10-Q 1 f10q_050917p.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

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 [ ]

Emerging growth company [ ]

Accelerated filer [x]

Smaller reporting company [ ]

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act. [ ]

 

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

 

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2017 was 28,811,160.

 

 

 

TABLE OF CONTENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

i

 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

 

(Dollars in thousands, except per share data)  March 31,
2017
  December 31,
2016
ASSETS          
Cash and due from banks  $51,215   $35,857 
Securities held-to-maturity:          
Other securities (none pledged) (fair value of $34,152 and $35,408
at March 31, 2017 and December 31, 2016, respectively)
   36,406    37,735 
Securities available for sale:          
Mortgage-backed securities (including assets pledged of $91,929 and $145,860
at March 31, 2017 and December 31, 2016, respectively; $1,898 and $2,016 at
fair value pursuant to the fair value option at March 31, 2017 and
December 31, 2016, respectively)
   537,905    516,476 
Other securities (including assets pledged of $136,143 and $82,064
at March 31, 2017 and December 31, 2016, respectively; $28,526 and
$28,429 at fair value pursuant to the fair value option at March 31, 2017
and December 31, 2016, respectively)
   346,238    344,905 
Loans:          
Multi-family residential   2,261,946    2,178,504 
Commercial real estate   1,268,770    1,246,132 
One-to-four family ― mixed-use property   561,355    558,502 
One-to-four family ― residential   184,201    185,767 
Co-operative apartments   7,216    7,418 
Construction   12,413    11,495 
Small Business Administration   10,519    15,198 
Taxi medallion   18,832    18,996 
Commercial business and other   632,503    597,122 
Net unamortized premiums and unearned loan fees   16,836    16,559 
Allowance for loan losses   (22,211)   (22,229)
Net loans   4,952,380    4,813,464 
Interest and dividends receivable   20,602    20,228 
Bank premises and equipment, net   26,026    26,561 
Federal Home Loan Bank of New York stock   57,384    59,173 
Bank owned life insurance   129,824    132,508 
Goodwill   16,127    16,127 
Other assets   57,378    55,453 
Total assets  $6,231,485   $6,058,487 
           
LIABILITIES          
Due to depositors:          
Non-interest bearing  $344,028   $333,163 
Interest-bearing:          
Certificate of deposit accounts   1,411,819    1,372,115 
Savings accounts   254,822    254,283 
Money market accounts   851,129    843,370 
NOW accounts   1,487,120    1,362,484 
Total interest-bearing deposits   4,004,890    3,832,252 
Mortgagors' escrow deposits   61,828    40,216 
Borrowed funds          
Federal Home Loan Bank advances   1,119,837    1,159,190 
Subordinated debentures   73,479    73,414 
Junior subordinated debentures, at fair value   34,536    33,959 
Total borrowed funds   1,227,852    1,266,563 
Other liabilities   67,485    72,440 
Total liabilities   5,706,083    5,544,634 
           
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 March 31, 2017 and December 31, 2016; 28,811,160
shares and 28,632,904 shares outstanding at March 31, 2017 and
December 31, 2016, respectively)
   315    315 
Additional paid-in capital   215,501    214,462 
Treasury stock, at average cost (2,719,435 shares and 2,897,691 shares at
March 31, 2017 and December 31, 2016, respectively)
   (51,224)   (53,754)
Retained earnings   367,944    361,192 
Accumulated other comprehensive loss, net of taxes   (7,134)   (8,362)
Total stockholders' equity   525,402    513,853 
           
Total liabilities and stockholders' equity  $6,231,485   $6,058,487 

 

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

 

 

 -1- 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

   For the three months
ended March 31,
(Dollars in thousands, except per share data)  2017  2016
    
Interest and dividend income          
Interest and fees on loans  $50,885   $47,558 
Interest and dividends on securities:          
Interest   6,095    6,592 
Dividends   121    119 
Other interest income   153    94 
Total interest and dividend income   57,254    54,363 
           
Interest expense          
Deposits   8,980    7,973 
Other interest expense   4,885    5,257 
Total interest expense   13,865    13,230 
           
Net interest income   43,389    41,133 
Provision for loan losses   -    - 
Net interest income after provision for loan losses   43,389    41,133 
           
Non-interest income          
Banking services fee income   874    976 
Net gain on sale of loans   210    341 
Net loss from fair value adjustments   (378)   (987)
Federal Home Loan Bank of New York stock dividends   823    623 
Gain from life insurance proceeds   1,161    411 
Bank owned life insurance   795    695 
Other income   204    481 
Total non-interest income   3,689    2,540 
           
Non-interest expense          
Salaries and employee benefits   17,104    16,261 
Occupancy and equipment   2,496    2,370 
Professional services   1,996    2,150 
FDIC deposit insurance   326    904 
Data processing   1,203    1,091 
Depreciation and amortization   1,165    1,032 
Other real estate owned/foreclosure expense   351    153 
Other operating expenses   4,923    4,536 
Total non-interest expense   29,564    28,497 
           
Income before income taxes   17,514    15,176 
           
Provision for income taxes          
Federal   4,749    4,747 
State and local   505    868 
Total taxes   5,254    5,615 
           
Net income  $12,260   $9,561 
           
           
Basic earnings per common share  $0.42   $0.33 
Diluted earnings per common share  $0.42   $0.33 
Dividends per common share  $0.18   $0.17 

 

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

 

 -2- 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   For the three months ended
March 31,
(In thousands)  2017  2016
       
Net income  $12,260   $9,561 
           
Other comprehensive income, net of tax:          
Amortization of actuarial losses, net of taxes of ($64) and ($83) for the three months ended March 31, 2017 and 2016, respectively   87    109 
Amortization of prior service credits, net of taxes of $4 and $5 for the three months ended March 31, 2017 and 2016, respectively   (7)   (6)
Net unrealized gains on securities, net of taxes of ($811) and ($5,028) for the three months ended March 31, 2017 and 2016, respectively   1,148    6,770 
           
Total other comprehensive income, net of tax   1,228    6,873 
           
Comprehensive income  $13,488   $16,434 

 

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

 

 -3- 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the three months ended
March 31,
(In thousands)  2017  2016
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $12,260   $9,561 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization of bank premises and equipment   1,165    1,032 
Amortization of premium, net of accretion of discount   1,903    2,189 
Net loss from fair value adjustments   378    987 
Net gain from sale of loans   (210)   (341)
Income from bank owned life insurance   (795)   (695)
Gain from life insurance proceeds   (1,161)   (411)
Stock-based compensation expense   3,085    2,989 
Deferred compensation   (1,431)   (1,774)
Excess tax benefit from stock-based payment arrangements   -    (303)
Deferred income tax provision   2,501    1,570 
Increase (decrease) in other liabilities   2,709    (2,006)
(Increase) decrease in other assets   (4,364)   3,798 
Net cash provided by operating activities   16,040    16,596 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of bank premises and equipment   (630)   (540)
Net redemptions of Federal Home Loan Bank of New York shares   1,789    2,698 
Purchases of securities held-to-maturity   -    (2,330)
Proceeds from maturities of securities held-to-maturity   1,330    2,000 
Purchases of securities available for sale   (40,581)   (58,472)
Proceeds from maturities and prepayments of securities available for sale   18,691    21,316 
Proceeds from bank owned life insurance   651    2,237 
Net originations of loans   (129,764)   (53,836)
Purchases of loans   (15,621)   (12,000)
Proceeds from sale of real estate owned   583    853 
Proceeds from sale of loans   5,190    5,915 
Net cash used in investing activities   (158,362)   (92,159)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in non-interest bearing deposits   10,865    10,981 
Net increase in interest-bearing deposits   172,471    140,370 
Net increase in mortgagors' escrow deposits   21,612    19,768 
Net repayments of short-term borrowed funds   (68,500)   (90,000)
Proceeds from long-term borrowings   80,000    81,758 
Repayment of long-term borrowings   (51,254)   (71,727)
Purchases of treasury stock   (2,268)   (1,885)
Excess tax benefit from stock-based payment arrangements   -    303 
Proceeds from issuance of common stock upon exercise of stock options   -    19 
Cash dividends paid   (5,246)   (4,970)
Net cash provided by financing activities   157,680    84,617 
           
Net increase in cash and cash equivalents   15,358    9,054 
Cash and cash equivalents, beginning of period   35,857    42,363 
Cash and cash equivalents, end of period  $51,215   $51,417 
           
SUPPLEMENTAL CASHFLOW DISCLOSURE          
Interest paid  $12,491   $12,921 
Income taxes paid   1,000    1,000 
Taxes paid if excess tax benefits were not tax deductible   1,000    1,303 
Non-cash activities:          
Securities purchased not yet settled   -    1,375 
Loans transferred to Other Real Estate Owned   -    533 

 

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

 

 -4- 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2017 and 2016

(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, 2016  $513,853   $315   $214,462   $361,192   $(53,754)  $(8,362)
Net Income   12,260    -    -    12,260    -    - 
Award of common shares released from Employee Benefit Trust (107,605 shares)   2,280    -    2,280    -    -    - 
Vesting of restricted stock unit awards (256,810 shares)   -    -    (4,536)   (262)   4,798    - 
Stock-based compensation expense   3,295    -    3,295    -    -    - 
Repurchase of shares to satisfy tax obligation (78,554 shares)   (2,268)   -    -    -    (2,268)   - 
Dividends on common stock ($0.18 per share)   (5,246)   -    -    (5,246)   -    - 
Other comprehensive income   1,228    -    -    -    -    1,228 
Balance at March 31, 2017  $525,402   $315   $215,501   $367,944   $(51,224)  $(7,134)
                               
                               
Balance at December 31, 2015  $473,067   $315   $210,652   $316,530   $(48,868)  $(5,562)
Net Income   9,561    -    -    9,561    -    - 
Award of common shares released from Employee Benefit Trust (129,831 shares)   1,851    -    1,851    -    -    - 
Vesting of restricted stock unit awards (245,111 shares)   -    -    (4,047)   (396)   4,443    - 
Exercise of stock options (18,200 shares)   19    -    16    -    3    - 
Stock-based compensation expense   2,960    -    2,960    -    -    - 
Stock-based income tax benefit   303    -    303    -    -    - 
Purchase of treasury shares (15,300 shares)   (303)   -    -    -    (303)   - 
Repurchase of shares to satisfy tax obligation (76,656 shares)   (1,582)   -    -    -    (1,582)   - 
Dividends on common stock ($0.17 per share)   (4,970)   -    -    (4,970)   -    - 
Other comprehensive income   6,873    -    -    -    -    6,873 
Balance at March 31, 2016  $487,779   $315   $211,735   $320,725   $(46,307)  $1,311 

 

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, 2016.

 

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 and the evaluation of other-than-temporary impairment (“OTTI”) on securities. Actual results could differ from these estimates.

 

3.Earnings Per Share

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

 

 -6- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

   For the three months ended 
 March 31,
(Dollars in thousands, except per share data)  2017  2016
       
Net income, as reported  $12,260   $9,561 
Divided by:          
Weighted average common shares outstanding   29,019    29,097 
Weighted average common stock equivalents   4    14 
Total weighted average common shares outstanding and common stock equivalents   29,023    29,111 
           
Basic earnings per common share  $0.42   $0.33 
Diluted earnings per common share (1)  $0.42   $0.33 
Dividend payout ratio   42.9%   51.5%

 

(1)For the three months ended March 31, 2017 and 2016, there were no stock options that were anti-dilutive.

 

4.Debt and Equity Securities

The Company’s investments in equity securities that have readily determinable fair values and all investments in debt securities are classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities available for sale and (3) securities held-to-maturity.

 

The Company did not hold any trading securities at March 31, 2017 and December 31, 2016. Securities available for sale are recorded at fair value. Securities held-to-maturity are recorded at amortized cost.

 

The following tables summarize the Company’s portfolio of securities held-to-maturity at the periods indicated:

 

   At March 31, 2017
   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Securites held-to-maturity:                    
Municipals  $36,406   $34,152   $-   $2,254 
                     
Total  $36,406   $34,152   $-   $2,254 

 

   At December 31, 2016
   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Securites held-to-maturity:                    
Municipals  $37,735   $35,408   $-   $2,327 
                     
Total  $37,735   $35,408   $-   $2,327 

 

 -7- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables summarize the Company’s portfolio of securities available for sale at the periods indicated:

 

   At March 31, 2017
   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Corporate  $110,000   $103,694   $-   $6,306 
Municipals   124,296    127,281    2,985    - 
Mutual funds   21,431    21,431    -    - 
Collateralized loan obligations   85,470    86,438    968    - 
Other   7,396    7,394    -    2 
Total other securities   348,593    346,238    3,953    6,308 
REMIC and CMO   426,537    425,209    1,826    3,154 
GNMA   1,250    1,352    102    - 
FNMA   107,176    106,140    396    1,432 
FHLMC   5,256    5,204    31    83 
Total mortgage-backed securities   540,219    537,905    2,355    4,669 
Total securities available for sale  $888,812   $884,143   $6,308   $10,977 

 

   At December 31, 2016
   Amortized
Cost
  Fair Value  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
   (In thousands)
Corporate  $110,000   $102,910   $-   $7,090 
Municipals   124,984    126,903    1,983    64 
Mutual funds   21,366    21,366    -    - 
Collateralized loan obligations   85,470    86,365    895    - 
Other   7,363    7,361    -    2 
Total other securities   349,183    344,905    2,878    7,156 
REMIC and CMO   402,636    401,370    1,607    2,873 
GNMA   1,319    1,427    108    - 
FNMA   109,493    108,351    463    1,605 
FHLMC   5,378    5,328    35    85 
Total mortgage-backed securities   518,826    516,476    2,213    4,563 
Total securities available for sale  $868,009   $861,381   $5,091   $11,719 

 

Mortgage-backed securities shown in the tables above include one private issue CMO that is collateralized by commercial real estate mortgages with an amortized cost and market value of $0.2 million at March 31, 2017 and December 31, 2016.

 

The corporate securities held by the Company at March 31, 2017 and December 31, 2016 are issued by U.S. banking institutions.

 

 -8- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at March 31, 2017 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.

 

Held-to-maturity  Amortized
Cost
  Fair Value
   (In thousands)
       
Due in one year or less  $14,540   $14,540 
Due after ten years   21,866    19,612 
           
Total securities held-to-maturity  $36,406   $34,152 

 

Available for sale  Amortized
Cost
  Fair Value
   (In thousands)
       
Due in one year or less  $-   $- 
Due after one year through five years   1,766    1,774 
Due after five years through ten years   121,217    119,423 
Due after ten years   204,179    203,610 
           
Total other securities   327,162    324,807 
Mutual funds   21,431    21,431 
Mortgage-backed securities   540,219    537,905 
           
Total securities available for sale  $888,812   $884,143 

 

 -9- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show 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 the periods indicated:

 

   At March 31, 2017
      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)
Held-to-maturity securities                                   
                                    
Municipals   1   $19,612   $2,254   $19,612   $2,254   $-   $- 
Total securities held-to-maturity   1   $19,612   $2,254   $19,612   $2,254   $-   $- 
                                    
Available for sale securities                                   
Corporate   14   $103,694   $6,306   $19,209   $791   $84,485   $5,515 
Other   1    299    2    -    -    299    2 
Total other securities   15    103,993    6,308    19,209    791    84,784    5,517 
                                    
REMIC and CMO   34    208,825    3,154    195,016    2,516    13,809    638 
FNMA   17    75,059    1,432    69,340    1,089    5,719    343 
FHLMC   1    3,972    83    3,972    83    -    - 
Total mortgage-backed  securities   52    287,856    4,669    268,328    3,688    19,528    981 
Total securities available for sale   67   $391,849   $10,977   $287,537   $4,479   $104,312   $6,498 

 

   At December 31, 2016
      Total  Less than 12 months  12 months or more
   Count  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses
  Fair Value  Unrealized
Losses
   (Dollars in thousands)
Held-to-maturity securities                                   
                                    
Municipals   1   $19,538   $2,327   $19,538   $2,327   $-   $- 
Total securities held-to-maturity   1   $19,538   $2,327   $19,538   $2,327   $-   $- 
                                    
Available for sale securities                                   
Corporate   14   $102,910   $7,090   $28,476   $1,524   $74,434   $5,566 
Municipals   4    16,047    64    16,047    64    -    - 
Other   1    298    2    -    -    298    2 
Total other securities   19    119,255    7,156    44,523    1,588    74,732    5,568 
                                    
REMIC and CMO   35    222,807    2,873    208,827    2,268    13,980    605 
FNMA   18    80,924    1,605    74,972    1,250    5,952    355 
FHLMC   1    3,993    85    3,993    85    -    - 
Total mortgage-backed  securities   54    307,724    4,563    287,792    3,603    19,932    960 
Total securities available for sale   73   $426,979   $11,719   $332,315   $5,191   $94,664   $6,528 

 

 -10- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 in an unrealized loss position, 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 loss (“AOCL”) within Stockholders’ Equity. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCL, net of tax.

 

The Company reviewed each investment that had an unrealized loss at March 31, 2017 and December 31, 2016. The unrealized losses in securities held-to-maturity at March 31, 2017 and December 31, 2016 were caused by illiquidity in the market and movements in interest rates.

 

The unrealized losses in securities available for sale at March 31, 2017 and December 31, 2016 were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2017 and December 31, 2016.

 

The Company did not sell any securities during the three months ended March 31, 2017 and 2016.

 

5.Loans

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

 

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

 

 -11- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

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

 

A loan is considered impaired when, based upon current information, the Company believes it is probable that it will be unable to collect all amounts due, both principal and interest, in accordance with the original terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or, as a practical expedient, the fair value of the collateral if the loan is collateral dependent. Interest income on impaired loans is recorded on the cash basis.

 

The Company reviews each impaired loan on an individual basis to determine if either a charge-off or a valuation allowance needs to be allocated to the loan. The Company does not charge-off or allocate a valuation allowance to loans for which management has concluded the current value of the underlying collateral will allow for recovery of the loan balance either through the sale of the loan or by foreclosure and sale of the property.

 

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

 

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

 

As of March 31, 2017, we utilized recent third party appraisals of the collateral to measure impairment for $44.3 million, or 82.3%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $9.5 million, or 17.7%, 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”).

 

 -12- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At March 31, 2017, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

 

The Company did not modify and classify any loans as TDR during the three months ended March 31, 2017 and 2016.

 

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

 

   March 31, 2017  December 31, 2016
(Dollars in thousands)  Number
of contracts
  Recorded
investment
  Number
of contracts
  Recorded
investment
             
Multi-family residential   9   $2,557    9   $2,572 
Commercial real estate   2    2,049    2    2,062 
One-to-four family - mixed-use property   5    1,791    5    1,800 
One-to-four family - residential   3    586    3    591 
Taxi medallion   12    9,660    12    9,735 
Commercial business and other   2    621    2    675 
                     
Total performing troubled debt restructured   33   $17,264    33   $17,435 

 

During the three months ended March 31, 2017 and 2016, there were no TDR loans transferred to non-performing status.

 

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

 

   March 31, 2017  December 31, 2016
(Dollars in thousands)  Number
of contracts
  Recorded
investment
  Number
of contracts
  Recorded
investment
             
Multi-family residential   1   $384    1   $396 
                     
Total troubled debt restructurings that subsequently defaulted   1   $384    1    396 

 

 -13- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

(In thousands)  March 31,
2017
  December 31,
2016
       
Loans ninety days or more past due and still accruing:          
Commercial real estate  $75   $- 
One-to-four family - mixed-use property   -    386 
Construction   602    - 
Total   677    386 
           
Non-accrual mortgage loans:          
Multi-family residential   1,354    1,837 
Commercial real estate   1,462    1,148 
One-to-four family - mixed-use property   3,328    4,025 
One-to-four family - residential   7,847    8,241 
Total   13,991    15,251 
           
Non-accrual non-mortgage loans:          
Small Business Administration   58    1,886 
Taxi medallion   3,771    3,825 
Commercial business and other   38    68 
Total   3,867    5,779 
           
Total non-accrual loans   17,858    21,030 
           
Total non-performing loans  $18,535   $21,416 

 

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

 

   For the three months ended
March 31,
   2017  2016
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $414   $540 
Less:  Interest income included in the results of operations   127    123 
Total foregone interest  $287   $417 

 

 -14- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

   March 31, 2017
(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  $5,465   $479   $1,354   $7,298   $2,254,648   $2,261,946 
Commercial real estate   2,194    876    1,537    4,607    1,264,163    1,268,770 
One-to-four family - mixed-use property   5,519    636    3,328    9,483    551,872    561,355 
One-to-four family - residential   1,379    1,350    7,655    10,385    173,816    184,201 
Co-operative apartments   -    -    -    -    7,216    7,216 
Construction loans   -    -    602    602    11,811    12,413 
Small Business Administration   -    -    -    -    10,519    10,519 
Taxi medallion   1,159    -    3,771    4,930    13,902    18,832 
Commercial business and other   21    731    -    752    631,751    632,503 
Total  $15,737   $4,072   $18,247   $38,057   $4,919,698   $4,957,755 

 

   December 31, 2016
(In thousands)  30 - 59 Days
Past Due
  60 - 89 Days
Past Due
  than
90 Days
  Total Past
Due
  Current  Total Loans
          
                   
Multi-family residential  $2,575   $287   $1,837   $4,699   $2,173,805   $2,178,504 
Commercial real estate   3,363    22    1,148    4,533    1,241,599    1,246,132 
One-to-four family - mixed-use property   4,671    762    4,411    9,844    548,658    558,502 
One-to-four family - residential   3,831    194    8,047    12,072    173,695    185,767 
Co-operative apartments   -    -    -    -    7,418    7,418 
Construction loans   -    -    -    -    11,495    11,495 
Small Business Administration   13    -    1,814    1,827    13,371    15,198 
Taxi medallion   -    -    3,825    3,825    15,171    18,996 
Commercial business and other   22    1    -    23    597,099    597,122 
Total  $14,475   $1,266   $21,082   $36,823   $4,782,311   $4,819,134 

 

 -15- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

March 31, 2017
(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  $5,923   $4,487   $2,903   $1,015   $92   $481   $2,243   $4,492   $593   $22,229 
Charge-off's   (14)   -    (34)   -    -    (65)   (54)   (12)   -    (179)
Recoveries   30    68    -    -    -    41    -    22    -    161 
Provision (benefit)   (32)   (70)   (178)   (36)   2    (140)   24    208    222    - 
Ending balance  $5,907   $4,485   $2,691   $979   $94   $317   $2,213   $4,710   $815   $22,211 

 

March 31, 2016
(In thousands)  Multi-family residential  Commercial real estate  One-to-four family - mixed-use property  One-to-four family - residential  Construction loans  Small Business Administration  Taxi medallion  Commercial business and other  Unallocated  Total
                               
Allowance for credit losses:                                                  
Beginning balance  $6,718   $4,239   $4,227   $1,227   $50   $262   $343   $4,469   $-   $21,535 
Charge-off's   (42)   -    (14)   (66)   -    -    -    (25)   -    (147)
Recoveries   13    -    187    365    -    31    -    9    -    605 
Provision (benefit)   (391)   (38)   (893)   (484)   5    (24)   (8)   138    1,695    - 
Ending balance  $6,298   $4,201   $3,507   $1,042   $55   $269   $335   $4,591   $1,695   $21,993 

 

 -16- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

At March 31, 2017
(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  $2,261,946   $1,268,770   $561,355   $184,201   $7,216   $12,413   $10,519   $18,832   $632,503   $-   $4,957,755 
Ending balance: individually evaluated for impairment  $5,299   $9,409   $7,311   $10,566   $-   $602   $170   $18,832   $2,647   $-   $54,836 
Ending balance: collectively evaluated for impairment  $2,256,647   $1,259,361   $554,044   $173,635   $7,216   $11,811   $10,349   $-   $629,856   $-   $4,902,919 
Allowance for credit losses:                                                       
Ending balance: individually evaluated for impairment  $227   $168   $240   $59   $-   $-   $-   $2,213   $10   $-   $2,917 
Ending balance: collectively evaluated for impairment  $5,681   $4,317   $2,451   $920   $-   $94   $316   $-   $4,700   $815   $19,294 

 

At December 31, 2016
(in thousands)  Multi-family residential  Commercial real estate  One-to-four family - mixed-use property  One-to-four family- residential  Co-operative apartments  Construction loans  Small Business Administration  Taxi Medallion  Commercial business and other  Unallocated  Total
Financing Receivables:                                                       
Ending Balance  $2,178,504   $1,246,132   $558,502   $185,767   $7,418   $11,495   $15,198   $18,996   $597,122   $-   $4,819,134 
Ending balance: individually evaluated for impairment  $5,923   $6,551   $8,809   $9,989   $-   $-   $1,937   $16,282   $2,492   $-   $51,983 
Ending balance: collectively evaluated for impairment  $2,172,581   $1,239,581   $549,693   $175,778   $7,418   $11,495   $13,261   $2,714   $594,630   $-   $4,767,151 
Allowance for credit losses:                                                       
Ending balance: individually evaluated for impairment  $232   $179   $417   $60   $-   $-   $90   $2,236   $12   $-   $3,226 
Ending balance: collectively evaluated for impairment  $5,691   $4,308   $2,486   $955   $-   $92   $391   $7   $4,480   $593   $19,003 

 

 -17- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

   March 31, 2017  December 31, 2016
   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  $3,048   $3,198   $-   $3,660   $3,796   $- 
Commercial real estate   7,360    7,387    -    4,489    4,516    - 
One-to-four family mixed-use property   5,660    6,098    -    6,435    6,872    - 
One-to-four family residential   10,141    11,665    -    9,560    11,117    - 
Construction   602    602    -    -    -    - 
Non-mortgage loans:                              
Small Business Administration   170    711    -    416    509    - 
Taxi medallion   4,958    5,155    -    2,334    2,476    - 
Commercial business and other   2,246    2,615    -    2,072    2,443    - 
                               
Total loans with no related allowance recorded   34,185    37,431    -    28,966    31,729    - 
                               
With an allowance recorded:                              
Mortgage loans:                              
Multi-family residential   2,251    2,251    227    2,263    2,263    232 
Commercial real estate   2,049    2,049    168    2,062    2,062    179 
One-to-four family mixed-use property   1,651    1,654    240    2,374    2,376    417 
One-to-four family residential   425    425    59    429    429    60 
Non-mortgage loans:                              
Small Business Administration   -    -    -    1,521    1,909    90 
Taxi medallion   13,874    13,874    2,213    13,948    13,948    2,236 
Commercial business and other   401    401    10    420    420    12 
                               
Total loans with an allowance recorded   20,651    20,654    2,917    23,017    23,407    3,226 
                               
Total Impaired Loans:                              
Total mortgage loans  $33,187   $35,329   $694   $31,272   $33,431   $888 
                               
Total non-mortgage loans  $21,649   $22,756   $2,223   $20,711   $21,705   $2,338 

 

 -18- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

   March 31, 2017  March 31, 2016
   Average
Recorded
Investment
  Interest
Income
Recognized
  Average
Recorded
Investment
  Interest
Income
Recognized
   (In thousands)
With no related allowance recorded:                    
Mortgage loans:                    
Multi-family residential  $3,354   $23   $5,925   $17 
Commercial real estate   5,925    95    4,507    12 
One-to-four family mixed-use property   6,048    37    9,418    33 
One-to-four family residential   9,851    26    11,610    27 
Construction   301    7    785    - 
Non-mortgage loans:                    
Small Business Administration   293    2    264    3 
Taxi Medallion   3,646    30    -    - 
Commercial Business and other   2,159    44    2,528    46 
                     
Total loans with no related allowance recorded   31,577    264    35,037    138 
                     
With an allowance recorded:                    
Mortgage loans:                    
Multi-family residential   2,257    29    2,300    29 
Commercial real estate   2,056    24    2,365    28 
One-to-four family mixed-use property   2,013    18    2,739    38 
One-to-four family residential   427    4    342    3 
Non-mortgage loans:                    
Small Business Administration   761    -    92    2 
Taxi Medallion   13,911    43    2,114    15 
Commercial Business and other   411    6    2,013    25 
                     
Total loans with an allowance recorded   21,836    124    11,965    140 
                     
Total Impaired Loans:                    
Total mortgage loans  $32,232   $263   $39,991   $187 
                     
Total non-mortgage loans  $21,181   $125   $7,011   $91 

 

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.” 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-off. Loans that are non-accrual are designated as Substandard, Doubtful or Loss. We designate a loan as Special Mention if the asset does not warrant classification within one of the other classifications, but does contain a potential weakness that deserves closer attention.

 

 -19- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

   March 31, 2017
(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
                
Multi-family residential  $7,230   $2,742   $-   $-   $9,972 
Commercial real estate   639    7,359    -    -    7,998 
One-to-four family - mixed-use property   3,446    5,521    -    -    8,967 
One-to-four family - residential   2,214    9,980    -    -    12,194 
Construction loans   -    602    -    -    602 
Small Business Administration   532    116    -    -    648 
Taxi Medallion   -    18,832    -    -    18,832 
Commercial business and other   9,108    2,647    -    -    11,755 
Total loans  $23,169   $47,799   $-   $-   $70,968 

 

   December 31, 2016
(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
                
Multi-family residential  $7,133   $3,351   $-   $-   $10,484 
Commercial real estate   2,941    4,489    -    -    7,430 
One-to-four family - mixed-use property   4,197    7,009    -    -    11,206 
One-to-four family - residential   1,205    9,399    -    -    10,604 
Small Business Administration   540    436    -    -    976 
Taxi Medallion   2,715    16,228    54    -    18,997 
Commercial business and other   9,924    2,493    -    -    12,417 
Total loans  $28,655   $43,405   $54   $-   $72,114 

 

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 $63.2 million and $241.8 million, respectively, at March 31, 2017.

 

6.Loans held for sale

Loans held for sale are carried at the lower of cost or fair value. At March 31, 2017 and December 31, 2016, the Bank did not have any loans held for sale.

 

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

 

 -20- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show delinquent and non-performing loans sold during the periods indicated:

 

   For the three months ended
March 31, 2017
(Dollars in thousands)  Loans sold  Proceeds  Net (charge-offs)
recoveries
  Net gain
             
One-to-four family - mixed-use property   5    1,790    (33)   28 
                     
Total (1)   5   $1,790   $(33)  $28 

 

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

 

1)The above table does not include the sale of three performing Small Business Administration loans for proceeds totaling $3.4 million during the three months ended March 31, 2017. These loans were sold for a net gain of $0.2 million.

 

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

 

7.Other Real Estate Owned

OREO are included in other assets on the Company’s Consolidated Statements of Financial Condition. The following table shows changes in OREO during the periods indicated:

 

   For the three months ended
March 31,
   2017  2016
   (In thousands)
       
Balance at beginning of period  $533   $4,932 
Acquisitions   -    533 
Write-down of carrying value   -    (47)
Sales   (533)   (816)
           
Balance at end of period  $-   $4,602 

 

 -21- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

   For the three months ended
March 31,
   2017  2016
   (In thousands)
       
Gross gains  $50   $37 
           
Total net gain  $50   $37 

 

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure or an in-substance repossession. During the three months ended March 31, 2017, we did not foreclose on any consumer mortgages through in-substance repossession. We did not hold any foreclosed residential real estate properties at March 31, 2017. At December 31, 2016, we held one foreclosed residential real estate property for $0.5 million. Included within net loans as of March 31, 2017 was a recorded investment of $11.5 million 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.Stock-Based Compensation

For the three months ended March 31, 2017 and 2016, the Company’s net income, as reported, includes $3.1 million and $3.0 million, respectively, of stock-based compensation costs and $1.0 million of income tax benefits related to the stock-based compensation plans in each of the periods. During the three months ended March 31, 2017 and 2016, the Company granted 276,900 and 337,175 restricted stock units, respectively. The Company has not granted stock options since 2009. At March 31, 2017, the Company had 5,600 stock options, all 100% vested, outstanding.

 

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 at or for the three months ended March 31, 2017:

 

   Shares  Weighted-Average
Grant-Date
Fair Value
       
Non-vested at December 31, 2016   488,779   $18.99 
Granted   276,900    28.21 
Vested   (242,917)   21.93 
Forfeited   (14,680)   21.77 
Non-vested at March 31, 2017   508,082   $22.53 
           
Vested but unissued at March 31, 2017   270,017   $22.33 

 

 -22- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

As of March 31, 2017, there was $10.7 million of total unrecognized compensation cost related to RSU awards granted. 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 March 31, 2017 and 2016 were $7.0 million and $4.8 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.

 

Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised during the three months ended March 31, 2017 and 2016 are provided in the following table:

 

   For the three months ended
March 31,
(In thousands)  2017  2016
Proceeds from stock options exercised  $-   $19 
Fair value of shares received upon exercised of stock options   -    328 
Tax expense related to stock options exercised   -    (16)
Intrinsic value of stock options exercised   -    43 

 

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. However, certain officers who have not reached the designated level but were already participants, remain eligible to participate in the Plan. Awards are made under this plan on certain compensation not eligible for contributions made under the profit sharing plan, due to the terms of the profit sharing plan and the Internal Revenue Code. Employees receive awards under this plan proportionate to the amount they would have received under the profit sharing plan, but for limits imposed by the profit sharing plan and the Internal Revenue Code. The awards are made as cash awards, and then converted to common stock equivalents (phantom shares) at the then current fair value of the Company’s common stock. Dividends are credited to each employee’s account in the form of additional phantom shares each time the Company pays a dividend on its common stock. In the event of a change of control (as defined in this plan), an employee’s interest is converted to a fixed dollar amount and deemed to be invested in the same manner as his interest in the Bank’s non-qualified deferred compensation plan. Employees vest under this plan 20% per year for the first 5 years of employment and are 100% vested thereafter. Employees also become 100% vested upon a change of control. Employees receive their vested interest in this plan in the form of a cash lump sum payment or installments, as elected by the employee, after termination of employment. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

 

The following table summarizes the Phantom Stock Plan at or for the three months ended March 31, 2017:

 

Phantom Stock Plan  Shares  Fair Value
       
Outstanding at December 31, 2016   89,339   $29.39 
Granted   6,743    27.17 
Forfeited   -    - 
Distributions   (198)   28.93 
Outstanding at March 31, 2017   95,884   $26.87 
Vested at March 31, 2017   95,462   $26.87 

 

The Company recorded stock-based compensation (benefit) expense for the Phantom Stock Plan of ($0.2 million) and $29,000 for the three months ended March 31, 2017 and 2016, respectively. The total fair value of the distributions from the Phantom Stock Plan was $6,000 and $28,000 for the three months ended March 31, 2017 and 2016, respectively.

 

 -23- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

9.Pension and Other Postretirement Benefit Plans

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

 

   Three months ended
March 31,
(In thousands)  2017  2016
       
Employee Pension Plan:          
Interest cost  $216   $226 
Amortization of unrecognized loss   174    201 
Expected return on plan assets   (348)   (348)
Net employee pension expense  $42   $79 
           
Outside Director Pension Plan:          
Service cost  $10   $11 
Interest cost   23    24 
Amortization of unrecognized gain   (23)   (21)
Amortization of past service liability   10    10 
Net outside director pension expense  $20   $24 
           
Other Postretirement Benefit Plans:          
Service cost  $79   $90 
Interest cost   76    80 
Amortization of unrecognized loss   -    12 
Amortization of past service liability   (21)   (21)
Net other postretirement expense  $134   $161 

 

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2016 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, 2017. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of March 31, 2017, the Company has contributed $36,000 to the Outside Director Pension Plan and $18,000 to the Other Postretirement Benefit Plans. As of March 31, 2017, the Company has not revised its expected contributions for the year ending December 31, 2017.

 

10.Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At March 31, 2017, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.4 million and $34.5 million, respectively. At December 31, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.4 million and $34.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three months ended March 31, 2017.

 

 -24- 

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 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 March 31,  at December 31,  Three Months Ended
(In thousands)  2017  2016  March 31, 2017  March 31, 2016
             
Mortgage-backed securities  $1,898   $2,016   $(7)  $5 
Other securities   28,526    28,429    32    96 
Borrowed funds   34,536    33,959    (570)   1,054 
Net (loss) gain from fair value adjustments (1)            $(545)  $1,155 

 

(1)The net (loss) gain from fair value adjustments presented in the above table does not include net gains of $0.2 million and net losses of $2.1 million for the three months ended March 31, 2017 and 2016, respectively from the change in the fair value of interest rate swaps.

 

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

 

The borrowed funds had a contractual principal amount of $61.9 million at both March 31, 2017 and December 31, 2016. The fair value of borrowed funds includes accrued interest payable of $0.2 million and $0.1 million at March 31, 2017 and December 31, 2016, respectively.

 

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:

 

 -25- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at March 31, 2017 and December 31, 2016.

 

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At March 31, 2017 and December 31, 2016, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

 

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At March 31, 2017 and December 31, 2016, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company and a single issuer trust preferred security.

 

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

 

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at March 31, 2017 and December 31, 2016:

 

   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
   2017  2016  2017  2016  2017  2016  2017  2016
   (In thousands)
                         
Assets:                                        
Mortgage-backed Securities  $-   $-   $537,905   $516,476   $-   $-   $537,905   $516,476 
Other securities   -    -    338,844    337,544    7,394    7,361    346,238    344,905 
Interest rate swaps   -    -    6,833    6,350    -    -    6,833    6,350 
                                         
Total assets  $-   $-   $883,582   $860,370   $7,394   $7,361   $890,976   $867,731 
                                         
Liabilities:                                        
Borrowings  $-   $-   $-   $-   $34,536   $33,959   $34,536   $33,959 
Interest rate swaps   -    -    3,040    3,386    -    -    3,040    3,386 
                                         
Total liabilities  $-   $-   $3,040   $3,386   $34,536   $33,959   $37,576   $37,345 

 

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:

 

 -26- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

   For the three months ended March 31,
   2017  2016
   Trust preferred
securities
  Junior subordinated
debentures
  Trust preferred
securities
  Junior subordinated
debentures
   (In thousands)
             
Beginning balance  $7,361   $33,959   $7,212   $29,018 
Net gain (loss) from fair value adjustment of financial assets   32    -    (60)   - 
Net (gain) loss from fair value adjustment of financial liabilities   -    570    -    (1,054)
Increase in accrued interest payable   -    7    -    13 
Change in unrealized gains (losses) included in other comprehensive income   1    -    (2)   - 
Ending balance  $7,394   $34,536   $7,150   $27,977 
                     
Changes in unrealized gain (loss) held at period end  $1   $-   $(2)  $- 

 

During the three months ended March 31, 2017 and 2016, there were no transfers between Levels 1, 2 and 3.

 

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

 

   March 31, 2017
                
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:               
                
Trust preferred securities  $7,394   Discounted cash flows  Discount rate  6.2% - 7.1%  6.9%
                  
Liabilities:                 
                  
Junior subordinated debentures  $34,536   Discounted cash flows  Discount rate    6.2%    6.2%

 

   December 31, 2016
                
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:               
                
Trust preferred securities  $7,361   Discounted cash flows  Discount rate  6.3% - 7.1%  7.0%
                  
Liabilities:                 
                  
Junior subordinated debentures  $33,959   Discounted cash flows  Discount rate    6.3%    6.3%

 

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at March 31, 2017 and December 31, 2016, is the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

 -27- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value, at March 31, 2017 and December 31, 2016:

 

   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
   2017  2016  2017  2016  2017  2016  2017  2016
   (In thousands)
Assets:                        
Impaired loans  $-   $-   $-   $-   $14,958   $14,968   $14,958   $14,968 
Other real estate owned   -    -    -    -    -    533    -    533 
                                         
Total assets  $-   $-   $-   $-   $14,958   $15,501   $14,958   $15,501 

 

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

 

   March 31, 2017
       
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)
Assets:               
                
Impaired loans  $2,014   Income approach  Capitalization rate  6.0% to 7.5%  7.0%
           Reduction for planned expedited disposal  10.9% to 15.0%  14.2%
                  
Impaired loans  $8,984   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -40.0% to 16.2%  -1.5%
           Reduction for planned expedited disposal  0.0% to 15.0%  8.0%
                  
                  
Impaired loans  $3,960   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -29.0% to 25.0%  0.0%
           Capitalization rate  5.3% to 9.5%  7.1%
           Reduction for planned expedited disposal  14.5% to 15.0%  15.0%

 

 -28- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

   At December 31, 2016
   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)
Assets:               
                
Impaired loans  $2,007   Income approach  Capitalization rate  6.0% to 7.5%  7.0%
           Reduction for planned expedited disposal    15.0%    15.0%
                  
Impaired loans  $8,703   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -40.0% to 16.2%  -1.5%
           Reduction for planned expedited disposal  0% to 15.0%  7.7%
                  
Impaired loans  $4,258   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0% to 25.0%  -0.6%
           Capitalization rate  5.3% to 9.5%  7.2%
           Reduction planned for expedited disposal    15.0%    15.0%
                  
                  
                  
Other real estate owned  $533   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  3.3% to 18.6%  11.0%

 

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2017 and December 31, 2016.

 

The methods and assumptions used to estimate fair value at March 31, 2017 and December 31, 2016 are as follows:

 

Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:

 

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

 

FHLB-NY stock:

 

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

 

Securities:

 

The fair values of securities are contained in Note 4 of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. When there is limited activity or less transparency around inputs to the valuation, securities are valued using discounted cash flows.

 

Loans:

 

The fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.

 

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates.

 

 -29- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Other Real Estate Owned:

 

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

 

Accrued Interest Receivable:

 

The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for its underlying financial asset.

 

Due to Depositors:

 

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

 

Borrowings:

 

The fair value of borrowings is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements or using a market-standard model. The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity.

 

Accrued Interest Payable:

 

The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for its underlying financial liability.

 

Interest Rate Swaps:

 

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

 

Other Financial Instruments:

 

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable). At March 31, 2017 and December 31, 2016, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

 

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

 

 -30- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

   March 31, 2017
   Carrying
Amount
  Fair
Value
  Level 1  Level 2  Level 3
   (In thousands)
Assets:               
                
Cash and due from banks  $51,215   $51,215   $51,215   $-   $- 
Securities held-to-maturity                         
Other securities   36,406    34,152    -    -    34,152 
Securities available for sale                         
Mortgage-backed securities   537,905    537,905    -    537,905    - 
Other securities   346,238    346,238    -    338,844    7,394 
Loans   4,974,591    4,956,089    -    -    4,956,089 
FHLB-NY stock   57,384    57,384    -    57,384    - 
Accrued interest receivable   20,602    20,602    -    20,602    - 
Interest rate swaps   6,833    6,833    -    6,833    - 
                          
Total assets  $6,031,174   $6,010,418   $51,215   $961,568   $4,997,635 
                          
                          
Liabilities:                         
Deposits  $4,410,746   $4,417,356   $2,998,927   $1,418,429   $- 
Borrowings   1,227,852    1,221,367    -    1,186,831    34,536 
Accrued interest payable   3,074    3,074    -    3,074    - 
Interest rate swaps   3,040    3,040    -    3,040    - 
                          
Total liabilities  $5,644,712   $5,644,837   $2,998,927   $2,611,374   $34,536 

 

 -31- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

   December 31, 2016
   Carrying
Amount
  Fair
Value
  Level 1  Level 2  Level 3
   (In thousands)
Assets:               
                
Cash and due from banks  $35,857   $35,857   $35,857   $-   $- 
Securities held-to-maturity                         
Other securities   37,735    35,408    -    -    35,408 
Securities available for sale                         
Mortgage-backed securities   516,476    516,476    -    516,476    - 
Other securities   344,905    344,905    -    337,544    7,361 
Loans   4,835,693    4,814,840    -    -    4,814,840 
FHLB-NY stock   59,173    59,173    -    59,173    - 
Interest rate swaps   6,350    6,350    -    6,350    - 
                          
Total assets  $5,836,189   $5,813,009   $35,857   $919,543   $4,857,609 
                          
Liabilities:                         
Deposits  $4,205,631   $4,213,714   $2,833,516   $1,380,198   $- 
Borrowings   1,266,563    1,255,283    -    1,221,324    33,959 
Interest rate swaps   3,386    3,386    -    3,386    - 
                          
Total liabilities  $5,475,580   $5,472,383   $2,833,516   $2,604,908   $33,959 

 

11.Derivative Financial Instruments

At March 31, 2017 and December 31, 2016, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for two purposes. The first purpose is to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million. The second purpose is to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $267.4 million and $235.4 million at March 31, 2017 and December 31, 2016, respectively.

 

At March 31, 2017 and December 31, 2016 derivatives with a combined notional amount of $36.3 million were not designated as hedges. At March 31, 2017 and December 31, 2016 derivatives with a combined notional amount of $249.1 million and $217.1 million were designated as fair value hedges. Changes in the fair value of all interest rate swaps and hedged items are reflected in “Net loss from fair value adjustments” in the Consolidated Statements of Income.

 

The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:

 

   March 31, 2017  December 31, 2016
   Notional
Amount
  Net Carrying
Value (1)
  Notional
Amount
  Net Carrying
Value (1)
          
Interest rate swaps (hedge)  $221,591   $6,833   $182,177   $6,350 
Interest rate swaps (hedge)   27,472    (544)   34,916    (658)
Interest rate swaps (non-hedge)   36,321    (2,496)   36,321    (2,728)
Total derivatives  $285,384   $3,793   $253,414   $2,964 

 

(1) Derivatives in a net positive position are recorded as “Other assets” and derivatives in a net negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition. There were no unrealized losses at March 31, 2017 and December 31, 2016.

 

 -32- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:

 

   For the three months ended
March 31,
(In thousands)  2017  2016
       
Financial Derivatives:          
Interest rate swaps (non-hedge)  $232   $(2,102)
Interest rate swaps (hedge)   (66)   (40)
Net gain (loss) (1) (2)  $166   $(2,142)

 

(1) Net gains and losses are recorded as part of “Net loss from fair value adjustments” in the Consolidated Statements of Income.
(2)

The net gain (loss) presented in the above table does not include net losses of $0.5 million and net gains of $1.2 million for the three months ended March 31, 2017 and 2016, respectively, from the change in the fair value of financial assets and liabilities carried at fair value under the fair value option.

 

The Company’s interest rate swaps are subject to two master netting arrangements between the Company and its two designated counterparties. The Company has not made a policy election to offset its derivative positions.

 

The following tables present the effect of the master netting arrangements on the presentation of the derivative assets and liabilities in the Consolidated Statements of Condition as of the dates indicated:

 

   March 31, 2017
            Gross Amounts Not Offset in the Consolidated Statement of Condition   
(In thousands)  Gross Amount of Recognized Assets  Gross Amount Offset in the Statement of Condition  Net Amount of Assets Presented in the Statement of Condition  Financial Instruments  Cash Collateral Received  Net Amount
                               
Interest rate swaps  $6,833   $-   $6,833   $-   $3,793   $3,040 

 

            Gross Amounts Not Offset in the Consolidated Statement of Condition   
(In thousands)  Gross Amount of Recognized Liabilities  Gross Amount Offset in the Statement of Condition  Net Amount of Liabilities Presented in the Statement of Condition  Financial Instruments  Cash Collateral Pledged  Net Amount
                               
Interest rate swaps  $3,040   $-   $3,040   $-   $-   $3,040 

 

 -33- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

   December 31, 2016
            Gross Amounts Not Offset in the Consolidated Statement of Condition   
(In thousands)  Gross Amount of Recognized Assets  Gross Amount Offset in the Statement of Condition  Net Amount of Assets Presented in the Statement of Condition  Financial Instruments  Cash Collateral Received  Net Amount
                               
Interest rate swaps  $6,350   $-   $6,350   $-   $2,964   $3,386 

 

            Gross Amounts Not Offset in the Consolidated Statement of Condition   
(In thousands)  Gross Amount of Recognized Liabilities  Gross Amount Offset in the Statement of Condition  Net Amount of Liabilities Presented in the Statement of Condition  Financial Instruments  Cash Collateral Pledged  Net Amount
                               
Interest rate swaps  $3,386   $-   $3,386   $-   $-   $3,386 

 

12.Income Taxes

Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of the Company’s trusts, which file separate Federal income tax returns as trusts, and Flushing Preferred Funding Corporation, which files a separate Federal income tax return as a real estate investment trust. Additionally, the Bank files New Jersey State tax returns.

 

Income tax provisions are summarized as follows:

 

   For the three months
ended March 31,
(In thousands)  2017  2016
       
Federal:          
Current  $2,952   $3,660 
Deferred   1,797    1,087 
Total federal tax provision   4,749    4,747 
State and Local:          
Current   (199)   385 
Deferred   704    483 
Total state and local tax provision   505    868 
Total income tax provision  $5,254   $5,615 

 

 -34- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The effective tax rate was 30.0% and 37.0% for the three months ended March 31, 2017 and 2016, respectively. The decrease in the effective tax rate reflects the impact of a change in the treatment of deductible stock compensation expense from prior years. In prior years the tax impact of deductible stock compensation expense flowed through additional paid-in-capital and did not have an impact on the Company’s effective tax rate, in contrast, in 2017 the impact is passed through the provision for income taxes.

 

The effective rates differ from the statutory federal income tax rate as follows:

 

   For the three months
ended March 31,
(Dollars in thousands)  2017  2016
          
Taxes at federal statutory rate  $6,130    35.0%  $5,312    35.0%
Increase (reduction) in taxes resulting from:                    
State and local income tax, net of Federal income tax benefit   328    1.9    564    3.7 
Other   (1,204)   (6.9)   (261)   (1.7)
Taxes at effective rate  $5,254    30.0%  $5,615    37.0%

 

The Company has recorded a deferred tax asset of $31.4 million at March 31, 2017, which is included in “Other assets” in the Consolidated Statements of Financial Condition. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three fiscal years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, the probability that some of the Company’s $16.9 million deferred tax liability can be used to offset a portion of the deferred tax asset, as well as certain tax planning strategies, it is more likely than not that the deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the deferred tax asset at March 31, 2017.

 

13.Accumulated Other Comprehensive Loss:

The following are changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2017 and 2016:

 

   Unrealized Gains
and (Losses) on
Available for Sale
Securities
  Defined Benefit
Pension Items
  Total
March 31, 2017  (In thousands)
          
Beginning balance, net of tax  $(3,859)  $(4,503)  $(8,362)
Other comprehensive income before reclassifications, net of tax   1,148    -   $1,148 
                
Amounts reclassified from accumulated other comprehensive income, net of tax   -    80    80 
                
Net current period other comprehensive income, net of tax   1,148    80    1,228 
                
Ending balance, net of tax  $(2,711)  $(4,423)  $(7,134)

 

 -35- 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

   Unrealized Gains
and (Losses) on
Available for Sale
Securities
  Defined Benefit
Pension Items
  Total
   (In thousands)
March 31, 2016         
Beginning balance, net of tax  $(521)  $(5,041)  $(5,562)
Other comprehensive income before reclassifications, net of tax   6,770    -   $6,770 
                
Amounts reclassified from accumulated other comprehensive income, net of tax   -    103    103 
                
Net current period other comprehensive income, net of tax   6,770    103    6,873