EX-13.1D 7 d50230_ex13-1d.txt ANNUAL REPORT [PHOTO] CORPORATE PROFILE Flushing Financial Corporation, a Delaware corporation, was formed 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 is a customer-oriented, full-service community bank primarily engaged in attracting deposits from residents and businesses in the local communities of Queens, Nassau, Brooklyn, the Bronx and Manhattan and investing such deposits and other available funds primarily in originations of multi-family mortgage loans, commercial real estate loans and one-to-four family residential loans. Flushing Financial Corporation's common stock is publicly traded on the Nasdaq National Market(R) under the symbol "FFIC." Additional information on Flushing Financial Corporation may be obtained by visiting the Company's web site at http://www.flushingsavings.com. Flushing Financial Corporation 1 2001 ANNUAL REPORT ================================================================================ TO OUR SHAREHOLDERS [PHOTO] ================================================================================ Partnership for Success We are pleased to report that 2001 was another profitable and successful year for Flushing Financial Corporation. We achieved record diluted earnings per share of $1.17, up 20.6% from $0.97 a year earlier. We also continued to grow our balance sheet, increase both net interest income and non-interest income and become more efficient. Credit quality remained strong despite a softening economy. Early in the year, we undertook an analysis of our past successes. With the knowledge we gained, we developed a strategic plan to emphasize our strengths in the markets we serve. We then set to work with a disciplined approach to implement that plan and build upon our areas of expertise. The strategic initiatives that we outlined in 2001 are in our view a blueprint for our growth in the near term. These initiatives fall into several categories: DIVERSIFY LENDING TO EMPHASIZE HIGHER YIELDS In 2001, we accelerated our efforts to further diversify our lending to emphasize higher yielding assets. To effect this change, we reallocated greater resources to several key lending areas including multi-family and commercial real estate lending. While the Federal Reserve Board and the credit markets exerted downward pressure on rates, our approach to high quality niche lending allowed us to grow our loan portfolio with only a slight reduction in yield. Originations in higher yielding multi-family and commercial real estate loans improved over last year. In the residential real estate lending area, we concentrated on changing our mix of originations toward higher yielding mixed-use Flushing Financial Corporation 2 2001 ANNUAL REPORT ================================================================================ ================================================================================ properties (those that contain both residential dwellings and commercial units). Single-family mortgages, while still an important part of our loan portfolio took on lesser significance in our earnings plan as margins in that business continued to narrow. MAINTAIN HIGH ASSET QUALITY While we have continued to search out profitable niches to expand lending, we have also continued to approach underwriting in a traditional manner, primarily focusing on basic housing stock and small commercial properties in the NY Metropolitan area. The loan portfolio has grown to $1.1 billion. At the same time, non-performing assets at December 31, 2001 were $2.4 million, and, although this represents a small increase over the prior year, our ratio of non-performing assets to total assets was a modest 0.16%. GROW CORE DEPOSITS We concentrated heavily on fine-tuning our retail network in our effort to grow lower costing core deposits. We initiated a new sales process, brought on additional talent and, capitalizing on market trends toward increased deposits, experienced unprecedented growth in total deposits of $136 million--more than 20% over year 2000, as more customers chose Flushing for their banking needs. Growth in lower costing core deposits was even more encouraging as those balances increased by $71 million or 26%. We saw an increase in depth of relationship as more Flushing customers chose to open checking and money market accounts with us in addition to their certificates of deposit. INCREASE NON-INTEREST INCOME We further augmented our basic business of deposit gathering and lending with an additional $2.2 million in non-interest income for the year. A leading contributor to the increase for 2001 was the Bank Owned Life Insurance (BOLI) program initiated in late 2000. A gain on sale of securities further contributed to the increase, as did an improvement in loan and deposit fees. CAPITAL MANAGEMENT Our effective management of capital, in addition to strong earnings growth, yielded a record high return on equity of 11.52% for the year. We continued to manage capital to improve shareholder value by repurchasing 639,950 shares of our stock during the year. Since our initial public offering in 1995, we have repurchased approximately 35% of the common shares issued in connection with that offering, thus enhancing the value for the remaining shareholders. Further, our continued financial success prompted us to increase the annual dividend paid in 2001 to $0.31 per share, up from the $0.27 per share paid in the prior year. We also declared a three-for-two stock split in August of 2001 in order to provide additional liquidity in the market for our common stock. Deposits (millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] '97 $655.9 '98 $664.1 '99 $666.9 '00 $689.8 '01 $828.6 Net Loan Portfolio (millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] '97 $ 598.4 '98 $ 750.6 '99 $ 875.9 '00 $ 986.4 '01 $1,067.2 Flushing Financial Corporation 3 2001 ANNUAL REPORT Total Assets (millions) [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] '97 $1,088.5 '98 $1,142.1 '99 $1,249.5 '00 $1,338.1 '01 $1,487.5 STRENGTHEN THE SALES AND SERVICE CULTURE No discussion of long-term strategy or 2001 results would be complete without mentioning the cultural changes that have been initiated and their positive impact on our staff and their performance. Throughout the year, we concentrated on building the skills of our customer contact staff through sales, product knowledge and small business training. In addition, we have recruited new talent to our organization in retail banking, investment sales, loan originations and small business banking. Expectations and responsibilities have been clearly defined to managers and staff and incentive pay structures have been put in place to reward results. Our people have responded well and we believe their increasing knowledge and skill will contribute to our success in the coming years. THE FUTURE We come out of the year 2001 a very strong, well-capitalized institution, with, in our view, a straightforward but effective business model that should continue to deliver shareholder value in the foreseeable future. In 2002, we anticipate a year of continued improvement in financial results, while we make the investments necessary to accomplish our strategic goals. ================================================================================ STRENGTHENING RELATIONSHIPS ================================================================================ We are working hard to build upon our success in targeted lending by enhancing our relationships with our communities, our existing customers and our broker networks. We intend to explore new technologies to streamline processes and make it easier for our customers to transact business with us. We will continue to focus on local businesses and consumers for the sources of our growth. We operate in an active and competitive market yet maintain a strong reputation for both lending and deposit products. By taking an active role in our communities, financing small business and delivering, in a personalized manner, an array of up-to-date financial products, we expect to continue to attract more customers to Flushing in the years to come. We would like to thank the Board for its active guidance, our employees for their commitment to our strategy and our customers for their valued trust. We thank you, our shareholders, for the confidence you have expressed in us through your investment. /S/ Gerard P. Tully, Sr. /S/ Michael J. Hegarty Gerard P. Tully, Sr. Michael J. Hegarty Chairman of the Board President and Chief Executive Officer We are working hard to build upon our success in targeted lending by enhancing our relationships with our communities, our existing customers and our broker networks. Flushing Financial Corporation 4 2001 ANNUAL REPORT ================================================================================ SELECTED FINANCIAL DATA ================================================================================
---------------------------------------------------------------------------------------------------------------------------- At or for the year ended December 31, 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) SELECTED FINANCIAL CONDITION DATA Total assets.......................................... $1,487,529 $1,338,092 $1,249,529 $1,142,055 $1,088,476 Loans, net............................................ 1,067,197 986,359 875,886 750,555 598,421 Securities available for sale......................... 305,539 255,220 285,016 326,690 356,712 Real estate owned, net................................ 93 44 368 77 433 Deposits.............................................. 828,582 689,811 666,941 664,059 655,911 Borrowed funds........................................ 513,435 508,839 451,831 335,458 287,187 Stockholders' equity.................................. 133,387 126,737 118,176 132,087 136,443 Book value per share (1) (2).......................... $ 9.89 $ 9.11 $ 8.10 $ 8.08 $ 7.71 SELECTED OPERATING DATA Interest and dividend income.......................... $ 101,899 $ 96,941 $ 87,143 $ 82,846 $ 66,866 Interest expense...................................... 59,702 57,048 47,795 46,702 34,795 ------------------------------------------------------------------- Net interest income................................. 42,197 39,893 39,348 36,144 32,071 Provision for loan losses............................. -- -- 36 214 104 ------------------------------------------------------------------- Net interest income after provision for loan losses. 42,197 39,893 39,312 35,930 31,967 Non-interest income: Net gains (losses) on sales of securities and loans. 321 (651) 252 368 67 Other income........................................ 5,737 4,509 3,622 2,927 2,596 ------------------------------------------------------------------- Total non-interest income......................... 6,058 3,858 3,874 3,295 2,663 Non-interest expense.................................. 24,457 23,797 22,646 23,023 19,324 Income before income tax provision.................... 23,798 19,954 20,540 16,202 15,306 Income tax provision.................................. 8,869 7,532 7,805 6,012 6,775 ------------------------------------------------------------------- Net income........................................ $ 14,929 $ 12,422 $ 12,735 $ 10,190 $ 8,531 ------------------------------------------------------------------- Basic earnings per share (2) (3)...................... $ 1.22 $ 0.99 $ 0.94 $ 0.67 $ 0.53 Diluted earnings per share (2) (3).................... $ 1.17 $ 0.97 $ 0.92 $ 0.65 $ 0.53 Dividends declared per share (2)...................... $ 0.31 $ 0.27 $ 0.21 $ 0.15 $ 0.10 Dividend payout ratio................................. 25.4% 27.3% 22.3% 22.3% 18.9%
Continued (Footnotes on the following page) ========================================================= TABLE OF CONTENTS ========================================================= Selected Financial Data 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Consolidated Financial Statements 20 Notes to Consolidated Financial Statements 26 Report of Independent Accountants 44 Corporate and Shareholder Information 1BC Flushing Financial Corporation and Subsidiaries 5 2001 ANNUAL REPORT ================================================================================ SELECTED FINANCIAL DATA ================================================================================ (continued)
---------------------------------------------------------------------------------------------------------------------------- At or for the year ended December 31, 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS AND OTHER DATA Performance ratios: Return on average assets............................ 1.06% 0.96% 1.08% 0.92% 0.96% Return on average equity............................ 11.52 10.48 10.31 7.51 6.41 Average equity to average assets.................... 9.19 9.18 10.49 12.24 15.00 Equity to total assets.............................. 8.97 9.47 9.46 11.57 12.53 Interest rate spread................................ 2.89 2.87 3.05 2.88 3.06 Net interest margin................................. 3.20 3.24 3.49 3.43 3.74 Non-interest expense to average assets.............. 1.74 1.84 1.92 2.08 2.18 Efficiency ratio.................................... 50.06 53.07 51.54 53.44 53.91 Average interest-earning assets to average interest-bearing liabilities...................... 1.07x 1.08x 1.11x 1.12x 1.17x Regulatory capital ratios (4): Tangible capital.................................... 7.32% 8.02% 8.28% 9.46% 9.11% Core capital........................................ 7.32 8.02 8.28 9.46 9.11 Total risk-based capital............................ 13.58 15.77 16.33 19.43 19.76 Asset quality ratios: Non-performing loans to gross loans (5)............. 0.22% 0.16% 0.36% 0.34% 0.41% Non-performing assets to total assets (6)........... 0.16 0.12 0.29 0.23 0.27 Net charge-offs (recoveries) to average loans....... 0.01 0.01 -- (0.01) 0.01 Allowance for loan losses to gross loans............ 0.61 0.68 0.77 0.89 1.07 Allowance for loan losses to total non-performing assets (6)......................... 272.94 404.28 191.29 252.83 223.94 Allowance for loan losses to total non-performing loans (5).......................... 283.85 415.32 213.29 260.36 263.38 Full-service customer facilities...................... 10 10 9 8 7
(1) Calculated by dividing stockholders' equity of $133.4 million and $126.7 million at December 31, 2001 and 2000, respectively, by 13,487,784 and 13,907,881 shares outstanding at December 31, 2001 and 2000, respectively. (2) All per share data has been adjusted for the three-for-two stock split distributed on August 30, 2001 in the form of a stock dividend and the three-for-two stock split distributed on September 30, 1998 in the form of a stock dividend. (3) The shares held in the Company's Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share. Unvested restricted stock awards are not included in basic earnings per share calculations, but are included in diluted earnings per share calculations. (4) The Bank exceeded all minimum regulatory capital requirements during the periods presented. (5) Non-performing loans consist of non-accrual loans and loans delinquent 90 days or more that are still accruing. (6) Non-performing assets consists of non-performing loans and real estate owned. MARKET PRICE OF COMMON STOCK Flushing Financial Corporation Common Stock is traded on the Nasdaq National Market (R) under the symbol "FFIC." As of December 31, 2001 the Company had approximately 760 shareholders of record, not including the number of persons or entities holding stock in nominee or street name through various brokers and banks. The Company's stock closed at $17.80 on December 31, 2001. The following table shows the high and low sales price of the Common Stock during the periods indicated. Such prices do not necessarily reflect retail markups, markdowns or commissions. All price and dividend information has been adjusted for the three-for-two stock split distributed on August 30, 2001 in the form of a stock dividend. See Note 12 of Notes to Consolidated Financial Statements for dividend restrictions.
--------------------------------------------------------------------------------------------------------- 2001 2000 ---------------------------------------------------------------------- High Low Dividend High Low Dividend --------------------------------------------------------------------------------------------------------- First Quarter............... $12.54 $11.00 $0.073 $10.17 $ 8.50 $0.067 Second Quarter.............. 16.20 12.17 0.073 10.33 8.33 0.067 Third Quarter............... 17.00 13.71 0.080 11.00 9.79 0.067 Fourth Quarter.............. 18.96 15.44 0.080 11.96 10.04 0.067
Flushing Financial Corporation and Subsidiaries 6 2001 ANNUAL REPORT ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ GENERAL Flushing Financial Corporation ("Holding Company") is the parent holding company for Flushing Savings Bank, FSB ("Bank"), a federally chartered stock savings bank. The following discussion of financial condition and results of operations includes the collective results of the Holding Company 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 funds generated from operations and borrowings, primarily in (1) originations and purchases of one-to-four family residential mortgage 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 other small business loans. The Company's results of operations depend primarily on net interest income, which is the difference between the interest income earned on its loan and investment portfolios, and its cost of funds, consisting primarily of interest paid on deposit accounts and borrowed funds. 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, and the average balance of interest-earning assets 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 ("BOLI"), dividends on Federal Home 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. In September 2000, the Bank sold certain lower-yielding mortgage-backed securities and invested the proceeds in $20.0 million of BOLI. The purchase of BOLI, with its tax-advantaged earnings and other benefits, allows the Company to fund a substantial portion of the Company's employee benefit costs. On July 17, 2001, the Board of Directors of the Company declared a three-for-two stock split of the Company's common stock in the form of a 50% stock dividend, which was paid on August 30, 2001. Each stockholder received one additional share for every two shares of the Company's common stock held at the record date, August 10, 2001. Cash was paid in lieu of fractional shares. The Company issued 4,617,270 shares of its common stock, of which 2,120,885 shares had been held as treasury stock. All share and per share amounts in this Annual Report have been restated to reflect this three-for-two stock split paid on August 30, 2001. During the fourth quarter of 2001, the Bank began to: (1) expand its business loan and deposit products, (2) increase its focus on the investment products it offers, and (3) plan for the anticipated introduction in 2002 of a debit card and Internet banking. As part of the Company's strategy to find ways to best utilize its available capital, during 2001 Flushing Financial Corporation continued its stock repurchase programs by repurchasing 639,950 shares of its common stock. The total number of treasury shares, at December 31, 2001 is 364,279 and the total number of outstanding common shares is 13,487,784. At December 31, 2001, 552,450 shares remain to be repurchased under the current stock repurchase program. Statements contained in this ANNUAL REPORT relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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 Flushing Financial Corporation and Subsidiaries 7 2001 ANNUAL REPORT anticipated due to a number of factors, which include, but are not limited to, the factors set forth in the third paragraph of this section, and under captions "Management Strategy" and "Other Trends and Contingencies" below, and elsewhere in this Annual Report and in other documents filed by the Company with the Securities and Exchange Commission from time to time. 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. FLUSHING SAVINGS BANK, FSB The Bank was organized in 1929 as a New York State chartered mutual savings bank. On May 10, 1994, the Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. As a federal savings bank, the Bank's primary regulator is the Office of Thrift Supervision ("OTS"). The Bank's deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). The Bank owns three subsidiaries: (1) Flushing Preferred Funding Corporation ("FPFC")--a real estate investment trust; (2) Flushing Service Corporation ("FSC")--a service corporation which markets insurance products and mutual funds; and (3) FSB Properties, Inc.--a service corporation formed to manage certain real estate properties, which is currently inactive. MANAGEMENT STRATEGY Management's strategy is to continue the Bank's focus as a consumer-oriented institution serving its local markets. In furtherance of this objective, the Company intends to (1) continue its emphasis on the origination of one-to-four family residential mortgage (focusing on mixed-use properties), multi-family real estate and commercial real estate loans, (2) maintain asset quality, (3) manage deposit growth and maintain a low cost of funds, (4) manage interest rate risk, and (5) explore new business opportunities. The Company has in the past increased growth through acquisitions of financial institutions and branches of other financial institutions, and will continue to pursue growth through acquisitions that are, or are expected to be within a reasonable time frame, accretive to earnings. The Company has also opened new branches. There can be no assurance that the Company will be able to effectively implement this strategy. The Company's strategy is subject to change by the Board of Directors. One-to-Four Family, Multi-Family Real Estate and Commercial Real Estate Lending. The Company has traditionally emphasized the origination and acquisition of one-to-four family residential mortgage loans, which include mixed-use property mortgage loans, adjustable rate mortgage ("ARM") loans, fixed rate mortgage loans and home equity loans. Increasingly, the Company has placed greater emphasis on multi-family and commercial real estate loans. The Company expects to continue this emphasis on multi-family and commercial real estate loans as well as on one-to-four family residential mortgage loans. During 2001, loan originations and purchases were $82.3 million for one-to-four family residential mortgage loans, $71.0 million for multi-family real estate loans, $62.1 million for commercial real estate loans and $8.7 million for construction loans. At December 31, 2001, the Company's one-to-four family residential mortgage loans, multi-family real estate loans and commercial real estate loans amounted to $468.4 million (43.7%), $369.7 million (34.5%) and $214.4 million (20.0%), respectively, of gross loans. The Company seeks to increase its originations of one-to-four family residential mortgage, multi-family real estate and commercial real estate loans through aggressive marketing and by maintaining competitive interest rates and origination fees. The Company's marketing efforts includes frequent contacts with mortgage brokers and other professionals who serve as referral sources. From time-to-time, the Company may purchase loans from mortgage bankers. Loans purchased by the Company from these mortgage bankers comply with the Bank's underwriting standards. Fully underwritten one-to-four family residential mortgage loans generally are considered by the banking industry to have less risk than other types of loans. Multi-family income-producing real estate loans and commercial real estate loans generally have higher yields than one-to-four family residential Flushing Financial Corporation and Subsidiaries 8 2001 ANNUAL REPORT mortgage loans and shorter terms to maturity, but typically involve higher principal amounts and generally expose the lender to a greater risk of credit loss than one-to-four family residential mortgage loans. The Company's increased emphasis on multi-family and commercial real estate loans has increased the overall level of credit risk inherent in the Company's loan portfolio. The greater risk associated with multi-family and commercial real estate loans could require the Company to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Company. To date, the Company has not experienced significant losses in its multi-family and commercial real estate loan portfolios, and has determined that, at this time, additional provisions are not required. Maintain Asset Quality. By adherence to its strict underwriting standards the Bank has been able to minimize net losses from impaired loans with net charge-offs of $136,000 and $97,000 for the years ended December 31, 2001 and 2000, respectively. The Company has maintained the strength of its loan portfolio, as evidenced by the Company's ratio of its allowance for loan losses to non-performing loans of 283.85% and 415.32% at December 31, 2001 and 2000, respectively. The Company seeks to maintain its loans in performing status through, among other things, strict collection efforts, and consistently monitors non-performing assets in an effort to return them to performing status. To this end, management reviews the quality of loans and reports to the Loan Committee of the Board of Directors of the Bank on a monthly basis. From time-to-time, the Company has sold and may continue to make sales of non-performing assets. Non-performing assets amounted to $2.4 million and $1.7 million at December 31, 2001 and 2000, respectively. Non-performing assets as a percentage of total assets were 0.16% and 0.12% at December 31, 2001 and 2000, respectively. Managing Deposit Growth and Maintaining Low Cost of Funds. The Company has a relatively stable retail deposit base drawn from its market area through its ten full-service offices. Although the Company seeks to retain existing deposits and maintain depositor relationships by offering quality service and competitive interest rates to its customers, the Company seeks to keep deposit growth within reasonable limits. Management intends to balance its goal to maintain competitive interest rates on deposits while seeking to manage its overall cost of funds to finance its strategies. Historically, the Company has relied on its deposit base as its principal source of funding. The Bank is also a member of the FHLB-NY, which provides it with an additional source of borrowing, which the Company has increasingly utilized to provide funding for asset growth which has increased net interest income. During 2001, the Company realized an increase in due to depositors and borrowed funds of $136.5 million and $4.6 million, respectively. Managing Interest Rate Risk. The Company seeks to manage its interest rate risk by actively reviewing the repricing and maturities of its interest rate sensitive assets and liabilities. The mix of loans originated by the Company (fixed or ARM) is determined in large part by borrowers' preferences and prevailing market conditions. The Company seeks to manage the interest rate risk of the loan portfolio by actively managing its security portfolio and borrowings. By adjusting the mix of fixed and adjustable rate securities, as well as the maturities of the securities, the Company has the ability to manage the combined interest rate sensitivity of its assets. In order to maintain flexibility in managing the Company's interest rate sensitive assets, the majority of fixed rate residential mortgage loans originated by the Company in recent years were made in accordance with Federal National Mortgage Association requirements to facilitate sale in the secondary market. Additionally, the Company seeks to balance the interest rate sensitivity of its assets by managing the maturities of its liabilities. Prevailing interest rates also affect the extent to which borrowers repay and refinance loans. An increasing interest rate environment would tend to extend the lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect net interest income. In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which could adversely affect the Bank's net interest income if rates were to subsequently decline. In a declining interest rate environment, the number of loan prepayments and loan refinancings may increase, as well as prepayments of mortgage-backed securities. Call provisions associated with the Company's investment in U.S. government agency and corporate securities may also adversely affect yield in a declining interest rate environment. Such prepayments Flushing Financial Corporation and Subsidiaries 9 2001 ANNUAL REPORT and calls may adversely affect the yield of the Company's loan portfolio and mortgage-backed and other securities as the Company reinvests the prepaid funds in a lower interest rate environment. However, the Company typically receives additional loan fees when existing loans are refinanced, which partially offset the reduced yield on the Company's loan portfolio resulting from prepayments. In periods of low interest rates, the Company's level of core deposits also may decline if depositors seek higher yielding instruments or other investments not offered by the Company, which in turn may increase the Company's cost of funds and decrease its net interest margin to the extent alternative funding sources are utilized. Additionally, adjustable rate mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount the interest rate can increase or decrease at repricing dates. Exploring New Business Opportunities. As part of the Company's strategy to explore new retailing concepts and products, the Bank opened its first in-store supermarket branch in June 1998 in the neighborhood of New Hyde Park. A second in-store supermarket branch was opened in November 1999 in Co-op City in the Bronx. These supermarket branches can address virtually all of their customers' financial needs, with the added convenience of extended hours and time saving grocery store access. A traditional branch was opened in July 2000 on Kissena Boulevard in Flushing, Queens. During the second quarter of 1998, the Company launched Flushing Service Corporation, which began offering mutual funds, tax-deferred annuities and other investment products, expanding the services offered by the Bank. The Bank intends to place additional emphasis on the sale of these products in 2002 through additional marketing efforts and the licensing of Bank employees allowing them to sell certain of these products. The Bank also established, in June 1998, a Business and Community Development Department. In the Company's demanding and constantly evolving marketplace, this office plays an active role in enhancing the Company's reputation as an essential player in the local economy, and expanding its participation in new business opportunities. In the fourth quarter of 2001, staffing was increased in this department to allow the Bank to further expand these efforts. Management is currently reviewing the profitability potential of various new products to further expand the Company's product lines and market. During 2002, the Bank plans to introduce a debit card and Internet banking, and continue to expand its business loan and deposit products. These initiatives are designed to allow us to continue to be the provider of choice for our current customers and help attract new customers. Interest Rate Sensitivity Analysis A financial institution's exposure to the risks of changing interest rates may be analyzed, in part, by examining the extent to which its assets and liabilities are "interest rate sensitive" and by monitoring the institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-earning assets maturing or repricing exceeds the amount of interest-bearing liabilities maturing or repricing within the same period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within the same period. Accordingly, a positive gap may enhance net interest income in a rising rate environment and reduce net interest income in a falling rate environment. Conversely, a negative gap may enhance net interest income in a falling rate environment and reduce net interest income in a rising rate environment. Flushing Financial Corporation and Subsidiaries 10 2001 ANNUAL REPORT The table below sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2001 which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period was determined in accordance with the earlier of the term to repricing or the contractual terms of the asset or liability. Prepayment assumptions for mortgage-backed securities are based on industry averages. Passbook and Money Market accounts were assumed to have a withdrawal or "run-off" rate of 5%, based on historical experience. Management believes that these assumptions are indicative of actual prepayments and withdrawals experienced by the Company.
Interest Rate Sensitivity Gap Analysis at December 31, 2001 ==================================================================================================================================== More Than More Than More Than More Than Three Three One Year Three Years Five Years Months Months to to Three to Five to Ten More Than and Less One Year Years Years Years Ten Years Total ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS (Dollars in thousands) Mortgage loans ............................... $ 32,243 $ 120,995 $ 331,345 $352,620 $208,002 $ 21,065 $1,066,270 Other loans .................................. 4,697 492 1,258 228 50 -- 6,725 Short-term securities (1) .................... 28,367 -- -- -- -- -- 28,367 Securities available for sale: Mortgage-backed securities ................. 28,702 34,734 64,566 43,184 50,878 20,994 243,058 Other ...................................... 20,459 24,644 16,472 -- 306 600 62,481 ------------------------------------------------------------------------------------ Total interest-earning assets ............ 114,468 180,865 413,641 396,032 259,236 42,659 1,406,901 ------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES Passbook accounts ............................ 2,448 7,344 18,141 16,372 34,285 117,265 195,855 NOW accounts ................................. -- -- -- -- -- 33,107 33,107 Money market accounts ........................ 1,172 3,516 8,687 7,841 16,418 56,155 93,789 Certificate of deposit accounts .............. 90,620 160,947 141,069 69,214 5,322 -- 467,172 Mortgagors' escrow deposits .................. -- -- -- -- -- 10,065 10,065 Borrowed funds ............................... 136,000 49,250 159,000 78,900 90,285 -- 513,435 ------------------------------------------------------------------------------------ Total interest-bearing liabilities (2) ... $ 230,240 $ 221,057 $ 326,897 $172,327 $146,310 $ 216,592 $1,313,423 ------------------------------------------------------------------------------------ Interest-rate sensitivity gap ................ $(115,772) $ (40,192) $ 86,744 $223,705 $112,926 $(173,933) Cumulative interest-rate sensitivity gap ..... $(115,772) $(155,964) $ (69,220) $154,485 $267,411 $ 93,478 Cumulative interest-rate sensitivity gap as a percentage of total assets ............ (7.78)% (10.48)% (4.65)% 10.39% 17.98% 6.28% Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities ................................ 49.72% 65.44% 91.11% 116.25% 124.38% 107.12% ------------------------------------------------------------------------------------------------------------------------------------
(1) Consists of interest-earning deposits and federal funds sold. (2) Does not include non-interest-bearing demand accounts totaling $28.6 million at December 31, 2001. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar estimated maturities or periods to repricing, they may react in differing degrees to changes in market interest rates and may bear rates that differ in varying degrees from the rates that would apply upon maturity and reinvestment or upon repricing. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in the level of interest rates, prepayments on loans and Flushing Financial Corporation and Subsidiaries 11 2001 ANNUAL REPORT mortgage-backed securities, and deposit withdrawal or "run-off" levels, would likely deviate materially from those assumed in calculating the above table. In the event of an interest rate increase, some borrowers may be unable to meet the increased payments on their adjustable-rate debt. The interest rate sensitivity analysis assumes that the nature of the Company's assets and liabilities remains static. Interest rates may have an effect on customer preferences for deposits and loan products. Finally, the maturity and repricing characteristics of many assets and liabilities as set forth in the above table are not governed by contract but rather by management's best judgement based on current market conditions and anticipated business strategies. INTEREST RATE RISK The Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. 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 operations if such assets were sold, or, in the case of securities classified as available-for-sale, decreases in the Company's stockholders' equity, if such securities were retained. The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. 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) 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company has been calculating the changes in the net interest income and net portfolio value for several years. In 1999, the OTS placed its focus on the net portfolio value ratio. This is the ratio used by the OTS to measure the interest rate sensitivity of the Company. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. 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 December 31, 2001. Various estimates regarding prepayment assumptions are made at each level of rate shock. Actual results could differ significantly from these estimates. The Company is within the guidelines established by the Board of Directors for each interest rate level. Projected Percentage Change In --------------------------------------------- Net Interest Net Portfolio Net Portfolio Change in Interest Rate Income Value Value Ratio -------------------------------------------------------------------------------- -300 basis points .............. -4.72% -3.02% 9.76% -200 basis points .............. -1.11 -1.28 10.13 -100 basis points .............. 0.17 1.97 10.65 Base interest rate ............. -- -- 10.67 +100 basis points .............. -2.63 -14.47 9.42 +200 basis points .............. -5.89 -28.81 8.10 +300 basis points .............. -9.29 -43.21 6.68 Analysis of Net Interest Income 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. Flushing Financial Corporation and Subsidiaries 12 2001 ANNUAL REPORT The following table sets forth certain information relating to the Company's Consolidated Statements of Financial Condition and the Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999, 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 that are considered adjustments to yields.
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------------------------------------------------------------------------------------------------------------------------------------ ASSETS (Dollars in thousands) Interest-earning assets: Mortgage loans, net (1) (2) . $1,030,126 $ 83,811 8.14% $ 936,222 $76,094 8.13% $ 800,668 $65,998 8.24% Other loans, net (1) (2) .... 6,405 558 8.71 6,681 686 10.27 5,515 545 9.88 --------------------------------------------------------------------------------------------------- Total loans, net ........ 1,036,531 84,369 8.14 942,903 76,780 8.14 806,183 66,543 8.25 --------------------------------------------------------------------------------------------------- Mortgage-backed securities .. 228,681 14,938 6.53 261,903 18,304 6.99 287,154 18,703 6.51 Other securities ............ 21,640 1,260 5.82 16,504 1,182 7.16 20,331 1,212 5.96 --------------------------------------------------------------------------------------------------- Total securities ........ 250,321 16,198 6.47 278,407 19,486 7.00 307,485 19,915 6.48 --------------------------------------------------------------------------------------------------- Interest-earning deposits and federal funds sold .... 33,810 1,332 3.94 9,542 675 7.07 12,346 685 5.55 --------------------------------------------------------------------------------------------------- Total interest-earning assets . 1,320,662 101,899 7.72 1,230,852 96,941 7.88 1,126,014 87,143 7.74 ------------------ ----------------- ----------------- Other assets .................. 88,237 60,344 52,174 ---------- ---------- ---------- Total assets ............ $1,408,899 $1,291,196 $1,178,188 ========== ========== ========== LIABILITIES AND EQUITY Interest-bearing liabilities: Deposits: Passbook accounts ......... $ 188,701 3,767 2.00 $ 189,852 3,931 2.07 $ 200,601 4,156 2.07 NOW accounts .............. 30,736 504 1.64 27,838 530 1.90 26,281 499 1.90 Money market accounts ..... 71,820 2,309 3.21 42,791 1,438 3.36 36,191 1,105 3.05 --------- Certificate of deposit accounts ................ 423,812 23,062 5.44 385,237 21,488 5.58 364,947 19,130 5.24 Mortgagors' escrow deposits ................ 13,013 69 0.53 13,177 86 0.65 11,718 92 0.79 --------------------------------------------------------------------------------------------------- Total deposits .......... 728,082 29,711 4.08 658,895 27,473 4.17 639,738 24,982 3.91 Other borrowed funds .......... 508,434 29,991 5.90 478,675 29,575 6.18 379,259 22,813 6.02 --------------------------------------------------------------------------------------------------- Total interest-bearing liabilities.................. 1,236,516 59,702 4.83 1,137,570 57,048 5.01 1,018,997 47,795 4.69 ------------------ ----------------- ----------------- Other liabilities (3) ......... 42,845 35,073 35,655 ---------- ---------- ---------- Total liabilities ....... 1,279,361 1,172,643 1,054,652 Equity ........................ 129,538 118,553 123,536 ---------- ---------- ---------- Total liabilities and equity................. $1,408,899 $1,291,196 $1,178,188 ========== ========== ========== Net interest income/net interest rate spread (4) .... $ 42,197 2.89% $39,893 2.87% $39,348 3.05% ================== ================= ================ Net interest-earning assets/net interest margin (5) .................. $ 84,146 3.20% $ 93,282 3.24% $107,017 3.49% ========== ===== ========== ===== ======== ===== Ratio of interest-earning assets to interest-bearing liabilities ................. 1.07x 1.08x 1.11x ===== ===== =====
(1) Average balances include non-accrual loans. (2) Loan interest income includes loan fee income of approximately $321,000, $555,000 and $1,304,000 for the years ended December 31, 2001, 2000 and 1999, respectively. (3) Includes non-interest-bearing demand deposit accounts. (4) Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities. (5) Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning assets. Flushing Financial Corporation and Subsidiaries 13 2001 ANNUAL REPORT RATE/VOLUME ANALYSIS The following table presents the impact of changes in interest rates and in the volume of interest-earning assets and interest-bearing liabilities on the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) changes attributable to changes in volume (changes in volume multiplied by the prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by the prior volume) and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Increase (Decrease) in Net Interest Income =========================================================================================================================== Year Ended December 31, 2001 Year Ended December 31, 2000 Compared to Year Ended Compared to Year Ended December 31, 2000 December 31, 1999 --------------------------------------------------------------------------------------------------------------------------- Due to Due to ----------------- --------------- Volume Rate Net Volume Rate Net --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Interest-Earning Assets Mortgage loans, net................................. $ 7,623 $ 94 $ 7,717 $10,960 $ (864) $10,096 Other loans......................................... (27) (101) (128) 118 23 141 Mortgage-backed securities.......................... (2,216) (1,150) (3,366) (1,711) 1,312 (399) Other securities.................................... 195 (117) 78 (251) 221 (30) Interest-earning deposits and federal funds sold.... 796 (139) 657 (177) 167 (10) -------------------------------------------------------------------- Total interest-earning assets................... 6,371 (1,413) 4,958 8,939 859 9,798 -------------------------------------------------------------------- Interest-Bearing Liabilities Deposits: Passbook accounts................................. (25) (139) (164) (225) -- (225) NOW accounts...................................... 84 (110) (26) 31 -- 31 Money market accounts............................. 932 (61) 871 214 119 333 Certificate of deposit accounts................... 2,100 (526) 1,574 1,088 1,270 2,358 Mortgagors' escrow deposits....................... (1) (16) (17) 11 (17) (6) Other borrowed funds................................ 1,533 (1,117) 416 6,139 623 6,762 -------------------------------------------------------------------- Total interest-bearing liabilities.............. 4,623 $(1,969) 2,654 7,258 1,995 9,253 -------------------------------------------------------------------- Net change in net interest income................... $ 1,748 $ 556 $ 2,304 $ 1,681 $(1,136) $ 545 ====================================================================
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 General. Diluted earnings per share increased 20.6% to $1.17 for the year ended December 31, 2001 from $0.97 for the year ended December 31, 2000. Net income increased $2.5 million, or 20.2%, to $14.9 million for the year ended December 31, 2001 from $12.4 million for the year ended December 31, 2000. This was due to increases in net interest income and non-interest income of $2.3 million and $2.2 million, respectively, partially offset by an increase in non-interest expense of $0.7 million. As a result of the increased net income before income taxes, there was a $1.3 million increase in income tax expense. The year ended December 31, 2000 included the sale of approximately $20.7 million of mortgage-backed securities in September, which resulted in an after tax loss of $445,000. Excluding this loss on sale of securities, net income for the year ended December 31, 2000 would have been $12.9 million, or $1.01 per diluted share. Interest Income. Interest income increased $5.0 million, or 5.1%, to $101.9 million for the year ended December 31, 2001 from $96.9 million for the year ended December 31, 2000. This increase is due to an increase of $89.8 million in the average balance of interest-earning assets, partially offset by a 16 basis point decline in the yield on interest-earning assets to 7.72% for 2001. Interest and fees on loans increased $7.6 million while interest on interest-earning deposits and federal funds sold increased $0.7 million. These increases were partially offset by a $3.3 million decrease in interest and dividends on investment securities. The increase in interest and fee income from loans is due to a $93.6 million increase in the average balance of loans to $1.04 billion during the year ended December 31, 2001, as the yield of 8.14% remained Flushing Financial Corporation and Subsidiaries 14 2001 ANNUAL REPORT unchanged for 2001 from 2000. A focus on the origination of higher yielding multi-family and commercial real estate mortgage loans, along with the origination of mixed-use property mortgage loans, allowed us to maintain the yield on our loan portfolio despite the declining interest rate environment experienced during the year ended December 31, 2001. The increase in interest on interest-earning deposits and federal funds sold is due to a $24.3 million increase in the average balance of these items, partially offset by a decline in the yield to 3.94% for 2001 from 7.07% for 2000. The decrease in interest and dividend income from investment securities reflects a $28.1 million decrease in the average balances of investment securities during 2001 to $250.3 million, combined with a 53 basis point decline in the yield on investment securities. The decrease in the average balance of investment securities is primarily due to the sale of mortgage-backed securities in the third quarter of 2000 and the reinvestment of the proceeds in BOLI. The investment in BOLI is included in Other Assets in the Consolidated Statements of Financial Condition, and the income earned on BOLI is included in Non-Interest Income in the Consolidated Statements of Income. The income on BOLI amounted to $1.3 million for the year ended December 31, 2001 compared to $0.4 million for the year ended December 31, 2000. Interest Expense. Interest expense increased $2.7 million, or 4.7%, to $59.7 million for the year ended December 31, 2001 from $57.0 million for the year ended December 31, 2000. The increase in interest expense is due to a $98.9 million increase in the average balance of total interest-bearing liabilities during 2001, partially offset by an 18 basis point decline in the cost of interest-bearing liabilities. The average balance for deposits increased $69.2 million to $728.1 million for 2001. The cost of deposits decreased nine basis points to 4.08% during 2001, as decreases in cost were seen in all categories of deposits in the declining interest rate environment experienced during the year. The average balance for borrowed funds increased $29.7 million to $508.4 million for 2001 from $478.7 million for 2000. The cost of borrowed funds decreased 28 basis points to 5.90% during 2001. Net Interest Income. Net interest income for the year ended December 31, 2001 totaled $42.2 million, an increase of $2.3 million from $39.9 million for 2000. The net interest spread improved two basis points to 2.89% for 2001 from 2.87% in 2000, as the yield on interest-earning assets declined 16 basis points while the cost of interest-bearing liabilities declined 18 basis points. However, the net interest margin declined four basis points to 3.20% for the year ended December 31, 2001 from 3.24% for the year ended December 31, 2000. The decline in the net interest margin is primarily due to a decline in the amount by which interest-earning assets exceed interest-bearing liabilities. During 2001, average interest-earning assets exceeded average interest-bearing liabilities by $84.2 million, a decline of $9.1 million from the $93.3 million during 2000. This decline is primarily due to the sale of mortgage-backed securities in September 2000 and the reinvestment of the proceeds in BOLI. Provision for Loan Losses. There was no provision for loan losses for the years ended December 31, 2001 and 2000. 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 the years ended December 31, 2001 and 2000. The ratio of non-performing loans to gross loans was 0.22% at December 31, 2001 compared to 0.16% at December 31, 2000. The allowance for loan losses as percentage of non-performing loans was 283.85% and 415.32% at December 31, 2001 and 2000, respectively. The ratio of allowance for loan losses to gross loans was 0.61% and 0.68% at December 31, 2001 and 2000, respectively. The Company experienced net charge-offs of $136,000 and $97,000 for the years ended December 31, 2001 and 2000, respectively. Non-Interest Income. Non-interest income for the year ended December 31, 2001 increased $2.2 million, or 57.0%, to $6.1 million from $3.9 million for the year ended December 31, 2000. The increase is due to net gains on the sale of securities and loans of $0.3 million for the year ended December 31, 2001 compared to net losses on sales of securities and loans of $0.7 million in the year ended December 31, 2000, increased income earned on BOLI, and higher fee income from loan fees and banking services. Non-Interest Expense. Non-interest expense for the year ended December 31, 2001 totaled $24.5 million, representing an increase of $0.7 million, or 2.8%, from the year ended Flushing Financial Corporation and Subsidiaries 15 2001 ANNUAL REPORT December 31, 2000. The increase is primarily attributed to the full year impact of the expenses associated with the operations of the Kissena branch (opened in July 2000) and an increase in salaries and benefits and professional services (which includes advertising) in the fourth quarter of 2001 as the Bank focuses on expanding its current product offerings to enhance its ability to serve its customers. Management continues to closely monitor expenditures, resulting in an efficiency ratio of 50.1% for the year ended December 31, 2001 compared to 53.1% for 2000. Income Tax Provisions. Income tax expense for the year ended December 31, 2001 totaled $8.9 million, compared to $7.5 million for the year ended December 31, 2000. This increase is primarily attributed to the increase of $3.8 million in income before income taxes. The effective tax rate was 37.3% for the year ended December 31, 2001 compared to 37.7% for the year ended December 31, 2000. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 General. Diluted earnings per share increased 6.6% to $0.97 for the year ended December 31, 2000 from $0.92 for the year ended December 31, 1999. Net income decreased $0.3 million, or 2.5%, to $12.4 million for the year ended December 31, 2000 from $12.7 million for the year ended December 31, 1999. An increase in net interest income of $0.6 million was offset by a $1.2 million increase in non-interest expense. As a result of the lower net income before income taxes, there was a $0.3 million decrease in income tax expense. The year ended December 31, 2000 included the sale of approximately $20.7 million of mortgage-backed securities in September, which resulted in an after tax loss of $445,000. The proceeds of this sale were used to purchase $20.0 million of BOLI, which has been included in Other Assets in the Consolidated Statements of Financial Condition. The purchase of the BOLI allows the Company to fund a substantial portion of its employee benefit costs. The tax advantages of the BOLI were immediately accretive to earnings, and allowed the Company to recover this loss within one year. Excluding this loss on sale of securities, net income for the year ended December 31, 2000 would have been $12.9 million, or $1.01 per diluted share. Interest Income. Interest income increased $9.8 million, or 11.2%, to $96.9 million for the year ended December 31, 2000 from $87.1 million for the year ended December 31, 1999. This increase was primarily due to an increase of $10.2 million in interest and fees on loans during 2000, which was partially offset by a $0.4 million decrease in interest and dividends on investment securities. The increase in interest and fee income from loans reflected a $136.7 million increase in the average balance of loans to $942.9 million during 2000, which, however, was partially offset by an 11 basis point decrease in the yield on loans. The decrease in interest and dividend income from investment securities reflected a $29.1 million decrease in the average balances of investment securities during 2000 to $278.4 million, offset in part by a 52 basis point increase in the yield on investment securities. The decrease in the average balance of investment securities was due to the Company investing these funds in higher yielding loans, BOLI and/or utilizing the funds to reduce certain short-term borrowed funds. Interest Expense. Interest expense increased $9.3 million, or 19.4%, to $57.1 million for the year ended December 31, 2000 from $47.8 million for the year ended December 31, 1999. The increase in interest expense was due to a $118.6 million increase in the average balance of total interest-bearing liabilities during 2000, combined with a 32 basis point increase in the cost of interest-bearing liabilities. The increase in the average balance primarily reflected the Bank's increased use of higher costing FHLB-NY advances and repurchase agreements as an alternative source of funding to leverage its highly capitalized balance sheet. The average balance for deposits increased $19.2 million to $658.9 million for 2000. The cost of deposits increased 26 basis points to 4.17% during 2000 as the average balance of higher costing certificates of deposit increased, and certificates of deposit were opened and renewed at higher rates. The average balance for borrowed funds increased $99.4 million to $478.7 million for 2000 from $379.3 million for 1999. In addition, the cost of borrowed funds increased 16 basis to 6.18% during 2000. Net Interest Income. Net interest income for the year ended December 31, 2000 totaled $39.9 million, an increase of $0.6 million from $39.3 million for 1999. The net interest margin declined 25 basis points to 3.24% for the year ended Flushing Financial Corporation and Subsidiaries 16 2001 ANNUAL REPORT December 31, 2000 from 3.49% for the year ended December 31, 1999. The decline in the margin was primarily due to the 32 basis point increase in the average cost of funds to 5.01% for 2000 from 4.69% for 1999, which, however, was partially offset by a 14 basis point improvement in the average yield of interest-earning assets and a $104.8 million increase in the average balance of interest-earning assets. Provision for Loan Losses. There was no provision for loan losses for the year ended December 31, 2000, as compared to $36,000 for the year ended December 31, 1999. The ratio of non-performing loans to gross loans declined to 0.16% at December 31, 2000 from 0.36% at December 31, 1999. The allowance for loan losses as percentage of non-performing loans was 415.32% and 213.29% at December 31, 2000 and 1999, respectively. The ratio of allowance for loan losses to gross loans was 0.68% and 0.77% at December 31, 2000 and 1999, respectively. The Company experienced net charge-offs of $97,000 for the year ended December 31, 2000 compared to net recoveries of $20,000 for the year ended December 31, 1999. Non-Interest Income. Non-interest income for the year ended December 31, 2000 was $3.9 million, the same as that reported for the year ended December 31, 1999. Increases in fee income from mortgage operations and banking services and the quarterly dividends on FHLB-NY stock, along with the income earned on the investment in BOLI, were offset by the net loss on sales of securities and loans. The net loss on sales of securities and loans is primarily related to the loss on the sale of securities in the third quarter of 2000, the proceeds from which were invested in BOLI. Non-Interest Expense. Non-interest expense for the year ended December 31, 2000 totaled $23.8 million, representing an increase of $1.2 million, or 5.1% from the year ended December 31, 1999. The increase was primarily attributed to the operating expenses of the Co-op City branch, opened in November 1999, and the Kissena branch, opened in July 2000. The efficiency ratio was 53.1% for the year ended December 31, 2000 compared to 51.5% for 1999. Income Tax Provisions. Income tax expense for the year ended December 31, 2000 totaled $7.5 million, compared to $7.8 million for the year ended December 31, 1999. This decrease was primarily attributed to the decrease of $0.6 million in income before income taxes. The effective tax rate was 37.7% for the year ended December 31, 2000 compared to 38.0% for the year ended December 31, 1999. LIQUIDITY, REGULATORY CAPITAL AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, borrowings, principal and interest payments on loans, mortgage-backed and other securities, proceeds from sales of securities and, to a lesser extent, proceeds from sales of loans. Deposit flows and mortgage prepayments, however, are greatly influenced by general interest rates, economic conditions and competition. At December 31, 2001, the Bank had an approved overnight line of credit of $50.0 million with the FHLB-NY. In total, as of December 31, 2001, the Bank may borrow up to $443.2 million from the FHLB-NY in Federal Home Loan advances and overnight lines of credit. As of December 31, 2001, the Bank had borrowed $400.3 million in FHLB-NY advances, which limits the funds available under the over-night line of credit to $42.9 million at December 31, 2001. There were no funds outstanding at December 31, 2001 under the overnight line of credit with the FHLB-NY. In addition, the Bank had $113.2 million in repurchase agreements to fund lending and investment opportunities. (See Note 8 of Notes to Consolidated Financial Statements.) The Company's most liquid assets are cash and cash equivalents, which include cash and due from banks, overnight interest-earning deposits and federal funds sold with original maturities of 90 days or less. The level of these assets is dependent on the Company's operating, financing, lending and investing activities during any given period. At December 31, 2001, cash and cash equivalents totaled $38.5 million, an increase of $16.5 million from December 31, 2000. The Company also held marketable securities available for sale with a carrying value of $305.5 million at December 31, 2001. At December 31, 2001, the Company had commitments to extend credit (principally real estate mortgage loans) of $39.0 million and open lines of credit for borrowers (principally construction loan lines of credit) of $12.2 million. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future cash requirements, whereas the amounts of lines of credit may not be indicative of the Company's future cash requirements. The loan commitments generally expire in ninety days, while construction loan lines of credit mature within eighteen Flushing Financial Corporation and Subsidiaries 17 2001 ANNUAL REPORT months. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Company's total interest and operating expenses in 2001 were $59.7 million and $24.5 million, respectively. Certificates of deposit accounts which are scheduled to mature in one year or less as of December 31, 2001 totaled $251.6 million. The market value of the assets of the Company's defined benefit pension plan is $9.2 million at December 31, 2001, which is $0.7 million less than the benefit obligation. The underfunding is due to a decline in the market value of pension plan's investments in 2001. The Company does not anticipate a change in the market value of these assets which would have a significant effect on liquidity, capital resources, or results of operations. During 2001, funds provided by the Company's operating activities amounted to $15.2 million. These funds, together with $130.3 million provided by financing activities and $22.0 million available at the beginning of the year, were utilized to fund net investing activities of $128.9 million. Financing activities were primarily provided by a growth in due to depositors of $136.5 million. Principal payments and calls on loans and securities provided additional funds. The primary investment activity of the Company is the origination of loans, and the purchase of mortgage-backed securities. During 2001, the Bank had loan originations and purchases of $230.3 million. Further, during 2001, the Company purchased $189.9 million of mortgage-backed and other securities. At the time of the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, the Bank was required by the OTS to establish a liquidation account which is reduced as and to the extent that eligible account holders reduce their qualifying deposits. The balance of the liquidation account at December 31, 2001 was $7.2 million. In the unlikely event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account. The Bank is not permitted to declare or pay a dividend or to repurchase any of its capital stock if the effect would be to cause the Bank's regulatory capital to be reduced below the amount required for the liquidation account. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the declaration or payment of dividends to its stockholders, although the source of such dividends could depend upon dividend payments from the Bank. The Holding Company is subject, however, to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of its net assets (the amount by which total assets exceed total liabilities) over its stated capital or, if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year. Regulatory Capital Position. Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards: tangible capital, core capital and total risk-based capital. Such classifications are used by the OTS and other bank regulatory agencies to determine matters ranging from each institution's semi-annual FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. At December 31, 2001 and 2000, the Bank exceeded each of the three OTS capital requirements. (See Note 13 of Notes to Consolidated Financial Statements.) IMPACT OF NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. The Statement changes the approach to how goodwill and other intangible assets are accounted for subsequent to their recognition. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will be amortized over their useful lives. The Statement provides specific guidance on testing intangible assets that will not be amortized for impairment. As of December 31, 2001, the Company has goodwill with a remaining balance of $3.9 million recorded in connection with its purchase of New York Federal Savings Bank in 1997. Amortization expense for each of the years in the three-year period ended December 31, 2001 was $0.4 million. Effective January 1, 2002, the Company is no longer recording this amortization expense, but rather is required, at least annually, to test the remaining goodwill for impairment. The impairment test performed in connection with the adoption of this Statement in January 2002 did not require an adjustment to the carrying value of the goodwill. Flushing Financial Corporation and Subsidiaries 18 2001 ANNUAL REPORT OTHER TRENDS AND CONTINGENCIES A declining interest rate environment marked the year ended December 31, 2001. This presented significant challenges and opportunities in managing our mortgage loan and investment portfolios. We strategically focused our loan origination efforts in 2001 on multi-family and commercial real estate mortgage loans, and on mixed-use property mortgage loans. Mixed-use properties are those which contain both residential dwelling units and commercial units. These types of loans have higher interest rates than traditional one-to-four family residential mortgage loans. As a result, despite the declining interest-rate environment of 2001, we were able to maintain the yield on our loan portfolio. Due to the availability of lower interest rates, many of our mortgagors chose to refinance their loans. We saw a significant increase in our single-family residential mortgagors refinancing with other institutions and realized a $53.7 million increase in due to depositors during the fourth quarter of 2001. Combining the increase in deposits with higher than anticipated loan prepayments, we experienced an increase in our cash position. Rather than investing these funds in low-yielding long-term investment securities, we invested these funds in shorter-term investment securities in order to provide readily available funding for loan originations in 2002. At December 31, 2001, we had loans in process of approximately $90 million. For the year ended December 31, 2001, we experienced an increase in due to depositors of $136.5 million. The higher costing certificate of deposits increased $65.0 million while other lower costing deposits increased $71.5 million. We seek to maintain our deposits at competitive rates. In recent years, we have increased our utilization of FHLB-NY advances and repurchase agreements as alternative sources of funding. During 2001, as a result of the increase in deposits, we increased our borrowed funds by only $4.6 million, the smallest increase in borrowed funds in over five years. As a result of the declining interest rate environment experienced during 2001, and the increase in lower costing deposits, we experienced a decrease in our cost of funds in each quarter during 2001. The cost of funds declined to 4.47% in the fourth quarter of 2001 from 5.19% in the fourth quarter of 2000. As a result of the declining interest-rate environment during 2001, the yield on our total interest-earning assets declined 16 basis points. This was more than offset by an 18 basis point decline in the cost of our total interest-bearing liabilities. This resulted in an increase of two basis points in the net interest spread. However, the net interest rate margin declined four basis points to 3.20% for the year ended December 31, 2001 from 3.24% for the year ended December 31, 2000. The decline in the margin is primarily due to a decline in the amount by which interest-earning assets exceed interest-bearing liabilities. During 2001, average interest-earning assets exceeded average interest-bearing liabilities by $84.2 million, a decline of $9.1 million from the $93.3 million during 2000. This decline is primarily due to the sale of mortgage-backed securities in September 2000 and the reinvestment of the proceeds in BOLI. The net interest margin improved to 3.34% in the fourth quarter of 2001 from 3.09% in the fourth quarter of 2000. It appears the decline in interest rates may have ended in the fourth quarter of 2001. While we are unable to predict the direction of future interest rate changes, it appears interest rates will not go lower. Should interest rates increase during 2002, we could see an increase in the cost of our existing deposit accounts and in obtaining new funds. However, approximately 55% of the Company's certificates of deposit accounts and borrowed funds do not reprice or mature during the next year. As a result, the average cost of our interest-bearing liabilities may not immediately reflect the full effect of an increasing interest-rate environment. Also, in an increasing interest rate environment, mortgage loans and mortgage-backed securities with lower rates do not usually prepay. This could result in our cost of funds increasing more than the yield on our interest-earning assets. The Company's operating results can also be affected by national and local economic conditions. During 2001, the nation's economy slowed and was generally considered to be in a recession. The local area economy was further hurt by the September 11, 2001 attacks on New York City's financial district, in particular, the destruction of the World Trade Center buildings. The Bank does not have a significant amount of mortgages or other loans to borrowers located in the area that was destroyed or damaged in the attacks of September 11, 2001. A slowing economy can result in borrowers defaulting on their loans, or withdrawing their funds on deposit at the Bank to meet their financial obligations. While we have not seen a significant increase in delinquent loans, and have seen an increase in deposits, we can not predict the effect of a slowing economy on the Company's financial condition or operating results. Flushing Financial Corporation and Subsidiaries 19 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ================================================================================
------------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except share data) ASSETS Cash and due from banks ............................................................................... $ 20,008 $ 10,235 Federal funds sold and overnight interest-earning deposits ............................................ 18,500 11,758 Securities available for sale: Mortgage-backed securities .......................................................................... 243,058 238,626 Other securities .................................................................................... 62,481 16,594 Loans ................................................................................................. 1,073,782 993,080 Less: Allowance for loan losses ..................................................................... (6,585) (6,721) -------------------------- Net loans ......................................................................................... 1,067,197 986,359 Interest and dividends receivable ..................................................................... 7,945 7,724 Real estate owned, net ................................................................................ 93 44 Bank premises and equipment, net ...................................................................... 5,565 6,311 Federal Home Loan Bank of New York stock .............................................................. 25,422 24,932 Goodwill .............................................................................................. 3,905 4,272 Other assets .......................................................................................... 33,355 31,237 -------------------------- Total assets .................................................................................... $ 1,487,529 $ 1,338,092 ========================== LIABILITIES Due to depositors: Non-interest-bearing ................................................................................ $ 28,594 $ 20,913 Interest-bearing .................................................................................... 789,923 661,145 Mortgagors' escrow deposits ........................................................................... 10,065 7,753 Borrowed funds, including securities sold under agreements to repurchase of $113,150 and $164,382 at December 31, 2001 and 2000, respectively ................................................ 513,435 508,839 Other liabilities ..................................................................................... 12,125 12,705 -------------------------- Total liabilities ............................................................................... 1,354,142 1,211,355 Commitments and contingencies (Note 14) ............................................................... STOCKHOLDERS' EQUITY Preferred stock, ($0.01 par value, authorized 5,000,000 shares; none issued) .......................... -- -- Common stock, ($0.01 par value, authorized 20,000,000 shares; 13,852,063 and 15,991,638 shares issued at December 31, 2001 and 2000, respectively; 13,487,784 and 13,907,881 shares outstanding at December 31, 2001 and 2000, respectively) ........................................................... 139 114 Additional paid-in capital ............................................................................ 45,280 76,396 Treasury stock, at average cost (364,279 and 2,083,757 shares at December 31, 2001 and 2000, respectively) (5,750) (31,755) Unearned compensation ................................................................................. (7,766) (7,781) Retained earnings ..................................................................................... 99,641 89,896 Accumulated other comprehensive income, net of taxes .................................................. 1,843 (133) -------------------------- Total stockholders' equity ...................................................................... 133,387 126,737 Total liabilities and stockholders' equity ...................................................... $ 1,487,529 $ 1,338,092 ==========================
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 20 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF INCOME ================================================================================
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) INTEREST AND DIVIDEND INCOME Interest and fees on loans ................................................ $ 84,369 $ 76,780 $66,543 Interest and dividends on securities: Interest ................................................................ 15,943 19,214 19,677 Dividends ............................................................... 255 272 238 Other interest income ..................................................... 1,332 675 685 ---------------------------------------------- Total interest and dividend income ...................................... 101,899 96,941 87,143 ---------------------------------------------- INTEREST EXPENSE Deposits .................................................................. 29,711 27,473 24,982 Other interest expense .................................................... 29,991 29,575 22,813 ---------------------------------------------- Total interest expense .................................................. 59,702 57,048 47,795 NET INTEREST INCOME ..................................................... 42,197 39,893 39,348 Provision for loan losses ................................................. -- -- 36 ---------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ..................... 42,197 39,893 39,312 ---------------------------------------------- NON-INTEREST INCOME Other fee income .......................................................... 2,261 2,053 1,916 Net gain (loss) on sales of securities and loans .......................... 321 (651) 252 Other income .............................................................. 3,476 2,456 1,706 ---------------------------------------------- Total non-interest income ............................................... 6,058 3,858 3,874 ---------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits ............................................ 12,679 12,254 11,221 Occupancy and equipment ................................................... 2,368 2,222 1,936 Professional services ..................................................... 2,291 2,245 2,412 Data processing ........................................................... 1,313 1,309 1,285 Depreciation and amortization of premises and equipment ................... 1,065 1,085 1,016 Other operating ........................................................... 4,741 4,682 4,776 ---------------------------------------------- Total non-interest expense .............................................. 24,457 23,797 22,646 ---------------------------------------------- INCOME BEFORE INCOME TAXES ................................................ 23,798 19,954 20,540 ---------------------------------------------- PROVISION FOR INCOME TAXES Federal ................................................................... 7,245 6,195 6,412 State and local ........................................................... 1,624 1,337 1,393 ---------------------------------------------- Total provision for income taxes ........................................ 8,869 7,532 7,805 ---------------------------------------------- NET INCOME ................................................................ $ 14,929 $ 12,422 $12,735 ============================================== Basic earnings per share .................................................. $ 1.22 $ 0.99 $ 0.94 Diluted earnings per share ................................................ $ 1.17 $ 0.97 $ 0.92
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 21 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ================================================================================
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except share data) COMMON STOCK Balance, beginning of year ................................................................ $ 114 $ 114 $ 114 Stock dividend (4,617,270 shares, 2,120,885 shares funded from Treasury) .................. 25 -- -- ------------------------------------- Balance, end of year ...................................................................... $ 139 $ 114 $ 114 ==================================== ADDITIONAL PAID-IN CAPITAL Balance, beginning of year ................................................................ $ 76,396 $ 75,952 $ 75,452 Stock dividend ............................................................................ (33,169) -- -- Award of shares released from Employee Benefit Trust (32,930, 49,480 and 43,227 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ..................... 376 257 253 Restricted stock awards (78,675, 6,900 and 115,125 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... 391 3 8 Stock options exercised (8,250 shares for the year ended December 31, 2001) ............... 5 -- -- Tax benefit of unearned compensation ...................................................... 1,281 184 239 ------------------------------------- Balance, end of year ...................................................................... $ 45,280 $ 76,396 $ 75,952 ==================================== TREASURY STOCK Balance, beginning of year ................................................................ $(31,755) $(25,308) $ (6,949) Purchases of common shares outstanding (639,950, 475,516 and 1,268,900 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................... (10,694) (6,797) (19,844) Stock dividend ............................................................................ 33,142 -- -- Restricted stock award forfeitures (1,400, 1,500 and 5,700 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... (26) (22) (84) Restricted stock awards (52,950, 9,600 and 76,750 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... 821 148 1,177 Repurchase of restricted stock awards (23,757, 23,234 and 19,646 shares for the years ended December 31, 2001, 2000 and 1999, respectively) to satisfy tax obligations ........ (519) (333) (291) Stock options exercised (210,750, 36,600, and 44,662 shares for the years ended December 31, 2001, 2000, and 1999, respectively) ........................................ 3,281 557 683 ------------------------------------- Balance, end of year ...................................................................... $ (5,750) $(31,755) $(25,308) ------------------------------------- UNEARNED COMPENSATION Balance, beginning of year ................................................................ $ (7,781) $ (9,142) $ (9,332) Release of shares from Employee Benefit Trust (76,641, 69,176 and 57,183 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................... 391 354 293 Restricted stock awards (78,675, 14,400 and 115,125 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... (1,212) (145) (1,185) Restricted stock award forfeitures (2,100, 2,250 and 8,550 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ......................................... 26 22 84 Restricted stock award expense ............................................................ 810 1,130 998 ------------------------------------- Balance, end of year ...................................................................... $ (7,766) $ (7,781) $ (9,142) ====================================
Continued Flushing Financial Corporation and Subsidiaries 22 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ================================================================================ (continued)
=================================================================================================================================== For the years ended December 31, 2001 2000 1999 (In thousands, except share data) ----------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year .................................................................. $ 89,896 $ 81,056 $ 71,460 Net income .................................................................................. 14,929 12,422 12,735 Stock options exercised (246,475, 54,900 and 66,993 shares for the years ended December 31, 2001, 2000 and 1999, respectively) ........................................... (1,362) (159) (191) Restricted stock awards (7,500 shares for the year ended December 31, 2000) ................. -- (6) -- Cash dividends declared and paid ............................................................ (3,822) (3,417) (2,948) ----------------------------------- Balance, end of year ........................................................................ $ 99,641 $ 89,896 $ 81,056 =================================== ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES Balance, beginning of year .................................................................. $ (133) $ (4,496) $ 1,342 Change in net unrealized gain (loss), net of taxes of approximately $1,719, $3,434 and $(4,936) for the years ended December 31, 2001, 2000 and 1999, respectively, on securities available for sale .......................................................... 2,035 3,902 (5,794) Less: Reclassification adjustment for losses (gains) included in net income, net of taxes of approximately $35, $(283) and $37 for the years ended December 31, 2001, 2000 and 1999, respectively .................................................................... (59) 461 (44) ----------------------------------- Balance, end of year ........................................................................ $ 1,843 $ (133) $ (4,496) =================================== TOTAL STOCKHOLDERS' EQUITY .................................................................. $ 133,387 $ 126,737 $ 118,176 =================================== COMPREHENSIVE INCOME Net income .................................................................................. $ 14,929 $ 12,422 $ 12,735 Other comprehensive income, net of tax: Unrealized gains (losses) on securities ................................................... 1,976 4,363 (5,838) ----------------------------------- Comprehensive income ........................................................................ $ 16,905 $ 16,785 $ 6,897 ===================================
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 23 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOW ================================================================================
=================================================================================================================================== For the years ended December 31, 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- (In thousands) OPERATING ACTIVITIES Net income ............................................................................. $ 14,929 $ 12,422 $ 12,735 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ............................................................ -- -- 36 Provision for losses on real estate owned ............................................ 4 -- -- Depreciation and amortization of bank premises and equipment ......................... 1,065 1,085 1,016 Amortization of goodwill ............................................................. 367 366 366 Net (gain) loss on sales of securities ............................................... (94) 744 (81) Net gain on sales of loans ........................................................... (227) (93) (171) Net (gain) loss on sales of real estate owned ........................................ (15) (199) 10 Amortization of unearned premium, net of accretion of unearned discount .............. 1,215 1,142 2,157 Amortization of deferred income ...................................................... (309) (544) (1,315) Deferred income tax (benefit) provision .............................................. 132 7 (140) Deferred compensation ................................................................ 469 232 192 Net increase (decrease) in other assets and liabilities ................................ (3,912) (2,709) 645 -------------------------------------- Unearned compensation .................................................................. 1,577 1,741 1,544 -------------------------------------- Net cash provided by operating activities .......................................... 15,201 14,194 16,994 INVESTING ACTIVITIES Purchases of bank premises and equipment ............................................... (319) (1,194) (777) Purchases of Federal Home Loan Bank shares ............................................. (490) (2,340) (5,272) Purchase of Bank Owned Life Insurance .................................................. -- (20,000) -- Purchases of securities available for sale ............................................. (189,858) (28,667) (75,430) Proceeds from sales and calls of securities available for sale ......................... 39,395 28,735 8,547 Proceeds from maturities and prepayments of securities available for sale .............. 102,953 36,130 96,112 Net originations and repayments of loans ............................................... (79,840) (94,312) (108,735) Purchases of loans ..................................................................... (887) (15,783) (15,970) Proceeds from sales of real estate owned ............................................... 106 567 67 -------------------------------------- Net cash used in investing activities .............................................. (128,940) (96,864) (101,458) --------------------------------------
Continued Flushing Financial Corporation and Subsidiaries 24 2001 ANNUAL REPORT ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOW ================================================================================ (continued)
==================================================================================================================================== For the years ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) FINANCING ACTIVITIES Net increase (decrease) in non-interest bearing deposits ........................... $ 7,681 $ 423 $ (7,015) Net increase in interest-bearing deposits .......................................... 128,778 25,717 5,437 Net increase (decrease) in mortgagors' escrow deposits ............................. 2,312 (3,270) 4,460 Net increase (decrease) in short-term borrowed funds ............................... (14,232) (5,768) 20,000 Proceeds from long-term borrowings ................................................. 123,000 159,150 181,000 Repayment of long-term borrowings .................................................. (104,172) (96,374) (84,627) Purchases of treasury stock, net ................................................... (9,291) (6,732) (19,643) Cash dividends paid ................................................................ (3,822) (3,417) (2,948) ----------------------------------------- Net cash provided by financing activities .................................... 130,254 69,729 96,664 Net increase (decrease) in cash and cash equivalents ............................... 16,515 (12,941) 12,200 Cash and cash equivalents, beginning of year ....................................... 21,993 34,934 22,734 ----------------------------------------- Cash and cash equivalents, end of year ....................................... $ 38,508 $ 21,993 $ 34,934 ========================================= SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid ...................................................................... $ 59,937 $ 56,227 $ 49,532 Income taxes paid .................................................................. 7,615 7,849 9,723 Non-cash activities: Loans originated as the result of real estate sales .............................. -- 191 -- Loans transferred through the foreclosure of a related mortgage loan to real estate owned .............................................................. 119 235 374
The accompanying notes are an integral part of these consolidated financial statements. Flushing Financial Corporation and Subsidiaries 25 2001 ANNUAL REPORT ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ For the years ended December 31, 2001, 2000 and 1999 1 NATURE OF OPERATIONS Flushing Financial Corporation (the "Holding Company"), a Delaware business corporation, is a savings and loan holding company organized at the direction of its subsidiary, Flushing Savings Bank, FSB (the "Bank"), in connection with the Bank's conversion from a mutual to capital stock form of organization. The Holding Company and its direct and indirect wholly-owned subsidiaries, the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation and FSB Properties, Incorporated are collectively herein referred to as the "Company." 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) originations and purchases of one-to-four family residential mortgage 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 other small business loans. The Bank conducts its business through ten full-service banking offices, five of which are located in Queens County, two in Nassau County, one in Kings County (Brooklyn), one in Bronx County and one in New York County (Manhattan), New York. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Company follow generally accepted accounting principles ("GAAP") and general practices applicable to the banking industry. The policies which materially affect the determination of the Company's financial position, results of operations and cash flows are summarized below. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Flushing Financial Corporation and its direct and indirect wholly-owned subsidiaries, the Bank, Flushing Preferred Funding Corporation ("FPFC"), Flushing Service Corporation ("FSC") and FSB Properties, Incorporated ("Properties"). FPFC is a real estate investment trust incorporated on November 5, 1997 to hold a portion of the Bank's mortgage loans to facilitate access to capital markets. FSC was formed to market insurance products and mutual funds. Properties is an inactive subsidiary whose purpose was to manage real estate properties and joint ventures. All significant intercompany accounts and transactions have been eliminated in consolidation. 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. Cash and cash equivalents: For the purpose of reporting cash flows, the Company defines cash and due from banks, overnight interest-earning deposits and federal funds sold with original maturities of 90 days or less as cash and cash equivalents. Securities available for sale: Securities are classified as available for sale when management intends to hold the securities for an indefinite period of time or when the securities may be utilized for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Premiums and discounts are amortized or accreted, respectively, using the level-yield method. Realized gains and losses on the sales of securities are determined using the specific identification method. Unrealized gains and losses (other than unrealized losses considered other than temporary) on securities available for sale are excluded from earnings and reported as accumulated other comprehensive income, net of taxes. Loans: Loans are carried at amortized cost. Interest on loans is recognized on the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency of ninety days or more, indicate reasonable doubt as to the timely collectibility of such income. Interest Flushing Financial Corporation and Subsidiaries 26 2001 ANNUAL REPORT previously recognized on non-accrual loans is reversed against interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status after the loan meets certain criteria. Subsequent cash payments received on non-accrual loans that do not meet the criteria are applied first as a reduction of principal until all principal is recovered and then subsequently to interest. The portion of loan origination fees that exceeds the direct costs of underwriting and closing loans is deferred. The deferred fees received in connection with a loan are recognized as an adjustment of the loan's yield over the shorter of the repricing period or the contractual life of the related loan by the interest method, which results in a constant rate of return. The direct costs of underwriting and closing loans that exceed loan origination fees, and premiums on mortgage loans purchased, are deferred and amortized to income over the life of the loans using the level-yield method. Allowance for loan losses: The Company maintains an allowance for loan losses at an amount, which, in management's judgment, is adequate to absorb estimated losses on existing loans that may become uncollectible. Management's judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available. A loan is considered impaired when, based upon current information, the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Interest income on impaired loans is recorded on the cash basis. The Company reviews all non-accrual loans for impairment. Real estate owned: Real estate owned consists of property acquired by foreclosure. These properties are carried at the lower of carrying amount or fair value (which is based on appraised value with certain adjustments) less estimated costs to sell (hereinafter defined as fair value). This determination is made on an individual asset basis. If the fair value is less than the carrying amount, the deficiency is recognized as a valuation allowance. Further decreases to fair value will be recorded in this valuation allowance through a provision for losses on real estate owned. The Company utilizes estimates of fair value to determine the amount of its valuation allowance. Actual values may differ from those estimates. Bank premises and equipment: Bank premises and equipment are stated at cost, less depreciation accumulated on a straight-line basis over the estimated useful lives of the related assets (3 to 40 years). Leasehold improvements are amortized on a straight-line basis over the terms of the related leases or the lives of the assets, whichever is shorter. Federal Home Loan Bank Stock: In connection with the Bank's borrowings from the Federal Home Loan Bank of New York ("FHLB-NY"), the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par. Such shares are redeemed by FHLB-NY at par with reductions in the Bank's borrowing levels. The Bank carries this investment at historical cost. Securities sold under agreements to repurchase: Securities sold under agreements to repurchase are accounted for as collateralized financing and are carried at amounts at which the securities will be subsequently reacquired as specified in the respective agreements. Goodwill: Goodwill, prior to January 1, 2002, was amortized using the straight-line method over fifteen years. The Company had periodically reviewed its goodwill for possible impairment. Upon the adoption of SFAS No. 142 on January 1, 2002, the company no longer amortizes goodwill, but rather performs annual tests for impairment. Stock Compensation Plans: Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," establishes a fair value based method of accounting for employee stock compensation plans. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using Flushing Financial Corporation and Subsidiaries 27 2001 ANNUAL REPORT the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue with the accounting methodology in Opinion No. 25. As a result, proforma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied, are provided in the notes to the consolidated financial statements. Earnings per share: Basic earnings per share for the years ended December 31, 2001, 2000 and 1999 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 portions of restricted stock awards during the period. The shares held in the Company's Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share. Earnings per share has been computed based on the following for the years ended December 31: ================================================================================ 2001 2000 1999 -------------------------------------------------------------------------------- (Amounts in thousands, except per share data) Net income ...................................... $14,929 $12,422 $12,735 Divided by: Weighted average common shares outstanding .......................... 12,267 12,565 13,620 Weighted average common stock equivalents ........................... 504 227 293 --------------------------- Total weighted average common shares outstanding & common stock equivalents .................... 12,771 12,792 13,913 Basic earnings per share ........................ $ 1.22 $ 0.99 $ 0.94 Diluted earnings per share ...................... $ 1.17 $ 0.97 $ 0.92 ================================================================================ 3 LOANS The composition of loans is as follows at December 31: ================================================================================ 2001 2000 -------------------------------------------------------------------------------- (In thousands) One-to-four family residential ......................... $ 461,801 $467,784 Multi-family residential ............................... 369,651 334,307 Commercial real estate ................................. 214,410 167,549 Co-operative apartments ................................ 6,601 8,009 Construction ........................................... 13,807 8,304 Small Business Administration .......................... 3,911 2,844 Consumer and other ..................................... 2,814 3,704 --------------------- Gross loans .......................................... 1,072,995 992,501 Unearned loan fees and deferred costs, net ........................................... 787 579 --------------------- Total loans ........................................ $1,073,782 $993,080 ================================================================================ The total amount of loans on non-accrual status, and loans classified as impaired, at December 31, 2001, 2000 and 1999 was $2,320,000, $1,618,000 and $3,196,000, respectively. The portion of the allowance for loan losses allocated to impaired loans was $541,000 (8.2%), $257,000 (3.8%) and $360,000 (5.3%) at December 31, 2001, 2000 and 1999, respectively. The portion of the impaired loan amount above 100% of the loan-to-value ratio is charged off. The average balance of impaired loans was $2,105,000, $1,692,000 and $4,269,000 for 2001, 2000 and 1999, respectively. The following is a summary of interest foregone on non-accrual loans for the years ended December 31: ================================================================================ 2001 2000 1999 -------------------------------------------------------------------------------- (In thousands) Interest income that would have been recognized had the loans performed in accordance with their original terms ................................. $193 $141 $254 Less: Interest income included in the results of operations ...................... 76 62 46 ------------------------ Foregone interest ................................ $117 $ 79 $208 ================================================================================ Flushing Financial Corporation and Subsidiaries 28 2001 ANNUAL REPORT The following are changes in the allowance for loan losses for the years ended December 31: ------------------------------------------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------- (In thousands) Balance, beginning of year ........... $ 6,721 $ 6,818 $ 6,762 Provision for loan losses ............ -- -- 36 Charge-offs .......................... (149) (99) (133) Recoveries ........................... 13 2 153 ------------------------------------ Balance, end of year ............... $ 6,585 $ 6,721 $ 6,818 ================================================================================ 4 REAL ESTATE OWNED The following are changes in the allowance for losses on real estate owned for the years ended December 31: ================================================================================ 2001 2000 1999 -------------------------------------------------------------------------------- (In thousands) Balance, beginning of year ............................. $-- $ -- $ -- Provision .............................................. 4 -- -- Reduction due to sales of real estate owned ................................... (4) -- -- --------------------- Balance, end of year ............................... $-- $ -- $ -- ================================================================================ 5 BANK PREMISES AND EQUIPMENT, NET Bank premises and equipment are as follows at December 31: ================================================================================ 2001 2000 -------------------------------------------------------------------------------- (In thousands) Land ....................................................... $ 801 $ 801 Building and leasehold improvements ........................ 4,231 4,213 Equipment and furniture .................................... 9,162 8,880 ---------------- Total .................................................. 14,194 13,894 Less: Accumulated depreciation and amortization ............................................. 8,629 7,583 ---------------- Bank premises and equipment, net ....................... $ 5,565 $ 6,311 ================================================================================ 6 DEBT AND EQUITY SECURITIES Investments in equity securities that have readily determinable fair values and all investments in debt securities are classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities available for sale and (3) securities held-to-maturity. The Company did not hold any trading securities or securities held-to-maturity during the years ended December 31, 2001, 2000 and 1999. Securities available for sale are recorded at estimated fair value based on dealer quotations where available. Actual values may differ from estimates provided by outside dealers. Securities classified as held-to-maturity would be stated at cost, adjusted for amortization of premium and accretion of discount using the level-yield method. -------------------------------------------------------------------------------- The amortized cost and estimated fair value of the Company's securities classified as available for sale at December 31, 2001 are as follows:
======================================================================================================================= Gross Gross Amortized Estimated Unrealized Unrealized Cost Fair Value Gains Losses ----------------------------------------------------------------------------------------------------------------------- (In thousands) Corporate debt securities ....................... $ 32,884 $ 32,985 $ 123 $ 22 Public utility debt securities .................. 8,042 8,132 90 -- Mutual funds .................................... 18,899 18,867 32 64 Other ........................................... 1,884 2,497 614 1 ----------------------------------------------------------- Total other securities ........................ 61,709 62,481 859 87 ----------------------------------------------------------- GNMA ............................................ 132,678 134,125 1,560 113 FNMA ............................................ 50,895 51,359 591 127 FHLMC ........................................... 20,552 20,810 273 15 REMIC and CMO ................................... 36,292 36,764 500 28 ----------------------------------------------------------- Total mortgage-backed securities .............. 240,417 243,058 2,924 283 ----------------------------------------------------------- Total securities available for sale ........... $302,126 $305,539 $3,783 $370 =======================================================================================================================
Flushing Financial Corporation and Subsidiaries 29 2001 ANNUAL REPORT The amortized cost and estimated fair value of the Company's securities, classified as available for sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ================================================================================ Amortized Estimated Cost Fair Value -------------------------------------------------------------------------------- (In thousands) Due in one year or less .......................... $ 44,418 $ 45,103 Due after one year through five years ............ 16,385 16,472 Due after five years through ten years ........... 306 306 Due after ten years .............................. 600 600 ----------------------- Total other securities ......................... 61,709 62,481 Mortgage-backed securities ....................... 240,417 243,058 ----------------------- Total securities available for sale ............ $302,126 $305,539 ================================================================================ The amortized cost and estimated fair value of the Company's securities classified as available for sale at December 31, 2000 were as follows:
================================================================================================================================ Gross Gross Amortized Estimated Unrealized Unrealized Cost Fair Value Gains Losses -------------------------------------------------------------------------------------------------------------------------------- (In thousands) U.S. Treasury securities and government agencies ............ $ 5,990 $ 5,932 $ 10 $ 68 Corporate debt securities ................................... 2,835 2,847 12 -- Public utility debt securities .............................. 1,001 1,038 37 -- Mutual funds ................................................ 3,566 3,593 27 -- Other ....................................................... 2,851 3,184 345 12 ---------------------------------------------------------- Total other securities .................................... 16,243 16,594 431 80 ---------------------------------------------------------- GNMA ........................................................ 201,688 200,718 681 1,651 FNMA ........................................................ 9,516 9,725 224 15 FHLMC ....................................................... 8,527 8,612 121 36 REMIC ....................................................... 19,493 19,571 78 -- ---------------------------------------------------------- Total mortgage-backed securities .......................... 239,224 238,626 1,104 1,702 ---------------------------------------------------------- Total securities available for sale ....................... $255,467 $255,220 $1,535 $1,782 ================================================================================================================================
For the year ended December 31, 2001, gross gains of $179,000 and losses of $85,000 were realized on sales of securities available for sale. For the year ended December 31, 2000, gross gains of $205,000 and losses of $949,000 were realized on sales of securities available for sale. For the year ended December 31, 1999, gross gains of $144,000 and losses of $63,000 were realized on sales of securities available for sale. Flushing Financial Corporation and Subsidiaries 30 2001 ANNUAL REPORT 7 DEPOSITS Total deposits at December 31, 2001 and 2000, and the weighted average rate on deposits at December 31, 2001, are as follows:
============================================================================================================================ Weighted Average Rate 2001 2000 2001 ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Interest-bearing deposits: Certificate of deposit accounts ................................ $467,172 $402,187 4.76% Passbook savings accounts ...................................... 195,855 186,207 1.73 Money market accounts .......................................... 93,789 43,136 2.39 NOW accounts ................................................... 33,107 29,615 1.01 -------------------------------------------------- Total interest-bearing deposits .............................. 789,923 661,145 Non-interest bearing deposits: Demand accounts ................................................ 28,594 20,913 ------------------------------- Total due to depositors ...................................... 818,517 682,058 Mortgagors' escrow deposits ...................................... 10,065 7,753 0.53 -------------------------------------------------- Total deposits ............................................... $828,582 $689,811 ============================================================================================================================
The aggregate amount of time deposits with denominations of $100,000 or more was $75,175,000 and $53,659,000 at December 31, 2001 and 2000, respectively. Interest expense on deposits is summarized as follows for the years ended December 31:
=============================================================================================== 2001 2000 1999 ----------------------------------------------------------------------------------------------- (In thousands) Certificate of deposit accounts ................................. $23,062 $21,488 $19,130 Passbook savings accounts ....................................... 3,767 3,931 4,156 Money market accounts ........................................... 2,309 1,438 1,105 NOW accounts .................................................... 504 530 499 --------------------------- Total due to depositors ....................................... 29,642 27,387 24,890 Mortgagors' escrow deposits ..................................... 69 86 92 --------------------------- Total interest expense on deposits ............................ $29,711 $27,473 $24,982 ===============================================================================================
8 BORROWED FUNDS Borrowed funds are summarized as follows at December 31:
==================================================================================================================================== 2001 2000 ------------------------------------------------------------ Weighted Weighted Average Average Amount Rate Amount Rate ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Repurchase agreements--fixed rate: Due in 2001 ............................................. $ -- --% $ 69,232 6.06% Due in 2002 ............................................. 9,250 6.01 9,250 6.01 Due in 2005 ............................................. 10,900 6.36 10,900 6.36 Due in 2006 ............................................. 18,000 4.96 -- -- Due in 2007 ............................................. 50,000 5.64 50,000 5.64 Due in 2009 ............................................. 25,000 5.52 25,000 5.52 ------------------------------------------------------------ Total repurchase agreements ........................... 113,150 5.60 164,382 5.87 ------------------------------------------------------------
Continued Flushing Financial Corporation and Subsidiaries 31 2001 ANNUAL REPORT
==================================================================================================================================== 2001 2000 ---------------------------------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------------------------------------------------------------------------------------------------------------------------------------ Continued (Dollars in thousands) FHLB-NY advances--adjustable rate: Due in 2002 ................................................ $ 25,000 1.95% $ 25,000 6.70% Due in 2003 ................................................ 25,000 5.50 25,000 6.61 Due in 2004 ................................................ 50,000 3.15 -- -- ---------------------------------------------------------- Total FHLB-NY advances--adjustable rate .................. 100,000 3.44 50,000 6.66 FHLB-NY advances--fixed rate: Due in 2001 ................................................ -- -- 49,152 6.40 Due in 2002 ................................................ 76,000 5.93 76,000 5.93 Due in 2003 ................................................ 85,000 6.12 85,000 6.12 Due in 2004 ................................................ 49,000 5.33 19,000 6.55 Due in 2006 ................................................ 25,000 4.99 -- -- Due in 2007 ................................................ 25,000 6.15 25,000 6.15 Due in 2010 ................................................ 40,000 7.30 40,000 7.30 Due in 2011 ................................................ 285 7.34 305 7.34 ---------------------------------------------------------- Total FHLB-NY advances--fixed rate ....................... 300,285 6.01 294,457 6.31 ---------------------------------------------------------- Total FHLB-NY advances ................................... 400,285 5.37 344,457 6.36 ---------------------------------------------------------- Total borrowings ............................................. $513,435 5.42% $508,839 6.20% ===================================================================================================================================
As part of the Company's strategy to finance investment opportunities and manage its cost of funds, the Company enters into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the consolidated financial statements. The securities underlying the agreements were delivered to the broker-dealers or the FHLB-NY who arranged the transaction. The securities remain registered in the name of the Company and are returned upon the maturity of the agreement. The Company retains the right of substitution of collateral throughout the terms of the agreements. All the repurchase agreements are collateralized by mortgage-backed securities. Information relating to these agreements at or for the years ended December 31 is as follows: ------------------------------------------------------------------------- 2001 2000 ------------------------------------------------------------------------- (Dollars in thousands) Book value of collateral ......................... $119,011 $172,533 Estimated fair value of collateral ............... 119,011 172,533 Average balance of outstanding agreements during the year ..................... 156,640 145,575 Maximum balance of outstanding agreements at a month end during the year ...... 182,226 164,382 Average interest rate of outstanding agreements during the year ..................... 5.71% 5.81% ------------------------------------------------------------------------- All of the repurchase agreements due in 2002 have maturities in excess of ninety days. Pursuant to a blanket collateral agreement with the FHLB-NY, advances are secured by all of the Bank's stock in the FHLB-NY, certain qualifying mortgage loans, mortgage-backed and mortgage-related securities, and other securities not otherwise pledged in an amount at least equal to 110% of the advances outstanding. 9 INCOME TAXES Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of FPFC, which files separate Federal, New York State and New York City income tax returns as a real estate investment trust. A deferred tax liability is recognized on all taxable temporary differences and a deferred tax asset is recognized on all deductible temporary differences and operating losses and tax credit carryforwards. A valuation allowance is recognized to reduce the potential deferred tax asset if it is "more likely than not" that all or some portion of that potential deferred tax asset will not be realized. The Company must also take Flushing Financial Corporation and Subsidiaries 32 2001 ANNUAL REPORT into account changes in tax laws or rates when valuing the deferred income tax amounts it carries on its Consolidated Statements of Financial Condition. The Company's annual tax liability for New York State and New York City was the greater of a tax based on "entire net income," "alternative entire net income," "taxable assets" or a minimum tax. For each of the years ended December 31, 2001, 2000 and 1999, the Company's state and city tax was based on "alternative entire net income." Income tax provisions (benefits) are summarized as follows for the years ended December 31:
====================================================================================== 2001 2000 1999 -------------------------------------------------------------------------------------- (In thousands) Federal: Current ............................................ $ 7,350 $ 6,387 $ 6,730 Deferred ........................................... (105) (192) (318) ----------------------------- Total federal tax provision ...................... 7,245 6,195 6,412 State and Local: Current ............................................ 1,387 1,138 1,215 Deferred ........................................... 237 199 178 ----------------------------- Total state and local tax provision .................................. 1,624 1,337 1,393 ----------------------------- Total income tax provision ........................... $ 8,869 $ 7,532 $ 7,805 ======================================================================================
The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 37.3%, 37.7% and 38.0% for the years ended December 31, 2001, 2000 and 1999, respectively. The effective rates differ from the statutory federal income tax rate as follows for the years ended December 31:
============================================================================================================================== 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Taxes at federal statutory rate ................................... $ 8,329 35.0% $ 6,984 35.0% $7,189 35.0 Increase (reduction) in taxes resulting from: State and local income tax, net of Federal income tax benefit ... 1,056 4.5 869 4.3 905 4.4 Other ........................................................... (516) (2.2) (321) (1.6) (289) (1.4) -------------------------------------------------------- Taxes at effective rate ......................................... $ 8,869 37.3% $ 7,532 37.7% $ 7,805 38.0% ==============================================================================================================================
The components of the income taxes attributable to income from operations and changes in equity are as follows for the years ended December 31:
==================================================================================================== 2001 2000 1999 ---------------------------------------------------------------------------------------------------- (In thousands) Income from operations .................... $ 8,869 $ 7,532 $ 7,805 Equity: Change in fair value of securities available for sale .................... (1,684) 3,717 (4,973) Compensation expense for tax purposes in excess of that recognized for financial reporting purposes .................... (1,281) (184) (239) ----------------------------------------------- Total ............................... $ 5,904 $ 11,065 $ 2,593 ====================================================================================================
The components of the net deferred tax asset are as follows at December 31:
================================================================================ 2001 2000 -------------------------------------------------------------------------------- (In thousands) Deferred tax asset: Postretirement benefits .................................... $3,117 $2,978 Unrealized losses on securities available for sale ....................................... -- 114 Other ...................................................... 907 1,026 --------------- Deferred tax asset ..................................... 4,024 4,118 --------------- Deferred tax liabilities: Unrealized gains on securities available for sale ................................................. 1,570 -- Allowance for loan losses .................................. 545 270 Depreciation ............................................... 192 306 Other ...................................................... 9 18 --------------- Deferred tax liability ................................. 2,316 594 Net deferred tax asset included in other assets .............. $1,708 $3,524 ================================================================================
Flushing Financial Corporation and Subsidiaries 33 2001 ANNUAL REPORT The Company has recorded a net deferred tax asset of $1,708,000. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three years. In management's opinion, in view of the Company's previous, current and projected future earnings trend, it is more likely than not that the net deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the net deferred tax asset at December 31, 2001. 10 BENEFIT PLANS Defined Contribution Plans: The Company maintains a profit-sharing plan and the Bank maintains a 401(k) plan. Both plans are tax-qualified defined contribution plans which cover substantially all employees. Annual contributions are at the discretion of the Company's Board of Directors, but not to exceed the maximum amount allowable under the Internal Revenue Code. Currently, annual matching contributions under the Bank's 401(k) plan equal fifty percent of the employee's contributions, up to a maximum of three percent of the employee's compensation. Contributions to the profit-sharing plan are determined at the end of each year. Contributions by the Bank into the 401(k) plan vest 20% per year over a five-year period beginning after the employee has completed one year of service. Contributions into the profit-sharing plan vest 20% per year over the employee's first five years of service. Compensation expense recorded by the Company for these plans amounted to $619,000, $581,000 and $534,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Employee Benefit Trust: An Employee Benefit Trust ("EBT") has been established to assist the Company in funding its benefit plan obligations. In connection with the Bank's conversion, the EBT borrowed $7,928,000 from the Company and used $7,000 of cash received from the Bank to purchase 1,552,500 shares of the common stock of the Company. The loan will be repaid principally from the Company's discretionary contributions to the EBT and dividend payments received on common stock held by the EBT, or may be forgiven by the Company, over a period of 30 years. At December 31, 2001 the loan had an outstanding balance of $5,913,000, bearing a fixed interest rate of 6.22% per annum. The loan obligation of the EBT is considered unearned compensation and, as such, is recorded as a reduction of the Company's stockholders' equity. Both the loan obligation and the unearned compensation are reduced by the amount of loan repayments made by the EBT or forgiven by the Company. Shares purchased with the loan proceeds are held in a suspense account for contribution to specified benefit plans as the loan is repaid or forgiven. Shares released from the suspense account are used solely for funding matching contributions under the Bank's 401(k) plan and contributions to the Company's profit-sharing plan. Since annual contributions are discretionary with the Company or dependent upon employee contributions, compensation payable under the EBT cannot be estimated. For the years ended December 31, 2001, 2000 and 1999, the Company funded $545,000, $511,000 and $475,000, respectively, of employer contributions to the 401(k) and profit sharing plans from the EBT. The shares held in the suspense account are pledged as collateral and are reported as unallocated EBT shares in stockholders' equity. As shares are released from the suspense account, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The EBT shares are as follows at December 31: -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- Shares owned by Employee Benefit Trust, beginning balance ................. 1,279,167 1,328,647 Shares released and allocated .............. 32,930 49,480 ----------------------------- Shares owned by Employee Benefit Trust, ending balance .................... 1,246,237 1,279,167 ----------------------------- Market value of unallocated shares ......... $22,183,019 $15,296,705 ================================================================================ Restricted Stock Plan: The 1996 Restricted Stock Incentive Plan ("Restricted Stock Plan") became effective on May 21, 1996 after adoption by the Board of Directors and approval by shareholders. The aggregate number of shares of common stock which may be issued under the Restricted Stock Plan, as amended, may not exceed 817,125 shares to employees, and may not exceed Flushing Financial Corporation and Subsidiaries 34 2001 ANNUAL REPORT 262,875 shares to Outside Directors, for a total of 1,080,000 shares. Lapsed, forfeited or canceled awards and shares withheld from an award to satisfy tax obligations will not count against these limits, and will be available for subsequent grants. The shares distributed under the Restricted Stock Plan may be shares held in treasury or authorized but unissued shares. The following table summarizes certain activity for the Restricted Stock Plan, after giving effect to the three-for-two common stock split distributed in the form of a stock dividend on August 30, 2001, for the years ended December 31: ------------------------------------------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------- Shares available for future Restricted Stock Awards at beginning of year .................. 238,203 215,502 292,608 Shares authorized for Restricted Stock Awards ....................... 135,000 -- -- Restricted Stock Awards .............. (78,675) (14,400) (115,125) Restricted shares repurchased to satisfy tax obligations .............. 35,221 34,851 29,469 Forfeitures .......................... 2,100 2,250 8,550 ----------------------------------- Shares available for future Restricted Stock Awards at end of year ..................... 331,849 238,203 215,502 =============================================================================== The Board of Directors has discretion to determine the vesting period of all grants. All grants that have been awarded to employees vest 20% per year over a five-year period. Initial grants to Outside Directors vest 20% per year over a five-year period, while subsequent annual grants to Outside Directors vest one-third per year over a three-year period. All grants have full vesting in the event of death, disability, retirement or a change in control. Total restricted stock award expense in 2001, 2000 and 1999 was $810,000, $1,130,000 and $998,000, respectively. Stock Option Plan: The 1996 Stock Option Incentive Plan ("Stock Option Plan") became effective on May 21, 1996 after adoption by the Board of Directors and approval by shareholders. The Stock Option Plan provides for the grant of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code, nonstatutory stock options, and limited stock appreciation rights granted in tandem with such options. The aggregate number of shares of common stock which may be issued under the Stock Option Plan, as amended, with respect to options granted to employees may not exceed 2,115,937 shares, and with respect to options granted to Outside Directors may not exceed 814,687 shares, for a total of 2,930,624 shares. Lapsed, forfeited or canceled options will not count against these limits and will be available for subsequent grants. However, the cancellation of an option upon exercise of a related stock appreciation right will count against these limits. Options with respect to more than 168,750 shares of common stock may not be granted to any employee in any calendar year. The shares distributed under the Stock Option Plan may be shares held in treasury or authorized but unissued shares. The Board of Directors has discretion to determine the vesting period of all grants. All grants that have been awarded to employees vest 20% per year over a five-year period. Initial grants to Outside Directors vest 20% per year over a five-year period, while subsequent annual grants to Outside Directors vest one-third per year over a three-year period. All grants have full vesting in the event of death, disability, retirement or a change in control. The following table summarizes certain information regarding the Stock Option Plan after giving effect to the three-for-two common stock split distributed in the form of a stock dividend on August 30, 2001. ---------------------------------------------------------------------------- Weighted Shares Average Underlying Exercise Options Price ---------------------------------------------------------------------------- Balance outstanding December 31, 1998 ......... 1,761,614 $ 7.47 Granted ....................................... 230,250 $10.29 Exercised ..................................... (66,993) $ 7.35 Forfeited ..................................... (22,050) $ 9.79 ------------------------ Balance outstanding December 31, 1999 ......... 1,902,821 $ 7.79 Granted ....................................... 28,800 $10.05 Exercised ..................................... (54,900) $ 7.22 Forfeited ..................................... (36,900) $ 9.71 ------------------------ Balance outstanding December 31, 2000 ......... 1,839,821 $ 7.80 Granted ....................................... 348,600 $15.01 Exercised ..................................... (254,725) $ 7.56 Forfeited ..................................... (5,700) $13.40 ------------------------ Balance Outstanding December 31, 2001 ......... 1,927,996 $ 9.12 Shares available for future stock option awards at December 31, 2001 ................. 557,216 ========================================================================== Flushing Financial Corporation and Subsidiaries 35 2001 ANNUAL REPORT The following table summarizes information about the Stock Option Plan at December 31, 2001:
========================================================================================================================== Options Outstanding Options Exercisable --------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Number Average Number Average Outstanding at Remaining Exercisable at Exercise Exercise Prices 12/31/01 Contractual Life 12/31/01 Price -------------------------------------------------------------------------------------------------------------------------- $ 7.22........................................................ 1,216,846 4.4 Years 1,216,846 $ 7.22 $ 8.00-$11.00.................................................... 351,600 7.1 Years 170,010 $ 9.50 $11.01-$14.00.................................................... 103,950 8.7 Years 6,750 $12.22 $14.01-$17.00.................................................... 255,600 9.5 Years -- -- ------------------------------------------------------ $ 7.22=$17.00.................................................... 1,927,996 5.8 Years 1,393,606 $ 7.52 ==========================================================================================================================
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 cost has been recognized for options granted under the Stock Option Plan. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value at the grant dates, consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been as indicated in the table below. However, the present impact of SFAS No. 123 may not be representative of the effect on income in future years because the options vest over several years and additional option grants may be made each year. ================================================================================ 2001 2000 1999 -------------------------------------------------------------------------------- (Dollars in thousands, except per share data) Net income: As reported ..................... $ 14,929 $ 12,422 $ 12,735 Pro forma ....................... $ 14,219 $ 11,655 $ 12,015 Diluted earnings per share: As reported ..................... $ 1.17 $ 0.97 $ 0.92 Pro forma ....................... $ 1.11 $ 0.91 $ 0.86 ================================================================================ The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants made in 2001, 2000 and 1999 are as follows:
=============================================================================== 2001 Grants 2000 Grants 1999 Grant ------------------------------------------------------------------------------- Dividend yield ................... 2.13% 2.65% 2.07% Expected volatility .............. 27.49% 24.37% 25.85% Risk-free interest rate .......... 5.27% 6.08% 6.01% Expected option life ............. 7 Years 7 Years 7 Years ===============================================================================
Pension Plans: The Bank has a defined benefit pension plan covering substantially all of its employees (the "Retirement Plan"). The benefits are based on years of service and the employee's compensation during the three consecutive years out of the final ten years of service that produces the highest average. The Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for the benefits attributed to service to date but also for those expected to be earned in the future. The Bank's Retirement Plan invests in diversified equity and fixed-income funds, which are independently managed by a third party. The components of the net pension expense are as follows for the years ended December 31:
=============================================================================== 2001 2000 1999 ------------------------------------------------------------------------------- (In thousands) Service cost .................................. $ 396 $ 350 $ 338 Interest cost ................................. 683 621 547 Amortization of past service liability ........ (24) (25) (24) Amortization of unrecognized gain ............. (116) (48) -- Return on plan assets ......................... (986) (823) (730) --------------------------- Net pension expense (benefit) ............... $ (47) $ 75 $ 131 ===============================================================================
Flushing Financial Corporation and Subsidiaries 36 2001 ANNUAL REPORT The following table sets forth, for the Retirement Plan, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
=================================================================================================== 2001 2000 1999 --------------------------------------------------------------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of year ................................................... $ 8,671 $ 7,998 $ 8,198 Service cost ................................................ 396 350 338 Interest cost ............................................... 683 621 547 Actuarial (gain) loss ....................................... 594 94 (708) Benefits paid ............................................... (417) (392) (377) Plan amendments ............................................. -- -- -- --------------------------------- Benefit obligation at end of year ............................................... 9,927 8,671 7,998 Change in plan assets: Market value of assets at beginning of year ......................................... 11,155 9,871 8,717 Actual return on plan assets ................................ (1,523) 1,676 1,531 Employer contributions ...................................... -- -- -- Benefits paid ............................................... (417) (392) (377) --------------------------------- Market value of plan assets at end of year ................................. 9,215 11,155 9,871 Funded status ................................................. (712) 2,484 1,873 Unrecognized net loss (gain) from past experience different from that assumed and effects of changes in assumptions ...................................... 805 (2,414) (1,703) Prior service cost not yet recognized in periodic pension cost ................................................ (62) (86) (111) --------------------------------- Prepaid (accrued) pension cost included in other assets/liabilities .......................................... $ 31 $ (16) $ 59 =================================================================================================== Assumptions used to develop periodic pension amounts were: =================================================================================================== 2001 2000 1999 --------------------------------------------------------------------------------------------------- Weighted average discount rate ................................ 7.25% 8.00% 7.75% Rate of increase in future compensation levels ......................................... 4.50% 5.50% 5.00% Expected long-term rate of return on assets ............................................ 9.00% 9.00% 8.50% ===================================================================================================
The Bank has an Outside Director Retirement Plan (the "Directors' Plan"), which provides benefits to each outside director who has at least five years of service as an outside director (including service as a director or trustee of the Bank or any predecessor) and whose years of service as an outside director plus age equal or exceed 55. Benefits are also payable to an outside director whose status as an outside director terminates because of death or disability or who is an outside director upon a change of control (as defined in the Directors' Plan). An eligible director will be paid an annual retirement benefit equal to the last annual retainer paid, plus fees paid to such director for attendance at Board meetings during the twelve-month period prior to retirement. Such benefit will be paid in equal monthly installments for the lesser of the number of months such director served as an outside director or 120 months. In the event of a termination of Board service due to a change of control, an outside director who has completed at least two years of service as an outside director will receive a cash lump sum payment equal to 120 months of benefit, and an outside director with less than two years service will receive a cash lump sum payment equal to a number of months of benefit equal to the number of months of his service as an outside director. In the event of the director's death, the surviving spouse will receive the equivalent benefit. No benefits will be payable to a director who is removed for cause. The Holding Company has guaranteed the payment of benefits under the Directors' Plan. Upon adopting the Directors' Plan, the Bank elected to immediately recognize the effect of adopting the Directors' Plan. Subsequent plan amendments are amortized as a past service liability. The components of the net pension expense for the Directors' Plan are as follows for the years ended December 31:
============================================================================== 2001 2000 1999 ------------------------------------------------------------------------------ (In thousands) Service cost ............................................ $ 27 $ 20 $ 20 Interest cost ........................................... 11 8 -- Amortization of past service liability .................. 119 109 109 ------------------ Net pension expense ................................... $157 $137 $129 ==============================================================================
The following table sets forth, for the Directors' Plan, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
=================================================================================================================== 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of year .................................. $ 2,043 $ 1,913 $ 1,953 Service cost ............................... 27 20 20 Interest cost .............................. 11 8 -- Actuarial (gain) loss ...................... 465 (24) (38) Benefits paid .............................. (38) (22) (22) Plan amendments ............................ -- 148 -- ----------------------------------------------------- Benefit obligation at end of year .......................... 2,508 2,043 1,913 Change in plan assets: Market value of assets at beginning of year ........................ -- -- -- Employer contributions ..................... 38 22 22 Benefits paid .............................. (38) (22) (22) ----------------------------------------------------- Market value of assets at end of year .......................... -- -- -- ----------------------------------------------------- Funded status ................................ (2,508) (2,043) (1,913) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions ............................. 489 15 39 Prior service cost not yet recognized in periodic pension cost ............................... 782 901 862 ----------------------------------------------------- Accrued pension cost included in other liabilities .......................... $(1,237) $(1,127) $(1,012) ==================================================================================================================
For the years ended December 31, 2001, 2000 and 1999, the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25%, 8.00% and 7.75%, respectively. The level of future retainers and meeting fees was projected to remain constant. 11 POSTRETIREMENT BENEFITS OTHER THAN PENSION The Company sponsors two postretirement benefit plans that cover all retirees who were full-time permanent employees with at least five years of service and their spouses. One plan provides medical benefits through a fifty-percent cost sharing arrangement. Effective January 1, 2000, the spouses of future retirees will be required to pay one hundred percent of the premiums for their coverage. The other plan provides life insurance benefits and is noncontributory. Under these programs, eligible retirees receive lifetime medical and life insurance coverage for themselves and lifetime medical coverage for their spouses. The Company reserves the right to amend or terminate these plans at its discretion. Comprehensive medical plan benefits equal the lesser of the normal plan benefit or the total amount not paid by Medicare. Life insurance benefits for retirees are based on annual compensation and age at retirement. As of December 31, 2001, the Bank has not funded these plans. The following table sets forth for the postretirement plans, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
=============================================================================================================== 2001 2000 1999 --------------------------------------------------------------------------------------------------------------- (In thousands) Change in benefit obligation: Benefit obligation at beginning of year ............................... $ 2,227 $ 2,407 $ 3,007 Service cost ............................ 79 82 136 Actuarial gain .......................... (222) (69) (853) Plan amendments ......................... -- (265) -- Interest cost ........................... 174 171 199 Benefits paid ........................... (94) (99) (82) ----------------------------------------------------- Benefit obligation at end of year ....................... 2,164 2,227 2,407 Change in plan assets: Market value of assets at beginning of year ..................... -- -- -- Employer contributions .................. 94 99 82 Benefits paid ........................... (94) (99) (82) ----------------------------------------------------- Market value of assets at end of year .................... -- -- -- ----------------------------------------------------- Funded status ............................. (2,164) (2,227) (2,407) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions .................. (13) 208 282 Prior service cost not yet recognized in periodic expense ................................. (527) (658) (517) ----------------------------------------------------- Accrued postretirement cost included in other liabilities ....................... $(2,704) $(2,677) $(2,642) ===============================================================================================================
Flushing Financial Corporation and Subsidiaries 38 2001 ANNUAL REPORT Assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligations at December 31 are as follows:
================================================================================================================= 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------- Rate of return on plan assets .......................... NA NA NA Discount rate .......................................... 7.25% 8.00% 7.75% Rate of increase in health care costs: Initial .............................................. 9.00% 6.50% 6.50% Ultimate (year 2007) ................................. 4.50% 5.00% 5.00% Annual rate of salary increases ........................ NA NA NA =================================================================================================================
The health care cost trend rate assumptions have a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 2001 by $179,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for the year then ended by $23,000. The resulting net periodic postretirement benefit expense consisted of the following components for the years ended December 31: =============================================================================== 2001 2000 1999 ------------------------------------------------------------------------------- (In thousands) Service cost .................................. $ 79 $ 82 $ 136 Interest cost ................................. 174 171 199 Amortization of unrecognized loss ............. -- 4 68 Amortization of past service liability ........ (131) (124) (102) --------------------------- Net postretirement benefit expense .......... $ 122 $ 133 $ 301 =============================================================================== 12 STOCKHOLDERS' EQUITY Dividend Restrictions: In connection with the Bank's conversion from mutual to stock form in November 1995, a special liquidation account was established at the time of conversion, in accordance with the requirements of the Office of Thrift Supervision ("OTS"), which was equal to its capital as of June 30, 1995. The liquidation account is reduced as and to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in deposits do not restore an eligible account holder's interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. As of December 31, 2001, the Bank's liquidation account was $7.2 million and was presented within retained earnings. In addition to the restriction described above, Federal banking regulations place certain restrictions on dividends paid by the Bank to the Holding Company. The total amount of dividends which may be paid at any date is generally limited to the net income of the Bank for the current year and prior two years, less any dividends previously paid from those earnings. As of December 31, 2001, the Bank had paid all eligible retained earnings to the Holding Company in the form of cash dividends. In addition, dividends paid by the Bank to the Holding Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. Stock Split: The Company declared a three-for-two stock split which was distributed on August 30, 2001 in the form of a stock dividend. This dividend was not paid on shares held in treasury. Shares issued and outstanding for prior years have been restated to reflect this three-for-two stock split. Treasury share amounts have not been restated for prior years, or the current year prior to the record date of the three-for-two stock split (August 10, 2001), as the stock dividend was not paid on these shares. Treasury Stock Transactions: During 2001, the Holding Company repurchased 639,950 shares of its outstanding common stock under its stock repurchase programs. Also during 2001, 2,120,885 shares of Treasury Stock were used to pay the stock dividend discussed above. At December 31, 2001, the Company had 364,279 shares of Treasury Stock which, among other things, could be used to award grants under the Company's Restricted Stock Plan and to satisfy obligations under the Stock Option Plan. Treasury stock is being accounted for using the average cost method. 13 Regulatory Capital The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") imposes a number of mandatory supervisory measures on banks and thrift institutions. Among Flushing Financial Corporation and Subsidiaries 39 2001 ANNUAL REPORT other matters, FDICIA established five capital zones or classifications (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Such classifications are used by the OTS and other bank regulatory agencies to determine matters ranging from each institution's semi-annual FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. As of December 31, 2001, the Bank continues to be categorized as "well-capitalized" by the OTS under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. Set forth below is a summary of the Bank's compliance with OTS capital standards.
===================================================================================================================== December 31, 2001 December 31, 2000 ---------------------------------------------------------------------------------------------------------------------- Percent Percent Amount of Assets Amount of Assets ---------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Tangible capital: Capital level ..................... $107,811 7.32% $106,191 8.02% Requirement ....................... 22,081 1.50% 19,858 1.50% Excess ............................ $ 85,730 5.82% $ 86,333 6.52% Core (Tier I) capital: Capital level ..................... $107,811 7.32% $106,191 8.02% Requirement ....................... 44,162 3.00% 39,715 3.00% Excess ............................ $ 63,649 4.32% $ 66,476 5.02% Total risk-based capital: Capital level ..................... $114,396 13.58% $112,912 15.77% Requirement ....................... 67,395 8.00% 57,290 8.00% Excess ............................ $ 47,001 5.58% $ 55,622 7.77% ====================================================================================================================
14 Commitments and Contingencies Commitments: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and lines of credit. The instruments involve, to varying degrees, elements of credit and market risks in excess of the amount recognized in the consolidated financial statements. The Company's exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for loan commitments and lines of credit is represented by the contractual amounts of these instruments. Commitments to extend credit (principally real estate mortgages) and lines of credit (principally construction loan lines of credit) amounted to approximately $38,971,000 and $12,187,000, respectively, at December 31, 2001. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future cash requirements, whereas the amounts of lines of credit may not be indicative of the Company's future cash requirements. The loan commitments generally expire in ninety days, while construction loan lines of credit mature within eighteen months. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. As of December 31, 2001, commitments to extend credit for fixed-rate real estate mortgages amounted to $7.6 million, with an average interest rate of 7.77%. Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and require payment of a fee. The Company evaluates each customer's credit worthiness on a case by case basis. Collateral held consists primarily of real estate. Flushing Financial Corporation and Subsidiaries 40 2001 ANNUAL REPORT The Company's minimum annual rental payments for Bank premises due under non-cancelable leases are as follows: ===================================================================== Minimum Rental --------------------------------------------------------------------- Years ending December 31: (In thousands) 2002.......................................... $ 922 2003.......................................... 924 2004.......................................... 919 2005.......................................... 891 2006.......................................... 880 Thereafter.................................... 2,264 ------- Total minimum payments required............. $6,800 ================================================================== The leases have escalation clauses for operating expenses and real estate taxes. Certain lease agreements provide for increases in rental payments based upon increases in the consumer price index. Rent expense under these leases for the years ended December 31, 2001, 2000 and 1999 was approximately $715,000, $643,000 and $488,000, respectively. Contingencies: The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsels, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations or cash flows. 15 CONCENTRATION OF CREDIT RISK The Company's lending is concentrated in one-to-four family residential real estate, multi-family residential real estate and commercial real estate loans to borrowers in the metropolitan New York area. The Company evaluates each customer's credit worthiness on a case-by-case basis under the Company's established underwriting policies. The collateral obtained by the Company generally consists of first liens on one-to-four family and multi-family residential real estate and commercial income producing real estate. 16 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires that the Company disclose the estimated fair values for certain of its financial instruments. Financial instruments include items such as loans, deposits, securities, commitments to lend and other items as defined in SFAS No. 107. Fair value estimates are supposed to represent estimates of the amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in a forced liquidation. However, in many instances current exchange prices are not available for many of the Company's financial instruments, since no active market generally exists for a significant portion of the Bank's financial instruments. Accordingly, the Company uses other valuation techniques to estimate fair values of its financial instruments such as discounted cash flow methodologies and other methods allowable under SFAS No. 107. Fair value estimates are subjective in nature and are dependent on a number of significant assumptions based on management's judgment regarding future expected loss experience, current economic condition, risk characteristics of various financial instruments, and other factors. In addition, SFAS No. 107 allows a wide range of valuation techniques; therefore, it may be difficult to compare the Company's fair value information to independent markets or to other financial institutions' fair value information. The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale. SFAS No. 107 does not require disclosure about fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes, foreclosed properties and equity. Further, SFAS No. 107 does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying "market" or franchise value of the Company. The estimated fair value of each material class of financial instruments at December 31, 2001 and 2000 and the Flushing Financial Corporation and Subsidiaries 41 2001 ANNUAL REPORT related methods and assumptions used to estimate fair value are as follows: Cash and due from banks, overnight interest-earning deposits and federal funds sold, FHLB-NY stock, interest and dividends receivable, mortgagors' escrow deposits and other liabilities The carrying amounts are a reasonable estimate of fair value. Securities available for sale The estimated fair values of securities available for sale are contained in Note 6 of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. Loans The estimated fair value of loans, with carrying amounts of $1,067,197,000 and $986,359,000 at December 31, 2001 and 2000, respectively, was $1,092,221,000 and $996,042,000 at December 31, 2001 and 2000, respectively. Fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. For non-accruing loans, fair value is generally estimated by discounting management's estimate of future cash flows with a discount rate commensurate with the risk associated with such assets. Due to depositors The estimated fair value of due to depositors, with carrying amounts of $818,517,000 and $682,058,000 at December 31, 2001 and 2000, respectively, was $831,808,000 and $685,748,000 at December 31, 2001 and 2000, respectively. The fair values of demand, passbook savings, NOW and money market deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e., their carrying value). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities. Borrowed funds The estimated fair value of borrowed funds, with carrying amounts of $513,435,000 and $508,839,000 at December 31, 2001 and 2000, respectively, was $527,398,000 and $513,075,000 at December 31, 2001 and 2000, respectively. The fair value of borrowed funds is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements. Other financial instruments The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable). At December 31, 2001 and 2000, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material. 17 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. The Statement changes the approach to how goodwill and other intangible assets are accounted for subsequent to their recognition. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will be amortized over their useful lives. The Statement provides specific guidance on testing intangible assets that will not be amortized for impairment. As of December 31, 2001, the Company has goodwill with a remaining balance of $3.9 million recorded in connection with its purchase of New York Federal Savings Bank in 1997. Amortization expense for each of the years in the three-year period ended December 31, 2001 was $0.4 million. Effective January 1, 2002, the Company is no longer recording this amortization expense, but rather is required, at least annually, to test the remaining goodwill for impairment. The impairment test performed in connection with the adoption of this Statement in January 2002 did not require an adjustment to the carrying value of the goodwill. Flushing Financial Corporation and Subsidiaries 42 2001 ANNUAL REPORT 18 QUARTERLY FINANCIAL DATA (UNAUDITED) Selected unaudited quarterly financial data for the fiscal years ended December 31, 2001 and 2000 is presented below:
==================================================================================================================================== 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ 4th 3rd 2nd 1st 4th 3rd 2nd 1st ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) Quarterly operating data: Interest income .................................. $26,038 $25,583 $25,227 $25,051 $24,702 $24,810 $24,153 $23,276 Interest expense ................................. 14,501 15,042 15,079 15,080 15,099 14,863 13,966 13,120 ----------------------------------------------------------------------------- Net interest income ............................ 11,537 10,541 10,148 9,971 9,603 9,947 10,187 10,156 Provision for loan losses ........................ -- -- -- -- -- -- -- -- Other operating income ........................... 1,417 1,300 1,618 1,723 1,553 264 965 1,076 Other expense .................................... 6,567 5,939 5,984 5,967 6,086 6,013 5,950 5,748 ----------------------------------------------------------------------------- Income before income tax expense ............... 6,387 5,902 5,782 5,727 5,070 4,198 5,202 5,484 Income tax expense ............................... 2,427 2,184 2,140 2,118 1,875 1,596 1,977 2,084 ----------------------------------------------------------------------------- Net income ..................................... $ 3,960 $ 3,718 $ 3,642 $ 3,609 $ 3,195 $ 2,602 $ 3,225 $ 3,400 ============================================================================= Basic earnings per share ......................... $ 0.33 $ 0.30 $ 0.30 $ 0.29 $ 0.26 $ 0.21 $ 0.26 $ 0.27 Diluted earnings per share ....................... $ 0.31 $ 0.29 $ 0.28 $ 0.28 $ 0.25 $ 0.20 $ 0.25 $ 0.26 Dividends per share .............................. $ 0.080 $ 0.080 $ 0.073 $ 0.073 $ 0.067 $ 0.067 $ 0.067 $ 0.067 Average common shares outstanding for: Basic earnings per share ....................... 12,107 12,316 12,284 12,364 12,407 12,505 12,584 12,768 Diluted earnings per share ..................... 12,700 12,882 12,832 12,800 12,677 12,774 12,798 12,957 ====================================================================================================================================
19 PARENT COMPANY-ONLY FINANCIAL INFORMATION Earnings of the Bank are recognized by the Holding Company using the equity method of accounting. Accordingly, earnings of the Bank are recorded as increases in the Holding Company's investment, any dividends would reduce the Holding Company's investment in the Bank, and any changes in the Bank's unrealized gain or loss on securities available for sale, net of taxes, would increase or decrease, respectively, the Holding Company's investment in the Bank. The condensed financial statements for the Holding Company at and for the years ended December 31, 2001 and 2000 are presented below: =============================================================================== 2001 2000 ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF (Dollars in thousands) FINANCIAL CONDITION Assets: Cash and due from banks .............................. $ 12,679 $ 8,757 Federal funds sold and overnight interest-earning deposit ........................... 924 758 Securities available for sale: Mortgage-backed securities ......................... -- -- Other securities ................................... 6,263 6,776 Interest receivable .................................. 17 33 Investment in Bank ................................... 113,232 110,135 Other assets ......................................... 600 519 ------------------- Total assets ..................................... $133,715 $126,978 ================================================================================ ================================================================================ 2001 2000 Continued (Dollars in thousands) Liabilities: Other liabilities .............................. $ 328 $ 241 ------------------------------------------------------------------------------- Total liabilities .......................... 328 241 Stockholders' equity: Common stock ................................... 139 114 Additional paid-in capital ..................... 45,280 76,396 Unearned compensation .......................... (7,766) (7,781) Treasury stock ................................. (5,750) (31,755) Retained earnings .............................. 99,641 89,896 Accumulated other comprehensive income, net of taxes ......................... 1,843 (133) ------------------------ Total equity ............................... 133,387 126,737 Total liabilities and equity ............... $ 133,715 $ 126,978 ================================================================================ CONDENSED STATEMENTS OF INCOME Dividends from the Bank .......................... $ 15,000 $ 9,500 Interest income .................................. 438 472 Non-interest income .............................. -- (25) Other operating expenses ......................... (609) (580) ------------------------ Income before taxes and equity in undistributed earnings of subsidiary ......... 14,829 9,367 Income tax benefit ............................... 127 124 ------------------------ Income before equity in undistributed earnings of subsidiary ....................... 14,956 9,491 Excess of dividends over current year earnings .................................. (27) -- Equity in undistributed earnings of the Bank ..... -- 2,931 ------------------------ Net income ................................. $ 14,929 $ 12,422 =============================================================================== Flushing Financial Corporation and Subsidiaries 43 2001 ANNUAL REPORT =============================================================================== 2001 2000 (Dollars in thousands) ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOW Operating activities: Net income ....................................... $ 14,929 $ 12,422 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of the Bank ................................... 27 (2,931) Net decrease in operating assets and liabilities ............................ (91) (419) Amortization of unearned premium, net of accretion of unearned discount ................................... 8 17 Net loss on sales of securities .............. -- 25 Unearned compensation, net ................... 1,577 1,741 ---------------------- Net cash provided by operating activities ............................. 16,450 10,855 ---------------------- Continued ================================================================================ 2001 2000 -------------------------------------------------------------------------------- Continued (Dollars in thousands) Investing activities: Purchases of securities available for sale ....... $ (709) $ (3,566) Proceeds from sales and calls of securities available for sale .................. 1,460 3,740 ---------------------- Net cash provided by investing activities ............................. 751 174 ---------------------- Financing activities: Purchase of treasury stock ....................... (9,289) (6,732) Cash dividends paid .............................. (3,824) (3,417) ---------------------- Net cash used in financing activities ............................. (13,113) (10,149) Net increase in cash and cash equivalents .......... 4,088 880 Cash and cash equivalents, beginning of year .......................................... 9,515 8,635 ---------------------- Cash and cash equivalents, end of year ............. $ 13,603 $ 9,515 =============================================================================== ================================================================================ REPORT OF INDEPENDENT ACCOUNTANTS ================================================================================ To the Board of Directors and Stockholders of Flushing Financial Corporation: In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, changes in stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Flushing Financial Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PriceWaterhouseCoopers LLP New York, New York January 22, 2002 Flushing Financial Corporation and Subsidiaries 44 2001 ANNUAL REPORT