UNITED STATES SECURITIES and EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended JUNE 30, 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, FLUSHING, NEW YORK 11354 (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 June 30, 1997 were 7,978,740.
1 CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition as of June 30, 1997 (unaudited) and December 31, 1996. 2 Consolidated Statements of Operations for the three months and six months ended June 30, 1997 and 1996 (unaudited). 3 Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited). 4 Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 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 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 EXHIBITS 24
2 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1997 1996 -------------- -------------- (Unaudited) <S> <C> <C> ASSETS Cash and due from banks $ 9,378,662 $ 7,472,155 Federal funds sold and overnight interest-earning deposits 16,400,000 26,953,000 Securities available for sale: Mortgage-backed securities 192,113,454 141,038,177 Other securities 144,755,811 190,856,985 Loans: 1-4 Family residential mortgage loans 273,337,504 236,518,280 Multi-family mortgage loans 146,406,177 104,870,271 Commercial real estate loans 55,767,368 46,697,783 Consumer loans 1,424,212 1,679,403 Less: Unearned loan fees (1,279,742) (1,548,287) Allowance for loan losses (5,490,739) (5,436,832) -------------- -------------- Net loans 470,164,780 382,780,618 Interest and dividends receivable 6,552,395 6,896,504 Real estate owned, net 281,464 1,218,296 Bank premises and equipment, net 6,518,304 5,796,166 Other assets 13,865,670 12,330,603 -------------- -------------- Total assets $ 860,030,540 $ 775,342,504 ============== ============== LIABILITIES Due to depositors: Non-interest bearing $ 10,621,780 $ 10,292,645 NOW and money market accounts 47,151,675 46,589,109 Savings accounts 206,058,649 209,689,857 Certificates of deposit 326,630,570 314,482,971 Mortgagors' escrow deposits 5,100,694 3,424,764 Borrowed funds 126,186,525 51,000,000 Other liabilities 5,191,231 6,582,114 -------------- -------------- Total liabilities 726,941,124 642,061,460 -------------- -------------- 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; 7,978,740 and 8,250,497 shares outstanding at June 30, 1997 and December 31, 1996, respectively) 89,101 89,101 Additional paid-in capital 101,400,217 101,277,592 Treasury stock (931,360 and 659,603 shares at June 30, 1997 and December 31, 1996, respectively) (17,017,731) (12,065,068) Unearned compensation (11,032,090) (11,660,140) Retained earnings 60,145,330 56,869,884 Net unrealized loss on securities available for sale, net of taxes (495,411) (1,230,325) -------------- -------------- Total stockholders' equity 133,089,416 133,281,044 -------------- -------------- Total liabilities and stockholders' equity $ 860,030,540 $ 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 For the six months ended June 30, June 30, ---------------------------- --------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- (Unaudited) <S> <C> <C> <C> <C> INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 9,758,184 $ 6,870,625 $ 18,348,191 $ 13,406,480 Interest and dividends on securities: Taxable interest 5,848,178 6,388,326 11,439,511 12,455,778 Tax-exempt interest 7,944 18,245 15,874 31,984 Dividends 63,068 86,432 135,998 196,293 Other interest income 262,237 150,100 657,519 323,642 ------------- ------------- ------------- ------------- Total interest and dividend income 15,939,611 13,513,728 30,597,093 26,414,177 ------------- ------------- ------------- ------------- INTEREST EXPENSE Deposits 6,294,238 5,928,434 12,543,693 11,919,955 Other interest expense 1,699,305 472,254 2,470,406 622,463 ------------- ------------- ------------- ------------- Total interest expense 7,993,543 6,400,688 15,014,099 12,542,418 ------------- ------------- ------------- ------------- NET INTEREST INCOME 7,946,068 7,113,040 15,582,994 13,871,759 Provision for loan losses 46,620 150,000 66,792 301,946 ------------- ------------- ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,899,448 6,963,040 15,516,202 13,569,813 ------------- ------------- ------------- ------------- NON-INTEREST INCOME Other fee income 142,429 193,947 487,401 422,633 Net(loss)gain on sale of securities and loans(3,180) 154,361 49,019 476,337 Other income 304,838 197,575 338,293 388,858 ------------- ------------- ------------- ------------- Total non-interest income 444,087 545,883 874,713 1,287,828 ------------- ------------- ------------- ------------- NON-INTEREST EXPENSE Salaries and employee benefits 2,353,596 2,129,232 4,773,212 4,145,324 Occupancy and equipment 481,366 501,854 938,415 1,026,092 Professional services 379,790 564,268 780,588 1,065,329 Federal deposit insurance premiums 18,946 500 37,035 1,000 Data processing 184,401 626,624 462,824 881,629 Depreciation and amortization 186,255 280,948 380,172 476,373 Real estate owned, net (9,901) 91,798 25,343 129,906 Recovery of provision for deposits at Nationar 0 (449,392) 0 (449,392) Other operating 839,223 766,072 1,589,917 1,477,759 ------------- ------------- ------------- ------------- Total non-interest expense 4,433,676 4,511,904 8,987,506 8,754,020 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 3,909,859 2,997,019 7,403,409 6,103,621 ------------- ------------- ------------- ------------- PROVISION FOR INCOME TAXES Federal 1,103,598 820,640 2,105,343 1,700,367 State and local 682,788 525,059 1,285,054 1,089,144 ------------- ------------- ------------- ------------- Total taxes 1,786,386 1,345,699 3,390,397 2,789,511 ------------- ------------- ------------- ------------- NET INCOME $ 2,123,473 $ 1,651,320 $ 4,013,012 $ 3,314,110 ============= ============= ============= ============= Weighted average number of common shares outstanding 7,388,815 8,086,081 7,427,836 8,021,731 Primary and fully diluted earnings per share $0.29 $0.20 $0.54 $0.41 <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 six months ended June 30, ------------------------------ 1997 1996 -------------- -------------- (Unaudited) <S> <C> <C> CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net income $ 4,013,012 $ 3,314,110 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 66,792 301,946 Provision for losses on real estate owned 0 60,000 Recovery of provision for deposits at Nationar 0 (449,392) Depreciation of bank premises and equipment 380,172 476,373 Net gain on sales of securities and loans (49,019) (476,337) Net gain on sales of real estate owned (299) (50,019) Amortization of unearned premium, net of accretion of unearned discount 274,206 683,638 Amortization of deferred income (275,302) (379,992) Deferred income tax provision 332,736 336,363 Deferred compensation 78,356 89,389 Changes in operating assets and liabilities, net (3,793,566) 3,510,425 Unearned compensation 750,675 126,342 -------------- -------------- Net cash provided by operating activities 1,777,763 7,542,846 -------------- -------------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchases of bank premises and equipment (1,102,310) (306,134) Purchases of securities available for sale (93,129,475) (121,490,000) Proceeds from sales and calls of securities available for sale 64,262,019 64,092,337 Proceeds from maturities and prepayments of securities available for sale 25,318,342 37,332,079 Net originations and repayments of loans (64,507,324) (24,535,903) Purchases of loans (22,186,000) (18,150,000) Proceeds from sales and operations of real estate owned 526,699 662,057 -------------- -------------- Net cash used in investing activities (90,818,049) (62,395,564) -------------- -------------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Net increase(decrease) in non-interest bearing deposits 329,135 (730,545) Net increase in interest-bearing deposits 9,078,957 10,168,031 Net increase in mortgagors' escrow deposits 1,675,930 1,018,898 Net increase in borrowed funds 75,000,000 51,000,000 Repurchase of common stock (4,952,663) 0 Cash dividends paid (737,566) 0 -------------- -------------- Net cash provided by financing activities 80,393,793 61,456,384 -------------- -------------- Net (decrease)increase in cash and cash equivalents (8,646,493) 6,603,666 Cash and cash equivalents, beginning of period 34,425,155 19,321,639 -------------- -------------- Cash and cash equivalents, end of period $ 25,778,662 $ 25,925,305 ============== ============== SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 15,014,099 $ 12,531,307 Income taxes paid 3,526,587 2,707,233 Non-cash activities: Loans originating as the result of real estate sales 617,200 220,009 Loans transferred through the foreclosure of a real estate owned 141,313 755,713 Net change in unrealized loss on securities available for sale 1,361,113 (12,659,411) <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 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Six months ended June 30, 1997 ---------------- (Unaudited) <S> <C> COMMON STOCK ($0.01 par value; 20,000,000 shares authorized; 8,910,100 shares issued; 7,978,740 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 Release and allocation of shares from Employee Benefit Trust 10,365 Stock options exercised (16,357) Tax benefit of stock plans 128,617 -------------- Balance at end of period $ 101,400,217 ============== TREASURY STOCK Balance at beginning of period $ (12,065,068) Stock Buyback of 264,800 common shares outstanding (4,833,887) Repurchase of 12,757 shares from Restricted Stock Award (242,383) Options exercised 123,607 -------------- Balance at end of period $ (17,017,731) ============== UNEARNED COMPENSATION Balance at beginning of period $ (11,660,140) Release of shares from Employee Benefit Trust 64,651 Restricted stock award expense 563,399 -------------- Balance at end of period $ (11,032,090) ============== RETAINED EARNINGS Balance at beginning of period $ 56,869,884 Net income 4,013,012 Cash dividends (737,566) -------------- Balance at end of period $ 60,145,330 ============== NET UNREALIZED (LOSS)GAIN ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES Balance at beginning of period $ (1,230,325) Mark-to-market adjustment 734,914 -------------- Balance at end of period $ (495,411) ============== <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 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 June 30, 1997, the results of operations for the three months and six months ended June 30, 1997 and 1996, the statement of cash flow for the six months ended June 30, 1997 and 1996, and the statement of changes in stockholders' equity for the six months ended June 30, 1997. These adjustments consist of items which are of a normal recurring nature. The results of operations for the six months ended June 30, 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 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 June 30, 1997, advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled $126.0 million, with a composite interest rate of 6.23% and an average maturity of 1.4 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. 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 June 30, 1997, the Company had purchased 932,450 shares at a cost of $17.1 million, an average of $18.29 per share, leaving 193,588 shares to be purchased under the share repurchase programs. Total shares outstanding at June 30, 1997 were 7,978,740. (continued)
7 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS 4. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") has issued SFAS 130, "Reporting Comprehensive Income", effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for reporting and display of comprehensive income in a full set of general-purpose financial statements. Comprehensive income is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners, an example of which is the unrealized gain/(loss) on securities available for sale, net of taxes. Management will implement the disclosure requirements as per FASB Pronouncement. The FASB has issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information", effective for fiscal years beginning after December 15, 1997. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and selected information about operating segments in interim financial reports. Operating segments are components of an enterprise about which seperate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocated resources and in assessing performance. Management will implement the disclosure requirements as per FASB Pronouncement.
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. As part of management's continuing review of the Company's operations, management has discussed the possibilities of problems relating to the year 2000 with its outside data processing vendors. These vendors are in the process of reviewing their systems in regards to this potential problem. The Company does not maintain a data processing center. (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 JUNE 30, 1997 AND 1996 GENERAL. Net income for the second quarter of 1997 was $2.1 million, an increase of $472,000 as compared to the 1996 second quarter net income of $1.7 million. This increase was primarily the result of a $833,000 increase in net interest income and a decline of $78,000 in non-interest expense, offset in part by a $102,000 decline in non-interest income. INTEREST INCOME. Total interest and dividend income increased $2.4 million from $13.5 million for the three months ended June 30, 1996 to $15.9 million for the comparable 1997 period. This increase was primarily the result of a $140.8 million increase in the average earning balances of mortgage loans from the quarter ended June 30, 1996 as compared to the quarter ended June 30, 1997, and a $13.1 million increase in the average balances of federal funds sold and overnight interest-earning deposits. These were offset in part by a $51.1 million decline in the average balances of investment securities available for sale from the second quarter of 1996 as compared to the second 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 $1.6 million from $6.4 million for the three months ended June 30, 1996 as compared to $8.0 million for the three months ended June 30, 1997. This increase is primarily due to a $78.3 million increase in the average balances of borrowed funds. The Company has increased its utilization of Federal Home Loan Bank ("FHLB") advances which totaled $126.0 million at June 30, 1997, bearing a composite rate of 6.23%. Interest paid on deposits also increased $366,000, resulting from an increase of $30.6 million in the average balance of higher costing certificates of deposit accounts and a decline of $9.9 million in the average balances of lower costing regular savings and money market accounts from the quarter ended June 30, 1996 as compared to the quarter ended June 30, 1997. PROVISION FOR LOAN LOSSES. The provision for loan losses during the three months ended June 30, 1997 was $47,000, compared to $150,000 for the three months ended June 30, 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), its analysis of specific loan situations, and the size and composition of the loan portfolio. NON-INTEREST INCOME. Total non-interest income declined by $102,000 from $546,000 for the second quarter of 1996 as compared to $444,000 for the three months ended June 30, 1997. This decline is primarily attributable to a $3,000 loss on sales of securities during the three months ended June 30, 1997, as compared to a gain on sales of securities of $154,000 during the second quarter of 1996. This decline is offset in part by a net increase of $56,000 in other fee and services income. NON-INTEREST EXPENSE. Non-interest expense declined by $78,000 from $4.5 million for the three months ended June 30, 1996 as compared to $4.4 million for the three months ended June 30, 1997. The decline is due primarily to a decrease of $442,000 in data processing expenses due to a one time accrual of expenses in the first half of 1996 for costs associated with changing the Company's data service providers, a $184,000 decrease in professional services, and a $102,000 decline in net expenses for real estate owned, because gain on sale of real estate owned exceeded expenses during the second quarter of 1997. These declines in expenses were offset in part by a $224,000 increase in expenses attributable to salaries and employee benefits, which reflects 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. Also offsetting the comparative decline in non-interest expenses was a one-time recovery of provision for deposits at Nationar of $449,000 during the 1996 period, which reduced 1996 expenses. (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 $913,000, or 30.46%, from $3.0 million for the three months ended June 30, 1996 as compared to $3.9 million for the three months ended June 30, 1997 for the reasons stated above. PROVISION FOR INCOME TAXES. The provision for income taxes increased $441,000 from $1.3 million for the three months ended June 30, 1996 as compared to $1.8 million for the three months ended June 30, 1997 as a result of a corresponding increase in income before income taxes. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 GENERAL. Net income for the six months ended 1997 was $4.0 million, an increase of $699,000 as compared to $3.3 million for the six months ended June 30, 1996. This increase was primarily the result of a $1.7 million increase in net interest income, offset in part by a decline of $413,000 in non-interest income and an increase of $233,000 in non-interest expense. INTEREST INCOME. Total interest and dividend income increased $4.2 million from $26.4 million for the six months ended June 30, 1996 as compared to $30.6 million for the six months ended June 30, 1997. This increase was primarily the result of a $126.9 million increase in the average earning balances of mortgage loans from the six months ended June 30, 1996 as compared to the six months ended June 30, 1997, and a $11.9 million increase in the average balances of federal funds sold and overnight interest-earning deposits. These were offset in part by a $54.4 million decline in the average balances of investment securities available for sale from the first half of 1996 as compared to the comparable 1997 period. This shift in assets reflects the Company's planned growth in the mortgage loan market. INTEREST EXPENSE. Interest expense increased $2.5 million from $12.5 million for the six months ended June 30, 1996 as compared to $15.0 million for the six months ended June 30, 1997. This increase is primarily due to a $63.9 million increase in the average balances of borrowed funds. The Company has increased its utilization of Federal Home Loan Bank ("FHLB") advances which totaled $126.0 million at June 30, 1997, bearing a composite rate of 6.23%. Interest paid on deposits also increased $596,000, resulting from an increase of $31.5 million in the average balance of higher costing certificates of deposit accounts and a decline of $9.9 million in the average balances of lower costing regular savings and money market accounts from the six months ended June 30, 1996 as compared to the six months ended June 30, 1997. (continued)
12 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 six months ended June 30, 1997 was $67,000, compared to $302,000 for the six months ended June 30, 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 $413,000 from $1.3 million for the first half of 1996 as compared to $875,000 for the comparable 1997 period. This decline is primarily attributable to a $427,000 decrease in gain on sales of securities from $476,000 during the six months ended June 30, 1996 as compared to $49,000 for the six months ended June 30, 1997. NON-INTEREST EXPENSE. Non-interest expense increased by $233,000 from $8.8 million for the six months ended June 30, 1996 as compared to $9.0 million for the six months ended June 30, 1997. The increase is due primarily to an increase of $628,000 in expenses attributable to salaries and employee benefits, which reflects 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. The increase in non-interest expense on a comparative basis from the 1996 period also was attributable to a one-time recovery of provision for deposits at Nationar of $449,000 during the 1996 period, which reduced 1996 expenses. These increases were offset in part by a $285,000 decline in professional services, a $419,000 decrease in data processing expenses due to a one time accrual of expenses in the first half of 1996 for costs associated with changing the Company's data service providers, and a $105,000 decline in net real estate owned expenses as management continues to monitor its loan portfolio. INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $1.3 million, or 21.30%, from $6.1 million for the six months ended June 30, 1996 as compared to $7.4 million for the six months ended June 30, 1997 for the reasons stated above. PROVISION FOR INCOME TAXES. The provision for income taxes increased $601,000 from $2.8 million for the six months ended June 30, 1996 as compared to $3.4 million for the six months ended June 30, 1997 as a result of a corresponding increase in income before income taxes. (continued)
13 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION ASSETS. At June 30, 1997, total assets equaled $860.0 million, an increase of $84.7 million, or 10.92%, from the December 31, 1996 balance of $775.3 million. The growth in assets is primarily reflected in an $87.4 million increase in mortgage loans and a $5.0 million increase in securities available for sale. This growth is offset in part by a decline of $10.6 million in federal funds sold and overnight interest-earning deposits. The increase in mortgage loans consisted primarily of a $36.8 million, or 15.57%, increase in one-to-four family residential mortgage loans, a $41.5 million, or 39.61% increase in multi-family real estate mortgage loans, and a $9.1 million, or 19.42%, increase in commercial real estate mortgage loans. From December 31, 1996 to June 30, 1997, total securities available for sale increased by $5.0 million. This increase in total securities available for sale includes a $1.4 million increase in unrealized mark-to-market valuation of the securities, before tax effect, as a result of 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 June 30, 1997, the Company had $105.8 million in callable U.S. government securities. The Company has no investments in derivatives at June 30, 1997. Non-performing assets declined by $1.1 million to $2.5 million at June 30, 1997 from $3.6 million at December 31, 1996. Total non-performing assets as a percentage of total assets declined from 0.47% at December 31, 1996 to 0.29% at June 30, 1997. 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 252.00% at June 30, 1997. (continued)
14 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIABILITIES. Deposit balances increased by $9.4 million during the six months ended June 30, 1997 to $590.5 million at June 30, 1997. This increase is primarily due to a $12.1 million increase in certificate of deposit accounts, a $563,000 increase in NOW and money market accounts, and a $329,000 increase in non-interest bearing accounts, offset in part by a decline of $3.6 million in regular savings accounts. Further funding the growth in assets is the increased utilization of Federal Home Loan Bank ("FHLB") advances which totaled $126.0 million at June 30, 1997, bearing a composite rate of 6.23% and an average maturity of 1.4 years. The Company's borrowing program with the FHLB of New York is consistent with our goal to leverage the Company's highly capitalized position when interest rates on FHLB advances are attractive, to fund increases in mortgage lending. EQUITY. Total stockholders' equity decreased $192,000 from $133.3 million at December 31, 1996 to $133.1 million at June 30, 1997. This decline is due primarily to $4.8 million in treasury shares purchased through the Company's stock repurchase plan, as noted below, and $738,000 in cash dividends paid, also as noted below. The decrease was partially offset by $4.0 million in net income, $563,000 in Restricted Stock Award amortization expenses, the exercise of 6,600 options for 6,600 shares with a net effect of $107,000, and a $735,000 decline in the unrealized loss on securities available for sale, net of taxes. Change in the market value of the Company's portfolio of securities available for sale is dependent primarily on the interest rate environment. Due to the size of the Company's portfolio of securities available for sale, changes in interest rate could produce significant changes in the value of such securities and could produce significant fluctuations in the equity of the Company. In June and December 1996, the Company had 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 June 30, 1997, the Company had purchased 932,450 shares at a cost of $17.1 million, an average of $18.29 per share, leaving 193,588 shares to be purchased under the Share Repurchase Program. Total shares outstanding at June 30, 1997 were 7,978,740. In light of the Company's capital strength and earnings performance, the Board of Directors declared a $0.04 per share dividend for the first quarter of 1997 and a $0.06 per share dividend for the second quarter of 1997. Retained earnings were reduced by $738,000 to reflect these cash dividends. (continued)
15 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY. The Bank, as a federal savings bank, is subject to Office of Thrift Supervision ("OTS") guidelines regarding liquidity requirements. Pursuant to these requirements, the Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, banker's acceptances, specific 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 June 30, 1997 and December 31, 1996, the Bank's liquidity ratio, computed in accordance with the OTS requirement was 6.53% 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. CASHFLOW. The Company's primary business objective is in the originations and purchases of residential, multi-family and commercial real estate loans. During the six months ended June 30, 1997, net originations and repayments of loans totaled $64.5 million, and $22.2 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 six months of 1997, the Company purchased a total of $93.1 million in securities available for sale. Cash flow used in these investment activities were funded in part from an aggregate of $89.6 million in sales, calls, maturities and prepayments of securities available for sale, and $75.0 million in additional borrowed funds. General funding for Company activities comes from cashflow provided by operating and financing activities totaling $1.8 million and $80.4 million for the six months ended June 30, 1997, respectively. For the six months ended June 30, 1997, the Company borrowed $75.0 million in short-term FHLB advances. In addition, the Bank's total deposit base increased $11.1 million from December 31, 1996 to June 30, 1997.
16 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 June 30, 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 June 30, 1997. <TABLE> <CAPTION> Percent of Amount Assets ------------ ------------ (Dollars in thousands) <S> <C> <C> Tangible Capital: Capital level $ 96,817 11.74% Requirement 12,371 1.50 Excess 84,446 10.24 Core Capital: Capital level $ 96,817 11.74% Requirement 32,990 4.00 Excess 63,827 7.74 Risk-based Capital: Capital level $101,606 26.57% Requirement 30,594 8.00 Excess 71,012 18.57 </TABLE>
17 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 six months ended June 30, 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 annualized 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 six months ended June 30, - ------------------------------------------------------------------ 1997 1996 -------------------------------- - -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ---------- ---------- ---------- ---------- ---------- - ---------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Mortgage loans, net $422,306 $18,273 8.65% $295,387 $13,299 9.00% Other loans 1,567 75 9.57 2,160 107 9.91 Mortgage-backed securities 167,807 5,812 6.93 172,457 5,458 6.33 Other securities 165,754 5,779 6.97 215,513 7,226 6.71 Interest-earning deposits and federal funds sold 24,095 658 5.46 12,227 324 5.30 ---------- ---------- ---------- ---------- ---------- - ---------- Total interest-earning assets 781,529 30,597 7.83 697,744 26,414 7.57 ---------- ---------- ---------- - ---------- Non-interest earning assets 35,852 38,792 ---------- ---------- Total assets $817,381 $736,536 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Regular savings accounts $208,698 2,963 2.84 $216,270 3,075 2.84 NOW accounts 22,029 213 1.93 19,219 181 1.88 Money market accounts 25,118 347 2.76 27,455 382 2.78 Certificate of deposit accounts 321,997 8,961 5.57 290,505 8,250 5.68 Mortgagors' escrow deposits 6,087 60 1.97 4,335 32 1.48 Borrowed funds 85,532 2,470 5.78 21,631 600 5.55 Other liabilities 0 0 0 542 23 8.49 ---------- ---------- ---------- ---------- ---------- - ---------- Total interest-bearing liabilities 669,461 15,014 4.49 579,957 12,543 4.33 ---------- ---------- ---------- - ---------- Other liabilities 17,255 17,780 ---------- ---------- Total liabilities 686,716 597,737 Stockholders' equity 130,665 138,799 ---------- ---------- Total liabilities and equity $817,381 $736,536 ========== ========== Net interest income/expense spread $15,583 3.34% $13,871 3.24% ========== ========== ========== ========== Net interest-earning assets / net interest margin $112,068 3.99% $117,787 3.98% ========== ========== ========== ========== Ratio of interest-earning assets to interest-bearing liabilities 1.17x 1.20x ========== ========== </TABLE>
18 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 six For the months ended year ended June 30, 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 27,405 51,309 Cooperative 0 76 Multi-family 45,627 43,184 Commercial 12,239 7,501 Construction 1,013 0 ---------------- ----------------- Total mortgage loans originated 86,284 102,070 Acquired loans 22,186 39,873 Less: Principal reductions 20,904 37,150 Mortgage loans sold 0 0 Mortgage loan foreclosures 141 1,150 ---------------- ----------------- At end of period $475,511 $388,086 ================ ================= OTHER LOANS At beginning of period $1,680 $2,328 Net activity (256) (648) ---------------- ----------------- At end of period $1,424 $1,680 ================ ================= </TABLE>
19 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> June 30, December 31, 1997 1996 ------------ ------------ (Dollars in thousands) <S> <C> <C> Non-accrual mortgage loans $2,125 $2,372 Other non-accrual loans 54 36 ------------ ------------ Total non-accrual loans 2,179 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 2,179 2,408 Real estate owned (foreclosed real estate) 281 1,218 ------------ ------------ Total non-performing assets $2,460 $3,626 ============ ============ Non-performing loans to gross loans 0.46% 0.62% Non-performing assets to total assets 0.29% 0.47% </TABLE>
20 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 from estimated losses inherent in the Company's overall loan portfolio. The allowance is established through a provision for loan losses based on management's evaluation of the risk inherent in the various components of its loan portfolio and other factors, including historical loan loss experience, changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional and national economic conditions. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by the Company's staff appraiser; however, the Company may from time to time obtain independent appraisals for significant properties. Current year charge-offs, charge-off trends, new loan production and current balance by particular loan categories 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> June 30, December 31, 1997 1996 ------------ ------------ (Dollars in thousands) <S> <C> <C> Balance at beginning of period $5,437 $5,310 Provision for loan losses 67 418 Loans charged-off: One-to-four family 17 220 Cooperative 20 162 Multi-family 0 41 Commercial 0 68 Other 38 44 ------------ ------------ Total loans charged off 75 535 ------------ ------------ Recoveries: Mortgage loans 57 244 Other 5 0 ------------ ------------ Total recoveries 62 244 ------------ ------------ Other adjustments 0 0 ------------ ------------ Balance at end of period $5,491 $5,437 ============ ============ Ratio of net charge-offs during the period to average loans outstanding during the period 0.00% 0.09% Ratio of allowance for loan losses to gross loans at the end of period 1.15% 1.39% Ratio of allowance for loan losses to non-performing loans at end of period 252.00% 225.79% Ratio of allowance for loan losses to non-performing assets at end of period 223.21% 149.94% </TABLE>
21 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. At the Company's Annual Meeting of Shareholders held on April 29, 1997, as contemplated by the Company's definitive proxy material for the meeting, certain matters were submitted to a vote of shareholders. The following table summarizes the results of voting with respect to each matter. Broker For Against Withheld Abstain Non-Votes --------- --------- --------- --------- --------- Election of Directors (three directors were elected to serve until the 2000 Annual Meeting of Shareholders and until their successors are elected and qualified). Robert A. Marani 6,651,713 103,669 Franklin F. Regan, Jr. 6,645,311 110,071 John E. Roe, Jr. 6,653,413 101,969 Amendments to the 1996 Restricted Stock Incentive Plan. 6,364,201 329,412 61,768 1 Amendments to the 1996 Stock Option Incentive Plan. 6,371,090 334,522 49,769 1 Ratification of the appointment of Coopers & Lybrand, LLP as the independent auditors of the Company. 6,666,200 65,170 24,011 1 (continued)
22 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (SECTION 249.308 OF THIS CHAPTER). a) EXHIBIT 10 Agreement and plan of merger as of April 24, 1997, by and between the Company, Flushing Savings Bank, and New York Federal Savings Bank. 27 Financial data schedules for electronic (EDGAR) filing. b) REPORTS ON FORM 8-K On April 29, 1997, the Company filed a report on Form 8-K to report a definitive merger agreement, pursuant to which the Company will acquire New York Federal Savings Bank in a transaction valued at approximately $13 million. The acquisition is anticipated to close in September of 1997, subject to approval by federal regulatory authorities. The acquisition will be accounted for as a purchase transaction.
23 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: August 14, 1997 By: /s/ James F. McConnell -------------------- -------------------------------- James F. McConnell President and Chief Executive Officer Dated: August 14, 1997 By: /s/ Monica C. Passick -------------------- -------------------------------- Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer
24 EXHIBIT INDEX Exhibit No. Description - ----------- ------------------------------------------------------------------ 10 Agreement and plan of merger as of April 24, 1997, by and between the Company, Flushing Savings Bank, and New York Federal Savings Bank. 27 Financial Data Schedule.