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 September 30, 20162017

 

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__Yes X No

 

The number of shares of the registrant’s Common Stock outstanding as of October 31, 20162017 was 28,618,493.28,819,891.

 

TABLE OF CONTENTS

 

 PAGE
PART I — FINANCIAL INFORMATION 
ITEM 1. Financial Statements - (Unaudited)
 
Consolidated Statements of Financial Condition1
Consolidated Statements of Income2
Consolidated Statements of Comprehensive Income3
Consolidated Statements of Cash Flows4
Consolidated Statements of Changes in Stockholders’ Equity5
Notes to Consolidated Financial Statements6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations4948
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk6763
ITEM 4. Controls and Procedures6763
PART II  —  OTHER INFORMATION 
PART II—OTHER INFORMATION
ITEM 1. Legal Proceedings6864
ITEM 1A. Risk Factors6864
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds6864
ITEM 3. Defaults Upon Senior Securities6864
ITEM 4. Mine Safety Disclosures6864
ITEM 5. Other Information6864
ITEM 6. Exhibits6965
SIGNATURES7066

 

i

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

 

(Dollars in thousands, except share data) September 30,
2016		 December 31,
2015		 September 30,
2017		 December 31,
2016
ASSETS            
Cash and due from banks $47,880  $42,363  $60,161  $35,857 
Securities held-to-maturity:                
Other securities (none pledged) (fair value of $33,410 and $6,180 at September 30, 2016 and December 31, 2015, respectively)  33,274   6,180 
Mortgage-backed securities (none pledged) (fair value of $7,839 at September 30, 2017)  7,978   - 
Other securities (none pledged) (fair value of $21,542 and $35,408 at September 30, 2017 and December 31, 2016, respectively)  22,952   37,735 
Securities available for sale:                
Mortgage-backed securities (including assets pledged of $133,470 and $496,121 at September 30, 2016 and December 31, 2015, respectively; $2,166 and $2,527 at fair value pursuant to the fair value option at September 30, 2016 and December 31, 2015, respectively)  545,067   668,740 
Other securities (including assets pledged of $91,799 and none at September 30, 2016 and December 31, 2015, respectively; $28,551 and $28,205 at fair value pursuant to the fair value option at September 30, 2016 and December 31, 2015, respectively)  365,812   324,657 
Mortgage-backed securities (including assets pledged of $94,414 and $145,860 at September 30, 2017 and December 31, 2016, respectively; $1,696 and $2,016 at fair value pursuant to the fair value option at September 30, 2017 and December 31, 2016, respectively)  519,861   516,476 
Other securities (including assets pledged of $45,921 and $82,064 at September 30, 2017 and December 31, 2016, respectively; $19,712 and $28,429 at fair value pursuant to the fair value option at September 30, 2017 and December 31, 2016, respectively)  276,698   344,905 
Loans:                
Multi-family residential  2,171,289   2,055,228   2,236,173   2,178,504 
Commercial real estate  1,195,266   1,001,236   1,352,775   1,246,132 
One-to-four family ― mixed-use property  555,691   573,043   556,723   558,502 
One-to-four family ― residential  183,993   187,838   177,578   185,767 
Co-operative apartments  7,494   8,285   7,035   7,418 
Construction  11,250   7,284   15,811   11,495 
Small Business Administration  14,339   12,194   14,485   15,198 
Taxi medallion  20,536   20,881   18,165   18,996 
Commercial business and other  564,972   506,622   674,706   597,122 
Net unamortized premiums and unearned loan fees  16,447   15,368   16,925   16,559 
Allowance for loan losses  (21,795)  (21,535)  (25,269)  (22,229)
Net loans  4,719,482   4,366,444   5,045,107   4,813,464 
Interest and dividends receivable  19,833   18,937   21,076   20,228 
Bank premises and equipment, net  26,000   25,622   28,389   26,561 
Federal Home Loan Bank of New York stock  65,185   56,066   55,228   59,173 
Bank owned life insurance  115,807   115,536   131,047   132,508 
Goodwill  16,127   16,127   16,127   16,127 
Other assets  44,788   63,962   76,758   55,453 
Total assets $5,999,255  $5,704,634  $6,261,382  $6,058,487 
                
LIABILITIES                
Due to depositors:                
Non-interest bearing $320,060  $269,469  $362,509  $333,163 
Interest-bearing:                
Certificate of deposit accounts  1,384,551   1,403,302   1,404,555   1,372,115 
Savings accounts  258,058   261,748   323,186   254,283 
Money market accounts  733,361   472,489   991,706   843,370 
NOW accounts  1,296,475   1,448,695   1,308,821   1,362,484 
Total interest-bearing deposits  3,672,445   3,586,234   4,028,268   3,832,252 
Mortgagors' escrow deposits  49,276   36,844   53,671   40,216 
Borrowed funds ($27,791 and $29,018 at fair value pursuant to the fair value option at September 30, 2016 and December 31, 2015, respectively)  1,320,515   1,155,676 
Securities sold under agreements to repurchase  40,000   116,000 
Borrowed funds        
Federal Home Loan Bank advances  1,090,989   1,159,190 
Subordinated debentures  73,622   73,414 
Junior subordinated debentures, at fair value  36,071   33,959 
Total borrowed funds  1,200,682   1,266,563 
Other liabilities  84,338   67,344   76,643   72,440 
Total liabilities  5,486,634   5,231,567   5,721,773   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 September 30, 2016 and December 31, 2015; 28,632,796 shares and 28,830,558 shares outstanding at September 30, 2016 and December 31, 2015, respectively)  315   315 
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 September 30, 2017 and December 31, 2016; 28,819,891 shares and 28,632,904 shares outstanding at September 30, 2017 and December 31, 2016, respectively)  315   315 
Additional paid-in capital  213,488   210,652   216,929   214,462 
Treasury stock, at average cost (2,897,799 shares and 2,700,037 shares at September 30, 2016 and December 31, 2015, respectively)  (53,373)  (48,868)
Treasury stock, at average cost (2,710,704 shares and 2,897,691 shares at September 30, 2017 and December 31, 2016, respectively)  (51,287)  (53,754)
Retained earnings  351,942   316,530   380,316   361,192 
Accumulated other comprehensive income (loss), net of taxes  249   (5,562)
Accumulated other comprehensive loss, net of taxes  (6,664)  (8,362)
Total stockholders' equity  512,621   473,067   539,609   513,853 
                
Total liabilities and stockholders' equity $5,999,255  $5,704,634  $6,261,382  $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 nine months
 For the three months
ended September 30,		 For the nine months
ended September 30,		 ended September 30, ended September 30,
(Dollars in thousands, except per share data) 2016 2015 2016 2015 2017 2016 2017 2016
        
Interest and dividend income                                
Interest and fees on loans $49,181  $45,243  $145,152  $132,861  $53,318  $49,181  $155,834  $145,152 
Interest and dividends on securities:                                
Interest  6,173   6,508   19,275   18,366   5,850   6,173   18,377   19,275 
Dividends  121   119   360   355   30   121   274   360 
Other interest income  49   43   191   96   121   49   403   191 
Total interest and dividend income  55,524   51,913   164,978   151,678   59,319   55,524   174,888   164,978 
                                
Interest expense                                
Deposits  8,520   7,701   24,590   22,596   10,655   8,520   29,145   24,590 
Other interest expense  5,291   4,902   15,653   14,078   5,623   5,291   15,696   15,653 
Total interest expense  13,811   12,603   40,243   36,674   16,278   13,811   44,841   40,243 
        ��                       
Net interest income  41,713   39,310   124,735   115,004   43,041   41,713   130,047   124,735 
Benefit for loan losses  -   (370)  -   (1,620)
Net interest income after benefit for loan losses  41,713   39,680   124,735   116,624 
Provision for loan losses  3,266   -   3,266   - 
Net interest income after provision for loan losses  39,775   41,713   126,781   124,735 
                                
Non-interest income                                
Banking services fee income  826   778   2,775   2,560   885   826   2,773   2,775 
Net gain on sale of securities  -   103   2,363   167 
Net (loss) gain on sale of securities  (186)  -   (186)  2,363 
Net gain on sale of loans  240   306   584   355   152   240   396   584 
Net gain on sale of buildings  -   -   33,814   6,537   -   -   -   33,814 
Net loss from fair value adjustments  (823)  (1,094)  (2,925)  (921)  (1,297)  (823)  (2,834)  (2,925)
Federal Home Loan Bank of New York stock dividends  665   480   1,870   1,455   740   665   2,206   1,870 
Gain from life insurance proceeds  47   -   458   -   238   47   1,405   458 
Bank owned life insurance  707   725   2,096   2,157   816   707   2,418   2,096 
Other income  191   399   1,075   1,264   313   191   1,120   1,075 
Total non-interest income  1,853   1,697   42,110   13,574   1,661   1,853   7,298   42,110 
                                
Non-interest expense                                
Salaries and employee benefits  14,795   12,648   45,024   40,471   15,310   14,795   47,838   45,024 
Occupancy and equipment  2,576   2,443   7,298   7,791   2,502   2,576   7,652   7,298 
Professional services  1,730   1,907   5,907   5,036   1,763   1,730   5,678   5,907 
FDIC deposit insurance  536   817   2,380   2,377   499   536   1,328   2,380 
Data processing  939   1,178   3,229   3,425   1,349   939   3,873   3,229 
Depreciation and amortization  1,169   993   3,263   2,528   1,173   1,169   3,493   3,263 
Other real estate owned/foreclosure expense  273   110   831   717   121   273   376   831 
Prepayment penalty on borrowings  -   -   2,082   -   -   -   -   2,082 
Other operating expenses  4,259   3,612   13,214   11,550   3,249   4,259   11,357   13,214 
Total non-interest expense  26,277   23,708   83,228   73,895   25,966   26,277   81,595   83,228 
                                
Income before income taxes  17,289   17,669   83,617   56,303   15,470   17,289   52,484   83,617 
                                
Provision for income taxes                                
Federal  5,568   5,375   25,518   16,782   4,680   5,568   15,005   25,518 
State and local  1,087   1,286   7,469   4,946   611   1,087   2,315   7,469 
Total taxes  6,655   6,661   32,987   21,728   5,291   6,655   17,320   32,987 
                                
Net income $10,634  $11,008  $50,630  $34,575  $10,179  $10,634  $35,164  $50,630 
                                
                                
Basic earnings per common share $0.37  $0.38  $1.75  $1.18  $0.35  $0.37  $1.21  $1.75 
Diluted earnings per common share $0.37  $0.38  $1.75  $1.18  $0.35  $0.37  $1.21  $1.75 
Dividends per common share $0.17  $0.16  $0.51  $0.48  $0.18  $0.17  $0.54  $0.51 

 

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 nine months ended
 For the three months ended
September 30,		 For the nine months ended
September 30,		 September 30, September 30,
(In thousands) 2016 2015 2016 2015 2017 2016 2017 2016
                
Net income $10,634  $11,008  $50,630  $34,575  $10,179  $10,634  $35,164  $50,630 
                                
Other comprehensive income (loss), net of tax:                                
Amortization of actuarial losses, net of taxes of ($82) and ($134) for the three months ended September 30, 2016 and 2015, respectively and of ($247) and ($402) for the nine months ended September 30, 2016 and 2015, respectively.  110   173   329   518 
Amortization of prior service credits, net of taxes of $4 and $5 for the three months ended September 30, 2016 and 2015, respectively and of $14 and $15 for the nine months ended September 30, 2016 and 2015, respectively.  (7)  (6)  (20)  (19)
Reclassificaton adjustment for net gains included in income, net of taxes of $45 for the three months ended September 30, 2015 and of $1,013 and $73 for the nine months ended September 30, 2016 and 2015, respectively.  -   (58)  (1,350)  (94)
Net unrealized gains (losses) on securities, net of taxes of $2,177 and ($3,063) for the three months ended September 30, 2016 and 2015, respectively and of ($5,103) and ($2,230) for the nine months ended September 30, 2016 and 2015, respectively.  (2,942)  3,943   6,852   2,798 
Amortization of actuarial losses, net of taxes of ($64) and ($82) for the three months ended September 30, 2017 and 2016, respectively and of ($192) and ($247) for the nine months ended September 30, 2017 and 2016, respectively.  88   110   262   329 
Amortization of prior service credits, net of taxes of $5 and $4 for the three months ended September 30, 2017 and 2016, respectively and $14 for each of the nine months ended September 30, 2017 and 2016.  (7)  (7)  (20)  (20)
Reclassification adjustment for net gains included in income, net of taxes of ($78) for the three and nine months ended September 30, 2017 and $1,013 for the nine months ended September 30, 2016.  108   -   108   (1,350)
Net unrealized (losses) gains on securities, net of taxes of $241 and $2,177 for the three months ended September 30, 2017 and 2016, respectively and of ($1,006) and ($5,103) for the nine months ended September 30, 2017 and 2016, respectively.  (333)  (2,942)  1,416   6,852 
Net unrealized gain (loss) on cash flow hedges, net of taxes of ($41) and $49 for the three and nine months ended September 30, 2017, respectively.  56   -   (68)  - 
                
                                
Total other comprehensive income (loss), net of tax  (2,839)  4,052   5,811   3,203   (88)  (2,839)  1,698   5,811 
                                
Comprehensive income $7,795  $15,060  $56,441  $37,778  $10,091  $7,795  $36,862  $56,441 

 

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 nine months ended
  September 30,
(In thousands) 2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income $35,164  $50,630 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  3,266   - 
Depreciation and amortization of bank premises and equipment  3,493   3,263 
Amortization of premium, net of accretion of discount  5,716   6,344 
Net loss from fair value adjustments  2,834   2,925 
Net gain from sale of loans  (396)  (584)
Net loss (gain) from sale of securities  186   (2,363)
Net gain from sale of buildings  -  ��(33,814)
Net (gain) loss from sale of OREO  (50)  1,726 
Income from bank owned life insurance  (2,418)  (2,096)
Gain from life insurance proceeds  (1,405)  (458)
Stock-based compensation expense  5,092   4,169 
Deferred compensation  (3,322)  (3,140)
Excess tax benefit from stock-based payment arrangements  -   (470)
Deferred income tax benefit  (1,806)  (1,228)
Increase in other liabilities  6,810   7,680 
(Increase) decrease in other assets  (68)  4,823 
Net cash provided by operating activities  53,096   37,407 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of bank premises and equipment  (5,321)  (4,159)
Net redemptions (purchases) of Federal Home Loan Bank of New York shares  3,945   (9,119)
Purchases of securities held-to-maturity  (8,030)  (35,705)
Proceeds from maturities of securities held-to-maturity  14,830   8,475 
Purchases of securities available for sale  (152,121)  (59,678)
Proceeds from sales and calls of securities available for sale  155,999   66,996 
Proceeds from maturities and prepayments of securities available for sale  60,573   85,829 
Proceeds from bank owned life insurance  4,646   2,236 
Proceeds from sale of buildings  -   34,332 
Net originations of loans  (234,227)  (210,506)
Purchases of loans  (75,832)  (137,994)
Proceeds from sale of real estate owned  583   853 
Proceeds from sale of loans  54,990   11,499 
Net cash used in investing activities  (179,965)  (246,941)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Net increase in non-interest bearing deposits  29,346   50,591 
Net increase in interest-bearing deposits  195,552   85,616 
Net increase in mortgagors' escrow deposits  13,455   12,432 
Net (repayments) proceeds from short-term borrowed funds  (43,500)  150,000 
Proceeds from long-term borrowings  180,000   200,000 
Repayment of long-term borrowings  (205,049)  (260,301)
Purchases of treasury stock  (2,902)  (9,102)
Excess tax benefit from stock-based payment arrangements  -   470 
Proceeds from issuance of common stock upon exercise of stock options  -   132 
Cash dividends paid  (15,729)  (14,787)
Net cash provided by financing activities  151,173   215,051 
         
Net increase in cash and cash equivalents  24,304   5,517 
Cash and cash equivalents, beginning of period  35,857   42,363 
Cash and cash equivalents, end of period $60,161  $47,880 
         
SUPPLEMENTAL CASHFLOW DISCLOSURE        
Interest paid $42,543  $39,792 
Income taxes paid  16,906   28,610 
Taxes paid if excess tax benefits were not tax deductible  16,906   29,080 
Non-cash activities:        
Securities purchased not yet settled  -   2,000 
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 Cash Flows

(Unaudited)

  For the nine months ended
September 30,
(Dollars in thousands) 2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $50,630  $34,575 
Adjustments to reconcile net income to net cash provided by operating activities:        
Benefit for loan losses  -   (1,620)
Depreciation and amortization of bank premises and equipment  3,263   2,528 
Amortization of premium, net of accretion of discount  6,344   6,804 
Net (gain) loss from fair value adjustments  2,925   921 
Net gain from sale of loans  (584)  (355)
Net gain from sale of securities  (2,363)  (167)
Net gain from sale of buildings  (33,814)  (6,537)
Income from bank owned life insurance  (2,096)  (2,157)
Gain from life insurance proceeds  (458)  - 
Stock-based compensation expense  4,169   4,222 
Deferred compensation  (3,140)  (2,768)
Excess tax benefit from stock-based payment arrangements  (470)  (467)
Deferred income tax benefit  (1,228)  (5,024)
Increase in other liabilities  7,680   2,432 
Decrease in other assets  6,549   2,065 
Net cash provided by operating activities  37,407   34,452 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of bank premises and equipment  (4,159)  (9,933)
Net purchases of Federal Home Loan Bank of New York shares  (9,119)  (6,467)
Purchases of securities held-to-maturity  (35,705)  (3,100)
Proceeds from maturities of securities held-to-maturity  8,475   1,390 
Purchases of securities available for sale  (59,678)  (294,453)
Proceeds from sales and calls of securities  66,996   163,158 
Proceeds from maturities and prepayments of securities  85,829   92,733 
Proceeds from bank owned life insurance  2,236   - 
Proceeds from sale of buildings  34,332   20,209 
Net originations of loans  (210,506)  (163,037)
Purchases of loans  (137,994)  (216,333)
Proceeds from sale of real estate owned  853   2,185 
Proceeds from sale of loans  11,499   10,363 
Net cash used in investing activities  (246,941)  (403,285)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Net increase in non-interest bearing deposits  50,591   1,362 
Net increase in interest-bearing deposits  85,616   207,653 
Net increase in mortgagors' escrow deposits  12,432   9,021 
Net proceeds from short-term borrowed funds  150,000   45,000 
Proceeds from long-term borrowings  200,000   225,000 
Repayment of long-term borrowings  (260,301)  (90,000)
Purchases of treasury stock  (9,102)  (15,604)
Excess tax benefit from stock-based payment arrangements  470   467 
Proceeds from issuance of common stock upon exercise of stock options  132   142 
Cash dividends paid  (14,787)  (13,999)
Net cash provided by financing activities  215,051   369,042 
         
Net increase in cash and cash equivalents  5,517   209 
Cash and cash equivalents, beginning of period  42,363   34,265 
Cash and cash equivalents, end of period $47,880  $34,474 
         
SUPPLEMENTAL CASHFLOW DISCLOSURE        
Interest paid $39,792  $35,838 
Income taxes paid  28,610   26,518 
Taxes paid if excess tax benefits were not tax deductible  29,080   26,985 
Non-cash activities:        
Securities purchased not yet settled  2,000   - 
Securities transferred from available for sale to held-to-maturity  -   4,510 
Loans transferred to Other Real Estate Owned  486   1,588 
Loans provided for the sale of Other Real Estate Owned  -   280 
Loans held for investment transferred to loans held for sale  -   300 

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

- 4 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the nine months ended September 30, 20162017 and 20152016

(Unaudited)

 

(Dollars in thousands, except per share data) Total Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss)
(Dollars in thousand, 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  35,164   -   -   35,164   -   - 
Award of common shares released from Employee Benefit Trust (114,754 shares)  2,433   -   2,433   -   -   - 
Vesting of restricted stock unit awards (284,595 shares)  -   -   (5,052)  (271)  5,323   - 
Exercise of stock options (4,400 shares)  -   -   (6)  (40)  46   - 
Stock-based compensation expense  5,092   -   5,092   -   -   - 
Purchase of treasury shares (10,000 shares)  (278)  -   -   -   (278)  - 
Repurchase of shares to satisfy tax obligation (90,779 shares)  (2,624)  -   -   -   (2,624)  - 
Dividends on common stock ($0.54 per share)  (15,729)  -   -   (15,729)  -   - 
Other comprehensive income  1,698   -   -   -   -   1,698 
Balance at September 30, 2017 $539,609  $315  $216,929  $380,316  $(51,287) $(6,664)
                                    
Balance at December 31, 2015 $473,067  $315  $210,652  $316,530  $(48,868) $(5,562) $473,067  $315  $210,652  $316,530  $(48,868) $(5,562)
Net Income  50,630   -   -   50,630   -   -   50,630   -   -   50,630   -   - 
Award of common shares released from Employee Benefit Trust (138,519 shares)  1,984   -   1,984   -   -   -   1,984   -   1,984   -   -   - 
Vesting of restricted stock unit awards (245,311 shares)  -   -   (4,049)  (397)  4,446   -   -   -   (4,049)  (397)  4,446   - 
Exercise of stock options (41,670 shares)  132   -   15   (34)  151   -   132   -   15   (34)  151   - 
Stock-based compensation expense  4,416   -   4,416   -   -   -   4,416   -   4,416   -   -   - 
Stock-based income tax benefit  470   -   470   -   -   -   470   -   470   -   -   - 
Purchase of treasury shares (378,695 shares)  (7,492)  -   -   -   (7,492)  -   (7,492)  -   -   -   (7,492)  - 
Repurchase of shares to satisfy tax obligation (77,994 shares)  (1,610)  -   -   -   (1,610)  -   (1,610)  -   -   -   (1,610)  - 
Dividends on common stock ($0.51 per share)  (14,787)  -   -   (14,787)  -   -   (14,787)  -   -   (14,787)  -   - 
Other comprehensive income  5,811   -   -   -   -   5,811   5,811   -   -   -   -   5,811 
Balance at September 30, 2016 $512,621  $315  $213,488  $351,942  $(53,373) $249  $512,621  $315  $213,488  $351,942  $(53,373) $249 
                        
                        
Balance at December 31, 2014 $456,247  $315  $206,437  $289,623  $(37,221) $(2,907)
Net Income  34,575   -   -   34,575   -   - 
Award of common shares released from Employee Benefit Trust (143,809 shares)  2,031   -   2,031   -   -   - 
Vesting of restricted stock unit awards (204,310 shares)  -   -   (3,076)  (504)  3,580   - 
Exercise of stock options (45,125 shares)  142   -   (51)  (179)  372   - 
Stock-based compensation expense  4,128   -   4,128   -   -   - 
Stock-based income tax benefit  467   -   467   -   -   - 
Purchase of treasury shares (735,599 shares)  (14,351)  -   -   -   (14,351)  - 
Repurchase of shares to satisfy tax obligation (65,637 shares)  (1,253)  -   -   -   (1,253)  - 
Dividends on common stock ($0.48 per share)  (13,999)  -   -   (13,999)  -   - 
Other comprehensive income  3,203   -   -   -   -   3,203 
Balance at September 30, 2015 $471,190  $315  $209,936  $309,516  $(48,873) $296 

 

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

 

- 5 -

- 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-ownedwholly 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 whichthat are, in the opinion of management, necessary for a fair statement of the results for such presented periods of the Company. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report. All inter-company balances and transactions have been eliminated in consolidation. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

 

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

2.2.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 (“ALL”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 includingand 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 nine months ended
 For the three months ended
September 30,		 For the nine months ended
September 30,		 September 30, September 30,
 2016 2015 2016 2015 2017 2016 2017 2016
 (In thousands, except per share data) (In thousands, except per share data)
Net income, as reported $10,634  $11,008  $50,630  $34,575  $10,179  $10,634  $35,164  $50,630 
Divided by:                                
Weighted average common shares outstanding  28,861   28,927   28,993   29,188   29,120   28,861   29,092   28,993 
Weighted average common stock equivalents  14   19   13   21   1   14   2   13 
Total weighted average common shares outstanding and common stock equivalents  28,875   28,946   29,006   29,209   29,121   28,875   29,094   29,006 
                                
Basic earnings per common share $0.37  $0.38  $1.75  $1.18  $0.35  $0.37  $1.21  $1.75 
Diluted earnings per common share (1) $0.37  $0.38  $1.75  $1.18  $0.35  $0.37  $1.21  $1.75 
Dividend payout ratio  45.9%  42.1%  29.1%  40.7%  51.4%  45.9%  44.6%  29.1%

 

(1)For the three and nine months ended September 30, 20162017 and 2015,2016, there were no stock options that were anti-dilutive.

- 6 - 

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 September 30, 20162017 and December 31, 2015.2016. 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 September 30, 2016:2017:

 

 Amortized
Cost		 Fair Value Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Amortized
Cost		 Fair Value Gross
Unrealized
Gains		 Gross
Unrealized
Losses
 (In thousands) (In thousands)
Securites held-to-maturity:                
Securities held-to-maturity:        
Municipals $33,274  $33,410  $136  $-  $22,952  $21,542  $-  $1,410 
                                
Total other securities  22,952   21,542   -   1,410 
                
FNMA  7,978   7,839   -   139 
                
Total mortgage-backed securities  7,978   7,839   -   139 
Total $33,274  $33,410  $136  $-  $30,930  $29,381  $-  $1,549 

 

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2015:2016:

 

 Amortized
Cost		 Fair Value Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Amortized
Cost		 Fair Value Gross
Unrealized
Gains		 Gross
Unrealized
Losses
 (In thousands) (In thousands)
Securites held-to-maturity:                
Securities held-to-maturity:        
Municipals $6,180  $6,180  $-  $-  $37,735  $35,408  $-  $2,327 
                                
Total $6,180  $6,180  $-  $-  $37,735  $35,408  $-  $2,327 

 

- 7 -

- 7 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

  Amortized
Cost		 Fair Value Gross
Unrealized
Gains		 Gross
Unrealized
Losses
  (In thousands)
Corporate $110,000  $103,126  $-  $6,874 
Municipals  102,226   104,979   2,753   - 
Mutual funds  18,629   18,629   -   - 
Collateralized loan obligations  48,398   48,881   483   - 
Other  1,083   1,083   -   - 
Total other securities  280,336   276,698   3,236   6,874 
REMIC and CMO  330,593   330,459   1,953   2,087 
GNMA  1,096   1,184   88   - 
FNMA  138,995   138,781   547   761 
FHLMC  49,557   49,437   23   143 
Total mortgage-backed securities  520,241   519,861   2,611   2,991 
Total securities available for sale $800,577  $796,559  $5,847  $9,865 

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

 

 Amortized
Cost		 Fair Value Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Amortized
Cost		 Fair Value Gross
Unrealized
Gains		 Gross
Unrealized
Losses
 (In thousands)   (In thousands)
Corporate $110,000  $104,011  $191  $6,180  $110,000  $102,910  $-  $7,090 
Municipals  125,667   130,380   4,713   -   124,984   126,903   1,983   64 
Mutual funds  21,658   21,658   -   -   21,366   21,366   -   - 
Collateralized loan obligations  101,660   102,572   920   8   85,470   86,365   895   - 
Other  7,193   7,191   -   2   7,363   7,361   -   2 
Total other securities  366,178   365,812   5,824   6,190   349,183   344,905   2,878   7,156 
REMIC and CMO  383,912   389,426   6,144   630   402,636   401,370   1,607   2,873 
GNMA  7,520   7,700   180   -   1,319   1,427   108   - 
FNMA  129,791   132,831   3,085   45   109,493   108,351   463   1,605 
FHLMC  14,802   15,110   308   -   5,378   5,328   35   85 
Total mortgage-backed securities  536,025   545,067   9,717   675   518,826   516,476   2,213   4,563 
Total securities available for sale $902,203  $910,879  $15,541  $6,865  $868,009  $861,381  $5,091  $11,719 

 

Mortgage-backed securities shown in the table above include one private issue collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $0.4$0.1 million and $0.2 million at September 30, 2017 and December 31, 2016.

 

The following table summarizescorporate securities held by the Company’s portfolio of securities available for saleCompany at September 30, 2017 and December 31, 2015:2016 are issued by U.S. banking institutions.

 

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

- 8 - 

 

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

 

- 8 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table detailstables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at September 30, 2016,2017, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 Amortized
Cost		 Fair Value Amortized  
Securities held-to-maturity: Cost Fair Value
 (In thousands) (In thousands)
        
Due in one year or less $11,370  $11,370  $1,085  $1,085 
Due after one year through five years  40   40 
Due after ten years  21,864   22,000   21,867   20,457 
                
Total securities held-to-maturity $33,274  $33,410 
Total other securities  22,952   21,542 
Mortgage-backed securities  7,978   7,839 
        
Total $30,930  $29,381 

The amortized cost and fair value of the Company’s securities, classified as available for sale at September 30, 2016, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 Amortized
Cost		 Fair Value
Securities available for sale: Amortized
Cost		 Fair Value
 (In thousands) (In thousands)
        
Due in one year or less $-  $-  $-  $- 
Due after one year through five years  1,795   1,821   4,335   4,443 
Due after five years through ten years  118,691   117,707   159,666   153,369 
Due after ten years  224,034   224,626   97,706   100,257 
Mutual funds  18,629   18,629 
                
Total other securities  344,520   344,154   280,336   276,698 
Mutual funds  21,658   21,658 
Mortgage-backed securities  536,025   545,067   520,241   519,861 
                
Total securities available for sale $902,203  $910,879 
Total $800,577  $796,559 

- 9 - 

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table showstables 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 September 30, 2016:the dates indicated:

 

   Total Less than 12 months 12 months or more At September 30, 2017
 Count Fair Value Unrealized
Losses		 Fair Value Unrealized
Losses		 Fair Value Unrealized
Losses		   Total Less than 12 months 12 months or more
   (Dollars in thousands)       Unrealized   Unrealized   Unrealized
 Count Fair Value Losses Fair Value Losses Fair Value Losses
   (Dollars in thousands)
              
Held-to-maturity securities              
Municipals  1  $20,457  $1,410  $20,457  $1,410  $-  $- 
Total other securities  1   20,457   1,410   20,457   1,410   -   - 
                            
FNMA  1   7,839   139   7,839   139   -   - 
Total mortgage-backed securities  1   7,839   139   7,839   139   -   - 
Total  2  $28,296  $1,549  $28,296  $1,549  $-  $- 
                            
                            
Available for sale securities                            
Corporate  13  $93,820  $6,180  $19,294  $706  $74,526  $5,474   14  $103,126  $6,874  $19,154  $846  $83,972  $6,028 
Collateralized loan obligations  1   7,474   8   -   -   7,474   8 
Other  1   299   2   -   -   299   2 
Total other securities  15   101,593   6,190   19,294   706   82,299   5,484   14   103,126   6,874   19,154   846   83,972   6,028 
                                                        
REMIC and CMO  11   55,603   630   19,707   131   35,896   499   23   149,238   2,087   133,091   1,449   16,147   638 
FNMA  1   6,694   45   -   -   6,694   45   11   90,337   761   81,621   595   8,716   166 
FHLMC  2   48,400   143   48,400   143   -   - 
Total mortgage-backed securities  12   62,297   675   19,707   131   42,590   544   36   287,975   2,991   263,112   2,187   24,863   804 
Total securities available for sale  27  $163,890  $6,865  $39,001  $837  $124,889  $6,028 
Total  50  $391,101  $9,865  $282,266  $3,033  $108,835  $6,832 

- 9 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

   Total Less than 12 months 12 months or more At December 31, 2016
 Count Fair Value Unrealized
Losses		 Fair Value Unrealized
Losses		 Fair Value Unrealized
Losses		   Total Less than 12 months 12 months or more
   (Dollars in thousands)       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  12  $85,563  $4,436  $76,218  $3,782  $9,345  $654   14  $102,910  $7,090  $28,476  $1,524  $74,434  $5,566 
Collateralized loan obligations  7   52,898   327   52,898   327   -   -   4   16,047   64   16,047   64   -   - 
Other  1   298   2   -   -   298   2   1   298   2   -   -   298   2 
Total other securities  20   138,759   4,765   129,116   4,109   9,643   656 
Total  19   119,255   7,156   44,523   1,588   74,732   5,568 
                                                        
REMIC and CMO  33   238,132   3,147   182,010   1,642   56,122   1,505   35   222,807   2,873   208,827   2,268   13,980   605 
GNMA  1   6,977   139   6,977   139   -   - 
FNMA  20   102,225   1,762   75,769   1,043   26,456   719   18   80,924   1,605   74,972   1,250   5,952   355 
FHLMC  3   14,715   99   14,715   99   -   -   1   3,993   85   3,993   85   -   - 
Total mortgage-backed securities  57   362,049   5,147   279,471   2,923   82,578   2,224   54   307,724   4,563   287,792   3,603   19,932   960 
Total securities available for sale  77  $500,808  $9,912  $408,587  $7,032  $92,221  $2,880 
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 incomeloss (“AOCI”AOCL”) within Stockholders’ Equity.

The Company reviewed each investment that had an unrealized loss at September 30, 2016 and December 31, 2015. An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCI,AOCL, net of tax.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company reviewed each investment that had an unrealized loss at September 30, 2017 and December 31, 2016. The unrealized losses in totalmunicipal securities held-to-maturity at September 30, 2017 and December 31, 2016 were caused by illiquidity in the market and movements in interest rates. The unrealized losses in FNMA securities held-to-maturity at September 30, 2017 were caused by movements in interest rates. The unrealized losses in securities available for sale at September 30, 20162017 and December 31, 20152016 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 September 30, 20162017 and December 31, 2015.2016.

 

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold available for sale securities with book values at the time of sale totaling $64.6 million and $163.0$112.4 million during the ninethree months ended September 30, 2016 and 2015, respectively.2017. The Company did not sell any available for sale securities during the three months ended September 30, 2016. The Company sold available for sale securities with book values at the time of sale totaling $138.0$112.4 million and $64.6 million during the threenine months ended September 30, 2015.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION2017 and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)2016, respectively.

 

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
September 30,		 For the nine months ended
September 30,		 
 		For the three months ended
September 30,		 
 		For the nine months ended
September 30,
 2016 2015 2016 2015 2017 2016 2017 2016
 (In thousands) (In thousands)
Gross gains from the sale of securities $-  $2,666  $2,370  $2,899  $401  $-  $401  $2,370 
Gross losses from the sale of securities  -   (2,563)  (7)  (2,732)  (587)  -   (587)  (7)
                                
Net gains from the sale of securities $-  $103  $2,363  $167 
Net (losses) gains from the sale of securities $(186) $-  $(186) $2,363 

 

5.Loans

5.       Loans

 

Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. 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.

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. Payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. 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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and certainSUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company recognizes a loan origination costsas 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 deferred. Netclassified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan origination costscurrent in the immediate future. Prior to a loan becoming 90 days delinquent, an updated appraisal is ordered and/or an internal evaluation is prepared.

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 premiums or discounts on loans purchased are amortized into interest, income overin accordance with the contractual lifeoriginal terms of the loan. Impaired loans usingare measured based on the level-yield method. Prepayment penalties received onpresent 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. All non-accrual loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.considered impaired.

 

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 ismay at times be maintained to cover uncertainties that could affect management's estimate of probable losses. TheWhen necessary an unallocated component of the allowance reflectswill reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The allowance is established through charges to earnings in the form of a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), current economic conditions, delinquency and non-accrual trends, classified loan levels, risk in the portfolio and volumes and trends in loan types, recent trends in charge-offs, changes in underwriting standards, experience, ability and depth of the Company’s lenders, collection policies and experience, internal loan review function and other external factors. Increases and decreases in the allowance other than charge-offs and recoveries are included in the provision for loan losses. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.

 

The 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.

 

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 loan balances of collateral dependent impaired loans are compared to the property’s updated fair value. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off, except for taxi medallion loans. The 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. Taxi medallion loans with a loan-to-value greater than 100% are allocated a portion of the allowance for loan losses in the amount of the excess of the loan-to-value over the loan’s principal balance. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. All taxi medallion loans are classified as impaired and allocated a portion of the allowance in the amount of the excess of the loan-to-value over the loan’s principal balance.

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 Company’s Board of Directors reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Prior to a loan becoming 90 days delinquent an updated appraisal is ordered and/or an internal evaluation is prepared. The loan balances of collateral dependent impaired loans are compared to the property’s updated fair value. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. In addition, taxi medallion loans with a loan-to-value greater than 100% are classified as impaired and allocated a portion of the ALL 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. All non-accrual loans are considered impaired. 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 September 30, 2016,2017, we utilized recent third party appraisals of the collateral to measure impairment for $45.3$39.2 million, or 88.2%82.9%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $6.1$8.1 million, or 11.8%17.1%, 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-performingnon-accrual performing TDR loans until they have made timely payments for six consecutive months.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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 September 30, 2016,2017, 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 following tabletables shows loans modified and classified as TDR during the periodperiods indicated:

 

  For the nine months ended
September 30, 2016		 For the nine months ended
September 30, 2015
(Dollars in thousands) Number Balance Modification description Number Balance Modification description
       
             
One-to-four family - residential  2  $263   Received a below market interest rate and the loan amortizations were extended.  -  $-   
Commercial business and other  2   739   One received an amortization extension and one received a below market interest rate and an amortization extension.  -   -   
Small Business Administration  -   -     1   41   Received a below market interest rate and the loan amortization was extended.
Total  4  $1,002     1  $41   
 
 		 
 		For the three months ended
September 30, 2017
(Dollars in thousands) Number Balance Modification description
     
           
Taxi medallion  4  $1,306  Loan amortization extension
    Total  4  $1,306   

 

The recorded investment of the loans modified

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and classified as TDR presented in the table above, were unchanged as there was no principal forgiven in this modification.SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

  For the nine months ended
  September 30, 2017 September 30, 2016
(Dollars in thousands) Number Balance Modification description Number Balance Modification description
     
One-to-four family - residential  -  $-     2  $263  Received below market interest rates and the amortizations were extended
Commercial business and other  -   -     2   739   One received an amortization extension and one received a below market interest rate and an amortization extension
Taxi medallion  9   5,595  All loans amortizations were extended, with three loans also receiving a below market interest rate  -   -   
Total  9  $5,595     4  $1,002   

 

The Company did not modify and classify any loans as TDR during the three months ended September 30, 2016 or 2015.2016.

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 these modifications.

 

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

 

 September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
(Dollars in thousands) Number
of contracts		 Recorded
investment		 Number
of contracts		 Recorded
investment		 
 		Number
of contracts		 
 		Recorded
investment		 
 		Number
of contracts		 
 		Recorded
investment
                
Multi-family residential  9  $2,586   9  $2,626   9  $2,533   9  $2,572 
Commercial real estate  2   2,074   3   2,371   2   2,031   2   2,062 
One-to-four family - mixed-use property  5   1,809   6   2,052   5   1,765   5   1,800 
One-to-four family - residential  3   596   1   343   3   577   3   591 
Small business administration  -   -   1   34 
Taxi medallion  21   15,074   12   9,735 
Commercial business and other  3   1,139   4   2,083   2   517   2   675 
                
Total performing troubled debt restructured  22  $8,204   24  $9,509   42  $22,497   33  $17,435 

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

 

- 13 -

- 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 not performing according to their restructured terms at the periods indicated:

 

 September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
(Dollars in thousands) Number
of contracts		 Recorded
investment		 Number
of contracts		 Recorded
investment		 Number
of contracts		 Recorded
investment		 Number
of contracts		 Recorded
investment
                
Multi-family residential  1  $392   1  $391   1  $377   1  $396 
                                
Total troubled debt restructurings that subsequently defaulted  1  $392   1  $391   1  $377   1  $396 

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

 

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

 

(In thousands) September 30,
2016		 December 31,
2015		 September 30,
2017		 December 31,
2016
        
Loans ninety days or more past due and still accruing:            
Multi-family residential $-  $233  $415  $- 
Commercial real estate  1,183   1,183   38   - 
One-to-four family - mixed-use property  470   611   129   386 
One-to-four family - residential  -   13 
Construction  -   1,000 
Commercial Business and other  -   220 
Taxi medallion  1,147   - 
Total  1,653   3,260   1,729   386 
                
Non-accrual mortgage loans:                
Multi-family residential  1,649   3,561   1,309   1,837 
Commercial real estate  1,157   2,398   1,147   1,148 
One-to-four family - mixed-use property  4,534   5,952   2,217   4,025 
One-to-four family - residential  8,340   10,120   7,434   8,241 
Total  15,680   22,031   12,107   15,251 
                
Non-accrual non-mortgage loans:                
Small business administration  2,132   218 
Small Business Administration  50   1,886 
Taxi medallion  3,971   -   -   3,825 
Commercial business and other  99   568   4   68 
Total  6,202   786   54   5,779 
                
Total non-accrual loans  21,882   22,817   12,161   21,030 
                
Total non-accrual loans and loans ninety days or more past due and still accruing $23,535  $26,077 
Total non-performing loans $13,890  $21,416 

 

- 15 - 

- 14 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the three and nine months ended September 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 September 30, 2017. At December 31, 2016, we held one foreclosed residential real estate property for $0.5 million. Included within net loans as of September 30, 2017 and December 31, 2016 was a recorded investment of $8.7 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.

 

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
September 30,		 For the nine months ended
September 30,		 For the three months ended
September 30,		 For the nine months ended
September 30,
 2016 2015 2016 2015 2017 2016 2017 2016
 (In thousands)     (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms $468  $627  $1,405  $1,879  $401  $468  $1,249  $1,405 
Less: Interest income included in the results of operations  99   153   391   540   166   99   434   391 
Total foregone interest $369  $474  $1,014  $1,339  $235  $369  $815  $1,014 

 

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

 

 September 30, 2016 September 30, 2017
(In thousands) 30 - 59 Days
Past Due		 60 - 89 Days
Past Due		 Greater
than
90 Days		 Total Past
Due		 Current Total Loans 

30 - 59 Days

Past Due

 

60 - 89 Days

Past Due

 

Greater than

90 Days

 

Total

Past Due

 Current Total Loans
                        
Multi-family residential $5,441  $917  $1,649  $8,007  $2,163,282  $2,171,289  $6,115  $155  $1,724  $7,994  $2,228,179  $2,236,173 
Commercial real estate  3,052   377   2,340   5,769   1,189,497   1,195,266   3,455   481   1,185   5,121   1,347,654   1,352,775 
One-to-four family - mixed-use property  4,396   746   5,004   10,146   545,545   555,691   3,577   112   2,346   6,035   550,688   556,723 
One-to-four family - residential  1,081   427   8,146   9,654   174,339   183,993   3,646   43   7,246   10,935   166,643   177,578 
Co-operative apartments  -   -   -   -   7,494   7,494   -   -   -   -   7,035   7,035 
Construction loans  -   -   -   -   11,250   11,250   -   -   -   -   15,811   15,811 
Small Business Administration  28   -   2,044   2,072   12,267   14,339   -   245   -   245   14,240   14,485 
Taxi medallion  -   1,408   2,563   3,971   16,565   20,536   -   -   1,147   1,147   17,018   18,165 
Commercial business and other  247   4   1   252   564,720   564,972   -   -   4   4   674,702   674,706 
Total $14,245  $3,879  $21,747  $39,871  $4,684,959  $4,724,830  $16,793  $1,036  $13,652  $31,481  $5,021,970  $5,053,451 

 

 December 31, 2015 December 31, 2016
(In thousands) 30 - 59 Days
Past Due		 60 - 89 Days
Past Due		 Greater
than
90 Days		 Total Past
Due		 Current Total Loans 

30 - 59 Days

Past Due

 

60 - 89 Days

Past Due

 

Greater than

90 Days

 

Total

Past Due

 Current Total Loans
                        
Multi-family residential $9,421  $804  $3,794  $14,019  $2,041,209  $2,055,228  $2,575  $287  $1,837  $4,699  $2,173,805  $2,178,504 
Commercial real estate  2,820   153   3,580   6,553   994,683   1,001,236   3,363   22   1,148   4,533   1,241,599   1,246,132 
One-to-four family - mixed-use property  8,630   1,258   6,563   16,451   556,592   573,043   4,671   762   4,411   9,844   548,658   558,502 
One-to-four family - residential  4,261   154   10,134   14,549   173,289   187,838   3,831   194   8,047   12,072   173,695   185,767 
Co-operative apartments  -   -   -   -   8,285   8,285   -   -   -   -   7,418   7,418 
Construction loans  -   -   1,000   1,000   6,284   7,284   -   -   -   -   11,495   11,495 
Small Business Administration  42   -   218   260   11,934   12,194   13   -   1,814   1,827   13,371   15,198 
Taxi medallion  -   -   -   -   20,881   20,881   -   -   3,825   3,825   15,171   18,996 
Commercial business and other  -   2   228   230   506,392   506,622   22   1   -   23   597,099   597,122 
Total $25,174  $2,371  $25,517  $53,062  $4,319,549  $4,372,611  $14,475  $1,266  $21,082  $36,823  $4,782,311  $4,819,134 

 

- 15 -

- 16 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

September 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 $5,917  $4,688  $2,568  $990  $130  $306  $2,330  $4,668  $560  $22,157 
Charge-off's  (290)  -   (1)  -   -   -   -   (33)  -   (324)
Recoveries  66   25   -   58   -   17   -   4   -   170 
Provision (Benefit)  43   (86)  (49)  (90)  (13)  70   3,661   290   (560)  3,266 
Ending balance $5,736  $4,627  $2,518  $958  $117  $393  $5,991  $4,929  $-  $25,269 

September 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 $6,177  $4,445  $3,326  $1,044  $75  $574  $1,042  $4,669  $846  $22,198 
Charge-off's  (90)  -   (71)  -   -   (361)  -   (19)  -   (541)
Recoveries  11   11   47   -   -   44   -   25   -   138 
Provision (Benefit)  (103)  60   (234)  (27)  15   151   1,290   (477)  (675)  - 
Ending balance $5,995  $4,516  $3,068  $1,017  $90  $408  $2,332  $4,198  $171  $21,795 

 

 

September 30, 2015
(In thousands) Multi-family residential Commercial real estate One-to-four family - mixed-use property One-to-four family - residential Construction loans Small Business Administration Taxi medallion Commercial business and other Total
                   
Allowance for credit losses:                                    
Beginning balance $8,300  $3,726  $5,180  $1,433  $29  $291  $11  $4,114  $23,084 
Charge-off's  (58)  -   (99)  -   -   (9)  -   (10)  (176)
Recoveries  4   100   26   300   -   5   -   -   435 
Provision (Benefit)  (596)  331   (233)  (371)  16   (42)  231   294   (370)
Ending balance $7,650  $4,157  $4,874  $1,362  $45  $245  $242  $4,398  $22,973 

- 17 - 

 

- 16 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

September 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  (452)  (4)  (36)  (170)  -   (89)  (54)  (48)  -   (853)
Recoveries  297   93   68   58   -   66   -   45   -   627��
Provision (Benefit)  (32)  51   (417)  55   25   (65)  3,802   440   (593)  3,266 
Ending balance $5,736  $4,627  $2,518  $958  $117  $393  $5,991  $4,929  $-  $25,269 

September 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  (155)  -   (139)  (74)  -   (362)  -   (59)  -   (789)
Recoveries  230   11   252   366   -   118   -   72   -   1,049 
Provision (Benefit)  (798)  266   (1,272)  (502)  40   390   1,989   (284)  171   - 
Ending balance $5,995  $4,516  $3,068  $1,017  $90  $408  $2,332  $4,198  $171  $21,795 

 

 

September 30, 2015
(In thousands) Multi-family residential Commercial real estate One-to-four family - mixed-use property One-to-four family - residential Construction loans Small Business Administration Taxi medallion Commercial business and other Total
                   
Allowance for credit losses:                                    
Beginning balance $8,827  $4,202  $5,840  $1,690  $42  $279  $11  $4,205  $25,096 
Charge-off's  (458)  (32)  (571)  (244)  -   (9)  -   (62)  (1,376)
Recoveries  218   168   73   374   -   32   -   8   873 
Provision (Benefit)  (937)  (181)  (468)  (458)  3   (57)  231   247   (1,620)
Ending balance $7,650  $4,157  $4,874  $1,362  $45  $245  $242  $4,398  $22,973 

- 18 - 

 

- 17 -

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:

 

 September 30, 2016 September 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 Multi-family residential Commercial real estate One-to-four family - mixed-use property One-to-four family- residential Co-operative apartments Construction loans Small Business Administration Taxi medallion Commercial business and other Total
                                        
Financing Receivables:                                                                                    
Ending Balance $2,171,289  $1,195,266  $555,691  $183,993  $7,494  $11,250  $14,339  $20,536  $564,972  $-  $4,724,830  $2,236,173  $1,352,775  $556,723  $177,578  $7,035  $15,811  $14,485  $18,165  $674,706  $5,053,451 
Ending balance: individually evaluated for impairment $5,820  $6,443  $9,997  $10,507  $-  $-  $664  $16,659  $2,608  $-  $52,698  $4,721  $6,798  $6,317  $10,079  $-  $1,178  $370  $18,165  $748  $48,376 
Ending balance: collectively evaluated for impairment $2,165,469  $1,188,823  $545,694  $173,486  $7,494  $11,250  $13,675  $3,877  $562,364  $-  $4,672,132  $2,231,452  $1,345,977  $550,406  $167,499  $7,035  $14,633  $14,115  $-  $673,958  $5,005,075 
                                        
Allowance for credit losses:                                                                                    
Ending balance: individually evaluated for impairment $237  $190  $449  $62  $-  $-  $47  $2,330  $13  $-  $3,328  $217  $154  $206  $56  $-  $-  $-  $5,991  $8  $6,632 
Ending balance: collectively evaluated for impairment $5,758  $4,326  $2,619  $955  $-  $90  $361  $2  $4,185  $171  $18,467  $5,519  $4,473  $2,312  $902  $-  $117  $393  $-  $4,921  $18,637 

  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 

 

  December 31, 2015
(In thousands) Multi-family residential Commercial real estate One-to-four family - mixed-use property One-to-four family- residential Co-operative apartments Construction loans Small Business Administration Taxi Medallion Commercial business and other Unallocated Total
Financing Receivables:                                            
Ending Balance $2,055,228  $1,001,236  $573,043  $187,838  $8,285  $7,284  $12,194  $20,881  $506,622  $-  $4,372,611 
Ending balance: individually evaluated for impairment $8,047  $6,183  $12,828  $12,598  $-  $1,000  $310  $2,118  $4,716  $-  $47,800 
Ending balance: collectively evaluated for impairment $2,047,181  $995,053  $560,215  $175,240  $8,285  $6,284  $11,884  $18,763  $501,906  $-  $4,324,811 
Allowance for credit losses:                                            
Ending balance: individually evaluated for impairment $252  $180  $502  $51  $-  $-  $-  $333  $112  $-  $1,430 
Ending balance: collectively evaluated for impairment $6,466  $4,059  $3,725  $1,176  $-  $50  $262  $10  $4,357  $-  $20,105 

- 19 - 

 

- 18 -

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:

 

 September 30, 2016 December 31, 2015
 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 September 30, 2017 December 31, 2016
             Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance		 Recorded
Investment		 Unpaid
Principal
Balance		 Related
Allowance
 (In thousands) (In thousands)
With no related allowance recorded:                                                
Mortgage loans:                                                
Multi-family residential $3,546  $3,877  $-  $5,742  $6,410  $-  $2,489  $2,935  $-  $3,660  $3,796  $- 
Commercial real estate  4,369   4,396   -   3,812   3,869   -   4,767   4,767   -   4,489   4,516   - 
One-to-four family mixed-use property  7,366   8,418   -   10,082   11,335   -   5,079   5,454   -   6,435   6,872   - 
One-to-four family residential  10,074   11,591   -   12,255   14,345   -   9,661   10,696   -   9,560   11,117   - 
Co-operative apartments  -   -   -   -   -   -   -   -   -   -   -   - 
Construction  -   -   -   1,000   1,000   -   1,178   1,178   -   -   -   - 
Non-mortgage loans:                                                
Small Business Administration  546   908   -   276   276   -   370   386   -   416   509   - 
Taxi Medallion  10,106   10,106   -   -   -   - 
Commercial Business and other  2,170   2,549   -   2,682   5,347   - 
Taxi medallion  2,608   2,608   -   2,334   2,476   - 
Commercial business and other  380   749   -   2,072   2,443   - 
                                                
Total loans with no related allowance recorded  38,177   41,845   -   35,849   42,582   -   26,532   28,773   -   28,966   31,729   - 
                                                
With an allowance recorded:                                                
Mortgage loans:                                                
Multi-family residential  2,274   2,274   237   2,305   2,305   252   2,232   2,232   217   2,263   2,263   232 
Commercial real estate  2,074   2,074   190   2,371   2,371   180   2,031   2,031   154   2,062   2,062   179 
One-to-four family mixed-use property  2,631   2,633   449   2,746   2,746   502   1,238   1,238   206   2,374   2,376   417 
One-to-four family residential  433   433   62   343   343   51   418   418   56   429   429   60 
Co-operative apartments  -   -   -   -   -   -   -   -   -   -   -   - 
Construction  -   -   -   -   -   -   -   -   -   -   -   - 
Non-mortgage loans:                                                
Small Business Administration  118   118   47   34   34   -   -   -   -   1,521   1,909   90 
Taxi Medallion  6,553   6,553   2,330   2,118   2,118   333 
Commercial Business and other  438   439   13   2,034   2,034   112 
Taxi medallion  15,557   15,557   5,991   13,948   13,948   2,236 
Commercial business and other  368   368   8   420   420   12 
                                                
Total loans with an allowance recorded  14,521   14,524   3,328   11,951   11,951   1,430   21,844   21,844   6,632   23,017   23,407   3,226 
                                                
Total Impaired Loans:                                                
Total mortgage loans $32,767  $35,696  $938  $40,656  $44,724  $985  $29,093  $30,949  $633  $31,272  $33,431  $888 
                                                
Total non-mortgage loans $19,931  $20,673  $2,390  $7,144  $9,809  $445  $19,283  $19,668  $5,999  $20,711  $21,705  $2,338 

 

- 19 -

- 20 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our average recorded investment and interest income recognized for impaired loans for the three months ended September 30, 20162017 and 2015:2016:

 

 September 30, 2016 September 30, 2015
 Average
Recorded
Investment		 Interest
Income
Recognized		 Average
Recorded
Investment		 Interest
Income
Recognized		 September 30, 2017 September 30, 2016
         
 
 		Average
Recorded
Investment		 
 
 		Interest
Income
Recognized		 
 
 		Average
Recorded
Investment		 
 
 		Interest
Income
Recognized
 (In thousands) (In thousands)
With no related allowance recorded:                        
Mortgage loans:                        
Multi-family residential $4,639  $23  $8,034  $14  $2,451  $12  $4,639  $23 
Commercial real estate  4,661   55   4,930   35   5,142   60   4,661   55 
One-to-four family mixed-use property  8,234   37   9,814   39   5,269   45   8,234   37 
One-to-four family residential  10,204   19   13,040   28   10,023   29   10,204   19 
Co-operative apartments  -   -   307   -   -   -   -   - 
Construction  285   -   -   -   890   15   285   - 
Non-mortgage loans:                                
Small Business Administration  404   13   301   6   260   5   404   13 
Taxi Medallion  5,053   52   -   - 
Commercial Business and other  2,211   45   3,363   51 
Taxi medallion  3,177   19   5,053   52 
Commercial business and other  1,254   6   2,211   45 
                                
Total loans with no related allowance recorded  35,691   244   39,789   173   28,466   191   35,691   244 
                                
With an allowance recorded:                                
Mortgage loans:                                
Multi-family residential  2,279   29   2,326   30   2,242   28   2,279   29 
Commercial real estate  2,080   24   538   7   2,040   24   2,080   24 
One-to-four family mixed-use property  2,567   35   3,054   42   1,445   16   2,567   35 
One-to-four family residential  435   4   348   3   422   4   435   4 
Co-operative apartments  -   -   -   -   -   -   -   - 
Construction  -   -   -   -   -   -   -   - 
Non-mortgage loans:                                
Small Business Administration  397   1   38   1   -   -   397   1 
Taxi Medallion  6,459   17   1,065   16 
Commercial Business and other  448   7   3,064   32 
Taxi medallion  14,716   73   6,459   17 
Commercial business and other  385   5   448   7 
                                
Total loans with an allowance recorded  14,665   117   10,433   131   21,250   150   14,665   117 
                                
Total Impaired Loans:                                
Total mortgage loans $35,384  $226  $42,391  $198  $29,924  $233  $35,384  $226 
                                
Total non-mortgage loans $14,972  $135  $7,831  $106  $19,792  $108  $14,972  $135 

 

- 20 -

- 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 nine months ended September 30, 20162017 and 2015:2016:

 

 September 30, 2016 September 30, 2015
 Average
Recorded
Investment		 Interest
Income
Recognized		 Average
Recorded
Investment		 Interest
Income
Recognized		 September 30, 2017 September 30, 2016
         
 
 		Average
Recorded
Investment		 
 
 		Interest
Income
Recognized		 
 
 		Average
Recorded
Investment		 
 
 		Interest
Income
Recognized
 (In thousands) (In thousands)
With no related allowance recorded:                        
Mortgage loans:                        
Multi-family residential $5,129  $69  $9,470  $46  $2,650  $57  $5,129  $69 
Commercial real estate  4,841   162   5,748   107   5,881   214   4,841   162 
One-to-four family mixed-use property  8,407   119   10,781   133   5,399   123   8,407   119 
One-to-four family residential  10,457   69   13,125   101   10,062   85   10,457   69 
Co-operative apartments  -   -   153   -   -   -   -   - 
Construction  380   -   -   -   794   22   380   - 
Non-mortgage loans:                                
Small Business Administration  353   38   230   18   230   9   353   38 
Taxi Medallion  3,369   155   -   - 
Commercial Business and other  2,265   136   3,937   170 
Taxi medallion  3,771   74   3,369   155 
Commercial business and other  1,584   93   2,265   136 
                                
Total loans with no related allowance recorded  35,201   748   43,444   575   30,371   677   35,201   748 
                                
With an allowance recorded:                                
Mortgage loans:                                
Multi-family residential  2,284   87   2,461   89   2,391   107   2,284   87 
Commercial real estate  2,173   73   998   22   2,039   72   2,173   73 
One-to-four family mixed-use property  2,622   107   3,069   126   1,379   50   2,622   107 
One-to-four family residential  403   10   350   10   422   12   403   10 
Co-operative apartments  -   -   -   -   -   -   -   - 
Construction  -   -   -   -   -   -   -   - 
Non-mortgage loans:                                
Small Business Administration  315   4   29   1   -   -   315   4 
Taxi Medallion  5,009   91   532   49 
Commercial Business and other  962   20   2,862   120 
Taxi medallion  14,663   166   5,009   91 
Commercial business and other  383   17   962   20 
                                
Total loans with an allowance recorded  13,768   392   10,301   417   21,277   424   13,768   392 
                                
Total Impaired Loans:                                
Total mortgage loans $36,696  $696  $46,155  $634  $31,017  $742  $36,696  $696 
                                
Total non-mortgage loans $12,273  $444  $7,590  $358  $20,631  $359  $12,273  $444 

 

- 21 -

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

 September 30, 2016 September 30, 2017
(In thousands) Special Mention Substandard Doubtful Loss Total Special Mention Substandard Doubtful Loss Total
                    
Multi-family residential $7,700  $3,234  $-  $-  $10,934  $9,333  $2,188  $-  $-  $11,521 
Commercial real estate  3,332   4,369   -   -   7,701   1,015   4,767   -   -   5,782 
One-to-four family - mixed-use property  3,732   8,188   -   -   11,920   1,700   4,551   -   -   6,251 
One-to-four family - residential  1,109   10,171   -   -   11,280   915   9,503   -   -   10,418 
Co-operative apartments  -   -   -   -   -   -   -   -   -   - 
Construction loans  -   -   -   -   -   -   1,178   -   -   1,178 
Small Business Administration  702   607   -   -   1,309   585   215   -   -   800 
Taxi Medallion  -   16,659   -   -   16,659 
Taxi medallion  -   18,165   -   -   18,165 
Commercial business and other  1,030   2,607   -   -   3,637   17,694   748   -   -   18,442 
Total loans $17,605  $45,835  $-  $-  $63,440  $31,242  $41,315  $-  $-  $72,557 

 

 December 31, 2015 December 31, 2016
(In thousands) Special Mention Substandard Doubtful Loss Total Special Mention Substandard Doubtful Loss Total
                    
Multi-family residential $4,361  $5,421  $-  $-  $9,782  $7,133  $3,351  $-  $-  $10,484 
Commercial real estate  1,821   3,812   -   -   5,633   2,941   4,489   -   -   7,430 
One-to-four family - mixed-use property  3,087   10,990   -   -   14,077   4,197   7,009   -   -   11,206 
One-to-four family - residential  1,437   12,255   -   -   13,692   1,205   9,399   -   -   10,604 
Co-operative apartments  -   -   -   -   -   -   -   -   -   - 
Construction loans  -   1,000   -   -   1,000   -   -   -   -   - 
Small Business Administration  229   224   -   -   453   540   436   -   -   976 
Taxi Medallion  -   2,118   -   -   2,118 
Taxi medallion  2,715   16,228   54   -   18,997 
Commercial business and other  -   3,123   -   -   3,123   9,924   2,493   -   -   12,417 
Total loans $10,935  $38,943  $-  $-  $49,878  $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 $87.2$94.7 million and $231.8$229.0 million, respectively, at September 30, 2016.2017.

 

- 22 -

- 23 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

6.Loans held for sale

6.       Loans held for sale

 

Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 20162017 and December 31, 2015,2016, 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. Additionally, at times the Company may sell participating interests in performing loans.

 

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

 


 
 		For the three months ended
September 30, 2017
 For the three months ended
September 30, 2016		      
(Dollars in thousands) Loans sold Proceeds Net (charge-offs)
recoveries		 Net gain Loans sold Proceeds Net gain (loss)
Delinquent and non-performing loans      
Multi-family residential  2  $707  $30 
Commercial real estate  3   1,118   34 
One-to-four family - mixed-use property  3   913   115 
Total  8  $2,738  $179 
                            
Performing loans            
Multi-family residential  3  $632  $-  $1   10  $12,704  $(22)
One-to-four family - mixed-use property  8   2,507   -   239 
                
Commercial real estate  2   17,832   (7)
Small Business Administration  1   142   2 
Total  11  $3,139  $-  $240   13  $30,678  $(27)

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

 


 
 		For the three months ended
September 30, 2016
 For the three months ended
September 30, 2015		      
(Dollars in thousands) Loans sold Proceeds Net (charge-offs)
recoveries		 Net gain Loans sold Proceeds Net gain
                
Delinquent and non-performing loans      
Multi-family residential  4  $1,539  $(3) $1   3  $632  $1 
Commercial real estate  2   741   -   13 
                
One-to-four family - mixed-use property  8   2,507   239 
Total (1)  6  $2,280  $(3) $14   11  $3,139  $240 

(1)The above table does not include one performing commercial real estate loan for $3.0 million, which sold for a net gain of $30,000, and four performing SBA loans totaling $3.8 million, which sold for a net gain of $0.3 million, during the three months ended September 30, 2015.

 

- 23 -
 
 		 
 		For the nine months ended
September 30, 2017
         
(Dollars in thousands) Loans sold Proceeds Net charge-offs Net gain (loss)
Delinquent and non-performing loans        
Multi-family residential  2  $707  $-  $30 
Commercial real estate  4   1,453   (4)  35 
One-to-four family - mixed-use property  8   2,703   (33)  143 
Total  14  $4,863  $(37) $208 
                 
Performing loans                
Multi-family residential  12  $18,784  $-  $(36)
Commercial real estate  7   26,283   -   (28)
Small Business Administration  8   5,061   -   252
Total  27  $50,128  $-  $188 

- 24 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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


 
 		For the nine months ended
September 30, 2016
 For the nine months ended
September 30, 2016		        
(Dollars in thousands) Loans sold Proceeds Net (charge-offs)
recoveries		 Net gain Loans sold Proceeds Net charge-offs Net gain
                
Delinquent and non-performing loans        
Multi-family residential  9  $2,680  $(8) $3   9  $2,680  $(8) $3 
Commercial real estate  2   192   -   -   2   192   -   - 
One-to-four family - mixed-use property  15   5,093   -   262 
One-to-four family - mixed use  15   5,093   -   262 
Total  26  $7,965  $(8) $265 
                                
Total (1)  26  $7,965  $(8) $265 
Performing loans                
Small Business Administration  6   3,534   -   319 
Total  6  $3,534  $-  $319 

 

(1)The above table does not include the sale of six performing small business administration loans for proceeds totaling $3.5 million during the nine months ended September 30, 2016. These loans were sold for a net gain of $0.3 million.

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

  For the nine months ended
September 30, 2015
(Dollars in thousands) Loans sold Proceeds Net (charge-offs)
recoveries		 Net gain (loss)
                 
Multi-family residential  8  $3,420  $134  $(1)
Commercial real estate  3   2,051   -   13 
One-to-four family - mixed-use property  7   1,836   -   51 
                 
Total (1)  18  $7,307  $134  $63 

(1)The above table does not include one performing commercial real estate loan for $3.0 million, which sold for a net gain of $30,000, and four performing SBA loans totaling $3.8 million, which sold for a net gain of $0.3 million, during the nine months ended September 30, 2015.

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

7.Other Real Estate Owned

The following are changes in OREO during the periods indicated:

  For the three months ended
September 30,		 For the nine months ended
September 30,
  2016 2015 2016 2015
  (In thousands)
         
Balance at beginning of period $3,668  $4,255  $4,932  $6,326 
Acquisitions  -   816   486   1,588 
Write-down of carrying value  (829)  -   (1,763)  (896)
Sales  -   (216)  (816)  (2,163)
                 
Balance at end of period (1) $2,839  $4,855  $2,839  $4,855 

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

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
September 30,		 For the nine months ended
September 30,
  2016 2015 2016 2015
  (In thousands)
         
Gross gains $-  $4  $37  $306 
Gross losses  -   -   -   (6)
Write-down of carrying value  (829)  -   (1,763)  (896)
                 
Total net loss $(829) $4  $(1,726) $(596)

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 nine months ended September 30, 2016, we did not foreclose on any consumer mortgages through in-substance repossession. At September 30, 2016, we held two foreclosed residential real estate properties totaling $0.6 million and at December 31, 2015, we held one foreclosed residential real estate property for $0.l million. Included within net loans as of September 30, 2016 and December 31, 2015 was a recorded investment of $12.9 million and $15.2 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

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PART I – FINANCIAL INFORMATION7.       Stock-Based Compensation

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

8.Repurchase Agreements

As part of the Company’s strategy to finance investment opportunities and manage its cost of funds, the Company enters into repurchase agreements with broker-dealers and the Federal Home Loan Bank of New York (“FHLB-NY”). These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the consolidated financial statements. The securities underlying the agreements are delivered to the broker-dealers or the FHLB-NY who arrange the transaction. The securities remain registered in the name of the Company and are returned upon the maturity of the agreement. The Company retains the right of substitution of collateral throughout the terms of the agreements. As a condition of the repurchase agreements the Company is required to provide sufficient collateral. If the fair value of the collateral were to fall below the required level, the Company is obligated to pledge additional collateral. All the repurchase agreements are collateralized by mortgage-backed securities.

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

  At September 30, 2016
  Remaining Contractual Maturity of Agreements
  Less than 1 year 1 year to 3 years Over 3 years Total
  (In thousands)
Repurchase agreements:                
Mortgage-backed securities $-  $-  $40,000  $40,000 
                 
Total repurchase agreements $-  $-  $40,000  $40,000 

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

The fair value of the collateral pledged for the repurchase agreements above was $44.1 million and $131.4 million at September 30, 2016 and December 31, 2015, respectively.

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

9.Stock-Based Compensation

 

For the three months ended September 30, 20162017 and 2015,2016, the Company’s net income, as reported, includes $1.1 million and $0.5 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 nine months ended September 30, 20162017 and 2015,2016, the Company’s net income, as reported, includes $5.2 million and $4.7 million, and $4.2 millionrespectively, of stock-based compensation costs and $1.7 million and $1.8 million, and $1.6 millionrespectively, 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 September 30, 20162017 and 2015.2016. During the nine months ended September 30, 20162017 and 2015,2016, the Company granted 337,175276,900 and 318,120337,175 restricted stock units, respectively. The Company has not granted any stock options since 2009. At September 30, 2017, the Company had 1,200 stock options, all 100% vested, outstanding.

 

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company estimated the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options included the exercise price of the award, the expected option term, the expected volatility of the Company’s stock price, the risk-free interest rate over the options’ expected term and the annual dividend yield. The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight linestraight-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, 953,268 shares are available for future issuance under the 2014 Omnibus Plan at September 30, 2017.

- 25 - 

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 under the 2014 Omnibus Plan and the Prior Plans in the aggregate at or for the nine months ended September 30, 2016:2017:

 

 Shares Weighted-Average
Grant-Date
Fair Value		 Shares Weighted-Average
Grant-Date
Fair Value
        
Non-vested at December 31, 2015  415,909  $18.10 
Non-vested at December 31, 2016  488,779  $18.99 
Granted  337,175   19.85   276,900   28.21 
Vested  (235,535)  18.70   (244,762)  21.93 
Forfeited  (17,010)  18.50   (22,860)  23.61 
Non-vested at September 30, 2016  500,539  $18.98 
Non-vested at September 30, 2017  498,057  $22.46 
                
Vested but unissued at September 30, 2016  280,450  $19.28 
Vested but unissued at September 30, 2017  244,077  $22.67 

 

As of September 30, 2016,2017, there was $7.4$8.7 million of total unrecognized compensation cost related to non-vested full valueRSU awards granted under the 2014 Omnibus Plan and the Prior Plans.granted. That cost is expected to be recognized over a weighted-average period of 3.33.1 years. The total fair value of awards vested for the three months ended September 30, 2017 and 2016 was $14,000 and 2015 were $4,000, and $39,000, respectively. The total fair value of awards vested for the nine months ended September 30, 2017 and 2016 and 2015 was $4.8$7.0 million and $4.9$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.

 

The following table summarizes certain information regarding the stock option awards under the 2014 Omnibus Plan and the Prior Plans in the aggregate at or for the nine months ended September 30, 2016:

  Shares Weighted-
Average
Exercise
Price		 Weighted-Average
Remaining
Contractual
Term		 Aggregate
Intrinsic
Value
($000)*
         
Outstanding at December 31, 2015  109,130  $16.14         
Granted  -   -         
Exercised  (41,670)  17.82         
Forfeited  -   -         
Outstanding at September 30, 2016  67,460  $15.10   1.7  $582 

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

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 nine months ended September 30, 20162017 and 20152016 are provided in the following table:

 

 For the three months ended
September 30,		 For the nine months ended
September 30,		 
 		For the three months ended
September 30,		 
 		For the nine months ended
September 30,
(In thousands) 2016 2015 2016 2015 2017 2016 2017 2016
Proceeds from stock options exercised $5  $-  $132  $142  $-  $5  $-  $132 
Fair value of shares received upon exercise of stock options  262   421   612   441   -   262   37   612 
Tax benefit (expense) related to stock options exercised  (10)  87   (12)  324   -   (10)  39   (12)
Intrinsic value of stock options exercised  44   291   156   96   -   44   96   156 

 

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.

 

- 26 - 

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 nine months ended September 30, 2016:2017:

 

Phantom Stock Plan Shares Fair Value Shares Fair Value
        
Outstanding at December 31, 2015  79,440  $21.64 
Outstanding at December 31, 2016  89,339  $29.39 
Granted  11,543   20.09   7,889   27.42 
Forfeited  -   -   (10)  28.95 
Distributions  (1,364)  20.28   (8,471)  28.69 
Outstanding at September 30, 2016  89,619  $23.72 
Vested at September 30, 2016  89,435  $23.72 
Outstanding at September 30, 2017  88,747  $29.72 
Vested at September 30, 2017  88,431  $29.72 

 

The Company recorded stock-based compensation expense for the Phantom Stock Plan of $0.4$0.2 million and $0.1$0.4 million for the three months ended September 30, 2017 and 2016, and 2015, respectively. The total fair value of the distributions from the Phantom Stock Plan was $0.2 million for the three months ended September 30, 2017. There were no distributions for the three months ended September 30, 2016 and 2015.2016.

 

For the nine months ended September 30, 20162017 and 2015,2016, the Company recorded stock-based compensation expense for the Phantom Stock Plan of $0.2$0.1 million and $29,000,$0.2 million, respectively. The total fair value of the distributions from the Phantom Stock Plan during the nine months ended September 30, 2017 and 2016 was $0.2 million and 2015 was $28,000, and $9,000, respectively.

 

- 28 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION8.       Pension and SUBSIDIARIESOther Postretirement Benefit Plans

Notes to Consolidated Financial Statements

(Unaudited)

10.Pension and Other Postretirement Benefit Plans

 

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

 

 Three months ended
September 30,		 Nine months ended
September 30,		 
 		Three months ended
September 30,		 
 		Nine months ended
September 30,
(In thousands) 2016 2015 2016 2015 2017 2016 2017 2016
                
Employee Pension Plan:                        
Interest cost $226  $221  $678  $663  $216  $226  $648  $678 
Amortization of unrecognized loss  201   291   604   872   174   201   523   604 
Expected return on plan assets  (348)  (350)  (1,044)  (1,050)  (348)  (348)  (1,044)  (1,044)
Net employee pension expense $79  $162  $238  $485  $42  $79  $127  $238 
                                
Outside Director Pension Plan:                                
Service cost $11  $11  $33  $33  $10  $11  $30  $33 
Interest cost  24   24   72   72   23   24   69   72 
Amortization of unrecognized gain  (21)  (14)  (65)  (42)  (23)  (21)  (69)  (65)
Amortization of past service liability  9   10   30   30   10   9   30   30 
Net outside director pension expense $23  $31  $70  $93  $20  $23  $60  $70 
                                
Other Postretirement Benefit Plans:                                
Service cost $90  $95  $270  $285  $79  $90  $237  $270 
Interest cost  80   75   240   225   76   80   228   240 
Amortization of unrecognized loss  12   30   36   90   -   12   -   36 
Amortization of past service credit  (22)  (21)  (64)  (64)  (21)  (22)  (64)  (64)
Net other postretirement expense $160  $179  $482  $536  $134  $160  $401  $482 

 

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 20152016 that it expects to contribute $0.3 million and $0.2 million to the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), respectively, during the year ending December 31, 2016.2017. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of September 30, 2016,2017, the Company has contributed $108,000 to the Outside Director Pension Plan and $48,000$60,000 in contributions were made to the Other Postretirement Benefit Plans. As of September 30, 2016,2017, the Company has not revised its expected contributions for the year ending December 31, 2016.2017.

 

11.Fair Value of Financial Instruments

- 27 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

9.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 September 30, 2017, the Company carried financial assets and financial liabilities under the fair value option with fair values of $21.4 million and $36.1 million, respectively. At December 31, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.7$30.4 million and $27.8 million, respectively. At December 31, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.7 million and $29.0$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 and nine months ended September 30, 2016.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)2017.

 

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

 

 Fair Value Fair Value Changes in Fair Values For Items Measured at Fair Value Fair Value Fair Value Changes in Fair Values For Items Measured at Fair Value
 Measurements Measurements Pursuant to Election of the Fair Value Option Measurements Measurements Pursuant to Election of the Fair Value Option
 at September 30, at December 31, Three Months Ended Nine Months Ended at September 30, at December 31, Three Months Ended Nine Months Ended
(Dollars in thousands) 2016 2015 September 30, 2016 September 30, 2015 September 30, 2016 September 30, 2015 2017 2016 September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
                        
Mortgage-backed securities $2,166  $2,527  $(6) $-  $(4) $(36) $1,696  $2,016  $(5) $(6) $(15) $(4)
Other securities  28,551   28,205   (30)  59   156   148   19,712   28,429   40   (30)  184   156 
Borrowed funds  27,791   29,018   (296)  987   1,250   282   36,071   33,959   (925)  (296)  (2,090)  1,250 
Net gain (loss) from fair value adjustments (1) (2)         $(332) $1,046  $1,402  $394          $(890) $(332) $(1,921) $1,402 

 

(1)The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $0.5$0.4 million and $2.1$0.5 million for the three months ended September 30, 20162017 and 2015,2016, respectively, from the change in the fair value of interest rate swaps.

 

(2)The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $4.3$0.9 million and $1.3$4.3 million for the nine months ended September 30, 20162017 and 2015,2016, 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 September 30, 20162017 and December 31, 2015.2016. The fair value of borrowed funds includes accrued interest payable of $0.2 million and $0.1 million at both September 30, 20162017 and December 31, 2015.2016, 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.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

 

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

 

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

 

Level 1 – where quoted market prices are available in an active market. TheAt September 30, 2017, Level 1 included one mutual fund. At December 31, 2016, 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 September 30, 2016 and December 31, 2015.

- 30 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)1.

 

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 September 30, 20162017 and December 31, 2015,2016, 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 September 30, 20162017, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company. At December 31, 2015,2016, 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 September 30, 20162017 and December 31, 2015:2016:

 

 Quoted Prices            
 in Active Markets Significant Other Significant Other    
 for Identical Assets Observable Inputs Unobservable Inputs Total carried at fair value
 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		 (Level 1) (Level 2) (Level 3) on a recurring basis
 2016 2015 2016 2015 2016 2015 2016 2015 2017 2016 2017 2016 2017 2016 2017 2016
 (In thousands) (In thousands)
                                
Assets:                                                
Mortgage-backed Securities $-  $-  $545,067  $668,740  $-  $-  $545,067  $668,740  $-  $-  $519,861  $516,476  $-  $-  $519,861  $516,476 
Other securities  -   -   358,621   317,445   7,191   7,212   365,812   324,657   11,589   -   264,026   337,544   1,083   7,361   276,698   344,905 
Interest rate swaps  -   -   -   48   -   -   -   48   -   -   5,410   6,350   -   -   5,410   6,350 
                                                                
Total assets $-  $-  $903,688  $986,233  $7,191  $7,212  $910,879  $993,445  $11,589  $-  $789,297  $860,370  $1,083  $7,361  $801,969  $867,731 
                                                                
Liabilities:                                                                
Borrowings $-  $-  $-  $-  $27,791  $29,018  $27,791  $29,018  $-  $-  $-  $-  $36,071  $33,959  $36,071  $33,959 
Interest rate swaps  -   -   15,426   4,314   -   -   15,426   4,314   -   -   4,645   3,386   -   -   4,645   3,386 
                                                                
Total liabilities $-  $-  $15,426  $4,314  $27,791  $29,018  $43,217  $33,332  $-  $-  $4,645  $3,386  $36,071  $33,959  $40,716  $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:

- 29 - 

 

  For the three months ended 
 September 30, 2016
  Trust preferred 
securities		 Junior subordinated 
debentures
  (In thousands)
     
Beginning balance $7,167  $27,485 
Net gain from fair value adjustment of financial assets (1)  23   - 
Net loss from fair value adjustment of financial liabilities (1)  -   296 
Increase in accrued interest payable  -   10 
Change in unrealized gains (losses) included in other comprehensive income  1   - 
Ending balance $7,191  $27,791 
         
Changes in unrealized gains (losses) held at period end $1  $- 

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

- 31 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  For the three months ended 
 September 30, 2015
  Municipals Trust preferred 
securities		 Junior subordinated 
debentures
  (In thousands)
       
Beginning balance $7,899  $7,226  $29,476 
Transfer to held-to-maturity  -   -   - 
Principal repayments  (7,899)  -   - 
Maturities  -   -   - 
Net loss from fair value adjustment of financial assets included in earnings (1)  -   (44)  - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)  -   -   (988)
Increase in accrued interest payable  -   -   3 
Change in unrealized gains (losses)  included in other comprehensive income  -   (1)  - 
Ending balance $-  $7,181  $28,491 
             
Changes in unrealized gains (losses) held at period end $-  $(1) $- 
  For the three months ended
  September 30, 2017 September 30, 2016
 
 		 
 		Trust preferred
securities		 
 		Junior subordinated
debentures		 
 		Trust preferred
securities		 
 		Junior subordinated
debentures
  (In thousands)
         
Beginning balance $7,444  $35,137  $7,167  $27,485 
Security call  (6,300)  -   -   - 
Net gain from fair value adjustment of financial assets (1)  28   -   23   - 
Net loss from fair value adjustment of financial liabilities (1)  -   925   -   296 
Decrease in accrued interest receivable  (89)  -   -   - 
Increase in accrued interest payable  -   9   -   10 
Change in unrealized gains included in other comprehensive income  -   -   1   - 
Ending balance $1,083  $36,071  $7,191  $27,791 
                 
Changes in unrealized gains held at period end $-  $-  $1  $- 

 

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

 

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

 

  For the nine months ended 
 September 30, 2016
  Trust preferred 
securities		 Junior subordinated 
debentures
   
     
Beginning balance $7,212  $29,018 
Net loss from fair value adjustment of financial assets included in earnings (1)  (23)  - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)  -   (1,250)
Increase in accrued interest payable  1   23 
Change in unrealized gains (losses) included in other comprehensive income  1   - 
Ending balance $7,191  $27,791 
         
Changes in unrealized gains (losses) held at period end $1  $- 
  For the nine months ended
  September 30, 2017 September 30, 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 
Security call  (6,300)  -   -   - 
Net gain (loss) from fair value adjustment of financial assets (1)  108   -   (23)  - 
Net loss (gain) from fair value adjustment of financial liabilities (1)  -   2,090   -   (1,250)
Decrease in accrued interest receivable  (88)  -   -   - 
Increase in accrued interest payable  -   22   1   23 
Change in unrealized gains included in other comprehensive income  2   -   1   - 
Ending balance $1,083  $36,071  $7,191  $27,791 
                 
Changes in unrealized gains held at period end $-  $-  $1  $- 

 

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

- 32 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

  For the nine months ended 
 September 30, 2015
  Municipals Trust preferred 
securities		 Junior subordinated 
debentures
  (In thousands)
       
Beginning balance $15,519  $7,090  $28,771 
Transfer to held-to-maturity  (4,510)  -   - 
Purchases  1,000   -   - 
Principal repayments  (8,009)  -   - 
Maturities  (4,000)  -   - 
Net gain from fair value adjustment of financial assets included in earnings (1)  -   86   - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)  -   -   (283)
Increase in accrued interest payable  -   -   3 
Change in unrealized gains (losses) included in other comprehensive income  -   5   - 
Ending balance $-  $7,181  $28,491 
             
Changes in unrealized gains (losses) held at period end $-  $5  $- 

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

 

During the three and nine months ended September 30, 2016 and 2015, there2017, one mutual fund security for $11.6 million was transferred from Level 2 into Level 1. There were no transfers between Levels 1, 2 and 3.3 during the three and nine months ended September 30, 2016.

 

 

- 33 -

- 30 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

 September 30, 2016 September 30, 2017
                    
 Fair Value Valuation Technique Unobservable Input Range Weighted Average Fair Value Valuation Technique Unobservable Input Range Weighted Average
 (Dollars in thousands)   (Dollars in thousands)
Assets:                    
                    
Trust preferred securities $7,191  Discounted cash flows Discount rate 7.0%-7.05%  7.0% $1,083  Discounted cash flows Discount rate  n/a   5.9%
                                
Liabilities:                                
                                
Junior subordinated debentures $27,791  Discounted cash flows Discount rate  7.0%   7.0% $36,071  Discounted cash flows Discount rate  n/a   5.9%

 

 December 31, 2015 December 31, 2016
                    
 Fair Value Valuation Technique Unobservable Input Range Weighted Average Fair Value Valuation Technique Unobservable Input Range Weighted Average
 (Dollars in thousands)   (Dollars in thousands)
Assets:                    
                    
Trust preferred securities $7,212  Discounted cash flows Discount rate 7.0%-7.07%  7.1% $7,191  Discounted cash flows Discount rate  6.3%-7.1%   7.0%
                                 
Liabilities:                                 
                                 
Junior subordinated debentures $29,018  Discounted cash flows Discount rate  7.0%   7.0% $33,959  Discounted cash flows Discount rate   n/a   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 September 30, 20162017 and December 31, 2015,2016, are the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value at September 30, 20162017 and December 31, 2015:2016:

 

 Quoted Prices            
 in Active Markets Significant Other Significant Other    
 for Identical Assets Observable Inputs Unobservable Inputs Total carried at fair value
 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		 (Level 1) (Level 2) (Level 3) on a recurring basis
 2016 2015 2016 2015 2016 2015 2016 2015 2017 2016 2017 2016 2017 2016 2017 2016
 (In thousands) (In thousands)
Assets:                                
Impaired loans $-  $-  $-  $-  $12,144  $15,360  $12,144  $15,360  $-  $-  $-  $-  $20,159  $14,968  $20,159  $14,968 
Other real estate owned  -   -   -   -   2,839   4,932   2,839   4,932   -   -   -   -   -   533   -   533 
                                                                
Total assets $-  $-  $-  $-  $14,983  $20,292  $14,983  $20,292  $-  $-  $-  $-  $20,159  $15,501  $20,159  $15,501 

 

 

- 34 -

- 31 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

 September 30, 2016 September 30, 2017
        
 Fair Value Valuation Technique Unobservable Input Range Weighted Average Fair Value Valuation Technique Unobservable Input Range Weighted Average
 (Dollars in thousands)   (Dollars in thousands)
Assets:                    
                    
Impaired loans $2,472 Income approach Capitalization rate 6.0%to7.1%  7.1% $1,566  Income approach Capitalization rate  6.5%to7.5%   7.0%
                 
  Loss severity discount 8.7%to15.0%  14.0%       Reduction for planned expedited disposal   15.0%  15.0%
                            
Impaired loans $4,426 Sales approach Adjustment to sales comparison value to reconcile differences between comparable sales -40.0%to16.2%  -3.1% $13,852  Sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to16.2%   -0.6%
  Loss severity discount  15.0%   15.0%                 
                  Reduction for planned expedited disposal  0.0%to15.0%    3.7%
                            
Impaired loans $5,246 Blended income and sales approach Adjustment to sales comparison value to reconcile differences between comparable sales -50.0%to25.0%  -2.4% $4,741  Blended income and sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -30.0%to25.0%   -0.8%
  Capitalization rate 5.3%to11.0%  7.1%                 
  Loss severity discount 6.9%to15.0%  13.8%       Capitalization rate  5.0%to9.8%    7.5%
                            
                  Reduction for planned expedited disposal  14.5%to15.0%    15.0%
           
           
Other real estate owned $2,839 Sales approach Adjustment to sales comparison value to reconcile differences between comparable sales -5.0%to25.0%  2.8%

 

- 35 -
  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%to7.5%   7.0%
                   
        Reduction planned for 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%to16.2%   -1.5%
                   
        Reduction planned for expedited disposal  0%to15.0%   7.7%
                   
Impaired loans $4,258  Blended income and sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to25.0%   -0.6%
                   
        Capitalization rate  5.3%to9.5%   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%to18.6%   11.0%

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 20162017 and December 31, 2015.2016.

- 32 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The fair value of each material class of financial instruments at September 30, 2016 and December 31, 2015 and the related methods and assumptions used to estimate fair value at September 30, 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 held for sale:

The fair value of non-performing loans held for sale is estimated through a negotiated sales price.

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.

 

- 36 -

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.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.

- 33 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Accrued Interest Payable:

 

The carrying amount is a reasonable estimate of fair value due to its short-term nature.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 September 30, 20162017 and December 31, 2015,2016, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

- 37 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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:

 

 September 30, 2017
 September 30, 2016 Carrying Fair      
 Carrying
Amount		 Value Level 1 Level 2 Level 3 Amount Value Level 1 Level 2 Level 3
 (In thousands) (In thousands)
Assets:                              
                              
Cash and due from banks $47,880  $47,880  $47,880  $-  $-  $60,161  $60,161  $60,161  $-  $- 
Securities held-to-maturity                                        
Mortgage-backed securities  7,978   7,839   -   7,839   - 
Other securities  33,274   33,410   -   -   33,410   22,952   21,542   -   -   21,542 
Securities available for sale                                        
Mortgage-backed securities  545,067   545,067   -   545,067   -   519,861   519,861   -   519,861   - 
Other securities  365,812   365,812   -   358,621   7,191   276,698   276,698   11,589   264,026   1,083 
Loans  4,741,277   4,780,500   -   -   4,780,500   5,070,376   5,058,558   -   -   5,058,558 
FHLB-NY stock  65,185   65,185   -   65,185   -   55,228   55,228   -   55,228   - 
Accrued interest receivable  21,076   21,076   -   21,076   - 
Interest rate swaps  5,410   5,410   -   5,410   - 
                                        
Total assets $5,798,495  $5,837,854  $47,880  $968,873  $4,821,101  $6,039,740  $6,026,373  $71,750  $873,440  $5,081,183 
                                        
                                        
Liabilities:                                        
Deposits $4,041,781  $4,058,678  $2,657,230  $1,401,448  $-  $4,444,448  $4,445,811  $3,039,893  $1,405,918  $- 
Borrowings  1,360,515   1,370,749   -   1,342,958   27,791   1,200,682   1,196,962   -   1,160,891   36,071 
Accrued interest payable  3,512   3,512   -   3,512   - 
Interest rate swaps  15,426   15,426   -   15,426   -   4,645   4,645   -   4,645   - 
                                        
Total liabilities $5,417,722  $5,444,853  $2,657,230  $2,759,832  $27,791  $5,653,287  $5,650,930  $3,039,893  $2,574,966  $36,071 

 

  December 31, 2015
  Carrying
Amount		 Fair
Value		 Level 1 Level 2 Level 3
  (In thousands)
Assets:                    
                     
Cash and due from banks $42,363  $42,363  $42,363  $-  $- 
Securities held-to-maturity                    
Other securities  6,180   6,180   -   -   6,180 
Securities available for sale                    
Mortgage-backed securities  668,740   668,740   -   668,740   - 
Other securities  324,657   324,657   -   317,445   7,212 
Loans  4,387,979   4,434,079   -   -   4,434,079 
FHLB-NY stock  56,066   56,066   -   56,066   - 
Interest rate swaps  48   48   -   48   - 
                     
Total assets $5,486,033  $5,532,133  $42,363  $1,042,299  $4,447,471 
                     
                     
Liabilities:                    
Deposits $3,892,547  $3,902,888  $2,489,245  $1,413,643  $- 
Borrowings  1,271,676   1,279,946   -   1,250,928   29,018 
Interest rate swaps  4,314   4,314   -   4,314   - 
                     
Total liabilities $5,168,537  $5,187,148  $2,489,245  $2,668,885  $29,018 

- 34 - 

 

- 38 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

  December 31, 2016
  Carrying Fair      
  Amount 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 

12.10.        Derivative Financial Instruments

 

At September 30, 20162017 and December 31, 2015,2016, 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 isthree purposes: 1) 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, at both September 30, 20162017 and December 31, 2015. The second purpose is to2016; 2) mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $208.1$279.5 million and $146.9$235.4 million at September 30, 20162017 and December 31, 2015, respectively.2016, respectively; and 3) to mitigate exposure to rising interest rates on certain short-term advances totaling $50.0 million at September 30, 2017.

 

At September 30, 2017, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges. At December 31, 2016, we held fair value hedges and certain derivatives not designated as hedges.

The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

At September 30, 2017 and December 31, 2015,2016, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At September 30, 20162017 and December 31, 2015,2016, derivatives with a combined notional amount of $189.8$261.2 million and $128.5$217.1 million were designated as fair value hedges. At September 30, 2017, derivatives with a combined notional amount of $50.0 million were designated as cash flow hedges. At December 31, 2016, the Company did not have any cash flow hedges.

For cash flow hedges, the effective portion of changes in the fair value of the derivative is reported in AOCL, net of tax, but the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain (loss)gain/loss from fair value adjustments” in the Consolidated Statements of Income.

- 35 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

 September 30, 2016 December 31, 2015 September 30, 2017 December 31, 2016
 Notional
Amount		 Net Carrying
Value (1)		 Notional
Amount		 Net Carrying
Value (1)		 Notional Net Carrying Notional Net Carrying
     Amount Value (1) Amount Value (1)
Interest rate swaps (hedge) $-  $-  $28,588  $48 
Interest rate swaps (hedge)  189,791   (9,095)  99,955   (1,515)
    
Interest rate swaps (fair value hedge) $176,408  $5,410  $182,177  $6,350 
Interest rate swaps (fair value hedge)  84,774   (1,482)  34,916   (658)
Interest rate swaps (non-hedge)  36,321   (6,331)  36,321   (2,799)  36,321   (3,045)  36,321   (2,728)
Interest rate swaps (cash flow hedge)  50,000   (118)  -   - 
Total derivatives $226,112  $(15,426) $164,864  $(4,266) $347,503  $765  $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 September 30, 2016 and December 31, 2015.

- 39 -

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 For the nine months ended
 For the three months ended 
September 30,		 For the nine months ended 
September 30,		 September 30, September 30,
(In thousands) 2016 2015 2016 2015 2017 2016 2017 2016
                
Financial Derivatives:                        
Interest rate swaps (non-hedge) $(111) $(1,753) $(3,532) $(882) $(56) $(111) $(316) $(3,532)
Interest rate swaps (hedge)  (380)  (387)  (795)  (433)
Net (loss) gain (1) $(491) $(2,140) $(4,327) $(1,315)
Interest rate swaps (fair value hedge)  (351)  (380)  (597)  (795)
Net loss (1) $(407) $(491) $(913) $(4,327)

 

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

 

During the three months and nine months ended September 30, 20162017 and 2015,2016, the Company did not record any hedge ineffectiveness.

 

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

 

The Company did not have derivative assets presented in the Consolidated Statements of Condition at September 30, 2016.

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

  December 31, 2015
        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 $48  $-  $48  $48  $-  $- 

- 36 - 

 

- 40 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

 September 30, 2016 September 30, 2017
       Gross Amounts Not Offset in the Consolidated Statement of Condition         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 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 $15,426  $-  $15,426  $-  $15,426  $-  $5,410  $-  $5,410  $-  $670  $4,740 

        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 $4,645  $-  $4,645  $1,105  $-  $3,540 

  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 

 

 December 31, 2015
       Gross Amounts Not Offset in the Consolidated Statement of Condition         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 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 $4,314  $-  $4,314  $48  $4,266  $-  $3,386  $-  $3,386  $-  $-  $3,386 

 

 

- 37 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

13.11.        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 September 30,		 For the nine months
ended September 30,		 
 		For the three months
ended September 30,		 
 		For the nine months
ended September 30,
(In thousands) 2016 2015 2016 2015 2017 2016 2017 2016
Federal:                        
Current $6,474  $6,195  $26,362  $20,262  $6,703  $6,474  $16,308  $26,362 
Deferred  (906)  (820)  (844)  (3,480)  (2,023)  (906)  (1,303)  (844)
Total federal tax provision  5,568   5,375   25,518   16,782   4,680   5,568   15,005   25,518 
State and Local:                                
Current  1,492   1,635   7,853   6,490   1,398   1,492   2,817   7,853 
Deferred  (405)  (349)  (384)  (1,544)  (787)  (405)  (502)  (384)
Total state and local tax provision  1,087   1,286   7,469   4,946   611   1,087   2,315   7,469 
                                
Total income tax provision $6,655  $6,661  $32,987  $21,728  $5,291  $6,655  $17,320  $32,987 

 

- 41 -

- 38 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The effective tax rate was 38.5% and 37.7% for the three months ended September 30, 2016 and 2015, respectively, and 39.5% and 38.6% for the nine months ended September 30, 2016 and 2015, respectively. The increase in the effective tax rate reflects the reduced impact of preferential tax items, as a result of the gain on sale of one of our properties in Flushing, Queens recorded during the nine months ended September 30, 2016.

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

  For the three months
ended September 30,		 For the nine months
ended September 30,
(dollars in thousands) 2016 2015 2016 2015
           
Taxes at federal statutory rate $6,051   35.0% $6,184   35.0% $29,266   35.0% $19,706   35.0%
Increase (reduction) in taxes resulting from:                                
State and local income tax, net of Federal income tax benefit  707   4.1   836   4.7   4,855   5.8   3,215   5.7 
Other  (103)  (0.6)  (359)  (2.0)  (1,134)  (1.3)  (1,193)  (2.1)
Taxes at effective rate $6,655   38.5% $6,661   37.7% $32,987   39.5% $21,728   38.6%

The Company has recorded a deferred tax asset of $34.8 million at September 30, 2016, which is included in “Other assets” in the Consolidated Statements of Financial Condition. This represents the 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 $23.3 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 September 30, 2016.

14.12.        Accumulated Other Comprehensive Income:Income (Loss):

 

The following table sets forth the changes in accumulated other comprehensive incomeloss by component for the three months ended September 30, 2017:

  Unrealized Gains
(Losses) on
Available for Sale
Securities		 Unrealized Gains
(Losses) on
Cash flow
Hedges		 Defined Benefit
Pension Items		 Total
  (In thousands)
         
Beginning balance, net of tax $(2,110) $(124) $(4,342) $(6,576)
Other comprehensive income before reclassifications, net of tax  (333)  56   -  (277)
                 
Amounts reclassified from accumulated other comprehensive income, net of tax  108   -   81   189 
                 
Net current period other comprehensive income, net of tax  (225)  56   81   (88)
                 
Ending balance, net of tax $(2,335) $(68) $(4,261) $(6,664)

The following table sets forth the changes in accumulated other comprehensive loss by component for the three months ended September 30, 2016:

 

 Unrealized Gains 
and (Losses) on 
Available for Sale
Securities		 Defined Benefit
Pension Items		 Total Unrealized Gains
(Losses) on
Available for Sale
Securities		 Defined Benefit
Pension Items		 Total
 (In thousands) (In thousands)
            
Beginning balance, net of tax $7,923  $(4,835) $3,088  $7,923  $(4,835) $3,088 
Other comprehensive income (loss) before reclassifications, net of tax  (2,942)  -   (2,942)
Other comprehensive income before reclassifications, net of tax  (2,942)  -  (2,942)
                        
Amounts reclassified from accumulated other comprehensive income, net of tax  -   103   103   -   103   103 
                        
Net current period other comprehensive income (loss), net of tax  (2,942)  103   (2,839)
Net current period other comprehensive income, net of tax  (2,942)  103   (2,839)
                        
Ending balance, net of tax $4,981  $(4,732) $249  $4,981  $(4,732) $249 

 

 

- 42 -

- 39 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table sets forth the changes in accumulated other comprehensive incomeloss by component for the threenine months ended September 30, 2015:2017:

 

 Unrealized Gains 
and (Losses) on 
Available for Sale
Securities		 Defined Benefit
Pension Items		 Total Unrealized Gains
(Losses) on
Available for Sale
Securities		 Unrealized Gains
(Losses) on
Cash flow
Hedges		 Defined Benefit
Pension Items		 Total
 (In thousands) (In thousands)
              
Beginning balance, net of tax $2,211  $(5,967) $(3,756) $(3,859) $-  $(4,503) $(8,362)
Other comprehensive income before reclassifications, net of tax  3,943   -   3,943   1,416   (68)  -  1,348 
                            
Amounts reclassified from accumulated other comprehensive income, net of tax  (58)  167   109   108   -   242   350 
                            
Net current period other comprehensive income, net of tax  3,885   167   4,052   1,524   (68)  242   1,698 
                            
Ending balance, net of tax $6,096  $(5,800) $296  $(2,335) $(68) $(4,261) $(6,664)

 

The following table sets forth the changes in accumulated other comprehensive income by component for the nine months ended September 30, 2016:

 

 Unrealized Gains 
and (Losses) on 
Available for Sale
Securities		 Defined Benefit
Pension Items		 Total Unrealized Gains
(Losses) on
Available for Sale
Securities		 Defined Benefit
Pension Items		 Total
 (In thousands) (In thousands)
            
Beginning balance, net of tax $(521) $(5,041) $(5,562) $(521) $(5,041) $(5,562)
Other comprehensive income before reclassifications, net of tax  6,852   -   6,852   6,852   -  6,852 
                        
Amounts reclassified from accumulated other comprehensive income, net of tax  (1,350)  309   (1,041)  (1,350)  309   (1,041)
                        
Net current period other comprehensive income, net of tax  5,502   309   5,811   5,502   309   5,811 
                        
Ending balance, net of tax $4,981  $(4,732) $249  $4,981  $(4,732) $249 

 

The following table sets forth the changes in accumulated other comprehensive income by component for the nine months ended September 30, 2015:

 

  Unrealized Gains 
and (Losses) on 
Available for Sale
Securities		 Defined Benefit
Pension Items		 Total
  (In thousands)
Beginning balance, net of tax $3,392  $(6,299) $(2,907)
Other comprehensive income before reclassifications, net of tax  2,798   -   2,798 
             
Amounts reclassified from accumulated other comprehensive income, net of tax  (94)  499   405 
             
Net current period other comprehensive income, net of tax  2,704   499   3,203 
             
Ending balance, net of tax $6,096  $(5,800) $296 

- 40 - 

- 43 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables set forth significant amounts reclassified from accumulated other comprehensive incomeloss by component for the periods indicated:

 

For the three months ended September 30, 2016
      
Details about Accumulated Other
Comprehensive Income Components		 Amounts Reclassified from
Accumulated Other
Comprehensive Income		  Affected Line Item in the Statement
Where Net Income is Presented
  (In thousands)   
      
Amortization of defined benefit pension items:       
Net actuarial losses $(192)(1)  Other expense
Net prior service credits  11 (1)  Other expense
   (181)  Total before tax
   78   Tax benefit
  $(103)  Net of tax
For the three months ended September 30, 2017
       
  Amounts Reclassified from    
Details about Accumulated Other Accumulated Other   Affected Line Item in the Statement
Comprehensive Loss Components Comprehensive Loss   Where Net Income is Presented
  (In thousands)    
Unrealized losses on available for sale securities: $(186)   Net loss on sale of securities
   78    Tax benefit
  $(108)   Net of tax
         
Amortization of defined benefit pension items:        
Actuarial losses $(152)(1)  Other operating expense
Prior service credits  12(1)  Other operating expense
   (140)   Total before tax
   59    Tax benefit
  $(81)   Net of tax

For the three months ended September 30, 2016
       
   Amounts Reclassified from     
Details about Accumulated Other  Accumulated Other    Affected Line Item in the Statement
Comprehensive Loss Components  Comprehensive Loss    Where Net Income is Presented
   (In thousands)     
         
Amortization of defined benefit pension items:        
Actuarial losses $(192)(1)  Other operating expense
Prior service credits  11(1)  Other operating expense
   (181)   Total before tax
   78    Tax benefit
  $(103)   Net of tax

 

 

For the three months ended September 30, 2015
      
Details about Accumulated Other
Comprehensive Income Components		 Amounts Reclassified from
Accumulated Other
Comprehensive Income		  Affected Line Item in the Statement
Where Net Income is Presented
  (In thousands)   
      
Net unrealized gains on available for sale securities $103    Net gain on sale of securities
   (45)   Tax expense
  $58    Net of tax
        
Amortization of defined benefit pension items:       
Net actuarial losses $(307)(1)  Other expense
Net prior service credits  11 (1)  Other expense
   (296)  Total before tax
   129    Tax benefit
  $(167)   Net of tax

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the nine months ended September 30, 2017
       
  Amounts Reclassified from    
Details about Accumulated Other Accumulated Other   Affected Line Item in the Statement
Comprehensive Loss Components Comprehensive Loss   Where Net Income is Presented
  (In thousands)    
Unrealized losses on available for sale securities: $(186)   Net loss on sale of securities
   78    Tax benefit
  $(108)   Net of tax
         
Amortization of defined benefit pension items:        
Actuarial losses $(454)(1)  Other operating expense
Prior service credits  34(1)  Other operating expense
   (420)   Total before tax
   178    Tax benefit
  $(242)   Net of tax

For the nine months ended September 30, 2016
  Amounts Reclassified from    
Details about Accumulated Other Accumulated Other   Affected Line Item in the Statement
Comprehensive Loss Components Comprehensive Loss   Where Net Income is Presented
(In thousands)
       
Unrealized gains on available for sale securities: $2,363    Net gain on sale of securities
   (1,013)   Tax expense
  $1,350    Net of tax
         
Amortization of defined benefit pension items:        
Actuarial losses $(575)(1)  Other operating expense
Prior service credits  33(1)  Other operating expense
   (542)   Total before tax
   233    Tax benefit
  $(309)   Net of tax

 

(1)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 10 of the Notes to Consolidated Financial Statements “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)

The following tables set forth significant amounts reclassified from accumulated other comprehensive income by component for the periods indicated:

For the nine months ended September 30, 2016
Details about Accumulated Other
Comprehensive Income Components		 Amounts Reclassified from
Accumulated Other
Comprehensive Income		  Affected Line Item in the Statement
Where Net Income is Presented
  (In thousands)   
      
Net unrealized gains on available for sale securities $2,363    Net gain on sale of securities
   (1,013)   Tax expense
  $1,350    Net of tax
        
Amortization of defined benefit pension items:       
Net actuarial losses $(575) (1)  Other expense
Net prior service credits  33 (1)  Other expense
   (542)  Total before tax
   233    Tax benefit
  $(309)   Net of tax

For the nine months ended September 30, 2015
Details about Accumulated Other
Comprehensive Income Components		 Amounts Reclassified from
Accumulated Other
Comprehensive Income		  Affected Line Item in the Statement
Where Net Income is Presented
  (in thousands)   
      
Net unrealized gains on available for sale securities $167    Net gain on sale of securities
   (73)   Tax expense
  $94    Net of tax
        
Amortization of defined benefit pension items:       
Net actuarial losses $(920) (1)  Other expense
Net prior service credits  34 (1)  Other expense
   (886)  Total before tax
   387    Tax benefit
  $(499)   Net of tax

(1)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 108 of the Notes to Consolidated Financial Statements “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)

15.13.        Regulatory Capital

 

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of September 30, 2016,2017, the Bank continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. In 2016, a Capital Conservation Buffer (“CCB”) requirement became effective for banks. The CCB is designed to establish a capital range above minimum capital requirements and impose constraints on dividends, share buybacks and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB in 20162017 is 0.625%1.25% and increases 0.625% annually through 2019 to 2.5%. The CCB for the Bank at September 30, 20162017 was 4.96%6.60%.

 

Set forth below is a summary of the Bank’s compliance with banking regulatory capital standards.

 

  September 30, 2016 December 31, 2015
  Amount Percent of
Assets		 Amount Percent of
Assets
  (Dollars in thousands)
         
Tier I (leverage) capital:                
Capital level $528,168   8.88% $494,690   8.89%
Requirement to be well capitalized  297,261   5.00   278,175   5.00 
Excess  230,907   3.88   216,515   3.89 
                 
Common Equity Tier I risk-based capital:                
Capital level $528,168   12.44% $494,690   12.62 
Requirement to be well capitalized  275,911   6.50   254,768   6.50 
Excess  252,257   5.94   239,922   6.12 
                 
Tier 1 risk-based capital:                
Capital level $528,168   12.44% $494,690   12.62%
Requirement to be well capitalized  339,583   8.00   313,560   8.00 
Excess  188,585   4.44   181,130   4.62 
                 
Total risk-based capital:                
Capital level $549,963   12.96% $516,226   13.17%
Requirement to be well capitalized  424,479   10.00   391,950   10.00 
Excess  125,484   2.96   124,276   3.17 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

  September 30, 2017 December 31, 2016
    Percent of   Percent of
  Amount Assets Amount Assets
  (Dollars in thousands)
         
Tier I (leverage) capital:        
Capital level $629,748   10.10% $607,033   10.12%
Requirement to be well capitalized  311,625   5.00   299,848   5.00 
Excess  318,123   5.10   307,185   5.12 
                 
Common Equity Tier I risk-based capital:                
Capital level $629,748   14.04% $607,033   14.12%
Requirement to be well capitalized  291,614   6.50   279,443   6.50 
Excess  338,134   7.54   327,590   7.62 
                 
Tier 1 risk-based capital:                
Capital level $629,748   14.04% $607,033   14.12%
Requirement to be well capitalized  358,910   8.00   343,930   8.00 
Excess  270,838   6.04   263,103   6.12 
                 
Total risk-based capital:                
Capital level $655,017   14.60% $629,262   14.64%
Requirement to be well capitalized  448,637   10.00   429,913   10.00 
Excess  206,380   4.60   199,349   4.64 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The Holding Company is subject to the same regulatory capital requirements as the Bank. As of September 30, 2016,2017, the Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The CCB for the Holding Company at September 30, 20162017 was 4.87%6.61%.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Set forth below is a summary of the Holding Company’s compliance with banking regulatory capital standards.

 

 September 30, 2017 December 31, 2016
 September 30, 2016 December 31, 2015   Percent of   Percent of
 Amount Percent of
Assets		 Amount Percent of
Assets		 Amount Assets Amount Assets
 (Dollars in thousands) (Dollars in thousands)
                
Tier I (leverage) capital:                        
Capital level $523,428   8.80% $490,919   8.84% $565,265   9.07% $539,228   9.00%
Requirement to be well capitalized  297,458   5.00   277,611   5.00   311,475   5.00   299,654   5.00 
Excess  225,970   3.80   213,308   3.84   253,790   4.07   239,574   4.00 
                                
Common Equity Tier I risk-based capital:                                
Capital level $496,605   11.72% $462,883   11.83  $530,442   11.84% $506,432   11.79%
Requirement to be well capitalized  275,404   6.50   254,335   6.50   291,325   6.50   279,121   6.50 
Excess  221,201   5.22   208,548   5.33   239,117   5.34   227,311   5.29 
                                
Tier 1 risk-based capital:                                
Capital level $523,428   12.35% $490,919   12.55% $565,265   12.61% $539,228   12.56%
Requirement to be well capitalized  338,958   8.00   313,028   8.00   358,554   8.00   343,534   8.00 
Excess  184,470   4.35   177,891   4.55   206,711   4.61   195,694   4.56 
                                
Total risk-based capital:                                
Capital level $545,223   12.87% $512,454   13.10% $665,534   14.85% $636,457   14.82%
Requirement to be well capitalized  423,698   10.00   391,285   10.00   448,193   10.00   429,417   10.00 
Excess  121,525   2.87   121,169   3.10   217,341   4.85   207,040   4.82 

 

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

16.14.       New Authoritative Accounting Pronouncements

 

In August 2016,2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, “Derivatives and Hedging (Topic 815)”providing targeted improvements to the accounting for hedging activities, which is effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional, that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. We are currently evaluating the impact of adopting this new guidance on our consolidated results of operations, financial condition and cash flows.

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities” which shortens the amortization period for premiums on purchased callable debt securities to the earliest call date, rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount. The amendments in this ASU require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional future call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance is not expected to have an impact on the Company's financial positions, results of operations or disclosures as we currently amortize our callable debt securities to the first call date.

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that an employer disaggregate the service cost component from the other components of net benefit cost, as follows:

·Service cost must be presented in the same line item(s) as other employee compensation costs. These costs are generally included within income from continuing operations, but in some cases may be eligible for capitalization, if certain criteria are met.

·All other components of net benefit cost must be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. These generally include interest cost, actual return on plan assets, amortization of prior service cost included in accumulated other comprehensive income, and gains or losses from changes in the value of the projected benefit obligation or plan assets. If a separate line item is used to present the other components of net benefit cost, it must be appropriately described. If a separate line item is not used, an entity must disclose the line item(s) in the income statement that includes the other components of net benefit cost. The ASU clarifies that these costs are not eligible for capitalization.

The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted as of the beginning of an annual period. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.

In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, to clarify how certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments are intended to reduce diversity in practice by clarifying whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company does not expect adoption of this ASU will have a material affecteffect on its consolidated financial statements.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” which sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and will apply to the measurement of credit losses on financial assets measured at amortized cost and to some off-balance sheet credit exposures. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of thehas begun collecting and evaluating data and system requirements to implement this standard. The adoption of this ASUupdate could have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation”, which introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an additional paid in capital pool. The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing GAAP) or account for forfeitures when they occur. The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of adopting this new guidance on ourCompany’s consolidated results of operations and financial condition. The extent of the impact is still unknown and will depend on many factors, such as the composition of the Company’s loan portfolio and expected loss history at adoption. Management has developed committees to evaluate and implement CECL.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. From the lessee's perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluatingThe Company has not adopted a new accounting policy as of the impactfiling date. Management is continuing to evaluate the standard, but the effects of adopting this new guidancerecognizing most operating leases on our consolidated resultsthe Consolidated Statements of operationsFinancial Condition is expected to be material. The Company expects to recognize right-of-use assets and financial condition.lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

In January 2016, FASB issued ASU No. 2016-01 “Financial Instruments” which requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. EarlyWe do not believe the adoption is not permitted forof this standard will have a material impact on the changes that affect the Company. We are currently evaluating the impact of adopting this new guidance on ourCompany’s consolidated results of operations, financial condition or cash flows.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The guidance in this ASU for public companies is effective for the annual periods beginning after December 15, 2016, including interim periods therein. ASU 2014-09 does not apply to the majority of our revenue streams. In August 2015, the FASB approved a one-year delay of the effective date of this standard. The deferral would require public entities to apply the standard for annual reporting periods beginning after December 15, 2017. Public companies would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016. The Company has completed a review of its income streams determining that a significant portion of its income is derived from sources scoped out of this guidance, therefore, we do not believe the adoption of this standard will have a material impact on the Company’s consolidated results of operations, financial condition.condition or cash flows.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

As used in this Quarterly Report, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial Corporation and its direct and indirect wholly owned subsidiaries, Flushing Bank (the “Bank”), Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.

 

Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed elsewhere in this Quarterly Report and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

 

Executive Summary

 

We are a Delaware corporation organized in May 1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. The Bank converted from a federally chartered mutual savings bank toand became a federally chartered stock savings bank on November 21, 1995, at which time Flushing Financial Corporation acquired all of the stock of the Bank. In 2013, the Bank’s charter was changed to a full-service New York State chartered commercial bank, and its name was changed to Flushing Bank. As a result of the Bank’s change in charter to a full-service New York State chartered commercial bank, thebank. The Bank’s primary regulator becameis the New York State Department of Financial Services, and its primary federal regulator becameis the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank also operates an internet branch, which operates under the brands of iGObanking.com®and BankPurely®. The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of junior subordinated debt, and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

 

Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential loans, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four family loans (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units); (2) Small Business Administration (“SBA”) loans and other small business loans; (3) construction loans, primarily for residential properties; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit. Our results of operations depend primarily on net interest income, which is the difference between the income earned on itsour interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income primarily from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Loan Bank of New York stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by changes in the fair value of financial assets and financial liabilities for which changes in value are recorded through earnings, our periodic provision for loan losses and specific provision for losses on real estate owned.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Our strategy is to continue our focus on being an institution serving consumers, businesses, and governmental units in our local markets. In furtherance of this objective, we intend to:

 

·increase core deposits and continue our emphasis on the origination of multi-family residential mortgage loans, commercial business loansto improve funding mix to manage funding costs;

·increase net interest income by leveraging loan pricing opportunities and commercial real estate mortgage loans;portfolio mix;

·enhance earnings by improving scalability and efficiency;

·manage credit risk;

·maintain well capitalized levels under all stress test scenarios;

 

·increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens;

·maintain asset quality;

·manage deposit growth and maintain a low cost of funds through

§business banking deposits,
§personal accounts,
§municipal deposits through government banking, and
§new customer relationships via iGObanking.com®;

·building relationships with our lending and deposit customers;

·take advantage of market disruptions to attract talent and customers from competitors;

·manage interest rate risk and capital; and

 

·manage enterprise-wide risk.

 

There can be no assurance that we will be able to effectively implement this strategy. Our strategy is subject to change by the Board of Directors.

 

Our investment policy, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate risk and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate risk exposure, our interest rate sensitivity “gap” position, the types of securities to be held and other factors. We classify our investment securities as available for sale or held-to-maturity.

 

We carry a portion of our financial assets and financial liabilities at fair value and record changes in their fair value through earnings in non-interest income on our Consolidated Statements of Income and Comprehensive Income. A description of the financial assets and financial liabilities that are carried at fair value through earnings can be found in Note 119 of the Notes to the Consolidated Financial Statements.

 

During the third quarter of 2017, we continued our strategy of focusing our origination efforts on higher yielding loans. Loan originations and purchases for the nine months ended September 30, 2017 totaled $710.7 million, with multi-family real estate, commercial real estate and commercial business loans accounting for 89.3% of originations and purchases. Our total loan portfolio grew 5% during the nine months ended September 30, 2017 while holding our strong underwriting standards. Loan applications in process strengthened to $417.0 million at September 30, 2017, compared to $279.1 million at June 30, 2017 and $289.3 million at September 30, 2016.

The yield on loan production increased 21 basis points to 4.25% for the three months ended September 30, 2017, from 4.04% for the three months ended June 30, 2017 and 51 basis points from 3.74% for the comparable quarter of 2016. This marks the first quarter since the quarter ended December 31, 2008 that our yield from new loan originations and purchases exceeded the yield of our total loan portfolio, after excluding prepayment penalty income and recovered interest from delinquent loans.

Our net interest margin for the third quarter of 2016three months ended September 30, 2017 was 2.94%2.90%, a decrease of five basis points from the trailing quarter. Included in net interest income are prepayment penalties on loansquarter and securities and interest recovered from non-accrual loans. Absent prepayment penalty income and recovered interest, the net interest margin would have decreased by sixfour basis points to 2.81% forfrom the third quartercomparable prior year period. At the end of 2016 from 2.87% for the second quarter of 2016.2017, in order to remain competitive in our market, we increased the rates paid on our government deposits by a weighted average of 33 basis points. At the same time, we expanded BankPurely®, our eco-friendly, socially conscious, healthier lifestyle community internet brand, by offering a premium savings account. The full impact of these initiatives was experienced in the most recent quarter, as the cost of total deposits increased 14 basis points from the second quarter of 2017. Additionally, this quarter’s net-interest margin was negatively impacted by seasonal government deposit outflows, which were replaced with short-term borrowings costing an additional 30 basis points to 65 basis points.

 

The trend of improvingWe continued our discipline regarding non-interest expense and credit quality continued to improve, as our non-performing assets have decreased by 37% since the end of 2016 and net charge-offs remain minimal. However, during the three months endedrecent quarter, we recorded a provision for loan losses for the first time since the fourth quarter of 2015, of $3.3 million. The provision was the result of a reduction in the estimated fair value of the collateral underlying our performing taxi medallion portfolio. At September 30, 2016, as2017, we continued to see improvements in classified assets. Classified assets were $48.7have allocated $6.0 million at September 30, 2016,of our allowance for taxi medallion loans which was an increaseequals 33.0% of $3.9 million, or 8.7%, from June 30, 2016, while non-accrual loans increased $1.5 million, or 7.4%, during the third quarter to $21.9 million. Net charge-offs for the three months ended September 30, 2016 were $0.4 million. Our strong underwriting standards coupled with our practice of obtaining updated appraisals and recording charge-offs, when necessary, has resulted in a 54.5% average loan-to-value ratio on our collateral dependent loans reviewed for impairment at September 30, 2016.outstanding principal.

 

Net loans increased $45.4 million, or 1.0%, during the third quarter of 2016. Loan originations for the three months ended September 30, 2016 totaled $233.2 million. During the three months ended September 30, 2016, originations were primarily multi-family real estate, commercial real estate and commercial business loans as originations of these loan types accounted for 92.1% of the quarter’s originations. The weighted average yield on loan originations and purchases was 3.74% for the third quarter of 2016 compared to 3.71% and 3.56% for the quarters ended June 30, 2016 and September 30, 2015, respectively. Loan applications in process were $289.3 million at September 30, 2016 compared to $329.8 million at June 30, 2016. We have begun to execute on the strategy change to increase net interest income through increasing rates as opposed to increasing volume. The interest rates on our mortgage loan pipeline increased 11 basis points to 4.05% from 3.94% at June 30, 2016. This strategy shift positions the Company to reap the benefits of an increase in rates.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

The Bank and Company are subject to the same regulatory capital requirements. At September 30, 2016,See Note 13 of the Bank and Company were consideredNotes to be well-capitalized under all regulatory requirements. At September 30, 2016, the Bank’s capital ratios for Tier 1 leverage, Common Equity Tier 1, Tier 1 Risk-based, and Total Risk-based capital were 8.88%, 12.44%, 12.44% and 12.96%, respectively. At September 30, 2016, the Company’s capital ratios for Tier 1 leverage, Common Equity Tier 1, Tier 1 Risk-based, and Total Risk-based capital were 8.80%, 11.72%, 12.35% and 12.87%, respectively.Consolidated Financial Statements “Regulatory Capital”.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 20162017 AND 20152016

 

General. Net income for the three months ended September 30, 20162017 was $10.6$10.2 million, a decrease of $0.4$0.5 million, or 3.4%4.3%, compared to $11.0$10.6 million for the three months ended September 30, 2015.2016. Diluted earnings per common share were $0.35 for the three months ended September 30, 2017, a decrease of $0.02, or 5.4%, from $0.37 for the three months ended September 30, 2016, a decrease of $0.01, or 2.6%, from $0.382016.

Return on average equity decreased to 7.6% for the three months ended September 30, 2015.

Return on average equity was2017 from 8.4% for the three months ended September 30, 2016 compared to 9.5% for the three months ended September 30, 2015.2016. Return on average assets was 0.7% for the three months ended September 30, 2016 compared to 0.8% for the three months ended September 30, 2015.2017 and 2016.

 

Interest Income. Interest and dividend income increased $3.6$3.8 million, or 7.0%6.8%, to $59.3 million for the three months ended September 30, 2017 from $55.5 million for the three months ended September 30, 2016 from $51.9 million for the three months ended September 30, 2015.2016. The increase in interest income was primarily attributable to an increase of $533.4$251.7 million in the average balance of interest-earning assets to $5,684.4$5,936.1 million for the three months ended September 30, 20162017 from $5,151.0$5,684.4 million for the comparable prior year period, partially offset by a decreasecombined with an increase of 12nine basis points in the yield onof interest-earning assets to 3.91%4.00% for the three months ended September 30, 20162017 from 4.03%3.91% in the comparable prior year period. The declineincrease in the yield on interest-earning assets of 12nine basis points was primarily due to a 25 basis point reductionan increase of $347.1 million in the yield onaverage balance of total loans, net, which have a higher yield than the yield of total interest-earning assets, combined with a decrease of $94.3 million in the average balance of total securities, which have a lower yield than the yield of total interest-earning assets. The yield of interest-earning assets also improved due to 4.20%increases of four basis points and 12 basis points, respectively, in the yields of total loans, net and taxable securities for the three months ended September 30, 20162017 from 4.45% for the three months ended September 30, 2015. The yield on interest-earning assets was positively impacted by an increase of $616.9 million in the average balance of higher yielding total loans, net to $4,686.6 million for the three months ended September 30, 2016 from $4,069.7 million for the comparable prior year period. Additionally, the yield on the securities portfolioof interest-earning deposits and federal funds sold increased two60 basis points to 2.66% for the three months ended September 30, 2016,2017 from 2.64% for the comparable prior year period.period due to increases in the Federal Funds rate. The 25increases of four basis point decreasepoints in the yield on the total loans, net wasand 12 basis points in the yield of taxable securities were primarily due to the decline in the rates earned on new loan originationsloans being originated and purchases, as compared toloans and securities being purchased at higher yields than the existing portfolio loans modifying to lower rates, and higher yielding loans prepaying.yield. Excluding prepayment penalty income and recovered interest from loans, the yield on total loans, net, would have decreased 16increased four basis points to 4.09% for the three months ended September 30, 2017 from 4.05% for the three months ended September 30, 2016 from 4.21% for the three months ended September 30, 2015.2016.

 

Interest Expense. Interest expense increased $1.2$2.5 million, or 9.6%17.9%, to $16.3 million for the three months ended September 30, 2017 from $13.8 million for the three months ended September 30, 2016 from $12.6 million for the three months ended September 30, 2015.2016. The increase in interest expense was primarily due to increasesan increase of $416.514 basis points in the average cost of interest-bearing liabilities to 1.23% for the three months ended September 30, 2017 from 1.09% for the three months ended September 30, 2016, combined with an increase of $216.3 million in the average balance of interest-bearing liabilities to $5,059.6$5,275.9 million for the three months ended September 30, 2016,2017, from $4,643.2$5,059.6 million for the comparable prior year period. The 14 basis point increase in the cost of interest-bearing liabilities was primarily due to the Bank raising the rates we pay on some of our deposit products to stay competitive within our market. This increase in rates was partially offset by an improvement in our funding mix, as the combined average balance of lower costing savings, NOW and money market deposits increased $352.7 million to $2,597.6 million for the three months ended September 30, 2017 from $2,245.0 million for the comparable prior year period, while the combined average balance of higher costing certificates of deposit and four basis points in the cost of total depositsborrowed funds decreased $141.7 million to 0.92%$2,624.1 million for the three months ended September 30, 20162017 from 0.88%$2,765.8 million for the comparable prior year period. This

Net Interest Income. For the three months ended September 30, 2017, net interest income was $43.0 million, an increase in interest expense was partially offset by a decrease of 16 basis points in the cost of borrowed funds to 1.58%$1.3 million, or 3.2%, from $41.7 million for the three months ended September 30, 20162016. The increase in net interest income was primarily due to an increase of $251.7 million in the average balance of interest-earning assets to $5,936.1 million for the three months ended September 30, 2017 from 1.74%$5,684.4 million for the comparable prior year period. The increase in the cost of total deposits was primarily due to increases of 23yield earned on interest-earning assets increased nine basis points 10 basis points and two basis points into 4.00% for the cost of money market, NOW and savings accounts, respectively.three months ended September 30, 2017 from 3.91% for the comparable prior year period. The cost of money market accountsinterest-bearing liabilities increased primarily due14 basis points to our shifting Government NOW deposits1.23% for the three months ended September 30, 2017 as compared to a money market product which does not require us1.09% for the three months ended September 30, 2016. The effects of the above on both the net interest spread and net interest margin were decreases of five basis points to provide collateral, allowing us2.77% and four basis points to invest these funds2.90%, respectively, for the quarter ended September 30, 2017, compared to the quarter ended September 30, 2016. Included in higher yielding assets. The costnet interest income was prepayment penalty income from loans for the three months ended September 30, 2017 and 2016 totaling $1.6 million and $1.5 million, respectively, and recovered interest from non-accrual loans totaling $0.3 million for each of NOWthe three months ended September 30, 2017 and savings accounts both increased primarily due to an increase in2016. Without the rate we pay on some of our products to attract additional deposits. These increases were partially offset byprepayment penalty income and recovered interest, the net interest margin for the three months ended September 30, 2017 would have been 2.77%, a decrease of sixfour basis points, inas compared to 2.81% for the cost of certificates of deposit, primarily resulting from maturing issuances being replaced at lower rates. The decrease in the cost of borrowed funds was primarily due to maturing and new borrowings being replaced and obtained at lower rates.three months ended September 30, 2016.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Net Interest Income. For the three months ended September 30, 2016, net interest income was $41.7 million, an increase of $2.4 million, or 6.1%, from $39.3 million for the three months ended September 30, 2015. The increase in net interest income was primarily due to an increase of $533.4 million in the average balance of interest-earning assets to $5,684.4 million for the three months ended September 30, 2016 from $5,151.0 million for the comparable prior year period. The yield earned on interest-earning assets decreased 12 basis points to 3.91% for the quarter ended September 30, 2016 from 4.03% for the comparable prior year period. The cost of interest-bearing liabilities was 1.09% for the three months ended September 30, 2016 and 2015. The effects of the above on both the net interest spread and net interest margin were decreases of 12 basis points to 2.82% and 11 basis points to 2.94%, respectively, for the quarter ended September 30, 2016, compared to the quarter ended September 30, 2015. Included in net interest income was prepayment penalty income from loans and securities for the three months ended September 30, 2016 and 2015 totaling $1.5 million and $2.2 million, respectively, along with recovered interest from non-accrual loans totaling $0.3 million and $0.4 million, respectively. Excluding prepayment penalty income and recovered interest, the net interest margin for the three months ended September 30, 2016 would have been 2.81%, a decrease of four basis points, as compared to 2.85% for the three months ended September 30, 2015.

BenefitProvision for Loan Losses. During the three months ended September 30, 2016, no2017, a provision for loan losses was recorded for $3.3 million, compared to a benefit of $0.4 million recorded duringnone for the comparable prior year period. NoThe provision was recorded during the three months ended September 30, 2016 due toresult of a reduction in the quarterly analysisestimated fair value of the adequacy of the allowance for loan losses indicating that the reserve was at an appropriate level.collateral underlying our performing taxi medallion portfolio. During the three months ended September 30, 2016,2017, the Bank recorded net charge-offs totaling $0.4$0.2 million and non-accrual loans increased $1.5decreased $2.0 million to $21.9$12.2 million from $20.4$14.1 million at June 30, 2016.2017. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 40.3%34.9% at September 30, 2016.2017. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see low loss content in our loan portfolio. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” and “-ALLOWANCE“ALLOWANCE FOR LOAN LOSSES.”

 

Non-Interest Income. Non-interest income for the three months ended September 30, 20162017 was $1.9$1.7 million, an increasea decrease of $0.2 million, or 9.2%10.4%, from $1.7$1.9 million for the three months ended September 30, 2015.2016. The increasedecrease in non-interest income was primarily due to a decreasean increase of $0.3$0.5 million in net losses from fair value adjustments, partially offset by an increase of $0.3 million in income from bank owned life insurance as compared to the prior year comparable period.

 

Non-Interest Expense. Non-interest expense was $26.0 million for the three months ended September 30, 2017, a decrease of $0.3 million, or 1.2%, from $26.3 million for the three months ended September 30, 2016, an increase of $2.6 million, or 10.8%, from $23.7 million for the three months ended September 30, 2015.2016. The increasedecrease in non-interest expense was primarily due to the prior year period including a write-down of $0.8 million on one OREO partially offset by an increase of $2.1 million in salaries and benefits expense, primarily due to annual salary increases and additions in staffing in retail, audit and compliance departments. The three months ended September 30, 2016 also included an $0.8 million write-down on one OREO. The efficiency ratio was 57.4% forto support the three months ended September 30, 2016 compared to 56.2% forgrowth of the three months ended September 30, 2015.Bank.

 

Income before Income Taxes. Income before the provision for income taxes decreased $0.4$1.8 million, or 2.2%10.5%, to $15.5 million for the three months ended September 30, 2017 from $17.3 million for the three months ended September 30, 2016 from $17.7 million for the three months ended September 30, 2015 for the reasons discussed above.

 

Provision for Income Taxes. The provision for income taxes was $5.3 million for the three months ended September 30, 2017, a decrease of $1.4 million, or 20.5%, from $6.7 million for the three months ended September 30, 2016 and 2015.2016. The effective tax rate increaseddecreased to 38.5%34.2% for the three months ended September 30, 20162017 from 37.7%38.5% in the comparable prior year period due to the reduced impact of preferential tax items.

 

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20162017 AND 20152016

 

General. Net income for the nine months ended September 30, 20162017 was $50.6$35.2 million, an increasea decrease of $16.1$15.5 million, or 46.4%30.5%, compared to $34.6$50.6 million for the nine months ended September 30, 2015.2016. Diluted earnings per common share were $1.21 for the nine months ended September 30, 2017, a decrease of $0.54, or 30.9%, from $1.75 for the nine months ended September 30, 2016.

The nine months ended September 30, 2016, an increaseincluded a net after-tax gain on the sale of $0.57,buildings of $19.6 million, or 48.3%, from $1.18$0.67 per diluted common share. The nine months ended September 30, 2017 did not include any net gains on sale of buildings.

Return on average equity decreased to 8.9% for the nine months ended September 30, 2015.

Return on average equity increased to2017 from 13.7% for the nine months ended September 30, 2016 from 10.0%2016. Return on average assets decreased to 0.8% for the nine months ended September 30, 2015. Return on average assets increased to 1.1% for the nine months ended September 30, 20162017 from 0.9% for the nine months ended September 30, 2015.

During the nine months ended September 30, 2016, the gain on sale of buildings increased $27.3 million to $33.8 million from $6.5 million for the comparable prior year period. Absent this increase from the gain on sale of buildings, the return on average equity and the return on average assets would have been 9.3% and 0.8%, respectively,1.2% for the nine months ended September 30, 2016.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Interest Income. Total interest and dividend income increased $13.3$9.9 million, or 8.8%6.0%, to $174.9 million for the nine months ended September 30, 2017 from $165.0 million for the nine months ended September 30, 2016 from $151.7 million for the nine months ended September 30, 2015.2016. The increase in interest income was primarily attributable to an increase of $579.8$313.5 million in the average balance of interest-earning assets to $5,596.3$5,909.9 million for the nine months ended September 30, 20162017 from $5,016.5$5,596.3 million for the comparable prior year period, partially offset by a decrease of 10 basis points in theperiod. The yield on interest-earning assets increased two basis points to 3.93%3.95% for the nine months ended September 30, 20162017 from 4.03%3.93% in the comparable prior year period. The declineincrease in the yield on interest-earning assets of 10two basis points was primarily due to a 21 basis point reduction in the yield on total loans, net to 4.26% for the nine months ended September 30, 2016 from 4.47% for the nine months ended September 30, 2015. The yield on interest-earning assets wasbeing positively impacted by an increase of $580.9$407.3 million in the average balance of higher yielding total loans, net to $4,548.2$4,955.4 million for the nine months ended September 30, 20162017 from $3,967.2$4,548.2 million for the comparable prior year period. Additionally, the yield on the securities portfolio increased 1315 basis points to 2.65%2.80% for nine months ended September 30, 2016,2017, from 2.52%2.65% for the comparable prior year period.period and the yield on interest-earning deposits increased 40 basis points to 0.81% for the nine months ended September 30, 2017 from 0.41% for the nine months ended September 30, 2016. The 21seven basis point decrease in the yield on total loans, net was primarily due to the decline in the rates earned on new loan originations and purchases, as compared to the existing portfolio, loans modifying to lower rates, and higher yielding loans prepaying. Excluding prepayment penalty income and recovered interest from loans, the yield on total loans, net, would have decreased 18two basis points to 4.07% for the nine months ended September 30, 2017 from 4.09% for the nine months ended September 30, 2016 from 4.27% for the nine months ended September 30, 2015.2016. The 1315 basis point increase in the yield on the securities portfolio was primarily due to the net impact in the current year including $97.2from $160.0 million in purchases at an average yield on 2.76%2.94% with $112.4 million in sales at an average yield of 2.21%.

 

Interest Expense. Interest expense increased $3.6$4.6 million, or 9.7%11.4%, to $44.8 million for the nine months ended September 30, 2017 from $40.2 million for the nine months ended September 30, 2016 from $36.7 million for the nine months ended September 30, 2015.2016. The increase in interest expense was primarily due to an increase of $495.7$250.9 million in the average balance of interest-bearing liabilities to $5,021.9$5,272.8 million for the nine months ended September 30, 2016,2017, from $4,526.2$5,021.9 million for the comparable prior year period. ThisAdditionally, the increase in interest expense was partially offset by a decreasedue to an increase of six basis points in the cost of borrowed fundstotal interest-bearing liabilities to 1.69%1.13% for the nine months ended September 30, 20162017 from 1.75%1.07% for the comparable prior year period. The six basis point increase in the cost of totalinterest-bearing liabilities was primarily due to the Bank raising the rates we pay on some of our deposit products to stay competitive within our market. This increase in rates was partially offset by an improvement in our funding mix, as the combined average balance of lower costing savings, NOW and money market deposits was 0.87%increased $329.1 million to $2,645.2 million for the nine months ended September 30, 2016 and 2015. During2017 from $2,316.1 million for the nine months ended September 30, 2016,comparable prior year period, while the costcombined average balance of higher costing certificates of deposit and borrowed funds decreased 12 basis points from the comparable prior period, resulting from maturing issuances being replaced at lower rates. This decrease was offset by increases of 21 basis points, six basis points and three basis points in the cost of money market, NOW and savings accounts, respectively,$83.6 million to $2,566.8 million for the nine months ended September 30, 20162017 from $2,650.4 million for the comparable prior year period. The cost of money market accounts increased primarily due to our shifting Government NOW deposits to a money market product which does not require us to provide collateral, allowing us to invest these funds in higher yielding assets. The cost of NOW and savings accounts both increased primarily due to an increase in the rate we pay on some of our products to attract additional deposits. The decrease in the cost of borrowed funds was primarily due to maturing and new borrowings being replaced and obtained at lower rates.

 

Net Interest Income. For the nine months ended September 30, 2016,2017, net interest income was $124.7$130.0 million, an increase of $9.7$5.3 million, or 8.5%4.3%, from $115.0$124.7 million for the nine months ended September 30, 2015.2016. The increase in net interest income was primarily due to an increase of $579.8$313.5 million in the average balance of interest-earning assets to $5,596.3$5,909.9 million for the nine months ended September 30, 20162017 from $5,016.5 million for the comparable prior year period. The yield earned on interest-earning assets decreased 10increased two basis points to 3.93%3.95% for the nine months ended September 30, 2016 from 4.03% for the comparable prior year period.2017. The cost of interest-bearing liabilities decreased oneincreased six basis pointpoints to 1.13% for the nine months ended September 30, 2017 as compared to 1.07% for the nine months ended September 30, 2016 as compared to 1.08% for the nine months ended September 30, 2015.2016. The effects of the above on both the net interest spread and net interest margin were decreases of ninefour basis points to 2.86%2.82% and 2.97%2.93%, respectively, for the nine months ended September 30, 2016,2017, compared to the nine months ended September 30, 2015.2016. Included in net interest income was prepayment penalty income from loans and securities for the nine months ended September 30, 2017 and 2016 and 2015 totaling $5.1$3.6 million and $4.9$5.0 million, respectively, along with recovered interest from non-accrual loans totaling $1.1 million and $0.5 million, respectively, and $1.2accelerated accretion of discount upon the call of CLO securities totaling $0.4 million and $26,000, respectively. ExcludingWithout the prepayment penalty income, and recovered interest and accelerated discount upon call, the net interest margin for the nine months ended September 30, 20162017 would have been 2.84%2.82%, a decrease of fivetwo basis points, as compared to 2.89%2.84% for the nine months ended September 30, 2015.2016.

 

BenefitProvision for Loan Losses. During the nine months ended September 30, 2016, no2017, a provision for loan losses was recorded for $3.3 million, compared to a benefit of $1.6 million recorded duringnone for the comparable prior year period. NoThe provision was recorded during the nine months ended September 30, 2016 due toresult of a reduction in the quarterly analysisestimated fair value of the adequacy of the allowance for loan losses indicating that the reserve was at an appropriate level.collateral underlying our performing taxi medallion portfolio. During the nine months ended September 30, 2016,2017, the Bank recorded net recoveriescharge-offs totaling $0.3$0.2 million and non-accrual loans decreased $0.9$8.9 million to $21.9$12.2 million from $22.8$21.0 million at December 31, 2015.2016. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 40.3%34.9% at September 30, 2016.2017. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see low loss content in our loan portfolio. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” and “-ALLOWANCE“ALLOWANCE FOR LOAN LOSSES.”

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Non-Interest Income. Non-interest income for the nine months ended September 30, 20162017 was $42.1$7.3 million, an increasea decrease of $28.5$34.8 million, or 210.2%82.7%, from $13.6$42.1 million for the nine months ended September 30, 2015.2016. The increasedecrease in non-interest income was primarily due to increases of $27.3the prior year period including $33.8 million in net gains on sale of buildings and $2.2$2.4 million in net gains on sale of securities compared to no building sales and a net loss of $0.2 million in sales of securities recorded during the nine months ended September 30, 2017. These decreases were partially offset by an increase in the gain from life insurance proceeds of $2.0$0.9 million in net losses from fair value adjustments asfor the nine months ended September 30, 2017 compared to the prior year comparable period.nine months ended September 30, 2016.

 

Non-Interest Expense. Non-interest expense was $81.6 million for the nine months ended September 30, 2017, a decrease of $1.6 million, or 2.0%, from $83.2 million for the nine months ended September 30, 2016, an increase of $9.3 million, or 12.6%, from $73.9 million for the nine months ended September 30, 2015.2016. The increasedecrease in non-interest expense was primarily due to the nine months ended September 30, 2016 including a penalty of $2.1 million on the prepayment of $38.0 million in repurchase agreements and $1.7 million in net losses from the sale of OREO compared to no prepayment penalties on borrowings and a net gain on the sale of OREO totaling $50,000 recorded during the nine months ended September 30, 2017. In addition, the nine months ended September 30, 2017 had decreases of $1.1 million in FDIC insurance expense due to lower assessment rates and $0.4 million in foreclosure expense due to improved credit conditions. These reductions in non-interest expense were partially offset by an increase of $4.6$2.8 million in salaries and benefits primarily due to annual salary increases and additions in staffing in retail, audit and compliance departments, as well as increases in production incentives and the cost of split dollar life insurance benefits. The nine months ended September 30, 2016 also included a penalty of $2.1 million on the prepayment of $38.0 million in repurchase agreements and $1.6 million write-down on one OREO. Additionally, the nine months ended September 30, 2016 included increases of $0.9 million in professional services expense from increased legal and consulting expenses, $0.7 million in depreciation and amortization expense, primarily due to the opening of two new branches along with the move to our new corporate headquarters both occurring in 2015 and $0.5 million in other operating expense due tosupport the growth of the Bank. The efficiency ratio was 59.6% for the nine months ended September 30, 2016 compared to 59.5% for the nine months ended September 30, 2015.

 

Income before Income Taxes. Income before the provision for income taxes increased $27.3decreased $31.1 million, or 48.5%37.2%, to $52.5 million for the nine months ended September 30, 2017 from $83.6 million for the nine months ended September 30, 2016 from $56.3 million for the nine months ended September 30, 2015 for the reasons discussed above.

 

Provision for Income Taxes. The provision for income taxes for the nine months ended September 30, 20162017 was $33.0$17.3 million, an increasea decrease of $11.3$15.7 million, or 51.8%47.5%, from $21.7$33.0 million for the comparable prior year period. The increasedecrease was primarily due to an increasea decrease of $27.3$31.1 million in income before income taxes and an increasea decrease in the effective tax rate to 39.5%33.0% for the nine months ended September 30, 20162017 from 38.6%39.5% in the comparable prior year period. The increasedecrease in the effective tax rate reflects the reducedimpact of a change in the accounting treatment of deductible stock compensation expense from prior years. Additionally, the nine months ended September 30, 2016, effective tax rate reflected the impact of preferential tax items as a resultbecause of the increase inthat period including the gain on sale of buildings.

 

FINANCIAL CONDITION

 

Assets. Total assets at September 30, 20162017 were $5,999.3$6,261.4 million, an increase of $294.6$202.9 million, or 5.2%3.3%, from $5,704.6$6,058.5 million at December 31, 2015.2016. Total loans, net increased $353.0$231.6 million, or 8.1%4.8%, during the nine months ended September 30, 20162017 to $4,719.5$5,045.1 million from $4,366.4$4,813.5 million at December 31, 2015.2016. Loan originations and purchases were $710.7 million for the nine months ended September 30, 2017, a decrease of $139.7 million, or 16.4%, from $850.3 million for the nine months ended September 30, 2016, an increase of $12.5 million, or 1.5%, from $837.9 million for the nine months ended September 30, 2015.2016. During the nine months ended September 30, 2016,2017, we continued to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full relationship. The loan pipeline totaled $289.3$417.0 million at September 30, 20162017 compared to $330.5$310.9 million at December 31, 2015.2016.

The following table shows loan originations and purchases for the periods indicated:

 
 		 
 		For the three months
ended September 30,		 
 		For the nine months
ended September 30,
(In thousands) 2017 2016 2017 2016
Multi-family residential (1) $64,551  $61,378  $254,728  $293,385 
Commercial real estate (2)  25,385   68,970   184,676   245,114 
One-to-four family – mixed-use property  13,136   12,618   45,334   42,493 
One-to-four family – residential  5,843   3,362   16,623   17,050 
Co-operative apartments  232   -   232   470 
Construction  148   1,920   7,121   6,034 
Small Business Administration  4,276   470   6,787   6,785 
Commercial business and other (3)  69,354   84,525   195,150   239,015 
Total $182,925  $233,243  $710,651  $850,346 

(1)Includes purchases of $31.0 million and $98.4 million for the nine months ended September 30, 2017 and 2016, respectively. There were purchases of $8.4 million during the three months ended September 30, 2017. There were no purchases during the three months ended September 30, 2016.
(2)Includes purchases of $25.9 million and $25.9 million for the nine months ended September 30, 2017 and 2016, respectively. There were no purchases during the three months ended September 30, 2017. There were no purchases during the three months ended September 30, 2016.
(3)Includes purchases of $18.9 million and $13.7 million for the nine months ended September 30, 2017 and 2016, respectively. There were purchases of $9.0 million during the three months ended September 30, 2017. There were no purchases during the three months ended September 30, 2016.

 

 

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- 53 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table shows loan originations and purchases for the periods indicated:

  For the three months For the nine months
  ended September 30, ended September 30,
(In thousands) 2016 2015 2016 2015
Multi-family residential (1) $61,378  $91,306  $293,385  $268,481 
Commercial real estate (2)  68,970   151,358   245,114   295,084 
One-to-four family – mixed-use property  12,618   20,008   42,493   44,905 
One-to-four family – residential  3,362   12,618   17,050   34,696 
Co-operative apartments  -   1,915   470   2,365 
Construction  1,920   1,999   6,034   3,386 
Small Business Administration  470   2,232   6,785   8,713 
Commercial business and other (3)  84,525   53,028   239,015   180,239 
Total $233,243  $334,464  $850,346  $837,869 

(1)Includes purchases of $98.4 million and $119.9 million for the nine months ended September 30, 2016 and 2015, respectively. There were no purchases during the three months ended September 30, 2016. Includes purchases of $20.0 million for the three months ended September 30, 2015.
(2)Includes purchases of $25.9 million and $76.1 million for the nine months ended September 30, 2016 and 2015, respectively. There were no purchases during the three months ended September 30, 2016. Includes purchases of $65.1 million for the three months ended September 30, 2015.
(3)Includes purchases of $13.7 million and $20.4 million for the nine months ended September 30, 2016 and 2015, respectively. There were no purchases during the three months ended September 30, 2016. Includes purchases of $5.2 million for the three months ended September 30, 2015.

 

The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated during the third quarter of 20162017 had an average loan-to-value ratio of 41.9%41.2% and an average debt coverage ratio of 204%187%.

 

The Bank’s non-performing assets totaled $26.4$13.9 million at September 30, 2016,2017, a decrease of $4.6$8.1 million, or 14.9%36.7%, from $31.0$21.9 million at December 31, 2015.2016. Total non-performing assets as a percentage of total assets were 0.44%0.22% at September 30, 20162017 compared to 0.54%0.36% at December 31, 2015.2016. The ratio of allowance for loan losses to total non-performing loans was 92.6%181.9% at September 30, 20162017 and 82.6%103.8% at December 31, 2015. Performing troubled debt restructured loans totaled $8.2 million at September 30, 2016, a decrease of $1.3 million, or 13.7%, from $9.5 million at December 31, 2015.2016.

 

During the nine months ended September 30, 2016,2017, mortgage-backed securities decreased $123.7including held-to-maturity increased $11.4 million, or 18.5%2.2%, to $545.1$527.8 million from $668.7$516.5 million at December 31, 2015.2016. The decreaseincrease in mortgage-backed securities during the nine months ended September 30, 20162017 was primarily due to purchases of $149.9 million at an average yield of 2.88%, partially offset by sales of $64.6$78.7 million at an average yield on 3.03%2.09% and principal repayments of $79.8 million, which were partially offset by purchases of $13.1 million at an average yield on 2.65% and an increase of $9.2 million in the fair value of mortgage-backed securities.$60.6 million.

 

During the nine months ended September 30, 2016,2017, other securities including held-to-maturity, increased $27.1decreased $83.0 million, or 438.4%21.7%, to $33.3$299.7 million from $6.2$382.6 million at December 31, 2015.2016. The increase in other securities held-to-maturity during the nine months ended September 30, 2016 was primarily due to purchases of $35.7 million at an average yield on 2.37%, which was partially offset by maturities totaling $8.5 million. Other securities held-to-maturity primarily consist of municipal bonds.

During the nine months ended September 30, 2016, other securities available for sale, increased $41.2 million, or 12.7%, to $365.8 million from $324.7 million at December 31, 2015. The increasedecrease in other securities during the nine months ended September 30, 20162017 was primarily due to purchases$43.1 million in calls of $48.4CLO securities and one private issue trust preferred security, sales totaling $33.7 million at an average yield on 3.07%of 2.49% and an increase of $0.5$14.8 million in the fair valuematurities of othermunicipal securities, which was partially offset by maturities totaling $6.0 million.a purchase of $10.0 million corporate bond at an average yield on 3.86%. Other securities available for sale primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, collateralized loan obligations and corporate bonds.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Liabilities. Total liabilities were $5,486.6$5,721.8 million at September 30, 2016,2017, an increase of $255.1$177.1 million, or 4.9%3.2%, from $5,231.6$5,544.6 million at December 31, 2015.2016. During the nine months ended September 30, 2016,2017, due to depositors increased $136.8$225.4 million, or 3.5%5.4%, to $3,992.5$4,390.8 million, due to increases of $155.6$192.9 million in core deposits partially offset by a decrease of $18.8and $32.4 million in certificates of deposit. The increase in core deposits was due to increases of $260.9$148.3 million, $68.9 million and $50.6$29.3 million in money market, savings and demand accounts, respectively, partially offset by decreasesa decrease of $152.2 million and $3.7$53.7 million in NOW and savings accounts, respectively.accounts. Borrowed funds increased $88.8decreased $65.9 million during the nine months ended September 30, 2016.2017. The increasedecrease in borrowed funds was primarily due to a net increasedecrease in FHLB short-term borrowings to replace the seasonal outflow of Government deposits which are expected to return during the quarter ended December 31, 2016.as funding needs were provided by increased deposits.

 

Equity. Total stockholders’ equity increased $39.6$25.8 million, or 8.4%5.0%, to $512.6$539.6 million at September 30, 20162017 from $473.1$513.9 million at December 31, 2015.2016. Stockholders’ equity increased primarily due to net income of $50.6$35.2 million, an increase inthe net impact totaling $4.9 million from the vesting and exercising of shares of employee and director stock plans and other comprehensive income totaling $5.8$1.7 million, primarily due to an increase in the fair value of the securities portfolio and the net impact of $5.4 million from the vesting and exercising of shares of employee and director stock plans.portfolio. These increases were partially offset by the declaration and payment of dividends on the Company’s common stock of $0.51$0.54 per common share totaling $14.8$15.7 million and the purchase of 378,69510,000 treasury shares, at an average pricecost of $19.78$27.80 per share, for a total cost of $7.5totaling $0.3 million. Book value per common share was $17.90$18.72 at September 30, 20162017 compared to $16.41$17.95 at December 31, 2015.2016.

 

Cash flow. During the nine months ended September 30, 2016,2017, funds provided by the Company's operating activities amounted to $37.4$53.1 million. These funds, combined with $215.1$151.2 million provided from financing activities, were utilized to fund net investing activities of $246.9$180.0 million. The Company's primary business objective is the origination and purchase of multi-family residential loans, commercial business loans and commercial real estate mortgage loans and to a lesser extent one-to-four family (including mixed-use properties) and SBA loans. During the nine months ended September 30, 2016,2017, the net total of loan originations and purchases less loan repayments and sales was $348.5$255.1 million. During the nine months ended September 30, 2016,2017, the Company also funded $152.1 million in purchases of $59.7 million in securities available for sale and $35.7$8.0 million inof securities held-to-maturity. During the nine months ended September 30, 2016,2017, funds were provided by net increases in short-term borrowing of $150.0long-term borrowed funds totaling $180.0 million and a net increase in total deposits of $148.6$238.4 million. Additionally, funds were provided by $152.8$216.6 million in proceeds from maturities, sales, calls and prepayments of securities available for sale and the sale$14.8 million in maturities of buildings totaling $34.3 million.securities held-to-maturity provided funds. In addition to funding loan growth, these funds were used to repay $60.3$205.0 million in long-term borrowings and $43.5 million in net short-term borrowings. The Company also used funds of $14.8$15.7 million and $9.1$2.9 million for dividend payments and purchases of treasury stock, respectively, during the nine months ended September 30, 2016.2017.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

INTEREST RATE RISK

 

The Consolidated Statements of Financial Position have been prepared in accordance with generally accepted accounting principles in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets which could adversely affect the Company’s results of operations if such assets were sold, or, in the case of securities classified as available-for-sale,available for sale, decreases in the Company’s stockholders’ equity, if such securities were retained.

- 56 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Asset Liability Committee of the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2016.2017. Various estimates regarding prepayment assumptions are made at each level of rate shock. However, prepayment penalty income is excluded from this analysis. Actual results could differ significantly from these estimates. At September 30, 2016,2017, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

 

The following table presents the Company’s interest rate shock as of September 30, 2016:2017:

 

  Projected Percentage Change In  
  Net Interest Net Portfolio Net Portfolio
Change in Interest Rate Income Value Value Ratio
-200 Basis points  -1.45%  11.69%  10.87%
-100 Basis points  0.30   7.25   10.62 
Base interest rate  0.00   0.00   10.19 
+100 Basis points  -3.56   -9.14   9.53 
+200 Basis points  -7.66   -20.60   8.60 

  Projected Percentage Change In  
  Net Interest Net Portfolio Net Portfolio
Change in Interest Rate Income Value Value Ratio
-200 Basis points 5.03% 11.57% 12.52%
-100 Basis points 4.63 3.84 12.04
Base interest rate 0.00 0.00 11.89
+100 Basis points -6.05 -8.76 11.18
+200 Basis points -12.18 -15.24 10.66

 

 

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- 57 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

AVERAGE BALANCES

 

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended September 30, 20162017 and 2015,2016, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

 

 For the three months ended September 30, For the three months ended September 30,
 2016 2015 2017 2016
 Average   Yield/ Average   Yield/ Average   Yield/ Average   Yield/
 Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets (Dollars in thousands) (Dollars in thousands)
Interest-earning assets:                                    
Mortgage loans, net $4,093,240  $43,777   4.28% $3,561,262  $40,754   4.58% $4,350,338  $46,121   4.24% $4,093,240  $43,777   4.28%
Other loans, net  593,353   5,402   3.64   508,388   4,489   3.53   683,328   7,197   4.21   593,353   5,404   3.64 
Total loans, net (1)  4,686,593   49,179   4.20   4,069,650   45,243   4.45   5,033,666   53,318   4.24   4,686,593   49,181   4.20 
Taxable securities:                                           ��    
Mortgage-backed securities  554,515   3,350   2.42   692,777   4,307   2.49   520,889   3,335   2.56   554,515   3,350   2.42 
Other securities  245,477   2,162   3.52   176,072   1,290   2.93   189,957   1,787   3.76   245,477   2,160   3.52 
Total taxable securities  799,992   5,512   2.76   868,849   5,597   2.58   710,846   5,122   2.88   799,992   5,510   2.76 
Tax-exempt securities: (3)(2)                                                
Other securities  148,004   784   2.12   136,043   1,030   3.03   142,899   758   2.12   148,004   784   2.12 
Total tax-exempt securities  148,004   784   2.12   136,043   1,030   3.03   142,899   758   2.12   148,004   784   2.12 
Interest-earning deposits and federal funds sold  49,824   49   0.39   76,473   43   0.22   48,718   121   0.99   49,824   49   0.39 
Total interest-earning assets  5,684,413   55,524   3.91   5,151,015   51,913   4.03   5,936,129   59,319   4.00   5,684,413   55,524   3.91 
Other assets  292,312           276,604           303,192           292,312         
Total assets $5,976,725          $5,427,619          $6,239,321          $5,976,725         
                                                
Liabilities and Equity                                                
Interest-bearing liabilities:                                                
Deposits:                                                
Savings accounts $258,884   306   0.47  $262,535   297   0.45  $330,316   583   0.71  $258,884   306   0.47 
NOW accounts  1,384,368   1,979   0.57   1,398,358   1,646   0.47   1,340,228   2,468   0.74   1,384,368   1,979   0.57 
Money market accounts  601,709   990   0.66   420,860   455   0.43   927,067   2,337   1.01   601,709   990   0.66 
Certificate of deposit accounts  1,428,770   5,213   1.46   1,391,511   5,276   1.52   1,375,052   5,218   1.52   1,428,770   5,213   1.46 
Total due to depositors  3,673,731   8,488   0.92   3,473,264   7,674   0.88   3,972,663   10,606   1.07   3,673,731   8,488   0.92 
Mortgagors' escrow accounts  48,840   32   0.26   44,606   27   0.24   54,236   49   0.36   48,840   32   0.26 
Total deposits  3,722,571   8,520   0.92   3,517,870   7,701   0.88   4,026,899   10,655   1.06   3,722,571   8,520   0.92 
Borrowed funds  1,337,049   5,291   1.58   1,125,291   4,902   1.74   1,249,038   5,623   1.80   1,337,049   5,291   1.58 
Total interest-bearing liabilities  5,059,620   13,811   1.09   4,643,161   12,603   1.09   5,275,937   16,278   1.23   5,059,620   13,811   1.09 
Non interest-bearing deposits  318,188           254,435           354,149           318,188         
Other liabilities  89,943           65,843           72,767           89,943         
Total liabilities  5,467,751           4,963,439           5,702,853           5,467,751         
Equity  508,974           464,180           536,468           508,974         
Total liabilities and equity $5,976,725          $5,427,619          $6,239,321          $5,976,725         
                                                
Net interest income /net interest rate spread     $41,713   2.82%     $39,310   2.94%
Net interest income / net interest rate spread     $43,041   2.77%     $41,713   2.82%
                                                
Net interest-earning assets /net interest margin $624,793       2.94% $507,854       3.05%
Net interest-earning assets / net interest margin $660,192       2.90% $624,793       2.94%
                                                
Ratio of interest-earning assets to interest-bearing liabilities          1.12X          1.11X          1.13X          1.12X

 

(1)Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.9 million and $1.4$0.9 million for the three months ended September 30, 20162017 and 2015,2016, respectively.
(2)Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.
(3)Includes prepayment penalty income of approximately $26,000 and $0.2 million for the three months ended September 30, 2016 and 2015, respectively.

 

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- 56 - 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the nine months ended September 30, 20162017 and 2015,2016, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

 

 For the nine months ended September 30, For the nine months ended September 30,
 2016 2015 2017 2016
 Average   Yield/ Average   Yield/ Average   Yield/ Average   Yield/
 Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets  (Dollars in thousands)  (Dollars in thousands)
Interest-earning assets:                                    
Mortgage loans, net $3,972,502  $129,200   4.34% $3,466,085  $119,931   4.61% $4,287,674  $135,429   4.21% $3,972,502  $129,200   4.34%
Other loans, net  575,652   15,950   3.69   501,154   12,930   3.44   667,749   20,405   4.07   575,652   15,952   3.69 
Total loans, net (1)  4,548,154   145,150   4.26   3,967,239   132,861   4.47   4,955,423   155,834   4.19   4,548,154   145,152   4.26 
Taxable securities:                                                
Mortgage-backed securities  603,994   11,231   2.48   700,563   13,028   2.48   527,890   10,122   2.56   603,994   11,231   2.48 
Other securities  241,821   6,040   3.33   151,589   2,897   2.55   215,453   6,220   3.85   241,821   6,038   3.33 
Total taxable securities  845,815   17,271   2.72   852,152   15,925   2.49   743,343   16,342   2.93   845,815   17,269   2.72 
Tax-exempt securities: (3)(2)                                                
Other securities  140,889   2,366   2.24   137,093   2,796   2.72   145,058   2,309   2.12   140,889   2,366   2.24 
Total tax-exempt securities  140,889   2,366   2.24   137,093   2,796   2.72   145,058   2,309   2.12   140,889   2,366   2.24 
Interest-earning deposits and federal funds sold  61,484   191   0.41   60,028   96   0.21   66,042   403   0.81   61,484   191   0.41 
Total interest-earning assets  5,596,342   164,978   3.93   5,016,512   151,678   4.03   5,909,866   174,888   3.95   5,596,342   164,978   3.93 
Other assets  287,111           274,581           299,139           287,111         
Total assets $5,883,453          $5,291,093          $6,209,005          $5,883,453         
                                                
Liabilities and Equity                                                
Interest-bearing liabilities:                                                
Deposits:                                                
Savings accounts $262,382   910   0.46  $265,831   852   0.43  $288,376   1,289   0.60  $262,382   910   0.46 
NOW accounts  1,539,050   5,863   0.51   1,441,598   4,847   0.45   1,474,572   7,006   0.63   1,539,050   5,863   0.51 
Money market accounts  514,626   2,277   0.59   352,639   1,015   0.38   882,213   5,487   0.83   514,626   2,277   0.59 
Certificate of deposit accounts  1,416,811   15,455   1.45   1,343,588   15,809   1.57   1,396,583   15,257   1.46   1,416,811   15,455   1.45 
Total due to depositors  3,732,869   24,505   0.88   3,403,656   22,523   0.88   4,041,744   29,039   0.96   3,732,869   24,505   0.88 
Mortgagors' escrow accounts  55,481   85   0.20   51,772   73   0.19   60,895   106   0.23   55,481   85   0.20 
Total deposits  3,788,350   24,590   0.87   3,455,428   22,596   0.87   4,102,639   29,145   0.95   3,788,350   24,590   0.87 
Borrowed funds  1,233,571   15,653   1.69   1,070,801   14,078   1.75   1,170,203   15,696   1.79   1,233,571   15,653   1.69 
Total interest-bearing liabilities  5,021,921   40,243   1.07   4,526,229   36,674   1.08   5,272,842   44,841   1.13   5,021,921   40,243   1.07 
Non interest-bearing deposits  296,321           243,693           340,221           296,321         
Other liabilities  73,594           57,855           67,967           73,594         
Total liabilities  5,391,836           4,827,777           5,681,030           5,391,836         
Equity  491,617           463,316           527,975           491,617         
Total liabilities and equity $5,883,453          $5,291,093          $6,209,005          $5,883,453         
                                                
Net interest income / net interest rate spread     $124,735   2.86%     $115,004   2.95%     $130,047   2.82%     $124,735   2.86%
                                                
Net interest-earning assets / net interest margin $574,421       2.97% $490,283       3.06% $637,024       2.93%��$574,421       2.97%
                                                
Ratio of interest-earning assets to interest-bearing liabilities          1.11X          1.11X          1.12X          1.11X

(1)Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $3.4$1.9 million and $3.2$3.4 million for the nine months ended September 30, 20162017 and 2015,2016, respectively.
(2)Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.
(3)Includes prepayment penalty income of approximately $26,000 and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

LOANS

 

The following table sets forth the Company’s loan originations (including the net effect of refinancing) and the changes in the Company’s portfolio of loans, including purchases, sales and principal reductions for the periods indicated.

 

 For the nine months ended September 30, For the nine months ended September 30,
(In thousands) 2016 2015 2017 2016
        
Mortgage Loans            
            
At beginning of period $3,832,914  $3,321,501  $4,187,818  $3,832,914 
                
Mortgage loans originated:                
Multi-family residential  195,028   148,592   223,766   195,028 
Commercial real estate  219,183   219,031   158,749   219,183 
One-to-four family – mixed-use property  42,493   44,905   45,334   42,493 
One-to-four family – residential  17,050   34,696   16,623   17,050 
Co-operative apartments  470   2,365   232   470 
Construction  6,034   3,386   7,121   6,034 
Total mortgage loans originated  480,258   452,975   451,825   480,258 
                
Mortgage loans purchased:                
Multi-family residential  98,357   119,889   30,962   98,357 
Commercial real estate  25,931   76,053   25,927   25,931 
Total mortgage loans purchased  124,288   195,942   56,889   124,288 
                
Less:                
Principal and other reductions  305,218   283,885   300,897   305,218 
Loans transferred to Available for Sale  -   300   30,565   - 
Sales  7,259   10,063   18,975   7,259 
                
At end of period $4,124,983  $3,676,170  $4,346,095  $4,124,983 
                
Non-Mortgage Loans                
                
At beginning of period $539,697  $477,153  $631,316  $539,697 
                
Other loans originated:                
Small Business Administration  6,785   8,713   6,787   6,785 
Commercial business  223,938   157,711   174,541   223,938 
Other  1,371   2,137   1,666   1,371 
Total other loans originated  232,094   168,561   182,994   232,094 
                
Other loans purchased:                
Commercial business  13,706   20,391   18,943   13,706 
Total other loans purchased  13,706   20,391   18,943   13,706 
                
Less:                
Principal and other reductions  182,439   151,690   119,519   182,439 
Sales  3,211   3,765   4,842   3,211 
        
Other  1,536     
At end of period $599,847  $510,650  $707,356  $599,847 

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

TROUBLED DEBT RESTRUCUTURED (“TDR”) AND NON-PERFORMING ASSETS

 

Management continues to adhere to the Company’s conservative underwriting standards. At times, the Company may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the best long-term interest of the Company. This restructure may include making concessionsSee Note 5 of the Notes to the borrower that the Company would not make in the normal course of business, such as reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, or changing the loan to interest only payments for a limited time period. At times, certain problem loans have been restructured by combining more than one of these options. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. The Company classifies these loans as TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded from the TDR table below, as they are placed on non-accrual status and reported as non-performing loans.Consolidated Financial Statements “Loans”.

 

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

 

 September 30, June 30, December 31,
(In thousands) 2016 2016 2015 
 		September 30,
2017		 
 		June 30,
2017		 
 		December 31,
2016
Accrual Status:                  
Multi-family residential $2,584  $2,599  $2,626  $2,531  $2,546  $2,572 
Commercial real estate  2,074   2,086   2,371   2,031   2,037   2,062 
One-to-four family - mixed-use property  1,809   1,819   2,052   1,765   1,778   1,800 
One-to-four family - residential  335   338   343   577   581   591 
Small business administration  -   -   34 
Taxi medallion  10,965   10,486   9,735 
Commercial business and other  849   872   2,083   368   381   420 
Total  7,651   7,714   9,509   18,237   17,809   17,180 
                        
                        
Non-Accrual Status:                        
One-to-four family - residential  261   262   - 
Taxi medallion  4,109   3,384   - 
Commercial business and other  290   325   -   150   185   255 
            
Total  551   587   -   4,259   3,569   255 
                        
Total performing troubled debt restructured $8,202  $8,301  $9,509  $22,496  $21,378  $17,435 

 

Subsequent to September 30, 2016, one taxi medallion relationship totaling $6.8 million was approved to be restuructured as a TDR. The TDR was approved to receive a below market interest rate.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

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

 

  September 30,   June 30,   December 31, 
(In thousands)  2016  2016  2015  
 		September 30,
2017		 
 		June 30,
2017		 
 		December 31,
2016
Loans 90 days or more past due and still accruing:                  
Multi-family residential $-  $574  $233  $415  $-  $- 
Commercial real estate  1,183   320   1,183   38   -   - 
One-to-four family - mixed-use property  470   635   611   129   -   386 
One-to-four family - residential  -   13   13 
Construction  -   -   1,000   -   602   - 
Commercial business and other  -   -   220 
Taxi medallion  1,147   727   - 
Total  1,653   1,542   3,260   1,729   1,329   386 
                        
Non-accrual loans:                        
Multi-family residential  1,649   3,162   3,561   1,309   1,537   1,837 
Commercial real estate  1,157   2,299   2,398   1,147   1,948   1,148 
One-to-four family - mixed-use property  4,534   6,005   5,952   2,217   2,971   4,025 
One-to-four family - residential  8,340   8,406   10,120   7,434   7,616   8,241 
Small business administration  2,132   185   218   50   53   1,886 
Taxi Medallion  3,971   196   - 
Taxi medallion  -   -   3,825 
Commercial business and other  99   128   568   4   5   68 
Total  21,882   20,381   22,817   12,161   14,130   21,030 
                        
Total non-performing loans  23,535   21,923   26,077   13,890   15,459   21,416 
                        
Other non-performing assets:                        
Real estate acquired through foreclosure  2,839   3,668   4,932   -   -   533 
Total  2,839   3,668   4,932   -   -   533 
                        
Total non-performing assets $26,374  $25,591  $31,009  $13,890  $15,459  $21,949 
                        
Non-performing assets to total assets  0.44%  0.43%  0.54%  0.22%  0.25%  0.36%
Allowance for loan losses to non-performing loans  92.61%  101.25%  82.58%  181.92%  143.33%  103.80%

 

Included in loans over 90 days past due and still accruing were four loans totaling $1.7 million, sevenfour loans totaling $1.5$1.3 million and tentwo loans totaling $3.3$0.4 million at September 30, 2016,2017, June 30, 20162017 and December 31, 2015,2016, respectively, which are past their respective maturity dates and are still remitting payments. The Bank is actively working with these borrowers to extend the loans maturity or repay these loans.

 

Included in non-performing loans was one loan totaling $0.4 million at September 30, 2016,2017, June 30, 20162017 and December 31, 20152016 which was restructured as TDR and not performing in accordance with its restructured terms.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table shows our delinquent loans that are less than 90 days past due and still accruing interest and considered performing at the periods indicated:

  September 30, 2016 December 31, 2015
  60 - 89 30 - 59 60 - 89 30 - 59
  days days days days
  (In thousands)
         
Multi-family residential $917  $5,441  $804  $9,422 
Commercial real estate  377   3,051   153   2,820 
One-to-four family - mixed-use property  746   4,396   1,257   8,630 
One-to-four family - residential  427   887   154   4,261 
Construction  -   -   -   - 
Small Business Administration  -   28   -   42 
Taxi medallion  -   -   -   - 
Commercial business and other  4   247   2   - 
Total delinquent loans $2,471  $14,050  $2,370  $25,175 

 

CRITICIZED AND CLASSIFIED ASSETS

 

Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that the credit quality is maintained at the highest levels. When weaknesses are identified, immediate action is taken to correct the problem through direct contact with the borrower or issuer. We then monitor these assets, and, in accordance with our policy and current regulatory guidelines, we designate them as “Special Mention,” which is considered a “Criticized Asset,” and “Substandard,” “Doubtful,” or “Loss” which are considered “Classified Assets,” as deemed necessary. These loan designations are updated quarterly. We designate an asset as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidationSee Note 5 of the debt. We designate an asset as Doubtful when it displaysNotes to the inherent weaknessConsolidated Financial Statements “Loans” for a description of how loans are determined to be criticized or classified and a Substandard asset with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate an asset as Loss if it is deemed the debtor is incapable of repayment. We dotable displaying criticized and classified loans at September 30, 2017 and December 31, 2016. The Company had no criticized or classified OREO at September 30, 2017 and had $0.5 million classified OREO at December 31, 2016. The Company did not hold any loans designated as loss, as loans that are designated as Loss are charged to the Allowance for Loan Losses. Assets that are non-accrual are designated as Substandardcriticized or Doubtful. We designate an asset as Special Mention if the asset does not warrant designation within one of the other categories, but does contain a potential weakness that deserves closer attention.classified investment securities at September 30, 2017 and December 31, 2016. Our total Criticized and Classified assets were $66.3$72.6 million at September 30, 2016, an increase of $11.52017, a decrease $0.1 million from $54.8 million at December 31, 2015.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table sets forth the Bank’s assets designated as Criticized and Classified at September 30, 2016:

(In thousands) Special Mention Substandard Doubtful Loss Total
           
Loans:                    
Multi-family residential $7,700  $3,234  $-  $-  $10,934 
Commercial real estate  3,332   4,369   -   -   7,701 
One-to-four family - mixed-use property  3,732   8,188   -   -   11,920 
One-to-four family - residential  1,109   10,171   -   -   11,280 
Construction loans  -   -   -   -   - 
Small Business Administration  702   607   -   -   1,309 
Taxi Medallion  -   16,659   -   -   16,659 
Commercial business and other  1,030   2,607   -   -   3,637 
Total loans  17,605   45,835   -   -   63,440 
                     
Other Real Estate Owned  -   2,839   -   -   2,839 
Total $17,605  $48,674  $-  $-  $66,279 

The following table sets forth the Bank's Criticized and Classified assets at December 31, 2015:

(In thousands) Special Mention Substandard Doubtful Loss Total
           
Loans:                    
Multi-family residential $4,361  $5,421  $-  $-  $9,782 
Commercial real estate  1,821   3,812   -   -   5,633 
One-to-four family - mixed-use property  3,087   10,990   -   -   14,077 
One-to-four family - residential  1,437   12,255   -   -   13,692 
Construction loans  -   1,000   -   -   1,000 
Small Business Administration  229   224   -   -   453 
Taxi Medallion  -   2,118   -   -   2,118 
Commercial business and other  -   3,123   -   -   3,123 
Total loans  10,935   38,943   -   -   49,878 
                     
Other Real Estate Owned  -   4,932   -   -   4,932 
Total $10,935  $43,875  $-  $-  $54,810 

2016.

 

On a quarterly basis, all collateral dependent loans that are classified as Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties, or updated independent appraisals. The loan balances of collateral dependent loans reviewed for impairment are then compared to the loans updated fair value. We consider 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 balance which exceeds fair value is generally charged-off, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. All taxi medallion loans are classified impaired. Taxi medallion loans with a loan-to-value greater than 100% are classified as impaired and allocated a portion of the allowance for loan losses (“ALL”) in the amount of the excess of the loan-to-value over the loan’s principal balance. At September 30, 2016,2017, the current average loan-to-value ratio on our collateral dependent loans reviewed for impairment was 54.5%52.9%.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

ALLOWANCE FOR LOAN LOSSES

 

The ALL represents the expense charged to earnings based upon management’s quarterly analysis of credit risk. The amount of the ALL is based upon multiple factors which reflectsthat reflect management’s assessment of the credit quality of the loan portfolio. The factors are both quantitative and qualitative in nature including, but not limited to, historical losses, economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.

 

Management has developed a comprehensive analytical process to monitor the adequacy of the ALL. The process and guidelines were developed using, among other factors, the guidance from federal banking regulatory agencies and accounting principles generally accepted in the United States of America.GAAP. The results of this process, along with the conclusions of our independent loan review officer, support management’s assessment as to the adequacy of the ALL at each balance sheet date. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” for a detailed explanation of management’s methodology and policy.

 

During the nine months ended September 30, 2106,2107, the portion of the ALL related to the loss history declined. Charge-offs recorded in the past twelve quarters have decreasedwere minimal, as credit conditions have improved.remained stable. The percentage of loans originated prior to 2009, compared to the total loan portfolio, is decreasingdecreased as scheduled amortization and repayments have occurred. As disclosed in Note 5 of the Notes to the Consolidated Financial Statements “Loans”, the loans originated prior to 2009 have a higher delinquency and loss rate. These reductions in the ALL were partiallymore than offset by an additional allocation to our taxi medallion portfolio coupled with an increasedue to a reduction in the estimated fair value of the collateral underlying our performing taxi medallion portfolio. At September 30, 2017, we have allocated $6.0 million of the allowance to the taxi medallion portfolio which equals 33.0% of the outstanding loan balances.principal. The impact from the above and the minimal charge-offs recorded net recoveries during the nine months ended September 30, 20162017 resulted in the ALL totaling $21.8$25.3 million, an increase of $0.3$3.0 million, or 13.7% from December 31, 2015.2016. Based upon management consistently applying the ALL methodology and review of the loan portfolio, management concluded a charge to earnings to increase the ALL was not warranted. The ALL at September 30, 2016,2017, represented 0.46%0.50% of gross loans outstanding as compared to 0.49%0.46% of gross loans outstanding at December 31, 2015.2016. The ALL represented 92.6%181.9% of non-performing loans at September 30, 20162017 compared to 82.6%103.8% at December 31, 2015. The ratio of net charge-offs to average total loans was a benefit of 0.01% for the nine months ended September 30, 2016 compared to net charge offs of 0.02% for the comparable 2015 period.2016.

 

As a component of the credit risk assessment, the Bank has established an Asset Classification Committee which carefully evaluates loans which are past due 90 days and/or are classified. The Asset Classification Committee thoroughly assesses the condition and circumstances surrounding each loan meeting the criteria. The Bank also has a Delinquency Committee whichthat evaluates loans meeting specific criteria. The Bank’s loan policy requires loans to be placed into non-accrual status once the loan becomes 90 days delinquent unless they are well secured andthere is, in our opinion, compelling evidence the borrower will bring the loan current in the processimmediate future.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of collection or they are past maturity but continue making payments

Financial Condition and are in the processResults of renegotiation. The Portfolio Management department reviews all loans greater than $650,000 annually.Operations

 

Management recommends to the Board of Directors the amount of the ALL quarterly. The Board of Directors approves the ALL.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table sets forth the activity in the Company's allowance for loan losses for the periods indicated:

 

 For the nine months ended September 30, For the nine months ended September 30,
(Dollars in thousands) 2016 2015 2017 2016
        
Balance at beginning of period $21,535  $25,096  $22,229  $21,535 
                
Benefit for loan losses  -   (1,620)
Provision for loan losses  3,266   - 
                
Loans charged-off:                
Multi-family residential  (155)  (458)  (452)  (155)
Commercial real estate  -   (32)  (4)  - 
One-to-four family – mixed-use property  (139)  (571)  (36)  (139)
One-to-four family – residential  (74)  (244)  (170)  (74)
Small Business Administration  (362)  (9)  (89)  (362)
Taxi medallion  (54)  - 
Commercial business and other  (59)  (62)  (48)  (59)
Total loans charged-off  (789)  (1,376)  (853)  (789)
                
Recoveries:                
Multi-family residential  230   218   297   230 
Commercial real estate  11   168   93   11 
One-to-four family – mixed-use property  252   73   68   252 
One-to-four family – residential  366   374   58   366 
Small Business Administration  118   32   66   118 
Commercial business and other  72   8   45   72 
Total recoveries  1,049   873   627   1,049 
                
Net recoveries (charge-offs)  260   (503)
Net (charge-offs) recoveries  (226)  260 
                
Balance at end of period $21,795  $22,973  $25,269  $21,795 
                
Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period  (0.01)%  0.02%  0.01%  (0.01)%
Ratio of allowance for loan losses to gross loans at end of period  0.46%  0.55%  0.50%  0.46%
Ratio of allowance for loan losses to non-performing assets at end of period  82.64%  68.67%  181.92%  82.64%
Ratio of allowance for loan losses to non-performing loans at end of period  92.61%  80.32%  181.92%  92.61%

 

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016,2017, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company's consolidated financial condition, results of operations and cash flows.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

2016.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended September 30, 2016:2017:

 

        Maximum
      Total Number of Number of
  Total   Shares Purchased Shares That May
  Number   as Part of Publicly Yet Be Purchased
  of Shares Average Price Announced Plans Under the Plans
Period Purchased Paid per Share or Programs or Programs
July 1 to July 31, 20162017  -  $-   -   520,905485,905 
August 1 to August 31, 20162017  -   -   -   520,905485,905 
September 1 to September 30, 20162017  -   -   -   520,905485,905 
Total  -  $-   -     

 

During the quarter ended September 30, 2016,2017, the Company did not repurchase any shares of the Company’s common stock. At September 30, 2016, 520,9052017, 485,905 shares may still be repurchased under the currently authorized stock repurchase program. Stock will be purchased under the current stock repurchase program from time to time, in the open market or through private transactions, subject to market conditions. There is no expiration or maximum dollar amount under this authorization.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

ITEM 6. EXHIBITS

 

Exhibit No.Description
   
 3.1Certificate of Incorporation of Flushing Financial Corporation (1)
 3.2Certificate of Amendment to Certificate of Incorporation of Flushing Financial       Corporation (3)
 3.3Certificate of Amendment to Certificate of Incorporation of Flushing Financial       Corporation (5)
 3.4Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
 3.5Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
 3.6Amended and Restated By-Laws of Flushing Financial Corporation (6)
 4.1Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
 31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
 31.2Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
 32.1Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
 32.2Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
 101.INSXBRL Instance Document (filed herewith)
 101.SCHXBRL Taxonomy Extension Schema Document (filed herewith)
 101.CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
 101.DEFXBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
 101.LABXBRL Taxonomy Extension Label Linkbase Document (filed herewith)
 101.PREXBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
(1)Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488.
(2)Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(3)Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4)Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5)Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.
(6)Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

 

 

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 Flushing Financial Corporation
  
Dated: November 4, 20166, 2017By: /s/John R. Buran
 John R. Buran
 President and Chief Executive Officer
  
Dated: November 4, 20166, 2017By: /s/Susan K. Cullen
 Susan K. Cullen
 Senior Executive Vice President, Treasurer and
 Chief Financial Officer

 

 

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

 

Exhibit No.Description
   
 3.1 PCertificate of Incorporation of Flushing Financial Corporation (1)
 3.2Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
 3.3Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
 3.4Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
 3.5Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
 3.6Amended and Restated By-Laws of Flushing Financial Corporation (6)
 4.1Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
 31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
 31.2Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
 32.1Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
 32.2Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
 101.INSXBRL Instance Document (filed herewith)
 101.SCHXBRL Taxonomy Extension Schema Document (filed herewith)
 101.CALXBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
 101.DEFXBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
 101.LABXBRL Taxonomy Extension Label Linkbase Document (filed herewith)
 101.PREXBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
(1)Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488. (P: Indicates a filing submitted in paper)
(2)Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(3)Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4)Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5)Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.
(6)Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

 

 

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