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, 1996. 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) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 (Title of Class) 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 / / The number of shares outstanding of the registrant's common stock, as of September 30, 1996 were 8,574,997.
1 CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition as of September 30, 1996 and December 31, 1995 (unaudited). 3 Consolidated Statements of Income for the three months and nine months ended September 30, 1996 and 1995 (unaudited). 4 Consolidated Statements of Cash flows for the nine months ended September 30, 1996 and 1995 (unaudited). 5 Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 30, 1996 (unaudited) 6 Notes to Consolidated Financial Statements. 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 25 Item 2. Changes in Securities. 25 Item 3. Defaults Upon Senior Securities. 25 Item 4. Submission of Matters to a Vote of Security Holders. 25 Item 5. Other information. 25 Item 6. Exhibits and Reports on Form 8-K. 25 SIGNATURES 26 EXHIBITS 27
2 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------- (Unaudited) <C> <C> <S> ASSETS: Cash and due from banks $ 8,678,327 $ 11,883,639 Federal funds sold and overnight interest-earning deposits 200,000 7,438,000 Securities available for sale: Mortgage-backed securities 147,620,681 179,300,164 Other securities 230,783,851 202,147,039 Loans: 1-4 Family residential mortgage loans 220,460,106 170,088,462 Multi-family mortgage loans 95,279,543 69,139,758 Commercial real estate loans 42,920,978 45,214,727 Consumer loans 1,723,870 2,328,365 Less: Unearned loan fees (1,384,825) (1,334,991) Allowance for loan losses (5,230,670) (5,309,859) --------------- -------------- Net loans 353,769,002 280,126,462 Interest and dividends receivable 6,670,889 5,879,501 Real estate owned, net 1,929,097 1,869,431 Bank premises and equipment, net 5,763,380 6,114,033 Other assets 14,686,846 13,626,246 ------------ -------------- Total assets $ 770,102,073 $ 708,384,515 ============== ============== LIABILITIES: Due to depositors: Non-interest bearing $ 9,464,607 $ 10,372,448 NOW and money market accounts 45,018,954 47,154,968 Savings accounts 212,657,918 215,577,540 Certificates of deposit 303,253,571 284,302,238 Mortgagors' escrow deposits 4,828,852 2,456,948 Borrowed funds 51,000,000 0 Other liabilities 8,959,146 7,190,167 ------------ -------------- Total liabilities 635,183,048 567,054,309 ------------ -------------- 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; 8,910,100 shares issued; 8,574,997 and 8,625,000 shares outstanding at September 30, 1996 and at December 31, 1995, respectively) 89,101 86,250 Additional paid-in capital 101,154,756 96,514,628 Treasury stock (335,103 shares at September 30, 1996) (6,166,010) 0 Unearned compensation - employee benefit trust (7,656,792) (7,680,850) Unearned compensation - Restricted Stock Award (4,258,950) 0 Retained earnings 55,442,577 50,777,543 Net unrealized (loss) gain on securities available for sale, net of taxes (3,685,657) 1,632,635 ------------- -------------- Total stockholders' equity 134,919,025 141,330,206 ------------- -------------- Total liabilities and stockholders' equity $ 770,102,073 $ 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 For the nine months ended September 30, September 30, ------------------------ ------------------------- 1996 1995 1996 1995 --------- ---------- -------- --------- (Unaudited) <S> <C> <C> <C> <C> Interest and dividend income: Interest and fees on loans $ 7,549,507 $ 6,095,647 $ 20,955,987 $ 18,336,834 Interest and dividends on securities: Taxable interest 6,470,660 4,628,221 18,926,438 13,527,127 Tax-exempt interest 16,368 24,755 48,352 83,852 Dividends 76,249 109,610 272,542 335,879 Other interest income 106,860 100,282 430,502 532,964 ---------- ---------- ----------- ---------- Total interest and dividend income 14,219,644 10,958,515 40,633,821 32,816,656 ---------- ---------- ----------- ---------- Interest expense: Deposits 6,038,044 5,877,136 17,957,999 16,346,907 Borrowed funds 750,574 0 1,350,117 369,108 Other interest expense 8,378 17,220 31,298 50,098 ---------- ---------- ----------- ---------- Total interest expense 6,796,996 5,894,356 19,339,414 16,766,133 ---------- ---------- ----------- ---------- Net interest income 7,422,648 5,064,159 21,294,407 16,050,543 Provision for loan losses 20,010 232,369 321,956 418,942 ---------- ---------- ----------- ---------- Net interest income after provision for loan losses 7,402,638 4,831,790 20,972,451 15,631,601 ---------- ---------- ----------- ---------- Non-interest income: Other fee income 164,295 160,953 586,928 544,531 Net gain (loss) on sales of securities and loans (45,402) (251,219) 430,935 (395,858) Amortization of deferred gain from sale of real estate 0 1,836,504 0 2,784,422 New York State gains tax refund 0 0 0 386,912 Other income 190,011 197,987 578,869 892,337 ---------- ---------- ----------- ---------- Total non-interest income 308,904 1,944,225 1,596,732 4,212,344 ---------- ---------- ----------- ---------- Non-interest expense: Salaries and employee benefits 2,206,730 1,890,379 6,352,054 5,478,281 Directors' pension expense 20,203 20,202 60,608 697,674 Occupancy and equipment 524,944 523,968 1,551,036 1,506,840 Professional services 522,066 340,652 1,587,395 1,113,230 Federal deposit insurance premiums 500 60,038 1,500 775,304 Data processing 250,026 261,200 1,131,655 742,689 Depreciation and amortization 253,657 195,595 730,030 547,216 Real estate owned 102,251 55,952 232,157 403,351 (Recovery) Provision for deposits at Nationar 0 0 (449,392) 660,096 Conversion expenses 0 0 0 2,221,832 Other operating 756,906 555,577 2,194,260 1,767,591 ---------- ---------- ----------- ---------- Total non-interest expense 4,637,283 3,903,563 13,391,303 15,914,104 ---------- ---------- ----------- ---------- Income (loss) before income taxes 3,074,259 2,872,452 9,177,880 3,929,841 ---------- ---------- ----------- ---------- Provision for income taxes: Federal 843,608 484,676 2,543,975 1,054,668 State and local 560,780 297,218 1,649,924 656,856 ---------- ---------- ----------- ---------- Total taxes 1,404,388 781,894 4,193,899 1,711,524 ---------- ---------- ----------- ---------- Net income $ 1,669,871 $ 2,090,558 $ 4,983,981 $ 2,218,317 ========== ========== =========== ========== Weighted average number of common shares outstanding 8,180,777 NA 8,074,946 NA Primary and fully diluted earnings per share $ 0.20 NA $ 0.62 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 nine months ended September 30, ------------------------- 1996 1995 ----------- ---------- (Unaudited) <S> <C> <C> Cash flows provided by (used in) operating activities: Net income $ 4,983,981 $ 2,218,317 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses 321,956 418,942 Provision for losses on real estate owned 92,217 220,032 (Recovery) provision for deposits at Nationar (449,392) 660,096 Depreciation of bank premises and equipment 730,030 547,216 Net (gain) loss on sales of securities & loans (430,935) 395,858 Net (gain) loss on sales of real estate owned (45,947) (60,115) Amortization of unearned premium, net of accretion of unearned discount 939,670 1,323,340 Amortization of deferred income (640,452) (459,596) Deferred income tax provision (257,748) (779,407) Deferred compensation 128,401 47,786 Originations of mortgage loans available for sale 0 (415,992) Deferred gain from sale of real estate 0 (2,784,422) Changes in operating assets and liabilities, net 5,836,363 (1,783,611) Unearned compensation 408,087 0 ----------- ----------- Net cash provided by (used) in operating activities 11,616,231 (451,556) ----------- ----------- Cash flows used in investing activities: Purchases of bank premises and equipment (379,377) (1,100,510) Purchases of securities available for sale (128,096,000) (46,360,000) Purchases of securities held to maturity 0 (13,578,000) Proceeds from sales and calls of securities available for sale 74,078,935 31,869,142 Proceeds from maturities and prepayments of securities available for sale 45,773,011 10,115,124 Proceeds from calls of securities held to maturity 0 249,000 Proceeds from maturities and prepayments of securities held to maturity 0 10,436,338 Net originations and repayments of loans (44,722,993) (2,779,491) Purchases of loans (29,641,000) (9,513,000) Proceeds from sales and operations of real estate owned 734,131 1,627,652 Net cash used in investing ----------- ----------- activities (82,253,293) (19,033,745) ----------- ------------ Cash flows provided by financing activities: Net decrease in non-interest bearing deposits (907,841) (119,825) Net increase in interest bearing deposits 13,895,697 24,878,392 Net increase in mortgagors' escrow deposits 2,371,904 1,137,601 Repayment of securities sold with the agreement to repurchase 0 (5,000,000) Increase (decrease)in borrowed funds 51,000,000 (10,000,000) Repurchase of common stock (6,166,010) 0 ----------- ------------ Net cash provided by financing activities 60,193,750 10,896,168 ----------- ------------ Net decrease (increase) in cash and cash equivalents (10,443,312) (8,589,133) Cash and cash equivalents, beginning of period 19,321,639 22,168,214 ----------- ----------- Cash and cash equivalents, end of period $ 8,878,327 $ 13,579,081 =========== =========== Supplemental cash flow disclosure: Interest paid $19,308,116 $ 16,716,017 Income taxes paid 3,753,933 1,425,066 Noncash activities: Loans originated as the result of real estate sales 252,193 492,292 Loans transferred through the foreclosure of a related mortgage loan or through in-substance foreclosure to real estate owned 1,120,123 526,152 Net change in unrealized gain (loss) on securities available for sale (9,855,367) 11,703,680 Transfer of deposits at Nationar to other assets 0 4,408,105 Dividends payable 318,947 0 <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 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Nine months ended September 30, 1996 ------------------ (Unaudited) <S> <C> COMMON STOCK ($0.01 par value; 20,000,000 shares authorized: 8,574,997 shares outstanding) Balance at beginning of period $ 86,250 Restricted stock award of 285,100 shares on May 21, 1996 2,851 ----------- Balance at end of period $ 89,101 =========== ADDITIONAL PAID-IN CAPITAL Balance at beginning of period $ 96,514,628 Restricted stock award of 285,100 shares on May 21, 1996 4,630,024 401-k contribution 10,104 ------------ Balance at end of period $101,154,756 ============ TREASURY STOCK Balance at beginning of period 0 Treasury shares repurchased at market $ 6,129,447 Restricted stock award forfeitures 36,563 ------------ Balance at end of period $ 6,166,010 ============ UNEARNED COMPENSATION - EMPLOYEE BENEFIT TRUST Balance at beginning of period $ (7,680,850) 401-k contribution: book value 24,058 ------------ Balance at end of period $ (7,656,792) ============ UNEARNED COMPENSATION - RESTRICTED STOCK AWARDS Balance at beginning of period 0 Restricted stock award on May 21, 1996 $ (4,632,875) Restricted stock award forfeitures 36,563 Restricted stock award expense 337,362 ------------ Balance at end of period $ (4,258,950) ============ RETAINED EARNINGS Balance at beginning of period $ 50,777,543 Net Income 4,983,981 Dividends payable (318,947) ------------ Balance at end of period $ 55,442,577 ============ NET UNREALIZED (LOSS) GAIN ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES Balance at beginning of period $ 1,632,635 Mark-to-market adjustment (5,318,292) ------------ Balance at end of period $ (3,685,657) ============ <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE>
6 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 September 30, 1996, the results of operations for the three months and nine months ended September 30, 1996 and 1995, the cash flow statements for the nine months ended September 30, 1996 and 1995, and the statement of changes in stockholders' equity for the nine months ended September 30, 1996. These adjustments consist of items which are of a normal recurring nature. The results of operations for the three months and nine months ended September 30, 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 condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The accompanying unaudited financial statements should be read in conjunction with the 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. Flushing Financial Corporation was 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 accompanying unaudited financial statements relate to the Bank only. The acquisition was accounted for using the pooling of interest method. 2. BORROWED FUNDS At September 30, 1996, advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled $51.0 million, with a composite interest rate of 5.85% and terms ranging from one to three years. During the first quarter of 1996, the Company initiated a borrowing program with the FHLB-NY to seek to leverage the Company's highly capitalized position when interest rates on FHLB advances are attractive, as compared to alternative funding sources, to finance investment opportunities. (continued)
7 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. 1996 RESTRICTED STOCK INCENTIVE PLAN At the Company's 1996 Annual Meeting of Shareholders held on May 21, 1996 (the "Annual Meeting"), the Company's shareholders approved the 1996 Restricted Stock Incentive Plan, in which 345,000 shares of restricted stock were authorized, and an aggregate of 285,100 shares of restricted stock were awarded to directors and employees. This award of restricted stock increased shares outstanding by 285,100 on May 21, 1996. The value of the awards at the grant date was $16.25 per share, equal to the average between the high and the low market prices of the Company's common stock on May 20, 1996. For the three and nine months ended September 30, 1996, accrued restricted stock expense amounted to $234,000 and $337,000, respectively. The restricted stock awards will vest at a rate of 20% per year, commencing on the first anniversary of the date of the award. As of September 30, 1996, 2,250 shares of the restricted stock award were forfeited. 4. 1996 STOCK OPTION INCENTIVE PLAN At the Annual Meeting, the Company's shareholders approved the Company's 1996 Stock Option Incentive Plan and thereby authorized the issuance of options to purchase 862,500 shares of the Company's common stock. On May 21, 1996, options to purchase 735,750 shares were issued to directors and employees with an exercise price of $16.25 per share. The exercise price is equal to the average between the high and the low market prices of the Company's common stock on May 20, 1996. The stock options will vest and become exercisable at a rate of 20% per year, commencing on the first anniversary of the date of the grant, and expire ten years from the anniversary of the date of the grant. 5. TREASURY STOCK In June 1996, the Company announced its intention to repurchase up to 716,350 shares of the Company's outstanding common stock. As of September 30, 1996, the Company had purchased 332,850 shares at a cost of $6.1 million, an average of $18.41 per share, leaving 383,500 shares to be purchased under the Share Repurchase Program. Total shares outstanding at September 30, 1996 were 8,574,997. (continued)
8 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. RECENT ACCOUNTING PRONOUNCEMENTS FASB has issued SFAS 123, "Accounting for Stock-Based Compensation", effective for fiscal years beginning after December 15, 1995. The Company has elected to measure compensation cost using APB Opinion No. 25 as per SFAS 123. Pro forma disclosures required for entities that elect to continue to measure compensation cost using APB Opinion No. 25 must include the effects of all awards granted in fiscal years that begin after December 15, 1994. Management will implement the pro forma disclosure requirements with the preparation of the annual financial statement for 1996. SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued by FASB. This Statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. Earlier or retroactive application of this Pronouncement is not permitted. Adoption of this Pronouncement is not expected to have a material impact on the Company's consolidated financial statements.
9 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 was formed in May 1994 to serve as the holding company for Flushing Savings Bank, FSB (the "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, Flushing Financial Corporation 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, Flushing Financial Corporation had no assets, liabilities or operations. The following discussion of financial condition and results of operations include the collective results of Flushing Financial Corporation 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. On June 28, 1996, the Company received approval to repurchase up to 431,250 shares of the Company's outstanding common stock, or 5% of the 8,625,000 shares issued in connection with the Conversion. The Company also intends to repurchase an additional 285,100 shares, representing the number of shares awarded under the Restricted Stock Plan on May 21, 1996. All stock repurchases are expected to be made in open market transactions and are subject to market conditions, the trading price of the stock, and the Company's financial performance. As of September 30, 1996, the Company had purchased 332,850 shares at a cost of $6.1 million, leaving 383,500 shares to be purchased under the Share Repurchase Program. In light of the Company's capital strength and earnings performance, the Board of Directors declared a $0.04 per share dividend to common shareholders of record at the close of business on September 30, 1996, and payable on October 15, 1996. Retained earnings was reduced by $319,000 to reflect this cash dividend. At the same time, the Company adopted a Stockholder Rights Plan ("Rights Plan") designed to preserve long-term values and protect stockholders against stock accumulations and other abusive tactics to acquire control of the Company. Under the Rights Plan, each stockholder of record at the close of business on September 30, 1996 received a dividend distribution of one right for each share of common stock held. The rights become exercisable only under very limited circumstances and expire on September 30, 2006. (continued)
10 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, primarily in (i) originations and purchases of one-to-four family residential mortgage loans, multi-family income-producing property loans and commercial real estate loans; (ii) mortgage loan surrogates such as mortgage-backed securities and; (iii) U.S. government and federal agency securities, corporate fixed-income securities and other marketable securities. To a lesser extent, the Company originates co-operative apartment loans, construction and consumer loans. 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 and borrowed funds. 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 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 1995 Annual Report to Shareholders and the SEC Report on Form 10-K for the year ended December 31, 1995. The Company has no obligation to update these forward-looking statements. (continued)
11 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 GENERAL. Net income for the third quarter of 1996 was $1.7 million, a decrease of $421,000 from the net income of $2.1 million for the third quarter of 1995. This decrease was primarily the result of a $1.6 million reduction in non-interest income, a $734,000 increase in non-interest expense, and a higher income tax provision during the third quarter of 1996 of $1.4 million as compared to $782,000 for the third quarter 1995, offset by a $2.4 million increase in net interest income from the 1995 period to the period in 1996. INTEREST INCOME. Total interest and dividend income increased $3.3 million from $11.0 million for the three months ended September 30, 1995 to $14.2 million for the three months ended September 30, 1996. This increase was primarily the result of increases in the average earning balances of mortgage loans and securities of $75.7 million and $84.3 million, respectively, from the quarter ended September 30, 1995 to the quarter ended September 30, 1996. INTEREST EXPENSE. Interest expense increased $903,000 from $5.9 million for the three months ended September 30, 1995 to $6.8 million for the three months ended September 30, 1996, primarily due to a $750,000 increase in borrowed funds expense as the average balance of borrowed funds increased. The Company had increased its utilization of Federal Home Loan Bank ("FHLB") advances which totaled $51.0 million at September 30, 1996, bearing a composite rate of 5.85% with terms ranging from one to three years. The Company's borrowing program seeks to leverage the Company's highly capitalized position when interest rates on FHLB advances are attractive, as compared to alternative funding sources, to finance investment opportunities. Interest expense also increased $161,000 in interest paid on deposits resulting from an increase of $25.1 million in the average balances of higher costing certificates of deposit accounts and a decrease of $29.7 million in the average balances of lower costing regular savings and money market accounts from the quarter ended September 30, 1995 to the quarter ended September 30, 1996. PROVISION FOR LOAN LOSSES. The provision for loan losses during the three months ended September 30, 1996 was $20,000 compared to $232,000 for the three months ended September 30, 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 (see Asset Section), it's analysis of specific loan situations, and increase in the size of the loan portfolio. (continued)
12 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-INTEREST INCOME. Total non-interest income declined by $1.6 million from $1.9 million for the third quarter of 1995 to $309,000 for the third quarter of 1996. This decline is primarily attributable to non-recurring income during the third quarter of 1995 of $1.8 million in amortization of deferred gain from the sale of real estate, offset by a $206,000 decline in net loss on sales of securities from the 1995 period to the period in 1996. NON-INTEREST EXPENSE. Non-interest expense increased by $734,000 from $3.9 million for the three months ended September 30, 1995 to $4.6 million for the three months ended September 30, 1996. Expenses attributable to salaries and employee benefits rose $316,000, reflecting salary increases, profit sharing plans, and the amortization of unearned compensation expense associated with the Restricted Stock Plan, which was implemented in May of 1996. A net loss of $4,000 on sales of real estate owned was recorded for the third quarter of 1996, as compared to a net gain of $73,000 for the third quarter of 1995. Additional professional fees and operating expenses associated with being a publicly-held company also increased non-interest expense from the 1995 period as compared to the period in 1996. Partially off-setting the increases to non-interest expense was a reduction in federal deposit insurance premiums from $60,000 for the quarter ended September 30, 1995 to $500 for the quarter ended September 30,1996. Expenses associated with real estate owned also declined by $20,000 from the third quarter of 1995 to the third quarter of 1996. INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $202,000 from $2.9 million for the three months ended September 30, 1995 to $3.1 million for the three months ended September 30, 1996 for the reasons stated above. PROVISION FOR INCOME TAXES. The effective income tax rate for the three months ended September 30, 1996 was higher than the three months ended September 30, 1995. This was primarily the result of a tax benefit in 1995 due to a decrease in the valuation allowance on the deferred tax asset attributable to the gain from sale of real estate for the three months ended September 30, 1995. (continued)
13 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 GENERAL. Net income increased $2.8 million from $2.2 million for the nine months ended September 30, 1995 to $5.0 million for the nine months ended September 30, 1996. This was primarily due to an increase of $5.2 million in net interest income from the 1995 period to the 1996 period, offset by a $2.5 million increase in the provision for income taxes during 1996. Absent in the 1996 period were certain one-time income and expense items as had been recorded in the 1995 period. INTEREST INCOME. Total interest and dividend income increased $7.8 million from the $32.8 million for the nine months ended September 30, 1995 to $40.6 million for the nine months ended September 30, 1996. This increase was primarily the result of increases in the average earning balances of mortgage loans and securities of $49.7 million and $95.5 million, respectively, from the nine months ended September 30, 1995 as compared to the nine months ended September 30, 1996. This increase was offset in part by a 7 basis point decline in the average yield of interest-earning assets, from 7.71% for the first nine months of 1995 to 7.64% for the first nine months of 1996. INTEREST EXPENSE. Interest expense increased $2.5 million from $16.8 million for the nine months ended September 30, 1995 to $19.3 million for the nine months ended September 30, 1996. This increase is due primarily to a $1.6 million increase in interest paid on deposits resulting from an increase of $39.3 million in the average balances of higher costing certificates of deposit accounts and a decline of $19.2 million in the average balances of lower costing regular savings and money market deposit accounts from the first nine months of 1995 to the first nine months of 1996. The average cost of certificates of deposit accounts also increased 16 basis points from 5.51% for the nine months ended September 30, 1995 to 5.67% for the nine months ended September 30, 1996. Interest expense on borrowed funds increased by $981,000 due to an increase in the average balance of borrowed funds of $24.6 million, offset in part by a 1.47% decline in the average cost of borrowed funds from 7.19% for the nine months ended September 30, 1995 to 5.72% for the nine months ended September 30, 1996. (continued)
14 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROVISION FOR LOAN LOSSES. The provision for loan losses during the nine months ended September 30, 1996 was $322,000 as compared to $419,000 for the nine months ended September 30, 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 (see Asset Section), it's analysis of specific loan situations, and increases in the size of the loan portfolio. NON-INTEREST INCOME. Total non-interest income declined by $2.6 million from $4.2 million for the nine months ended September 30, 1995 to $1.6 million for the nine months ended September 30, 1996. This decline is primarily attributable to one-time income items recorded in the 1995 period of $2.8 million in amortization of deferred gain recognized on a prior period sale of real estate, and a $387,000 gains tax refund from New York State. Offsetting these declines was a change in gain/(loss) on sales of securities of $827,000 from a loss of $396,000 in the 1995 period as compared to a gain of $431,000 in the period in 1996. NON-INTEREST EXPENSE. Non-interest expense declined $2.5 million from $15.9 million for the nine months ended September 30, 1995 to $13.4 million for the nine months ended September 30, 1996. The higher non-interest expense for the first nine months of 1995 as compared to the current period is primarily a result of certain one-time items incurred during 1995 consisting of: the expensing of $2.2 million of deferred costs that were incurred in connection with the Conversion through March 31, 1995; the immediate recognition of expenses of $677,000 representing the projected benefit obligation under the retirement plan for the Company's non-employee directors; and the $660,000 loss provision on deposits at Nationar. Also contributing to the lower non-interest expense in the current period is the recovery of $449,000 of the $660,000 loss provision on deposits at Nationar, made possible by the receipt of the Company of $4.2 million of its $4.4 million of deposits previously frozen by the New York State Banking Department in connection with its supervisory liquidation of Nationar. Further contributing to the reduction in non-interest expense was a decrease in federal deposit insurance premiums from $775,000 for the nine months ended September 30, 1995 to $2,000 for the nine months ended September 30, 1996. The combined effect that the recovery of the $449,000 loss provision and the decrease in federal deposit insurance premium had on reducing the current period's non-interest expense below that of the year ago period was offset in part by (continued)
15 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS additional professional fees and operating expenses associated with being a publicly-held company and costs associated with implementing improved data processing systems as part of the Company's strategy to enhance its systems to improve efficiencies. Additionally, expenses attributable to salaries and employee benefits rose $874,000, reflecting salary increases, profit sharing plans, and the amortization of unearned compensation expense associated with the Restricted Stock Plan, which was implemented in May of 1996. INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $5.3 million from $3.9 million for the nine months ended September 30, 1995 to $9.2 for the nine months ended September 30, 1996, for reasons stated above. PROVISION FOR INCOME TAXES. The effective income tax rate for the nine months ended September 30, 1996 was higher than the nine months ended September 30, 1995, with an effective tax rate of 45.70% and 43.55% for the nine months ended September 30, 1996 and 1995, respectively. This was primarily the result of a tax benefit in 1995 due to a decrease in the valuation allowance on the deferred tax asset attributable to the gain from sale of real estate for the nine months ended September 30, 1995. FINANCIAL CONDITION ASSETS. From December 31, 1995, total assets increased $61.7 million to $770.1 million at September 30, 1996. During the nine months ended September 30, 1996, mortgage loans increased by $74.2 million, securities available for sale declined by $3.0 million, and cash and federal funds sold and overnight interest-earning deposits decreased by $10.4 million. The increase in mortgage loans consisted primarily of a $50.4 million increase in the Bank's portfolio of 1-4 family residential mortgage loans and a $26.1 million increase in multi-family real estate mortgage loans. From December 31, 1995 to September 30, 1996, mortgage-backed securities had declined $31.7 million and the proceeds were used to fund loan originations and a $28.6 million increase in other securities. The reduction in total securities available for sale takes into account a decline of $9.9 million in unrealized 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 (continued)
16 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, assuming the securities are held to maturity. At September 30, 1996, the Company had $4.8 million invested in collateralized mortgage obligations ("CMOs"). The CMOs in the Company's portfolio were not considered high risk under regulations promulgated by the Office of Thrift Supervision. At September 30, 1996, the Company had $180.4 million in callable U.S. government securities. Non-performing assets declined by $1.4 million from $6.9 million at December 31, 1995 to $5.5 million at September 30, 1996. Total non-performing assets as a percentage of total assets has consistently declined quarterly from 0.97% at December 31, 1995 to 0.71% at September 30, 1996. By adherence to its strict underwriting standards and aggressive charge-offs of possible losses from impaired loans, the Company has continued to strengthen its loan portfolio, evidenced by the increase in the Company's ratio of the allowance for loan losses to non-performing loans from 106.61% at December 31, 1995 to 148.19% at September 30, 1996. LIABILITIES. Deposit balances increased by $13.0 million during the first nine months of 1996 to $570.4 million at September 30, 1996 primarily due to a $19.0 million increase in certificate of deposit accounts, offset in part by a decrease of $2.9 million in regular savings accounts and a decrease of $3.0 million in demand, NOW and money market accounts. As described above, the Company also has increased its utilization of FHLB advances which totaled $51.0 million at September 30, 1996 with a weighted average interest rate of 5.85% and terms ranging from one to three years. The borrowing program is part of the Company's strategy to leverage its balance sheet when rates are attractive, as compared to alternative funding sources, to finance investment opportunities. EQUITY. Total stockholders' equity decreased $6.4 million during the first nine months of 1996 to $134.9 million at September 30, 1996. This decrease is due primarily to $6.1 million in treasury shares purchased through the Company's stock repurchase plan, as noted below, $319,000 in dividends declared as also noted below, and a decrease of $5.3 million, net of taxes, in unrealized market value of securities available for sale from December 31, 1995 to September 30, 1996, offset by $5.0 million in net income for the first nine months of 1996. The decline in the market value of the Company's portfolio of securities available for sale is due primarily to an increasing interest rate environment beginning in the latter portion of the first quarter of 1996. Due to the size of the Company's portfolio of securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant fluctuations in the equity of the Company. (continued)
17 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total shares outstanding at September 30, 1996 were 8,574,997. On June 28, 1996, the Company announced the intention to repurchase an aggregate of 716,350 shares, representing (i) 5.00% of the 8,625,000 shares issued in connection with the Conversion, plus (ii) 285,100 shares which equals the amount of restricted stock that was granted by the Company on May 21, 1996 pursuant to the Restricted Stock Plan. As of September 30, 1996, the Company had purchased 332,850 shares at a cost of $6.1 million, leaving 383,500 shares to be purchased under the Share Repurchase Program. In light of the Company's capital strength and earnings performance, the Board of Directors declared a $0.04 per share dividend on September 17, 1996, to common shareholders of record September 30, 1996, and payable on October 15, 1996. Retained earnings was reduced by $319,000 to reflect this cash dividend. 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, banker's 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 net withdrawable deposit accounts plus short-term borrowings. Monetary penalties may be imposed by the OTS for failure to meet these liquidity requirements. At September 30, 1996 and December 31, 1995, the Bank's liquidity ratio, computed in accordance with the OTS requirement, was 13.57% 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. Due to its strength in capital position, the Company has the ability to leverage its capital base and consider alternative funding sources to finance its growth strategy. (continued)
18 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CASHFLOW. The Company's primary business objective is the origination and purchase of residential, multi-family and commercial real estate mortgage loans. During the nine months ended September 30, 1996, net originations and repayments of loans totaled $44.7 million, and $29.6 million in residential mortgage loans were purchased. The Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. In the first nine months of 1996, the Company purchased a total of $128.1 million in securities available for sale, funded partially from $119.9 million in sales, calls, maturities and prepayments of securities available for sale. General funding for these assets comes from cashflow generated by operating and financing activities totaling $11.6 million and $60.2 million for the nine months ended September 30, 1996, respectively. For the nine months ended September 30, 1996, the Company borrowed $51.0 million in low cost, short-term FHLB advances. In addition, the Bank's deposit base increased by $13.0 million from December 31, 1995 to September 30, 1996. During a favorable interest rate environment, management may use low cost borrowing to leverage the Company's balance sheet. OTHER TRENDS From December 31, 1995 to September 30, 1996, total deposits increased $13.0 million, with the increase occurring in certificate of deposit accounts, amounting to $19.0 million, offset by a decrease of $2.9 million in savings accounts, and a decrease of $3.0 million in demand, NOW and money market accounts. This trend of increasing balances in higher costing certificates of deposit is due largely to increases in the prevailing rates paid in the Company's market area. Interest rates offered on the Company's passbook accounts, and certificates of deposit are at competitive rates. These trends contributed to the increase in the Company's average cost of funds from 4.10% for the nine months ended September 30, 1995 to 4.36% for the nine months ended September 30, 1996. A continuation of these trends could further increase the Company's cost of funds and a narrowing of the Company's net interest spread. It is management's strategy to maintain deposit growth within reasonable limits, and to utilize various low cost funding venues to finance investment opportunities.
19 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 September 30, 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 September 30, 1996: <TABLE> <CAPTION> Percent of Amount Assets ---------- ----------- (Dollars in thousands) <S> <C> <C> Tangible capital: Capital level $91,654 12.52% Requirement 10,982 1.50 Excess 80,672 11.02 Core capital: Capital level $91,654 12.52% Requirement 29,284 4.00 Excess 62,370 8.52 Risk-based capital: Capital level $96,249 26.22% Requirement 29,362 8.00 Excess 66,887 18.22 </TABLE>
20 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 nine months ended September 30, 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 nine months ended September 30, --------------------------------------------------------- 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 $ 309,675 $ 20,776 8.95% $ 259,939 $ 18,109 9.29% Other loans 2,067 180 11.61 2,919 228 10.41 Mortgage-backed securities 165,493 7,995 6.44 180,578 8,750 6.46 Interest-earning deposits 10,732 431 5.35 13,806 533 5.15 Other securities 220,900 11,252 6.79 110,269 5,197 6.28 --------- ------- ---- -------- ------ ----- Total interest-earning assets 708,867 40,634 7.64 567,511 32,817 7.71 ------- ---- ------ ----- Non-interest earning assets 38,453 36,674 --------- -------- Total assets $ 747,320 $ 604,185 ========= ======== LIABILITIES and NET WORTH Interest-bearing liabilities: Deposits: Regular savings accounts $ 215,978 4,622 2.85 $ 230,025 4,905 2.84 NOW accounts 19,228 273 1.89 18,330 259 1.88 Money market accounts 26,917 564 2.79 32,077 670 2.78 Certificates of deposit accounts 292,772 12,452 5.67 253,482 10,470 5.51 Mortgagors escrow deposits 4,209 47 1.49 4,108 43 1.40 Borrowed funds 31,492 1,350 5.72 6,846 369 7.19 Other interest-bearing liabilities 498 32 8.57 789 50 8.45 --------- ------- ---- -------- ------ ---- Total interest-bearing liabilities 591,094 19,340 4.36 545,657 16,766 4.10 ------- ---- ------ ---- Other liabilities 17,947 14,741 --------- -------- Total liabilities 609,041 560,398 Equity 138,279 43,787 --------- -------- Total liabilities and equity $ 747,320 $ 604,185 ========= ======== Net interest income/expense spread $ 21,294 3.28% $ 16,051 3.61% ======== ===== ====== ==== Net interest-earning assets/ net interest margin $ 117,773 4.01% $ 21,854 3.77% ========= ===== ======== ==== Ratio of interest-earning asset to interest-bearing liabilities 1.20x 1.04x ===== ==== </TABLE>
21 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LOANS - ----- 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 nine For the months ended year ended September 30, 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 38,496 19,298 Cooperative 20 140 Multi-family 31,380 19,162 Commercial 2,402 2,144 ------- ------ Total mortgage loans originated 72,298 40,744 Acquired loans 29,641 18,766 Less: Principal reductions 26,718 29,384 Mortgage loans sold 0 626 Mortgage loan foreclosures 1,003 653 ------- ------- At end of period $ 358,661 $ 284,443 ======= ======= OTHER LOANS: At beginning of period $ 2,328 $ 3,231 Net activity (605) (903) ------- ------- At end of period $ 1,723 $ 2,328 ======= ======= </TABLE>
22 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> September 30, December, 31 1996 1995 ---------- ------------ (Dollars in thousands) <S> <C> <C> Non-accrual mortgage loans $ 3,494 $ 4,697 Other non-accrual loans 36 50 ------ ------ Total non-accrual loans 3,530 4,747 Mortgage loans 90 days or more delinquent and still accruing 0 234 Other loans 90 days or more delinquent and still accruing 0 0 ------ ------ Total non-performing loans 3,530 4,981 Real estate owned (foreclosed real estate) 1,929 1,869 ------ ------ Total non-performing assets $ 5,459 $ 6,850 ====== ====== Non-performing loans to gross loans 0.98% 1.74% Non-performing assets to total assets 0.71% 0.97% </TABLE>
23 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 Board of Directors reviews and approves the adequacy of the loan loss reserves on a quarterly basis. The following table sets forth the Bank's allowance for loan losses at and for the dates indicated. <TABLE> <CAPTION> September 30, December 31, 1996 1995 ----------- ------------- (Dollars in thousands) <S> <C> <C> Balance at beginning of period $ 5,310 $ 5,370 Provision for loan losses 322 496 Loans charged-off: One-to-four family 180 312 Cooperative 162 183 Multi-family 29 251 Commercial 58 260 Other 34 46 ------- ------- Total loans charged-off 463 1,052 ------- ------- Recoveries: Mortgage loans 62 496 Other 0 0 ------- ------- Total recoveries 62 496 ------- ------- Other adjustments 0 0 ------- ------- Balance at end of period $ 5,231 $ 5,310 ======= ======= Ratio of net charge-offs during the year to average loans outstanding during the period 0.13% 0.21% Ratio of allowance for loans losses to gross loans at end of period 1.45% 1.85% Ratio of allowance for loans losses to non-performing loans at end of period 148.19% 106.61% Ratio of allowance for loans losses to non-performing assets at end of period 95.82% 77.52% </TABLE>
24 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. Flushing Financial Corporation rights Plan (see item 6A and 6B). 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 4.1 Flushing Financial Corporation Rights Plan (incorporated by reference to Form 8-K filed on September 30, 1996) 10.3(a) Amendment to Employment Agreement between Flushing Financial Corporation and Michael J. Hegarty. 10.3(b) Amendment to Employment Agreements between Flushing Financial Corporation and Certain Officers. 10.8(a) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and each Director. 10.8(b) Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and Certain Officers. 27 Financial data schedules for electronic (EDGAR) filing. b) REPORTS ON FORM 8-K On September 30, 1996, the Company filed a Form 8-k reporting the Board of Director's declaration on September 17, 1996 of a dividend distribution of one Right for each outstanding share of Common Stock, par value $0.01 per share, of the Company to stockholders of record on September 30, 1996.
25 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: November 13, 1996 By: /s/ James F. McConnell ------------------ ------------------------------------ James F. McConnell President and Chief Executive Officer Dated: November 13, 1996 By: /s/ Monica C. Passick ------------------ ----------------------------------- Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer
26 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 10.3(a) Employment Agreement Amendment No. 1 10.3(b) Employment Agreement Amendment No. 2 10.8(a) Indemnity Agreement Amendment No. 1 10.8(b) Indemnity Agreement Amendment No. 2 27 Financial Data Schedule