization of unrecognized loss
40
20
120
Amortization of past service liability
(4)
(10)
Expected return on plan assets
(309)
(292)
(927)
(875)
Net employee pension expense
88
77
264
233
Outside Director Pension Plan:
21
63
18
12
54
37
35
111
106
Net outside director pension expense
79
70
237
210
Other Postretirement Benefit Plans:
39
41
117
62
186
164
16
13
48
38
(9)
(33)
(27)
(98)
Net other postretirement benefit expense
108
75
324
228
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 September 30, 2005, the Company has contributed $976,000 to the Employee Pension Plan, $110,000 to the Outside Director Pension Plan and $110,000 to the Other Postretirement Benefit Plans, for the year ending December 31, 2005. The contribution to the Employee Pension Plan exceeded management’s original estimate. Management does not expect to make additional contributions to the Employee Pension Plan during 2005. As of September 30, 2005, the Company has not revised its expected contributions for the year ending December 31, 2005 for the other two 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. In the fourth quarter of 2005, the Bank will consolidate two branch offices located in Nassau County. The Bank also plans to open a new branch office in early 2006. 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. The Company also 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
SEPTEMBER 30, 2005 AND 2004
General. Diluted earnings per share decreased $0.02 or 5.7% to $0.33 for the three months ended September 30, 2005 from $0.35 for the three months ended September 30, 2004. Net income declined $0.3 million, or 4.5%, to $6.0 million for the three months ended September 30, 2005 from $6.3 million for the three months ended September 30, 2004. The third quarter of 2005 includes a charge to earnings of $0.5 million, $0.3 million on an after-tax basis or $0.02 per diluted share, for expenses incurred in connection with the Company’s negotiations to acquire another financial institution. The negotiations were terminated after several months, as the parties were unable to come to an agreement on terms. The return on average assets was 1.06% for the three months ended September 30, 2005, as compared to 1.25% for the three months ended September 30, 2004, while the return on average equity was 14.23% for the three months ended September 30, 2005 and 16.57% for the three months ended September 30, 2004.
Interest Income. Total interest and dividend income increased $4.1 million, or 13.6%, to $34.1 million for the three months ended September 30, 2005 from $30.0 million for the three months ended September 30, 2004. The increase in interest income is primarily attributed to the growth in the average balance of interest-earning assets, which increased $246.5 million to $2,160.8 million. The yield on interest-earning assets increased four basis points to 6.31% for the three months ended September 30, 2005 from 6.27% in the three months ended September 30, 2004, which is primarily due to the increase of $358.7 million in the average balance of the loan portfolio to $1,775.6 million, combined with a $95.5 million and $16.8 million decrease in the average balances of the lower-yielding securities portfolio and interest earning deposits and federal funds sold, respectively. However, the yield on the mortgage loan portfolio decreased 31 basis points from the three months ended September 30, 2004 to 6.78% for the three months ended September 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. 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 $3.8 million, or 29.0%, to $17.0 million for the three months ended September 30, 2005 from $13.2 million for the three months ended September 30, 2004, due primarily to the increase of $234.9 million in the average balance of interest-bearing liabilities. This was combined with a 41 basis point increase in the cost of interest-bearing liabilities to 3.35% for the three months ended September 30, 2005 from 2.94% for the three months ended September 30, 2004. The average balance of certificates of deposit increased $82.3 million, while the average balance of borrowed funds increased $151.4 million. In addition, there was a decline in the combined average balances of lower-costing passbook, money market and NOW accounts totaling $6.1 million. The cost of due to depositors and borrowed funds each increased by 36 basis points for the three months ended September 30, 2005 compared to the three months ended September 30, 2004. The increase in the cost of funds is attributed to the increase in the rates for due to depositors and average balances of higher costing certificates of deposit and borrowed funds.
Net Interest Income. For the three months ended September 30, 2005, net interest income increased $0.3 million, or 1.6%, to $17.1 million from $16.9 million for the three months ended September 30, 2004. The increase in net interest income is attributed to the growth in the average balance of interest-earning assets, which increased $246.5 million to $2.16 billion, while the net interest spread declined 37 basis points to 2.96% for the quarter ended September 30, 2005, as compared to 3.33% in the same period in 2004. The net interest margin decreased 36 basis points to 3.17% for the three months ended September 30, 2005 from 3.53% for the three months ended September 30, 2004. Excluding prepayment penalty income, the net interest margin would have been 2.95% and 3.21% for the three-month periods ended September 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 September 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 charges offs of $76,000 and $1,000 for the three months ended September 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 September 30, 2005 and 2004.
Non-Interest Income. Non-interest income increased $0.6 million, or 36.7%, to $2.1 million for the three months ended September 30, 2005 from $1.5 million for the three months ended September 30, 2004. This was attributed to an increase of $0.4 million in gains on the sale of loans held for sale and $0.2 million in dividends received on FHLB-NY stock.
Non-Interest Expense. Non-interest expense was $9.4 million for the three months ended September 30, 2005, an increase of $1.3 million, or 15.9%, from $8.1 million for the three months ended September 30, 2004. The increase from the prior year period is primarily attributed to increases of: $0.3 million in employee salary and benefit expenses; $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 advertising costs for campaigns to attract new deposits, $0.1 million in audit and exam fees due to increased compliance requirements of the Sarbanes-Oxley Act and $0.5 million for the previously mentioned expenses incurred in connection with the Company’s terminated negotiations to acquire another financial institution. Management continues to monitor expenditures resulting in efficiency ratios of 49.1 percent and 44.3 percent for three-month periods ended September 30, 2005 and 2004, respectively.
Income before Income Taxes. Income before the provision for income taxes decreased $0.5 million, or 4.5%, to $9.8 million for the three months ended September 30, 2005 from $10.3 million for the three months ended September 30, 2004, for the reasons discussed above.
Provision for Income Taxes. Income tax expense decreased $0.2 million to $3.8 million for the three months ended September 30, 2005 compared to $4.0 million for the three months ended September 30, 2004. This decrease was due to lower income before income taxes in the three-month period ending September 30, 2005 versus the three- month period ending September 30, 2004. The effective tax rate was 39.0% for each of the three-month periods ended September 30, 2005 and 2004.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
General. Diluted earnings per share increased 2.1% to $0.99 for the nine months ended September 30, 2005 from $0.97 for the nine months ended September 30, 2004. Net income for the nine months ended September 30, 2005 increased $0.3 million, or 1.5%, to $17.8 million from the $17.6 million reported for the nine months ended September 30, 2004. This increase 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 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. Offsetting this reduction in expenses is a charge in the third quarter of 2005 of $0.5 million, $0.3 million on an after-tax basis or $0.02 per diluted share, for expenses incurred in connection with the Company’s negotiations to acquire another financial institution. The negotiations were terminated after several months, as the parties were unable to come to an agreement on terms. The return on average assets for the nine months ended September 30, 2005 was 1.10%, as compared to 1.18% for the nine months ended September 30, 2004, while the return on average equity for the nine months ended September 30, 2005 was 14.57% compared to 15.67% for the nine months ended September 30, 2004.
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Interest Income. Total interest and dividend income increased $8.6 million, or 9.7%, to $97.3 million for the nine months ended September 30, 2005 from $88.7 million for the nine months ended September 30, 2004. The increase in interest income is primarily attributed to the growth in the average balance of interest-earning assets, which increased $178.8 million to $2,071.1 million. The yield on interest-earning assets was 6.26% for the nine months ended September 30, 2005 and 6.25% for the similar 2004 period. This was due to an increase of $305.6 million in the average balance of the higher-yielding loan portfolio to $1,664.4 million for the nine months ended September 30, 2005 from $1,358.8 million for the nine months ended September 30, 2004, combined with a decline of $111.9 million and $14.9 million in the average balances of the lower-yielding securities portfolio and interest earning deposits and federal funds sold, respectively. The yield on the mortgage loan portfolio declined 38 basis points to 6.78% for the nine months ended September 30, 2005 from 7.16% for the nine months ended September 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. 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 $7.6 million, or 19.7%, to $46.1 million for the nine months ended September 30, 2005 from $38.5 million for the nine months ended September 30, 2004, primarily due to an increase of $162.5 million in the average balance of interest-bearing liabilities. This was combined with a 28 basis point rise in the cost of interest-bearing liabilities to 3.17% for the nine months ended September 30, 2005 from 2.89% for the nine months ended September 30, 2004. The average balance of certificates of deposit increased $97.5 million, while the average balance of borrowed funds increased $87.0 million. In addition, there was a decline in the combined average balances of lower-costing passbook, money market and NOW accounts totaling $29.2 million. The cost of due to depositors’ increased 24 basis points and borrowed funds increased 30 basis points in the nine months ended September 30, 2005 compared to the nine months ended September 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 nine months ended September 30, 2005, net interest income increased $1.0 million, or 2.1%, to $51.2 million from $50.1 million for the nine months ended September 30, 2004. The increase in net interest income is attributed to the growth in the average balance of interest-earning assets which increased $178.8 million to $2.07 billion, while the net interest spread declined 27 basis points to 3.09% for the nine months ended September 30, 2005, as compared to 3.36% in the same period in 2004. The net interest margin also decreased 24 basis points to 3.29% for the nine months ended September 30, 2005 from 3.53% for the nine months ended September 30, 2004. Excluding prepayment penalty income, the net interest margin would have been 3.10% and 3.29% for the nine-month periods ended September 30, 2005 and 2004, respectively.
Provision for Loan Losses. There was no provision for loan losses for either of the nine-month periods ended September 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. The Bank had net charge-offs of $74,000 and $7,000 for the nine months ended September 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, and one-to-four family mixed-use property mortgage loans, no provision for loan losses was deemed necessary for either of the nine-month periods ended September 30, 2005 and 2004.
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Non-Interest Income. Non-interest income increased $0.8 million to $5.5 million for the nine months ended September 30, 2005, as compared to $4.6 million for same period in 2004. This increase was primarily attributed to an increase of $0.3 million in gains on the sale of loans originated for sale and $0.5 million in dividends received on FHLB-NY stock.
Non-Interest Expense. Non-interest expense was $27.4 million for the nine months ended September 30, 2005, an increase of $1.5 million, or 5.6 percent, from $25.9 million for the nine months ended September 30, 2004. The increase from the prior year period is attributed to increases of: $0.4 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; $0.3 million in audit and exam fees related to increased compliance requirements due to the Sarbanes-Oxley Act; $0.5 million for the previously mentioned expenses incurred in connection with the Company’s terminated negotiations to acquire another financial institution; $0.1 million in advertising costs for campaigns to attract new deposits; $0.4 million in employee salary and benefit expenses; $0.3 million for the cost of certain restricted stock unit awards granted in the current period as the participants have no risk of forfeiture; and $0.3 million in board of director fees due to the increase in the size of the board of directors and the number of meetings. The increased cost of restricted stock units in the current period compared to the prior period is due to the increased level of 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. This will provide an expense benefit in future years when we will be required to expense stock option grants. 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 48.4 percent and 47.4 percent for nine-month periods ended September 30, 2005 and 2004, respectively.
Income before Income Taxes. Income before the provision for income taxes increased $0.4 million, or 1.5%, to $29.2 million for the nine months ended September 30, 2005 as compared to $28.8 million for the nine months ended September 30, 2004, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $11.4 million for the nine months ended September 30, 2005 an increase of $0.2 million, or 1.5%, compared to $11.2 million for the nine months ended September 30, 2004. This increase is due to the $0.4 million increase in income before income taxes. The effective tax rate was 39.0% for each of the nine-month periods ended September 30, 2005 and 2004.
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FINANCIAL CONDITION
Assets. Total assets at September 30, 2005 were $2.31 billion, a $248.0 million increase from December 31, 2004. Total loans, net increased $310.0 million during the nine months ended September 30, 2005 to $1.83 billion from $1.52 billion at December 31, 2004. At September 30, 2005, loans in process totaled $189.5 million.
The following table shows loan originations and purchases for the period indicated.
49,183
58,053
186,027
158,058
24,246
22,436
80,743
71,384
56,569
36,454
150,367
104,186
3,309
6,501
10,733
14,743
18,997
8,846
35,351
19,163
302
Commercial business and other loans
7,744
3,894
20,460
11,916
Total
160,048
136,259
483,681
379,752
As the Company continues to increase its loan portfolio, management continues to adhere to the Bank's strict underwriting standards. As a result, the Company has been able to minimize charge-offs of losses from impaired loans and maintain asset quality. Non-performing assets were $2.0 million at September 30, 2005 compared to $0.9 million at December 31, 2004 and $4.5 million at September 30, 2004. Total non-performing assets as a percentage of total assets were 0.09% at September 30, 2005 compared to 0.04% at December 31, 2004 and 0.22% at September 30, 2004. The ratio of allowance for loan losses to total non-performing loans was 318% at September 30, 2005 compared to 717% at December 31, 2004 and 146% at September 30, 2004.
During the nine months ended September 30, 2005, mortgage-backed securities decreased $73.8 million to $321.8 million, while other securities decreased $1.7 million to $38.4 million. As funds became available from principal reductions on the securities portfolio during the first nine 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 $237.2 million to $2.13 billion at September 30, 2005 from $1.90 billion at December 31, 2004. During the nine months ended September 30, 2005, due to depositors increased $55.1 million to $1.33 billion, primarily as a result of increased marketing to attract deposits in this highly competitive market. Certificate of deposit accounts increased $64.3 million, while lower-costing deposits decreased by a net amount of $9.1 million. Borrowed funds increased $174.0 million during the nine months ended September 30, 2005 to partially fund the growth in the loan portfolio. Mortgagors’ escrow deposits increased $10.6 million during the nine months ended September 30, 2005.
Equity. Total stockholders’ equity increased $10.8 million to $171.4 million at September 30, 2005, from $160.7 million at December 31, 2004. Net income of $17.8 million for the nine months ended September 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 $3.3 million on the market value of securities available for sale, and $5.3 million of cash dividends paid. The exercise of stock options increased stockholders’ equity by $2.5 million, including the income tax benefit realized by the Company upon the exercise of the options. Book value per share was $8.87 at September 30, 2005 compared to $8.35 per share at December 31, 2004 and $8.16 per share at September 30, 2004.
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Under its current stock repurchase program, the Company repurchased 133,000 shares during the nine months ended September 30, 2005, at a total cost of $2.4 million, or an average of $17.93 per share. At September 30, 2005, 786,350 shares remain to be repurchased under the current stock repurchase program. Through September 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 nine months ended September 30, 2005, funds provided by the Company's operating activities amounted to $20.4 million. These funds, together with $233.2 million provided by financing activities, were utilized to fund net investing activities of $250.8 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 nine months ended September 30, 2005, the net total of loan originations less loan repayments was $314.1 million. Net borrowings of $174.0 million and $55.1 million of customer deposits were used to fund this activity. Funds were also provided by $69.3 million in maturities and prepayments of securities available for sale. Additional funds of $1.6 million were provided through the exercise of stock options. The Company also used funds of $2.9 million for treasury stock repurchases and $5.3 million for dividend payments during the nine months ended September 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 September 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
-0.54
4.63
9.77
-200 Basis points
1.76
9.92
-100 Basis points
2.46
4.20
10.03
Base interest rate
0.00
9.81
+100 Basis points
-2.63
-6.50
9.37
+200 Basis points
-4.94
-14.05
8.81
+300 Basis points
-7.87
-23.24
8.07
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REGULATORY CAPITAL POSITION
Under Office of Thrift Supervision ("OTS") capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. At September 30, 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 September 30, 2005.
(Dollars in thousands)
Amount
Percent of Assets
Tangible Capital:
Capital level
161,241
7.02
Requirement
34,469
1.50
Excess
126,772
5.52
Leverage and Core Capital:
68,937
3.00
92,304
4.02
Risk-Based Capital:
167,701
12.00
111,778
8.00
55,923
4.00
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AVERAGE BALANCES
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company's consolidated statements of financial condition and consolidated statements of operations for the three-month periods ended September 30, 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 September 30,
Average
Yield/
Balance
Cost
Assets
Interest-earning assets:
Mortgage loans, net (1)
1,751,355
29,701
6.78
1,402,672
24,868
7.09
Other loans, net (1)
24,283
401
6.61
14,225
209
5.88
Total loans, net
1,775,638
1,416,897
7.08
342,765
3,595
432,856
4,507
4.16
38,990
375
3.85
44,390
377
3.40
Total securities
381,755
3,970
477,246
4,884
4.09
Interest-earning deposits and
federal funds sold
3,410
3.05
20,179
1.21
Total interest-earning assets
2,160,803
6.31
1,914,322
6.27
102,126
93,082
2,262,929
2,007,404
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Passbook accounts
252,874
677
1.07
219,083
275
0.50
41,713
53
0.51
43,839
0.49
224,860
1,387
2.47
262,651
1,093
1.66
744,351
6,741
3.62
662,088
5,812
3.51
Total due to depositors
1,263,798
8,858
2.80
1,187,661
7,234
2.44
Mortgagors' escrow accounts
25,410
15
0.24
18,062
0.29
Total deposits
1,289,208
2.75
1,205,723
2.40
736,947
4.39
585,560
4.03
Total interest-bearing liabilities
2,026,155
3.35
1,791,283
2.94
Non interest-bearing deposits
52,499
46,616
16,265
18,484
2,094,919
1,856,383
Equity
168,010
151,021
Total liabilities and equity
Net interest income /
net interest rate spread
2.96
3.33
Net interest-earning assets /
net interest margin
134,648
3.17
123,039
3.53
Ratio of interest-earning assets to
interest-bearing liabilities
X
(1)
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.2 million and $1.6 million for each of the three-month periods ended September 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 nine-month periods ended September 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 nine months ended September 30,
Mortgage loans, net (2)
1,642,390
83,555
1,347,379
72,401
7.16
Other loans, net (2)
22,023
1,048
6.34
11,436
6.09
1,664,413
1,358,815
365,121
11,563
4.22
459,637
14,210
4.12
39,337
1,091
3.70
56,755
1,431
3.36
404,458
12,654
4.17
516,392
15,641
4.04
2,192
2.62
17,092
2,071,063
6.26
1,892,299
6.25
100,304
95,605
2,171,367
1,987,904
230,889
1,287
0.74
218,828
819
44,230
165
43,340
162
241,780
4,021
2.22
283,922
3,869
1.82
722,746
19,129
625,219
16,307
3.48
1,239,645
24,602
2.65
1,171,309
21,157
2.41
26,617
42
0.21
19,494
0.25
1,266,262
2.59
1,190,803
2.37
671,881
4.26
584,833
3.96
1,938,143
1,775,636
2.89
51,574
44,317
18,356
18,372
2,008,073
1,838,325
163,294
149,579
3.09
132,920
3.29
116,663
Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $3.1 million and $3.8 million for each of the nine-month periods ended September 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
463,221
367,836
Less:
Principal and other reductions
160,072
177,149
Sales
4,118
5,424
Mortgage loan foreclosures
At end of period
1,799,135
1,449,482
Commercial Business and Other Loans
18,138
9,825
Other loans originated:
9,818
2,788
Small business
9,761
7,313
Other
881
1,815
Total other loans originated
6,299
6,622
6,141
1,518
26,158
13,601
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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
1,704
659
Other non-accrual loans
325
252
Total non-accrual loans
2,029
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)
Total non-performing assets
Non-performing loans to gross loans
0.11
0.06
Non-performing loans to total assets
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:
(89)
Total loans charged-off
Recoveries:
Mortgage loans
Other loans
Total recoveries
Net charge-offs
(74)
(7)
Balance at end of period
6,459
6,546
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
0.45
Ratio of allowance for loan losses to non-performing
assets at end of period
318.27
145.76
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 September 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 September 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
July 1 to July 31, 2005
1,958
18.99
786,350
August 1 to August 31, 2005
September 1 to September 30, 2005
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 September 30, 2005, the Company purchased 1,958 common shares from employees, at an average cost of $18.99, 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.
ITEM 5.
OTHER INFORMATION.
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ITEM 6.
EXHIBITS.
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)
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.
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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: November 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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