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Flushing Financial (FFIC)

Filed: 10 May 18, 4:54pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

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 X

Non-accelerated filer __

Emerging growth company __

Accelerated filer __

Smaller reporting company __

 

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

 

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

 

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2018 was 28,522,021.

 

 

 

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 Operations41
  
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk53
  
ITEM 4. Controls and Procedures53
  
PART II — OTHER INFORMATION 
  
ITEM 1. Legal Proceedings54
  
ITEM 1A. Risk Factors54
  
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds54
  
ITEM 3. Defaults Upon Senior Securities54
  
ITEM 4. Mine Safety Disclosures54
  
ITEM 5. Other Information54
  
ITEM 6. Exhibits55
  
SIGNATURES56

 

 

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

 

Item 1. Financial Statements

 

  March 31, December 31,
  2018 2017
  (Dollars in thousands, except per share data)
Assets        
Cash and due from banks $91,959  $51,546 
Securities held-to-maturity:        
Mortgage-backed securities (none pledged; fair value of $7,564 and $7,810 at March 31, 2018 and December 31, 2017, respectively)  7,968   7,973 
Other securities (none pledged; fair value of $21,347 and $21,889 at March 31, 2018 and December 31, 2017, respectively)  23,267   22,913 
Securities available for sale, at fair value:        
Mortgage-backed securities (including assets pledged of $245,531 and $148,505 at March 31, 2018 and December 31, 2017, respectively; $1,505 and $1,590 at fair value pursuant to the fair value option at March 31, 2018 and December 31, 2017, respectively)  512,781   509,650 
Other securities (including assets pledged of $41,647 and $44,052 at March 31, 2018 and December 31, 2017, respectively; $12,612 and $12,685 at fair value pursuant to the fair value option at March 31, 2018 and December 31, 2017, respectively)  216,480   228,704 
Loans:        
Multi-family residential  2,286,803   2,273,595 
Commercial real estate  1,426,847   1,368,112 
One-to-four family ― mixed-use property  566,930   564,206 
One-to-four family ― residential  190,115   180,663 
Co-operative apartments  6,826   6,895 
Construction  23,887   8,479 
Small Business Administration  20,004   18,479 
Taxi medallion  6,617   6,834 
Commercial business and other  768,440   732,973 
Net unamortized premiums and unearned loan fees  16,395   16,763 
Allowance for loan losses  (20,542)  (20,351)
Net loans  5,292,322   5,156,648 
Interest and dividends receivable  22,578   21,405 
Bank premises and equipment, net  31,314   30,836 
Federal Home Loan Bank of New York stock, at cost  54,045   60,089 
Bank owned life insurance  130,653   131,856 
Goodwill  16,127   16,127 
Other assets  83,277   61,527 
Total assets $6,482,771  $6,299,274 
         
Liabilities        
Due to depositors:        
Non-interest bearing $377,861  $385,269 
Interest-bearing  4,257,942   3,955,403 
Mortgagors' escrow deposits  65,979   42,606 
Borrowed funds:        
Federal Home Loan Bank advances  1,064,641   1,198,968 
Subordinated debentures  73,768   73,699 
Junior subordinated debentures, at fair value  38,692   36,986 
Total borrowed funds  1,177,101   1,309,653 
Other liabilities  68,581   73,735 
Total liabilities  5,947,464   5,766,666 
         
Stockholders' Equity        
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)  -   - 
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at March 31, 2018 and December 31, 2017; 28,546,443 shares and 28,588,266 shares outstanding at March 31, 2018 and December 31, 2017, respectively)  315   315 
Additional paid-in capital  219,115   217,906 
Treasury stock, at average cost (2,984,152 shares and 2,942,329 at March 31, 2018 and December 31, 2017, respectively)  (60,737)  (57,675)
Retained earnings  387,793   381,048 
Accumulated other comprehensive loss, net of taxes  (11,179)  (8,986)
Total stockholders' equity  535,307   532,608 
         
Total liabilities and stockholders' equity $6,482,771  $6,299,274 

 

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

 

- 1 -


 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

  For the three months
  ended March 31,
(Dollars in thousands, except per share data) 2018 2017
Interest and dividend income        
Interest and fees on loans $55,017  $50,885 
Interest and dividends on securities:        
Interest  5,468   6,095 
Dividends  14   121 
Other interest income  287   153 
Total interest and dividend income  60,786   57,254 
         
Interest expense        
Deposits  12,110   8,980 
Other interest expense  6,067   4,885 
Total interest expense  18,177   13,865 
         
Net interest income  42,609   43,389 
Provision for loan losses  153   - 
Net interest income after provision for loan losses  42,456   43,389 
         
Non-interest income        
Banking services fee income  948   874 
Net (loss) gain on sale of loans  (263)  210 
Net loss from fair value adjustments  (100)  (378)
Federal Home Loan Bank of New York stock dividends  876   823 
Gain from life insurance proceeds  776   1,161 
Bank owned life insurance  762   795 
Other income  201   204 
Total non-interest income  3,200   3,689 
         
Non-interest expense        
Salaries and employee benefits  18,455   17,104 
Occupancy and equipment  2,577   2,496 
Professional services  2,185   1,996 
FDIC deposit insurance  500   326 
Data processing  1,401   1,203 
Depreciation and amortization  1,389   1,165 
Other real estate owned/foreclosure expense  96   351 
Net gain from sales of real estate owned  -   (50)
Other operating expenses  4,691   4,973 
Total non-interest expense  31,294   29,564 
         
Income before income taxes  14,362   17,514 
         
Provision for income taxes        
Federal  2,607   4,749 
State and local  343   505 
Total taxes  2,950   5,254 
         
Net income $11,412  $12,260 
         
Basic earnings per common share $0.39  $0.42 
Diluted earnings per common share $0.39  $0.42 
Dividends per common share $0.20  $0.18 

 

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

 

- 2 -

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

  For the three months ended
  March 31,
(In thousands) 2018 2017
     
Net income $11,412  $12,260 
         
Other comprehensive income (loss), net of tax:        
Amortization of actuarial losses, net of taxes of ($41) and ($64) for the three months ended March 31, 2018 and 2017, respectively.  91   87 
Amortization of prior service credits, net of taxes of $3 and $4 for the three months ended March 31, 2018 and 2017, respectively.  (7)  (7)
Net unrealized (losses) gains on securities, net of taxes of $3,055 and ($811) for the three months ended March 31, 2018 and 2017, respectively.  (6,640)  1,148 
Net unrealized gain on cash flow hedges, net of taxes of ($2,604) for the three months ended March 31, 2018.  5,661   - 
         
Total other comprehensive income (loss), net of tax  (895)  1,228 
         
Comprehensive income $10,517  $13,488 

 

 

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

 

- 3 -

 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

  For the three months ended
  March 31,
(In thousands) 2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES        
Net income $11,412  $12,260 
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for loan losses  153   - 
Depreciation and amortization of bank premises and equipment  1,389   1,165 
Amortization of premium, net of accretion of discount  2,018   1,903 
Net loss from fair value adjustments  100   378 
Net loss (gain) from sale of loans  263   (210)
Net gain from sale of OREO  -   (50)
Income from bank owned life insurance  (762)  (795)
Gain from life insurance proceeds  (776)  (1,161)
Stock-based compensation expense  3,452   3,085 
Deferred compensation  (1,238)  (1,431)
Deferred income tax expense  350   2,501 
Increase in other liabilities  (118)  2,709 
Decrease (increase) in other assets  (955)  (4,314)
Net cash provided by operating activities  15,288   16,040 
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Purchases of bank premises and equipment  (1,867)  (630)
Net redemptions of Federal Home Loan Bank of New York shares  6,044   1,789 
Purchases of securities held-to-maturity  (353)  - 
Proceeds from maturities of securities held-to-maturity  -   1,330 
Purchases of securities available for sale  (32,646)  (40,581)
Proceeds from sales and calls of securities available for sale  10,000   - 
Proceeds from maturities and prepayments of securities available for sale  20,943   18,691 
Proceeds from bank owned life insurance  2,741   651 
Net originations of loans  (83,734)  (129,764)
Purchases of loans  (68,818)  (15,621)
Proceeds from sale of real estate owned  -   583 
Proceeds from sale of loans  2,464   5,190 
Net cash used in investing activities  (145,226)  (158,362)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Net (decrease) increase in non-interest bearing deposits  (7,408)  10,865 
Net increase in interest-bearing deposits  302,438   172,471 
Net increase in mortgagors' escrow deposits  23,373   21,612 
Net repayments from short-term borrowed funds  (10,500)  (68,500)
Proceeds from long-term borrowings  -   80,000 
Repayment of long-term borrowings  (123,794)  (51,254)
Purchases of treasury stock  (7,963)  (2,268)
Cash dividends paid  (5,795)  (5,246)
Net cash provided by financing activities  170,351   157,680 
         
Net increase in cash and cash equivalents  40,413   15,358 
Cash and cash equivalents, beginning of period  51,546   35,857 
Cash and cash equivalents, end of period $91,959  $51,215 
         
SUPPLEMENTAL CASH FLOW DISCLOSURE        
Interest paid $15,233  $12,491 
Income taxes paid  1,103   1,000 
Taxes paid if excess tax benefits were not tax deductible  1,691   2,194 
Non-cash activities:        
Loans transferred to Other Real Estate Owned or Other Assets  744   - 

 

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

 

- 4 -

 
PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2018 and 2017

(Unaudited)

 

(Dollars in thousands, except per share data) Total Common
Stock
 Additional
Paid-in
Capital
 Retained
Earnings
 Treasury
Stock
 Accumulated Other
Comprehensive
Income (Loss)
             
Balance at December 31, 2017 $532,608  $315  $217,906  $381,048  $(57,675) $(8,986)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from Accumulated Other Comprehensive Income (Loss) to Retained Earnings  -   -   -   2,073   -   (2,073)
Impact of adoption of Accounting Standard Update 2016-01  -   -   -   (775)  -   775 
Net Income  11,412   -   -   11,412   -   - 
Award of common shares released from Employee Benefit Trust (116,229 shares)  2,488   -   2,488   -   -   - 
Vesting of restricted stock unit awards (248,877 shares)  -   -   (4,731)  (170)  4,901   - 
Stock-based compensation expense  3,452   -   3,452   -   -   - 
Purchase of treasury shares (217,863 shares)  (5,913)  -   -   -   (5,913)  - 
Repurchase of shares to satisfy tax obligation (72,837 shares)  (2,050)  -   -   -   (2,050)  - 
Dividends on common stock ($0.20 per share)  (5,795)  -   -   (5,795)  -   - 
Other comprehensive loss  (895)  -   -   -   -   (895)
Balance at March 31, 2018 $535,307  $315  $219,115  $387,793  $(60,737) $(11,179)
                         
Balance at December 31, 2016 $513,853  $315  $214,462  $361,192  $(53,754) $(8,362)
Net Income  12,260   -   -   12,260   -   - 
Award of common shares released from Employee Benefit Trust (107,605 shares)  2,280   -   2,280   -   -   - 
Vesting of restricted stock unit awards (256,810 shares)  -   -   (4,536)  (262)  4,798   - 
Stock-based compensation expense  3,295   -   3,295   -   -   - 
Repurchase of shares to satisfy tax obligation (78,554 shares)  (2,268)  -   -   -   (2,268)  - 
Dividends on common stock ($0.18 per share)  (5,246)  -   -   (5,246)  -   - 
Other comprehensive income  1,228   -   -   -   -   1,228 
Balance at March 31, 2017 $525,402  $315  $215,501  $367,944  $(51,224) $(7,134)

 

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

 

- 5 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

1.Basis of Presentation

 

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

 

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

 

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

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

 

2.Use of Estimates

 

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

 

3.Earnings Per Share

 

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

 

  For the three months ended
  March 31,
  2018 2017
  (Dollars in thousands, except per share data)
Net income, as reported $11,412  $12,260 
Divided by:        
Weighted average common shares outstanding  28,974   29,019 
Weighted average common stock equivalents  1   4 
Total weighted average common shares outstanding and common stock equivalents  28,975   29,023 
         
Basic earnings per common share $0.39  $0.42 
Diluted earnings per common share (1) $0.39  $0.42 
Dividend payout ratio  51.3%  42.9%

 

(1)For the three months ended March 31, 2018 and 2017, there were no common stock equivalents that were anti-dilutive.

 

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

4.Debt and Equity Securities

 

The Company did not hold any trading securities at March 31, 2018 and December 31, 2017. Securities available for sale are recorded at fair value. Securities held-to-maturity are recorded at amortized cost.

 

The following table summarizes the Company’s portfolio of securities held-to-maturity at March 31, 2018:

 

      Gross Gross
  Amortized   Unrealized Unrealized
  Cost Fair Value Gains Losses
  (In thousands)
Securities held-to-maturity:                
Municipals $23,267  $21,347  $-  $1,920 
                 
Total other securities  23,267   21,347   -   1,920 
                 
FNMA  7,968   7,564   -   404 
                 
Total mortgage-backed securities  7,968   7,564   -   404 
Total $31,235  $28,911  $-  $2,324 

 

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2017:

 

      Gross Gross
  Amortized   Unrealized Unrealized
  Cost Fair Value Gains Losses
  (In thousands)
Securities held-to-maturity:                
Municipals $22,913  $21,889  $-  $1,024 
                 
Total municipals  22,913   21,889   -   1,024 
                 
FNMA  7,973   7,810   -   163 
                 
Total mortgage-backed securities  7,973   7,810   -   163 
                 
Total $30,886  $29,699  $-  $1,187 

 

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2018:

 

      Gross Gross
  Amortized   Unrealized Unrealized
  Cost Fair Value Gains Losses
  (In thousands)
Corporate $110,000  $101,578  $-  $8,422 
Municipals  101,129   102,289   1,191   31 
Mutual funds  11,451   11,451   -   - 
Other  1,162   1,162   -   - 
Total other securities  223,742   216,480   1,191   8,453 
REMIC and CMO  346,414   338,368   188   8,234 
GNMA  940   1,004   64   - 
FNMA  131,918   128,535   68   3,451 
FHLMC  45,938   44,874   15   1,079 
Total mortgage-backed securities  525,210   512,781   335   12,764 
Total securities available for sale $748,952  $729,261  $1,526  $21,217 

 

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2017:

 

      Gross Gross
  Amortized   Unrealized Unrealized
  Cost Fair Value Gains Losses
  (In thousands)
Corporate $110,000  $102,767  $-  $7,233 
Municipals  101,680   103,199   1,519   - 
Mutual funds  11,575   11,575   -   - 
Collateralized loan obligations  10,000   10,053   53   - 
Other  1,110   1,110   -   - 
Total other securities  234,365   228,704   1,572   7,233 
REMIC and CMO  328,668   325,302   595   3,961 
GNMA  1,016   1,088   72   - 
FNMA  136,198   135,474   330   1,054 
FHLMC  48,103   47,786   18   335 
Total mortgage-backed securities  513,985   509,650   1,015   5,350 
Total securities available for sale $748,350  $738,354  $2,587  $12,583 

 

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 $21,000 at December 31, 2017. We did not hold any private issue CMO that is collateralized by commercial real estate mortgages at March 31, 2018.

 

The corporate securities held by the Company at March 31, 2018 and December 31, 2017 are issued by U.S. banking institutions.

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at March 31, 2018, 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  
Securities held-to-maturity: Cost Fair Value
  (In thousands)
Due in one year or less $1,398  $1,398 
Due after ten years  21,869   19,949 
Total other securities  23,267   21,347 
Mortgage-backed securities  7,968   7,564 
Total $31,235  $28,911 

 

 

  Amortized  
Securities available for sale: Cost Fair Value
  (In thousands)
Due in one year or less $-  $- 
Due after one year through five years  4,277   4,299 
Due after five years through ten years  125,670   117,351 
Due after ten years  82,344   83,379 
Total other securities  212,291   205,029 
Mutual funds  11,451   11,451 
Mortgage-backed securities  525,210   512,781 
Total $748,952  $729,261 

 

 

 

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables show the Company’s securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated:

 

  At March 31, 2018
    Total Less than 12 months 12 months or more
      Unrealized   Unrealized   Unrealized
  Count Fair Value Losses Fair Value Losses Fair Value Losses
    (Dollars in thousands)
Held-to-maturity securities                            
Municipals  1  $19,949  $1,920  $-  $-  $19,949  $1,920 
Total other securities  1   19,949   1,920   -   -   19,949   1,920 
                             
FNMA  1   7,564   404   7,564   404   -   - 
Total mortgage-backed securities  1   7,564   404   7,564   404   -   - 
Total  2  $27,513  $2,324  $7,564  $404  $19,949  $1,920 
                             
Available for sale securities                            
Corporate  14  $101,578  $8,422  $9,469  $531  $92,109  $7,891 
Municipals  3   5,107   31   5,107   31   -   - 
Total other securities  17   106,685   8,453   14,576   562   92,109   7,891 
                             
REMIC and CMO  46   306,808   8,234   223,172   4,458   83,636   3,776 
FNMA  20   126,645   3,451   116,149   2,971   10,496   480 
FHLMC  2   44,001   1,079   41,061   961   2,940   118 
Total mortgage-backed securities  68   477,454   12,764   380,382   8,390   97,072   4,374 
Total  85  $584,139  $21,217  $394,958  $8,952  $189,181  $12,265 

 

 

  At December 31, 2017
    Total Less than 12 months 12 months or more
      Unrealized   Unrealized   Unrealized
  Count Fair Value Losses Fair Value Losses Fair Value Losses
  (Dollars in thousands)
Held-to-maturity securities                            
Municipals  1  $20,844  $1,024  $20,844  $1,024  $-  $- 
Total other securities  1   20,844   1,024   20,844   1,024   -   - 
                             
FNMA  1   7,810   163   7,810   163   -   - 
Total mortgage-backed securities  1   7,810   163   7,810   163   -   - 
Total securities held-to-maturity  2  $28,654  $1,187  $28,654  $1,187  $-  $- 
                             
Available for sale securities                            
Corporate  14  $102,767  $7,233  $9,723  $277  $93,044  $6,956 
Total other securities  14   102,767   7,233   9,723   277   93,044   6,956 
                             
REMIC and CMO  36   249,596   3,961   162,781   1,406   86,815   2,555 
FNMA  17   120,510   1,054   109,258   850   11,252   204 
FHLMC  2   46,829   335   43,258   294   3,571   41 
Total mortgage-backed securities  55   416,935   5,350   315,297   2,550   101,638   2,800 
Total securities available for sale  69  $519,702  $12,583  $325,020  $2,827  $194,682  $9,756 

 

 

- 10 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

The Company reviewed each investment that had an unrealized loss at March 31, 2018 and December 31, 2017. The unrealized losses in held-to-maturity municipal securities at March 31, 2018 and December 31, 2017 were caused by illiquidity in the market and movements in interest rates. The unrealized losses in held-to-maturity FNMA securities at March 31, 2018 and December 31, 2017 were caused by movements in interest rates. The unrealized losses in securities available for sale at March 31, 2018 and December 31, 2017 were caused by movements in interest rates.

 

It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2018 and December 31, 2017.

 

The Company did not sell any securities during the three months ended March 31, 2018 and 2017.

 

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.

 

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.

 

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.

 

- 11 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. An unallocated component may at times be maintained to cover uncertainties that could affect management's estimate of probable losses. When necessary an unallocated component of the allowance will 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 through the sale of the loan or by foreclosure and sale of the property.

 

The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. 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. For collateral dependent taxi medallion loans, the Company considers fair value to be the value of the underlying medallion based upon the most recently reported arm’s length sales transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. For both collateral dependent mortgage loans and taxi medallion loans, the amount by which the loan’s book value exceeds fair value is charged-off.

 

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. For the three months ended March 31, 2018, the Company used a loss emergence period of 1.33 years. The Company’s Board of Directors reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.

 

The 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.

 

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

 

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

 

- 12 -

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 March 31, 2018, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

 

The Company did not modify any loans as TDR during the three months ended March 31, 2018 and March 31, 2017.

 

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

 

  March 31, 2018 December 31, 2017
  Number Recorded Number Recorded
(Dollars in thousands) of contracts investment of contracts investment
         
Multi-family residential  9  $2,503   9  $2,518 
Commercial real estate  -   -   2   1,986 
One-to-four family - mixed-use property  5   1,740   5   1,753 
One-to-four family - residential  3   567   3   572 
Taxi medallion  19   5,712   20   5,916 
Commercial business and other  2   407   2   462 
Total performing troubled debt restructured  38  $10,929   41  $13,207 

 

During the three months ended March 31, 2018, we sold one commercial real estate TDR totaling $1.8 million, for a loss of $0.3 million and foreclosed on one taxi medallion TDR of $0.1 million, which is included in “Other Assets”. There were no TDRs that defaulted during the period, which were within 12 months of their modification date.

 

 

- 13 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  March 31, 2018 December 31, 2017
  Number Recorded Number Recorded
(Dollars in thousands) of contracts investment of contracts investment
         
Multi-family residential  1  $383   1  $383 
                 
Total troubled debt restructurings that subsequently defaulted  1  $383   1  $383 

 

During the three months ended March 31, 2018, one taxi medallion TDR was foreclosed upon and transferred to non-performing status. There were no TDR loans transferred to non-performing status during the three months ended March 31, 2017.

 

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

 

  March 31, December 31,
(In thousands) 2018 2017
     
Loans ninety days or more past due and still accruing:        
Commercial real estate $1,668  $2,424 
Total  1,668   2,424 
         
Non-accrual mortgage loans:        
Multi-family residential  2,193   3,598 
Commercial real estate  1,894   1,473 
One-to-four family - mixed-use property  2,396   1,867 
One-to-four family - residential  7,542   7,808 
Total  14,025   14,746 
         
Non-accrual non-mortgage loans:        
Small Business Administration  41   46 
Taxi medallion  906   918 
Total  947   964 
Total non-accrual loans  14,972   15,710 
Total non-performing loans $16,640  $18,134 

 

 

- 14 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  For the three months ended
March 31,
  2018 2017
  (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms $406  $414 
Less:  Interest income included in the results of operations  158   127 
Total foregone interest $248  $287 

 

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

 

  March 31, 2018
      Greater      
  30 - 59 Days 60 - 89 Days than Total Past    
(In thousands) Past Due Past Due 90 Days Due Current Total Loans
             
Multi-family residential $2,748  $-  $2,193  $4,941  $2,281,862  $2,286,803 
Commercial real estate  -   -   3,563   3,563   1,423,284   1,426,847 
One-to-four family - mixed-use property  2,659   -   2,396   5,055   561,875   566,930 
One-to-four family - residential  1,449   151   7,542   9,142   180,973   190,115 
Co-operative apartments  -   -   -   -   6,826   6,826 
Construction loans  -   730   -   730   23,157   23,887 
Small Business Administration  -   -   -   -   20,004   20,004 
Taxi medallion  -   -   -   -   6,617   6,617 
Commercial business and other  200   5   -   205   768,235   768,440 
Total $7,056  $886  $15,694  $23,636  $5,272,833  $5,296,469 

 

  December 31, 2017
      Greater      
  30 - 59 Days 60 - 89 Days than Total Past    
(In thousands) Past Due Past Due 90 Days Due Current Total Loans
             
Multi-family residential $2,533  $279  $3,598  $6,410  $2,267,185  $2,273,595 
Commercial real estate  1,680   2,197   3,897   7,774   1,360,338   1,368,112 
One-to-four family - mixed-use property  1,570   860   1,867   4,297   559,909   564,206 
One-to-four family - residential  1,921   680   7,623   10,224   170,439   180,663 
Co-operative apartments  -   -   -   -   6,895   6,895 
Construction loans  -   -   -   -   8,479   8,479 
Small Business Administration  -   -   -   -   18,479   18,479 
Taxi medallion  -   108   -   108   6,726   6,834 
Commercial business and other  2   -   -   2   732,971   732,973 
Total $7,706  $4,124  $16,985  $28,815  $5,131,421  $5,160,236 

 

 

- 15 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

March 31, 2018
(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 $5,823  $4,643  $2,545  $1,082  $68  $669  $-  $5,521  $20,351 
Charge-off's  (53)  -   -   (1)  -   (25)  -   (6)  (85)
Recoveries  2   -   -   108   -   6   -   7   123 
Provision (benefit)  (22)  (41)  (75)  (148)  123   25   -   291   153 
Ending balance $5,750  $4,602  $2,470  $1,041  $191  $675  $-  $5,813  $20,542 

 

March 31, 2017
(In thousands) Multi-family
residential
 Commercial
real estate
 One-to-four
family -
mixed-use
property
 One-to-four
family -
residential
 Construction
loans
 Small Business
Administration
 Taxi
medallion
 Commercial
business and
other
 Unallocated Total
                     
Allowance for credit losses:                                        
Beginning balance $5,923  $4,487  $2,903  $1,015  $92  $481  $2,243  $4,492  $593  $22,229 
Charge-off's  (14)  -   (34)  -   -   (65)  (54)  (12)  -   (179)
Recoveries  30   68   -   -   -   41   -   22   -   161 
Provision (benefit)  (32)  (70)  (178)  (36)  2   (140)  24   208   222   - 
Ending balance $5,907  $4,485  $2,691  $979  $94  $317  $2,213  $4,710  $815  $22,211 

 

 

- 16 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

March 31, 2018
(In thousands) Multi-family
residential
 Commercial
real estate
 One-to-four
family - mixed-
use property
 One-to-four
family-
residential
 Co-operative
apartments
 Construction
loans
 Small Business
Administration
 Taxi medallion Commercial
business and
other
 Total
Financing Receivables:                                        
Ending Balance $2,286,803  $1,426,847  $566,930  $190,115  $6,826  $23,887  $20,004  $6,617  $768,440  $5,296,469 
Ending balance: individually evaluated for impairment $6,785  $6,727  $5,592  $8,848  $-  $-  $99  $6,617  $407  $35,075 
Ending balance: collectively evaluated for impairment $2,280,018  $1,420,120  $561,338  $181,267  $6,826  $23,887  $19,905  $-  $768,033  $5,261,394 
                                         
Allowance for credit losses:                                        
Ending balance: individually evaluated for impairment $158  $-  $167  $55  $-  $-  $-  $-  $5  $385 
Ending balance: collectively evaluated for impairment $5,592  $4,602  $2,303  $986  $-  $191  $675  $-  $5,808  $20,157 

 

 

December 31, 2017
(In thousands) Multi-family
residential
 Commercial
real estate
 One-to-four
family - mixed-
use property
 One-to-four
family-
residential
 Co-operative
apartments
 Construction
loans
 Small Business
Administration
 Taxi medallion Commercial
business and
other
 Total
Financing Receivables:                                        
Ending Balance $2,273,595  $1,368,112  $564,206  $180,663  $6,895  $8,479  $18,479  $6,834  $732,973  $5,160,236 
Ending balance: individually evaluated for impairment $7,311  $9,089  $5,445  $9,686  $-  $-  $137  $6,834  $661  $39,163 
Ending balance: collectively evaluated for impairment $2,266,284  $1,359,023  $558,761  $170,977  $6,895  $8,479  $18,342  $-  $732,312  $5,121,073 
                                         
Allowance for credit losses:                                        
Ending balance: individually evaluated for impairment $205  $177  $198  $56  $-  $-  $-  $-  $6  $642 
Ending balance: collectively evaluated for impairment $5,618  $4,466  $2,347  $1,026  $-  $68  $669  $-  $5,515  $19,709 

 

 

 

- 17 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  March 31, 2018 December 31, 2017
    Unpaid     Unpaid  
  Recorded Principal Related Recorded Principal Related
  Investment Balance Allowance Investment Balance Allowance
  (In thousands)
With no related allowance recorded:                        
Mortgage loans:                        
Multi-family residential $4,577  $5,078  $-  $5,091  $5,539  $- 
Commercial real estate  6,727   6,727   -   7,103   7,103   - 
One-to-four family mixed-use property  4,375   4,711   -   4,218   4,556   - 
One-to-four family residential  8,437   9,442   -   9,272   10,489   - 
Non-mortgage loans:                        
Small Business Administration  99   135   -   137   151   - 
Taxi medallion  6,617   17,561   -   6,834   18,063   - 
Commercial business and other  79   449   -   313   682   - 
Total loans with no related allowance recorded  30,911   44,103   -   32,968   46,583   - 
                         
With an allowance recorded:                        
Mortgage loans:                        
Multi-family residential  2,208   2,208   158   2,220   2,220   205 
Commercial real estate  -   -   -   1,986   1,986   177 
One-to-four family mixed-use property  1,217   1,217   167  ��1,227   1,227   198 
One-to-four family residential  411   411   55   414   414   56 
Non-mortgage loans:                        
Commercial business and other  328   328   5   348   348   6 
Total loans with an allowance recorded  4,164   4,164   385   6,195   6,195   642 
                         
Total Impaired Loans:                        
Total mortgage loans $27,952  $29,794  $380  $31,531  $33,534  $636 
Total non-mortgage loans $7,123  $18,473  $5  $7,632  $19,244  $6 

 

 

- 18 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our average recorded investment and interest income recognized for impaired loans for the three months ended March 31, 2018 and 2017:

 

  March 31, 2018 March 31, 2017
  Average Interest Average Interest
  Recorded Income Recorded Income
  Investment Recognized Investment Recognized
  (In thousands)
With no related allowance recorded:                
Mortgage loans:                
Multi-family residential $4,834  $20  $3,354  $23 
Commercial real estate  6,915   74   5,925   95 
One-to-four family mixed-use property  4,297   41   6,048   37 
One-to-four family residential  8,855   15   9,851   26 
Construction  -   -   301   7 
Non-mortgage loans:                
Small Business Administration  118   1   293   2 
Taxi medallion  6,726   82   3,646   30 
Commercial business and other  196   2   2,159   44 
Total loans with no related allowance recorded  31,941   235   31,577   264 
                 
With an allowance recorded:                
Mortgage loans:                
Multi-family residential  2,214   29   2,257   29 
Commercial real estate  993   -   2,056   24 
One-to-four family mixed-use property  1,222   9   2,013   18 
One-to-four family residential  413   4   427   4 
Non-mortgage loans:                
Small Business Administration  -   -   761   - 
Taxi medallion  -   -   13,911   43 
Commercial business and other  338   5   411   6 
Total loans with an allowance recorded  5,180   47   21,836   124 
                 
Total Impaired Loans:                
Total mortgage loans $29,743  $192  $32,232  $263 
Total non-mortgage loans $7,378  $90  $21,181  $125 

 

 

- 19 -

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:

 

  March 31, 2018
(In thousands) Special Mention Substandard Doubtful Loss Total
           
Multi-family residential $4,124  $4,282  $-  $-  $8,406 
Commercial real estate  1,892   6,727   -   -   8,619 
One-to-four family - mixed-use property  1,277   3,852   -   -   5,129 
One-to-four family - residential  1,018   8,282   -   -   9,300 
Construction loans  730   -   -   -   730 
Small Business Administration  525   73   -   -   598 
Taxi medallion  -   6,617   -   -   6,617 
Commercial business and other  21,142   328   -   -   21,470 
Total loans $30,708  $30,161  $-  $-  $60,869 

 

  December 31, 2017
(In thousands) Special Mention Substandard Doubtful Loss Total
           
Multi-family residential $6,389  $4,793  $-  $-  $11,182 
Commercial real estate  2,020   8,871   -   -   10,891 
One-to-four family - mixed-use property  2,835   3,691   -   -   6,526 
One-to-four family - residential  2,076   9,115   -   -   11,191 
Small Business Administration   548   108   -   -   656 
Taxi medallion  -   6,834   -   -   6,834 
Commercial business and other  14,859   545   -   -   15,404 
Total loans $28,727  $33,957  $-  $-  $62,684 

 

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 $79.6 million and $254.8 million, respectively, at March 31, 2018.

 

- 20 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

6.Loans held for sale

 

Loans held for sale are carried at the lower of cost or estimated fair value. At March 31, 2018 and December 31, 2017, 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 tables show loans sold during the period indicated:

 

  For the three months ended March 31, 2018
(Dollars in thousands) Loans sold Proceeds Net loss
Delinquent and non-performing loans            
Multi-family residential  3  $964  $- 
Commercial real estate.  1   1,500   (263)
Total  4  $2,464  $(263)

 

 

  For the three months ended March 31, 2017
(Dollars in thousands) Loans sold Proceeds Net charge-offs Net gain
Delinquent and non-performing loans                
One-to-four family - mixed-use property  5  $1,790  $(33) $28 
Total  5  $1,790  $(33) $28 
                 
Performing loans                
Small Business Administration  3  $3,400  $-  $182 
Total  3  $3,400  $-  $182 

 

 

- 21 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

7.Other Real Estate Owned

 

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

 

  For the three months ended
  March 31,
  2018 2017
  (In thousands)
Balance at beginning of period $-  $533 
Acquisitions  638   - 
Sales  -   (533)
Balance at end of period $638  $- 

 

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

 

  For the three months ended
  March 31,
  2018 2017
  (In thousands)
Gross gains $-  $50 

 

At March 31, 2018, we held one foreclosed residential real estate property totaling $0.6 million. Also, we held one taxi medallion for $0.1 million acquired through foreclosure, which is included in “Other Assets.” Included within net loans as of March 31, 2018 and December 31, 2017 was a recorded investment of $10.3 million and $10.5 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

 

8.Stock-Based Compensation

 

For the three months ended March 31, 2018 and 2017, the Company’s net income, as reported, includes $3.4 million and $3.1 million, respectively, of stock-based compensation costs and $0.7 million and $1.0 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. During the three months ended March 31, 2018 and 2017, the Company granted 274,990 and 276,900 restricted stock units, respectively. There were no stock options granted or exercised during the three months ended March 31, 2018 and 2017. The Company has not granted stock options since 2009. At March 31, 2018, the Company had 1,200 stock options, all 100% vested, outstanding, at an average exercise price of $13.91 per share.

 

The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight-line method.

 

- 22 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Company’s restricted stock unit (“RSU”) awards at or for the three months ended March 31, 2018:

 

    Weighted-Average
    Grant-Date
  Shares Fair Value
Non-vested at December 31, 2017  497,322  $22.46 
Granted  274,990   28.21 
Vested  (238,249)  23.64 
Forfeited  (6,005)  25.24 
Non-vested at March 31, 2018  528,058  $24.89 
         
Vested but unissued at March 31, 2018  233,449  $25.15 

 

As of March 31, 2018, there was $11.9 million of total unrecognized compensation cost related to RSU awards granted. That cost is expected to be recognized over a weighted-average period of 3.3 years. The total fair value of awards vested for the three months ended March 31, 2018 and 2017 was $6.7 and $7.0 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.

 

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

 

The following table summarizes the Phantom Stock Plan at or for the three months ended March 31, 2018:

 

Phantom Stock Plan Shares Fair Value
Outstanding at December 31, 2017  89,180  $27.50 
Granted  8,200   27.90 
Forfeited  -   - 
Distributions  (24)  27.57 
Outstanding at March 31, 2018  97,356  $26.96 
Vested at March 31, 2018  96,509  $26.96 

 

The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $37,000 and $0.2 million for the three months ended March 31, 2018 and 2017, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 and $6,000 for the three months ended March 31, 2018 and 2017, respectively.

 

- 23 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

9.Pension and Other Postretirement Benefit Plans

 

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

 

  Three months ended
  March 31,
(In thousands) 2018 2017
     
Employee Pension Plan:        
Interest cost $195  $216 
Amortization of unrecognized loss  155   174 
Expected return on plan assets  (363)  (348)
Net employee pension ( benefit) expense $(13) $42 
         
Outside Director Pension Plan:        
Service cost $11  $10 
Interest cost  20   23 
Amortization of unrecognized gain  (23)  (23)
Amortization of past service liability  3   10 
Net outside director pension expense $11  $20 
         
Other Postretirement Benefit Plans:        
Service cost $88  $79 
Interest cost  77   76 
Amortization of unrecognized loss  -   - 
Amortization of past service credit  (13)  (21)
Net other postretirement expense $152  $134 

 

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2017 that it expects to contribute $0.2 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), during the year ending December 31, 2018. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of March 31, 2018, the Company has contributed $24,000 to the Outside Director Pension Plan and $20,000 in contributions were made to the Other Postretirement Benefit Plans. As of March 31, 2018, the Company has not revised its expected contributions for the year ending December 31, 2018.

 

10.Fair Value of Financial Instruments

 

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At March 31, 2018, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.1 million and $38.7 million, respectively. At December 31, 2017, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $37.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three months ended March 31, 2018.

 

- 24 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  Fair Value Fair Value Changes in Fair Values For Items Measured at Fair Value
  Measurements Measurements Pursuant to Election of the Fair Value Option
  at March 31, at December 31, Three Months Ended
(In thousands) 2018 2017 March 31, 2018 March 31, 2017
         
Mortgage-backed securities $1,505  $1,590  $(11) $(7)
Other securities  12,612   12,685   (138)  32 
Borrowed funds  38,692   36,986   (1,681)  (570)
Net loss from fair value adjustments (1)         $(1,830) $(545)

 

(1)The net loss from fair value adjustments presented in the above table does not include net gains of $1.7 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively, from the change in the fair value of interest rate swaps.

 

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

 

The borrowed funds had a contractual principal amount of $61.9 million at both March 31, 2018 and December 31, 2017. The fair value of borrowed funds includes accrued interest payable of $0.2 million at March 31, 2018 and December 31, 2017.

 

The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale.

 

Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.

 

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

 

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

 

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

 

Level 1 – where quoted market prices are available in an active market. At March 31, 2018 and December 31, 2017, Level 1 included one mutual fund.

 

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At March 31, 2018 and December 31, 2017, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

 

- 25 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At March 31, 2018 and December 31, 2017, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company.

 

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 their respective category in the fair value hierarchy , at March 31, 2018 and December 31, 2017:

 

  Quoted Prices            
  in Active Markets Significant Other Significant Other    
  for Identical Assets Observable Inputs Unobservable Inputs Total carried at fair value
  (Level 1) (Level 2) (Level 3) on a recurring basis
  2018 2017 2018 2017 2018 2017 2018 2017
  (In thousands)
Assets:                                
Mortgage-backed Securities $-  $-  $512,781  $509,650  $-  $-  $512,781  $509,650 
Other securities  11,451   11,575   203,867   216,019   1,162   1,110   216,480   228,704 
Interest rate swaps  -   -   21,854   7,388   -   -   21,854   7,388 
                                 
Total assets $11,451  $11,575  $738,502  $733,057  $1,162  $1,110  $751,115  $745,742 
                                 
Liabilities:                                
Borrowings $-  $-  $-  $-  $38,692  $36,986  $38,692  $36,986 
Interest rate swaps  -   -   1,653   3,758   -   -   1,653   3,758 
                                 
Total liabilities $-  $-  $1,653  $3,758  $38,692  $36,986  $40,345  $40,744 

 

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

 

  For the three months ended
  March 31, 2018 March 31, 2017
  Trust preferred Junior subordinated Trust preferred Junior subordinated
  securities debentures securities debentures
  (In thousands)
Beginning balance $1,110  $36,986  $7,361  $33,959 
Net gain from fair value adjustment of financial assets (1)  51   -   32   - 
Net loss from fair value adjustment of financial liabilities (1)  -   1,681   -   570 
Increase in accrued interest receivable  1   -   -   - 
Increase in accrued interest payable  -   25   -   7 
Change in unrealized gains included in other comprehensive income  -   -   1   - 
Ending balance $1,162  $38,692  $7,394  $34,536 
                 
Changes in unrealized gains held at period end $-  $-  $1  $- 

 

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

 

During the three months ended March 31, 2018 and 2017, there were no transfers between Levels 1, 2 and 3.

 

- 26 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  March 31, 2018
  Fair Value Valuation Technique Unobservable Input Range Weighted Average
  (Dollars in thousands)
Assets:          
                 
Trust preferred securities $1,162  Discounted cash flows Discount rate  n/a   5.6%
                 
Liabilities:                
                 
Junior subordinated debentures $38,692  Discounted cash flows Discount rate  n/a   5.6%

 

 

  December 31, 2017
           
  Fair Value Valuation Technique Unobservable Input Range Weighted Average
  (Dollars in thousands)
Assets:          
           
Trust preferred securities $1,110  Discounted cash flows Discount rate  n/a   5.7%
                 
Liabilities:                
                 
Junior subordinated debentures $36,986  Discounted cash flows Discount rate  n/a   5.7%

 

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at March 31, 2018 and December 31, 2017, 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 their respective category in the fair value hierarchy at March 31, 2018 and December 31, 2017:

 

  Quoted Prices            
  in Active Markets Significant Other Significant Other    
  for Identical Assets Observable Inputs Unobservable Inputs Total carried at fair value
  (Level 1) (Level 2) (Level 3) on a recurring basis
  2018 2017 2018 2017 2018 2017 2018 2017
  (In thousands)
Assets:                
Impaired loans $-  $-  $-  $-  $14,892  $16,027  $14,892  $16,027 
Other real estate owned  -   -   -   -   638   -   638   - 
Other repossesed assets  -   -   -   -   106   -   106   - 
                                 
Total assets $-  $-  $-  $-  $15,636  $16,027  $15,636  $16,027 

 

 

- 27 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  March 31, 2018
  Fair Value Valuation Technique Unobservable Input Range Weighted Average
  (Dollars in thousands)
Assets:                
                 
Impaired loans $1,809  Income approach Capitalization rate  6.0%to7.5%   6.8%
        Reduction for planned expedited disposal   15.0%   15.0%
                   
Impaired loans $8,896  Sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to16.2%   -1.4%
        Reduction for planned expedited disposal  -44.9%to15.0%   7.7%
                   
Impaired loans $4,187  Blended income and sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -30.0%to25.0%   -0.4%
        Capitalization rate  5.0%to9.8%   7.2%
        Reduction for planned expedited disposal   15.0%   15.0%
                   
Other real estate owned $638  Sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -3.5%to14.1%   5.3%
                   
Other repossesed assets $106  Sales approach Reduction for planned expediated disposal   10.0%   10.0%

 

 

  December 31, 2017
  Fair Value Valuation Technique Unobservable Input Range Weighted Average
  (Dollars in thousands)
Assets:          
           
Impaired loans $1,818  Income approach Capitalization rate  6.5%to7.5%   6.8%
        Reduction planned for expedited disposal   15.0%   15.0%
                   
Impaired loans $10,003  Sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0%to16.2%   -0.8%
        Reduction planned for expedited disposal  -30.9%to15.0%   8.7%
                   
Impaired loans $4,206  Blended income and sales approach Adjustment to sales comparison value to reconcile differences between comparable sales  -30.0%to25.0%   -1.2%
        Capitalization rate  5.0%to9.8%   7.2%
        Reduction planned for expedited disposal   15.0%   15.0%

 

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2018 and December 31, 2017.

 

The methods and assumptions used to estimate fair value at March 31, 2018 and December 31, 2017 are as follows:

 

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.

 

- 28 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Impaired Loans:

 

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.

 

Other Real Estate Owned and Other Repossessed Assets:

 

OREO and other repossessed assets are carried at fair value less selling costs. The fair value for OREO 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. The fair value for other repossessed assets are based upon the most recently reported arm’s length sales transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates.

 

Junior Subordinated Debentures:

 

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.

 

Interest Rate Swaps:

 

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

 

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

 

  March 31, 2018
  Carrying Fair      
  Amount Value Level 1 Level 2 Level 3
  (In thousands)
Assets:                    
                     
Cash and due from banks $91,959  $91,959  $91,959  $-  $- 
Securities held-to-maturity                    
Mortgage-backed securities  7,968   7,564   -   7,564   - 
Other securities  23,267   21,347   -   -   21,347 
Securities available for sale                    
Mortgage-backed securities  512,781   512,781   -   512,781   - 
Other securities  216,480   216,480   11,451   203,867   1,162 
Loans  5,312,864   5,283,891   -   -   5,283,891 
FHLB-NY stock  54,045   54,045   -   54,045   - 
Accrued interest receivable  22,578   22,578   10   1,874   20,694 
Interest rate swaps  21,854   21,854   -   21,854   - 
                     
Liabilities:                    
Deposits $4,701,782  $4,695,084  $3,202,456  $1,492,628  $- 
Borrowings  1,177,101   1,165,487   -   1,126,795   38,692 
Accrued interest payable  5,288   5,288   -   5,288   - 
Interest rate swaps  1,653   1,653   -   1,653   - 

 

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

  December 31, 2017
  Carrying Fair      
  Amount Value Level 1 Level 2 Level 3
  (In thousands)
Assets:                    
                     
Cash and due from banks $51,546  $51,546  $51,546  $-  $- 
Securities held-to-maturity                    
Mortgage-backed securities  7,973   7,810   -   7,810   - 
Other securities  22,913   21,889   -   -   21,889 
Securities available for sale                    
Mortgage-backed securities  509,650   509,650   -   509,650   - 
Other securities  228,704   228,704   11,575   216,019   1,110 
Loans  5,176,999   5,169,108   -   -   5,169,108 
FHLB-NY stock  60,089   60,089   -   60,089   - 
Accrued interest receivable  21,405   21,405   16   1,916   19,473 
Interest rate swaps  7,388   7,388   -   7,388   - 
                     
Liabilities:                    
Deposits $4,383,278  $4,380,174  $3,031,345  $1,348,829  $- 
Borrowings  1,309,653   1,310,487   -   1,273,501   36,986 
Accrued interest payable  2,659   2,659   -   2,659   - 
Interest rate swaps  3,758   3,758   -   3,758   - 

 

 

11.Derivative Financial Instruments

 

At March 31, 2018 and December 31, 2017, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for three 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 March 31, 2018 and December 31, 2017; 2) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $281.6 million and $280.2 million at March 31, 2018 and December 31, 2017, respectively; and 3) to mitigate exposure to rising interest rates on certain short-term advances totaling $441.5 million at March 31, 2018 and December 31, 2017.

 

At March 31, 2018 and December 31, 2017, we held derivatives designated as cash flow hedges, 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 March 31, 2018 and December 31, 2017, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At March 31, 2018 and December 31, 2017, derivatives with a combined notional amount of $263.3 million and $261.9 million were designated as fair value hedges. At March 31, 2018 and December 31, 2017, derivatives with a combined notional amount of $441.5 million were designated as 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, with the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended March 31, 2018, $0.3 million was reclassified from accumulated other comprehensive loss to interest expense.

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

 

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

 

  March 31, 2018 December 31, 2017
  Notional Net Carrying Notional Net Carrying
(In thousands) Amount Value (1) Amount Value (1)
Interest rate swaps (fair value hedge) $253,784  $13,179  $199,341  $6,971 
Interest rate swaps (fair value hedge)  9,508   (99)  62,564   (921)
Interest rate swaps (cash flow hedge)  441,500   8,675   250,000   417 
Interest rate swaps (cash flow hedge)  -   -   191,500   (7)
Interest rate swaps (non-hedge)  36,321   (1,554)  36,321   (2,830)
Total derivatives $741,113  $20,201  $739,726  $3,630 

 

(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.

 

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

 

  For the three months ended
  March 31,
(In thousands) 2018 2017
Financial Derivatives:        
Interest rate swaps (non-hedge) $1,276  $232 
Interest rate swaps (fair value hedge)  454   (66)
Net gain (1) $1,730  $166 

  

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

 

During the three months ended March 31, 2018 and 2017, the Company did not record any hedge ineffectiveness.

 

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

 

- 31 -

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 on the presentation of the derivative assets and liabilities in the Consolidated Statements of Condition as of the dates indicated:

 

  March 31, 2018
        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 $21,854  $-  $21,854  $-  $20,940  $914 

 

        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 $1,653  $-  $1,653  $- $-  $1,653 

 

  December 31, 2017
        Gross Amounts Not Offset in the
Consolidated Statement of
Condition
  
(In thousands) Gross Amount of
Recognized Assets
 Gross Amount Offset
in the Statement of
Condition
 Net Amount of Assets
Presented in the Statement of
Condition
 Financial
Instruments
 Cash Collateral
Received
 Net Amount
                         
Interest rate swaps $7,388  $-  $7,388  $-  $3,660  $3,728 

 

 

- 32 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

        Gross Amounts Not Offset in the
Consolidated Statement of
Condition
  
(In thousands) Gross Amount of
Recognized
Liabilities
 Gross Amount Offset
in the Statement of
Condition
 Net Amount of Liabilities
Presented in the Statement of
Condition
 Financial
Instruments
 Cash Collateral
Pledged
 Net Amount
                         
Interest rate swaps $3,758  $-  $3,758  $-  $-  $3,758 

 

12.Income Taxes

 

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

 

Income tax provisions are summarized as follows:

 

  For the three months
  ended March 31,
(In thousands) 2018 2017
Federal:    
Current $2,411  $2,952 
Deferred  197   1,797 
Total federal tax provision  2,608   4,749 
State and Local:        
Current  189   (199)
Deferred  153   704 
Total state and local tax provision  342   505 
         
Total income tax provision $2,950  $5,254 

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted, which among other things, reduced the federal income tax rate for corporations from 35% to 21% effective January 1, 2018. As a result of TCJA, the Company re-measured its deferred tax assets and liabilities based on the rates these items are expected to reverse at in the future. This re-measurement caused $2.1 million of stranded tax effects at December 31, 2017. Effective January 1, 2018, these stranded effects were reclassified from accumulated other comprehensive income to retained earnings.

 

- 33 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

13.Accumulated Other Comprehensive Income (Loss):

 

The following table sets forth the changes in accumulated other comprehensive loss by component for the three months ended March 31, 2018:

 

  Unrealized Gains Unrealized Gains      
  (Losses) on (Losses) on   Fair Value  
  Available for Sale Cash flow Defined Benefit Option Elected  
  Securities Hedges Pension Items on Liabilities Total
  (In thousands)
Beginning balance, net of tax $(5,522) $231  $(3,695) $-  $(8,986)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCL to Retained Earnings  (1,325)  50   (798)  -   (2,073)
Impact of adoption of Accounting Standard Update 2016-01  -   -   -   775   775 
                     
Other comprehensive income before reclassifications, net of tax  (6,640)  5,481   -   -   (1,159)
                     
Amounts reclassified from accumulated other comprehensive income, net of tax  -   180   84   -   264 
                     
Net current period other comprehensive income, net of tax  (6,640)  5,661   84   -   (895)
                     
Ending balance, net of tax $(13,487) $5,942  $(4,409) $775  $(11,179)

 

The following table sets forth the changes in accumulated other comprehensive loss by component for the three months ended March 31, 2017:

 

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

 

 

- 34 -

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 loss by component for the periods indicated:

 

For the three months ended March 31, 2018
  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)    
Cash flow hedges: $(263)   Interest expense
Interest rate swaps  83    Tax benefit
  $(180)   Net of tax
         
Amortization of defined benefit pension items:        
Actuarial losses $(132)(1)  Other operating expense
Prior service credits  10(1)  Other operating expense
   (122)   Total before tax
   38    Tax benefit
  $(84)   Net of tax

 

 

For the three months ended March 31, 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)    
Amortization of defined benefit pension items:        
Actuarial losses $(151)(1)  Other operating expense
Prior service credits  11(1)  Other operating expense
   (140)   Total before tax
   60    Tax benefit
  $(80)   Net of tax

 

(1)These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (See Note 8 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”.)

 

 

- 35 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

14. Regulatory Capital

 

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of March 31, 2018, 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 2018 is 1.875% and increases 0.625% annually through 2019 to 2.5%. The CCB for the Bank at March 31, 2018 was 5.82%.

 

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

 

  March 31, 2018 December 31, 2017
    Percent of   Percent of
  Amount Assets Amount Assets
  (Dollars in thousands)
Tier I (leverage) capital:                
Capital level $637,091   9.92% $631,285   10.11%
Requirement to be well capitalized  321,195   5.00   312,343   5.00 
Excess  315,896   4.92   318,942   5.11 
                 
Common Equity Tier I risk-based capital:                
Capital level $637,091   13.39% $631,285   13.87%
Requirement to be well capitalized  309,368   6.50   295,937   6.50 
Excess  327,723   6.89   335,348   7.37 
                 
Tier 1 risk-based capital:                
Capital level $637,091   13.39% $631,285   13.87%
Requirement to be well capitalized  380,760   8.00   364,230   8.00 
Excess  256,331   5.39   267,055   5.87 
                 
Total risk-based capital:                
Capital level $657,633   13.82% $651,636   14.31%
Requirement to be well capitalized  475,950   10.00   455,288   10.00 
Excess  181,683   3.82   196,348   4.31 

 

 

- 36 -

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 March 31, 2018, 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 March 31, 2018 was 5.95%.

 

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

 

  March 31, 2018 December 31, 2017
    Percent of   Percent of
  Amount Assets Amount Assets
  (Dollars in thousands)
Tier I (leverage) capital:                
Capital level $568,635   8.86% $563,426   9.02%
Requirement to be well capitalized  321,057   5.00   312,278   5.00 
Excess  247,578   3.86   251,148   4.02 
                 
Common Equity Tier I risk-based capital:                
Capital level $531,305   11.17% $527,727   11.59%
Requirement to be well capitalized  309,286   6.50   295,865   6.50 
Excess  222,019   4.67   231,862   5.09 
                 
Tier 1 risk-based capital:                
Capital level $568,635   11.95% $563,426   12.38%
Requirement to be well capitalized  380,660   8.00   364,141   8.00 
Excess  187,975   3.95   199,285   4.38 
                 
Total risk-based capital:                
Capital level $664,177   13.96% $658,777   14.47%
Requirement to be well capitalized  475,824   10.00   455,177   10.00 
Excess  188,353   3.96   203,600   4.47 

 

 

- 37 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

15.New Authoritative Accounting Pronouncements

 

Accounting Standards Adopted in 2018:

 

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220).” As a result of the Tax Cuts and Jobs Act (the “TCJA”), concerns arose regarding the guidance which requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. The amendments in this ASU require a reclassification for stranded tax effects from accumulated other comprehensive income to retained earnings, furthermore eliminating the stranded tax effects resulting from the TCJA. The amount of the reclassification is the difference between the previous corporate income tax rate of 35% and the newly enacted corporate income tax rate of 21%. The amendments of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted in any interim period or fiscal year before the effective date. We have elected to early adopt this guidance as of January 1, 2018. Our Consolidated Statements of Financial Condition reflect adoption of this ASU and reclassification of $2.1 million in stranded tax effects from accumulated other comprehensive income to retained earnings. See Note 12 “Income Taxes” for additional information.

 

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. This ASU was adopted on January 1, 2018 and did not have a significant impact on the presentation of our cash flows.

 

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. This ASU became effective for us on January 1, 2018. The adoption of the guidance resulted in a cumulative-adjustment totaling $0.8 million and did not have a significant impact on our results of operations, financial condition and cash flows.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under 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. In August 2015, the FASB approved a one-year delay of the effective date of this standard to reporting periods beginning after December 15, 2017. This ASU allows for either full retrospective adoption or modified retrospective adoption. This ASU became effective for us on January 1, 2018. We adopted this standard through the modified retrospective transition method. The modified retrospective method requires application of ASU 2014-09 to uncompleted contracts at the date of adoption; however, periods prior to the date of adoption have not been retrospectively revised as the impact of the new standard on uncompleted contracts as the date of adoption was not material as such a cumulative effective adjustment to opening retained earnings was not deemed necessary.

 

Topic 606 does not apply to the majority of our revenue streams which are primarily comprised of interest and dividend income and associated fees within those revenue streams. The revenue streams derived by the Company that are within the scope of Topic 606 are primarily certain banking service fees, including wire transfer fees, ATM fees, account maintenance fees, overdraft fees and other deposit fees. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis or based on activity. Being that performance obligations are satisfied as service are rendered and the transaction prices are fixed, there is little judgement involved in applying topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. Additionally, the Company will receive revenue from the sale of investment products through a third party as part of a revenue sharing agreement. This revenue is included in “Other Income” in the Consolidated Statements of Income. These fees are remitted to the Company monthly as our performance obligation is satisfied. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is present in the Consolidated Statements of Income was not necessary.

 

- 38 -

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Accounting Standards Pending Adoption:

 

In August 2017, the FASB issued 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. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and changes the presentation so that all items that affect earnings are in the same income statement line as the hedged item. 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 FASB issued 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.

 

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. Under this ASU, 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 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 has begun collecting and evaluating data and system requirements to implement this standard. The adoption of this update could have a material impact on the Company’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 engaged consultants to assess the preparedness of the Company and has developed inter-departmental steering and working committees to evaluate and implement CECL.

 

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PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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. The Company has not adopted a new accounting policy as of the filing date. Management is continuing to evaluate the standard and the Company’s outstanding inventory of leases determining the effect of recognizing most operating leases on the Consolidated Statements of Financial Condition is expected to be material. The Company expects to recognize right-of-use assets and 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

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, 2017. 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, 2017. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “goals,” “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. Today the Bank operates as a full-service New York State commercial bank. The Bank’s primary regulator is the New York State Department of Financial Services, and its primary federal regulator is 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 “Internet Branch”). The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of subordinated debt, 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 our 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 to improve funding mix to manage cost of funds;

 

increase net interest income by leveraging loan pricing opportunities and portfolio mix;

 

enhance earnings power by improving scalability and efficiency;

 

manage credit risk;

 

remain well capitalized;

 

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

 

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 10 of the Notes to the Consolidated Financial Statements.

 

During the first quarter of 2018, we continued our strategy of focusing our origination efforts on higher yielding loans. Loan originations and purchases for the three months ended March 31, 2018 totaled $341.8 million, with multi-family real estate, commercial real estate and commercial business loans accounting for 85.5% of originations and purchases. Our total loan portfolio grew 2.6% (non-annualized) during the three months ended March 31, 2018 while holding our strong underwriting standards. Loan applications in process remains strong totaling $325.6 million at March 31, 2018, compared to $359.8 million at December 31, 2017 and $303.1 million at March 31, 2017.

 

The yield on loan production increased 12 basis points to 4.27% for the three months ended March 31, 2018, from 4.15% for the three months ended December 31, 2017 and 42 basis points from 3.85% for the comparable quarter of 2017. This marked the third consecutive quarter that the yield on new loans exceeded the quarterly average yield of the total loan portfolio, net of prepayment penalty income and recovered interest from delinquent loans. The increase in the yield of our loan production aided in improving our yield on interest-earning assets to 3.92% for the three months ended March 31, 2018, an increase of two basis points from the three months ended December 31, 2017 and 12 basis points from the three months ended March 31, 2017, excluding prepayment penalty income, accelerated accretion of discount upon the call of CLO securities and recovered interest from delinquent loans.

 

On the liability side of the balance sheet, we experienced deposit growth of 6.8% (non-annualized), reducing the loan-to-deposit ratio to 113% from 118% at December 31, 2017. The cost of interest-bearing liabilities increased due to an increase in rates, as we raised the rates we pay on certain deposit products to remain competitive in our market, resulting in the average cost of our interest-bearing liabilities increasing seven basis points from the three months ended December 31, 2017 and 28 basis points from March 31, 2017. To mitigate the impact of future rate increases, we have been actively extending the maturity on our liabilities and entered into forward interest rate swaps totaling $441.5 million to hedge against rising interest rates.

 

We continued our discipline regarding credit quality, as our non-performing assets have decreased by 4% during the three months ended March 31, 2018 and we had net recoveries of $38,000 during the same period.

 

The Bank and Company are subject to the same regulatory capital requirements. See Note 14 of the Notes to the Consolidated Financial Statements “Regulatory Capital.”

 

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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

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

General. Net income for the three months ended March 31, 2018 was $11.4 million, a decrease of $0.8 million, or 6.9%, compared to $12.3 million for the three months ended March 31, 2017. Diluted earnings per common share were $0.39 for the three months ended March 31, 2018, a decrease of $0.03, or 7.1%, from $0.42 for the three months ended March 31, 2017.

 

Return on average equity decreased to 8.6% for the three months ended March 31, 2018 from 9.5% for the three months ended March 31, 2017. Return on average assets decreased to 0.7% for the three months ended March 31, 2018 from 0.8% for the three months ended March 31, 2017.

 

Interest Income. Interest and dividend income increased $3.5 million, or 6.2%, to $60.8 million for the three months ended March 31, 2018 from $57.3 million for the three months ended March 31, 2017. The increase in interest income was primarily attributable to an increase of $224.9 million in the average balance of interest-earning assets to $6,098.7 million for the three months ended March 31, 2018 from $5,873.8 million for the comparable prior year period, combined with an increase of nine basis points in the yield of interest-earning assets to 3.99% for the three months ended March 31, 2018 from 3.90% in the comparable prior year period. The increase in the yield on interest-earning assets of nine basis points was primarily due to an increase of $363.3 million in the average balance of total loans, net, which have a higher yield than the yield of total interest-earning assets, combined with a decrease of $135.9 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 increases of three basis points, nine basis points and 11 basis points in the yields of total loans, net, taxable securities and tax-exempt securities, respectively, for the three months ended March 31, 2018 from the comparable prior year period. Additionally, the yield on interest-earning deposits sold increased 63 basis points for the three months ended March 31, 2018 from the comparable prior year period due to increases in the Federal Funds rate. The increases of three basis points in the yield on the total loans, net, nine basis points in taxable securities and 11 basis points in tax-exempt securities were primarily due to loans being originated and securities being purchased at higher yields than the existing portfolio yield. Excluding prepayment penalty income and recovered interest from loans, the yield on total loans, net, would have increased six basis points to 4.12% for the three months ended March 31, 2018 from 4.06% for the three months ended March 31, 2017.

 

Interest Expense. Interest expense increased $4.3 million, or 31.1%, to $18.2 million for the three months ended March 31, 2018 from $13.9 million for the three months ended March 31, 2017. The increase in interest expense was primarily due to an increase of 28 basis points in the average cost of interest-bearing liabilities to 1.34% for the three months ended March 31, 2018 from 1.06% for the three months ended March 31, 2017, combined with an increase of $187.9 million in the average balance of interest-bearing liabilities to $5,442.6 million for the three months ended March 31, 2018, from $5,254.6 million for the comparable prior year period. The 28 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 and an increase in borrowing costs from the Bank extending maturities on borrowed funds to mitigate the impact of future rate increases. The cost was also impacted by the average balance of borrowed funds increasing $95.1 million to $1,207.1 million for the three months ended March 31, 2018, from $1,112.0 million for the comparable prior year period. The increase in the cost of interest-bearing liabilities was partially offset by an improvement in our deposit mix, as the combined average balance of lower costing savings, NOW and money market deposits increased $148.8 million to $2,832.1 million for the three months ended March 31, 2018 from $2,683.3 million for the comparable prior year period, while the average balance of higher costing certificates of deposit decreased $60.4 million to $1,344.4 million for the three months ended March 31, 2018 from $1,404.7 million for the comparable prior year period.

 

Net Interest Income. For the three months ended March 31, 2018, net interest income was $42.6 million, a decrease of $0.8 million, or 1.8%, from $43.4 million for the three months ended March 31, 2017. The decrease in net interest income was primarily due to the 28 basis point increase in the cost of interest-bearing liabilities to 1.34% for the three months ended March 31, 2018 from 1.06% for the comparable prior year period, partially offset by an increase of nine basis points in the yield of interest-earning assets to 3.99% for the three months ended March 31, 2018 as compared to 3.90% for the three months ended March 31, 2017. The effects of the above on both the net interest spread and net interest margin were decreases of 19 basis points to 2.65% and 16 basis points to 2.79%, respectively, for the quarter ended March 31, 2018, compared to the quarter ended March 31, 2017. Included in net interest income was prepayment penalty income from loans for the three months ended March 31, 2018 and 2017 totaling $0.9 million and $1.1 million, respectively, and recovered interest from non-accrual loans totaling $0.2 million and $0.5 million for each of the three months ended March 31, 2018 and 2017, respectively. Without the prepayment penalty income and recovered interest, the net interest margin for the three months ended March 31, 2018 would have been 2.72%, a decrease of 13 basis points, as compared to 2.85% for the three months ended March 31, 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

 

Provision for Loan Losses. During the three months ended March 31, 2018, a provision for loan losses was recorded for $0.2 million, primarily due to loan growth, compared to none for the comparable prior year period. During the three months ended March 31, 2018, the Bank recorded net recoveries totaling $38,000 and non-accrual loans decreased $0.7 million to $15.0 million from $15.7 million at December 31, 2017. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 36.7% at March 31, 2018. 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 FOR LOAN LOSSES.”

 

Non-Interest Income. Non-interest income for the three months ended March 31, 2018 was $3.2 million, a decrease of $0.5 million, or 13.3%, from $3.7 million for the three months ended March 31, 2017. The decrease in non-interest income was primarily due to the recording of a loss on sale of one non-performing troubled debt restructured loan of $0.3 million during the three months ended March 31, 2018 compared to a gain on sale of $0.2 million recorded during the three months ended March 31, 2017. Additionally, the gain from life insurance proceeds was $0.4 million lower during the three months ended March 31, 2018 compared to the prior year period, partially offset by a decrease of $0.3 million in net losses from fair value adjustments as compared to March 31, 2017.

 

Non-Interest Expense. Non-interest expense was $31.3 million for the three months ended March 31, 2018, an increase of $1.7 million, or 5.9%, from $29.6 million for the three months ended March 31, 2017. The increase in non-interest expense was primarily due to annual salary increases and one-time bonuses totaling $0.5 million paid to non-executive employees during the three months ended March 31, 2018.

 

Income before Income Taxes. Income before the provision for income taxes decreased $3.2 million, or 18.0%, to $14.4 million for the three months ended March 31, 2018 from $17.5 million for the three months ended March 31, 2017 for the reasons discussed above.

 

Provision for Income Taxes. The provision for income taxes was $3.0 million for the three months ended March 31, 2018, a decrease of $2.3 million, or 43.9%, from $5.3 million for the three months ended March 31, 2017. The effective tax rate decreased to 20.5% for the three months ended March 31, 2018 from 30.0% in the comparable prior year period primarily due to the impact of the top federal tax rate declining to 21% in 2018 from 35% in 2017, as a result of the Tax Cuts and Jobs Act (the “TCJA”) .

 

Interpretive guidance of the TCJA is anticipated throughout 2018, and we may update our disclosure on a quarterly basis as interpretative guidance is received within each quarter that it is received. During the period ended March 31, 2018, the U.S. Treasury Department and the Internal Revenue Service did not issue further clarification or guidance applicable to us.

 

FINANCIAL CONDITION

 

Assets. Total assets at March 31, 2018 were $6,482.8 million, an increase of $183.5 million, or 2.9%, from $6,299.3 million at December 31, 2017. Total loans, net increased $135.7 million, or 2.6%, during the three months ended March 31, 2018 to $5,292.3 million from $5,156.6 million at December 31, 2017. Loan originations and purchases were $341.8 million for the three months ended March 31, 2018, an increase of $75.3 million, or 28.2%, from $266.6 million for the three months ended March 31, 2017. During the three months ended March 31, 2018, 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 $325.6 million at March 31, 2018 compared to $359.8 million at December 31, 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

 

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

  

  For the three months
  ended March 31,
(In thousands) 2018 2017
Multi-family residential (1) $81,181  $126,708 
Commercial real estate  71,554   35,732 
One-to-four family – mixed-use property  16,068   18,542 
One-to-four family – residential (2)  16,968   5,920 
Construction  14,679   2,544 
Small Business Administration  1,967   641 
Commercial business and other (3)  139,407   76,484 
Total $341,824  $266,571 

 

(1)Includes purchases of $13.3 million and $6.7 million for the three months ended March 31, 2018 and 2017, respectively.
(2)Includes purchases of $0.9 million and none for the three months ended March 31, 2018 and 2017, respectively.
(3)Includes purchases of $54.7 million and $8.9 million for the three months ended March 31, 2018 and 2017, respectively.

  

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 first quarter of 2018 had an average loan-to-value ratio of 47.9% and an average debt coverage ratio of 171%.

 

The Bank’s non-performing assets totaled $17.4 million at March 31, 2018, a decrease of $0.8 million, or 4.1%, from $18.1 million at December 31, 2017. Total non-performing assets as a percentage of total assets were 0.27% at March 31, 2018 compared to 0.29% at December 31, 2017. The ratio of allowance for loan losses to total non-performing loans was 123.45% at March 31, 2018 and 112.23% at December 31, 2017.

 

During the three months ended March 31, 2018, mortgage-backed securities including held-to-maturity increased $3.1 million, or 0.6%, to $520.7 million from $517.6 million at December 31, 2017. The increase in mortgage-backed securities during the three months ended March 31, 2018 was primarily due to purchases of $32.6 million at an average yield of 3.27%, partially offset by principal repayments of $20.9 million and a decline in the fair value of $8.1 million.

 

During the three months ended March 31, 2018, other securities, including held-to-maturity, decreased $11.9 million, or 4.7%, to $239.7 million from $251.6 million at December 31, 2017. The decrease in other securities during the three months ended March 31, 2018 was primarily due to the call of one CLO security at par for $10.0 million. At March 31, 2018, other securities primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds and corporate bonds.

 

Liabilities. Total liabilities were $5,947.5 million at March 31, 2018, an increase of $180.8 million, or 3.1%, from $5,766.7 million at December 31, 2017. During the three months ended March 31, 2018, due to depositors increased $295.1 million, or 6.8%, to $4,635.8 million, due to increases of $147.7 million in non-maturity deposits and $147.4 million in certificates of deposit. The increase in core deposits was due to increases of $146.1 million and $52.5 million in NOW and money market accounts, respectively, partially offset by decreases of $43.4 million and $7.4 million in savings and demand accounts, respectively. Borrowed funds decreased $132.6 million during the three months ended March 31, 2018. The decrease in borrowed funds was primarily due to a decrease in FHLB short-term borrowings as funding needs were provided by increased deposits.

 

Equity. Total stockholders’ equity increased $2.7 million, or 0.5%, to $535.3 million at March 31, 2018 from $532.6 million at December 31, 2017. Stockholders’ equity increased primarily due to net income of $11.4 million and the net impact of vesting and exercising of shares of employee and director stock plans totaling $3.9 million. These increases were partially offset by the purchase of 217,863 treasury shares, at an average cost of $27.14 per share, totaling $5.9 million, the declaration and payment of dividends on the Company’s common stock of $0.20 per common share totaling $5.8 million and a decrease of $0.9 million in other comprehensive loss. Book value per common share was $18.75 at March 31, 2018 compared to $18.63 at December 31, 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

 

Cash flow. During the three months ended March 31, 2018, funds provided by the Company's operating activities amounted to $15.3 million. These funds, combined with $170.4 million provided from financing activities, were utilized to fund net investing activities of $145.2 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 three months ended March 31, 2018, the net total of loan originations and purchases less loan repayments and sales was $150.1 million. During the three months ended March 31, 2018, the Company also funded $32.6 million in purchases of securities available for sale and $0.4 million of securities held-to-maturity. During the three months ended March 31, 2018, funds were provided by a net increase in total deposits of $318.4 million. In addition to funding loan growth, these funds were used to repay $123.8 million in long-term borrowings and $10.5 million in net short-term borrowings. The Company also used funds of $8.0 million and $5.8 million for purchases of treasury stock and dividend payments, respectively, during the three months ended March 31, 2018.

 

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, decreases in the Company’s stockholders’ equity, if such securities were retained.

 

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 March 31, 2018. 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 March 31, 2018, 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 March 31, 2018:

 

  Projected Percentage Change In  
  Net Interest Net Portfolio Net Portfolio
Change in Interest Rate Income Value Value Ratio
-200 Basis points  3.84%  7.23%  13.41%
-100 Basis points  3.42   3.54   13.35 
Base interest rate  0.00   0.00   13.24 
+100 Basis points  -4.23   -4.89   12.94 
+200 Basis points  -8.47   -9.63   12.63 

 

 

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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

 

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 March 31, 2018 and 2017, 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 March 31,
  2018 2017
  Average   Yield/ Average   Yield/
  Balance Interest Cost Balance Interest Cost
Assets (Dollars in thousands)
Interest-earning assets:                        
Mortgage loans, net $4,442,870   46,112   4.15% $4,213,482   44,429   4.22%
Other loans, net  788,507   8,905   4.52   654,566   6,456   3.95 
Total loans, net (1)  5,231,377   55,017   4.21   4,868,048   50,885   4.18 
Taxable securities:                        
Mortgage-backed securities  524,710   3,507   2.67   529,942   3,366   2.54 
Other securities  131,078   1,121   3.42   239,345   1,882   3.15 
Total taxable securities  655,788   4,628   2.82   769,287   5,248   2.73 
Tax-exempt securities: (2)                        
Other securities  124,125   854   2.75   146,502   968   2.64 
Total tax-exempt securities  124,125   854   2.75   146,502   968   2.64 
Interest-earning deposits and federal funds sold  87,416   287   1.31   89,962   153   0.68 
Total interest-earning assets  6,098,706   60,786   3.99   5,873,799   57,254   3.90 
Other assets  304,690           295,049         
Total assets $6,403,396          $6,168,848         
                         
Liabilities and Equity                        
Interest-bearing liabilities:                        
Deposits:                        
Savings accounts $265,895   389   0.59  $254,255   307   0.48 
NOW accounts  1,540,465   3,148   0.82   1,568,267   2,207   0.56 
Money market accounts  1,025,727   3,075   1.20   860,779   1,499   0.70 
Certificate of deposit accounts  1,344,370   5,463   1.63   1,404,730   4,940   1.41 
Total due to depositors  4,176,457   12,075   1.16   4,088,031   8,953   0.88 
Mortgagors' escrow accounts  58,960   35   0.24   54,616   27   0.20 
Total deposits  4,235,417   12,110   1.14   4,142,647   8,980   0.87 
Borrowed funds  1,207,137   6,067   2.01   1,111,993   4,885   1.76 
Total interest-bearing liabilities  5,442,554   18,177   1.34   5,254,640   13,865   1.06 
Non interest-bearing deposits  364,983           330,215         
Other liabilities  66,578           66,193         
Total liabilities  5,874,115           5,651,048         
Equity  529,281           517,800         
Total liabilities and equity $6,403,396          $6,168,848         
                         
Net interest income / net interest rate spread      42,609   2.65%      43,389   2.84%
                         
Net interest-earning assets / net interest margin $656,152       2.79% $619,159       2.95%
                         
Ratio of interest-earning assets to interest-bearing liabilities          1.12X          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 $0.1 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively.
(2)Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.

 

 

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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 three months ended March 31,
(In thousands) 2018 2017
     
Mortgage Loans        
         
At beginning of period $4,401,950  $4,187,818 
         
Mortgage loans originated:        
Multi-family residential  67,891   119,989 
Commercial real estate  71,554   35,732 
One-to-four family – mixed-use property  16,068   18,542 
One-to-four family – residential  16,093   5,920 
Construction  14,679   2,544 
Total mortgage loans originated  186,285   182,727 
         
Mortgage loans purchased:        
Multi-family residential  13,290   6,719 
One-to-four family – residential  875   - 
Total mortgage loans purchased  14,165   6,719 
         
Less:        
Principal and other reductions  98,288   79,733 
Sales  2,703   1,630 
         
At end of period $4,501,409  $4,295,901 
         
Non-Mortgage Loans        
         
At beginning of period $758,286  $631,316 
         
Other loans originated:        
Small Business Administration  1,967   641 
Commercial business  84,388   67,273 
Other  366   309 
Total other loans originated  86,721   68,223 
         
Other loans purchased:        
Commercial business  54,653   8,902 
Total other loans purchased  54,653   8,902 
         
Less:        
Principal and other reductions  104,438   43,343 
Sales  -   3,244 
Other  162   - 
At end of period $795,060  $661,854 

 

 

- 48 -

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. See Note 5 of the Notes to the Consolidated Financial Statements “Loans”.

 

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

 

  March 31, December 31,
(In thousands) 2018 2017
Accrual Status:        
Multi-family residential $2,503  $2,518 
Commercial real estate  -   1,986 
One-to-four family - mixed-use property  1,740   1,753 
One-to-four family - residential  567   572 
Commercial business and other  407   462 
Total  5,217   7,291 
         
Non-Accrual Status:        
Taxi medallion  5,712   5,916 
Total  5,712   5,916 
         
Total performing troubled debt restructured $10,929  $13,207 

 

During the three months ended March 31, 2018, we sold one commercial real estate TDR totaling $1.8 million, for a loss of $0.3 million and foreclosed on one taxi medallion TDR of $0.1 million, which is recorded in “Other Assets”.

 

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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:

 

  March 31, December 31,
(In thousands) 2018 2017
Loans 90 days or more past due and still accruing:        
Commercial real estate $1,668  $2,424 
Total  1,668   2,424 
         
Non-accrual loans:        
Multi-family residential  2,193   3,598 
Commercial real estate  1,894   1,473 
One-to-four family - mixed-use property  2,396   1,867 
One-to-four family - residential  7,542   7,808 
Small business administration  41   46 
Taxi medallion  906   918 
Total  14,972   15,710 
         
Total non-performing loans  16,640   18,134 
         
Other non-performing assets:        
Real estate acquired through foreclosure  638   - 
Other assets acquired through foreclosure  106   - 
Total  744   - 
         
Total non-performing assets $17,384  $18,134 
         
Non-performing assets to total assets  0.27%  0.29%
Allowance for loan losses to non-performing loans  123.45%  112.23%

 

Included in loans over 90 days past due and still accruing were two loans totaling $1.7 million and three loans totaling $2.4 million at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017 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

 

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. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at March 31, 2018 and December 31, 2017. The Company had classified OREO and other assets acquired through foreclosure totaling $0.7 million at March 31, 2018 and none at December 31, 2017. The Company did not hold any criticized or classified investment securities at March 31, 2018 and December 31, 2017. Our total Criticized and Classified assets were $61.6 million at March 31, 2018, a decrease of $1.1 million from $62.7 million at December 31, 2017.

 

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 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. For collateral dependent mortgage loans and taxi medallion loans, the portion of the loan balance which exceeds fair value is generally charged-off. At March 31, 2018, the current average loan-to-value ratio on our collateral dependent loans reviewed for impairment was 42.4%.

 

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 that 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 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 three months ended March 31, 2018, the portion of the ALL related to the loss history declined, while the qualitative factors increased slightly, primarily due to growth in the loan portfolio. Charge-offs recorded in the past twelve quarters were minimal, with the exception of taxi medallion charge-offs recorded in the fourth quarter of 2017, as credit conditions remained stable. The percentage of loans originated prior to 2009, compared to the total loan portfolio, decreased as scheduled amortization and repayments 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. The impact from the above and the net recoveries recorded during the three months ended March 31, 2018 resulted in the ALL totaling $20.5 million, an increase of $0.2 million, or 0.94%, from December 31, 2017. 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 warranted. The ALL at March 31, 2018 and December 31, 2017, represented 0.39% of gross loans outstanding. The ALL represented 123.5% of non-performing loans at March 31, 2018 compared to 112.2% at December 31, 2017.

 

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 that 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 there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future.

 

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

 

- 51 -

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 three months ended March 31,
(Dollars in thousands) 2018 2017
     
Balance at beginning of period $20,351  $22,229 
         
Provision for loan losses  153   - 
         
Loans charged-off:        
Multi-family residential  53   (14)
One-to-four family – mixed-use property  -   (34)
One-to-four family – residential  1   - 
Small Business Administration  25   (65)
Taxi medallion  -   (54)
Commercial business and other  6   (12)
Total loans charged-off  85   (179)
         
Recoveries:        
Multi-family residential  2   30 
Commercial real estate  -   68 
One-to-four family – residential  108   - 
Small Business Administration  6   39 
Commercial business and other  7   24 
Total recoveries  123   161 
         
Net recoveries (charge-offs)  38   (18)
         
Balance at end of period $20,542  $22,211 
         
Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period  -%  -%
Ratio of allowance for loan losses to gross loans at end of period  0.39%  0.45%
Ratio of allowance for loan losses to non-performing assets at end of period  118.17%  119.84%
Ratio of allowance for loan losses to non-performing loans at end of period  123.45%  119.84%

 

 

 

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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 March 31, 2018, 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.

 

 

 

 

 

 

 

 

- 53 -

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, 2017.

 

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 March 31, 2018:

 

        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
January 1 to January 31, 2018  -  $-   -   254,280 
February 1 to February 28, 2018  158,999   27.12   158,999   1,095,281 
March 1 to March 31, 2018  58,864   27.19   58,864   1,036,417 
Total  217,863   27.14   217,863     

 

During the quarter ended March 31, 2018, the Company repurchased 217,863 shares of the Company’s common stock at an average cost of $27.14 per share. On February 27, 2018, the Company announced the authorization by the Board of Directors of a new common stock repurchase program, which authorizes the purchase of up to 1,000,000 shares of its common stock. On March 31, 2018, 1,036,417 shares may still be repurchased under the currently authorized stock repurchase programs. The Company will complete the purchase of the 36,417 shares remaining from its previous purchase authorization prior to purchasing shares under the new authorization. Stock will be purchased under the current stock repurchase programs 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 these authorizations.

 

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: May 10, 2018 By: /s/John R. Buran
  John R. Buran
  President and Chief Executive Officer
   
   
Dated: May 10, 2018 By: /s/Susan K. Cullen
  Susan K. Cullen
  Senior Executive Vice President, Treasurer and
  Chief Financial Officer
   

 

 

 

 

 

 

- 56 -

 

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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