SMALL
ENOUGH TO
KNOW YOU.
LARGE
ENOUGH TO
HELP YOU.®
2017 ANNUAL REPORT
FLUSHING FINANCIAL CORPORATION (Nasdaq: FFIC) is
the holding company for Flushing Bank®, a New York
State–chartered commercial bank insured by the Federal
Deposit Insurance Corporation. The Bank serves consumers,
businesses, professionals, corporate clients, and public
entities by offering a full complement of deposit, loan,
equipment finance, and cash management services through
its banking offices located in Queens, Brooklyn, Manhattan,
and Nassau County. As a leader in real estate lending, the
Bank’s experienced lending team creates mortgage
solutions for real estate owners and property managers
both within and outside the New York City metropolitan
area. Flushing Bank is an Equal Housing Lender. The Bank
also operates an online banking division consisting of
iGObanking.com®, which offers competitively priced deposit
products to consumers nationwide, and BankPurely®, our
eco-friendly, healthier lifestyle community brand.
VALUE
FOCUSED
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Selected Financial Condition Data
Total assets
Loans, net
Securities held to maturity
Securities available for sale
Certificates of deposit
Other deposit accounts
Stockholders’ equity
Dividends paid per common share
Book value per common share
Selected Operating Data
Net interest income
Net income
Basic earnings per common share
Diluted earnings per common share
Selected Financial Ratios and Other Data
Performance ratios:
Return on average assets
Return on average equity
Interest rate spread
Net interest margin
Efficiency ratio
Equity to total assets
Non-performing assets to total assets
Allowance for loan losses to gross loans
At or for the years ended
December 31,
2017
2016
$ 6,299,274
$ 6,058,487
$ 5,156,648
$ 4,813,464
$
30,886
$
37,735
$ 738,354
$ 861,381
$ 1,351,933
$ 1,372,115
$ 3,031,345
$ 2,833,516
$ 532,608
$ 513,853
$
$
0.72
18.63
$
$
0.68
17.95
$ 173,107
$ 167,086
$
$
$
41,121
1.41
1.41
$
$
$
64,916
2.24
2.24
0.66%
7.75%
2.80%
2.93%
57.90%
8.46%
0.29%
0.39%
1.10%
13.07%
2.86%
2.97%
59.64%
8.48%
0.36%
0.46%
Allowance for loan losses to total non-performing loans
112.23%
103.80%
TO OUR VALUED
SHAREHOLDERS,
We are pleased to report 2017 was another
profitable year for our company.
Even through challenging times, we
execute on our strategy of maintaining
continued to grow profitably and build
net loan growth and increasing net
upon a strong track record of delivering
interest income by focusing on yield,
solid and consistent financial performance.
Our longevity and success are evidenced
by the fact that of the 69 publicly traded
banks in our market in 1995, only 11 remain,
with Flushing Bank ranked fourth overall
on a total return basis during this 22-year
as opposed to volume, evidenced by
our record net interest income and loan
growth of 7.1%.
We successfully completed several
strategic actions in 2017 to better
timeframe.* Additionally, our stock has
position our company for profitable
delivered a total shareholder return of
growth in 2018 and beyond, including:
108% over the last five years.**
• Improved branch network expense
We achieved record net interest income
scalability by converting two branches
of $173.1 million and full-year GAAP
in the Flushing market to our Universal
earnings per diluted share of $1.41 while
Banker model, bringing our total
core diluted earnings per share was
$1.57, up five cents or 3.3% YoY. Many
accomplishments fueled our strong
performance, including core deposit
growth, industry-leading credit quality,
conversions to nine branches at the
year end.
• Mitigated future credit and margin
risks by:
and a third consecutive year with over
o Reducing carrying value of the taxi
$1 billion in new loans. We continued to
medallion portfolio to only 13 basis
* Source: Company filings, FactSet, and SNL Financial. NYC MSA banks less than $50 billion in assets as of 12/31/95.
Total return as of March 2018.
** Source: S&P Global Market Intelligence, December 2013–December 2017.
2
points of total loans, essentially
We continue to identify and proactively
removing the risk of future outsized
address changes in consumer preferences
write-downs.
to provide our customers with account
o Entering into forward swap contracts
access, product choices, and delivery
totaling approximately $400 million
channels that enable them to bank where,
to minimize effects of rising interest
when, and how they choose. Delivering
rates on our funding.
a consistent and superior customer
• Achieved favorable ratings for both the
experience at every touchpoint is vital
Company and the Bank for the second
and our ultimate goal, so we enhanced
consecutive year with a stable outlook
the experience by further investing in
of A-/K2 and BBB+/K2, respectively,
technology and converting our branches
from the Kroll Bond Rating Agency.
to the Universal Banker model with our
• Enhanced our brand in both digital and
unique Video Banker service that gives
branch environments by:
customers face-to-face video chat access
o Launching BankPurely, our Internet-
from 7 a.m. to 11 p.m. daily via our ATMs.
based, eco-friendly, healthier lifestyle
The Universal Banker model provides
community brand.
o Relocating three branches in the
ethnically diverse Flushing, New York
market into two modernized offices,
customers with cutting-edge technology,
including state-of-the-art ATMs and
higher-quality service, all while further
reducing overall costs. We have been
resulting in more than $32 million in
rolling this model out across our network as
new deposits from this market.
branches are renovated and new branches
WELL
CAPITALIZED FOR
GROWTH
PREMIER NYC
METRO COMMUNITY
BANK
INDUSTRY
LEADING CREDIT
QUALITY
LONG-TERM
SHAREHOLDER
VALUE
CONTINUE
MANAGING FUNDING
COSTS
NIMBLE AND
RESPONSIVE TO INDUSTRY
SHIFTS
OPTIMIZE
DIGITAL AND BRANCH
FOOTPRINT
2
3
are opened, and we anticipate a 20%
our business systems. We will remain
expense savings in compensation costs
diligent in monitoring the evolution of
through more scalable and efficient
cyber threats and will continue to modify
branches.
Our strategic plan emphasizes assets with
the best risk-adjusted returns by focusing
on diversified growth of multifamily and
commercial real estate loans as well as
commercial business loans while maintaining
a conservative risk management approach.
Stress testing and portfolio management
have enhanced our disciplined approach
to due diligence and overall risk
management of commercial real estate
concentration.
Our strategic objectives are to:
and enhance our protective measures
to remediate information security
vulnerabilities.
We continue to make great strides in
improving the quality of our credit while
we worked hard to limit increases in funding
costs in this rising rate environment. Our
strong capital levels, ability to grow core
deposits, and unwavering credit discipline
all position Flushing Bank uniquely well
for the future.
As a community-focused bank, we
continue our nearly 90-year tradition
• Increase core deposits and continue to
of providing quality service to local
improve funding mix
• Increase net interest income by
communities to support their growth,
diversity, and prosperity. As a premier
leveraging loan pricing opportunities
New York City Metro bank, we are large
and portfolio mix
• Enhance core earnings power by
improving scalability and efficiency
• Manage credit risk while increasing our
lending portfolio
• Maintain well-capitalized levels under
all stress test scenarios
A critical area of focus for us is cyber
security and the continued development
and enhancement of our controls,
processes, and practices designed to
protect our systems, computers, software,
enough to facilitate banking and lending
solutions but small enough to take the
time to know our customers and offer
customized solutions.
Our brand message, “Small enough to
know you. Large enough to help you.”
encapsulates our vision to be the
preeminent community bank in our
multicultural market. We create value and
attract new customers by delivering a
consistent and superior experience through
quality service and personalized attention.
data, and networks from attack, damage,
Our dedicated employees are the face of
or unauthorized access. We currently
our brand and our connection to the
employ a series of security measures
communities we serve, and we would not
including intrusion protection. These
be able to accomplish our goals without
protections along with other security
them. We remain confident that our team
layers enhance our ability to protect
and our brand will continue to drive our
customer data, intellectual property, and
positive momentum in 2018 and beyond.
4
5
#1
Total Assets
(in millions)
$7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
8000
7000
6000
5000
4000
3000
2000
1000
0
#1
Total Assets
(in millions)
$7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
#2
Net Loans
8000
(in millions)
$6,000
7000
6000
5,000
5000
4,000
4000
3,000
3000
2,000
2000
1,000
1000
0
0
6000
5000
4000
3000
2000
1000
0
’13 ’14
’15
’16 ’17
’13 ’14
’15
’16 ’17
’13 ’14
’15
’16 ’17
’13 ’14
’15
’16 ’17
To be plotted 3.20.18
To be plotted 3.20.18
#1
Total Assets
(in millions)
$7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
8000
7000
6000
5000
4000
3000
2000
1000
0
Net Interest Income
(in millions)
#3
$200
150
100
50
0
#1
Total Assets
(in millions)
$7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
’13 ’14
’15
’16 ’17
200
150
100
50
0
#3
#4
#2
Net Loans
8000
(in millions)
Net Interest Income
(in millions)
Dividends Per Common Share
(in dollars)
$6,000
7000
6000
5,000
5000
4,000
4000
3,000
3000
2,000
2000
1,000
1000
0
0
$200
6000
$0.80
200
5000
150
4000
100
3000
2000
50
1000
0.60
150
0.40
100
0.20
50
’13 ’14
’15
’16 ’17
0
0
’13 ’14 ’15 ’16 ’17
0
0
’13 ’14 ’15 ’16 ’17
#2
Net Loans
(in millions)
$6,000
5,000
4,000
3,000
2,000
1,000
0
80
70
60
50
40
30
20
10
0
’13 ’14
’15
’16 ’17
’13 ’14 ’15 ’16 ’17
’13 ’14
’15
’16 ’17
0
’13 ’14 ’15 ’16 ’17
#2
Net Loans
(in millions)
$6,000
5,000
4,000
3,000
2,000
1,000
0
#4
0.60
0.40
0.20
Dividends Per Common Share
(in dollars)
$0.80
6000
5000
4000
3000
2000
1000
0
80
70
60
50
40
30
20
10
0
To be plotted 3.20.18
To be plotted 3.20.18
Net Interest Income
(in millions)
#3
$200
150
100
50
0
’13 ’14 ’15 ’16 ’17
200
150
100
50
0
In summary, we have a strong foundation,
underwriting standards and improving
proven track record, clear strategy, and
yields, to achieve desired risk-adjusted
seasoned leadership team to execute our
returns.
strategy. We remain well capitalized and
positioned to deliver profitable growth
and long-term value to our shareholders.
As we look forward, we are poised to
take advantage of market opportunities
while maintaining the flexibility to
respond to the challenges that will
#3
inevitably arise. We continue to focus
on maintaining strong risk management
#4
In closing, it is with sincere appreciation
that we thank our Board of Directors
and Advisory Boards for their vision
and guidance. We are grateful to our
employees for their dedication and
commitment and to our customers
for allowing us to serve them. And to
you, our shareholders, we thank you
and appreciate your continued trust
practices, including conservative
and support.
Net Interest Income
(in millions)
Dividends Per Common Share
(in dollars)
$200
$0.80
200
150
100
50
0
0.60
150
0.40
100
0.20
50
’13 ’14 ’15 ’16 ’17
0
0
’13 ’14 ’15 ’16 ’17
Alfred A. DelliBovi
Chairman of the Board
5
80
70
60
50
40
30
20
10
0
John R. Buran
President and Chief Executive Officer
6000
5000
4000
3000
2000
1000
0
80
70
60
50
40
30
20
10
0
Dividends Per Common Share
(in dollars)
$0.80
#4
0.60
0.40
0.20
0
’13 ’14 ’15 ’16 ’17
CUSTOMER
FOCUSED
Providing timely, innovative, and flexible solutions that meet the changing
financial needs of our customers is one of our core competencies. Our
goal is to be a reliable financial partner small enough to place the customer
at the center of everything we do yet large enough to offer the latest
banking technology. To improve our customer interactions, recent
enhancements to our product offerings and branch network include:
Universal Banker: Provides a highly skilled banker as a single point of
contact for all the customer’s financial needs supplemented with cutting-
edge technology, including state-of-the-art ATMs, creating a stronger
banking relationship and a superior banking experience.
assisted service kiosk (ASK): Allows customers to choose to self-serve
for routine transactions. These enhanced ATMs handle almost any type
of transaction that a teller can do, from cashing a check to providing cash
in preferred denominations.
video Banker: Enables face-to-face live banker service at the touch of a
screen through a video-chat platform. Customers can simply touch
“Help” on the ATM screen to request assistance, such as temporarily
increasing their debit card withdrawal limit for an emergency or other
situation.
We provide a full range
of sophisticated services
formerly available only at
the largest banks.
SOLUTIONS
FOCUSED
We continue to strengthen our Internet banking platform with online and
mobile solutions that evolve with the latest technology and provide
customers access to their accounts when and where they need it.
MoBile Banking: Provides on-the-go account management from most
mobile devices, including the ability to pay bills, check balances, view
recent transactions, and transfer funds to/from Flushing Bank accounts.
FlUshing Bank FlexiBle deposit®: Enables customers to deposit checks
remotely into their Flushing Bank accounts using their iPhone® or
Android™ devices, or their PCs with a desktop scanner.
reMote deposit: Allows business customers to deposit checks into their
accounts from their offices using a scanner attached to their computers.
cash Manager direct: Permits business customers to review their
account balances and transaction details online, as well as to transfer
funds, pay bills, initiate wire transfers, originate ACH payments, and
request stop payments.
We continue to research and
deploy new technologies that
will enhance customer access
and engagement.
RELATIONSHIP
FOCUSED
11
retail Banking: Our retail branch network focuses on providing a consistent
and superior customer experience and expanding relationships with
our customers in the New York metropolitan area. Our online banks,
iGObanking.com and BankPurely, strive for the same while serving
consumers nationwide.
BUsiness Banking: Our business team is inspired by our commitment to
local business owners and by our certainty that we will continue to grow
together. We offer a full suite of products and lending solutions,
including credit lines, term loans, equipment financing, owner-occupied
commercial real estate mortgages, SBA loans, deposit products, and
cash management services designed for small, middle market, and large
corporate clients.
real estate lending: Our real estate team, composed of experienced
lenders with local market knowledge, takes a community-based approach
that features solutions with competitive rates, such as long-term, fixed-rate
loan programs. Our prudent lending philosophy enables us to grow our
multifamily and mixed-use portfolio while maintaining high credit standards.
governMent Banking: Our government banking team focuses exclusively
on serving the unique needs of public entities, municipalities, and school
districts across the New York area. We offer expert service, customized
solutions (including operating and investment accounts), traditional
collateral options, letters of credit, and reciprocal deposits with full
FDIC coverage.
Our size allows us to be nimble,
offer choices to our customers, and
customize a solution specifically
for them.
11
At the heart of our community-based approach to banking
relationships is the philosophy that we are “Small enough
to know you. Large enough to help you.” We offer the
products, services, and conveniences associated with
large commercial banks combined with the personalized,
relationship-based attention you would expect from a
community bank.
At Flushing Bank, we recognize the importance of our
role in the community and believe it is our responsibility
to do more for our customers and the communities we
serve. For almost 90 years, we have been integrally
connected to these communities, and we support their
prosperity and diversity.
As a community-focused organization that has distinguished
itself as a leader in serving multicultural neighborhoods,
we are proud to sponsor cultural and charitable events
throughout our markets. We pride ourselves on staffing
our branches with bankers who can communicate in the
languages and dialects prevalent within our multicultural
customer base to help ensure a first-rate experience for
every customer.
COMMUNITY
FOCUSED
2017 FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
UNITED STATES
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission file number 001-33013
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
11-3209278
(I.R.S. Employer Identification No.)
220 RXR Plaza, Uniondale, New York 11556
(Address of principal executive offices)
(718) 961-5400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock $0.01 par value (and
associated Preferred Stock Purchase Rights)
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act: None.
NASDAQ Global Select Market
(Name of exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act.
___ Yes X No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
___ Yes X No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter; the aggregate
market value of the voting stock held by non-affiliates of the registrant was $776,807,000. This figure is based on the closing price
on that date on the NASDAQ Global Select Market for a share of the registrant’s Common Stock, $0.01 par value, which was
$28.19.
The number of shares of the registrant’s Common Stock outstanding as of February 27, 2018 was 28,634,739 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 30, 2018 are
incorporated herein by reference in Part III.
Page
Item 1. Business. .................................................................................................................................... 1
TABLE OF CONTENTS
GENERAL
Overview................................................................................................................................ 1
Market Area and Competition ............................................................................................... 2
Lending Activities ................................................................................................................. 3
Loan Portfolio Composition ........................................................................................ 3
Loan Maturity and Repricing ...................................................................................... 6
Multi-Family Residential Lending .............................................................................. 7
Commercial Real Estate Lending ................................................................................ 7
One-to-Four Family Mortgage Lending – Mixed-Use
Properties ..................................................................................................................... 8
One-to-Four Family Mortgage Lending – Residential
Properties ..................................................................................................................... 8
Construction Loans ...................................................................................................... 9
Small Business Administration Lending ..................................................................... 9
Taxi medallion ........................................................................................................... 10
Commercial Business and Other Lending ................................................................. 10
Loan Extensions, Renewals, Modifications and
Restructuring ............................................................................................................. 10
Loan Approval Procedures and Authority ................................................................. 11
Loan Concentrations .................................................................................................. 11
Loan Servicing ........................................................................................................... 11
Asset Quality ....................................................................................................................... 12
Loan Collection ......................................................................................................... 12
Troubled Debt Restructured ...................................................................................... 13
Delinquent Loans and Non-performing Assets ......................................................... 13
Other Real Estate Owned .......................................................................................... 15
Environmental Concerns Relating to Loans .............................................................. 15
Classified Assets ........................................................................................................ 15
Allowance for Loan Losses ................................................................................................. 16
Investment Activities ........................................................................................................... 20
General ...................................................................................................................... 20
Mortgage-backed securities ....................................................................................... 21
Sources of Funds .................................................................................................................. 24
General ...................................................................................................................... 24
Deposits ..................................................................................................................... 24
Borrowings ................................................................................................................ 28
Subsidiary Activities ............................................................................................................ 29
Personnel.............................................................................................................................. 29
Omnibus Incentive Plan ....................................................................................................... 30
REGULATION
General ................................................................................................................................. 30
The Dodd - Frank Act .......................................................................................................... 30
Basel III ............................................................................................................................... 31
Volcker Rule ........................................................................................................................ 32
New York State Law............................................................................................................ 32
FDIC Regulations ................................................................................................................ 33
i
Transactions with Affiliates ................................................................................................. 35
Community Reinvestment Act ............................................................................................. 35
Federal Reserve System ....................................................................................................... 36
Federal Home Loan Bank System ....................................................................................... 36
Holding Company Regulations ............................................................................................ 36
Acquisition of the Holding Company .................................................................................. 37
Consumer Financial Protection Bureau ............................................................................... 37
Mortgage Banking and Related Consumer Protection Regulations ..................................... 37
Available Information .......................................................................................................... 38
Item 1A. Risk Factors .......................................................................................................................... 39
Changes in Interest Rates May Significantly Impact Our Financial Condition and
Results of Operations ...................................................................................................... 39
Our Lending Activities Involve Risks that May Be Exacerbated Depending on the
Mix of Loan Types ......................................................................................................... 39
Failure to Effectively Manage Our Liquidity Could Significantly Impact Our
Financial Condition and Results of Operations .............................................................. 40
Our Ability to Obtain Brokered Deposits as an Additional Funding Source Could
be Limited ....................................................................................................................... 40
The Markets in Which We Operate Are Highly Competitive .............................................. 41
Our Results of Operations May Be Adversely Affected by Changes in National
and/or Local Economic Conditions ................................................................................ 41
Changes in Laws and Regulations Could Adversely Affect Our Business .......................... 41
Current Conditions in, and Regulation of, the Banking Industry May Have a
Material Adverse Effect on Our Results of Operations .................................................. 42
A Failure in or Breach of Our Operational or Security Systems or Infrastructure, or
Those of Our Third Party Vendors and Other Service Providers, Including as a
Result of Cyber Attacks, could Disrupt Our Business, Result in the Disclosure
or Misuse of Confidential or Proprietary Information, Damage Our Reputation,
Increase Our Costs and Cause Losses ............................................................................. 42
We May Experience Increased Delays in Foreclosure Proceedings .................................... 44
We May Need to Recognize Other-Than-Temporary Impairment Charges in the
Future .............................................................................................................................. 44
Our Inability to Hire or Retain Key Personnel Could Adversely Affect Our
Business. ......................................................................................................................... 44
We Are Not Required to Pay Dividends on Our Common Stock. ....................................... 44
Goodwill Recorded as a Result of Acquisitions Could Become Impaired,
Negatively Impacting Our Earnings and Capital ............................................................ 44
We May Not Fully Realize the Expected Benefit of Our Deferred Tax Assets ................... 44
Uncertainty about the future of LIBOR may adversely affect our business ........................ 45
Item 1B. Unresolved Staff Comments ................................................................................................. 45
Item 2. Properties ................................................................................................................................. 45
Item 3. Legal Proceedings ................................................................................................................... 45
Item 4. Mine Safety Disclosures .......................................................................................................... 45
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities ........................................................................... 46
Stock Performance Graph .................................................................................................... 48
Item 6. Selected Financial Data ........................................................................................................... 49
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations ....................................................................................................................... 51
General ................................................................................................................................. 51
ii
Overview.............................................................................................................................. 51
Management Strategy ................................................................................................ 51
Trends and Contingencies ......................................................................................... 54
Interest Rate Sensitivity Analysis ........................................................................................ 55
Interest Rate Risk ................................................................................................................. 57
Analysis of Net Interest Income .......................................................................................... 57
Rate/Volume Analysis ......................................................................................................... 59
Comparison of Operating Results for the Years Ended December 31, 2017 and
2016 ................................................................................................................................ 59
Comparison of Operating Results for the Years Ended December 31, 2016 and
2015 ................................................................................................................................ 61
Liquidity, Regulatory Capital and Capital Resources .......................................................... 62
Critical Accounting Policies ................................................................................................ 64
Contractual Obligations ....................................................................................................... 65
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .............................................. 66
Item 8. Financial Statements and Supplementary Data ....................................................................... 67
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .......................................................................................................... 134
Item 9A. Controls and Procedures ..................................................................................................... 134
Item 9B. Other Information ............................................................................................................... 134
PART III
Item 10. Directors, Executive Officers and Corporate Governance .................................................. 135
Item 11. Executive Compensation ..................................................................................................... 135
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters .............................................................................................. 135
Item 13. Certain Relationships and Related Transactions, and Director Independence .................... 135
Item 14. Principal Accounting Fees and Services .............................................................................. 135
PART IV
Item 15. Exhibits, Financial Statement Schedules ............................................................................. 136
(a) 1. Financial Statements ........................................................................................................ 136
(a) 2. Financial Statement Schedules ........................................................................................ 136
(a) 3. Exhibits Required by Securities and Exchange Commission
Regulation S-K ................................................................................................................... 137
SIGNATURES
POWER OF ATTORNEY
iii
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K (this “Annual Report”) relating to plans, strategies, 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 under the captions “Business — General — Allowance for Loan Losses” and “Business — General
— Market Area and Competition” in Item 1 below, “Risk Factors” in Item 1A below, in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Overview” in Item 7 below, and elsewhere in this Annual Report and in other
documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements
may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,”
“estimates,” “predicts,” “forecasts,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe
that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We have no obligation to update these forward-looking statements.
As used in this Report, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial
Corporation (the “Holding Company”) and its direct and indirect wholly owned subsidiaries, Flushing Bank (the “Bank”),
Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.
PART I
Item 1. Business.
Overview
GENERAL
The Holding Company is a Delaware corporation organized in 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. Our primary
business is 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 (the “Internet Branch”), which operates
under the brands of iGObanking.com® and BankPurely®. The activities of the Holding Company are primarily funded by
dividends, if any, received from the Bank, issuances of subordinated debt and junior subordinated debt, and issuances of equity
securities. The Holding Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”
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 formed to issue a total of $60.0 million of
capital securities and $1.9 million of common securities (which are the only voting securities). The Holding Company owns
100% of the common securities of the Trusts. The Trusts used the proceeds from the issuance of these securities to purchase
junior subordinated debentures from the Holding Company. The Trusts are not included in our consolidated financial statements
as we would not absorb the losses of the Trusts if losses were to occur.
Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and results
of operations of the Company. Management views the Company as operating a single unit – a community bank. Therefore,
segment information is not provided. At December 31, 2017, the Company had total assets of $6.3 billion, deposits of $4.4 billion
and stockholders’ equity of $532.6 million.
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
properties, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four family (focusing
on mixed-use properties, which are properties that contain both residential dwelling units and commercial units); (2) construction
loans, primarily for residential properties; (3) Small Business Administration (“SBA”) loans and other small business loans; (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. At
December 31, 2017, we had gross loans outstanding of $5,160.2 million (before the allowance for loan losses and net deferred
costs), with gross mortgage loans totaling $4,402.0 million, or 85.3% of gross loans, and non-mortgage loans totaling $758.3
million, or 14.7% of gross loans. Mortgage loans are primarily multi-family, commercial and one-to-four family mixed-use
properties, which totaled 81.5% of gross loans. Our revenues are derived principally from interest on our mortgage and other
loans and mortgage-backed securities portfolio, and interest and dividends on other investments in our securities portfolio. Our
1
primary sources of funds are deposits, Federal Home Loan Bank of New York (“FHLB-NY”) borrowings, principal and interest
payments on loans, mortgage-backed, other securities and to a lesser extent proceeds from sales of securities and loans. The
Bank’s primary regulator is the New York State Department of Financial Services (“NYDFS”), 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 (“FHLB”) system.
Our operating results are significantly affected by national and local economic conditions, including the strength of the
local economy. According to the New York Department of Labor, the unemployment rate for the New York City region improved
to 4.3% at December 2017 from 4.9% at December 2016. In this economic environment, we continued to experience
improvements in our non-performing loans. Non-performing loans totaled $18.1 million, $21.4 million and $26.1 million at
December 31, 2017, 2016 and 2015, respectively. Foreclosed properties decreased to none at December 31, 2017 from $0.5
million at December 31, 2016 and $4.9 million at December 31, 2015. We did experience an increase in net charge-offs of
impaired loans in 2017 with net charge-offs totaling $11.7 million compared to net recoveries of $0.7 million for the year ended
December 31, 2016 and net charge-offs of $2.6 million for the year ended December 31, 2015. The increase in net charge-offs
was primarily due to taxi medallion charge-offs during 2017 totaling $11.3 million compared to $0.1 million recorded in 2016.
The charge-offs related to taxi medallion loans resulted from a reduction in the fair value of their underlying collateral, which is
based upon the most recently reported arm’s length sales transaction. We reduced the carrying value of our NYC taxi medallion
portfolio to an average carrying value of $164,000 at December 31, 2017. The remaining carrying value of this portfolio was
$6.8 million at December 31, 2017. Our operating results are also affected by extensions, renewals, modifications and
restructuring of loans in our loan portfolio. All extensions, renewals, restructurings and modifications must be approved by either
the Board of Directors of the Bank (the “Bank Board of Directors”) or its Loan Committee (the “Loan Committee”).
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. We recorded $3.8 million in additional tax
expense during 2017 from the revaluation of our net deferred tax assets, resulting from the TCJA. The Company has recorded a
deferred tax asset of $24.4 million, which reflects the tax impact from the TCJA.
Our operating results are also affected by losses on non-performing loans. Our policy requires a reappraisal by an
independent third party when a loan becomes twelve months delinquent. We generally obtain a reappraisal by an independent
third party for loans over 90 days delinquent when the outstanding loan balance is at least $1.0 million. We also obtain
reappraisals when our internally prepared valuation of a property indicates there has been a decline in value below the outstanding
balance of the loan, or when a property inspection has indicated significant deterioration in the condition of the property. These
internal valuations are prepared when a loan becomes 90 days delinquent.
Market Area and Competition
We are a community oriented financial institution offering a wide variety of financial services to meet the needs of the
communities we serve. The Bank’s main office is in Uniondale, New York, located in Nassau County. At December 31, 2017,
the Bank operated 18 full-service offices and an Internet Branch. The offices are located in the New York City Boroughs of
Queens, Brooklyn, and Manhattan, and in Nassau County, New York. We also maintain our executive offices in Uniondale in
Nassau County, New York. Substantially all of our mortgage loans are secured by properties located in the New York City
metropolitan area.
We face intense competition both in making loans and in attracting deposits. Competition for loans in our market is
primarily based on the types of loans offered and the related terms for these loans, including fixed-rate versus adjustable-rate
loans and the interest rate on the loan. For adjustable rate loans, competition is also based on the repricing period, the index to
which the rate is referenced, and the spread over the index rate. Also, competition is influenced by the ability of a financial
institution to respond to customer requests and to provide the borrower with a timely decision to approve or deny the loan
application.
Our market area has a high density of financial institutions, many of which have greater financial resources, name
recognition and market presence, and all of which are competitors to varying degrees. Particularly intense competition exists for
deposits, as we compete with 112 banks and thrifts in the counties in which we have branch locations. Our market share of
deposits, as of June 30, 2017, in these counties was approximately 0.32% of the total deposits of these FDIC insured competing
financial institutions, and we are the 27th largest financial institution. In addition, we compete with credit unions, the stock
market and mutual funds for customers’ funds. Competition for deposits in our market and for national brokered deposits is
primarily based on the types of deposits offered and rate paid on the deposits. Particularly intense competition also exists in all
of the lending activities we emphasize. In addition to the financial institutions mentioned above, we compete against mortgage
banks and insurance companies located both within our market and available on the internet. Competition for loans in our market
is primarily based on the types of loans offered and the related terms for these loans, including fixed-rate versus adjustable-rate
loans and the interest rate on the loan. For adjustable rate loans, competition is also based on the repricing period, the index to
which the rate is referenced, and the spread over the index rate. Also, competition is influenced by the ability of a financial
2
institution to respond to customer requests and to provide the borrower with a timely decision to approve or deny the loan
application. The internet banking arena also has many larger financial institutions which have greater financial resources, name
recognition and market presence. Our future earnings prospects will be affected by our ability to compete effectively with other
financial institutions and to implement our business strategies. Our strategy for attracting deposits includes using various
marketing techniques, delivering enhanced technology and customer friendly banking services, and focusing on the unique
personal and small business banking needs of the multi-ethnic communities we serve. Our strategy for attracting new loans is
primarily dependent on providing timely response to applicants and maintaining a network of quality brokers. See “Risk Factors
– The Markets in Which We Operate Are Highly Competitive” included in Item 1A of this Annual Report.
For a discussion of our business strategies, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Overview — Management Strategy” included in Item 7 of this Annual Report.
Lending Activities
Loan Portfolio Composition. Our loan portfolio consists primarily of mortgage loans secured by multi-family
residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential property, and
commercial business loans. In addition, we also offer construction loans, SBA loans and other consumer loans. Substantially all
of our mortgage loans are secured by properties located within our market area. At December 31, 2017, we had gross loans
outstanding of $5,160.2 million (before the allowance for loan losses and net deferred costs).
We have focused our loan origination efforts on multi-family residential mortgage loans, commercial real estate and
commercial business loans with full banking relationships. All of these loan types generally have higher yields than one-to-four
family residential properties, and include prepayment penalties that we collect if the loans pay in full prior to the contractual
maturity. We expect to continue this emphasis through marketing and by maintaining competitive interest rates and origination
fees. Our marketing efforts include frequent contact with mortgage brokers and other professionals who serve as referral sources.
Fully underwritten one-to-four family residential mortgage loans generally are considered by the banking industry to
have less risk than other types of loans. Multi-family residential, commercial real estate and one-to-four family mixed-use
property mortgage loans generally have higher yields than one-to-four family residential property mortgage loans and shorter
terms to maturity, but typically involve higher principal amounts and may expose the lender to a greater risk of credit loss than
one-to-four family residential property mortgage loans. The greater risk associated with multi-family residential, commercial
real estate and one-to-four family mixed-use property mortgage loans could require us to increase our provisions for loan losses
and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance we currently maintain. We
continually review the composition of our mortgage loan portfolio to manage the risk in the portfolio. See “General – Overview”
in this Item 1 of this Annual Report.
Our loan portfolio consists of adjustable rate mortgage (“ARM”) loans and fixed-rate mortgage loans. Interest rates we
charge on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rate
offered by our competitors and the creditworthiness of the borrower. Many of those factors are, in turn, affected by local and
national economic conditions, and the fiscal, monetary and tax policies of the federal, state and local governments.
In general, consumers show a preference for ARM loans in periods of high interest rates and for fixed-rate loans when
interest rates are low. In periods of declining interest rates, we may experience refinancing activity in ARM loans, as borrowers
show a preference to lock-in the lower rates available on fixed-rate loans. In the case of ARM loans we originated, volume and
adjustment periods are affected by the interest rates and other market factors as discussed above as well as consumer preferences.
We have not in the past, nor do we currently, originate ARM loans that provide for negative amortization.
The majority of our commercial business loans are generated by the Company’s business banking group which focuses
on loan and deposit relationships to businesses located within our market area. These loans are generally personally guaranteed
by the owners, and may be secured by the assets of the business, which at times may include real estate. The interest rate on these
loans is generally an adjustable rate based on a published index. These loans, while providing us a higher rate of return, also
present a higher level of risk. The greater risk associated with commercial business loans could require us to increase our
provision for loan losses, and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance
we currently maintain.
At times, we may purchase whole or participations in loans from banks, mortgage bankers and other financial institutions
when the loans complement our loan portfolio strategy. Loans purchased must meet our underwriting standards when they were
originated. Our lending activities are subject to federal and state laws and regulations. See “— Regulation.”
3
The following table sets forth the composition of our loan portfolio at the dates indicated:
2017
Amount
Percent
of Total
2016
Amount
Percent
of Total
At December 31,
2015
Amount
Percent
of Total
(Dollars in thousands)
2014
Amount
Percent
of Total
2013
Amount
Percent
of Total
$
2,273,595
1,368,112
%
44.08
26.51
$
2,178,504
1,246,132
%
45.21
25.86
$
2,055,228
1,001,236
%
46.98
22.90
$
1,923,460
621,569
%
50.64
16.36
$
1,712,039
512,552
%
50.02
14.97
564,206
10.93
558,502
11.59
573,043
13.11
573,779
15.10
595,751
17.40
180,663
6,895
8,479
3.50
0.13
0.16
185,767
7,418
11,495
3.85
0.15
0.24
187,838
8,285
7,284
4.30
0.19
0.17
187,572
9,835
5,286
4.94
0.26
0.14
193,726
10,137
4,247
5.66
0.30
0.12
Mortgage Loans:
Multi-family residential
Commercial real estate
One-to-four family -
mixed-use property
One-to-four family -
residential (1)
Co-operative apartment (2)
Construction
Gross mortgage loans
4,401,950
85.31
4,187,818
86.90
3,832,914
87.65
3,321,501
87.44
3,028,452
88.47
Non-mortgage loans:
Small Business Administration
Taxi medallion
Commercial business and other
Gross non-mortgage loans
18,479
6,834
732,973
758,286
0.36
0.13
14.20
14.69
15,198
18,996
597,122
631,316
0.32
0.39
12.39
13.10
12,194
20,881
506,622
539,697
0.28
0.48
11.59
12.35
7,134
22,519
447,500
477,153
0.19
0.59
11.78
12.56
7,792
13,123
373,641
394,556
0.23
0.38
10.92
11.53
Gross loans
5,160,236
100.00
%
4,819,134
100.00
%
4,372,611
100.00
%
3,798,654
100.00
%
3,423,008
100.00
%
Unearned loan fees and deferred
costs, net
Less: Allowance for loan losses
Loans, net
16,763
(20,351)
5,156,648
$
16,559
(22,229)
4,813,464
$
15,368
(21,535)
4,366,444
$
11,719
(25,096)
3,785,277
$
11,170
(31,776)
3,402,402
$
(1)
(2)
One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2017, gross home equity loans totaled $48.0 million and condominium loans
totaled $22.9 million.
Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied.
4
The following table sets forth our loan originations (including the net effect of refinancing) and the changes in
our portfolio of loans, including purchases, sales and principal reductions for the years indicated:
(In thousands)
Mortgage Loans
At beginning of year
Mortgage loans originated:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartment
Construction
Total mortgage loans originated
Mortgage loans purchased:
Multi-family residential
Commercial real estate
Total mortgage loans purchased
Less:
Principal reductions
Loans transferred to loans held for sale
Mortgage loan sales
Charge-offs
Mortgage loan foreclosures
At end of year
Non-mortgage loans
At beginning of year
Loans originated:
Small Business Administration
Commercial business
Other
Total other loans originated
Non-mortgage loans purchased:
Commercial business
Total non-mortgage loans purchased
Less:
Non-mortgage loan sales
Loans transferred to loans held for sale
Principal reductions
Charge-offs
For the years ended December 31,
2016
2015
2017
$
4,187,818
$
3,832,914
$
3,321,501
318,903
212,130
65,247
26,168
332
7,847
630,627
54,609
25,927
80,536
445,561
30,565
19,993
912
-
245,175
296,620
62,735
24,820
470
15,772
645,592
126,022
26,101
152,123
434,587
-
7,259
419
546
205,393
376,036
68,295
40,831
1,625
4,999
697,179
168,450
76,053
244,503
416,101
300
11,057
1,440
1,371
$
4,401,950
$
4,187,818
$
3,832,914
$
631,316
$
539,697
$
477,153
11,559
198,476
2,352
212,387
115,920
115,920
4,842
-
184,935
11,560
8,447
290,444
1,738
300,629
34,594
34,594
3,211
-
239,653
740
11,261
243,316
2,777
257,354
34,425
34,425
3,935
-
222,895
2,405
At end of year
$
758,286
$
631,316
$
539,697
5
Loan Maturity and Repricing. The following table shows the maturity of our total loan portfolio at December 31, 2017. Scheduled repayments are shown in
the maturity category in which the payments become due.
(In thousands)
Amounts due within one year
Amounts due after one year:
One to two years
Two to three years
Three to five years
Over five years
Total due after one year
Total amounts due
Sensitivity of loans to changes in
interest rates - loans due
after one year:
Fixed rate loans
Adjustable rate loans
Total loans due after one year
Multi-family
residential
Commercial
real estate
Mortgage loans
One-to-four
family
mixed-use
property
One-to-four
family
residential
Non-mortgage loans
Co-operative
apartment
Construction
Small Business
Administration
Taxi
Medallion
Commercial
business
and other
Total loans
$
227,936
$
194,920
$
34,230
$
6,777
$
236
$
8,479
$
1,980
$
4,164
$
264,248
$
742,970
199,854
193,559
192,306
1,459,940
2,045,659
2,273,595
$
142,727
128,789
121,168
780,508
1,173,192
1,368,112
$
28,866
28,802
29,117
443,191
529,976
564,206
$
6,763
6,896
7,027
153,200
173,886
180,663
$
236
235
245
5,943
6,659
6,895
$
-
-
-
-
-
8,479
$
1,833
1,697
1,644
11,325
16,499
18,479
$
2,210
337
70
53
2,670
6,834
$
119,603
97,654
77,357
174,111
468,725
732,973
$
502,092
457,969
428,934
3,028,271
4,417,266
5,160,236
$
$
$
$
$
$
$
$
380,815
1,664,844
2,045,659
$
193,481
979,711
1,173,192
93,985
435,991
529,976
27,235
146,651
173,886
889
5,770
6,659
-
$
-
$
-
$
$
$
$
$
$
2,565
13,934
16,499
2,670
-
2,670
$
$
212,856
255,869
468,725
$
914,496
3,502,770
4,417,266
$
6
Multi-Family Residential Lending. Loans secured by multi-family residential properties were $2,273.6 million,
or 44.08% of gross loans at December 31, 2017. Our multi-family residential mortgage loans had an average principal
balance of $1.0 million at December 31, 2017, and the largest multi-family residential mortgage loan held in our portfolio
had a principal balance of $30.8 million. We offer both fixed-rate and adjustable-rate multi-family residential mortgage
loans, with maturities of up to 30 years.
In underwriting multi-family residential mortgage loans, we review the expected net operating income generated
by the real estate collateral securing the loan, the age and condition of the collateral, the financial resources and income
level of the borrower and the borrower’s experience in owning or managing similar properties. We typically require debt
service coverage of at least 125% of the monthly loan payment. We generally originate these loans up to only 75% of the
appraised value or the purchase price of the property, whichever is less. Any loan with a final loan-to-value ratio in excess
of 75% must be approved by the Bank Board of Directors or the Loan Committee as an exception to policy. We generally
rely on the income generated by the property as the primary means by which the loan is repaid. However, personal
guarantees may be obtained for additional security from these borrowers. We typically order an environmental report on
our multi-family and commercial real estate loans.
Loans secured by multi-family residential property generally involve a greater degree of risk than residential
mortgage loans and carry larger loan balances. The increased credit risk is the result of several factors, including the
concentration of principal in a smaller number of loans and borrowers, the effects of general economic conditions on
income producing properties and the increased difficulty in evaluating and monitoring these types of loans. Furthermore,
the repayment of loans secured by multi-family residential property is typically dependent upon the successful operation
of the related property, which is usually owned by a legal entity with the property being the entity’s only asset. If the cash
flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. If the borrower defaults, our
only remedy may be to foreclose on the property, for which the market value may be less than the balance due on the
related mortgage loan. Loans secured by multi-family residential property also may involve a greater degree of
environmental risk. We seek to protect against this risk through obtaining an environmental report. See “—Asset Quality
— Environmental Concerns Relating to Loans.”
At December 31, 2017, $1,938.6 million, or 85.26%, of our multi-family mortgage loans consisted of ARM loans.
We offer ARM loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM
loans currently offered by us are adjusted at the beginning of each adjustment period based upon a fixed spread above the
FHLB-NY corresponding Regular Advance Rate. From time to time, due to competitive forces, we may originate ARM
loans at an initial rate lower than the fully indexed rate as a result of a discount on the spread for the initial adjustment
period. Multi-family adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either
on an adjustment period or aggregate basis over the life of the loan; however, the loans generally contain interest rate
floors. We originated and purchased multi-family ARM loans totaling $298.5 million, $330.6 million and $339.5 million
during 2017, 2016 and 2015, respectively.
At December 31, 2017, $335.0 million, or 14.74%, of our multi-family mortgage loans consisted of fixed rate
loans. Our fixed-rate multi-family mortgage loans are generally originated for terms up to 15 years and are competitively
priced based on market conditions and our cost of funds. We originated and purchased $75.0 million, $40.6 million and
$34.3 million of fixed-rate multi-family mortgage loans in 2017, 2016 and 2015, respectively.
Commercial Real Estate Lending. Loans secured by commercial real estate were $1,368.1 million, or 26.51% of
gross loans, at December 31, 2017. Our commercial real estate mortgage loans are secured by properties such as office
buildings, hotels/motels, nursing homes, small business facilities, strip shopping centers and warehouses. At December
31, 2017, our commercial real estate mortgage loans had an average principal balance of $1.9 million and the largest of
such loans, which was secured by seven multi-tenant shopping centers, had a principal balance of $41.7 million.
Commercial real estate mortgage loans are generally originated in a range of $100,000 to $6.0 million.
In underwriting commercial real estate mortgage loans, we employ the same underwriting standards and
procedures as are employed in underwriting multi-family residential mortgage loans.
Commercial real estate mortgage loans generally carry larger loan balances than residential mortgage loans and
involve a greater degree of credit risk for the same reasons applicable to multi-family residential mortgage loans.
At December 31, 2017, $1,264.5 million, or 92.43%, of our commercial mortgage loans consisted of ARM loans.
We offer ARM loans with adjustment periods of one to five years and generally for terms of up to 15 years. Interest rates
on ARM loans currently offered by us are adjusted at the beginning of each adjustment period based upon a fixed spread
above the FHLB-NY corresponding Regular Advance Rate. From time to time, we may originate ARM loans at an initial
7
rate lower than the index as a result of a discount on the spread for the initial adjustment period. Commercial adjustable-
rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or
aggregate basis over the life of the loan; however, the loans generally contain interest rate floors. We originated and
purchased commercial ARM loans totaling $219.6 million, $293.9 million and $441.1 million during 2017, 2016 and 2015,
respectively.
At December 31, 2017, $103.6 million, or 7.57%, of our commercial mortgage loans consisted of fixed-rate loans.
Our fixed-rate commercial mortgage loans are generally originated for terms up to 20 years and are competitively priced
based on market conditions and our cost of funds. We originated and purchased $18.5 million, $28.8 million and $11.0
million of fixed-rate commercial mortgage loans in 2017, 2016 and 2015, respectively.
One-to-Four Family Mortgage Lending – Mixed-Use Properties. We offer mortgage loans secured by one-to-
four family mixed-use properties. These properties contain up to four residential dwelling units and include a commercial
component. We offer both fixed-rate and adjustable-rate one-to-four family mixed-use property mortgage loans with
maturities of up to 30 years and a general maximum loan amount of $1.0 million. One-to-four family mixed-use property
mortgage loans were $564.2 million, or 10.93% of gross loans, at December 31, 2017.
In underwriting one-to-four family mixed-use property mortgage loans, we employ the same underwriting
standards as are employed in underwriting multi-family residential mortgage loans.
At December 31, 2017, $454.8 million, or 80.61%, of our one-to-four family mixed-use property mortgage loans
consisted of ARM loans. We offer adjustable-rate one-to-four family mixed-use property mortgage loans with adjustment
periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by the Bank
are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding
Regular Advance Rate. From time to time, we may originate ARM loans at an initial rate lower than the index as a result
of a discount on the spread for the initial adjustment period. One-to-four family mixed-use property adjustable-rate
mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate
basis over the life of the loan; however, the loans generally contain interest rate floors. We originated and purchased one-
to-four family mixed-use property ARM loans totaling $47.9 million, $72.4 million and $54.6 million during 2017, 2016
and 2015, respectively.
At December 31, 2017, $109.4 million, or 19.39%, of our one-to-four family mixed-use property mortgage loans
consisted of fixed-rate loans. Our fixed-rate one-to-four family mixed-use property mortgage loans are originated for terms
of up to 15 years and are competitively priced based on market conditions and the Bank’s cost of funds. We originated and
purchased $17.3 million, $15.6 million and $13.7 million of fixed-rate one-to-four family mixed-use property mortgage
loans in 2017, 2016 and 2015, respectively.
One-to-Four Family Mortgage Lending – Residential Properties. We offer mortgage loans secured by one-to-
four family residential properties, including townhouses and condominium units. For purposes of the description contained
in this section, one-to-four family residential mortgage loans, co-operative apartment loans and home equity loans are
collectively referred to herein as “residential mortgage loans.” We offer both fixed-rate and adjustable-rate residential
mortgage loans with maturities of up to 30 years and a general maximum loan amount of $1.0 million. Residential mortgage
loans were $187.6 million, or 3.63% of gross loans, at December 31, 2017.
We generally originate residential mortgage loans in amounts up to 80% of the appraised value or the sale price,
whichever is less. We may make residential mortgage loans with loan-to-value ratios of up to 90% of the appraised value
of the mortgaged property; however, private mortgage insurance is required whenever loan-to-value ratios exceed 80% of
the appraised value of the property securing the loan.
In addition to income verified loans, we have in the past originated residential mortgage loans to self-employed
individuals within our local community based on stated income and verifiable assets that allowed us to assess repayment
ability, provided that the borrower’s stated income was considered reasonable for the borrower’s type of business.
Additionally, we have in the past originated home equity lines of credit on one-to-four residential properties to homeowners
based on various levels of income verification, including no income verification loans. Since 2009, our underwriting
standards for home equity loans were modified to discontinue originating home equity lines of credit without verifying the
borrower’s income. We also discontinued offering one-to-four family residential property mortgage loans to self-employed
individuals based on stated income and verifiable assets in 2010. We had $6.0 million and $9.0 million outstanding of one-
to four family residential mortgage loans originated to individuals based on stated income and verifiable assets at December
31, 2017 and 2016, respectively. At December 31, 2017 and 2016, we had $31.9 million and $38.6 million of outstanding
advances on home equity lines of credit for which we did not verify the borrowers’ income.
8
At December 31, 2017, $157.1 million, or 83.74%, of our residential mortgage loans consisted of ARM loans.
We offer ARM loans with adjustment periods of one, three, five, seven or ten years. Interest rates on ARM loans currently
offered by us are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY
corresponding Regular Advance Rate. From time to time, we may originate ARM loans at an initial rate lower than the
index as a result of a discount on the spread for the initial adjustment period. ARM loans generally are subject to limitations
on interest rate increases of 2% per adjustment period and an aggregate adjustment of 6% over the life of the loan and have
interest rate floors. We originated and purchased residential ARM loans totaling $24.4 million, $24.3 million and $39.2
million during 2017, 2016 and 2015, respectively.
The retention of ARM loans in our portfolio helps us reduce our exposure to interest rate risks. However, in an
environment of rapidly increasing interest rates, it is possible for the interest rate increase to exceed the maximum
aggregate adjustment on one-to-four family residential ARM loans and negatively affect the spread between our interest
income and our cost of funds.
ARM loans generally involve credit risks different from those inherent in fixed-rate loans, primarily because if
interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. However, this
potential risk is lessened by our policy of originating one-to-four family residential ARM loans with annual and lifetime
interest rate caps that limit the increase of a borrower’s monthly payment.
At December 31, 2017, $30.5 million, or 16.26%, of our residential mortgage loans consisted of fixed-rate loans.
Our fixed-rate residential mortgage loans typically are originated for terms of 15 and 30 years and are competitively priced
based on market conditions and our cost of funds. We originated and purchased $2.1 million, $0.9 million and $3.3 million
in 15-year fixed-rate residential mortgages in 2017, 2016 and 2015, respectively. We did not originate or purchase any 30-
year fixed-rate residential mortgages in 2017, 2016 and 2015.
At December 31, 2017, home equity loans totaled $48.0 million, or 0.93%, of gross loans. Home equity loans
are included in our portfolio of residential mortgage loans. These loans are offered as adjustable-rate “home equity lines
of credit” on which interest only is due for an initial term of 10 years and thereafter principal and interest payments
sufficient to liquidate the loan are required for the remaining term, not to exceed 30 years. These adjustable “home equity
lines of credit” may include a “floor” and/or a “ceiling” on the interest rate that we charge for these loans. These loans also
may be offered as fully amortizing closed-end fixed-rate loans for terms up to 15 years. The majority of home equity loans
originated are owner occupied one-to-four family residential properties and condominium units. To a lesser extent, home
equity loans are also originated on one-to-four residential properties held for investment and second homes. All home
equity loans are subject to an 80% loan-to-value ratio computed on the basis of the aggregate of the first mortgage loan
amount outstanding and the proposed home equity loan. They are generally granted in amounts from $25,000 to $300,000.
Construction Loans. At December 31, 2017, construction loans totaled $8.5 million, or 0.16%, of gross loans.
Our construction loans primarily are adjustable rate loans to finance the construction of one-to-four family residential
properties, multi-family residential properties and residential condominiums. We also, to a limited extent, finance the
construction of commercial real estate. Our policies provide that construction loans may be made in amounts up to 70%
of the estimated value of the developed property and only if we obtain a first lien position on the underlying real estate.
However, we generally limit construction loans to 60% of the estimated value of the developed property. In addition, we
generally require personal guarantees on all construction loans. Construction loans are generally made with terms of two
years or less. Advances are made as construction progresses and inspection warrants, subject to continued title searches to
ensure that we maintain a first lien position. We made construction loans of $7.8 million, $15.8 million and $5.0 million
during 2017, 2016 and 2015, respectively.
Construction loans involve a greater degree of risk than other loans because, among other things, the underwriting
of such loans is based on an estimated value of the developed property, which can be difficult to ascertain in light of
uncertainties inherent in such estimations. In addition, construction lending entails the risk that the project may not be
completed due to cost overruns or changes in market conditions.
Small Business Administration Lending. At December 31, 2017, SBA loans totaled $18.5 million, representing
0.36%, of gross loans. These loans are extended to small businesses and are guaranteed by the SBA up to a maximum of
85% of the loan balance for loans with balances of $150,000 or less, and to a maximum of 75% of the loan balance for
loans with balances greater than $150,000. We also provide term loans and lines of credit up to $350,000 under the SBA
Express Program, on which the SBA provides a 50% guaranty. The maximum loan size under the SBA guarantee program
is $5.0 million, with a maximum loan guarantee of $3.75 million. All SBA loans are underwritten in accordance with SBA
Standard Operating Procedures which requires collateral and the personal guarantee of the owners with more than 20%
ownership from SBA borrowers. Typically, SBA loans are originated in the range of $25,000 to $2.0 million with terms
ranging from one to seven years and up to 25 years for owner occupied commercial real estate mortgages. SBA loans are
9
generally offered at adjustable rates tied to the prime rate (as published in the Wall Street Journal) with adjustment periods
of one to three months. At times, we may sell the guaranteed portion of certain SBA term loans in the secondary market,
realizing a gain at the time of sale, and retaining the servicing rights on these loans, collecting a servicing fee of
approximately 1%. We originated and purchased $11.6 million, $8.4 million and $11.3 million of SBA loans during 2017,
2016 and 2015, respectively.
Taxi Medallion. At December 31, 2017, taxi medallion loans consisted of loans made primarily to New York City
taxi medallion owners and to a lesser extent Chicago taxi medallion owners, which are secured by liens on the taxi
medallions, totaling $6.8 million, or 0.13%, of gross loans. In 2015, we decided to no longer originate or purchase taxi
medallion loans. During 2017, the Bank recorded charge-offs on taxi medallion loans totaling $11.3 million, resulting from
a reduction in the fair value of their underlying collateral, which is based upon the most recently reported arm’s length
sales transaction.
Commercial Business and Other Lending. At December 31, 2017, commercial business and other loans totaled
$733.0 million, or 14.20%, of gross loans. We originate and purchase commercial business loans and other loans for
business, personal, or household purposes. Commercial business loans are provided to businesses in the New York City
metropolitan area with annual sales of up to $250.0 million. Our commercial business loans include lines of credit and
term loans including owner occupied mortgages. These loans are secured by business assets, including accounts
receivables, inventory and real estate and generally require personal guarantees. The Bank also enters into
participations/syndications on senior secured commercial business loans, which are serviced by other banks. Commercial
business loans are generally originated in a range of $100,000 to $10.0 million. We generally offer adjustable rate loans
with adjustment periods of five years for owner occupied mortgages and for lines of credit the adjustment period is
generally monthly. Interest rates on adjustable rate loans currently offered by us are adjusted at the beginning of each
adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate for owner
occupied mortgages and a fixed spread above the London Interbank Offered Rate (“LIBOR”) or Prime Rate for lines of
credit. Commercial business adjustable-rate loans generally are not subject to limitations on interest rate increases either
on an adjustment period or aggregate basis over the life of the loan, however they generally are subject to interest rate
floors. Our fixed-rate commercial business loans are generally originated for terms up to 20 years and are competitively
priced based on market conditions and our cost of funds. We originated and purchased $314.4 million, $325.0 million and
$277.7 million of commercial business loans during 2017, 2016 and 2015, respectively.
Other loans generally consist of overdraft lines of credit. Generally, unsecured consumer loans are limited to
amounts of $5,000 or less for terms of up to five years. We originated and purchased $2.4 million, $1.7 million and $2.8
million of other loans during 2017, 2016 and 2015, respectively. The underwriting standards employed by us for consumer
and other loans include a determination of the applicant’s payment history on other debts and assessment of the applicant’s
ability to meet payments on all of his or her obligations. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.
Unsecured loans tend to have higher risk, and therefore command a higher interest rate.
Loan Extensions, Renewals, Modifications and Restructuring. Extensions, renewals, modifications or
restructuring a loan, other than a loan that is classified as a troubled debt restructured (“TDR”), requires the loan to be
fully underwritten in accordance with our policy. The borrower must be current to have a loan extended, renewed or
restructured. Our policy for modifying a mortgage loan due to the borrower’s request for changes in the terms will depend
on the changes requested. The borrower must be current and have a good payment history to have a loan modified. If the
borrower is seeking additional funds, the loan is fully underwritten in accordance with our policy for new loans. If the
borrower is seeking a reduction in the interest rate due to a decline in interest rates in the market, we generally limit our
review as follows: (1) for income producing properties and commercial business loans, to a review of the operating results
of the property/business and a satisfactory inspection of the property, and (2) for one-to-four residential properties, to a
satisfactory inspection of the property. Our policy on restructuring a loan when the loan will be classified as a TDR requires
the loan to be fully underwritten in accordance with Company policy. The borrower must demonstrate the ability to repay
the loan under the new terms. When the restructuring results in a TDR, we may waive some requirements of Company
policy provided the borrower has demonstrated the ability to meet the requirements of the restructured loan and repay the
restructured loan. While our formal lending policies do not prohibit making additional loans to a borrower or any related
interest of the borrower who is past due in principal or interest more than 90 days, it has been our practice not to make
additional loans to a borrower or a related interest of the borrower if the borrower is past due more than 90 days as to
principal or interest. During the most recent three fiscal years, we did not make any additional loans to a borrower or any
related interest of the borrower who was past due in principal or interest more than 90 days. All extensions, renewals,
restructurings and modifications must be approved by the appropriate Loan Committee.
10
Loan Approval Procedures and Authority. The Board of Directors of the Company (the “Board of Directors”)
approved lending policies establishing loan approval requirements for our various types of loan products. Our Residential
Mortgage Lending Policy (which applies to all one-to-four family mortgage loans, including residential and mixed-use
property) establishes authorized levels of approval. One-to-four family mortgage loans that do not exceed $750,000 require
two signatures for approval, one of which must be from either the Senior Executive Vice President, the Executive Vice
President or a Senior Vice President (collectively, “Authorized Officers”) and the other from a Senior Underwriter,
Manager, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department (collectively, “Loan Officers”),
and ratification by the Management Loan Committee. For one-to-four family mortgage loans in excess of $750,000 up to
$2.5 million, three signatures are required for approval, at least two of which must be from Authorized Officers, and the
other one may be a Loan Officer, and ratification by the Management Loan Committee and the Director’s Loan Committee.
The Director’s Loan Committee or the Bank Board of Directors also must approve one-to-four family mortgage loans in
excess of $2.5 million. Pursuant to our Commercial Real Estate Lending Policy, loans secured by commercial real estate
and multi-family residential properties up to $2.0 million are approved by the Executive Vice President of Commercial
Real Estate and the Senior Executive Vice President, Chief of Real Estate Lending and then ratified by the Management
Loan Committee and/or the Director’s Loan Committee. Loans provided in excess of $2.0 million and up to and including
$5.0 million must be submitted to the Management Loan Committee for final approval and then to the Director’s Loan
Committee and/or Board of Directors for ratification. Loans in excess of $5.0 million and up to and including $25.0 million
must be submitted to the Director’s Loan Committee and/ or the Board of Directors for approval. Loan amounts in excess
of $25.0 million must be approved by the Board of Directors.
In accordance with our Business Credit Policy all commercial business loans and SBA loans up to $2.5 million
must be approved by the Business Loan Committee and ratified by the Management Loan Committee. Commercial
business loans and SBA loans in excess of $2.5 million up to $5.0 million must be approved by the Management Loan
Committee and ratified by the Loan Committee. Commercial business and other loans require two signatures from the
Business Loan Committee for approval.
Our Construction Loan Policy requires construction loans up to and including $1.0 million must be approved by
the Senior Executive Vice President, Chief of Real Estate Lending and the Executive Vice President of Commercial Real
Estate, and ratified by the Management Loan Committee or the Director’s Loan Committee. Such loans in excess of $1.0
million up to and including $2.5 million require the same officer approvals, approval of the Management Loan Committee,
and ratification of the Director’s Loan Committee or the Bank Board of Directors. Construction loans in excess of $15.0
million require the same officer approvals, approval by the Management Loan Committee, and approval of the Bank Board
of Directors. Any loan, regardless of type, that deviates from our written credit policies must be approved by the Loan
Committee or the Bank Board of Directors.
For all loans originated by us, upon receipt of a completed loan application, a credit report is ordered and certain
other financial information is obtained. An appraisal of the real estate intended to secure the proposed loan is required to
be received. An independent appraiser designated and approved by us currently performs such appraisals. Our staff
appraisers review all appraisals. The Bank Board of Directors annually approves the independent appraisers used by the
Bank and approves the Bank’s appraisal policy. It is our policy to require borrowers to obtain title insurance and hazard
insurance on all real estate loans prior to closing. For certain borrowers, and/or as required by law, the Bank may require
escrow funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from
which we make disbursements for items such as real estate taxes and, in some cases, hazard insurance premiums.
Loan Concentrations. The maximum amount of credit that the Bank can extend to any single borrower or related
group of borrowers generally is limited to 15% of the Bank’s unimpaired capital and surplus, or $94.7 million at December
31, 2017. Applicable laws and regulations permit an additional amount of credit to be extended, equal to 10% of unimpaired
capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate.
See “-Regulation.” However, it is currently our policy not to extend such additional credit. At December 31, 2017, there
were no loans in excess of the maximum dollar amount of loans to one borrower that the Bank was authorized to make. At
that date, the three largest concentrations of loans to one borrower consisted of loans secured by commercial real estate,
multi-family income producing properties and commercial business loans with an aggregate principal balance of $74.2
million, $64.1 million and $63.3 million for each of the three borrowers, respectively.
Loan Servicing. At December 31, 2017, we were servicing $38.8 million of mortgage loans and $14.9 million of
SBA loans for others. Our policy is to retain the servicing rights to the mortgage and SBA loans that we sell in the secondary
market, other than sales of delinquent loans, which are sold with servicing released to the buyer. On mortgage loans and
commercial business loan participations purchased by us for whom the seller retains the servicing rights, we receive
monthly reports with which we monitor the loan portfolio. Based upon servicing agreements with the servicers of the loans,
we rely upon the servicer to contact delinquent borrowers, collect delinquent amounts and initiate foreclosure proceedings,
11
when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between us
and our servicing agents. The servicers are required to submit monthly reports on their collection efforts on delinquent
loans. At December 31, 2017 and 2016, we held $811.5 million and $742.6 million, respectively, of loans that were
serviced by others.
Asset Quality
Loan Collection. When a borrower fails to make a required payment on a loan, except for serviced loans as
described above, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current
status. In the case of mortgage loans, personal contact is made with the borrower after the loan becomes 30 days delinquent.
We take a proactive approach to managing delinquent loans, including conducting site examinations and encouraging
borrowers to meet with one of our representatives. When deemed appropriate, we develop short-term payment plans that
enable borrowers to bring their loans current, generally within six to nine months. We review delinquencies on a loan by
loan basis, diligently exploring ways to help borrowers meet their obligations and return them back to current status.
In the case of commercial business or other loans, we generally send the borrower a written notice of non-payment
when the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are
made in order to encourage the borrower to meet with one of our representatives to discuss the delinquency. If the loan
still is not brought current and it becomes necessary for us to take legal action, which typically occurs after a loan is
delinquent 90 days or more, we may attempt to repossess personal or business property that secures an SBA loan,
commercial business loan or consumer loan.
When the borrower has indicated that they will be unable to bring the loan current, or due to other circumstances
which, in our opinion, indicate the borrower will be unable to bring the loan current within a reasonable time, the loan is
classified as non-performing. All loans classified as non-performing, which includes all loans past due 90 days or more,
are on non-accrual status unless there is, in our opinion, compelling evidence the borrower will bring the loan current in
the immediate future. At December 31, 2017, there were three loans, which totaled $2.4 million, past due 90 days or more
and still accruing interest.
Upon classifying a loan as non-performing, we review available information and conditions that relate to the
status of the loan, including the estimated value of the loan’s collateral and any legal considerations that may affect the
borrower’s ability to continue to make payments. Based upon the available information, we will consider the sale of the
loan or retention of the loan. If the loan is retained, we may continue to work with the borrower to collect the amounts due
or start foreclosure proceedings. If a foreclosure action is initiated and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the real property securing the loan is sold at foreclosure or by us as soon thereafter
as practicable.
Once the decision to sell a loan is made, we determine what we would consider adequate consideration to be
obtained when that loan is sold, based on the facts and circumstances related to that loan. Investors and brokers are then
contacted to seek interest in purchasing the loan. We have been successful in finding buyers for some of our non-
performing loans offered for sale that are willing to pay what we consider to be adequate consideration. Terms of the sale
include cash due upon closing of the sale, no contingencies or recourse to us, servicing is released to the buyer and time is
of the essence. These sales usually close within a reasonably short time period.
This strategy of selling non-performing loans has allowed us to optimize our return by quickly converting our
non-performing loans to cash, which can then be reinvested in earning assets. This strategy also allows us to avoid lengthy
and costly legal proceedings that may occur with non-performing loans. There can be no assurances that we will continue
this strategy in future periods, or if continued, we will be able to find buyers to pay adequate consideration.
12
The following tables show delinquent and non-performing loans sold during the period indicated:
(Dollars in thousands)
Count
Proceeds
Net (charge-offs) recoveries
Gross gains
Gross losses
For the years ended December 31,
2017
2015
2016
17
26
23
$
6,217
(37)
415
-
$
7,965
48
265
-
$
8,986
134
71
2
Troubled Debt Restructured . We have restructured certain problem loans for borrowers who are experiencing
financial difficulties by either: reducing the interest rate until the next reset date, extending the amortization period thereby
lowering the monthly payments, deferring a portion of the interest payment, or changing the loan to interest only payments
for a limited time period. At times, certain problem loans have been restructured by combining more than one of these
options. These restructurings have not included a reduction of principal balance. We believe that restructuring these loans
in this manner will allow certain borrowers to become and remain current on their loans. These restructured loans are
classified TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain
on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status
until they have made timely payments for six consecutive months.
The following table shows our recorded investment in loans classified as TDR that are performing according to
their restructured terms at the periods indicated:
(Dollars in thousands)
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Construction
Small Business Administration
Taxi medallion
Commercial business and other
Total performing troubled debt restructured
2017
2016
At December 31,
2015
2014
2013
$
$
$
$
$
2,518
1,986
1,753
572
-
-
5,916
462
13,207
2,572
2,062
1,800
591
-
-
9,735
675
17,435
2,626
2,371
2,052
343
-
34
-
2,083
9,509
3,035
2,373
2,381
354
-
-
-
2,249
10,392
3,087
2,407
2,692
364
746
-
-
4,406
13,702
$
$
$
$
$
Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded
from the TDR table above, as they are placed on non-accrual status and reported as non-performing loans. At December
31, 2017 and 2016, there was one loan for $0.4 million which was restructured as TDR which was not performing in
accordance with its restructured terms.
Delinquent Loans and Non-performing Assets. We generally discontinue accruing interest on delinquent loans
when a loan is 90 days past due or foreclosure proceedings have been commenced, whichever first occurs. At that time,
previously accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to their maturity
date but not their payments, however, continue to accrue interest as long as the borrower continues to remit monthly
payments.
13
The following table shows our non-performing assets at the dates indicated. During the years ended December
31, 2017, 2016 and 2015, the amounts of additional interest income that would have been recorded on non-accrual loans,
had they been current, totaled $1.1 million, $1.5 million and $1.7 million, respectively. These amounts were not included
in our interest income for the respective periods.
(Dollars in thousands)
Loans 90 days or more past due
and still accruing:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family - residential
Construction
Commercial Business and other
Total
Non-accrual mortgage loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartments
Total
Non-accrual non-mortgage loans:
Small Business Administration
Taxi medallion (1)
Commercial business and other
Total
Total non-accrual loans
Total non-performing loans
Other non-performing assets:
Real Estate Owned
Investment securities
Total
2017
2016
At December 31,
2015
2014
2013
-
$
2,424
-
-
-
-
2,424
-
$
-
386
-
-
-
386
$
233
1,183
611
13
1,000
220
3,260
$
676
820
405
14
-
386
2,301
$
52
-
-
15
-
539
606
3,598
1,473
1,867
7,808
-
14,746
46
918
-
964
15,710
18,134
-
-
-
1,837
1,148
4,025
8,241
-
15,251
1,886
3,825
68
5,779
21,030
21,416
533
-
533
3,561
2,398
5,952
10,120
-
22,031
218
-
568
786
22,817
26,077
4,932
-
4,932
6,878
5,689
6,936
11,244
-
30,747
-
-
1,143
1,143
31,890
34,191
6,326
-
6,326
13,682
9,962
9,063
13,250
57
46,014
-
-
2,348
2,348
48,362
48,968
2,985
1,871
4,856
Total non-performing assets
$
18,134
$
21,949
$
31,009
$
40,517
$
53,824
Non-performing loans to gross loans
Non-performing assets to total assets
0.35%
0.29%
0.44%
0.36%
0.60%
0.54%
0.90%
0.80%
1.43%
1.14%
(1) Non-performing taxi medallion loans decreased in 2017 primarily due to charge-offs recorded as a result of the reduction
in the estimated fair value of NYC taxi medallion loans, based on most recent sales data.
14
The following table shows our delinquent loans that are less than 90 days past due and still accruing interest at
the periods indicated:
December 31, 2017
60 - 89
days
30 - 59
days
(In thousands)
December 31, 2016
30 - 59
60 - 89
days
days
(In thousands)
$
$
$
$
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential
Small Business Administration
Commercial business and other
Total
279
2,197
860
680
-
-
4,016
2,533
1,680
1,570
1,921
-
2
7,706
287
22
762
-
-
1
1,072
2,575
3,363
4,671
3,831
13
22
14,475
$
$
$
$
Other Real Estate Owned. We aggressively market our Other Real Estate Owned (“OREO”) properties. At
December 31, 2017, we did not own any OREO properties. At December 31, 2016, we owned one OREO property with a
fair value of $0.5 million. At December 31, 2015, we owned four OREO properties with a combined fair value of $4.9
million.
We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via
foreclosure as an in-substance repossession. During the year ended December 31, 2017, we did not foreclose on any
consumer mortgages through in-substance repossession. At December 31, 2017, we did not hold any foreclosed residential
real estate compared to 2016 and 2015 of $0.5 million and $0.1 million, respectively. Included within net loans as of
December 31, 2017 and 2016 was a recorded investment of $10.5 million and $11.4 million, respectively, of consumer
mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process
according to local requirements of the applicable jurisdiction.
Environmental Concerns Relating to Loans. We currently obtain environmental reports in connection with the
underwriting of commercial real estate loans, and typically obtain environmental reports in connection with the
underwriting of multi-family loans. For all other loans, we obtain environmental reports only if the nature of the current
or, to the extent known to us, prior use of the property securing the loan indicates a potential environmental risk. However,
we may not be aware of such uses or risks in any particular case, and, accordingly, there is no assurance that real estate
acquired by us in foreclosure is free from environmental contamination or that, if any such contamination or other violation
exists, whether we will have any liability.
Classified Assets. Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the
investment portfolios, to ensure that the credit quality is maintained at the highest levels. When weaknesses are identified,
immediate action is taken to correct the problem through direct contact with the borrower or issuer. We then monitor these
assets, and, in accordance with our policy and current regulatory guidelines, we designate them as “Special Mention,”
which is considered a “Criticized Asset,” and “Substandard,” “Doubtful,” or “Loss” which are considered “Classified
Assets,” as deemed necessary. These loan designations are updated quarterly. We designate an asset as Substandard when
a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate an asset as Doubtful
when it displays the inherent weakness of a Substandard asset with the added provision that collection of the debt in full,
on the basis of existing facts, is highly improbable. We designate an asset as Loss if it is deemed the debtor is incapable of
repayment. We do not hold any loans designated as loss, as loans that are designated as Loss are charged to the Allowance
for Loan Losses. Assets that are non-accrual are designated as Substandard, Doubtful or Loss. We designate an asset as
Special Mention if the asset does not warrant designation within one of the other categories, but does contain a potential
weakness that deserves closer attention. Our total Criticized Assets and Classified Assets were $62.7 million at December
31, 2017, a decrease of $10.0 million from $72.6 million at December 31, 2016. The decrease in Criticized Assets and
Classified Assets was primarily due to a decrease in Special Mention and Substandard taxi medallion loans, mixed use
loans and commercial business and other loans, partially offset by an increase in commercial real estate loans.
15
The following table sets forth the Bank's Criticized and Classified assets at December 31, 2017:
(In thousands)
Special Mention
Substandard
Doubtful
Loss
Total
Loans:
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential
Small Business Administration
Taxi medallion
Commercial business and other
Total
$
$
$
6,389
2,020
2,835
2,076
548
-
14,859
28,727
4,793
8,871
3,691
9,115
108
6,834
545
33,957
-
$
-
-
-
-
-
-
$
-
-
$
-
-
-
-
-
-
$
-
11,182
10,891
6,526
11,191
656
6,834
15,404
62,684
$
$
$
The following table sets forth the Bank's Criticized and Classified assets at December 31, 2016:
(In thousands)
Special Mention
Substandard
Doubtful
Loss
Total
Loans:
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential
Small Business Administration
Taxi medallion
Commercial business and other
Total loans
Other Real Estate Owned
Total
$
7,133
2,941
4,197
1,205
540
2,715
9,924
28,655
$
3,351
4,489
7,009
9,399
436
16,228
2,493
43,405
$
-
28,655
533
43,938
$
-
$
-
-
-
-
54
-
54
-
54
$
-
$
-
-
-
-
-
-
-
-
$
-
$
10,484
7,430
11,206
10,604
976
18,997
12,417
72,114
533
72,647
$
Allowance for Loan Losses
We have established and maintain on our books an allowance for loan losses (“ALL”) that is designed to provide
a reserve against estimated losses inherent in our overall loan portfolio. The allowance is established through a provision
for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and
other factors, including historical loan loss experience (which is updated quarterly), current economic conditions,
delinquency and non-accrual trends, classified loan levels, risk in the portfolio and volumes and trends in loan types, recent
trends in charge-offs, changes in underwriting standards, experience, ability and depth of our lenders, collection policies
and experience, internal loan review function and other external factors.
The Company segregated its loans into two portfolios based on year of origination. One portfolio was reviewed for loans
originated after December 31, 2009 and a second portfolio for loans originated prior to January 1, 2010. Our decision to
segregate the portfolio based upon origination dates was based on changes made in our underwriting standards during
2009. By the end of 2009, all loans were being underwritten based on revised and tightened underwriting standards. Loans
originated prior to 2010 have a higher delinquency rate and loss history. Each of the years in the portfolio for loans
originated prior to 2010 has a similar delinquency rate. The determination of the amount of the ALL includes estimates
that are susceptible to significant changes due to changes in appraisal values of collateral, national and local economic
conditions and other factors. We review our loan portfolio by separate categories with similar risk and collateral
characteristics. Impaired loans are segregated and reviewed separately. All non-accrual loans are classified impaired.
Impaired loans secured by collateral are reviewed based on the fair value of their collateral. For non-collateralized impaired
16
loans, management estimates any recoveries that are anticipated for each loan. In connection with the determination of the
allowance, the market value of collateral ordinarily is evaluated by our staff appraiser. On a quarterly basis, the estimated
values of impaired mortgage loans are internally reviewed, based on updated cash flows for income producing properties,
and at times an updated independent appraisal is obtained. The loan balances of collateral dependent impaired loans are
then compared to the property’s updated fair value. We consider 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 OREO as a percentage of OREO’s appraised value. 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 sales
transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. All taxi medallion
loans are classified as impaired at December 31, 2017. For collateral dependent mortgage loans and taxi medallion loans,
the portion of the loan balance which exceeds fair value is generally charged-off. When evaluating a loan for impairment,
we do not rely on guarantees, and the amount of impairment, if any, is based on the fair value of the collateral. We do not
carry loans at a value in excess of the fair value due to a guarantee from the borrower. Our Board of Directors reviews and
approves the adequacy of the ALL on a quarterly basis.
In assessing the adequacy of the allowance, we review our loan portfolio by separate categories which have similar
risk and collateral characteristics, e.g., multi-family residential, commercial real estate, one-to-four family mixed-use
property, one-to-four family residential, co-operative apartment, construction, SBA, commercial business, taxi medallion
and consumer loans. General provisions are established against performing loans in our portfolio in amounts deemed
prudent based on our qualitative analysis of the factors, including the historical loss experience, delinquency trends and
local economic conditions. Non-performing loans totaled $18.1 million and $21.4 million at December 31, 2017 and 2016,
respectively. The Bank’s underwriting standards generally require a loan-to-value ratio of no more than 75% at the time
the loan is originated. At December 31, 2017, the outstanding principal balance of our impaired mortgage loans was 39.8%
of the estimated current value of the supporting collateral, after considering the charge-offs that have been recorded. We
incurred total net charge-offs of $11.7 million and net recoveries of $0.7 million during the years ended December 31,
2017 and 2016, respectively. For the year ended December 31, 2017, we recorded a provision for loan losses totaling $9.9
million compared to no provision recorded for the year ended December 31, 2016 and a benefit of $1.0 million recorded
for the year ended December 31, 2015. Management has concluded, and the Board of Directors has concurred, that at
December 31, 2017, the allowance was sufficient to absorb losses inherent in our loan portfolio.
Our determination as to the classification of our assets and the amount of our valuation allowance is subject to
review by our regulators, which can require the establishment of additional allowances or require charge-offs. Such
authorities may require us to make additional provisions to the allowance based on their judgments about information
available to them at the time of their examination. A policy statement provides guidance for examiners in determining
whether the levels of general valuation allowances for banking institutions are adequate. The policy statement requires that
if a bank’s general valuation allowance policies and procedures are deemed to be inadequate, recommendations for
correcting deficiencies, including any examiner concerns regarding the level of the allowance, should be noted in the report
of examination. Additional supervisory action may also be taken based on the magnitude of the observed shortcomings in
the allowance process, including the materiality of any error in the reported amount of the allowance.
During 2017, the portion of the ALL related to the loss history and qualitative factors increased slightly, primarily
due to growth in the loan portfolio and an increase in the loss emergence period to 1.33 years from one year, resulting in
an increase of $0.5 million in the ALL. These increases in the ALL were more than offset by charge-offs of taxi medallion
loans in 2017. Taxi medallion loans net charge-offs totaled $11.3 million during 2017 compared to $0.1 million in 2016,
due to a decline in the fair value of the taxi medallions underlying collateral, which is based upon the most recently reported
arm’s length sales transaction. Excluding the aforementioned charge-offs related to taxi medallion loans, charge-offs
recorded in the past twelve quarters, were minimal, as credit conditions have remained stable. The percentage of loans
originated prior to 2009, compared to the total loan portfolio, decreased as scheduled amortization and repayments
occurred. The impact from the above resulted in the ALL totaling $20.4 million, a decrease of $1.9 million, or 8.4% from
December 31, 2016. Based upon management consistently applying the ALL methodology and review of the loan portfolio,
management concluded a charge to earnings was warranted to maintain the balance of the ALL at the appropriate level.
The ALL at December 31, 2017, represented 0.39% of gross loans outstanding as compared to 0.46% of gross loans
outstanding at December 31, 2016. The ALL represented 112.2% of non-performing loans at December 31, 2017 compared
to 103.8% at December 31, 2016.
Many factors may require additions to the ALL in future periods beyond those currently revealed. These factors
include further adverse changes in economic conditions, changes in interest rates and changes in the financial capacity of
individual borrowers (any of which may affect the ability of borrowers to make repayments on loans), changes in the real
estate market within our lending area and the value of collateral, or a review and evaluation of our loan portfolio in the
17
future. The determination of the amount of the ALL includes estimates that are susceptible to significant changes due to
changes in appraised values of collateral, national and local economic conditions, interest rates and other factors. In
addition, our overall level of credit risk inherent in our loan portfolio can be affected by the loan portfolio’s composition.
At December 31, 2017, multi-family residential, commercial real estate, construction and one-to-four family mixed-use
property mortgage loans, totaled 81.7% of our gross loans. The greater risk associated with these loans, as well as
commercial business loans, could require us to increase our provisions for loan losses and to maintain an ALL as a
percentage of total loans that is in excess of the allowance we currently maintain. Provisions for loan losses are charged
against net income. See “—Lending Activities” and “—Asset Quality.”
The following table sets forth changes in, and the balance of, our ALL.
(Dollars in thousands)
2017
At and for the years ended December 31,
2015
2016
2014
2013
Balance at beginning of year
$
22,229
$
21,535
$
25,096
$
31,776
$
31,104
Provision (benefit) for loan losses
9,861
-
(956)
(6,021)
13,935
Loans charged-off:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartment
Construction
SBA
Taxi medallion
Commercial business and other loans
Total loans charged-off
Recoveries:
Mortgage loans
SBA, commercial business and other loans
Total recoveries
Net (charge-offs) recoveries
(454)
(4)
(39)
(415)
-
-
(212)
(11,283)
(65)
(12,472)
595
138
733
(11,739)
(161)
-
(144)
(114)
-
-
(529)
(142)
(69)
(1,159)
1,493
360
1,853
694
(474)
(32)
(592)
(342)
-
-
(34)
-
(2,371)
(3,845)
888
352
1,240
(1,161)
(325)
(423)
(103)
-
-
(49)
-
(381)
(2,442)
1,515
268
1,783
(3,585)
(1,051)
(4,206)
(701)
(108)
(2,678)
(457)
-
(2,057)
(14,843)
1,407
173
1,580
(2,605)
(659)
(13,263)
Balance at end of year
$
20,351
$
22,229
$
21,535
$
25,096
$
31,776
Ratio of net charge-offs (recoveries) during the year
to average loans outstanding during the year
Ratio of allowance for loan losses to
gross loans at end of the year
Ratio of allowance for loan losses to
0.24%
(0.02%)
0.06%
0.02%
0.41%
0.39%
0.46%
0.49%
0.66%
0.93%
non-performing loans at the end of the year
112.23%
103.80%
82.58%
73.40%
64.89%
Ratio of allowance for loan losses to
non-performing assets at the end of the year
112.23%
101.28%
69.45%
61.94%
59.04%
18
Loan Category
Mortgage loans:
Multi-family residential
Commercial real estate
One-to-four family
mixed-use property
One-to-four family
residential
Co-operative apartment
Construction
The following table sets forth our allocation of the ALL to the total amount of loans in each of the categories listed at the dates indicated. The numbers
contained in the “Amount” column indicate the ALL allocated for each particular loan category. The numbers contained in the column entitled “Percentage of
Loans in Category to Total Loans” indicate the total amount of loans in each particular category as a percentage of our loan portfolio.
2017
Percent
of Loans in
Category to
Total loans
Amount
2016
Percent
of Loans in
Category to
Total loans
Amount
At December 31,
2015
2014
2013
Percent
of Loans in
Category to
Total loans
Percent
of Loans in
Category to
Total loans
Amount
Percent
of Loans in
Category to
Total loans
Amount
Amount
(Dollars in thousands)
$
5,823
4,643
44.08 %
26.51
$
5,923
4,487
45.21 %
25.86
$
6,718
4,239
%
46.98
22.90
$
8,827
4,202
%
50.64
16.36
$
12,084
4,959
%
50.02
14.97
2,545
1,082
-
68
10.93
3.50
0.13
0.16
2,903
1,015
-
92
11.59
3.85
0.15
0.24
4,227
1,227
-
50
Gross mortgage loans
14,161
85.31
14,420
86.90
16,461
Non-mortgage loans:
Small Business Administration
Taxi medallion
Commercial business and other
Gross non-mortgage loans
669
-
5,521
6,190
0.36
0.13
14.20
14.69
481
2,243
4,492
7,216
0.32
0.39
12.39
13.10
262
343
4,469
5,074
13.11
4.30
0.19
0.17
87.65
0.28
0.48
11.59
12.35
5,840
1,690
-
42
20,601
279
11
4,205
4,495
15.10
4.94
0.26
0.14
87.44
0.19
0.59
11.78
12.56
6,328
2,079
104
444
25,998
458
-
5,320
5,778
17.40
5.66
0.30
0.12
88.47
0.23
0.38
10.92
11.53
Unallocated
Total loans
-
20,351
$
-
100.00
%
593
22,229
$
-
100.00
%
-
21,535
$
-
100.00
%
-
25,096
$
-
100.00
%
-
31,776
$
-
100.00
%
19
Investment Activities
General. 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
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. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Overview—Management Strategy” in Item 7 of this Annual Report.
Although we have authority to invest in various types of assets, we primarily invest in mortgage-backed securities,
securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds,
corporate bonds and collateralized loan obligations (“CLO”). We did not hold any issues of foreign sovereign debt at December
31, 2017 and 2016.
Our Investment Committee meets quarterly to monitor investment transactions and to establish investment strategy. The
Board of Directors reviews the investment policy on an annual basis and investment activity on a monthly basis.
We classify our investment securities as available for sale when management intends to hold the securities for an
indefinite period of time or when the securities may be utilized for tactical asset/liability purposes and may be sold from time to
time to effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Securities are classified as
held-to-maturity when management intends to hold the securities until maturity. We carry some of our investments under the fair
value option, totaling $14.3 million at December 31, 2017. Unrealized gains and losses for investments carried under the fair
value option are included in our Consolidated Statements of Income. Unrealized gains and losses on securities available for sale,
other than unrealized credit losses considered other than temporary, are excluded from earnings and included in accumulated
other comprehensive loss (a separate component of equity), net of taxes. Securities held-to-maturity are carried at their cost basis.
At December 31, 2017, we had $738.4 million in securities available for sale and $30.9 million in securities held-to-maturity,
which together represented 12.21% of total assets. These securities had an aggregate market value at December 31, 2017 that
was approximately 1.4 times the amount of our equity at that date.
There were no credit related other-than-temporary impairment charges recorded during the years ended December 31,
2017, 2016 and 2015. As a result of our holdings of securities available for sale, changes in interest rates could produce significant
changes in the value of such securities and could produce significant fluctuations in our operating results and equity. (See Notes 6
and 18 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report.)
20
The table below sets forth certain information regarding the amortized cost and market values of our securities portfolio,
interest-earning deposits and federal funds sold, at the dates indicated. Securities available for sale are recorded at market value.
2017
At December 31,
2016
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In thousands)
2015
Amortized
Cost
Fair
Value
Securities held-to-maturity
Bonds and other debt securities:
Municipal securities
Total bonds and other debt securities
Mortgage-backed securities:
FNMA
Total mortgage-backed securities
$
22,913
22,913
$
21,889
21,889
$
37,735
37,735
$
35,408
35,408
$
6,180
6,180
$
6,180
6,180
7,973
7,973
7,810
7,810
-
-
-
-
-
-
-
-
Total securities held-to-maturity
30,886
29,699
37,735
35,408
6,180
6,180
Securities available for sale
Bonds and other debt securities:
Municipal securities
Corporate debentures
Collateralized loan obligations
Total bonds and other debt securities
Mutual funds
Equity securities:
Common stock
Preferred stock
Total equity securities
Mortgage-backed securities:
REMIC and CMO
GNMA
FNMA
FHLMC
Total mortgage-backed securities
Total securities available for sale
Interest-earning deposits and
Federal funds sold
101,680
110,000
10,000
221,680
11,575
1,110
-
1,110
328,668
1,016
136,198
48,103
513,985
748,350
103,199
102,767
10,053
216,019
11,575
1,110
-
1,110
325,302
1,088
135,474
47,786
509,650
738,354
124,984
110,000
85,470
320,454
21,366
1,019
6,344
7,363
402,636
1,319
109,493
5,378
518,826
868,009
126,903
102,910
86,365
316,178
21,366
1,019
6,342
7,361
401,370
1,427
108,351
5,328
516,476
861,381
127,696
115,976
53,225
296,897
131,583
111,674
52,898
296,155
21,290
21,290
871
6,343
7,214
469,987
11,635
170,327
16,961
668,910
871
6,341
7,212
469,936
11,798
170,057
16,949
668,740
994,311
993,397
39,362
39,362
25,771
25,771
32,825
32,825
Total
$
818,598
$
807,415
$
931,515
$
922,560
$
1,033,316
$
1,032,402
Mortgage-backed securities. At December 31, 2017, we had available for sale and held-to-maturity mortgage-backed
securities with a market value totaling $517.5 million, of which $2.5 million was invested in adjustable-rate mortgage-backed
securities. The mortgage loans underlying these adjustable-rate securities generally are subject to limitations on annual and
lifetime interest rate increases. We anticipate that investments in mortgage-backed securities may continue to be used in the
future to supplement mortgage-lending activities. Mortgage-backed securities are more liquid than individual mortgage loans
and may be used more easily to collateralize our obligations, including collateralizing of the governmental deposits of the Bank.
21
The following table sets forth our available for sale mortgage-backed securities purchases, sales and principal
repayments for the years indicated:
For the years ended December 31,
2016
2015
2017
Balance at beginning of year
$
516,476
$
668,740
$
704,933
Purchases of mortgage-backed securities
151,692
90,572
169,383
(In thousands)
Amortization of unearned premium, net of
accretion of unearned discount
Net change in unrealized gains on mortgage-backed
securities available for sale
Net realized gains (losses) recorded on mortgage-backed
securities carried at fair value
Net change in interest due on securities carried at fair value
(1,593)
(2,086)
(2,747)
(1,985)
(2,180)
(2,573)
(25)
-
(33)
-
77
(6)
Sales of mortgage-backed securities
(78,685)
(126,045)
(103,100)
Principal repayments received on
mortgage-backed securities
(76,230)
(112,492)
(97,227)
Net decrease in mortgage-backed securities
(6,826)
(152,264)
(36,193)
Balance at end of year
$
509,650
$
516,476
$
668,740
While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject
to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the
underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and
value of such securities.
22
The table below sets forth certain information regarding the amortized cost, fair value, annualized weighted average yields and maturities of our investment in debt
and equity securities and interest-earning deposits at December 31, 2017. The stratification of balances is based on stated maturities. Assumptions for repayments and
prepayments are not reflected for mortgage-backed securities. Securities available for sale are carried at their fair value in the consolidated financial statements and securities
held-to-maturity are carried at their amortized cost.
One year or Less
One to Five Years
Five to Ten Years
More than Ten Years
Total Securities
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
(Dollars in thousands)
Weighted
Average
Yield
Average
Remaining
Years to
Maturity
Amortized
Cost
Fair
Value
Weighted
Average
Yield
Securities held-to-maturity
Bonds and other debt securities:
Municipal securities
Total bonds and other debt securities
Mortgage-backed securities:
FNMA
Total mortgage-backed securities
Securities available for sale
Bonds and other debt securities:
Municipal securities
Corporate debentures
CLO
Total bonds and other debt securities
Mutual funds
Equity securities:
Common stock
Total equity securities
Mortgage-backed securities:
REMIC and CMO
GNMA
FNMA
FHLMC
Total mortgage-backed securities
$
1,045
1,045
%
1.36
1.36
-
$
-
%
$
21,868
21,868
%
3.27
3.27
24.15
24.15
$
22,913
22,913
$
21,889
21,889
%
3.18
3.18
-
-
-
-
-
-
-
-
-
-
-
-
11,575
2.06
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,306
-
-
4,306
-
-
-
13,949
5,049
152
-
19,150
-
%
-
$
-
-
-
9,931
110,000
10,000
129,931
-
-
-
10,155
287
786
86
11,314
-
-
-
-
4.67
3.50
3.86
3.62
-
-
-
2.43
4.08
3.81
7.47
2.61
-
-
-
-
4.64
-
-
4.64
-
-
-
3.37
4.24
6.67
-
3.63
-
7,973
7,973
87,443
-
-
87,443
3.28
3.28
4.83
-
-
4.83
-
-
1,110
1,110
112,094
323,332
47,165
930
483,521
4.86
4.86
3.19
2.86
3.41
5.72
3.00
15.34
15.34
14.99
8.56
9.06
11.53
-
-
-
20.87
28.80
29.09
17.11
26.70
7,973
7,973
7,810
7,810
101,680
110,000
10,000
221,680
103,199
102,767
10,053
216,019
11,575
11,575
1,110
1,110
136,198
328,668
48,103
1,016
513,985
1,110
1,110
135,474
325,302
47,786
1,088
509,650
3.28
3.28
4.80
3.50
3.86
4.11
2.06
4.86
4.86
3.15
2.88
3.43
5.87
3.01
1.50
Interest-earning deposits
39,362
1.50
-
-
-
-
-
39,362
39,362
Total
$
51,982
1.62
%
$
23,456
3.81
%
$
141,245
3.54
%
$
601,915
3.28
%
22.42
$
818,598
$
807,415
3.23
%
23
Sources of Funds
General. Deposits, FHLB-NY borrowings, other borrowings, repurchase agreements, principal and interest
payments on loans, mortgage-backed and other securities, and proceeds from sales of loans and securities are our
primary sources of funds for lending, investing and other general purposes.
Deposits. We offer a variety of deposit accounts having a range of interest rates and terms. Our deposits
primarily consist of savings accounts, money market accounts, demand accounts, NOW accounts and certificates of
deposit. We have a relatively stable retail deposit base drawn from our market area through our 18 full-service offices.
We seek to retain existing depositor relationships by offering quality service and competitive interest rates, while
keeping deposit growth within reasonable limits. It is management’s intention to balance its goal to maintain
competitive interest rates on deposits while seeking to manage its cost of funds to finance its strategies.
In addition to our full-service offices we operate the Internet Branch and a government banking unit. The
Internet Branch currently offers savings accounts, money market accounts, checking accounts, and certificates of
deposit. This allows us to compete on a national scale without the geographical constraints of physical locations. At
December 31, 2017 and 2016, total deposits at our Internet Branch were $401.0 million and $417.3 million,
respectively. The government banking unit provides banking services to public municipalities, including counties,
cities, towns, villages, school districts, libraries, fire districts, and the various courts throughout the New York City
metropolitan area. At December 31, 2017 and 2016, total deposits in our government banking unit totaled $1,133.3
million and $1,062.1 million, respectively.
Our core deposits, consisting of savings accounts, NOW accounts, money market accounts, and non-interest
bearing demand accounts, are typically more stable and lower costing than other sources of funding. However, the
flow of deposits into a particular type of account is influenced significantly by general economic conditions, changes
in prevailing interest rates, and competition. We experienced an increase in our due to depositors’ during 2017 of
$175.3 million. During the year ended December 31, 2017, the cost of our interest-bearing due to depositors’ accounts
increased 11 basis points to 1.00% from 0.89% for the year ended December 31, 2016. This increase in the cost of
deposits was primarily due to increases in the cost of money market, savings, NOW accounts and certificate of deposits
of 28 basis points, 15 basis points, 14 basis points and two basis points, respectively. The increase in the cost of
deposits was primarily due to an increase in the rates we pay on some of our products to maintain competitive in our
market. While we are unable to predict the direction of future interest rate changes, if interest rates rise during 2018,
the result could be an increase in our cost of deposits, which could reduce our net interest margin. Similarly, if interest
rates remain at their current level or decline in 2018, we could see a decline in our cost of deposits, which could
increase our net interest margin.
Included in deposits are certificates of deposit with balances of $100,000 or more (excluding brokered
deposits issued in $1,000 amounts under a master certificate of deposit) totaling $681.2 million, $648.1 million and
$484.7 million at December 31, 2017, 2016 and 2015, respectively.
We utilize brokered deposits as an additional funding source and to assist in the management of our interest
rate risk. We have obtained brokered certificates of deposit when the interest rate on these deposits is below the
prevailing interest rate for non-brokered certificates of deposit with similar maturities in our market, or when obtaining
them allowed us to extend the maturities of our deposits at favorable rates compared to borrowing funds with similar
maturities, when we are seeking to extend the maturities of our funding to assist in the management of our interest
rate risk. Brokered certificates of deposit provide a large deposit for us at a lower operating cost as compared to non-
brokered certificates of deposit since we only have one account to maintain versus several accounts with multiple
interest and maturity checks. The Depository Trust Company is used as the clearing house, maintaining each deposit
under the name of CEDE & Co. These deposits are transferable just like a stock or bond investment and the customer
can open the account with only a phone call, just like buying a stock or bond. Unlike non-brokered certificates of
deposit, where the deposit amount can be withdrawn with a penalty for any reason, including increasing interest rates,
a brokered certificate of deposit can only be withdrawn in the event of the death, or court declared mental
incompetence, of the depositor. This allows us to better manage the maturity of our deposits and our interest rate risk.
We also utilized brokers to obtain money market deposits. The rate we pay on brokered money market accounts is
similar to the rate we pay on non-brokered money market accounts, and the rate is agreed to in a contract between the
Bank and the broker. These accounts are similar to brokered certificates of deposit accounts in that we only maintain
one account for the total deposit per broker, with the broker maintaining the detailed records of each depositor.
24
We also offer access to FDIC insurance coverage in excess of $250,000 through a Certificate of Deposit
Account Registry Service (“CDARS®”) and through an Insured Cash Sweep service (“ICS”). CDARS® and ICS are
deposit placement services. These networks arrange for placement of funds into certificate of deposit accounts or
money market accounts issued by other member banks of the network in increments of less than $250,000 to ensure
that both principal and interest are eligible for full FDIC deposit insurance. This allows us to accept deposits in excess
of $250,000 from a depositor, and place the deposits through the network to other member banks to provide full FDIC
deposit insurance coverage. We may receive deposits from other member banks in exchange for the deposits we place
into the network. We may also obtain deposits from other network member banks without placing deposits into the
network. We will obtain deposits in this manner primarily as a short-term funding source. We also can place deposits
with other member banks without receiving deposits from other member banks. Depositors are allowed to withdraw
funds, with a penalty, from these accounts at one or more of the member banks that hold the deposits. Additionally,
we place a portion of our government deposits in an ICS brokered money market product which does not require us
to provide collateral. This allows us to invest our funds in higher yielding assets. At December 31, 2017 and 2016, the
Bank held government ICS deposits totaling $639.5 million and $539.0 million, respectively.
Traditional brokered deposits and funds obtained through the CDARS® and ICS networks are classified as
brokered deposits for financial reporting purposes. At December 31, 2017, we had $1,090.0 million classified as
brokered deposits, with $380.4 million in brokered certificates of deposit, $704.9 million in brokered money market
accounts and $4.7 million in brokered checking accounts. The brokered certificates of deposit include $45.0 million
obtained through the CDARS® network and the brokered money market accounts include $639.5 million obtained
through the ICS network.
25
The following table sets forth the distribution of our deposit accounts at the dates indicated and the weighted average nominal interest rates on each
category of deposits presented.
2017
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
Amount
At December 31,
2016
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
(Dollars in thousands)
Amount
2015
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
Amount
$
290,280
6.62
%
0.64
%
$
254,283
6.05
%
0.48
%
$
261,748
6.72
%
0.45
%
1,333,232
385,269
42,606
2,051,387
979,958
113,306
8,201
679,966
163,739
350,719
36,002
1,351,933
30.42
8.79
0.97
46.80
22.36
2.59
0.19
15.51
3.74
8.00
0.82
30.84
0.83
-
0.25
0.65
1.05
1.30
0.14
1.41
1.51
1.87
2.92
1.57
1,362,484
333,163
40,216
1,990,146
843,370
31,432
53,222
588,751
281,454
369,630
47,626
1,372,115
32.40
7.92
0.96
47.32
20.05
0.75
1.27
14.00
6.69
8.79
1.13
32.63
0.59
-
0.22
0.47
0.67
0.64
0.99
1.18
1.26
1.83
2.86
1.41
1,448,695
269,469
36,844
2,016,756
472,489
19,615
21,962
496,343
316,475
461,843
87,064
1,403,302
37.22
6.92
0.95
51.81
12.14
0.50
0.56
12.75
8.13
11.86
2.24
36.05
0.49
-
0.17
0.42
0.46
0.40
0.41
1.08
1.20
1.73
2.77
1.41
$
4,383,278
100.00
%
1.02
%
$
4,205,631
100.00
%
0.82
%
$
3,892,547
100.00
%
0.78
%
Savings accounts
NOW accounts (9)
Demand accounts (10)
Mortgagors' escrow deposits
Total
Money market accounts (8)
Certificate of deposit accounts
with original maturities of:
Less than 6 Months (2)
6 to less than 12 Months (3)
(4)
12 to less than 30 Months
30 to less than 48 Months (5)
48 to less than 72 Months (6)
72 Months or more (7)
Total certificate of deposit accounts
Total deposits (1)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Included in the above balances are IRA and Keogh deposits totaling $65.5 million, $69.3 million and $71.5 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $111.9 million, $29.1 million and $5.0 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $0.8 million at December 31, 2015. There were no brokered deposits in this category at December 31, 2017 and 2016.
Includes brokered deposits of $74.3 million, $84.0 million and $168.2 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $88.6 million, $229.5 million and $244.6 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $103.1 million, $113.0 million and $165.6 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $2.5 million, $3.1 million and $41.0 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $704.9 million, $655.0 million and $339.8 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $15.0 million at December 31, 2015. There were no brokered deposits in this category at December 31, 2017, and 2016.
Includes brokered deposits of $4.7 million, $1.1 million and 2.8 million at December 31, 2017, 2016 and 2015, respectively.
26
The following table presents by various rate categories, the amount of time deposit accounts outstanding at the dates
indicated, and the years to maturity of the certificate accounts outstanding at December 31, 2017.
2017
At December 31,
2016
2015
At December 31, 2017
One to
Three Years
Within
One Year
Thereafter
(In thousands)
Interest rate:
1.99% or less
(1)
2.00% to 2.99% (2)
3.00% to 3.99% (3)
Total
$
$
1,051,876
272,475
27,582
1,351,933
$
$
1,107,882
237,122
27,111
1,372,115
$
$
1,074,229
279,688
49,385
1,403,302
$
$
689,190
68,199
1,971
759,360
$
$
352,882
192,037
-
544,919
$
9,804
12,239
25,611
47,654
$
(1)
(2)
(3)
Includes brokered deposits of $364.2 million, $442.4 million and $542.3 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $16.2 million, $16.4 million and $59.9 million at December 31, 2017, 2016 and 2015, respectively.
Includes brokered deposits of $23.0 million at December 31, 2015. There were no brokered deposits in this category at December 31, 2017 and 2016.
The following table presents by remaining maturity categories the amount of certificate of deposit accounts with
balances of $100,000 or more at December 31, 2017 and their annualized weighted average interest rates.
Amount
Weighted
Average Rate
(Dollars in thousands)
Maturity Period:
Three months or less
Over three through six months
Over six through 12 months
Over 12 months
Total
$
$
140,324
109,749
104,340
326,828
681,241
1.33
1.32
1.72
1.90
1.66
%
%
The above table does not include brokered deposits issued in $1,000 amounts under a master certificate of deposit
totaling $332.7 million with a weighted average rate of 1.40%.
The following table presents the deposit activity, including mortgagors’ escrow deposits, for the periods indicated.
2017
For the year ended December 31,
2016
2015
$
$
352,602
1,012
30,336
383,950
Net deposits
Amortization of premiums, net
Interest on deposits
Net increase in deposits
$
$
136,740
588
40,319
177,647
(In thousands)
278,793
$
747
33,350
312,890
$
27
The following table sets forth the distribution of our average deposit accounts for the years indicated, the percentage
of total deposit portfolio, and the average interest cost of each deposit category presented. Average balances for all years shown
are derived from daily balances.
2017
Percent
of Total
Deposits
Average
Cost
Average
Balance
At December 31,
2016
Percent
of Total
Deposits
(Dollars in thousands)
2015
Percent
of Total
Deposits
Average
Cost
Average
Cost
Average
Balance
%
6.59
32.49
7.84
1.39
48.31
20.42
31.27
100.00
%
0.62
0.67
-
0.23
0.54
0.90
1.48
0.91
%
$
260,948
1,496,712
305,096
56,152
2,118,908
581,390
%
6.35
36.41
7.42
1.37
51.55
14.15
1,409,772
4,110,070
$
%
34.30
100.00
%
0.47
0.53
-
0.20
0.44
0.62
1.46
0.81
%
$
264,891
1,432,609
250,488
52,364
2,000,352
380,595
%
7.10
38.38
6.71
1.40
53.59
10.20
1,351,619
3,732,566
$
%
36.21
100.00
%
0.43
0.46
-
0.19
0.39
0.41
1.55
0.81
%
%
Average
Balance
$
292,887
1,444,944
348,518
61,962
2,148,311
908,025
1,390,491
4,446,827
$
Savings accounts
NOW accounts
Demand accounts
Mortgagors' escrow deposits
Total
Money market accounts
Certificate of deposit accounts
Total deposits
Borrowings. Although deposits are our primary source of funds, we also use borrowings as an alternative and cost
effective source of funds for lending, investing and other general purposes. The Bank is a member of, and is eligible to obtain
advances from, the FHLB-NY. Such advances generally are secured by a blanket lien against the Bank’s mortgage portfolio
and the Bank’s investment in the stock of the FHLB-NY. In addition, the Bank may pledge mortgage-backed securities to
obtain advances from the FHLB-NY. See “— Regulation — Federal Home Loan Bank System.” The maximum amount that
the FHLB-NY will advance for purposes other than for meeting withdrawals fluctuates from time to time in accordance with
the policies of the FHLB-NY. The Bank may also enter into repurchase agreements with broker-dealers and the FHLB-NY.
These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in our
consolidated financial statements. In addition, we issued junior subordinated debentures with a total par of $61.9 million in
2007. These junior subordinated debentures are carried at fair value in the Consolidated Statement of Financial Condition. In
2016, the Company issued subordinated debt with an aggregated principal amount of $75.0 million, receiving net proceeds
totaling $73.4 million. The subordinated debt was issued at 5.25% fixed-to-floating rate maturing in 2026. The debt is callable
at par quarterly through its maturity date beginning December 15, 2021.
The average cost of borrowings was 1.81%, 1.67% and 1.76% for the years ended December 31, 2017, 2016 and
2015, respectively. The average balances of borrowings were $1,169.8 million, $1,231.0 million and $1,104.4 million for the
same years, respectively.
28
The following table sets forth certain information regarding our borrowings at or for the periods ended on the
dates indicated.
Securities Sold with the Agreement to Repurchase
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
FHLB-NY Advances
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
Other Borrowings
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
Total Borrowings
Average balance outstanding
Maximum amount outstanding at any month
end during the period
Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period
Subsidiary Activities
At or for the years ended December 31,
2017
2016
2015
(Dollars in thousands)
$
-
$
64,087
$
116,000
-
-
-
-
%
116,000
-
3.26
n/a
%
116,000
116,000
3.22
3.18
%
$
1,058,466
$
1,123,411
$
947,370
1,317,087
1,198,968
1.38
1.49
%
1,337,265
1,159,190
1.46
1.17
%
1,106,658
1,106,658
1.48
1.40
%
$
111,325
$
43,516
$
40,998
110,685
110,685
5.86
5.18
%
107,373
107,373
4.76
5.02
%
89,479
49,018
4.02
2.56
%
$
1,169,791
$
1,231,014
$
1,104,368
1,427,772
1,309,653
1.81
1.80
%
1,560,639
1,266,563
1.67
1.53
%
1,312,137
1,271,676
1.76
1.61
%
At December 31, 2017, the Holding Company had four wholly owned subsidiaries: the Bank and the Trusts. In
addition, the Bank had three wholly owned subsidiaries: FSB Properties Inc. (“Properties”), Flushing Preferred Funding
Corporation (“FPFC”), and Flushing Service Corporation.
(a)Properties, which is incorporated in the State of New York, was formed in 1976 under the Savings Bank’s
(predecessor to the Bank) New York State leeway investment authority. The original purpose of Properties was to engage in
joint venture real estate equity investments. The Savings Bank discontinued these activities in 1986. The last joint venture in
which Properties was a partner was dissolved in 1989, and the remaining property disposed. Properties is currently used to hold
title to real estate owned that is obtained via foreclosure.
(b)FPFC, which is incorporated in the State of Delaware, was formed in 1997 as a real estate investment trust for the
purpose of acquiring, holding and managing real estate mortgage assets. FPFC also provides an additional vehicle for access
by the Company to the capital markets for future opportunities.
(c)Flushing Service Corporation, which is incorporated in the State of New York, was formed in 1998 to market
insurance products and mutual funds.
Personnel
At December 31, 2017, we had 444 full-time employees and 23 part-time employees. None of our employees are
represented by a collective bargaining unit, and we consider our relationship with our employees to be good. At the present
29
time, the Holding Company only employs certain officers of the Bank. These employees do not receive any extra compensation
as officers of the Holding Company.
Omnibus Incentive Plan
The 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) became effective on May 20, 2014 after adoption by the
Board of Directors and approval by the stockholders. The 2014 Omnibus Plan authorizes the Compensation Committee of the
Company’s Board of Directors (the “Compensation Committee”) to grant a variety of equity compensation awards as well as
long-term and annual cash incentive awards, all of which can, but need not, be structured so as to comply with Section 162(m)
of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The 2014 Omnibus Plan authorizes the
issuance of 1,100,000 shares. To the extent that an award under the 2014 Omnibus Plan is cancelled, expired, forfeited, settled
in cash, settled by issuance of fewer shares than the number underlying the award, or otherwise terminated without delivery of
shares to a participant in payment of the exercise price or taxes relating to an award, the shares retained by or returned to the
Company will be available for future issuance under the 2014 Omnibus Plan. No further awards may be granted under the
Company’s 2005 Omnibus Incentive Plan, 1996 Stock Option Incentive Plan, and 1996 Restricted Stock Incentive Plan. On
May 31, 2017, stockholders approved an amendment to the 2014 Omnibus Plan (the “Amendment”) authorizing an additional
672,000 shares available for future issuance. In addition, to increasing the number of shares for future grants, the Amendment
eliminates, in the case of stock options and SARs, the ability to recycle shares used to satisfy the exercise price or taxes for
such awards. No other amendments to the 2014 Omnibus Plan were made. Including the additional shares authorized from the
Amendment, 954,003 shares are available for future issuance under the 2014 Omnibus Plan at December 31, 2017.
For additional information concerning this plan, see “Note 11 of Notes to Consolidated Financial Statements” in Item
8 of this Annual Report.
General
REGULATION
The Bank is a New York State-chartered commercial bank and its deposit accounts are insured under the Deposit
Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to applicable legal limits. The Bank
is subject to extensive regulation and supervision by the New York State Department of Financial Services (“NYDFS”), as its
chartering agency, by the FDIC, as its insurer of deposits, and by the Consumer Financial Protection Bureau (the “CFPB”),
which was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in 2011
to implement and enforce consumer protection laws applying to banks. The Bank must file reports with the NYDFS, the FDIC,
and the CFPB concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering
into certain transactions such as mergers with, or acquisitions of, other depository institutions. Furthermore, the Bank is
periodically examined by the NYDFS and the FDIC to assess compliance with various regulatory requirements, including
safety and soundness considerations. This regulation and supervision establishes a comprehensive framework of activities in
which a commercial bank can engage, and is intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion in connection with its supervisory and
enforcement activities and examination policies, including policies with respect to the classification of assets and the
establishment of adequate loan loss allowances for regulatory purposes. Any change in such regulation, whether by the NYDFS,
the FDIC, or through legislation, could have a material adverse impact on the Company, the Bank and its operations, and the
Company’s shareholders.
The Company is required to file certain reports under, and otherwise comply with, the rules and regulations of the
Federal Reserve Board of Governors (the “FRB”), the FDIC, the NYDFS, and the Securities and Exchange Commission (the
“SEC”) under federal securities laws. In addition, the FRB periodically examines the Company. Certain of the regulatory
requirements applicable to the Bank and the Company are referred to below or elsewhere herein. However, such discussion is
not meant to be a complete explanation of all laws and regulations and is qualified in its entirety by reference to the actual laws
and regulations.
The Dodd-Frank Act
The Dodd-Frank Act has significantly impacted the current bank regulatory structure and is expected to continue to
affect, into the immediate future, the lending and investment activities and general operations of depository institutions and
their holding companies. In addition to creating the CFPB, the Dodd-Frank Act requires the FRB to establish minimum
consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository
institutions; the components of Tier 1 capital will be restricted to capital instruments that are currently considered to be Tier 1
capital for insured depository institutions. In addition, the proceeds of trust preferred securities will be excluded from Tier 1
capital unless (i) such securities are issued by bank holding companies with assets of less than $500 million, or (ii) such
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securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with assets of less than $15 billion.
The Dodd-Frank Act created a new supervisory structure for oversight of the U.S. financial system, including the establishment
of a new council of regulators, the Financial Stability Oversight Council, to monitor and address systemic risks to the financial
system. Non-bank financial companies that are deemed to be significant to the stability of the U.S. financial system and all
bank holding companies with $50 billion or more in total consolidated assets will be subject to heightened supervision and
regulation. The FRB will implement prudential requirements and prompt corrective action procedures for such companies.
The Dodd-Frank Act made many additional changes in banking regulation, including: authorizing depository
institutions, for the first time, to pay interest on business checking accounts; requiring originators of securitized loans to retain
a percentage of the risk for transferred loans; establishing regulatory rate-setting for certain debit card interchange fees; and
establishing a number of reforms for mortgage lending and consumer protection.
The Dodd-Frank Act also broadened the base for FDIC insurance assessments. The FDIC was required to promulgate
rules revising its assessment system so that it is based not on deposits, but on the average consolidated total assets less the
tangible equity capital of an insured institution. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently
increased the maximum amount of deposit insurance for banks, savings institutions, and credit unions to $250,000 per
depositor, retroactive to January 1, 2008, and provided non-interest-bearing transaction accounts with unlimited deposit
insurance through December 31, 2012.
Some of the provisions of the Dodd-Frank Act are not yet in effect. The Dodd-Frank Act requires various federal
agencies to promulgate numerous and extensive implementing regulations over the next several years.
On February 3, 2017, however, President Trump signed an executive order requiring a comprehensive review of
financial system regulations, including the Dodd-Frank Act. President Trump has promised other significant changes to
financial system regulations. Nonetheless, changes to these regulations are expected to be politically controversial and may be
slow and unpredictable in enactment and effect. It is too early to predict when or what, if any, existing regulations affecting us
will be repealed or amended and what if any new regulations affecting us will be adopted, leaving the bank regulatory
environment particularly uncertain at present. Further, there can be no assurance as to the impact that any laws, regulations or
governmental programs that may be introduced or implemented in the future will have on the financial markets and the
economy.
Basel III
On January 1, 2015, the Company and the Bank became subject to a new comprehensive capital framework for U.S. banking
organizations that was issued by the FDIC and FRB in July 2013 (the “Basel III Capital Rules”), subject to phase-in periods
for certain components and other provisions. Under the Basel III Capital Rules, the minimum capital ratios effective as of
January 1, 2015 are:
•
•
•
•
4.5% Common Equity Tier 1 (“CET1”) to risk-weighted assets;
6.0% Tier 1 capital that is CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total Capital that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the
“leverage ratio”).
The Basel III Capital Rules also introduced a new “capital conservation buffer,” composed entirely of CET1, on top
of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016
at the 0.625% level and increased and will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January
1, 2019. Banking institutions with a ratio of CET1 to risk-weighted assets below the effective minimum (4.5% plus the capital
conservation buffer) will face constraints on dividends, equity repurchases and compensation based on the amount of the
shortfall. We believe that, as of December 31, 2017, the Company and the Bank would meet all capital adequacy requirements
under the Basel III Capital Rules on a fully phased-in basis as if such requirements had been in effect.
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Volcker Rule
Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule,” generally prohibits insured
depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading
and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private
equity fund. These prohibitions are subject to a number of statutory exemptions, restrictions, and definitions. The FRB is
working with the other agencies charged with implementing the requirements of Section 619, including the FDIC and the SEC.
We do not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company or the Bank.
New York State Law
The Bank derives its lending, investment, and other authority primarily from the applicable provisions of New York
State Banking Law and the regulations of the NYDFS, as limited by FDIC regulations. Under these laws and regulations, banks,
including the Bank, may invest in real estate mortgages, consumer and commercial loans, certain types of debt securities
(including certain corporate debt securities, and obligations of federal, state, and local governments and agencies), certain types
of corporate equity securities, and certain other assets. The lending powers of New York State-chartered commercial banks are
not subject to percentage-of-assets or capital limitations, although there are limits applicable to loans to individual borrowers.
The exercise by an FDIC-insured commercial bank of the lending and investment powers under New York State
Banking Law is limited by FDIC regulations and other federal laws and regulations. In particular, the applicable provisions of
New York State Banking Law and regulations governing the investment authority and activities of an FDIC-insured state-
chartered savings bank and commercial bank have been effectively limited by the Federal Deposit Insurance Corporation
Improvement Act of 1991 (“FDICIA”) and the FDIC regulations issued pursuant thereto.
With certain limited exceptions, a New York State-chartered commercial bank may not make loans or extend credit
for commercial, corporate, or business purposes (including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank’s net worth or up to 25% for loans secured by collateral having an ascertainable market
value at least equal to the excess of such loans over the bank’s net worth. The Bank currently complies with all applicable
loans-to-one-borrower limitations. At December 31, 2017, the Bank’s largest aggregate amount of loans to one borrower was
$94.7 million, all of which were performing according to their terms. See “— General — Lending Activities.”
Under New York State Banking Law, New York State-chartered stock-form commercial banks may declare and pay
dividends out of its net profits, unless there is an impairment of capital, but approval of the NYDFS Superintendent (the
“Superintendent”) is required if the total of all dividends declared by the bank in a calendar year would exceed the total of its
net profits for that year combined with its retained net profits for the preceding two years less prior dividends paid.
New York State Banking Law gives the Superintendent authority to issue an order to a New York State-chartered
banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices, and to
keep prescribed books and accounts. Upon a finding by the NYDFS that any director, trustee, or officer of any banking
organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking
organization after having been notified by the Superintendent to discontinue such practices, such director, trustee, or officer
may be removed from office after notice and opportunity to be heard. The Superintendent also has authority to appoint a
conservator or a receiver for a savings or commercial bank under certain circumstances.
In addition, on February 16, 2017, the NYDFS issued the final version of its cybersecurity regulation, which has an
effective date of March 1, 2017. The regulation, which is detailed and broad in scope, covers five basic areas.
Governance: The regulation requires senior management and boards of directors must adopt a cybersecurity policy
for protecting information systems and most sensitive information. Covered companies must also designate a Chief Information
Security Officer, who must report to the board annually. The cybersecurity policy must be in place, and the security officer
designated, by August 28, 2017.
Testing: The regulation requires the conduct of cybersecurity tests and analyses, including a “risk assessment” to
“evaluate and categorize risks,” evaluate the integrity and confidentiality of information systems and non-public information,
and develop a process to mitigate any identified risks. These tests and assessments must be conducted by March 1, 2018.
Ongoing Requirements: The regulation imposes substantial day-to-day and technical requirements. Among others,
we must develop access controls for our information systems, ensure the physical security of our computer systems, encrypt or
protect personally identifiable information, perform reviews of in-house and externally created applications, train employees,
and build an audit trail system. The timeline to ensure compliance with these rules ranges from one year to eighteen months.
Vendors: The new regulation also regulates third-party vendors with access to our information technology or non-
public information. We will be required to develop and implement written policies and procedures to ensure the security of our
information technology systems or non-public information that can be accessed by our vendors, including identifying the risks
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from third-party access, imposing minimum cybersecurity practices for vendors, and creating a due-diligence process for
evaluating those vendors. We will have two years to satisfy these extensive requirements.
Reports: The new regulation imposes a notification process for any material cybersecurity event. Within 72 hours, a
cybersecurity event that has a “reasonable likelihood” of “materially harming” us or that must be reported to another
government or self-regulating agency must be reported to the NYDFS. In addition, an annual compliance certification to the
NYDFS from either the board or a senior officer is required.
FDIC Regulations
Capital Requirements. The FDIC has adopted risk-based capital guidelines to which the Bank is subject. The
guidelines establish a systematic analytical framework that makes regulatory capital requirements sensitive to differences in
risk profiles among banking organizations. The Bank is required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to regulatory risk-weighted assets is referred to as a “risk-
based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance-sheet items to risk-
weighted categories ranging from 0% to 1,250%, with higher levels of capital being required for the categories perceived as
representing greater risk.
These guidelines divide an institution’s capital into two tiers. The first tier (“Tier 1”) includes common equity, retained
earnings, certain non-cumulative perpetual preferred stock (excluding auction rate issues), and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and other intangible assets (except mortgage servicing rights and purchased
credit card relationships subject to certain limitations). Supplementary (“Tier 2”) capital includes, among other items,
cumulative perpetual and long-term limited-life preferred stock, mandatorily convertible securities, certain hybrid capital
instruments, term subordinated debt, and the ALL, subject to certain limitations, and up to 45% of pre-tax net unrealized gains
on equity securities with readily determinable fair market values, less required deductions. See “Prompt Corrective Action”
below.
The regulatory capital regulations of the FDIC and other federal banking agencies provide that the agencies will take
into account the exposure of an institution’s capital and economic value to changes in interest rate risk in assessing capital
adequacy. According to such agencies, applicable considerations include the quality of the institution’s interest rate risk
management process, overall financial condition, and the level of other risks at the institution for which capital is needed.
Institutions with significant interest rate risk may be required to hold additional capital. The agencies have issued a joint policy
statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the
agencies’ evaluation of interest rate risk in connection with capital adequacy. Institutions that engage in specified amounts of
trading activity may be subject to adjustments in the calculation of the risk-based capital requirement to assure sufficient
additional capital to support market risk.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe, for the depository
institutions under its jurisdiction, standards that relate to, among other things, internal controls; information and audit systems;
loan documentation; credit underwriting; the monitoring of interest rate risk; asset growth; compensation; fees and benefits;
and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted
final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness (the “Guidelines”) to implement
these safety and soundness standards. The Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the
appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the
agency may require the institution to provide it with an acceptable plan to achieve compliance with the standard, as required
by the Federal Deposit Insurance Act, as amended, (the “FDI Act”). The final regulations establish deadlines for the submission
and review of such safety and soundness compliance plans.
Real Estate Lending Standards. The FDIC and the other federal banking agencies have adopted regulations that
prescribe standards for extensions of credit that are (i) secured by real estate, or (ii) made for the purpose of financing
construction or improvements on real estate. The FDIC regulations require each institution to establish and maintain written
internal real estate lending standards that are consistent with safe and sound banking practices, and appropriate to the size of
the institution and the nature and scope of its real estate lending activities. The standards also must be consistent with
accompanying FDIC guidelines, which include loan-to-value limitations for the different types of real estate loans. Institutions
are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as
such exceptions are reviewed and justified appropriately. The FDIC guidelines also list a number of lending situations in which
exceptions to the loan-to-value standard are justified.
Dividend Limitations. The FDIC has authority to use its enforcement powers to prohibit a commercial bank from
paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law
33
prohibits the payment of dividends that will result in the institution failing to meet applicable capital requirements on a pro
forma basis. The Bank is also subject to dividend declaration restrictions imposed by New York State law as previously
discussed under “New York State Law.”
Investment Activities. Since the enactment of FDICIA, all state-chartered financial institutions, including commercial
banks and their subsidiaries, have generally been limited to such activities as principal and equity investments of the type, and
in the amount, authorized for national banks. State law, FDICIA, and FDIC regulations permit certain exceptions to these
limitations. In addition, the FDIC is authorized to permit institutions to engage in state-authorized activities or investments not
permitted for national banks (other than non-subsidiary equity investments) for institutions that meet all applicable capital
requirements if it is determined that such activities or investments do not pose a significant risk to the insurance fund. The
Gramm-Leach-Bliley Act of 1999 and FDIC regulations impose certain quantitative and qualitative restrictions on such
activities and on a bank’s dealings with a subsidiary that engages in specified activities.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory
authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For
such purposes, the law establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement prompt corrective action. Among other things, the regulations define
the relevant capital measures for the five capital categories. An institution is deemed to be “well capitalized” if it has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a common equity Tier 1 risk-based
capital ratio of 6.5% and a leverage capital ratio of 5% or greater, and is not subject to a regulatory order, agreement, or directive
to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately capitalized” if
it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a common equity Tier
1 risk-based capital ratio of 4.5% or greater and a leverage capital ratio of 4% or greater. An institution is deemed to be
“undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a
common equity Tier 1 risk-based capital ratio of less than 4.5% or a leverage capital ratio of less than 4%. An institution is
deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital
ratio of less than 4% a common equity Tier 1 risk-based capital ratio of less than 3%, or a leverage capital ratio of less than
3%. An institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations)
to total assets that is equal to or less than 2%. For a summary of the regulatory capital ratios of the Bank at December 31, 2017,
see “Note 14 of Notes to Consolidated Financial Statements” in Item 8 of this Annual Report. An institution may be
downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be
in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s
capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category
may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
Insurance of Deposit Accounts. The Dodd-Frank Act made permanent the standard maximum amount of FDIC deposit
insurance at $250,000 per depositor. In addition, the deposits of the Bank are insured up to applicable limits by the DIF. In
this regard, insured depository institutions are required to pay quarterly deposit insurance assessments to the DIF. Assessments
are based on average total assets minus average tangible equity. Through the second quarter of 2016, the assessment rate was
determined through a risk-based system. For depository institutions with less than $10 billion in assets, such as the Bank, under
the FDIC’s risk-based assessment system, insured institutions were assigned to one of four risk categories based upon
supervisory evaluations, regulatory capital level, and certain other factors, with less risky institutions paying lower assessments.
Through the second quarter of 2016, an institution’s assessment rate depended upon the category to which it was assigned and
certain other factors. The initial base assessment rate ranged from five to 35 basis points on an annualized basis. The initial
base assessment rate decreased depending on the institution's ratio of long-term unsecured debt to its assessment base (with
such decrease not to exceed the lesser of five basis points or 50% of the initial base assessment rate) and, for institutions not in
the highest risk category, increased if the institution's brokered deposits are more than ten percent of its domestic deposits (with
such increase not to exceed ten basis points). Through the second quarter of 2016, the total base assessment rate was therefore
from 2.5 to 45 basis points on an annualized basis.
Under a final rule adopted in April 2016, effective in the third quarter of 2016, the risk based system was amended
for banks with less than $10.0 billion in assets that have been FDIC-insured for at least five years. The final rule replaced the
four risk categories for determining such a bank's assessment rate with a financial ratios method based on a statistical model
estimating the bank's probability of failure over three years utilizing seven financial ratios (leverage ratio; net income before
taxes/total assets; nonperforming loans and leases/gross assets; other real estate owned/gross assets; brokered deposit ratio; one
year asset growth; and loan mix index) and a weighted average of supervisory ratings components. The final rule also eliminated
the brokered deposit downward adjustment factor for such banks' assessment rates, providing a new brokered deposit ratio
applicable to all small banks, whereby brokered deposits in excess of 10% of total assets (inclusive of reciprocal deposits if a
34
bank is not well capitalized or has a composite supervisory rating other than a 1 or 2) as a result of which assessment rates may
be increased for banks which experience rapid growth; lowers the range of assessment rates authorized to 1.5 basis points for
an institution posing the least risk, to 40 basis points for an institution posing the most risk; and will further lower the range of
assessment rates if the reserve ratio of the DIF increases to 2% or more. Banks with over $10.0 billion in assets are required to
pay a surcharge of 4.5 basis points on their assessment basis, subject to certain adjustments. The FDIC may also impose special
assessments from time to time. At December 31, 2017, the Bank had $1,090.0 million in brokered deposit accounts.
FDIC deposit insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”)
assessments related to outstanding bonds issued by FICO in the late 1980s to recapitalize the now defunct Federal Savings &
Loan Insurance Corporation. The Bank paid $289,000, $297,000 and $278,000 for their share of the interest due on FICO
bonds in 2017, 2016 and 2015, respectively, which is included in FDIC insurance expense. These payments, which generally
approximate 10% of the Bank's annual FDIC insurance payments, will continue until those bonds mature through 2019.
Transactions with Affiliates
Under current federal law, transactions between depository institutions and their affiliates are governed by Sections
23A and 23B of the Federal Reserve Act and the FRB’s Regulation W promulgated thereunder. An affiliate of a commercial
bank is any company or entity that controls, is controlled by, or is under common control with, the institution, other than a
subsidiary. Generally, an institution’s subsidiaries are not treated as affiliates unless they are engaged in activities as principal
that are not permissible for national banks. In a holding company context, at a minimum, the parent holding company of an
institution, and any companies that are controlled by such parent holding company, are affiliates of the institution. Generally,
Section 23A limits the extent to which the institution or its subsidiaries may engage in “covered transactions” with any one
affiliate to an amount equal to 10% of the institution’s capital stock and surplus, and contains an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The term “covered transaction”
includes the making of loans or other extensions of credit to an affiliate; the purchase of assets from an affiliate; the purchase
of, or an investment in, the securities of an affiliate; the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Section 23A
also establishes specific collateral requirements for loans or extensions of credit to, or guarantees or acceptances on letters of
credit issued on behalf of, an affiliate. Section 23B requires that covered transactions and a broad list of other specified
transactions be on terms substantially the same as, or at least as favorable to, the institution or its subsidiary as similar
transactions with non-affiliates.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by the Company to its executive officers and directors.
However, the Sarbanes-Oxley Act contains a specific exemption for loans by an institution to its executive officers and directors
in compliance with federal banking laws. Section 22(h) of the Federal Reserve Act, and FRB Regulation O adopted thereunder,
governs loans by a savings bank or commercial bank to directors, executive officers, and principal shareholders. Under
Section 22(h), loans to directors, executive officers, and shareholders who control, directly or indirectly, 10% or more of voting
securities of an institution, and certain related interests of any of the foregoing, may not exceed, together with all other
outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Section 22(h) also prohibits
loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and shareholders
who control 10% or more of the voting securities of an institution, and its respective related interests, unless such loan is
approved in advance by a majority of the board of the institution’s directors. Any “interested” director may not participate in
the voting. The loan amount (which includes all other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or any loans aggregating over $500,000. Further,
pursuant to Section 22(h), loans to directors, executive officers, and principal shareholders must be made on terms substantially
the same as those offered in comparable transactions to other persons. There is an exception for loans made pursuant to a benefit
or compensation program that is widely available to all employees of the institution and does not give preference to executive
officers over other employees. Section 22(g) of the Federal Reserve Act places additional limitations on loans to executive
officers.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, an
institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop the types of products
and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC,
in connection with its examinations, to assess the institution’s record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such institution. The CRA requires public disclosure of an
institution’s CRA rating and further requires the FDIC to provide a written evaluation of an institution’s CRA performance
35
utilizing a four-tiered descriptive rating system. The Bank received a CRA rating of “Satisfactory” in its most recent completed
CRA examination, which was completed as of April 16, 2015. Institutions that receive less than a satisfactory rating may face
difficulties in securing approval for new activities or acquisitions. The CRA requires all institutions to make public disclosures
of their CRA ratings.
New York State Regulation. The Bank is also subject to provisions of the New York State Banking Law that impose
continuing and affirmative obligations upon a banking institution organized in New York State to serve the credit needs of its
local community (the “NYCRA”). Such obligations are substantially similar to those imposed by the CRA. The NYCRA
requires the NYDFS to make a periodic written assessment of an institution’s compliance with the NYCRA, utilizing a four-
tiered rating system, and to make such assessment available to the public. The NYCRA also requires the Superintendent to
consider the NYCRA rating when reviewing an application to engage in certain transactions, including mergers, asset
purchases, and the establishment of branch offices or ATMs, and provides that such assessment may serve as a basis for the
denial of any such application.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain cash reserves against its transaction accounts (primarily interest-
bearing demand deposit accounts and demand deposit accounts). The FRB regulations generally require that reserves be
maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating between
$16.0 million and $122.3 million (subject to adjustment by the FRB), the reserve requirement is 3%; for amounts greater than
$122.3 million, the reserve requirement is 10% (subject to adjustment by the FRB between 8% and 14%). The first $16.0
million of otherwise reservable balances (subject to adjustments by the FRB) are exempted from the reserve requirements. The
Bank is in compliance with the foregoing requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLB-NY, one of 11 regional FHLBs comprising the FHLB system. Each regional
FHLB manages its customer relationships, while the 11 FHLBs use its combined size and strength to obtain its necessary
funding at the lowest possible cost. As a member of the FHLB-NY, the Bank is required to acquire and hold shares of FHLB-
NY capital stock. Pursuant to this requirement, at December 31, 2017, the Bank was required to maintain $60.1 million of
FHLB-NY stock.
Holding Company Regulations
The Company is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of
1956, as amended (the “BHCA”), as administered by the FRB. The Company is required to obtain the prior approval of the
FRB to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior FRB approval would be
required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of
voting shares of such bank or bank holding company. In addition before any bank acquisition can be completed, prior approval
thereof may also be required to be obtained from other agencies having supervisory jurisdiction over the bank to be acquired,
including the NYDFS.
FRB regulations generally prohibit a bank holding company from engaging in, or acquiring, direct or indirect control
of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to
this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling Bank as to be
a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be so closely related to
banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage
services; (iv) acting as fiduciary, investment, or financial advisor; (v) leasing personal or real property; (vi) making investments
in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan
association.
The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis). At December
31, 2016, the Company’s consolidated capital exceeded these requirements. The Dodd-Frank Act required the FRB to issue
consolidated regulatory capital requirements for bank holding companies that are at least as stringent as those applicable to
insured depository institutions. Such regulations eliminated the use of certain instruments, such as cumulative preferred stock
and trust preferred securities, as Tier 1 holding company capital.
Bank holding companies are generally required to give the FRB prior written notice of any purchase or redemption of
its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to 10% or more of the
Company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal
36
would constitute an unsafe or unsound practice, or would violate any law, regulation, FRB order or directive, or any condition
imposed by, or written agreement with, the FRB. The FRB has adopted an exception to this approval requirement for well-
capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general,
the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings
retention by the bank holding company appears consistent with the organization’s capital needs, asset quality, and overall
financial condition. The FRB’s policies also require that a bank holding company serve as a source of financial strength to its
subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods
of financial stress or adversity, and by maintaining the financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codifies the source of financial strength
policy and requires regulations to facilitate its application. Under the prompt corrective action laws, the ability of a bank holding
company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could
affect the ability of the Company to pay dividends or otherwise engage in capital distributions.
Under the FDI Act, a depository institution may be liable to the FDIC for losses caused the DIF if a commonly
controlled depository institution were to fail. The Bank is commonly controlled within the meaning of that law.
The status of the Company as a registered bank holding company under the BHCA does not exempt it from certain
federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of
the federal securities laws.
The Company, the Bank, and their respective affiliates will be affected by the monetary and fiscal policies of various
agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is difficult for management to accurately predict future changes in monetary policy or
the effect of such changes on the business or financial condition of the Company or the Bank.
Acquisition of the Holding Company
Under the Federal Change in Bank Control Act (“CIBCA”), a notice must be submitted to the FRB if any person
(including a company), or group acting in concert, seeks to acquire 10% or more of the Company’s shares of outstanding
common stock, unless the FRB has found that the acquisition will not result in a change in control of the Company. Under the
CIBCA, the FRB generally has 60 days within which to act on such notices, taking into consideration certain factors, including
the financial and managerial resources of the acquirer; the convenience and needs of the communities served by the Company
and the Bank; and the anti-trust effects of the acquisition. Under the BHCA, any company would be required to obtain approval
from the FRB before it may obtain “control” of the Company within the meaning of the BHCA. Control generally is defined
to mean the ownership or power to vote 25% or more of any class of voting securities of the Company or the ability to control
in any manner the election of a majority of the Company’s directors. An existing bank holding company would, under the
BHCA, be required to obtain the FRB’s approval before acquiring more than 5% of the Company’s voting stock. In addition
to the CIBCA and the BHCA, New York State Banking Law generally requires prior approval of the New York State Banking
Board before any action is taken that causes any company to acquire direct or indirect control of a banking institution that is
organized in New York.
Consumer Financial Protection Bureau
Created under the Dodd-Frank Act, and given extensive implementation and enforcement powers, the CFPB has broad
rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the
authority to prohibit “unfair, deceptive, or abusive” acts and practices. Abusive acts or practices are defined as those that
(1) materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service,
or (2) take unreasonable advantage of a consumer’s (a) lack of financial savvy, (b) inability to protect himself in the selection
or use of consumer financial products or services, or (c) reasonable reliance on a covered entity to act in the consumer’s
interests. The CFPB has the authority to investigate possible violations of federal consumer financial law, hold hearings and
commence civil litigation. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer
financial laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in
order to impose a civil penalty or an injunction.
Mortgage Banking and Related Consumer Protection Regulations
The retail activities of the Bank, including lending and the acceptance of deposits, are subject to a variety of statutes
and regulations designed to protect consumers. Interest and other charges collected or contracted for by the Bank are subject
to state usury laws and federal laws concerning interest rates. Loan operations are also subject to federal laws applicable to
credit transactions, such as:
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• The federal Truth-In-Lending Act and Regulation Z issued by the FRB, governing disclosures of credit terms to
consumer borrowers;
• The Home Mortgage Disclosure Act and Regulation C issued by the FRB, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves;
• The Equal Credit Opportunity Act and Regulation B issued by the FRB, prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending credit;
• The Fair Credit Reporting Act and Regulation V issued by the FRB, governing the use and provision of information
to consumer reporting agencies;
• The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection
agencies; and
• The guidance of the various federal agencies charged with the responsibility of implementing such federal laws.
Deposit operations also are subject to:
• The Truth in Savings Act and Regulation DD issued by the FRB, which requires disclosure of deposit terms to
consumers;
• Regulation CC issued by the FRB, which relates to the availability of deposit funds to consumers;
• The Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records; and
• The Electronic Funds Transfer Act and Regulation E issued by the FRB, which governs automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
In addition, the Bank and its subsidiaries may also be subject to certain state laws and regulations designed to protect
consumers.
Many of the foregoing laws and regulations are subject to change resulting from the provisions in the Dodd-Frank
Act, which in many cases calls for revisions to implementing regulations. In addition, oversight responsibilities of these and
other consumer protection laws and regulations will, in large measure, transfer from the Bank’s primary regulators to the CFPB.
We cannot predict the effect that being regulated by a new, additional regulatory authority focused on consumer financial
protection, or any new implementing regulations or revisions to existing regulations that may result from the establishment of
this new authority, will have on our businesses.
Available Information
We are a reporting company and file annual, quarterly and current reports, proxy statements and other information
with the SEC. We make available free of charge on or through our web site at www.flushingbank.com our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. Our SEC filings are also available to the public free of charge
over the Internet at the SEC’s web site at http://www.sec.gov.
You may also read and copy any document we file at the SEC’s public reference room located at 100 F. Street, N.E.,
Room 1580, Washington, D.C. 20549. You may obtain information about the operation of the public reference room by calling
the SEC at 1-800-SEC-0330. You may request copies of these documents by writing to the SEC and paying a fee for the
copying cost.
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Item 1A. Risk Factors.
In addition to the other information contained in this Annual Report, the following factors and other considerations
should be considered carefully in evaluating us and our business.
Changes in Interest Rates May Significantly Impact Our Financial Condition and Results of Operations
Like most financial institutions, our results of operations depend to a large degree on our net interest income. When
interest-bearing liabilities mature or reprice more quickly than interest-earning assets, a significant increase in market interest
rates could adversely affect net interest income. Conversely, a significant decrease in market interest rates could result in
increased net interest income. As a general matter, we seek to manage our business to limit our overall exposure to interest rate
fluctuations. However, fluctuations in market interest rates are neither predictable nor controllable and may have a material
adverse impact on our operations and financial condition. Additionally, in a rising interest rate environment, a borrower’s
ability to repay adjustable rate mortgages can be negatively affected as payments increase at repricing dates.
Prevailing interest rates also affect the extent to which borrowers repay and refinance loans. In a declining interest
rate environment, the number of loan prepayments and loan refinancing may increase, as well as prepayments of mortgage-
backed securities. Call provisions associated with our investment in U.S. government agency and corporate securities may also
adversely affect yield in a declining interest rate environment. Such prepayments and calls may adversely affect the yield of
our loan portfolio and mortgage-backed and other securities as we reinvest the prepaid funds in a lower interest rate
environment. However, we typically receive additional loan fees when existing loans are refinanced, which partially offset the
reduced yield on our loan portfolio resulting from prepayments. In periods of low interest rates, our level of core deposits also
may decline if depositors seek higher-yielding instruments or other investments not offered by us, which in turn may increase
our cost of funds and decrease our net interest margin to the extent alternative funding sources are utilized. An increasing
interest rate environment would tend to extend the average lives of lower yielding fixed rate mortgages and mortgage-backed
securities, which could adversely affect net interest income. In addition, depositors tend to open longer term, higher costing
certificate of deposit accounts which could adversely affect our net interest income if rates were to subsequently decline.
Additionally, adjustable rate mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that
limit the amount the interest rate can increase or decrease at repricing dates. Significant increases in prevailing interest rates
may significantly affect demand for loans and the value of bank collateral. See “— Local Economic Conditions.”
Our Lending Activities Involve Risks that May Be Exacerbated Depending on the Mix of Loan Types
At December 31, 2017, our gross loan portfolio was $5,160.2 million, of which 85.3% was mortgage loans secured
by real estate. The majority of these real estate loans were secured by multi-family residential property ($2,273.6 million),
commercial real estate ($1,368.1 million) and one-to-four family mixed-use property ($564.2 million), which combined
represent 81.5% of our loan portfolio. Our loan portfolio is concentrated in the New York City metropolitan area. Multi-family
residential, one-to-four family mixed-use property, commercial real estate mortgage loans, and construction loans, are generally
viewed as exposing the lender to a greater risk of loss than fully underwritten one-to-four family residential mortgage loans
and typically involve higher principal amounts per loan. Multi-family residential, one-to-four family mixed-use property and
commercial real estate mortgage loans are typically dependent upon the successful operation of the related property, which is
usually owned by a legal entity with the property being the entity’s only asset. If the cash flow from the property is reduced,
the borrower’s ability to repay the loan may be impaired. If the borrower defaults, our only remedy may be to foreclose on the
property, for which the market value may be less than the balance due on the related mortgage loan. We attempt to mitigate
this risk by generally requiring a loan-to-value ratio of no more than 75% at a time the loan is originated, except for one-to-
four family residential mortgage loans, where we require a loan-to value ratio of no more than 80%. Repayment of construction
loans is contingent upon the successful completion and operation of the project. The repayment of commercial business loans
(the increased origination of which is part of management’s strategy), is contingent on the successful operation of the related
business. Changes in local economic conditions and government regulations, which are outside the control of the borrower or
lender, also could affect the value of the security for the loan or the future cash flow of the affected properties. We continually
review the composition of our mortgage loan portfolio to manage the risk in the portfolio.
In addition, prior to 2010, we have originated one-to-four family residential mortgage loans without verifying the
borrower’s level of income. These loans involve a higher degree of risk as compared to our other fully underwritten one-to-
four family residential mortgage loans. These risks are mitigated by our policy to generally limit the amount of one-to-four
family residential mortgage loans to 80% of the appraised value or sale price, whichever is less, as well as charging a higher
interest rate than when the borrower’s income is verified. At December 31, 2017, we had $6.0 million outstanding of one-to-
four family residential properties originated to individuals based on stated income and verifiable assets, and $31.9 million
advanced on home equity lines of credit for which we did not verify the borrower’s income. The total loans for which we did
not verify the borrower’s income at December 31, 2017 was $37.9 million, or 0.6% of gross loans. These types of loans are
generally referred to as “Alt A” loans since the borrower’s income was not verified. These loans are not as readily saleable in
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the secondary market as our other fully underwritten loans, either as whole loans or when pooled or securitized. We no longer
originate one-to-four family residential mortgage loans or home equity lines of credit to individuals without verifying their
income. We have not originated, nor do we hold in portfolio, any subprime loans.
Even in stable economic times, higher default rates may be expected for Alt A and similar loans. Although we
attempted to incorporate the higher default rates associated with these loans into our pricing models, there can be no assurance
that the premiums earned and the associated investment income will prove adequate to compensate for future losses from these
loans. Worsening economic conditions, rising unemployment rates and/or other regional real estate price declines could even
more significantly increase the default risks associated with these loans. In addition, these same negative economic and market
conditions could also significantly increase the default risk on loans for which we did not assume higher default and claim
rates.
In assessing our future earnings prospects, investors should consider, among other things, our level of origination of
one-to-four family residential, multi-family residential, commercial real estate and one-to-four family mixed-use property
mortgage loans, and commercial business and construction loans, and the greater risks associated with such loans. See
“Business — Lending Activities” in Item 1 of this Annual Report.
Failure to Effectively Manage Our Liquidity Could Significantly Impact Our Financial Condition and Results of
Operations
Our liquidity is critical to our ability to operate our business. Our primary sources of liquidity are deposits, both retail
deposits from our branch network including our Internet Branch, brokered deposits, and borrowed funds, primarily wholesale
borrowing from the FHLB-NY. Funds are also provided by the repayment and sale of securities and loans. Our ability to obtain
funds are influenced by many external factors, including but not limited to, local and national economic conditions, the direction
of interest rates and competition for deposits in the markets we serve. Additionally, changes in the FHLB-NY underwriting
guidelines may limit or restrict our ability to borrow. A decline in available funding caused by any of the above factors or could
adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill our obligations such as repaying
our borrowings or meeting deposit withdrawal demands.
Our Ability to Obtain Brokered Deposits as an Additional Funding Source Could be Limited
We utilize brokered deposits as an additional funding source and to assist in the management of our interest rate risk.
The Bank had $1,090.0 million, or 25.1% of total deposits, and $1,114.9 million, or 26.5% of total deposits, in brokered deposit
accounts at December 31, 2017 and 2016, respectively. We have obtained brokered certificates of deposit when the interest
rate on these deposits is below the prevailing interest rate for non-brokered certificates of deposit with similar maturities in our
market, or when obtaining them allowed us to extend the maturities of our deposits at favorable rates compared to borrowing
funds with similar maturities, when we are seeking to extend the maturities of our funding to assist in the management of our
interest rate risk. Brokered certificates of deposit provide a large deposit for us at a lower operating cost as compared to non-
brokered certificates of deposit since we only have one account to maintain versus several accounts with multiple interest and
maturity checks. Unlike non-brokered certificates of deposit where the deposit amount can be withdrawn with a penalty for
any reason, including increasing interest rates, a brokered certificate of deposit can only be withdrawn in the event of the death
or court declared mental incompetence of the depositor. This allows us to better manage the maturity of our deposits and our
interest rate risk. We also utilize brokers to obtain money market account deposits. The rate we pay on brokered money market
accounts is similar to the rate we pay on non-brokered money market accounts, and the rate is agreed to in a contract between
the Bank and the broker. These accounts are similar to brokered certificates of deposit accounts in that we only maintain one
account for the total deposit per broker, with the broker maintaining the detailed records of each depositor. Additionally, we
place a portion of our government deposits in an ICS brokered money market product which does not require us to provide
collateral. This allows us to invest our funds in higher yielding assets. The Bank had $704.9 million and $655.0 million in
brokered money market accounts at December 31, 2017 and 2016, respectively. The Bank also had $4.7 million and $1.1
million in brokered checking accounts at December 31, 2017 and 2016, respectively.
The FDIC has promulgated regulations implementing limitations on brokered deposits. Under the regulations, well-
capitalized institutions, such as the Bank, are not subject to brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to restrictions
on the interest rate that can be paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits.
Pursuant to the regulation, the Bank, as a well-capitalized institution, may accept brokered deposits. Should our capital ratios
decline, this could limit our ability to replace brokered deposits when they mature.
The maturity of brokered certificates of deposit could result in a significant funding source maturing at one time.
Should this occur, it might be difficult to replace the maturing certificates with new brokered certificates of deposit. We have
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used brokers to obtain these deposits which results in depositors with whom we have no other relationships since these
depositors are outside of our market, and there may not be a sufficient source of new brokered certificates of deposit at the time
of maturity. In addition, upon maturity, brokers could require us to offer some of the highest interest rates in the country to
retain these deposits, which would negatively impact our earnings. The Bank mitigates this risk by obtaining brokered
certificates of deposit with various maturities ranging up to six years, and attempts to avoid having a significant amount
maturing in any one year.
The Markets in Which We Operate Are Highly Competitive
We face intense and increasing competition both in making loans and in attracting deposits. Our market area has a
high density of financial institutions, many of which have greater financial resources, name recognition and market presence
than us, and all of which are our competitors to varying degrees. Particularly intense competition exists for deposits and in all
of the lending activities we emphasize. Our competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, mortgage banking companies, insurance companies, finance companies and credit unions.
Management anticipates that competition for mortgage loans will continue to increase in the future. Our most direct competition
for deposits historically has come from savings banks, commercial banks, savings and loan associations and credit unions. In
addition, we face competition for deposits from products offered by brokerage firms, insurance companies and other financial
intermediaries, such as money market and other mutual funds and annuities. Consolidation in the banking industry and the
lifting of interstate banking and branching restrictions have made it more difficult for smaller, community-oriented banks, such
as us, to compete effectively with large, national, regional and super-regional banking institutions. Our Internet Branch provides
us access to consumers in markets outside our geographic locations. The internet banking arena exposes us to competition with
many larger financial institutions that have greater financial resources, name recognition and market presence than we do.
Our Results of Operations May Be Adversely Affected by Changes in National and/or Local Economic Conditions
Our operating results are affected by national and local economic and competitive conditions, including changes in
market interest rates, the strength of the local economy, government policies and actions of regulatory authorities. During the
Great Recession, for example, unemployment increased, the housing market in the United States experienced a significant
slowdown, and foreclosures rose. Adverse economic conditions can result in borrowers defaulting on their loans, or
withdrawing their funds on deposit at the Bank to meet their financial obligations. A decline in the local or national economy
or the New York City metropolitan area real estate market could adversely affect our financial condition and results of
operations, including through decreased demand for loans or increased competition for good loans, increased non-performing
loans and loan losses and resulting additional provisions for loan losses and for losses on real estate owned. Many factors could
require additions to the ALL in future periods above those currently maintained. These factors include: (1) adverse changes in
economic conditions and changes in interest rates that may affect the ability of borrowers to make payments on loans, (2)
changes in the financial capacity of individual borrowers, (3) changes in the local real estate market and the value of our loan
collateral, and (4) future review and evaluation of our loan portfolio, internally or by regulators. The amount of the ALL at any
time represents good faith estimates that are susceptible to significant changes due to changes in appraisal values of collateral,
national and local economic conditions, prevailing interest rates and other factors. See “Business — General — Allowance for
Loan Losses” in Item 1 of this Annual Report.
These same factors could cause delinquencies to increase for the mortgages which are the collateral for the mortgage-
backed securities we hold in our investment portfolio. Combining increased delinquencies with liquidity problems in the market
could result in a decline in the market value of our investments in privately issued mortgage-backed securities. There can be
no assurance that a decline in the market value of these investments will not result in other-than-temporary impairment charges
in our financial statements.
Changes in Laws and Regulations Could Adversely Affect Our Business
From time to time, legislation, such as the Dodd-Frank Act, is enacted or regulations are promulgated that have the
effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance
between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and
taxation of banks and other financial institutions are frequently made in Congress, in the New York legislature and before
various bank regulatory agencies. In particular, on February 3, 2017, President Trump signed an executive order requiring a
comprehensive review of financial system regulations, including the Dodd-Frank Act. President Trump has promised other
significant changes to financial system regulations. Nonetheless, changes to these regulations are expected to be politically
controversial and may be slow and unpredictable in enactment and effect. It is too early to predict when or what, if any, existing
regulations affecting us will be repealed or amended and what if any new regulations affecting us will be adopted, leaving the
bank regulatory environment particularly uncertain at present. Further, there can be no assurance as to the impact that any laws,
regulations or governmental programs that may be introduced or implemented in the future will have on the financial markets
41
and the economy. For a discussion of regulations affecting us, see “Business —Regulation” and “Business—Federal, State and
Local Taxation” in Item 1 of this Annual Report.
Current Conditions in, and Regulation of, the Banking Industry May Have a Material Adverse Effect on Our
Results of Operations
Financial institutions have been the subject of significant legislative and regulatory changes, including the adoption
of The Dodd Frank Act, which imposes a wide variety of regulations affecting us, and may be the subject of further significant
legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in,
or repeals of, existing laws or regulations, including those with respect to federal and state taxation, may cause our results of
operations to differ materially. In addition, the cost and burden of compliance, over time, have significantly increased and
could adversely affect our ability to operate profitably.
The Bank faces several minimum capital requirements imposed by federal regulation. Failure to adhere to these
minimums could limit the dividends the Bank is allowed to pay, including the payment of dividends to the Holding Company,
and could limit the annual growth of the Bank. Under the Dodd Frank Act, banks with assets greater than $10.0 billion in total
assets are required to complete stress tests, which predict capital levels under certain stress levels. Although, our total assets
are currently $6.3 billion, as a best practice, we completed these tests. As of December 31, 2017, under all stress scenarios, we
remained well capitalized per current regulations. See “Regulation.” At the New York State level, the Company and the Bank
are subject to extensive supervision, regulation and examination by the NYDFS and the FDIC. Such regulation limits the
manner in which the Company and Bank conduct business, undertake new investments and activities and obtain financing.
This regulation is designed primarily for the protection of the deposit insurance funds and the Bank's depositors, and not to
benefit the Bank or its creditors. The regulatory structure also provides the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with respect to capital
levels, the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Failure to
comply with applicable laws and regulations could subject the Company and Bank to regulatory enforcement action that could
result in the assessment of significant civil money penalties against the Company and Bank.
The fiscal and monetary policies of the federal government and its agencies could have a material adverse effect on
the Company's results of operations. The Federal Reserve regulates the supply of money and credit in the United States. Its
policies determine in significant part the cost of funds for lending and investing and the return earned on those loans and
investments, both of which affect the Company's net interest margin. Governmental policies can also adversely affect
borrowers, potentially increasing the risk that they may fail to repay their loans. Changes in Federal Reserve or governmental
policies are beyond the Company's control and difficult to predict; consequently, the impact of these changes on the Company's
activities and results of operations is difficult to predict.
As noted above, financial institution regulation has been the subject of significant legislation in recent years, and may
be the subject of further significant legislation in the future, especially in light of the uncertainty of initiatives suggested by the
Trump administration in the context of a Republican-controlled Congress, none of which is within the control of the Company
or the Bank. Significant new laws or changes in, or repeals of, existing laws, may cause the Company's results of operations to
differ materially. Further, federal monetary policy significantly affects credit conditions for the Company, primarily through
open market operations in United States government securities, the discount rate for bank borrowings and reserve requirements
for liquid assets. A material change in any of these conditions could have a material adverse impact on the Bank, and therefore,
on the Company's results of operations.
A Failure in or Breach of Our Operational or Security Systems or Infrastructure, or Those of Our Third Party Vendors
and Other Service Providers, Including as a Result of Cyber Attacks, Could Disrupt Our Business, Result in the
Disclosure or Misuse of Confidential or Proprietary Information, Damage Our Reputation, Increase Our Costs and
Cause Losses
We depend upon our ability to process, record and monitor our client transactions on a continuous basis. As client,
public and regulatory expectations regarding operational and information security have increased, our operational systems and
infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business,
financial, accounting and data processing systems, or other operating systems and facilities, may stop operating properly or
become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our control.
For example, there could be electrical or telecommunications outages; natural disasters such as earthquakes, tornadoes and
hurricanes; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and,
as described below, cyber-attacks. Although we have business continuity plans and other safeguards in place, our business
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operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating
systems that support our business and clients.
Information security risks for financial institutions such as ours have generally increased in recent years in part because
of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial
transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external
parties. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in
our computer systems and networks. Our business relies on our digital technologies, computer and email systems, software and
networks to conduct its operations. In addition, to access our products and services, our clients may use personal smartphones,
tablet PC’s, personal computers and other mobile devices that are beyond our control systems. Although we have information
security procedures and controls in place, our technologies, systems, networks and our clients’ devices may become the target
of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse,
loss or destruction of our or our clients’ confidential, proprietary and other information, or otherwise disrupt our or our clients’
or other third parties’ business operations.
Third parties with whom we do business or that facilitate our business activities, including financial intermediaries or
vendors that provide services or security solutions for our operations, could also be sources of operational and information
security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
Although to date we have not experienced any material losses relating to cyber-attacks or other information security
breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters
remains heightened because of the evolving nature of these threats. As a result, cyber security and the continued development
and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and
networks from attack, damage or unauthorized access remain a focus for us. As threats continue to evolve, we may be required
to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate
information security vulnerabilities.
Disruptions or failures in the physical infrastructure or operating systems that support our business and clients, or
cyber-attacks or security breaches of the networks, systems or devices that our clients use to access our products and services
could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other
compensation costs and/or additional compliance costs, any of which could materially and adversely affect our financial
condition or results of operations.
In addition, on February 16, 2017, the NYDFS issued the final version of its cybersecurity regulation, which has an
effective date of March 1, 2017. The regulation, which is detailed and broad in scope, covers five basic areas.
Governance: The regulation requires senior management and boards of directors must adopt a cybersecurity policy
for protecting information systems and most sensitive information. Covered companies must also designate a Chief Information
Security Officer, who must report to the board annually. The cybersecurity policy must be in place, and the security officer
designated, by August 28, 2017.
Testing: The regulation requires the conduct of cybersecurity tests and analyses, including a “risk assessment” to
“evaluate and categorize risks,” evaluate the integrity and confidentiality of information systems and non-public information,
and develop a process to mitigate any identified risks. These tests and assessments must be conducted by March 1, 2018.
Ongoing Requirements: The regulation imposes substantial day-to-day and technical requirements. Among others,
we must develop access controls for our information systems, ensure the physical security of our computer systems, encrypt or
protect personally identifiable information, perform reviews of in-house and externally created applications, train employees,
and build an audit trail system. The timeline to ensure compliance with these rules ranges from one year to eighteen months.
Vendors: The new regulation also regulates third-party vendors with access to our information technology or non-
public information. We will be required to develop and implement written policies and procedures to ensure the security of our
information technology systems or non-public information that can be accessed by our vendors, including identifying the risks
from third-party access, imposing minimum cybersecurity practices for vendors, and creating a due-diligence process for
evaluating those vendors. We will have two years to satisfy these extensive requirements.
Reports: The new regulation imposes a notification process for any material cybersecurity event. Within 72 hours, a
cybersecurity event that has a “reasonable likelihood” of “materially harming” us or that must be reported to another
government or self-regulating agency must be reported to the NYDFS. In addition, an annual compliance certification to the
NYDFS from either the board or a senior officer is required.
In light of the newness of the cybersecurity regulation, it is impossible to determine the cost and other effects on us
of full and timely compliance. In addition to resources that may be required, in the event that we do not timely and fully comply,
43
we would be subject to enforcement and other consequences in addition to any other claims that might arise. There can be no
assurance that we will achieve full and timely compliance with the regulation, in which event our business mat be materially
adversely affected.
We May Experience Increased Delays in Foreclosure Proceedings
Foreclosure proceedings face increasing delays. While we cannot predict the ultimate impact of any delay in
foreclosure sales, we may be subject to additional borrower and non-borrower litigation and governmental and regulatory
scrutiny related to our past and current foreclosure activities. Delays in foreclosure sales, including any delays beyond those
currently anticipated could increase the costs associated with our mortgage operations and make it more difficult for us to
prevent losses in our loan portfolio.
We May Need to Recognize Other-Than-Temporary Impairment Charges in the Future
We conduct a periodic review and evaluation of the securities portfolio to determine if the decline in the fair value of
any security below its cost basis is other-than-temporary. Factors which we consider in our analysis include, but are not limited
to, the severity and duration of the decline in fair value of the security, the financial condition and near-term prospects of the
issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions, our intent and
ability to retain the security for a period of time sufficient to allow for any anticipated recovery in fair value and the likelihood
of any near-term fair value recovery. We generally view changes in fair value caused by changes in interest rates as temporary.
However, we have recorded other-than-temporary impairment charges on some securities in our portfolio. If we deem such
decline to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings
as a component of non-interest income.
We continue to monitor the fair value of our securities portfolio as part of our ongoing other-than-temporary
impairment evaluation process. There can be no assurance that we will not need to recognize other-than-temporary impairment
charges related to securities in the future.
Our Inability to Hire or Retain Key Personnel Could Adversely Affect Our Business
Our success depends, in large part, on our ability to retain and attract key personnel. We face intense competition from
commercial banks, savings banks, savings and loan associations, mortgage banking companies, insurance companies, finance
companies and credit unions. As a result, it could prove difficult to retain and attract key personnel. The inability to hire or
retain key personnel may result in the loss of customer relationships and may adversely affect our financial condition or results
of operations.
We Are Not Required to Pay Dividends on Our Common Stock
Holders of shares of our common stock are only entitled to receive such dividends as our Board of Directors may
declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common
stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. A reduction or
elimination of our common stock dividend could adversely affect the market price of our common stock.
Goodwill Recorded as a Result of Acquisitions Could Become Impaired, Negatively Impacting Our Earnings and
Capital
Goodwill is presumed to have an indefinite life and is tested annually, or when certain conditions are met, for
impairment. If the fair value of the reporting unit is greater than the goodwill amount, no further evaluation is required and no
impairment is recorded. If the fair value of the reporting unit is less than the goodwill amount, further evaluation would be
required to compare the fair value of the reporting unit to the goodwill amount and determine if a write down is required.
Management views the Company as operating as a single unit - a community bank. At December 31, 2017, we had goodwill
with a carrying amount of $16.1 million. Declines in the fair value of the reporting unit may result in a future impairment
charge. Any such impairment charge could have a material effect on our earnings and capital.
We May Not Fully Realize the Expected Benefit of Our Deferred Tax Assets
At December 31, 2017 and 2016, we had deferred tax assets totaling $24.4 million and $34.7 million, respectively.
This represents the anticipated federal, state and local tax benefits expected to be realized in future years upon the utilization
of the underlying tax attributes comprising this balance. In order to use the future benefit of these deferred tax assets, we will
44
need to report taxable income for federal, state and local tax purposes. Although we have reported taxable income for federal,
state, and local tax purposes in each of the past three years, there can be no assurance that this will continue in the future.
Uncertainty about the future of LIBOR may adversely affect our business
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR,
announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the
administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot
and will not be guaranteed after 2021. It is impossible to predict whether, and to what extent, banks will continue to provide
LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United
Kingdom or elsewhere. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR
and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans,
including the trust preferred securities owned by and junior subordinated debentures issued by the Company or other securities
or financial arrangements, given LIBOR’s role in determining market interest rates globally. Uncertainty as to the nature of
alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and other
interest rates. In the event that a published LIBOR rate is unavailable after 2021, the dividend rate on the trust preferred
securities owned by and junior subordinated debentures issued by the Company, which are currently, or in the future, based on
the LIBOR rate, will be determined as set forth in the offering documents, and the value of such securities may be adversely
affected. Currently, the manner and impact of this transition and related developments, as well as the effect of these
developments on our funding costs, investment and trading securities portfolios and business, is uncertain.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At December 31, 2017, the Bank conducted its business through 18 full-service offices and its Internet Branch.
The Holding Company neither owns nor leases any property but instead uses the premises and equipment of the Bank.
Item 3. Legal Proceedings.
We are involved in various legal actions arising in the ordinary course of our business which, in the aggregate, involve
amounts which are believed by management to be immaterial to our financial condition, results of operations and cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
45
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
The Holding Company’s Common Stock is traded on the NASDAQ Global Select Market® under the symbol “FFIC.”
As of December 31, 2017, we had approximately 683 shareholders of record, not including the number of persons or entities
holding stock in nominee or street name through various brokers and banks. Our stock closed at $27.50 on December 29, 2017,
the last trading day of 2017. The following table shows the high and low sales price of the Common Stock and the dividends
declared on the Common Stock during the periods indicated. Such prices do not necessarily reflect retail markups, markdowns,
or commissions. (See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report for dividend
restrictions.)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$
31.96
31.69
30.34
31.45
2017
Low
$
24.90
24.27
25.98
24.59
Dividend
0.18
$
0.18
0.18
0.18
High
$
22.32
21.72
23.78
29.90
2016
Low
$
19.02
18.95
19.22
20.95
Dividend
0.17
$
0.17
0.17
0.17
The following table sets forth information regarding the shares of common stock repurchased by us during the quarter
ended December 31, 2017:
Total
Number
of Shares
Purchased
-
57,796
173,829
231,625
Average Price
Paid per Share
-
27.23
27.70
27.58
$
$
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
-
57,796
173,829
231,625
Maximum
Number of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
485,905
428,109
254,280
Period
October 1 to October 31, 2017
November 1 to November 30, 2017
December 1 to December 31, 2017
Total
On June 16, 2015, the Company announced the authorization by the Board of Directors of a common stock repurchase
program, which authorizes the purchase of up to 1,000,000 shares of its common stock. During the years ended December 31,
2017 and 2016, the Company repurchased 241,625 shares and 403,695 shares, respectively, of the Company’s common stock
at an average cost of $27.59 per share and $19.89 per share, respectively. At December 31, 2017, 254,280 shares remain to be
repurchased under the current stock repurchase program. Stock will be purchased under the current stock repurchase program
from time to time, in the open market or through private transactions subject to market conditions and at the discretion of the
management of the Company. There is no expiration or maximum dollar amount under this authorization.
46
The following table sets forth securities authorized for issuance under all equity compensation plans of the Company at
December 31, 2017:
(a)
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)
1,200
$
13.91
954,003
-
-
1,200
$
13.91
-
954,003
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
47
Stock Performance Graph
The following graph shows a comparison of cumulative total stockholder return on the Company’s common stock since
December 31, 2012 with the cumulative total returns of a broad equity market index as well as comparative published industry
indices. The broad equity market index chosen was the Nasdaq Composite. The comparative published industry indices chosen
were the SNL Bank $5 Billion to $10 Billion in Assets Index and the SNL Mid-Atlantic Bank Index. The SNL Mid-Atlantic
Bank Index was chosen for inclusion in the Company’s Stock Performance Graph because the Company believes it provides
valuable comparative information reflecting the Company’s geographic peer group. The SNL Bank $5 Billion to $10 Billion
in Assets Index was chosen for inclusion in the Company’s Stock Performance Graph because it uses a broader group of banks
and therefore more closely reflects the Company’s size. The Company believes that both geographic area and size are important
factors in analyzing the Company’s performance against its peers. The graph below reflects historical performance only, which
is not indicative of possible future performance of the common stock.
Flushing Financial Corporation
Total Return Performance
Flushing Financial Corporation
NASDAQ Composite
SNL Bank $5 billion to $10 billion
SNL Mid-Atlantic Bank
350
300
250
200
150
e
u
l
a
V
x
e
d
n
I
100
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
The total return assumes $100 invested on December 31, 2012 and all dividends reinvested through the end of the
Company’s fiscal year ended December 31, 2017. The performance graph above is based upon closing prices on the trading
date specified.
Index
Flushing Financial Corporation
NASDAQ Composite Index
SNL Bank $5B-$10B Index
SNL Mid-Atlantic Bank Index
Period Ending
12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17
207.70
242.71
258.40
237.34
100.00
100.00
100.00
100.00
139.03
140.12
154.28
134.79
140.29
160.78
158.92
146.85
154.62
171.97
181.04
152.36
216.24
187.22
259.37
193.66
48
Item 6.Selected Financial Data.
At or for the years ended December 31,
2017
2016
2015
2014
2013
(Dollars in thousands, except per share data)
Selected Financial Condition Data
Total assets
Loans, net
Securities held to maturity
Securities available for sale
Deposits
Borrowed funds
Total stockholders' equity
Book value per common share (1)
Selected Operating Data
Interest and dividend income
Interest expense
Net interest income
Provision (benefit) for loan losses
Net interest income after provision
for loan losses
Non-interest income:
Net gains on sales of securities
and loans
Net gains on sales of building
Other-than-temporary credit impairment
charge on securities
Net loss from fair value adjustments
Other income
Total non-interest income
Non-interest expense
Income before income tax provision
Income tax provision
Net income
Basic earnings per common share (2)
Diluted earnings per common share (2)
Dividends declared per common share
Dividend payout ratio
$
$
$
6,299,274
5,156,648
30,886
738,354
4,383,278
1,309,653
532,608
18.63
6,058,487
4,813,464
37,735
861,381
4,205,631
1,266,563
513,853
17.95
5,704,634
4,366,444
6,180
993,397
3,892,547
1,271,676
473,067
16.41
$
5,077,013
3,785,277
$
4,721,501
3,402,402
-
973,310
3,508,598
1,056,492
456,247
15.52
$
-
1,017,790
3,232,780
1,012,122
432,532
14.36
$
$
$
$
$
234,585
61,478
173,107
9,861
$
220,997
53,911
167,086
-
$
204,146
49,726
154,420
(956)
$
197,128
49,554
147,574
(6,021)
$
200,526
52,284
148,242
13,935
163,246
167,086
155,376
153,595
134,307
417
-
2,108
48,018
589
6,537
2,942
-
3,197
-
-
(3,465)
13,410
10,362
107,474
66,134
25,013
41,121
$
-
(3,434)
10,844
57,536
118,603
106,019
41,103
64,916
$
-
(1,841)
10,434
15,719
97,719
73,376
27,167
46,209
$
-
(2,568)
9,869
10,243
91,026
72,812
28,573
44,239
$
(1,419)
(2,521)
10,299
9,556
83,155
60,708
22,956
37,752
$
$
$
$
2.24
2.24
0.68
30.4%
(Footnotes on the following page)
$
$
$
1.41
1.41
0.72
51.1%
$
$
$
1.59
1.59
0.64
40.3%
$
$
$
1.49
1.48
0.60
40.3%
$
$
$
1.26
1.26
0.52
41.3%
49
At or for the years ended December 31,
2017
2016
2015
2014
2013
Selected Financial Ratios and Other Data
Performance ratios:
Return on average assets
Return on average equity
Average equity to average assets
Equity to total assets
Interest rate spread
Net interest margin
Non-interest expense to average assets
Efficiency ratio
Average interest-earning assets to average
interest-bearing liabilities
Regulatory capital ratios: (3)
Tier 1 leverage capital (well capitalized = 5%)
Common equity tier 1 risk-based capital (well capitalized = 6.5%)
Tier 1 risk-based capital (well capitalized =8%)
Total risk-based capital (well capitalized =10%)
Asset quality ratios:
Non-performing loans to gross loans (4)
Non-performing assets to total assets (5)
Net charge-offs (recoveries) to average loans
Allowance for loan losses to gross loans
Allowance for loan losses to total
non-performing assets (5)
Allowance for loan losses to total
non-performing loans (4)
%
0.66
7.75
8.53
8.46
2.80
2.93
1.73
57.90
%
1.10
13.07
8.40
8.48
2.86
2.97
2.01
59.64
%
0.86
9.93
8.68
8.29
2.94
3.04
1.82
58.57
%
0.91
9.82
9.31
8.99
3.10
3.22
1.77
54.40
%
0.82
8.73
9.45
9.16
3.32
3.43
1.76
50.64
1.12
x
1.12
x
1.11
x
1.11
x
1.10
x
%
%
10.11
13.87
13.87
14.31
0.35
0.29
0.24
0.39
%
%
%
10.12
14.12
14.12
14.64
8.89
12.62
12.62
13.17
%
0.44
0.36
(0.02)
0.46
0.60
0.54
0.06
0.49
%
%
9.63
n/a
13.87
14.60
0.90
0.80
0.02
0.66
%
%
9.48
n/a
14.59
15.63
1.43
1.14
0.41
0.93
112.23
101.28
69.45
61.94
59.04
112.23
103.80
82.58
73.40
64.89
Full-service customer facilities
18
19
19
17
17
(1) Calculated by dividing stockholders’ equity of by shares outstanding.
(2) The shares held in the Company’s Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share.
(3) Represents the Bank’s capital ratios, which exceeded all minimum regulatory capital requirements during the periods presented. Common equity tier 1
risk-based capital was not a required ratio prior to 2015.
(4) Non-performing loans consist of non-accrual loans and loans delinquent 90 days or more that are still accruing.
(5) Non-performing assets consist of non-performing loans, real estate owned and non-performing investment securities.
50
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this discussion and analysis, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing
Financial Corporation (the “Holding Company”) and its direct and indirect wholly owned subsidiaries, Flushing Bank (the
“Bank”), Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.
General
We are a Delaware corporation organized in 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 primary business of the
Holding Company 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 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”). The Bank’s deposits are insured to the maximum allowable amount by the FDIC.
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 formed during 2007 to issue a
total of $60.0 million of capital securities, and $1.9 million of common securities (which are the only voting securities). The
Holding Company owns 100% of the common securities of the Trusts. The Trusts used the proceeds from the issuance of these
securities to purchase junior subordinated debentures from the Holding Company. The Trusts are not included in our
consolidated financial statements, as we would not absorb the losses of the Trusts if losses were to occur.
The following discussion of financial condition and results of operations includes the collective results of the Holding
Company and its subsidiaries (collectively, the “Company”), but reflects principally the Bank’s activities. Management views
the Company as operating as a single unit - a community bank. Therefore, segment information is not provided.
Overview
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 properties, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four
family (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial
units); (2) construction loans, primarily for residential properties; (3) Small Business Administration (“SBA”) loans and other
small business loans; (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 its 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 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 Bank of New York (“FHLB-NY”) 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 our periodic
provision for loan losses and specific provision for losses on real estate owned.
Management Strategy. 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.
51
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.
Increase core deposits and continue to improve funding mix to manage cost of funds. We have a relatively stable retail
deposit base drawn from our market area through our full-service offices. Although we seek to retain existing deposits and
maintain depositor relationships by offering quality service and competitive interest rates to our customers, we also seek to
keep deposit growth within reasonable limits and our strategic plan. In order to implement our strategic plan, we have built
multi-channel deposit gathering capabilities. In addition to our full-service branches we gather deposits through our Internet
Branch and a government banking unit. The Internet Branch currently offers savings accounts, money market accounts,
checking accounts, and certificates of deposit. This allows us to compete on a national scale without the geographical
constraints of physical locations. At December 31, 2017 and 2016, total deposits at our Internet Branch were $401.0 million
and $417.3 million, respectively. The government banking unit provides banking services to public municipalities, including
counties, cities, towns, villages, school districts, libraries, fire districts, and the various courts throughout the New York City
metropolitan area. At December 31, 2017 and 2016, total deposits in our government banking unit totaled $1,133.3 million and
$1,062.1 million, respectively. Additionally, we have a business banking group which was designed specifically to develop full
business relationships thereby bringing in lower-costing checking and money market deposits. At December 31, 2017, deposits
balances in the business banking group were $168.7 million. We also obtain deposits through brokers and the CDARS® and
ICS network. Management intends to balance its goal to maintain competitive interest rates on deposits while seeking to manage
its overall cost of funds to finance its strategies. We generally rely on our deposit base as our principal source of funding.
During 2017, we realized an increase in due to depositors of $175.3 million, as core deposits increased $195.4 million while
certificates of deposit decreased $20.2 million.
A significant portion of our lending and deposit customers do not have both their loans and deposits with us. We
intend to continue to focus on obtaining additional deposits from our lending customers and originating additional loans to our
deposit customers. Product offerings were expanded and are expected to be further expanded to accommodate perceived
customer demands. In addition, specific employees are assigned responsibilities of generating these additional deposits and
loans by coordinating efforts between lending and deposit gathering departments.
Increase net interest income by leveraging loan pricing opportunities and portfolio mix. During 2017, we continued
our strategy of focusing more on loan pricing as opposed to volume. We saw yields on originations for the full year of 2017
increase by 31 basis points to 4.06% from 3.75% for the full year of 2016. Additionally for the first time since 2010 the yield
of originations for the full year of 2017, exceeded the average yield on total interest-earning assets for the same period.
We have emphasized the strategic growth of multi-family residential mortgage loans, non-owner occupied commercial
mortgage loans and floating rate commercial business loans. The commercial business and other loans have increased to 14.20%
of the entire loan portfolio as of December 31, 2017 compared to 12.39% at December 31, 2016. We continued to deemphasize
one-to-four family – mixed-use property and construction lending and we no longer originate new taxi medallion loans.
52
The following table shows loan originations and purchases during 2017, and loan balances as of December 31, 2017.
Loan
Originations and
Purchases
Loan Balances
December 31,
2017
Percent of
Gross Loans
Multi-family residential
Commercial real estate
One-to-four family ― mixed-use property
One-to-four family ― residential
Co-operative apartment
Construction
Small Business Administration
Taxi medallion
Commercial business and Other
$
373,512
238,057
65,247
26,168
332
7,847
11,559
-
316,748
(Dollars in thousands)
$
2,273,595
1,368,112
564,206
180,663
6,895
8,479
18,479
6,834
732,973
%
44.08
26.51
10.93
3.50
0.13
0.16
0.36
0.13
14.20
Total
$
1,039,470
$
5,160,236
100.00
%
At December 31, 2017, multi-family residential, commercial business and other loans and commercial real estate
loans, totaled 84.8% of our gross loans. We have repositioned our loan growth to reduce credit risk; however, our concentration
in these types of loans could require us to increase our provisions for loan losses and to maintain an allowance for loan losses
as a percentage of total loans in excess of the allowance currently maintained.
Enhance earnings power by improving scalability and efficiency. We are improving scalability and efficiency by
converting our branches to the Universal Banker model with our unique video banker service that gives customers face-to-face
video chat access from 7am to 11pm daily via at our ATM terminals. The Universal Banker model provides customers with
cutting-edge technology, including state-of-the-art ATMs and a higher-quality service experience, all while further reducing
overall costs. We have been rolling this model out across our network as branches are renovated and new branches are opened,
and anticipate a 20% expense savings through more scalable and efficient branches. In the branches using the Universal Banker
model for December, over 60% of customer transactions were completed at our high powered ATMs.
Manage credit risk. By adherence to our conservative underwriting standards, we have been able to minimize net
losses from impaired loans, excluding the taxi medallion portfolio. We recorded net charge-offs of $11.7 million for the year
ended December 31, 2017, of which $11.3 million was related to taxi medallion loans, compared to net recoveries of $0.7
million for the year ended December 31, 2016. The taxi medallion charge-offs recorded during 2017, were the result of a
reduction in the fair value of their underlying collateral, which is based upon the most recently reported arm’s length sales
transaction. The remaining carrying value of this portfolio is $6.8 million at December 31, 2017. The loan to value for the real
estate dependent loan portfolio was 39.1% and the average loan to value for non-performing loans collateralized by real estate
was 39.8% at December 31, 2017. We seek to maintain our loans in performing status through, among other things, disciplined
collection efforts, and consistently monitoring non-performing assets in an effort to return them to performing status. To this
end, we review the quality of our loans and report to the Loan Committee of the Board of Directors of the Bank on a monthly
basis. We sold 17 delinquent loans totaling $6.2 million, 26 delinquent loans totaling $8.0 million, and 23 delinquent loans
totaling $9.0 million during the years ended December 31, 2017, 2016 and 2015, respectively. We recorded net charge-offs on
delinquent loans that were sold during 2017 of $37,000 and net recoveries of $48,000 and $0.1 million on delinquent loan sales
in 2016 and 2015, respectively. We realized gross gains of $0.4 million, $0.3 million and $0.1 million on the sale of delinquent
loans for the years ended December 31, 2017, 2016 and 2015, respectively. We realized gross losses of $2,000 for the year
ended December 31, 2015. We did not record any gross losses during the years ended December 31, 2017 and 2016. There can
be no assurances that we will continue this strategy in future periods, or if continued, we will be able to find buyers to pay
adequate consideration. Non-performing loans totaled $18.1 million and $21.4 million at December 31, 2017 and 2016,
respectively. Non-performing assets as a percentage of total assets were 0.29% and 0.36% at December 31, 2017 and 2016,
respectively.
Remain well capitalized. The Bank faces several minimum capital requirements imposed by federal regulation. Failure
to adhere to these minimums could limit the dividends the Bank is allowed to pay, including the payment of dividends to the
Holding Company, and could limit the annual growth of the Bank. Under the Dodd Frank Act, banks with assets greater than
$10.0 billion in total assets are required to complete stress tests, which predict capital levels under certain stress levels.
Although, our total assets are currently $6.3 billion, as a best practice, we completed these tests. As of December 31, 2017,
under all stress scenarios, we remained well capitalized per current regulations.
53
Increase Our Commitment to the Multi-Cultural Marketplace, with a Particular Focus on the Asian Community in
Queens. Our branches are all located in the New York City metropolitan area with particular concentration in the borough of
Queens. Queens is characterized with a high level of ethnic diversity. An important element of our strategy is to service multi-
ethnic consumers and businesses. We have a particular presence and concentration in Asian communities, including in
particular the Chinese and Korean populations. Both groups are noted for high levels of savings, education and
entrepreneurship. In order to service these and other important ethnic groups in our market, our staff speaks more than 30
languages. We have an Asian advisory board to help broaden our links to the community by providing guidance and fostering
awareness of our active role in the local community. Through our focus on and commitment to the Asian community in Queens,
where we have three branches, we have obtained more than $500 million in deposits in these branches. We also have over $450
million of loans and lines of credit outstanding to borrowers in the Asian community.
Manage Enterprise-Wide Risk. We identify, measure and attempt to mitigate risks that affect, or have the potential to
affect, our business. Due to past economic crises and recent increases in government regulation, we devote significant resources
to risk management. We have a seasoned risk officer to provide executive risk leadership, and an enterprise-wide risk
management program. Several enterprise risk management analytical products are in use which include key risk indicators. We
also have had a chief information security officer even before one will be required by recent NYDFS rulemaking not yet in
effect. Our management of enterprise-wide risk enables us to recognize and monitor risks and establish procedures to
disseminate the risk information across our organization and to our Board of Directors. The objective is to have a robust and
focused risk management process capable of identifying and mitigating emerging threats to the Bank’s safety and soundness.
Trends and Contingencies. Our operating results are significantly affected by national and local economic and
competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and
actions of regulatory authorities. We have remained strategically focused on the origination of multi-family residential
mortgages, commercial mortgages and commercial business loans with a full banking relationship. Because of this strategy,
we were able to continue to achieve a higher yield on our mortgage portfolio than we would have otherwise experienced.
As we have seen improvements in the local economy, our non-performing loans have decreased. The majority of our
impaired loans are income producing residential properties located in the New York City metropolitan market. Due to the low
vacancy rates for these types of properties, they have retained more of their value, thereby reducing their loss content. Non-
performing loans totaled $18.1 million, $21.4 million and $26.1 million at December 31, 2017, 2016 and 2015, respectively.
We have not experienced a significant increase in foreclosed properties despite an extended foreclosure process in our market.
The extended foreclosure process in our market is due to the high number of foreclosure actions filed in the court system in the
counties for which we are seeking foreclosure on delinquent mortgage loans. We have not encountered significant issues with
documentation relating to mortgages for which we are seeking foreclosure as we maintain custody of all loan documents and
review them prior to providing them to our legal counsel to initiate the foreclosure action. During the year ended December
31, 2017, we recorded net charge-offs of $11.7 million compared to net recoveries of $0.7 million and $2.6 million for the
years ended December 31, 2016 and 2015, respectively. The increase in charge-offs related primarily to the taxi medallion
portfolio and resulted in a provision totaling $9.9 million in 2017, compared to no provision in 2016, and a benefit of $1.0
million for the year ended December 31, 2015. We cannot predict the effect of these economic conditions on the Company’s
future financial condition or operating results.
Loan originations and purchases were $1,039.5 million, $1,132.9 million and $1,233.5 million for the years ended
December 31, 2017, 2016 and 2015, respectively. While we primarily rely on originating our own loans, we purchased $196.5
million, $186.7 million and $278.9 million during the years ended December 31, 2017, 2016 and 2015, respectively. We
purchase loans when the loans complement our loan portfolio strategy. Loans purchased must meet our underwriting standards
when they were originated.
During the three-year period ended December 31, 2017, the allocation of our loan portfolio has remained fairly
consistent. The majority of our loans are collateralized by real estate, which comprised 85.3% of our portfolio at December 31,
2017 compared to 86.9% at December 31, 2016 and 87.7% at December 31, 2015. Multi-family residential mortgage loans
comprised 44.1%, 45.2% and 47.0% of our loan portfolio at December 31, 2017, 2016 and 2015, respectively. Commercial
real estate mortgage loans comprised 26.5%, 25.9% and 22.9% of our loan portfolio at December 31, 2017, 2016 and 2015,
respectively. One-to-four family mixed-use property mortgage loans comprised 10.9%, 11.6% and 13.1% of loan portfolio at
December 31, 2017, 2016 and 2015, respectively. One-to-four family residential mortgage loans comprised 3.5%, 3.9% and
4.3% of loan portfolio at December 31, 2017, 2016 and 2015, respectively.
Due to depositors increased $175.3 million, $309.7 million and $382.8 million in 2017, 2016 and 2015, respectively.
Lower-costing core deposits increased $195.4 million, $340.9 million and $285.3 million in 2017, 2016 and 2015, respectively.
Higher-costing certificates of deposit decreased $20.2 million during 2017 compared to a decrease of $31.2 million in 2016
54
and an increase of $97.5 million during 2015. Brokered deposits represented 24.9%, 26.5% and 25.2% of total deposits at
December 31, 2017, 2016 and 2015, respectively.
Prevailing interest rates affect the extent to which borrowers repay and refinance loans. In a declining interest rate
environment, the number of loan prepayments and loan refinancing tends to increase, as do prepayments of mortgage-backed
securities. Call provisions associated with our investments in U.S. government agency and corporate securities may also
adversely affect yield in a declining interest rate environment. Such prepayments and calls may adversely affect the yield of
our loan portfolio and mortgage-backed and other securities as we reinvest the prepaid funds in a lower interest rate
environment. However, we typically receive additional loan fees when existing loans are refinanced, which partially offsets the
reduced yield on our loan portfolio resulting from prepayments. In periods of low interest rates, our level of core deposits also
may decline if depositors seek higher-yielding instruments or other investments not offered by us, which in turn may increase
our cost of funds and decrease our net interest margin to the extent alternative funding sources, are utilized. By contrast, an
increasing interest rate environment would tend to extend the average lives of lower yielding fixed rate mortgages and
mortgage-backed securities, which could adversely affect net interest income. In addition, depositors tend to open longer term,
higher costing certificate of deposit accounts which could adversely affect our net interest income if rates were to subsequently
decline. Additionally, adjustable rate residential mortgage loans and mortgage-backed securities generally contain interim and
lifetime caps that limit the amount the interest rate can increase at re-pricing dates.
During 2017 our net interest income increased $6.0 million, or 3.6%, to $173.1 million for the twelve months ended
December 31, 2017 from $167.1 million for the prior year, as a four basis point decrease in the net interest margin to 2.93%
for the twelve months ended December 31, 2017 was more than offset by balance sheet growth. The decrease in the net interest
margin for 2017 was primarily due to an increase in our funding costs, partially offset by an increase in the yield of our interest-
earning assets. The increase in the yield of our interest earning assets was primarily due to the average balance of total loans,
net increasing $387.9 million to $4,988.6 million. During 2017, the average balance of borrowed funds decreased by $61.2
million to $1,169.8 million compared to $1,231.0 million for 2016, while the cost of borrowed funds increased 14 basis points
to 1.81% for the year ended December 31, 2017 from 1.67% in the comparable period. The cost of money market, savings,
NOW and certificates of deposits accounts increased 28 basis points, 15 basis points, 14 basis points and two basis points,
respectively, for the twelve months ended December 31, 2017 from the prior year. The cost of our deposits increased as we
increased the rates we pay on certain accounts to attract additional deposits. This resulted in an increase in the cost of due to
depositors of 11 basis points to 1.00% for the twelve months ended December 31, 2017 from 0.89% for the twelve months
ended December 31, 2016. Overall, as a result of these changes to our funding mix our cost of interest-bearing liabilities
increased 10 basis points to 1.17% for the year ended December 31, 2017 from 1.07% for the year ended December 31, 2016.
We are unable to predict the direction or timing of future interest rate changes. Approximately 54% of our certificates
of deposit accounts and borrowings reprice or mature during the next year, which could result in an increase in the cost of our
interest-bearing liabilities. Also, in an increasing interest rate environment, mortgage loans and mortgage-backed securities
may prepay at slower rates than experienced in the past, which could result in a reduction of prepayment penalty income.
Interest Rate Sensitivity Analysis
A financial institution’s exposure to the risks of changing interest rates may be analyzed, in part, by examining the
extent to which its assets and liabilities are “interest rate sensitive” and by monitoring the institution’s interest rate sensitivity
“gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within
that time period. A gap is considered positive when the amount of interest-earning assets maturing or repricing exceeds the
amount of interest-bearing liabilities maturing or repricing within the same period. A gap is considered negative when the
amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing
within the same period. Accordingly, a positive gap may enhance net interest income in a rising rate environment and reduce
net interest income in a falling rate environment. Conversely, a negative gap may enhance net interest income in a falling rate
environment and reduce net interest income in a rising rate environment.
55
The table below sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at
December 31, 2017 which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Except as stated below, the amount of assets and liabilities shown that reprice or mature during a
particular period was determined in accordance with the earlier of the term to repricing or the contractual terms of the asset or
liability. Prepayment assumptions for mortgage loans and mortgage-backed securities are based on our experience and industry
averages, which generally range from 6% to 27%, depending on the contractual rate of interest and the underlying collateral.
NOW Accounts, money market accounts and savings accounts were assumed to have withdrawal or “run-off” rates of 6%, 14%
and 23%, respectively, based on our experience. While management bases these assumptions on actual prepayments and
withdrawals experienced by us, there is no guarantee that these trends will continue in the future.
Interest Rate Sensitivity Gap Analysis at December 31, 2017
More Than
Three Years
To Five
Years
More Than
One Year
To Three
Years
More Than
Five Years
To Ten
Years
More Than
Three
Months To
One Year
More Than
Ten Years
Three
Months
And Less
Total
Interest-Earning Assets
Mortgage loans
Other loans
Short-term securities (1)
Securities held-to-maturity:
Mortgage-backed securities
Other
Securities available for sale:
Mortgage-backed securities
Other
Total interest-earning assets
Interest-Bearing Liabilities
Savings accounts
NOW accounts
Money market accounts
Certificate of deposit accounts
Mortgagors' escrow deposits
Borrowings
Total interest-bearing liabilities (2)
Interest rate sensitivity gap
Cumulative interest-rate sensitivity gap
Cumulative interest-rate sensitivity gap
as a percentage of total assets
Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities
(Dollars in thousands)
$
341,896
112,052
39,362
$
689,227
149,084
-
$
1,738,118
206,605
-
$
1,099,386
116,159
-
$
481,354
166,132
-
$
51,969
8,254
-
$
4,401,950
758,286
39,362
329
-
14,119
57,642
565,400
987
1,045
40,823
67,516
948,682
3,947
-
2,710
-
114,968
103,546
2,167,184
85,668
-
1,303,923
-
-
138,389
-
785,875
-
21,868
115,683
-
197,774
7,973
22,913
509,650
228,704
5,968,838
10,282
20,737
20,222
267,882
-
521,280
840,403
$
30,847
62,210
60,667
491,478
-
146,294
791,496
$
68,163
96,257
110,075
544,919
-
443,364
1,262,778
$
113,765
551,571
788,994
45,576
-
198,715
1,698,621
$
67,223
596,949
-
2,078
-
-
666,250
$
-
5,508
-
-
42,606
-
48,114
$
290,280
1,333,232
979,958
1,351,933
42,606
1,309,653
5,307,662
$
$
$
(275,003)
(275,003)
$
$
157,186
(117,817)
$
$
904,406
786,589
$
$
(394,698)
391,891
$
$
119,625
511,516
$
$
149,660
661,176
$
661,176
-4.37%
-1.87%
12.49%
6.22%
8.12%
10.50%
67.28%
92.78%
127.17%
108.53%
109.73%
112.46%
(1) Consists of interest-earning deposits.
(2) Does not include non-interest bearing demand accounts totaling $385.3 million at December 31, 2017.
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although
certain assets and liabilities may have similar estimated maturities or periods to repricing, they may react in differing degrees
to changes in market interest rates and may bear rates that differ in varying degrees from the rates that would apply upon
maturity and reinvestment or upon repricing. Also, the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally,
certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a significant change in the level of interest rates, prepayments on loans and mortgage-backed
securities, and deposit withdrawal or “run-off” levels, would likely deviate materially from those assumed in calculating the
above table. In the event of an interest rate increase, some borrowers may be unable to meet the increased payments on their
adjustable-rate debt. The interest rate sensitivity analysis assumes that the nature of the Company’s assets and liabilities remains
static. Interest rates may have an effect on customer preferences for deposits and loan products. Finally, the maturity and
repricing characteristics of many assets and liabilities as set forth in the above table are not governed by contract but rather by
management’s best judgment based on current market conditions and anticipated business strategies.
56
Interest Rate Risk
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, which requires 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 our interest-earning assets which could
adversely affect our results of operations if such assets were sold, or, in the case of securities classified as available for sale,
decreases in our stockholders’ equity if such securities were retained.
We manage the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return
and adjust our 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 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. 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 December 31, 2017. Various estimates
regarding prepayment assumptions are made at each level of rate shock. Actual results could differ significantly from these
estimates. At December 31, 2017, we were within the guidelines established by the Board of Directors for each interest rate
level.
Change in Interest Rate
-200 basis points
-100 basis points
Base interest rate
+100 basis points
+200 basis points
Projected Percentage Change In
Net Interest Income
2017
2016
3.91 %
3.80
―
-5.03
-10.41
0.74 %
2.11
―
-6.38
-13.97
Net Portfolio Value
2017
2016
10.44 %
3.03
―
-5.58
-13.38
9.79 %
7.47
―
-11.56
-26.43
Net Portfolio
Value Ratio
2017
2016
12.84 % 11.76 %
12.41
12.46
12.11
11.37
11.77
11.26
10.26
8.83
Analysis of Net Interest Income
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 our Consolidated Statements of Financial Condition and
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015, 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 that are considered adjustments to yields.
57
Average
Balance
2017
Interest
Yield/
Cost
For the year ended December 31,
2016
Average
Balance
Interest
Yield/
Cost
(Dollars in thousands)
2015
Average
Balance
Interest
Yield/
Cost
$
4,304,889
$
181,006
4.20
%
$
4,014,734
$
173,419
4.32
%
$
3,524,331
$
161,115
4.57
%
683,724
4,988,613
28,277
209,283
526,934
199,350
726,284
139,704
139,704
13,689
8,103
21,792
2,984
2,984
4.14
4.20
2.60
4.06
3.00
2.14
2.14
585,948
4,600,682
21,706
195,125
3.70
4.24
509,147
4,033,478
17,605
178,720
3.46
4.43
581,505
243,567
825,072
142,472
142,472
14,231
8,243
22,474
3,148
3,148
2.45
3.38
2.72
2.21
2.21
693,893
163,604
857,497
134,807
134,807
17,309
4,398
21,707
3,593
3,593
2.49
2.69
2.53
2.67
2.67
61,472
526
0.86
58,522
250
0.43
58,397
126
0.22
5,916,073
301,673
6,217,746
$
234,585
3.97
5,626,748
286,786
5,913,534
$
220,997
3.93
5,084,179
276,965
5,361,144
$
204,146
4.02
$
292,887
1,444,944
908,025
1,390,491
4,036,347
1,808
9,640
8,151
20,579
40,178
0.62
0.67
0.90
1.48
1.00
$
260,948
1,496,712
581,390
1,409,772
3,748,822
1,219
7,891
3,592
20,536
33,238
0.47
0.53
0.62
1.46
0.89
$
264,891
1,432,609
380,595
1,351,619
3,429,714
1,151
6,593
1,551
20,943
30,238
0.43
0.46
0.41
1.55
0.88
61,962
141
0.23
56,152
112
0.20
52,364
98
0.19
4,098,309
1,169,791
40,319
21,159
0.98
1.81
3,804,974
1,231,015
33,350
20,561
0.88
1.67
3,482,078
1,104,368
30,336
19,390
0.87
1.76
5,268,100
61,478
1.17
5,035,989
53,911
1.07
4,586,446
49,726
1.08
348,518
70,828
5,687,446
530,300
305,096
75,629
5,416,714
496,820
250,488
59,016
4,895,950
465,194
$
6,217,746
$
5,913,534
$
5,361,144
$
173,107
2.80
%
$
167,086
2.86
%
$
154,420
2.94
%
$
647,973
2.93
%
$
590,759
2.97
%
$
497,733
3.04
%
1.12
X
1.12
X
1.11
X
Interest-earning assets:
Mortgage loans, net (1)(2)
Other loans, net (1)(2)
Total loans, net
Taxable securities:
Mortgage-backed
securities
Other securities
Total taxable securities
Tax-exempt securities: (3)
Other securities
Total tax-exempt securities
Interest-earning deposits
and federal funds sold
Total interest-earning
assets
Other assets
Total assets
Interest-bearing liabilities:
Deposits:
Savings accounts
NOW accounts
Money market accounts
Certificate of deposit
accounts
Total due to depositors
Mortgagors' escrow
accounts
Total interest-bearing
deposits
Borrowings
Total interest-bearing
liabilities
Non interest-bearing
demand deposits
Other liabilities
Total liabilities
Equity
Total liabilities and
equity
Net interest income /
net interest rate spread (4)
Net interest-earning assets /
net interest margin (5)
Ratio of interest-earning
assets to interest-bearing
liabilities
(1) Average balances include non-accrual loans.
(2) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of
approximately $2.4 million, $4.2 million and $4.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.
Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.
(3)
(4)
(5) Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning assets.
58
Rate/Volume Analysis
The following table presents the impact of changes in interest rates and in the volume of interest-earning assets and
interest-bearing liabilities on the Company’s interest income and interest expense during the periods indicated. Information is
provided in each category with respect to (1) changes attributable to changes in volume (changes in volume multiplied by the
prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by the prior volume) and (3) the net change.
The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.
Increase (Decrease) in Net Interest Income
Year Ended December 31, 2017
Compared to
Year Ended December 31, 2016
Due to
Year Ended December 31, 2016
Compared to
Year Ended December 31, 2015
Due to
Volume
Rate
Net
Volume
Rate
Net
(Dollars in thousands)
$
12,441
3,837
(1,384)
(1,467)
$
(4,854)
2,734
842
1,163
$
7,587
6,571
(542)
(304)
$
21,481
2,809
(2,800)
2,531
$
(9,177)
1,292
(278)
869
$
12,304
4,101
(3,078)
3,400
14
13,441
262
147
276
13,588
-
24,021
124
(7,170)
124
16,851
163
(282)
2,527
(260)
12
(1,060)
1,100
426
2,031
2,032
303
17
1,658
6,467
589
1,749
4,559
43
29
598
7,567
(20)
295
1,036
862
8
2,185
4,366
88
1,003
1,005
(1,269)
6
(1,014)
(181)
68
1,298
2,041
(407)
14
1,171
4,185
Interest-Earning Assets:
Mortgage loans, net
Other loans, net
Mortgage-backed securities
Other securities
Interest-earning deposits and
federal funds sold
Total interest-earning assets
Interest-Bearing Liabilities:
Deposits:
Savings accounts
NOW accounts
Money market accounts
Certificate of deposit accounts
Mortgagors' escrow accounts
Borrowings
Total interest-bearing liabilities
Net change in net interest income
$
12,341
$
(6,320)
$
6,021
$
19,655
$
(6,989)
$
12,666
Comparison of Operating Results for the Years Ended December 31, 2017 and 2016
General. Net income for the twelve months ended December 31, 2017 was $41.1 million, a decrease of $23.8 million,
or 36.66%, compared to $64.9 million for the twelve months ended December 31, 2016. Diluted earnings per common share
were $1.41 for the twelve months ended December 31, 2017, a decrease of $0.83, or 37.1%, from $2.24 for the twelve months
ended December 31, 2016. Included in net income for the year ended December 31, 2016 was a gain on sale of buildings
totaling $48.0 million, whereas there was no such gain in the recent year.
Return on average equity decreased to 7.75% for the twelve months ended December 31, 2017, from 13.07% for the
prior year. Return on average assets decreased to 0.66% for the twelve months ended December 31, 2017, from 1.10% for the
prior year.
Interest Income. Interest income increased $13.6 million, or 6.15%, to $234.6 million for the year ended December
31, 2017 from $221.0 million for the year ended December 31, 2016. The increase in interest income was primarily due to an
increase of $289.3 million in the average balance of interest-earning assets to $5,916.1 million for the year ended December
31, 2017 from $5,626.7 million for the year ended December 31, 2016, combined with an increase of four basis points in the
yield of interest-earning assets to 3.97% for the year ended December 31, 2017 from 3.93% for the year ended December 31,
2016. The four basis point increase in the yield of interest-earning assets was primarily due to an increase of $387.9 million in
the average balance of higher yielding total loans, net to $4,988.6 million for the year ended December 31, 2017, combined
with a decrease of $101.6 million in the average balance of lower yielding total securities to $866.0 million for the year ended
December 31, 2017. Additionally, the four basis point improvement the yield of interest-earning assets was aided by a 21 basis
point increase in the yield on total securities to 2.86% for the twelve months ended December 31, 2017 from 2.65% for the
59
twelve months ended December 31, 2016, partially offset by a four basis point decline in the yield on the total loans to 4.20%
for the twelve months ended December 31, 2017 from 4.24% for the prior year. The 21 basis point increase in the yield on the
securities portfolio was primarily due to the purchase of new securities at higher yields than the existing portfolio. The four
basis point decrease in the yield on the loan portfolio was primarily due to a decline in prepayment penalty income collected
in 2017 compared to 2016. The yield on the loan portfolio, excluding prepayment penalty income on loans, decreased one basis
points to 4.09% for the twelve months ended December 31, 2017 from 4.10 % for the twelve months ended December 31,
2016.
Interest Expense. Interest expense increased $7.6 million, or 14.04%, to $61.5 million for the year ended December
31, 2017 from $53.9 million for the year ended December 31, 2016. The increase in interest expense was primarily due to an
increase of 10 basis points in the average cost of interest-bearing liabilities to 1.17% for the year ended December 31, 2017
from 1.07% for the year ended December 31, 2016, combined with an increase of $232.1 million in the average balance of
interest-bearing liabilities to $5,268.1 million for the year ended December 31, 2017, from $5,036.0 million for the prior year.
The 10 basis point increase in the cost of interest-bearing liabilities was primarily due to the Bank raising the rates we pay on
some of our deposit products to stay competitive within our market. This increase in rates was partially offset by an
improvement in our funding mix, as the combined average balance of lower costing savings, NOW and money market deposits
increased $306.8 million to $2,645.9 million for the year ended December 31, 2017 from $2,339.1 million for the prior year,
while the combined average balance of higher costing certificates of deposit and borrowed funds decreased $80.5 million to
$2,560.3 million for the year ended December 31, 2017 from $2,640.8 million for the prior year.
Net Interest Income. Net interest income for the year ended December 31, 2017 totaled $173.1 million, an increase
of $6.0 million, or 3.60%, from $167.1 million for 2016. The increase in net interest income was primarily due to the growth
of net interest-earning assets. These improvements to net interest income were partially offset by a decrease in the net interest
spread of six basis points to 2.80% for the twelve months ended December 31, 2017 from 2.86% for the prior year. The yield
on interest-earning assets increased four basis points to 3.97% for the year ended December 31, 2017 from 3.93% for the year
ended December 31, 2016, while the cost of interest-bearing liabilities increased 10 basis point to 1.17% for the year ended
December 31, 2017 from 1.07% for the prior year. The net interest margin decreased four basis points to 2.93% for the year
ended December 31, 2017 from 2.97% for the year ended December 31, 2016. Excluding prepayment penalty income, the net
interest margin would have been 2.84% and 2.85% for the years ended December 31, 2017 and 2016, respectively.
Provision for Loan Losses. Provision for loan losses of $9.9 million was recorded for the year ended December 31,
2017, compared to no provision during the prior year. The provision recorded during 2017 was due to the estimated fair value
of NYC taxi medallions being lowered based on most recent sales data. During the twelve months ended December 31, 2017,
non-accrual loans decreased $5.3 million to $15.7 million from $21.0 million at December 31, 2016. During the twelve months
ended December 31, 2017, the Bank recorded net charge-offs totaling $11.7 million, or 24 basis points of average loans. The
current average loan-to-value ratio for our non-performing loans collateralized by real estate was 39.8% at December 31, 2017.
When we have obtained properties through foreclosure, we have been able to quickly sell the properties at amounts that
approximate book value. The Bank continues to maintain conservative underwriting standards. We anticipate that we will
continue to see low loss content in our loan portfolio.
Non-Interest Income. Non-interest income for the twelve months ended December 31, 2017 was $10.4 million, a
decrease of $47.2 million, or 81.99%, from $57.5 million for the twelve months ended December 31, 2016. The decrease in
non-interest income was primarily due to net gains on the sale of buildings of $48.0 million, as we sold three of our branch
buildings during the year ending December 31, 2016 in sale-leaseback transactions. Additionally, non-interest income
decreased due to a decrease in net gains from the sale of securities of $1.7 million partially offset by an increase in gains from
life insurance proceeds of $0.9 million.
Non-Interest Expense. Non-interest expense was $107.5 million for the twelve months ended December 31, 2017, a
decrease of $11.1 million, or 9.38%, from $118.6 million for the twelve months ended December 31, 2016. The decrease in
non-interest expense was primarily due to the year ended December 31, 2016 including $10.4 million in prepayment penalties
from the early extinguishment of debt.
Income Tax Provisions. Income tax expense for the year ended December 31, 2017 decreased $16.1 million, or
39.15%, to $25.0 million, compared to $41.1 million for the year ended December 31, 2016. The decrease was primarily due
to a decrease of $39.9 million in income before income taxes and a decrease in the effective tax rate to 37.8% for the twelve
months ended December 31, 2017 from 38.8% in the prior year. The decrease in the effective tax rate reflects the reduced
impact that preferential tax items had on the Company’s tax liability during the twelve months ended December 31, 2017
compared to the twelve months ended December 31, 2016. This was partially offset by $3.8 million in additional tax expense
recorded during 2017 from the revaluation of our net deferred tax assets, resulting from the Tax Cuts and Jobs Act (the “TCJA”),
which reduced our federal income tax rate from 35% to 21%, effective January 1, 2018. Additionally, on December 22, 2017,
60
Staff Accounting Bulletin No. 118 (“SAB 118”) was released by the SEC to address any concerns related to the accounting for
income tax effects as a result of the TCJA in situations where a registrant may not have the necessary information available,
prepared, or analyzed in reasonable detail to complete the required accounting in the reporting period including the enactment
date. SAB 118 allows for a measurement period not to extend beyond one year from the TCJA enactment date to complete the
necessary accounting.
Comparison of Operating Results for the Years Ended December 31, 2016 and 2015
General. Net income for the twelve months ended December 31, 2016 was $64.9 million, an increase of $18.7 million,
or 40.48%, compared to $46.2 million for the twelve months ended December 31, 2015. Diluted earnings per common share
were $2.24 for the twelve months ended December 31, 2016, an increase of $0.65, or 40.88%, from $1.59 for the twelve months
ended December 31, 2015.
Return on average equity increased to 13.07% for the twelve months ended December 31, 2016, from 9.93% for the
prior year. Return on average assets increased to 1.10% for the twelve months ended December 31, 2016, from 0.86% for the
prior year.
Interest Income. Interest income increased $16.9 million, or 8.25%, to $221.0 million for the year ended December
31, 2016 from $204.1 million for the year ended December 31, 2015. The increase in interest income was primarily due to an
increase of $542.6 million in the average balance of interest-earning assets to $5,626.7 million for the year ended December
31, 2016 from $5,084.2 million for the year ended December 31, 2015, which was partially offset by a nine basis point reduction
in the yield of interest-earning assets to 3.93% for the year ended December 31, 2016 from 4.02% for the year ended December
31, 2015. The nine basis point decline in the yield of interest-earning assets was primarily due to a 19 basis point reduction in
the yield on the loan portfolio to 4.24% for the twelve months ended December 31, 2016 from 4.43% for the twelve months
ended December 31, 2015, partially offset by a 10 basis point increase in the yield on total securities to 2.65% for the twelve
months ended December 31, 2016 from 2.55% for the prior year. The 19 basis point decrease in the yield on the loan portfolio
was primarily due to a decline in the rates earned on new loan originations and existing loans modified to lower rates. The 10
basis point increase in the yield on the securities portfolio was primarily due to the purchase of new securities at higher yields
than the existing portfolio. The yield on the loan portfolio, excluding prepayment penalty income on loans, decreased 17 basis
points to 4.10% for the twelve months ended December 31, 2016 from 4.27 % for the twelve months ended December 31,
2015.
Interest Expense. Interest expense increased $4.2 million, or 8.42%, to $53.9 million for the year ended December
31, 2016 from $49.7 million for the year ended December 31, 2015. The increase in the cost of interest-bearing liabilities was
primarily attributable to an increase of $449.5 million in the average balance of interest-bearing liabilities to $5,036.0 million
for the year ended December 31, 2016 from $4,586.4 million for the year ended December 31, 2015, which was partially offset
by a decrease of one basis point in the cost of interest-bearing liabilities to 1.07% for the year ended December 31, 2016 from
1.08% for the year ended December 31, 2015. The one basis point decrease in the cost of interest-bearing liabilities was
primarily attributable to decreases of nine basis points in each of the cost of certificates of deposit and borrowed funds. The
decrease in the cost of certificates of deposit and borrowed funds was primarily due to maturing issuances being replaced at
lower rates. Additionally, the cost of borrowed funds benefited from the early extinguishment of $130.0 million in FHLB-NY
advances at an average cost of 2.82% and $78.0 million in securities sold under agreements to repurchase, at an average cost
of 3.80% during 2016. These decreases were partially offset by increases of 21 basis points, seven basis points and four basis
points in the cost of money market, NOW and savings accounts, respectively, for the twelve months ended December 31, 2016
from the prior year. The cost of money market accounts increased primarily due to our shifting of Government NOW deposits
to a money market product which does not require us to provide collateral, allowing us to invest these funds in higher yielding
assets. The cost of NOW and savings accounts increased as we increased the rate we pay on some of our products to attract
additional deposits. Additionally, the cost of interest-bearing liabilities was negatively affected by increases of $126.6 million
and $58.2 million in the average balance of higher costing borrowed funds and certificates of deposit, during the twelve months
ended December 31, 2016, which was partially offset by an increase of $261.0 million in the average balance of lower-costing
core deposits during the twelve months ended December 31, 2016 to $2,339.1 million from $2,078.1 million for the prior year.
Net Interest Income. Net interest income for the year ended December 31, 2016 totaled $167.1 million, an increase
of $12.7 million, or 8.20%, from $154.4 million for 2015. The increase in net interest income was primarily due to the growth
of net interest-earning assets. These improvements to net interest income were partially offset by a decrease in the net interest
spread of eight basis points to 2.86% for the twelve months ended December 31, 2016 from 2.94% for the prior year. The yield
on interest-earning assets decreased nine basis points to 3.93% for the year ended December 31, 2016 from 4.02% for the year
ended December 31, 2015, while the cost of interest-bearing liabilities decreased one basis point to 1.07% for the year ended
December 31, 2016 from 1.08% for the prior year. The net interest margin decreased seven basis points to 2.97% for the year
61
ended December 31, 2016 from 3.04% for the year ended December 31, 2015. Excluding prepayment penalty income, the net
interest margin would have been 2.85% and 2.91% for the years ended December 31, 2016 and 2015, respectively.
Provision (Benefit) for Loan Losses. There was no provision or benefit for loan losses recorded for the twelve months
ended December 31, 2016, compared to a benefit of $1.0 million recorded during the prior year. No provision was recorded
during the twelve months ended December 31, 2016 due to the Company’s analysis of the adequacy of the allowance for loan
losses indicating that the reserve was at an appropriate level. During the twelve months ended December 31, 2016, non-accrual
loans decreased $1.8 million to $21.0 million from $22.8 million at December 31, 2015. During the twelve months ended
December 31, 2016, the Bank recorded net recoveries totaling $0.7 million, or two basis points of average loans. The current
average loan-to-value ratio for our non-performing loans collateralized by real estate was 39.1% at December 31, 2016. When
we have obtained properties through foreclosure, we have been able to quickly sell the properties at amounts that approximate
book value. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see
low loss content in our loan portfolio.
Non-Interest Income. Non-interest income for the twelve months ended December 31, 2016 was $57.5 million, an
increase of $41.8 million, or 266.03%, from $15.7 million for the twelve months ended December 31, 2015. The increase in
non-interest income was primarily due to an increase of $41.5 million in net gains on the sale of buildings, as we sold three of
our branch buildings during each of the years ending December 31, 2016 and 2015 in sale-leaseback transactions. Additionally,
non-interest income increased due to an increase in net gains from the sale of securities of $1.4 million and a gain from life
insurance proceeds of $0.5 million. These increases were partially offset by a $1.6 million increase in net losses from fair value
adjustments.
Non-Interest Expense. Non-interest expense was $118.6 million for the twelve months ended December 31, 2016, an
increase of $20.9 million, or 21.37%, from $97.7 million for the twelve months ended December 31, 2015. The increase in
non-interest expense was primarily due to increases of $10.4 million in prepayment penalties from the early extinguishment of
debt during 2016, $7.7 million in salaries and benefits expense, $1.6 million in other operating expenses, $0.9 million in
depreciation and amortization expense and $0.6 million in professional services expense from increases in legal and consulting
expenses. The increase in salaries and benefits was primarily due to annual salary increases and additions in staffing in retail,
audit and compliance departments, as well as increases in production incentives and the cost of split dollar life insurance
benefits. The increase in other operating expenses was due to a $1.4 million increase in net losses on the sale of OREO recorded
during the twelve months ended December 31, 2016, primarily due to the write-down and subsequent sale of one OREO. The
growth in depreciation and amortization expense was primarily due to the opening of two new branches along with the move
to our new corporate headquarters both occurring during 2015. The efficiency ratio was 59.6% for the twelve months ended
December 31, 2016 compared to 58.6% for the twelve months ended December 31, 2015.
Income Tax Provisions. Income tax expense for the year ended December 31, 2016 increased $13.9 million, or
51.30%, to $41.1 million, compared to $27.2 million for the year ended December 31, 2015. The increase was primarily
due to a $32.6 million increase in income before income taxes and an increase in the effective tax rate to 38.8% for the
twelve months ended December 31, 2016 from 37.0% in the prior year. The increase in the effective tax rate reflects
the reduced impact that preferential tax items had on the Company’s tax liability during the twelve months ended December
31, 2016 compared to the twelve months ended December 31, 2015.
Liquidity, Regulatory Capital and Capital Resources
Our primary sources of funds are deposits, borrowings, principal and interest payments on loans, mortgage-backed
and other securities, and proceeds from sales of securities and loans. Deposit flows and mortgage prepayments, however, are
greatly influenced by general interest rates, economic conditions and competition. At December 31, 2017, the Bank was able
to borrow up to $2,819.5 million from the FHLB-NY in Federal Home Loan Bank advances and letters of credit. As of
December 31, 2017, the Bank had $1,600.8 million outstanding in combined balances of FHLB-NY advances and letters of
credit. At December 31, 2017, the Bank also has unsecured lines of credit with other commercial banks totaling $100.0 million.
In addition, the Holding Company has subordinated debentures totaling $73.7 million and junior subordinated debentures with
a face amount of $61.9 million and a carrying amount of $37.0 million (which are both included in Borrowed Funds). (See
Note 9 of Notes to the Consolidated Financial Statements in Item 8 of this Annual Report.) Management believes its available
sources of funds are sufficient to fund current operations.
Our most liquid assets are cash and cash equivalents, which include cash and due from banks, overnight interest-
earning deposits and federal funds sold with original maturities of 90 days or less. The level of these assets is dependent on our
operating, financing, lending and investing activities during any given period. At December 31, 2017, cash and cash equivalents
totaled $51.5 million, a decrease of $15.7 million from December 31, 2016. We also held marketable securities available for
sale with a market value of $738.4 million at December 31, 2017.
62
At December 31, 2017, we had commitments to extend credit (principally real estate mortgage loans) of $116.7 million
and open lines of credit for borrowers (principally business lines of credit and home equity loan lines of credit) of $224.7
million. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate
future cash requirements, whereas the amounts of lines of credit may not be indicative of our future cash requirements. The
loan commitments generally expire in 90 days, while construction loan lines of credit mature within 18 months and home equity
loan lines of credit mature within 10 years. We use the same credit policies in making commitments and conditional obligations
as we do for on-balance-sheet instruments.
Our total interest expense and non-interest expense in 2017 were $61.5 million and $107.5 million, respectively.
We maintain three postretirement defined benefit plans for our employees: a noncontributory defined benefit pension
plan which was frozen as of September 30, 2006, a contributory medical plan, and a noncontributory life insurance plan. The
life insurance plan was amended to discontinue providing life insurance benefits to future retirees after January 1, 2010 and the
medical plan was frozen as of January 1, 2011. We also maintain a noncontributory defined benefit plan for certain of our non-
employee directors, which was frozen as of January 1, 2004. The employee pension plan is the only plan that we have funded.
During 2017, we incurred cash expenditures of $0.1 million for the medical and life insurance plans and $0.1 million for the
non-employee director plan; we did not make a contribution to the employee pension plan in 2017. We expect to pay similar
amounts for these plans in 2018. (See Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)
The amounts reported in our financial statements are obtained from reports prepared by independent actuaries, and
are based on significant assumptions. The most significant assumption is the discount rate used to determine the accumulated
postretirement benefit obligation (“APBO”) for these plans. The APBO is the present value of projected benefits that employees
and retirees have earned to date. The discount rate is a single rate at which the liabilities of the plans are discounted into today’s
dollars and could be effectively settled or eliminated. The discount rate used is based on the Citigroup Pension Liability Index,
and reflects a rate that could be earned on bonds over a similar period that we anticipate the plans’ liabilities will be paid. An
increase in the discount rate would reduce the APBO, while a reduction in the discount rate would increase the APBO. During
the past several years, when interest rates have been at historically low levels, the discount rate used for our plans has declined
from 7.25% for 2001 to 3.42% for 2017. This decline in the discount rate has resulted in an increase in our APBO.
The Company’s actuaries use several other assumptions that could have a significant impact on our APBO and periodic
expense for these plans. These assumptions include, but are not limited to, expected rate of return on plan assets, future increases
in medical and life insurance premiums, turnover rates of employees, and life expectancy. The accounting standards for
postretirement plans involve mechanisms that serve to limit the volatility of earnings by allowing changes in the value of plan
assets and benefit obligations to be amortized over time when actual results differ from the assumptions used, there are changes
in the assumptions used, or there are plan amendments. At December 31, 2017, our employee pension plan and medical and
life insurance plan have unrecognized losses of $6.2 million and $1.2 million, respectively. The non-employee director plan
has a $0.5 million unrecognized gain, due to experience different from what had been estimated and changes in actuarial
assumptions. The employee pension plan’s unrecognized loss is primarily attributed to the reduction in the discount rate and
change in the Plan’s mortality table. The medical and life insurance plans’ unrecognized loss is attributed to the reduction in
the discount rate over the past several years. In addition, the non-employee director pension plan has an unrecognized past
service liability of $12,000 due to plan amendments in prior years and the medical and life insurance plan have a $0.4 million
past service credit due to plan amendments. The net after tax effect of the unrecognized gains and losses associated with these
plans has been recorded in accumulated other comprehensive loss in stockholders’ equity, resulting in a reduction of
stockholders’ equity of $3.7 million as of December 31, 2017.
The change in the discount rate, the Pension Plan’s mortality table and the reduction in medical premiums are the only
significant changes made to the assumptions used for these plans for each of the three years ended December 31, 2017. During
the years ended December 31, 2017, 2016 and 2015, the actual return on the employee pension plan assets was approximately
255%, 90% and 31%, respectively, of the assumed return used to determine the periodic pension expense for that respective
year.
The market value of the assets of our employee pension plan is $22.7 million at December 31, 2017, which is $0.9
million less than the projected benefit obligation. We do not anticipate a change in the market value of these assets which would
have a significant effect on liquidity, capital resources, or results of operations.
During 2017, funds provided by the Company's operating activities amounted to $83.8 million. These funds combined
with $186.3 million provided from financing activities were utilized to fund net investing activities of $254.4 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 year ended December 31, 2017, the net total of loan originations and purchases less loan repayments
and sales was $365.6 million. During the year ended December 31, 2017, the Company also purchased $170.9 million in
securities. During 2017, funds were provided by net increases of $177.1 million and $92.0 million in total deposits and short-
63
term borrowed funds, respectively, and $230.0 million in long-term borrowings. Additionally, funds were provided by $286.9
million in proceeds from maturities, sales, calls and prepayments of securities. The Company also used funds of $282.5 million,
$21.0 million and $9.3 million for the repayment of long-term borrowed funds, dividend payments and purchases of treasury
stock, respectively, during the year ended December 31, 2017.
At the time of the Bank’s conversion from a federally chartered mutual savings bank to a federally chartered stock
savings bank, the Bank was required by its primary regulator to establish a liquidation account which is reduced as and to the
extent that eligible account holders reduce their qualifying deposits. Upon completion of the Merger, the liquidation account
was assumed by the Bank. The balance of the liquidation account at December 31, 2017 was $0.6 million. In the unlikely event
of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation
account. The Bank is not permitted to declare or pay a dividend or to repurchase any of its capital stock if the effect would be
to cause the Bank’s regulatory capital to be reduced below the amount required for the liquidation account but approval of the
NYDFS Superintendent is required if the total of all dividends declared by the Bank in a calendar year would exceed the total
of its net profits for that year combined with its retained net profits for the preceding two years less prior dividends paid. The
Holding Company is subject to the same regulatory restrictions on the declaration of dividends as the Bank.
Regulatory Capital Position. Under applicable regulatory capital regulations, the Bank and the Company are required
to comply with each of four separate capital adequacy standards: leverage capital, common equity Tier I risk-based capital,
Tier I risk-based capital and total risk-based capital. Such classifications are used by the FDIC and other bank regulatory
agencies to determine matters ranging from each institution’s quarterly FDIC deposit insurance premium assessments, to
approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. At December
31, 2017 and 2016, the Bank and the Company exceeded each of their four regulatory capital requirements. (See Note 14 of
Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.)
Critical Accounting Policies
The Company’s accounting policies are integral to understanding the results of operations and statement of financial
condition. These policies are described in the Notes to Consolidated Financial Statements. Several of these policies require
management’s judgment to determine the value of the Company’s assets and liabilities. The Company has established detailed
written policies and control procedures to ensure consistent application of these policies. The Company has identified four
accounting policies that require significant management valuation judgment: the allowance for loan losses, fair value of
financial instruments, including other-than-temporary impairment assessment, goodwill impairment and income taxes.
Allowance for Loan Losses. An allowance for loan losses (“ALL”) is provided to absorb probable estimated losses
inherent in the loan portfolio. Management reviews the adequacy of the ALL by reviewing all impaired loans on an individual
basis. The remaining portfolio is evaluated based on the Company's historical loss experience, recent trends in losses, collection
policies and collection experience, trends in the volume of non-performing loans, changes in the composition and volume of
the gross loan portfolio, and local and national economic conditions. Judgment is required to determine how many years of
historical loss experience are to be included when reviewing historical loss experience. A full credit cycle must be used, or loss
estimates may be inaccurate. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant
revisions as more information becomes available.
Notwithstanding the judgment required in assessing the components of the ALL, the Company believes that the ALL
is adequate to cover losses inherent in the loan portfolio. The policy has been applied on a consistent basis for all periods
presented in the Consolidated Financial Statements.
Fair Value of Financial Instruments. The Company carries certain financial assets and financial liabilities at fair value
under the fair value option. Fair value is considered 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. Management selected the fair value option for
certain investment securities, primarily mortgage-backed securities, and certain borrowings. Changes in the fair value of
financial instruments for which the fair value election is made are recorded in the Consolidated Statements of Income. At
December 31, 2017, financial assets and financial liabilities with fair values of $14.3 million and $37.0 million, respectively,
are carried at fair value under the fair value option.
The securities portfolio also consists of mortgage-backed and other securities for which the fair value election was not
selected. These securities are classified as available for sale or held-to-maturity. Securities classified as available for sale are
carried at fair value in the Consolidated Statements of Financial Condition, with changes in fair value recorded in accumulated
other comprehensive loss. Securities held-to-maturity are carried at their amortized cost in the Consolidated Statements of
Financial Condition. If any decline in fair value for securities classified available for sale or held-to-maturity is deemed other-
than-temporary, the security is written down to a new cost basis with the resulting loss recorded in the Consolidated Statements
of Income. During 2017 and 2016, no other-than-temporary impairment charges were recorded.
64
Financial assets and financial liabilities reported at fair value are required to be measured based on the following
alternatives: (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). Judgment is required in selecting the appropriate level to be
used to determine fair value. The majority of financial assets and financial liabilities for which the fair value election was made,
and the majority of investments classified as available for sale and held-to-maturity, were measured using Level 2 inputs, which
require judgment to determine the fair value. The trust preferred securities held in the investment portfolio, and the Company’s
junior subordinated debentures, were measured using Level 3 inputs due to the inactive market for these securities.
Goodwill Impairment. Goodwill is presumed to have an indefinite life and is tested for impairment, rather than
amortized, on at least an annual basis. For the purpose of goodwill impairment testing, management has concluded that the
Company has one reporting unit. If the fair value of the reporting unit exceeds its carrying amount, there is no impairment of
goodwill. However, if the fair value of the reporting unit is less than its carrying amount, further evaluation is required to
determine if a write down of goodwill is required.
Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for
measurement, when available. Other acceptable valuation methods include an asset approach, which determines a fair value
based upon the value of assets net of liabilities, an income approach, which determines fair value using one or more methods
that convert anticipated economic benefits into a present single amount, and a market approach, which determines a fair value
based on the similar businesses that have been sold.
The Company conducts its annual qualitative impairment testing of goodwill as of December 31. The impairment
testing as of December 31, 2017, 2016 and 2015 did not show an impairment of goodwill based on the fair value of the
Company.
Income Taxes. The Company estimates its income taxes payable based on the amounts it expects to owe to the various
taxing authorizes (i.e. federal, state and local). In estimating income taxes, management assesses the relative merits and risks
of the tax treatment of transactions, taking into account statutory, judicial and regulatory guidance in the context of the
Company’s tax position. Management also relies on tax opinions, recent audits, and historical experience.
The Company also recognizes deferred tax assets and liabilities for the future tax consequences of differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance
is required for deferred tax assets that the Company estimates are more likely than not to be unrealizable, based on evidence
available at the time the estimate is made. These estimates can be affected by changes to tax laws, statutory tax rates, and future
income levels.
Contractual Obligations
Payments Due By Period
Total
$
1,309,653
4,383,278
341,462
59,196
25,073
Less Than
1 Year
$
630,588
3,790,705
341,462
6,333
6,292
1 - 3
Years
(In thousands)
443,364
$
544,919
-
14,520
10,736
3 - 5
Years
More
Than
5 Years
$
125,016
45,576
-
12,685
8,045
$
110,685
2,078
-
25,658
-
12,459
14,032
484
339
1,083
678
1,140
678
9,752
12,337
Borrowings
Deposits
Loan commitments
Operating lease obligations
Purchase obligations
Pension and other postretirement
benefits
Deferred compensation plans
Total
$
6,145,153
$
4,776,203
$
1,015,300
$
193,140
$
160,510
We have significant obligations that arise in the normal course of business. We finance our assets with deposits and
borrowings. We also use borrowings to manage our interest-rate risk. Borrowings with call provisions are included in the period
of the next call date. We have the means to refinance these borrowings as they mature or are called through financing
arrangements with the FHLB-NY and our ability to arrange repurchase agreements with broker-dealers and the FHLB-NY.
(See Notes 8 and 9 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)
65
We focus our balance sheet growth on the origination of mortgage loans. At December 31, 2017, we had commitments
to extend credit and lines of credit of $341.5 million for mortgage and other loans. These loans will be funded through principal
and interest payments received on existing mortgage loans and mortgage-backed securities, growth in customer deposits, and,
when necessary, additional borrowings. (See Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual
Report.)
At December 31, 2017, the Bank had 18 branches, which were all leased. In addition, we lease our executive offices.
We currently outsource our data processing, loan servicing and check processing functions. We believe that this is the most
cost effective method for obtaining these services. These arrangements are usually volume dependent and have varying terms.
The contracts for these services usually include annual increases based on the increase in the consumer price index. The
amounts shown above for purchase obligations represent the current term and volume of activity of these contracts. We expect
to renew these contracts as they expire.
The amounts shown for pension and other postretirement benefits reflect our directors’ pension plan and amounts due
under our plan for medical and life insurance benefits for retired employees. The amount shown in the “Less Than 1 Year”
column represents our current estimate for these benefits, some of which are based on information supplied by actuaries. The
amounts shown in columns reflecting periods over one year represent our current estimate based on the past year’s actual
disbursements and information supplied by actuaries. The amounts do not include an increase for possible future retirees or
increases in health plan costs. The amount shown in the “More Than 5 Years” column represents the amount required to
increase the total amount to the projected benefit obligation of the directors’ plan and the medical and life insurance benefit
plans, since these are unfunded plans and the underfunded portion of the employee pension plan. (See Note 12 of Notes to
Consolidated Financial Statements in Item 8 of this Annual Report.)
We currently provide a non-qualified deferred compensation plan for officers who have achieved the designated level
and completed one year of service. However, certain officers who have not reached the designated level but were already
participants remain eligible to participate in the Plan. In addition to the amounts deferred by the officers, we match 50% of
their contributions, generally up to a maximum of 5% of the officer’s salary. These plans generally require the deferred balance
to be credited with earnings at a rate earned by certain mutual funds. The amounts shown in the columns for less than five years
represent the estimate of the amounts we will contribute to a rabbi trust with respect to matching contributions under these
plans. The amount shown in the “More Than 5 Years” column represents the current accrued liability for these plans, adjusted
for the activity in the columns for less than five years. This expense is provided in the Consolidated Statements of Income, and
the liability has been provided in the Consolidated Statements of Financial Condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
This information is contained in the section captioned “Interest Rate Risk” on page 57 and in Notes 15 and 16 of the
Notes to Consolidated Financial Statements in Item 8 of this Annual Report.
66
Item 8.
Financial Statements and Supplementary Data.
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
Assets
Cash and due from banks
Securities held-to-maturity:
Mortgage-backed securities (none pledged; fair value of $7,810 at December 31, 2017)
Other securities (none pledged; fair value of $21,889 and $35,408
at December 31, 2017 and 2016, respectively)
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $148,505 and
$145,860 at December 31, 2017 and 2016, respectively; $1,590 and
$2,016 at fair value pursuant to the fair value option at
December 31, 2017 and 2016, respectively)
Other securities (including assets pledged of $44,052 and $82,064 at
December 31, 2017 and 2016, respectively ; $12,685 and $28,429 at fair value
pursuant to the fair value option at December 31, 2017 and 2016, respectively)
Loans, net of fees and costs
Less: Allowance for loan losses
Net loans
Interest and dividends receivable
Bank premises and equipment, net
Federal Home Loan Bank of New York stock, at cost
Bank owned life insurance
Goodwill
Other assets
Total assets
Liabilities
Due to depositors:
Non-interest bearing
Interest-bearing
Mortgagors' escrow deposits
Borrowed funds:
Federal Home Loan Bank advances
Subordinated debentures
Junior subordinated debentures, at fair value
Total borrowed funds
Other liabilities
Total liabilities
Commitments and contingencies (Note 15)
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 December 31, 2017 and 2016; 28,588,266 shares and 28,632,904 shares
outstanding at December 31, 2017 and 2016, respectively)
Additional paid-in capital
Treasury stock, at average cost (2,942,329 shares and 2,897,691 at December 31,
2017 and 2016, respectively)
Retained earnings
Accumulated other comprehensive loss, net of taxes
Total stockholders' equity
December 31,
2017
December 31,
2016
(Dollars in thousands, except per share data)
$
51,546
$
35,857
7,973
22,913
-
37,735
509,650
516,476
228,704
5,176,999
(20,351)
5,156,648
21,405
30,836
60,089
131,856
16,127
61,527
6,299,274
$
344,905
4,835,693
(22,229)
4,813,464
20,228
26,561
59,173
132,508
16,127
55,453
6,058,487
$
$
385,269
3,955,403
42,606
$
333,163
3,832,252
40,216
1,198,968
73,699
36,986
1,309,653
73,735
5,766,666
1,159,190
73,414
33,959
1,266,563
72,440
5,544,634
-
-
315
217,906
(57,675)
381,048
(8,986)
532,608
315
214,462
(53,754)
361,192
(8,362)
513,853
Total liabilities and stockholders' equity
$
6,299,274
$
6,058,487
The accompanying notes are an integral part of these consolidated financial statements.
67
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
2017
For the years ended December 31,
2016
(In thousands, except per share data)
2015
Interest and dividend income
Interest and fees on loans
Interest and dividends on securities:
Interest
Dividends
Other interest income
Total interest and dividend income
Interest expense
Deposits
Other interest expense
Total interest expense
Net interest income
Provision (benefit) for loan losses
Net interest income after benefit for loan losses
Non-interest income
Banking services fee income
Net gain on sale of loans
Net (loss) gain on sale of securities
Net gain on sale of buildings
Net loss from fair value adjustments
Federal Home Loan Bank of New York stock dividends
Gains from life insurance proceeds
Bank owned life insurance
Other income
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy and equipment
Professional services
FDIC deposit insurance
Data processing
Depreciation and amortization of bank premises and equipment
Other real estate owned / foreclosure expense
Prepayment penalty on borrowings
Other operating expenses
Total non-interest expense
Income before income taxes
Provision for income taxes
Federal
State and local
Total provision for income taxes
Net income
Basic earnings per common share
Diluted earnings per common share
$
209,283
$
195,125
$
178,720
24,489
287
526
234,585
40,319
21,159
61,478
173,107
9,861
163,246
4,156
603
(186)
-
(3,465)
3,081
1,405
3,227
1,541
10,362
62,087
10,409
7,500
1,815
5,238
4,832
404
-
15,189
107,474
66,134
22,844
2,169
25,013
25,141
481
250
220,997
33,350
20,561
53,911
167,086
-
167,086
3,758
584
1,524
48,018
(3,434)
2,664
460
2,797
1,165
57,536
60,825
9,848
7,720
2,993
4,364
4,450
1,307
10,356
16,740
118,603
106,019
33,580
7,523
41,103
24,827
473
126
204,146
30,336
19,390
49,726
154,420
(956)
155,376
3,805
422
167
6,537
(1,841)
1,969
-
2,880
1,780
15,719
53,093
10,206
7,074
3,236
4,471
3,579
942
-
15,118
97,719
73,376
21,843
5,324
27,167
$
41,121
$
64,916
$
46,209
$
$
1.41
1.41
$
$
2.24
2.24
$
$
1.59
1.59
The accompanying notes are an integral part of these consolidated financial statements.
68
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the years ended December 31,
2016
2015
2017
Net income
$
41,121
$
64,916
$
46,209
(in thousands)
Other comprehensive income (loss), net of tax:
Amortization of prior service credits, net of taxes of $12, $18 and $20
for the years ended December 31, 2017, 2016 and 2015, respectively
Amortization of net actuarial losses, net of taxes of ($249), ($238) and ($509)
for the years ended December 31, 2017, 2016 and 2015, respectively
Unrecognized actuarial gains (losses), net of taxes of ($146), ($367) and ($465)
for the years ended December 31, 2017, 2016 and 2015, respectively
Change in net unrealized losses on securities available for sale,
net of taxes of $1,783, $1,737 and $2,911
for the years ended December 31, 2017, 2016 and 2015, respectively
Reclassification adjustment for net losses (gains) included in net income,
net of taxes of ($78), $638 and $72
for the years ended December 31, 2017, 2016 and 2015, respectively
Net unrealized gain on cashflow hedges, net of taxes of ($179)
for the year ended December 31, 2017
Total other comprehensive income (loss), net of tax
Comprehensive income
(33)
356
485
(27)
330
235
(26)
669
615
(1,771)
(2,452)
(3,818)
108
231
(624)
(886)
-
(95)
-
(2,800)
(2,655)
$
40,497
$
62,116
$
43,554
The accompanying notes are an integral part of these consolidated financial statements.
69
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Total
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated Other
Comprehensive Loss
(Dollars in thousands, except per share data)
Balance at December 31, 2014
$
456,247
$
315
$
206,437
$
(37,221)
$
289,623
$
(2,907)
Net Income
Award of common shares released from Employee
Benefit Trust (147,616 shares)
Vesting of restricted stock unit awards (204,310 shares)
Exercise of stock options (45,785 shares)
Stock-based compensation expense
Stock-based income tax benefit
Purchase of treasury shares (735,599 shares)
Repurchase of shares to satisfy tax
obligation (65,666 shares)
Dividends on common stock ($0.64 per share)
Other comprehensive loss
Balance at December 31, 2015
Net Income
Award of common shares released from Employee
Benefit Trust (142,065 shares)
Vesting of restricted stock unit awards (245,311 shares)
Exercise of stock options (103,530 shares)
Stock-based compensation expense
Stock-based income tax benefit
Purchase of treasury shares (403,695 shares)
Repurchase of shares to satisfy tax
obligation (85,982 shares)
Dividends on common stock ($0.68 per share)
Other comprehensive loss
Balance at December 31, 2016
Net Income
Award of common shares released from Employee
Benefit Trust (118,371 shares)
Vesting of restricted stock unit awards (284,595 shares)
Exercise of stock options (4,400 shares)
Stock-based compensation expense
Stock-based income tax benefit
Purchase of treasury shares (241,625 shares)
Repurchase of shares to satisfy tax
obligation (90,779 shares)
Dividends on common stock ($0.72 per share)
Other comprehensive loss
Balance at December 31, 2017
46,209
2,092
-
145
4,676
574
(14,351)
(1,254)
(18,616)
(2,655)
473,067
64,916
2,057
-
328
5,120
712
(8,031)
(1,827)
(19,689)
(2,800)
513,853
41,121
2,512
-
-
5,990
-
(6,666)
-
-
-
-
-
-
-
-
-
-
315
-
-
-
-
-
-
-
-
-
-
315
-
-
-
-
-
-
-
-
-
46,209
2,092
(3,076)
(51)
4,676
574
-
-
-
-
210,652
-
3,580
378
-
-
(14,351)
(1,254)
-
-
(48,868)
-
(504)
(182)
-
-
-
-
(18,616)
-
316,530
-
-
64,916
2,057
(4,049)
(30)
5,120
712
-
-
-
-
214,462
-
4,446
526
-
-
(8,031)
(1,827)
-
-
(53,754)
-
(397)
(168)
-
-
-
-
(19,689)
-
361,192
-
-
41,121
2,512
(5,052)
(6)
5,990
-
-
-
5,323
46
-
-
(6,666)
-
(271)
(40)
-
-
-
-
-
-
-
-
-
-
-
-
(2,655)
(5,562)
-
-
-
-
-
-
-
-
-
(2,800)
(8,362)
-
-
-
-
-
-
-
(2,624)
(20,954)
(624)
532,608
$
-
-
-
315
$
-
-
-
217,906
$
(2,624)
-
-
(57,675)
$
-
(20,954)
-
381,048
$
-
-
(624)
(8,986)
$
The accompanying notes are an integral part of these consolidated financial statements.
70
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision (benefit) for loan losses
Depreciation and amortization of premises and equipment
Net gain on sales of loans
Net loss (gain) on sales of securities
Net gain on sales of OREO
Net gain on sales of buildings
Amortization of premium, net of accretion of discount
Fair value adjustment for financial assets and financial liabilities
Income from bank owned life insurance
Gain from life insurance proceeds
Stock-based compensation expense
Deferred compensation
Excess tax benefits from stock-based payment arrangements
Deferred income tax provision (benefit)
Decrease (increase) in other assets
Increase in other liabilities
Net cash provided by operating activities
Investing Activities
Purchases of premises and equipment
Net purchases of Federal Home Loan Bank-NY shares
Purchases of securities held-to-maturity
Proceeds from sales and calls of securities held-to-maturity
Purchases of securities available for sale
Proceeds from sales and calls of securities available for sale
Proceeds from maturities and prepayments of
securities available for sale
Proceeds from sale of buildings
Purchase of bank owned life insurance
Proceeds from life insurance
Net originations of loans
Purchases of loans
Proceeds from sale of loans
Proceeds from sale of OREO, net
Net cash used in investing activities
For the years ended December 31,
2016
2015
2017
(In thousands)
$
41,121
$
64,916
$
46,209
9,861
4,832
(603)
186
(50)
-
7,509
3,465
(3,227)
(1,405)
5,990
(4,154)
-
8,735
5,205
6,061
83,526
(9,434)
(916)
(9,030)
15,870
(161,939)
194,799
76,230
-
-
5,284
(225,449)
(196,456)
56,344
583
(254,114)
-
4,450
(584)
(1,524)
238
(48,018)
8,453
3,434
(2,797)
(460)
5,884
(4,033)
(712)
(1,540)
4,932
9,756
42,395
(6,655)
(3,107)
(40,205)
8,515
(139,186)
143,819
118,498
49,284
(16,000)
2,432
(267,446)
(186,717)
11,499
3,037
(322,232)
(956)
3,579
(422)
(167)
(300)
(6,537)
8,986
1,841
(2,880)
-
4,845
(3,561)
(574)
(5,210)
(4,984)
4,861
44,730
(11,089)
(9,142)
(5,100)
3,430
(313,822)
163,158
114,097
20,209
-
-
(301,766)
(278,928)
16,252
2,185
(600,516)
Continued
The accompanying notes are an integral part of these consolidated financial statements.
71
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the years ended December 31,
2016
2015
2017
Financing Activities
Net increase in non interest-bearing deposits
Net increase in interest-bearing deposits
Net increase in mortgagors' escrow deposits
Net proceeds from short-term borrowed funds
Proceeds from long-term borrowings
Repayment of long-term borrowings
Issuance of subordinated debentures, net of issuance costs of $1,598
Purchases of treasury stock
Excess tax benefits from stock-based payment arrangements
Proceeds from issuance of common stock upon exercise
of stock options
Cash dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
(In thousands)
$
63,694
245,271
3,372
178,500
300,000
(562,401)
73,402
(9,858)
712
328
(19,689)
273,331
(6,506)
42,363
$
52,106
122,563
2,390
92,000
230,000
(282,538)
-
(9,290)
-
-
(20,954)
186,277
15,689
35,857
$
13,635
368,137
1,165
30,000
310,000
(125,551)
-
(15,605)
574
145
(18,616)
563,884
8,098
34,265
Cash and cash equivalents, end of year
$
51,546
$
35,857
$
42,363
Supplemental Cash Flow Disclosure
Interest paid
Income taxes paid
Taxes paid if excess tax benefits on stock-based compensation
were not tax deductible
Non-cash activities:
Securities transferred from available for sale to held-to-maturity
Loans transferred to Other Real Estate Owned
Loans provided for the sale of Other Real Estate Owned
Loans held for investment transferred to loans held for sale
Securities transferred to other assets
.
$
59,868
23,899
$
53,755
36,813
$
48,467
32,574
25,450
37,525
33,148
-
-
-
30,565
7,000
-
639
-
-
-
4,510
1,667
280
300
-
The accompanying notes are an integral part of these consolidated financial statements.
72
FLUSHING FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the years ended December 31, 2017, 2016 and 2015
1. Nature of Operations
Flushing Financial Corporation (the “Holding Company”), a Delaware business corporation, is the bank holding company of
its wholly-owned subsidiary Flushing Bank (the “Bank”). The Holding Company and its direct and indirect wholly-owned
subsidiaries, including the Bank, Flushing Preferred Funding Corporation (“FPFC”), Flushing Service Corporation (“FSC”),
and FSB Properties Inc. (“Properties”), are collectively herein referred to as the “Company.”
The Company’s 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 properties, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four
family (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial
units); (2) construction loans, primarily for residential properties; (3) Small Business Administration (“SBA”) loans and other
small business loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities,
corporate fixed-income securities and other marketable securities. The Bank also originates certain other consumer loans
including overdraft lines of credit. The Bank primarily conducts its business through eighteen full-service banking offices,
eight of which are located in Queens County, three in Nassau County, five in Kings County (Brooklyn), and two in New York
County (Manhattan), New York. The Bank also operates an internet branch, which operates under the brands of
iGObanking.com® and BankPurely® (the “Internet Branch”), offering checking, savings, money market and certificates of
deposit accounts.
2. Summary of Significant Accounting Policies
The accounting and reporting policies of the Company follow accounting principles generally accepted in the United States of
America (“GAAP”) and general practices within the banking industry. The policies which materially affect the determination
of the Company’s financial position, results of operations and cash flows are summarized below.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Holding Company and the following direct
and indirect wholly-owned subsidiaries of the Holding Company: the Bank, FPFC, FSC, and Properties. FPFC is a real estate
investment trust formed to hold a portion of the Bank’s mortgage loans to facilitate access to capital markets. FSC was formed
to market insurance products and mutual funds. Properties is currently used to hold title to real estate owned acquired via
foreclosure. Amounts held in a rabbi trust for certain non-qualified deferred compensation plans are included in the consolidated
financial statements. All intercompany transactions and accounts are eliminated in consolidation. The Holding Company
currently has three unconsolidated subsidiaries in the form of wholly-owned statutory business trusts, which were formed to
issue guaranteed capital debentures (“capital securities”). See Note 9, “Borrowed Funds,” for additional information regarding
these trusts.
When necessary, certain reclassifications were made to prior-year amounts to conform to the current-year presentation.
Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the
financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly
susceptible to change in the near term are used in connection with the determination of the allowance for loan losses (“ALL”),
the evaluation of goodwill for impairment, the review of the need for a valuation allowance of the Company’s deferred tax
assets, the fair value of financial instruments including the evaluation of other-than-temporary impairment (“OTTI”) on
securities. Actual results could differ from these estimates.
Cash and Cash Equivalents:
For the purpose of reporting cash flows, the Company defines cash and due from banks, overnight interest-earning deposits
and federal funds sold with original maturities of 90 days or less as cash and cash equivalents. At December 31, 2017 and 2016,
the Company’s cash and cash equivalents totaled $51.5 million and $35.9 million, respectively. Included in cash and cash
equivalents at those dates were $39.4 million and $25.8 million in interest-earning deposits in other financial institutions,
primarily due from the Federal Reserve Bank of New York and the Federal Home Loan Bank of New York (“FHLB-NY”).
The Bank is required to maintain cash reserves equal to a percentage of certain deposits. The reserve requirement is included
in cash and cash equivalents and totaled $9.7 million and $10.1 million at December 31, 2017 and 2016, respectively.
73
Debt and Equity Securities:
Securities are classified as held-to-maturity when management intends to hold the securities until maturity. Securities are
classified as available for sale when management intends to hold the securities for an indefinite period of time or when the
securities may be utilized for tactical asset/liability purposes and may be sold from time to time to effectively manage interest
rate exposure and resultant prepayment risk and liquidity needs. Premiums and discounts are amortized or accreted,
respectively, using the level-yield method. Realized gains and losses on the sales of securities are determined using the specific
identification method. Unrealized gains and losses (other than unrealized losses considered other-than-temporary which are
recognized in the Consolidated Statements of Income) on securities available for sale are excluded from earnings and reported
as part of accumulated other comprehensive loss, net of taxes. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the
current interest rate environment, (3) the financial condition and near-term prospects of the issuer, if applicable, and (4) the
intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. OTTI losses for debt securities are measured using a discounted cash flow model. OTTI losses for equity
securities are measured using quoted market prices, when available, or, when market quotes are not available due to an illiquid
market, we use an impairment model from a third party or quotes from investment brokers. See Note 6, “Debt and Equity
Securities,” for additional information regarding other-than-temporary impairment for debt and equity securities.
Goodwill:
Goodwill is presumed to have an indefinite life and is tested annually, or more frequently when certain conditions are met, for
impairment. If the fair value of the reporting unit is greater than the goodwill amount, no further evaluation is required. If the
fair value of the reporting unit is less than the goodwill amount, further evaluation would be required to compare the fair value
of the reporting unit to the goodwill amount and determine if impairment is required.
In performing the goodwill impairment testing, the Company has identified a single reporting unit. The Company performed
the qualitative assessment in reviewing the carrying value of goodwill as of December 31, 2017, 2016 and 2015, concluding
that there was no goodwill impairment. At December 31, 2017 and 2016, the carrying amount of goodwill totaled $16.1 million.
The identification of additional reporting units, the use of other valuation techniques and/or changes to input assumptions used
in the analysis could result in materially different evaluations of goodwill impairment.
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 not likely to occur.
The Bank may purchase loans to supplement originations. Loan purchases are evaluated at the time of purchase to determine
the appropriate accounting treatment. Performing loans purchased at a premium/discount are recorded at the purchase price
with the premium/discount being amortized/accreted into interest income over the life of the loan. All loans purchased during
the years ended December 31, 2017 and 2016 were performing loans at the time of purchase and therefore were not considered
impaired when purchased.
Allowance for Loan Losses:
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
74
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.
The Company maintains an ALL 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. 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 ALL includes estimates that are susceptible to significant changes due to changes in
appraisal values of collateral, national and local economic conditions and other factors. We review our loan portfolio by
separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. The
Company reviews each impaired loan on an individual basis to determine if either a charge-off or a valuation allowance needs
to be allocated to the loan. The Company does not charge-off or allocate a valuation allowance to loans for which management
has concluded the current value of the underlying collateral will allow for recovery of the loan balance either through the sale
of the loan or by foreclosure and sale of the property.
For calculating the ALL, 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. For 2017, the Company used a loss emergence
period of 1.33 years compared to one year used in the calculation in prior periods. This change resulted in an increase of $0.5
million in the ALL at December 31, 2017. The Company’s Board of Directors reviews and approves management’s evaluation
of the adequacy of the ALL on a quarterly basis.
The Company considers fair value of collateral dependent mortgage loans to be 85% of the appraised or internally estimated
value. 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 evaluates the underlying collateral through a third party appraisal, or when a third party appraisal is not available,
the Company will use an internal evaluation. The internal evaluations are prepared using an income approach or a sales
approach. The income approach is used for income producing properties and uses current revenues less operating expenses to
determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using
an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market. When an
internal evaluation is used, we place greater reliance on the income approach to value the collateral.
In preparing internal evaluations of property values, the Company seeks to obtain current data on the subject property from
various sources, including: (1) the borrower; (2) copies of existing leases; (3) local real estate brokers and appraisers; (4) public
records (such as for real estate taxes and water and sewer charges); (5) comparable sales and rental data in the market; (6) an
inspection of the property and (7) interviews with tenants. These internal evaluations primarily focus on the income approach
and comparable sales data to value the property.
75
As of December 31, 2017, we utilized recent third party appraisals of the collateral to measure impairment for $28.0 million,
or 72.8%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $10.4 million, or
27.2%, of collateral dependent impaired loans.
The Company may restructure a loan to enable a borrower experiencing financial difficulties to continue making payments
when it is deemed to be in the Company’s best long-term interest. This restructure may include reducing the interest rate or
amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the
original terms of the loan. We classify these loans as Troubled Debt Restructured (“TDR”).
These restructurings have not included a reduction of principal balance. The Company believes that restructuring these loans
in this manner will allow certain borrowers to become and remain current on their loans. All loans classified as TDR are
considered impaired. TDRs 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. Loans that are restructured as TDR but are not performing in accordance with the
restructured terms are placed on non-accrual status and reported as non-performing loans.
The allocation of a portion of the ALL 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 December 31, 2017, there were no commitments to lend additional funds to borrowers whose loans were
modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it
require a significant allocation of the ALL.
Loans Held for Sale:
Loans held for sale are carried at the lower of cost or estimated fair value. At December 31, 2017 and 2016, there were no loans
classified as held for sale.
Bank Owned Life Insurance:
Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain current and past employees who have
provided positive consent allowing the Bank to be the beneficiary of such policies. BOLI is carried in the Consolidated
Statements of Financial Condition at its cash surrender value. Increases in the cash value of the policies, as well as proceeds
received, are recorded in other non-interest income, and are not subject to income taxes.
Other Real Estate Owned:
OREO consists of property acquired through foreclosure. These properties are carried at fair value, less estimated selling costs.
The fair value is based on appraised value through a current appraisal, or at times through an internal review, additionally
adjusted by the estimated costs to sell the property. This determination is made on an individual asset basis. If the fair value of
a property is less than the carrying amount, the difference is recognized as a valuation allowance. Further decreases to the
estimated value will be charged directly to expense. There was no OREO at December 31, 2017 compared to $0.5 million at
December 31, 2016.
Bank Premises and Equipment:
Bank premises and equipment are stated at cost, less depreciation accumulated on a straight-line basis over the estimated useful
lives of the related assets (3 to 17 years). Leasehold improvements are amortized on a straight-line basis over the term of the
related leases or the lives of the assets, whichever is shorter. Maintenance, repairs and minor improvements are charged to non-
interest expense in the period incurred.
Federal Home Loan Bank Stock:
The FHLB-NY has assigned to the Bank a mandated membership stock ownership requirement, based on its asset size. In
addition, for all borrowing activity, the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par.
Such shares are redeemed by FHLB-NY at par with reductions in the Bank’s borrowing levels. The Bank carries its investment
in FHLB-NY stock at historical cost. The Company periodically reviews its FHLB-NY stock to determine if impairment exists.
At December 31, 2017, the Company considered among other things the earnings performance, credit rating and asset quality
of the FHLB-NY. Based on this review, the Company did not consider the value of our investment in FHLB-NY stock to be
impaired at December 31, 2017.
Income Taxes:
Deferred income tax assets and liabilities are determined using the asset and liability (or balance sheet) method. Under this
method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between book
and tax bases of the various balance sheet assets and liabilities. A deferred tax liability is recognized on all taxable temporary
differences and a deferred tax asset is recognized on all deductible temporary differences and operating losses and tax credit
76
carry-forwards. A valuation allowance is recognized to reduce the potential deferred tax asset if it is “more likely than not” that
all or some portion of that potential deferred tax asset will not be realized. The Company must also take into account changes
in tax laws or rates when valuing the deferred income tax amounts it carries on its Consolidated Statements of Financial
Condition.
Stock Compensation Plans:
The Company accounts for its stock-based compensation using a fair-value-based measurement method for share-based
payment transactions with employees and directors. The Company measures the cost of employee and directors services
received in exchange for an award of an equity instrument based on the grant date fair value of the award. That cost is recognized
over the period during which the employee and directors are required to provide services in exchange for the award. The
requisite service period is usually the vesting period.
Benefit Plans:
The Company sponsors a qualified pension, 401(k), and profit sharing plan for its employees. The Company also sponsors
postretirement health care and life insurance benefits plans for its employees, a non-qualified deferred compensation plan for
officers who have achieved the level of at least senior vice president, and a non-qualified pension plan for its outside directors.
The Company recognizes the funded status of a benefit plan – measured as the difference between plan assets at fair value and
the benefit obligation – in the Consolidated Statements of Financial Condition, with the unrecognized credits and charges
recognized, net of taxes, as a component of accumulated other comprehensive loss. These credits or charges arose as a result
of gains or losses and prior service costs or credits that arose during prior periods but were not recognized as components of
net periodic benefit cost.
Treasury Stock:
The Company records treasury stock at cost. Treasury stock is reissued at average cost.
Derivatives:
Derivatives are recorded on the Consolidated Statements of Financial Condition at fair value. The Company records derivatives
on a gross basis in “Other assets” and/or “Other liabilities” in the Consolidated Statements of Financial Condition. The
accounting for changes in value of a derivative depends on the type of hedge and on whether or not the transaction has been
designated and qualifies for hedge accounting. Derivatives that are not designated as hedges are reported and measured at fair
value through earnings.
To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being
hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be
documented. Hedge documentation must identify the derivative hedging instrument, the asset or liability or forecasted
transaction and type of risk to be hedged, and how the effectiveness of the derivative is assessed prospectively and
retrospectively. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in
the fair value of the hedged item must be assessed at least quarterly. For cash flow hedges, the effective portion of changes in
the fair value of the derivative is initially recorded as a component of accumulated other comprehensive income or loss, net of
tax, and subsequently reclassified into earnings when the hedged transaction effects earnings. Any hedge ineffectiveness (gain
or loss) is reported in current-period earnings. For fair value hedges, the gain or loss on the derivative, as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk, is recognized in earnings. If it is determined that a derivative is
not highly effective at hedging the designated exposure, hedge accounting is discontinued.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss)
includes changes in unrealized gains and losses on securities available for sale and cash flow hedges arising during the period,
adjustments to net periodic pension costs and reclassification adjustments for realized gains and losses on securities available
for sale and OTTI charges included in net income.
Segment Reporting:
Management views the Company as operating as a single unit, a community bank. Therefore, segment information is not
provided.
Advertising Expense:
Costs associated with advertising are expensed as incurred. The Company recorded advertising expenses of $2.4 million, $2.4
million and $2.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Earnings per Common Share:
Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted
average number of common shares outstanding, which includes unvested participating securities. Unvested share-based
77
payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and as such are included in the calculation of earnings per share. The Company’s unvested restricted
stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for
computing basic earnings per common share includes common shares outstanding plus unvested restricted stock unit awards.
The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding and other
common stock equivalents during the period. Common stock equivalents that are anti-dilutive are not included in the
computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share
is net income available to common shareholders. The shares held in the Company’s Employee Benefit Trust are not included
in shares outstanding for purposes of calculating earnings per common share.
Earnings per common share have been computed based on the following, for the years ended December 31:
Net income, as reported
Divided by:
2017
2016
2015
(In thousands, except per share data)
$
41,121
$
64,916
$
46,209
Weighted average common shares outstanding
Weighted average common stock equivalents
Total weighted average common shares outstanding and
common stock equivalents
29,080
2
29,082
28,957
13
28,970
29,106
20
29,126
Basic earnings per common share
Diluted earnings per common share
Dividend Payout ratio
$
$
1.41
1.41
51.1%
$
$
2.24
2.24
30.4%
$
$
1.59
1.59
40.3%
There were no options that were anti-dilutive for the years ended December 31, 2017, 2016 and 2015.
3. Loans and Allowance for Loan Losses
The composition of loans is as follows at December 31:
Multi-family residential
Commercial real estate
One-to-four family ― mixed-use property
One-to-four family ― residential
Co-operative apartments
Construction
Small Business Administration
Taxi medallion
Commercial business and other
Gross loans
Net unamortized premiums and unearned loan fees
Total loans, net of fees and costs
2017
2016
(In thousands)
$
2,273,595
1,368,112
564,206
180,663
6,895
8,479
18,479
6,834
732,973
$
2,178,504
1,246,132
558,502
185,767
7,418
11,495
15,198
18,996
597,122
5,160,236
16,763
4,819,134
16,559
$
5,176,999
$
4,835,693
The majority of our loan portfolio is invested in multi-family residential, commercial real estate and commercial business and
other loans, which totaled 84.8% and 83.5% of our gross loans at December 31, 2017 and 2016, respectively. Our concentration
in these types of loans increases the overall level of credit risk inherent in our loan portfolio. The greater risk associated with
these types of loans could require us to increase our provisions for loan losses and to maintain an ALL as a percentage of total
loans in excess of the allowance currently maintained. At December 31, 2017, we were servicing $38.8 million of mortgage
loans and $14.9 million of SBA loans for others.
78
Loans secured by multi-family residential property and commercial real estate generally involve a greater degree of risk than
residential mortgage loans and generally carry larger loan balances. The increased credit risk is the result of several factors,
including the concentration of principal in a smaller number of loans and borrowers, the effects of general economic conditions
on income producing properties and the increased difficulty in evaluating and monitoring these types of loans. Furthermore,
the repayments of loans secured by these types of properties are typically dependent upon the successful operation of the related
property, which is usually owned by a legal entity with the property being the entity’s only asset. If the cash flow from the
property is reduced, the borrower’s ability to repay the loan may be impaired. If the borrower defaults, our only remedy may
be to foreclose on the property, for which the market value may be less than the balance due on the related mortgage loan.
Loans secured by commercial business and other loans involve a greater degree of risk for the same reasons as for multi-family
residential and commercial real estate loans with the added risk that many of the loans are not secured by improved properties.
To minimize the risks involved in the origination of multi-family residential, commercial real estate and commercial business
and other loans, the Bank adheres to strict underwriting standards, which include reviewing the expected net operating income
generated by the real estate collateral securing the loan, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower’s experience in owning or managing similar properties. We typically require
debt service coverage of at least 125% of the monthly loan payment. We generally originate these loans up to a maximum of
75% of the appraised value or the purchase price of the property, whichever is less. Any loan with a final loan-to-value ratio in
excess of 75% must be approved by the Bank’s Board of Directors or the Loan Committee as an exception to policy. We
generally rely on the income generated by the property as the primary means by which the loan is repaid. However, personal
guarantees may be obtained for additional security from these borrowers. Additionally, for commercial business and other loans
which are not secured by improved properties, the Bank will secure these loans with business assets, including accounts
receivables, inventory and real estate and generally require personal guarantees.
The following tables show loans modified and classified as TDR during the periods indicated:
(Dollars in thousands)
Number
Balance
Modification description
For the year ended
December 31, 2017
Taxi medallion
10
$
6,741
Total
10
$
6,741
Four loans received a below
market interest rate and the
loan amortization was
extended. Six loans had loan
amortization extensions.
(Dollars in thousands)
Number
Balance
Modification description
For the year ended
December 31, 2016
One-to-four family - residential
2
$
263
Taxi medallion
12
9,764
Commercial business and other
1
324
Total
15
$
10,351
Received a below market
interest rate and the loans
amortization were extended
Nine loans received a below
market interest rate and three
had their loan amortization
extended
Received a below market
interest rate and the loan
amortization was extended
79
(Dollars in thousands)
Number
Balance
Modification description
For the year ended
December 31, 2015
Small Business Administration
1
$
41
Received a below market
interest rate and the loan
amortization was extended
Total
1
$
41
The recorded investment of the loans modified and classified to a TDR, presented in the tables above, were unchanged as there
was no principal forgiven in these modifications.
The following table shows our recorded investment for loans classified as TDR that are performing according to their
restructured terms at the periods indicated:
(Dollars in thousands)
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential
Taxi medallion
Commercial business and other
Total performing troubled debt restructured
December 31, 2017
December 31, 2016
Number
of contracts
Recorded
investment
Number
of contracts
Recorded
investment
9
2
5
3
20
2
41
$
2,518
1,986
1,753
572
5,916
462
$
13,207
9
2
5
3
12
2
33
$
2,572
2,062
1,800
591
9,735
675
$
17,435
During the year ended December 31, 2017 and 2016, there were no TDR loans transferred to non-performing status. The decline
in the recorded investment of taxi medallion TDR loans was due to the Company recording partial charge-offs on these loans.
The partial charge-offs were the result of the fair value of the underlying collateral declining. These loans continue to pay as
agreed, however the Company has stopped accruing interest on these loans and records interest on the cash basis.
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:
(Dollars in thousands)
Multi-family residential
Total troubled debt restructurings
that subsequently defaulted
December 31, 2017
December 31, 2016
Number
of contracts
Recorded
investment
Number
of contracts
Recorded
investment
1
1
$
383
$
383
1
1
$
396
$
396
80
The following table shows our non-performing loans at the periods indicated:
(In thousands)
Loans ninety days or more past due
and still accruing:
Commercial real estate
One-to-four family mixed-use property
Total
Non-accrual mortgage loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Total
Non-accrual non-mortgage loans:
Small Business Administration
Taxi medallion
Commercial business and other
Total
Total non-accrual loans
Total non-performing loans
At December 31,
2017
2016
$
2,424
-
2,424
$
-
386
386
3,598
1,473
1,867
7,808
14,746
46
918
-
964
15,710
1,837
1,148
4,025
8,241
15,251
1,886
3,825
68
5,779
21,030
$
18,134
$
21,416
81
The following is a summary of interest foregone on non-accrual loans and loans classified as TDR for the years ended
December 31:
Interest income that would have been recognized had the loans performed
in accordance with their original terms
Less: Interest income included in the results of operations
Total foregone interest
2017
2016
(In thousands)
2015
$
1,705
619
$
1,086
$
1,963
455
$
1,508
$
2,387
702
$
1,685
The following table shows an age analysis of our recorded investment in loans at 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
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
than
90 Days
Total Past
Due
Current
Total Loans
$
$
$
$
$
$
2,533
1,680
1,570
1,921
-
-
-
-
2
7,706
279
2,197
860
680
-
-
-
108
-
4,124
3,598
3,897
1,867
7,623
-
-
-
-
-
16,985
6,410
7,774
4,297
10,224
-
-
-
108
2
28,815
2,267,185
1,360,338
559,909
170,439
6,895
8,479
18,479
6,726
732,971
5,131,421
2,273,595
1,368,112
564,206
180,663
6,895
8,479
18,479
6,834
732,973
5,160,236
$
$
$
$
$
$
The following table shows an age analysis of our recorded investment in loans at December 31, 2016:
(in thousands)
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential
Co-operative apartments
Construction loans
Small Business Administration
Taxi medallion
Commercial business and other
Total
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
than
90 Days
Total Past
Due
Current
Total Loans
$
$
$
$
$
$
2,575
3,363
4,671
3,831
-
-
13
-
22
14,475
287
22
762
194
-
-
-
-
1
1,266
1,837
1,148
4,411
8,047
-
-
1,814
3,825
-
21,082
4,699
4,533
9,844
12,072
-
-
1,827
3,825
23
36,823
2,173,805
1,241,599
548,658
173,695
7,418
11,495
13,371
15,171
597,099
4,782,311
2,178,504
1,246,132
558,502
185,767
7,418
11,495
15,198
18,996
597,122
4,819,134
$
$
$
$
$
$
82
The following tables show the activity in the allowance for loan losses for the periods indicated:
(in thousands)
Multi-family
residential
Commercial
real estate
For the year ended December 31, 2017
One-to-four
family -
mixed-use
property
One-to-four
family -
residential
Co-operative
apartments
Construction
loans
Small Business
Administration
Taxi
medallion
Commercial
business and
other
Unallocated
Total
Allowance for credit losses:
Beginning balance
Charge-off's
Recoveries
Provision (benefit)
Ending balance
$
$
$
$
$
$
$
$
5,923
(454)
300
54
5,823
4,487
(4)
96
64
4,643
2,903
(39)
108
(427)
2,545
1,015
(415)
91
391
1,082
$
-
-
-
-
$
-
481
(212)
80
320
669
$
2,243
(11,283)
-
9,040
$
-
4,492
(65)
58
1,036
5,521
$
593
-
-
(593)
$
-
22,229
(12,472)
733
9,861
20,351
$
$
$
$
$
$
$
$
(in thousands)
Multi-family
residential
Commercial
real estate
For the year ended December 31, 2016
One-to-four
family -
mixed-use
property
One-to-four
family -
residential
Co-
operative
apartments
Construction
loans
Small Business
Administration
Taxi
medallion
Commercial
business
and other
Unallocated
Total
Allowance for credit losses:
Beginning balance
Charge-off's
Recoveries
Provision (benefit)
Ending balance
$
$
$
$
$
$
$
$
$
6,718
(161)
339
(973)
5,923
4,239
-
11
237
4,487
4,227
(144)
777
(1,957)
2,903
1,227
(114)
366
(464)
1,015
-
$
-
-
-
$
-
262
(529)
99
649
481
343
(142)
-
2,042
2,243
4,469
(69)
261
(169)
4,492
-
$
-
-
593
593
$
21,535
(1,159)
1,853
-
22,229
$
$
$
$
$
$
$
$
$
(in thousands)
Multi-family
residential
Commercial
real es tate
For the year ended December 31, 2015
One-to-four
family -
mixed-use
property
One-to-four
family -
residential
Co-
operative
apartments
Cons truction
loans
Small Business
Administration
Taxi
medallion
Commercial
business
and other
Total
Allowance for credit losses:
Beginning balance
Charge-off's
Recoveries
Provision (benefit)
Ending balance
$
$
$
$
$
$
$
$
$
8,827
(474)
269
(1,904)
6,718
4,202
(32)
168
(99)
4,239
5,840
(592)
76
(1,097)
4,227
1,690
(342)
375
(496)
1,227
-
$
-
-
-
$
-
42
-
-
8
50
279
(34)
40
(23)
262
11
-
-
332
343
4,205
(2,371)
312
2,323
4,469
25,096
(3,845)
1,240
(956)
21,535
$
$
$
$
$
$
$
$
$
83
92
-
-
(24)
68
50
-
-
42
92
The following tables show the manner in which loans were evaluated for impairment at the periods indicated:
At December 31, 2017
(in thousands)
Financing Receivables:
Ending Balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Allowance for credit losses:
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
(in thousands)
Financing Receivables:
Ending Balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Allowance for credit losses:
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Multi-family
residential
Commercial
real estate
One-to-four
family - mixed-
use property
One-to-four
family-
residential
Co-operative
apartments
Construction
loans
Small Business
Administration
Taxi
medallion
Commercial
business and other Unallocated
Total
$
2,273,595
$
1,368,112
$
564,206
$
180,663
$
6,895
$
8,479
$
18,479
$
6,834
$
732,973
$
-
$
5,160,236
$
7,311
$
9,089
$
5,445
$
9,686
$
-
$
-
$
137
$
6,834
$
661
$
-
$
39,163
$
2,266,284
$
1,359,023
$
558,761
$
170,977
$
6,895
$
8,479
$
18,342
$
-
$
732,312
$
-
$
5,121,073
$
205
$
177
$
198
$
56
$
-
$
-
$
-
$
-
$
6
$
-
$
642
$
5,618
$
4,466
$
2,347
$
1,026
$
-
$
68
$
669
$
-
$
5,515
$
-
$
19,709
Multi-family
residential
Commercial
real estate
One-to-four
family - mixed-
use property
One-to-four
family-
residential
Co-operative
apartments
Construction
loans
Small Business
Administration
Taxi
medallion
Commercial
business and other Unallocated
Total
At December 31, 2016
$
2,178,504
$
1,246,132
$
558,502
$
185,767
$
7,418
$
11,495
$
15,198
$
18,996
$
597,122
$
-
$
4,819,134
$
5,923
$
6,551
$
8,809
$
9,989
$
-
$
-
$
1,937
$
16,282
$
2,492
$
-
$
51,983
$
2,172,581
$
1,239,581
$
549,693
$
175,778
$
7,418
$
11,495
$
13,261
$
2,714
$
594,630
$
-
$
4,767,151
$
232
$
179
$
417
$
60
$
-
$
-
$
90
$
2,236
$
12
$
-
$
3,226
$
5,691
$
4,308
$
2,486
$
955
$
-
$
92
$
391
$
7
$
4,480
$
593
$
19,003
84
The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses for
loans that were considered impaired at December 31, 2017 and 2016:
With no related allowance recorded:
Mortgage loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartments
Construction
Non-mortgage loans:
Small Business Administration
Taxi medallion
Commercial business and other
Total loans with no related allowance recorded
With an allowance recorded:
Mortgage loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartments
Construction
Non-mortgage loans:
Small Business Administration
Taxi medallion
Commercial business and other
December 31, 2017
December 31, 2016
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
(In thousands)
Unpaid
Principal
Balance Allowance
Related
$
5,091
7,103
4,218
9,272
-
-
$
5,539
7,103
4,556
10,489
-
-
-
$
-
-
-
-
-
$
3,660
4,489
6,435
9,560
-
-
$
3,796
4,516
6,872
11,117
-
-
-
$
-
-
-
-
-
137
6,834
313
32,968
151
18,063
682
46,583
2,220
1,986
1,227
414
-
-
-
-
348
2,220
1,986
1,227
414
-
-
-
-
348
-
-
-
-
205
177
198
56
-
-
-
-
6
416
2,334
2,072
509
2,476
2,443
28,966
31,729
2,263
2,062
2,374
429
-
-
1,521
13,948
420
23,017
2,263
2,062
2,376
429
-
-
1,909
13,948
420
23,407
-
-
-
-
232
179
417
60
-
-
90
2,236
12
3,226
Total loans with an allowance recorded
6,195
6,195
642
Total Impaired Loans:
Total mortgage loans
$
31,531
$
33,534
$
636
$
31,272
$
33,431
$
888
Total non-mortgage loans
$
7,632
$
19,244
$
6
$
20,711
$
21,705
$
2,338
85
The following table shows our average recorded investment and interest income recognized for loans that were considered
impaired for the years ended December 31, 2017, 2016 and 2015:
December 31, 2017
December 31, 2016
December 31, 2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(In thousands)
$
3,260
6,187
5,104
9,865
-
596
$
80
300
168
108
-
22
$
4,762
4,753
7,914
10,233
-
285
$
96
169
141
82
-
7
$
8,285
4,926
10,295
12,985
153
250
$
92
7
244
138
-
-
207
4,537
1,267
31,023
2,348
2,026
1,341
420
-
-
-
10,997
375
17,507
11
161
98
948
136
95
65
16
-
-
-
166
22
500
369
3,110
2,217
33,643
2,279
2,145
2,560
410
-
-
616
7,244
827
16,081
20
67
181
763
116
100
138
15
-
-
42
147
45
603
299
-
3,912
41,105
2,343
997
2,983
347
-
-
38
1,062
2,692
10,462
1
-
253
735
117
167
151
14
-
-
2
66
102
619
$
31,147
$
990
$
35,341
$
864
$
43,564
$
930
With no related allowance recorded:
Mortgage loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartments
Construction
Non-mortgage loans:
Small Business Administration
Taxi medallion
Commercial business and other
Total loans with no related allowance recorded
With an allowance recorded:
Mortgage loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartments
Construction
Non-mortgage loans:
Small Business Administration
Taxi medallion
Commercial business and other
Total loans with an allowance recorded
Total Impaired Loans:
Total mortgage loans
Total non-mortgage loans
$
17,383
$
458
$
14,383
$
502
$
8,003
$
424
86
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 previously mentioned categories then the loan would be considered “Pass.” These loan
designations are updated quarterly. We designate a loan as Substandard when a well-defined weakness is identified that
jeopardizes the orderly liquidation of the debt. We designate a loan Doubtful when it displays the inherent weakness of a
Substandard loan with the added provision that collection of the debt in full, on the basis of existing facts, is highly
improbable. We designate a loan as Loss if it is deemed the debtor is incapable of repayment. The Company does not hold
any loans designated as loss, as loans that are designated as Loss are charged to the ALL. Loans that are non-accrual are
designated as Substandard, Doubtful or Loss. We designate a loan as Special Mention if the asset does not warrant
classification within one of the other classifications, but does contain a potential weakness that deserves closer attention.
The following table sets forth the recorded investment in loans designated as Criticized or Classified at December 31, 2017:
(In thousands)
Special Mention Substandard
Doubtful
Loss
Total
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential
Co-operative apartments
Construction loans
Small Business Administration (1)
Taxi medallion
Commercial business and other
Total loans
$
6,389
2,020
2,835
2,076
-
-
$
4,793
8,871
3,691
9,115
-
-
548
-
14,859
28,727
$
108
6,834
545
33,957
$
-
$
-
-
-
-
-
-
-
-
$
-
-
$
-
-
-
-
-
-
-
-
$
-
$
11,182
10,891
6,526
11,191
-
-
656
6,834
15,404
62,684
$
(1) Balances shown are net of the portion guaranteed by the Small Business Administration totaling $0.1 million at December 31,
2017.
The following table sets forth the recorded investment in loans designated as Criticized or Classified at December 31, 2016:
(In thousands)
Special Mention Substandard
Doubtful
Loss
Total
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential
Co-operative apartments
Construction loans
Small Business Administration (1)
Taxi medallion
Commercial business and other
Total loans
$
7,133
2,941
4,197
1,205
-
-
$
3,351
4,489
7,009
9,399
-
-
540
2,715
9,924
28,655
$
436
16,228
2,493
43,405
$
-
$
-
-
-
-
-
-
54
-
54
$
-
$
-
-
-
-
-
-
-
-
$
-
$
10,484
7,430
11,206
10,604
-
-
976
18,997
12,417
72,114
$
(1) Balances shown are net of the portion guaranteed by the Small Business Administration totaling $1.5 million at December 31,
2016.
87
4. 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 will close 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 generally
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:
(Dollars in thousands)
Delinquent and non-performing loans
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
For the year ended December 31, 2017
Loans sold
Proceeds
Net charge-offs
Net gain (loss)
3
5
9
$
872
1,821
3,523
-
$
(4)
(33)
$
38
34
343
Total
17
$
6,216
$
(37)
$
415
Performing loans
Multi-family residential
Commercial real estate
Small Business Administration
Total
12
7
8
27
$
18,784
26,283
5,061
-
$
-
-
$
(36)
(28)
252
$
50,128
$
-
$
188
(Dollars in thousands)
Delinquent and non-performing loans
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
Total
Performing loans
Small Business Administration
Total
For the year ended December 31, 2016
Loans sold
Proceeds
Net recoveries
Net gain
$
2,680
192
5,093
1
$
-
47
3
$
-
262
$
7,965
$
48
$
265
$
3,534
$
-
$
319
$
3,534
$
-
$
319
9
2
15
26
6
6
88
(Dollars in thousands)
Delinquent and non-performing loans
Multi-family residential
Commercial real estate
One-to-four family - mixed-use property
One-to-four family - residential property
Total
Performing loans
Commercial real estate
Small Business Administration
Total
5. Other Real Estate Owned
For the year ended December 31, 2015
Loans sold
Proceeds
Net recoveries
Net gain (loss)
9
4
10
1
24
1
5
6
$
3,540
2,615
2,831
160
$
134
-
-
-
$
(1)
13
58
42
$
9,146
$
134
$
112
$
3,056
4,209
-
$
-
$
30
280
$
7,265
$
-
$
310
The following table shows the activity in OREO during the periods indicated:
For the years ended December 31,
2017
2016
2015
(In thousands)
Balance at beginning of year
Acquisitions
Reductions to carrying value
Sales
$
533
-
-
(533)
$
4,932
639
(1,763)
(3,275)
$
6,326
1,667
(896)
(2,165)
Balance at end of year
$
-
$
533
$
4,932
OREO balances are included in “Other assets” within our Consolidated Statements of Financial Condition.
The following table shows the gross gains, gross losses and write-downs of OREO reported in the Consolidated Statements
of Income in “Other operating expenses” during the periods presented:
For the years ended December 31,
2017
2016
2015
(In thousands)
Gross gains
Gross losses
Write-down of carrying value
$
50
-
-
$
37
(275)
(1,763)
$
306
(6)
(896)
Total Income (Expense)
$
50
$
(2,001)
$
(596)
89
.
We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure
through an in-substance repossession. During the year ended December 31, 2017, we did not foreclose on any consumer
mortgages through in-substance repossession. We did not hold any foreclosed residential real estate at December 31, 2017
and held $0.5 million at December 31, 2016. Included within net loans as of December 31, 2017 and 2016, was a recorded
investment of $10.5 million and $11.4 million, respectively, of consumer mortgage loans secured by residential real estate
properties for which formal foreclosure proceedings were in process according to local requirements of the applicable
jurisdiction.
6. Debt and Equity Securities
The Company did not hold any trading securities at December 31, 2017 and 2016. Securities available for sale are recorded
at fair value. Securities held-to-maturity are recorded at amortized cost.
The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2017:
Amortized
Cost
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Securities held-to-maturity:
Municipals
$
22,913
$
21,889
$
-
$
1,024
Total municipals
22,913
21,889
FNMA
Total mortgage-backed securities
7,973
7,973
7,810
7,810
-
-
-
1,024
163
163
Total
$
30,886
$
29,699
$
-
$
1,187
The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2016:
Amortized
Cost
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
Securities held-to-maturity:
Municipals
$
37,735
$
35,408
$
-
$
2,327
Total
$
37,735
$
35,408
$
-
$
2,327
90
The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2017:
Amortized
Cost
Fair Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In thousands)
$
$
$
$
$
$
Mortgage-backed securities shown in the table above includes one private issue collateralized mortgage obligations
(“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $21,000
at December 31, 2017.
The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2016:
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Amortized
Cost
Fair Value
(In thousands)
$
$
$
Corporate
Municipals
Mutual funds
Collateralized loan obligations
Other
Total other securities
REMIC and CMO
GNMA
FNMA
FHLMC
Total mortgage-backed securities
Total securities available for sale
Corporate
Municipals
Mutual funds
Collateralized loan obligations
Other
Total other securities
REMIC and CMO
GNMA
FNMA
FHLMC
Total mortgage-backed securities
Total securities available for sale
110,000
101,680
11,575
10,000
1,110
234,365
328,668
1,016
136,198
48,103
513,985
748,350
110,000
124,984
21,366
85,470
7,363
349,183
402,636
1,319
109,493
5,378
518,826
868,009
102,767
103,199
11,575
10,053
1,110
228,704
325,302
1,088
135,474
47,786
509,650
738,354
$
-
1,519
-
53
-
1,572
595
72
330
18
1,015
2,587
$
102,910
126,903
21,366
86,365
7,361
344,905
401,370
1,427
108,351
5,328
516,476
861,381
-
$
1,983
-
895
-
2,878
1,607
108
463
35
2,213
5,091
$
7,233
-
-
-
-
7,233
3,961
-
1,054
335
5,350
12,583
7,090
64
-
-
2
7,156
2,873
-
1,605
85
4,563
11,719
$
$
$
Mortgage-backed securities shown in the table above includes one private issue collateralized mortgage obligations
(“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $0.2
million at December 31, 2016.
The corporate securities held by the Company at December 31, 2017 and 2016 are issued by U.S. banking institutions.
91
The following table details the amortized cost and fair value of the Company’s securities classified as held-to-maturity at
December 31, 2017, by contractual maturity. Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Cost
Fair Value
(In thousands)
Due in one year or less
Due after ten years
Total other securities
Mortgage-backed securities
Total securities held-to-maturity
$
$
1,045
21,868
22,913
7,973
30,886
1,045
20,844
21,889
7,810
29,699
$
$
The amortized cost and fair value of the Company’s securities, classified as available for sale at December 31, 2017, by
contractual maturity, are shown below.
Amortized
Cost
Fair Value
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
-
$
4,306
129,931
88,553
-
$
4,317
122,809
90,003
Total other securities
Mutual funds
Mortgage-backed securities
222,790
11,575
513,985
217,129
11,575
509,650
Total securities available for sale
$
748,350
$
738,354
92
The following table shows 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 December 31,
2017.
Count
Fair Value
Total
Less than 12 months
12 months or more
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(Dollars in thousands)
Held-to-maturity securities
Municipals
Total other securities
FNMA
Total mortgage-backed securities
Total securities held-to-maturity
Available for sale securities
Corporate
Total other securities
REMIC and CMO
FNMA
FHLMC
Total mortgage-backed securities
Total securities available for sale
1
1
1
1
2
14
14
36
17
2
55
69
$
20,844
20,844
$
1,024
1,024
$
20,844
20,844
$
1,024
1,024
7,810
7,810
163
163
7,810
7,810
163
163
$
-
$
-
-
-
-
-
-
-
$
28,654
$
1,187
$
28,654
$
1,187
$
-
$
-
$
102,767
102,767
$
7,233
7,233
$
9,723
9,723
$
277
277
$
93,044
93,044
$
6,956
6,956
249,596
120,510
46,829
416,935
519,702
$
3,961
1,054
335
5,350
12,583
$
162,781
109,258
43,258
315,297
325,020
$
1,406
850
294
2,550
2,827
$
86,815
11,252
3,571
101,638
194,682
$
2,555
204
41
2,800
9,756
$
The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value,
aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at
December 31, 2016.
Count
Fair Value
Total
Less than 12 months
12 months or more
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(Dollars in thousands)
Held-to-maturity securities
Municipals
Total securities held-to-maturity
Available for sale securities
Corporate
Municipals
Other
Total other securities
REMIC and CMO
FNMA
FHLMC
Total mortgage-backed securities
Total securities available for sale
1
1
14
4
1
19
35
18
1
54
73
$
19,538
$
2,327
$
19,538
$
2,327
$
-
$
19,538
$
2,327
$
19,538
$
2,327
$
-
$
-
$
-
$
102,910
16,047
298
$
7,090
64
2
$
28,476
16,047
-
$
1,524
64
-
$
74,434
-
298
$
5,566
-
2
119,255
222,807
80,924
3,993
7,156
2,873
1,605
85
44,523
208,827
74,972
3,993
1,588
2,268
1,250
85
74,732
13,980
5,952
-
5,568
605
355
-
307,724
426,979
$
4,563
11,719
$
287,792
332,315
$
3,603
5,191
$
19,932
94,664
$
960
6,528
$
OTTI losses on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security
or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized
cost. However, even if an investor does not expect to sell a debt security in an unrealized loss position, the investor must
evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss
93
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 December 31, 2017 and 2016. The unrealized losses
in held-to-maturity municipal securities at December 31, 2017 and 2016 were caused by illiquidity in the market and
movements in interest rates. The unrealized losses in held-to-maturity FNMA securities at December 31, 2017 were caused
by movements in interest rates. The unrealized losses in securities available for sale at December 31, 2017 and 2016 were
caused by movements in interest rates.
It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s
investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue
to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than
not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This
conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory
obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not
consider these investments to be other-than-temporarily impaired at December 31, 2017 and 2016.
The Company did not record any credit related OTTI charges during the years ended December 31, 2017, 2016 and 2015.
The Company sold available for sale securities with carrying values at the time of sale totaling $112.4 million, $126.0
million and $163.0 million during the years ended December 31, 2017, 2016 and 2015, respectively.
The following table represents the gross gains and gross losses realized from the sale of securities available for sale for the
periods indicated:
Gross gains from the sale of securities
Gross losses from the sale of securities
For the years ended
December 31,
2017
2016
2015
$
401
(587)
(In thousands)
2,370
$
(846)
$
2,899
(2,732)
Net (losses) gains from the sale of securities
$
(186)
$
1,524
$
167
Included in “Other assets” within our Consolidated Statements of Financial Condition are amounts held in a rabbi trust for
certain non-qualified deferred compensation plans totaling $17.0 million and $15.7 million at December 31, 2017 and
2016, respectively.
7. Bank Premises and Equipment, Net
Bank premises and equipment are as follows at December 31:
Leasehold improvements
Equipment and furniture
Total
Less: Accumulated depreciation and amortization
Bank premises and equipment, net
2017
2016
(In thousands)
$
37,044
22,489
59,533
28,697
$
29,795
21,924
51,719
25,158
$
30,836
$
26,561
94
During the year ended December 31, 2016, the Company sold three branch buildings, realizing a pre-tax gain of $48.0
million. During the year ended December 31, 2015, the Company sold three branch buildings in sale-leaseback
transactions, realizing a pre-tax gain of $12.7 million, of which $6.5 million was recognized in earnings during the year
ended December 31, 2015 and $6.2 million was deferred and is being amortized over the 10-year term of the branch leases.
The Company has no continuing involvement in any of the sold branch buildings other than as an ordinary lessee. The
Company owned no branch buildings at December 31, 2017.
8. Deposits
Total deposits at December 31, 2017 and 2016, and the weighted average rate on deposits at December 31, 2017, are as
follows:
Interest-bearing deposits:
Certificate of deposit accounts
Savings accounts
Money market accounts
NOW accounts
Total interest-bearing deposits
Non-interest bearing demand deposits
Total due to depositors
Mortgagors' escrow deposits
Total deposits
2017
2016
(Dollars in thousands)
$
$
1,351,933
290,280
979,958
1,333,232
3,955,403
385,269
4,340,672
42,606
4,383,278
1,372,115
254,283
843,370
1,362,484
3,832,252
333,163
4,165,415
40,216
4,205,631
$
$
Weighted
Average
Rate
2017
%
1.57
0.64
1.05
0.83
0.25
The aggregate amount of time deposits with denominations of $250,000 or more (excluding brokered deposits issued in
$1,000 amounts under a master certificate of deposit) was $238.8 million and $214.0 million at December 31, 2017 and
2016, respectively. The aggregate amount of brokered deposits was $1,090.0 million and $1,114.9 million at December
31, 2017 and 2016, respectively.
Government deposits are collateralized by either securities, letters of credit issued by FHLB-NY or are placed in an Insured
Cash Sweep service (“ICS”). ICS deposits are considered brokered deposits. The letters of credit are collateralized by
mortgage loans pledged by the Bank.
At December 31, 2017, government deposits totaled $1,133.3 million, of which $639.5 million were ICS deposits and
$493.8 million were collateralized by $183.9 million in securities and $402.1 million of letters of credit. At December 31,
2016, government deposits totaled $1,062.1 million, of which $539.0 million were ICS deposits and $523.1 million were
collateralized by $218.8 million in securities and $382.5 million of letters of credit.
Interest expense on deposits is summarized as follows for the years ended December 31:
2017
2016
(In thousands)
2015
$
$
$
Certificate of deposit accounts
Savings accounts
Money market accounts
NOW accounts
Total due to depositors
Mortgagors' escrow deposits
Total interest expense on deposits
20,579
1,808
8,151
9,640
40,178
141
40,319
20,536
1,219
3,592
7,891
33,238
112
33,350
20,943
1,151
1,551
6,593
30,238
98
30,336
$
$
$
95
Scheduled remaining maturities of certificate of deposit accounts are summarized as follows for the years ended
December 31:
2017
2016
(In thousands)
Within 12 months
More than 12 months to 24 months
More than 24 months to 36 months
More than 36 months to 48 months
More than 48 months to 60 months
More than 60 months
Total certificate of deposit accounts
9. Borrowed Funds
Borrowed funds are summarized as follows at December 31:
FHLB-NY advances - fixed rate:
Due in 2017
Due in 2018
Due in 2019
Due in 2020
Due in 2021
Total FHLB-NY advances
Subordinated debentures - fixed rate through 2021
Due in 2026
Junior subordinated debentures - adjustable rate
Due in 2037
Total borrowings
$
$
759,360
449,293
95,626
42,928
2,648
2,078
1,351,933
644,336
475,858
173,936
34,038
42,673
1,274
1,372,115
$
$
2017
2016
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
(Dollars in thousands)
$
-
630,588
257,216
186,148
125,016
1,198,968
%
-
1.41
1.55
1.64
1.57
1.49
$
550,981
259,088
149,112
105,206
94,803
1,159,190
73,699
5.34
73,414
36,986
4.86
33,959
%
1.02
1.27
1.48
1.42
1.47
1.21
5.36
4.28
$
1,309,653
1.80
%
$
1,266,563
1.53
%
The FHLB-NY advances are fixed rate borrowings with no call provisions. The borrowings terms range from one day to
five years.
During 2016, $130.0 million in FHLB-NY advances at an average cost of 2.82% and $78.0 million in securities sold under
agreements to repurchase, at an average cost of 3.80%, were extinguished prior to their scheduled maturity dates, incurring
a prepayment penalty totaling $10.4 million. During 2015, $80.0 million in FHLB-NY fixed rate advances were modified
from an average cost of 4.41% to an average cost of 3.46%. This modification extended the maturity on the advances by
an average of 2.3 years without incurring a prepayment penalty. During 2017, there were no modifications or
extinguishments prior to the borrowings contractual maturity dates.
At December 31, 2017, the Bank was able to borrow up to $2,819.5 million from the FHLB-NY in Federal Home Loan
Bank advances and letters of credit. As of December 31, 2017, the Bank had $1,600.8 million outstanding in combined
balances of FHLB-NY advances and letters of credit. At December 31, 2017, the Bank also has unsecured lines of credit
with other commercial banks totaling $100.0 million.
As part of the Company’s strategy to finance investment opportunities and manage its cost of funds, the Company can
enter into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as financing
96
transactions and the obligations to repurchase are reflected as a liability in the Consolidated Statements of Financial
Condition. The securities underlying the agreements are delivered to the broker-dealers or the FHLB-NY who arrange the
transaction. The securities remain registered in the name of the Company and are returned upon the maturity of the
agreement. The Company retains the right of substitution of collateral throughout the terms of the agreements. As a
condition of the repurchase agreements the Company is required to provide sufficient collateral. If the fair value of the
collateral were to fall below the required level, the Company is obligated to pledge additional collateral. All the repurchase
agreements were collateralized by mortgage-backed securities. At December 31, 2017 and 2016, the Company did not
have any repurchase agreements outstanding.
Information relating to these agreements at or for the years ended December 31 is as follows:
Book value of collateral
Estimated fair value of collateral
Average balance of outstanding agreements during the year
Maximum balance of outstanding agreements at a month end
during the year
Average interest rate of outstanding agreements during the year
2017
2016
2015
(Dollars in thousands)
-
$
-
-
-
$
-
64,087
$
131,421
131,421
116,000
-
-
116,000
3.26%
116,000
3.22%
Pursuant to a blanket collateral agreement with the FHLB-NY, advances are secured by all of the Bank’s stock in the
FHLB-NY and certain qualifying mortgage loans in an amount at least equal to 110% of the advances outstanding. The
Bank may also pledge mortgage-backed and mortgage-related securities, and other securities not otherwise pledged.
During the year ended December 31, 2016, the Holding Company issued subordinated debt with an aggregated principal
amount of $75.0 million. The subordinated debt was issued at 5.25% fixed-to-floating rate maturing in 2026. The debt is
fixed-rate for the first five years, after which it resets quarterly. Additionally, the debt is callable at par quarterly through
its maturity date beginning December 15, 2021. The subordinated debentures were structured to qualify as Tier 2 capital
for regulatory purposes.
The following table shows the terms of the subordinated debt issued by the Holding Company:
Issue Date
Initial Rate
First Reset Date
First Call Date
Spread over 3-month LIBOR
Maturity Date
Subordinated
Debentures
December 12, 2016
5.25%
December 15, 2021
December 15, 2021
3.44%
December 15, 2026
We may not redeem the subordinated debt prior to December 15, 2021, except that the Company may redeem the
subordinated debt at any time, at its option, in whole but not in part, subject to obtaining any required regulatory approvals,
if (i) a change or prospective change in law occurs that could prevent the Company from deducting interest payable on the
subordinated debt for U.S. federal income tax purposes, (ii) a subsequent event occurs that precludes the subordinated debt
from being recognized as Tier 2 capital for regulatory capital purposes, or (iii) the Company is required to register as an
investment company under the Investment Company Act of 1940, as amended, in each case, at a redemption price equal
to 100% of the principal amount of the subordinated debt plus any accrued and unpaid interest through, but excluding, the
redemption date.
The Holding Company has three trusts formed under the laws of the State of Delaware for the purpose of issuing capital
and common securities, and investing the proceeds thereof in junior subordinated debentures of the Holding Company.
Each of these trusts issued $20.6 million of securities which had a fixed-rate for the first five years, after which they reset
quarterly based on a spread over 3-month LIBOR. The securities were first callable at par after five years, and pay
cumulative dividends. The Holding Company has guaranteed the payment of these trusts’ obligations under their capital
97
securities. The terms of the junior subordinated debentures are the same as those of the capital securities issued by the
trusts. The junior subordinated debentures issued by the Holding Company are carried at fair value in the consolidated
financial statements.
The table below shows the terms of the securities issued by the trusts.
Issue Date
Initial Rate
First Reset Date
Spread over 3-month LIBOR
Maturity Date
Flushing Financial
Capital Trust II
Flushing Financial
Capital Trust III
Flushing Financial
Capital Trust IV
June 20, 2007
7.14%
September 1, 2012
1.41%
September 1, 2037
June 21, 2007
6.89%
June 15, 2012
1.44%
September 15, 2037
July 3, 2007
6.85%
July 30, 2012
1.42%
July 30, 2037
The consolidated financial statements do not include the securities issued by the trusts, but rather include the junior
subordinated debentures of the Holding Company.
10. 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 trusts, which file separate Federal income tax returns as trusts, and
FPFC, which files a separate Federal income tax return as a real estate investment trust. Additionally, the Bank files New
Jersey State tax returns. The Company remains subject to examination for its Federal, New York State and New Jersey
income tax returns for the years ending on or after December 31, 2014. The Company is undergoing examinations of its
Federal income tax return for 2015 and its New York City income tax returns for 2011, 2012 and 2013. The Company
believes it has accrued for all potential amounts that may be due to all taxing authorities.
Income tax provisions are summarized as follows for the years ended December 31:
Federal:
Current
Deferred
Total federal tax provision
State and Local:
Current
Deferred
Total state and local tax provision
Total income tax provision
2017
2016
(In thousands)
2015
$
14,859
7,985
22,844
$
34,996
(1,416)
33,580
$
25,319
(3,476)
21,843
1,419
750
2,169
25,013
$
7,647
(124)
7,523
41,103
$
7,059
(1,735)
5,324
27,167
$
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. We recorded $3.8 million in additional
tax expense during 2017 from the revaluation of our net deferred tax assets, resulting from the TCJA. The Company has
recorded a deferred tax asset of $24.4 million, which reflects the tax impact from the TCJA. Additionally, on December
22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was released by the Securities and Exchange Commission
(“SEC”) to address any concerns related to the accounting for income tax effects as a result of the TCJA in situations where
a registrant may not have the necessary information available, prepared, or analyzed in reasonable detail to complete the
required accounting in the reporting period including the enactment date. SAB 118 allows for a measurement period not
to extend beyond one year from the TCJA enactment date to complete the necessary accounting.
98
The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 37.8%, 38.8%
and 37.0% for the years ended December 31, 2017, 2016 and 2015, respectively. The effective rates differ from the
statutory federal income tax rate as follows for the years ended December 31:
Taxes at federal statutory rate
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal
income tax benefit
TCJA
Other
Taxes at effective rate
2017
2016
2015
$
23,147
35.0
%
$
37,106
35.0
%
$
25,681
35.0
%
(Dollars in thousands)
1,410
3,770
(3,314)
25,013
$
2.1
5.7
(5.0)
37.8
%
4,890
-
(893)
41,103
$
4.6
-
(0.8)
38.8
%
3,461
-
(1,975)
27,167
$
4.7
-
(2.7)
37.0
%
The components of the net deferred tax assets are as follows at December 31:
Deferred tax assets:
Postretirement benefits
Allowance for loan losses
Stock based compensation
Depreciation
Unrealized loss on securities available for sale
Fair value adjustment on financial assets carried at fair value
Fair value hedges
Adjustment required to recognize funded status of
postretirement pension plans
Gain on sale of buildings
Other
Deferred tax assets
Deferred tax liabilities:
FPFC deferred income
Cashflow hedges
Fair value adjustment on financial assets carried
at fair value
Fair value adjustment on financial liabilities carried
at fair value
Other
Deferred tax liabilities
2017
2016
(In thousands)
$
6,047
6,414
2,808
1,057
3,150
168
939
$
7,800
9,518
3,525
2,135
2,770
-
1,027
2,068
1,434
299
24,384
1,916
129
-
7,800
4,239
14,084
3,246
2,211
2,434
34,666
-
-
150
11,943
4,684
16,777
Net deferred tax asset included in other assets
$
10,300
$
17,889
The Company has recorded a deferred tax asset of $24.4 million. This represents the anticipated net federal, state and local
tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this
balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three years.
In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, the probability
that some of the Company’s $14.1 million deferred tax liability can be used to offset a portion of the deferred tax asset, as
well as certain tax planning strategies, it is more likely than not that the deferred tax asset will be fully realized.
Accordingly, no valuation allowance was deemed necessary for the deferred tax asset at December 31, 2017 and 2016.
The Company does not have uncertain tax positions that are deemed material. The Company’s policy is to recognize
interest and penalties on income taxes in operating expenses. During the three years ended December 31, 2017, the
Company did not recognize any material amounts of interest or penalties on income taxes.
99
11. Stock-Based Compensation
For the years ended December 31, 2017, 2016 and 2015 the Company’s net income, as reported, includes $5.9 million,
$5.9 million and $4.8 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom
stock awards, and $1.9 million, $2.3 million and $1.7 million, respectively, of income tax benefits related to the stock-
based compensation plans.
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.
There were 276,900, 337,175 and 318,120 restricted stock units granted for the years ended December 31, 2017, 2016 and
2015, respectively.
No stock options have been granted by the Company since 2009. There are 1,200 options outstanding at an average
weighted exercise price of $13.91.
The 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) became effective on May 20, 2014 after adoption by the Board
of Directors and approval by the stockholders. The 2014 Omnibus Plan authorizes the Compensation Committee of the
Company’s Board of Directors (the “Compensation Committee”) to grant a variety of equity compensation awards as well
as long-term and annual cash incentive awards, all of which can, but need not, be structured so as to comply with Section
162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The 2014 Omnibus Plan
authorizes the issuance of 1,100,000 shares. To the extent that an award under the 2014 Omnibus Plan is cancelled, expired,
forfeited, settled in cash, settled by issuance of fewer shares than the number underlying the award, or otherwise terminated
without delivery of shares to a participant in payment of the exercise price or taxes relating to an award, the shares retained
by or returned to the Company will be available for future issuance under the 2014 Omnibus Plan. No further awards may
be granted under the Company’s 2005 Omnibus Incentive Plan, 1996 Stock Option Incentive Plan, and 1996 Restricted
Stock Incentive Plan (“Prior Plans”). On May 31, 2017, stockholders approved an amendment to the 2014 Omnibus Plan
(the “Amendment”) authorizing an additional 672,000 shares available for future issuance. In addition, to increasing the
number of shares for future grants, the Amendment eliminates, in the case of stock options and SARs, the ability to recycle
shares used to satisfy the exercise price or taxes for such awards. No other amendments to the 2014 Omnibus Plan were
made. Including the additional shares authorized from the Amendment, 954,003 shares are available for future issuance
under the 2014 Omnibus Plan at December 31, 2017. To fund restricted stock unit awards or option exercises, shares are
issued from treasury stock, if available; otherwise new shares are issued. Options, stock appreciation rights, restricted
stock, restricted stock units and other stock-based awards granted under the 2014 Omnibus Plan are generally subject to a
minimum vesting period of three years with stock options having a 10-year maximum contractual term. Other awards do
not have a contractual term of expiration. The Compensation Committee is authorized to grant awards that vest upon a
participant’s retirement. These amounts are included in stock-based compensation expense at the time of the participant’s
retirement eligibility.
The following table summarizes the Company’s restricted stock unit (“RSU”) awards under the 2014 Omnibus Plan and
the Prior Plans in the aggregate for the year ended December 31, 2017:
Non-vested at December 31, 2016
Granted
Vested
Forfeited
Non-vested at December 31, 2017
Shares
488,779
276,900
(244,762)
(23,595)
497,322
Weighted-Average
Grant-Date
Fair Value
$
18.99
28.21
21.93
23.62
22.46
$
Vested but unissued at December 31, 2017
244,077
$
22.67
As of December 31, 2017, there was $7.8 million of total unrecognized compensation cost related to RSU awards granted
under the 2014 Omnibus Plan and the Prior Plans. That cost is expected to be recognized over a weighted-average period
of 2.9 years. The total fair value of awards vested for the years ended December 31, 2017, 2016 and 2015 were $7.0
million, $4.9 million and $4.9 million, respectively. The vested but unissued RSU awards consist of awards made to
employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting
upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original
100
contractual vesting and settlement dates. As of December 31, 2017, there is no remaining unrecognized compensation cost
related to stock options granted.
The following table summarizes certain information regarding the stock option awards under the 2014 Omnibus Plan and
the Prior Plans in the aggregate for the year ended December 31, 2017:
Weighted-
Average
Exercise
Price
Weighted-Average
Remaining
Contractual
(years)
Aggregate
Intrinsic
Value
($000) *
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Shares
5,600
-
(4,400)
-
1,200
$
$
9.61
-
8.44
-
13.91
Exercisable shares at December 31, 2017
1,200
$
13.91
0.8
0.8
$
16
$
16
* The intrinsic value of a stock option is the difference between the market value of the underlying stock and the exercise
price of the option.
Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised, during the years
ended December 31, 2017, 2016 and 2015 are provided in the following table:
(In thousands)
Proceeds from stock options exercised
Fair value of shares received upon exercise of stock options
Tax benefit related to stock options exercised
Intrinsic value of stock options exercised
2017
2016
2015
$
$
-
37
39
96
$
328
1,380
185
841
145
447
99
330
Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing
plan for officers who have achieved the designated level and completed one year of service. However, certain officers who
have not reached the designated level but were already participants remain eligible to participate in the Plan. Awards are
made under this plan on certain compensation not eligible for contributions made under the profit sharing plan, due to the
terms of the profit sharing plan and the Internal Revenue Code. Employees receive awards under this plan proportionate
to the amount they would have received under the profit sharing plan, but for limits imposed by the profit sharing plan and
the Internal Revenue Code. The awards are made as cash awards, and then converted to common stock equivalents
(phantom shares) at the then current fair value of the Company’s common stock. Dividends are credited to each employee’s
account in the form of additional phantom shares each time the Company pays a dividend on its common stock. In the
event of a change of control (as defined in this plan), an employee’s interest is converted to a fixed dollar amount and
deemed to be invested in the same manner as his interest in the Bank’s non-qualified deferred compensation plan.
Employees vest under this plan 20% per year for the first 5 years of employment and are 100% vested thereafter. Employees
also become 100% vested upon a change of control. Employees receive their vested interest in this plan in the form of a
cash lump sum payment or installments, as elected by the employee, after termination of employment. The Company
adjusts its liability under this plan to the fair value of the shares at the end of each period.
101
The following table summarizes the Company’s Phantom Stock Plan at or for the year ended December 31, 2017:
Phantom Stock Plan
Shares
Fair Value
Outstanding at December 31, 2016
Granted
Forfeited
Distributions
Outstanding at December 31, 2017
89,339
8,469
(10)
(8,618)
89,180
$
$
29.39
27.43
28.95
28.72
27.50
Vested at December 31, 2017
88,895
$
27.50
The Company recorded stock-based compensation (benefit) expense for the phantom stock plan of ($0.1) million, $0.7
million and $0.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The total fair value of
distributions from the phantom stock plan were $247,000, $45,000 and $12,000 for the years ended December 31, 2017,
2016 and 2015, respectively.
12. Pension and Other Postretirement Benefit Plans
The amounts recognized in accumulated other comprehensive loss, on a pre-tax basis, consist of the following, as of
December 31:
Net Actuarial
Loss (Gain)
2016
2017
2015
2017
Prior Service
Cost (Credit)
2016
2015
2017
Total
2016
2015
Employee Retirement Plan
Other Postretirement Benefit Plans
Outside Directors Plan
Total
$
$
$
6,166
1,223
(472)
6,917
8,055
636
(540)
8,151
8,589
1,296
(562)
9,323
$
$
$
-
$
(368)
12
(356)
$
(In thousands)
$
-
(453)
52
(401)
$
-
$
(538)
91
(447)
$
$
$
$
6,166
855
(460)
6,561
8,055
183
(488)
7,750
8,589
758
(471)
8,876
$
$
$
Amounts in accumulated other comprehensive loss to be recognized as components of net periodic expense for these plans
in 2018 are as follows:
Net Actuarial
Loss (Gain)
Prior Service
Cost (Credit)
Expense
(Benefit)
Employee Retirement Plan
Other Postretirement Benefit Plans
Outside Directors Plan
Total
$
$
621
33
(91)
563
(In thousands)
-
$
(85)
12
(73)
$
621
(52)
(79)
490
$
$
Employee Retirement Plan:
The Bank has a funded noncontributory defined benefit retirement plan covering substantially all of its salaried employees
who were hired before September 1, 2005 (the “Retirement Plan”). The benefits are based on years of service and the
employee’s compensation during the three consecutive years out of the final ten years of service, which was completed
prior to September 30, 2006, the date the Retirement Plan was frozen, that produces the highest average. The Bank’s
funding policy is to contribute annually the amount recommended by the Retirement Plan’s actuary. The Bank’s
Retirement Plan invests in diversified equity and fixed-income funds, which are independently managed by a third party.
The Company did not make a contribution to the Retirement Plan during the years ended December 31, 2017, 2016 and
2015. The Company uses a December 31 measurement date for the Retirement Plan.
102
The following table sets forth, for the Retirement Plan, the change in benefit obligation and assets, and for the Company,
the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
Change in benefit obligation:
Projected benefit obligation at beginning of year
Interest cost
Actuarial loss
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Market value of assets at beginning of year
Actual return on plan assets
Benefits paid
Market value of plan assets at end of year
2017
2016
(In thousands)
$
22,769
864
962
(990)
23,605
$
22,764
902
130
(1,027)
22,769
20,146
3,546
(990)
22,702
19,924
1,249
(1,027)
20,146
Accrued pension liability included in other liabilities
$
(903)
$
(2,623)
The accumulated benefit obligation for the Retirement Plan was $23.6 million and $22.8 million at December 31, 2017
and 2016, respectively.
Assumptions used to determine the Retirement Plan’s benefit obligations are as follows at December 31:
Weighted average discount rate
Rate of increase in future compensation levels
2017
2016
3.42%
n/a
3.88%
n/a
The mortality assumptions for 2017 were based on the RP-2014 Adjusted to 2006 Total Dataset with Scale MP-2017 and
the mortality assumptions for 2016 were based on the RP-2014 Adjusted to 2006 Total Dataset with Scale MP-2016.
The components of the net pension expense for the Retirement Plan are as follows for the years ended December 31:
Interest cost
Amortization of unrecognized loss
Expected return on plan assets
Net pension expense
Current year actuarial (gain) loss
Amortization of actuarial loss
Total recognized in other comprehensive income
Total recognized in net pension cost (benefit) and other
2017
$
864
697
(1,392)
169
2016
(In thousands)
902
$
809
(1,394)
317
(1,192)
(697)
(1,889)
275
(809)
(534)
2015
$
889
1,112
(1,400)
601
(237)
(1,112)
(1,349)
comprehensive loss
$
(1,720)
$
(217)
$
(748)
103
Assumptions used to develop periodic pension cost for the Retirement Plan for the years ended December 31:
Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets
2017
2016
2015
3.88%
n/a
7.00%
4.06%
n/a
7.25%
3.76%
n/a
7.50%
The following benefit payments are expected to be paid by the Retirement Plan:
For the years ending December 31:
2018
2019
2020
2021
2022
2023 – 2027
Future Benefit
Payments
(In thousands)
$ 1,421
1,202
1,199
1,238
1,306
6,490
The long-term rate of return on assets assumption was set based on historical returns earned by equities and fixed income
securities, adjusted to reflect expectations of future returns as applied to the plan's target allocation of asset classes. Equities
and fixed income securities were assumed to earn real rates of return in the ranges of 8-10% and 3-5%, respectively. When
these overall return expectations are applied to the plans target allocation, the result is an expected rate return of 7.00% for
2017.
The Retirement Plan’s weighted average asset allocations by asset category at December 31:
Equity securities
Debt securities
2017
72%
28%
2016
69%
31%
Plan assets are invested in a diversified mix of stock and bond investment funds on the pooled account, group annuity
platform of Prudential Retirement Services. Each fund has its own investment objectives, investment strategies and risks
as detailed in its prospectus.
The long-term investment objectives are to maintain plan assets at a level that will sufficiently cover long-term obligations
and to generate a return on plan assets that will meet or exceed the rate at which long-term obligations will grow. A
combination of equity and fixed income portfolios are used to help achieve these objectives based on a long-term, liability
based strategic mix of 60% equities and 40% fixed income. Adjustments to this mix are made periodically based on current
capital market conditions and plan funding levels. Performance of the investment fund managers is monitored on an
ongoing basis using modern portfolio risk analysis and appropriate index benchmarks.
The Bank does not expect to make a contribution to the Retirement Plan in 2018.
The fair value of the pooled separate accounts is determined by the investment manager and is based on the value of the
underlying assets held at December 31, 2017 and 2016. These are measured at net asset value under the practical expedient
with future redemption dates.
The fair values of the Plan’s investments in pooled separate accounts are calculated each business day. All investments
can be redeemed on a daily basis without restriction. The investments in pooled separate accounts, which are valued at net
asset value, have not been classified in the fair value hierarchy in accordance with Accounting Standards ASU No. 2015-
07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”.
104
The following table sets forth the Retirement Plan’s assets at the periods indicated:
Pooled Separate Accounts
U.S. large-cap growth (a)
U.S. large-cap value (b)
U.S. small-cap blend (c)
International blend (d)
Bond fund (e)
Prudential short term (f)
At December 31,
2017
2016
(In thousands)
$
5,822
5,164
2,735
2,566
6,338
77
$
4,702
4,789
2,362
2,017
5,950
326
Total
$
22,702
$
20,146
a. Comprised of large-cap stocks seeking to outperform, over the long term, the Russell 1000 Growth Index. The
portfolio will typically hold between 55 and 70 stocks.
b. Comprised of large-cap stocks seeking to outperform the Russell 1000 Value benchmark over the rolling three
and five year periods, or a full market cycle, whichever is longer.
c. Comprised of stocks with market capitalization of between $100 million and the market capitalization of the
largest stock in the Russell 2000 index at the time of purchase. The portfolio will typically hold between 40
and 100 stocks.
d. Comprised of non-U.S. domiciled stocks. The portfolio will typically hold between 80 and 90 stocks.
e. Comprised of a portfolio of fixed income securities including U.S agency mortgage-backed securities, corporate
bonds, U.S. government bonds and high yield bonds.
f. Comprised of money market instruments with an emphasis on safety and liquidity.
Other Postretirement Benefit Plans:
The Company sponsors two unfunded postretirement benefit plans (the “Postretirement Plans”) that cover all retirees who were
full-time permanent employees with at least five years of service, and their spouses. Effective January 1, 2011, the Postretirement
Plans are no longer available for new hires. One plan provides medical benefits through a 50% cost sharing arrangement.
Effective January 1, 2000, the spouses of future retirees were required to pay 100% of the premiums for their coverage.
The other plan provides life insurance benefits and is noncontributory. Effective January 1, 2010, life insurance benefits
are not available for future retirees. Under these programs, eligible retirees receive lifetime medical and life insurance
coverage for themselves and lifetime medical coverage for their spouses. The Company reserves the right to amend or
terminate these plans at its discretion.
Comprehensive medical plan benefits equal the lesser of the normal plan benefit or the total amount not paid by Medicare.
Life insurance benefits for retirees are based on annual compensation and age at retirement. As of December 31, 2017, the
Company has not funded these plans. The Company used a December 31 measurement date for these plans.
105
The following table sets forth, for the Postretirement Plans, the change in benefit obligation and assets, and for the
Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Market value of assets at beginning of year
Employer contributions
Benefits paid
Market value of plan assets at end of year
2017
2016
(In thousands)
$
7,978
316
305
588
(83)
9,104
$
7,977
359
320
(613)
(65)
7,978
-
83
(83)
-
-
65
(65)
-
Accrued pension cost included in other liabilities
$
(9,104)
$
(7,978)
The accumulated benefit obligation for the Postretirement Plans was $9.1 million and $8.0 million at December 31, 2017
and 2016, respectively.
Assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligations at
December 31 are as follows:
Discount rate
Rate of increase in health care costs
Initial
Ultimate (year 2023)
Annual rate of salary increase for life insurance
2017
2016
3.42%
3.88%
7.00%
5.00%
n/a
8.00%
5.00%
n/a
The mortality assumptions for 2017 were based on the RP-2014 Adjusted to 2006 White Collar Mortality Table with Scale
MP-2017 and the mortality assumptions for 2016 were based on the RP-2014 Adjusted to 2006 White Collar Mortality
Table with Scale MP-2016.
106
The resulting net periodic postretirement expense consisted of the following components for the years ended December
31:
Service cost
Interest cost
Amortization of unrecognized loss
Amortization of past service credit
Net postretirement benefit expense
Current year actuarial loss (gain)
Amortization of actuarial loss
Amortization of prior service credit
Total recognized in other comprehensive income
Total recognized in net postretirement expense
2017
2016
2015
$
316
305
-
(85)
536
(In thousands)
359
$
320
47
(85)
641
$
382
300
119
(85)
716
587
-
85
672
(613)
(47)
85
(575)
(715)
(119)
85
(749)
and other comprehensive loss
$
1,208
$
66
$
(33)
Assumptions used to develop periodic postretirement expense for the Postretirement Plans for the years ended December
31:
Rate of return on plan assets
Discount rate
Rate of increase in health care costs
Initial
Ultimate (year 2023)
Annual rate of salary increase for life insurance
2017
2016
2015
n/a
3.88%
8.00%
5.00%
n/a
n/a
4.06%
7.00%
5.00%
n/a
n/a
3.76%
8.00%
5.00%
n/a
The health care cost trend rate assumptions have a significant effect on the amounts reported. A one percentage point
change in assumed health care trend rates would have the following effects:
Effect on postretirement benefit obligation
Effect on total service and interest cost
Increase
Decrease
(In thousands)
$1,949
175
$(1,481)
(130)
The following benefit payments under the Postretirement Plan, which reflect expected future service, are expected to be
paid:
For the years ending December 31:
2018
2019
2020
2021
2022
2023 – 2027
Future Benefit
Payments
(In thousands)
$ 236
251
256
270
294
1,561
107
Defined Contribution Plans:
The Bank maintains a tax qualified 401(k) plan which covers substantially all salaried employees who have completed one
year of service. Currently, annual matching contributions under the Bank’s 401(k) plan equal 50% of the employee’s
contributions, up to a maximum of 3% of the employee’s base salary. In addition, the 401(k) plan includes the Defined
Contribution Retirement Plan (“DCRP”), under which the Bank contributes an amount equal to 4% of an employee’s
eligible compensation as defined in the plan, and the Profit Sharing Plan (“PSP”), under which at the discretion of the
Company’s Board of Directors a contribution is made. Contributions for the DCRP and PSP are made in the form of
Company common stock at or after the end of each year. Annual contributions under these plans are subject to the limits
imposed under the Internal Revenue Code. Contributions by the Company into the 401(k) plan vest 20% per year over the
employee's first five years of service. Contributions to these plans are 100% vested upon a change of control (as defined
in the applicable plan). Compensation expense recorded by the Company for these plans amounted to $3.4 million, $3.3
million and $3.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Bank provides a non-qualified deferred compensation plan as an incentive for officers who have achieved the
designated level and completed one year of service. However, certain officers who have not reached the designated level
but were already participants remain eligible to participate. In addition to the amounts deferred by the officers, the Bank
matches 50% of their contributions, generally up to a maximum of 5% of the officers’ base salary. Matching contributions
under this plan vest 20% per year for five years. The non-qualified deferred compensation plan assets are held in a rabbi
trust totaling $11.5 million and $10.4 million at December 31, 2017 and 2016, respectively. Contributions become 100%
vested upon a change of control (as defined in the plan). Compensation expense recorded by the Company for this plan
amounted to $0.4 million for each of the years ended December 31, 2017, 2016 and 2015.
Employee Benefit Trust:
An Employee Benefit Trust (“EBT”) has been established to assist the Company in funding its benefit plan obligations.
Dividend payments received are used to purchase additional shares of common stock. Shares released are used solely for
funding matching contributions under the Bank’s 401(k) plan, contributions to the 401(k) plan for the DCRP, and
contributions to the PSP. For the years ended December 31, 2017, 2016 and 2015, the Company funded $3.2 million, $2.8
million and $2.8 million, respectively, of employer contributions to the 401(k), DCRP and profit sharing plans from the
EBT.
Upon a change of control (as defined in the EBT), the EBT will terminate and any trust assets remaining after certain
benefit plan contributions will be distributed to all full-time employees of the Company with at least one year of service,
in proportion to their compensation over the four most recently completed calendar years plus the portion of the current
year prior to the termination of the EBT.
As shares are released from the suspense account, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share computations.
The EBT shares are as follows at December 31:
Shares owned by Employee Benefit Trust, beginning balance
Shares purchased
Shares released and allocated
Shares owned by Employee Benefit Trust, ending balance
2017
2016
551,762
11,631
(118,371)
445,022
675,436
18,391
(142,065)
551,762
Market value of unallocated shares
$
12,238,105
$
16,216,285
Outside Director Retirement Plan:
The Bank has an unfunded noncontributory defined benefit Outside Director Retirement Plan (the “Directors’ Plan”),
which provides benefits to each non-employee director who became a non-employee director before January 1, 2004,
who has at least five years of service as a non-employee director and whose years of service as a non-employee director
plus age equals or exceeds 55. Any person who became a non-employee director after January 1, 2004 is not eligible to
participate in the Directors’ Plan. Upon termination an eligible director will be paid an annual retirement benefit equal to
$48,000. Such benefit will be paid in equal monthly installments for 120 months. In the event of a termination of Board
service due to a change of control, a non-employee director will receive a cash lump sum payment equal to 120 months of benefit.
In the event of the director’s death, the surviving spouse will receive the equivalent benefit. No benefits will be payable
to a director who is removed for cause. The Holding Company has guaranteed the payment of benefits under the Directors’
108
Plan, for this reason the Bank has assets held in a rabbi trust totaling $4.4 million and $4.2 million at December 31, 2017
and 2016, respectively. The Bank uses a December 31 measurement date for the Directors’ Plan.
The following table sets forth, for the Directors’ Plan, the change in benefit obligation and assets, and for the Company,
the amounts recognized in the Consolidated Statements of Financial Condition at December 31:
Change in benefit obligation:
Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid
Projected benefit obligation at end of year
Change in plan assets:
Market value of assets at beginning of year
Employer contributions
Benefits paid
Market value of plan assets at end of year
2017
2016
(In thousands)
$
2,462
42
89
(24)
(144)
2,425
$
2,530
42
97
(63)
(144)
2,462
-
144
(144)
-
-
144
(144)
-
Accrued pension cost included in other liabilities
$
(2,425)
$
(2,462)
The accumulated benefit obligation for the Directors’ Plan was $2.4 million at December 31, 2017 and $2.5 million at
December 31, 2016.
The components of the net pension expense for the Directors’ Plan are as follows for the years ended December 31:
Service cost
Interest cost
Amortization of unrecognized gain
Amortization of past service liability
Net pension expense
Current actuarial gain
Amortization of actuarial gain
Amortization of prior service cost
Total recognized in other comprehensive income
Total recognized in net pension expense and other
2017
2016
2015
$
42
89
(92)
40
79
(In thousands)
42
$
97
(86)
40
93
$
45
95
(56)
40
124
(24)
92
(40)
28
(63)
86
(40)
(17)
(130)
56
(40)
(114)
comprehensive income
$
107
$
76
$
10
Assumptions used to determine benefit obligations and periodic pension expense for the Directors’ Plan for the years
ended December 31:
Weighted average discount rate for the benefit obligation
Weighted average discount rate for periodic pension benefit expense
Rate of increase in future compensation levels
2017
2016
2015
3.42%
3.88%
n/a
3.88%
4.06%
n/a
4.06%
3.76%
n/a
109
The following benefit payments under the Directors’ Plan, which reflect expected future service, are expected to be paid:
For the years ending December 31:
2018
2019
2020
2021
2022
2023 – 2027
Future Benefit
Payments
(In thousands)
$ 248
288
288
288
288
1,052
The Company expects to make payments of $0.2 million under its Directors’ Plan in 2017.
13. Stockholders’ Equity
Dividend Restrictions on the Bank:
In connection with the Bank’s conversion from mutual to stock form in November 1995, a special liquidation account was
established at the time of conversion, in accordance with the requirements of its primary regulator, which was equal to its
capital as of June 30, 1995. The liquidation account is reduced as and to the extent that eligible account holders have
reduced their qualifying deposits. Subsequent increases in deposits do not restore an eligible account holder’s interest in
the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. As of December 31, 2017 and 2016, the Bank’s liquidation account was $0.6 million and $0.7
million, respectively, and was presented within retained earnings.
In addition to the restriction described above, New York State and Federal banking regulations place certain restrictions
on dividends paid by the Bank to the Holding Company. The total amount of dividends which may be paid at any date is
generally limited to the net income of the Bank for the current year and prior two years, less any dividends previously paid
from those earnings. As of December 31, 2017, the Bank had $89.4 million in retained earnings available to distribute to
the Holding Company in the form of cash dividends.
In addition, dividends paid by the Bank to the Holding Company would be prohibited if the effect thereof would cause the
Bank’s capital to be reduced below applicable minimum capital requirements.
As a bank holding company, the Holding Company is subject to similar dividend restrictions.
Treasury Stock Transactions:
The Holding Company repurchased 241,625 common shares at an average cost of $27.59 and 403,695 common shares at
an average cost of $19.89 during the years ended December 31, 2017 and 2016, respectively. At December 31, 2017,
254,280 shares remain to be repurchased under the current stock repurchase program. Stock will be purchased under the
current stock repurchase program from time to time, in the open market or through private transactions, subject to market
conditions and at the discretion of the management of the Company. There is no expiration or maximum dollar amount
under this authorization.
110
Accumulated Other Comprehensive Loss:
The following are changes in accumulated other comprehensive loss by component, net of tax, for the years ended:
December 31, 2017
Beginning balance, net of tax
Other comprehensive income (loss) before
reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Net current period other comprehensive income (loss), net of tax
Unrealized Gains Unrealized Gains
(Losses) on
Available for Sale
Securities
(Losses) on
Cash flow
Hedges
Defined Benefit
Pension Items
Total
$
(3,859)
(In thousands)
-
$
$
(4,503)
(1,771)
108
(1,663)
231
-
231
485
323
808
$
(8,362)
(1,055)
431
(624)
Ending balance, net of tax
$
(5,522)
$
231
$
(3,695)
$
(8,986)
December 31, 2016
Beginning balance, net of tax
Other comprehensive income (loss) before
reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Net current period other comprehensive income (loss), net of tax
Unrealized Gains
(Losses) on
Available for Sale
Securities
$
(521)
Defined Benefit
Pension Items
(In thousands)
$
(5,041)
Total
$
(5,562)
(2,452)
(886)
(3,338)
235
303
538
(2,217)
(583)
(2,800)
Ending balance, net of tax
$
(3,859)
$
(4,503)
$
(8,362)
December 31, 2015
Beginning balance, net of tax
Other comprehensive income (loss) before
reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Net current period other comprehensive income (loss), net of tax
Unrealized Gains
(Losses) on
Available for Sale
Securities
$
3,392
Defined Benefit
Pension Items
(In thousands)
$
(6,299)
Total
$
(2,907)
(3,818)
(95)
(3,913)
615
(3,203)
643
1,258
548
(2,655)
Ending balance, net of tax
$
(521)
$
(5,041)
$
(5,562)
111
The following tables set forth significant amounts reclassified out of accumulated other comprehensive loss by component
for the periods indicated:
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available
for sale securities:
For the year ended December 31, 2017
Amounts Reclassified from
Accumulated Other
Comprehensive Income
(Dollars in thousands)
$
$
Amortization of defined benefit pension items:
Actuarial losses
Prior service credits
$
$
Affected Line Item in the Statement
Where Net Income is Presented
Net loss on sale of securities
Tax expense
Net of tax
(1) Other operating expenses
(1) Other operating expenses
Total before tax
Tax expense
Net of tax
(186)
78
(108)
(605)
45
(560)
237
(323)
(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 12 of the Notes to
Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”).
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available
for sale securities:
For the year ended December 31, 2016
Amounts Reclassified from
Accumulated Other
Comprehensive Income
(Dollars in thousands)
$
$
Amortization of defined benefit pension items:
Actuarial losses
Prior service credits
$
$
Affected Line Item in the Statement
Where Net Income is Presented
Net gain on sale of securities
Tax expense
Net of tax
(1) Other operating expenses
(1) Other operating expenses
Total before tax
Tax benefit
Net of tax
1,524
(638)
886
(568)
45
(523)
220
(303)
112
Details about Accumulated Other
Comprehensive Income Components
Unrealized gains (losses) on available
for sale securities:
For the year ended December 31, 2015
Amounts Reclassified from
Accumulated Other
Comprehensive Income
(Dollars in thousands)
$
$
167
(72)
95
Amortization of defined benefit pension items:
Actuarial losses
Prior service credits
$
(1,178)
46
(1,132)
489
(643)
$
Affected Line Item in the Statement
Where Net Income is Presented
Net gain on sale of securities
Tax expense
Net of tax
(1) Other operating expenses
(1) Other operating expenses
Total before tax
Tax benefit
Net of tax
(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 12 of the Notes to
Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”).
14. Regulatory Capital
Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of
December 31, 2017, the Bank continued to be categorized as “well-capitalized” under the prompt corrective action
regulations and continued 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 2017 was 1.25% and increases 0.625% annually through 2019 to 2.5%.
The CCB for the Bank at December 31, 2017 and 2016 was 6.31% and 6.64%, respectively.
Set forth below is a summary of the Bank’s compliance with banking regulatory capital standards.
December 31, 2017
December 31, 2016
Amount
Percent of
Assets
Amount
Percent of
Assets
(Dollars in thousands)
Tier I (leverage) capital:
Capital level
Requirement to be well capitalized
Excess
Common Equity Tier I risk-based capital:
Capital level
Requirement to be well capitalized
Excess
Tier I risk-based capital:
Capital level
Requirement to be well capitalized
Excess
$
631,285
312,343
318,942
$
631,285
295,937
335,348
$
631,285
364,230
267,055
Total risk-based capital:
Capital level
Requirement to be well capitalized
Excess
$
651,636
455,288
196,348
113
%
%
%
%
10.11
5.00
5.11
13.87
6.50
7.37
13.87
8.00
5.87
14.31
10.00
4.31
$
607,033
299,848
307,185
$
607,033
279,443
327,590
$
607,033
343,930
263,103
$
629,262
429,913
199,349
%
%
%
%
10.12
5.00
5.12
14.12
6.50
7.62
14.12
8.00
6.12
14.64
10.00
4.64
The Holding Company is subject to the same regulatory capital requirements as the Bank. As of December 31, 2017, the
Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and
continues to exceed all regulatory capital requirements. The CCB for the Holding Company at December 31, 2017 and
2016 was 6.38% and 6.56%, respectively.
Set forth below is a summary of the Holding Company’s compliance with banking regulatory capital standards.
December 31, 2017
December 31, 2016
Amount
Percent of
Assets
Amount
Percent of
Assets
(Dollars in thousands)
$
563,426
312,278
251,148
$
527,727
295,865
231,862
$
563,426
364,141
199,285
$
658,777
455,177
203,600
%
%
%
%
9.02
5.00
4.02
11.59
6.50
5.09
12.38
8.00
4.38
14.47
10.00
4.47
$
539,228
299,654
239,574
$
506,432
279,121
227,311
$
539,228
343,534
195,694
$
636,457
429,417
207,040
%
%
%
%
9.00
5.00
4.00
11.79
6.50
5.29
12.56
8.00
4.56
14.82
10.00
4.82
Tier I (leverage) capital:
Capital level
Requirement to be well capitalized
Excess
Common Equity Tier I risk-based capital:
Capital level
Requirement to be well capitalized
Excess
Tier I risk-based capital:
Capital level
Requirement to be well capitalized
Excess
Total risk-based capital:
Capital level
Requirement to be well capitalized
Excess
15. Commitments and Contingencies
Commitments:
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit and lines of credit.
The instruments involve, to varying degrees, elements of credit and market risks in excess of the amount recognized in the
consolidated financial statements.
The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for
loan commitments and lines of credit is represented by the contractual amounts of these instruments.
Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally business lines of
credit and home equity lines of credit) amounted to $116.7 million and $224.7 million, respectively, at December 31, 2017.
Included in these commitments were $39.6 million of fixed-rate commitments at a weighted average rate of 4.93% and
$301.9 million of adjustable-rate commitments with a weighted average rate of 3.66%, as of December 31, 2017. Since
generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future cash
requirements, whereas the amounts of lines of credit may not be indicative of the Company’s future cash requirements.
The loan commitments generally expire in 90 days, while construction loan lines of credit mature within eighteen months
and home equity lines of credit mature within ten years. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates and require payment of a fee.
The Company evaluates each customer’s creditworthiness on a case-by-case basis. Collateral held consists primarily of
real estate.
114
The Bank collateralized a portion of its deposits with letters of credit issued by FHLB-NY. At December 31, 2017 and
2016, there were $402.1 million and $382.5 million, respectively, of letters of credit outstanding. The letters of credit are
collateralized by mortgage loans pledged by the Bank.
The Trusts issued capital securities with a par value of $61.9 million in June and July 2007. The Holding Company has
guaranteed the payment of the Trusts’ obligations under these capital securities.
The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows:
Minimum Rental
(In thousands)
Years ended December 31:
2018
2019
2020
2021
2022
Thereafter
Total minimum payments required
$
6,108
6,999
7,071
6,305
5,909
24,608
57,000
$
The leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating
lease agreements expire through 2032. Rent expense under these leases for the years ended December 31, 2017, 2016 and
2015 was approximately $6.3 million, $5.8 million and $5.8 million, respectively.
Contingencies:
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 or cash flows.
16. Concentration of Credit Risk
The Company’s lending is concentrated in the New York City metropolitan area. The Company evaluates each customer’s
creditworthiness on a case-by-case basis under the Company’s established underwriting policies. The collateral obtained
by the Company generally consists of first liens on one-to-four family residential, multi-family residential, and commercial
real estate. At December 31, 2017, the largest amount the Bank could lend to one borrower was approximately
$94.7 million, and at that date, the Bank’s largest aggregate amount of loans to one borrower was $74.2 million, all of
which were performing according to their terms.
17. Related Party Transactions
At December 31, 2017, there were no outstanding loans to a related party. At December 31, 2016, one loan for $8,000 was
outstanding to an executive officer of the Company. The loan was made in the ordinary course of business and was fully
approved in accordance with all of the Company’s credit underwriting standards and was made at market rates of interest
and other normal terms but with reduced origination fees. No such loans were made during 2017, 2016 and 2015. The
Company believes that such loans do not involve more than the normal risk of collectability or present other unfavorable
features. Deposits of related parties totaled $13.8 million and $13.2 million at December 31, 2017 and 2016, respectively.
18. 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 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. At December 31, 2016, the Company carried
financial assets and financial liabilities under the fair value option with fair values of $30.4 million and $34.0 million,
respectively. The year ended December 31, 2017 included the call of one security for $6.0 million and the sale of one
security for $3.0 million. The Company did not purchase any financial assets or liabilities under the fair value option during
115
the years ended December 31, 2017 and 2016 and did not sell any financial assets or liabilities under the fair value option
during the year ended December 31, 2016.
Management selected the fair value option for certain investment securities, and certain borrowed funds as the yield, at the
time of election, on the financial assets was below-market, while the rate on the financial liabilities was above-market rate.
Management also considered the average duration of these instruments, which, for investment securities, was longer than
the average for the portfolio of securities, and, for borrowings, primarily represented the longer-term borrowings of the
Company. Choosing these instruments for the fair value option adjusted the carrying value of these financial assets and
financial liabilities to their current fair value, and more closely aligned the financial performance of the Company with the
economic value of these financial instruments. Management believed that electing the fair value option for these financial
assets and financial liabilities allows them to better react to changes in interest rates. At the time of election, Management
did not elect the fair value option for investment securities and borrowings with shorter duration, adjustable rates, and
yields that approximated the then current market rate, as management believed that these financial assets and financial
liabilities approximated their economic value.
The following table presents the financial assets and financial liabilities reported at fair value under the fair value option
at December 31, 2017 and 2016, and the changes in fair value included in the Consolidated Statement of Income – Net
loss from fair value adjustments, for the years ended December 31, 2017, 2016 and 2015:
Description
(Dollars in thousands)
Mortgage-backed securities
Other securities
Borrowed funds
Net loss from fair value adjustments (1)
Fair Value
Measurements
at December 31,
2017
Fair Value
Measurements
at December 31,
2016
Changes in Fair Values For Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
For the year ended December 31,
2016
2017
2015
$
1,590
12,685
36,986
$
2,016
28,429
33,959
$
(26)
134
(2,993)
$
(25)
(38)
(4,908)
$
(59)
53
(238)
$
(2,885)
$
(4,971)
$
(244)
(1) The net loss from fair value adjustments presented in the above table does not include net (losses) gains of ($0.6)
million, $1.5 million and ($1.6) million from the change in fair value of derivative instruments during the years
ended December 31, 2017, 2016 and 2015, respectively.
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 have a contractual principal amount of $61.9 million at December 31, 2017 and 2016. The fair value
of borrowed funds includes accrued interest payable of $0.2 million and $0.1 million at December 31, 2017 and 2016,
respectively.
The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities
at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information.
These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s
entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair
value estimates change and these amounts may not necessarily be realized in an immediate sale.
Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial
instrument or certain other financial instruments specifically excluded from its requirements. These items include core
deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.
Further, fair value disclosure does not attempt to value future income or business. These items may be material and
accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the
underlying “market” or franchise value of the Company.
116
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 December 31, 2017, Level 1 included one
mutual fund. At December 31, 2016, the Company did not value any of its assets or liabilities that are carried at fair value
on a recurring basis as Level 1.
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 December 31, 2017 and 2016, Level 2 included mortgage related securities, corporate debt,
municipals and interest rate swaps.
Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are
classified as Level 3. At December 31, 2017, Level 3 included trust preferred securities owned by and junior subordinated
debentures issued by the Company. At December 31, 2016, Level 3 included trust preferred securities owned and junior
subordinated debentures issued by the Company and a single issuer trust preferred security.
The methods described above may produce fair values that may not be indicative of net realizable value or reflective of
future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other
market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial
instruments could produce different estimates of fair value at the reporting date.
The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis,
including those reported at fair value under the fair value option, and the level that was used to determine their fair value,
at December 31:
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
2017
2016
Significant Other
Observable Inputs
(Level 2)
2017
2016
Significant Other
Unobservable Inputs
(Level 3)
2017
2016
(In thousands)
Total carried at fair value
on a recurring basis
2017
2016
Assets:
Securities available for sale
Mortgage-backed
Securities
Other securities
Interest rate swaps
-
$
11,575
-
-
$
-
-
$
509,650
216,019
7,388
$
516,476
337,544
6,350
-
$
1,110
-
-
$
7,361
-
$
509,650
228,704
7,388
$
516,476
344,905
6,350
Total assets
$
11,575
$
-
$
733,057
$
860,370
$
1,110
$
7,361
$
745,742
$
867,731
Liabilities:
Borrowings
Interest rate swaps
$
-
-
$
-
-
$
-
3,758
$
-
3,386
$
36,986
-
$
33,959
-
$
36,986
3,758
$
33,959
3,386
Total liabilities
$
-
$
-
$
3,758
$
3,386
$
36,986
$
33,959
$
40,744
$
37,345
During the year ended December 31, 2017, one mutual fund security for $11.6 million was transferred from Level 2 into
Level 1. There were no other transfers between Levels 1, 2 and 3 during the years ended December 31, 2017 and 2016.
117
The following tables set 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 periods indicated:
For the year ended
December 31, 2017
December 31, 2016
Trust preferred
securities
Junior subordinated
debentures
Trust preferred
securities
Junior subordinated
debentures
(In thousands)
Beginning balance
Security call
Net gain from fair value adjustment
of financial assets (1)
Net loss from fair value
adjustment of financial liabilities (1)
Increase(Decrease) in accrued interest
Change in unrealized losses included
in other comprehensive loss
Ending balance
$
7,361
(6,300)
$
33,959
-
$
7,212
-
$
29,018
-
134
-
(87)
-
2,993
34
149
-
-
-
4,908
33
2
1,110
$
$
-
36,986
-
7,361
$
$
-
33,959
Changes in unrealized held at period end
$
-
$
-
$
-
$
-
(1) These totals in the table above are presented in the Consolidated Statement of Income under net loss from fair value adjustments.
The following tables present the qualitative information about recurring Level 3 fair value of financial instruments and
the fair value measurements at the periods indicated:
Fair Value
Valuation Technique
December 31, 2017
Unobservable Input
(Dollars in thousands)
Assets:
Trust preferred securities
$
1,110
Discounted cash flows
Discount rate
Liabilities:
Junior subordinated debentures
$
36,986
Discounted cash flows
Discount rate
Range
Weighted Average
n/a
n/a
5.7%
5.7%
Fair Value
Valuation Technique
December 31, 2016
Unobservable Input
(Dollars in thousands)
Range
Weighted Average
Assets:
Trust preferred securities
$
7,361
Discounted cash flows
Discount rate
6.3%- 7.1%
7.0%
Liabilities:
Junior subordinated debentures
$
33,959
Discounted cash flows
Discount rate
n/a
6.3%
The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and
junior subordinated debentures valued under Level 3 at December 31, 2017 and 2016, are the effective yields used in the
cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower
or higher fair value measurement.
118
The following table sets forth the Company's assets that are carried at fair value on a non-recurring basis, and the level
that was used to determine their fair value, at December 31:
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
2017
2016
Significant Other
Observable Inputs
(Level 2)
2017
2016
Significant Other
Unobservable Inputs
(Level 3)
2017
2016
(In thousands)
Total carried at fair value
on a recurring basis
2017
2016
Assets:
Impaired loans
Other real estate owned
-
$
-
-
$
-
-
$
-
-
$
-
$
16,027
-
$
14,968
533
$
16,027
-
$
14,968
533
Total assets
$
-
$
-
$
-
$
-
$
16,027
$
15,501
$
16,027
$
15,501
The following tables present the qualitative information about non-recurring Level 3 fair value measurements of financial
instruments at the periods indicated:
Fair Value
Valuation Technique
At December 31, 2017
Unobservable Input
(Dollars in thousands)
Range
Weighted Average
Assets:
Impaired loans
$
1,818
Income approach
Capitalization rate
6.5% to 7.5%
Impaired loans
$ 10,003
Sales approach
Impaired loans
$ 4,206
Blended income and
sales approach
Reduction for planned expedited disposal
15.0%
Adjustment to sales comparison value to
reconcile differences between
comparable sales
-50.0% to 16.2%
Reduction for planned expedited disposal
-30.9% to 15.0%
Adjustment to sales comparison value to
reconcile differences between
comparable sales
Capitalization rate
-30.0% to 25.0%
5.0% to 9.8%
Reduction for planned expedited disposal
15.0%
6.8%
15.0%
-0.8%
8.7%
-1.2%
7.2%
15.0%
119
Fair Value
Valuation Technique
At December 31, 2016
Unobservable Input
(Dollars in thousands)
Range
Weighted Average
Assets:
Impaired loans
$
2,007
Income approach
Impaired loans
$ 8,703
Sales approach
Impaired loans
$ 4,258
Blended income and
sales approach
Capitalization rate
Reduction for planned expedited disposal
6.0% to 7.5%
15.0%
Adjustment to sales comparison value to
reconcile differences between
comparable sales
Reduction for planned expedited disposal
Adjustment to sales comparison value to
reconcile differences between
comparable sales
Capitalization rate
Reduction planned for expedited disposal
-40.0% to 16.2%
0% to 15.0%
-50.0% to 25.0%
5.3% to 9.5%
15.0%
7.0%
15.0%
-1.5%
7.7%
-0.6%
7.2%
15.0%
Other real estate owned
$ 533
Sales approach
Adjustment to sales comparison value to
reconcile differences between
comparable sales
3.3% to 18.6%
11.0%
The Company did not have any liabilities that were carried at fair value on a non-recurring basis at December 31, 2017
and 2016.
The fair value of each material class of financial instruments at December 31, 2017 and 2016 and the related methods and
assumptions used to estimate fair value are as follows:
Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:
The fair values of financial instruments that are short-term or reprice frequently and have little or no risk are considered to
have a fair value that approximates carrying value.
FHLB-NY stock:
The fair value is based upon the par value of the stock which equals its carrying value.
Securities:
The fair values of securities are contained in Note 6 of Notes to Consolidated Financial Statements. Fair value is based
upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being
valued. When there is limited activity or less transparency around inputs to the valuation, securities are valued using
discounted cash flows.
Loans:
The fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and remaining maturities.
For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with
a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the
appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying
collateral of taxi medallion loans is the most recent reported arm’s length sales transaction. When there is no recent sale
activity, the fair value is calculated using capitalization rates.
120
Other Real Estate Owned:
OREO are carried at fair value less selling costs. The fair value is based on appraised value through a current appraisal, or
sometimes through an internal review, additionally adjusted by the estimated costs to sell the property.
Accrued Interest Receivable:
The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for
its underlying financial asset.
Due to Depositors:
The fair values of demand, savings, NOW, money market deposits and escrow deposits are, by definition, equal to the
amount payable on demand at the reporting dates (i.e. their carrying value). The fair value of certificates of deposits are
estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining
maturities.
Borrowings:
The fair value of borrowings is estimated by discounting the contractual cash flows using interest rates in effect for
borrowings with similar maturities and collateral requirements or using a market-standard model. The fair value of the
junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company
adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity.
Accrued Interest Payable:
The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for
its underlying financial liability.
Interest Rate Swaps:
The fair value of interest rate swaps is based upon broker quotes.
Other Financial Instruments:
The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into
similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the
counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date.
For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of
interest rates and committed rates (where applicable). At December 31, 2017 and December 31, 2016, the fair values of
the above financial instruments approximate the recorded amounts of the related fees and were not considered to be
material.
121
The following tables set forth the carrying amounts and fair values of selected financial instruments based on the
assumptions described above used by the Company in estimating fair value at the periods indicated:
Carrying
Amount
Fair
Value
December 31, 2017
Level 1
(In thousands)
Level 2
Level 3
$
51,546
$
51,546
$
51,546
$
-
$
-
7,973
22,913
7,810
21,889
-
-
7,810
-
-
21,889
509,650
228,704
5,176,999
60,089
21,405
7,388
509,650
228,704
5,169,108
60,089
21,405
7,388
-
11,575
-
-
16
-
509,650
216,019
-
60,089
1,916
7,388
-
1,110
5,169,108
-
19,473
-
Assets:
Cash and due from banks
Securities held-to-maturity
Mortgage-backed
securities
Other securities
Securities available for sale
Mortgage-backed
securities
Other securities
Loans
FHLB-NY stock
Accrued interest receivable
Interest rate swaps
Total assets
$
6,086,667
$
6,077,589
$
63,137
$
802,872
$
5,211,580
Liabilities:
Deposits
Borrowings
Accrued interest payable
Interest rate swaps
$
4,383,278
1,309,653
2,659
3,758
$
4,380,174
1,310,487
2,659
3,758
$
3,031,345
-
-
-
$
1,348,829
1,273,501
2,659
3,758
-
$
36,986
-
-
Total liabilities
$
5,699,348
$
5,697,078
$
3,031,345
$
2,628,747
$
36,986
122
Carrying
Amount
Fair
Value
December 31, 2016
Level 1
(In thousands)
Level 2
Level 3
$
35,857
$
35,857
$
35,857
$
-
$
-
37,735
35,408
516,476
344,905
4,835,693
59,173
6,350
516,476
344,905
4,814,840
59,173
6,350
-
-
-
-
-
-
-
35,408
516,476
337,544
-
59,173
6,350
-
7,361
4,814,840
-
-
Assets:
Cash and due from banks
Securities held-to-maturity
Other securities
Securities available for sale
Mortgage-backed
securities
Other securities
Loans
FHLB-NY stock
Interest rate swaps
Total assets
$
5,836,189
$
5,813,009
$
35,857
$
919,543
$
4,857,609
Liabilities:
Deposits
Borrowings
Interest rate swaps
Total liabilities
$
4,205,631
1,266,563
3,386
$
4,213,714
1,255,283
3,386
$
2,833,516
-
-
$
1,380,198
1,221,324
3,386
-
$
33,959
-
$
5,475,580
$
5,472,383
$
2,833,516
$
2,604,908
$
33,959
123
19. Derivative Financial Instruments
At December 31, 2017 and 2016, 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 December 31, 2017 and 2016; 2) to mitigate the Company’s exposure to rising interest rates on certain fixed
rate loans totaling $280.2 million and $235.4 million at December 31, 2017 and 2016, respectively; and 3) to mitigate
exposure to rising interest rates on certain short-term advances totaling $441.5 million at December 31, 2017.
At December 31, 2017, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not
designated as hedges. At December 31, 2016, we held fair value hedges and certain derivatives not designated as hedges.
The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other
Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The
accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has
been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.
At December 31, 2017 and 2016, derivatives with a combined notional amount of $36.3 million were not designated as
hedges. At December 31, 2017 and 2016, derivatives with a combined notional amount of $261.9 million and $217.1
million were designated as fair value hedges. At December 31, 2017, derivatives with a combined notional amount of
$441.5 million were designated as cash flow hedges. At December 31, 2016, the Company did not have any cash flow
hedges.
For cash flow hedges, the effective portion of changes in the fair value of the derivative is reported in AOCL, net of tax,
totaling $0.2 million at December 31, 2017, but the ineffective portion of changes in the fair value of the derivative is
recognized directly in earnings. Changes in the fair value of interest rate swaps not designated as hedges are reflected in
“Net 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:
December 31, 2017
December 31, 2016
Notional
Amount
Fair Value (1)
(In thousands)
Notional
Amount
Fair Value (1)
$
$
$
$
Interest rate swaps (fair value hedge)
Interest rate swaps (fair value hedge)
Interest rate swaps (cash flow hedge)
Interest rate swaps (cash flow hedge)
Interest rate swaps (non-hedge)
Total derivatives
199,341
62,564
250,000
191,500
36,321
739,726
6,971
(921)
417
(7)
(2,830)
3,630
182,177
34,916
-
-
36,321
253,414
6,350
(658)
-
-
(2,728)
2,964
$
$
$
$
(1) Derivatives in a net positive position are recorded as “Other assets” and derivatives in a net negative position are recorded as “Other liabilities”
in the Consolidated Statements of Financial Condition.
124
The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods
indicated:
(In thousands)
Financial Derivatives:
Interest rate swaps (non-hedge)
Interest rate swaps (fair value hedge)
Net (loss) gain (1)
For the year ended
December 31,
2016
2017
2015
$
(102)
(478)
$
71
1,466
$
(561)
(1,036)
$
(580)
$
1,537
$
(1,597)
(1) Net gains (losses) are recorded as “Net loss from fair value adjustments” in the Consolidated Statements of Income.
During the years ended December 31, 2017, 2016 and 2015, 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.
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:
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
(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
Gross Amounts Not Offset in the
Consolidated Statement of
Condition
125
December 31, 2016
Gross Amounts Not Offset in the
Consolidated Statement of
Condition
(In thousands)
Gross Amount of
Recognized Assets
Gross Amount Offset
in the Statement of
Condition
Net Amount of Assets
Presented in the Statement of
Condition
Financial
Instruments
Cash Collateral
Received
Net Amount
Interest rate swaps
$
6,350
$
-
$
6,350
$
-
$
2,964
$
3,386
(In thousands)
Gross Amount of
Recognized
Liabilities
Gross Amount Offset
in the Statement of
Condition
Net Amount of Liabilities
Presented in the Statement of
Condition
Financial
Instruments
Cash Collateral
Pledged
Net Amount
Interest rate swaps
$
3,386
$
-
$
3,386
$
-
$
-
$
3,386
Gross Amounts Not Offset in the
Consolidated Statement of
Condition
20. New Authoritative Accounting Pronouncements
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 plan to adopt this guidance retrospectively in the first quarter
of 2018. Our Consolidated Statements of Financial Condition at December 31, 2017 reflect $2.1 million of stranded tax
effects resulting from the TCJA.
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
126
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 March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost”, which requires that an employer disaggregate the service cost component from the
other components of net benefit cost, as follows:
Service cost must be presented in the same line item(s) as other employee compensation costs. These costs are
generally included within income from continuing operations, but in some cases may be eligible for
capitalization, if certain criteria are met.
All other components of net benefit cost must be presented in the income statement separately from the service
cost component and outside a subtotal of income from operations, if one is presented. These generally include
interest cost, actual return on plan assets, amortization of prior service cost included in accumulated other
comprehensive income, and gains or losses from changes in the value of the projected benefit obligation or plan
assets. If a separate line item is used to present the other components of net benefit cost, it must be appropriately
described. If a separate line item is not used, an entity must disclose the line item(s) in the income statement that
includes the other components of net benefit cost. The ASU clarifies that these costs are not eligible for
capitalization.
The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those
years. Early adoption is permitted as of the beginning of an annual period. The guidance is not expected to have a significant
impact on the Company's financial positions, results of operations or disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment.” The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the
goodwill impairment test. 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 August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, to
clarify how certain cash receipts and cash payments are presented and classified in the statements of cash flows. The
amendments are intended to reduce diversity in practice by clarifying whether the following items should be categorized
as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii)
settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of
corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity
method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of
more than one class of cash flows. The ASU will be effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An
entity that elects early adoption must adopt all of the amendments in the same period. The Company does not expect
adoption of this ASU will have a material effect on its consolidated financial statements.
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.
127
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 disclosed in Note 15 based on the present value of unpaid lease payments as of the date of adoption.
In January 2016, FASB issued ASU No. 2016-01 “Financial Instruments” which requires an entity to: (i) measure equity
investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the
changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial
assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial
instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets
related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The ASU
provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and
adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity
investments and amends certain fair value disclosure requirements. The amendments are effective for public business
entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption
is not permitted for the changes that affect the Company. We do not expect adoption of this ASU to have a material effect
on our consolidated results of operations, financial condition or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This ASU establishes a
comprehensive revenue recognition standard for virtually all industries under 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. ASU 2014-09
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 Company has compared our current revenue recognition policies to the
requirements of this ASU and has not identified any material differences in the amount and timing of revenue recognition
for the revenue streams we have. As such, we have concluded that the adoption of this ASU will not have a material impact
on the Company’s consolidated results of operations, financial condition or cash flows. The Company will adopt this ASU
effective January 1, 2018 through use of modified retrospective transition method.
128
21. Quarterly Financial Data (unaudited)
Selected unaudited quarterly financial data for the fiscal years ended December 31, 2017 and 2016 is presented below:
Quarterly operating data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Other operating income
Other operating expense
Income before income
tax expense
Income tax expense
Net income
4th
3rd
2nd
1st
4th
3rd
2nd
1st
2017
2016
(In thousands, except per share data)
$
59,697
16,637
43,060
6,595
3,064
25,879
$
59,319
16,278
43,041
3,266
1,661
25,966
$
58,315
14,698
43,617
-
1,948
26,065
$
57,254
13,865
43,389
-
3,689
29,564
$
56,019
13,668
42,351
-
15,426
35,375
$
55,524
13,811
41,713
-
1,853
26,277
$
55,091
13,202
41,889
-
37,717
28,454
$
54,363
13,230
41,133
-
2,540
28,497
13,650
7,693
5,957
$
15,470
5,291
10,179
$
19,500
6,775
12,725
$
17,514
5,254
12,260
$
22,402
8,116
14,286
$
17,289
6,655
10,634
$
51,152
20,717
30,435
$
15,176
5,615
9,561
$
Basic earnings per common share
Diluted earnings per common share
Dividends per common share
$0.21
$0.21
$0.18
$0.35
$0.35
$0.18
$0.44
$0.44
$0.18
$0.42
$0.42
$0.18
$0.50
$0.50
$0.17
$0.37
$0.37
$0.17
$1.05
$1.05
$0.17
$0.33
$0.33
$0.17
Average common shares outstanding for:
Basic earnings per share
Diluted earnings per share
29,045
29,046
29,120
29,120
29,135
29,136
29,019
29,023
28,850
28,860
28,861
28,875
29,022
29,034
29,097
29,111
22. Parent Company Only Financial Information
Earnings of the Bank are recognized by the Holding Company using the equity method of accounting. Accordingly,
earnings of the Bank are recorded as increases in the Holding Company’s investment, any dividends would reduce the
Holding Company’s investment in the Bank, and any changes in the Bank’s unrealized gain or loss on securities available
for sale, net of taxes, would increase or decrease, respectively, the Holding Company’s investment in the Bank.
129
The condensed financial statements for the Holding Company are presented below:
Condensed Statements of Financial Condition
Assets:
Cash and due from banks
Securities available for sale:
Other securities ($1,110 and $1,019 at fair value pursuant to
the fair value option at December 31, 2017 and 2016, respectively)
Interest receivable
Investment in Bank
Goodwill
Other assets
Total assets
Liabilities:
Subordinated debentures
Junior subordinated debentures, at fair value
Other liabilities
Total liabilities
Stockholders' Equity:
Preferred stock
Common stock
Additional paid-in capital
Treasury stock, at average cost (2,942,329 shares and 2,897,691 at
December 31, 2017 and 2016, respectively)
Retained earnings
Accumulated other comprehensive loss, net of taxes
Total equity
Total liabilities and equity
December 31,
2017
December 31,
2016
(Dollars in thousands)
$
10,198
$
13,972
1,110
-
634,056
2,185
3,645
651,194
$
1,317
4
612,374
2,185
3,704
633,556
$
$
73,699
36,986
7,901
118,586
$
73,414
33,959
12,330
119,703
-
315
217,906
(57,675)
381,048
(8,986)
532,608
-
315
214,462
(53,754)
361,192
(8,362)
513,853
$
651,194
$
633,556
Condensed Statements of Income
Dividends from the Bank
Interest income
Interest expense
Net loss from fair value adjustments
Other operating expenses
Income before taxes and equity in undistributed
earnings of subsidiary
Income tax benefit
Income before equity in undistributed earnings of subsidiary
Equity in undistributed earnings of the Bank
Net income
Other comprehensive loss, net of tax
Comprehensive income
130
For the years ended December 31,
2016
2017
2015
$
21,500
505
(5,860)
(2,903)
(1,354)
11,888
6,926
18,814
22,307
41,121
(624)
40,497
$
(In thousands)
$
24,000
247
(1,324)
(4,761)
(1,611)
16,551
3,198
19,749
45,167
64,916
(2,800)
62,116
$
$
26,000
242
(1,075)
(231)
(1,298)
23,638
687
24,325
21,884
46,209
(2,655)
43,554
$
Condensed Statements of Cash Flows
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the Bank
Deferred income tax (benefit) provision
Fair value adjustments for financial assets and
financial liabilities
Stock-based compensation expense
Net change in operating assets and liabilities
Net cash provided by operating activities
Investing activities:
Investment in Bank
Proceeds from sales and calls of securities available for sale
Net cash provided (used in) investing activities
Financing activities:
Issuance of subordinated debt, net
Purchase of treasury stock
Cash dividends paid
Stock options exercised
Net cash (used in) provided by financing activities
For the years ended December 31,
2016
2015
2017
(In thousands)
$
41,121
$
64,916
$
46,209
(22,307)
(3,990)
2,903
5,990
2,453
26,170
-
300
300
-
(9,290)
(20,954)
-
(30,244)
(45,167)
(2,316)
4,761
5,120
3,318
30,632
(66,497)
-
(66,497)
73,402
(9,858)
(19,689)
328
44,183
(21,884)
575
231
4,676
2,174
31,981
-
-
-
-
(15,605)
(18,616)
145
(34,076)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(3,774)
13,972
10,198
$
8,318
5,654
13,972
$
(2,095)
7,749
5,654
$
131
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Flushing Financial Corporation
Uniondale, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Flushing Financial Corporation and
Subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2015.
/S/ BDO USA, LLP
New York, New York
March 1, 2018
132
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Flushing Financial Corporation
Uniondale, New York
Opinion on Internal Control over Financial Reporting
We have audited Flushing Financial Corporation and Subsidiaries’ (the “Company’s”) internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated statements of financial condition of Flushing Financial Corporation and Subsidiaries
(the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2017, and the related notes and our report dated March 1, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A,
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/S/ BDO USA, LLP
New York, New York
March 1, 2018
133
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure 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 Annual Report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, the design and operation of these
disclosure controls and procedures were effective. During the period covered by this Annual 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.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting,
and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2017.
Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities
Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and
principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Management performed an assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2017 based upon criteria in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”). Based on this
assessment, management concluded that the Company’s internal control over financial reporting was effective as of
December 31, 2017 based on those criteria issued by COSO.
BDO USA, LLP, the Company’s independent registered public accounting firm that audited the Company’s
consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2017, as stated in its report.
Item 9B. Other Information.
None.
134
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Other than the disclosures below, information regarding the directors and executive officers of the Company
appears in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 30, 2018 (“Proxy
Statement”) under the captions “Board Nominees,” “Continuing Directors,” “Executive Officers Who Are Not Directors”
and “Meeting and Committees of the Board of Directors – Audit Committee” and is incorporated herein by this reference.
Information regarding Section 16(a) beneficial ownership appears in the Company’s Proxy Statement under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by this reference.
Code of Ethics. The Company has adopted a Code of Business Conduct and Ethics that applies to all of its
the Company’s website at:
directors, officers and employees. This code
https://www.snl.com/Cache/1500107243.PDF?Y=&O=PDF&D=&FID=1500107243&T=&IID=102398
Any substantive amendments to the code and any grant of a waiver from a provision of the code requiring disclosure under
applicable SEC or NASDAQ rules will be disclosed in a report on Form 8-K.
is publicly available on
Audit Committee Financial Expert. The Board of Directors of the Company has determined that Louis C. Grassi,
the Chairman of the Audit Committee, is an “audit committee financial expert” as defined under Item 401(h) of Regulation
S-K, and that he is independent as defined under applicable NASDAQ listing standards. Mr. Grassi is a certified public
accountant and a certified fraud examiner.
Item 11. Executive Compensation.
Information regarding executive compensation appears in the Proxy Statement under the caption “Executive
Compensation” and is incorporated herein by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information regarding security ownership of certain beneficial owners appears in the Proxy Statement under the
caption “Stock Ownership of Certain Beneficial Owners” and is incorporated herein by this reference.
Information regarding security ownership of management appears in the Proxy Statement under the caption
“Stock Ownership of Management” and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information regarding certain relationships and related transactions and directors independence appears in the
Proxy Statement under the captions “Compensation Committee Interlocks and Insider Participation” and “Related Party
Transactions” and is incorporated herein by this reference.
Item 14. Principal Accounting Fees and Services.
Information regarding fees paid to the Company’s independent auditor appears in the Proxy Statement under the
caption “Schedule of Fees to Independent Auditors” and is hereby incorporated by this reference.
135
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements
PART IV
The following financial statements are included in Item 8 of this Annual Report and are incorporated herein by
this reference:
Consolidated Statements of Financial Condition at December 31, 2017 and 2016
Consolidated Statements of Income for each of the three years in the period ended December 31, 2017
Consolidated Statements of Comprehensive Income for each of the three years in the period ended
December 31, 2017
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period
ended December 31, 2017
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2017
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto included in Item 8 of this Annual Report and are
incorporated herein by this reference.
136
3. Exhibits Required by Securities and Exchange Commission Regulation S-K
Exhibit
Number Description
3.1 P
3.2
3.3
3.4
3.5
3.6
4.1
4.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
Certificate of Incorporation of Flushing Financial Corporation (1)
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (15)
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial
Corporation (6)
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing
Financial Corporation (12)
Amended and Restated By-Laws of Flushing Financial Corporation (18)
Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington
Trust, National Association, as Trustee. (11)
First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and
Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A
thereto. (11)
Form of Amended and Restated Employment Agreement between Flushing Bank and Certain Officers (16)
Form of Amended and Restated Employment Agreement between Flushing Financial Corporation and
Certain Officers (16)
Amended and Restated Employment Agreement between Flushing Financial Corporation and John R. Buran
(16)
Amended and Restated Employment Agreement between Flushing Bank and John R. Buran (16)
Amended and Restated Employment Agreement between Flushing Financial Corporation and Maria A.
Grasso (16)
Amended and Restated Employment Agreement between Flushing Bank and Maria A. Grasso (16)
Flushing Bank Specified Officer Change in Control Severance Policy (as Amended Effective January 1,
2016) (20)
Employee Severance Compensation Plan for Vice Presidents and Assistant Vice Presidents of Flushing
Bank (Effective as of January 1, 2016) (20)
Employee Severance Compensation Plan of Flushing Bank (Amended and Restated as of January 1, 2016)
(20)
Amended and Restated Outside Director Retirement Plan (10)
Amended and Restated Flushing Bank Outside Director Deferred Compensation Plan (4)
Amended and Restated Flushing Bank Supplemental Savings Incentive Plan (19)
Form of Indemnity Agreement among Flushing Bank, Flushing Financial Corporation, and each Director (2)
Form of Indemnity Agreement among Flushing Bank, Flushing Financial Corporation, and Certain Officers
(2)
Amendment to the Employee Benefit Trust Agreement (3)
10.15* P Employee Benefit Trust Agreement (1)
10.16*
10.17* P Guarantee by Flushing Financial Corporation (1)
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31
1996 Restricted Stock Incentive Plan of Flushing Financial Corporation (8)
1996 Stock Option Incentive Plan of Flushing Financial Corporation (7)
Form of Outside Director Restricted Stock Award Letter (9)
Form of Outside Director Restricted Stock Unit Award Letter (20)
Form of Outside Director Stock Option Grant Letter (9)
Form of Employee Restricted Stock Award Letter (9)
Form of Employee Restricted Stock Unit Grant Letter Agreement (20)
Form of Employee Stock Option Award Letter (9)
Amended and Restated Flushing Financial Corporation 2005 Omnibus Incentive Plan (13)
Amendment to Flushing Financial Corporation 2005 Omnibus Incentive Plan (14)
Annual Incentive Plan for Executives and Senior Officers (15)
Form of Amendment to Employee Stock Option Award Letter (17)
Form of Amendment to Director Stock Option Award Letter (17)
Lease agreement between Flushing Bank and Rexcorp Plaza SPE LLC (18)
137
10.32*
21.1
23.1
31.1
31.2
32.1
32.2
Flushing Financial Corporation 2014 Omnibus Incentive Plan (18)
Subsidiaries information incorporated herein by reference to Part I – Subsidiary Activities
Consent of Independent Registered Public Accounting Firm (filed herewith)
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
(filed herewith)
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
(filed herewith)
Certification 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)
Certification 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.INS XBRL Instance Document (filed herewith)
101.SCH XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
*Indicates compensatory plan or arrangement.
_______________
(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 Exhibits filed with Form 10-Q for the quarter ended September 30, 1996.
(3) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1997.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2000.
(5) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(6) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(7) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2003.
(8) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended June 30, 2004.
(9) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2004.
(10) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended March 31, 2006.
(11) Incorporated by reference to Exhibit filed with Form 8-K filed December 12, 2016.
(12) Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(13) Incorporated by reference to Appendices filed with Proxy Statement on Schedule 14A filed April 7, 2011.
(14) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2011.
(15) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2011.
(16) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended June 30, 2013.
(17) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2012.
(18) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended June 30, 2014.
(19) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2014.
(20) Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2015.
138
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Company has duly
caused this report, to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on
March 1, 2018.
SIGNATURES
FLUSHING FINANCIAL CORPORATION
By
/S/JOHN R. BURAN
John R. Buran
President and CEO
POWER OF ATTORNEY
We, the undersigned directors and officers of Flushing Financial Corporation (the “Company”) hereby severally
constitute and appoint John R. Buran and Susan K. Cullen as our true and lawful attorneys and agents, each acting alone
and with full power of substitution and re-substitution, to do any and all things in our names in the capacities indicated
below which said John R. Buran or Susan K. Cullen may deem necessary or advisable to enable the Company to comply
with the Securities Exchange Act of 1934, and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the report on Form 10-K, or amendment thereto, including specifically, but not limited
to, power and authority to sign for us in our names in the capacities indicated below the report on Form 10-K, or amendment
thereto; and we hereby approve, ratify and confirm all that said John R. Buran or Susan K. Cullen shall do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K, has been signed
by the following persons in the capacities and on the dates indicated.
Signature
Title
Date
/S/JOHN R. BURAN
John R. Buran
/S/ALFRED A. DELLIBOVI
Alfred A. DelliBovi
/S/SUSAN K. CULLEN
Susan K. Cullen
/S/ JAMES D. BENNETT
James D. Bennett
/S/STEVEN J. D'IORIO
Steven J. D'Iorio
Director, President (Principal Executive
Officer)
February 27, 2018
Director, Chairman
February 27, 2018
Treasurer (Principal Financial and
Accounting Officer)
February 27, 2018
Director
February 27, 2018
Director
139
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
/S/LOUIS C. GRASSI
Louis C. Grassi
/S/SAM S. HAN
Sam S. Han
/S/JOHN J. MCCABE
John J. McCabe
/S/JOHN E. ROE, SR.
John E. Roe, Sr.
/S/DONNA M. O'BRIEN
Donna M. O'Brien
/S/MICHAEL J. RUSSO
Michael J. Russo
/S/THOMAS S. GULOTTA
Thomas S. Gulotta
/S/CAREN C. YOH
Caren C. Yoh
Director
Director
Director
Director
Director
Director
Director
Director
140
CORPORATE INFORMATION
Executive and Senior Management
John R. Buran
President,
Chief Executive Officer
Susan K. Cullen
Senior Executive Vice President,
Treasurer & Chief Financial Officer
Maria A. Grasso
Senior Executive Vice President,
Chief Operating Officer &
Corporate Secretary
Francis W. Korzekwinski
Senior Executive Vice President,
Chief of Real Estate Lending
Barbara A. Beckmann
Executive Vice President,
Director of Operations
Michael Bingold
Executive Vice President,
Director of Distribution and
Client Development
Allen M. Brewer
Executive Vice President,
Chief Information Officer
Board of Directors
Alfred A. DelliBovi
Chairman of the Board
Retired President & CEO of the
Federal Home Loan Bank of New York
John R. Buran
President & Chief Executive Officer
James D. Bennett
Attorney in Nassau County, New York
Steven J. D’Iorio
Senior Vice President
Jones, Lang, LaSalle
Louis C. Grassi
Managing Partner & Chief Executive
Officer of Grassi & Co.
Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders of
Flushing Financial Corporation will be
held at 1:00 p.m., May 30, 2018, at:
625 RXR Plaza
Lobby Level
Uniondale, NY 11556
Stock Listing
NASDAQ Global Select MarketSM
Symbol “FFIC”
Astrid Burrowes
Executive Vice President,
Chief Accounting Officer
Ruth E. Filiberto
Executive Vice President,
Director of Human Resources
Ronald M. Hartmann
Executive Vice President,
Director of Commercial
Real Estate Lending
James P. Jacovatos
Executive Vice President,
Real Estate Credit Center Manager
Jeoung Yun Jin
Executive Vice President,
Director of Residential &
Mixed-Use Lending
Theresa Kelly
Executive Vice President,
Director of Business Banking
Gary P. Liotta
Executive Vice President,
Chief Risk Officer
Rosina Manzi
Executive Vice President,
Chief Audit Officer
Patricia Mezeul
Executive Vice President,
Director of Government Banking
John F. Stewart
Executive Vice President,
Chief of Staff
Frank Akalski
Senior Vice President,
Chief Investment Officer
Caterina dePasquale
Senior Vice President,
Director of Strategic
Development & Delivery
Alexander Gellerman
Senior Vice President,
Chief Technology Officer
Thomas S. Gulotta
Special Counsel, Albanese & Albanese
CEO, Executive Strategies, LLC
Sam S. Han
Founder & President
The Korean Channel, Inc.
John J. McCabe
Retired Chief Equity Strategist
Shay Assets Management
Donna M. O’Brien
President
Strategic Visions in Healthcare, LLC
John E. Roe, Sr.
Former Chairman of the Board
Retired Chairman of City Underwriting
Agency, Inc.
Michael J. Russo
Consulting Engineer, CEO
Fresh Meadow Mechanical Corp. and
President & Director of Operations for
Northeastern Aviation Corp.
Caren C. Yoh
President, CPA
Accounting Firm
Transfer Agent and Registrar
Computershare Trust Company NA
P.O. Box 30170
College Station, TX 77842-3170
800-426-5523
www.Computershare.com
Independent Registered
Public Accounting Firm
BDO USA, LLP
100 Park Avenue
New York, NY 10017
212-885-8000
Shareholder Relations
Susan K. Cullen
718-961-5400
Legal Counsel
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, NY 10004
212-837-6000
BROOKLYN
7102 T h i r d Av e n u e
186 M o n t a g u e St r e e t
1402 Av e n u e J
217 H a v e m e y e r S t r e e t
4616 13 t h Av e n u e
MANHATTAN
99 Pa r k Av e n u e
225 Pa r k Av e n u e S o u t h
NASSAU COUNTY
garden city
1122 F r a n k l i n Av e n u e
new hyde park
661 H i l l s i d e Av e n u e
Uniondale
260E R X R P l a z a
QUEENS
astoria
31-16 30t h Av e n u e
Bayside
61-14 S p r i n g f i e l d B o u l e v a r d
42-11 B e l l B o u l e v a r d
FlUshing
147-42 N o r t h e r n B o u l e v a r d
164-20 N o r t h e r n B o u l e v a r d
44- 43 K i s s e n a B o u l e v a r d
136 - 41 R o o s e v e l t Av e n u e
Forest hills
107-11 C o n t i n e n t a l A v e n u e
Flushing Bank
220 RXR Plaza, Uniondale, NY 11556
718-961-5400
www.flushingbank.com
© 2018 Flushing Financial Corporation. All rights reserved. BRANR0418
Annual Report Design by Curran & Connors, Inc.