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| FFIC > SEC Filings for FFIC > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
ITEM 2.
This Quarterly Report on Form 10-Q ("Quarterly Report") should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2008. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.
As used in this discussion and analysis, the words "we," "us," "our" and the "Company" are used to refer to Flushing Financial Corporation and our consolidated subsidiaries, including Flushing Savings Bank, FSB (the "Savings Bank") and Flushing Commercial Bank (the "Commercial Bank"), collectively, the "Banks."
Statements contained in this Quarterly 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, the factors set forth in the preceding paragraph and elsewhere in this Quarterly Report, and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2008. 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. We have no obligation to update these forward-looking statements.
Executive Summary
We are a Delaware corporation organized in May 1994 to serve as the holding company for the Savings Bank, a federally chartered, Federal Deposit Insurance Corporation ("FDIC") insured savings institution, originally organized in 1929. Our common stock is publicly traded on the NASDAQ Global Select Market under the symbol "FFIC." The Savings Bank is a community oriented savings institution offering a wide variety of financial services to meet the needs of the businesses and consumers in the communities it serves. The Savings Bank conducts its business through fifteen banking offices located in Queens, Brooklyn, Manhattan and Nassau County, and its Internet banking division, "iGObanking.comŽ." During 2007, the Savings Bank formed a wholly-owned subsidiary, Flushing Commercial Bank, for the limited purpose of accepting municipal deposits and state funds in the State of New York.
Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of one-to-four family (focusing on mixed-use properties - properties that contain both residential dwelling units and commercial units), multi-family residential and commercial real estate mortgage loans; (2) construction loans, primarily for residential properties; (3) Small Business Administration ("SBA") loans and other small business loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans. Our revenues are derived principally from interest on our mortgage and other loans and mortgage-backed securities portfolio, and interest and dividends on other investments in our securities portfolio. Our primary sources of funds are deposits, Federal Home Loan Bank of New York ("FHLB-NY") borrowings, repurchase agreements, 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. As a federal savings bank, the Savings Bank's primary regulator is the Office of Thrift Supervision ("OTS"). Deposits are insured to the maximum allowable amount by the FDIC.
Our strategy is to continue our focus as an institution serving consumers, businesses, and governmental units in our local markets. In furtherance of this objective, we intend to: (1) continue our emphasis on the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans, (2) transition from a traditional thrift to a more 'commercial-like' banking institution, (3) increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens, (4) maintain asset quality, (5) manage deposit growth and maintain a low cost of funds, utilizing the Internet banking division to grow deposits, (6) cross sell to lending and deposit customers, (7) actively pursue deposits from local area government units, (8)
manage interest rate risk, (9) explore new business opportunities, and (10) manage capital. There can be no assurance that we will be able to effectively implement this strategy. Our strategy is subject to change by the Board of Directors.
Our results of operations depend primarily on net interest income, which is the difference between the income earned on our interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance ("BOLI"), dividends on FHLB-NY stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by our 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.
Our investment policy, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, out interest rate risk exposure, our interest rate sensitivity "gap" position, the types of securities to be held, and other factors. We classify our investment securities as available for sale.
We carry a portion of our financial assets and financial liabilities at fair value. Valuing financial assets and financial liabilities at fair value can at times have a significant impact on our financial statements, as changes in fair value of financial assets and financial liabilities are reflected in non-interest income on our Consolidated Statements of Income and Comprehensive Income. During the three months ended September 30, 2009, we recorded a $1.0 million net gain from financial assets and financial liabilities carried at fair value, a $19.6 million decrease from the $20.6 million net gain for the three months ended September 30, 2008. The net gain recorded for the three months ended September 30, 2008 was primarily due to higher interest rates being required in the market of new issuances of trust preferred stocks and their related junior subordinated debentures. The Company issued junior subordinated debentures in 2007 with a face amount of $61.9 million that are carried at fair value. As a result of widening spreads on new issuances, we recorded a gain during the three months ended September 30, 2008 on our junior subordinated debentures.
We recorded a provision for loan losses of $5.0 million during the three months ended September 30, 2009, which reduced diluted earnings per common share, on an after-tax basis, by $0.13. During the quarter ended September 30, 2009, we recorded net loan charge-offs totaling $0.8 million while at the same time non-performing loans increased $20.5 million to $81.4 million at September 30, 2009 from $60.9 million at June 30, 2009. Non-performing loans increased $41.4 million as compared to December 31, 2008. We have been developing short-term payment plans that enable certain borrowers to bring their loans current. At times, the Bank may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the best long-term interest of the Bank. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. The Bank classifies these loans as "Troubled Debt Restructured," and also classifies these loans as non-performing loans. We review delinquencies on a loan by loan basis, diligently exploring ways to help borrowers meet their obligations and return them back to current status and we have increased staffing to handle delinquent loans by hiring people experienced in loan workouts.
The majority of our non-performing loans consists of mortgage loans collateralized by residential income producing properties that are occupied, thereby retaining more of their value and reducing the potential loss, and are located in the New York City metropolitan market. The Bank continues to apply conservative underwriting standards that include, among other things, a loan to value ratio of 75% or less and a debt coverage ratio of at least 125%. However, given the increase in non-performing loans and current economic uncertainties, management, as a result of the regular analysis of the adequacy of the allowance for loan losses deemed it necessary to record the above mentioned additional provision for possible loan losses. See "-ALLOWANCE FOR LOAN LOSSES."
Net income for the three months ended September 30, 2009 was $8.1 million, an increase of $6.0 million, from the $2.1 million earned during the three months ended September 30, 2008. Diluted earnings per common share for the three months ended September 30, 2009 was $0.33, an increase of $0.23, from the $0.10 earned in the comparable quarter a year ago.
This continues to be an extremely difficult time for the banking industry and the economy as a whole. We have been facing difficult challenges, and expect to continue to do so in the future. Despite the turmoil in the markets, the net interest margin for the three months ended September 30, 2009 improved over the prior year comparable period by 40 basis points to 3.00%. This resulted in a $6.9 million increase in net interest income for the three months ended September 30, 2009 to $29.1 million from $22.1 million for the comparable prior year period.
At September 30, 2009, total assets were $4,176.8 million, an increase of $227.3 million, or 5.8%, from $3,949.5 million at December 31, 2008. Total loans, net increased $198.9 million, or 6.7%, during the nine months ended September 30, 2009 to $3,159.6 million from $2,960.7 million at December 31, 2008. Loan originations and purchases were $388.9 million for the nine months ended September 30, 2009, a decrease of $140.1 million from $529.0 million for the nine months ended September 30, 2008, as loan demand has declined due to the current economic environment. At September 30, 2009, loan applications in process totaled $183.6 million, compared to $274.1 million at September 30, 2008 and $185.4 million at December 31, 2008. During the nine months ended September 30, 2009, cash and due from banks increased $94.2 million to $124.6 million from $30.4 million at December 31, 2008. The increase is primarily due to $90.5 million received from the issuance of 8.3 million shares of Flushing Financial Corporation common stock through a public offering completed in September.
During the nine months ended September 30, 2009, mortgage-backed securities decreased $27.0 million to $647.7 million, while other securities decreased $33.2 million to $39.3 million. During the nine months ended September 30, 2009, there were purchases and sales of mortgage-backed securities of $119.2 million and $38.2 million, respectively. Other securities primarily consists of securities issued by government agencies and mutual or bond funds that invest in government and government agency securities.
Total liabilities were $3,760.1 million at September 30, 2009, an increase of $112.1 million, or 3.1%, from December 31, 2008. During the nine months ended September 30, 2009, due to depositors increased $229.2 million to $2,666.8 million, as a result of an increase of $247.5 million in core deposits and a decline of $18.3 million in certificates of deposit. Borrowed funds decreased $112.0 million as loan growth was more than funded by deposit growth. In addition, mortgagors' escrow deposits decreased $0.4 million during the nine months ended September 30, 2009.
During the third quarter of 2009, we completed the sale of 8.3 million shares of our common stock through a public offering at a price of $11.50 per share. The net proceeds received increased our capital by $90.5 million for the third quarter of 2009, and increased our ratio of tangible common equity to tangible assets to 7.93% at September 30, 2009. We received strong institutional and retail demand for our stock, and on October 1, 2009 issued an additional 1.0 million common shares to cover underwriters' over-allotments. Total net proceeds received from the public offering, including over-allotments and deducting underwriting discounts and offering expenses, was $101.6 million. We used part of this additional capital to repurchase the preferred stock issued to the U.S. Treasury under the Troubled Asset Relief Program ("TARP") Capital Purchase Program. The additional capital also places us in a strong position to take advantage of growth opportunities in our market.
At September 30, 2009, we continue to be well-capitalized under regulatory requirements, with tangible and risk-weighted capital ratios of 8.55% and 12.97%, respectively.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
General. Net income increased $6.0 million, to $8.1 million for the three months ended September 30, 2009 from $2.1 million for the three months ended September 30, 2008. Diluted earnings per common share were $0.33, an increase of $0.23, from $0.10 for the three months ended September 30, 2008. The return on average assets was 0.8% for the three months ended September 30, 2009, as compared to 0.2% for the three months ended September 30, 2008, while the return on average equity was 10.1% for the three months ended September 30, 2009 as compared to 3.7% for the three months ended September 30, 2008.
Interest Income. Total interest and dividend income increased $3.0 million, or 5.6%, to $57.2 million for the three months ended September 30, 2009 from $54.2 million for the three months ended September 30, 2008. The increase in interest income is attributed to the growth in the average balance of interest-earning assets, which increased $472.5 million to $3,882.0 million, partially offset by a 46 basis point reduction in the yield of interest-earning assets to 5.90% for the three months ended September 30, 2009 from 6.36% for the quarter ended September 30, 2008. The decline in the yield of interest-earning assets was primarily due to a 41 basis point reduction in the yield of the loan portfolio combined with a $210.7 million increase in the average balance of the lower yielding securities portfolio, which has a lower yield than the average yield of total interest-earning assets. The 41 basis point reduction in the yield of the loan portfolio to 6.22% for the quarter ended September 30, 2009 from 6.63% for the quarter ended September 30, 2008 was primarily due to a decline in prepayment penalty income, adjustable rate loans adjusting down as rates have declined, and an increase in non-accrual loans for which we do not accrue interest income. The yield on the mortgage loan portfolio declined 36 basis points to 6.28% for the three months ended September 30, 2009 from 6.64% for the three months ended September 30, 2008. The yield on the mortgage loan portfolio, excluding prepayment penalty income, declined 26 basis points to 6.24% for the three months ended September 30, 2009 from 6.50% for the three months ended September 30, 2008. The decline in the yield of interest-earning assets was partially offset by an increase of $240.1 million in the average balance of the loan portfolio to $3,120.5 million for the three months ended September 30, 2009.
Interest Expense. Interest expense decreased $3.9 million, or 12.2%, to $28.2 million for the three months ended September 30, 2009 from $32.1 million for the three months ended September 30, 2008. The decrease in interest expense is attributed to an 82 basis point decline in the cost of interest-bearing liabilities to 3.10% for the three months ended September 30, 2009 from 3.92% for the three months ended September 30, 2008. The decline in the cost of interest-bearing liabilities was partially offset by a $362.3 million increase in the average balance of interest-bearing liabilities to $3,635.2 million for the three months ended September 30, 2009 from $3,272.9 million for the three months ended September 30, 2008.
The decrease in the cost of interest-bearing liabilities is primarily attributable to the Federal Open Market Committee ("FOMC") lowering the overnight interest rate throughout 2008, and maintaining the targeted Fed Funds rate in a range of 0.00% to 0.25% during 2009. This has allowed the Bank to reduce the rates it pays on its deposit products. The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 83 basis points, 158 basis points, 82 basis points and 109 basis points respectively, for the quarter ended September 30, 2009 compared to the same period in 2008. The cost of due to depositors was also reduced due to the Bank's focus on increasing lower-costing core deposits. The combined average balances of lower-costing savings, money market and NOW accounts increased a total of $315.6 million for the quarter ended September 30, 2009 compared to the same period in 2008, while the average balance of higher-costing certificates of deposits increased $116.4 million for the quarter ended September 30, 2009 compared to the comparable period in 2008. This resulted in a decrease in the cost of due to depositors of 106 basis points to 2.50% for the quarter ended September 30, 2009 from 3.56% for the quarter ended September 30, 2008. The increase in deposits allowed the Bank to reduce its reliance on borrowed funds, as the average balance of borrowed funds declined $70.8 million to $1,042.0 million for the quarter ended September 30, 2009 from $1,112.8 million for the quarter ended September 30, 2008, with the cost of borrowed funds decreasing five basis points to 4.66% for the quarter ended September 30, 2009 from 4.71% for the quarter ended September 30, 2008.
Net Interest Income. For the three months ended September 30, 2009, net interest income was $29.1 million, an increase of $6.9 million, or 31.4%, from $22.1 million for the three months ended September 30, 2008. The increase in net interest income is attributed to an increase in the average balance of interest-earning assets of $472.5 million, to $3,882.0 million for the quarter ended September 30, 2009, combined with an increase in the net interest spread of 36 basis points to 2.80% for the quarter ended September 30, 2009 from 2.44% for the comparable period in 2008. The yield on interest-earning assets decreased 46 basis points to 5.90% for the three months ended September 30, 2009 from 6.36% in the three months ended September 30, 2008. However, this was more than offset by a decline in the cost of funds of 82 basis points to 3.10% for the three months ended September 30, 2009 from 3.92% for the comparable prior year period. The net interest margin improved 40 basis points to 3.00% for the three months ended September 30, 2009 from 2.60% for the three months ended September 30, 2008. Excluding prepayment penalty income, the net interest margin would have been 2.97% and 2.48% for the three month periods ended September 30, 2009 and 2008, respectively.
Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2009 was $5.0 million compared to $3.0 million recorded in the quarter ended September 30, 2008. The provision for loan losses recorded for the three months ended September 30, 2009 was primarily due to an increase in non-performing loans. This increase in non-performing loans primarily consists of mortgage loans collateralized by residential income producing properties located in the New York City metropolitan market. Prior to 2009, the Bank had recorded minimal losses on mortgage loans. The Bank continues to maintain conservative underwriting standards that include, among other things, a loan to value ratio of 75% or less and a debt coverage ratio of at least 125%. However, given the increase in non-performing loans and the current economic uncertainties, management, as a result of the regular quarterly analysis of the allowance for loans losses, deemed it necessary to record an additional provision for possible loan losses in the third quarter of 2009.
We have not been directly affected by defaults on sub-prime mortgages as we do not originate, or hold in portfolio, sub-prime mortgages. However, we saw a $41.4 million increase in non-performing loans to $81.4 million at September 30, 2009 from December 31, 2008. We had net charge-offs of $0.8 million for the three months ended September 30, 2009, compared to $0.4 million for the comparable period in 2008. See "-ALLOWANCE FOR LOAN LOSSES."
Non-Interest Income. Non-interest income for the three months ended September 30, 2009 was $4.6 million, an increase of $7.2 million from the three months ended September 30, 2008. The net gain recorded from financial assets and financial liabilities carried at fair value decreased $19.6 million to a net gain of $1.0 million for the three months ended September 30, 2009 compared to a net gain of $20.6 million for the three months ended September 30, 2008. The three months ended September 30, 2009 included a $26.3 million other-than-temporary impairment charge on the Company's investments in Freddie Mac and Fannie Mae preferred stocks.
Non-Interest Expense. Non-interest expense was $15.3 million for the three months ended September 30, 2009, an increase of $1.7 million, or 12.6%, from $13.6 million for the three months ended September 30, 2008. Employee salary and benefits increased $0.6 million, which is primarily attributed to the growth of the Bank, including one new branch and the expansion of the collections department, and increased costs for postretirement benefits. FDIC insurance increased $0.8 million compared to the comparable prior year period, as the FDIC raised the deposit insurance premiums during 2009. Other operating expense increased $0.4 million primarily due an increase in foreclosure expense as non-performing loans have increased from the prior year period. The efficiency ratio was 48.5% and 54.7% for the three months ended, September 30, 2009 and 2008, respectively.
Income before Income Taxes. Income before the provision for income taxes increased $10.4 million to $13.3 million for the three months ended September 30, 2009 from $2.9 million for the three months ended September 30, 2008 for the reasons discussed above.
Provision for Income Taxes. Income tax expense increased $4.5 million, to $5.2 million, for the three months ended September 30, 2009 as compared to $0.7 million for the three months ended September 30, 2008. This increase was primarily due to the increase in pre-tax income for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008, combined with a higher effective tax rate. The effective tax rate was 39.0% and 25.3% for the three-month periods ended September 30, 2009 and 2008, respectively. The tax rate was lower for the three months ended September 30, 2008 due to the increased impact tax preference items, including income earned on BOLI and dividend income, had on the lower level of income earned for the three months ended September 30, 2008 as compared to the comparable period in 2009.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008
General. Net income increased $3.8 million, or 24.1%, to $19.6 million for the nine months ended September 30, 2009 from $15.8 million for the nine months ended September 30, 2008. Diluted earnings per common share was $0.80, an increase of $0.02, or 2.6%, for the nine months ended September 30, 2009 from $0.78 for the nine months ended September 30, 2008. The return on average assets was 0.64% for the nine months ended September 30, 2009, as compared to 0.60% for the nine months ended September 30, 2008, while the return on average equity was 8.41% for the nine months ended September 30, 2009, as compared to 9.04% for the nine months ended September 30, 2008.
Interest Income. Total interest and dividend income increased $11.6 million, or 7.2%, to $172.6 million for the nine months ended September 30, 2009 from $161.0 . . .
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