10-Q 1 f10q_080417p.htm FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 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 ___

Accelerated filer X

Smaller reporting company ___

Emerging growth 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 July 31, 2017 was 28,803,937.

 

 

 

 

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 50
   
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk 67
   
ITEM 4.  Controls and Procedures 67
   
PART II  —  OTHER INFORMATION  
   
ITEM 1.  Legal Proceedings 68
   
ITEM 1A. Risk Factors 68
   
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds 68
   
ITEM 3.  Defaults Upon Senior Securities 68
   
ITEM 4.  Mine Safety Disclosures 68
   
ITEM 5.  Other Information 68
   
ITEM 6.  Exhibits 69
   
SIGNATURES 70

 

 

 

i 

 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

 

Item 1. Financial Statements

 

   June 30,  December 31,
(Dollars in thousands, except per share data)  2017  2016
ASSETS          
Cash and due from banks  $48,539   $35,857 
Securities held-to-maturity:          
Mortgage-backed securities (none pledged) (fair value of $7,816 at at June 30, 2017)   7,983    - 
Other securities (none pledged) (fair value of $22,777 and $35,408 at June 30, 2017 and December 31, 2016, respectively)   24,451    37,735 
Securities available for sale:          
Mortgage-backed securities (including assets pledged of $89,197 and $145,860 at June 30, 2017 and December 31, 2016, respectively; $1,801 and $2,016 at fair value pursuant to the fair value option at June 30, 2017 and December 31, 2016, respectively)   520,012    516,476 
Other securities (including assets pledged of $143,261 and $82,064 at June 30, 2017 and December 31, 2016, respectively; $28,706 and $28,429 at fair value pursuant to the fair value option at June 30, 2017 and December 31, 2016, respectively)   317,693    344,905 
Loans held for sale   30,565    - 
Loans:          
Multi-family residential   2,243,643    2,178,504 
Commercial real estate   1,349,634    1,246,132 
One-to-four family ― mixed-use property   556,906    558,502 
One-to-four family ― residential   181,213    185,767 
Co-operative apartments   7,069    7,418 
Construction   16,842    11,495 
Small Business Administration   10,591    15,198 
Taxi medallion   18,303    18,996 
Commercial business and other   644,262    597,122 
Net unamortized premiums and unearned loan fees   17,217    16,559 
Allowance for loan losses   (22,157)   (22,229)
Net loans   5,023,523    4,813,464 
Interest and dividends receivable   21,439    20,228 
Bank premises and equipment, net   26,592    26,561 
Federal Home Loan Bank of New York stock   66,630    59,173 
Bank owned life insurance   130,631    132,508 
Goodwill   16,127    16,127 
Other assets   51,051    55,453 
Total assets  $6,285,236   $6,058,487 
           
LIABILITIES          
Due to depositors:          
Non-interest bearing  $349,302   $333,163 
Interest-bearing:          
Certificate of deposit accounts   1,332,377    1,372,115 
Savings accounts   325,815    254,283 
Money market accounts   837,565    843,370 
NOW accounts   1,368,441    1,362,484 
Total interest-bearing deposits   3,864,198    3,832,252 
Mortgagors' escrow deposits   41,303    40,216 
Borrowed funds          
Federal Home Loan Bank advances   1,317,087    1,159,190 
Subordinated Debentures   73,555    73,414 
Junior subordinated debentures, at fair value   35,137    33,959 
Total borrowed funds   1,425,779    1,266,563 
Other liabilities   70,563    72,440 
Total liabilities   5,751,145    5,544,634 
           
STOCKHOLDERS' EQUITY          
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)   -    - 
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at June 30, 2017 and December 31, 2016; 28,803,937 shares and 28,632,904 shares outstanding at June 30, 2017 and December 31, 2016, respectively)   315    315 
Additional paid-in capital   216,447    214,462 
Treasury stock, at average cost (2,726,658 shares and 2,897,691 shares at June 30, 2017 and December 31, 2016, respectively)   (51,483)   (53,754)
Retained earnings   375,388    361,192 
Accumulated other comprehensive loss, net of taxes   (6,576)   (8,362)
Total stockholders' equity   534,091    513,853 
           
Total liabilities and stockholders' equity  $6,285,236   $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  For the six months
   ended June 30,  ended June 30,
(Dollars in thousands, except per share data)  2017  2016  2017  2016
       
Interest and dividend income                    
Interest and fees on loans  $51,631   $48,413   $102,516   $95,971 
Interest and dividends on securities:                    
Interest   6,432    6,510    12,527    13,102 
Dividends   123    120    244    239 
Other interest income   129    48    282    142 
Total interest and dividend income   58,315    55,091    115,569    109,454 
                     
Interest expense                    
Deposits   9,510    8,097    18,490    16,070 
Other interest expense   5,188    5,105    10,073    10,362 
Total interest expense   14,698    13,202    28,563    26,432 
                     
Net interest income   43,617    41,889    87,006    83,022 
Provision for loan losses   -    -    -    - 
Net interest income after provision for loan losses   43,617    41,889    87,006    83,022 
                     
Non-interest income                    
Banking services fee income   1,014    973    1,888    1,949 
Net gain on sale of securities   -    2,363    -    2,363 
Net gain on sale of loans   34    3    244    344 
Net gain on sale of buildings   -    33,814    -    33,814 
Net loss from fair value adjustments   (1,159)   (1,115)   (1,537)   (2,102)
Federal Home Loan Bank of New York stock dividends   643    582    1,466    1,205 
Gain from life insurance proceeds   6    -    1,167    411 
Bank owned life insurance   807    694    1,602    1,389 
Other income   603    403    807    884 
Total non-interest income   1,948    37,717    5,637    40,257 
                     
Non-interest expense                    
Salaries and employee benefits   15,424    13,968    32,528    30,229 
Occupancy and equipment   2,654    2,352    5,150    4,722 
Professional services   1,919    2,027    3,915    4,177 
FDIC deposit insurance   503    940    829    1,844 
Data processing   1,321    1,199    2,524    2,290 
Depreciation and amortization   1,155    1,062    2,320    2,094 
Other real estate owned/foreclosure expense (income)   (96)   405    255    558 
Prepayment penalty on borrowings   -    2,082    -    2,082 
Other operating expenses   3,185    4,419    8,108    8,955 
Total non-interest expense   26,065    28,454    55,629    56,951 
                     
Income before income taxes   19,500    51,152    37,014    66,328 
                     
Provision for income taxes                    
Federal   5,576    15,203    10,325    19,950 
State and local   1,199    5,514    1,704    6,382 
Total taxes   6,775    20,717    12,029    26,332 
                     
Net income  $12,725   $30,435   $24,985   $39,996 
                     
                     
Basic earnings per common share  $0.44   $1.05   $0.86   $1.38 
Diluted earnings per common share  $0.44   $1.05   $0.86   $1.38 
Dividends per common share  $0.18   $0.17   $0.36   $0.34 

 

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  For the six months ended
   June 30,  June 30,
(In thousands)  2017  2016  2017  2016
             
Net income  $12,725   $30,435   $24,985   $39,996 
                     
Other comprehensive income, net of tax:                    
Amortization of actuarial losses, net of taxes of ($64) and ($82) for the three months ended June 30, 2017 and 2016, respectively and of ($128) and ($165) for the six months ended June 30, 2017 and 2016, respectively.   87    110    174    219 
Amortization of prior service credits, net of taxes of $5 for each of the three months ended June 30, 2017 and 2016, respectively and $9 and $10 for the six months ended June 30, 2017 and 2016, respectively.   (6)   (7)   (13)   (13)
Reclassification adjustment for net gains included in income, net of taxes of $1,013 for the three and six months ended June 30, 2016.   -    (1,350)   -    (1,350)
Net unrealized gains on securities, net of taxes of ($436) and $2,252 for the three months ended June 30, 2017 and 2016, respectively and of ($1,247) and ($7,280) for the six months ended June 30, 2017 and 2016, respectively.   601    3,024    1,749    9,794 
Net unrealized loss on cash flow hedge, net of taxes of $90 for the three and six months ended June 30, 2017.   (124)   -    (124)   - 
                     
Total other comprehensive income, net of tax   558    1,777    1,786    8,650 
                     
Comprehensive income  $13,283   $32,212   $26,771   $48,646 

 

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

 

- 3 -
 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the six months ended
   June 30,
(Dollars in thousands)  2017  2016
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $24,985   $39,996 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization of bank premises and equipment   2,320    2,094 
Amortization of premium, net of accretion of discount   3,657    4,099 
Net loss from fair value adjustments   1,537    2,102 
Net gain from sale of loans   (244)   (344)
Net gain from sale of securities   -    (2,363)
Net gain from sale of buildings   -    (33,814)
Net (gain) loss from sale of OREO   (50)   897 
Income from bank owned life insurance   (1,602)   (1,389)
Gain from life insurance proceeds   (1,167)   (411)
Stock-based compensation expense   4,190    3,673 
Deferred compensation   (1,930)   (2,629)
Excess tax benefit from stock-based payment arrangements   -    (421)
Deferred income tax provision   1,005    83 
(Increase) decrease in other assets   (21)   3,857 
Increase in other liabilities   4    16,102 
Net cash provided by operating activities   32,684    31,532 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of bank premises and equipment   (2,351)   (1,460)
Net purchases of Federal Home Loan Bank of New York shares   (7,457)   (11,129)
Purchases of securities held-to-maturity   (8,030)   (27,705)
Proceeds from maturities of securities held-to-maturity   13,330    5,475 
Purchases of securities available for sale   (40,641)   (61,615)
Proceeds from sales and calls of securities available for sale   27,500    66,996 
Proceeds from maturities and prepayments of securities available for sale   38,161    53,856 
Proceeds from bank owned life insurance   3,911    2,236 
Proceeds from sale of buildings   -    34,332 
Net originations of loans   (201,438)   (160,139)
Purchases of loans   (58,431)   (137,994)
Proceeds from sale of real estate owned   583    853 
Proceeds from sale of loans   21,575    8,360 
Net cash used in investing activities   (213,288)   (227,934)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in non-interest bearing deposits   16,139    47,643 
Net increase (decrease) in interest-bearing deposits   31,629    (8,448)
Net increase in mortgagors' escrow deposits   1,087    9,061 
Net proceeds from short-term borrowed funds   66,500    215,000 
Proceeds from long-term borrowings   173,066    150,000 
Repayment of long-term borrowings   (82,049)   (190,637)
Purchases of treasury stock   (2,599)   (9,085)
Excess tax benefit from stock-based payment arrangements   -    421 
Proceeds from issuance of common stock upon exercise of stock options   -    127 
Cash dividends paid   (10,487)   (9,878)
Net cash provided by financing activities   193,286    204,204 
           
Net increase in cash and cash equivalents   12,682    7,802 
Cash and cash equivalents, beginning of period   35,857    42,363 
Cash and cash equivalents, end of period  $48,539   $50,165 
           
SUPPLEMENTAL CASHFLOW DISCLOSURE          
Interest paid  $27,840   $28,250 
Income taxes paid   10,646    9,270 
Taxes paid if excess tax benefits were not tax deductible   10,646    9,691 
Non-cash activities:          
Loans transferred to Other Real Estate Owned   -    486 
Loans held for investment transferred to loans available for sale   30,565    - 

 

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


- 4 -
 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the six months ended June 30, 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   24,985    -    -    24,985    -    - 
Award of common shares released from Employee Benefit Trust (111,470 shares)   2,363    -    2,363    -    -    - 
Vesting of restricted stock unit awards (258,165 shares)   -    -    (4,562)   (262)   4,824    - 
Exercise of stock options (4,400 shares)   -    -    (6)   (40)   46    - 
Stock-based compensation expense   4,190    -    4,190    -    -    - 
Purchase of treasury shares (10,000 shares)   (278)   -    -    -    (278)   - 
Repurchase of shares to satisfy tax obligation (80,303 shares)   (2,321)   -    -    -    (2,321)   - 
Dividends on common stock ($0.36 per share)   (10,487)   -    -    (10,487)   -    - 
Other comprehensive income   1,786    -    -    -    -    1,786 
Balance at June 30, 2017  $534,091   $315   $216,447   $375,388   $(51,483)  $(6,576)
                               
                               
Balance at December 31, 2015  $473,067   $315   $210,652   $316,530   $(48,868)  $(5,562)
Net Income   39,996    -    -    39,996    -    - 
Award of common shares released from Employee                              
Benefit Trust (134,005 shares)   1,912    -    1,912    -    -    - 
Vesting of restricted stock unit awards (245,111 shares)   -    -    (4,047)   (396)   4,443    - 
Exercise of stock options (27,945 shares)   127    -    2    (34)   159    - 
Stock-based compensation expense   3,673    -    3,673    -    -    - 
Stock-based income tax benefit   421    -    421    -    -    - 
Purchase of treasury shares (378,695 shares)   (7,492)   -    -    -    (7,492)   - 
Repurchase of shares to satisfy tax obligation (77,212 shares)   (1,593)   -    -    -    (1,593)   - 
Dividends on common stock ($0.34 per share)   (9,878)   -    -    (9,878)   -    - 
Other comprehensive income   8,650    -    -    -    -    8,650 
Balance at June 30, 2016  $508,883   $315   $212,613   $346,218   $(53,351)  $3,088 

 

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

 

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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 that 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.

 

When necessary, certain reclassifications were made to prior-year amounts to conform to the current-year presentation.

 

 

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  For the six months ended
   June 30,  June 30,
   2017  2016  2017  2016
   (In thousands, except per share data)
Net income, as reported  $12,725   $30,435   $24,985   $39,996 
Divided by:                    
Weighted average common shares outstanding   29,135    29,022    29,077    29,059 
Weighted average common stock equivalents   1    12    3    14 
Total weighted average common shares outstanding and common stock equivalents   29,136    29,034    29,080    29,073 
                     
Basic earnings per common share  $0.44   $1.05   $0.86   $1.38 
Diluted earnings per common share (1)  $0.44   $1.05   $0.86   $1.38 
Dividend payout ratio   40.9%   16.2%   41.9%   24.6%

 

(1)For the three and six months ended June 30, 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 June 30, 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 table summarizes the Company’s portfolio of securities held-to-maturity at June 30, 2017:

 

         Gross  Gross
   Amortized     Unrealized  Unrealized
   Cost  Fair Value  Gains  Losses
   (In thousands)
Securities held-to-maturity:                    
Municipals  $24,451   $22,777   $-   $1,674 
                     
Total other securities   24,451    22,777    -    1,674 
                     
FNMA   7,983    7,816    -    167 
                     
Total mortgage-backed securities   7,983    7,816    -    167 
Total  $32,434   $30,593   $-   $1,841 

 

 

- 7 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

The following table summarizes the Company’s portfolio of securities available for sale at June 30, 2017:

 

         Gross  Gross
   Amortized     Unrealized  Unrealized
   Cost  Fair Value  Gains  Losses
Securities available for sale:  (In thousands)
Corporate  $110,000   $103,191   $-   $6,809 
Municipals   123,606    126,596    2,990    - 
Mutual funds   21,563    21,563    -    - 
Collateralized loan obligations   58,379    58,899    520    - 
Other   7,444    7,444    -    - 
Total other securities   320,992    317,693    3,510    6,809 
REMIC and CMO   409,049    408,926    2,248    2,371 
GNMA   1,153    1,248    95    - 
FNMA   105,011    104,736    540    815 
FHLMC   5,131    5,102    24    53 
Total mortgage-backed securities   520,344    520,012    2,907    3,239 
Total  $841,336   $837,705   $6,417   $10,048 

 

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

 

         Gross  Gross
   Amortized     Unrealized  Unrealized
   Cost  Fair Value  Gains  Losses
Securities available for sale:  (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  $868,009   $861,381   $5,091   $11,719 

 

Mortgage-backed securities shown in the table above include one private issue CMO that is collateralized by commercial real estate mortgages with an amortized cost and market value of $0.1 million and $0.2 million at June 30, 2017 and December 31, 2016, respectively.

 

- 8 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The corporate securities held by the Company at June 30, 2017 and December 31, 2016 are issued by U.S. banking institutions.

 

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 June 30, 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.

 

   Amortized   
Securities held-to-maturity:  Cost  Fair Value
   (In thousands)
       
Due in one year or less  $2,585   $2,585 
Due after ten years   21,866    20,192 
           
Total other securities   24,451    22,777 
Mortgage-backed securities   7,983    7,816 
           
Total  $32,434   $30,593 

 

   Amortized   
Securities available for sale:  Cost  Fair Value
   (In thousands)
       
Due in one year or less  $-   $- 
Due after one year through five years   1,751    1,762 
Due after five years through ten years   123,872    120,810 
Due after ten years   173,806    173,558 
Mutual funds   21,563    21,563 
           
Total other securities   320,992    317,693 
Mortgage-backed securities   520,344    520,012 
           
Total  $841,336   $837,705 

 

 

 

- 9 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables show the Company’s 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 dates indicated:

 

   At June 30, 2017
      Total  Less than 12 months  12 months or more
         Unrealized     Unrealized     Unrealized
   Count  Fair Value  Losses  Fair Value  Losses  Fair Value  Losses
   (Dollars in thousands)
                      
Held-to-maturity securities                                   
Municipals   1   $20,192   $1,674   $20,192   $1,674   $-   $- 
Total other securities   1    20,192    1,674    20,192    1,674    -    - 
                                    
FNMA   1    7,816    167    7,816    167    -    - 
Total mortgage-backed securities   1    7,816    167    7,816    167    -    - 
Total   2   $28,008   $1,841   $28,008   $1,841   $-   $- 
                                    
                                    
Available for sale securities                                   
Corporate   14   $103,191   $6,809   $9,475   $525   $93,716   $6,284 
Total other securities   14    103,191    6,809    9,475    525    93,716    6,284 
                                    
REMIC and CMO   31    188,993    2,371    176,158    1,815    12,835    556 
FNMA   14    52,826    815    47,153    605    5,673    210 
FHLMC   1    3,981    53    3,981    53    -    - 
Total mortgage-backed securities   46    245,800    3,239    227,292    2,473    18,508    766 
Total   60   $348,991   $10,048   $236,767   $2,998   $112,224   $7,050 

 

 

- 10 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

   At December 31, 2016
      Total  Less than 12 months  12 months or more
         Unrealized     Unrealized     Unrealized
   Count  Fair Value  Losses  Fair Value  Losses  Fair Value  Losses
   (Dollars in thousands)
                      
Held-to-maturity securities                                   
Municipals   1   $19,538   $2,327   $19,538   $2,327   $-   $- 
Total   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   73   $426,979   $11,719   $332,315   $5,191   $94,664   $6,528 

 

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 June 30, 2017 and December 31, 2016. The unrealized losses in FNMA securities held-to-maturity at June 30, 2017 were caused by movements in interest rates. The unrealized losses in municipal securities held-to-maturity at June 30, 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 June 30, 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 June 30, 2017 and December 31, 2016.

 

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold available for sale securities totaling $64.6 million during the three and six months ended June 30, 2016. The Company did not sell any securities available for sale during the three and six months ended June 30, 2017.

 

- 11 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   For the three months ended  For the six months ended
   June 30,  June 30,
   2017  2016  2017  2016
   (In thousands)
Gross gains from the sale of securities  $-   $2,370   $-   $2,370 
Gross losses from the sale of securities   -    (7)   -    (7)
                     
Net gains from the sale of securities  $-   $2,363   $-   $2,363 

 

 

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.

 

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.

 

- 12 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. 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 June 30, 2017, we utilized recent third party appraisals of the collateral to measure impairment for $41.9 million, or 82.4%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $8.9 million, or 17.6%, of collateral dependent impaired loans.

 

The Company may restructure a loan to enable a borrower experiencing financial difficulties to continue making payments when it is deemed to be in the Company’s best long-term interest. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. We classify these loans as Troubled Debt Restructured (“TDR”).

 

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

 

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR, which is collateral dependent, the fair value of the collateral. At June 30, 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.

 

- 13 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   For the three and six months ended
   June 30, 2017
(Dollars in thousands)  Number  Balance  Modification description
                
Taxi medallion   5   $4,289    Three received a below market
interest rate and a loan amortization extension, while two received an amortization extension. 
 
Total   5   $4,289      

 

 

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

 

The recorded investment of the loans modified and classified as TDR presented in the tables above, were unchanged as there was no principal forgiven in this modification.

 

 

- 14 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   June 30, 2017  December 31, 2016
   Number  Recorded  Number  Recorded
(Dollars in thousands)  of contracts  investment  of contracts  investment
             
Multi-family residential   9   $2,546    9   $2,572 
Commercial real estate   2    2,037    2    2,062 
One-to-four family - mixed-use property   5    1,778    5    1,800 
One-to-four family - residential   3    581    3    591 
Taxi medallion   17    13,870    12    9,735 
Commercial business and other   2    566    2    675 
                     
Total performing troubled debt restructured   38   $21,378    33   $17,435 

 

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

 

   June 30, 2017  December 31, 2016
   Number  Recorded  Number  Recorded
(Dollars in thousands)  of contracts  investment  of contracts  investment
             
Multi-family residential   1   $383    1   $396 
                     
Total troubled debt restructurings that subsequently defaulted   1   $383    1   $396 

 

During the three and six months ended June 30, 2017 and 2016 there were no TDR loans transferred to non-performing status.

 

- 15 -

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 dates indicated:

 

   June 30,  December 31,
(In thousands)  2017  2016
       
Loans ninety days or more past due and still accruing:          
One-to-four family - mixed-use property  $-   $386 
Construction   602    - 
Taxi medallion   727    - 
Total   1,329    386 
           
Non-accrual mortgage loans:          
Multi-family residential   1,537    1,837 
Commercial real estate   1,948    1,148 
One-to-four family - mixed-use property   2,971    4,025 
One-to-four family - residential   7,616    8,241 
Total   14,072    15,251 
           
Non-accrual non-mortgage loans:          
Small Business Administration   53    1,886 
Taxi medallion   -    3,825 
Commercial business and other   5    68 
Total   58    5,779 
           
Total non-accrual loans   14,130    21,030 
           
Total non-performing loans  $15,459   $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  For the six months ended
   June 30,  June 30,
   2017  2016  2017  2016
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $433   $476   $848   $948 
Less: Interest income included in the results of operations   141    101    268    213 
Total foregone interest  $292   $375   $580   $735 

 

 

- 16 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   June 30, 2017
         Greater         
   30 - 59 Days  60 - 89 Days  than  Total Past      
(In thousands)  Past Due  Past Due  90 Days  Due  Current  Total Loans
                   
Multi-family residential  $4,380   $417   $1,537   $6,334   $2,237,309   $2,243,643 
Commercial real estate   1,106    1,671    1,948    4,725    1,344,909    1,349,634 
One-to-four family - mixed-use property   1,807    675    2,971    5,453    551,453    556,906 
One-to-four family - residential   789    322    7,426    8,537    172,676    181,213 
Co-operative apartments   -    -    -    -    7,069    7,069 
Construction loans   -    576    602    1,178    15,664    16,842 
Small Business Administration   -    -    -    -    10,591    10,591 
Taxi medallion   -    -    727    727    17,576    18,303 
Commercial business and other   4    -    5    9    644,253    644,262 
Total  $8,086   $3,661   $15,216   $26,963   $5,001,500   $5,028,463 

 

   December 31, 2016
         Greater         
   30 - 59 Days  60 - 89 Days  than  Total Past      
(In thousands)  Past Due  Past Due  90 Days  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 

 

 

- 17 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

June 30, 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  $5,907   $4,485   $2,691   $979   $94   $315   $2,213   $4,712   $815   $22,211 
Charge-off's   (148)   (4)   (1)   (170)   -    (24)   -    (3)   -    (350)
Recoveries   201    -    68    -    -    10    -    17    -    296 
Provision (Benefit)   (43)   207    (190)   181    36    5    117    (58)   (255)   - 
Ending balance  $5,917   $4,688   $2,568   $990   $130   $306   $2,330   $4,668   $560   $22,157 

 

 

June 30, 2016
(In thousands)  Multi-family
residential
  Commercial
real estate
  One-to-four
family -
mixed-use
property
  One-to-four
family -
residential
  Construction
loans
  Small Business
Administration
  Taxi
medallion
  Commercial
business and
other
  Unallocated  Total
                               
Allowance for credit losses:                                                  
Beginning balance  $6,298   $4,201   $3,507   $1,042   $55   $269   $335   $4,591   $1,695   $21,993 
Charge-off's   (23)   -    (54)   (8)   -    (1)   -    (15)   -    (101)
Recoveries   206    -    18    1    -    43    -    38    -    306 
Provision (Benefit)   (304)   244    (145)   9    20    263    707    55    (849)   - 
Ending balance  $6,177   $4,445   $3,326   $1,044   $75   $574   $1,042   $4,669   $846   $22,198 

 

 

- 18 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

June 30, 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   (162)   (4)   (35)   (170)   -    (89)   (54)   (15)   -    (529)
Recoveries   231    68    68    -    -    49    -    41    -    457 
Provision (Benefit)   (75)   137    (368)   145    38    (135)   141    150    (33)   - 
Ending balance  $5,917   $4,688   $2,568   $990   $130   $306   $2,330   $4,668   $560   $22,157 

 

 

June 30, 2016
(In thousands)  Multi-family
residential
  Commercial
real estate
  One-to-four
family -
mixed-use
property
  One-to-four
family -
residential
  Construction
loans
  Small Business
Administration
  Taxi
medallion
  Commercial
business and
other
  Unallocated  Total
                               
Allowance for credit losses:                                                  
Beginning balance  $6,718   $4,239   $4,227   $1,227   $50   $262   $343   $4,469   $-   $21,535 
Charge-off's   (65)   -    (68)   (74)   -    (1)   -    (40)   -    (248)
Recoveries   219    -    205    366    -    74    -    47    -    911 
Provision (Benefit)   (695)   206    (1,038)   (475)   25    239    699    193    846    - 
Ending balance  $6,177   $4,445   $3,326   $1,044   $75   $574   $1,042   $4,669   $846   $22,198 

 

 

- 19 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

June 30, 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  $2,243,643   $1,349,634   $556,906   $181,213   $7,069   $16,842   $10,591   $18,303   $644,262   $-   $5,028,463 
Ending balance: individually
evaluated for impairment
  $5,102   $7,552   $6,708   $10,806   $-   $602   $150   $18,303   $2,508   $-   $51,731 
Ending balance: collectively evaluated for impairment   $2,238,541   $1,342,082   $550,198   $170,407   $7,069   $16,240   $10,441   $-   $641,754   $-   $4,976,732 
                                                        
Allowance for credit losses:                                                       
Ending balance: individually evaluated for impairment   $328   $157   $214   $57   $-   $-   $-   $2,330   $9   $-   $3,095 
Ending balance: collectively evaluated for impairment  $5,589   $4,531   $2,354   $933   $-   $130   $306   $-   $4,659   $560   $19,062 

 

 

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 

 

 

- 20 -

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 dates indicated:

 

   June 30, 2017  December 31, 2016
      Unpaid        Unpaid   
   Recorded  Principal  Related  Recorded  Principal  Related
   Investment  Balance  Allowance  Investment  Balance  Allowance
   (In thousands)
With no related allowance recorded:                              
Mortgage loans:                              
Multi-family residential  $2,412   $2,695   $-   $3,660   $3,796   $- 
Commercial real estate   5,516    5,543    -    4,489    4,516    - 
One-to-four family mixed-use property   5,459    5,833    -    6,435    6,872    - 
One-to-four family residential   10,384    11,649    -    9,560    11,117    - 
Construction   602    602    -    -    -    - 
Non-mortgage loans:                              
Small Business Administration   150    236    -    416    509    - 
Taxi medallion   3,746    3,746    -    2,334    2,476    - 
Commercial business and other   2,127    2,496    -    2,072    2,443    - 
                               
Total loans with no related allowance recorded   30,396    32,800    -    28,966    31,729    - 
                               
With an allowance recorded:                              
Mortgage loans:                              
Multi-family residential   2,690    2,705    328    2,263    2,263    232 
Commercial real estate   2,036    2,037    157    2,062    2,062    179 
One-to-four family mixed-use property   1,249    1,249    214    2,374    2,376    417 
One-to-four family residential   422    422    57    429    429    60 
Non-mortgage loans:                              
Small Business Administration   -    -    -    1,521    1,909    90 
Taxi medallion   14,557    14,557    2,330    13,948    13,948    2,236 
Commercial business and other   381    381    9    420    420    12 
                               
Total loans with an allowance recorded   21,335    21,351    3,095    23,017    23,407    3,226 
                               
Total Impaired Loans:                              
Total mortgage loans  $30,770   $32,735   $756   $31,272   $33,431   $888 
                               
Total non-mortgage loans  $20,961   $21,416   $2,339   $20,711   $21,705   $2,338 

 

 

- 21 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our average recorded investment and interest income recognized for impaired loans for the three months ended:

 

   June 30, 2017  June 30, 2016
   Average  Interest  Average  Interest
   Recorded  Income  Recorded  Income
   Investment  Recognized  Investment  Recognized
   (In thousands)
With no related allowance recorded:                    
Mortgage loans:                    
Multi-family residential  $2,730   $22   $5,920   $33 
Commercial real estate   6,438    59    5,077    45 
One-to-four family mixed-use property   5,560    41    8,928    41 
One-to-four family residential   10,263    30    10,649    25 
Construction   602    -    570    7 
Non-mortgage loans:                    
Small Business Administration   160    2    257    3 
Taxi medallion   4,352    25    -    - 
Commercial business and other   2,187    43    2,313    46 
                     
Total loans with no related allowance recorded   32,292    222    33,714    200 
                     
With an allowance recorded:                    
Mortgage loans:                    
Multi-family residential   2,471    50    2,289    29 
Commercial real estate   2,043    24    2,222    24 
One-to-four family mixed-use property   1,450    16    2,617    34 
One-to-four family residential   424    4    389    4 
Non-mortgage loans:                    
Small Business Administration   -    -    413    10 
Taxi medallion   14,216    50    4,237    44 
Commercial business and other   391    6    1,225    7 
                     
Total loans with an allowance recorded   20,995    150    13,392    152 
                     
Total Impaired Loans:                    
Total mortgage loans  $31,981   $246   $38,661   $242 
                     
Total non-mortgage loans  $21,306   $126   $8,445   $110 

 

 

- 22 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our average recorded investment and interest income recognized for impaired loans for the six months ended:

 

   June 30, 2017  June 30, 2016
   Average  Interest  Average  Interest
   Recorded  Income  Recorded  Income
   Investment  Recognized  Investment  Recognized
   (In thousands)
With no related allowance recorded:                    
Mortgage loans:                    
Multi-family residential  $3,040   $45   $5,861   $67 
Commercial real estate   5,788    154    4,655    90 
One-to-four family mixed-use property   5,851    78    9,313    88 
One-to-four family residential   10,028    56    11,184    52 
Construction   401    7    713    14 
Non-mortgage loans:                    
Small Business Administration   245    4    263    6 
Taxi medallion   3,679    55    -    - 
Commercial business and other   2,148    87    2,436    93 
                     
Total loans with no related allowance recorded   31,180    486    34,425    410 
                     
With an allowance recorded:                    
Mortgage loans:                    
Multi-family residential   2,401    79    2,294    58 
Commercial real estate   2,049    48    2,272    49 
One-to-four family mixed-use property   1,758    34    2,660    68 
One-to-four family residential   425    8    373    7 
Non-mortgage loans:                    
Small Business Administration   507    -    287    19 
Taxi medallion   14,126    93    3,531    88 
Commercial business and other   401    12    1,494    14 
                     
Total loans with an allowance recorded   21,667    274    12,911    303 
                     
Total Impaired Loans:                    
Total mortgage loans  $31,741   $509   $39,325   $493 
                     
Total non-mortgage loans  $21,106   $251   $8,011   $220 

 

 

- 23 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

In accordance with our policy and the current regulatory guidelines, we designate loans as “Special Mention,” which are considered “Criticized Loans,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Loans.” If a loan does not fall within one of the previous mentioned categories, then the loan would be considered “Pass.” 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.

 

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

 

   June 30, 2017
(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
                
Multi-family residential  $8,312   $2,554   $-   $-   $10,866 
Commercial real estate   2,295    5,516    -    -    7,811 
One-to-four family - mixed-use property   3,050    4,929    -    -    7,979 
One-to-four family - residential   843    10,225    -    -    11,068 
Construction loans   576    602    -    -    1,178 
Small Business Administration   525    107    -    -    632 
Taxi medallion   -    18,303    -    -    18,303 
Commercial business and other   8,772    2,508    -    -    11,280 
Total loans  $24,373   $44,744   $-   $-   $69,117 

 

   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 $77.1 million and $243.0 million, respectively, at June 30, 2017.

 

- 24 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

6.             Loans held for sale

 

Loans held for sale are carried at the lower of cost or estimated fair value. The Bank had $30.6 million in loans held for sale at June 30, 2017. The Bank did not have any loans held for sale at December 31, 2016.

 

The Bank has implemented a strategy of selling certain delinquent and non-performing loans. Once the Bank 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. For delinquent and non-performing loan sales, terms of sale include cash due upon the closing of the sale, no contingencies or recourse to the Bank and servicing is released to the buyer.

 

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

 

   For the three months ended
   June 30, 2017
         Net (charge-offs)   
(Dollars in thousands)  Loans sold  Proceeds  recoveries  Net gain
                     
Commercial real estate   1   $335   $(4)  $- 
                     
Total (1)   1   $335   $(4)  $- 

 

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

 

   For the six months ended
   June 30, 2017
         Net (charge-offs)   
(Dollars in thousands)  Loans sold  Proceeds  recoveries  Net gain
                     
One-to-four family - mixed-use property   5   $1,790   $(33)  $28 
Commercial real estate   1    335    (4)   - 
                     
Total (2)   6   $2,125   $(37)  $28 

 

 

- 25 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

   For the six months ended
   June 30, 2016
         Net (charge-offs)   
(Dollars in thousands)  Loans sold  Proceeds  recoveries  Net gain
                     
Multi-family residential   6   $2,049   $(8)  $2 
Commercial real estate   2    192    -    - 
One-to-four family - mixed-use property   7    2,585    -    23 
                     
Total (3)   15   $4,826   $(8)  $25 

 

(1)Does not include the sale of four performing Small Business Administration loans for proceeds totaling $1.5 million, resulting in a net gain totaling $69,000 and the sale of a participating interest in seven mortgage loans for proceeds totaling $14.5 million, resulting in a net loss of $35,000 during the three months ended June 30, 2017.

 

(2)Does not include the sale of seven performing Small Business Administration loans for proceeds totaling $4.9 million, resulting in a net gain totaling $250,000 and the sale of a participating interest in seven mortgage loans for proceeds totaling $14.5 million, resulting in a net loss of $35,000 during the six months ended June 30, 2017.

 

(3)Does not include the sale of six performing Small Business Administration loans for proceeds totaling $3.5 million during the six months ended June 30, 2016. These loans were sold for a net gain of $0.3 million.

 

 

7.                  Other Real Estate Owned

 

The following are changes in OREO during the periods indicated:

 

   For the three months ended  For the six months ended
   June 30,  June 30,
   2017  2016  2017  2016
   (In thousands)
             
Balance at beginning of period  $-   $4,602   $533   $4,932 
Acquisitions   -    -    -    486 
Write-down of carrying value   -    (934)   -    (934)
Sales   -    -    (533)   (816)
                     
Balance at end of period (1)  $-   $3,668   $-   $3,668 

 

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

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   For the three months ended  For the six months ended
   June 30,  June 30,
   2017  2016  2017  2016
   (In thousands)
             
Gross gains  $-   $-   $50   $37 
Write-down of carrying value   -    (934)   -    (934)
                     
Total net loss (gain)  $-   $(934)  $50   $(897)

 

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure or an in-substance repossession. During the three and six months ended June 30, 2017, we did not foreclose on any consumer mortgages through in-substance repossession. We did not hold any foreclosed residential real estate properties at June 30, 2017. At December 31, 2016, we held one foreclosed residential real estate property for $0.5 million. Included within net loans as of June 30, 2017 and December 31, 2016 was a recorded investment of $9.9 million and $11.4 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

 

 

8.             Stock-Based Compensation

 

For the three months ended June 30, 2017 and 2016, the Company’s net income, as reported, includes $1.0 million and $0.6 million, respectively, of stock-based compensation costs and $0.4 million and $0.2 million, respectively, of income tax benefits related to the stock-based compensation plans in each of the periods. For the six months ended June 30, 2017 and 2016, the Company’s net income, as reported, includes $4.1 million and $3.6 million, respectively, of stock-based compensation costs and $1.2 million and $1.4 million, respectively, of income tax benefits related to the stock-based compensation plans. The Company did not issue any restricted stock units during the three months ended June 30, 2017 and 2016. During the six months ended June 30, 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 June 30, 2017, the Company had 1,200 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 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) became effective on May 20, 2014 after adoption by the Board of Directors and approval by the stockholders. The 2014 Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can, but need not, be structured so as to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended. On May 31, 2017, stockholders approved an amendment to the 2014 Omnibus Plan (the “Amendment”) authorizing an additional 672,000 shares available for future issuance. In addition, to increasing the number of shares for future grants, the Amendment eliminates, in the case of stock options and SARs, the ability to recycle shares used to satisfy the exercise price or taxes for such awards. No other amendments to the 2014 Omnibus Plan were made. Including the additional shares authorized from the Amendment, 944,676 shares are available for future issuance under the 2014 Omnibus Plan at June 30, 2017.

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Company’s restricted stock unit (“RSU”) awards at or for the six months ended June 30, 2017:

 

      Weighted-Average
      Grant-Date
   Shares  Fair Value
       
Non-vested at December 31, 2016   488,779   $18.99 
Granted   276,900    28.21 
Vested   (244,272)   21.93 
Forfeited   (21,360)   23.30 
Non-vested at June 30, 2017   500,047   $22.48 
           
Vested but unissued at June 30, 2017   270,017   $22.33 

 

As of June 30, 2017, there was $9.7 million of total unrecognized compensation cost related to RSU awards granted. That cost is expected to be recognized over a weighted-average period of 3.3 years. The total fair value of awards vested for the three months ended June 30, 2017 was $40,000. No awards vested during the three months ended June 30, 2016. The total fair value of awards vested for the six months ended June 30, 2017 and 2016 was $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, and the weighted average grant date fair value for options granted, during the three and six months ended June 30, 2017 and 2016 are provided in the following table:

 

   For the three months ended  For the six months ended
   June 30,  June 30,
(In thousands)  2017  2016  2017  2016
Proceeds from stock options exercised  $-   $109   $-   $127 
Fair value of shares received upon exercise of stock options   37    22    37    350 
Tax benefit (expense) related to stock options exercised   39    14    39    (2)
Intrinsic value of stock options exercised   96    69    96    112 

 

Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing plan for officers who have achieved the designated level and completed one year of service. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Phantom Stock Plan at or for the six months ended June 30, 2017:

 

Phantom Stock Plan  Shares  Fair Value
       
Outstanding at December 31, 2016   89,339   $29.39 
Granted   7,356    27.25 
Forfeited   (10)   28.95 
Distributions   (206)   28.93 
Outstanding at June 30, 2017   96,479   $28.19 
Vested at June 30, 2017   96,146   $28.19 

 

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $144,000 and ($139,000) for the three months ended June 30, 2017 and 2016, respectively. The total fair value of the distributions from the Phantom Stock Plan was less than $1,000 for the three months ended June 30, 2017. There were no distributions for the three months ended June 30, 2016.

 

For the six months ended June 30, 2017 and 2016, the Company recorded stock-based compensation benefit for the Phantom Stock Plan of $66,000 and $109,000, respectively. The total fair value of the distributions from the Phantom Stock Plan during the six months ended June 30, 2017 and 2016 was $6,000 and $28,000, respectively.

 

 

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.

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

   Three months ended  Six months ended
   June 30,  June 30,
(In thousands)  2017  2016  2017  2016
             
Employee Pension Plan:                    
Interest cost  $216   $226   $432   $452 
Amortization of unrecognized loss   174    201    348    402 
Expected return on plan assets   (348)   (348)   (696)   (696)
Net employee pension expense  $42   $79   $84   $158 
                     
Outside Director Pension Plan:                    
Service cost  $10   $11   $20   $22 
Interest cost   23    24    46    48 
Amortization of unrecognized gain   (23)   (21)   (46)   (42)
Amortization of past service liability   10    10    20    20 
Net outside director pension expense  $20   $24   $40   $48 
                     
Other Postretirement Benefit Plans:                    
Service cost