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, 2003
Commission file number 000-24272
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
11-3209278
(I.R.S. Employer Identification No.)
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(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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). X Yes __No
The number of shares of the registrant’s Common Stock outstanding as of October 24, 2003 was 12,750,896.
TABLE OF CONTENTS
| PAGE | |
| PART I -- FINANCIAL INFORMATION | |
ITEM 1. Financial Statements |
|
Consolidated Statements of Financial Condition |
1 |
Consolidated Statements of Income and Comprehensive Income |
2 |
Consolidated Statements of Cash Flows |
3 |
Consolidated Statements of Changes in Stockholders' Equity |
4 |
Notes to Consolidated Statements |
5 |
ITEM 2. Management's Discussion and Analysis of Financial Condition | |
| and Results of Operations | 7 |
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk |
20 |
ITEM 4. Controls and Procedures |
20 |
PART II. -- OTHER INFORMATION | |
ITEM 1. Legal Proceedings |
20 |
ITEM 2. Changes in Securities and Use of Proceeds |
20 |
ITEM 3. Defaults Upon Senior Securities |
20 |
ITEM 4. Submission of Matters to a Vote of Security Holders |
20 |
ITEM 5. Other Information |
20 |
ITEM 6. Exhibits and Reports on Form 8-K |
21 |
SIGNATURES |
22 |
i
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Financial Condition
| (Dollars in thousands, except share data) |
September 30, 2003 |
December 31, 2002 | ||||||
|---|---|---|---|---|---|---|---|---|
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | 26,790 | $ | 29,119 | ||||
| Federal funds sold | -- | 18,500 | ||||||
| Securities available for sale: | ||||||||
| Mortgage-backed securities | 458,399 | 319,255 | ||||||
| Other securities | 50,765 | 39,729 | ||||||
| Loans: | ||||||||
| One-to-four family residential - conventional | 195,282 | 262,944 | ||||||
| One-to-four family residential - mixed-use property | 208,182 | 170,499 | ||||||
| Multi-family residential | 516,751 | 452,663 | ||||||
| Commercial real estate | 286,072 | 257,054 | ||||||
| Co-operative apartment | 4,039 | 5,205 | ||||||
| Construction | 18,532 | 17,827 | ||||||
| Small Business Administration | 4,244 | 4,301 | ||||||
| Commercial business and other | 3,834 | 4,185 | ||||||
| Unearned loan fees and deferred costs, net | 1,582 | 1,463 | ||||||
| Allowance for loan losses | (6,554 | ) | (6,581 | ) | ||||
| Net loans | 1,231,964 | 1,169,560 | ||||||
| Interest and dividends receivable | 8,699 | 8,409 | ||||||
| Real estate owned, net | -- | -- | ||||||
| Bank premises and equipment, net | 6,181 | 5,389 | ||||||
| Federal Home Loan Bank of New York stock | 25,213 | 22,213 | ||||||
| Goodwill | 3,905 | 3,905 | ||||||
| Other assets | 37,181 | 36,879 | ||||||
| Total assets | $ | 1,849,097 | $ | 1,652,958 | ||||
| LIABILITIES | ||||||||
| Due to depositors: | ||||||||
| Non-interest bearing | $ | 38,396 | $ | 35,287 | ||||
| Interest-bearing: | ||||||||
| Certificate of deposit accounts | 573,474 | 543,330 | ||||||
| Passbook savings accounts | 218,044 | 213,572 | ||||||
| Money market accounts | 246,602 | 170,029 | ||||||
| NOW accounts | 42,466 | 39,795 | ||||||
| Total interest-bearing deposits | 1,080,586 | 966,726 | ||||||
| Mortgagors' escrow deposits | 14,157 | 9,812 | ||||||
| Borrowed funds | 553,147 | 493,164 | ||||||
| Other liabilities | 22,426 | 16,583 | ||||||
| Total liabilities | 1,708,712 | 1,521,572 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock ($0.01 par value; 5,000,000 shares authorized) | -- | -- | ||||||
| Common stock ($0.01 par value; 40,000,000 shares authorized; 13,852,063;shares issued; 12,746,596 and 12,598,343 shares outstanding at September 30, 2003 and December 31, 2002, respectively) | 139 | 139 | ||||||
| Additional paid-in capital | 49,773 | 47,208 | ||||||
| Treasury stock, at average cost (1,105,467 and 1,253,720 shares at September 30, 2003 and December 31, 2002, respectively) | (20,168 | ) | (21,733 | ) | ||||
| Unearned compensation | (7,762 | ) | (7,825 | ) | ||||
| Retained earnings | 117,168 | 109,208 | ||||||
| Accumulated other comprehensive income, net of taxes | 1,235 | 4,389 | ||||||
| Total stockholders' equity | 140,385 | 131,386 | ||||||
| Total liabilities and stockholders' equity | $ | 1,849,097 | $ | 1,652,958 | ||||
The accompanying notes are an integral part of these consolidated financial statements
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
| For the three months | For the nine months | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ended September 30, |
ended September 30, | |||||||||||||
| (In thousands, except per share data) |
2003 |
2002 |
2003 |
2002 | ||||||||||
| (Unaudited) | ||||||||||||||
| Interest and dividend income | ||||||||||||||
| Interest and fees on loans | $ | 23,460 | $ | 22,858 | $ | 69,687 | $ | 67,173 | ||||||
| Interest and dividends on securities: | ||||||||||||||
| Interest | 4,552 | 3,775 | 13,255 | 11,899 | ||||||||||
| Dividends | 79 | 36 | 169 | 107 | ||||||||||
| Other interest income | 34 | 186 | 151 | 467 | ||||||||||
| Total interest and dividend income | 28,125 | 26,855 | 83,262 | 79,646 | ||||||||||
| Interest expense | ||||||||||||||
| Deposits | 6,694 | 7,084 | 20,703 | 20,901 | ||||||||||
| Other interest expense | 6,233 | 6,648 | 18,727 | 20,027 | ||||||||||
| Total interest expense | 12,927 | 13,732 | 39,430 | 40,928 | ||||||||||
| Net interest income | 15,198 | 13,123 | 43,832 | 38,718 | ||||||||||
| Provision for loan losses | -- | -- | -- | -- | ||||||||||
| Net interest income after provision for loan losses | 15,198 | 13,123 | 43,832 | 38,718 | ||||||||||
| Non-interest income | ||||||||||||||
| Other fee income | 871 | 742 | 2,498 | 2,122 | ||||||||||
| Net gain (loss) on sales of securities and loans | 101 | 84 | 252 | (4,175 | ) | |||||||||
| Other income | 690 | 650 | 2,165 | 2,019 | ||||||||||
| Total non-interest income | 1,662 | 1,476 | 4,915 | (34 | ) | |||||||||
| Non-interest expense | ||||||||||||||
| Salaries and employee benefits | 4,017 | 3,583 | 11,949 | 10,549 | ||||||||||
| Occupancy and equipment | 799 | 694 | 2,205 | 2,023 | ||||||||||
| Professional services | 758 | 551 | 2,134 | 1,944 | ||||||||||
| Data processing | 530 | 377 | 1,350 | 1,126 | ||||||||||
| Depreciation and amortization | 322 | 263 | 872 | 778 | ||||||||||
| Other operating expenses | 1,496 | 1,445 | 4,551 | 3,967 | ||||||||||
| Total non-interest expense | 7,922 | 6,913 | 23,061 | 20,387 | ||||||||||
| Income before income taxes | 8,938 | 7,686 | 25,686 | 18,297 | ||||||||||
| Provision for income taxes | ||||||||||||||
| Federal | 2,620 | 2,203 | 7,637 | 5,609 | ||||||||||
| State and local | 801 | 718 | 2,188 | 1,344 | ||||||||||
| Total taxes | 3,421 | 2,921 | 9,825 | 6,953 | ||||||||||
| Net income | $ | 5,517 | $ | 4,765 | $ | 15,861 | $ | 11,344 | ||||||
| Other comprehensive income, net of tax | ||||||||||||||
| Unrealized gains (losses) on securities: | ||||||||||||||
| Unrealized holding gains (losses) arising during period | $ | (2,855 | ) | $ | 496 | $ | (3,151 | ) | $ | (574 | ) | |||
| Reclassification adjustments for (gains) losses included in income | (13 | ) | -- | (3 | ) | 2,358 | ||||||||
| Net unrealized holding gains (losses) | (2,868 | ) | 496 | (3,154 | ) | 1,784 | ||||||||
| Comprehensive net income | $ | 2,649 | $ | 5,261 | $ | 12,707 | $ | 13,128 | ||||||
| Basic earnings per share | $0.48 | $0.41 | $1.40 | $0.97 | ||||||||||
| Diluted earnings per share | $0.46 | $0.39 | $1.34 | $0.92 | ||||||||||
| Dividends per share | $0.11 | $0.09 | $0.31 | $0.27 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
| For the nine months ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| September 30, | ||||||||
| (In thousands) |
2003 |
2002 | ||||||
| (Unaudited) | ||||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | 15,861 | $ | 11,344 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of bank premises and equipment | 872 | 778 | ||||||
| Net loss (gain) on sales of securities | (6 | ) | 4,366 | |||||
| Net gain on sales of loans | (246 | ) | (191 | ) | ||||
| Net gain on sales of real estate owned | -- | (4 | ) | |||||
| Amortization of unearned premium, net of accretion of unearned discount | 2,702 | 2,105 | ||||||
| Deferred income tax benefit | 1,753 | 897 | ||||||
| Deferred compensation | 542 | 435 | ||||||
| Origination of loans held for sale | 9,078 | 2,799 | ||||||
| Proceeds from sale of loans originated for sale | (9,078 | ) | (2,799 | ) | ||||
| Net decrease in other assets and liabilities | (1,836 | ) | (4,213 | ) | ||||
| Unearned compensation | 1,148 | 907 | ||||||
| Net cash provided by operating activities | 20,790 | 16,424 | ||||||
| INVESTING ACTIVITIES | ||||||||
| Purchases of bank premises and equipment | (1,664 | ) | (654 | ) | ||||
| Redemptions (purchases) of Federal Home Loan Bank shares | (3,000 | ) | 2,458 | |||||
| Purchases of securities available for sale | (366,481 | ) | (138,990 | ) | ||||
| Proceeds from sales and calls of securities available for sale | 62,391 | 30,969 | ||||||
| Proceeds from maturities and prepayments of securities available for sale | 155,324 | 99,002 | ||||||
| Proceeds from sale of non-performing loans | 3,502 | -- | ||||||
| Net originations and repayment of loans | (64,982 | ) | (89,722 | ) | ||||
| Purchases of loans | (789 | ) | (10,106 | ) | ||||
| Proceeds from sales of real estate owned | -- | 97 | ||||||
| Net cash used by investing activities | (215,699 | ) | (106,946 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Net increase in non-interest bearing deposits | 3,109 | 2,567 | ||||||
| Net increase in interest-bearing deposits | 113,860 | 141,054 | ||||||
| Net increase in mortgagors' escrow deposits | 4,345 | 4,493 | ||||||
| Proceeds from long-term borrowed funds | 130,000 | 50,000 | ||||||
| Repayment of long-term borrowed funds | (70,017 | ) | (70,265 | ) | ||||
| Purchases of treasury stock, net | (3,644 | ) | (16,560 | ) | ||||
| Cash dividends paid | (3,573 | ) | (3,201 | ) | ||||
| Net cash provided by financing activities | 174,080 | 108,088 | ||||||
| Net (decrease) increase in cash and cash equivalents | (20,829 | ) | 17,566 | |||||
| Cash and cash equivalents, beginning of period | 47,619 | 38,508 | ||||||
| Cash and cash equivalents, end of period | $ | 26,790 | $ | 56,074 | ||||
| SUPPLEMENTAL CASH FLOW DISCLOSURE | ||||||||
| Interest paid | $ | 39,428 | $ | 40,562 | ||||
| Income taxes paid | 6,611 | 8,005 | ||||||
Non-cash activities: | ||||||||
| Securities purchased not yet settled | 9,851 | 5,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| For the nine months ended | |||||
|---|---|---|---|---|---|
| (In thousands, except share data) |
September 30, 2003 | ||||
| Common Stock | |||||
| Balance, beginning of period | $ | 139 | |||
| No activity | -- | ||||
| Balance, end of period | $ | 139 | |||
| Additional Paid-In Capital | |||||
| Balance, beginning of period | $ | 47,208 | |||
| Award of shares released from Employee Benefit Trust (3,347 common shares) | 48 | ||||
| Restricted stock awards (54,375 common shares) | 156 | ||||
| Options exercised (400 shares) | -- | ||||
| Tax benefit of unearned compensation | 2,361 | ||||
| Balance, end of period | $ | 49,773 | |||
| Treasury Stock | |||||
| Balance, beginning of period | $ | (21,733 | ) | ||
| Purchases of common shares outstanding (326,700 common shares) | (6,652 | ) | |||
| Repurchase of restricted stock awards (20,079 common shares) | (417 | ) | |||
| Restricted stock awards (54,375 common shares) | 949 | ||||
| Forfeiture of restricted stock awards (3,990 common shares) | (68 | ) | |||
| Options exercised (444,497 common shares) | 7,753 | ||||
| Balance, end of period | $ | (20,168 | ) | ||
| Unearned Compensation | |||||
| Balance, beginning of period | $ | (7,825 | ) | ||
| Restricted stock award expense | 725 | ||||
| Restricted stock awards (54,375 common shares) | (1,105 | ) | |||
| Forfeiture of restricted stock awards (3,990 common shares) | 68 | ||||
| Release of shares from Employee Benefit Trust (73,385 common shares) | 375 | ||||
| Balance, end of period | $ | (7,762 | ) | ||
| Retained Earnings | |||||
| Balance, beginning of period | $ | 109,208 | |||
| Net income | 15,861 | ||||
| Options exercised (444,097 common shares) | (4,328 | ) | |||
| Cash dividends declared and paid | (3,573 | ) | |||
| Balance, end of period | $ | 117,168 | |||
| Accumulated Other Comprehensive Income | |||||
| Balance, beginning of period | $ | 4,389 | |||
| Change in net unrealized gain, net of taxes of approximately $2,684 on securities available for sale | (3,151 | ) | |||
| Less: Reclassification adjustment for gains included in net income, net of taxes of approximately $(3) | (3 | ) | |||
| Balance, end of period | $ | 1,235 | |||
The accompanying notes are an integral part of these consolidated financial statements.
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The primary business of Flushing Financial Corporation is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the "Bank"). The Holding Company also owns a special purpose business trust, Flushing Financial Capital Trust I (the "Trust"). The consolidated financial statements presented in this Form 10-Q include the collective results of the Holding Company, the Trust and the Bank, but reflects principally the Bank's activities.
The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation 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 principles in the United States of America ("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 2002 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. Earnings Per Share
Basic earnings per share for the three and nine month periods ended September 30, 2003 and 2002 was computed by dividing net income by the total weighted average number of common shares outstanding, including only the vested portion of restricted stock awards. Diluted earnings per share includes the additional dilutive effect of stock options outstanding and the unvested portion of restricted stock awards during the period. Earnings per share has been computed based on the following:
| Three Months Ended | Nine Months Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, |
September 30, | |||||||||||||
| (Amounts in thousands, except per share data) |
2003 |
2002 |
2003 |
2002 | ||||||||||
| Net income | $5,517 | $4,765 | $15,861 | $11,344 | ||||||||||
| Divided by: | ||||||||||||||
| Weighted average common shares outstanding | 11,403 | 11,491 | 11,323 | 11,715 | ||||||||||
| Weighted average common stock equivalents | 474 | 579 | 476 | 560 | ||||||||||
| Total weighted average common shares & common stock equivalents | 11,877 | 12,070 | 11,799 | 12,275 | ||||||||||
| Basic earnings per share | $0.48 | $0.41 | $1.40 | $0.97 | ||||||||||
| Diluted earnings per share | $0.46 | $0.39 | $1.34 | $0.92 | ||||||||||
| Dividends per share | $0.11 | $0.09 | $0.31 | $0.27 | ||||||||||
| Dividend payout ratio | 22.92 | % | 21.95 | % | 22.14 | % | 27.84 | % | ||||||
Common stock equivalents that are antidilutive are not included in the computation of diluted earnings per share. Options to purchase 600 shares at an average exercise price of $22.05 and 89,100 shares at an average exercise price of $19.00, were not included in the computation of diluted earnings per share for the three months ended September 30, 2003 and 2002, respectively. Unvested restricted stock awards of 300 shares at an average price of $22.05 and 10,125 shares at an average price of $19.00, were not included in the computation of diluted earnings per share for the three months ended September 30, 2003 and 2002, respectively. Options to purchase 178,700 shares at an average exercise price of $20.33 and 274,400 shares at an average exercise price of $18.70 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2003 and 2002, respectively. Unvested restricted stock awards of 54,525 shares at an average price of $20.26 and 68,875 shares at average price of $18.62 were not included in the computation of diluted earnings per share for the nine months ended September 30, 2003 and 2002, respectively.
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
4. Stock Option Plans
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its Stock Option Plan. Accordingly, no compensation expense has been recognized for options granted under the Stock Option Plan. Compensation expense is recognized in the financial statements for restricted stock awards. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No.123 to all stock-based employee compensation. However, the present impact of SFAS No. 123 may not be representative of the effect on income in future periods because the options vest over several years and additional option grants may be made each year.
| Three months ended | Nine Months ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30, |
September 30, | |||||||||||||
| (Dollars in thousands, except per share data) |
2003 |
2002 |
2003 |
2002 | ||||||||||
| Net income, as reported | $5,517 | $4,765 | $15,861 | $11,344 | ||||||||||
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | 170 | 136 | 513 | 359 | ||||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (365 | ) | (284 | ) | (1,043 | ) | (733 | ) | ||||||
| Pro forma net income | $5,322 | $4,617 | $15,331 | $10,970 | ||||||||||
| Basic earnings per share: | ||||||||||||||
| As reported | $0.48 | $0.41 | $1.40 | $0.97 | ||||||||||
| Pro forma | $0.47 | $0.40 | $1.35 | $0.94 | ||||||||||
| Diluted earnings per share: | ||||||||||||||
| As reported | 0.46 | 0.39 | 1.34 | 0.92 | ||||||||||
| Pro forma | 0.45 | 0.38 | 1.30 | 0.89 | ||||||||||
There were stock option grants of 600 shares of common stock, at an exercise price of $22.05, and restricted stock grants of 300 shares of common stock, at a price of $22.05, granted in the three-month period ended September 30, 2003. There were no such grants in the three-month period ended September 30, 2002.
There were stock option grants of 178,700 shares of common stock, at an average exercise price of $20.33, and 275,000 shares of common stock, at an average exercise price of $18.70 granted in the nine-month periods ended September 30, 2003 and 2002, respectively. There were restricted stock grants of 54,525 shares of common stock, at an average price of $20.26, and 69,075 shares of common stock, at an average price of $18.62 granted in the nine-month periods ended September 30, 2003 and 2002, respectively.
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 (the"Holding Company"), was organized in May 1994 to serve as the holding company for Flushing Savings Bank, FSB (the "Bank"), a federally chartered, FDIC insured savings institution, originally organized in 1929. The Holding Company also owns a special purpose business trust, Flushing Financial Capital Trust I ("Trust"). The Bank is a consumer-oriented savings institution and conducts its business through eleven banking offices located in Queens, Brooklyn, Manhattan, Bronx 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 includes the collective results of the Holding Company, the Bank and the Trust (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 funds generated from operations and borrowings, primarily in (1) origination and purchases of one-to-four family residential real estate loans (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family income-producing property loans and commercial real estate loans; (2) mortgage loan surrogates such as mortgage-backed securities; and (3) 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, Small Business Administration loans and commercial and consumer loans.
The Company's results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of its interest-bearing liabilities. Net interest income is the result of the Company's interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. The Company also generates non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, late charges and other fees, income earned on Bank Owned Life Insurance, dividends on Federal Home Loan Bank of NY ("FHLB-NY") stock 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, 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. Such results also are 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.
On October 14, 2003, the Bank opened its 11th branch, which is a traditional full-service branch, on 30th Avenue in Astoria, Queens.
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 second 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 2002 Annual Report to Stockholders and its SEC Report on Form 10-K for the year ended December 31, 2002. Forward-looking statements may be identified by terms such as"may", "will", "should", "could", "expects","plans","intends", "anticipates", "believes", "estimates", "predicts", "forecasts", "potential" or"continue" or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.
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 THREE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
General. Diluted earnings per share increased $0.07, or 17.9%, to $0.46 for the three months ended September 30, 2003 from $0.39 for the three months ended September 30, 2002. Net income increased $0.7 million, or 15.8%, to $5.5 million for the three months ended September 30, 2003 from $4.8 million for the three months ended September 30, 2002. The return on average assets was 1.20% for the three months ended September 30, 2003 and September 30, 2002, while the return on average equity for the three months ended September 30, 2003 increased to 16.28% from 14.87% for the three months ended September 30, 2002.
Interest Income. Total interest and dividend income increased $1.2 million, or 4.7%, to $28.1 million for the three months ended September 30, 2003 from $26.9 million for the three months ended September 30, 2002. This increase was primarily the result of a $242.2 million increase in the average balance of interest-earning assets for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. The average balance of mortgage loans, net and mortgage-backed securities increased $71.9 million and $209.0 million, respectively, for the three months ended September 30, 2003 as compared to the three months ended September 30, 2002. These increases were partially offset by an $11.0 million and a $29.2 million decrease in the average balance of other securities and interest earning deposits and federal funds sold, respectively, for the three months ended September 30, 2003 compared to the three months ended September 30, 2002. The yield on interest-earning assets declined 72 basis points to 6.49% for the three months ended September 30, 2003 from 7.21% for the three months ended September 30, 2002. This decrease is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the yield on assets during 2003. We continued our focus on the origination of higher yielding multi-family residential and commercial real estate mortgage loans, along with the origination of mixed-use property one-to-four family residential mortgage loans, which allowed us to maintain a higher yield on our loan portfolio than we would have otherwise experienced. The yield on mortgage loans reflects the high refinancing activity that has occurred during the current year. The Bank's existing borrowers have been refinancing their higher costing mortgage loans at the current lower rates, which has resulted in a decrease on the yield of the mortgage portfolio. This decrease has been partially offset by prepayment penalties that have been collected. However, the increase in the lower-yielding mortgage-backed securities portfolio, while increasing interest income, reduced the yield on total interest-earning assets.
Interest Expense. Interest expense decreased $0.8 million, or 5.9%, to $12.9 million for the three months ended September 30, 2003 from $13.7 million for the three months ended September 30, 2002, primarily due to a 74 basis point decline in the cost of interest-bearing liabilities to 3.16% in the three months ended September 30, 2003 from 3.90% in the three months ended September 30, 2002. This decrease was partially offset by a $229.1 million increase in the average balance of interest-bearing liabilities. The decrease in the cost of funds is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the cost of funds in the third quarter of 2003. This was coupled with an increase in the average balance of lower costing core deposits. This marks the twelfth consecutive quarter that the cost of funds has declined.
Net Interest Income. For the three months ended September 30, 2003, net interest income increased $2.1 million, or 15.8%, to $15.2 million from $13.1 million in the three months ended September 30, 2002. This increase in net interest income is primarily due to a $242.2 million increase in the average balance of interest-earning assets, combined with a two basis point increase in the net interest spread. The net interest margin decreased one basis point to 3.51% for the three months ended September 30, 2003 from 3.52% for the three months ended September 30, 2002. This decline is attributed to the growth in the average balance of interest-earning assets.
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Provision for Loan Losses. There was no provision for loan losses for the three-month periods ended September 30, 2003 and 2002. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for either of the three-month periods ended September 30, 2003 and 2002.
Non-Interest Income. Non-interest income increased $0.2 million to $1.7 million for the three months ended September 30, 2003 from $1.5 million for the three months ended September 30, 2002. This increase is primarily attributed to an increase in loan fees and banking service fees.
Non-Interest Expense. Non-interest expense was $7.9 million for the three months ended September 30, 2003, an increase of $1.0 million, or 14.6%, from $6.9 million for the three months ended September 30, 2002. The increase from the prior year period is attributable to the Bank's continued focus on expanding its current product offerings to enhance its ability to serve its customers. Increases were seen in personnel and other expense areas, as we focused on loan and deposit growth. Management continues to monitor expenditures resulting in efficiency ratios of 47.06% and 47.38% for the three months ended September 30, 2003 and 2002, respectively.
Income before Income Taxes. Income before the provision for income taxes increased approximately $1.2 million to $8.9 million for the three months ended September 30, 2003 as compared to $7.7 million for the three months ended September 30, 2002, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $3.4 million for the three months ended September 30, 2003 compared to $2.9 million for the three months ended September 30, 2002. This increase is due to the $1.2 million increase in income before income taxes. The effective rate was 38.27% for the three months ended September 30, 2003 compared to 38.00% for the three months ended September 30, 2002.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
General. Diluted earnings per share increased $0.42, or 45.7%, to $1.34 for the nine months ended September 30, 2003 from $0.92 for the nine months ended September 30, 2002. Net income for the nine months ended September 30, 2003 increased $4.5 million, or 39.8%, to $15.9 million from the $11.3 million reported for the nine months ended September 30, 2002. The return on average assets for the nine months ended September 30, 2003 was 1.19% compared to 0.98% for the nine months ended September 30, 2002, while the return on average equity for the nine months ended September 30, 2003 was 15.70% compared to 11.64% for the nine months ended September 30, 2002. The nine months ended September 30, 2002 included an after-tax writedown of $2.6 million, or $0.22 per diluted share, due to the impairment of the Bank's investment in a WorldCom, Inc. senior note. Excluding this impairment writedown, net income for the nine months ended September 30, 2002 would have been $13.9 million, or $1.14 per diluted share, and diluted earnings per share would have increased 17.5% for the nine months ended September 30, 2003 compared to the comparable prior year period. Return on average assets and return on average equity, excluding the impairment charge, would have been 1.20% and 14.31%, respectively, for the nine months ended September 30, 2002.
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Interest Income. Total interest and dividend income increased $3.7 million, or 4.5%, to $83.3 million for the nine months ended September 30, 2003 from $79.6 million for the nine months ended September 30, 2002. This increase was primarily the result of a $205.5 million increase in the average balance of interest-earning assets for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. The average balance of mortgage loans, net, and mortgage-backed securities increased $81.9 million and $158.1 million, respectively, for the nine months ended September 30, 2003 as compared to the nine months ended September 30, 2002. These increases were partially offset by an $18.2 million and an $18.0 million decrease in the average balance of other securities and interest-earning deposits and federal funds sold, respectively, for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. The yield on interest-earning assets declined 62 basis points to 6.68% for the nine months ended September 30, 2003 from 7.30% for the nine months ended September 30, 2002. This decrease is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the yield on assets during the first nine months of 2003. Our focus on the origination of higher yielding multi-family residential and commercial real estate mortgage loans, along with the origination of mixed-use property one-to-four family residential mortgage loans, allowed us to maintain a higher yield on our loan portfolio than we would have otherwise experienced. In addition, the increase in the average balance of the lower-yielding mortgage-backed securities portfolio, while increasing interest income, reduced the yield on total interest-earning assets.
Interest Expense. Interest expense decreased $1.5 million, or 3.7%, to $39.4 million for the nine months ended September 30, 2003 from $40.9 million for the nine months ended September 30, 2002, primarily due to a 64 basis point decline in the cost of interest-bearing liabilities to 3.35% in the nine months ended September 30, 2003 from 3.99% in the nine months ended September 30, 2002. This decrease was partially offset by a $199.7 million increase in the average balance of interest-bearing liabilities. The decrease in the cost of funds is primarily due to the declining interest rate environment experienced during the past two years, the effect of which further lowered the cost of funds during the first nine months of 2003. This was coupled with an increase in the average balance of lower costing core deposits.
Net Interest Income. For the nine months ended September 30, 2003, net interest income increased $5.1 million, or 13.2%, to $43.8 million from $38.7 million in the nine months ended September 30, 2002. This increase in net interest income is primarily due to a $205.5 million increase in the average balance of interest-earning assets. The net interest margin decreased three basis points to 3.52% for the nine months ended September 30, 2003 from 3.55% for the nine months ended September 30, 2002, due to the increase in the average balance of interest-earning assets.
Provision for Loan Losses. There was no provision for loan losses for the nine-month periods ended September 30, 2003 and 2002. In assessing the adequacy of the Company's allowance for loan losses, management considers the Company's historical loss experience, recent trends in losses, collection policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of the gross loan portfolio, and local and national economic conditions. Based on these reviews, no provision for loan losses was deemed necessary for either of the nine-month periods ended September 30, 2003 and 2002.
Non-Interest Income. Non-interest income increased $4.9 million to $4.9 million for the nine months ended September 30, 2003 from a net loss of $34,000 for the nine months ended September 30, 2002. The increase is primarily due to the $4.4 million pretax impairment writedown of the Bank's investment in a WorldCom, Inc. senior note recorded in the nine-month period ended September 30, 2002. Loan fees and banking services fees increased $0.4 million for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002.
Non-Interest Expense. Non-interest expense was $23.1 million for the nine months ended September 30, 2003, an increase of $2.7 million, or 13.1%, from $20.4 million for the nine months ended September 30, 2002. The increase from the prior year period is attributable to the Bank's continued focus on expanding its current product offerings to enhance its ability to serve its customers. Increases were seen in personnel and other expense areas, as we focused on loan and deposit growth. Salaries and benefits also increased due to the increase in our stock price, as certain employee compensation is tied to our stock price, which increased approximately 27% in the nine months ended September 30, 2003. Management continues to monitor expenditures resulting in efficiency ratios to 47.31% and 47.38% for the nine months ended September 30, 2003 and 2002, respectively.
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. Income before the provision for income taxes increased $7.4 million, or 40.4%, to $25.7 million for the nine months ended September 30, 2003 as compared to $18.3 million for the nine months ended September 30, 2002, for the reasons discussed above.
Provision For Income Taxes. Income tax expense was $9.8 million for the nine months ended September 30, 2003 compared to $7.0 million for the nine months ended September 30, 2002. This increase is due to the $7.4 million increase in income before income taxes. The effective rate was 38.25% for the nine months ended September 30, 2003 compared to 38.00% for the nine months ended September 30, 2002.
RECONCILIATION OF NON-GAAP FINANCIAL AMOUNTS AND RATIOS
The preceding discussions include prior year comparable periods that included an after-tax impairment writedown of $2.6 million relating to the Bank's investment in a WorldCom, Inc. senior note. Comparisons of the current year nine-month period to the prior year period were made excluding this writedown in the prior year period. Management believes that this impairment writedown was a one-time event that is not likely to be repeated, and is therefore not indicative of the ongoing operating results of the Company. Excluding this writedown, in our view, presents a better comparison of the Company's ongoing operating results. A reconciliation of amounts and financial ratios of the Company as reported in its financial statements to the adjusted amounts and financial ratios, which exclude this impairment writedown, is shown below.
| Nine Months Ended | |||||
|---|---|---|---|---|---|
| (Dollars in thousands, except per share data) |
September 30, 2002 | ||||
| Net income as reported | $11,344 | ||||
| Impairment writedown | 4,429 | ||||
| Income tax benefit | (1,849 | ) | |||
| Adjusted net income | $13,924 | ||||
Basic earnings per share | $0.97 | ||||
| Impairment writedown | 0.22 | ||||
| Adjusted basic earnings per share | $1.19 | ||||
Diluted earnings per share | $0.92 | ||||
| Impairment writedown | 0.22 | ||||
| Adjusted diluted earnings per share | $1.14 | ||||
Non-interest income | $(34 | ) | |||
| Impairment writedown | 4,429 | ||||
| Adjusted non-interest income | $4,395 | ||||
Return on average assets | 0.98 | % | |||
| Impairment writedown | 0.22 | % | |||
| Adjusted return on average assets | 1.20 | % | |||
Return on average equity | 11.64 | % | |||
| Impairment writedown | 2.67 | % | |||
| Adjusted return on average equity | 14.31 | % | |||
PART I - FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION
Assets. Total assets at September 30, 2003 were $1,849.1 million, a $196.1 million increase from December 31, 2002. During the nine months ended September 30, 2003, loan originations and purchases were $124.4 million for multi-family real estate loans, $72.3 million for commercial real estate loans