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, 1998
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)
(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.
-----------------------------
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. X Yes No
The number of shares of the registrant's Common Stock outstanding as of October
31, 1998 was 11,234,130 shares.
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TABLE OF CONTENTS
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PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements Of Financial Condition....................................................................1
Consolidated Statements Of Operations And Comprehensive Income....................................................2
Consolidated Statements Of Cash Flows.............................................................................3
Consolidated Statements Of Changes In Stockholders'Equity.........................................................5
Notes To Consolidated 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.......................................................................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................24
SIGNATURES.......................................................................................................25
EXHIBITS.........................................................................................................26
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<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- --------------------
(Unaudited)
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ASSETS
Cash and due from banks $ 9,972,750 $ 8,257,791
Federal funds sold and overnight interest-earning deposits 23,800,000 82,094,629
Securities available for sale:
Mortgage-backed securities 340,926,887 217,110,108
Other securities 25,298,862 139,602,095
Loans:
1-4 Family residential mortgage loans 357,350,201 301,351,063
Multi-family mortgage loans 260,898,226 230,229,036
Commercial real estate loans 84,357,242 68,181,602
Construction loans 2,612,396 2,797,256
Small Business Administration loans 2,244,388 2,789,036
Consumer loans 1,025,385 1,385,574
Less: Unearned loan fees (1,401,860) (1,838,229)
Allowance for loan losses (6,720,097) (6,474,027)
-------------------- --------------------
Net loans 700,365,881 598,421,311
Interest and dividends receivable 7,033,684 9,281,705
Real estate owned, net 172,335 432,986
Bank premises and equipment, net 6,544,792 6,492,937
Federal Home Loan Bank of New York stock 17,320,350 14,355,750
Goodwill 5,095,302 5,369,899
Other assets 6,651,408 7,056,825
-------------------- --------------------
Total assets $ 1,143,182,251 $ 1,088,476,036
==================== ====================
LIABILITIES
Due to depositors:
Non-interest bearing $ 17,851,129 $ 22,089,514
Interest bearing 621,995,717 631,747,441
Mortgagors' escrow deposits 8,803,143 2,074,434
Borrowed funds 346,110,188 287,187,199
Other liabilities 11,284,870 8,934,348
-------------------- --------------------
Total liabilities 1,006,045,047 952,032,936
-------------------- --------------------
STOCKHOLDERS' EQUITY (1)
Preferred stock ($0.01 par value; 5,000,000 shares authorized) -- --
Common stock ($0.01 par value; 20,000,000 shares authorized;
11,355,678 shares issued; 11,337,307 and 11,796,930 shares outstanding
at September 30, 1998 and December 31, 1997, respectively) 113,557 89,101
Additional paid-in capital 75,132,246 101,697,157
Treasury stock (18,371 and 1,045,480 shares at
September 30, 1998 and December 31, 1997 respectively) (401,426) (19,666,287)
Unearned compensation - Employee Benefit Plan (7,045,680) (7,202,703)
Unearned compensation - Restricted Stock Awards (2,670,490) (3,718,355)
Retained earnings 69,436,783 63,785,160
Accumulated Other Comprehensive Income:
Net unrealized gain on securities available for sale, net of taxes 2,572,214 1,459,027
-------------------- --------------------
Total stockholders' equity 137,137,204 136,443,100
-------------------- --------------------
Total liabilities and stockholders' equity $ 1,143,182,251 $ 1,088,476,036
==================== ====================
<FN>
(1) Adjusted for three-for-two stock dividend paid on September 30, 1998.
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME.
(Unaudited)
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For the three months For the nine months
Ended September 30, Ended September 30,
------------------------------ -------------------------------
1998 1997 1998 1997
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INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 14,363,853 $ 11,151,914 $ 41,741,897 $ 29,500,105
Interest and dividends on securities:
Taxable interest 6,125,532 5,540,792 18,435,993 16,980,303
Tax-exempt interest 2,976 7,869 17,875 23,743
Dividends 56,978 56,573 166,410 192,571
Other interest income 278,933 608,836 1,494,436 1,266,355
-------------- -------------- -------------- ---------------
Total interest and dividend income 20,828,272 17,365,984 61,856,611 47,963,077
-------------- -------------- -------------- ---------------
INTEREST EXPENSE
Deposits 7,046,086 6,723,322 21,267,893 19,267,015
Other interest expense 4,922,188 2,409,164 13,430,904 4,879,570
-------------- -------------- -------------- ---------------
Total interest expense 11,968,274 9,132,486 34,698,797 24,146,585
-------------- -------------- -------------- ---------------
NET INTEREST INCOME 8,859,998 8,233,498 27,157,814 23,816,492
Provision for loan losses 15,234 -- 173,517 66,792
-------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,844,764 8,233,498 26,984,297 23,749,700
-------------- -------------- -------------- ---------------
NON-INTEREST INCOME
Other fee income 345,668 215,297 1,019,191 702,698
Net gain on sales of securities and loans 179,795 (36,628) 330,030 12,391
Other income 436,259 595,742 1,142,936 934,035
-------------- -------------- -------------- ---------------
Total non-interest income 961,722 774,411 2,492,157 1,649,124
-------------- -------------- -------------- ---------------
NON-INTEREST EXPENSE
Salaries and employee benefits 3,428,763 2,626,316 10,068,897 7,399,528
Occupancy and equipment 476,233 494,895 1,425,589 1,433,310
Professional services 421,660 388,280 1,318,988 1,168,868
Federal deposit insurance premiums 25,439 21,956 77,374 58,991
Data processing 296,008 261,695 851,368 724,519
Depreciation and amortization 252,678 205,059 728,921 585,231
Real estate owned expenses 7,805 49,583 86,558 74,926
Other operating expenses 1,122,991 965,184 3,069,975 2,555,101
-------------- -------------- -------------- ---------------
Total non-interest expense 6,031,577 5,012,968 17,627,670 14,000,474
-------------- -------------- -------------- ---------------
INCOME BEFORE INCOME TAXES 3,774,909 3,994,941 11,848,784 11,398,350
-------------- -------------- -------------- ---------------
PROVISION FOR INCOME TAXES
Federal 1,264,138 1,096,948 3,991,433 3,202,291
State and local 52,802 705,425 431,971 1,990,479
-------------- -------------- -------------- ---------------
Total taxes 1,316,940 1,802,373 4,423,404 5,192,770
-------------- -------------- -------------- ---------------
NET INCOME $ 2,457,969 $ 2,192,568 $ 7,425,380 $ 6,205,580
============== ============== ============== ===============
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gains on securities:
Unrealized holding gains arising during period 1,202,328 1,697,970 1,058,941 2,406,414
Less: reclassification adjustment for gains
included in net income 14,167 48,006 54,246 74,476
-------------- -------------- -------------- ---------------
Net unrealized holding gains 1,216,495 1,745,976 1,113,187 2,480,890
-------------- -------------- -------------- ---------------
COMPREHENSIVE INCOME $ 3,674,464 $ 3,938,544 $ 8,538,567 $ 8,686,470
============== ============== ============== ===============
Weighted average shares outstanding (1) 10,209,310 10,632,516 10,286,931 10,692,716
Weighted average total equivalent common shrs (1) 10,454,413 10,809,141 10,546,201 10,824,033
Basic earnings per share (1) $0.24 $0.21 $0.72 $0.58
Diluted earnings per share (1) $0.24 $0.20 $0.70 $0.57
<FN>
(1) Share and per share amounts adjusted for three-for-two stock dividend paid on September 30, 1998.
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
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<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS.
(Unaudited)
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<CAPTION>
For the nine months ended
September 30,
-------------------------------------------
1998 1997
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 7,425,380 $ 6,205,580
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 173,517 66,792
Provision for losses on real estate owned 33,243 0
Depreciation of bank premises and equipment 728,921 585,231
Amortization of Goodwill 274,597 30,491
Net gain on sales of securities (100,456) (12,391)
Net gain on sales of Small Business Administration loans (229,574) 0
Net loss on sale of real estate owned 6,293 9,000
Amortization of unearned premium, net of
accretion of unearned discount 1,389,632 301,648
Amortization of deferred income (619,836) (643,291)
Deferred income tax (benefit) provision (511,446) 979,530
Deferred compensation 160,648 127,798
Proceeds from sales of Small Business Administration loans 2,635,656 0
Changes in operating assets and liabilities 5,211,956 (2,421,597)
Unearned compensation 1,204,888 541,658
------------------ -------------------
Net cash provided by operating activities 17,783,419 5,770,449
------------------ -------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of banking premises and equipment (780,776) (1,087,613)
Purchases of FHLB stock (2,964,600) 0
Purchases of securities available for sale (242,341,000) (114,105,000)
Proceeds from sales and calls of securities available for sale 176,679,456 102,268,391
Proceeds from maturities and prepayments of securities
available for sale 57,156,454 31,943,979
Net originations and repayments of loans (84,363,091) (80,050,900)
Purchases of loans (20,587,000) (107,518,000)
Proceeds from sales & operations of real estate owned 564,882 588,400
Acquisitions, net of cash and cash equivalents 0 (5,152,893)
------------------ -------------------
Net cash used by investing activities (116,635,675) (173,113,636)
------------------ -------------------
</TABLE>
(continued)
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS.
(Unaudited)
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<CAPTION>
For the nine months ended
September 30,
-------------------------------------------
1998 1997
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CASH FLOWS USED BY FINANCING ACTIVITIES:
Net (decrease) increase in non-interest bearing deposits (4,238,385) 8,876,432
Net (decrease) increase in interest bearing deposits ( 9,751,724) 53,507,245
Net increase in mortgagors' escrow deposits 6,728,709 3,781,039
Repayments of short-term borrowed funds (20,000,000) 0
Increases in long-term borrowed funds 90,000,000 114,062,594
Repayments of long-term borrowed funds (11,077,011) 0
Purchases of treasury stock, net (7,615,246) (4,943,319)
Cash dividends paid (1,773,757) (1,176,557)
------------------ -------------------
Net cash provided by financing activities 42,272,586 174,107,434
------------------ -------------------
Net (decrease) increase in cash and cash equivalents (56,579,670) 6,764,247
Cash and cash equivalents, beginning of period 90,352,420 34,425,155
------------------ -------------------
Cash and cash equivalents, end of period $ 33,772,750 $ 41,189,402
================== ===================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 30,065,978 $ 23,106,711
Income taxes paid 5,050,414 5,056,589
Non-cash activities:
Loans originated as the result of real estate sales 0 637,100
Net change in unrealized gains on securities available for sale 2,086,188 4,597,190
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY.
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1998
--------------------------
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COMMON STOCK
Balance, beginning of period $ 89,101
Stock dividend paid on September 30, 1998 (3,785,168 common shares, of which
1,339,590 common shares were paid from Treasury) 24,456
--------------------------
Balance, end of period $ 113,557
==========================
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period $ 101,697,157
Stock dividend paid on September 30, 1998 (26,914,295)
Release of shares from Employee Benefit Trust (1,895 common shares) 26,455
Stock options exercised (23,175 common shares) (64,506)
Tax benefit of stock plans 387,435
--------------------------
Balance, end of period $ 75,132,246
==========================
TREASURY STOCK
Balance, beginning of period $ (19,666,287)
Purchases of common shares outstanding (320,946 shares) (7,674,209)
Stock dividend paid on September 30, 1998 (3,785,168 common shares, of which
1,339,590 common shares were paid from Treasury) 26,888,627
Options exercised (23,175 common shares) 441,100
Restricted stock awards, net of forfeitures (-300 common shares) (9,733)
Repurchase of restricted stock award (14,410 common shares) (380,924)
--------------------------
Balance, end of period $ (401,426)
==========================
UNEARNED COMPENSATION
Balance, beginning of period $ (10,921,058)
Release of shares from Employee Benefit Trust (13,665 common shares) 157,023
Restricted stock award expense 1,038,132
Restricted stock awards, net of forfeitures (300 common shares) 9,733
--------------------------
Balance, end of period $ (9,716,170)
==========================
RETAINED EARNINGS
Balance, beginning of period $ 63,785,160
Net income 7,425,380
Cash dividends declared and paid (1,773,757)
--------------------------
Balance, end of period $ 69,436,783
==========================
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of period $ 1,459,027
Change in net unrealized holding gains on securities
available for sale 1,113,187
--------------------------
Balance, end of period $ 2,572,214
==========================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATMENTS.
1. BASIS OF PRESENTATION
The information furnished in these interim statements reflects all adjustments
which are, in the opinion of management, necessary for a fair statement of the
results for such periods of Flushing Financial Corporation and Subsidiaries (the
"Company"). Such adjustments are of a normal recurring nature, unless otherwise
disclosed in this Form 10-Q. The results of operations in the interim statements
are not necessarily indicative of the results that may be expected for the full
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 interim financial
information should be read in conjunction with the Company's 1997 Annual Report
on Form 10-K.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates.
3. BORROWED FUNDS
The primary business of the Company is the operation of its wholly-owned
subsidiary, Flushing Savings Bank, FSB (the "Bank"). Although deposits are the
Bank's primary source of funds, the Bank has increased utilization of borrowings
as a complimentary and cost effective source of funds for lending, investing and
other general purposes. Upon the Bank's conversion from a New York State
chartered mutual savings bank to a federally chartered mutual savings bank on
May 10, 1994, the Bank became a member of, and became eligible to obtain
advances from, the Federal Home Loan Bank of New York (FHLB-NY). Such advances
generally are secured by a blanket lien against the Bank's mortgage portfolio
and the Bank's investment in the stock of the FHLB-NY. At September 30, 1998,
borrowings from FHLB-NY totaled $346.1 million, with a composite interest rate
of 6.10%.
4. TREASURY STOCK AND STOCK DIVIDEND
In November of 1997, the Company announced its intention to repurchase up to
397,946 shares of the Company's outstanding common stock in its Third Stock
Repurchase program. During the third quarter of 1998, the Company completed its
Third Stock Repurchase Program, and announced its intention to repurchase an
additional 568,071 shares of the Company's outstanding common stock in its
Fourth Stock Repurchase Program. At September 30, 1998, the Company had
purchased a total of 1,394,799 shares at a cost of $27.9 million pursuant to the
Company's Stock Repurchase programs, leaving 550,071 shares to be repurchased
under the current Stock Repurchase program. The total number of shares issued in
the three-for-two stock dividend paid on September 30, 1998 were 3,785,168, of
which 1,339,590 were funded by shares of treasury stock. All share and per share
amounts in this report on Form 10-Q have been retro-actively restated to reflect
the three-for-two stock dividend paid on September 30, 1998. Total shares
outstanding at September 30, 1998 were 11,337,307.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
5. EARNINGS PER SHARE
Earnings per share is computed by dividing the net income by the weighted
average number of common shares and common equivalent shares outstanding during
each period. The Company has adopted SFAS 128 "Earnings Per Share" ("SFAS 128"),
which has changed the method for calculating earnings per share. SFAS 128
requires the presentation of "basic" and "diluted" earnings per share on the
face of the income statement. Prior period earnings per share data have been
restated in accordance with Statement 128.
6. IMPACT OF NEW ACCOUNTING STANDARDS
In June of 1997, FASB issued SFAS No.131, "Disclosures about Segments of an
Enterprise and Related Information", effective for financial statements for
periods beginning after December 15, 1997. This Statement establishes standards
for the methodology of reporting information about operating segments of public
enterprises in annual and interim financial reports. Adoption of this
Pronouncement did not have a material impact on the Company's disclosures.
In February of 1998, the Financial Accounting Standard Board ("FASB") issued
SFAS No.132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", an amendment of FASB Statements No. 87, 88 and 106. This
pronouncement is effective for fiscal years beginning after December 15, 1997.
This Statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable and does not change the
measurement or recognition of the benefits. Adoption of this Pronouncement is
not expected to have a material impact on the Company's disclosures.
In June of 1998, FASB issued SFAS No.133, "Accounting for Derivative Instruments
and Hedging Activities", which amends SFAS No.52 and 107, and it supercedes FASB
Statements No.80, 105 and 109. This Pronouncement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This Statement requires
the recognition of all derivatives as either assets or liabilities in the
statement of financial position and the measurement of these derivatives at fair
value. Management will implement the disclosure requirements as per FASB
Pronouncement.
FASB issued in October of 1998 SFAS No.134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise", an amendment of FASB Statement No.65. This
Pronouncement amends SFAS No.65 to permit classification as trading,
available-for-sale, or held-to-maturity mortgage-backed securities retained
after the securitization of mortgage loans held for sale. SFAS No.134 is
effective for the first fiscal quarter beginning after December 15, 1998.
Adoption of this Pronouncement is not expected to have a material impact on the
Company's disclosures.
<PAGE>
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.
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) origination and purchases of
multi-family income-producing property loans, commercial real estate loans, and
one-to-four family residential mortgage 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 certain other loans, including
construction loans and Small Business Administration loans.
The Company has in the past increased growth through acquisitions of financial
institutions or branches of other financial institutions, and will pursue growth
through acquisitions that are, or are expected to be within a reasonable time
frame, accretive to earnings, as opportunities arise. On September 9, 1997, The
Company acquired New York Federal Savings Bank, a privately held federal savings
bank ("New York Federal") in a cash transaction valued at approximately $13.0
million.
In November of 1997, the Bank established a real estate investment trust
subsidiary, Flushing Preferred Funding Corporation ("FPFC"), and transferred
$256.7 million in real estate loans from the Bank to FPFC. On September 30,
1998, the bank transferred an additional $69.7 million in real estate loans from
the Bank to FPFC. The assets transferred to FPFC are viewed by regulators as
part of the Bank's assets in consolidation. However, the establishment of FPFC
provides an additional vehicle for access by the Company to the capital markets
for future investment opportunities. In addition, under current law, all income
earned by FPFC and distributed to the Bank in the form of a dividend has the
effect of reducing income tax expenses.
During the first quarter of 1998, the Bank formed Flushing Service Corporation
("FSC"), a service corporation to market insurance products and mutual funds.
The insurance products and mutual funds sold are products of unrelated insurance
and securities firms from which the service corporation earns a commission. FSC
became fully operational during the month of June, 1998. Management is currently
reviewing the potential profitability of various new products to further extend
the Bank's product lines and market.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On August 18, 1998, the Board of Directors of the Company declared a
three-for-two split of the Company's common stock in the form of a 50% stock
dividend, payable September 30, 1998. Each shareholder received one additional
share for every two shares of the Company's common stock held at the record
date, September 10, 1998. Cash was paid in lieu of fractional shares. All share
and per share amounts in this report on Form 10-Q have been retro-actively
restated to reflect the three-for-two stock split paid on September 30, 1998.
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 also generates
non-interest income from loan fees, service charges on deposit accounts,
mortgage servicing fees, late charges and other fees and net gains and losses on
sales of securities and loans. The Company's operating expenses consist
principally of employee compensation and benefits, occupancy and equipment
costs, federal deposit insurance premiums, other general and administrative
expenses and income tax expense. The Company's results of operations also can be
significantly affected by its periodic provision for loan losses and specific
provision for losses on real estate owned ("REO"), as well as non-interest
income, general and administrative expenses, other non-interest expense and
income tax expense. In addition, such results may be significantly affected by
general economic and competitive conditions, including changes in market
interest rates, the strength of the local economy, government policies and
actions of regulatory authorities.
Statements contained in this Quarterly Report relating to plans, strategies,
objectives, economic performance and trends and other statements that are not
descriptions of historical facts may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward looking information is inherently
subject to risks and uncertainties, and actual results could differ materially
from those currently anticipated due to a number of factors, which include, but
are not limited to, the factors set forth in the preceding paragraph, the
factors described below under Year 2000 Compliance, 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 1997 Annual Report to Shareholders and the SEC Report
on Form 10-K for the year ended December 31, 1997. The Company has no obligation
to update these forward-looking statements.
YEAR 2000 COMPLIANCE
The Company utilizes and is dependent upon data processing systems and software
to conduct its business. The data processing systems and software include those
developed and maintained by the Company's third party data processing vendors,
and purchased software operating on in-house computer networks. As the year 2000
approaches, a critical business issue has emerged regarding how existing
software, such as application programs and operating systems, will accommodate
the year 2000 date value. In the past, such software was programmed to assume
that all year values begin with "19". In response to this business concern, the
Company established, in 1997, a Year 2000 Task Force ("Y2K Task Force") to
evaluate whether its computer systems will function properly in the year 2000,
and report to the Board of Directors on a monthly basis. With the implementation
of the Y2K Task Force, actions were taken to remedy the Company's year 2000
problems and management expects to be year 2000 compliant by the end of calendar
1998, although the Company plans to continue monitoring its year 2000 readiness
until the year 2000. However, due to possible unanticipated events, there can be
no assurances that the Company will meet its target date for compliance.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since established, the Y2K Task Force has contacted parties with which the
Company has material relationships, including the Company's data processing
vendors, and software suppliers to determine whether the systems used, or relied
upon, by the Company are year 2000 compliant, and if not to assess the
corrective steps being taken. The Company also contacted all borrowers with loan
balances outstanding in excess of two million dollars to assess the state of
each such party's year 2000 readiness, and is currently awaiting their response
for assessment. The Company's investment securities portfolio, which amounted to
32.03% of total assets at September 30, 1998, consists primarily of U.S.
government securities or U.S. government agency backed mortgage-backed
securities. Although the Company is attempting to monitor and evaluate the
efforts of these other parties, it cannot control the success of their efforts.
The Company's data processing vendors and the majority of other vendors have
indicated that their hardware and/or software is or will be year 2000 compliant.
Systems for which year 2000 compliance could not be assured are being replaced.
Assessment and testing for year 2000 compliance has been performed on in-house
systems, and is being performed, or will be performed, for the Company's third
party data processing vendors. The anticipated costs to upgrade various
equipment is approximately $100,000, of which $48,000 has already been expensed.
This update cost consists primarily of bios and software version upgrades. The
foregoing estimate of costs does not include the time that internal staff are
devoting to testing and monitoring year 2000 compliance, although these
activities are not expected to add significant incremental cost. Based on
compliance efforts and testing through October 31, 1998, management does not
believe that costs of year 2000 compliance will have a material adverse effect
on the Company's consolidated financial condition, results of operations, or
cash flows.
The Company is also dependent in its business upon the availability of public
utilities, including communications and power services. The year 2000 readiness
of such utilities has yet to be established, and the Company cannot predict the
outcome of such utilities' remediation efforts.
The Company believes the most reasonably likely worst case scenario, should the
Company's systems not meet the year 2000 compliance, is an inability to process
banking transactions, calculate investment yields and costs, send and receive
electronic data with third parties, or engage in similar normal business
activities. Although the Company does not believe this scenario will occur,
should the Company need to manually calculate and complete transactions,
assuming a doubling in manpower, the cost of alternative methods of doing
business is projected to be approximately $250,000 in additional expenses per
month.
Management believes a more likely scenario, if the Company's systems are not
year 2000 compliant, is a temporary disruption of service to its customers. The
Company is of the opinion that its contingency plans would mitigate the
long-term effect of such a scenario and that a temporary disruption would not
have a material adverse effect on its consolidated financial condition, results
of operations or cash flow.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In case of unanticipated events, the Company has developed contingency plans
that management believes will combat the unavailability of each mission critical
system, including the identification of reasonable substitutes for the functions
of such systems. Some of these contingency plans are already in use for
unanticipated data processing vendor downtime which occurs during the normal
course of business.
The discussion above of the Company's efforts, and management's expectations,
relating to year 2000 compliance are forward-looking statements, which are based
on management's best estimate of various factors involving numerous assumptions.
The Company's ability to achieve year 2000 compliance and the level of
incremental costs associated therewith could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
GENERAL. Net income for the third quarter of 1998 increased 12.10% to $2.5
million, or $0.24 per diluted share, from the $2.2 million, or $0.20 per diluted
share, earned in the quarter ended September 30, 1997. The return on average
assets for the third quarter of 1998 decreased to 0.88% from 0.97% for the
comparable 1997 period, while the return on average equity for the third quarter
of 1998 increased to 7.16% from 6.53% for the comparable 1997 period. Excluding
a one-time non-recurring compensation expense of $490,000, net income for the
three months ended September 30, 1998 would have been $2.7 million, or $0.26 per
diluted share. Excluding this non-recurring item, the return on average assets
for the third quarter of 1998, would have increased to 0.98% , and the return on
average equity for the third quarter of 1998 would have increased to 7.91%.
INTEREST INCOME. Total interest and dividend income increased $3.4 million from
$17.4 million for the three months ended September 30, 1997 to $20.8 million for
the three months ended September 30, 1998. This increase was primarily the
result of a $171.8 million increase in the average earning balances of mortgage
loans from the quarter ended September 30, 1997 as compared to the quarter ended
September 30, 1998, and a $51.2 million increase in the average earning balances
of investment securities available for sale from the third quarter of 1997 as
compared to the third quarter of 1998.
INTEREST EXPENSE. Interest expense increased $2.9 million from $9.1 million for
the three months ended September 30, 1997 to $12.0 million for the three months
ended September 30, 1998, primarily due to a $2.5 million increase in borrowed
funds expense as the average balance of borrowed funds increased $166.3 million
from the third quarter of 1997 as compared to the third quarter of 1998.
Interest paid on deposits also increased $323,000, resulting from an increase of
$29.9 million in the average balances of higher costing certificates of deposit
accounts from the quarter ended September 30, 1997 as compared to the quarter
ended September 30, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME. For the three months ended September 30, 1998, net interest
income increased 7.61% to $8.9 million from $8.2 million in the comparable 1997
period, for reasons stated above. Net interest margin declined from 3.81% for
the three months ended September 30, 1997 to 3.33% for the comparable 1998
period, as a result of increased utilization of borrowed funds from the Federal
Home Loan Bank of New York ("FHLB-NY") which have a higher average cost than
deposits. Mindful of the balance between return on assets and cost of funds, the
Company continues its focus on asset growth and market penetration, the results
of which are reflected in the continued growth in dollars earned.
PROVISION FOR LOAN LOSSES. Provision for loan losses for the three months ended
September 30, 1998 were $15,000 as compared to none for the comparable 1997
period. The allowance for loan losses increased from $6.5 million at December
31, 1997 to $6.7 million at September 30, 1998, which reflects the Bank's
evaluation of current economic conditions, the overall trend of non-performing
loans in the loan portfolio (see Asset Section), its analysis of specific loan
situations, and the size and composition of the loan portfolio.
NON-INTEREST INCOME. Total non-interest income increased by 24.19% to $962,000
for the three months ended September 30, 1998 from $774,000 for the three months
ended September 30, 1997. The increase is due primarily to $154,000 in gains
recorded on sales of the guaranteed portion of Small Business Association Loans
("SBA") during the third quarter of 1998, an increase of $143,000 in quarterly
dividends on FHLB stock, and increased fee income from mortgage and banking
services, partially offset by a one-time non-recurring receipt of $361,000 in
1997 associated with a construction project that was completed in prior years.
NON-INTEREST EXPENSE. Non-interest expense increased by $1.0 million to $6.0
million for the three months ended September 30, 1998 as compared to $5.0
million for the quarter ended September 30, 1997. This increase is primarily a
result of additional expenses attributable to the New York Federal division
which was established as a result of the acquisition of New York Federal Savings
Bank in September 1997, expenses related to the opening of the Edward's
Supermarket branch in June of 1998, and a one-time payout of $490,000 under a
senior officer's employment agreement during the third quarter of 1998. The
efficiency ratio, which excludes distortions from non-recurring items, was
55.49% and 54.77% for the three months ended September 30, 1998 and 1997,
respectively.
INCOME BEFORE INCOME Taxes. Total income before provision for income taxes
decreased $220,000, from $4.0 million for the three months ended September 30,
1997 as compared to $3.8 million for the three months ended September 30, 1998
for reasons stated above. Excluding the effect of a one-time payout of $490,000
under a senior officer's employment agreement, total income before provision for
taxes would have been $4.3 million for the three months ended September 30,
1998, an increase of $270,000 as compared to $4.0 million for the three months
ended September 30, 1997.
PROVISION FOR INCOME TAXES. Income tax expense declined $485,000 to $1.3 million
for the three months ended September 30, 1998 as compared to $1.8 million for
the comparable 1997 period. This is primarily due to a decrease in income before
taxes, and a reduction in the Company's effective tax rate attributed to a tax
benefit associated with the Company's real estate investment trust.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
GENERAL. Net income for the nine months ended September 30, 1998 increased
19.66% to $7.4 million, or $0.70 per diluted share, from the $6.2 million, or
$0.57 per diluted share, earned in the comparable 1997 period. The return on
average assets for the nine months ended September 30, 1998 decreased to 0.90%
from 0.98% for the comparable 1997 period, while the return on average equity
for the nine months ended September 30, 1998 increased to 7.28% from 6.27% for
comparable 1997 period. Excluding one-time non-recurring compensation expenses
of $1.5 million, net income for the nine months ended September 30, 1998 would
have been $8.2 million or $0.78 per diluted share. Excluding the one-time
non-recurring compensation expenses, return on average assets for the nine
months ended September 30, 1998 would have improved to 1.00%, and the return on
average equity for the nine months ended September 30, 1998 would have increased
to 8.06%.
INTEREST INCOME. Total interest and dividend income increased $13.9 million from
$48.0 million for the nine months ended September 30, 1997 to $61.9 million for
the nine months ended September 30, 1998. This increase was primarily the result
of a $190.6 million increase in the average earning balances of mortgage loans,
and a $38.0 million increase in the average earning balances of investment
securities available for sale, from the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1998.
INTEREST EXPENSE. Interest expense increased $10.6 million from $24.1 million
for the nine months ended September 30, 1997 to $34.7 million for the nine
months ended September 30, 1998, primarily due to a $8.6 million increase in
borrowed funds expense as the average balance of borrowed funds increased by
$183.0 million from the nine months ended September 30, 1997 as compared to the
nine months ended September 30, 1998. Interest paid on deposits also increased
$2.0 million, resulting from an increase of $49.0 million in the average
balances of certificates of deposit accounts from the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1998.
NET INTEREST INCOME. For the nine months ended September 30, 1998, net interest
income increased 14.03% to $27.2 million from $23.8 million in the comparable
1997 period, for reasons stated above. Net interest margin declined from 3.92%
for the nine months ended September 30, 1997 to 3.47% for the comparable 1998
period primarily a result of increased utilization of higher costing FHLB
borrowings. Mindful of the balance between return on assets and cost of funds,
the Company continued its focus on asset growth and market penetration, the
results of which was reflected in the $3.4 million increase in net interest
income from the nine months ended September 30, 1997 as compared to the nine
months ended September 30, 1998.
PROVISION FOR LOAN LOSSES. Provision for loan losses increased to $174,000 for
the nine months ended September 30, 1998 as compared to $67,000 for the nine
months ended September 30, 1997. The allowance for loan losses increased from
$6.5 million at December 31, 1997 to $6.7 million at September 30, 1998, which
reflects 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.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NON-INTEREST INCOME. Total non-interest income during the nine months ended
September 30, 1998 increased by 51.12% to $2.5 million as compared to $1.6
million for the nine months ended September 30, 1997. The increase is due
primarily to $230,000 in gains on sales of the guaranteed portion of Small
Business Administration loans ("SBA"), a $510,000 increase in quarterly FHLB
stock dividends for the nine months ended September 30, 1998 as compared to the
nine months ended September 30, 1997, and increased fee income from mortgage and
banking services.
NON-INTEREST EXPENSE. Non-interest expense increased by $3.6 million to $17.6
million for the nine months ended September 30, 1998 as compared to $14.0
million for the nine months ended September 30, 1997. This increase is primarily
a result of additional expenses attributable to the New York Federal division
which was established as a result of the acquisition of New York Federal Savings
Bank in September 1997, $1.5 million in one-time non-recurring compensation
expenses relating to the planned retirement of a senior executive and a one-time
payout under a senior officer's employment agreement, and expenses related to
the opening of the Edward's Supermarket branch in June of 1998. The efficiency
ratio, which excludes distortions from non-recurring items, improved to 53.55%
for the nine months ended September 30, 1998 as compared to 54.71% for the
comparable period in 1997, despite an increase in non-interest expense.
INCOME BEFORE INCOME TAXES. Total income before provision for income taxes
increased $450,000, from $11.4 million for the nine months ended September 30,
1997 as compared to $11.8 million for the nine months ended September 30, 1998
for the reasons stated above. Excluding the effect of $1.5 million in one-time
non-recurring compensation expenses referred to above, total income before
provision for income taxes would have increased $1.9 million to $13.3 million
for the nine months ended September 30, 1998, compared to $11.4 for the nine
months ended September 30, 1997.
PROVISION FOR INCOME TAXES. Income tax expense declined $769,000 to $4.4 million
for the nine months ended September 30, 1998 as compared to $5.2 million for the
comparable 1997 period, despite an increase in income before taxes. The
reduction in the Company's effective tax rate was primarily attributed to a tax
benefit associated with the Company's real estate investment trust.
FINANCIAL CONDITION
ASSETS. Total assets at September 30, 1998 were $1.1 billion. During the first
nine months of 1998, loan originations and purchases were $84.8 million for 1-4
family residential mortgage loans, $58.8 million for multi-family real estate
loans, $31.2 million for commercial real estate loans and $2.3 million in
construction loans. For the first nine months of 1997, loan originations and
purchases were $73.2 million for 1-4 family real estate loans, $53.6 million for
multi-family real estate loans, $15.8 million for commercial real estate loans
and $1.4 million in construction loans. As part of the purchase of New York
Federal Savings Bank during September of 1997, the Company also acquired
$901,000 in 1-4 family real estate loans, $62.4 million in multi-family real
estate loans, $11.7 million in commercial real estate loans, and $2.0 million in
Small Business Administration Loans ("SBA"). Since December 31, 1997, the total
loan portfolio has increased $101.8 million or 16.77%.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As the Company continues to increase its loan portfolio, management continues to
adhere to the Bank's strict underwriting standards. As a result, the Company has
been able to minimize charge-offs of losses from impaired loans and maintain
asset quality. Non-performing assets were reduced by $332,000 from $2.9 million
at December 31, 1997 to $2.6 million at September 30, 1998. At the same time,
total non-performing assets as a percentage of total assets improved from 0.27%
at December 31, 1997 to 0.22% at September 30, 1998. The ratio of allowance for
loan losses to non-performing loans was 281.53% at September 30, 1998.
LIABILITIES. Total liabilities increased $54.0 million to $1.0 billion at
September 30, 1998 from $952.0 million at December 31, 1997 . The change in
total liabilities was due primarily to an increase in FHLB borrowings of $58.9
million during the first nine months of 1998 bringing FHLB borrowings to $346.1
million at September 30, 1998 offset, in part, by a decline of $7.3 million in
deposits. The decline in deposits consists of a $9.8 million decrease in
interest bearing deposits, a $4.2 million reduction in non-interest bearing
deposits, and an increase of $6.7 million in mortgagor's escrow deposits.
EQUITY. Total stockholders' equity increased 0.51% to $137.1 million at
September 30, 1998 from $136.4 million at December 31, 1997. The increase was
due to $7.4 million in net income for the nine months ended September 30, 1998,
and an increase of $1.1 million in net unrealized gain on securities available
for sale. These increases are offset, in part, by $7.7 million in treasury
shares purchased through the Company's stock repurchase plans, and $1.8 million
in cash dividends paid during 1998. Quarterly dividends per share, adjusted for
the three-for-two stock dividend paid on September 30, 1998, were increased from
$0.04 per share for the fourth quarter of 1997 to $0.05 per share in the first
and second quarters of 1998, and then to $0.06 for the third quarter of 1998.
Book value per share, adjusted for the three-for two stock dividend paid on
September 30, 1998, continued to improve to $12.10 per share at September 30,
1998 from $11.57 per share at December 31, 1997 and $11.39 at September 30,
1997.
During September of 1998, the Company announced its intention to repurchase up
to 568,071 shares of the Company's outstanding common stock in its Fourth Stock
Repurchase program. At September 30, 1998, the Company had purchased a total of
1,394,799 shares at a cost of $27.9 million pursuant to the Company's Stock
Repurchase programs, leaving 550,071 shares to be repurchased under the current
Stock Repurchase program. The total number of shares issued in the three-for-two
stock dividend paid on September 30, 1998 was 3,785,168 of which 1,339,590
shares were funded by shares of treasury stock. The total number of shares
outstanding at September 30, 1998 was 11,337,307.
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 and certain securities with detailed maturity limitations
and marketability requirements) 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 4%.
Monetary penalties may be imposed by the OTS for failure to meet these liquidity
requirements. At September 30, 1998 and December 31, 1997, the Bank's liquidity
ratio, computed in accordance with the OTS requirement was 21.79% and 24.53%,
respectively. 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.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CASH FLOW. General funding for Company activities comes from cash flows provided
by operating, and financing activities which totaled $17.8 million and $42.3
million respectively, for the nine months ended September 30, 1998. The
Company's primary business objective is the origination and purchase of
residential, multi-family and commercial real estate loans. During the nine
months ended September 30, 1998, the net total of loan originations and loan
repayments were $84.4 million, and real estate loans purchased were $20.6
million. The Company also invests in other securities including mortgage loan
surrogates such as mortgage-backed securities. During the nine months ended
September 30, 1998, the Company purchased a total of $242.3 million in
securities available for sale. Cash flow used in these investment activities
were funded primarily from funds provided by operating activities, and an
aggregate of $233.8 million in sales, calls, maturities, and prepayments of
securities available for sale. In addition, cash flows provided by financing
activities totaled $42.3 million for the nine months ended September 30, 1998,
primarily attributable to net borrowings of $58.9 million from the Federal Home
Loan Bank of New York, offset in part by a decrease of $7.3 million in deposits,
$7.6 million in treasury stock repurchases, and $1.8 million paid in dividends
for the nine month period ending September 30, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST RATE RISK
The Consolidated Financial Statements have been prepared in accordance with
GAAP, which requires the measurement of financial position and operating results
in terms of historical dollars without considering the changes in fair value of
investments due to changes in interest rate risk. Generally, the fair value of
financial investments such as loans and securities fluctuates inversely with
changes in interest rates. As a result, increases in interest rates could result
in decreases in the fair value of the Company's interest-earning assets which
could adversely affect the Company's results of operation if sold, or, in the
case of securities classified as available-for-sale, the Company's stockholders'
equity, if retained.
The Company manages the mix of interest-earning assets and interest-bearing
liabilities on a continuous basis to maximize return and adjust risk exposure.
On a quarterly basis, management prepares the "Earnings and Economic Exposure to
Changes In Interest Rate" report for review by the Board of Directors, as
summarized below. This report quantifies the potential changes in net interest
income and net portfolio value should interest rates go up or down (shocked) 400
basis points, assuming the yield curves of the rate shocks will be parallel to
each other. Net portfolio value is defined as interest-earning assets net of
interest-bearing liabilities. All changes in income and value are measured as
percentage changes from the projected net interest income and net portfolio
value at the base interest rate scenario. The base interest rate scenario
assumes interest rates at September 30, 1998 and various estimates regarding
prepayment and all activities are made at each level of rate shock. Actual
results could differ significantly from these estimates. The Company's current
interest rate exposure is within the guidelines set forth by the Board of
Directors.
<TABLE>
<CAPTION>
Projected Percentage Change In
- --------------------------------------------------------------------------------------------------------------------
Change in Interest Rate Net Interest Income Net Portfolio Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
-400 Basis Points 10.50 % 24.46 %
-300 Basis Points 7.11 17.00
-200 Basis Points 3.20 10.30
-100 Basis Points 1.03 5.18
Base Interest Rate 0 0
+100 Basis Points -3.17 -12.90
+200 Basis Points -9.13 -31.02
+300 Basis Points -15.74 -50.37
+400 Basis Points -23.04 -66.80
</TABLE>
<PAGE>
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, 1998, 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, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets
----------------------- ------------------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital:
Capital level $102,793 9.27%
Requirement 16,638 1.50
Excess 86,155 7.77
Core Capital:
Capital level $102,793 9.27%
Requirement 44,368 4.00
Excess 58,425 5.27
Risk-Based Capital:
Capital level $109,512 20.35%
Requirement 43,044 8.00
Excess 66,468 12.35
</TABLE>
<PAGE>
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, 1998 and 1997, and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods shown. Average balances are
derived from average daily balances. The yields include amortization of fees
which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
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 $638,421 $41,457 8.66 % $447,829 $29,366 8.74 %
Other loans 3,192 285 11.90 1,719 134 10.39
Mortgage-backed securities 316,333 15,989 6.74 173,047 9,057 6.98
Other securities 51,635 2,632 6.80 156,948 8,140 6.92
Interest-earning deposits
and federal funds sold 32,688 1,494 6.09 29,929 1,266 5.64
------------ -------- ----------- ----------- --------- -----------
Total interest-earning assets 1,042,269 61,857 7.91 809,472 47,963 7.90
-------- ----------- --------- -----------
Non-interest earning assets 52,174 37,482
------------ -----------
Total assets $1,094,443 $846,954
============ ===========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Deposits:
Passbook accounts $202,043 4,322 2.85 % $207,612 4,435 2.85 %
NOW accounts 24,156 345 1.90 22,431 331 1.97
Money market accounts 25,557 570 2.97 24,458 509 2.77
Certificate of deposit accounts 378,253 15,979 5.63 329,217 13,937 5.64
Mortgagors' escrow deposits 5,692 52 1.22 6,009 55 1.22
Borrowed Funds 290,472 13,431 6.17 107,426 4,880 6.06
------------ -------- ----------- ----------- --------- -----------
Total interest-bearing
liabilities 926,173 34,699 5.00 697,153 24,147 4.62
-------- ----------- --------- -----------
Other liabilities 32,254 17,919
------------ -----------
Total liabilities 958,427 715,072
Equity 136,016 131,882
------------ -----------
Total liabilities and equity $1,094,443 $846,954
============ ===========
Net interest income/expense spread $27,158 2.91 % $23,816 3.28 %
======== =========== ========= ===========
Net interest-earning assets/net interest
Margin $116,096 3.47 % $112,319 3.92 %
============ =========== =========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities 1.13 x 1.16 x
=========== ===========
</TABLE>
<PAGE>
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 refinancing) and the changes in the Company's portfolio of loans,
including purchases, sales and principal reductions for the periods indicated.
<TABLE>
<CAPTION>
For the nine For the
months ended year ended
September 30, 1998 December 31, 1997
---------------------- ----------------------
(In thousands)
<S> <C> <C>
MORTGAGE LOANS $ 602,559 $ 388,086
At beginning of period
Mortgage loans originated:
One-to-four family 64,258 42,756
Cooperative 0 475
Multi-family 58,791 79,976
Commercial 31,193 17,121
Construction 2,251 3,016
---------- ----------
Total mortgage loans originated 156,493 143,344
---------- ----------
Acquired loans:
Loans purchased 20,587 49,965
Acquired NY Federal 1-4 family loans 0 901
Acquired NY Federal multi-family loans 0 62,405
Acquired NY Federal commercial loans 0 11,717
---------- ----------
Total acquired loans 20,587 124,988
---------- ----------
Less:
Principal reductions 73,969 53,416
Mortgage loans sold 0 0
Mortgage loan foreclosures 452 443
---------- ----------
At end of period $ 705,218 $ 602,559
========== ==========
OTHER LOANS:
At beginning of period $ 4,175 $ 1,680
Small Businesses Administration lending activity, net (546) 2,029
Other consumer loan activity, net (359) 466
---------- ----------
At end of period $ 3,270 $ 4,175
========== ==========
</TABLE>
<PAGE>
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 loans in its portfolio on a monthly basis to determine
whether any problem 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,
1998 1997
-------------------------- -------------------------
(Dollars in Thousands)
<S> <C> <C>
Non-accrual mortgage loans $2,344 $2,409
Other non-accrual loans 43 49
-------------------------- -------------------------
Total non-accrual loans 2,387 2,458
-------------------------- -------------------------
Mortgage loans 90 days or more delinquent
and still accruing 0 0
Other loans 90 days or more delinquent
and still accruing 0 0
-------------------------- -------------------------
Total non-performing loans 2,387 2,458
-------------------------- -------------------------
Real estate owned (foreclosed real estate) 172 433
-------------------------- -------------------------
Total REO 172 433
-------------------------- -------------------------
Total non-performing assets $2,559 $2,891
========================== =========================
Non-performing loans to gross loans 0.34% 0.41%
Non-performing assets to total assets 0.22% 0.27%
</TABLE>
<PAGE>
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 a reserve against 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 are also 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,
1998 1997
------------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $6,474 $5,437
Provision for loan losses 174 104
NY Federal acquisition provision 0 979
Loans charged-off:
One-to-four family 91 85
Co-operative 0 44
Multi-family 0 0
Commercial 0 0
Construction 0 0
Other 12 77
------------------- -----------------
Total loans charged-off 103 206
------------------- -----------------
Recoveries:
Mortgage loans 175 155
Other loans 0 5
------------------- -----------------
Total recoveries 175 160
------------------- -----------------
Balance at end of period $6,720 $6,474
=================== =================
Ratio of net (recoveries)charge-offs during the year
to average loans outstanding during the period (0.01%) 0.01%
Ratio of allowance for loans losses to
loans at end of period 0.95% 1.07%
Ratio of allowance for loans losses to
non-performing loans at end of period 281.53% 263.38%
Ratio of allowance for loans losses to
non-performing assets at end of period 262.57% 223.94%
</TABLE>
<PAGE>
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 adverse effect on the Company's
consolidated financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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.
On September 29, 1998, the Company's Board of Directors held a special meeting
and elected two new directors, James D. Bennett and Louis C. Grassi. Mr.
Bennett, a Class A director, will serve a term expiring at the annual meeting of
stockholders of the Company in 1999, and Mr. Grassi, a Class B director, will
serve a term expiring at the annual meeting of stockholders of the Company in
2000 or, in each case, until his successor is elected and qualified. Messrs.
Bennett an Grassi will also serve on the Board of Directors of the Bank.
Mr.Bennett is a partner in the law firm of Bennett, Rice & Schure, LLP, and also
serves as President, and Chief Executive Officer of Land Enterprises, Inc., a
real estate investment and management firm. In addition, Mr. Bennett is a
Commissioner of the Public Service Commission of New York State.
Mr. Grassi, a certified public accountant and certified fraud examiner, is
Managing Partner of Grassi & Co., CPA's, P.C. He is a member of the Board of
Directors of the New York State Society of Certified Public Accountants and
serves as Chairman of their Task Force on Professional Liability Insurance.
Messrs. Bennett and Grassi were elected to fill vacancies resulting from the
retirement of one director, Thomas Trent, on February 28, 1997, and an increase,
by one, in the size of the Company's Board of Directors.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT
27 Financial data schedule.
b) REPORTS ON FORM 8-K
On August 28, 1998, the Company filed Form 8-K to report a three-for-two stock
split in the form of a 50% stock dividend, payable on September 30, 1998.
Shareholder's received one additional share for every two shares of the
Company's common stock held at the record date, September 10, 1998. Cash was
paid in lieu of fractional shares.
<PAGE>
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 12, 1998 By: /s/ Michael J. Hegarty
------------------------ ---------------------------------
Michael J. Hegarty
President and Chief Executive Officer
Dated: November 12, 1998 By: /s/ Monica C. Passick
------------------------ -------------------------
Monica C. Passick
Senior Vice President, Treasurer
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at September 30, 1998
(unaudited), and the Condensed Consolidated Statement of Income for the nine
months ended September 30, 1998 (unaudited), and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<CASH> 9,973
<INT-BEARING-DEPOSITS> 6,000
<FED-FUNDS-SOLD> 17,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 366,226
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 707,086
<ALLOWANCE> 6,720
<TOTAL-ASSETS> 1,143,182
<DEPOSITS> 648,650
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 11,285
<LONG-TERM> 336,110
0
0
<COMMON> 114
<OTHER-SE> 137,023
<TOTAL-LIABILITIES-AND-EQUITY> 1,143,182
<INTEREST-LOAN> 41,742
<INTEREST-INVEST> 18,621
<INTEREST-OTHER> 1,494
<INTEREST-TOTAL> 61,857
<INTEREST-DEPOSIT> 21,268
<INTEREST-EXPENSE> 34,699
<INTEREST-INCOME-NET> 27,158
<LOAN-LOSSES> 174
<SECURITIES-GAINS> 100
<EXPENSE-OTHER> 15,235
<INCOME-PRETAX> 11,849
<INCOME-PRE-EXTRAORDINARY> 11,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,425
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.70
<YIELD-ACTUAL> 7.91
<LOANS-NON> 2,387
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,474
<CHARGE-OFFS> 103
<RECOVERIES> 175
<ALLOWANCE-CLOSE> 6,720
<ALLOWANCE-DOMESTIC> 6,720
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,720
</TABLE>
