10-Q 1 gff10q_080715.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

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)

 

1979 Marcus Avenue, Suite E140, Lake Success, New York 11042

(Former address of Principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). X Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer __

Non-accelerated filer __

Accelerated filer X

Smaller reporting company __

 

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

 

The number of shares of the registrant’s Common Stock outstanding as of July 31, 2015 was 28,924,818.

 

 
 

TABLE OF CONTENTS

 

  PAGE
PART I  —  FINANCIAL INFORMATION  
ITEM 1.   Financial Statements - (Unaudited)  
Consolidated Statements of Financial Condition 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Changes in Stockholders’ Equity 5
Notes to Consolidated Financial Statements 6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

49

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

 

 

 

 

 

i
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

 

(Dollars in thousands, except per share data)  June 30,
2015
  December 31,
2014
ASSETS          
Cash and due from banks  $36,599   $34,265 
Securities held-to-maturity:          
Other securities (none pledged) (fair value of $7,220 at June 30, 2015)   7,220    - 
Securities available for sale:          
Mortgage-backed securities (including assets pledged of $438,646 and $464,626 at June 30, 2015 and December 31, 2014, respectively; $4,037 and $4,678 at fair value pursuant to the fair value option at June 30, 2015 and December 31, 2014, respectively.)   729,674    704,933 
Other securities (including assets pledged of $68,516 and $57,562 at June 30, 2015 and December 31, 2014, respectively; $28,122 and $27,915 at fair value pursuant to the fair value option at June 30, 2015 and December 31, 2014, respectively)   307,823    268,377 
Loans held for sale   300    - 
Loans:          
Multi-family residential   2,017,891    1,923,460 
Commercial real estate   726,136    621,569 
One-to-four family ― mixed-use property   567,060    573,779 
One-to-four family ― residential   189,573    187,572 
Co-operative apartments   7,681    9,835 
Construction   3,673    5,286 
Small Business Administration   12,181    7,134 
Taxi medallion   21,211    22,519 
Commercial business and other   472,485    447,500 
Net unamortized premiums and unearned loan fees   13,251    11,719 
Allowance for loan losses   (23,084)   (25,096)
Net loans   4,008,058    3,785,277 
Interest and dividends receivable   17,980    17,251 
Bank premises and equipment, net   24,418    21,868 
Federal Home Loan Bank of New York stock   49,926    46,924 
Bank owned life insurance   114,088    112,656 
Goodwill   16,127    16,127 
Other assets   47,751    69,335 
Total assets  $5,359,964   $5,077,013 
           
LIABILITIES          
Due to depositors:          
Non-interest bearing  $257,575   $255,834 
Interest-bearing:          
Certificate of deposit accounts   1,375,506    1,305,823 
Savings accounts   264,718    261,942 
Money market accounts   399,191    290,263 
NOW accounts   1,357,412    1,359,057 
Total interest-bearing deposits   3,396,827    3,217,085 
Mortgagors' escrow deposits   43,930    35,679 
Borrowed funds ($29,476 and $28,771 at fair value pursuant to the fair  value option at June 30, 2015 and December 31, 2014, respectively)   999,435    940,492 
Securities sold under agreements to repurchase   116,000    116,000 
Other liabilities   84,061    55,676 
Total liabilities   4,897,828    4,620,766 
           
Commitments and contingencies (Notes 4 & 5)          
           
STOCKHOLDERS' EQUITY          
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)   -    - 
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at June 30, 2015 and December 31, 2014; 28,923,000 shares and 29,403,823 shares outstanding at June 30, 2015 and December 31, 2014, respectively)   315    315 
Additional paid-in capital   209,257    206,437 
Treasury stock, at average cost (2,607,595 shares and 2,126,772 shares at June 30, 2015 and December 31, 2014, respectively)   (46,980)   (37,221)
Retained earnings   303,300    289,623 
Accumulated other comprehensive loss, net of taxes   (3,756)   (2,907)
Total stockholders' equity   462,136    456,247 
           
Total liabilities and stockholders' equity  $5,359,964   $5,077,013 

 

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

-1-
 


PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

  

For the three months

ended June 30,

 

For the six months

ended June 30,

   2015  2014  2015  2014
       
Interest and dividend income                    
Interest and fees on loans  $44,084   $42,489   $87,618   $84,609 
Interest and dividends on securities:                    
Interest   5,988    6,867    11,858    13,742 
Dividends   118    195    236    384 
Other interest income   32    18    53    45 
Total interest and dividend income   50,222    49,569    99,765    98,780 
                     
Interest expense                    
Deposits   7,437    7,670    14,895    15,388 
Other interest expense   4,645    5,070    9,176    10,076 
Total interest expense   12,082    12,740    24,071    25,464 
                     
Net interest income   38,140    36,829    75,694    73,316 
Benefit for loan losses   (516)   (1,092)   (1,250)   (2,211)
Net interest income after benefit for loan losses   38,656    37,921    76,944    75,527 
                     
Non-interest income                    
Banking services fee income   898    867    1,782    1,576 
Net gain on sale of securities   64    -    64    - 
Net gain on sale of loans   47    -    49    - 
Net gain on sale of buildings   6,537    -    6,537    - 
Net gain (loss) from fair value adjustments   768    (402)   173    (1,046)
Federal Home Loan Bank of New York stock dividends   457    430    975    981 
Bank owned life insurance   715    755    1,432    1,531 
Other income   461    336    865    654 
Total non-interest income   9,947    1,986    11,877    3,696 
                     
Non-interest expense                    
Salaries and employee benefits   13,157    11,944    27,823    24,522 
Occupancy and equipment   2,635    1,919    5,348    3,954 
Professional services   1,350    1,527    3,129    2,737 
FDIC deposit insurance   811    673    1,560    1,370 
Data processing   1,172    1,042    2,247    2,110 
Depreciation and amortization   867    717    1,535    1,432 
Other real estate owned/foreclosure expense   87    279    607    535 
Other operating expenses   4,169    2,523    7,938    6,057 
Total non-interest expense   24,248    20,624    50,187    42,717 
                     
Income before income taxes   24,355    19,283    38,634    36,506 
                     
Provision for income taxes                    
Federal   7,155    5,513    11,407    10,271 
State and local   2,366    2,085    3,660    4,254 
Total taxes   9,521    7,598    15,067    14,525 
                     
Net income  $14,834   $11,685   $23,567   $21,981 
                     
                     
Basic earnings per common share  $0.51   $0.39   $0.80   $0.73 
Diluted earnings per common share  $0.51   $0.39   $0.80   $0.73 
Dividends per common share  $0.16   $0.15   $0.32   $0.30 

 

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

-2-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

(Dollars in thousands)  2015  2014  2015  2014
             
             
Net income  $14,834   $11,685   $23,567   $21,981 
                     
Other comprehensive income, net of tax:                    
Amortization of actuarial losses   171    98    345    161 
Amortization of prior service credits   (7)   (7)   (13)   (10)
Reclassificaton adjustment for net gains included in income   (36)   -    (36)   - 
Net unrealized (losses) gains on securities   (5,477)   6,513    (1,145)   11,873 
                     
Total other comprehensive income, net of tax  $(5,349)  $6,604   $(849)  $12,024 
                     
Comprehensive income  $9,485   $18,289   $22,718   $34,005 

 

 

 

 

 

 

 

 

 

 

 

 

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

-3-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the six months ended
June 30,
(Dollars in thousands)  2015  2014
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $23,567   $21,981 
Adjustments to reconcile net income to net cash provided by operating activities:          
Benefit for loan losses   (1,250)   (2,211)
Depreciation and amortization of bank premises and equipment   1,535    1,432 
Amortization of premium, net of accretion of discount   4,447    3,582 
Net (gain) loss from fair value adjustments   (173)   1,046 
Net gain from sale of loans   (49)   - 
Net gain from sale of securities   (64)   - 
Net gain from sale of buildings   (6,537)   - 
Income from bank owned life insurance   (1,432)   (1,531)
Stock-based compensation expense   3,643    3,135 
Deferred compensation   (2,004)   (1,486)
Excess tax benefit from stock-based payment arrangements   (380)   (748)
Deferred income tax (benefit) provision   (3,855)   2,745 
Increase in other liabilities   706    1,948 
Decrease in other assets   5,374    1,489 
Net cash provided by operating activities   23,528    31,382 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of bank premises and equipment   (7,841)   (855)
Net purchases of Federal Home Loan Bank of New York shares   (3,002)   (5,382)
Purchases of securities held-to-maturity   (3,100)   - 
Proceeds from maturities of securities held-to-maturity   390    - 
Purchases of securities available for sale   (138,095)   (70,871)
Proceeds from sales and calls of securities available for sale   25,039    1,871 
Proceeds from maturities and prepayments of securities available for sale   61,868    47,535 
Proceeds from sale of buildings   20,209    - 
Net originations of loans   (82,544)   (90,946)
Purchases of loans   (126,070)   (12,884)
Proceeds from sale of real estate owned   2,070    2,034 
Proceeds from sale of delinquent loans   5,028    7,332 
Net cash used in investing activities   (246,048)   (122,166)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in non-interest bearing deposits   1,741    15,920 
Net increase (decrease) in interest-bearing deposits   179,213    (18,405)
Net increase in mortgagors' escrow deposits   8,251    8,189 
Net proceeds from short-term borrowed funds   35,000    109,000 
Proceeds from long-term borrowings   72,996    - 
Repayment of long-term borrowings   (50,000)   (9,300)
Purchases of treasury stock   (13,490)   (3,285)
Excess tax benefit from stock-based payment arrangements   380    748 
Proceeds from issuance of common stock upon exercise of stock options   142    429 
Cash dividends paid   (9,379)   (9,015)
Net cash provided by financing activities   224,854    94,281 
           
Net increase in cash and cash equivalents   2,334    3,497 
Cash and cash equivalents, beginning of period   34,265    33,485 
Cash and cash equivalents, end of period  $36,599   $36,982 
           
SUPPLEMENTAL CASH  FLOW DISCLOSURE          
Interest paid  $23,585   $25,172 
Income taxes paid   16,221    12,236 
Taxes paid if excess tax benefits were not tax deductible   16,601    12,984 
Non-cash activities:          
Securities purchased not yet settled   22,037    - 
Securities transferred from available for sale to held-to-maturity   4,510    - 
Loans transferred to Other Real Estate Owned   772    655 
Loans provided for the sale of Other Real Estate Owned   175    308 
Loans held for investment transferred to loans held for sale   300    - 

 

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

-4-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

  

For the six months ended

June 30,

(Dollars in thousands, except per share data)  2015  2014
       
Common Stock          
Balance, beginning of period  $315   $315 
No activity   -    - 
Balance, end of period  $315   $315 
Additional Paid-In Capital          
Balance, beginning of period  $206,437   $201,902 
Award of common shares released from Employee Benefit Trust (136,114 and 129,694 common shares for the six months ended June 30, 2015 and 2014, respectively)   1,969    1,975 
Shares issued upon vesting of restricted stock unit awards (59,532 and 2,500 common shares for the six months ended June 30, 2015 and 2014, respectively)   160    9 
Issuance upon exercise of stock options (6,025 and 100,625 common shares for the six months ended June 30, 2015 and 2014, respectively)   8    296 
Stock-based compensation activity, net   303    392 
Stock-based income tax benefit   380    748 
Balance, end of period  $209,257   $205,322 
Treasury Stock          
Balance, beginning of period  $(37,221)  $(22,053)
Purchases of outstanding shares (635,199 and 108,120 common shares for the six months ended June 30, 2015 and 2014, respectively)   (12,380)   (2,143)
Shares issued upon vesting of restricted stock unit awards (204,110 and 188,480 common shares for the six months ended June 30, 2015 and 2014, respectively)   3,577    2,972 
Issuance upon exercise of stock options (9,725 and 100,625 common shares for the six months ended June 30, 2015 and 2014, respectively)   174    1,608 
Purchases of shares to fund options exercised (998 and 63,732 common shares for the six months ended June 30, 2015 and 2014, respectively)   (20)   (1,290)
Repurchase of shares to satisfy tax obligations (58,461 and 55,465 common shares for the six months ended June 30, 2015 and 2014, respectively)   (1,110)   (1,142)
Balance, end of period  $(46,980)  $(22,048)
Retained Earnings          
Balance, beginning of period  $289,623   $263,743 
Net income   23,567    21,981 
Cash dividends declared and paid on common shares ($0.32 and $0.30 per common share for the six months ended June 30, 2015 and 2014, respectively)   (9,379)   (9,015)
Issuance upon exercise of stock options (3,700 common shares and 7,200 common shares for the six months ended June 30, 2015 and 2014, respectively)   (8)   (45)
Shares issued upon vesting of restricted stock unit awards (144,578 and 185,980 common shares for the six months ended June 30, 2015 and 2014, respectively)   (503)   (395)
Balance, end of period  $303,300   $276,269 
Accumulated Other Comprehensive Income (loss)          
Balance, beginning of period  $(2,907)  $(11,375)
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately $833 and ($9,141) for the six months ended June 30, 2015 and 2014, respectively   (1,145)   11,873 
Reclassification adjustment for loss included in net income, net of taxes of approximately $28 for the six months ended June 30, 2015   (36)   - 
Amortization of actuarial losses, net of taxes of approximately ($268) and ($189) for the six months ended June 30, 2015 and 2014, respectively   345    161 
Amortization of prior service credits, net of taxes of approximately $10 and $13 for the six months ended June 30, 2015 and 2014, respectively)   (13)   (10)
Balance, end of period  $(3,756)  $649 
           
Total Stockholders' Equity  $462,136   $460,507 

 

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

-5-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

1.Basis of Presentation

 

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

 

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

 

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

2.Use of Estimates

 

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

 

3.Earnings Per Share

 

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

 

-6-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2015  2014  2015  2014
   (In thousands, except per share data)
Net income, as reported  $14,834   $11,685   $23,567   $21,981 
Divided by:                    
Weighted average common shares outstanding   29,246    30,059    29,321    30,022 
Weighted average common stock equivalents   22    31    22    34 
Total weighted average common shares outstanding and common stock equivalents   29,268    30,090    29,343    30,056 
                     
Basic earnings per common share  $0.51   $0.39   $0.80   $0.73 
Diluted earnings per common share (1)  $0.51   $0.39   $0.80   $0.73 
Dividend payout ratio   31.4%   38.5%   40.0%   41.1%

 

(1)For the three and six months ended June 30, 2015 and 2014, there were no stock options that were anti-dilutive.

 

4.Debt and Equity Securities

 

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

 

The Company did not hold any trading securities at June 30, 2015 and December 31, 2014. The Company did not hold any securities held-to-maturity at December 31, 2014. Securities available for sale are recorded at fair value.

 

The following table summarizes the Company’s portfolio of securities held-to-maturity at June 30, 2015:

 

  

Amortized

Cost

  Fair Value 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

   (In thousands)
Securites held-to-maturity:                    
Municipals  $7,220   $7,220   $-   $- 
                     
Total  $7,220   $7,220   $-   $- 

 

During the three months ended June 30, 2015, the Company transferred municipal bonds with an amortized cost and fair value of $4.5 million from available for sale to held-to-maturity. The transferred securities had a weighted average term to maturity of approximately seven months at the time of transfer.

 

-7-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Company’s portfolio of securities available for sale at June 30, 2015:

 

  

Amortized

Cost

 

Gross

Unrealized

Fair Value

 

Gross

Unrealized

Gains

  Losses
   (In thousands)
Securites available for sale:                    
Corporate  $105,852   $104,648   $521   $1,725 
Municipals   136,927    139,911    3,114    130 
Mutual funds   21,193    21,193    -    - 
Other   42,004    42,071    69    2 
Total other securities   305,976    307,823    3,704    1,857 
REMIC and CMO   530,684    532,662    6,165    4,187 
GNMA   12,802    13,080    401    123 
FNMA   170,838    170,534    1,635    1,939 
FHLMC   13,259    13,398    139    - 
Total mortgage-backed securities   727,583    729,674    8,340    6,249 
Total securities available for sale  $1,033,559   $1,037,497   $12,044   $8,106 

 

Mortgage-backed securities shown in the table above include two private issue collateralized mortgage obligations (“CMOs”) that are collateralized by commercial real estate mortgages with amortized cost and fair value of $9.1 million at June 30, 2015.

 

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2014:

 

  

Amortized

Cost

  Fair Value 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

   (In thousands)
Securites available for sale:                    
Corporate  $90,719   $91,273   $1,268   $714 
Municipals   145,864    148,896    3,093    61 
Mutual funds   21,118    21,118    -    - 
Other   7,098    7,090    -    8 
Total other securities   264,799    268,377    4,361    783 
REMIC and CMO   504,207    505,768    6,188    4,627 
GNMA   13,862    14,159    421    124 
FNMA   169,956    170,367    2,128    1,717 
FHLMC   14,505    14,639    142    8 
Total mortgage-backed securities   702,530    704,933    8,879    6,476 
Total securities available for sale  $967,329   $973,310   $13,240   $7,259 

 

Mortgage-backed securities shown in the table above include three private issue CMOs that are collateralized by commercial real estate mortgages with an amortized cost and fair value of $12.4 million at December 31, 2014.

 

-8-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table represents the activity related to the credit loss component recognized in earnings on debt securities held by the Company for which a portion of OTTI was recognized in AOCI for the periods indicated:

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2015  2014  2015  2014
   (In thousands)
Beginning balance  $-   $3,738   $-   $3,738 
                     
Recognition of actual losses   -    -    -    - 
OTTI charges due to credit loss recorded in earnings   -    -    -    - 
Securities sold during the period   -    -    -    - 
Securities where there is an intent to sell or requirement to sell   -    -    -    - 
Ending balance  $-   $3,738   $-   $3,738 

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2015  2014  2015  2014
   (In thousands)
Gross gains from the sale of securities  $233   $-   $233   $- 
Gross losses from the sale of securities   (169)   -    (169)   - 
                     
Net gains from the sale of securities  $64   $-   $64   $- 

 

The following table details the amortized cost and fair value of the Company’s securities classified as held-to-maturity at June 30, 2015, by contractual maturity.

 

  

Amortized

Cost

  Fair Value
   (In thousands)
Securities held-to-maturity:(1)          
Due in one year or less  $6,140   $6,140 
Due after one year through five years   1,080    1,080 
           
Total securities held-to-maturity  $7,220   $7,220 

 

(1)Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

-9-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table details the amortized cost and fair value of the Company’s securities classified as available for sale at June 30, 2015, by contractual maturity.

 

  

Amortized

Cost

  Fair Value
   (In thousands)
Securities available for sale:(1)          
Due in one year or less  $32,046   $32,232 
Due after one year through five years   15,000    15,298 
Due after five years through ten years   92,077    90,741 
Due after ten years   166,853    169,552 
           
Total other securities   305,976    307,823 
Mortgage-backed securities   727,583    729,674 
           
Total securities available for sale  $1,033,559   $1,037,497 

 

(1)Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

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 the individual securities had been in a continuous unrealized loss position at June 30, 2015:

 

   Total  Less than 12 months  12 months or more
   Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

   (In thousands)
Corporate  $53,275   $1,725   $38,413   $1,587   $14,862   $138 
Municipals   17,077    130    17,077    130    -    - 
Other   298    2    298    2    -    - 
Total other securities   70,650    1,857    55,788    1,719    14,862    138 
REMIC and CMO   245,107    4,187    141,760    1,205    103,347    2,982 
GNMA   7,727    123    7,727    123    -    - 
FNMA   100,608    1,939    68,604    1,040    32,004    899 
Total mortgage-backed securities   353,442    6,249    218,091    2,368    135,351    3,881 
Total securities available for sale  $424,092   $8,106   $273,879   $4,087   $150,213   $4,019 

 

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, the investor must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment associated with the credit loss is recognized in earnings in the Consolidated Statements of Income. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive income (“AOCI”) within Stockholders’ Equity.

 

The Company reviewed each investment that had an unrealized loss at June 30, 2015. An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCI, net of tax. Unrealized losses that are considered to be other-than-temporary are split between credit related and noncredit related impairments, with the credit related impairment being recorded as a charge against earnings and the noncredit related impairment being recorded in AOCI, net of tax.

 

-10-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Corporate:

The unrealized losses in Corporate securities at June 30, 2015 consist of losses on seven Corporate securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2015.

 

Municipal Securities:

The unrealized losses in Municipal securities at June 30, 2015, consist of losses on five Municipal securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2015.

 

Other Securities:

The unrealized losses in Other Securities at June 30, 2015, consist of a loss on one single issuer trust preferred security. The unrealized losses on this security were caused by market interest volatility, a significant widening of credit spreads across markets for these securities and illiquidity and uncertainty in the financial markets. This security is currently rated below investment grade. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security 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 this security and it is more likely than not the Company will not be required to sell this security before recovery of the security’s 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 security. Therefore, the Company did not consider this investment to be other-than-temporarily impaired at June 30, 2015.

 

REMIC and CMO:

The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at June 30, 2015 consist of 12 issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), 14 issues from the Federal National Mortgage Association (“FNMA”) and nine issues from Government National Mortgage Association (“GNMA”). The unrealized losses on the REMIC and CMO securities issued by FHLMC, FNMA and GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2015.

 

GNMA:

The unrealized losses in GNMA securities at June 30, 2015 consist of a loss on one security. The unrealized losses were caused by movements in interest rates. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security 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 this security and it is more likely than not the Company will not be required to sell the security before recovery of the security’s 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 security. Therefore, the Company did not consider this security to be other-than-temporarily impaired at June 30, 2015.

 

-11-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

FNMA:

The unrealized losses in FNMA securities at June 30, 2015 consist of losses on 17 securities. The unrealized losses 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 will cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2015.

 

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 had been in a continuous unrealized loss position, at December 31, 2014.

 

   Total  Less than 12 months  12 months or more
   Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

   (In thousands)
Corporate  $39,287   $714   $9,573   $428   $29,714   $286 
Municipals   8,810    61    3,546    11    5,264    50 
Other   292    8    -    -    292    8 
Total other securities   48,389    783    13,119    439    35,270    344 
                               
REMIC and CMO   216,190    4,627    77,382    399    138,808    4,228 
GNMA   8,358    124    -    -    8,358    124 
FNMA   95,148    1,717    -    -    95,148    1,717 
FHLMC   6,773    8    6,773    8    -    - 
Total mortgage-backed  securities   326,469    6,476    84,155    407    242,314    6,069 
Total securities available for sale  $374,858   $7,259   $97,274   $846   $277,584   $6,413 

 

5.Loans

 

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

 

-12-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

-13-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

As of June 30, 2015, we utilized recent third party appraisals of the collateral to measure impairment for $26.0 million, or 65.9%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $13.5 million, or 34.1%, of collateral dependent impaired loans.

 

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

 

These restructurings have not included a reduction of principal balance. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. Restructured loans are classified as a TDR when the Bank grants a concession to a borrower who is experiencing financial difficulties. All loans classified as TDR are considered impaired, however TDR loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status and are not included as part of non-performing loans. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status and reported as non-performing loans until they have made timely payments for six consecutive months. 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 allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At June 30, 2015, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

 

The following table shows loans modified and classified as TDR during the period indicated:

 

  

For the six months ended

June 30, 2015

(Dollars in thousands)  Number  Balance  Modification description
                
                
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 loan modified and classified as a TDR, presented in the table above, was unchanged as there was no principal forgiven in this modification.

 

The Bank did not modify and classify any loans as TDR during the three months ended June 30, 2015. The Bank did not modify and classify any loans as TDR during the three or six months ended June 30, 2014.

 

-14-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   June 30, 2015  December 31, 2014
(Dollars in thousands) 

Number

of contracts

 

Recorded

investment

 

Number

of contracts

 

Recorded

investment

             
Multi-family residential   9   $2,657    10   $3,034 
Commercial real estate   3    2,356    3    2,373 
One-to-four family - mixed-use property   7    2,358    7    2,381 
One-to-four family - residential   1    349    1    354 
Small business administration   1    39    -    - 
Commercial business and other   4    2,167    4    2,249 
                     
Total performing troubled debt restructured   25   $9,926    25   $10,391 

 

During the six months ended June 30, 2015 one TDR loan of $0.4 million was transferred to non-performing status, which resulted in this loan being included in non-performing loans.

 

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

 

   June 30, 2015  December 31, 2014
(Dollars in thousands)  Number
of contracts
  Recorded
investment
  Number
of contracts
  Recorded
investment
             
Multi-family residential   1   $378    -   $- 
Commercial real estate   -    -    1    2,252 
One-to-four family - mixed use property   1    187    1    187 
                     
Total troubled debt restructurings that subsequently defaulted   2   $565    2   $2,439 

 

-15-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

(In thousands) 

June 30,

2015

 

December 31,

2014

       
Loans ninety days or more past due and still accruing:          
Multi-family residential  $-   $676 
Commercial real estate   416    820 
One-to-four family - mixed-use property   353    405 
One-to-four family - residential   13    14 
Commercial Business and other   315    386 
Total   1,097    2,301 
           
Non-accrual mortgage loans:          
Multi-family residential   6,352    6,878 
Commercial real estate   2,694    5,689 
One-to-four family - mixed-use property   6,238    6,936 
One-to-four family - residential   11,329    11,244 
Total   26,613    30,747 
           
Non-accrual non-mortgage loans:          
Small business administration   170    - 
Commercial business and other   537    1,143 
Total   707    1,143 
           
Total non-accrual loans   27,320    31,890 
           
Total non-accrual loans and loans ninety days or more past due and still accruing  $28,417   $34,191 

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2015  2014  2015  2014
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $662   $989   $1,313   $1,979 
Less:  Interest income included in the results of operations   143    151    301    318 
Total foregone interest  $519   $838   $1,012   $1,661 

 

-16-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows an age analysis of our recorded investment in loans at June 30, 2015:

 

(in thousands) 

30 - 59 Days

Past Due

 

60 - 89 Days

Past Due

 

Greater

than

90 Days

 

Total Past

Due

  Current  Total Loans
Multi-family residential  $7,289   $-   $6,209   $13,498   $2,004,393   $2,017,891 
Commercial real estate   862    417    3,110    4,389    721,747    726,136 
One-to-four family - mixed-use property   8,019    588    6,591    15,198    551,862    567,060 
One-to-four family - residential   524    354    11,138    12,016    177,557    189,573 
Co-operative apartments   -    -    -    -    7,681    7,681 
Construction loans   -    -    -    -    3,673    3,673 
Small Business Administration   128    -    170    298    11,883    12,181 
Taxi medallion   -    -    -    -    21,211    21,211 
Commercial business and other   5    466    746    1,217    471,268    472,485 
Total  $16,827   $1,825   $27,964   $46,616   $3,971,275   $4,017,891 

 

The following table shows an age analysis of our recorded investment in loans at December 31, 2014:

 

(in thousands) 

30 - 59 Days

Past Due

 

60 - 89 Days

Past Due

 

Greater

than

90 Days

 

Total Past

Due

  Current  Total Loans
Multi-family residential  $7,721   $1,729   $7,554   $17,004   $1,906,456   $1,923,460 
Commercial real estate   2,171    1,344    6,510    10,025    611,544    621,569 
One-to-four family - mixed-use property   10,408    1,154    7,341    18,903    554,876    573,779 
One-to-four family - residential   1,751    2,244    11,051    15,046    172,526    187,572 
Co-operative apartments   -    -    -    -    9,835    9,835 
Construction loans   3,000    -    -    3,000    2,286    5,286 
Small Business Administration   90    -    -    90    7,044    7,134 
Taxi medallion   -    -    -    -    22,519    22,519 
Commercial business and other   6    1,585    740    2,331    445,169    447,500 
Total  $25,147   $8,056   $33,196   $66,399   $3,732,255   $3,798,654 

 

-17-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows the activity in the allowance for loan losses for the three months ended June 30, 2015:

 

(in thousands) 

Multi-family

residential

 

Commercial

real estate

 

One-to-four

family -

mixed-use

property

 

One-to-four

family-

residential

 

Co-operative

apartments

 

Construction

loans

 

Small Business

Administration

 

Taxi

Medallion

 

Commercial

business and

other

  Total
Allowance for credit losses:                                                  
Beginning balance  $8,629   $3,902   $5,429   $1,465   $-   $23   $266   $11   $4,366   $24,091 
Charge-offs   (303)   (14)   (394)   (91)   -    -    -    -    (1)   (803)
Recoveries   191    (4)   44    74    -    -    7    -    -    312 
Provision (Benefit)   (217)   (158)   101    (15)   -    6    18    -    (251)   (516)
Ending balance  $8,300   $3,726   $5,180   $1,433   $-   $29   $291   $11   $4,114   $23,084 
Ending balance: individually evaluated for impairment  $263   $17   $507   $53   $-   $-   $-   $-   $127   $967 
Ending balance: collectively evaluated for impairment  $8,037   $3,709   $4,673   $1,380   $-   $29   $291   $11   $3,987   $22,117 
                                                   
Financing Receivables:                                                  
Ending Balance  $2,017,891   $726,136   $567,060   $189,573   $7,681   $3,673   $12,181   $21,211   $472,485   $4,017,891 
Ending balance: individually evaluated for impairment  $11,562   $5,702   $13,221   $13,662   $613   $-   $348   $-   $5,533   $50,641 
Ending balance: collectively evaluated for impairment  $2,006,329   $720,434   $553,839   $175,911   $7,068   $3,673   $11,833   $21,211   $466,952   $3,967,250 

 

-18-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows the activity in the allowance for loan losses for the three months ended June 30, 2014:

 

(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
Allowance for credit losses:                                                  
Beginning balance  $11,103   $5,379   $7,142   $1,944   $-   $40   $391   $14   $4,257   $30,270 
Charge-offs   (69)   (39)   (175)   (37)   -    -    (49)   -    (1)   (370)
Recoveries   134    -    95    97    -    -    51    -    50    427 
Provision (Benefit)   (418)   (13)   (69)   (214)   -    (6)   (20)   -    (352)   (1,092)
Ending balance  $10,750   $5,327   $6,993   $1,790   $-   $34   $373   $14   $3,954   $29,235 
Ending balance: individually evaluated for impairment  $299   $197   $601   $56   $-   $-   $-   $-   $150   $1,303 
Ending balance: collectively evaluated for impairment  $10,451   $5,130   $6,392   $1,734   $-   $34   $373   $14   $3,804   $27,932 
                                                   
Financing Receivables:                                                  
Ending Balance  $1,784,111   $510,224   $581,207   $192,895   $9,885   $4,717   $7,543   $25,291   $405,853   $3,521,726 
Ending balance: individually evaluated for impairment  $20,613   $16,728   $16,704   $13,505   $-   $570   $-   $-   $7,899   $76,019 
Ending balance: collectively evaluated for impairment  $1,763,498   $493,496   $564,503   $179,390   $9,885   $4,147   $7,543   $25,291   $397,954   $3,445,707 

 

-19-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows the activity in the allowance for loan losses for the six months ended June 30, 2015:

 

(in thousands) 

Multi-family

residential

 

Commercial

real estate

 

One-to-four

family -

mixed-use

property

 

One-to-four

family-

residential

 

Co-operative

apartments

 

Construction

loans

 

Small Business

Administration

 

Taxi

Medallion

 

Commercial

business and

other

  Total
Allowance for credit losses:                                                  
Beginning balance  $8,827   $4,202   $5,840   $1,690   $-   $42   $279   $11   $4,205   $25,096 
Charge-offs   (400)   (32)   (472)   (244)   -    -    -    -    (52)   (1,200)
Recoveries   214    68    47    74    -    -    27    -    8    438 
Provision (Benefit)   (341)   (512)   (235)   (87)   -    (13)   (15)   -    (47)   (1,250)
Ending balance  $8,300   $3,726   $5,180   $1,433   $-   $29   $291   $11   $4,114   $23,084 
Ending balance: individually evaluated for impairment  $263   $17   $507   $53   $-   $-   $-   $-   $127   $967 
Ending balance: collectively evaluated for impairment  $8,037   $3,709   $4,673   $1,380   $-   $29   $291   $11   $3,987   $22,117 
                                                   
Financing Receivables:                                                  
Ending Balance  $2,017,891   $726,136   $567,060   $189,573   $7,681   $3,673   $12,181   $21,211   $472,485   $4,017,891 
Ending balance: individually evaluated for impairment  $11,562   $5,702   $13,221   $13,662   $613   $-   $348   $-   $5,533   $50,641 
Ending balance: collectively evaluated for impairment  $2,006,329   $720,434   $553,839   $175,911   $7,068   $3,673   $11,833   $21,211   $466,952   $3,967,250 

 

-20-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows the activity in the allowance for loan losses for the six months ended June 30, 2014:

 

(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
Allowance for credit losses:                                                  
Beginning balance  $12,084   $4,959   $6,328   $2,079   $104   $444   $458   $-   $5,320   $31,776 
Charge-offs   (674)   (86)   (258)   (79)   -    -    (49)   -    (125)   (1,271)
Recoveries   141    382    135    165    7    -    61    -    50    941 
Provision (Benefit)   (801)   72    788    (375)   (111)   (410)   (97)   14    (1,291)   (2,211)
Ending balance  $10,750   $5,327   $6,993   $1,790   $-   $34   $373   $14   $3,954   $29,235 
Ending balance: individually evaluated for impairment  $299   $197   $601   $56   $-   $-   $-   $-   $150   $1,303 
Ending balance: collectively evaluated for impairment  $10,451   $5,130   $6,392   $1,734   $-   $34   $373   $14   $3,804   $27,932 
                                                   
Financing Receivables:                                                  
Ending Balance  $1,784,111   $510,224   $581,207   $192,895   $9,885   $4,717   $7,543   $25,291   $405,853   $3,521,726 
Ending balance: individually evaluated for impairment  $20,613   $16,728   $16,704   $13,505   $-   $570   $-   $-   $7,899   $76,019 
Ending balance: collectively evaluated for impairment  $1,763,498   $493,496   $564,503   $179,390   $9,885   $4,147   $7,543   $25,291   $397,954   $3,445,707 

 

-21-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our recorded investment, unpaid principal balance, allocated allowance for loan losses, average recorded investment and interest income recognized for loans that were considered impaired at or for the six months ended June 30, 2015:

 

  

Recorded

Investment

 

Unpaid

Principal

Balance

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest

Income

Recognized

                
   (In thousands)
With no related allowance recorded:               
Mortgage loans:                         
Multi-family residential  $9,232   $10,050   $-   $10,347   $77 
Commercial real estate   5,163    5,220    -    6,099    71 
One-to-four family mixed-use property   10,160    11,741    -    11,219    103 
One-to-four family residential   13,313    16,190    -    13,244    42 
Co-operative apartments   613    613    -    204    10 
Construction   -    -    -    -    - 
Non-mortgage loans:                         
Small Business Administration   309    309    -    209    6 
Taxi Medallion   -    -    -    -    - 
Commercial Business and other   2,971    3,341    -    3,997    100 
Total loans with no related allowance recorded   41,761    47,464    -    45,319    409 
                          
With an allowance recorded:                         
Mortgage loans:                         
Multi-family residential   2,330    2,330    263    2,508    61 
Commercial real estate   539    539    17    1,151    15 
One-to-four family mixed-use property   3,061    3,061    507    3,077    84 
One-to-four family residential   349    349    53    351    7 
Co-operative apartments   -    -    -    -    - 
Construction   -    -    -    -    - 
Non-mortgage loans:                         
Small Business Administration   39    39    -    27    1 
Taxi Medallion   -    -    -    -    - 
Commercial Business and other   2,562    2,562    127    2,627    69 
Total loans with an allowance recorded   8,880    8,880    967    9,741    237 
                          
Total Impaired Loans:                         
Total mortgage loans  $44,760   $50,093   $840   $48,200   $470 
Total non-mortgage loans  $5,881   $6,251   $127   $6,860   $176 

 

-22-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our recorded investment, unpaid principal balance, allocated allowance for loan losses, average recorded investment and interest income recognized for loans that were considered impaired at or for the year ended December 31, 2014:

 

  

Recorded

Investment

 

Unpaid

Principal

Balance

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest

Income

Recognized

                
   (In thousands)
With no related allowance recorded:                         
Mortgage loans:                         
Multi-family residential  $10,481   $11,551   $-   $14,168   $194 
Commercial real estate   7,100    7,221    -    11,329    51 
One-to-four family mixed-use property   12,027    13,381    -    12,852    321 
One-to-four family residential   12,816    15,709    -    13,015    103 
Co-operative apartments   -    -    -    -    - 
Construction   -    -    -    285    - 
Non-mortgage loans:                         
Small Business Administration   -    -    -    -    - 
Taxi Medallion   -    -    -    -    - 
Commercial Business and other   2,779    3,149    -    3,428    137 
Total loans with no related allowance recorded   45,203    51,011    -    55,077    806 
                          
With an allowance recorded:                         
Mortgage loans:                         
Multi-family residential   2,779    2,779    286    2,936    149 
Commercial real estate   2,373    2,373    21    3,242    167 
One-to-four family mixed-use property   3,093    3,093    579    3,249    170 
One-to-four family residential   354    354    54    358    14 
Co-operative apartments   -    -    -    -    - 
Construction   -    -    -    187    - 
Non-mortgage loans:                         
Small Business Administration   -    -    -    -    - 
Taxi Medallion   -    -    -    -    - 
Commercial Business and other   2,713    2,713    154    3,149    115 
Total loans with an allowance recorded   11,312    11,312    1,094    13,121    615 
                          
Total Impaired Loans:                         
Total mortgage loans  $51,023   $56,461   $940   $61,621   $1,169 
Total non-mortgage loans  $5,492   $5,862   $154   $6,577   $252 

 

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

 

-23-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table sets forth the recorded investment in loans designated as Criticized or Classified at June 30, 2015:

 

(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
Multi-family residential  $3,859   $8,904   $-   $-   $12,763 
Commercial real estate   2,697    3,347    -    -    6,044 
One-to-four family - mixed-use property   4,944    10,863    -    -    15,807 
One-to-four family - residential   997    13,313    -    -    14,310 
Co-operative apartments   -    613    -    -    613 
Construction loans   -    -    -    -    - 
Small Business Administration   241    243    -    -    484 
Commercial business and other   1,690    3,879    -    -    5,569 
Total loans  $14,428   $41,162   $-   $-   $55,590 

 

The following table sets forth the recorded investment in loans designated as Criticized or Classified at December 31, 2014:

 

(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
Multi-family residential  $6,494   $10,226   $-   $-   $16,720 
Commercial real estate   5,453    7,100    -    -    12,553 
One-to-four family - mixed-use property   5,254    12,499    -    -    17,753 
One-to-four family - residential   2,352    13,056    -    -    15,408 
Co-operative apartments   623    -    -    -    623 
Construction loans   -    -    -    -    - 
Small Business Administration   479    -    -    -    479 
Commercial business and other   2,841    3,779    -    -    6,620 
Total loans  $23,496   $46,660   $-   $-   $70,156 

 

Commitments to extend credit (principally real estate mortgage loans and business loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $131.4 million and $202.4 million, respectively, at June 30, 2015.

 

6.Loans held for sale

 

Loans held for sale are carried at the lower of cost or fair value. At June 30, 2015, the Bank had one multi-family residential loan held for sale of $0.3 million. At December 31, 2014, the Bank did not have any loans classified as held for sale.

 

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

 

-24-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the three months ended

June 30, 2015

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

  Net gain (loss)
             
Multi-family residential   2   $1,045   $137   $- 
Commercial real estate   1    1,311    -    - 
One-to-four family - mixed-use property   4    1,150    -    47 
                     
Total   7   $3,506   $137   $47 

 

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

 

  

For the three months ended

June 30, 2014

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

  Net gain (loss)
             
Multi-family residential   3   $1,478   $76   $- 
Commercial real estate   1    430    -    - 
                     
Total   4   $1,908   $76   $- 

 

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

 

  

For the six months ended

June 30, 2015

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

  Net gain (loss)
             
Multi-family residential   4   $1,881   $137   $(2)
Commercial real estate   1    1,311    -    - 
One-to-four family - mixed-use property   7    1,836    -    51 
                     
Total   12   $5,028   $137   $49 

 

-25-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the six months ended

June 30, 2014

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

  Net gain (loss)
             
Multi-family residential   7   $3,216   $(70)  $- 
Commercial real estate   3    2,047    295    - 
One-to-four family - mixed-use property   6    2,069    38    - 
                     
Total   16   $7,332   $263   $- 

 

7.Other Real Estate Owned

 

The following are changes in OREO during the periods indicated:

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2015  2014  2015  2014
   (In thousands)
             
Balance at beginning of period  $5,252   $1,700   $6,326   $2,985 
Acquisitions   289    491    772    606 
Recovery (write-down) of carrying value   (896)   49    (896)   (5)
Sales   (390)   (894)   (1,947)   (2,240)
                     
Balance at end of period  $4,255   $1,346   $4,255   $1,346 

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

   2015  2014  2015  2014
   (In thousands)
             
Gross gains  $86   $77   $302   $131 
Gross losses   -    -    (6)   (30)
Recovery (write-down) of carrying value   (896)   49    (896)   (5)
                     
Total gain (loss)  $(810)  $126   $(600)  $96 

 

We may obtain physical possession of residential real estate collaterizing a consumer mortgage loan via foreclosure on an in-substance repossession. During the three and six months ended June 30, 2015 we did not foreclose on any consumer mortgages through in-substance repossession.

 

-26-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

8.Repurchase Agreements

 

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

 

The following table shows securities pledged and remaining maturity of repurchase agreements held during the period indicated:

 

   At June 30, 2015
   Remaining Contractual Maturity of Agreements
   Less than 1 year  1 year to 3 years  Over 3 years  Total
   (In thousands)
Repurchase agreements:                    
Mortgage-backed securities  $18,000   $58,000   $40,000   $116,000 
Total repurchase agreements  $18,000   $58,000   $40,000   $116,000 

 

The fair value of the collateral pledged for the repurchase agreements above was $134.4 million at June 30, 2015.

 

9.Stock-Based Compensation

 

For the three months ended June 30, 2015 and 2014, the Company’s net income, as reported, includes $0.9 million and $0.6 million, respectively, of stock-based compensation costs and $0.3 million and $0.2 million, respectively, of income tax benefits related to the stock-based compensation plans. For the six months ended June 30, 2015 and 2014, the Company’s net income, as reported, includes $3.6 million and $3.1 million, respectively, of stock-based compensation costs and $1.4 million and $1.2 million, respectively, of income tax benefits related to the stock-based compensation plans.

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock price, the risk-free interest rate over the options’ expected term and the annual dividend yield. The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight line method. During the three months ended June 30, 2015, the Company granted 3,600 restricted stock units. There were no restricted stock units granted during the three months ended June 30, 2014. During the six months ended June 30, 2015 and 2014, the Company granted 318,120 and 264,095 restricted stock units, respectively. There were no stock options granted during the three and six months ended June 30, 2015 and 2014.

 

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 (the “Prior Plans”). At June 30, 2015, there were 783,230 shares available for delivery in connection with awards under the 2014 Omnibus Plan. To satisfy stock option exercises or fund restricted stock and restricted stock unit awards, shares are issued from treasury stock, if available; otherwise new shares are issued. The exercise price per share of a stock option grant may not be less than the fair value of the common stock of the Company, as defined in the Omnibus Plan, on the date of grant and may not be re-priced without the approval of the Company’s stockholders. Options, stock appreciation rights, restricted stock, restricted stock units and other stock based awards granted under the 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.

 

-27-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Company’s restricted stock unit (“RSU”) awards under the 2014 Omnibus Plan and the Prior Plans in the aggregate at or for the six months ended June 30, 2015:

 

   Shares 

Weighted-Average

Grant-Date

Fair Value

       
Non-vested at December 31, 2014   373,154   $16.75 
Granted   318,120    19.10 
Vested   (258,700)   17.37 
Forfeited   (7,320)   18.42 
Non-vested at June 30, 2015   425,254   $18.10 
           
Vested but unissued at June 30, 2015   288,426   $18.08 

 

As of June 30, 2015, there was $6.7 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years. The total fair value of awards vested for the three months ended June 30, 2015 was $0.8 million. There were no awards vested for the three months ended June 30, 2014. The total fair value of awards vested for the six months ended June 30, 2015 and 2014 was $4.9 million and $4.1 million, respectively. The vested but unissued RSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates. As of June 30, 2015, there is no remaining unrecognized compensation cost related to stock options granted.

 

 

 

 

 

 

 

 

-28-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes certain information regarding the stock option awards under the Omnibus Plan and the Prior Plans in the aggregate at or for the six months ended June 30, 2015:

 

   Shares 

Weighted-

Average

Exercise

Price

 

Weighted-Average

Remaining

Contractual

Term

 

Aggregate

Intrinsic

Value

($000)*

             
Outstanding at December 31, 2014   154,915   $15.19           
Granted   -    -           
Exercised   (9,725)   16.65           
Forfeited   -    -           
Outstanding at June 30, 2015   145,190   $15.09    3.1   $860 

 

* The intrinsic value of a stock option is the difference between the fair 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, and the weighted average grant date fair value for options granted, during the three and six months ended June 30, 2015 and 2014 are provided in the following table:

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

(In thousands)  2015  2014  2015  2014
Proceeds from stock options exercised  $142   $87   $142   $429 
Fair value of shares received upon exercised of stock options   -    812    20    1,290 
Tax benefit related to stock options exercised   8    24    9    93 
Intrinsic value of stock options exercised   31    105    33    317 

 

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 level of Senior Vice President II and above and completed one year of service. However, all Senior Vice Presidents level III and Vice Presidents who were participants on January 31, 2015 remain eligible to participate in the phantom stock plan. Awards are made under this plan on certain compensation not eligible for awards 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.

 

-29-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Phantom Stock Plan at or for the six months ended June 30, 2015:

 

Phantom Stock Plan  Shares  Fair Value
Outstanding at December 31, 2014   67,113   $20.27 
Granted   11,729    19.28 
Forfeited   (2)   20.58 
Distributions   (451)   19.64 
Outstanding at June 30, 2015   78,389   $21.01 
Vested at June 30, 2015   78,119   $21.01 

  

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $85,000 and ($25,000) for the three months ended June 30, 2015 and 2014, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 and $7,000 for the three months ended June 30, 2015 and 2014, respectively.

 

For the six months ended June 30, 2015 and 2014, the Company recorded stock-based compensation expense for the Phantom Stock Plan of $94,000 and $17,000, respectively. The total fair value of the distributions from the Phantom Stock Plan during the six months ended June 30, 2015 and 2014 was $9,000 and $13,000, respectively.

 

10.Pension and Other Postretirement Benefit Plans

 

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

 

   Three months ended
June 30,
  Six months ended
June 30,
(In thousands)  2015  2014  2015  2014
             
Employee Pension Plan:                    
Interest cost  $221   $223   $442   $446 
Amortization of unrecognized loss   290    190    581    380 
Expected return on plan assets   (350)   (336)   (700)   (672)
Net employee pension expense  $161   $77   $323   $154 
                     
Outside Director Pension Plan:                    
Service cost  $11   $13   $22   $26 
Interest cost   24    29    48    58 
Amortization of unrecognized gain   (14)   (15)   (28)   (30)
Amortization of past service liability   10    10    20    20 
Net outside director pension expense  $31   $37   $62   $74 
                     
Other Postretirement Benefit Plans:                    
Service cost  $95   $90   $190   $180 
Interest cost   75    63    150    126 
Amortization of unrecognized loss   30    -    60    - 
Amortization of past service credit   (22)   (22)   (43)   (43)
Net other postretirement expense  $178   $131   $357   $263 

 

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2014 that it expects to contribute $0.3 million and $0.2 million to the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), respectively, during the year ending December 31, 2015. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of June 30, 2015, the Company has contributed $76,000 to the Outside Director Pension Plan and $37,000 to the Other Postretirement Benefit Plans. As of June 30, 2015, the Company has not revised its expected contributions for the year ending December 31, 2015.

 

-30-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

11.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 June 30, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $32.2 million and $29.5 million, respectively. At December 31, 2014, the Company carried financial assets and financial liabilities under the fair value option with fair values of $32.6 million and $28.8 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the six months ended June 30, 2015. The Company elected to measure at fair value securities with a cost of $5.0 million that were purchased during the six months ended June 30, 2014. During the six months ended June 30, 2014, the Company sold financial assets carried under the fair value option totaling $1.9 million.

 

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

 

  

Fair Value

Measurements

 

Fair Value

Measurements

 

Changes in Fair Values For Items Measured at Fair Value

Pursuant to Election of the Fair Value Option

   at June 30,  at December 31,  Three Months Ended  Six Months Ended
(Dollars in thousands)  2015  2014  June 30, 2015  June 30, 2014  June 30, 2015  June 30, 2014
                               
Mortgage-backed securities  $4,037   $4,678   $(28)  $24   $(36)  $72 
Other securities   28,122    27,915    (108)   172    89    497 
Borrowed funds   29,476    28,771    (1,229)   154    (705)   179 
Net gain (loss) from fair value adjustments (1) (2)            $(1,365)  $350   $(652)  $748 

 

(1)The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of $2.1 million and ($0.8) million for the three months ended June 30, 2015 and 2014, respectively, from the change in the fair value of interest rate swaps.

 

(2)The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of $0.8 million and ($1.8) million for the six months ended June 30, 2015 and 2014, respectively, from the change in the fair value of interest rate swaps.

 

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

 

The borrowed funds had a contractual principal amount of $61.9 million at both June 30, 2015 and December 31, 2014. The fair value of borrowed funds includes accrued interest payable of $0.1 million at June 30, 2015 and December 31, 2014.

 

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.

 

-31-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at June 30, 2015 and December 31, 2014.

 

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 June 30, 2015 and December 31, 2014, Level 2 included mortgage related securities, corporate debt, certain municipal securities, mutual funds 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 June 30, 2015 and December 31, 2014, Level 3 included certain municipal securities and trust preferred securities owned by and junior subordinated debentures issued by the Company.

 

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

 

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at June 30, 2015 and December 31, 2014:

 

   Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
  Significant Other
Observable Inputs
(Level 2)
  Significant Other
Unobservable Inputs
(Level 3)
  Total carried at fair value
on a recurring basis
   2015  2014  2015  2014  2015  2014  2015  2014
   (In thousands)
                         
Assets:                                        
Mortgage-backed
Securities
  $-   $-   $729,674   $704,933   $-   $-   $729,674   $704,933 
Other securities   -    -    292,698    245,768    15,125    22,609    307,823    268,377 
Interest rate swaps   -    -    94    84    -    -    94    84 
                                         
Total assets  $-   $-   $1,022,466   $950,785   $15,125   $22,609   $1,037,591   $973,394 
                                         
Liabilities:                                        
Borrowings  $-   $-   $-   $-   $29,476   $28,771   $29,476   $28,771 
Interest rate swaps   -    -    1,711    2,649    -    -    1,711    2,649 
                                         
Total liabilities  $-   $-   $1,711   $2,649   $29,476   $28,771   $31,187   $31,420 

 

 

-32-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   For the three months ended
June 30, 2015
   Municipals  Trust preferred
securities
  Junior subordinated
debentures
      (In thousands)   
Beginning balance  $14,464   $7,189   $28,245 
Transfer to held-to-maturity   (4,510)   -    - 
Principal repayments   (55)   -    - 
Maturities   (2,000)   -    - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    37    - 
Net loss from fair value adjustment of financial liabilities included in earnings (1)   -    -    1,229 
Increase in accrued interest payable   -    -    2 
Change in unrealized gains included in other comprehensive income   -    -    - 
Ending balance  $7,899   $7,226   $29,476 
Changes in unrealized gains (losses) held at period end  $-   $-   $- 

 

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

 

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

 

   For the three months ended
June 30, 2014
   Municipals  Trust preferred
securities
  Junior subordinated
debentures
      (In thousands)   
Beginning balance  $10,170   $13,059   $29,541 
Purchases   475    -    - 
Principal repayments   (53)   -    - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    29    - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)   -    -    (154)
Increase in accrued interest payable   -    -    1 
Change in unrealized gains (losses) included in other comprehensive income   -    273    - 
Ending balance  $10,592   $13,361   $29,388 
Changes in unrealized gains (losses) held at period end  $-   $273   $- 

 

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

 

 

 

-33-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   For the six months ended
June 30, 2015
   Municipals  Trust preferred
securities
  Junior subordinated
debentures
      (In thousands)   
Beginning balance  $15,519   $7,090   $28,771 
Transfer to held-to-maturity   (4,510)   -    - 
Purchases   1,000    -    - 
Principal repayments   (110)   -    - 
Maturities   (4,000)   -    - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    131    - 
Net loss from fair value adjustment of financial liabilities included in earnings (1)   -    -    705 
Decrease in accrued interest payable   -    -    - 
Change in unrealized gains (losses) included in other comprehensive income   -    5    - 
Ending balance  $7,899   $7,226   $29,476 
Changes in unrealized gains (losses) held at period end  $-   $5   $- 

 

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

 

 

 

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

 

   For the six months ended
June 30, 2014
   Municipals  Trust preferred
securities
  Junior subordinated
debentures
      (In thousands)   
Beginning balance  $9,223   $14,935   $29,570 
Purchases   2,475    -    - 
Principal repayments   (1,106)   -    - 
Sales   -    (1,871)   - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    55    - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)   -    -    (179)
Decrease in accrued interest payable   -    -    (3)
Change in unrealized gains (losses) included in other comprehensive income   -    242    - 
Ending balance  $10,592   $13,361   $29,388 
Changes in unrealized gains (losses) held at period end  $-   $242   $- 

 

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

 

-34-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

During the three and six months ended June 30, 2015 and 2014, there were no transfers between Levels 1, 2 and 3.

 

The following table presents the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements as of June 30, 2015:

 

   Fair Value  Valuation Technique  Unobservable Input  Range (Weighted Average)
   (Dollars in thousands)
Assets:                  
                   
Municipals  $7,899   Discounted cash flows  Discount rate   4.0%  (4.0%)
                   
Trust Preferred Securities  $7,226   Discounted cash flows  Discount rate  7.0%- 7.1% (7.1%)
                   
Liabilities:                  
                   
Junior subordinated debentures  $29,476   Discounted cash flows  Discount rate   7.0%  (7.0%)

 

The significant unobservable input used in the fair value measurement of the Company’s municipal securities valued under Level 3 is the securities’ effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

The significant unobservable input used in the fair value measurement of the Company’s trust preferred securities valued under Level 3 is the securities’ effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

The significant unobservable input used in the fair value measurement of the Company’s junior subordinated debentures under Level 3 is effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

The following table presents the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements as of December 31, 2014:

 

   Fair Value  Valuation Technique  Unobservable Input  Range (Weighted Average)
   (Dollars in thousands)
Assets:                  
                   
Municipals  $15,519   Discounted cash flows  Discount rate  0.2%- 4.0% (2.3%)
                   
Trust Preferred Securities  $7,090   Discounted cash flows  Discount rate  7.0%- 7.25%(7.2%)
                   
Liabilities:                  
                   
Junior subordinated debentures  $28,771   Discounted cash flows  Discount rate   7.0%  (7.0%)

 

The significant unobservable input used in the fair value measurement of the Company’s municipal securities valued under Level 3 is the securities’ effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

The significant unobservable input used in the fair value measurement of the Company’s trust preferred securities valued under Level 3 is the securities’ effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

-35-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The significant unobservable input used in the fair value measurement of the Company’s junior subordinated debentures is effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value, at June 30, 2015 and December 31, 2014:

 

 
 
 
 
 
 
 
 
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
 
 
 
 
 
Significant Other
Observable Inputs
(Level 2)
 
 
 
 
 
Significant Other
Unobservable Inputs
(Level 3)
 
 
 
 
 
 
Total carried at fair value
on a recurring basis
   2015  2014  2015  2014  2015  2014  2015  2014
   (In thousands)
Assets:                                        
Loans held for sale  $-   $-   $-   $-   $300   $-   $300   $- 
Impaired loans                       16,912    22,174    16,912    22,174 
Other real estate owned   -    -    -    -    4,255    6,326    4,255    6,326 
                                         
Total assets  $-   $-   $-   $-   $21,467   $28,500   $21,467   $28,500 

 

The following table presents the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements as of June 30, 2015:

 

   Fair Value  Valuation Technique  Unobservable Input  Range (Weighted Average)
   (Dollars in thousands)
Assets:                  
                   
Loans held for sale  $300   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales   59.6%  (59.6%)
           Loss severity discount       
                   
Impaired loans  $3,910   Income  approach  Capitalization rate  7.3% to 8.0%(7.7%)
           Loss severity discount  0.5% to 55.4%(15.7%)
                   
Impaired loans  $5,587   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0% to 40.0%(-5.9%)
           Loss severity discount  0.2% to 89.4%(13.2%)
                   
Impaired loans  $7,415   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -50.0% to 25.0%(-2.3%)
           Capitalization rate  5.6% to 11.0%(7.5%)
           Loss severity discount  0.9% to 50.7%(16.3%)
                   
Other real estate owned  $158   Income  approach  Capitalization rate   12.0%  (12.0%)
           Loss severity discount   16.1%  (16.1%)
                   
Other real estate owned  $4,097   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -41.5% to 25.0%(0.0%)
           Loss severity discount  1.6% to 66.2%(18.5%)

 

 

-36-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table presents the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements as of December 31, 2014:

 

   Fair Value  Valuation Technique  Unobservable Input  Range (Weighted Average)
   (Dollars in thousands)
Assets:                  
                   
Impaired loans  $6,981   Income  approach  Capitalization rate  7.3% to 8.5%(7.8%)
           Loss severity discount  0.5% to 81.7%(21.3%)
                   
Impaired loans  $6,935   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -41.5% to 40.0%(-2.2%)
           Loss severity discount  1.8% to 89.4%(20.0%)
                   
Impaired loans  $8,258   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -55.0% to 25.0%(-6.1%)
           Capitalization rate  5.8% to 11.0%(8.0%)
           Loss severity discount  0.9% to 74.4%(30.0%)
                   
Other real estate owned  $4,768   Income  approach  Capitalization rate  9.0% to 12.0%(9.1%)
           Loss severity discount  0.9% to 4.9%(1.0%)
                   
Other real estate owned  $587   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -11.9% to 15.0% (-3.5%)
           Loss severity discount  0.0% to 36.9%(9.6%)
                   
Other real estate owned  $971   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales  -25.0% to 0.0%(-8.9%)
           Capitalization rate  7.5% to 8.0%(7.7%)
           Loss severity discount  0.0% to 6.2%(3.0%)

 

The Company carries its impaired collateral dependent loans at 85% of the appraised or internally estimated value of the underlying property.

 

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at June 30, 2015 and December 31, 2014.

 

The estimated fair value of each material class of financial instruments at June 30, 2015 and December 31, 2014 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 (Level 1).

 

FHLB-NY stock:

 

The fair value is based upon the par value of the stock which equals its carrying value (Level 2).

 

-37-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Securities:

 

The estimated fair values of securities are contained in Note 4 of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices (Level 1 input), 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 (Level 2 input). When there is limited activity or less transparency around inputs to the valuation, securities are valued using (Level 3 input).

 

Loans held for sale:

 

The fair value of non-performing loans held for sale is estimated through bids received on the loans and, as such, are classified as a Level 3 input.

 

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 (Level 3 input).

 

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 (Level 3 input).

 

Due to Depositors:

 

The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value) (Level 1). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities (Level 2 input).

 

Borrowings:

 

The fair value of borrowings are estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements (Level 2 input) or using a market-standard model (Level 3 input).

 

Interest Rate Swaps:

 

The estimated fair value of interest rate swaps is based upon broker quotes (Level 2 input).

 

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 (Level 3 input).

 

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 June 30, 2015 and December 31, 2014, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

 

 

-38-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table sets forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at June 30, 2015:

 

   June 30, 2015
   Carrying
Amount
  Fair
Value
  Level 1  Level 2  Level 3
   (in thousands)
Assets:                         
Cash and due from banks  $36,599   $36,599   $36,599   $-   $- 
Securities held-to-maturity   7,220    7,220    -    -    7,220 
Mortgage-backed securities available for sale   729,674    729,674    -    729,674    - 
Other securities available for sale   307,823    307,823    -    292,698    15,125 
Loans   4,031,142    4,078,118    -    -    4,078,118 
FHLB-NY stock   49,926    49,926    -    49,926    - 
Interest rate swaps   94    94    -    94    - 
                          
Total assets  $5,162,478   $5,209,454   $36,599   $1,072,392   $4,100,463 
                          
                          
Liabilities:                         
Deposits  $3,698,332    3,785,530   $2,322,826   $1,462,704   $- 
Borrowings   1,115,435    1,130,046    -    1,100,570    29,476 
Interest rate swaps   1,711    1,711    -    1,711    - 
                          
Total liabilities  $4,815,478   $4,917,287   $2,322,826   $2,564,985   $29,476 

 

 

-39-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table sets forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at December 31, 2014:

 

   December 31, 2014
 
 
 
 
Carrying
Amount
 
 
Fair
Value
 
 
 
Level 1
 
 
 
Level 2
 
 
 
Level 3
   (in thousands)
Assets:                         
Cash and due from banks  $34,265   $34,265   $34,265   $-   $- 
Mortgage-backed Securities   704,933    704,933    -    704,933    - 
Other securities   268,377    268,377    -    245,768    22,609 
Loans   3,810,373    3,871,087    -    -    3,871,087 
FHLB-NY stock   46,924    46,924    -    46,924    - 
Interest rate swaps   84    84    -    84    - 
                          
Total assets  $4,864,956   $4,925,670   $34,265   $997,709   $3,893,696 
                          
                          
Liabilities:                         
Deposits  $3,508,598   $3,524,123   $2,202,775   $1,321,348   $- 
Borrowings   1,056,492    1,070,428    -    1,041,657    28,771 
Interest rate swaps   2,649    2,649    -    2,649    - 
                          
Total liabilities  $4,567,739   $4,597,200   $2,202,775   $2,365,654   $28,771 

 

 

12.Derivative Financial Instruments

 

At June 30, 2015 and December 31, 2014, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used 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. Additionally, the Company at times may use interest rate swaps to mitigate the Company’s exposure to rising interest rates on its fixed rate loans.

 

At June 30, 2015 and December 31, 2014, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At June 30, 2015 and December 31, 2014, derivatives with a combined notional amount of $19.4 million and $14.5 million, respectively, were designated as fair value hedges. Changes in the fair value of the derivatives not designated as hedges are reflected in “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income. The portion of the changes in the fair value of the derivative designated as a fair value hedge which is considered ineffective are reflected in “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

 

-40-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table sets forth information regarding the Company’s derivative financial instruments at June 30, 2015:

 

   Notional
Amount
 

Net Carrying

Value (1)

   (In thousands)
Interest rate swaps (non-hedge)  $36,321   $(1,367)
Interest rate swaps (hedge)   4,087    94 
Interest rate swaps (hedge)   15,305    (344)
Total derivatives  $55,713   $(1,617)

 

The following table sets forth information regarding the Company’s derivative financial instruments at December 31, 2014:

 

 

Notional

Amount

 

Net Carrying

Value (1)

  (In thousands)
Interest rate swaps (non-hedge)  $36,321   $(2,239)
Interest rate swaps (hedge)   4,131    84 
Interest rate swaps (hedge)   10,340    (410)
Total derivatives  $50,792   $(2,565)

 

(1)Derivatives in a net positive position are recorded as “Other assets” and derivatives in a net negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.

 

 

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

 

 

For the three months ended

June 30,

 

For the six months ended

June 30,

(In thousands)  2015  2014  2015  2014
Financial Derivatives:                    
Interest rate swaps (non-hedge)  $(2,125)  $(719)  $871   $(1,733)
Interest rate swaps (hedge)   (8)   (33)   (46)   (61)
Net Gain (loss) (1)  $(2,133)  $(752)  $825   $(1,794)

 

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

 

 

-41-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

13.Income Taxes

 

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