--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 9
--------------------------------------------------------------------------------
> SELECTED FINANCIAL DATA
=============================================================================================================================
At or for the year ended December 31, 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
> Selected Financial Condition Data
Total assets .................................. $ 1,652,958 $1,487,529 $ 1,338,092 $1,249,529 $1,142,055
Loans, net .................................... 1,169,560 1,067,197 986,359 875,886 750,555
Securities available for sale ................. 358,984 305,539 255,220 285,016 326,690
Real estate owned, net ........................ -- 93 44 368 77
Deposits ...................................... 1,011,825 828,582 689,811 666,941 664,059
Borrowed funds ................................ 493,164 513,435 508,839 451,831 335,458
Stockholders' equity .......................... 131,386 133,387 126,737 118,176 132,087
Book value per share (1) (2) .................. $ 10.43 $ 9.89 $ 9.11 $ 8.10 $ 8.08
> Selected Operating Data
Interest and dividend income .................. $ 106,906 $ 101,899 $ 96,941 $ 87,143 $ 82,846
Interest expense .............................. 54,564 59,702 57,048 47,795 46,702
--------------------------------------------------------------------------
Net interest income ......................... 52,342 42,197 39,893 39,348 36,144
Provision for loan losses ..................... -- -- -- 36 214
--------------------------------------------------------------------------
Net interest income after provision for
loan losses ................................ 52,342 42,197 39,893 39,312 35,930
--------------------------------------------------------------------------
Non-interest income:
Net gains (losses) on sales of securities
and loans .................................. (4,158) 321 (651) 252 368
Other income ................................ 5,667 5,737 4,509 3,622 2,927
--------------------------------------------------------------------------
Total non-interest income ............... 1,509 6,058 3,858 3,874 3,295
--------------------------------------------------------------------------
Non-interest expense .......................... 27,621 24,457 23,797 22,646 23,023
--------------------------------------------------------------------------
Income before income tax provision ............ 26,230 23,798 19,954 20,540 16,202
Income tax provision .......................... 9,967 8,869 7,532 7,805 6,012
--------------------------------------------------------------------------
Net income .............................. $ 16,263 $ 14,929 $ 12,422 $ 12,735 $ 10,190
==========================================================================
Basic earnings per share (2) (3) .............. $ 1.40 $ 1.22 $ 0.99 $ 0.94 $ 0.67
Diluted earnings per share (2) (3) ............ $ 1.34 $ 1.17 $ 0.97 $ 0.92 $ 0.65
Dividends declared per share (2) .............. $ 0.36 $ 0.31 $ 0.27 $ 0.21 $ 0.15
Dividend payout ratio ......................... 25.7% 25.4% 27.3% 22.3% 22.3%
Continued
(Footnotes on the following page)
================================================================================
TABLE OF CONTENTS
Selected Financial Data.................................................. > 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ > 11
Consolidated Financial Statements........................................ > 25
Notes to Consolidated Financial Statements............................... > 30
Report of Independent Accountants........................................ > 48
Corporate and Shareholder Information.................................... > IBC
================================================================================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 10
--------------------------------------------------------------------------------
> SELECTED FINANCIAL DATA (continued)
-------------------------------------------------------------------------------------------------------------------------
At or for the year ended December 31, 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
> Selected Financial Ratios and Other Data
Performance ratios:
Return on average assets ................................... 1.03% 1.06% 0.96% 1.08% 0.92%
Return on average equity ................................... 12.57 11.52 10.48 10.31 7.51
Average equity to average assets ........................... 8.22 9.19 9.18 10.49 12.24
Equity to total assets ..................................... 7.95 8.97 9.47 9.46 11.57
Interest rate spread ....................................... 3.32 2.89 2.87 3.05 2.88
Net interest margin ........................................ 3.55 3.20 3.24 3.49 3.43
Non-interest expense to average assets ..................... 1.76 1.74 1.84 1.92 2.08
Efficiency ratio ........................................... 47.41 50.06 53.07 51.54 53.44
Average interest-earning assets to average interest-bearing
liabilities .............................................. 1.06x 1.07x 1.08x 1.11x 1.12x
Regulatory capital ratios (4):
Tangible capital ........................................... 7.74% 7.32% 8.02% 8.28% 9.46%
Core capital ............................................... 7.74 7.32 8.02 8.28 9.46
Total risk-based capital ................................... 14.27 13.58 15.77 16.33 19.43
Asset quality ratios:
Non-performing loans to gross loans (5) .................... 0.31% 0.22% 0.16% 0.36% 0.34%
Non-performing assets to total assets (6) .................. 0.26 0.16 0.12 0.29 0.23
Net charge-offs (recoveries) to average loans .............. -- 0.01 0.01 -- (0.01)
Allowance for loan losses to gross loans ................... 0.56 0.61 0.68 0.77 0.89
Allowance for loan losses to total non-performing assets (6) 153.34 272.94 404.28 191.29 252.83
Allowance for loan losses to total non-performing loans (5) 183.23 283.85 415.32 213.29 260.36
Full-service customer facilities ............................. 10 10 10 9 8
(1) Calculated by dividing stockholders' equity of $131.4 million and $133.4
million at December 31, 2002 and 2001, respectively, by 12,598,343 and
13,487,784 shares outstanding at December 31, 2002 and 2001, 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.
(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 consist of non-performing loans, real estate owned
and non-performing investment securities.
> 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, 2002 the Company
had approximately 750 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 $16.38 on December 31, 2002.
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.
===========================================================================================
2002 2001
-------------------------------------------------------------------
High Low Dividend High Low Dividend
===========================================================================================
First Quarter .... $18.08 $15.95 $0.090 $12.54 $11.00 $0.073
Second Quarter ... 20.83 16.45 0.090 16.20 12.17 0.073
Third Quarter .... 20.84 16.00 0.090 17.00 13.71 0.080
Fourth Quarter ... 18.52 14.85 0.090 18.96 15.44 0.080
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 11
--------------------------------------------------------------------------------
> 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 Holding Company also owns a special purpose business trust,
Flushing Financial Capital Trust I ("Trust"). The following discussion of
financial condition and results of operations includes the collective results of
the Holding Company, the Trust 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.
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. This effort continued into 2002, as the Bank
continued to explore new products that will help it continue to be the provider
of choice for existing customers and help attract new customers. The debit card
and Internet banking were introduced in 2002.
During the third quarter of 2002, the Holding Company issued $20.0 million
of floating rate capital securities through the Trust, a newly created special
purpose business trust formed by the Holding Company. The capital securities
have a maturity date of October 7, 2032, are callable at par in five years and
every quarter thereafter, and pay cumulative cash distributions at a floating
per annum rate of interest, reset quarterly, equal to 3.65% over 3-month LIBOR,
with an initial rate of 5.51387%. A rate cap of 12.50% is effective through
October 7, 2007. The rate at December 31, 2002 was 5.425%.
As part of the Company's strategy to find ways to best utilize its
available capital, during 2002 Flushing Financial Corporation continued its
stock repurchase programs by repurchasing 1,202,450 shares of its common stock.
The total number of treasury shares, at December 31, 2002 is 1,253,720 and the
total number of outstanding common shares is 12,598,343. At December 31, 2002,
630,000 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
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 12
--------------------------------------------------------------------------------
> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 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. The Bank converted to a federally chartered stock savings
bank in 1995. 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 residential mortgage and commercial real estate mortgage 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. Market interest rates on conventional
one-to-four family residential mortgage loans declined to their lowest levels in
almost 40 years during 2002. As a result, many borrowers sought to refinance
their mortgages. The Company decided not to actively pursue this refinance
market due to the low rates. The Company focused its origination efforts on
higher yielding mixed-use property one-to-four family residential mortgage
loans, multi-family residential mortgage loans and commercial real estate
mortgage loans. The Company expects to continue this emphasis on the higher
yielding mortgage loan products. During 2002, loan originations and purchases
were $19.4 million for conventional one-to-four family residential mortgage
loans, $71.9 million for mixed-use property one-to-four family residential
mortgage loans, $136.9 million for multi-family residential mortgage loans,
$73.1 million for commercial real estate loans and $13.8 million for
construction loans. At December 31, 2002, the Company's conventional one-to-four
family residential mortgage loans, mixed-use property one-to-four family
residential mortgage loans, multi-family residential mortgage loans and
commercial real estate loans amounted to $268.1 million (22.8%), $170.5 million
(14.5%), $452.7 million (38.5%) and $257.1 million (21.9%), respectively, of
gross loans.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 13
--------------------------------------------------------------------------------
The Company seeks to increase its originations of mixed-use property
one-to-four family residential mortgage, multi-family residential mortgage and
commercial real estate mortgage loans through aggressive marketing and by
maintaining competitive interest rates and origination fees. The Company's
marketing efforts include 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 and other financial institutions. Loans
purchased by the Company 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 residential mortgage loans and commercial real estate loans
generally have higher yields than one-to-four family residential 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 residential 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 $4,000 and $136,000 for the years ended December 31, 2002 and
2001, 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 183.23% and 283.85% at December 31, 2002 and 2001,
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 $4.3 million and $2.4 million at
December 31, 2002 and 2001, respectively. This increase in non-performing assets
is primarily attributed to one borrower. None of the loan-to-value ratios for
each of this borrower's three loans is greater than 65 percent. Therefore,
management believes the Bank will recover its investment in these loans.
Non-performing assets as a percentage of total assets were 0.26% and 0.16% at
December 31, 2002 and 2001, 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 and its strategic plan. 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 utilized to provide funding for asset growth
which has increased net interest income. During 2002, the Company realized an
increase in due to depositors of $183.5 million and a reduction in borrowed
funds of $20.3 million.
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.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 14
--------------------------------------------------------------------------------
> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 average 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 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
expand its operations, the Bank opened a traditional branch in July 2000 on
Kissena Boulevard in Flushing, Queens, and plans to open a traditional branch in
Northern Queens in the second half of 2003.
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 placed
additional emphasis on the sale of these products in 2002 through 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, which has allowed the Bank to further
expand these efforts.
During 2002, the Bank introduced a debit card and Internet banking, and
continued to expand its business loan and deposit products. Management plans to
continue reviewing the profitability potential of various new products to
further expand the Company's product lines and market. 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 > 15
--------------------------------------------------------------------------------
The table below sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2002 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
loans, other loans and mortgage-backed securities are based on industry
averages, which generally range from 6% to 40%. Passbook and Money Market
accounts were assumed to have a withdrawal or "run-off" rate of 5%, based on
historical experience. While management believes that these assumptions are
indicative of actual prepayments and withdrawals experienced by the Company,
there is no guarantee that these trends will continue in the future.
===================================================================================
Interest Rate Sensitivity Gap
Analysis at December 31, 2002
-------------------------------------
More Than More Than
Three Three One Year
Months Months to to Three
and Less One Year Years
-----------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets
Mortgage loans ............................. $ 23,947 $ 108,442 $390,626
Other loans ................................ 946 1,314 1,755
Short-term securities (1) .................. 34,785 -- --
Securities available for sale:
Mortgage-backed securities ............... 33,686 87,178 112,687
Other .................................... 21,033 -- 2,252
------------------------------------
Total interest-earning assets .......... 114,397 196,934 507,320
------------------------------------
Interest-Bearing Liabilities
Passbook accounts .......................... 2,670 8,010 19,782
NOW accounts ............................... -- -- --
Money market accounts ...................... 2,125 6,375 15,749
Certificate of deposit accounts ............ 97,460 161,083 197,647
Mortgagors' escrow deposits ................ -- -- --
Borrowed funds ............................. 75,000 95,000 114,900
------------------------------------
Total interest-bearing liabilities (2).. $ 177,255 $ 270,468 $348,078
------------------------------------
Interest rate sensitivity gap .............. $ (62,858) $ (73,534) $159,242
Cumulative interest-rate sensitivity gap ... $ (62,858) $(136,392) $ 22,850
Cumulative interest-rate sensitivity gap
as a percentage of total assets .......... (3.80)% (8.25)% 1.38%
Cumulative interest-earning assets as
a percentage of cumulative interest-
bearing liabilities ...................... 64.54% 69.54% 102.87%
-------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap
Analysis at December 31, 2002
---------------------------------------------------
More Than More Than
Three Years Five Years
to Five to Ten More Than
Years Years Ten Years Total
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets
Mortgage loans ............................. $442,711 $150,357 $ 50,109 $1,166,192
Other loans ................................ 1,590 2,881 -- 8,486
Short-term securities (1) .................. -- -- -- 34,785
Securities available for sale:
Mortgage-backed securities ............... 58,093 25,202 2,409 319,255
Other .................................... 276 10,462 5,706 39,729
---------------------------------------------------
Total interest-earning assets .......... 502,670 188,902 58,224 1,568,447
---------------------------------------------------
Interest-Bearing Liabilities
Passbook accounts .......................... 17,854 37,384 127,872 213,572
NOW accounts ............................... -- -- 39,795 39,795
Money market accounts ...................... 14,214 29,762 101,804 170,029
Certificate of deposit accounts ............ 78,958 8,182 -- 543,330
Mortgagors' escrow deposits ................ -- -- 9,812 9,812
Borrowed funds ............................. 113,000 95,264 -- 493,164
---------------------------------------------------
Total interest-bearing liabilities (2).. $224,026 $170,592 $ 279,283 $1,469,702
---------------------------------------------------
Interest rate sensitivity gap .............. $278,644 $ 18,310 $(221,059) $ 98,745
Cumulative interest-rate sensitivity gap ... $301,494 $319,804 $ 98,745
Cumulative interest-rate sensitivity gap
as a percentage of total assets .......... 18.24% 19.35% 5.97%
Cumulative interest-earning assets as
a percentage of cumulative interest-
bearing liabilities ...................... 129.56% 126.86% 106.72%
(1) Consists of interest-earning deposits and federal funds sold.
(2) Does not include non-interest-bearing demand accounts totaling $35.3
million at December 31, 2002.
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 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
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 16
--------------------------------------------------------------------------------
> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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
judgment 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 OTS currently
places its focus on the net portfolio value ratio, focusing on a rate shock up
or down of 200 basis points. The OTS uses the change in Net Portfolio Value
Ratio 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, 2002. Various estimates
regarding prepayment assumptions are made at each level of rate shock. Actual
results could differ significantly from these estimates. At December 31, 2002,
the Company is within the guidelines established by the Board of Directors for
each interest rate level for Net Interest Income and Net Portfolio Value. The
Company, however, does not meet the guideline established by the Board of
Directors for the Net Portfolio Value Ratio for plus 300 basis points, which is
6.00%. This exception has been reviewed with the Board of Directors, who is
monitoring the exception and considering the steps to be taken, if any, required
to bring this exposure into compliance in the near term.
===========================================================================================
Projected Percentage Change In
----------------------------------------- Net Portfolio
Change in Interest Rate Net Interest Income Net Portfolio Value Value Ratio
===========================================================================================
2002 2001 2002 2001 2002 2001
---------------------------------------------------------------
-300 basis points ..... -0.09% -4.72% 12.04% -3.02% 9.48% 9.76%
-200 basis points ..... 1.70 -1.11 4.84 -1.28 9.10 10.13
-100 basis points ..... 1.15 0.17 2.29 1.97 9.09 10.65
Base interest rate .... -- -- -- -- 9.09 10.67
+100 basis points ..... -2.10 -2.63 -8.58 -14.47 8.55 9.42
+200 basis points ..... -5.39 -5.89 -25.42 -28.81 7.22 8.10
+300 basis points ..... -10.06 -9.29 -43.83 -43.21 5.64 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 > 17
--------------------------------------------------------------------------------
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, 2002, 2001 and 2000, 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, 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest-earning assets:
Mortgage loans, net (1) (2) ......................... $1,118,016 $ 89,978 8.05% $1,030,126 $ 83,811 8.14%
Other loans, net (1) (2) ............................ 7,293 523 7.17 6,405 558 8.71
--------------------------------------------------------------------
Total loans, net ................................ 1,125,309 90,501 8.04 1,036,531 84,369 8.14
--------------------------------------------------------------------
Mortgage-backed securities .......................... 247,733 13,342 5.39 228,681 14,938 6.53
Other securities .................................... 62,110 2,436 3.92 21,640 1,260 5.82
--------------------------------------------------------------------
Total securities ................................ 309,843 15,778 5.09 250,321 16,198 6.47
--------------------------------------------------------------------
Interest-earning deposits and federal funds sold .... 39,798 627 1.58 33,810 1,332 3.94
--------------------------------------------------------------------
Total interest-earning assets ......................... 1,474,950 106,906 7.25 1,320,662 101,899 7.72
------------------ ------------------
Other assets .......................................... 98,201 88,237
---------- ----------
Total assets .................................... $1,573,151 $1,408,899
========== ==========
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Passbook accounts ................................. $ 208,250 3,147 1.51 $ 188,701 3,767 2.00
NOW accounts ...................................... 36,054 321 0.89 30,736 504 1.64
Money market accounts ............................. 126,431 3,039 2.40 71,820 2,309 3.21
Certificate of deposit accounts ................... 507,104 21,640 4.27 423,812 23,062 5.44
--------------------------------------------------------------------
Total due to depositors ......................... 877,839 28,147 3.21 715,069 29,642 4.15
▇▇▇▇▇▇▇▇▇▇' escrow accounts ....................... 15,064 57 0.38 13,013 69 0.53
--------------------------------------------------------------------
Total deposits .................................. 892,903 28,204 3.16 728,082 29,711 4.08
Other borrowed funds ................................ 496,964 26,360 5.30 508,434 29,991 5.90
--------------------------------------------------------------------
Total interest-bearing liabilities .................... 1,389,867 54,564 3.93 1,236,516 59,702 4.83
------------------ ------------------
Other liabilities (3) ................................. 53,905 42,845
---------- ----------
Total liabilities ............................... 1,443,772 1,279,361
Equity ................................................ 129,379 129,538
---------- ----------
Total liabilities and equity .................... $1,573,151 $1,408,899
========== ==========
Net interest income/net interest rate spread (4) ..... $ 52,342 3.32% $ 42,197 2.89%
================== ==================
Net interest-earning assets/net interest margin (5) ... $ 85,083 3.55% $ 84,146 3.20%
========== =================== =====
Ratio of interest-earning assets to
interest-bearing liabilities ........................ 1.06x 1.07x
===== =====
------------------------------------------------------------------------------------------
For the years ended December 31, 2000
------------------------------------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Interest-earning assets:
Mortgage loans, net (1) (2) ......................... $ 936,222 $76,094 8.13%
Other loans, net (1) (2) ............................ 6,681 686 10.27
------------------------------
Total loans, net ................................ 942,903 76,780 8.14
------------------------------
Mortgage-backed securities .......................... 261,903 18,304 6.99
Other securities .................................... 16,504 1,182 7.16
------------------------------
Total securities ................................ 278,407 19,486 7.00
------------------------------
Interest-earning deposits and federal funds sold .... 9,542 675 7.07
------------------------------
Total interest-earning assets ......................... 1,230,852 96,941 7.88
----------------
Other assets .......................................... 60,344
----------
Total assets .................................... $1,291,196
==========
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Passbook accounts ................................. $ 189,852 3,931 2.07
NOW accounts ...................................... 27,838 530 1.90
Money market accounts ............................. 42,791 1,438 3.36
Certificate of deposit accounts ................... 385,237 21,488 5.58
------------------------------
Total due to depositors ......................... 645,718 27,387 4.24
Mortgagors' escrow accounts ....................... 13,177 86 0.65
------------------------------
Total deposits .................................. 658,895 27,473 4.17
Other borrowed funds ................................ 478,675 29,575 6.18
------------------------------
Total interest-bearing liabilities .................... 1,137,570 57,048 5.01
----------------
Other liabilities (3) ................................. 35,073
----------
Total liabilities ............................... 1,172,643
Equity ................................................ 118,553
----------
Total liabilities and equity .................... $1,291,196
==========
Net interest income/net interest rate spread (4) ..... $39,893 2.87%
================
Net interest-earning assets/net interest margin (5) ... $ 93,282 3.24%
========== ====
Ratio of interest-earning assets to
interest-bearing liabilities ........................ 1.08x
=====
(1) Average balances include non-accrual loans.
(2) Loan interest income includes loan fee income of approximately $186,000,
$321,000 and $555,000 for the years ended December 31, 2002, 2001 and
2000, respectively.
(3) Includes non-interest-bearing demand deposit accounts of $29,827, $23,200
and $24,624 for the years ended December 31, 2002, 2001 and 2000,
respectively.
(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 > 18
--------------------------------------------------------------------------------
> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
> 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 Year Ended
December 31, 2002 December 31, 2001
Compared to Year Ended Compared to Year Ended
December 31, 2001 December 31, 2000
---------------------------------- -------------------------------
Due to Due to
--------------------- -------------------
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets
Mortgage loans, net ............................... $ 7,101 $ (934) $ 6,167 $ 7,623 $ 94 $ 7,717
Other loans, net .................................. 71 (106) (35) (27) (101) (128)
Mortgage-backed securities ........................ 1,169 (2,765) (1,596) (2,216) (1,150) (3,366)
Other securities .................................. 1,701 (525) 1,176 195 (117) 78
Interest-earning deposits and federal funds sold .. 203 (908) (705) 796 (139) 657
----------------------------------------------------------------------
Total interest-earning assets ................... 10,245 (5,238) 5,007 6,371 (1,413) 4,958
----------------------------------------------------------------------
Interest-Bearing Liabilities
Deposits:
Passbook accounts ............................... 365 (985) (620) (25) (139) (164)
NOW accounts .................................... 76 (259) (183) 84 (110) (26)
Money market accounts ........................... 1,422 (692) 730 932 (61) 871
Certificate of deposit accounts ................. 4,056 (5,478) (1,422) 2,100 (526) 1,574
Mortgagors' escrow deposits ..................... 10 (22) (12) (1) (16) (17)
Other borrowed funds .............................. (659) (2,972) (3,631) 1,533 (1,117) 416
----------------------------------------------------------------------
Total interest-bearing liabilities .............. 5,270 (10,408) (5,138) 4,623 (1,969) 2,654
----------------------------------------------------------------------
Net change in net interest income ................. $ 4,975 $ 5,170 $ 10,145 $ 1,748 $ 556 $ 2,304
======================================================================
> COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
General. Diluted earnings per share increased 14.5% to $1.34 for the year
ended December 31, 2002 from $1.17 for the year ended December 31, 2001. Net
income increased $1.4 million, or 8.9%, to $16.3 million for the year ended
December 31, 2002 from $14.9 million for the year ended December 31, 2001. This
was due to an increase in net interest income of $10.1 million, partially offset
by a decrease in non-interest income of $4.6 million and an increase in
non-interest expense of $3.1 million. As a result of the increased net income
before income taxes, there was a $1.1 million increase in income tax expense.
The decrease in non-interest income was primarily attributed to a $4.4 million
pre-tax impairment writedown of the Bank's investment in a WorldCom, Inc. senior
note during the second quarter of 2002. Excluding this impairment writedown,
which on an after-tax basis was $2.6 million, diluted earnings per share would
have increased 33.3% to $1.56 for the year ended December 31, 2002 from $1.17
per share for the year ended December 31, 2001, and net income for the year
ended December 31, 2002 would have increased 26.2% to $18.8 million from $14.9
million for the year ended December 31, 2001.
Return on average assets declined to 1.03% for the year ended December 31,
2002 from 1.06% for the year ended December 31, 2001, due to the increase in
average assets. Return on average equity increased to 12.57% for the year ended
December 31, 2002 from 11.52% for the year ended December 31, 2001. Excluding
the above mentioned impairment writedown, return on average assets and return on
average equity would have been 1.20% and 14.56%, respectively, for the year
ended December 31, 2002.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 19
--------------------------------------------------------------------------------
Interest Income. Interest income increased $5.0 million, or 4.9%, to
$106.9 million for the year ended December 31, 2002 from $101.9 million for the
year ended December 31, 2001. This increase is due to an increase of $154.3
million in the average balance of interest-earning assets, partially offset by a
47 basis point decline in the yield on interest-earning assets to 7.25% for
2002. The increase in interest and fees on loans of $6.1 million was partially
offset by decreases in interest and dividends on investment securities and
interest on interest-earning deposits and federal funds sold of $0.4 million and
$0.7 million, respectively. The increase in interest and fee income from loans
is due to an $88.8 million increase in the average balance of loans to $1.13
billion during the year ended December 31, 2002, which was partially offset by a
decrease in the yield of 10 basis points to 8.04% for the year ended December
31, 2002 from 8.14% for the year ended December 31, 2001. Our focus on the
origination of higher yielding multi-family residential and commercial real
estate mortgage loans, along with the origination of mixed-use property
one-to-four family residential mortgage loans, allowed us to maintain a higher
yield on our loan portfolio than we would have otherwise experienced, despite
the declining interest rate environment experienced during 2002 and 2001. The
decrease in interest and dividend income from investment securities is due to a
138 basis point decline in the yield to 5.09% for 2002 from 6.47% in 2001,
partially offset by a $59.5 million increase in the average balances of
investment securities during 2002 to $309.8 million. The decrease in interest on
interest-earning deposits and federal funds sold is due to a 236 basis point
decline in the yield to 1.58% for 2002 from 3.94% in 2002, partially offset by a
$6.0 million increase in the average balance of these items in 2002.
Interest Expense. Interest expense decreased $5.1 million, or 8.6%, to
$54.6 million for the year ended December 31, 2002 from $59.7 million for the
year ended December 31, 2001. The decrease in interest expense is due to a 90
basis point decline in the cost of interest-bearing liabilities, partially
offset by a $153.4 million increase in the average balance of total
interest-bearing liabilities to $1.39 billion during 2002.
The average balance for due to depositors increased $162.8 million to
$877.8 million for 2002. The cost of these deposits decreased 94 basis points to
3.21% during 2002, as decreases in cost were seen in all categories of deposits
due to the declining interest rate environment experienced during 2002 and 2001.
The average balance for borrowed funds decreased $11.4 million to $497.0 million
for 2002 from $508.4 million for 2001. The cost of borrowed funds decreased 60
basis points to 5.30% during 2002.
Net Interest Income. Net interest income for the year ended December 31,
2002 totaled $52.3 million, an increase of $10.1 million from $42.2 million for
2001. The net interest spread improved 43 basis points to 3.32% for 2002 from
2.89% in 2001, as the yield on interest-earning assets declined 47 basis points
while the cost of interest-bearing liabilities declined 90 basis points. The net
interest margin improved 35 basis points to 3.55% for the year ended December
31, 2002 from 3.20% for the year ended December 31, 2001.
Provision for Loan Losses. There was no provision for loan losses for the
years ended December 31, 2002 and 2001. 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, 2002 and 2001. The ratio of
non-performing loans to gross loans was 0.31% at December 31, 2002 compared to
0.22% at December 31, 2001. The allowance for loan losses as percentage of
non-performing loans was 183.23% and 283.85% at December 31, 2002 and 2001,
respectively. The ratio of allowance for loan losses to gross loans was 0.56%
and 0.61% at December 31, 2002 and 2001, respectively. The Company experienced
net charge-offs of $4,000 and $136,000 for the years ended December 31, 2002 and
2001, respectively.
Non-Interest Income. Non-interest income for the year ended December 31,
2002 decreased $4.6 million, or 75.1%, to $1.5 million from $6.1 million for the
year ended December 31, 2001. The decrease is primarily due to a $4.4 million
pretax impairment writedown of the Bank's investment in a WorldCom, Inc. senior
note. In addition, higher income from loan fees and banking services were offset
by reduced dividends on Federal Home Loan Bank of New York stock.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 20
--------------------------------------------------------------------------------
> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Non-Interest Expense. Non-interest expense for the year ended December 31,
2002 totaled $27.6 million, representing an increase of $3.1 million, or 12.9%,
from the year ended December 31, 2001. The increase is primarily attributed to
the Bank's continued focus on expanding its current product offerings to enhance
its ability to serve its customers. During the fourth quarter of 2001, the Bank
began increasing its staffing to provide additional services to its customers,
and to process the increasing volume of loan applications. Additional staffing
increases for these same purposes were made in 2002. The Bank also expanded its
training program to provide its staff with the knowledge needed to expand into
new services. Advertising and business promotions were also expanded in 2002 to
better promote new and existing services. Management continues to closely
monitor expenditures, resulting in an efficiency ratio of 47.4% for the year
ended December 31, 2002 compared to 50.1% for 2001.
Income Tax Provisions. Income tax expense for the year ended December 31,
2002 totaled $10.0 million, compared to $8.9 million for the year ended December
31, 2000. This increase is primarily attributed to the increase of $2.4 million
in income before income taxes. The effective tax rate was 38.0% for the year
ended December 31, 2002 compared to 37.3% for the year ended December 31, 2001.
> 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.
Return on average assets increased to 1.06% for the year ended December
31, 2001 from 0.96% for the year ended December 31, 2000. Return on average
equity increased to 11.52% for the year ended December 31, 2001 from 10.48% for
the year ended December 31, 2000.
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 was 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 was 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 unchanged for 2001 from 2000. Our focus on the origination of higher
yielding multi-family residential and commercial real estate mortgage loans,
along with the origination of mixed-use property one-to-four family residential
mortgage loans, allowed us to maintain 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 was 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 reflected 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 was 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.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 21
--------------------------------------------------------------------------------
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 was 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 was 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 was 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. 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 was 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 December 31, 2000. The increase was 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 focused on expanding its product offerings to enhance its
ability to serve its customers. Management continued 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 was 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.
> 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,
2002, the Bank had an approved overnight line of credit of $46.0 million with
the FHLB-NY. In total, as of December 31, 2002, the Bank may borrow up to $557.7
million from the FHLB-NY in Federal Home Loan advances and overnight lines of
credit. As of December 31, 2002, the Bank had borrowed $359.3 million in FHLB-NY
advances. There
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 22
--------------------------------------------------------------------------------
> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
were no funds outstanding at December 31, 2002 under the overnight line of
credit with the FHLB-NY. In addition, the Trust has $20.0 million in capital
securities (which are included in Borrowed Funds) and the Bank had $113.9
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, 2002, cash and cash
equivalents totaled $47.6 million, an increase of $9.1 million from December 31,
2001. The Company also held marketable securities available for sale with a
carrying value of $359.0 million at December 31, 2002.
At December 31, 2002, the Company had commitments to extend credit
(principally real estate mortgage loans) of $53.0 million and open lines of
credit for borrowers (principally construction loan and home equity loan lines
of credit) of $17.7 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
months and home equity loan lines of credit mature within ten years. 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 2002 were $54.6
million and $27.6 million, respectively. Certificates of deposit accounts which
are scheduled to mature in one year or less as of December 31, 2002 totaled
$258.5 million.
The market value of the assets of the Company's defined benefit pension
plan is $10.1 million at December 31, 2002, which is $1.2 million less than the
benefit obligation. During 2002, the Bank contributed $2.5 million to the
pension plan. The underfunding is due to a decline in the market value of
pension plan's investments in 2002 and 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 2002, funds provided by the Company's operating activities amounted
to $25.1 million. These funds, together with $139.2 million provided by
financing activities and $38.5 million available at the beginning of the year,
were utilized to fund net investing activities of $155.2 million. Financing
activities were primarily provided by a growth in due to depositors of $183.5
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
2002, the Bank had loan originations and purchases of $325.0 million. Further,
during 2002, the Company purchased $262.5 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, 2002 was $6.2 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
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 23
--------------------------------------------------------------------------------
December 31, 2002 and 2001, 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 had 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
two-year period ended December 31, 2001 was $0.4 million. Effective January 1,
2002, the Company no longer recorded 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, and the subsequent annual impairment test performed in January
2003, did not require an adjustment to the carrying value of the goodwill.
> CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are integral to understanding the
results of operations and statement of financial condition. These policies are
described in the Notes to Consolidated Financial Statements. Several of these
policies require management's judgment to determine the value of the Company's
assets and liabilities. The Company has established detailed written policies
and control procedures to ensure consistent application of these policies. The
accounting policy that requires significant management valuation judgment is
determining the allowance for loan losses.
An allowance for loan losses is provided to absorb estimated losses on
existing loans that may be uncollectable. Management reviews the adequacy of the
allowance for loan losses by reviewing all impaired loans on an individual
basis. The remaining portfolio is evaluated based on 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. Judgment is required to determine how many years of
historical loss experience are to be included when reviewing historical loss
experience. A full credit cycle must be used, or loss estimates may be
inaccurate. This evaluation is inherently subjective, as it requires estimates
that are susceptible to significant revisions as more information becomes
available.
Notwithstanding the judgment required in assessing the components of the
allowance for loan losses, the Company believes that the allowance for loan
losses is adequate to cover losses inherent in the loan portfolio. The policy
has been applied on a consistent basis for all periods presented in the
Consolidated Financial Statements.
> OTHER TRENDS AND CONTINGENCIES
Interest rates remained low during 2002, with long-term rates declining
over the course of the year, while short-term rates remained stable at low
levels until November, when they declined approximately 50 basis points. At
December 31, 2002, interest rates were at their lowest level in almost 40 years.
This presented significant challenges and opportunities in managing our mortgage
loan and investment portfolios. We remained strategically focused in 2002 on the
origination of multi-family residential and commercial real estate mortgage
loans, and on mixed-use property one-to-four family residential mortgage loans.
Mixed-use properties are those that 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 of this
strategy, we were able to achieve a higher yield on our mortgage portfolio then
we would have otherwise experienced, despite the declining interest-rate
environment experienced during 2002 and 2001.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 24
--------------------------------------------------------------------------------
> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
Due to the availability of lower interest rates, many of our mortgagors
chose to refinance their loans. We saw a significant increase in our mortgagors
refinancing with other institutions. In addition, due to depositors increased
$183.5 million during 2002. 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 readily marketable mortgage-backed
securities and shorter-term investment securities to provide readily available
funding for loan originations. Other securities primarily consists of securities
issued by government agencies and mutual or bond funds that invest in government
and government agency securities. At December 31, 2002, we had loans in process
of $189.2 million.
For the year ended December 31, 2002, the higher costing certificate of
deposits increased $76.2 million while lower costing deposits increased $107.3
million. We seek to maintain our deposits at competitive rates. In recent years,
we had increased our utilization of FHLB-NY advances and repurchase agreements
as alternative sources of funding. During 2002, as a result of the increase in
deposits, we decreased our borrowed funds by $20.3 million. As a result of the
declining interest rate environment experienced during 2002 and 2001, and the
increase in lower costing deposits, we experienced a decrease in our cost of
funds in each quarter during 2002. The cost of funds declined to 3.76% in the
fourth quarter of 2002 from 4.47% in the fourth quarter of 2001.
As a result of the low interest-rate environment during 2002 and 2001, the
yield on our total interest-earning assets declined 47 basis points. This was
more than offset by a 90 basis point decline in the cost of our total
interest-bearing liabilities. This resulted in an increase of 43 basis points in
the net interest spread to 3.32% for the year ended December 31, 2002 from 2.89%
for the year ended December 31, 2001. The net interest rate margin improved 35
basis points to 3.55% for the year ended December 31, 2002 from 3.20% for the
year ended December 31, 2001. The net interest margin improved to 3.55% in the
fourth quarter of 2002 from 3.34% in the fourth quarter of 2001.
We are unable to predict the direction of future interest rate changes.
Should interest rates increase during 2003, we could see an increase in the cost
of our existing deposit accounts and in obtaining new funds. However,
approximately 59% 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 as quickly. In a rising interest rate
environment, 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 2002, the nation's economy was generally considered
to be expanding slowly. World events, particularly the "War on Terror" and the
unsettled situation in the Middle East (primarily the situation with Iraq),
slowed the economic recovery. The local area economy has been 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.
In addition, job growth was limited during 2002. These economic conditions 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 cannot predict the effect of these economic conditions on the
Company's financial condition or operating results.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 25
--------------------------------------------------------------------------------
> CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
===========================================================================================================================
December 31, 2002 2001
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except share data)
> Assets
Cash and due from banks ...................................................................... $ 29,119 $ 20,008
Federal funds sold ........................................................................... 18,500 18,500
Securities available for sale:
Mortgage-backed securities ................................................................. 319,255 243,058
Other securities ........................................................................... 39,729 62,481
Loans ........................................................................................ 1,176,141 1,073,782
Less: Allowance for loan losses ............................................................ (6,581) (6,585)
--------------------------
Net loans ................................................................................ 1,169,560 1,067,197
Interest and dividends receivable ............................................................ 8,409 7,945
Real estate owned, net ....................................................................... -- 93
Bank premises and equipment, net ............................................................. 5,389 5,565
Federal Home Loan Bank of New York stock ..................................................... 22,213 25,422
Goodwill ..................................................................................... 3,905 3,905
Other assets ................................................................................. 36,879 33,355
--------------------------
Total assets ............................................................................. $ 1,652,958 $ 1,487,529
==========================
> Liabilities
Due to depositors:
Non-interest bearing ....................................................................... $ 35,287 $ 28,594
Interest-bearing ........................................................................... 966,726 789,923
Mortgagors' escrow deposits .................................................................. 9,812 10,065
Borrowed funds, including securities sold under agreements to repurchase
of $113,900 and $113,150 at December 31, 2002 and 2001, respectively ....................... 493,164 513,435
Other liabilities ............................................................................ 16,583 12,125
--------------------------
Total liabilities ........................................................................ 1,521,572 1,354,142
--------------------------
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 40,000,000 shares; 13,852,063 shares issued;
12,598,343 and 13,487,784 shares outstanding at December 31, 2002 and 2001, respectively) .. 139 139
Additional paid-in capital ................................................................... 47,208 45,280
Treasury stock, at average cost (1,253,720 and 364,279 shares at December 31, 2002 and
2001, respectively) ........................................................................ (21,733) (5,750)
Unearned compensation ........................................................................ (7,825) (7,766)
Retained earnings ............................................................................ 109,208 99,641
Accumulated other comprehensive income, net of taxes ......................................... 4,389 1,843
--------------------------
Total stockholders' equity ............................................................... 131,386 133,387
--------------------------
Total liabilities and stockholders' equity ............................................... $ 1,652,958 $ 1,487,529
==========================
The accompanying notes are an integral part of these consolidated financial
statements.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 26
--------------------------------------------------------------------------------
> CONSOLIDATED STATEMENTS OF INCOME
================================================================================================
For the years ended December 31, 2002 2001 2000
------------------------------------------------------------------------------------------------
(In thousands, except per share data)
> Interest and dividend income
Interest and fees on loans ............................... $ 90,501 $ 84,369 $ 76,780
Interest and dividends on securities:
Interest ............................................... 15,613 15,943 19,214
Dividends .............................................. 165 255 272
Other interest income .................................... 627 1,332 675
--------------------------------
Total interest and dividend income ................... 106,906 101,899 96,941
--------------------------------
> Interest expense
Deposits ................................................. 28,204 29,711 27,473
Other interest expense ................................... 26,360 29,991 29,575
--------------------------------
Total interest expense ............................... 54,564 59,702 57,048
--------------------------------
Net interest income .................................. 52,342 42,197 39,893
Provision for loan losses ................................ -- -- --
--------------------------------
Net interest income after provision for loan losses .. 52,342 42,197 39,893
--------------------------------
> Non-interest income
Other fee income ......................................... 2,896 2,261 2,053
Net gain (loss) on sales of securities and loans ......... (4,158) 321 (651)
Other income ............................................. 2,771 3,476 2,456
--------------------------------
Total non-interest income ............................ 1,509 6,058 3,858
--------------------------------
> Non-interest expense
Salaries and employee benefits ........................... 13,921 12,679 12,254
Occupancy and equipment .................................. 2,749 2,368 2,222
Professional services .................................... 2,759 2,291 2,245
Data processing .......................................... 1,566 1,313 1,309
Depreciation and amortization of premises and equipment .. 1,035 1,065 1,085
Other operating .......................................... 5,591 4,741 4,682
--------------------------------
Total non-interest expense ........................... 27,621 24,457 23,797
--------------------------------
Income before income taxes ............................... 26,230 23,798 19,954
--------------------------------
> Provision for income taxes
Federal .................................................. 8,247 7,245 6,195
State and local .......................................... 1,720 1,624 1,337
--------------------------------
Total provision for income taxes ..................... 9,967 8,869 7,532
--------------------------------
Net income ............................................... $ 16,263 $ 14,929 $ 12,422
================================
Basic earnings per share ................................. $ 1.40 $ 1.22 $ 0.99
Diluted earnings per share ............................... $ 1.34 $ 1.17 $ 0.97
The accompanying notes are an integral part of these consolidated financial
statements.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 27
--------------------------------------------------------------------------------
> CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
==================================================================================================================================
For the years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
> Common Stock
Balance, beginning of year ................................................................. $ 139 $ 114 $ 114
Stock dividend (4,617,270 shares, 2,120,885 shares funded from Treasury) ................... -- 25 --
-----------------------------------
Balance, end of year ....................................................................... $ 139 $ 139 $ 114
===================================
> Additional Paid-In Capital
Balance, beginning of year ................................................................. $ 45,280 $ 76,396 $ 75,952
Stock dividend ............................................................................. -- (33,169) --
Award of shares released from Employee Benefit Trust (35,341, 32,930 and 49,480
shares for the years ended December 31, 2002, 2001 and 2000, respectively) ............... 416 376 257
Restricted stock awards (69,075, 78,675 and 6,900 shares for the years ended
December 31, 2002, 2001 and 2000, respectively) .......................................... 146 391 3
Stock options exercised (8,250 shares for the year ended December 31, 2001) ................ -- 5 --
Tax benefit of unearned compensation ....................................................... 1,366 1,281 184
-----------------------------------
Balance, end of year ....................................................................... $ 47,208 $ 45,280 $ 76,396
===================================
> Treasury Stock
Balance, beginning of year ................................................................. $ (5,750) $ (31,755) $ (25,308)
Purchases of common shares outstanding (1,202,450, 639,950 and 475,516 shares
for the years ended December 31, 2002, 2001 and 2000, respectively) ...................... (21,196) (10,694) (6,797)
Stock dividend ............................................................................. -- 33,142 --
Restricted stock award forfeitures (2,180, 1,400 and 1,500 shares for the years
ended December 31, 2002, 2001 and 2000, respectively) .................................... (28) (26) (22)
Restricted stock awards (69,075, 52,950 and 9,600 shares for the years ended
December 31, 2002, 2001 and 2000, respectively) .......................................... 1,140 821 148
Repurchase of restricted stock awards (13,553, 23,757 and 23,234 shares for the years
ended December 31, 2002, 2001 and 2000, respectively) to satisfy tax obligations ......... (260) (519) (333)
Stock options exercised (259,667, 210,750, and 36,600 shares for the years ended
December 31, 2002, 2001, and 2000, respectively) ......................................... 4,361 3,281 557
-----------------------------------
Balance, end of year ....................................................................... $ (21,733) $ (5,750) $ (31,755)
===================================
> Unearned Compensation
Balance, beginning of year ................................................................. $ (7,766) $ (7,781) $ (9,142)
Release of shares from Employee Benefit Trust (87,679, 76,641 and 69,176 shares
for the years ended December 31, 2002, 2001 and 2000, respectively) ...................... 448 391 354
Restricted stock awards (69,075, 78,675 and 14,400 shares for the years ended
December 31, 2002, 2001 and 2000, respectively) .......................................... (1,286) (1,212) (145)
Restricted stock award forfeitures (2,180, 2,100 and 2,250 shares for the years ended
December 31, 2002, 2001 and 2000, respectively) .......................................... 28 26 22
Restricted stock award expense ............................................................. 751 810 1,130
-----------------------------------
Balance, end of year ....................................................................... $ (7,825) $ (7,766) $ (7,781)
===================================
Continued
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 28
--------------------------------------------------------------------------------
> CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
==================================================================================================================================
For the years ended December 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
> Retained Earnings
Balance, beginning of year ................................................................. $ 99,641 $ 89,896 $ 81,056
Net income ................................................................................. 16,263 14,929 12,422
Stock options exercised (259,667, 246,475 and 54,900 shares for the years ended
December 31, 2002, 2001 and 2000, respectively) .......................................... (2,458) (1,362) (159)
Restricted stock awards (7,500 shares for the year ended December 31, 2000) ................ -- -- (6)
Cash dividends declared and paid ........................................................... (4,238) (3,822) (3,417)
-----------------------------------
Balance, end of year ....................................................................... $ 109,208 $ 99,641 $ 89,896
===================================
> Accumulated Other Comprehensive Income, Net of Taxes
Balance, beginning of year ................................................................. $ 1,843 $ (133) $ (4,496)
Adjustment required to recognize minimum pension liability, net of taxes of
approximately $221 ....................................................................... (254) -- --
Change in net unrealized gain (loss), net of taxes of approximately $(347), $(1,719)
and $(3,434) for the years ended December 31, 2002, 2001 and 2000, respectively,
on securities available for sale ......................................................... 408 2,035 3,902
Less: Reclassification adjustment for losses (gains) included in net income, net of taxes
of approximately $(2,038), $35 and $(283) for the years ended December 31, 2002,
2001 and 2000, respectively .............................................................. 2,392 (59) 461
-----------------------------------
Balance, end of year ....................................................................... $ 4,389 $ 1,843 $ (133)
===================================
Total stockholders' equity ................................................................. $ 131,386 $ 133,387 $ 126,737
===================================
> Comprehensive Income
Net income ................................................................................. $ 16,263 $ 14,929 $ 12,422
Other comprehensive income, net of tax:
Minimum pension liability ................................................................ (254) -- --
Unrealized gains (losses) on securities .................................................. 2,800 1,976 4,363
-----------------------------------
Comprehensive income ....................................................................... $ 18,809 $ 16,905 $ 16,785
===================================
The accompanying notes are an integral part of these consolidated financial
statements.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 29
--------------------------------------------------------------------------------
> CONSOLIDATED STATEMENTS OF CASH FLOW
===================================================================================================================================
For the years ended December 31, 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
> Operating Activities
Net income ................................................................................... $ 16,263 $ 14,929 $ 12,422
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses .................................................................. -- -- --
Provision for losses on real estate owned .................................................. -- 4 --
Depreciation and amortization of bank premises and equipment ............................... 1,035 1,065 1,085
Amortization of goodwill ................................................................... -- 367 366
Impairment writedown of investment security ................................................ 4,429 -- --
Net (gain) loss on sales of securities ..................................................... 1 (94) 744
Net gain on sales of loans ................................................................. (272) (227) (93)
Net gain on sales of real estate owned ..................................................... (4) (15) (199)
Amortization of unearned premium, net of accretion of unearned discount .................... 2,988 1,215 1,142
Amortization of deferred income ............................................................ (174) (309) (544)
Deferred income tax (benefit) provision .................................................... (859) 132 7
Deferred compensation ...................................................................... 523 469 232
Net decrease in other assets and liabilities ................................................. (428) (3,912) (2,709)
Unearned compensation ........................................................................ 1,615 1,577 1,741
-----------------------------------
Net cash provided by operating activities ................................................ 25,117 15,201 14,194
-----------------------------------
> Investing Activities
Purchases of bank premises and equipment ..................................................... (859) (319) (1,194)
Net redemptions (purchases) of Federal Home Loan Bank shares ................................. 3,209 (490) (2,340)
Purchase of Bank Owned Life Insurance ........................................................ -- -- (20,000)
Purchases of securities available for sale ................................................... (262,506) (189,858) (28,667)
Proceeds from sales and calls of securities available for sale ............................... 39,022 39,395 28,735
Proceeds from maturities and prepayments of securities available for sale .................... 168,133 102,953 36,130
Net originations and repayments of loans ..................................................... (92,100) (79,840) (94,312)
Purchases of loans ........................................................................... (10,183) (887) (15,783)
Proceeds from sales of real estate owned ..................................................... 97 106 567
-----------------------------------
Net cash used in investing activities .................................................... (155,187) (128,940) (96,864)
-----------------------------------
> Financing Activities
Net increase in non-interest bearing deposits ................................................ 6,693 7,681 423
Net increase in interest-bearing deposits .................................................... 176,803 128,778 25,717
Net increase (decrease) in mortgagors' escrow deposits ....................................... (253) 2,312 (3,270)
Net decrease in short-term borrowed funds .................................................... -- (14,232) (5,768)
Proceeds from long-term borrowings ........................................................... 90,000 123,000 159,150
Repayment of long-term borrowings ............................................................ (110,271) (104,172) (96,374)
Purchases of treasury stock, net ............................................................. (19,553) (9,291) (6,732)
Cash dividends paid .......................................................................... (4,238) (3,822) (3,417)
-----------------------------------
Net cash provided by financing activities ................................................ 139,181 130,254 69,729
-----------------------------------
Net increase (decrease) in cash and cash equivalents ......................................... 9,111 16,515 (12,941)
Cash and cash equivalents, beginning of year ................................................. 38,508 21,993 34,934
-----------------------------------
Cash and cash equivalents, end of year ................................................... $ 47,619 $ 38,508 $ 21,993
===================================
> Supplemental Cash Flow Disclosure
Interest paid ................................................................................ $ 54,479 $ 59,937 $ 56,227
Income taxes paid ............................................................................ 9,273 7,615 7,849
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
The accompanying notes are an integral part of these consolidated financial
statements.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 30
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2002, 2001 and 2000
> 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 Financial Capital Trust I, 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 Financial Capital Trust I ("FFCTI"), Flushing
Preferred Funding Corporation ("FPFC"), Flushing Service Corporation ("FSC") and
FSB Properties, Incorporated ("Properties"). FFCTI is a special purpose business
trust formed to issue capital securities. FPFC is a real estate investment trust
formed 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 which are recognized in the Consolidated Statements of Income) 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
previously recognized on non-accrual
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 31
--------------------------------------------------------------------------------
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 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.
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. 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. The Board of Directors reviews and approves management's
evaluation of the adequacy of the allowance for loan losses on a quarterly
basis.
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 as of the end of each year.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 32
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
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 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, pro forma 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, 2002, 2001 and
2000 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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
Net income ...................... $16,263 $14,929 $12,422
Divided by:
Weighted average common
shares outstanding .......... 11,600 12,267 12,565
Weighted average common
stock equivalents ........... 514 504 227
-------------------------------------
Total weighted average common
shares outstanding &
common stock equivalents .... 12,114 12,771 12,792
Basic earnings per share ........ $ 1.40 $ 1.22 $ 0.99
Diluted earnings per share ...... $ 1.34 $ 1.17 $ 0.97
=====================================
Common stock equivalents that are antidilutive are not included in the
computation of diluted earnings per share. Options to purchase 274,400 shares at
$18.70, 255,600 shares at $16.18, and 290,550 shares at $10.38 were not included
in the computation of diluted earnings per share for 2002, 2001 and 2000,
respectively. Unvested restricted stock awards of 68,875 shares at $18.62,
62,925 shares at $16.27, and 110,400 shares at $10.37 were not included in the
computation of diluted earnings per share for 2002, 2001 and 2000, respectively
> 3. LOANS
The composition of loans is as follows at December 31:
================================================================================
2002 2001
--------------------------------------------------------------------------------
(In thousands)
One-to-four family residential--
conventional ................................... $ 262,944 $ 351,992
One-to-four family residential--
mixed-use properties ........................... 170,499 109,809
Multi-family residential ......................... 452,663 369,651
Commercial real estate ........................... 257,054 214,410
Co-operative apartments .......................... 5,205 6,601
Construction ..................................... 17,827 13,807
Small Business Administration .................... 4,301 3,911
Consumer and other ............................... 4,185 2,814
-------------------------
Gross loans .................................. 1,174,678 1,072,995
Unearned loan fees and deferred
costs, net ..................................... 1,463 787
-------------------------
Total loans .................................. $1,176,141 $1,073,782
=========================
The total amount of loans on non-accrual status, and loans classified as
impaired, at December 31, 2002, 2001 and 2000 was $3,592,000, $2,320,000 and
$1,618,000, respectively. The portion of the allowance for loan losses allocated
to impaired loans was $340,000 (5.2%), $541,000 (8.2%) and $257,000 (3.8%) at
December 31, 2002, 2001 and 2000, 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 $2,681,000, $2,105,000 and $1,692,000 for 2002, 2001 and
2000, respectively.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 33
--------------------------------------------------------------------------------
The following is a summary of interest foregone on non-accrual loans for
the years ended December 31:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Interest income that would have been
recognized had the loans performed in
accordance with their original terms ................. $298 $193 $141
Less: Interest income included in the
results of operations ................................ 76 76 62
--------------------
Foregone interest ...................................... $222 $117 $ 79
====================
The following are changes in the allowance for loan losses for the years
ended December 31:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Balance, beginning of year ................. $ 6,585 $ 6,721 $ 6,818
Provision for loan losses .................. -- -- --
Charge-offs ................................ (12) (149) (99)
Recoveries ................................. 8 13 2
-------------------------------
Balance, end of year ..................... $ 6,581 $ 6,585 $ 6,721
===============================
> 4. REAL ESTATE OWNED
The following are changes in the allowance for losses on real estate owned
for the years ended December 31:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(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:
================================================================================
2002 2001
--------------------------------------------------------------------------------
(In thousands)
Land ..................................................... $ 801 $ 801
Building and leasehold improvements ...................... 4,214 4,231
Equipment and furniture .................................. 9,595 9,162
------------------
Total .................................................. 14,610 14,194
Less: Accumulated depreciation
and amortization ....................................... 9,221 8,629
------------------
Bank premises and equipment, net ....................... $ 5,389 $ 5,565
==================
--------------------------------------------------------------------------------
> 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, 2002, 2001 and 2000.
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, 2002 are as follows:
========================================================================================================
Gross Gross
Amortized Estimated Unrealized Unrealized
Cost Fair Value Gains Losses
--------------------------------------------------------------------------------------------------------
(In thousands)
U.S. Treasury securities and government agencies ... $ 15,376 $ 15,609 $ 233 $ --
Corporate debt securities .......................... 1,700 2,252 552 --
Mutual funds ....................................... 19,535 19,412 99 222
Other .............................................. 1,853 2,456 645 42
--------------------------------------------
Total other securities ........................... 38,464 39,729 1,529 264
--------------------------------------------
GNMA ............................................... 94,302 97,529 3,227 --
FNMA ............................................... 114,103 116,983 2,882 2
FHLMC .............................................. 46,468 47,153 691 6
REMIC and CMO ...................................... 57,049 57,590 619 78
--------------------------------------------
Total mortgage-backed securities ................. 311,922 319,255 7,419 86
--------------------------------------------
Total securities available for sale .............. $350,386 $358,984 $8,948 $350
============================================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 34
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
The amortized cost and estimated fair value of the Company's securities,
classified as available for sale at December 31, 2002, 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 Fair
Cost Value
--------------------------------------------------------------------------------
(In thousands)
Due in one year or less .................... $ 20,513 $ 21,033
Due after one year through five years ...... 1,975 2,528
Due after five years through ten years ..... 10,282 10,462
Due after ten years ........................ 5,694 5,706
------------------------
Total other securities ................... 38,464 39,729
Mortgage-backed securities ................. 311,922 319,255
------------------------
Total securities available for sale ...... $350,386 $358,984
========================
The amortized cost and estimated fair value of the Company's securities
classified as available for sale at December 31, 2001 were 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
===============================================
For the year ended December 31, 2002, gross gains of $423,000 and losses
of $424,000 were realized on sales of securities available for sale. In
addition, an impairment writedown of $4,429,000 was recorded during the year
ended December 31, 2002. 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.
> 7. DEPOSITS
Total deposits at December 31, 2002 and 2001, and the weighted average
rate on deposits at December 31, 2002, are as follows:
-----------------------------------------------------------------------------------------
Weighted
Average Rate
2002 2001 2002
-----------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-bearing deposits:
Certificate of deposit accounts ..... $ 543,330 $467,172 3.96%
Passbook savings accounts ........... 213,572 195,855 1.00
Money market accounts ............... 170,029 93,789 2.31
NOW accounts ........................ 39,795 33,107 0.75
---------------------------------------
Total interest-bearing deposits ... 966,726 789,923
Non-interest bearing deposits:
Demand accounts ..................... 35,287 28,594
-------------------------
Total due to depositors ........... 1,002,013 818,517
Mortgagors' escrow deposits ........... 9,812 10,065 0.38
---------------------------------------
Total deposits .................... $1,011,825 $828,582
=======================================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 35
--------------------------------------------------------------------------------
The aggregate amount of time deposits with denominations of $100,000 or
more was $100,926,000 and $75,175,000 at December 31, 2002 and 2001,
respectively.
Interest expense on deposits is summarized as follows for the years ended
December 31:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Certificate of deposit accounts ............... $21,640 $23,062 $21,488
Passbook savings accounts ..................... 3,147 3,767 3,931
Money market accounts ......................... 3,039 2,309 1,438
NOW accounts .................................. 321 504 530
-----------------------------
Total due to depositors ..................... 28,147 29,642 27,387
Mortgagors' escrow deposits ................... 57 69 86
-----------------------------
Total interest expense on deposits .......... $28,204 $29,711 $27,473
=============================
> 8. BORROWED FUNDS
Borrowed funds are summarized as follows at December 31:
=====================================================================================================================
2002 2001
------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Repurchase agreements--fixed rate:
Due in 2002 ................................................ $ -- --% $ 9,250 6.01%
Due in 2005 ................................................ 10,900 6.36 10,900 6.36
Due in 2006 ................................................ 18,000 4.96 18,000 4.96
Due in 2007 ................................................ 60,000 5.25 50,000 5.64
Due in 2009 ................................................ 25,000 5.52 25,000 5.52
----------------------------------------------
Total repurchase agreements .............................. 113,900 5.37 113,150 5.60
----------------------------------------------
FHLB-NY advances--adjustable rate:
Due in 2002 ................................................ -- -- 25,000 1.95
Due in 2003 ................................................ 25,000 5.50 25,000 5.50
Due in 2004 ................................................ 50,000 2.54 50,000 3.15
Due in 2007 ................................................ 20,000 3.15 -- --
----------------------------------------------
Total FHLB-NY advances--adjustable rate .................. 95,000 3.45 100,000 3.44
----------------------------------------------
FHLB-NY advances--fixed rate:
Due in 2002 ................................................ -- -- 76,000 5.93
Due in 2003 ................................................ 85,000 6.12 85,000 6.12
Due in 2004 ................................................ 49,000 5.33 49,000 5.33
Due in 2006 ................................................ 35,000 4.93 25,000 4.99
Due in 2007 ................................................ 25,000 6.15 25,000 6.15
Due in 2008 ................................................ 30,000 3.85 -- --
Due in 2010 ................................................ 40,000 7.30 40,000 7.30
Due in 2011 ................................................ 264 7.34 285 7.34
----------------------------------------------
Total FHLB-NY advances--fixed rate ....................... 264,264 5.74 300,285 6.01
----------------------------------------------
Total FHLB-NY advances ................................... 359,264 5.13 400,285 5.37
----------------------------------------------
Other borrowings--adjustable rate:
Due in 2032 ................................................ 20,000 5.43 -- --
----------------------------------------------
Total borrowings ......................................... $493,164 5.20% $513,435 5.42%
==============================================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 36
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
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:
================================================================================
2002 2001
--------------------------------------------------------------------------------
(Dollars in thousands)
Book value of collateral ............................. $111,634 $119,011
Estimated fair value of collateral ................... 111,634 119,011
Average balance of outstanding
agreements during the year ......................... 108,514 156,640
Maximum balance of outstanding
agreements at a month end
during the year ...................................... 113,900 182,226
Average interest rate of outstanding
agreements during the year ......................... 5.58% 5.71%
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.
The Holding Company also has a trust formed under the laws of the State of
Delaware for the purpose of issuing capital and common securities and investing
the proceeds thereof in junior subordinated debentures of the Holding Company.
On July 11, 2002, FFCTI issued $20.0 million of floating rate capital
securities. The capital securities have a maturity date of October 7, 2032, are
callable at par in 5 years and every quarter thereafter, and pay cumulative cash
distributions at a floating per annum rate of interest, reset quarterly, equal
to 3.65% over 3-month LIBOR, with an initial rate of 5.51387%. The rate was
5.425% at December 31, 2002. A rate cap of 12.50% is effective through October
7, 2007. The Holding Company has guaranteed the payment of FFCTI's obligations
under these capital securities.
> 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 FFCTI and FPFC, which file separate Federal, New York State and New
York City income tax returns as a trust and real estate investment trust,
respectively. 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 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, 2002, 2001 and 2000, 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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Federal:
Current .................................. $ 9,174 $ 7,350 $ 6,387
Deferred ................................. (927) (105) (192)
-------------------------------
Total federal tax provision ............ 8,247 7,245 6,195
-------------------------------
State and Local:
Current .................................. 1,652 1,387 1,138
Deferred ................................. 68 237 199
-------------------------------
Total state and local
tax provision ........................ 1,720 1,624 1,337
-------------------------------
Total income tax provision ................. $ 9,967 $ 8,869 $ 7,532
===============================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 37
--------------------------------------------------------------------------------
The income tax provision in the Consolidated Statements of Income has been
provided at effective rates of 38.0%, 37.3% and 37.7% for the years ended
December 31, 2002, 2001 and 2000, respectively. The effective rates differ from
the statutory federal income tax rate as follows for the years ended December
31:
================================================================================================================================
2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Taxes at federal statutory rate ................................ $ 9,181 35.0% $ 8,329 35.0% $ 6,984 35.0%
Increase (reduction) in taxes resulting from:
State & local income tax, net of Federal income tax benefit .. 1,118 4.3 1,056 4.5 869 4.3
Other ........................................................ (332) (1.3) (516) (2.2) (321) (1.6)
------------------------------------------------------------
Taxes at effective rate .................................... $ 9,967 38.0% $ 8,869 37.3% $ 7,532 37.7%
============================================================
The components of the income taxes attributable to income from operations
and changes in equity are as follows for the years ended December 31:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Income from operations ................ $ 9,967 $ 8,869 $ 7,532
Equity:
Change in fair value of
securities available for sale ....... 2,385 1,684 3,717
Adjustment required to
recognize minimum
pension liability ................... (221) -- --
Compensation expense for
tax purposes in excess of
that recognized for financial
reporting purposes .................. (1,366) (1,281) (184)
-----------------------------------
Total ........................... $ 10,765 $ 9,272 $ 11,065
===================================
The components of the net deferred tax asset are as follows at December
31:
================================================================================
2002 2001
--------------------------------------------------------------------------------
(In thousands)
Deferred tax asset:
Postretirement benefits .................................. $1,923 $3,117
Impairment writedown ..................................... 1,849 --
Allowance for loan losses ................................ 206 --
Minimum pension liability ................................ 221 --
Other .................................................... 237 907
----------------
Deferred tax asset ..................................... 4,436 4,024
----------------
Deferred tax liabilities:
Unrealized gains on securities
available for sale ....................................... 3,955 1,570
Allowance for loan losses ................................ -- 545
Depreciation ............................................. 64 192
Other .................................................... 14 9
----------------
Deferred tax liability ................................. 4,033 2,316
----------------
Net deferred tax asset included in
other assets ............................................. $ 403 $1,708
================
The Company has recorded a net deferred tax asset of $403,000. 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, 2002.
> 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 50% of the employee's contributions, up to a
maximum of 3% 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 $679,000, $619,000 and $581,000 for the years ended December 31, 2002, 2001
and 2000, respectively.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 38
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
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, 2002 the loan had an outstanding balance of $5,465,000, 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. ▇▇▇▇▇▇ 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, 2002, 2001 and 2000, the Company funded $597,000, $545,000 and
$511,000, 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:
================================================================================
2002 2001
--------------------------------------------------------------------------------
Shares owned by Employee Benefit
Trust, beginning balance ..................... 1,246,237 1,279,167
▇▇▇▇▇▇ released and allocated .................. 35,341 32,930
---------------------------
Shares owned by Employee Benefit
Trust, ending balance ........................ 1,210,896 1,246,237
===========================
Market value of unallocated shares ............. $19,832,055 $22,183,019
===========================
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 stockholders. 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 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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
Shares available for future
Restricted Stock Awards
at beginning of year ................ 331,849 238,203 215,502
Shares authorized for Restricted
Stock Awards .......................... -- 135,000 --
Restricted Stock Awards ................. (69,075) (78,675) (14,400)
Restricted shares repurchased
to satisfy tax obligations ............ 13,553 35,221 34,851
Forfeitures ............................. 2,180 2,100 2,250
---------------------------------
Shares available for future
Restricted Stock Awards
at end of year ........................ 278,507 331,849 238,203
=================================
The Board of Directors has discretion to determine the vesting period of
all grants to employees. 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 2002, 2001 and 2000 was $751,000,
$810,000 and $1,130,000, respectively.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 39
--------------------------------------------------------------------------------
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 stockholders. 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 to employees. 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, 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
Granted ................................. 275,000 $18.70
Exercised ............................... (259,667) $ 7.33
Forfeited ............................... (4,860) $13.23
-------------------------
Balance Outstanding
December 31, 2002 ......................... 1,938,469 $10.71
=========================
Shares available for future stock option
awards at December 31, 2002 ............... 287,076
=========================
--------------------------------------------------------------------------------
The following table summarizes information about the Stock Option Plan at
December 31, 2002:
===================================================================================================
Options Outstanding Options Exercisable
----------------------------------- ---------------------------------
Number Weighted Average Number
Outstanding at Remaining Exercisable at Weighted Average
Exercise Prices 12/31/02 Contractual Life 12/31/02 Exercise Price
---------------------------------------------------------------------------------------------------
$7.22 .............. 966,209 3.4 Years 966,209 $ 7.22
$8.00-$11.00 ....... 339,810 6.1 Years 224,700 $ 9.62
$11.01-$14.00 ...... 103,950 7.7 Years 28,350 $11.83
$14.01-$17.00 ...... 254,100 8.5 Years 62,700 $16.13
$17.01-$20.00 ...... 274,400 9.5 Years -- --
-----------------------------------------------------------------------
$7.22-$20.00 ....... 1,938,469 5.6 Years 1,281,959 $ 8.18
=======================================================================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 40
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
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.
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(Dollars in thousands,
except per share data)
Net income:
As reported ................................ $16,263 $14,929 $12,422
Pro forma .................................. $15,751 $14,219 $11,655
Diluted earnings per share:
As reported ................................ $ 1.34 $ 1.17 $ 0.97
Pro forma .................................. $ 1.30 $ 1.11 $ 0.91
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 2002, 2001 and 2000 are as follows:
================================================================================
2002 2001 2000
Grants Grants Grants
--------------------------------------------------------------------------------
Dividend yield ................................... 1.93% 2.13% 2.65%
Expected volatility .............................. 29.33% 27.49% 24.37%
Risk-free interest rate .......................... 4.76% 5.27% 6.08%
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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Service cost ..................................... $ 452 $ 396 $ 350
Interest cost .................................... 695 683 621
Amortization of past service liability ........... (24) (24) (25)
Amortization of unrecognized gain ................ -- (116) (48)
Expected return on plan assets ................... (947) (986) (823)
-------------------------
Net pension expense (benefit) .................. $ 176 $ (47) $ 75
=========================
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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year ................ $ 9,927 $ 8,671 $ 7,998
Service cost ....................... 452 396 350
Interest cost ...................... 695 683 621
Actuarial loss ..................... 738 594 94
Benefits paid ...................... (495) (417) (392)
Plan amendments .................... 12 -- --
------------------------------------
Benefit obligation at
end of year .................... 11,329 9,927 8,671
------------------------------------
Change in plan assets:
Market value of assets at
beginning of year ................ 9,215 11,155 9,871
Actual return on plan assets ....... (1,136) (1,523) 1,676
Employer contributions ............. 2,528 -- --
Benefits paid ...................... (495) (417) (392)
------------------------------------
Market value of plan assets
at end of year ................. 10,112 9,215 11,155
------------------------------------
Funded status ........................ (1,217) (712) 2,484
Unrecognized net loss (gain)
from past experience
different from that assumed
and effects of changes
in assumptions ..................... 3,638 805 (2,414)
Prior service cost not yet
recognized in periodic
pension cost ....................... (37) (62) (86)
------------------------------------
Prepaid (accrued) pension cost
included in other assets/
liabilities ........................ $ 2,384 $ 31 $ (16)
====================================
Assumptions used to develop periodic pension amounts were:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
Weighted average discount rate ....... 6.50% 7.25% 8.00%
Rate of increase in future
compensation levels ................ 4.00% 4.50% 5.50%
Expected long-term rate of
return on assets ................... 8.50% 9.00% 9.00%
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 41
--------------------------------------------------------------------------------
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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Service cost ........................................ $ 38 $ 27 $ 20
Interest cost ....................................... 32 11 8
Amortization of unrecognized loss ................... 14 -- --
Amortization of past service liability .............. 119 119 109
----------------------
Net pension expense ................................. $203 $157 $137
======================
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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year ...................... $ 2,508 $ 2,043 $ 1,913
Service cost ............................. 38 27 20
Interest cost ............................ 32 11 8
Actuarial (gain) loss .................... -- 465 (24)
Benefits paid ............................ (60) (38) (22)
Plan amendments .......................... -- -- 148
-------------------------------
Benefit obligation at
end of year .......................... 2,518 2,508 2,043
-------------------------------
Change in plan assets:
Market value of assets at
beginning of year ...................... -- -- --
Employer contributions ................... 60 38 22
Benefits paid ............................ (60) (38) (22)
-------------------------------
Market value of assets at
end of year .......................... -- -- --
-------------------------------
Funded status .............................. (2,518) (2,508) (2,043)
Unrecognized net loss from
past experience different
from that assumed and
effects of changes
in assumptions ........................... 475 489 15
Prior service cost not yet
recognized in periodic
pension cost ............................. 663 782 901
Adjustment required to
recognize minimum liability .............. (1,123) -- --
-------------------------------
Accrued pension cost included
in other liabilities ..................... $(2,503) $(1,237) $(1,127)
===============================
For the years ended December 31, 2002, 2001 and 2000, the weighted average
discount rate used in determining the actuarial present value of the projected
benefit obligation was 6.50%, 7.25% and 8.00%, respectively. The level of future
retainers and meeting fees was projected to remain constant.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 42
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
> 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 50% cost
sharing arrangement. Effective January 1, 2000, the spouses of future retirees
will be required to pay 100% 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, 2002, 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:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year ...................... $ 2,164 $ 2,227 $ 2,407
Service cost ............................. 98 79 82
Actuarial (gain) loss .................... 1,131 (222) (69)
Plan amendments .......................... -- -- (265)
Interest cost ............................ 153 174 171
Benefits paid ............................ (123) (94) (99)
-------------------------------
Benefit obligation at
end of year .......................... 3,423 2,164 2,227
-------------------------------
Change in plan assets:
Market value of assets at
beginning of year ...................... -- -- --
Employer contributions ................... 123 94 99
Benefits paid ............................ (123) (94) (99)
-------------------------------
Market value of assets at
end of year .......................... -- -- --
-------------------------------
Funded status .............................. (3,423) (2,164) (2,227)
Unrecognized net (gain) loss from
past experience different from
that assumed and effects of
changes in assumptions ................... 1,118 (13) 208
Prior service cost not yet
recognized in periodic expense ........... (397) (527) (658)
-------------------------------
Accrued postretirement cost
included in other liabilities ............ $(2,702) $(2,704) $(2,677)
===============================
Assumptions used in determining the actuarial present value of the
accumulated postretirement benefit obligations at December 31 are as follows:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
Rate of return on plan assets .............. NA NA NA
Discount rate .............................. 6.50% 7.25% 8.00%
Rate of increase in health care costs:
Initial .................................. 9.00% 9.00% 6.50%
Ultimate (year 2008) ..................... 4.50% 4.50% 5.00%
Annual rate of salary increases ............ 4.50% 5.50% 5.00%
============================
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, 2002 by $327,000 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit costs for the year then ended by $26,000.
The resulting net periodic postretirement benefit expense consisted of the
following components for the years ended December 31:
================================================================================
2002 2001 2000
--------------------------------------------------------------------------------
(In thousands)
Service cost ............................... $ 98 $ 79 $ 82
Interest cost .............................. 153 174 171
Amortization of unrecognized loss .......... -- -- 4
Amortization of past service liability ..... (130) (131) (124)
-----------------------------
Net postretirement benefit expense ....... $ 121 $ 122 $ 133
=============================
> 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, 2002, the Bank's liquidation account was $6.2
million and was presented within retained earnings.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 43
--------------------------------------------------------------------------------
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, 2002, the Bank had $19.6 million in retained earnings available to
distribute 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 as the stock dividend was not paid on these
shares.
Treasury Stock Transactions:
During 2002, the Holding Company repurchased 1,202,450 shares of its
outstanding common stock on the open market under its stock repurchase programs.
During 2001, 2,120,885 shares of Treasury Stock were used to pay the stock
dividend discussed above. At December 31, 2002, the Company had 1,253,720 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 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, 2002, 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, 2002 December 31, 2001
---------------------- -----------------------
Percent of Percent of
Amount Assets Amount Assets
----------------------------------------------------------------------------------------
(Dollars in thousands)
Tangible capital:
Capital level ................. $125,656 7.74% $107,811 7.32%
Requirement ................... 24,344 1.50% 22,081 1.50%
Excess ........................ $101,312 6.24% $ 85,730 5.82%
Core (Tier I) capital:
Capital level ................. $125,656 7.74% $107,811 7.32%
Requirement ................... 48,687 3.00% 44,162 3.00%
Excess ........................ $ 76,969 4.74% $ 63,649 4.32%
Total risk-based capital:
Capital level ................. $132,237 14.27% $114,396 13.58%
Requirement ................... 74,151 8.00% 67,395 8.00%
Excess ........................ $ 58,086 6.27% $ 47,001 5.58%
=============================================
--------------------------------------------------------------------------------
> 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.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 44
--------------------------------------------------------------------------------
> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
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 and home equity loan lines of credit)
amounted to approximately $53,043,000 and $17,667,000, respectively, at December
31, 2002. 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 and home equity
lines of credit mature within ten years. 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, 2002, commitments to extend credit for fixed-rate real
estate mortgages amounted to $16.1 million, with an average interest rate of
7.17%.
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 creditworthiness on a
case-by-case basis. Collateral held consists primarily of real estate.
FFCTI issued $20.0 million of floating rate capital securities in July
2002. The Holding Company has guaranteed the payment of FFCTI's obligations
under these capital securities.
The Company's minimum annual rental payments for Bank premises due under
non-cancelable leases are as follows:
================================================================================
Minimum Rental
--------------------------------------------------------------------------------
(In thousands)
Years ending December 31:
2003 ......................................................... $ 971
2004 ......................................................... 998
2005 ......................................................... 968
2006 ......................................................... 887
2007 ......................................................... 273
Thereafter ................................................... 745
------
Total minimum payments required ............................ $4,842
======
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, 2002, 2001 and 2000 was approximately $936,000,
$715,000 and $643,000, 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 creditworthiness 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.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 45
--------------------------------------------------------------------------------
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, 2002 and 2001 and the 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 $1,169,560,000
and $1,067,197,000 at December 31, 2002 and 2001, respectively, was
$1,207,408,000 and $1,092,221,000 at December 31, 2002 and 2001, 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
$1,002,013,000 and $818,517,000 at December 31, 2002 and 2001, respectively, was
$1,018,495,000 and $831,808,000 at December 31, 2002 and 2001, 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
$493,164,000 and $513,435,000 at December 31, 2002 and 2001, respectively, was
$524,480,000 and $527,398,000 at December 31, 2002 and 2001, 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.
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 46
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> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the years ended December 31, 2002, 2001 and 2000
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 creditworthiness
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, 2002 and 2001, 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 had 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, and the subsequent annual impairment test performed in January
2003, did not require an adjustment to the carrying value of the goodwill.
--------------------------------------------------------------------------------
> 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the fiscal years ended
December 31, 2002 and 2001 is presented below:
=============================================================================================================================
2002 2001
-----------------------------------------------------------------------------------------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Quarterly operating data:
Interest income ......................... $27,260 $26,855 $ 26,678 $26,113 $26,038 $25,583 $25,227 $25,051
Interest expense ........................ 13,636 13,732 13,494 13,702 14,501 15,042 15,079 15,080
-------------------------------------------------------------------------------
Net interest income ................... 13,624 13,123 13,184 12,411 11,537 10,541 10,148 9,971
Provision for loan losses ............... -- -- -- -- -- -- -- --
Other operating income .................. 1,543 1,476 (2,896) 1,386 1,417 1,300 1,618 1,723
Other expense ........................... 7,234 6,913 6,973 6,501 6,567 5,939 5,984 5,967
-------------------------------------------------------------------------------
Income before income tax expense ...... 7,933 7,686 3,315 7,296 6,387 5,902 5,782 5,727
Income tax expense ...................... 3,014 2,921 1,274 2,758 2,427 2,184 2,140 2,118
-------------------------------------------------------------------------------
Net income ............................ $ 4,919 $ 4,765 $ 2,041 $ 4,538 $ 3,960 $ 3,718 $ 3,642 $ 3,609
===============================================================================
Basic earnings per share ................ $ 0.44 $ 0.41 $ 0.17 $ 0.38 $ 0.33 $ 0.30 $ 0.30 $ 0.29
Diluted earnings per share .............. $ 0.42 $ 0.39 $ 0.17 $ 0.36 $ 0.31 $ 0.29 $ 0.28 $ 0.28
Dividends per share ..................... $ 0.090 $ 0.090 $ 0.090 $ 0.090 $ 0.080 $ 0.080 $ 0.073 $ 0.073
Average common shares outstanding for:
Basic earnings per share .............. 11,258 11,491 11,689 11,970 12,107 12,316 12,284 12,364
Diluted earnings per share ............ 11,741 12,070 12,308 12,541 12,700 12,882 12,832 12,800
===============================================================================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 47
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> 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, 2002 and 2001 are presented below:
================================================================================
2002 2001
--------------------------------------------------------------------------------
(In thousands)
Condensed Statements of Financial Condition
Assets:
Cash and due from banks ............................ $ 9,976 $ 12,679
Federal funds sold and overnight
interest-earning deposit ........................... -- 924
Securities available for sale:
Mortgage-backed securities ....................... -- --
Other securities ................................. 6,153 6,263
Interest receivable ................................ 30 17
Investment in subsidiaries ......................... 134,598 113,232
Other assets ....................................... 1,821 600
----------------------
Total assets ................................... $ 152,578 $ 133,715
======================
Liabilities:
Other liabilities .................................. $ 573 $ 328
Borrowings ......................................... 20,619 --
----------------------
Total liabilities .................................... 21,192 328
----------------------
Stockholders' equity:
Common stock ....................................... 139 139
Additional paid-in capital ......................... 47,208 45,280
Treasury stock ..................................... (21,733) (5,750)
Unearned compensation .............................. (7,825) (7,766)
Retained earnings .................................. 109,208 99,641
Accumulated other comprehensive
income, net of taxes ............................. 4,389 1,843
----------------------
Total equity ................................... 131,386 133,387
----------------------
Total liabilities and equity ................... $ 152,578 $ 133,715
======================
================================================================================
2002 2001
--------------------------------------------------------------------------------
(In thousands)
Condensed Statements of Income
Dividends from the Bank ................................ $ -- $ 15,000
Interest income ........................................ 333 438
Interest expense ....................................... (540) --
Non-interest income .................................... -- --
Other operating expenses ............................... (722) (609)
--------------------
Income before taxes and equity in
undistributed earnings of subsidiary ............... (929) 14,829
Income tax benefit ..................................... 457 127
--------------------
Income before equity in undistributed
earnings of subsidiary ............................. (472) 14,956
Excess of dividends over current
year earnings ........................................ -- (27)
Equity in undistributed earnings
of the Bank .......................................... 16,735 --
--------------------
Net income ....................................... $ 16,263 $ 14,929
====================
================================================================================
2002 2001
--------------------------------------------------------------------------------
(In thousands)
Condensed Statements of Cash Flow
Operating activities:
Net income ........................................... $ 16,263 $ 14,929
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed earnings
of the Bank .................................... (16,735) 27
Net decrease in operating assets
and liabilities ................................ (898) (91)
Amortization of unearned
premium, net of accretion
of unearned discount ......................... 1 8
Unearned compensation, net ....................... 1,615 1,577
--------------------
Net cash provided by
operating activities ....................... 246 16,450
--------------------
Investing activities:
Purchases of securities available
for sale ......................................... (112) (709)
Proceeds from sales and calls of
securities available for sale ...................... 30 1,460
Investment in subsidiary ............................. (619) --
--------------------
Net cash (used) provided
by investing activities .................... (701) 751
--------------------
Financing activities:
Purchase of treasury stock ........................... (19,553) (9,289)
Cash dividends paid .................................. (4,238) (3,824)
Proceeds from long-term borrowings ................... 20,619 --
--------------------
Net cash used in
financing activities ....................... (3,172) (13,113)
--------------------
Net increase (decrease) in cash and
cash equivalents ..................................... (3,627) 4,088
Cash and cash equivalents, beginning
of year .............................................. 13,603 9,515
--------------------
Cash and cash equivalents, end of year ................. $ 9,976 $ 13,603
====================
--------------------------------------------------------------------------------
Flushing Financial Corporation and Subsidiaries > 48
--------------------------------------------------------------------------------
> 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, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 29, 2003