-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOq0AUsSYw6btGL6046Pew9sjL1g6BJBc05ot/auddKVsN6XXZUVgntVI2JIndPd xL2gNQbJ2OlZNaR8eK1vOw== 0000923139-99-000011.txt : 19990805 0000923139-99-000011.hdr.sgml : 19990805 ACCESSION NUMBER: 0000923139-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLUSHING FINANCIAL CORP CENTRAL INDEX KEY: 0000923139 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 113209278 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24272 FILM NUMBER: 99677668 BUSINESS ADDRESS: STREET 1: 144-51 NORTHERN BLVD CITY: FLUSHING STATE: NY ZIP: 11354 BUSINESS PHONE: 7189615400 10-Q 1 FLUSHING FINANCIAL CORP. FORM 10-Q, 6/30/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Commission file number 000-24272 FLUSHING FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 11-3209278 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 144-51 NORTHERN BOULEVARD, FLUSHING, NEW YORK 11354 (Address of principal executive offices) (718) 961-5400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE. Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.01 PAR VALUE. ---------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. __X__ Yes _____No The number of shares of the registrant's Common Stock outstanding as of July 20, 1999 was 10,340,321 shares.
TABLE OF CONTENTS PAGE PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Statements of Financial Condition 1 Consolidated Statements of Operations and Comprehensive Income 2 Consolidated Statements of Cash Flows 3 Consolidated Statements of Changes in Stockholders' Equity 4 Notes to Consolidated Statements 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 6 AND RESULTS OF OPERATIONS ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 20 PART II. -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 20 ITEM 2. CHANGES IN SECURITIES 20 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5. OTHER INFORMATION 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 SIGNATURES 22 EXHIBITS 23
i PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data) June 30, 1999 December 31, 1998 ======================================================================================================== (Unaudited) ASSETS Cash and due from banks $ 10,248 $ 11,934 Federal funds sold and overnight interest-earning deposits 14,435 10,800 Securities available for sale: Mortgage-backed securities 279,002 302,421 Other securities 21,624 24,269 Loans: 1-4 Family residential mortgage loans 383,826 361,786 Multi-family mortgage loans 288,638 277,437 Commercial real estate loans 123,040 101,401 Co-operative apartment loans 9,487 10,238 Construction loans 6,264 3,203 Small Business Administration loans 2,652 2,616 Consumer and other loans 2,972 1,899 Less: Unearned loan fees (1,183) (1,263) Allowance for loan losses (6,940) (6,762) --------------- --------------- Net loans 808,756 750,555 Interest and dividends receivable 7,074 7,120 Real estate owned, net 333 77 Bank premises and equipment, net 6,147 6,441 Federal Home Loan Bank of New York stock 18,951 17,320 Goodwill 4,821 5,004 Other assets 8,788 6,114 --------------- --------------- Total assets $ 1,180,179 $ 1,142,055 =============== =============== LIABILITIES Due to depositors: Non-interest bearing $ 29,153 $ 27,505 Interest-bearing 625,076 629,991 Mortgagors' escrow deposits 8,662 6,563 Borrowed funds 379,017 335,458 Other liabilities 13,698 10,451 --------------- --------------- Total liabilities 1,055,606 1,009,968 --------------- --------------- STOCKHOLDERS' EQUITY Preferred stock ($0.01 par value; 5,000,000 shares authorized) -- -- Common stock ($0.01 par value; 20,000,000 shares authorized; 11,355,678 shares issued; 10,253,071 and 10,898,805 shares outstanding at June 30, 1999 and December 31, 1998, respectively) 114 114 Additional paid-in capital 75,644 75,452 Treasury stock (1,102,607 and 456,873 shares at June 30, 1999 and December 31, 1998, respectively) (16,905) (6,949) Unearned compensation - Employee Benefit Plan (6,809) (6,956) Unearned compensation - Restricted Stock Awards (1,919) (2,376) Retained earnings 76,062 71,460 Accumulated other comprehensive income: Net unrealized gain (loss) on securities available for sale, net of taxes (1,614) 1,342 --------------- --------------- Total stockholders' equity 124,573 132,087 --------------- --------------- Total liabilities and stockholders' equity $ 1,180,179 $ 1,142,055 =============== =============== The accompanying notes are an integral part of these consolidated financial statements.
-1- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months For the six months ended June 30, ended June 30, ---------------------- ---------------------- (In thousands, except per share data) 1999 1998 1999 1998 ========================================================================================================= (Unaudited) INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 16,462 $ 13,934 $ 32,353 $ 27,378 Interest and dividends on securities: Taxable interest 4,810 6,147 9,442 12,326 Dividends 57 58 115 109 Other interest income 129 392 304 1,215 ----------- ---------- ----------- ---------- Total interest and dividend income 21,458 20,531 42,214 41,028 ----------- ---------- ----------- ---------- INTEREST EXPENSE Deposits 6,162 7,115 12,381 14,222 Other interest expense 5,290 4,187 10,357 8,509 ----------- ---------- ----------- ---------- Total interest expense 11,452 11,302 22,738 22,731 ----------- ---------- ----------- ---------- NET INTEREST INCOME 10,006 9,229 19,476 18,297 Provision for loan losses 12 42 36 158 ----------- ---------- ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,994 9,187 19,440 18,139 ----------- ---------- ----------- ---------- NON-INTEREST INCOME Other fee income 496 337 954 673 Net gain on sales of securities and loans 25 74 145 150 Other income 398 359 810 707 ----------- ---------- ----------- ---------- Total non-interest income 919 770 1,909 1,530 ----------- ---------- ----------- ---------- NON-INTEREST EXPENSE Salaries and employee benefits 2,820 3,164 5,604 6,640 Occupancy and equipment 429 464 942 949 Professional services 654 471 1,250 897 Data processing 295 278 591 556 Depreciation and amortization 258 243 514 476 Other operating expenses 1,240 1,040 2,401 2,078 ----------- ---------- ----------- ---------- Total non-interest expense 5,696 5,660 11,302 11,596 ----------- ---------- ----------- ---------- INCOME BEFORE INCOME TAXES 5,217 4,297 10,047 8,073 ----------- ---------- ----------- ---------- PROVISION FOR INCOME TAXES Federal 1,611 1,364 3,121 2,727 State and local 396 191 697 379 ----------- ---------- ----------- ---------- Total taxes 2,007 1,555 3,818 3,106 ----------- ---------- ----------- ---------- NET INCOME $ 3,210 $ 2,742 $ 6,229 $ 4,967 =========== ========== =========== ========== OTHER COMPREHENSIVE INCOME, NET OF TAX Unrealized gains on securities: Unrealized holding (losses) gains arising during period $ (2,502)$ 211 $ (2,921)$ (63) Less: reclassification adjustments for gains included in income -- (8) (35) (40) ----------- ---------- ----------- ---------- Net unrealized holding (losses) gains (2,502) 203 (2,956) (103) ----------- ---------- ----------- ---------- COMPREHENSIVE NET INCOME $ 708 $ 2,945 $ 3,273 $ 4,864 =========== ========== =========== ========== Basic earnings per share (1) $0.35 $0.26 $0.67 $0.48 Diluted earnings per share (1) $0.34 $0.26 $0.65 $0.46 (1) Prior year amounts adjusted for three-for-two stock split paid in the form of a stock dividend on September 30, 1998. The accompanying notes are an integral part of these consolidated financial statements.
-2- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, -------------------------------- (In thousands) 1999 1998 ==================================================================================================================== (Unaudited) CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Net income $ 6,229 $ 4,967 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 36 158 Provision for losses on real estate owned -- 33 Depreciation of bank premises and equipment 514 476 Amortization of goodwill 183 183 Net gain on sales of securities (64) (74) Net gain on sales of Small Business Administration loans (81) (76) Net loss on sales of real estate owned 10 6 Amortization of unearned premium, net of accretion of unearned discount 1,426 798 Amortization of deferred income (640) (333) Deferred income tax benefit (39) (265) Deferred compensation 86 118 Changes in operating assets and liabilities 3,267 481 Unearned compensation 618 1,132 --------------- --------------- Net cash provided by operating activities 11,545 7,604 --------------- --------------- CASH FLOWS USED IN INVESTING ACTIVITIES Purchases of banking premises and equipment (220) (582) Purchases of Federal Home Loan Bank stock (1,631) -- Purchases of securities available for sale (45,817) (185,418) Proceeds from sales and calls of securities available for sale 7,540 141,430 Proceeds from maturities and prepayments of securities 57,688 33,319 available for sale Net originations and repayment of loans (50,152) (47,890) Purchases of loans (7,879) (13,478) Proceeds from sales and operations of real estate owned 67 420 --------------- --------------- Net cash used by investing activities (40,404) (72,199) --------------- --------------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES Net increase in non-interest bearing deposits 1,648 14,956 Net decrease in interest-bearing deposits (4,915) (205) Net increase in mortgagors' escrow deposits 2,099 1,484 Increases in short-term borrowed funds 10,000 -- Repayments of short-term borrowed funds -- (20,000) Increases in long-term borrowed funds 80,000 15,000 Repayments of long-term borrowed funds (46,441) (10,722) Purchases of treasury stock, net (10,073) (1,488) Cash dividends paid (1,510) (1,149) --------------- --------------- Net cash provided (used) by financing activities 30,808 (2,124) --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,949 (66,719) Cash and cash equivalents, beginning of period 22,734 90,352 --------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,683 $ 23,633 =============== =============== SUPPLEMENTAL CASH FLOW DISCLOSURE Interest paid $ 22,795 $ 20,375 Income taxes paid 1,773 3,825 Non-cash activities: Loans originated as the result of real estate sales -- -- Loans transferred through foreclosure of a related mortgage loan to real estate owned (339) (167) The accompanying notes are an integral part of these consolidated financial statements.
-3- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
For the six months ended (In thousands, except share data) June 30, 1999 ===================================================================================================== COMMON STOCK Balance, beginning of period $ 114 No activity -- --------------------------- Balance, end of period $ 114 =========================== ADDITIONAL PAID-IN CAPITAL Balance, beginning of period $ 75,452 Release of shares from Employee Benefit Trust (1,831 common shares) 14 Tax benefit of stock plans 178 --------------------------- Balance, end of period $ 75,644 =========================== TREASURY STOCK Balance, beginning of period $ (6,949) Purchases of common shares outstanding (653,800 common shares) (10,088) Repurchase of restricted stock awards (18,596 common shares) (274) Options exercised (26,662 common shares) 406 --------------------------- Balance, end of period $ (16,905) =========================== UNEARNED COMPENSATION Balance, beginning of period $ (9,332) Restricted stock award expense 457 Release of shares from Employee Benefit Trust (19,081 common shares) 147 --------------------------- Balance, end of period $ (8,728) =========================== RETAINED EARNINGS Balance, beginning of period $ 71,460 Net income 6,229 Options exercised (26,662 common shares) (117) Cash dividends declared and paid (1,510) --------------------------- Balance, end of period $ 76,062 =========================== ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period $ 1,342 Change in net unrealized gain (loss), net of taxes of approximately $2,488 on securities available for sale (2,921) Less: Reclassification adjustment for gains included in net income, net of taxes of approximately $29 (35) --------------------------- Balance, end of period $ (1,614) =========================== The accompanying notes are an integral part of these consolidated financial statements.
-4- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENTS 1. BASIS OF PRESENTATION The primary business of Flushing Financial Corporation is the operation of its wholly-owned subsidiary, Flushing Savings Bank, FSB (the "Bank"). The consolidated financial statements presented in this Form 10-Q reflect principally the Bank's activities. The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such periods of Flushing Financial Corporation and Subsidiaries (the "Company"). Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The interim financial information should be read in conjunction with the Company's 1998 Annual Report on Form 10-K. 2. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. 3. EARNINGS PER SHARE Basic earnings per share for the three and six month periods ended June 30, 1999 and 1998 was computed by dividing net income by the total weighted average number of common shares outstanding, including only the vested portion of restricted stock awards. Diluted earnings per share includes the additional dilutive effect of stock options outstanding and the unvested portion of restricted stock awards during the period. Earnings per share has been computed based on the following:
Three Months Ended Six Months Ended -------------------- -------------------- June 30, June 30, -------------------- -------------------- (Amounts in thousands, except per share data) 1999 1998 1999 1998 ==================================================================================================== Net income $3,210 $2,742 $6,229 $4,967 Divided by: Weighted average common shares outstanding 9,161 10,435 9,334 10,428 Weighted average common stock equivalents 169 290 178 260 Total weighted average common shares & common stock 9,330 10,725 9,512 10,688 equivalents Basic earnings per share $0.35 $0.26 $0.67 $0.48 Diluted earnings per share $0.34 $0.26 $0.65 $0.46 Dividends per share $0.08 $0.05 $0.16 $0.10
-5- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Flushing Financial Corporation, a Delaware corporation, was organized in May 1994 to serve as the holding company for Flushing Savings Bank, FSB (the "Bank"), a federally chartered, FDIC insured savings institution, originally organized in 1929. The Bank is a consumer-oriented savings institution and conducts its business through eight banking offices located in Queens, Brooklyn, Manhattan and Nassau County. Flushing Financial Corporation's common stock is publicly traded on the Nasdaq National Market under the symbol "FFIC". The following discussion of financial condition and results of operations include the collective results of Flushing Financial Corporation and the Bank (collectively, the "Company"), but reflects principally the Bank's activities. The Company's principal business is attracting retail deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in (i) origination and purchases of one-to-four family residential mortgage loans, multi-family income-producing property loans and commercial real estate loans, (ii) mortgage loan surrogates such as mortgage-backed securities; and (iii) U.S. government and federal agency securities, corporate fixed-income securities and other marketable securities. To a lesser extent, the Company originates 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 securities 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 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. The Company has in the past increased growth through acquisitions of financial institutions or branches of other financial institutions, and will pursue growth through acquisitions that are, or are expected to be within a reasonable time frame, accretive to earnings, as opportunities arise. During the first quarter of 1998, the Bank formed Flushing Service Corporation ("FSC"), a service corporation to market insurance products and mutual funds. The insurance products and mutual funds sold are products of unrelated insurance and securities firms from which the service corporation earns a commission. FSC became fully operational during the month of June, 1998. Management is currently reviewing the potential profitability of various new products to further extend the Bank's product lines and market. On August 18, 1998, the Board of Directors of the Company declared a three-for-two split of the Company's common stock in the form of a 50% stock dividend, which was paid on September 30, 1998. Each shareholder received one additional share for every two shares of the Company's common stock held at the record date, September 10, 1998. Cash was paid in lieu of fractional shares. All share and per share amounts in this report on Form 10-Q have been restated to reflect the three-for-two stock split paid on September 30, 1998. -6- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth in the preceding paragraphs, the factors described below under Year 2000 Compliance, and elsewhere in this Quarterly Report, and in other documents filed by the Company with the Securities and Exchange Commission from time to time, including, without limitation, the Company's 1998 Annual Report to Shareholders and the SEC Report on Form 10-K for the year ended December 31, 1998. The Company has no obligation to update these forward-looking statements. YEAR 2000 COMPLIANCE The Company utilizes and is dependent upon data processing systems and software to conduct its business. The data processing systems and software include those developed and maintained by the Company's third party data processing vendors, and purchased software operating on in-house computer networks. As the year 2000 approaches, a critical business issue has emerged regarding how existing software, such as application programs and operating systems, will accommodate the year 2000 date value. In the past, such software was programmed to assume that all year values begin with "19". In response to this business concern, the Company established, in 1997, a Year 2000 Task Force ("Y2K Task Force") to evaluate whether its computer systems will function properly in the year 2000, and report to the Board of Directors on a monthly basis. With the implementation of the Y2K Task Force, actions were taken to remedy the Company's year 2000 problems. Since its formation, the Y2K Task Force has contacted parties with which the Company has material relationships, including the Company's data processing vendors, and software suppliers to determine whether the systems used, or relied upon, by the Company are year 2000 compliant, and if not to assess the corrective steps being taken. The Company also contacted all borrowers with loan balances outstanding in excess of two million dollars to assess the state of each such party's year 2000 readiness. The Company continues to communicate with these borrowers to monitor their 2000 readiness. The Company's investment securities portfolio, which amounted to 25.5% of total assets at June 30, 1999, consists primarily of U.S. government securities or U.S. government agency backed mortgage-backed securities. Although the Company is attempting to monitor and evaluate the efforts of these other parties, it cannot control the success of their efforts. The Company believes that its in-house systems and software are year 2000 compliant. In addition, the Company's data processing vendors have indicated that their hardware and software are year 2000 compliant. The majority of other vendors have indicated that their hardware and/or software is or will be year 2000 compliant prior to the date change. Notwithstanding the foregoing, given the inherent uncertainty in the year 2000 problem, there can be no assurance that the Company will not experience a disruption in service related to the year 2000 problem. For this reason, the Company plans to continue to monitor its year 2000 readiness through the end of the year. The Company is also dependent in its business upon the availability of public utilities, including communications and power services. The Company cannot predict the year 2000 readiness of such utilities or the outcome their remediation efforts. -7- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's cost to upgrade various systems, primarily software version upgrades, was approximately $70,000, excluding the time that internal staff devoted to testing and monitoring year 2000 compliance, although these activities did not add significant incremental cost. Management does not anticipate significant future costs for year 2000 compliance and testing. Therefore, management believes that the cost of year 2000 compliance, in the aggregate, will not have a material adverse effect on the Company's consolidated financial condition, results of operations, or cash flow. The Company believes that the most reasonably likely worst case scenario, should there be a disruption of service in spite of the year 2000 efforts of the Company and its third party vendors, would be an inability to process banking transactions, calculate investment yields and costs, send and receive electronic data with third parties, or engage in similar normal business activities. Should the Company need to manually calculate and complete transactions, assuming a doubling in manpower, the cost of alternative methods of doing business is projected to be approximately $250,000 in additional expenses per month. Management believes that a more likely scenario in the event of any year 2000 non-compliance would be a temporary disruption of service to its customers. The Company is of the opinion that its contingency plans would mitigate the long-term effect of such a scenario and that a temporary disruption would not have a material adverse effect on its consolidated financial condition, results of operations or cash flow. In the unanticipated event that the Company experiences a disruption of service, the Company has developed contingency plans that management believes will provide reasonable substitutes for the essential functions in the Company's primary business that become unavailable on its systems or those of its third party vendors. Some of these contingency plans are already in use for unanticipated data processing vendor downtime which occurs during the normal course of business. The discussion above of the Company's efforts, and management's expectations, relating to year 2000 compliance are forward-looking statements, which are based on management's best estimate of various factors involving numerous assumptions. The Company's ability to achieve year 2000 compliance and the level of incremental costs associated therewith could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. -8- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 GENERAL. Net income for the second quarter of 1999 increased 17.1% to $3.2 million, or $0.34 per diluted share, from the $2.7 million, or $0.26 per diluted share, earned in the quarter ended June 30, 1998. The return on average assets for the second quarter of 1999 increased to 1.11% from 1.01% for the comparable 1998 period, while the return on average equity for the second quarter of 1999 increased to 10.21% from 7.93% for the comparable 1998 period. INTEREST INCOME. Total interest and dividend income increased $1.0 million, or 4.5%, to $21.5 million for the three months ended June 30, 1999 from $20.5 million for the three months ended June 30, 1998. This increase was primarily the result of a $74.8 million increase in the average earning balances of interest-earning assets for the quarter ended June 30, 1999 as compared to the quarter ended June 30, 1998. The average balance of mortgage loans, net, increased $148.9 million for the second quarter of 1999 as compared to the second quarter of 1998. This increase was partially offset by $59.8 million and $16.6 million decreases in the average balances of other securities and interest-earning deposits and federal funds, respectively, for the second quarter of 1999 compared to the second quarter of 1998. The yield on interest-earning assets declined 20 basis points to 7.75% for the second quarter of 1999 from 7.95% for the second quarter of 1998 due to declining rates on mortgage loans originated. INTEREST EXPENSE. Interest expense increased $0.2 million, or 1.3%, to $11.5 million for the three months ended June 30, 1999 from $11.3 million for the three months ended June 30, 1998, primarily due to an $88.1 million increase in the average balance of interest-bearing liabilities. This increase in the average balance of interest-bearing liabilities was partially offset by a 38 basis point decrease in the average cost of interest-bearing liabilities to 4.59% in the second quarter of 1999 from 4.97% in the second quarter of 1998, as certificates of deposit renewed at lower rates, the rate paid for passbook deposit accounts was reduced, and the cost of borrowings declined. NET INTEREST INCOME. For the three months ended June 30, 1999, net interest income increased $0.8 million, or 8.4%, to $10.0 million from $9.2 million in the comparable 1998 period, for reasons stated above. The net interest margin improved 4 basis points to 3.61% for the three months ended June 30, 1999 from 3.57% for the comparable 1998 period. In addition, the net interest margin of 3.61% for the quarter ended June 30, 1999 reflects an 11 basis points improvement over the 3.50% level for the prior quarter ended March 31, 1999, as the yield on interest-earning assets improved seven basis points while the cost of funds declined five basis points. PROVISION FOR LOAN LOSSES. The provision for loan losses for the three months ended June 30, 1999 was $12,000 as compared to $42,000 for the comparable 1998 period. Despite the lower provision, the allowance for loan losses increased from $6.8 million at December 31, 1998 to $6.9 million at June 30, 1999 due to recoveries on previously charged-off loans. The level of the allowance for loan losses reflects the Bank's evaluation of current economic conditions, the overall trend of non-performing loans in the loan portfolio (see Asset Section), its analysis of specific loan situations, and the size and composition of the loan portfolio. NON-INTEREST INCOME. Total non-interest income increased by 19.4% to $919,000 for the three months ended June 30, 1999 from $770,000 for the three months ended June 30, 1998. The increase is due primarily to increases in fee income from mortgage operations and banking services. -9- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-INTEREST EXPENSE. Non-interest expense was $5.7 million for the three months ended June 30, 1999 and 1998. Salaries and benefits declined by $0.3 million, which was offset by increases in professional fees, business promotion, and other expenses. Management continues to monitor expenditures resulting in efficiency ratios, which exclude non-recurring items, of 51.3% and 53.4% for the three months ended June 30, 1999 and 1998, respectively. INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $0.9 million, or 21.4%, to $5.2 million for the three months ended June 30, 1999 as compared to $4.3 million for the three months ended June 30, 1998 for reasons stated above. PROVISION FOR INCOME TAXES. Income tax expense increased $452,000 to $2.0 million for the three months ended June 30, 1999 as compared to $1.6 million for the comparable 1998 period. This is primarily due to the $0.9 million increase in income before taxes. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 GENERAL. Net income for the six months ended June 30, 1999 increased 25.4% to $6.2 million, or $0.65 per diluted share, from the $5.0 million, or $0.46 per diluted share, earned in the six months ended June 30, 1998. The return on average assets for the six months ended June 30, 1999 increased to 1.09% from 0.92% for the comparable 1998 period, while the return on average equity for the six months ended June 30, 1999 increased to 9.73% from 7.34% for the comparable 1998 period. INTEREST INCOME. Total interest and dividend income increased $1.2 million, or 2.9%, to $42.2 million for the six months ended June 30, 1999 from $41.0 million for the six months ended June 30, 1998. This increase was primarily the result of a $62.6 million increase in the average earning balances of interest-earning assets for the six months ended June 30, 1999 as compared to the six months ended June 30, 1998. The average balance of mortgage loans, net, increased $148.8 million for the six months ended June 30, 1999 as compared to the comparable 1998 period. This increase was partially offset by $58.2 million and $29.7 million decreases in the average balances of other securities and interest-earning deposits and federal funds, respectively, for the six months ended June 30, 1999 compared to the comparable 1998 period. The yield on interest-earning assets declined 23 basis points to 7.72% for the six months ended June 30, 1999 from 7.95% for the six months ended June 30, 1998 due to declining rates on mortgage loans originated. INTEREST EXPENSE. Interest expense was $22.7 million for the six months ended June 30, 1999 and 1998. A $71.3 million increase in the average balance of interest-bearing liabilities for the six months ended June 30, 1999 from the comparable 1998 period was offset by a 36 basis point decline in the cost of interest-bearing liabilities to 4.61% in the six months ended June 30, 1999 as compared to 4.97% for the six months ended June 30, 1998. This decline in the cost of interest-bearing liabilities is due to certificates of deposit renewing at lower rates, the rate paid for passbook deposit accounts being reduced, and a decline in the cost of borrowed funds. NET INTEREST INCOME. For the six months ended June 30, 1999, net interest income increased $1.2 million, or 6.4%, to $19.5 million from $18.3 million in the comparable 1998 period, for reasons stated above. The net interest margin improved one basis point to 3.56% for the six months ended June 30, 1999 from 3.55% for the comparable 1998 period. -10- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROVISION FOR LOAN LOSSES. The provision for loan losses for the six months ended June 30, 1999 was $36,000 as compared to $158,000 for the comparable 1998 period. Despite the lower provision, the allowance for loan losses increased from $6.8 million at December 31, 1998 to $6.9 million at June 30, 1999 due to recoveries on previously charged-off loans. The level of the allowance for loan losses reflects the Bank's evaluation of current economic conditions, the overall trend of non-performing loans in the loan portfolio (see Asset Section), its analysis of specific loan situations, and the size and composition of the loan portfolio. NON-INTEREST INCOME. Total non-interest income increased by 24.8% to $1.9 million for the six months ended June 30, 1999 from $1.5 million for the six months ended June 30, 1998. The increase is due primarily to increases in fee income from mortgage operations and banking services. NON-INTEREST EXPENSE. Non-interest expense decreased by $0.3 million, or 2.5%, to $11.3 million for the six months ended June 30, 1999 as compared to $11.6 million for the six months ended June 30, 1998. Salaries and benefits declined by $1.0 million due primarily to a one-time non-recurring compensation expense of $750,000 in connection with the planned retirement of a senior executive recorded in the quarter ended June 30, 1998. This decrease was partially offset by increases in professional fees, business promotion, and other expenses. Management continues to monitor expenditures resulting in efficiency ratios, which exclude non-recurring items, of 52.0% and 52.6% for the six months ended June 30, 1999 and 1998, respectively. INCOME BEFORE INCOME TAXES. Total income before provision for income taxes increased $1.9 million, or 24.5%, to $10.0 million for the six months ended June 30, 1999 as compared to $8.1 million for the six months ended June 30, 1998 for reasons stated above. PROVISION FOR INCOME TAXES. Income tax expense increased $0.7 million to $3.8 million for the six months ended June 30, 1999 as compared to $3.1 million for the comparable 1998 period. This is primarily due to the $1.9 million increase in income before taxes. FINANCIAL CONDITION ASSETS. Total assets at June 30, 1999 were $1.18 billion, a $38 million increase from December 31, 1998. During the six months ended June 30, 1999, loan originations and purchases were $48.8 million for 1-4 family residential mortgage loans, $42.6 million for multi-family real estate loans, $25.0 million for commercial real estate loans and $5.0 million in construction loans. During the six months ended June 30, 1998, loan originations and purchases were $50.9 million for 1-4 family residential mortgage loans, $39.7 million for multi-family real estate loans, $10.9 million for commercial real estate loans and $2.0 million in construction loans. Total loans, net, increased $58.2 million during the six months ended June 30, 1999 to $808.8 million from $750.6 million at December 31, 1998. As the Company continues to increase its loan portfolio, management continues to adhere to the Bank's strict underwriting standards. As a result, the Company has been able to minimize charge-offs of losses from impaired loans and maintain asset quality. For the six months ended June 30, 1999, the Bank realized net recoveries of $142,000, and for the 1998 year, the Bank realized net recoveries of $74,000. Non-performing assets were $5.5 million at June 30, 1999 compared to $2.7 million at December 31, 1998 and $3.4 million at June 30, 1998. The increase in non-performing assets primarily relates to three commercial mortgage loans for which management believes the value of the underlying collateral is sufficient to allow the Bank to realize its investment in these loans. Total non-performing assets as a percentage of total assets were 0.46% at June 30, 1999 compared to 0.23% at December 31, 1998 and 0.31% at June 30, 1998. The ratio of allowance for loan losses to total non-performing loans was 135.27% at June 30, 1999 compared to 260.36% at December 31, 1998 and 214.31% at June 30, 1998. -11- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIABILITIES. Total liabilities increased $46 million to $1.06 billion at June 30, 1999 from $1.01 billion at December 31, 1998 . The change in total liabilities was due primarily to an increase in FHLB borrowings of $43.6 million during the six months ended June 30, 1999, bringing FHLB borrowings to $379.0 million at June 30, 1999. EQUITY. Total stockholders' equity decreased $7.5 million to $124.6 million at June 30, 1999 from $132.1 million at December 31, 1998. The decrease is primarily due to $6.2 million in net income for the six months ended June 30, 1999, more than offset by $10.1 million in treasury shares purchased through the Company's stock repurchase plans, $1.5 million in cash dividends paid during the six month period, and a $3.0 million after tax decline in the market value of securities available for sale. Quarterly dividends per share were increased from $0.06 per share for the fourth quarter of 1998 to $0.08 per share in the first and second quarters of 1999. Book value per share, adjusted for the three-for two stock dividend paid on September 30, 1998, continued to improve to $12.15 per share at June 30, 1999 from $12.12 per share at December 31, 1998 and $11.93 at June 30, 1998. During the first quarter of 1999, the Company completed its fourth stock repurchase program, and the Board of Directors approved the fifth stock repurchase program for 540,000 shares, which was completed during the second quarter of 1999. The Board of Directors approved the sixth stock repurchase program for 512,000 during the second quarter of 1999. Under these programs, the Company repurchased 653,800 shares during the six months ended June 30, 1999, leaving 512,000 shares to be repurchased under the current stock repurchase program at June 30, 1999. LIQUIDITY. The Bank, as a federal savings bank, is subject to Office of Thrift Supervision ("OTS") guidelines regarding liquidity requirements. Pursuant to these requirements, the Bank is required to maintain an average daily balance of liquid assets (cash and certain securities with detailed maturity limitations and marketability requirements) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions, and is currently 4%. Monetary penalties may be imposed by the OTS for failure to meet these liquidity requirements. At June 30, 1999 and December 31, 1998, the Bank's liquidity ratio, computed in accordance with the OTS requirement was 18.11% and 18.28%, respectively. Management anticipates that the Bank will continue to meet OTS liquidity requirements. Unlike the Bank, Flushing Financial Corporation is not subject to OTS regulatory requirements on the maintenance of minimum levels of liquid assets. CASH FLOW. During the six months ended June 30,1999, funds provided by the Company's operating activities amounted to $11.5 million. These funds, together with $30.8 million provided by financing activities, were utilized to fund net investing activities of $40.4 million. The Company's primary business objective is the origination and purchase of 1-4 family residential, multi-family and commercial real estate loans. During the six months ended June 30, 1999, the net total of loan originations less loan repayments was $50.2 million, and the total amount of real estate loans purchased was $7.9 million. The Company also invests in other securities including mortgage loan surrogates such as mortgage-backed securities. During the six months ended June 30, 1999, the Company purchased a total of $45.8 million in securities available for sale. Funds for investment were also provided by $65.2 million in sales, calls, maturities, and prepayments of securities available for sale, and $43.6 million of net increased borrowings from the FHLB-NY with original maturities greater than one year. The Company also used funds of $10.1 million for treasury stock repurchases and $1.5 million in dividend payments during the six months ended June 30, 1999. -12- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST RATE RISK The Consolidated Financial Statements have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rate risk. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company's interest-earning assets which could adversely affect the Company's results of operation if sold, or, in the case of securities classified as available-for-sale, the Company's stockholders' equity, if retained. The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust risk exposure. On a quarterly basis, management prepares the "Earnings and Economic Exposure to Changes In Interest Rate" report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. Net portfolio value is defined as the market value of assets net of the market value of liabilities. 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 June 30, 1999 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates. The Company's current interest rate exposure is within the guidelines set forth by the Board of Directors.
Projected Percentage Change In ---------------------------------- Change in Interest Rate Net Interest Net Portfolio NetPortfolio Income Value Value Ratio ========================================================================================= -300 Basis points -0.12 % 14.61 % 16.40 % -200 Basis points 1.68 13.07 16.53 -100 Basis points 2.38 10.67 16.48 Base interest rate 0.00 0.00 15.37 +100 Basis points -4.71 -13.59 13.77 +200 Basis points -10.14 -28.35 11.87 +300 Basis points -15.98 -41.94 9.99
-13- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REGULATORY CAPITAL POSITION Under Office of Thrift Supervision ("OTS") capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. At June 30, 1999, the Bank exceeded each of the three OTS capital requirements and is categorized as "well-capitalized" by the OTS under the prompt corrective action regulations. Set forth below is a summary of the Bank's compliance with OTS capital standards as of June 30, 1999.
(Dollars in thousands) Amount Percent of Assets ====================================================================================== Tangible Capital: Capital level $104,060 8.91% Requirement 17,510 1.50 Excess 86,550 7.41 Core Capital: Capital level $104,060 8.91% Requirement 46,694 4.00 Excess 57,366 4.91 Risk-Based Capital: Capital level $111,001 17.65% Requirement 50,320 8.00 Excess 60,681 9.65
-14- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AVERAGE BALANCES Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table set forth certain information relating to the Company's consolidated statements of financial condition and consolidated statements of operations for the three month periods ended June 30, 1999 and 1998, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.
For the three months ended June 30, ---------------------------------------------------------------- 1999 1998 ---------------------------------------------------------------- Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost ================================================================================================================ ASSETS Interest-earning assets: Mortgage loans, net $785,371 $16,328 8.32% $636,480 $13,813 8.68% Other loans 5,407 134 9.91 3,103 121 15.60 Mortgage-backed securities 285,804 4,568 6.39 326,758 5,532 6.77 Other securities 21,194 299 5.64 40,053 673 6.72 Interest-earning deposits and federal funds sold 9,802 129 5.26 26,392 392 5.94 -------------------------------- ------------------------------- Total interest-earning assets 1,107,578 21,458 7.75 1,032,786 20,531 7.95 --------------------- --------------------- Non-interest earning assets 52,342 50,646 ----------- ----------- Total assets $1,159,920 $1,083,432 =========== =========== LIABILITIES AND EQUITY Interest-bearing liabilities: Due Depositors: Passbook accounts $202,041 1,043 2.06 $204,277 1,446 2.83 NOW accounts 27,249 128 1.88 24,758 118 1.91 Money market accounts 34,417 256 2.98 25,626 191 2.98 Certificate of deposit accounts 363,360 4,714 5.19 379,811 5,342 5.63 Mortgagors' escrow deposits 13,846 21 0.61 4,764 18 1.51 Borrowed funds 356,807 5,290 5.93 270,423 4,187 6.19 -------------------------------- ------------------------------- Total interest-bearing liabilities 997,720 11,452 4.59 909,659 11,302 4.97 --------------------- --------------------- Other liabilities 36,408 35,340 ----------- ----------- Total liabilities 1,034,128 944,999 Equity 125,792 138,433 ----------- ----------- Total liabilities and equity $1,159,920 $1,083,432 =========== =========== Net interest income/Interest rate spread $10,006 3.16% $9,229 2.98% ===================== ===================== Net interest-earning assets / Net interest margin $109,858 3.61% $123,127 3.57% =========== =========== =========== =========== Ratio of interest-earning assets to interest-bearing liabilities 1.11X 1.14X =========== ===========
-15- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AVERAGE BALANCES (CONTINUED) The following tables set forth certain information relating to the Company's consolidated statements of financial condition and consolidated statements of operations for the six month periods ended June 30, 1999 and 1998, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.
For the six months ended June 30, ----------------------------------------------------------------- 1999 1998 -------------------------------- ------------------------------- Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost ================================================================================================================ ASSETS Interest-earning assets: Mortgage loans, net $771,294 $32,116 8.33% $622,474 $27,157 8.73% Other loans 4,962 237 9.55 3,356 221 13.17 Mortgage-backed securities 289,377 9,054 6.26 302,843 10,333 6.82 Other securities 17,273 503 5.82 61,959 2,102 6.79 Interest-earning deposits and federal funds sold 11,376 304 5.34 41,082 1,215 5.91 -------------------------------- -------------------------------- Total interest-earning assets 1,094,282 42,214 7.72 1,031,714 41,028 7.95 --------------------- --------------------- Non-interest earning assets 53,328 50,672 ----------- ----------- Total assets $1,147,610 $1,082,386 =========== =========== LIABILITIES AND EQUITY Interest-bearing liabilities: Due Depositors: Passbook accounts $202,295 2,080 2.06 $202,290 2,873 2.84 NOW accounts 26,654 251 1.88 23,858 227 1.90 Money market accounts 32,644 470 2.88 24,934 363 2.91 Certificate of deposit accounts 365,732 9,540 5.22 380,779 10,725 5.63 Mortgagors' escrow deposits 11,707 40 0.68 5,285 34 1.29 Borrowed funds 346,528 10,357 5.98 277,111 8,509 6.14 -------------------------------- -------------------------------- Total interest-bearing liabilities 985,560 22,738 4.61 914,257 22,731 4.97 --------------------- --------------------- Other liabilities 34,073 32,728 ----------- ----------- Total liabilities 1,019,633 946,985 Equity 127,977 135,401 =========== =========== Total liabilities and equity $1,147,610 $1,082,386 =========== =========== Net interest income/Interest rate spread $19,476 3.11% $18,297 2.98% ===================== ===================== Net interest-earning assets / Net interest margin $108,722 3.56% $117,457 3.55% =========== =========== =========== =========== Ratio of interest-earning assets to interest-bearing liabilities 1.11X 1.13X =========== ===========
-16- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LOANS The following table sets forth the Company's loan originations (including the net effect of refinancing) and the changes in the Company's portfolio of loans, including purchases, sales and principal reductions for the periods indicated.
Six Months Ended ------------------------------------------------- (In thousands) June 30, 1999 June 30, 1998 ============================================================================================= MORTGAGE LOANS At beginning of period $754,065 $602,559 Mortgage loans originated: One-to-four family 40,822 37,462 Cooperative 300 -- Multi-family real estate 42,595 39,679 Commercial real estate 25,046 10,889 Construction 4,999 2,001 ---------------------- ---------------------- Total mortgage loans originated 113,762 90,031 ---------------------- ---------------------- Acquired loans: Loans purchased 7,814 13,478 ---------------------- ---------------------- Total acquired loans 7,814 13,478 ---------------------- ---------------------- Less: Principal reductions 64,047 40,433 Mortgage loans sold -- -- Mortgage loan foreclosures 339 312 ---------------------- ---------------------- At end of period $811,255 $665,323 ====================== ====================== OTHER LOANS At beginning of period $4,515 $4,174 Other loans originated: Small Business Administration 1,176 1,840 Small business loans 1,542 -- Other loans 496 885 ---------------------- ---------------------- Total other loans originated 3,214 2,725 ---------------------- ---------------------- Less: Sales 1,004 1,813 Principal reductions 1,101 2,409 ---------------------- ---------------------- At end of period $5,624 $2,677 ====================== ======================
-17- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NON-PERFORMING ASSETS The Company reviews loans in its portfolio on a monthly basis to determine whether any problem loans require classification in accordance with internal policies and applicable regulatory guidelines. The following table sets forth information regarding all non-accrual loans, loans which are 90 days or more delinquent, and real estate owned at the dates indicated.
(Dollars in thousands) June 30, 1999 December 31, 1998 =============================================================================================== Non-accrual mortgage loans $5,111 $2,556 Other non-accrual loans 19 41 ---------------------- ----------------------- Total non-accrual loans 5,130 2,597 Mortgage loans 90 days or more delinquent and still accruing -- -- Other loans 90 days or more delinquent and still accruing -- -- ---------------------- ----------------------- Total non-performing loans 5,130 2,597 Real estate owned (foreclosed real estate) 333 77 ---------------------- ----------------------- Total non-performing assets $5,463 $2,674 ====================== ======================= Non-performing loans to gross loans 0.63% 0.34% Non-performing assets to total assets 0.46% 0.23%
The increase in non-accrual mortgage loans primarily relates to three commercial mortgage loans for which management believes the value of the underlying collateral is sufficient to allow the Bank to realize its investment in these mortgage loans. The increase in real estate owned is primarily related to one property which is currently under contract for sale at an amount which will result in the Bank realizing the carrying value of the property. -18- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALLOWANCE FOR LOAN LOSSES The Company has established and maintains on its books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in the Company's overall loan portfolio. The allowance is established through a provision for loan losses based on management's evaluation of the risk inherent in the various components of its loan portfolio and other factors, including historical loan loss experience, changes in the composition and volume of the portfolio, collection policies and experience, trends in the volume of non-accrual loans and regional and national economic conditions. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. In connection with the determination of the allowance, the market value of collateral ordinarily is evaluated by the Company's staff appraiser; however, the Company may from time to time obtain independent appraisals for significant properties. Current year charge-offs, charge-off trends, new loan production and current balance by particular loan categories are also taken into account in determining the appropriate amount of allowance. The Board of Directors reviews and approves the adequacy of the loan loss reserves on a quarterly basis. The following table sets forth the activity in the Bank's allowance for loan losses for the periods indicated.
Six Months Ended --------------------------------------------------- (Dollars in thousands) June 30, 1999 June 30, 1998 =================================================================================================== Balance at beginning of period $6,762 $6,474 Provision for loan losses 36 158 Loans charged-off: One-to-four family 8 91 Co-operative -- -- Multi-family -- -- Commercial -- -- Construction -- -- Other 3 12 ----------------------- ---------------------- Total loans charged-off 11 103 ----------------------- ---------------------- Recoveries: Mortgage loans 153 139 Other loans -- -- ----------------------- ---------------------- Total recoveries 153 139 ----------------------- ---------------------- Balance at end of period $6,940 $6,668 ======================= ====================== Ratio of net charge-offs(recoveries) during the year to average loans outstanding during the period (0.02)% 0.00% Ratio of allowance for loan losses to loans at end of period 0.85% 1.00% Ratio of allowance for loan losses to non-performing loans at end of period 135.27% 214.31% Ratio of allowance for loan losses to non-performing assets at end of period 127.03% 198.68%
-19- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk". PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations and cash flows. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's Annual Meeting of Shareholders held on May 18, 1999, as contemplated by the Company's definitive proxy material for the meeting, certain matters were submitted to a vote of shareholders. The following table summarizes the results of voting with respect to each matter.
For Against Abstain ------------- ------------ ------------- Election of Directors (four directors were elected to serve until the 2002 Annual Meeting of Shareholders and until their successors are elected and qualified): Michael J. Hegarty 9,087,575 116,455 James D. Bennett 9,112,232 91,798 John O. Mead 9,119,982 84,048 Michael J. Russo 9,103,557 100,473 Ratification of PricewaterhouseCoopers LLP as the independent auditors of the Company 9,103,708 51,643 48,679
-20- PART I -- FINANCIAL INFORMATION FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 5. OTHER INFORMATION. During the quarter ended June 30, 1999, the Board of Directors approved the sixth stock repurchase program for 512,000 shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBIT. Exhibit No. Description 10.12(c) Amendment No. 3 to Gerald P. Tully Consulting Agreement 27. Financial data schedule b) REPORTS ON FORM 8-K. Not applicable. -21- FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Flushing Financial Corporation, Dated: August 2, 1999 By:/s/Michael J. Hegarty -------------- --------------------- Michael J. Hegarty President and Chief Executive Officer Dated: August 2, 1999 By:/s/Monica C. Passick -------------- -------------------- Monica C. Passick Senior Vice President, Treasurer and Chief Financial Officer -22- FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT INDEX Exhibit No. Description 10.12(c) Amendment No. 3 to Gerald P. Tully Consulting Agreement 27 Financial Data Schedule. -23- EX-10.12(C) 2 AMENDMENT NO. 3 TO CONSULTING AGREEMENT AMENDMENT TO TULLY AGREEMENT This Amendment to the Agreement dated as of December 1, 1995 (the "Agreement") is entered into as of July 1, 1999 between Flushing Savings Bank, FSB (the "Bank"), Flushing Financial Corporation (the "Company") and Gerard P. Tully, Sr. ("Mr. Tully"). WITNESSETH: The Agreement is amended as set forth herein; 1. Section 3 of the Agreement is hereby amended by replacing the Aggregate fee per month to be $11,250. 2. The amendment set forth in paragraph 1 hereof shall be effective July 1, 1999 and except as amended by paragraph 1 hereof, the Agreement shall remain in effect in accordance with its terms. IN WITNESS WHEREOF, Mr. Tully, the Bank and the Company have caused this Amendment to be executed on this 20th day of July, 1999. Flushing Savings Bank, FSB By /s/ Michael J. Hegarty ---------------------- Michael J. Hegarty President & C.E.O. Flushing Financial Corporation By /s/ Anna M. Piacentini ---------------------- Anna M. Piacentini Senior Vice President /s/ Gerard P. Tully, Sr. ------------------------ Gerard P. Tully, Sr. EX-27 3 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Condensed Consolidated Statement of Financial Condition at June 30, 1999 (unaudited), and the Condensed Statement of Income for the six months ended June 30, 1999 (unaudited), and is qualified in its entirety by reference to such financial statements. 1,000 DEC-31-1999 JAN-01-1999 JUN-30-1999 6-MOS 10,248 14,435 0 0 300,626 0 0 815,696 6,940 1,180,179 662,891 25,000 13,698 354,017 0 0 114 124,459 1,180,179 32,353 9,557 304 42,214 12,381 22,738 19,476 36 64 11,302 10,047 10,047 0 0 6,229 0.67 0.65 7.72 5,130 0 0 0 6,762 11 153 6,940 6,940 0 0
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