UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended MARCH 31, 1997. 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 March 31, 1997 were 8,087,597.
1 CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition as of March 31, 1997 (unaudited) and December 31, 1996 2 Consolidated Statements of Income for the three months and three months ended March 31, 1997 and 1996 (unaudited). 3 Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (unaudited). 4 Consolidated Statement of Changes in Shareholders' Equity for the three months ended March 31, 1997 (unaudited) 5 Notes to Consolidated Financial Statements. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 20 Item 2. Changes in Securities. 20 Item 3. Defaults Upon Senior Securities. 20 Item 4. Submission of Matters to a Vote of Security Holders. 20 Item 5. Other information. 20 Item 6. Exhibits and Reports on Form 8-K. 20 SIGNATURES 21 EXHIBITS 22
2 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1997 1996 ------------- ------------- (Unaudited) <C> <C> <S> ASSETS: Cash and due from banks $ 9,037,791 $ 7,472,155 Federal funds sold and overnight interest-earning deposits 28,800,000 26,953,000 Securities available for sale: Mortgage-backed securities 158,599,024 141,038,177 Other securities 164,066,541 190,856,985 Loans: 1-4 Family residential mortgage loans 248,649,174 236,518,280 Multi-family mortgage loans 122,709,058 104,870,271 Commercial real estate loans 57,364,279 46,697,783 Consumer loans 1,565,360 1,679,403 Less: Unearned loan fees (1,272,218) (1,548,287) Allowance for loan losses (5,508,470) (5,436,832) ------------- ------------- Net loans 423,507,183 382,780,618 Interest and dividends receivable 6,014,268 6,896,504 Real estate owned, net 279,896 1,218,296 Bank premises and equipment, net 6,136,208 5,796,166 Other assets 14,748,100 12,330,603 ------------- ------------- Total assets $ 811,189,011 $ 775,342,504 ============= ============= LIABILITIES: Due to depositors: Non-interest bearing $ 13,466,269 $ 10,292,645 NOW and money market accounts 46,006,533 46,589,109 Savings accounts 208,922,914 209,689,857 Certificates of deposit 322,665,309 314,482,971 Mortgagors' escrow deposits 6,871,690 3,424,764 Borrowed funds 76,000,000 51,000,000 Other liabilities 7,342,118 6,582,114 ------------- ------------- Total liabilities 681,274,833 642,061,460 ------------- ------------- 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; 8,087,597 and 8,250,497 shares outstanding at March 31, 1997 and at December 31, 1996, respectively) 89,101 89,101 Additional paid-in capital 101,282,565 101,277,592 Treasury stock (822,503 and 659,603 shares at March 31, 1997 and December 31, 1996, respectively) (14,965,918) (12,065,068) Unearned compensation - Employee Benefit Trust (7,417,397) (7,443,267) Unearned compensation - Restricted Stock Awards (3,833,617) (4,216,873) Retained earnings 58,461,789 56,869,884 Net unrealized loss on securities available for sale, net of taxes (3,702,345) (1,230,325) ------------- ------------- Total stockholders' equity 129,914,178 133,281,044 ------------- ------------- Total liabilities and stockholders' equity $ 811,189,011 $ 775,342,504 ============= ============= <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, -------------------------- 1997 1996 ----------- ----------- (Unaudited) <S> <C> <C> Interest and dividend income: Interest and fees on loans $ 8,590,007 $ 6,535,855 Interest and dividends on securities: Taxable interest 5,591,333 6,067,452 Tax-exempt interest 7,930 13,739 Dividends 72,930 109,861 Other interest income 395,282 173,542 ----------- ----------- Total interest and dividend income 14,657,482 12,900,449 ----------- ----------- Interest expense: Deposits 6,249,455 5,991,521 Other interest expense 771,101 150,209 ----------- ----------- Total interest expense 7,020,556 6,141,730 ----------- ----------- Net interest income 7,636,926 6,758,719 Provision for loan losses 20,172 151,946 ----------- ----------- Net interest income after provision for loan losses 7,616,754 6,606,773 ----------- ----------- Non-interest income: Other fee income 344,972 228,686 Net gain (loss) on sales of securities and loans 52,199 321,976 Other income 33,455 191,283 ----------- ----------- Total non-interest income 430,626 741,945 ----------- ----------- Non-interest expense: Salaries and employee benefits 2,419,616 2,016,092 Occupancy and equipment 457,049 524,238 Professional services 400,798 501,061 Federal deposit insurance premiums 18,089 500 Data processing 278,423 255,005 Depreciation and amortization 193,917 195,425 Real estate owned, net 35,244 38,108 Other operating 750,694 711,687 ----------- ----------- Total non-interest expense 4,553,830 4,242,116 ----------- ----------- Income (loss) before income taxes 3,493,550 3,106,602 ----------- ----------- Provision for income taxes: Federal 1,001,745 879,727 State and local 602,266 564,085 ----------- ----------- Total taxes 1,604,011 1,443,812 ----------- ----------- Net income $ 1,889,539 $ 1,662,790 =========== =========== Weighted average number of common shares outstanding 7,468,091 7,957,381 Primary and fully diluted earnings per share $0.25 $0.21 <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, ------------------------- 1997 1996 ----------- ----------- (Unaudited) <S> <C> <C> Cash flows provided by operating activities: Net income $ 1,889,539 $ 1,662,790 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 20,172 151,946 Provision for losses on real estate owned 0 9,096 Depreciation of bank premises and equipment 193,917 195,425 Net (gain) loss on sales of securities & loans (52,199) (321,976) Net loss (gain) on sales of real estate owned 15,081 (21,169) Amortization of unearned premium, net of accretion of unearned discount 128,816 342,517 Amortization of deferred income (303,630) (179,212) Deferred income tax (benefit) provision (90,738) 52,008 Deferred compensation 22,035 40,835 Changes in operating assets and liabilities, net 1,443,213 2,289 Unearned compensation 414,099 10,130 ----------- ----------- Net cash provided by operating activities 3,680,305 1,944,679 ----------- ----------- Cash flows used in investing activities: Purchases of bank premises and equipment (533,959) (41,402) Purchases of securities available for sale (29,689,000) (90,128,000) Proceeds from sales and calls of securities available for sale 16,320,199 48,587,976 Proceeds from maturities and prepayments of securities available for sale 17,933,422 17,607,698 Net originations and repayments of loans (30,825,635) (10,749,708) Purchases of loans (9,154,000) (5,388,000) Proceeds from sales and operations of real estate owned 426,419 409,642 ----------- ----------- Net cash used in investing activities (35,522,554) (39,701,794) ----------- ----------- Cash flows provided by financing activities: Net increase (decrease) in non-interest bearing deposits 3,173,624 (279,438) Net increase in interest bearing deposits 6,832,819 9,755,271 Net increase in mortgagors' escrow deposits 3,446,926 2,377,408 Increase in borrowed funds 25,000,000 21,000,000 Repurchase of common stock (2,900,850) 0 Cash dividends paid (297,634) 0 ----------- ----------- Net cash provided by financing activities 35,254,885 32,853,241 ----------- ----------- Net increase(decrease) in cash and cash equivalents 3,412,636 (4,903,874) Cash and cash equivalents, beginning of period 34,425,155 19,321,639 ----------- ----------- Cash and cash equivalents, end of period $37,837,791 $14,417,765 =========== =========== Supplemental cash flow disclosure: Interest paid $ 7,020,556 $ 6,129,041 Income taxes paid 1,080,587 328,408 Non-cash activities: Loans originated as the result of real estate sales 542,500 146,525 Loans transferred through the foreclosure of a related mortgage loan foreclosure to real estate owned 0 341,169 Net change in unrealized loss on securities available for sale (4,590,220) (8,498,080) <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> Three months ended March 31, 1997 ------------------ (Unaudited) <S> <C> COMMON STOCK ($0.01 par value; 20,000,000 shares authorized; 8,910,100 shares issued; 8,087,597 shares outstanding) Balance at beginning of period $ 89,101 No activity 0 ------------ Balance at end of period $ 89,101 ============ ADDITIONAL PAID-IN CAPITAL Balance at beginning of period $101,277,592 401-k contribution 4,973 ------------ Balance at end of period $101,282,565 ============ TREASURY STOCK Balance at beginning of period $(12,065,068) Treasury shares repurchased at market (2,900,850) ------------ Balance at end of period $(14,965,918) ============ UNEARNED COMPENSATION - EMPLOYEE BENEFIT TRUST Balance at beginning of period $ (7,443,267) 401-k contribution: book value 25,870 ------------ Balance at end of period $ (7,417,397) ============ UNEARNED COMPENSATION - RESTRICTED STOCK AWARDS Balance at beginning of period $ (4,216,873) Restricted stock award expense ("RSA") 366,005 Permanent tax effect of vested RSA's 17,251 ------------ Balance at end of period $ (3,833,617) ============ RETAINED EARNINGS Balance at beginning of period $ 56,869,884 Net Income 1,889,539 Cash dividends (297,634) ------------ Balance at end of period $ 58,461,789 ============ NET UNREALIZED (LOSS) GAIN ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES Balance at beginning of period $ (1,230,325) Mark-to-market adjustment (2,472,020) ------------ Balance at end of period $ (3,702,345) ============ <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 March 31, 1997, the results of operations for the three months ended March 31, 1997 and 1996, the cash flow statements for the three months ended March 31, 1997 and 1996, and the statement of changes in stockholders'equity for the three months ended March 31, 1997. These adjustments consist of items which are of a normal recurring nature. The results of operations for the three months ended March 31, 1997 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 1996 Annual Report to Shareholders and SEC Form 10-K for the year ended December 31, 1996. 2. BORROWED FUNDS At March 31, 1997, advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled $76.0 million, with a composite interest rate of 6.07% 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, to fund increases in mortgage lending. (continued)
7 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. TREASURY STOCK In June and December 1996, the Company announced its intention to repurchase up to 716,350 and 409,688 shares of the Company's outstanding common stock, respectively, totaling 1,126,038 shares. As of March 31, 1997, the Company had purchased 830,550 shares at a cost of $15.1 million, an average of $18.21 per share, leaving 295,488 shares to be purchased under the Share Repurchase Program. Total shares outstanding at March 31, 1997 were 8,087,597. 4. RECENT ACCOUNTING PRONOUNCEMENTS FASB has issued SFAS 128, "Earnings per Share", effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. The objective of this Statement is to simplify the computation of earnings per share and to make the U.S. standard for computing earnings per share more comparable with the EPS standards of other countries and with that of the International Accounting Standards Committee. Adoption of this Pronouncement is not expected to have a material impact on the Company's consolidated financial statements. 5. SUBSEQUENT EVENTS Flushing Financial Corporation and New York Federal Savings Bank, a privately held federal savings bank, announced on April 25, 1997 a signed definitive merger agreement by which Flushing Financial Corporation will acquire New York Federal Savings Bank in a cash transaction valued at approximately $13 million. New York Federal will continue its operations as a division of Flushing Savings Bank under the New York Federal name. The acquisition must be approved by New York Federal shareholders and by federal regulatory authorities and is subject to various customary closing conditions. The merger agreement has been approved unanimously by the Boards of Directors of both Flushing Financial Corporation and New York Federal. The acquisition is anticipated to close in the third quarter of 1997 and will be accounted for as a purchase transaction.
8 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, a Delaware corporation, was organized in May 1994 to serve as the holding company for Flushing Savings Bank, FSB, a federally chartered, FDIC insured savings institution originally organized in 1929 (the "Bank"). The Bank is a consumer oriented savings institution and conducts its business through seven banking offices located in Queens, Brooklyn, Manhattan and Nassau County. Flushing Financial Corporation's common stock is publicly traded on the Nasdaq National Market under the symbol "FFIC". The following discussion of financial condition and results of operations include the collective results of Flushing Financial Corporation and the Bank (collectively the "Company"), but reflects principally the Bank's activities. The Company's principal business is attracting retail deposits from the general public and investing those deposits, together with borrowed funds and 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. (continued)
9 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 1996 Annual Report to Shareholders and the SEC Report on Form 10-K for the year ended December 31, 1996. The Company has no obligation to update these forward-looking statements. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 GENERAL. Net income for the first quarter of 1997 was $1.9 million, an increase of $227,000 from the net income of $1.7 million for the comparable 1995 period. This increase was primarily the result of a $878,000 increase net interest income, offset by a $311,000 decline in non-interest income and a $312,000 increase in non-interest expenses in the 1997 period as compared to the 1996 period. INTEREST INCOME. Total interest and dividend income increased $1.8 million from $12.9 million for the three months ended March 31, 1996 to $14.7 million for the three months ended March 31, 1997. This increase was primarily the result of a $112.8 million increase in the average earning balances of mortgage loans from the quarter ended March 31, 1996 as compared to the quarter ended March 31, 1997, and a $14.9 million increase in the average balances of federal funds sold and overnight interest-bearing deposits. These increases were offset in part by a $54.3 million decline in the average balances of investment securities available for sale from the first quarter of 1996 as compared to the first quarter of 1997. This shift in assets reflects the Company's planned growth in the mortgage loan market. (continued)
10 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST EXPENSE. Interest expense increased $879,000 from $6.1 million for the three months ended March 31, 1996 to $7.0 million for the three months ended March 31, 1997, primarily due to a $633,000 increase in borrowed funds expense as the average balance of borrowed funds increased. The Company has increased its utilization of Federal Home Loan Bank ("FHLB") advances which totaled $76.0 million at March 31, 1997, bearing a composite rate of 6.07%. Interest paid on deposits also increased $258,000 resulting from an increase of $34.8 million in the average balances of higher costing certificates of deposit accounts and a decline of $8.0 million in the average balances of lower costing regular savings and money market accounts from the quarter ended March 31, 1996 as compared to the quarter ended March 31, 1997. PROVISION FOR LOAN LOSSES. The provision for loan losses during the three months ended March 31, 1997 was $20,000 compared to $152,000 for the three months ended March 31, 1996. 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 the size and composition of the loan portfolio. NON-INTEREST INCOME. Total non-interest income declined by $311,000 from $742,000 for the first quarter of 1996 to $431,000 for the first quarter of 1997. This decline is primarily attributable to a reduction of $270,000 in net gain on sales of securities from $322,000 during the three months ended March 31, 1996 to $52,000 during the three months ended March 31, 1997. NON-INTEREST EXPENSE. Non-interest expense increased by $312,000 from $4.2 million for the three months ended March 31, 1996 to $4.6 million for the three months ended March 31, 1997. Expenses attributable to salaries and employee benefits rose $404,000, reflecting salary increases, contributions to profit sharing plans, and the amortization of unearned compensation expense associated with the Restricted Stock Awards made in May and December of 1996. (continued)
11 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $387,000 from $3.1 million for the three months ended March 31, 1996 to $3.5 million for the three months ended March 31, 1997 for the reasons stated above. PROVISION FOR INCOME TAXES. The provision for income taxes increased $160,000 from $1.4 million for the three months ended March 31, 1996 to $1.6 million for the three months ended March 31, 1997 as a result of a corresponding increase in income before income taxes. FINANCIAL CONDITION ASSETS. At March 31, 1997, total assets were $811.2 million, an increase of $35.8 million, or 4.62%, from the December 31, 1996 balance of $775.3 million. The growth in assets is primarily reflected in a $40.6 million increase in mortgage loans, offset in part by a decline of $9.2 million in securities available for sale. This shift in assets reflects the Company's planned growth in the mortgage loan market. The increase in mortgage loans consisted primarily of a $12.1 million, or 5.13% increase in the Bank's portfolio of 1-4 family residential loans and a $28.5 million, or 18.81% increase in multi-family and commercial real estate mortgage loans. From December 31, 1996 to March 31, 1997 total securities available for sale declined $9.2 million. This reduction in total securities available for sale includes a decline of $4.6 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 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 March 31, 1997, the Company had $4.0 million invested in one collateralized mortgage obligation ("CMO"). The CMO in the Company's portfolio is not considered high risk under regulations promulgated by the Office of Thrift Supervision ("OTS"). At March 31, 1997, the Company had $138.9 million in callable U.S. government securities. (continued)
12 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-performing assets declined by $1.4 million from $3.6 million at December 31, 1996 to $2.2 million at March 31, 1997. Total non-performing assets as a percentage of total assets declined to 0.27% at March 31, 1997 from 0.47% at December 31, 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 225.79% at December 31, 1996 to 288.53% at March 31, 1997. LIABILITIES. Deposit balances increased by $10.0 million during the first three months of 1997 to $591.1 million at March 31, 1997 primarily due to an $8.2 million increase in certificate of deposit accounts and a $3.2 increase in non-interest bearing demand deposits, offset in part by a decrease of $1.3 million in regular savings accounts, NOW and money market accounts. As described above, the Company also has continued its utilization of FHLB advances which totaled $76.0 million at March 31, 1996 with a weighted average interest rate of 6.07% and remaining maturity ranging from two months to two years, and an average maturity of 13 months. EQUITY. Total stockholders' equity decreased $3.4 million during the first three months of 1997 to $129.9 million at March 31, 1997. This decrease is due primarily to $2.9 million in treasury shares purchased through the Company's stock repurchase plan, as noted below, $298,000 in dividends declared as also noted below, and a decrease of $2.5 million, net of taxes, in unrealized market value of securities available for sale from December 31, 1996 to March 31, 1997, offset by $1.9 million in net income for the first three months of 1997. 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. 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)
13 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In June and December 1996, the Company announced its intention to repurchase up to 716,350 and 409,688 shares of the Company's outstanding common stock, respectively, totaling 1,126,038 shares. 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 March 31, 1997, the Company had purchased 830,550 shares at a cost of $15.1 million, an average of $18.21 per share, leaving 295,488 shares to be purchased under the Share Repurchase Program. Total shares outstanding at March 31, 1997 were 8,087,597. In light of the Company's capital strength and earnings performance, the Board of Directors declared a $0.04 per share dividend on February 18, 1997, to common shareholders of record March 10, 1997, and payable on March 28, 1997. Retained earnings was reduced by $298,000 to reflect this cash dividend. LIQUIDITY. The Bank, as a federal savings bank, is subject to 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 March 31, 1997 and December 31, 1996, the Bank's liquidity ratio, computed in accordance with the OTS requirement, was 8.35% and 10.91%, respectively. The decline in liquidity ratio is due to the Bank's implementation of management's strategy to increase mortgage loans, a long-term income producing asset. Management anticipates that the Bank will continue to meet OTS liquidity requirements. Unlike the Bank, Flushing Financial Corporation is not subject to OTS regulatory requirements on the maintenance of minimum levels of liquid assets. (continued)
14 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 in the originations and purchases of residential, multi-family and commercial real estate mortgage loans. During the three months ended March 31, 1997, net originations and repayments of loans totaled $30.8 million, and $9.2 million in residential mortgage loans were purchased. During periods of low loan demand, the Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. In the first three months of 1997, the Company purchased a total of $29.7 million in securities available for sale. Cash flow used in these investment activities were funded in part from an aggregate $34.3 million in sales, calls, maturities and prepayments of securities available for sale. General funding for Company activities comes from cashflow provided by operating and financing activities totaling $3.7 million and $35.3 million for the three months ended March 31, 1997, respectively. For the three months ended March 31, 1997, the Company borrowed $25.0 million in short-term FHLB advances. In addition, the Bank's total deposit base increased by $13.5 million from December 31, 1996 to March 31, 1997.
15 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 Office of Thrift Supervision ("OTS") capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. At March 31, 1997, 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, 1997: <TABLE> <CAPTION> Percent of Amount Assets ------------ ------------ (Dollar in thousands) <S> <C> <C> Tangible capital: Capital level $94,801 12.22% Requirement 11,636 1.50 Excess 83,165 10.72 Core capital: Capital level $94,801 12.22% Requirement 31,031 4.00 Excess 63,770 8.22 Risk-based capital: Capital level $99,404 27.06% Requirement 29,388 8.00 Excess 70,016 19.06 </TABLE>
16 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, 1997 and 1996, 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, ----------------------------------------------------------- 1997 1996 ---------------------------- ----------------------------- 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 $399,500 $ 8,546 8.56% $286,666 $ 6,477 9.04% Other loans 1,653 44 10.65 2,261 59 10.44 Mortgage-backed securities 150,078 2,567 6.84 177,802 2,809 6.32 Other securities 180,303 3,105 6.89 206,892 3,382 6.54 Interest-earning deposits 27,483 395 5.75 12,629 174 5.51 --------- -------- ---------- --------- -------- ---------- Total interest-earning assets 759,017 14,657 7.72 686,250 12,901 7.52 -------- ---------- -------- ---------- Non-interest earning assets 31,308 36,855 --------- --------- Total assets $790,325 $723,105 ========= ========= LIABILITIES and NET WORTH Interest-bearing liabilities: Deposits: Regular savings accounts $209,947 1,485 2.83 $215,853 1,535 2.84 NOW accounts 21,457 100 1.86 18,920 89 1.88 Money market accounts 25,744 170 2.64 27,800 194 2.79 Certificates of deposit accounts 323,556 4,481 5.54 288,723 4,157 5.76 Mortgagors escrow deposits 5,242 13 1.00 4,047 16 1.58 Borrowed funds 60,611 771 5.09 10,395 138 5.31 Other interest-bearing liabilities 0 0 0 596 13 8.72 --------- -------- ---------- --------- -------- ---------- Total interest-bearing liabilities 646,557 7,020 4.34 566,334 6,142 4.34 -------- ---------- -------- ---------- Other liabilities 13,353 16,187 --------- --------- Total liabilities 659,910 582,521 Equity 130,415 140,584 --------- --------- Total liabilities and equity $790,325 $723,105 ========= ========= Net interest income/expense spread $ 7,637 3.38% $ 6,759 3.18% ======== ========== ======== ========== Net interest-earning assets/ net interest margin $112,460 4.02% $119,916 3.94% ========= ========== ========= ========== Ratio of interest-earning asset to interest-bearing liabilities 1.17x 1.21x ========== ========== </TABLE>
17 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 three For the months ended year ended March 31, 1997 December 31, 1996 ------------------ ----------------- (In thousands) <S> <C> <C> MORTGAGE LOANS: At beginning of period $ 388,086 $ 284,443 Mortgage loans originated: One-to-four family 9,625 51,309 Cooperative 0 76 Multi-family 18,985 43,184 Commercial 10,934 7,501 Construction 605 0 --------- --------- Total mortgage loans originated 40,149 102,070 Acquired loans 9,154 39,873 Less: Principal reductions 8,666 37,150 Mortgage loans sold 0 0 Mortgage loan foreclosures 0 1,150 --------- --------- At end of period $ 428,723 $ 388,086 ========= ========= OTHER LOANS: At beginning of period $ 1,680 $ 2,328 Net activity (115) (648) --------- --------- At end of period $ 1,565 $ 1,680 ========= ========= </TABLE>
18 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 1997 1996 ------------ ------------ (Dollars in thousands) <S> <C> <C> Non-accrual mortgage loans $ 1,859 $ 2,372 Other non-accrual loans 50 36 ------- ------- Total non-accrual loans 1,909 2,408 Mortgage loans 90 days or more delinquent and still accruing 0 0 Other loans 90 days or more delinquent and still accruing 0 0 ------- ------- Total non-performing loans 1,909 2,408 Real estate owned (foreclosed real estate) 280 1,218 ------- ------- Total non-performing assets $ 2,189 $ 3,626 ======= ======= Non-performing loans to gross loans 0.44% 0.62% Non-performing assets to total assets 0.27% 0.47% </TABLE>
19 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> March 31, December 31, 1997 1996 ------------ ------------ (Dollars in thousands) <S> <C> <C> Balance at beginning of period $ 5,437 $ 5,310 Provision for loan losses 20 418 Loans charged-off: One-to-four family 0 220 Cooperative 0 162 Multi-family 0 41 Commercial 0 68 Other 10 44 ------- ------- Total loans charged-off 10 535 ------- ------- Recoveries: Mortgage loans 56 244 Other 5 0 ------- ------- Total recoveries 61 244 ------- ------- Other adjustments 0 0 ------- ------- Balance at end of period $ 5,508 $ 5,437 ======= ======= Ratio of net charge-offs during the year to average loans outstanding during the period -0.01% 0.09% Ratio of allowance for loans losses to gross loans at end of period 1.28% 1.39% Ratio of allowance for loans losses to non-performing loans at end of period 288.53% 225.79% Ratio of allowance for loans losses to non-performing assets at end of period 251.62% 149.94% </TABLE>
20 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.
21 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 14, 1997 By: /s/ James F. McConnell ---------------- ------------------------------------ James F. McConnell President and Chief Executive Officer Dated: May 14, 1997 By: /s/ Monica C. Passick ---------------- ------------------------------------ Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer
22 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 27 Financial Data Schedule