10-Q 1 f10q_050316p.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

Commission file number 001-33013

 

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

11-3209278

(I.R.S. Employer Identification No.)

 

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

 

(718) 961-5400

(Registrant's telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   X  Yes __ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   X  Yes __ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer __

Non-accelerated filer __

Accelerated filer  X 

Smaller reporting company __

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ___Yes   X   No

 

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2016 was 28,969,566.

 

 

 

TABLE OF CONTENTS

 

 

  PAGE
PART I  —  FINANCIAL INFORMATION  
ITEM 1.   Financial Statements - (Unaudited)  
Consolidated Statements of Financial Condition 1
Consolidated Statements of Income  2
Consolidated Statements of Comprehensive Income  3
Consolidated Statements of Cash Flows  4
Consolidated Statements of Changes in Stockholders’ Equity 5
Notes to Consolidated Financial Statements 6
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  41
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk 55
ITEM 4.  Controls and Procedures 55
PART II  —  OTHER INFORMATION  
ITEM 1.  Legal Proceedings 56
ITEM 1A. Risk Factors 56
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds 56
ITEM 3.  Defaults Upon Senior Securities 56
ITEM 4.  Mine Safety Disclosures 56
ITEM 5.  Other Information 56
ITEM 6.  Exhibits 57
SIGNATURES 58

 

 

 i

 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

 

 

(Dollars in thousands, except per share data)  March 31, 
2016
  December 31,
2015
ASSETS          
Cash and due from banks  $51,417   $42,363 
Securities held-to-maturity:          
Other securities (none pledged) (fair value of $7,885 and $6,180  at March 31, 2016 and December 31, 2015, respectively)   7,885    6,180 
Securities available for sale:          
Mortgage-backed securities (including assets pledged of $523,749 and $496,121 at March 31, 2016 and December 31, 2015, respectively; $2,403 and $2,527 at fair value pursuant to the fair value option at March 31, 2016 and December 31, 2015, respectively.)   668,412    668,740 
Other securities (including assets pledged of $74,885 and none at March 31, 2016 and December 31, 2015, respectively; $28,361 and $28,205 at fair value pursuant to the fair value option at March 31, 2016 and December 31, 2015, respectively)   372,851    324,657 
Loans:          
Multi-family residential   2,039,794    2,055,228 
Commercial real estate   1,058,028    1,001,236 
One-to-four family ― mixed-use property   571,846    573,043 
One-to-four family ― residential   191,158    187,838 
Co-operative apartments   8,182    8,285 
Construction   7,472    7,284 
Small Business Administration   14,701    12,194 
Taxi medallion   20,757    20,881 
Commercial business and other   531,322    506,622 
Net unamortized premiums and unearned loan fees   15,281    15,368 
Allowance for loan losses   (21,993)   (21,535)
Net loans   4,436,548    4,366,444 
Interest and dividends receivable   19,369    18,937 
Bank premises and equipment, net   25,130    25,622 
Federal Home Loan Bank of New York stock   53,368    56,066 
Bank owned life insurance   114,405    115,536 
Goodwill   16,127    16,127 
Other assets   47,555    63,962 
Total assets  $5,813,067   $5,704,634 
LIABILITIES          
Due to depositors:          
Non-interest bearing  $280,450   $269,469 
Interest-bearing:         
Certificate of deposit accounts   1,362,062    1,403,302 
Savings accounts   268,057    261,748 
Money market accounts   485,774    472,489 
NOW accounts   1,610,932    1,448,695 
Total interest-bearing deposits   3,726,825    3,586,234 
Mortgagors' escrow deposits   56,612    36,844 
Borrowed funds ($27,977 and $29,018 at fair value pursuant to the fair value option at March 31, 2016 and December 31, 2015, respectively)   1,074,789    1,155,676 
Securities sold under agreements to repurchase   116,000    116,000 
Other liabilities   70,612    67,344 
Total liabilities   5,325,288    5,231,567 
Commitments and contingencies (Note 5)          
STOCKHOLDERS' EQUITY          
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)   -    - 
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at March 31, 2016 and December 31, 2015; 28,986,566 shares and 28,830,558 shares outstanding at March 31, 2016 and December 31, 2015, respectively)   315    315 
Additional paid-in capital   211,735    210,652 
Treasury stock, at average cost (2,544,029 shares and 2,700,037 shares at March 31, 2016 and December 31, 2015, respectively)   (46,307)   (48,868)
Retained earnings   320,725    316,530 
Accumulated other comprehensive income (loss), net of taxes   1,311    (5,562)
Total stockholders' equity   487,779    473,067 
Total liabilities and stockholders' equity  $5,813,067   $5,704,634 

 

The accompanying notes are an integral part of these consolidated financial statements

 - 1 - 

 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

   For the three months
ended March 31,
(Dollars in thousands, except per share data)  2016  2015
Interest and dividend income          
Interest and fees on loans  $47,558   $43,534 
Interest and dividends on securities:          
   Interest   6,592    5,870 
   Dividends   119    118 
Other interest income   94    21 
      Total interest and dividend income   54,363    49,543 
Interest expense          
Deposits   7,973    7,458 
Other interest expense   5,257    4,531 
      Total interest expense   13,230    11,989 
Net interest income   41,133    37,554 
Benefit for loan losses   -    (734)
Net interest income after benefit for loan losses   41,133    38,288 
Non-interest income          
Banking services fee income   976    884 
Net gain on sale of loans   341    2 
Net loss from fair value adjustments   (987)   (595)
Federal Home Loan Bank of New York stock dividends   623    518 
Gain from life insurance proceeds   411    - 
Bank owned life insurance   695    717 
Other income   481    404 
      Total non-interest income   2,540    1,930 
Non-interest expense          
Salaries and employee benefits   16,261    14,666 
Occupancy and equipment   2,370    2,713 
Professional services   2,150    1,779 
FDIC deposit insurance   904    749 
Data processing   1,091    1,075 
Depreciation and amortization   1,032    668 
Other real estate owned/foreclosure expense   153    520 
Other operating expenses   4,536    3,769 
      Total non-interest expense   28,497    25,939 
Income before income taxes   15,176    14,279 
Provision for income taxes          
Federal   4,747    4,252 
State and local   868    1,294 
      Total taxes   5,615    5,546 
Net income  $9,561   $8,733 
Basic earnings per common share  $0.33   $0.30 
Diluted earnings per common share  $0.33   $0.30 
Dividends per common share  $0.17   $0.16 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 - 2 - 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   For the three months ended
March 31,
(In thousands)  2016  2015
       
Net income  $9,561   $8,733 
           
Other comprehensive income, net of tax:          
Amortization of actuarial losses, net of taxes of ($83) and ($133) for  the three months ended March 31, 2016 and 2015, respectively   109    174 
Amortization of prior service credits, net of taxes of $5 and $5 for the three months ended March 31, 2016 and 2015, respectively   (6)   (6)
Net unrealized gains on securities, net of taxes of ($5,028) and ($3,293) for the three months ended March 31, 2016 and 2015, respectively   6,770    4,332 
           
Total other comprehensive income, net of tax   6,873    4,500 
           
Comprehensive income  $16,434   $13,233 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 - 3 - 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the three months ended
March 31,
(In thousands)  2016  2015
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $9,561   $8,733 
Adjustments to reconcile net income to net cash provided by operating activities:          
   Benefit for loan losses   -    (734)
   Depreciation and amortization of bank premises and equipment   1,032    668 
   Amortization of premium, net of accretion of discount   2,189    2,143 
   Net loss from fair value adjustments   987    595 
   Net gain from sale of loans   (341)   (2)
   Income from bank owned life insurance   (695)   (717)
   Gain from life insurance proceeds   (411)   - 
   Stock-based compensation expense   2,989    2,778 
   Deferred compensation   (1,774)   (1,392)
   Excess tax benefit from stock-based payment arrangements   (303)   (318)
   Deferred income tax provision   1,570    1,925 
Decrease in other liabilities   (2,006)   (4,403)
Decrease in other assets   3,798    3,336 
        Net cash provided by operating activities   16,596    12,612 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of bank premises and equipment   (540)   (5,229)
Net (purchases) redemptions of Federal Home Loan Bank of New York shares   2,698    (3,564)
Purchases of securities held-to-maturity   (2,330)   - 
Proceeds from maturities of securities held-to-maturity   2,000    - 
Purchases of securities available for sale   (58,472)   (48,962)
Proceeds from maturities and prepayments of securities available for sale   21,316    31,019 
Proceeds from bank owned life insurance   2,237    - 
Net originations of loans   (53,836)   (59,071)
Purchases of loans   (12,000)   (111,296)
Proceeds from sale of real estate owned   853    1,594 
Proceeds from sale of loans   5,915    1,522 
        Net cash used in investing activities   (92,159)   (193,987)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase (decrease) in non-interest bearing deposits   10,981    (5,750)
Net increase in interest-bearing deposits   140,370    84,816 
Net increase in mortgagors' escrow deposits   19,768    18,222 
Net proceeds (repayments) from short-term borrowed funds   (90,000)   41,500 
Proceeds from long-term borrowings   81,758    47,706 
Repayment of long-term borrowings   (71,727)   (10,000)
Purchases of treasury stock   (1,885)   (3,876)
Excess tax benefit from stock-based payment arrangements   303    318 
Proceeds from issuance of common stock upon exercise of stock options   19    - 
Cash dividends paid   (4,970)   (4,722)
        Net cash provided by financing activities   84,617    168,214 
           
Net increase (decrease) in cash and cash equivalents   9,054    (13,161)
Cash and cash equivalents, beginning of period   42,363    34,265 
        Cash and cash equivalents, end of period  $51,417   $21,104 
           
SUPPLEMENTAL CASH  FLOW DISCLOSURE          
Interest paid  $12,921   $11,948 
Income taxes paid   1,000    1,596 
Taxes paid if excess tax benefits were not tax deductible   1,303    1,914 
Non-cash activities:          
  Securities purchased not yet settled   1,375    9,877 
  Loans transferred to Other Real Estate Owned   533    483 
  Loans provided for the sale of Other Real Estate Owned   -    175 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 - 4 - 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2016 and 2015

(Unaudited)

 

 

(Dollars in thousands, except per share data)  Total  Common Stock  Additional Paid-in Capital  Retained Earnings  Treasury Stock  Accumulated Other Comprehensive Income (Loss)
                   
Balance at December 31, 2015  $473,067   $315   $210,652   $316,530   $(48,868)  $(5,562)
Net Income   9,561    -    -    9,561    -    - 
Award of common shares released from Employee Benefit Trust (129,831 shares)   1,851    -    1,851    -    -    - 
Vesting of restricted stock unit awards (245,111 shares)   -    -    (4,047)   (396)   4,443    - 
Exercise of stock options (18,200 shares)   19    -    16    -    3    - 
Stock-based compensation expense   2,960    -    2,960    -    -    - 
Stock-based income tax benefit   303    -    303    -    -    - 
Purchase of treasury shares (15,300 shares)   (303)   -    -    -    (303)   - 
Repurchase of shares to satisfy tax obligation (76,656 shares)   (1,582)   -    -    -    (1,582)   - 
Dividends on common stock ($0.17 per share)   (4,970)   -    -    (4,970)   -    - 
Other comprehensive income   6,873    -    -    -    -    6,873 
Balance at March 31, 2016  $487,779   $315   $211,735   $320,725   $(46,307)  $1,311 
                               
                               
Balance at December 31, 2014  $456,247   $315   $206,437   $289,623   $(37,221)  $(2,907)
Net Income   8,733    -    -    8,733    -    - 
Award of common shares released from Employee Benefit Trust (136,114 shares)   1,917    -    1,917    -    -    - 
Vesting of restricted stock unit awards (204,110 shares)   -    -    (3,074)   (503)   3,577    - 
Exercise of stock options (1,100 shares)   -    -    1    -    (1)   - 
Stock-based compensation expense   2,769    -    2,769    -    -    - 
Stock-based income tax benefit   318    -    318    -    -    - 
Purchase of treasury shares (142,315 shares)   (2,766)   -    -    -    (2,766)   - 
Repurchase of shares to satisfy tax obligation (58,461 shares)   (1,110)   -    -    -    (1,110)   - 
Dividends on common stock ($0.16 per share)   (4,722)   -    -    (4,722)   -    - 
Other comprehensive income   4,500    -    -    -    -    4,500 
Balance at March 31, 2015  $465,886   $315   $208,368   $293,131   $(37,521)  $1,593 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 - 5 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

1.Basis of Presentation

 

The primary business of Flushing Financial Corporation (the “Holding Company”), a Delaware corporation, is the operation of its wholly-owned subsidiary, Flushing Bank (the “Bank”).

 

The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Holding Company and its direct and indirect wholly-owned subsidiaries, including the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc., which are collectively herein referred to as “we,” “us,” “our” and the “Company.”

 

The Holding Company also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”), which are special purpose business trusts. The Trusts are not included in the Company’s consolidated financial statements as the Company would not absorb the losses of the Trusts if any losses were to occur.

 

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such presented periods of the Company. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report. All inter-company balances and transactions have been eliminated in consolidation. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

2.Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowance for loan losses (“ALLL”), the evaluation of goodwill for impairment, the review of the need for a valuation allowance of the Company’s deferred tax assets, the fair value of financial instruments including the evaluation of other-than-temporary impairment (“OTTI”) on securities. Actual results could differ from these estimates.

 

3.Earnings Per Share

 

Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted average number of common shares outstanding, which includes unvested participating securities. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and as such are included in the calculation of earnings per share. The Company’s unvested restricted stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for computing basic earnings per common share includes common shares outstanding plus unvested restricted stock unit awards. The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding and other common stock equivalents during the period. Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share is net income available to common shareholders. The shares held in the Company’s Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per common share.

 

 - 6 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Earnings per common share have been computed based on the following:

 

   For the three months ended 
 March 31,
(Dollars in thousands, except per share data)  2016  2015
Net income, as reported  $9,561   $8,733 
Divided by:          
Weighted average common shares outstanding   29,097    29,397 
Weighted average common stock equivalents   14    22 
Total weighted average common shares outstanding and common stock equivalents   29,111    29,419 
Basic earnings per common share  $0.33   $0.30 
Diluted earnings per common share (1)  $0.33   $0.30 
Dividend payout ratio   51.5%   53.3%

 

(1)For the three months ended March 31, 2016 and 2015, there were no stock options that were anti-dilutive.

 

4.Debt and Equity Securities

 

The Company’s 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 at March 31, 2016 and December 31, 2015. Securities available for sale are recorded at fair value. Securities held-to-maturity are recorded at amortized cost.

 

The following table summarizes the Company’s portfolio of securities held-to-maturity at March 31, 2016:

 

   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Securites held-to-maturity:                    
Municipals  $7,885   $7,885   $-   $- 
                     
Total  $7,885   $7,885   $-   $- 

 

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2015:

 

   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Securites held-to-maturity:                    
Municipals  $6,180   $6,180   $-   $- 
                     
Total  $6,180   $6,180   $-   $- 

 

 - 7 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2016:

 

   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Corporate  $115,993   $111,399   $592   $5,186 
Municipals   127,023    131,869    4,846    - 
Mutual funds   21,507    21,507    -    - 
Collateralized loan obligations   101,613    100,926    33    720 
Other   7,154    7,150    -    4 
Total other securities   373,290    372,851    5,471    5,910 
REMIC and CMO   462,677    470,194    8,107    590 
GNMA   10,832    11,122    325    35 
FNMA   167,229    170,511    3,543    261 
FHLMC   16,351    16,585    234    - 
Total mortgage-backed securities   657,089    668,412    12,209    886 
Total securities available for sale  $1,030,379   $1,041,263   $17,680   $6,796 

 

Mortgage-backed securities shown in the table above includes one private issue collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with amortized cost and market value of $7.6 million at March 31, 2016.

 

 

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2015:

 

   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Corporate  $115,976   $111,674   $134   $4,436 
Municipals   127,696    131,583    3,887    - 
Mutual funds   21,290    21,290    -    - 
Collateralized loan obligations   53,225    52,898    -    327 
Other   7,214    7,212    -    2 
Total other securities   325,401    324,657    4,021    4,765 
REMIC and CMO   469,987    469,936    3,096    3,147 
GNMA   11,635    11,798    302    139 
FNMA   170,327    170,057    1,492    1,762 
FHLMC   16,961    16,949    87    99 
Total mortgage-backed securities   668,910    668,740    4,977    5,147 
Total securities available for sale  $994,311   $993,397   $8,998   $9,912 

 

Mortgage-backed securities shown in the table above includes one private issue CMO that is collateralized by commercial real estate mortgages with an amortized cost and market value of $7.7 million at December 31, 2015.

 

 - 8 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table details the amortized cost and fair value of the Company’s securities classified as held-to-maturity at March 31, 2016, by contractual maturity. 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
Cost
  Fair Value
   (In thousands)
       
Due in one year or less  $6,845   $6,845 
Due after one year through five years   1,040    1,040 
           
Total securities held-to-maturity  $7,885   $7,885 

 

The amortized cost and fair value of the Company’s securities, classified as available for sale at March 31, 2016, 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
Cost
  Fair Value
   (In thousands)
       
Due in one year or less  $5,993   $6,003 
Due after one year through five years   1,825    1,855 
Due after five years through ten years   74,821    74,261 
Due after ten years   269,144    269,225 
           
Total other securities   351,783    351,344 
Mutual funds   21,507    21,507 
Mortgage-backed securities   657,089    668,412 
           
Total securities available for sale  $1,030,379   $1,041,263 

 

 

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2016:

 

      Total  Less than 12 months  12 months or more
   Count  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses
      (Dollars in thousands)
Corporate   11   $74,813   $5,186   $56,128   $3,871   $18,685   $1,315 
Collateralized loan obligations   9    72,328    720    72,328    720    -    - 
Other   1    296    4    -    -    296    4 
Total other securities   21    147,437    5,910    128,456    4,591    18,981    1,319 
                                    
REMIC and CMO   10    49,379    590    13,733    60    35,646    530 
GNMA   1    6,786    35    -    -    6,786    35 
FNMA   4    26,415    261    -    -    26,415    261 
Total mortgage-backed securities   15    82,580    886    13,733    60    68,847    826 
Total securities available for sale   36   $230,017   $6,796   $142,189   $4,651   $87,828   $2,145 

 

 - 9 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2015:

 

      Total  Less than 12 months  12 months or more
   Count  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses
      (Dollars in thousands)
Corporate   12   $85,563   $4,436   $76,218   $3,782   $9,345   $654 
Collateralized loan obligations   7    52,898    327    52,898    327    -    - 
Other   1    298    2    -    -    298    2 
Total other securities   20    138,759    4,765    129,116    4,109    9,643    656 
                                    
REMIC and CMO   33    238,132    3,147    182,010    1,642    56,122    1,505 
GNMA   1    6,977    139    6,977    139    -    - 
FNMA   20    102,225    1,762    75,769    1,043    26,456    719 
FHLMC   3    14,715    99    14,715    99    -    - 
Total mortgage-backed securities   57    362,049    5,147    279,471    2,923    82,578    2,224 
Total securities available for sale   77   $500,808   $9,912   $408,587   $7,032   $92,221   $2,880 

 

OTTI losses on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, the investor must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment associated with the credit loss is recognized in earnings in the Consolidated Statements of Income. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive income (“AOCI”) within Stockholders’ Equity.

 

The Company reviewed each investment that had an unrealized loss at March 31, 2016 and December 31, 2015. An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCI, net of tax.

 

The unrealized losses in total securities available for sale at March 31, 2016 and December 31, 2015 were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2016 and December 31, 2015.

 

We did not sell any securities during the three months ended March 31, 2016 and 2015.

 

5.      Loans

 

Loans are reported at their principal outstanding balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is recognized on the accrual basis. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Subsequent cash payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Subsequent cash payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is likely to occur. Loan fees and certain loan origination costs are deferred. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.

 

 - 10 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), current economic conditions, delinquency and non-accrual trends, classified loan levels, risk in the portfolio and volumes and trends in loan types, recent trends in charge-offs, changes in underwriting standards, experience, ability and depth of the Company’s lenders, collection policies and experience, internal loan review function and other external factors. The Company segregated its loans into two portfolios based on year of origination. One portfolio was reviewed for loans originated after December 31, 2009 and a second portfolio for loans originated prior to January 1, 2010. Our decision to segregate the portfolio based upon origination dates was based on changes made in our underwriting standards during 2009. By the end of 2009, all loans were being underwritten based on revised and tightened underwriting standards. Loans originated prior to 2010 have a higher delinquency rate and loss history. Each of the years in the portfolio for loans originated prior to 2010 has a similar delinquency rate. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and local economic conditions and other factors. We review our loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-accrual loans are classified as impaired loans. The Company’s Board of Directors reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.

 

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Increases and decreases in the allowance other than charge-offs and recoveries are included in the provision for loan losses. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.

 

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Appraisals are obtained and/or updated internal evaluations are prepared as soon as practical, and before the loan becomes 90 days delinquent. The loan balances of collateral dependent impaired loans are compared to the property’s updated fair value. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. The balance which exceeds fair value is generally charged-off. In addition, taxi medallion loans on accrual status with a loan-to-value greater than 100% are classified as impaired and allocated a portion of the ALLL in the amount of the excess of the loan-to-value over the loan’s principal balance. The 85% is based on the actual net proceeds the Bank has received from the sale of other real estate owned (“OREO”) as a percentage of OREO’s appraised value.

 

A loan is considered impaired when, based upon current information, the Company believes it is probable that it will be unable to collect all amounts due, both principal and interest, in accordance with the original 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 at the loan’s observable market price or, as a practical expedient, 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 each impaired loan on an individual basis to determine if either a charge-off or a valuation allowance needs to be allocated to the loan. The Company does not charge-off or allocate a valuation allowance to loans for which management has concluded the current value of the underlying collateral will allow for recovery of the loan balance either through the sale of the loan or by foreclosure and sale of the property.

 - 11 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The Company evaluates the underlying collateral through a third party appraisal, or when a third party appraisal is not available, the Company will use an internal evaluation. The internal evaluations are prepared using an income approach or a sales approach. The income approach is used for income producing properties and uses current revenues less operating expenses to determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market. When an internal evaluation is used, we place greater reliance on the income approach to value the collateral.

 

In preparing internal evaluations of property values, the Company seeks to obtain current data on the subject property from various sources, including: (1) the borrower; (2) copies of existing leases; (3) local real estate brokers and appraisers; (4) public records (such as for real estate taxes and water and sewer charges); (5) comparable sales and rental data in the market; (6) an inspection of the property and (7) interviews with tenants. These internal evaluations primarily focus on the income approach and comparable sales data to value the property.

 

As of March 31, 2016, we utilized recent third party appraisals of the collateral to measure impairment for $27.3 million, or 80.8%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $6.5 million, or 19.2%, of collateral dependent impaired loans.

 

The Company may restructure a loan to enable a borrower experiencing financial difficulties to continue making payments when it is deemed to be in the Company’s best long-term interest. 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. We classify these loans as Troubled Debt Restructured (“TDR”).

 

These restructurings have not included a reduction of principal balance. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. All loans classified as TDR are considered impaired, however TDR loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status and are not included as part of non-performing loans. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status and reported as non-performing loans until they have made timely payments for six consecutive months.

 

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At March 31, 2016, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

 

The Company did not modify and classify any loans as TDR during the three months ended March 31, 2016.

 

The following table shows loans modified and classified as TDR during the period indicated:

 

   For the three months ended
March 31, 2015
(Dollars in thousands)  Number  Balance  Modification description
       
              
Small Business Administration   1   $41    Received a below market interest rate and the loan amortization was extended
Total   1   $41    

 

The recorded investment of the loan modified and classified to a TDR, presented in the table above, was unchanged as there was no principal forgiven in this modification.

 - 12 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table shows our recorded investment for loans classified as TDR that are performing according to their restructured terms at the periods indicated:

 

   March 31, 2016  December 31, 2015
(Dollars in thousands)  Number
 of contracts
  Recorded
investment
  Number
 of contracts
  Recorded
investment
             
Multi-family residential   9   $2,611    9   $2,626 
Commercial real estate   3    2,358    3    2,371 
One-to-four family - mixed-use property   6    2,042    6    2,052 
One-to-four family - residential   1    341    1    343 
Small business administration   1    32    1    34 
Commercial business and other   4    2,038    4    2,083 
                     
Total performing troubled debt restructured   24   $9,422    24   $9,509 

 

During the three months ended March 31, 2016 and 2015, there were no TDR loans transferred to non-performing status.

 

 

The following table shows our recorded investment for loans classified as TDR that are not performing according to their restructured terms at the periods indicated:

 

   March 31, 2016  December 31, 2015
(Dollars in thousands)  Number
 of contracts
  Recorded
investment
  Number
 of contracts
  Recorded
investment
             
Multi-family residential   1   $385    1   $391 
                     
Total troubled debt restructurings that subsequently defaulted   1   $385    1    391 

 

 

 - 13 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table shows our non-performing loans at the periods indicated:

 

(In thousands)  March 31, 
2016
  December 31, 
2015
       
Loans ninety days or more past due and still accruing:          
Multi-family residential  $792   $233 
Commercial real estate   1,083    1,183 
One-to-four family - mixed-use property   743    611 
One-to-four family - residential   13    13 
Construction   570    1,000 
Commercial Business and other   -    220 
Total   3,201    3,260 
           
Non-accrual mortgage loans:          
Multi-family residential   3,518    3,561 
Commercial real estate   3,295    2,398 
One-to-four family - mixed-use property   5,519    5,952 
One-to-four family - residential   8,861    10,120 
Total   21,193    22,031 
           
Non-accrual non-mortgage loans:          
Small business administration   201    218 
Taxi Medallion   196    - 
Commercial business and other   511    568 
Total   908    786 
           
Total non-accrual loans   22,101    22,817 
           
Total non-accrual loans and loans ninety days or more past due and still accruing  $25,302   $26,077 

 

 

The following is a summary of interest foregone on non-accrual loans and loans classified as TDR for the periods indicated:

 

   For the three months ended 
 March 31,
   2016  2015
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $540   $691 
Less:  Interest income included in the results of operations   123    148 
Total foregone interest  $417   $543 

 

 - 14 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following tables show an age analysis of our recorded investment in loans, including performing loans past maturity, at the periods indicated:

 

   March 31, 2016
(In thousands)  30 - 59 Days
Past Due
  60 - 89 Days
Past Due
  Greater
than
90 Days
  Total Past
Due
  Current  Total Loans
    
                   
Multi-family residential  $6,644   $445   $4,310   $11,399   $2,028,395   $2,039,794 
Commercial real estate   767    381    4,378    5,526    1,052,502    1,058,028 
One-to-four family - mixed-use property   8,961    326    6,262    15,549    556,297    571,846 
One-to-four family - residential   2,711    276    8,677    11,664    179,494    191,158 
Co-operative apartments   -    -    -    -    8,182    8,182 
Construction loans   -    -    570    570    6,902    7,472 
Small Business Administration   37    -    201    238    14,463    14,701 
Taxi medallion   860    -    196    1,056    19,701    20,757 
Commercial business and other   -    1    353    354    530,968    531,322 
Total  $19,980   $1,429   $24,947   $46,356   $4,396,904   $4,443,260 

 

 

   December 31, 2015
(In thousands)  30 - 59 Days
Past Due
  60 - 89 Days
Past Due
  Greater
than
90 Days
  Total Past
Due
  Current  Total Loans
    
                   
Multi-family residential  $9,421   $804   $3,794   $14,019   $2,041,209   $2,055,228 
Commercial real estate   2,820    153    3,580    6,553    994,683    1,001,236 
One-to-four family - mixed-use property   8,630    1,258    6,563    16,451    556,592    573,043 
One-to-four family - residential   4,261    154    10,134    14,549    173,289    187,838 
Co-operative apartments   -    -    -    -    8,285    8,285 
Construction loans   -    -    1,000    1,000    6,284    7,284 
Small Business Administration   42    -    218    260    11,934    12,194 
Taxi medallion   -    -    -    -    20,881    20,881 
Commercial business and other   -    2    228    230    506,392    506,622 
Total  $25,174   $2,371   $25,517   $53,062   $4,319,549   $4,372,611 

 

 - 15 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following tables show the activity in the allowance for loan losses for the three month periods indicated:

 

March 31, 2016
(in thousands)  Multi-family residential  Commercial real estate  One-to-four family - mixed-use property  One-to-four family - residential  Construction loans  Small Business Administration  Taxi medallion  Commercial business and other  Unallocated  Total
                               
Allowance for credit losses:                                                  
Beginning balance  $6,718   $4,239   $4,227   $1,227   $50   $262   $343   $4,469   $-   $21,535 
   Charge-off's   (42)   -    (14)   (66)   -    -    -    (25)   -    (147)
   Recoveries   13    -    187    365    -    31    -    9    -    605 
   Provision   (391)   (38)   (893)   (484)   5    (24)   (8)   138    1,695    - 
Ending balance  $6,298   $4,201   $3,507   $1,042   $55   $269   $335   $4,591   $1,695   $21,993 
Ending balance: individually evaluated for impairment  $247   $171   $491   $50   $-   $47   $325   $108   $-   $1,439 
Ending balance: collectively evaluated for impairment  $6,051   $4,030   $3,016   $992   $55   $222   $10   $4,483   $1,695   $20,554 

 

 

March 31, 2015
(in thousands)  Multi-family residential  Commercial real estate  One-to-four family - mixed-use property  One-to-four family - residential  Construction loans  Small Business Administration  Taxi medallion  Commercial business and other  Total
                            
Allowance for credit losses:                                             
Beginning balance  $8,827   $4,202   $5,840   $1,690   $42   $279   $11   $4,205   $25,096 
   Charge-off's   (97)   (18)   (78)   (153)   -    -    -    (51)   (397)
   Recoveries   23    72    3    -    -    20    -    8    126 
   Provision (benefit)   (124)   (354)   (336)   (72)   (19)   (33)   -    204    (734)
Ending balance  $8,629   $3,902   $5,429   $1,465   $23   $266   $11   $4,366   $24,091 
Ending balance: individually evaluated for impairment  $267   $19   $566   $54   $-   $-   $-   $139   $1,045 
Ending balance: collectively evaluated for impairment  $8,362   $3,883   $4,863   $1,411   $23   $266   $11   $4,227   $23,046 

 

 - 16 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following tables show the manner in which loans were evaluated for impairment at the periods indicated:

 

At March 31, 2016
(In thousands)  Multi-family residential  Commercial real estate  One-to-four family - mixed-use property  One-to-four family- residential  Co-operative apartments  Construction loans  Small Business Administration  Taxi Medallion  Commercial business and other  Total
                               
Financing Receivables:                                                  
Ending Balance  $2,039,794   $1,058,028   $571,846   $191,158   $8,182   $7,472   $14,701   $20,757   $531,322   $4,443,260 
Ending balance: individually evaluated for impairment  $8,402   $7,560   $11,485   $11,305   $-   $570   $402   $2,110   $4,366   $46,200 
                                                   
Ending balance: collectively evaluated for impairment  $2,031,392   $1,050,468   $560,361   $179,853   $8,182   $6,902   $14,299   $18,647   $526,956   $4,397,060 

 

 

At December 31, 2015
(In thousands)  Multi-family residential  Commercial real estate  One-to-four family - mixed-use property  One-to-four family- residential  Co-operative apartments  Construction loans  Small Business Administration  Taxi Medallion  Commercial business and other  Total
                               
Financing Receivables:                                                  
Ending Balance  $2,055,228   $1,001,236   $573,043   $187,838   $8,285   $7,284   $12,194   $20,881   $506,622   $4,372,611 
Ending balance: individually evaluated for impairment  $8,047   $6,183   $12,828   $12,598   $-   $1,000   $310   $2,118   $4,716   $47,800 
                                                   
Ending balance: collectively evaluated for impairment  $2,047,181   $995,053   $560,215   $175,240   $8,285   $6,284   $11,884   $18,763   $501,906   $4,324,811 

 

 

 - 17 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses for impaired loans at the periods indicated:

 

   March 31, 2016  December 31, 2015
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
                   
   (In thousands)
With no related allowance recorded:                              
Mortgage loans:                              
Multi-family residential  $6,108   $6,818   $-   $5,742   $6,410   $- 
Commercial real estate   5,202    5,259    -    3,812    3,869    - 
One-to-four family mixed-use property   8,754    9,698    -    10,082    11,335    - 
One-to-four family residential   10,964    12,558    -    12,255    14,345    - 
Co-operative apartments   -    -    -    -    -    - 
Construction   570    570    -    1,000    1,000    - 
Non-mortgage loans:                              
Small Business Administration   252    252    -    276    276    - 
Taxi Medallion   -    -    -    -    -    - 
Commercial Business and other   2,374    2,744    -    2,682    5,347    - 
                               
Total loans with no related allowance recorded   34,224    37,899    -    35,849    42,582    - 
                               
With an allowance recorded:                              
Mortgage loans:                              
Multi-family residential   2,294    2,294    247    2,305    2,305    252 
Commercial real estate   2,358    2,358    171    2,371    2,371    180 
One-to-four family mixed-use property   2,731    2,731    491    2,746    2,746    502 
One-to-four family residential   341    341    50    343    343    51 
Co-operative apartments   -    -    -    -    -    - 
Construction   -    -    -    -    -    - 
Non-mortgage loans:                              
Small Business Administration   150    150    47    34    34    - 
Taxi Medallion   2,110    2,110    325    2,118    2,118    333 
Commercial Business and other   1,992    1,992    108    2,034    2,034    112 
                               
Total loans with an allowance recorded   11,976    11,976    1,439    11,951    11,951    1,430 
                               
Total Impaired Loans:                              
Total mortgage loans  $39,322   $42,627   $959   $40,656   $44,724   $985 
                               
Total non-mortgage loans  $6,878   $7,248   $480   $7,144   $9,809   $445 

 

 - 18 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table shows our average recorded investment and interest income recognized for impaired loans for the periods indicated:

 

   March 31, 2016  March 31, 2015
   Average
Recorded
Investment
  Interest
Income
Recognized
  Average
Recorded
Investment
  Interest
Income
Recognized
             
   (In thousands)
With no related allowance recorded:                    
Mortgage loans:                    
Multi-family residential  $5,925   $17   $10,905   $56 
Commercial real estate   4,507    12    6,567    39 
One-to-four family mixed-use property   9,418    33    11,749    57 
One-to-four family residential   11,610    27    13,210    25 
Co-operative apartments   -    -    -    - 
Construction   785    -    -    - 
Non-mortgage loans:                    
Small Business Administration   264    3    159    1 
Taxi Medallion   -    -    -    - 
Commercial Business and other   2,528    46    4,511    69 
                     
Total loans with no related allowance recorded   35,037    138    47,101    247 
                     
With an allowance recorded:                    
Mortgage loans:                    
Multi-family residential   2,300    29    2,597    32 
Commercial real estate   2,365    28    1,458    7 
One-to-four family mixed-use property   2,739    38    3,085    42 
One-to-four family residential   342    3    353    4 
Co-operative apartments   -    -    -    - 
Construction   -    -    -    - 
Non-mortgage loans:                    
Small Business Administration   92    2    21    1 
Taxi Medallion   2,114    15    -    - 
Commercial Business and other   2,013    25    2,660    35 
                     
Total loans with an allowance recorded   11,965    140    10,174    121 
                     
Total Impaired Loans:                    
Total mortgage loans  $39,991   $187   $49,924   $262 
                     
Total non-mortgage loans  $7,011   $91   $7,351   $106 

 

In accordance with our policy and the current regulatory guidelines, we designate loans as “Special Mention,” which are considered “Criticized Loans,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Loans”. If a loan does not fall within one of the previous mentioned categories then the loan would be considered “Pass.” Loans that are non-accrual are designated as Substandard, Doubtful or Loss. These loan designations are updated quarterly. We designate a loan as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate a loan Doubtful when it displays the inherent weakness of a Substandard loan with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate a loan as Loss if it is deemed the debtor is incapable of repayment. The Company does not hold any loans designated as Loss, as loans that are designated as Loss are charged to the Allowance for Loan Losses. We designate a loan as Special Mention if the asset does not warrant classification within one of the other classifications, but does contain a potential weakness that deserves closer attention.

 - 19 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table sets forth the recorded investment in loans designated as Criticized or Classified at the periods indicated:

 

   March 31, 2016
(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
                
Multi-family residential  $8,505   $5,790   $-   $-   $14,295 
Commercial real estate   1,500    5,203    -    -    6,703 
One-to-four family - mixed-use property   2,716    9,657    -    -    12,373 
One-to-four family - residential   1,538    10,964    -    -    12,502 
Co-operative apartments   -    -    -    -    - 
Construction loans   -    570    -    -    570 
Small Business Administration   504    326    -    -    830 
Taxi Medallion   -    2,110    -    -    2,110 
Commercial business and other   147    2,803    -    -    2,950 
Total loans  $14,910   $37,423   $-   $-   $52,333 

 

   December 31, 2015
(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
                
Multi-family residential  $4,361   $5,421   $-   $-   $9,782 
Commercial real estate   1,821    3,812    -    -    5,633 
One-to-four family - mixed-use property   3,087    10,990    -    -    14,077 
One-to-four family - residential   1,437    12,255    -    -    13,692 
Co-operative apartments   -    -    -    -    - 
Construction loans   -    1,000    -    -    1,000 
Small Business Administration   229    224    -    -    453 
Taxi Medallion   -    2,118    -    -    2,118 
Commercial business and other   -    3,123    -    -    3,123 
Total loans  $10,935   $38,943   $-   $-   $49,878 

 

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $164.1 million and $219.6 million, respectively, at March 31, 2016.

 

 

6.        Loans held for sale

 

Loans held for sale are carried at the lower of cost or estimated fair value. At March 31, 2016 and December 31, 2015, the Bank did not have any loans held for sale.

 

The Company has implemented a strategy of selling certain delinquent and non-performing loans. Once the Company has decided to sell a loan, the sale usually closes in a short period of time, generally within the same quarter. Loans designated held for sale are reclassified from loans held for investment to loans held for sale. Terms of sale include cash due upon the closing of the sale, no contingencies or recourse to the Company and servicing is released to the buyer.

 

 - 20 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table shows delinquent and non-performing loans sold during the period indicated:

 

   For the three months ended
March 31, 2016
(Dollars in thousands)  Loans sold  Proceeds  Net (charge-offs)
recoveries
  Net gain
             
Multi-family residential   3   $874   $-   $2 
Commercial real estate   2    192    -    - 
One-to-four family - mixed-use property   4    1,315    -    21 
                     
Total (1)   9   $2,381   $-   $23 

 

1)The above table does not include the sale of six performing small business administration loans for proceeds totaling $3.5 million during the three months ended March 31, 2016. These loans were sold for a net gain of $0.3 million.

 

 

The following table shows delinquent and non-performing loans sold during the period indicated:

 

   For the three months ended
March 31, 2015
(Dollars in thousands)  Loans sold  Proceeds  Net (charge-offs)
recoveries
  Net gain
             
Multi-family residential   2   $836   $-   $2 
One-to-four family - mixed-use property   3    686    -    - 
                     
Total   5   $1,522   $-   $2 

 

 

7.    Other Real Estate Owned

 

The following are changes in OREO during the periods indicated:

 

   For the three months ended
March 31,
   2016  2015
   (In thousands)
       
Balance at beginning of period  $4,932   $6,326 
Acquisitions   533    483 
Write-down of carrying value   (47)   - 
Sales   (816)   (1,557)
           
Balance at end of period  $4,602   $5,252 

 

 - 21 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table shows the gross gains, gross losses and write-downs of OREO reported in the Consolidated Statements of Income during the periods indicated:

 

   For the three months ended
March 31,
   2016  2015
   (In thousands)
       
Gross gains  $37   $216 
Gross losses   -    (6)
           
Total net gain  $37   $210 

 

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. During the three months ended March 31, 2016, we did not foreclose on any consumer mortgages through in-substance repossession. OREO are included in other assets on the Company’s balance sheet. At March 31, 2016, we held two foreclosed residential real estate properties totaling $0.6 million and at December 31, 2015, we held one foreclosed residential real estate property for $0.l million. Included within net loans as of March 31, 2016 and December 31, 2015 was a recorded investment of $13.5 million and $15.2 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

 

 

8.     Repurchase Agreements

 

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 Federal Home Loan Bank of New York (“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 are delivered to the broker-dealers or the FHLB-NY who arrange 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. As a condition of the repurchase agreements the Company is required to provide sufficient collateral. If the fair value of the collateral were to fall below the required level, the Company is obligated to pledge additional collateral. All the repurchase agreements are collateralized by mortgage-backed securities.

 

The following tables shows the type of securities pledged and remaining maturity of repurchase agreements held at the periods indicated:

 

   At March 31, 2016
   Remaining Contractual Maturity of Agreements
   Less than 1 year  1 year to 3 years  Over 3 years  Total
   (In thousands)
Repurchase agreements:                    
Mortgage-backed securities  $38,000   $38,000   $40,000   $116,000 
                     
Total repurchase agreements  $38,000   $38,000   $40,000   $116,000 

 

   At December 31, 2015
   Remaining Contractual Maturity of Agreements
   Less than 1 year  1 year to 3 years  Over 3 years  Total
   (In thousands)
Repurchase agreements:                    
Mortgage-backed securities  $38,000   $38,000   $40,000   $116,000 
                     
Total repurchase agreements  $38,000   $38,000   $40,000   $116,000 

 

The fair value of the collateral pledged for the repurchase agreements above was $132.3 million and $131.4 million at March 31, 2016 and December 31, 2015, respectively.

 

 - 22 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

9.    Stock-Based Compensation

 

For the three months ended March 31, 2016 and 2015, the Company’s net income, as reported, includes $3.0 million and $2.8 million, respectively, of stock-based compensation costs and $1.1 million of income tax benefits related to the stock-based compensation plans in each of the periods.

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock price, the risk-free interest rate over the options’ expected term and the annual dividend yield. The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight line method. During the three months ended March 31, 2016 and 2015, the Company granted 337,175 and 314,520 restricted stock units, respectively. There were no stock options granted during the three months ended March 31, 2016 and 2015.

 

The 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) became effective on May 20, 2014 after adoption by the Board of Directors and approval by the stockholders. The 2014 Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can, but need not, be structured so as to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The 2014 Omnibus Plan authorizes the issuance of 1,100,000 shares. To the extent that an award under the 2014 Omnibus Plan is cancelled, expired, forfeited, settled in cash, settled by issuance of fewer shares than the number underlying the award, or otherwise terminated without delivery of shares to a participant in payment of the exercise price or taxes relating to an award, the shares retained by or returned to the Company will be available for future issuance under the 2014 Omnibus Plan. No further awards may be granted under the Company’s 2005 Omnibus Incentive Plan, 1996 Stock Option Incentive Plan, and 1996 Restricted Stock Incentive Plan (the “Prior Plans”). At March 31, 2016, there were 473,040 shares available for delivery in connection with awards under the 2014 Omnibus Plan. To satisfy stock option exercises or fund restricted stock and restricted stock unit awards, shares are issued from treasury stock, if available; otherwise new shares are issued. The exercise price per share of a stock option grant may not be less than the fair market value of the common stock of the Company, as defined in the Omnibus Plan, on the date of grant and may not be re-priced without the approval of the Company’s stockholders. Options, stock appreciation rights, restricted stock, restricted stock units and other stock based awards granted under the Omnibus Plan are generally subject to a minimum vesting period of three years with stock options having a 10-year maximum contractual term. Other awards do not have a contractual term of expiration. The Compensation Committee is authorized to grant awards that vest upon a participant’s retirement. These amounts are included in stock-based compensation expense at the time of the participant’s retirement eligibility.

 

The following table summarizes the Company’s restricted stock unit (“RSU”) awards under the 2014 Omnibus Plan and the Prior Plans in the aggregate at or for the three months ended March 31, 2016:

 

   Shares  Weighted-Average
Grant-Date
Fair Value
       
Non-vested at December 31, 2015   415,909   $18.10 
Granted   337,175    19.85 
Vested   (235,335)   18.71 
Forfeited   (900)   19.43 
Non-vested at March 31, 2016   516,849   $18.97 
           
Vested but unissued at March 31, 2016   280,450   $19.28 

 

 - 23 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

As of March 31, 2016, there was $9.1 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 3.6 years. The total fair value of awards vested for the three months ended March 31, 2016 and 2015 were $4.8 million and $4.1 million, respectively. The vested but unissued RSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

 

The following table summarizes certain information regarding the stock option awards under the Omnibus Plan and the Prior Plans in the aggregate at or for the three months ended March 31, 2016:

 

   Shares  Weighted-
Average
Exercise
Price
  Weighted-Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
($000) *
             
Outstanding at December 31, 2015   109,130   $16.14           
Granted   -    -           
Exercised   (18,200)   19.03           
Forfeited   -    -           
Outstanding at March 31, 2016   90,930   $15.56    2.1   $551 

 

* The intrinsic value of a stock option is the difference between the market value of the underlying stock and the exercise price of the option.

 

 

Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised, and the weighted average grant date fair value for options granted, during the three months ended March 31, 2016 and 2015 are provided in the following table:

 

   For the three months ended
March 31,
(In thousands)  2016  2015
Proceeds from stock options exercised  $19   $- 
Fair value of shares received upon exercised of stock options   328    20 
Tax (expense) benefit related to stock options exercised   (16)   1 
Intrinsic value of stock options exercised   43    2 

 

Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing plan for officers who have achieved the designated level and completed one year of service. Prior to January 1, 2015, the Plan included officers at a level that are no longer qualified to participate, however those that were eligible remain eligible to participate in the Plan. Awards are made under this plan on certain compensation not eligible for awards made under the profit sharing plan, due to the terms of the profit sharing plan and the Internal Revenue Code. Employees receive awards under this plan proportionate to the amount they would have received under the profit sharing plan, but for limits imposed by the profit sharing plan and the Internal Revenue Code. The awards are made as cash awards, and then converted to common stock equivalents (phantom shares) at the then current fair value of the Company’s common stock. Dividends are credited to each employee’s account in the form of additional phantom shares each time the Company pays a dividend on its common stock. In the event of a change of control (as defined in this plan), an employee’s interest is converted to a fixed dollar amount and deemed to be invested in the same manner as his interest in the Bank’s non-qualified deferred compensation plan. Employees vest under this plan 20% per year for the first 5 years of employment and are 100% vested thereafter. Employees also become 100% vested upon a change of control. Employees receive their vested interest in this plan in the form of a cash lump sum payment or installments, as elected by the employee, after termination of employment. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

 

 - 24 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table summarizes the Phantom Stock Plan at or for the three months ended March 31, 2016:

 

Phantom Stock Plan  Shares  Fair Value
       
Outstanding at December 31, 2015   79,440   $21.64 
Granted   10,150    19.88 
Forfeited   -    - 
Distributions   (1,362)   20.28 
Outstanding at March 31, 2016   88,228   $21.62 
Vested at March 31, 2016   87,826   $21.62 

 

The Company recorded stock-based compensation expense for the Phantom Stock Plan of $29,000 and $9,000 for the three months ended March 31, 2016 and 2015, respectively. The total fair value of the distributions from the Phantom Stock Plan was $28,000 and $8,000 for the three months ended March 31, 2016 and 2015, respectively.

 

 

10.     Pension and Other Postretirement Benefit Plans

 

The following table sets forth information regarding the components of net expense for the pension and other postretirement benefit plans.

 

   Three months ended
March 31,
(In thousands)  2016  2015
       
Employee Pension Plan:          
    Interest cost  $226   $221 
    Amortization of unrecognized loss   201    291 
    Expected return on plan assets   (348)   (350)
        Net employee pension expense  $79   $162 
           
Outside Director Pension Plan:          
    Service cost  $11   $11 
    Interest cost   24    24 
    Amortization of unrecognized gain   (21)   (14)
    Amortization of past service liability   10    10 
        Net outside director pension expense  $24   $31 
           
Other Postretirement Benefit Plans:          
    Service cost  $90   $95 
    Interest cost   80    75 
    Amortization of unrecognized loss   12    30 
    Amortization of past service liability   (21)   (21)
        Net other postretirement expense  $161   $179 

 

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2015 that it expects to contribute $0.3 million and $0.2 million to the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), respectively, during the year ending December 31, 2016. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of March 31, 2016, the Company has contributed $36,000 to the Outside Director Pension Plan and $18,000 to the Other Postretirement Benefit Plans. As of March 31, 2016, the Company has not revised its expected contributions for the year ending December 31, 2016.

 - 25 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

11.   Fair Value of Financial Instruments

 

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At March 31, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.8 million and $28.0 million, respectively. At December 31, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.7 million and $29.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three months ended March 31, 2016.

 

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:

 

   Fair Value
Measurements
  Fair Value
Measurements
  Changes in Fair Values For Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
   at March 31,  at December 31,  Three Months Ended
(In thousands)  2016  2015  March 31, 2016  March 31, 2015
             
Mortgage-backed securities  $2,403   $2,527   $5   $(8)
Other securities   28,361    28,205    96    197 
Borrowed funds   27,977    29,018    1,054    524 
Net gain from fair value adjustments (1)            $1,155   $713 

 

(1)The net gain from fair value adjustments presented in the above table does not include net losses of $2.1 million and $1.3 million for the three months ended March 31, 2016 and 2015, respectively, from the change in the fair value of interest rate swaps.

 

Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company reports as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.

 

The borrowed funds had a contractual principal amount of $61.9 million at both March 31, 2016 and December 31, 2015. The fair value of borrowed funds includes accrued interest payable of $0.1 million at March 31, 2016 and December 31, 2015.

 

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.

 

Disclosure of fair value does not require 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 and equity.

 

Further, fair value disclosure 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.

 - 26 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).

 

A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:

 

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at March 31, 2016 and December 31, 2015.

 

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At March 31, 2016 and December 31, 2015, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

 

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At March 31, 2016 and December 31, 2015, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company and a single issuer trust preferred security.

 

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.

 

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at March 31, 2016 and December 31, 2015:

 

   Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant Other
Unobservable Inputs
(Level 3)
  Total carried at fair value
on a recurring basis
   2016  2015  2016  2015  2016  2015  2016  2015
   (In thousands)
                         
Assets:                                        
Mortgage-backed Securities  $-   $-   $668,412   $668,740   $-   $-   $668,412   $668,740 
Other securities   -    -    365,701    317,445    7,150    7,212    372,851    324,657 
Interest rate swaps   -    -    -    48    -    -    -    48 
                                         
Total assets  $-   $-   $1,034,113   $986,233   $7,150   $7,212   $1,041,263   $993,445 
                                         
Liabilities:                                        
Borrowings  $-   $-   $-   $-   $27,977   $29,018   $27,977   $29,018 
Interest rate swaps   -    -    11,466    4,314    -    -    11,466    4,314 
                                         
Total liabilities  $-   $-   $11,466   $4,314   $27,977   $29,018   $39,443   $33,332 

 

 - 27 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

 

   For the three months ended 
 March 31, 2016
   Trust preferred 
securities
  Junior subordinated 
debentures
   (In thousands)
       
Beginning balance  $7,212   $29,018 
Net loss from fair value adjustment of financial assets   (60)   - 
Net gain from fair value adjustment of financial liabilities   -    (1,056)
Increase in accrued interest payable   -    15 
Change in unrealized gains included in other comprehensive income   (2)   - 
Ending balance  $7,150   $27,977 
           
Changes in unrealized gain (loss) held at period end  $(2)  $- 

 

 

The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

 

   For the three months ended 
 March 31, 2015
   Municipals  Trust preferred 
securities
  Junior subordinated 
debentures
   (In thousands)
          
Beginning balance  $15,519   $7,090   $28,771 
Purchases   1,000    -    - 
Principal repayments   (55)   -    - 
Maturities   (2,000)   -    - 
Net gain from fair value adjustment of financial assets   -    94    - 
Net gain from fair value adjustment of financial liabilities   -    -    (524)
Decrease in accrued interest payable   -    -    (3)
Change in unrealized gains included in other comprehensive income   -    5    - 
Ending balance  $14,464   $7,189   $28,244 
                
Changes in unrealized gain (loss) held at period end  $-   $5   $- 

 

During the three months ended March 31, 2016 and 2015, there were no transfers between Levels 1, 2 and 3.

 

 - 28 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following tables present the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:

 

   March 31, 2016
                
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:                     
                      
Trust preferred securities  $7,150   Discounted cash flows  Discount rate  7.0%- 7.12%   7.1%
                      
Liabilities:                     
                      
Junior subordinated debentures  $27,977   Discounted cash flows  Discount rate   7.0%    7.0%

 

   December 31, 2015
                
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:                     
                      
Trust preferred securities  $7,212   Discounted cash flows  Discount rate  7.0%- 7.07%   7.1%
                      
Liabilities:                     
                      
Junior subordinated debentures  $29,018   Discounted cash flows  Discount rate   7.0%    7.0%

 

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at March 31, 2016 and December 31, 2015, is the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

 

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value, at March 31, 2016 and December 31, 2015:

 

   Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant Other
Unobservable Inputs
(Level 3)
  Total carried at fair value
on a recurring basis
   2016  2015  2016  2015  2016  2015  2016  2015
   (In thousands)
Assets:                                        
Impaired loans  $-   $-   $-   $-   $15,175   $15,360   $15,175   $15,360 
Other real estate owned   -    -    -    -    4,602    4,932    4,602    4,932 
                                         
Total assets  $-   $-   $-   $-   $19,777   $20,292   $19,777   $20,292 

 

 

 - 29 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following tables present the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:

 

   March 31, 2016
       
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:                     
                      
Impaired loans  $3,465   Income approach  Capitalization rate  7.3%to8.0%   7.6%
           Loss severity discount  14.0%to15.0%   14.9%
                      
Impaired loans  $4,985   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to20.0%   -3.3%
           Loss severity discount   15.0%    15.0%
                      
                      
Impaired loans  $6,725   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to25.0%   -3.3%
           Capitalization rate  5.3%to9.0%   7.1%
           Loss severity discount  5.2%to15.0%   13.8%
                      
                      
Other real estate owned  $3,750   Income approach  Capitalization rate   9.0%    9.0%
                      
                      
Other real estate owned  $852   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -5.0%to25.0%   10.9%

 

   December 31, 2015
       
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:                     
                      
Impaired loans  $3,878   Income approach  Capitalization rate  7.3%to8.5%   7.7%
           Loss severity discount   15.0%    15.0%
                      
Impaired loans  $5,555   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to40.0%   -2.2%
           Loss severity discount   15.0%    15.0%
                      
                      
Impaired loans  $5,927   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to25.0%   -2.2%
           Capitalization rate  5.3%to9.0%   7.0%
           Loss severity discount  5.2%to15.0%   13.7%
                      
                      
Other real estate owned  $3,750   Income approach  Capitalization rate   9.0%    9.0%
                      
                      
Other real estate owned  $366   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -5.0%to25.0%   12.0%
                      
                      
Other real estate owned  $816   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -10.0%to15.0%   2.5%
           Capitalization rate   8.6%    8.6%

 

 - 30 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015.

 

The fair value of each material class of financial instruments at March 31, 2016 and December 31, 2015 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:

 

The fair values of financial instruments that are short-term or reprice frequently and have little or no risk are considered to have a fair value that approximates carrying value.

 

FHLB-NY stock:

 

The fair value is based upon the par value of the stock which equals its carrying value.

 

Securities:

 

The fair values of securities are contained in Note 4 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. When there is limited activity or less transparency around inputs to the valuation, securities are valued using discounted cash flows.

 

Loans:

 

The fair value of loans 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 or for collateral dependent loans 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction.

 

Other Real Estate Owned:

 

OREO are carried at fair value less selling costs. The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property.

 

Accrued Interest Receivable:

 

The carrying amount is a reasonable estimate of fair value due to its short-term nature.

 

Due to Depositors:

 

The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value). The fair value of certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities.

 

Borrowings:

 

The fair value of borrowings is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements or using a market-standard model.

 

Accrued Interest Payable:

 

The carrying amount is a reasonable estimate of fair value due to its short-term nature.

 

Interest Rate Swaps:

 

The fair value of interest rate swaps is based upon broker quotes.

 - 31 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

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 March 31, 2016 and December 31, 2015, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

 

The following tables set forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at the periods indicated:

 

   March 31, 2016
   Carrying
Amount
  Fair
Value
  Level 1  Level 2  Level 3
   (In thousands)
Assets:                         
                          
Cash and due from banks  $51,417   $51,417   $51,417   $-   $- 
Securities held-to-maturity                         
Other securities   7,885    7,885    -    -    7,885 
Securities available for sale                         
Mortgage-backed securities   668,412    668,412    -    668,412    - 
Other securities   372,851    372,851    -    365,701    7,150 
Loans   4,458,541    4,501,190    -    -    4,501,190 
FHLB-NY stock   53,368    53,368    -    53,368    - 
                          
Total assets  $5,612,474   $5,655,123   $51,417   $1,087,481   $4,516,225 
                          
                          
Liabilities:                         
Deposits  $4,063,887   $4,082,649   $2,701,825   $1,380,824   $- 
Borrowings   1,190,789    1,206,237    -    1,178,260    27,977 
Interest rate swaps   11,466    11,466    -    11,466    - 
                          
Total liabilities  $5,266,142   $5,300,352   $2,701,825   $2,570,550   $27,977 

 

   December 31, 2015
   Carrying
Amount
  Fair
Value
  Level 1  Level 2  Level 3
   (In thousands)
Assets:                         
                          
Cash and due from banks  $42,363   $42,363   $42,363   $-   $- 
Securities held-to-maturity                         
Other securities   6,180    6,180    -    -    6,180 
Securities available for sale                         
Mortgage-backed securities   668,740    668,740    -    668,740    - 
Other securities   324,657    324,657    -    317,445    7,212 
Loans   4,387,979    4,434,079    -    -    4,434,079 
FHLB-NY stock   56,066    56,066    -    56,066    - 
Interest rate swaps   48    48    -    48    - 
                          
Total assets  $5,486,033   $5,532,133   $42,363   $1,042,299   $4,447,471 
                          
                          
Liabilities:                         
Deposits  $3,892,547   $3,902,888   $2,489,245   $1,413,643   $- 
Borrowings   1,271,676    1,279,946    -    1,250,928    29,018 
Interest rate swaps   4,314    4,314    -    4,314    - 
               &n