UNITED STATES SECURITIES and EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended SEPTEMBER 30, 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 September 30, 1997 were 7,983,423.
1 CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition as of September 30, 1997 (unaudited) and December 31, 1996. 2 Consolidated Statements of Operations for the three months and nine months ended September 30, 1997 and 1996 (unaudited). 3 Consolidated Statement of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited). 4 Consolidated Statement of Changes in Stockholders' Equity for the nine months ended September 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 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 EXHIBITS 23
2 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1997 1996 -------------- -------------- (Unaudited) <S> <C> <C> ASSETS Cash and due from banks $ 11,048,485 $ 7,472,155 Federal funds sold and overnight interest-earning deposits 30,140,917 26,953,000 Securities available for sale: Mortgage-backed securities 183,442,123 141,038,177 Other securities 131,126,896 190,856,985 Loans: 1-4 Family residential mortgage loans 289,150,352 236,518,280 Multi-family mortgage loans 213,970,709 104,870,271 Commercial real estate loans 70,861,329 46,697,783 Small Business Administration loans 2,003,430 0 Consumer loans 1,683,579 1,679,403 Less: Unearned loan fees (1,724,468) (1,548,287) Allowance for loan losses (6,467,920) (5,436,832) -------------- -------------- Net loans 569,477,011 382,780,618 Interest and dividends receivable 6,636,324 6,896,504 Real estate owned, net 332,970 1,218,296 Bank premises and equipment, net 6,298,548 5,796,166 Goodwill 5,457,862 0 Other assets 16,168,378 12,330,603 -------------- -------------- Total assets $ 960,129,514 $ 775,342,504 ============== ============== LIABILITIES Due to depositors: Non-interest bearing $ 19,169,077 $ 10,292,645 NOW and money market accounts 40,821,178 46,589,109 Savings accounts 202,343,745 209,689,857 Certificates of deposit 381,104,259 314,482,971 Mortgagors' escrow deposits 7,205,803 3,424,764 Borrowed funds 165,062,594 51,000,000 Other liabilities 8,033,562 6,582,114 -------------- -------------- Total liabilities 823,740,218 642,061,460 -------------- -------------- 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; 7,983,423 and 8,250,497 shares outstanding at September 30, 1997 and December 31, 1996, respectively) 89,101 89,101 Additional paid-in capital 101,490,501 101,277,592 Treasury stock (926,677 and 659,603 shares at September 30, 1997 and December 31, 1996, respectively) (17,008,387) (12,065,068) Unearned compensation (11,331,391) (11,660,140) Retained earnings 61,898,907 56,869,884 Net unrealized gain (loss) on securities available for sale, net of taxes 1,250,565 (1,230,325) -------------- -------------- Total stockholders' equity 136,389,296 133,281,044 -------------- -------------- Total liabilities and stockholders' equity $ 960,129,514 $ 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 nine months ended September 30, September 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------- ------------- ------------- ------------- (Unaudited) <S> <C> <C> <C> <C> INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 11,151,914 $ 7,549,507 $ 29,500,105 $ 20,955,987 Interest and dividends on securities: Taxable interest 5,540,792 6,470,660 16,980,303 18,926,438 Tax-exempt interest 7,869 16,368 23,743 48,352 Dividends 56,573 76,249 192,571 272,542 Other interest income 608,836 106,860 1,266,355 430,502 ------------- ------------- ------------- ------------- Total interest and dividend income 17,365,984 14,219,644 47,963,077 40,633,821 ------------- ------------- ------------- ------------- INTEREST EXPENSE Deposits 6,723,322 6,038,044 19,267,015 17,957,999 Other interest expense 2,409,164 758,952 4,879,570 1,381,415 ------------- ------------- ------------- ------------- Total interest expense 9,132,486 6,796,996 24,146,585 19,339,414 ------------- ------------- ------------- ------------- NET INTEREST INCOME 8,233,498 7,422,648 23,816,492 21,294,407 Provision for loan losses 0 20,010 66,792 321,956 ------------- ------------- ------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,233,498 7,402,638 23,749,700 20,972,451 ------------- ------------- ------------- ------------- NON-INTEREST INCOME Other fee income 215,297 164,295 702,698 586,928 Net (loss)gain on sales of securities and loans (36,628) (45,402) 12,391 430,935 Other income 595,742 190,011 934,035 578,869 ------------- ------------- ------------- ------------- Total non-interest income 774,411 308,904 1,649,124 1,596,732 ------------- ------------- ------------- ------------- NON-INTEREST EXPENSE Salaries and employee benefits 2,626,316 2,206,730 7,399,528 6,352,054 Occupancy and equipment 494,895 524,944 1,433,310 1,551,036 Professional services 388,280 522,066 1,168,868 1,587,395 Federal deposit insurance premiums 21,956 500 58,991 1,500 Data processing 261,695 250,026 724,519 1,131,655 Depreciation and amortization 205,059 253,657 585,231 730,030 Real estate owned, net 49,583 102,251 74,926 232,157 Recovery of provision for deposits at Nationar 0 0 0 (449,392) Other operating 965,184 777,109 2,555,101 2,254,868 ------------- ------------- ------------- ------------- Total non-interest expense 5,012,968 4,637,283 14,000,474 13,391,303 ------------- ------------- ------------- ------------- INCOME BEFORE INCOME TAXES 3,994,941 3,074,259 11,398,350 9,177,880 ------------- ------------- ------------- ------------- PROVISION FOR INCOME TAXES Federal 1,096,948 843,608 3,202,291 2,543,975 State and local 705,425 560,780 1,990,479 1,649,924 ------------- ------------- ------------- ------------- Total taxes 1,802,373 1,404,388 5,192,770 4,193,899 ------------- ------------- ------------- ------------- NET INCOME $ 2,192,568 $ 1,669,871 $ 6,205,580 $ 4,983,981 ============= ============= ============= ============= Weighted average number of common shares outstanding 7,324,998 8,180,777 7,392,849 8,074,946 Primary and fully diluted earnings per share $0.30 $0.20 $0.84 $0.62 <FN> The accompanying notes are an integral part of these consolidated financial statements. </FN> </TABLE>
4 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> For the nine months ended September 30, ------------------------------ 1997 1996 -------------- -------------- (Unaudited) <S> <C> <C> CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net income $ 6,205,580 $ 4,983,981 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 66,792 321,956 Provision for losses on real estate owned 0 92,217 Recovery of provision for deposits at Nationar 0 (449,392) Depreciation of bank premises and equipment 585,231 730,030 Amortization of goodwill 30,491 0 Net gain on sales of securities and loans (12,391) (430,935) Net loss (gain) on sales of real estate owned 9,000 (45,947) Amortization of unearned premium, net of accretion of unearned discount 301,648 939,670 Amortization of deferred income (643,291) (640,452) Deferred income tax provision 979,530 (257,748) Deferred compensation 127,798 128,401 Changes in operating assets and liabilities, net (2,421,597) 5,836,363 Unearned compensation 541,658 408,087 -------------- -------------- Net cash provided by operating activities 5,770,449 11,616,231 -------------- -------------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchases of bank premises and equipment (1,087,613) (379,377) Purchases of securities available for sale (114,105,000) (128,096,000) Proceeds from sales and calls of securities available for sale 102,268,391 74,078,935 Proceeds from maturities and prepayments of securities available for sale 31,943,979 45,773,011 Net originations and repayments of loans (80,050,900) (44,722,993) Purchases of loans (107,518,000) (29,641,000) Proceeds from sales and operations of real estate owned 588,400 734,131 Acquisitions, net of cash and cash equivalents (5,152,893) 0 -------------- -------------- Net cash used in investing activities (173,113,636) (82,253,293) -------------- -------------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES Net increase(decrease) in non-interest bearing deposits 8,876,432 (907,841) Net increase in interest-bearing deposits 53,507,245 13,895,697 Net increase in mortgagors' escrow deposits 3,781,039 2,371,904 Net increase in borrowed funds 114,062,594 51,000,000 Net repurchase of common stock (4,943,319) (6,166,010) Cash dividends paid (1,176,557) 0 -------------- -------------- Net cash provided by financing activities 174,107,434 60,193,750 -------------- -------------- Net increase (decrease) in cash and cash equivalents 6,764,247 (10,443,312) Cash and cash equivalents, beginning of period 34,425,155 19,321,639 -------------- -------------- Cash and cash equivalents, end of period $ 41,189,402 $ 8,878,327 ============== ============== SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 23,106,711 $ 19,308,116 Income taxes paid 5,056,589 3,753,933 Non-cash activities: Loans originating as the result of real estate sales 637,100 252,193 Loans transferred through the foreclosure of a real estate owned 273,970 1,120,123 Net change in unrealized loss on securities available for sale 4,597,190 (9,855,367) Dividends payable 0 318,947 <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> Nine months ended September 30, 1997 ------------------ (Unaudited) <S> <C> COMMON STOCK ($0.01 par value; 20,000,000 shares authorized; 8,910,100 shares issued; 7,983,423 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 16,830 Stock options exercised (19,706) Restricted Stock Award of 29,500 shares 100,011 Tax benefit of stock plans 115,774 -------------- Balance at end of period $ 101,490,501 ============== TREASURY STOCK Balance at beginning of period $ (12,065,068) Stock Buyback of 288,700 common shares outstanding (5,335,225) Repurchase of 13,974 shares from Restricted Stock Award (267,560) Restricted Stock Award forfeitures (22,105) Restricted Stock Award of 29,500 shares 541,614 Options exercised 139,957 -------------- Balance at end of period $ (17,008,387) ============== UNEARNED COMPENSATION Balance at beginning of period $ (11,660,140) Release of shares from Employee Benefit Trust 103,375 Restricted Stock Award expense 844,894 Restricted Stock Award forfeitures 22,105 Restricted Stock Award of 29,500 shares (641,625) -------------- Balance at end of period $ (11,331,391) ============== RETAINED EARNINGS Balance at beginning of period $ 56,869,884 Net income 6,205,580 Cash dividends (1,176,557) -------------- Balance at end of period $ 61,898,907 ============== NET UNREALIZED GAIN(LOSS) ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES Balance at beginning of period $ (1,230,325) Mark-to-market adjustment 2,480,890 -------------- Balance at end of period $ 1,250,565 ============== <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 September 30, 1997, the statements of operations for the three months and nine months ended September 30, 1997 and 1996, the statement of cash flow for the nine months ended September 30, 1997 and 1996, and the statement of changes in stockholders' equity for the nine months ended September 30, 1997. These adjustments consist of items which are of a normal recurring nature. The results of operations for the nine months ended September 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 September 30, 1997, advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled $165.1 million, with a composite interest rate of 6.29% and an average maturity of 1.7 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 September 30, 1997, the Company had purchased 956,350 shares at a cost of $17.6 million, an average of $18.36 per share, leaving 169,688 shares to be purchased under the share repurchase programs. Total shares outstanding at September 30, 1997 were 7,983,423.
7 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 eight 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. On September 9, 1997, The Company acquired New York Federal Savings Bank, a privately held federal savings bank ("New York Federal"), and merged New York Federal with and into the Bank. New York Federal will continue its operations as a division of the Bank, under the New York Federal name. The cash transaction is valued at approximately $13 million and will be accounted for under the purchase method of accounting. 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)
8 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 ofreviewing their systems in regards to this potential problem. The Company does not maintain a data processing center. 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 SEPTEMBER 30, 1997 AND 1996 GENERAL. Net income for the third quarter of 1997 was $2.2 million, an increase of $523,000 as compared to the 1996 third quarter net income of $1.7 million. This increase was primarily the result of an $811,000 increase in net interest income and a $466,000 increase in non-interest income, offset in part by a $376,000 increase in non-interest expense. INTEREST INCOME. Total interest and dividend income increased $3.2 million from $14.2 million for the three months ended September 30, 1996 to $17.4 million for the comparable 1997 period. This increase was primarily the result of a $160.1 million increase in the average earning balances of mortgage loans from the quarter ended September 30, 1996 as compared to the quarter ended September 30, 1997, and a $33.6 million increase in the average balances of federal funds sold and overnight interest-earning deposits. These were offset in part by a $60.3 million decline in the average balances of investment securities available for sale from the third quarter of 1996 as compared to the third quarter of 1997. This shift in assets reflects the Company's planned growth in the mortgage loan market. Interest income also was positively affected during the month of September 1997 with the acquisition of New York Federal and the incorporation of $77.1 million of gross loans from New York Federal into the Bank's loan portfolio. (continued)
9 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 $2.3 million from $6.8 million for the three months ended September 30, 1996 as compared to $9.1 million for the three months ended September 30, 1997. This increase is primarily due to a $99.5 million increase in the average balances of borrowed funds as the Company increased its utilization of Federal Home Loan Bank ("FHLB") advances. FHLB advances totaled $165.1 million at September 30, 1997, bearing a composite rate of 6.29%, as compared to $51.0 million at September 30, 1996 with a composite rate of 5.85%. Interest paid on deposits also increased $685,000, resulting from an increase of $46.2 million in the average balance of higher costing certificates of deposit accounts and a decline of $12.6 million in the average balances of lower costing regular savings and money market accounts from the quarter ended September 30, 1996 as compared to the quarter ended September 30, 1997. PROVISION FOR LOAN LOSSES. The provision for loan losses 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. Based on these factors, management determined that no additional provision for loan losses was required during the three months ended September 30, 1997. The provision for loan losses for the three months ended September 30, 1996 was $20,000. NON-INTEREST INCOME. Total non-interest income increased by $466,000 from $309,000 for the third quarter of 1996 as compared to $774,000 for the three months ended September 30, 1997. This increase is primarily attributable to receipt of $361,000 associated with a construction project that was completed in prior years and a general increase of $51,000 in other fee income during the three months ended September 30, 1997, as compared to the third quarter of 1996. (continued)
10 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-INTEREST EXPENSE. Non-interest expense increased by $376,000 from $4.6 million for the three months ended September 30, 1996 as compared to $5.0 million for the three months ended September 30, 1997. This increase is due primarily to a $420,000 increase in expenses attributable to salaries and employee benefits, which reflects salary increases, contributions to profit sharing plans, the amortization of unearned compensation expense associated with the Restricted Stock Awards made in December of 1996, and the inclusion of New York Federal employees that were retained by the Bank after the merger of New York Federal with and into the Bank. Other operating expenses also increased as a result of $45,000 in non-recurring provision for contingencies relating to a prior sale of property and $30,000 in amortization of goodwill. Contributing to the increase was a general rise in other operating expenses and federal deposit insurance premiums. These increases were offset in part by a $134,000 decline in professional services, a $49,000 decline in depreciation expense resulting from accelerated depreciation of old equipment in 1996 during our electronic data processor conversion, and a $53,000 decrease in real estate owned expenses. INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $921,000, or 29.95%, from $3.1 million for the three months ended September 30, 1996 as compared to $4.0 million for the three months ended September 30, 1997 for the reasons stated above. PROVISION FOR INCOME TAXES. The provision for income taxes increased $398,000 from $1.4 million for the three months ended September 30, 1996 as compared to $1.8 million for the three months ended September 30, 1997 as a result of a corresponding increase in income before income taxes. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 GENERAL. Net income for the nine months ended September 30, 1997 was $6.2 million, an increase of $1.2 million as compared to $5.0 million for the nine months ended September 30, 1996. This increase was primarily the result of a $2.5 million increase in net interest income, offset in part by an increase of $609,000 in non-interest expense. (continued)
11 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST INCOME. Total interest and dividend income increased $7.3 million from $40.6 million for the nine months ended September 30, 1996 as compared to $47.9 million for the nine months ended September 30, 1997. This increase was primarily the result of a $138.2 million increase in the average earning balances of mortgage loans from the nine months ended September 30, 1996 as compared to the nine months ended September 30, 1997, and a $19.2 million increase in the average balances of federal funds sold and overnight interest-earning deposits. These were offset in part by a $56.4 million decline in the average balances of investment securities available for sale from the nine months ended September 30, 1996 as compared to the comparable 1997 period. This shift in assets reflects the Company's planned growth in the mortgage loan market. Interest income also was positively affected during the month of September 1997 with the acquisition of New York Federal and the incorporation of $77.1 million of gross loans from New York Federal into the Bank's loan portfolio. INTEREST EXPENSE. Interest expense increased $4.8 million from $19.3 million for the nine months ended September 30, 1996 as compared to $24.1 million for the nine months ended September 30, 1997. This increase is primarily due to a $75.9 million increase in the average balances of borrowed funds as the Company increased its utilization of Federal Home Loan Bank ("FHLB") advances. FHLB advances totaled $165.1 million at September 30, 1997, bearing a composite rate of 6.29%, as compared to $51.0 million at September 30, 1996 with a composite rate of 5.85%. Interest paid on deposits also increased $1.3 million, resulting from an increase of $36.4 million in the average balance of higher costing certificates of deposit accounts and a decline of $10.8 million in the average balances of lower costing regular savings and money market accounts from the nine months ended September 30, 1996 as compared to the nine months ended September 30, 1997. PROVISION FOR LOAN LOSSES. The provision for loan losses during the nine months ended September 30, 1997 was $67,000, compared to $322,000 for the nine months ended September 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. Non-interest income during the nine months ended September 30, 1997 increased by $52,000 to $1.6 million as compared to the comparable 1996 period. This increase is primarily attributable to receipt of $361,000 associated with a construction project that was completed in prior years and a general increase of $116,000 in other fee income during the nine months ended September 30, 1997, as compared to the comparable 1996 period. This increase is partially offset by a $419,000 decrease in gain on sales of securities from $431,000 during the nine months ended September 30, 1996 as compared to $12,000 for the nine months ended September 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 NON-INTEREST EXPENSE. Non-interest expense increased by $609,000 from $13.4 million for the nine months ended September 30, 1996 as compared to $14.0 million for the nine months ended September 30, 1997. This increase is due primarily to a $1.0 million increase in expenses attributable to salaries and employee benefits, which reflects salary increases, contributions to profit sharing plans, the amortization of unearned compensation expense associated with the Restricted Stock Awards made in December of 1996, and the inclusion of New York Federal employees that were retained by the Bank after the merger of New York Federal with and into the Bank. The increase in non-interest expense on a comparative basis from the 1996 period was also attributable to a one-time recovery of provision for deposits at Nationar of $449,000 during the 1996 period, which reduced 1996 expenses. Contributing to the increase was a general rise in federal deposit insurance premiums and other operating expenses. Part of the increase in other operating expenses was a result of $45,000 in non-recurring provision for contingencies relating to a prior sale of property and $30,000 in amortization of goodwill. These increases were offset in part by a one time accrual of expenses in the first half of 1996 for costs associated with changing the Company's data service providers which resulted in a $145,000 decline in depreciation expense and a $407,000 decline in data processing expenses. Professional services also declined $419,000 and real estate owned expenses decreased $157,000 as management continues to monitor its loan portfolio. This increase in non-interest expense as a result of the deliberate growth of our institution still resulted in an improvement in our efficiency ratio from 57.10% for the nine months ended September 30, 1996 to the present 54.71% for the nine months ended September 30, 1997. INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $2.2 million, or 24.19%, from $9.2 million for the nine months ended September 30, 1996 as compared to $11.4 million for the nine months ended September 30, 1997 for the reasons stated above. PROVISION FOR INCOME TAXES. The provision for income taxes increased $999,000 from $4.2 million for the nine months ended September 30, 1996 as compared to $5.2 million for the nine months ended September 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 September 30, 1997, total assets were $960.1 million, an increase of $184.8 million, or 23.83%, from the December 31, 1996 balance of $775.3 million. The growth in assets is primarily due to a 48.21% increase, or $187.9 million, in gross loans, of which $77.1 million was attributable to the acquisition of New York Federal Savings in September 1997. This growth is offset in part by a decline of $17.3 million in securities available for sale. At September 30, 1997, the Company had $121.8 million in callable U.S. government securities. There were no collateralized mortgage obligations ("CMO") at September 30, 1997. Loan originations and purchases, excluding the New York Federal acquisition, for the third quarter of 1997 totaled $23.6 million for 1-4 family residential mortgage loans, $8.0 million for multi-family real estate loans and $3.5 million for commercial real estate loans. For the nine months ended September 30, 1997, loan originations and purchases, excluding the New York Federal acquisition, totaled $73.2 million for 1-4 family real estate loans, $53.6 million for multi-family real estate loans and $15.8 million for commercial real estate. This compares to the loan originations and purchases activity for the nine months ended September 30, 1996 of $68.2 million for 1-4 family real estate loans, $31.4 million for multi-family real estate loans and $2.4 million for commercial real estate loans. While non-performing assets increased by $114,000 to $3.7 million at September 30, 1997 from $3.6 million at December 31, 1996 as a result of the New York Federal Savings acquisition, the ratio of total non-performing assets as a percentage of total assets continued to improve from 0.47% at December 31, 1996 to 0.39% at September 30, 1997. By adherence to strict underwriting standards and aggressive charge-offs of possible losses from impaired loans, the Company continues to monitor its loan portfolio quality, as evidenced by the Company's ratio of allowance for loan losses to non-performing loans which equaled 189.84% at September 30, 1997. LIABILITIES. Funding the growth in assets was an increase of $62.3 million in deposit accounts from $581.1 million at December 31, 1996 to $643.4 million at September 30, 1997, and increased utilization of Federal Home Loan Bank (FHLB) advances which totaled $165.1 million at September 30, 1997, bearing a composite interest rate of 6.29%. 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. (continued)
14 PART I - FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EQUITY. Total stockholders' equity increased $3.1 million from $133.3 million at December 31, 1996 to $136.4 million at September 30, 1997. This increase is due to $6.2 million in net income for the nine months ended September 30, 1997 and a $2.5 million improvement in the net unrealized gain (loss) on securities available for sale, net of taxes. 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. These increases to stockholders' equity are partially offset by $5.6 million in treasury shares purchased through the Company's stock repurchase plan, as noted below, and $1.2 million in cash dividends paid during 1997. As a result of improving earnings and policies beneficial to shareholders, book value per share continued to improve from $15.73 per share at September 30, 1996 to $17.08 per share at September 30, 1997. 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 September 30, 1997, the Company had purchased 956,350 shares at a cost of $17.6 million, an average of $18.36 per share, leaving 169,688 shares to be purchased under the Share Repurchase Program. Total shares outstanding at September 30, 1997 were 7,983,423. 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 and third quarters of 1997. Retained earnings were reduced by $1.2 million 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 September 30, 1997 and December 31, 1996, the Bank's liquidity ratio, computed in accordance with the OTS requirement was 7.24% 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 nine months ended September 30, 1997, net originations and repayments of loans totaled $80.1 million and $107.5 million in real estate loans were purchased, of which $77.1 million were related to the acquisition of New York Federal Savings Bank. During periods of low loan demand, the Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. In the nine months ended September 30, 1997, the Company purchased a total of $114.1 million in securities available for sale. During the month of September 1997, the Bank also purchased New York Federal Savings Bank at a net cash outlay of $5.2 million. Cash flow used in these investment activities were funded in part from an aggregate of $134.2 million in sales, calls, maturities and prepayments of securities available for sale, a net increase of $62.4 million in deposits and $114.1 million in additional borrowed funds. General funding for Company activities comes from cashflow provided by operating and financing activities totaling $5.8 million and $174.1 million for the nine months ended September 30, 1997, respectively. For the nine months ended September 30, 1997, the Company borrowed $88.9 million in short-term FHLB advances and acquired $25.2 million in FHLB advance funds from the purchase of New York Federal Savings Bank. In addition, the Bank's total deposit base increased $62.4 million from December 31, 1996 to September 30, 1997, which includes $50.9 million in deposits acquired from New York Federal Savings Bank.
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 September 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 September 30, 1997. <TABLE> <CAPTION> Percent of Amount Assets ------------ ------------ (Dollars in thousands) <S> <C> <C> Tangible Capital: Capital level $ 93,280 10.17% Requirement 13,762 1.50 Excess 79,518 8.67 Core Capital: Capital level $ 93,280 10.17% Requirement 36,699 4.00 Excess 56,581 6.17 Risk-based Capital: Capital level $ 99,177 21.05% Requirement 37,700 8.00 Excess 61,477 13.05 </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 nine months ended September 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 nine months ended September 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 $447,829 $29,366 8.74% $309,675 $20,776 8.95% Other loans 1,719 134 10.39 2,067 180 11.61 Mortgage-backed securities 173,047 9,057 6.98 165,493 7,995 6.44 Other securities 156,948 8,140 6.92 220,900 11,252 6.79 Interest-earning deposits and federal funds sold 29,929 1,266 5.64 10,732 431 5.35 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-earning assets 809,472 47,963 7.90 708,867 40,634 7.64 ---------- ---------- ---------- ---------- Non-interest earning assets 37,482 38,453 ---------- ---------- Total assets $846,954 $747,320 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Regular savings accounts $207,612 4,435 2.85 $215,978 4,622 2.85 NOW accounts 22,431 331 1.97 19,228 273 1.89 Money market accounts 24,458 509 2.77 26,917 564 2.79 Certificate of deposit accounts 329,217 13,937 5.64 292,772 12,452 5.67 Mortgagors' escrow deposits 6,009 55 1.22 4,209 47 1.49 Borrowed funds 107,426 4,880 6.06 31,492 1,350 5.72 Other liabilities 0 0 0 498 32 8.57 ---------- ---------- ---------- ---------- ---------- ---------- Total interest-bearing liabilities 697,153 24,147 4.62 591,094 19,340 4.36 ---------- ---------- ---------- ---------- Other liabilities 17,919 17,947 ---------- ---------- Total liabilities 715,072 609,041 Stockholders' equity 131,882 138,279 ---------- ---------- Total liabilities and equity $846,954 $747,320 ========== ========== Net interest income/expense spread $23,816 3.28% $21,294 3.28% ========== ========== ========== ========== Net interest-earning assets / net interest margin $112,319 3.92% $117,773 4.01% ========== ========== ========== ========== Ratio of interest-earning assets to interest-bearing liabilities 1.16x 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 nine For the months ended year ended September 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 40,689 51,309 Cooperative 0 76 Multi-family 53,592 43,184 Commercial 15,788 7,501 Construction 1,435 0 ------------------ ----------------- Total mortgage loans originated 111,504 102,070 Acquired loans 32,495 39,873 Real estate loans acquired from New York Federal Savings Bank: One-to-four family 901 0 Multi-family 62,405 0 Commercial 11,717 0 ------------------ ----------------- Total mortgage loans acquired 107,518 39,873 Less: Principal reductions 32,825 37,150 Mortgage loans sold 0 0 Mortgage loan foreclosures 301 1,150 ------------------ ----------------- At end of period $573,982 $388,086 ================== ================= OTHER LOANS At beginning of period $1,680 $2,328 Acquired New York Federal SBA loans 2,029 0 Net activity (22) (648) ------------------ ----------------- At end of period $3,687 $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> September 30, December 31, 1997 1996 ------------- ------------ (Dollars in thousands) <S> <C> <C> Non-accrual mortgage loans $3,374 $2,372 Other non-accrual loans 33 36 ------------- ------------ Total non-accrual loans 3,407 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 3,407 2,408 Real estate owned (foreclosed real estate) 333 1,218 ------------- ------------ Total non-performing assets $3,740 $3,626 ============= ============ Non-performing loans to gross loans 0.59% 0.62% Non-performing assets to total assets 0.39% 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> September 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 Provision for loans acquired from New York Federal Savings Bank 979 0 Loans charged-off: One-to-four family 19 220 Cooperative 20 162 Multi-family 0 41 Commercial 0 68 Other 38 44 ------------- ------------ Total loans charged off 77 535 ------------- ------------ Recoveries: Mortgage loans 57 244 Other 5 0 ------------- ------------ Total recoveries 62 244 ------------- ------------ Other adjustments 0 0 ------------- ------------ Balance at end of period $6,468 $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 1.12% 1.39% Ratio of allowance for loan losses to non-performing loans at end of period 189.84% 225.79% Ratio of allowance for loan losses to non-performing assets at end of period 172.94% 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. 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 10.1 Employment agreement between Flushing Financial Corporation and Donald L. Shapiro. 10.2 Employment agreement between Flushing Savings Bank, FSB and Donald L. Shapiro. 10.3 Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation and Donald L. Shapiro, dated September 9, 1997, in the form filed as exhibit 10.8(b) to the Company's SEC Form 10-Q for the quarterly period ended September 30, 1996 (incorporated by reference to Form 10-Q filed on November 14, 1996). 27 Financial data schedules for electronic (EDGAR) filing. b) REPORTS ON FORM 8-K On September 24, 1997, the Company filed a report on Form 8-K to report that it has completed the merger of New York Federal Savings Bank, a privately held federal savings bank, with Flushing Savings, effective September 9, 1997.
22 FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Flushing Financial Corporation Dated: November 13, 1997 By: /s/ James F. McConnell -------------------- -------------------------------- James F. McConnell President and Chief Executive Officer Dated: November 13, 1997 By: /s/ Monica C. Passick -------------------- -------------------------------- Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer
23 EXHIBIT INDEX Exhibit No. Description - ----------- ------------------------------------------------------------------ 10.1 Employment agreement between Flushing Financial Corporation and Donald L. Shapiro. 10.2 Employment agreement between Flushing Savings Bank, FSB and Donald L. Shapiro. 27 Financial Data Schedule.