Flushing Financial Corporation announces $25.6 million in profit

Flushing Financial Corporation (the “Company”) (Nasdaq:FFIC – News), the parent holding company for Flushing Savings Bank, FSB (the “Bank”), today announced its financial results for the year and three months ended December 31, 2009. 

John R. Buran, President and Chief Executive Officer, stated: “We are pleased to report record GAAP and core net income for the year ended December 31, 2009. Net income under GAAP was $25.6 million, an increase of $3.3 million, or 14.8%, from $22.3 million for the year ended December 31, 2008. We achieved core net income of $26.4 million, an increase of $1.5 million, or 6.2%, from $24.9 million for the year ended December 31, 2008. Our strong operating performance for 2009 was primarily driven by an increase of $27.1 million in net interest income, as the net interest margin for the year ended December 31, 2009 improved over the prior year by 36 basis points to 2.96%, and total assets increased $193.8 million, or 4.9%. We are particularly encouraged with the continued growth in our net interest margin during the fourth quarter, as it improved 14 basis points over the third quarter to 3.14%. 

“While the lower interest rate environment has helped margins, structural changes in our balance sheet have aided in decreasing funding costs for the Company. Over the past several years we expanded our products to attract business customers and public entities, and established an internet banking division. This product expansion has resulted in significant growth in our core deposits, which increased $434.7 million during 2009. This growth allowed us to reduce our reliance on certificates of deposit and borrowings, which decreased $205.9 million and $78.7 million, respectively, during 2009. The result of this shift in our funding sources was a reduction in our cost of deposits and total funding costs of 103 basis points and 82 basis points, respectively. As a result, we were able to reduce our cost of funds to 2.96% for the fourth quarter of 2009, a decline of 89 basis points from the fourth quarter of 2008.

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“2009 continued many of the same challenges we faced in 2008 as the economy remained in a recession for the first half of the year, and began to slowly recover during the second half of the year. The banking industry saw non-performing loans increase throughout the year, and continued to incur significant loan losses and impairment charges during the year. Industry regulators closed 140 banks and thrifts during 2009. We recorded OTTI charges on our holdings of private issue collateralized mortgage obligations and pooled trust preferred securities. Our non-performing loans increased significantly, which resulted in an increase in our provision for loan losses. Significant margin improvement allowed us to more than cover these negatives.

“We tightened our underwriting standards to ensure we would continue to originate quality loans. We also focused on the performance of our existing loan portfolio. Non-performing loans increased $45.9 million during 2009 to $85.9 million from $40.0 million at December 31, 2008. The majority of non-performing loans are collateralized by residential income producing properties in the New York metropolitan area that remain occupied and generate revenue. Given New York City’s low vacancy rates, they have retained value and provided us with low loss content in our non-performing loans during the year. Net loan charge-offs during 2009 were 33 basis points of average loans, which continues to be below the industry average. We recorded a $19.5 million provision for loan losses during 2009, bringing our allowance up to 63 basis points of total loans. Our growth in net interest income has more than offset the additional provision for loan losses as net interest income after the provision for loan losses increased $13.2 million, or 16.0%, to $95.3 million for 2009 as compared to $82.1 million for 2008.

“During 2009 we completed the public offering of 9.3 million shares of our common stock at an offering price of $11.50 per share. The net proceeds received increased our capital by $101.6 million. We used part of this additional capital to redeem the $70.0 million of preferred stock, and repurchase the remaining warrant issued to the U.S. Treasury under the TARP Capital Purchase Program. At the time we redeemed the preferred stock, we wrote off the unamortized issuance costs of the preferred stock of $1.3 million. This write-off reduced diluted earnings per common share by $0.04 and $0.06 for the fourth quarter and full year of 2009, respectively. The additional capital also places us in a strong position to take advantage of growth opportunities in our market. The Bank continues to be well-capitalized under regulatory requirements, with core and risk-weighted capital ratios of 8.84% and 13.42%, respectively, at December 31, 2009.

“We have begun to see some positive changes in the economic environment.   Our strong capital, our ability to grow core deposits, and our traditionally strong credit discipline has enabled us to increase net income in spite of the extreme challenges of 2009.  With an improving economic landscape and our expanded product base, we feel confident that 2010 will provide additional opportunities for growth, as some competitors continue to deal with the challenges of weakened profitability and organizational disruption.” 

Net income for the quarter ended December 31, 2009 was $6.0 million, a decrease of $0.5 million from the $6.5 million earned in the fourth quarter of 2008. Diluted earnings per common share for the fourth quarter were $0.15, a decrease of $0.16 from the $0.31 earned in the comparable quarter a year ago. 

Net income for the year ended December 31, 2009 was $25.6 million, an increase of $3.3 million, or 14.8%, from the $22.3 million earned in the comparable 2008 period. Diluted earnings per common share for the year ended December 31, 2009 were $0.91, a decrease of $0.18, or 16.5%, from the $1.09 earned in the comparable 2008 period.

Core earnings, which exclude the effects of financial assets and financial liabilities carried at fair value, OTTI charges, net gains/losses on the sale of securities, and certain non-recurring items, was $7.9 million for the three months ended December 31, 2009, an increase of $0.9 million, from the $7.0 million earned in the third quarter of 2009, and an increase of $1.6 million, from the $6.3 million earned for the fourth quarter of 2008. Core diluted earnings per common share was $0.25, a decrease of $0.03, from the $0.28 earned in the third quarter of 2009, and a decrease of $0.05, from the $0.30 earned for the fourth quarter of 2008. During the quarter ended December 31, 2009, the average common shares outstanding increased to 30.1 million shares, an increase of 8.5 million shares from the third quarter of 2009 and an increase of 9.6 million shares from the fourth quarter of 2008. The increase in average common shares reduced core earnings per diluted common share for the three months ended December 31, 2009 by $0.10 as compared to the quarter ended September 30, 2009 and $0.12 as compared to the quarter ended December 31, 2008.

Core earnings were $26.4 million for the year ended December 31, 2009 an increase of $1.5 million from the $24.9 million earned in the year ended December 31, 2008. Core diluted earnings per common share for the year ended December 31, 2009 was $1.00, a decrease of $0.21 from the $1.21 earned for the year ended December 31, 2008. Core diluted earnings per common share for the year ended December 31, 2009 was reduced by $0.19 as compared to the year ended December 31, 2008 as a result of dividends paid to the U.S. Treasury on TARP preferred stock and the write-off of unamortized issuance costs at the time the TARP preferred stock was redeemed. For a reconciliation of core earnings and core earnings per common share to accounting principles generally accepted in the United States (“GAAP”) net income and GAAP earnings per common share, please refer to the tables in the section titled Reconciliation of GAAP and Core Earnings.

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Earnings Summary – Three Months Ended December 31, 2009

Net income for the three months ended December 31, 2009 was $6.0 million, a decrease of $0.5 million, as compared to $6.5 million for the three months ended December 31, 2008. Diluted earnings per common share were $0.15 for the three months ended December 31, 2009, a decrease of $0.16 from $0.31 for the three months ended December 31, 2008. The decrease in earnings per common share was partially due to an increase in diluted common shares outstanding of 9.6 million common shares during the three months ended December 31, 2009 as compared to the three months ended December 31, 2008, which was primarily the result of the common stock offering which was completed on October 1, 2009. Diluted earnings per common share were further reduced by $0.04 due to the write-off of unamortized issuance costs of the TARP preferred stock when it was redeemed

Return on average equity was 6.3% for the three months ended December 31, 2009 compared to 11.0% for the three months ended December 31, 2008. The decrease in the return on average equity is primarily due to an increase in the average balance of equity of $143.6 milion. Return on average assets was 0.6% for the three months ended December 31, 2009 compared to 0.7% for the three months ended December 31, 2008

For the three months ended December 31, 2009, net interest income was $30.7 million, an increase of $7.9 million, or 34.9%, from $22.8 million for the three months ended December 31, 2008. The increase in net interest income is attributed to an increase in the average balance of interest-earning assets of $342.3 million, to $3,916.2 million for the quarter ended December 31, 2009, combined with an increase in the net interest spread of 52 basis points to 2.91% for the quarter ended December 31, 2009 from 2.39% for the comparable period in 2008. The yield on interest-earning assets decreased 37 basis points to 5.87% for the three months ended December 31, 2009 from 6.24% in the three months ended December 31, 2008. However, this was more than offset by a decline in the cost of funds of 89 basis points to 2.96% for the three months ended December 31, 2009 from 3.85% for the comparable prior year period. The net interest margin improved 59 basis points to 3.14% for the three months ended December 31, 2009 from 2.55% for the three months ended December 31, 2008. Excluding prepayment penalty income, the net interest margin would have been 3.10% and 2.44% for the three month periods ended December 31, 2009 and 2008, respectively.

The decline in the yield of interest-earning assets was primarily due to a 30 basis point reduction in the yield of the loan portfolio combined with a $77.9 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 30 basis point reduction in the yield of the loan portfolio to 6.23% for the quarter ended December 31, 2009 from 6.53% for the quarter ended December 31, 2008 was primarily due to a decline in prepayment penalty income and an increase in non-accrual loans for which we do not accrue interest income.  The yield on the mortgage loan portfolio declined 26 basis points to 6.29% for the three months ended December 31, 2009 from 6.55% for the three months ended December 31, 2008. The yield on the mortgage loan portfolio, excluding prepayment penalty income, declined 17 basis points to 6.24% for the three months ended December 31, 2009 from 6.41% for the three months ended December 31, 2008. The decline in the yield of interest-earning assets was partially offset by an increase of $255.0 million in the average balance of the loan portfolio to $3,182.8 million for the three months ended December 31, 2009 from $2,927.8 million for the three months ended December 31, 2008.

The decrease in the cost of interest-bearing liabilities is primarily attributable to the Federal Open Market Committee (“FOMC”) 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 throughout 2009.  The cost of certificates of deposit, money market accounts, savings accounts and NOW accounts decreased 79 basis points, 163 basis points, 96 basis points and 115 basis points respectively, for the quarter ended December 31, 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 $358.7 million for the quarter ended December 31, 2009 compared to the same period in 2008, while the average balance of higher-costing certificates of deposits decreased $60.0 million for the quarter ended December 31, 2009 compared to the comparable period in 2008. This resulted in a decrease in the cost of due to depositors of 115 basis points to 2.32% for the quarter ended December 31, 2009 from 3.47% for the quarter ended December 31, 2008. The increase in deposits allowed the Bank to reduce its reliance on borrowed funds, as the average balance of borrowed funds declined $102.6 million to $999.6 million for the quarter ended December 31, 2009 from $1,102.2 million for the quarter ended December 31, 2008, with the cost of borrowed funds decreasing seven basis points to 4.69% for the quarter ended December 31, 2009 from 4.76% for the quarter ended December 31, 2008.

The net interest margin for the three months ended December 31, 2009 increased 14 basis points to 3.14% from 3.00% for the quarter ended September 30, 2009. The net interest spread increased 11 basis points to 2.91% for the three months ended December 31, 2009 from 2.80% for the quarter ended September 30, 2009 with the yield on interest-earning assets decreasing three basis points to 5.87% for the three months ended December 31, 2009, and the cost of interest-bearing liabilities decreasing 14 basis points to 2.96% for the three months ended December 31, 2009.  Excluding prepayment penalty income, the net interest margin would have been 3.10% for the quarter ended December 31, 2009, an increase of 13 basis points from 2.97% for the quarter ended September 30, 2009.

A provision for loan losses of $5.0 million was recorded for the quarter ended December 31, 2009, which was an increase of $3.0 million from the $2.0 million recorded in the quarter ended December 31, 2008. The provision for loan losses recorded for the three months ended December 31, 2009 was primarily due to an increase in both non-performing loans and charge-offs in the fourth quarter of 2009. This increase in non-performing loans primarily consists of mortgage loans collateralized by residential income producing properties located in the New York 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, the current economic uncertainties, and the charge-offs recorded in the fourth quarter of 2009, 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 fourth quarter of 2009.

Non-interest loss for the three months ended December 31, 2009 was $0.6 million, a decrease of $3.6 million from income of $2.9 million for the three months ended December 31, 2008. The decrease in non-interest income was primarily due to a $3.5 million increase in OTTI charges to $4.8 million during the three months ended December 31, 2009 from $1.3 million during the three months ended December 31, 2008. The OTTI charges recorded during the three months ended December 31, 2009 were recorded on two pooled trust preferred securities with OTTI charges totaling $2.8 million and four private issue collateralized mortgage obligations with OTTI charges totaling $2.0 million.

Non-interest expense was $15.9 million for the three months ended December 31, 2009, an increase of $2.2 million, or 16.4%, from $13.6 million for the three months ended December 31, 2008. Employee salary and benefits increased $1.5 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. Federal Deposit Insurance Corporation (“FDIC”) insurance increased $0.5 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 increased during 2009. The efficiency ratio was 47.2% and 53.5% for the three months ended, December 31, 2009 and 2008, respectively.

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Earnings Summary – Year Ended December 31, 2009

Net income for the year ended December 31, 2009 was $25.6 million, an increase of $3.3 million or 14.8%, as compared to $22.3 million for the year ended December 31, 2008. Diluted earnings per common share were $0.91 for the year ended December 31, 2009, a decrease of $0.18, or 16.5%, from $1.09 in the year ended December 31, 2008. Diluted earnings per common share were reduced by $0.06 due to the write-off of unamortized issuance costs of the TARP preferred stock when it was redeemed.

Return on average equity was 7.8% for the year ended December 31, 2009 compared to 9.6% for the year ended December 31, 2008.  The decrease in the return on average equity is due to an increase in the average balance of equity of $94.8 milion.  Return on average assets was 0.6% for the years ended December 31, 2009 and 2009.

For the year ended December 31, 2009, net interest income was $114.8 million, an increase of $27.1 million, or 30.8%, from $87.7 million for the year ended December 31, 2008. The increase in net interest income is attributed to an increase in the average balance of interest-earning assets of $502.1 million, to $3,879.5 million for the year ended December 31, 2009, combined with an increase in the net interest spread of 33 basis points to 2.76% for the year ended December 31, 2009 from 2.43% for the comparable period in 2008.  The yield on interest-earning assets decreased 49 basis points to 5.93% for the year ended December 31, 2009 from 6.42% for the year ended December 31, 2008. However, this was more than offset by a decline in the cost of funds of 82 basis points to 3.17% for the year ended December 31, 2009 from 3.99% for the comparable prior year period. The net interest margin improved 36 basis points to 2.96% for the year ended December 31, 2009 from 2.60% for the year ended December 31, 2008. Excluding prepayment penalty income, the net interest margin would have been 2.92% and 2.48% for the year ended December 31, 2009 and 2008, respectively.

The decline in the yield of interest-earning assets was primarily due to a 39 basis point reduction in the yield of the loan portfolio combined with a $258.1 million increase in the combined average balances of the lower yielding securities portfolio and interest-earning deposits, with each having a lower yield than the average yield of total interest-earning assets. The 39 basis point reduction in the yield of the loan portfolio to 6.30% for the year ended December 31, 2009 from 6.69% for the year ended December 31, 2008 was primarily due to a decline in prepayment penalty income, adjustable rate loans adjusting down as rates have continued to decline, and an increase in non-accrual loans for which we do not accrue interest income. The yield on the mortgage loan portfolio declined 33 basis points to 6.36% for the year ended December 31, 2009 from 6.69% for the year ended December 31, 2008. The yield on the mortgage loan portfolio, excluding prepayment penalty income, declined 24 basis points to 6.31% for the year ended December 31, 2009 from 6.55% for the year ended December 31, 2008. The decline in the yield of interest-earning assets was partially offset by an increase of $244.0 million in the average balance of the loan portfolio to $3,085.9 million for the year ended December 31, 2009.

The decrease in the cost of interest-bearing liabilities is primarily attributed to the 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 the year ended December 31, 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 84 basis points, 161 basis points, 82 basis points and 93 basis points respectively, for the year ended December 31, 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 $314.3 million for the year ended December 31, 2009 compared to the same period in 2008, partially offset by the average balance of higher-costing certificates of deposits increasing $147.8 million for the year ended December 31, 2009 compared to the comparable period in 2008. This resulted in a decrease in the cost of due to depositors of 105 basis points to 2.61% for the year ended December 31, 2009 from 3.66% for the year ended December 31, 2008. The increase in deposits allowed the Bank to reduce its reliance on borrowed funds, as the average balance of borrowed funds declined $64.4 million to $1,043.2 million for the year ended December 31, 2009 from $1,107.6 million for the year ended December 31, 2008, with the cost of borrowed funds decreasing six basis points to 4.65% for the year ended December 31, 2009 from 4.71% for the year ended December 31, 2008.

A provision for loan losses of $19.5 million was recorded for the year ended December 31, 2009 compared to $5.6 million recorded in the year ended December 31, 2008. The provision for loan losses recorded in 2009 was primarily due to an increase in both non-performing loans and the level of charge-offs recorded in 2009. This increase in non-performing loans primarily consists of mortgage loans collateralized by residential income producing properties that are 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, the current economic uncertainties, and the charge-offs recorded during 2009, 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 year ended 2009.

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Non-interest income increased $4.0 million for the year ended December 31, 2009 to $11.0 million, as compared to $7.0 million for the year ended December 31, 2008. The net gain recorded from financial assets and financial liabilities carried at fair value decreased $15.1 million to a net gain of $5.0 million for the year ended December 31, 2009 compared to a net gain of $20.1 million for the year ended December 31, 2008. The $15.1 million decline in fair value was more than offset by a $21.7 million decline in OTTI charges, as the year ended December 31, 2009 included OTTI charges on two pooled trust preferred securities totaling $2.8 million and four private issue collateralized mortgage obligations totaling $3.1 million compared to the year ended December 31, 2008 which included a $27.6 million OTTI charge on investments in Freddie Mac and Fannie Mae preferred stocks. The year ended December 31, 2008 also included income of $2.4 million representing a partial recovery of a loss sustained in 2002 on a WorldCom, Inc. senior note. This amount was received as a result of a class action litigation settlement.

Non-interest expense was $64.9 million for the year ended December 31, 2009, an increase of $10.1 million, or 18.5%, from $54.8 million for the year ended December 31, 2008. Employee salary and benefits increased $3.8 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. Occupancy and equipment, data processing, and depreciation and amortization increased $0.3 million, $0.2 million and $0.3 million, respectively, primarily due to the growth of the Bank. Other operating expense increased $0.8 million primarily due an increase in foreclosure expense as non-performing loans have increased from the prior year period. FDIC insurance increased $4.9 million compared to the comparable prior year period, as the FDIC raised the deposit insurance premiums during 2009, and a $2.0 million special assessment was levied during the quarter ended June 30, 2009 by the FDIC to partially replenish the deposit insurance fund. The efficiency ratio was 51.8% and 55.1% for the years ended December 31, 2009 and 2008, respectively.

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