10-Q 1 f10q_080516p.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 June 30, 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 July 29, 2016 was 28,631,468.

 

 
 

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 48
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 66
ITEM 4. Controls and Procedures 66
PART II — OTHER INFORMATION  
ITEM 1. Legal Proceedings 67
ITEM 1A. Risk Factors 67
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 67
ITEM 3. Defaults Upon Senior Securities 67
ITEM 4. Mine Safety Disclosures 67
ITEM 5. Other Information 67
ITEM 6. Exhibits 68
SIGNATURES 69

 

 

 
 

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)  June 30,
2016
  December 31,
2015
ASSETS          
Cash and due from banks  $50,165   $42,363 
Securities held-to-maturity:          
Other securities (none pledged) (fair value of $28,410 and $6,180 at June 30, 2016 and December 31, 2015, respectively)   28,410    6,180 
Securities available for sale:          
Mortgage-backed securities (including assets pledged of $399,599 and $496,121 at June 30, 2016 and December 31, 2015, respectively; $2,292 and $2,527 at fair value pursuant to the fair value option at June 30, 2016 and December 31, 2015, respectively)   580,500    668,740 
Other securities (including assets pledged of $65,660 and none at June 30, 2016 and December 31, 2015, respectively; $28,514 and $28,205 at fair value pursuant to the fair value option at June 30, 2016 and December 31, 2015, respectively)   368,611    324,657 
Loans:          
Multi-family residential   2,159,138    2,055,228 
Commercial real estate   1,146,400    1,001,236 
One-to-four family ― mixed-use property   566,702    573,043 
One-to-four family ― residential   190,251    187,838 
Co-operative apartments   7,571    8,285 
Construction   9,899    7,284 
Small Business Administration   14,718    12,194 
Taxi medallion   20,641    20,881 
Commercial business and other   564,084    506,622 
Net unamortized premiums and unearned loan fees   16,875    15,368 
Allowance for loan losses   (22,198)   (21,535)
Net loans   4,674,081    4,366,444 
Interest and dividends receivable   20,390    18,937 
Bank premises and equipment, net   24,470    25,622 
Federal Home Loan Bank of New York stock   67,195    56,066 
Bank owned life insurance   115,100    115,536 
Goodwill   16,127    16,127 
Other assets   41,678    63,962 
Total assets  $5,986,727   $5,704,634 
           
LIABILITIES          
Due to depositors:          
Non-interest bearing  $317,112   $269,469 
Interest-bearing:          
Certificate of deposit accounts   1,411,550    1,403,302 
Savings accounts   260,528    261,748 
Money market accounts   452,589    472,489 
NOW accounts   1,453,540    1,448,695 
Total interest-bearing deposits   3,578,207    3,586,234 
Mortgagors' escrow deposits   45,905    36,844 
Borrowed funds ($27,485 and $29,018 at fair value pursuant to the fair value option at June 30, 2016 and December 31, 2015, respectively)   1,384,751    1,155,676 
Securities sold under agreements to repurchase   60,000    116,000 
Other liabilities   91,869    67,344 
Total liabilities   5,477,844    5,231,567 
           
Commitments and contingencies          
           
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 June 30, 2016 and December 31, 2015; 28,631,243 shares and 28,830,558 shares outstanding at June 30, 2016 and December 31, 2015, respectively)   315    315 
Additional paid-in capital   212,613    210,652 
Treasury stock, at average cost (2,899,352 shares and 2,700,037 shares at          
June 30, 2016 and December 31, 2015, respectively)   (53,351)   (48,868)
Retained earnings   346,218    316,530 
Accumulated other comprehensive income (loss), net of taxes   3,088    (5,562)
Total stockholders' equity   508,883    473,067 
           
Total liabilities and stockholders' equity  $5,986,727   $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 June 30,

 

For the six months

ended June 30,

(Dollars in thousands, except per share data)  2016  2015  2016  2015
       
Interest and dividend income                    
Interest and fees on loans  $48,413   $44,084   $95,971   $87,618 
Interest and dividends on securities:                    
Interest   6,510    5,988    13,102    11,858 
Dividends   120    118    239    236 
Other interest income   48    32    142    53 
Total interest and dividend income   55,091    50,222    109,454    99,765 
                     
Interest expense                    
Deposits   8,097    7,437    16,070    14,895 
Other interest expense   5,105    4,645    10,362    9,176 
Total interest expense   13,202    12,082    26,432    24,071 
                     
Net interest income   41,889    38,140    83,022    75,694 
Benefit for loan losses   -    (516)   -    (1,250)
Net interest income after benefit for loan losses   41,889    38,656    83,022    76,944 
                     
Non-interest income                    
Banking services fee income   973    898    1,949    1,782 
Net gain on sale of securities   2,363    64    2,363    64 
Net gain on sale of loans   3    47    344    49 
Net gain on sale of buildings   33,814    6,537    33,814    6,537 
Net gain (loss) from fair value adjustments   (1,115)   768    (2,102)   173 
Federal Home Loan Bank of New York stock dividends   582    457    1,205    975 
Gain from life insurance proceeds   -    -    411    - 
Bank owned life insurance   694    715    1,389    1,432 
Other income   403    461    884    865 
Total non-interest income   37,717    9,947    40,257    11,877 
                     
Non-interest expense                    
Salaries and employee benefits   13,968    13,157    30,229    27,823 
Occupancy and equipment   2,352    2,635    4,722    5,348 
Professional services   2,027    1,350    4,177    3,129 
FDIC deposit insurance   940    811    1,844    1,560 
Data processing   1,199    1,172    2,290    2,247 
Depreciation and amortization   1,062    867    2,094    1,535 
Other real estate owned/foreclosure expense   405    87    558    607 
Prepayment penalty on borrowings   2,082    -    2,082    - 
Other operating expenses   4,419    4,169    8,955    7,938 
Total non-interest expense   28,454    24,248    56,951    50,187 
                     
Income before income taxes   51,152    24,355    66,328    38,634 
                     
Provision for income taxes                    
Federal   15,203    7,155    19,950    11,407 
State and local   5,514    2,366    6,382    3,660 
Total taxes   20,717    9,521    26,332    15,067 
                     
Net income  $30,435   $14,834   $39,996   $23,567 
                     
                     
Basic earnings per common share  $1.05   $0.51   $1.38   $0.80 
Diluted earnings per common share  $1.05   $0.51   $1.38   $0.80 
Dividends per common share  $0.17   $0.16   $0.34   $0.32 

 

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
June 30,
  For the six months ended
June 30,
(In thousands)  2016  2015  2016  2015
             
Net income  $30,435   $14,834   $39,996   $23,567 
                     
Other comprehensive income, net of tax:                    
Amortization of actuarial losses, net of taxes of ($82) and ($135) for the three months ended June 30, 2016 and 2015, respectively and of ($165) and ($268) for the six months ended June 30, 2016 and 2015, respectively.   110    171    219    345 
Amortization of prior service credits, net of taxes of $5 for each of the three months ended June 30, 2016 and 2015, respectively and of $10 for each of the six months ended June 30, 2016 and 2015, respectively.   (7)   (7)   (13)   (13)
Reclassification adjustment for net gains included in income, net of taxes of $1,013 and $28 for the three and six months ended June 30, 2016 and 2015, respectively.   (1,350)   (36)   (1,350)   (36)
Net unrealized gains on securities, net of taxes of ($2,252) and $4,126 for the three months ended June 30, 2016 and 2015, respectively and of ($7,280) and $833 for the six months ended June 30, 2016 and 2015, respectively.   3,024    (5,477)   9,794    (1,145)
                     
                     
Total other comprehensive income (loss), net of tax   1,777    (5,349)   8,650    (849)
                     
Comprehensive income  $32,212   $9,485   $48,646   $22,718 

 

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 six months ended
June 30,
(Dollars in thousands)  2016  2015
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $39,996   $23,567 
Adjustments to reconcile net income to net cash provided by operating activities:          
Benefit for loan losses   -    (1,250)
Depreciation and amortization of bank premises and equipment   2,094    1,535 
Amortization of premium, net of accretion of discount   4,099    4,447 
Net (gain) loss from fair value adjustments   2,102    (173)
Net gain from sale of loans   (344)   (49)
Net gain from sale of securities   (2,363)   (64)
Net gain from sale of buildings   (33,814)   (6,537)
Income from bank owned life insurance   (1,389)   (1,432)
Gain from life insurance proceeds   (411)   - 
Stock-based compensation expense   3,564    3,643 
Deferred compensation   (2,629)   (2,004)
Excess tax benefit from stock-based payment arrangements   (421)   (380)
Deferred income tax (benefit) provision   83    (3,855)
Increase in other liabilities   16,211    706 
Decrease in other assets   4,754    5,374 
Net cash provided by operating activities   31,532    23,528 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of bank premises and equipment   (1,460)   (7,841)
Net purchases of Federal Home Loan Bank of New York shares   (11,129)   (3,002)
Purchases of securities held-to-maturity   (27,705)   (3,100)
Proceeds from maturities of securities held-to-maturity   5,475    390 
Purchases of securities available for sale   (61,615)   (138,095)
Proceeds from sales and calls of securities   66,996    25,039 
Proceeds from maturities and prepayments of securities   53,856    61,868 
Proceeds from bank owned life insurance   2,236    - 
Proceeds from sale of buildings   34,332    20,209 
Net originations of loans   (160,139)   (82,544)
Purchases of loans   (137,994)   (126,070)
Proceeds from sale of real estate owned   853    2,070 
Proceeds from sale of loans   8,360    5,028 
Net cash used in investing activities   (227,934)   (246,048)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in non-interest bearing deposits   47,643    1,741 
Net increase (decrease) in interest-bearing deposits   (8,448)   179,213 
Net increase in mortgagors' escrow deposits   9,061    8,251 
Net proceeds from short-term borrowed funds   215,000    35,000 
Proceeds from long-term borrowings   150,000    72,996 
Repayment of long-term borrowings   (190,637)   (50,000)
Purchases of treasury stock   (9,085)   (13,490)
Excess tax benefit from stock-based payment arrangements   421    380 
Proceeds from issuance of common stock upon exercise of stock options   127    142 
Cash dividends paid   (9,878)   (9,379)
Net cash provided by financing activities   204,204    224,854 
           
Net increase in cash and cash equivalents   7,802    2,334 
Cash and cash equivalents, beginning of period   42,363    34,265 
Cash and cash equivalents, end of period  $50,165   $36,599 
           
SUPPLEMENTAL CASHFLOW DISCLOSURE          
Interest paid  $28,250   $23,585 
Income taxes paid   9,270    16,221 
Taxes paid if excess tax benefits were not tax deductible   9,691    16,601 
Non-cash activities:          
Securities purchased not yet settled   -    22,037 
Securities transferred from available for sale to held-to-maturity   -    4,510 
Loans transferred to Other Real Estate Owned   486    772 
Loans provided for the sale of Other Real Estate Owned   -    175 
Loans held for investment transferred to loans held for sale   -    300 

 

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 six months ended June 30, 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   39,996    -    -    39,996    -    - 
Award of common shares released from Employee Benefit Trust (134,005 shares)   1,912    -    1,912    -    -    - 
Vesting of restricted stock unit awards (245,111 shares)   -    -    (4,047)   (396)   4,443    - 
Exercise of stock options (27,945 shares)   127    -    2    (34)   159    - 
Stock-based compensation expense   3,673    -    3,673    -    -    - 
Stock-based income tax benefit   421    -    421    -    -    - 
Purchase of treasury shares (378,695 shares)   (7,492)   -    -    -    (7,492)   - 
Repurchase of shares to satisfy tax obligation (77,212 shares)   (1,593)   -    -    -    (1,593)   - 
Dividends on common stock ($0.34 per share)   (9,878)   -    -    (9,878)   -    - 
Other comprehensive income   8,650    -    -    -    -    8,650 
Balance at June 30, 2016  $508,883   $315   $212,613   $346,218   $(53,351)  $3,088 
                               
Balance at December 31, 2014  $456,247   $315   $206,437   $289,623   $(37,221)  $(2,907)
Net Income   23,567    -    -    23,567    -    - 
Award of common shares released from Employee Benefit Trust (139,607 shares)   1,969    -    1,969    -    -    - 
Vesting of restricted stock unit awards (204,110 shares)   -    -    (3,074)   (503)   3,577    - 
Exercise of stock options (9,725 shares)   142    -    (4)   (8)   154    - 
Stock-based compensation expense   3,549    -    3,549    -    -    - 
Stock-based income tax benefit   380    -    380    -    -    - 
Purchase of treasury shares (635,199 shares)   (12,380)   -    -    -    (12,380)   - 
Repurchase of shares to satisfy tax obligation (58,461 shares)   (1,110)   -    -    -    (1,110)   - 
Dividends on common stock ($0.32 per share)   (9,379)   -    -    (9,379)   -    - 
Other comprehensive income   (849)   -    -    -    -    (849)
Balance at June 30, 2015  $462,136   $315   $209,257   $303,300   $(46,980)  $(3,756)

 

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
June 30,
  For the six months ended
June 30,
   2016  2015  2016  2015
   (In thousands, except per share data)
Net income, as reported  $30,435   $14,834   $39,996   $23,567 
Divided by:                    
Weighted average common shares outstanding   29,022    29,246    29,059    29,321 
Weighted average common stock equivalents   12    22    14    22 
Total weighted average common shares outstanding and common stock equivalents   29,034    29,268    29,073    29,343 
Basic earnings per common share  $1.05   $0.51   $1.38   $0.80 
Diluted earnings per common share (1)  $1.05   $0.51   $1.38   $0.80 
Dividend payout ratio   16.2%   31.4%   24.6%   40.0%

 

(1)For the three and six months ended June 30, 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 June 30, 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 June 30, 2016:

 

   Amortized Cost  Fair Value  Gross Unrealized Gains  Gross Unrealized Losses
   (In thousands)
Securities held-to-maturity:                    
Municipals  $28,410   $28,410   $-   $- 
                     
Total  $28,410   $28,410   $-   $- 

 

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)
Securities 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 June 30, 2016:

 

   Amortized Cost  Fair Value  Gross Unrealized Gains  Gross Unrealized Losses
   (In thousands)
Corporate  $110,000   $106,263   $981   $4,718 
Municipals   126,347    131,716    5,369    - 
Mutual funds   21,645    21,645    -    - 
Collateralized loan obligations   101,650    101,820    340    170 
Other   7,169    7,167    -    2 
Total other securities   366,811    368,611    6,690    4,890 
REMIC and CMO   412,117    420,227    8,562    452 
GNMA   7,952    8,120    168    - 
FNMA   132,981    136,393    3,449    37 
FHLMC   15,453    15,760    307    - 
Total mortgage-backed securities   568,503    580,500    12,486    489 
Total securities available for sale  $935,314   $949,111   $19,176   $5,379 

 

Mortgage-backed securities shown in the table above include one private issue collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with amortized cost and market value of $5.3 million at June 30, 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 include 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 June 30, 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  $6,370   $6,370 
Due after one year through five years   40    40 
Due after ten years   22,000    22,000 
           
Total securities held-to-maturity  $28,410   $28,410 

 

The amortized cost and fair value of the Company’s securities, classified as available for sale at June 30, 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  $-   $- 
Due after one year through five years   1,810    1,843 
Due after five years through ten years   91,683    91,795 
Due after ten years   251,673    253,328 
           
Total other securities   345,166    346,966 
Mutual funds   21,645    21,645 
Mortgage-backed securities   568,503    580,500 
           
Total securities available for sale  $935,314   $949,111 

 

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 June 30, 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   12   $85,282   $4,718   $52,559   $2,441   $32,723   $2,277 
Collateralized loan obligations   6    45,861    170    45,861    170    -    - 
Other   1    298    2    -    -    298    2 
Total other securities   19    131,441    4,890    98,420    2,611    33,021    2,279 
                                    
REMIC and CMO   8    45,906    452    11,004    61    34,902    391 
FNMA   1    7,084    37    -    -    7,084    37 
Total mortgage-backed securities   9    52,990    489    11,004    61    41,986    428 
Total securities available for sale   28   $184,431   $5,379   $109,424   $2,672   $75,007   $2,707 

 

 - 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 June 30, 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 June 30, 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 June 30, 2016 and December 31, 2015.

 

The Company sold available for sale securities with book values at the time of sale totaling $64.6 million and $25.0 million during the three and six months ended June 30, 2016 and 2015, respectively.

 

 - 10 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table represents the gross gains and gross losses realized from the sale of securities available for sale for the periods indicated:

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2016  2015  2016  2015
   (In thousands)
Gross gains from the sale of securities  $2,370   $233   $2,370   $233 
Gross losses from the sale of securities   (7)   (169)   (7)   (169)
                     
Net gains from the sale of securities  $2,363   $64   $2,363   $64 

 

5.Loans

 

Loans are reported at their outstanding principal 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.

 

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 charges to earnings in the form of 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. 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 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.

 

 - 11 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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. Prior to a loan becoming 90 days delinquent an updated appraisal is ordered and/or an internal evaluation is prepared. 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. The balance which exceeds fair value is generally charged-off, 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. When there is no recent sale activity, the fair value is calculated using capitalization rates. In addition, taxi medallion loans 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.

 

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 June 30, 2016, we utilized recent third party appraisals of the collateral to measure impairment for $33.0 million, or 71.3%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $13.3 million, or 28.7%, 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 June 30, 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.

 

 - 12 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   For the three and six months ended
June 30, 2016
(Dollars in thousands)  Number  Balance  Modification description
          
One-to-four family - residential   2   $263    Received below market interest rates and the loan amortizations were extended.
Commercial business and other   2    739    One received an amortization extension and one received a below market interest rate and an amortization extension.
Total   4   $1,002    

 

The Company did not modify and classify any loans as TDR during the three months ended June 30, 2015.

 

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

 

   For the six months ended
June 30, 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 loans modified and classified as TDR presented in the table above, were unchanged as there was no principal forgiven in this modification.

 

 - 13 - 

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:

 

   June 30, 2016  December 31, 2015
(Dollars in thousands)  Number of contracts  Recorded investment  Number of contracts  Recorded investment
             
Multi-family residential   9   $2,599    9   $2,626 
Commercial real estate   2    2,086    3    2,371 
One-to-four family - mixed-use property   5    1,819    6    2,052 
One-to-four family - residential   3    600    1    343 
Small business administration   -    -    1    34 
Commercial business and other   3    1,197    4    2,083 
                     
Total performing troubled debt restructured   22   $8,301    24   $9,509 

 

During the three and six months ended June 30, 2016 there were no TDR loans transferred to non-performing status. During the three and six months ended June 30, 2015 one TDR loan of $0.4 million was transferred to non-performing status, which resulted in this loan being included in non-performing loans.

 

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:

 

   June 30, 2016  December 31, 2015
(Dollars in thousands)  Number of contracts  Recorded investment  Number of contracts  Recorded investment
             
Multi-family residential   1   $397    1   $391 
                     
Total troubled debt restructurings that subsequently defaulted   1   $397    1   $391 

 

 - 14 - 

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)  June 30, 2016  December 31, 2015
           
Loans ninety days or more past due and still accruing:          
Multi-family residential  $574   $233 
Commercial real estate   320    1,183 
One-to-four family - mixed-use property   635    611 
One-to-four family - residential   13    13 
Construction   -    1,000 
Commercial Business and other   -    220 
Total   1,542    3,260 
           
Non-accrual mortgage loans:          
Multi-family residential   3,162    3,561 
Commercial real estate   2,299    2,398 
One-to-four family - mixed-use property   6,005    5,952 
One-to-four family - residential   8,406    10,120 
Total   19,872    22,031 
           
Non-accrual non-mortgage loans:          
Small business administration   185    218 
Taxi medallion   196    - 
Commercial business and other   128    568 
Total   509    786 
           
Total non-accrual loans   20,381    22,817 
           
           
Total non-accrual loans and loans ninety days or more past due and still accruing  $21,923   $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
June 30,
  For the six months ended
June 30,
   2016  2015  2016  2015
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $476   $662   $948   $1,313 
Less:  Interest income included in the results of operations   101    143    213    301 
Total foregone interest  $375   $519   $735   $1,012 

 

 - 15 - 

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 loans past maturity, at the periods indicated:

 

   June 30, 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  $4,706   $363   $3,737   $8,806   $2,150,332   $2,159,138 
Commercial real estate   2,405    987    2,619    6,011    1,140,389    1,146,400 
One-to-four family - mixed-use property   4,417    1,025    6,640    12,082    554,620    566,702 
One-to-four family - residential   1,518    527    8,221    10,266    179,985    190,251 
Co-operative apartments   -    -    -    -    7,571    7,571 
Construction loans   -    576    -    576    9,323    9,899 
Small Business Administration   2,435    119    80    2,634    12,084    14,718 
Taxi medallion   3,767    -    196    3,963    16,678    20,641 
Commercial business and other   3,012    12    -    3,024    561,060    564,084 
Total  $22,260   $3,609   $21,493   $47,362   $4,632,042   $4,679,404 

 

   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 

 

 - 16 - 

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:

 

June 30, 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  $6,298   $4,201   $3,507   $1,042   $55   $269   $335   $4,591   $1,695   $21,993 
Charge-off's   (23)   -    (54)   (8)   -    (1)   -    (15)   -    (101)
Recoveries   206    -    18    1    -    43    -    38    -    306 
Provision (Benefit)   (304)   244    (145)   9    20    263    707    55    (849)   - 
Ending balance  $6,177   $4,445   $3,326   $1,044   $75   $574   $1,042   $4,669   $846   $22,198 

 

June 30, 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  $8,629   $3,902   $5,429   $1,465   $23   $266   $11   $4,366   $24,091 
Charge-off's   (303)   (14)   (394)   (91)   -    -    -    (1)   (803)
Recoveries   191    (4)   44    74    -    7    -    -    312 
Provision (Benefit)   (217)   (158)   101    (15)   6    18    -    (251)   (516)
Ending balance  $8,300   $3,726   $5,180   $1,433   $29   $291   $11   $4,114   $23,084 

 

 - 17 - 

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 six month periods indicated:

 

June 30, 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   (65)   -    (68)   (74)   -    (1)   -    (40)   -    (248)
Recoveries   219    -    205    366    -    74    -    47    -    911 
Provision (Benefit)   (695)   206    (1,038)   (475)   25    239    699    193    846    - 
Ending balance  $6,177   $4,445   $3,326   $1,044   $75   $574   $1,042   $4,669   $846   $22,198 

 

June 30, 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   (400)   (32)   (472)   (244)   -    -    -    (52)   (1,200)
Recoveries   214    68    47    74    -    27    -    8    438 
Provision (Benefit)   (341)   (512)   (235)   (87)   (13)   (15)   -    (47)   (1,250)
Ending balance  $8,300   $3,726   $5,180   $1,433   $29   $291   $11   $4,114   $23,084 

 

 - 18 - 

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:

 

June 30, 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  Unallocated  Total
Financing Receivables:                                                       
Ending Balance  $2,159,138   $1,146,400   $566,702   $190,251   $7,571   $9,899   $14,718   $20,641   $564,084   $-   $4,679,404 
Ending balance: individually evaluated for impairment  $8,015   $7,038   $11,605   $10,769   $-   $570   $938   $6,364   $2,709   $-   $48,008 
Ending balance: collectively evaluated for impairment  $2,151,123   $1,139,362   $555,097   $179,482   $7,571   $9,329   $13,780   $14,277   $561,375   $-   $4,631,396 
                                                        
Allowance for credit losses:                                                       
Ending balance: individually evaluated for impairment  $242   $201   $480   $50   $-   $-   $412   $1,035   $1   $-   $2,421 
Ending balance: collectively evaluated for impairment  $5,935   $4,244   $2,846   $994   $-   $75   $162   $7   $4,668   $846   $19,777 

 

 

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  Unallocated  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 
                                                        
Allowance for credit losses:                                                       
Ending balance: individually evaluated for impairment  $252   $180   $502   $51   $-   $-   $-   $333   $112   $-   $1,430 
Ending balance: collectively evaluated for impairment  $6,466   $4,059   $3,725   $1,176   $-   $50   $262   $10   $4,357   $-   $20,105 

 

 - 19 - 

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:

 

   June 30, 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  $5,732   $6,209   $-   $5,742   $6,410   $- 
Commercial real estate   4,952    4,980    -    3,812    3,869    - 
One-to-four family mixed-use property   9,102    10,082    -    10,082    11,335    - 
One-to-four family residential   10,333    11,934    -    12,255    14,345    - 
Co-operative apartments   -    -    -    -    -    - 
Construction   570    570    -    1,000    1,000    - 
Non-mortgage loans:                              
Small Business Administration   262    262    -    276    276    - 
Taxi Medallion   -    -    -    -    -    - 
Commercial Business and other   2,252    2,622    -    2,682    5,347    - 
                               
Total loans with no related allowance recorded   33,203    36,659    -    35,849    42,582    - 
                               
With an allowance recorded:                              
Mortgage loans:                              
Multi-family residential   2,283    2,283    242    2,305    2,305    252 
Commercial real estate   2,086    2,086    201    2,371    2,371    180 
One-to-four family mixed-use property   2,503    2,503    480    2,746    2,746    502 
One-to-four family residential   436    436    50    343    343    51 
Co-operative apartments   -    -    -    -    -    - 
Construction   -    -    -    -    -    - 
Non-mortgage loans:                              
Small Business Administration   676    676    412    34    34    - 
Taxi Medallion   6,364    6,364    1,035    2,118    2,118    333 
Commercial Business and other   457    457    1    2,034    2,034    112 
                               
Total loans with an allowance recorded   14,805    14,805    2,421    11,951    11,951    1,430 
                               
Total Impaired Loans:                              
Total mortgage loans  $37,997   $41,083   $973   $40,656   $44,724   $985 
                               
Total non-mortgage loans  $10,011   $10,381   $1,448   $7,144   $9,809   $445 

 

 - 20 - 

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 three months ended:

 

   June 30, 2016  June 30, 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  $5,920   $33   $10,281   $36 
Commercial real estate   5,077    45    5,598    36 
One-to-four family mixed-use property   8,928    41    10,816    51 
One-to-four family residential   10,649    25    13,458    18 
Co-operative apartments   -    -    307    5 
Construction   570    7    -    - 
Non-mortgage loans:                    
Small Business Administration   257    3    314    3 
Taxi Medallion   -    -    -    - 
Commercial Business and other   2,313    46    4,607    49 
                     
Total loans with no related allowance recorded   33,714    200    45,381    198 
                     
With an allowance recorded:                    
Mortgage loans:                    
Multi-family residential   2,289    29    2,372    30 
Commercial real estate   2,222    24    541    7 
One-to-four family mixed-use property   2,617    34    3,069    42 
One-to-four family residential   389    4    350    3 
Co-operative apartments   -    -    -    - 
Construction   -    -    -    - 
Non-mortgage loans:                    
Small Business Administration   413    10    40    1 
Taxi Medallion   4,237    44    -    - 
Commercial Business and other   1,225    7    2,584    35 
                     
Total loans with an allowance recorded   13,392    152    8,956    118 
                     
Total Impaired Loans:                    
Total mortgage loans  $38,661   $242   $46,792   $228 
                     
Total non-mortgage loans  $8,445   $110   $7,545   $88 

 

 - 21 - 

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 six months ended:

 

   June 30, 2016  June 30, 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  $5,861   $67   $10,347   $77 
Commercial real estate   4,655    90    6,099    71 
One-to-four family mixed-use property   9,313    88    11,219    103 
One-to-four family residential   11,184    52    13,244    42 
Co-operative apartments   -    -    204    10 
Construction   713    14    -    - 
Non-mortgage loans:                    
Small Business Administration   263    6    209    6 
Taxi Medallion   -    -    -    - 
Commercial Business and other   2,436    93    3,997    100 
                     
Total loans with no related allowance recorded   34,425    410    45,319    409 
                     
With an allowance recorded:                    
Mortgage loans:                    
Multi-family residential   2,294    58    2,508    61 
Commercial real estate   2,272    49    1,151    15 
One-to-four family mixed-use property   2,660    68    3,077    84 
One-to-four family residential   373    7    351    7 
Co-operative apartments   -    -    -    - 
Construction   -    -    -    - 
Non-mortgage loans:                    
Small Business Administration   287    19    27    1 
Taxi Medallion   3,531    88    -    - 
Commercial Business and other   1,494    14    2,627    69 
                     
Total loans with an allowance recorded   12,911    303    9,741    237 
                     
Total Impaired Loans:                    
Total mortgage loans  $39,325   $493   $48,200   $470 
                     
Total non-mortgage loans  $8,011   $220   $6,860   $176 

 

 - 22 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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.

 

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

 

   June 30, 2016
(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
                
Multi-family residential  $7,678   $5,416   $-   $-   $13,094 
Commercial real estate   1,552    4,952    -    -    6,504 
One-to-four family - mixed-use property   3,797    9,785    -    -    13,582 
One-to-four family - residential   1,346    10,431    -    -    11,777 
Co-operative apartments   -    -    -    -    - 
Construction loans   576    570    -    -    1,146 
Small Business Administration   554    870    -    -    1,424 
Taxi Medallion   -    6,364    -    -    6,364 
Commercial business and other   730    2,710    -    -    3,440 
Total loans  $16,233   $41,098   $-   $-   $57,331 

 

   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 $58.9 million and $217.2 million, respectively, at June 30, 2016.

 

 - 23 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

6.Loans held for sale

 

Loans held for sale are carried at the lower of cost or estimated fair value. At June 30, 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.

 

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

 

   For the three months ended
June 30, 2016
(Dollars in thousands)  Loans sold  Proceeds  Net (charge-offs) recoveries  Net gain
             
Multi-family residential   3   $1,174   $(8)  $- 
One-to-four family - mixed-use property   3    1,271    -    3 
                     
Total   6   $2,445   $(8)  $3 

 

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

 

   For the three months ended
June 30, 2015
(Dollars in thousands)  Loans sold  Proceeds  Net (charge-offs) recoveries  Net gain
             
Multi-family residential   2   $1,045   $137   $- 
Commercial real estate   1    1,311    -    - 
One-to-four family - mixed-use property   4    1,150    -    47 
                     
Total   7   $3,506   $137   $47 

 

 - 24 - 

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 six months ended
June 30, 2016
(Dollars in thousands)  Loans sold  Proceeds  Net (charge-offs) recoveries  Net gain
             
Multi-family residential   6   $2,049   $(8)  $2 
Commercial real estate   2    192    -    - 
One-to-four family - mixed-use property   7    2,585    -    23 
                     
Total (1)   15   $4,826   $(8)  $25 

 

(1)The above table does not include the sale of six performing small business administration loans for proceeds totaling $3.5 million during the six months ended June 30, 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 six months ended
June 30, 2015
(Dollars in thousands)  Loans sold  Proceeds  Net (charge-offs) recoveries  Net gain (loss)
             
Multi-family residential   4   $1,881   $137   $(2)
Commercial real estate   1    1,311    -    - 
One-to-four family - mixed-use property   7    1,836    -    51 
                     
Total   12   $5,028   $137   $49 

 

7.Other Real Estate Owned

 

The following are changes in OREO during the periods indicated:

 

   For the three months ended
June 30,
  For the six months ended
June 30,
   2016  2015  2016  2015
   (In thousands)
             
Balance at beginning of period  $4,602   $5,252   $4,932   $6,326 
Acquisitions   -    289    486    772 
Write-down of carrying value   (934)   (896)   (934)   (896)
Sales   -    (390)   (816)   (1,947)
                     
Balance at end of period (1)  $3,668   $4,255   $3,668   $4,255 

 

(1)OREO are included in other assets on the Company’s Consolidated Statements of Financial Condition.

 

 - 25 - 

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
June 30,
  For the six months ended
June 30,
   2016  2015  2016  2015
   (In thousands)
             
Gross gains  $-   $86   $37   $302 
Gross losses   -    -    -    (6)
Write-down of carrying value   (934)   (896)   (934)   (896)
                     
Total net loss  $(934)  $(810)  $(897)  $(600)

 

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure or an in-substance repossession. During the three and six months ended June 30, 2016, we did not foreclose on any consumer mortgages through in-substance repossession. At June 30, 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 June 30, 2016 and December 31, 2015 was a recorded investment of $13.1 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 show the type of securities pledged and remaining maturity of repurchase agreements held at the periods indicated:

 

   At June 30, 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  $20,000   $-   $40,000   $60,000 
                     
Total repurchase agreements  $20,000   $-   $40,000   $60,000 

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

   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 $67.9 million and $131.4 million at June 30, 2016 and December 31, 2015, respectively.

 

During the three months ended June 30, 2016, $38.0 million in repurchase agreements, at an average cost of 4.16%, which were scheduled to mature in late 2017, were pre-paid. A $2.1 million prepayment penalty was incurred as part of this transaction.

 

9.Stock-Based Compensation

 

For the three months ended June 30, 2016 and 2015, the Company’s net income, as reported, includes $0.6 million and $0.9 million, respectively, of stock-based compensation costs and $0.2 and $0.3 million, respectively, of income tax benefits related to the stock-based compensation plans in each of the periods. For the six months ended June 30, 2016 and 2015, the Company’s net income, as reported, includes $3.6 million of stock-based compensation costs and $1.4 million of income tax benefits related to the stock-based compensation plans. During the three months ended June 30, 2015, the Company granted 3,600 restricted stock units. The Company did not issue any restricted stock units during the three months ended June 30, 2016. During the six months ended June 30, 2016 and 2015, the Company granted 337,175 and 318,120 restricted stock units, respectively. The Company has not granted any stock options since 2009.

 

The Company estimated the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options included 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.

 

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 six months ended June 30, 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   (14,660)   18.49 
Non-vested at June 30, 2016   503,089   $18.98 
           
Vested but unissued at June 30, 2016   280,450   $19.28 

 

As of June 30, 2016, there was $8.2 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 3.5 years. The total fair value of awards vested for the three months ended June 30, 2015 were $0.8 million. No awards vested during the three months ended June 30, 2016. The total fair value of awards vested for the six months ended June 30, 2016 and 2015 was $4.8 million and $4.9 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.

 

 - 27 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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 six months ended June 30, 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   (27,945)   17.08           
Forfeited   -    -           
Outstanding at June 30, 2016   81,185   $15.81    1.9   $330 

 

* 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 and six months ended June 30, 2016 and 2015 are provided in the following table:

 

   For the three months ended
June 30,
  For the six months ended
June 30,
(In thousands)  2016  2015  2016  2015
Proceeds from stock options exercised  $109   $142   $127   $142 
Fair value of shares received upon exercise of stock options   22    -    350    20 
Tax benefit (expense) related to stock options exercised   14    8    (2)   9 
Intrinsic value of stock options exercised   69    31    112    33 

 

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. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

The following table summarizes the Phantom Stock Plan at or for the six months ended June 30, 2016:

 

Phantom Stock Plan  Shares  Fair Value
           
Outstanding at December 31, 2015   79,440   $21.64 
Granted   10,905    19.88 
Forfeited   -    - 
Distributions   (1,363)   20.28 
Outstanding at June 30, 2016   88,982   $19.88 
Vested at June 30, 2016   88,667   $19.88 

 

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of ($139,000) and $85,000 for the three months ended June 30, 2016 and 2015, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 for the three months ended June 30, 2015. There were no distributions for the three months ended June 30, 2016.

 

 - 28 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

For the six months ended June 30, 2016 and 2015, the Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of ($109,000) and $94,000, respectively. The total fair value of the distributions from the Phantom Stock Plan during the six months ended June 30, 2016 and 2015 was $28,000 and $9,000, 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
June 30,
  Six months ended
June 30,
(In thousands)  2016  2015  2016  2015
             
Employee Pension Plan:                    
Interest cost  $226   $221   $452   $442 
Amortization of unrecognized loss   201    290    402    581 
Expected return on plan assets   (348)   (350)   (696)   (700)
Net employee pension expense  $79   $161   $158   $323 
                     
Outside Director Pension Plan:                    
Service cost  $11   $11   $22   $22 
Interest cost   24    24    48    48 
Amortization of unrecognized gain   (21)   (14)   (42)   (28)
Amortization of past service liability   10    10    20    20 
Net outside director pension expense  $24   $31   $48   $62 
                     
Other Postretirement Benefit Plans:                    
Service cost  $90   $95   $180   $190 
Interest cost   80    75    160    150 
Amortization of unrecognized loss   12    30    24    60 
Amortization of past service credit   (22)   (22)   (43)   (43)
Net other postretirement expense  $160   $178   $321   $357 

  

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 June 30, 2016, the Company has contributed $72,000 to the Outside Director Pension Plan and $33,000 to the Other Postretirement Benefit Plans. As of June 30, 2016, the Company has not revised its expected contributions for the year ending December 31, 2016.

 

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 June 30, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.8 million and $27.5 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 and six months ended June 30, 2016.

 

 - 29 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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  Fair Value  Changes in Fair Values For Items Measured at Fair Value
   Measurements  Measurements  Pursuant to Election of the Fair Value Option
   at June 30,  at December 31,  Three Months Ended  Six Months Ended
(Dollars in thousands)  2016  2015  June 30, 2016  June 30, 2015  June 30, 2016  June 30, 2015
                   
Mortgage-backed securities  $2,292   $2,527   $(3)  $(28)  $2   $(36)
Other securities   28,514    28,205    90    (108)   186    89 
Borrowed funds   27,485    29,018    492    (1,229)   1,546    (705)
Net gain (loss) from fair value adjustments (1) (2)            $579   $(1,365)  $1,734   $(652)

 

(1)The net gain from fair value adjustments presented in the above table does not include net gains (losses) of ($1.7) million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively, from the change in the fair value of interest rate swaps.

 

(2)The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of ($3.8) million and $0.8 million for the six months ended June 30, 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 June 30, 2016 and December 31, 2015. The fair value of borrowed funds includes accrued interest payable of $0.1 million at June 30, 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.

 

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 June 30, 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 June 30, 2016 and December 31, 2015, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

 

 - 30 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At June 30, 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 June 30, 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  $-   $-   $580,500   $668,740   $-   $-   $580,500   $668,740 
Other securities   -    -    361,444    317,445    7,167    7,212    368,611    324,657 
Interest rate swaps   -    -    -    48    -    -    -    48 
                                         
Total assets  $-   $-   $941,944   $986,233   $7,167   $7,212   $949,111   $993,445 
                                         
Liabilities:                                        
Borrowings  $-   $-   $-   $-   $27,485   $29,018   $27,485   $29,018 
Interest rate swaps   -    -    16,201    4,314    -    -    16,201    4,314 
                                         
Total liabilities  $-   $-   $16,201   $4,314   $27,485   $29,018   $43,686   $33,332 

 

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
June 30, 2016
   Trust preferred securities  Junior subordinated debentures
   (In thousands)
       
Beginning balance  $7,150   $27,977 
Net gain from fair value adjustment of financial assets (1)   15    - 
Net gain from fair value adjustment of financial liabilities (1)   -    (491)
Decrease in accrued interest payable   -    (1)
Change in unrealized gains included in other comprehensive income   2    - 
Ending balance  $7,167   $27,485 
           
Changes in unrealized gains held at period end  $2   $- 

 

(1)These totals in the table above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.

 

 - 31 - 

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
June 30, 2015
   Municipals  Trust preferred securities  Junior subordinated debentures
   (In thousands)
          
Beginning balance  $14,464   $7,189   $28,245 
Transfer to held-to-maturity   (4,510)   -    - 
Principal repayments   (55)   -    - 
Maturities   (2,000)   -    - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    37    - 
Net loss from fair value adjustment of financial liabilities included in earnings (1)   -    -    1,229 
Increase in accrued interest payable   -    -    2 
Change in unrealized gains included in other comprehensive income   -    -    - 
Ending balance  $7,899   $7,226   $29,476 
                
Changes in unrealized gains (losses) held at period end  $-   $-   $- 

 

(1)These totals in the table above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.

 

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 six months ended
June 30, 2016
   Trust preferred securities  Junior subordinated debentures
       
Beginning balance  $7,212   $29,018 
Net loss from fair value adjustment of financial assets included in earnings (1)   (45)   - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)   -    (1,547)
Increase in accrued interest payable   -    14 
Change in unrealized gains (losses) included in other comprehensive income   -    - 
Ending balance  $7,167   $27,485 
           
Changes in unrealized gains (losses) held at period end  $-   $- 

 

(1)These totals in the table above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.

 

 - 32 - 

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 six months ended
June 30, 2015
   Municipals  Trust preferred securities  Junior subordinated debentures
   (In thousands)
          
Beginning balance  $15,519   $7,090   $28,771 
Transfer to held-to-maturity   (4,510)   -    - 
Purchases   1,000    -    - 
Principal repayments   (110)   -    - 
Maturities   (4,000)   -    - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    131    - 
Net loss from fair value adjustment of financial liabilities included in earnings (1)   -    -    705 
Decrease in accrued interest payable   -    -    - 
Change in unrealized gains (losses) included in other comprehensive income   -    5    - 
Ending balance  $7,899   $7,226   $29,476 
                
Changes in unrealized gains held at period end  $-   $5   $- 

 

(1)These totals in the table above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.

 

During the three and six months ended June 30, 2016 and 2015, there were no transfers between Levels 1, 2 and 3.

 

 - 33 - 

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:

 

   June 30, 2016
                
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:                     
                      
Trust preferred securities  $7,167   Discounted cash flows  Discount rate   7.0% - 7.07%    7.1%