UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended MARCH 31, 1996. / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission File Number: 000-24272 FLUSHING FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 11-3209278 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 144-51 NORTHERN BOULEVARD 11354 FLUSHING, NEW YORK (Address of principal executive offices) (Zip Code) (718) 961-5400 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) 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. (1) Yes /X/ No / / (2) Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. AT MARCH 31, 1996 7,957,767 SHARES WERE OUTSTANDING.
1 FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES SEC FORM 10-Q ------------- FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 INDEX PAGE No. - - ----- -------- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition as of March 31, 1996 and December 31, 1995 (unaudited). 3 Consolidated Statements of Operations for the three months ended March 31, 1996 and 1995 (unaudited). 4 Consolidated Statements of Cash flows for the three months ended March 31, 1996 and 1995 (unaudited). 5 Notes to Consolidated Financial Statements. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 17 Item 2. Changes in Securities. 17 Item 3. Defaults Upon Senior Securities. 17 Item 4. Submission of Matters to a Vote of Security Holders. 17 Item 5. Other information. 17 Item 6. Exhibits and Reports on Form 8-K. 17 SIGNATURES 18 EXHIBITS 19
2 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1996 1995 ------------- ------------- (Unaudited) <C> <C> <S> ASSETS: Cash and due from banks $ 10,217,765 $ 11,883,639 Federal funds sold and overnight interest-earning deposits 4,200,000 7,438,000 Securities available for sale: Mortgage-backed securities 169,067,704 179,300,164 Other securities 227,501,913 202,147,039 Loans: 1-4 Family residential mortgage loans 177,366,073 170,088,462 Multi-family mortgage loans 77,912,026 69,139,758 Commercial real estate loans 45,281,079 45,214,727 Consumer loans 2,121,368 2,328,365 Less: Unearned loan fees (1,306,375) (1,334,991) Allowance for loan losses (5,349,613) (5,309,859) ------------- -------------- Net loans 296,024,558 280,126,462 Interest and dividends receivable 6,463,841 5,879,501 Real estate owned, net 1,667,767 1,869,431 Bank premises and equipment, net 5,960,010 6,114,033 Other assets 18,278,622 13,626,246 ------------- -------------- Total assets $ 739,382,180 $ 708,384,515 ============= ============== LIABILITIES: Due to depositors: Non-interest bearing $ 10,093,010 $ 10,372,448 NOW and money market accounts 47,480,965 47,154,968 Savings accounts 216,227,551 215,577,540 Certificates of deposit 293,081,501 284,302,238 Mortgagors' escrow deposits 4,834,356 2,456,948 Borrowed funds 21,000,000 0 Other liabilities 8,248,336 7,190,167 ----------- ----------- Total liabilities 600,965,719 567,054,309 ----------- ----------- Committments and Contingencies (Note 3) STOCKHOLDERS' EQUITY: Preferred stock ($0.01 par value; 5,000,000 shares authorized) 0 0 Common stock ($0.01 par value; 20,000,000 shares authorized; 8,625,000 shares issued: 7,957,767 and 7,957,100 shares outstanding at March 31, 1996 and at December 31, 1995, respectively) 86,250 86,250 Additional paid-in capital 96,517,087 96,514,628 Employee benefit trust - unearned compensation (7,673,179) (7,680,850) Retained earnings 52,440,333 50,777,543 Net unrealized (loss) gain on securities available for sale, net of taxes (2,954,030) 1,632,635 ------------ ----------- Total stockholders' equity 138,416,461 141,330,206 ------------ ----------- Total liabilities and stockholders' equity $ 739,382,180 $ 708,384,515 ============ ============ <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE>
3 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> For the three months ended March 31, -------------------------- 1996 1995 ---------- ---------- (Unaudited) <S> <C> <C> Interest and dividend income: Interest and fees on loans $ 6,535,855 $ 6,226,426 Interest and dividends on securities: Taxable interest 6,067,452 4,376,698 Tax-exempt interest 13,739 30,273 Dividends 109,861 112,753 Other interest income 173,542 206,746 ---------- ---------- Total interest and dividend income 12,900,449 10,952,896 ---------- ---------- Interest expense: Deposits 5,991,521 4,937,714 Other interest expense 150,209 221,654 ---------- ---------- Total interest expense 6,141,730 5,159,368 ---------- ---------- Net interest income 6,758,719 5,793,528 Provision for loan losses 151,946 110,171 ---------- ---------- Net interest income after provision for loan losses 6,606,773 5,683,357 ---------- ---------- Non-interest income: Other fee income 228,686 214,785 Net gain on sales of securities and loans 321,976 53,411 Amortization of deferred gain from sale of real estate 0 368,918 Other income 191,283 284,404 ---------- ---------- Total non-interest income 741,945 921,518 ---------- ---------- Non-interest expense: Salaries and employee benefits 2,016,092 1,812,066 Directors' pension expense 20,202 643,800 Occupancy and equipment 524,238 473,606 Professional services 501,061 359,965 Federal deposit insurance premiums 500 357,633 Data processing 255,005 196,626 Depreciation and amortization 195,425 173,359 Real estate owned 38,108 204,144 Conversion expenses 0 2,221,832 Other operating 691,485 666,313 ---------- ---------- Total non-interest expense 4,242,116 7,109,344 ---------- ---------- Income (loss) before income taxes 3,106,602 (504,469) ---------- ---------- Provision for income taxes: Federal 879,727 323,191 State and local 564,085 230,739 ---------- ---------- Total taxes 1,443,812 553,930 ---------- ---------- Net income (loss) $ 1,662,790 $ (1,058,399) ========== ========== Primary and fully diluted earnings per share $ 0.21 NA Weighted average shares outstanding 7,957,381 NA <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE>
4 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For the three months ended March 31, ------------------------- 1996 1995 ---------- ---------- (Unaudited) <S> <C> <C> Cash flows provided by operating activities: Net income (loss) $ 1,662,790 $(1,058,399) Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 151,946 110,170 Provision for losses on real estate owned 9,096 103,025 Depreciation of bank premises and equipment 195,425 173,357 Net gain on sales of securities & loans (321,976) (53,412) Net gain (loss) on sales of real estate owned (21,169) 28,244 Amortization of unearned premium, net of accretion of unearned discount 342,517 463,026 Amortization of deferred income (179,212) (176,079) Deferred income tax provision 52,008 392,270 Deferred compensation 40,835 16,567 Changes in operating assets and liabilities, net 2,289 1,467,942 ----------- --------- Net cash provided by operating activities 1,934,549 1,466,711 ----------- --------- Cash flows (used in) provided by investing activities: Purchases of bank premises and equipment (41,402) ( 332,313) Purchases of securities available for sale (90,128,000) (3,976,000) Purchases of securities held to maturity 0 (2,751,000) Proceeds from sales and calls of securities available for sale 48,587,976 11,634,412 Proceeds from maturities and prepayments of securities available for sale 17,607,698 3,643,892 Proceeds from calls of securities held to maturity 0 31,000 Proceeds from maturities and prepayments of securities held to maturity 0 2,338,394 Net originations and repayments of loans (10,749,708) (2,601,256) Purchases of loans (5,388,000) (8,007,000) Proceeds from sales and operations of real estate owned 409,642 427,675 Net cash (used in) provided by investing ------------ ---------- activities (39,701,794) 407,804 ------------ ---------- Cash flows provided by financing activities: Net (decrease) increase in non-interest bearing deposits (279,438) 7,876,736 Net increase in interest bearing deposits 9,755,271 1,514,954 Net increase in mortgagors' escrow deposits 2,377,408 2,000,909 Repayment of securities sold with the agreement to repurchase 0 (5,000,000) Borrowed funds 21,000,000 0 Employee benefit trust 10,130 0 ----------- ---------- Net cash provided by financing activities 32,863,371 6,392,599 ----------- ---------- Net (decrease) increase in cash and cash equivalents (4,903,874) 8,267,114 Cash and cash equivalents, beginning of period 19,321,639 22,168,214 ----------- ----------- Cash and cash equivalents, end of period $14,417,765 $30,435,328 =========== =========== Supplemental cash flow disclosure: Interest paid $ 6,129,041 $5,141,288 Income taxes paid 328,408 295,066 Noncash activities: Loans originated as the result of real estate sales 146,525 150,292 Loans transferred through the foreclosure of a related mortgage loan or through in-substance foreclosure to real estate owned 341,169 29,782 Net change in unrealized gain (loss) on securities available for sale (8,498,080) 5,390,611 <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE>
5 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair presentation of the financial condition of Flushing Financial Corporation and Subsidiaries (the "Company") as of March 31, 1996, the results of operations and cash flow statements for the three months ended March 31, 1996 and 1995. These adjustments consists of items which are of a recurring nature. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results of operations to be expected for the remainder of the year. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals ("GAAP") have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). It is presumed that the users of the accompanying unaudited financial statements have read or have access to the Company's audited financial statements and the notes thereto included in the Company's 1995 Annual Report to Shareholders and SEC Form 10-K for the year ended December 31, 1995. 2. NATURE OF OPERATIONS Flushing Financial Corporation is a newly formed holding company, formed for the purpose of acquiring all of the common stock of Flushing Savings Bank, FSB (the "Bank") concurrent with the Bank's conversion from mutual to stock form of organization which was completed on November 21, 1995. Activities prior to November 21, 1995 presented in the financial statements relate to the Bank only. The acquisition was accounted for using the pooling of interest method. 3. COMMITMENTS AND CONTINGENCIES On February 6, 1995, the Superintendent of Banks of the State of New York (the "Superintendent") seized control of the business and property of Nationar, a commercial bank and trust company wholly owned by savings institutions ("Nationar"), due to its alleged unsafe and unsound financial condition. The Superintendent is currently in the process of winding up the affairs of Nationar and liquidating assets. The company has deposits at Nationar totaling $4,408,105 that have been frozen pending the completion of the liquidation. The combined deposits are included in other assets. In connection with the liquidation process, the Company has filed a claim for these funds with the New York State Banking Department. Uncertainties exist regarding amounts ultimately distributable to creditors of Nationar. These uncertainties include (i) the legal process and results of evaluation of claims, and resolution of contested claims; (ii) the amounts realized on the assets of Nationar in its liquidation; and (iii) the legal and administrative expenses that will be incurred during the course of liquidation. The New York State Banking Department has given preliminary indications that the assets may be inadequate to satisfy all claims of creditors in full. The Company recorded a provision for estimated losses in the amount of $660,000, representing approximately 15% of the Company's total demand deposit claims against Nationar.
6 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Flushing Financial Corporation (the "Holding Company") was formed in May 1994 to serve as the holding company for Flushing Savings Bank, FSB ("Bank"). On November 21, 1995, the Bank completed its Conversion ("Conversion") from a federally charted mutual savings bank to a federally chartered stock savings bank. In connection with the Conversion, the Holding Company issued 8,625,000 shares of common stock at a price of $11.50 per share and utilized a portion of the proceeds to acquire all of the issued shares of the Bank. Prior to the Conversion, the Holding Company had no assets, liabilities or operations. The following discussion of financial condition and results of operations include the collective results of the Holding Company and the Bank (collectively the "Company"), but reflects principally the Bank's activities. Unless otherwise indicated, for the periods prior to November 21, 1995, reference to the Company reflects only the Bank's activities. The Company's principal business has been, and continues to be, attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, primarily in originations and purchases of one-to-four family residential mortgage loans (including condominium and home equity loans), commercial real estate loans and multi-family income-producing property loans. To a lesser extent, the Company originates co-operative apartment loans, construction and consumer loans. The Company also invests in U.S. government and federal agency securities, mortgage-backed securities, corporate fixed-income securities and other marketable securities. The Company's results of operations depend primarily on net interest income, which is the difference between the interest income earned on its loan and securities portfolios and its cost of funds, consisting primarily of interest paid on deposit accounts. The Company's results of operations may also be significantly affected by its periodic provision for loan losses and provision for losses on real estate owned ("REO") as well as non-interest income, general and administrative expenses, other non-interest expense and income tax expense. In addition, such results may be 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 and other statements that are not descriptions of historical facts may be foward-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 Company's 1995 Annual Report to Shareholders and SEC Form 10-K for the year ended December 31, 1995
7 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS under the captions "Management Strategy" and "Results of Operation-General" and "Other Trends and Contingencies", and elsewhere in this Quarterly Report and in other documents filed by the Company with the Securities and Exchange Commission from time to time. The Company has no obligation to update these forward-looking statements. COMPARISION OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 General. Net income for the first quarter of 1996 was $1.7 million compared to a net loss of $1.1 million for the first quarter of 1995. The first quarter 1995 Statement of Operations includes certain non-recurring items, which if excluded, net of tax effect, would have resulted in a net income of $1.1 million for the first quarter of 1995. Excluding the non-recurring items incurred in 1995, net income increased $587,000, or 54.56% from the three months ended March 31, 1995 as compared to the three months ended March 31, 1996. This increase is primarily the result of a $965,000 increase in net interest income and an increase of $189,000 in non-interest income, offset in part by an $527,000 increase in provision for income taxes. Interest Income. Interest income for the three months ended March 31, 1996 was $12.9 million, an increase of $1.9 million as compared to $11.0 million for the three months ended March 31, 1995. This increase is due primarily to a $1.7 million increase in interest income from securities as the average securities balance increased $103.0 million from $281.7 million for the three months ended March 31, 1995 to $384.7 million for the comparable 1996 period. Interest income from mortgage loans also increased by $326,000 as the average mortgage loan balances increased $31.3 million from $255.4 million for the first quarter of 1995 to $286.7 million for the first quarter of 1996. The increase in income due to the average yield of the mortgage loan balances was partly offset by a 60 basis point decline in the average yield of the mortgage loan portfolio. Interest Expense. Interest expense increased $982,000 from $5.2 million for the three months ended March 31, 1995 to $6.1 million for the three months ended March 31, 1996. This increase resulted from a $1.1 million increase in deposit expense, offset in part by $71,000 decline in borrowed funds expense. Deposit expense increased as the average deposit balances increased $26.6 million from $524.7 million for the three months ended March 31, 1995 to $551.3 million for the three months ended March 31, 1996. This increase in average balances is primarily due to a $57.9 million increase in higher costing certificates of deposit accounts, partly offset by a $32.3 million decline in lower costing passbook and money market accounts. Furthering the increase in deposit expense was a rise of 72 basis points in the average cost of certificates of deposit accounts from 5.04% for the quarter ended March 31, 1995 to 5.76% for the quarter ended March 31, 1996. Interest expense for borrowed funds declined as average cost of borrowed funds decreased 1.65 percentage points from 6.96% for the first quarter of 1995 to 5.31% for the first quarter of 1996.
8 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provision for Loan Losses. The provision for loan losses during the three months ended March 31, 1996 was $152,000 compared to $110,000 for the three months ended March 31, 1995. The provision reflects, among other things, the Bank's evaluation of current economic conditions, the overall trend of non-performing loans in the loan portfolio, it's analysis of specific loan situations, and the increase in the loan portfolio. Non-Interest Income. Total non-interest income declined by $180,000 from $922,000 for the first quarter of 1995 as compared to $742,000 for the first quarter of 1996. This decline is primarily attributable to a non-recurring item during 1995 for $369,000, offset in part by a $269,000 increase in gain on sales of securities. The non-recurring item relates to the amortization of deferred gain recognized on a prior period sale of real estate. Non-Interest Expense. Non-Interest expense for three months ended March 31, 1996 totaled $4.2 million, representing a decrease of $2.9 million from the comparable 1995 period. This decrease is due primarily to two non-recurring items during the first quarter of 1995: the expensing of $2.2 million of deferred costs that were associated with the Conversion through March 31, 1995 and the immediate recognition of $644,000 representing the projected benefit obligation under the retirement plan for the Company's non-employee directors. Excluding these two non-recurring items, total non-interst expense in the first quarter of 1996 was essentially flat, as compared to the first quarter of 1995, as a $357,000 decrease in federal deposit insurance premium was largely offset by an increase in salaries and employee benefits, and the use of professional services attributable to benefits and other costs associated with the operation of a public company. Income Before Income Taxes. Total income before provision for income taxes increased $3.6 million for reasons stated above. Excluding the previously described non-recurring items, total income before provision for income taxes would have increased $1.1 million, or 55.93%. Provision for Income Taxes. Income tax provision for the three months ended March 31, 1995 was relatively higher than the three months ended March 31, 1996. This is primarily due to the write-off of certain non-deductible costs that were associated with the Conversion through March 31, 1995. This increase is partially offset by a decrease in the valuation allowance on a deferred tax asset atributable to a deferred gain on on a deferred tax asset attributable to a deferred gain on the sale of real estate.
9 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN FINANCIAL CONDITION Assets. From the year ended December 31, 1995, total assets increased $31.0 million to $739.4 million at March 31, 1996. The growth in assets is primarily reflected in a $15.9 million increase in net loans and a net increase of $15.1 million in investment securities. The investment securities also reflects an $8.5 million unrealized loss on mark-to-market valuation of securities, before tax effect, as a result of increases in prevailing interest rates. An increasing interest rate environment may result in an increase in unrealized loss on mark-to-market valuation of securities. The actual amount of cash flows from investment securities does not change as a result of mark-to-market valuation adjustments. As part of the Company's continuing effort to manage non-performing assets, real estate owned declined by $202,000, or 10.79%, from December 31, 1995 levels. Non-performing loans as a percentage of gross loans declined 10 basis points from 1.74% at December 31, 1995 to 1.64% at March 31, 1996. Allowance for loan losses to total non-performing loans also increased from 106.61% at December 31, 1995 to 107.67% at March 31, 1996. Liabilities. Deposit balances increased by $9.5 million from the end of 1995 to March 31, 1996, reflecting increases in certificates of deposit accounts. During the first quarter of 1996, the Bank borrowed $21.0 million from the Federal Home Loan Bank ("FHLB") at an average cost of 5.31% with maturities ranging from two to three years. The Company initiated a borrowing program as part of its strategy to leverage its balance sheet when rates are attractive to management for financing investment opportunities. Equity. Total equity decreased $2.9 million to $138.4 million at March 31, 1996, reflecting the $1.7 million net income for the first quarter of 1996, offset by a decrease of $4.6 million, net of taxes, in unrealized market value of securities available for sale from December 31, 1995 to March 31, 1996. The decline in the market value of securities available for sale is related to an increasing interest rate environment during the latter portion of the first quarter of 1996. Due to the magnitude of the Company's securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce fluctuations in the equity of the Company.
10 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Bank, as a federal savings bank, is subject to Office of Thrift Supervision ("OTS") guidelines regarding liquidity requirements. Pursuant to these requirements, the Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S. government securities, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 5%. OTS regulations also require the maintenance of an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed by the OTS for failure to meet these liquidity requirements. At March 31, 1996 and December 31, 1995, the Bank's liquidity ratio, computed in accordance with the OTS requirement, was 16.15% and 20.73%, respectively. Unlike the Bank, Flushing Financial Corporation is not subject to OTS regulatory requirements on the maintenance of minimum levels of liquid assets. OTHER TRENDS AND CONTINGENCIES Recent Legislative proposals would repeal the special bad debt reserve deduction for federal income tax purposes that currently is available for qualifying thrifts, such as the Bank, and would require recapture of a portion of the previously deducted bad debt reserves into income over a period of six to eight years, for tax years beginning after December 31, 1995. The Company is unable to predict whether such legislation will be enacted and if so in what form. The repeal of the bad debt reserve deduction could result in a significant increase in the Bank's income tax liabilities. For a detailed discussion of this proposed legislation, see the Company's 1995 Annual Report to Shareholders and SEC Form 10-K for the year ended December 31, 1995, under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations-Other Trends and Contingencies" and "Risk Factors-Pending Legislation", respectively.
11 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REGULATORY CAPITAL POSITION - - --------------------------- Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. At March 31, 1996, the Bank exceeded each of the three OTS capital requirements. Set forth below is a summary of the Bank's compliance with OTS capital standards as of March 31, 1996: <TABLE> <CAPTION> Percent of Amount Assets ---------- ----------- (Dollars in thousands) <S> <C> <C> Flushing Savings Bank GAAP capital $ 97,888 14.01% Tangible capital: Capital level 100,328 14.31% Requirement 10,518 1.50 Excess 89,810 12.81 Core capital: Capital level 100,328 14.31% Requirement 28,047 4.00 Excess 72,281 10.31 Risk-based capital: Capital level 104,567 30.93% Requirement 27,042 8.00 Excess 77,525 22.93 </TABLE>
12 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 months ended March 31, 1996 and 1995, and reflects the average yield on assets and average costs 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. <TABLE> <CAPTION> For the three months ended March 31, ------------------------------------------------------------ 1996 1995 ------------------------------- --------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Mortgage loans, net $ 286,666 $ 6,477 9.04% $ 255,377 $ 6,151 9.63% Other loans 2,261 59 10.44 3,163 77 9.74 Mortgage-backed securities 177,802 2,809 6.32 174,754 2,812 6.44 Interest-earning deposits 12,629 174 5.51 15,246 207 5.43 Other securities 206,892 3,382 6.54 106,931 1,706 6.38 --------- ------- ---- ------- ------ ----- Total interest-earning assets 686,250 12,901 7.52 555,471 10,953 7.89 ------- ---- ------ ----- Non-interest earning assets 36,855 40,408 --------- -------- Total assets $ 723,105 $ 595,879 ========= ======== LIABILITIES and NET WORTH Interest-bearing liabilities: Deposits: Passbook accounts $ 215,853 1,535 2.84 $ 241,116 1,694 2.81 NOW accounts 18,920 89 1.88 17,937 83 1.85 Money market accounts 27,800 194 2.79 34,791 239 2.75 Certificates of deposit accounts 288,723 4,157 5.76 230,827 2,908 5.04 Mortgagors escrow deposits 4,047 16 1.58 3,788 13 1.37 Borrowed funds 10,395 138 5.31 11,544 201 6.96 Other interest-bearing liabilities 596 13 8.72 853 21 9.85 ------ ----- ---- ------- ----- ---- Total interest-bearing liabilities 566,334 6,142 4.34 540,856 5,159 3.82 ----- ---- ----- ---- Other liabilities 16,187 13,593 ------- ------- Total liabilities 582,521 554,449 Equity 140,584 41,430 ------- ------- Total liabilities and equity $ 723,105 $ 595,879 ======= ======= Net interest income/expense spread $ 6,759 3.18% $ 5,794 4.07% ===== ==== ===== ==== Net interest-earning assets/ net interest margin $ 119,916 3.94% $14,615 4.17% ======= ==== ====== ==== Ratio of interest-earning asset to interest-bearing liabilities 1.21x 1.03x ===== ===== </TABLE>
13 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LOAN ACTIVITY - - ------------- The following table sets forth the Company's loan originations (including the net effect of refinancings) and the changes in the Company's portfolio of loans, including purchases, sales and principal reductions for the period indicated. <TABLE> <CAPTION> For the three For the months ended year ended March 31, 1996 December 31, 1995 ------------------ ---------------- (In thousands) <S> <C> <C> MORTGAGE LOANS: At beginning of period $ 284,443 $ 255,596 Mortgage loans originated: One-to-four family 5,857 19,298 Cooperative 0 140 Multi-family 10,892 19,162 Commercial 680 2,144 ------- ------ Total mortgage loans originated 17,429 40,744 Acquired loans 5,388 18,766 Less: Principal reductions 6,326 29,384 Mortgage loans sold 0 626 Mortgage loan foreclosures 375 653 ------- ------- At end of period $ 300,559 $ 284,443 ======= ======= OTHER LOANS: At beginning of period $ 2,328 $ 3,231 Net activity (207) (903) ----- ----- At end of period $ 2,121 $ 2,328 ====== ====== </TABLE>
14 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-PERFORMING ASSETS - - --------------------- The Company reviews the problem loans in its portfolio on a monthly basis to determine whether any 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 ("REO") at the dates indicated. <TABLE> <CAPTION> March 31, December, 31 1996 1995 ---------- ------------ (Dollars in thousands) <S> <C> <C> Non-accrual mortgage loans $ 4,913 $ 4,697 Other non-accrual loans 51 50 ------ ----- Total non-accrual loans 4,964 4,747 Mortgage loans 90 days or more delinquent and still accruing 5 234 Other loans 90 days or more delinquent and still accruing 0 0 ------ ----- Total non-performing loans 4,969 4,981 Real estate owned (foreclosed real estate) 1,668 1,869 ------ ----- Total non-performing assets $ 6,637 $ 6,850 ====== ===== Non-performing loans to gross loans 1.64% 1.74% Non-performing assets to total assets 0.90% 0.97% </TABLE>
15 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALLOWANCE FOR LOAN LOSSES - - ------------------------- The Company has established and maintains on its books an allowance for loan losses that is designed to provide reserves for 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 experiences, 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 also are taken into account in determining the appropriate amount of allowance. The following table sets forth the Bank's allowance for loan losses at and for the dates indicated. <TABLE> <CAPTION> March 31, December 31, 1996 1995 ----------- ------------- (Dollars in thousands) <S> <C> <C> Balance at beginning of period $ 5,310 $ 5,370 Provision for loan losses 152 496 Loans charged-off: One-to-four family 70 312 Cooperative 51 183 Multi-family 11 251 Commercial 8 260 Other 11 46 -------- ------- Total loans charged-off 151 1,052 -------- ------- Recoveries: Mortgage loans 39 496 Other 0 0 -------- ------- Total recoveries 39 496 -------- ------- Other adjustments 0 0 -------- ------- Balance at end of period $ 5,350 $ 5,310 ======== ======= Ratio of net charge-offs during the year to average loans outstanding during the period 0.04% 0.21% Ratio of allowance for loan losses to gross loans at end of period 1.77% 1.85% Ratio of allowance for loan losses to non-performing loans at end of period 107.67% 106.61% Ratio of allowance for loan losses to non-performing assets at end of period 80.61% 77.52% </TABLE>
16 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 effect on the Company's consolidated financial condition and results of operations. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (SECTION 249.308 OF THIS CHAPTER). a) EXHIBIT 27 Financial data schedules for electronic (EDGAR) filing. b) REPORTS ON FORM 8-K None
17 FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Flushing Financial Corporation Dated: May 13, 1996 By: /s/ James F. McConnell ------------- ------------------------------------ James F. McConnell President and Chief Executive Officer Dated: May 13, 1996 By: /s/ Monica C. Passick ------------- ------------------------------------ Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer
18 EXHIBIT INDEX Exhibit No. Description - - ------- ----------- 27 Financial Data Schedule