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, 1996.
Commission File Number: 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 11-3209278
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
144-51 NORTHERN BOULEVARD 11354
FLUSHING, NEW YORK
(Address of principal executive offices) (Zip Code)
(718) 961-5400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(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 / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
AT JUNE 30, 1996 8,909,100 SHARES WERE OUTSTANDING.
<PAGE> 1
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
SEC FORM 10-Q
-------------
FOR THE THREE- AND- SIX MONTH PERIODS ENDED JUNE 30, 1996
INDEX PAGE No.
- ----- --------
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition
as of June 30, 1996 and December 31, 1995
(unaudited). 3
Consolidated Statements of Income for the three
months and six months ended June 30, 1996 and 1995
(unaudited). 4
Consolidated Statements of Cash flows for the six
months ended June 30, 1996 and 1995 (unaudited). 5
Notes to Consolidated Financial Statements. 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 2. Changes in Securities. 23
Item 3. Defaults Upon Senior Securities. 23
Item 4. Submission of Matters to a Vote of Security Holders. 23
Item 5. Other information. 24
Item 6. Exhibits and Reports on Form 8-K. 24
SIGNATURES 25
EXHIBITS 26
<PAGE> 2
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
(Unaudited)
<C> <C>
<S>
ASSETS:
Cash and due from banks $ 15,525,305 $ 11,883,639
Federal funds sold and overnight
interest-earning deposits 10,400,000 7,438,000
Securities available for sale:
Mortgage-backed securities 154,779,861 179,300,164
Other securities 233,063,400 202,147,039
Loans:
1-4 Family residential mortgage loans 199,331,767 170,088,462
Multi-family mortgage loans 85,739,863 69,139,758
Commercial real estate loans 42,277,876 45,214,727
Consumer loans 1,952,719 2,328,365
Less: Unearned loan fees (1,364,280) (1,334,991)
Allowance for loan losses (5,443,288) (5,309,859)
------------ -------------
Net loans 322,494,657 280,126,462
Interest and dividends receivable 7,183,635 5,879,501
Real estate owned, net 1,763,558 1,869,431
Bank premises and equipment, net 5,943,794 6,114,033
Other assets 15,477,409 13,626,246
------------ -------------
Total assets $ 766,631,619 $ 708,384,515
============ =============
LIABILITIES:
Due to depositors:
Non-interest bearing $ 9,641,903 $ 10,372,448
NOW and money market accounts 45,672,420 47,154,968
Savings accounts 217,553,869 215,577,540
Certificates of deposit 293,976,488 284,302,238
Mortgagors' escrow deposits 3,475,846 2,456,948
Borrowed funds 51,000,000 0
Other liabilities 7,372,900 7,190,167
----------- -------------
Total liabilities 628,693,426 567,054,309
----------- -------------
Commitments and Contingencies (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock ($0.01 par value;
5,000,000 shares authorized) 0 0
Common stock ($0.01 par value; 20,000,000
shares authorized; 8,909,100 and
8,625,000 shares outstanding at June 30,
1996 and at December 31, 1995,
respectively) 89,091 86,250
Additional paid-in capital 101,134,375 96,514,628
Unearned compensation - employee benefit
trust (7,664,187) (7,680,850)
Unearned compensation - restricted
stock award (4,512,909) 0
Retained earnings 54,091,653 50,777,543
Net unrealized (loss) gain on securities
available for sale, net of taxes (5,199,830) 1,632,635
----------- -----------
Total stockholders' equity 137,938,193 141,330,206
----------- -----------
Total liabilities and stockholders'
equity $ 766,631,619 $ 708,384,515
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
------------------------ -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 6,870,625 $ 6,014,761 $ 13,406,480 $ 12,241,187
Interest and dividends on securities:
Taxable interest 6,388,326 4,522,208 12,455,778 8,898,906
Tax-exempt interest 18,245 28,824 31,984 59,097
Dividends 86,432 113,516 196,293 226,269
Other interest income 150,100 225,936 323,642 432,682
---------- ---------- ----------- ----------
Total interest and dividend income 13,513,728 10,905,245 26,414,177 21,858,141
---------- ----------- ----------- ----------
Interest expense:
Deposits 5,928,434 5,532,057 11,919,955 10,469,771
Borrowed funds 462,025 163,625 599,543 367,202
Other interest expense 10,229 16,707 22,920 34,784
--------- --------- ----------- ----------
Total interest expense 6,400,688 5,712,389 12,542,418 10,871,757
--------- --------- ----------- ----------
Net interest income 7,113,040 5,192,856 13,871,759 10,986,384
Provision for loan losses 150,000 76,402 301,946 186,573
--------- --------- ----------- ----------
Net interest income after provision for
loan losses 6,963,040 5,116,454 13,569,813 10,799,811
--------- --------- ----------- ----------
Non-interest income:
Other fee income 193,947 168,793 422,633 383,578
Net gain (loss) on sales of securities
and loans 154,361 (198,050) 476,337 (144,639)
Amortization of deferred gain from sale
of real estate 0 579,000 0 947,918
New York State gains tax refund 0 386,912 0 386,912
Other income 197,575 409,946 388,858 694,350
--------- ---------- ---------- ----------
Total non-interest income 545,883 1,346,601 1,287,828 2,268,119
--------- --------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 2,129,232 1,775,836 4,145,324 3,587,902
Directors' pension expense 20,203 33,672 40,405 677,472
Occupancy and equipment 501,854 509,266 1,026,092 982,872
Professional services 564,268 412,613 1,065,329 772,578
Federal deposit insurance premiums 500 357,633 1,000 715,266
Data processing 626,624 284,863 881,629 481,489
Depreciation and amortization 280,948 178,262 476,373 351,621
Real estate owned 91,798 143,255 129,906 347,399
(Recovery) Provision for deposits
at Nationar (449,392) 660,096 (449,392) 660,096
Conversion expenses 0 0 0 2,221,833
Other operating 745,869 545,701 1,437,354 1,212,013
--------- --------- ---------- ----------
Total non-interest expense 4,511,904 4,901,197 8,754,020 12,010,541
--------- --------- ---------- ----------
Income before income taxes 2,997,019 1,561,858 6,103,621 1,057,389
--------- --------- ---------- ----------
Provision for income taxes:
Federal 820,640 246,801 1,700,367 569,992
State and local 525,059 128,899 1,089,144 359,638
--------- --------- ---------- ----------
Total taxes 1,345,699 375,700 2,789,511 929,630
--------- --------- ---------- ----------
Net income $ 1,651,320 $ 1,186,158 $ 3,314,110 $ 127,759
========== ========= ========== ==========
Weighted average number of common
shares outstanding 8,086,081 NA 8,021,731 NA
Primary and fully diluted earnings per
share $ 0.20 NA $ 0.41 NA
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
</TABLE>
<PAGE> 4
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
June 30,
-------------------------
1996 1995
----------- ----------
(Unaudited)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 3,314,110 $ 127,759
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 301,946 186,573
Provision for losses on real estate owned 60,000 177,032
(Recovery) provision for deposits at Nationar (449,392) 660,096
Depreciation of bank premises and equipment 476,373 351,621
Net (gain) loss on sales of securities & loans (476,337) 144,639
Net (gain) loss on sales of real estate owned (50,019) 12,600
Amortization of unearned premium, net of accretion
of unearned discount 683,638 872,847
Amortization of deferred income (379,992) (317,618)
Deferred income tax provision 336,363 702,206
Deferred compensation 89,389 301,733
Deferred gain from sale of real estate 0 (947,919)
Changes in operating assets and liabilities, net 3,510,425 (5,128,799)
Unearned compensation 126,342 0
--------- ---------
Net cash provided by (used in) operating
activities 7,542,846 (2,857,230)
--------- ---------
Cash flows used in investing activities:
Purchases of bank premises and equipment (306,134) (1,017,074)
Purchases of securities available for sale (121,490,000)(13,691,000)
Purchases of securities held to maturity 0 (13,578,000)
Proceeds from sales and calls of securities
available for sale 64,092,337 14,924,361
Proceeds from maturities and prepayments of
securities available for sale 37,332,079 6,254,676
Proceeds from calls of securities held to maturity 0 249,000
Proceeds from maturities and prepayments of
securities held to maturity 0 5,056,255
Net originations and repayments of loans (24,535,903) (5,869,586)
Purchases of loans (18,150,000) (8,774,000)
Proceeds from sales and operations of real estate
owned 662,057 1,153,159
---------- ----------
Net cash used in investing
activities (62,395,564)(15,292,209)
---------- ----------
Cash flows provided by financing activities:
Net decrease in non-interest bearing
deposits (730,545) (187,266)
Net increase in interest bearing deposits 10,168,031 19,559,836
Net increase in mortgagors' escrow deposits 1,018,898 501,822
Repayment of securities sold with the agreement
to repurchase 0 (5,000,000)
Increase (decrease) in Borrowed funds 51,000,000 (10,000,000)
----------- ----------
Net cash provided by financing activities 61,456,384 4,874,392
----------- ----------
Net (decrease) increase in cash and cash equivalents 6,603,666 (13,275,047)
Cash and cash equivalents, beginning of period 19,321,639 22,168,214
----------- ----------
Cash and cash equivalents, end of period $25,925,305 $ 8,893,167
=========== ==========
Supplemental cash flow disclosure:
Interest paid $12,531,307 $10,836,974
Income taxes paid 2,707,233 1,425,066
Noncash activities:
Loans originated as the result of real estate sales 220,009 454,042
Loans transferred through the foreclosure of a
related mortgage loan or through in-substance
foreclosure to real estate owned 755,713 441,481
Net change in unrealized gain (loss) on securities
available for sale (12,659,411) (5,099,844)
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
</TABLE>
<PAGE> 5
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary for a fair presentation of the
financial condition of Flushing Financial Corporation and Subsidiaries (the
"Company") as of June 30, 1996, the results of operations for the three months
and six months ended June 30, 1996 and 1995, and the cash flow statements for
the six months ended June 30, 1996 and 1995. These adjustments consist of
items which are of a normal recurring nature. The results of operations for
the three months and six months ended June 30, 1996 are not necessarily
indicative of the results of operations to be expected for the remainder of the
year.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principals ("GAAP") have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The
accompanying unaudited financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the
Company's 1995 Annual Report to Shareholders and SEC Form 10-K for the year
ended December 31, 1995.
Flushing Financial Corporation was formed for the purpose of acquiring all of
the common stock of Flushing Savings Bank, FSB (the "Bank") concurrent with the
Bank's conversion from mutual to stock form of organization which was completed
on November 21, 1995. Activities prior to November 21, 1995 presented in the
accompanying unaudited financial statements relate to the Bank only. The
acquisition was accounted for using the pooling of interest method.
2. BORROWED FUNDS
At June 30, 1996, advances from the Federal Home Loan Bank of New York
("FHLB-NY") totaled $51.0 million, with a composite interest rate of 5.85% and
terms
ranging from one to three years. During the first quarter of 1996, the
Company initiated a borrowing program with the FHLB-NY to seek to leverage the
Company's highly capitalized position when interest rates on FHLB-NY advances
are attractive, as compared to alternative funding sources, to finance
investment opportunities.
<PAGE> 6
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. 1996 RESTRICTED STOCK INCENTIVE PLAN
Total shares issued and outstanding increased to 8,909,100 at June 30, 1996 as
a result of the issuance of shares to directors and officers pursuant to the
Company's 1996 Restricted Stock Incentive Plan (the "Restricted Stock Plan").
The Restricted Stock Plan was approved by the Company's shareholders at the
Company's 1996 Annual Meeting of Shareholders held on May 21, 1996 (the "Annual
Meeting"), in which 345,000 shares of restricted stock were authorized, and an
aggregate of 285,100 shares of restricted stock were awarded to directors and
employees. The value of the awards at the grant date was $16.25 per share,
equal to the average between the high and the low market prices of the
Company's common stock on May 20, 1996. For the three and six months ended
June 30, 1996, accrued restricted stock expense amounted to $104,000. The
restricted stock awards will vest at a rate of 20% per year, commencing on the
first anniversary of the date of the award.
4. 1996 STOCK OPTION INCENTIVE PLAN
At the Annual Meeting, the Company's shareholders approved the Company's 1996
Stock Option Incentive Plan and thereby authorized the issuance of options to
purchase 862,500 shares of the Company's common stock. On May 21, 1996,
options to purchase 735,750 shares were issued to directors and employees with
an exercise price of $16.25 per share. The exercise price is equal to the
average between the high and the low market prices of the Company's common
stock on May 20, 1996. The stock options will vest and become exercisable at a
rate of 20% per year, commencing on the first anniversary of the date of the
grant, and expire ten years from the anniversary of the date of the grant.
5. RECENT ACCOUNTING PRONOUNCEMENTS
FASB has issued SFAS 123, "Accounting for Stock-Based Compensation", effective
for fiscal years beginning after December 15, 1995. The Company had elected to
measure compensation cost using APB Opinion No. 25 as per SFAS 123. Pro forma
disclosures required for entities that elect to continue to measure
compensation cost using APB Opinion No. 25 must include the effects of all
awards granted in fiscal years that begin after December 15, 1994. Management
will implement the pro forma disclosure requirements with the preparation of
the annual financial statement for 1996.
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", was issued by FASB. This Statement is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. Earlier or retroactive
application of this Pronouncement is not permitted. Adoption of this
Pronouncement is not expected to have a material impact on the Company's
consolidated financial statements.
<PAGE> 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 was formed in May 1994 to serve as the holding
company for Flushing Savings Bank, FSB (the "Bank"). On November 21, 1995, the
Bank completed its Conversion ("Conversion") from a federally charted mutual
savings bank to a federally chartered stock savings bank. In connection with
the Conversion, Flushing Financial Corporation issued 8,625,000 shares of
common stock at a price of $11.50 per share and utilized a portion of the
proceeds to acquire all of the issued shares of the Bank. Prior to the
Conversion, Flushing Financial Corporation had no assets, liabilities or
operations. The following discussion of financial condition and results of
operations include the collective results of Flushing Financial Corporation and
the Bank (collectively the "Company"), but reflects principally the Bank's
activities. Unless otherwise indicated, for the periods prior to November 21,
1995, reference to the Company reflects only the Bank's activities.
On May 21, 1996, the Company held its first Annual Meeting of Shareholders (the
"Annual Meeting"). At the Annual Meeting, the Company's shareholders adopted a
1996 Restricted Stock Incentive Plan (the "Restricted Stock Plan") and thereby
authorized the issuance of 345,000 shares of restricted stock, of which 285,100
were awarded on May 21, 1996. Also at the Annual Meeting, the Company's
shareholders adopted a 1996 Stock Option Incentive Plan (the "Stock Option
Plan") and thereby authorized the issuance of 862,500 stock options, of which
735,750 were granted on May 21, 1996. The value of the restricted stock awards
and the exercise price of the stock options was $16.25 per share, based on the
average between the high and the low market prices of the Company's common
stock on May 20, 1996.
On June 28, 1996, the Company received approval to repurchase up to 431,250
shares of the Company's outstanding common stock, or 5% of the 8,625,000 shares
issued in connection with the Conversion. The Company also intends to
repurchase an additional 285,100 shares, representing the number of shares
awarded under the Restricted Stock Plan on May 21, 1996. All stock repurchases
are expected to be made in open market transactions and are subject to market
conditions, the trading price of the stock, and the Company's financial
performance.
The Company's principal business is attracting retail deposits from the general
public and investing those deposits, together with funds generated from
operations, primarily in (i) originations and purchases of one-to-four family
residential mortgage loans, multi-family income-producing property loans and
commercial real estate loans; and (ii) mortgage loan surrogates such as
mortgage-backed securities. To a lesser extent, the Company originates
co-operative apartment loans, construction and consumer loans. The Company
also
invests in U.S. government and federal agency securities, corporate
fixed-income securities and other marketable securities.
(continued)
<PAGE> 8
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's results of operations depend primarily on net interest income,
which is the difference between the interest income earned on its loan and
securities portfolios and its cost of funds, consisting primarily of interest
paid on deposit accounts and borrowed funds. The Company's results of
operations may also be significantly affected by its periodic provision for
loan losses and provision for losses on real estate owned ("REO"), as well as
non-interest income, general and administrative expenses, other non-interest
expense and income tax expense. In addition, such results may be significantly
affected by general economic and competitive conditions, including changes in
market interest rates, the strength of the local economy, government policies
and actions of regulatory authorities.
Statements contained in this Quarterly Report relating to plans, strategies,
objectives, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking information is inherently
subject to risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, which include,
but are not limited to, the factors set forth in the the preceding paragraph
and elsewhere in this Quarterly Report and in other documents filed by the
Company with the Securities and Exchange Commission from time to time,
including, without limitation, the Company's 1995 Annual Report to Shareholders
and SEC Report on Form 10-K for the year ended December 31, 1995. The Company
has no obligation to update these forward-looking statements.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND
1995
General. Net Income for the second quarter of 1996 was $1.7 million, an
increase of $465,000 over the net income of $1.2 million for the second quarter
of 1995. This increase was primarily the result of a $1.9 million increase in
net interest income and a $389,000 decrease in non-interest expense. This
increase was offset in part by an $801,000 decrease in non-interest income from
the 1995 period as compared to the period in 1996, and lower income tax
provisions during the second quarter of 1995 of $376,000 as compared to $1.3
million for the second quarter of 1996.
Interest Income. Total interest and dividend income increased $2.6 million
from $10.9 for the three months ended June 30, 1995 to $13.5 million for the
three months ended June 30, 1996. This increase was primarily the result of
increases in the average earning balances of mortgage loans and securities of
$42.0 million and $94.4 million, respectively, form the quarter ended June 30,
1995 to the quarter ended June 30, 1996.
(continued)
<PAGE> 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 $688,000 from $5.7 million for
the three months ended June 30, 1995 to $6.4 million for the three months ended
June 30, 1996, primarily due to a $396,000 increase in interest paid on
deposits resulting from a decrease of $16.7 million in the average balances of
lower costing passbook and money market accounts and an increase of $35.2
million in the average balances of higher costing certificates of deposit
accounts for the quarter ended June 30, 1995 as compared to the quarter ended
June 30, 1996. Interest expense also increased $301,000 as the average balance
of borrowed funds increased by $23.7 million, offset in part by a 1.44% decline
in the average cost of borrowed funds from 7.06% for the three months ended
June 30, 1995 to 5.62% for the quarter ended June 30, 1996. During the first
quarter of 1996, the Company initiated a borrowing program with the Federal
Home Loan Bank of New York ("FHLB-NY") to seek to leverage the Company's highly
capitalized position when interest rates on FHLB-NY advances are attractive, as
compared to alternative funding sources, to finance investment opportunities.
Provision for Loan Losses. The provision for loan losses during the three
months ended June 30, 1996 was $150,000 compared to $76,402 for the three
months ended June 30, 1995. The provision reflects, among other things, the
Bank's evaluation of current economic conditions, the overall trend of
non-performing loans in the loan portfolio, it's analysis of specific loan
situations, and the increase in the size of the loan portfolio.
Non-Interest Income. Total non-interest income declined by $801,000 from $1.3
million for the second quarter of 1995 to $546,000 for the second quarter of
1996. This decline is primarily attributable to one-time income items during
the second quarter of 1995 of $579,000 relating to the amortization of deferred
gain recognized on a prior period sale of real estate, and a $387,000 gains tax
refund from New York State.
Non-Interest Expense. Non-interest expense declined $389,000 from $4.9 million
for the three months ended June 30, 1995 to $4.5 million for the three months
ended June 30, 1996. This decline is primarily a result of the recovery,
during the second quarter of 1996, of $449,000 of the $660,000, reserve for
possible losses on deposits at Nationar, a New York commercial bank, in
liquidation, which reserves were recorded during the second quarter of 1995.
The 1996 recovery was made possible by the receipt by the Company of $4.2
million of its $4.4 million of deposits previously frozen by the New York State
Banking Department in connection with its supervisory liquidation of Nationar.
Also contributing to the reduction in non-interest expense was a decrease in
Federal deposit insurance premiums from $358,000 for the three months ended
June 30, 1995 to $500 for the three months ended June 30, 1996. Expenses
attributable to salaries and employee benefits rose $353,000, reflecting salary
increases, profit sharing plans, and the amortization of unearned compensation
expense associated with the Restricted Stock Plan, which was implemented in May
of 1996. The combined reduction in non-interest expense was offset in part by
additional expenses associated with being a publicly-held company and costs
associated with implementing improved data processing systems as a part of the
Company's strategy to enhance its systems to improve efficiencies.
(continued)
<PAGE> 10
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 $1.4 million from $1.6 million for the three months ended June 30,
1995 to $3.0 million for the three months ended June 30, 1996 for reasons
stated above.
Provision for Income Taxes. The effective income tax rate for the three months
ended June 30, 1996 was higher than the three months ended June 30, 1995. This
was primarily the result of a tax benefit in 1995 due to a decrease in the
valuation allowance on the deferred tax asset attributable to the gain from
sale of real estate for the three months ended June 30, 1995.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
General. Net income increased $3.2 million from $128,000 for the six months
ended June 30, 1995 to $3.3 million for the six months ended June 30, 1996.
This was primarily due to an increase of $2.9 million in net interest income
from the 1995 period to the 1996 period and the absence in the 1996 period of
in certain one-time income and expense items recorded in the 1995 period that
had the net effect of reducing net income for the six months ended June 30,
1995 by $2.2 million, partially offset by a $1.9 million increase in the
provision for income taxes during the 1996 period as income before taxes in the
period increased by $5.0 million.
Interest Income. Total interest and dividend income increased $4.5 million
from $21.9 million for the six months ended June 30, 1995 to $26.4 million for
the six months ended June 30, 1996. This increase was primarily the result of
increases in the average earning balances of mortgage loans and securities of
$36.6 million and $97.3 million, respectively, from the six months ended June
30, 1995 to the six months ended June 30, 1996. This increase was offset in
part by a 17 basis point decline in the average yield of interest-earning
assets, from 7.74% for the first half of 1995 to 7.57% for the first half of
1996.
(continued)
<PAGE> 11
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 $10.9 million
for the six months ended June 30, 1995 to $12.5 million for the six months
ended June 30, 1996. This increase is due primarily to a $1.4 million increase
in interest paid on deposits resulting from a decrease of $23.9 million in the
average balances of lower costing passbook and money market accounts and an
increase of $46.5 million in the average balances of higher costing certificate
of deposit accounts from the first half of 1995 as compared to the first half
of 1996. The average cost of certificates of deposit accounts also increased
35 basis points from 5.33% for the six months ended June 30, 1995 to 5.68% for
the six months ended June 30, 1996. Interest expense on borrowed funds also
increased by $238,000 due to an increase in the average balance of borrowed
funds of $11.3 million, offset in part by a 1.46% decline in the average cost
of borrowed funds from 7.01% for the six months ended June 30, 1995 to 5.55%
for the six months ended June 30, 1996.
Provision for Loan Losses. The provision for loan losses during the six months
ended June 30, 1996 was $302,000 as compared to $187,000 for the six months
ended June 30, 1995. The provision reflects, among other things, the Bank's
evaluation of current economic conditions, the overall trend of non-performing
loans in the loan portfolio, it's analysis of specific loan situations, and the
increase in the loan portfolio.
Non-Interest Income. Total non-interest income declined by $980,000 from $2.3
million for the six months ended June 30, 1995 to $1.3 million for the six
months ended June 30, 1996. This decline is primarily attributable to one-time
income items recorded in the 1995 period of $948,000 in amortization of
deferred gain recognized on a prior period sale of real estate, and a $387,000
gains tax refund from New York State.
Non-Interest Expense. Non-interest expense declined $3.2 million from $12.0
million for the six months ended June 30, 1995 to $8.8 million for the six
months ended June 30, 1996. The higher non-interest expense for the first half
of 1995 as compared to the current period is primarily a result of certain
one-time items incurred during 1995 consisting of: the expensing of $2.2
million
of deferred costs that were incurred in connection with the Conversion through
March 31, 1995; the immediate recognition of expenses of $677,000 representing
the projected benefit obligation under the retirement plan for the Company's
non-employee directors; and the $660,000 loss provision on deposits at
Nationar. Also contributing to the lower non-interest expense in the current
period is the recovery of $449,000 of the $660,000 loss provision on deposits
at Nationar, made possible by the receipt by the Company of $4.2 million of its
$4.4 million of deposits previously frozen by the New York State Banking
Department in connection with its supervisory liquidation of Nationar. Further
contributing to the reduction in non-interest expense was a decrease in Federal
deposit insurance premiums from $715,000 for the six months ended June 30, 1995
to $1,000 for the six months ended June 30, 1996. The combined
(continued)
<PAGE> 12
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
effect that the recovery of the $449,000 loss provision and the decrease in
Federal deposit insurance premium had on reducing the current period's
non-interest expense further below that of the year ago period was offset in
part
by additional expenses associated with being a publicly-held company and costs
associated with implementing improved data processing systems as part of the
Company's strategy to enhance its systems to improve efficiencies.
Income Before Income Taxes. Total income before provision for income taxes
increased $5.0 million from $1.1 million for the six months ended June 30, 1995
to $6.1 million for the six months ended June 30, 1996, for reasons stated
above. Excluding the previously defined one-time items, total income before
income taxes would have been $3.3 million for the six months ended June 30,
1995 as compared to $5.7 million for the six months ended June 30, 1996,
representing a $2.4 million, or 72.28%, increase from period to period.
Provision for Income Taxes. The effective income tax rate for the six months
ended June 30, 1995 was higher than the six months ended June 30, 1996, with an
effective tax rate of 87.92% and 45.70% for the six months ended June 30, 1995
and 1996, respectively. The higher effective tax rate in 1995 was primarily
due to the write-off of certain costs that were associated with the Conversion
through March 31, 1995. This increase was partially offset by a decrease in
the valuation allowance on a deferred tax asset attributable to a deferred gain
on the sale of real estate.
CHANGES IN FINANCIAL CONDITION
Assets. From December 31, 1995, total assets increased $58.2 million to $766.6
million at June 30, 1996. During the six months ended June 30, 1996, mortgage
loans increased by $42.9 million, securities available for sale increased by
$6.4 million, and cash and overnight interest-earning deposits increased by
$6.6 million reflecting the receipt on June 30, 1996 of $4.2 million of
deposits frozen at Nationar. The increase in mortgage loans consisted
primarily of a $29.2 million increase in the Bank's portfolio of 1-4 family
residential mortgage loans and a $16.6 million increase in multi-family real
estate loans. The increase in securities available for sale takes into account
a $12.7 million unrealized loss on mark-to-market valuation of securities,
before tax effect, as a result of increases in prevailing interest rates. An
increasing interest rate environment may result in an increase in unrealized
loss on mark-to-market valuation of securities. The actual amount of cash
flows from investment securities does not change as a result of mark-to-market
valuation adjustments, assuming the securities are held to maturity. At June
30, 1996, the Company had $5.7 million invested in collateralized mortgage
obligations ("CMOs"). The CMOs in the Company's portfolio were not considered
high risk under regulations promulgated by the Office of Thrift Supervision.
At June 30, 1996, the Company had $187.1 million in callable U.S. government
agency securities.
(continued)
<PAGE> 13
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-performing assets declined by $265,000 from $6.9 million at December 31,
1995 to $6.6 million at June 30, 1996. Total non-performing assets as a
percentage of total assets declined from 0.97% at December 31, 1995 to 0.86% at
June 30, 1996. By adherence to its strict underwriting standards and
aggressive charge-offs of possible losses from impaired loans, the Company has
continued to strengthen its loan portfolio, evidenced by the increase in the
Company's ratio of the allowance for loan losses to non-performing loans from
106.61% at December 31, 1995 to 112.90% at June 30, 1996.
Liabilities. Deposit balances increased by $9.4 million during the first six
months of 1996 to $566.8 at June 30, 1996 primarily due to a $9.7 million
increase in certificate of deposit accounts and a $1.9 million increase in
savings accounts offset in part by a decrease of $2.2 million demand, NOW and
money market accounts. As described above, the Company also has increased its
utilization of FHLB-NY advances which totaled $51.0 million at June 30, 1996
with a weighted average interest rate of 5.85% and terms ranging from one to
three years. The borrowing program is part of the Company's strategy to
leverage its balance sheet when rates are attractive, as compared to
alternative funding sources, to finance investment opportunities.
Equity. Total equity decreased $3.4 million during the first six months of
1996 to $137.9 million at June 30, 1996, reflecting $3.3 million of net income
for the first six months of 1996, offset by a decrease of $6.8 million, net of
taxes, in unrealized market value of securities available for sale from
December 31, 1995 to June 30, 1996. The decline in the market value of the
Company's portfolio of securities available for sale is due primarily to an
increasing interest rate environment beginning in the latter portion of the
first quarter of 1996. Due to the size of the Company's portfolio of
securities available for sale, changes in interest rates could produce
significant changes in the value of such securities and could produce
significant fluctuations in the equity of the Company.
Shares outstanding increased to 8,909,100 at June 30, 1996 as a result of the
issuance of shares to directors and officers pursuant to the Restricted Stock
Plan. However, on June 28, 1996, the Company announced the intention to
repurchase an aggregate of 716,350 shares, representing (i) 5% of the 8,625,000
shares issued in connection with the Conversion, plus (ii) 285,100 shares which
equals the amount of restricted stock that was granted by the Company on May
21, 1996 pursuant to the Restricted Stock Plan.
(continued)
<PAGE> 14
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Bank, as a federal savings bank, is subject to Office of Thrift
Supervision ("OTS") guidelines regarding liquidity requirements. Pursuant to
these requirements, the Bank is required to maintain an average daily balance
of liquid assets (cash, certain time deposits, bankers' acceptances, specified
U.S. government securities, state or federal agency obligations, shares of
certain mutual funds and certain corporate debt securities and commercial
paper) equal to a monthly average of not less than a specified percentage of
its net withdrawable deposit accounts plus short-term borrowings. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10% depending upon economic conditions and the
savings flows of member institutions, and is currently 5%. OTS regulations
also require the maintenance of an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total net withdrawable
deposit accounts and borrowings payable in one year or less. Monetary penalties
may be imposed by the OTS for failure to meet these liquidity requirements. At
June 30, 1996 and December 31, 1995, the Bank's liquidity ratio, computed in
accordance with the OTS requirement, was 16.35% and 20.73%, respectively.
Unlike the Bank, Flushing Financial Corporation is not subject to OTS
regulatory requirements on the maintenance of minimum levels of liquid assets.
Due to its strength in capital position, the Company has the ability to
leverage its capital base and consider alternative funding sources to finance
its growth strategy.
Cashflow. The Company's primary business objective is in the originations and
purchases of residential, multi-family and commercial real estate mortgage
loans. During the six months ended June 30, 1996, net originations and
repayments of loans totaled $24.5 million and $18.2 million in residential
mortgage loans were purchased. During periods of low loan demand, the
Company also invests in mortgage loan surrogates such as mortgage-backed
securities. In the first half of 1996, the Company had purchased a total of
$121.5 million in securities available for sale, funded partially from $101.4
million in sales, calls, maturities and prepayments of securities available for
sale. General funding for these assets comes from cashflow generated by
operating and financing activities totaling $7.5 million and $61.5 million for
the six months ended June 30, 1996, respectively. For the six months ended
June 30, 1996, the Company had borrowed $51.0 million in low cost, short-term
FHLB advances. In addition, the Bank's deposit base had increased by $9.4
million from December 31, 1995 to June 30, 1996. During a favorable interest
rate environment, management may use low cost borrowing to leverage the
Company's balance sheet.
<PAGE> 15
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER TRENDS
From December 31, 1995 to June 30, 1996, total deposits increased $9.4 million,
with the majority of the increases occuring in certificate of deposit accounts,
amounting to $9.7 million, offset in part by a decrease of $2.2 million in
demand, NOW and money market accounts. Savings accounts also increased by $1.9
million from December 31, 1995 levels. This trend of increasing balances in
higher costing certificates of deposit is due largely to increases in the
prevailing rates paid in the Company's market area. Although the Company has
not raised the interest rate offered on its passbook accounts, it has sought to
maintain its certificates of deposit at competitive rates. These trends
contributed to the increase in the Company's average cost of funds from 3.99%
for the six months ended June 30, 1995 to 4.33 for the six months ended June
30, 1996. A continuation of these trends could result in a further increase in
the Company's cost of funds and a narrowing of the Company's net interest
spread. It is management's strategy to maintain deposit growth within
reasonable limits, and to utilize various low cost funding venues to finance
investment opportunities.
<PAGE> 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 OTS capital regulations, the Bank is required to comply with each of
three separate capital adequacy standards. At June 30, 1996, the Bank
exceeded each of the three OTS capital requirements. Set forth below is a
summary of the Bank's compliance with OTS capital standards as of June 30,
1996:
<TABLE>
<CAPTION>
Percent of
Amount Assets
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital:
Capital level $ 90,249 12.35%
Requirement 10,957 1.50
Excess 79,292 10.85
Core capital:
Capital level $ 90,249 12.35%
Requirement 29,220 4.00
Excess 61,029 8.35
Risk-based capital:
Capital level $ 94,650 26.96%
Requirement 28,086 8.00
Excess 66,564 18.96
</TABLE>
<PAGE> 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
income for the three months ended June 30, 1996 and 1995, and reflects
the average yield on assets and average costs of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average daily balances. The yields
include amortization of fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the three months ended June 30,
-------------------------------------------------------------
1996 1995
------------------------------- ----------------------------
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 $ 304,109 $ 6,822 8.97% $ 262,107 $ 5,951 9.08%
Other loans 2,059 48 9.32 2,915 62 8.51
Mortgage-backed securities 167,112 2,649 6.34 184,354 3,000 6.51
Interest-earning deposits 11,825 150 5.07 16,978 226 5.32
Other securities 224,135 3,844 6.86 107,387 1,666 6.21
--------- ------ ---- ------- ------ -----
Total interest-earning assets 709,240 13,513 7.62 573,741 10,905 7.60
------ ---- ------ -----
Non-interest earning assets 40,726 35,200
--------- --------
Total assets $ 749,966 $ 608,941
========= =========
LIABILITIES AND NET WORTH
Interest-bearing liabilities:
Deposits:
Passbook accounts $ 215,759 1,540 2.85 $ 227,886 1,620 2.84
NOW accounts 19,518 92 1.89 18,479 87 1.88
Money market accounts 27,110 188 2.77 31,634 221 2.79
Certificate of deposit accounts 292,288 4,093 5.60 257,054 3,589 5.58
Mortgagors' escrow deposits 4,622 16 1.38 5,027 16 1.27
Borrowed funds 32,868 462 5.62 9,121 161 7.06
Other interest-bearing liabilities 489 10 8.18 789 19 9.63
------- ----- ---- ------- ----- ----
Total interest-bearing liabilities 592,654 6,401 4.32 549,990 5,713 4.15
----- ---- ----- ----
Other liabilities 20,299 15,004
------- -------
Total liabilities 612,953 564,994
Equity 137,013 43,947
------- -------
Total liabilities and equity $ 749,966 $ 608,941
======= =======
Net interest income/expense spread $ 7,112 3.30% $ 5,192 3.45%
===== ===== ===== ====
Net interest-earning assets/
net interest margin $ 116,586 4.01% $23,751 3.62%
======= ===== ======= ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.20x 1.04x
====== ======
</TABLE>
<PAGE> 18
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
income for the six months ended June 30, 1996 and 1995, and reflects
the average yield on assets and average costs of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average balance of assets or liabilities, respectively, for the periods
shown. Average balances are derived from average daily balances. The yields
include amortization of fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------------------------------
1996 1995
------------------------------- -----------------------------
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 $ 295,387 $ 13,299 9.00% $ 258,761 $ 12,102 9.35%
Other loans 2,160 107 9.91 3,038 139 9.15
Mortgage-backed securities 172,457 5,458 6.33 179,580 5,812 6.47
Interest-earning deposits 12,227 324 5.30 16,116 433 5.37
Other securities 215,513 7,226 6.71 107,160 3,372 6.29
--------- ------ ---- ------- ------ -----
Total interest-earning assets 697,744 26,414 7.57 564,655 21,858 7.74
------- ---- ------ -----
Non-interest earning assets 38,792 37,791
--------- ------
Total assets $ 736,536 $ 602,446
========= =========
LIABILITIES AND NET WORTH
Interest-bearing liabilities:
Deposits:
Passbook accounts $ 216,270 3,075 2.84 $ 234,464 3,314 2.83
NOW accounts 19,219 181 1.88 18,210 170 1.87
Money market accounts 27,455 382 2.78 33,203 460 2.77
Certificate of deposit accounts 290,505 8,250 5.68 244,013 6,497 5.33
Mortgagors' escrow deposits 4,335 32 1.48 4,411 29 1.31
Borrowed funds 21,631 600 5.55 10,326 362 7.01
Other interest-bearing liabilities 542 23 8.49 821 40 9.74
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities 579,957 12,543 4.33 545,448 10,872 3.99
------ ---- ------ ----
Other liabilities 17,780 14,303
------- -------
Total liabilities 597,737 559,751
Equity 138,799 42,695
------- -------
Total liabilities and equity $ 736,536 $ 602,446
======= =======
Net interest income/expense spread $ 13,871 3.24% $ 10,986 3.75%
====== ===== ====== ====
Net interest-earning assets/
net interest margin $ 117,787 3.98% $19,207 3.89%
======= ===== ====== ====
Ratio of interest-earning assets to
interest-bearing liabilities 1.20x 1.04x
====== ======
</TABLE>
<PAGE> 19
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LOAN ACTIVITY
- -------------
The following table sets forth the Company's loan originations (including the
net effect of refinancings) and the changes in the Company's portfolio of
loans, including purchases, sales and principal reductions for the period
indicated.
<TABLE>
<CAPTION>
For the six For the
months ended year ended
June 30, 1996 December 31, 1995
------------------ ----------------
(In thousands)
<S> <C> <C>
MORTGAGE LOANS:
At beginning of period $ 284,443 $ 255,596
Mortgage loans originated:
One-to-four family 20,584 19,298
Cooperative 0 140
Multi-family 20,555 19,162
Commercial 680 2,144
------- ------
Total mortgage loans originated 41,819 40,744
Acquired loans 18,150 18,766
Less:
Principal reductions 16,687 29,384
Mortgage loans sold 0 626
Mortgage loan foreclosures 375 653
------- -------
At end of period $ 327,350 $ 284,443
======= =======
OTHER LOANS:
At beginning of period $ 2,328 $ 3,231
Net activity (375) (903)
------- -------
At end of period $ 1,953 $ 2,328
======= =======
</TABLE>
<PAGE> 20
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
1996 1995
---------- ------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual mortgage loans $ 4,601 $ 4,697
Other non-accrual loans 68 50
------ -----
Total non-accrual loans 4,669 4,747
Mortgage loans 90 days or more delinquent and
still accruing 152 234
Other loans 90 days or more delinquent and
still accruing 0 0
------ -----
Total non-performing loans 4,821 4,981
Real estate owned (foreclosed real estate) 1,764 1,869
------ -----
Total non-performing assets $ 6,585 $ 6,850
====== =====
Non-performing loans to gross loans 1.46% 1.74%
Non-performing assets to total assets 0.86% 0.97%
</TABLE>
<PAGE> 21
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The Company has established and maintains on its books an allowance for loan
losses that is designed to provide reserves for estimated losses inherent in
the Company's overall loan portfolio. The allowance is established through a
provision for loan losses based on management's evaluation of the risk
inherent in the various components of its loan portfolio and other factors,
including historical loan loss experience, changes in the composition and
volume of the portfolio, collection policies and experiences, trends in the
volume of non-accrual loans and regional and national economic conditions.
The determination of the amount of the allowance for loan losses includes
estimates that are susceptible to significant changes due to changes in
appraisal values of collateral, national and regional economic conditions and
other factors. In connection with the determination of the allowance, the
market value of collateral ordinarily is evaluated by the Company's staff
appraiser; however, the Company may from time to time obtain independent
appraisals for significant properties. Current year charge-offs, charge-off
trends, new loan production and current balance by particular loan categories
also are taken into account in determining the appropriate amount of
allowance. The Board of Directors reviews and approves the adequacy of the
loan loss reserves on a quarterly basis.
The following table sets forth the Bank's allowance for loan losses at and for
the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 5,310 $ 5,370
Provision for loan losses 302 496
Loans charged-off:
One-to-four family 127 312
Cooperative 52 183
Multi-family 24 251
Commercial 10 260
Other 11 46
-------- -------
Total loans charged-off 224 1,052
-------- -------
Recoveries:
Mortgage loans 55 496
Other 0 0
-------- -------
Total recoveries 55 496
-------- -------
Other adjustments 0 0
-------- -------
Balance at end of period $ 5,443 $ 5,310
======== =======
Ratio of net charge-offs during the year to
average loans outstanding during the period 0.06% 0.21%
Ratio of allowance for loans losses to gross
loans at end of period 1.65% 1.85%
Ratio of allowance for loans losses to
non-performing loans at end of period 112.90% 106.61%
Ratio of allowance for loans losses to
non-performing assets at end of period 82.66% 77.52%
</TABLE>
<PAGE> 22
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 May 21, 1996, 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 1999 Annual
Meeting of Shareholders and
until their successors are
elected and qualified).
Michael J. Hegarty 7,675,352 89,117 3,000
John O. Mead 7,679,299 85,170 3,000
Michael J. Russo 7,660,770 103,699 3,000
Adoption of the 1996
Restricted Stock Incentive
Plan. 4,708,574 1,103,581 53,716 1,901,598
Adoption of the 1996 Stock
Option Incentive Plan. 4,744,355 901,048 56,541 2,065,525
(continued)
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (CONTINUED)
Broker
For Against Withheld Abstain Non-Votes
------- -------- -------- ------- ---------
Ratification of the
appointment of Coopers &
Lybrand L.L.P. as the
independent auditors of
the Company. 7,641,548 82,466 40,455 3,000
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 Flushing Financial Corporation employment contract amendment
agreements.
10.2 Flushing Savings Bank, FSB employment contract amendment
agreements.
27 Financial data schedules for electronic (EDGAR) filing.
b) REPORTS ON FORM 8-K
None
<PAGE> 24
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, 1996 By: /s/ James F. McConnell
---------------- ------------------------------------
James F. McConnell
President and Chief Executive
Officer
Dated: August 14, 1996 By: /s/ Monica C. Passick
---------------- ------------------------------------
Monica C. Passick
Senior Vice President, Treasurer and
Chief Financial Officer
<PAGE> 25
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.1 Company Employment Agreement
10.2 Bank Employment Agreement
27 Financial Data Schedule
EXHIBIT 10.1
AMENDMENT AGREEMENT No. 1
This AMENDMENT AGREEMENT ("Agreement") is made and entered into as of the 18th
day of June, 1996, by and between Flushing Financial Corporation, a Delaware
corporation having its executive offices at 144-51 Northern Boulevard,
Flushing, New York 11354 (the "Holding Company") and Michael J. Hegarty,
residing at Two Central Drive, Glen Head, New York 11545 ("Officer").
The Holding Company and the Officer agree that, effective as of the date
thereof, the employment agreement entered into between the Holding Company and
the Officer as of November 21, 1995 (the "Employment Agreement"), is hereby
amended as provided herein.
1. The second sentence of Section 2(a) of the Employment Agreement is amended
to read as follows:
"The Employment Period shall be for a term commencing on the day on which the
conversion of Flushing Savings Bank, FSB ("the Bank") from the mutual to stock
form of ownership becomes effective (the "Effective Date of the Conversion")
and ending on the third anniversary of such date, plus such extensions as are
provided pursuant to section 2(b) of this agreement."
2. Section 7(b)(iii) of the Employment agreement is amended to read as
follows:
"continued group life, disability, health (including medical and major medical)
and accident insurance benefits, in addition to that provided pursuant to
section 7(b)(ii), to the extent necessary to provide coverage for the Officer
for a period of 36 months ("Severance Period"). Such coverage shall be
equivalent to that which the Officer would have been entitled if he had
continued working for the Bank and the Holding Company during the Severance
Period at the highest annual rate of Current Salary achieved during the
Employment Period; and"
3. Except as it may be amended as provided herein, the Employment Agreement
shall continue in full force and effect in accordance with its original terms.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date and
year first above written.
FLUSHING FINANCIAL CORPORATION
/s/ Michael J. Hegarty By: /s/ James F. McConnell
- ------------------------ ----------------------
Michael J. Hegarty James F. McConnell
President and Chief Executive
Officer
EXHIBIT 10.2
AMENDMENT AGREEMENT No. 1
This AMENDMENT AGREEMENT ("Agreement") is made and entered into as of the 18th
day of June, 1996, by and between Flushing Savings Bank, FSB, a savings bank
organized and existing under Federal law and having its executive offices at
144-51 Northern Boulevard, Flushing, New York 11354 (the "Bank") and Michael J.
Hegarty, residing at Two Central Drive, Glen Head, New York 11545 ("Officer").
The Bank and the Officer agree that, effective as of the date hereof, the
employment agreement entered into between the Bank and the Officer as of
November 21, 1995 (the "Employment Agreement"), is hereby amended as provided
herein.
1. The second sentence of Section 2(a) of the Employment Agreement is amended
to read as follows:
"The Employment Period shall be for a term commencing on the day on which the
conversion of the bank from the mutual to stock form of ownership becomes
effective (the "Effective Date of the Conversion") and ending on the third
anniversary of such date, plus such extensions as are provided pursuant to
section 2(b) of this agreement."
2. Section 7(b)(iii) of the Employment agreement is amended to read as
follows:
"continued group life, disability, health (including medical and major medical)
and accident insurance benefits, in addition to that provided pursuant to
section 7(b)(ii), to the extent necessary to provide coverage for the Officer
for a period of 36 months ("Severance Period"). Such coverage shall be
equivalent to that which the Officer would have been entitled if he had
continued working for the Bank during the Severance Period at the highest
annual rate of Current Salary achieved during the Employment Period; and"
3. Except as it may be amended as provided herein, the Employment Agreement
shall continue in full force and effect in accordance with its original terms.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date and
year first above written.
FLUSHING SAVINGS BANK, FSB
/s/ Michael J. Hegarty By: /s/ James F. McConnell
- ------------------------ ----------------------
Michael J. Hegarty James F. McConnell
President and Chief Executive
Officer
<TABLE> <S> <C>
<ARTICLE> 9
<PAGE>
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at June 30, 1996
(unaudited) and the Condensed Consolidated Statement of Income for the
six months ended June 30, 1996 (unaudited) and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<PERIOD-TYPE> 6-MOS
<CASH> 14,593
<INT-BEARING-DEPOSITS> 932
<FED-FUNDS-SOLD> 10,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 387,843
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 327,937
<ALLOWANCE> 5,443
<TOTAL-ASSETS> 766,632
<DEPOSITS> 570,321
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,373
<LONG-TERM> 51,000
0
0
<COMMON> 89
<OTHER-SE> 137,849
<TOTAL-LIABILITIES-AND-EQUITY> 766,632
<INTEREST-LOAN> 13,406
<INTEREST-INVEST> 12,684
<INTEREST-OTHER> 324
<INTEREST-TOTAL> 26,414
<INTEREST-DEPOSIT> 11,920
<INTEREST-EXPENSE> 12,542
<INTEREST-INCOME-NET> 13,872
<LOAN-LOSSES> 302
<SECURITIES-GAINS> 476
<EXPENSE-OTHER> 7,943
<INCOME-PRETAX> 6,104
<INCOME-PRE-EXTRAORDINARY> 6,104
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,314
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 7.57
<LOANS-NON> 4,669
<LOANS-PAST> 152
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,310
<CHARGE-OFFS> 224
<RECOVERIES> 55
<ALLOWANCE-CLOSE> 5,443
<ALLOWANCE-DOMESTIC> 5,443
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,443
<PAGE>
</TABLE>
