10-Q 1 gff10q_1109015.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 September 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 October 31, 2015 was 28,830,210.

 

 

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

51

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk 70
ITEM 4.  Controls and Procedures 70
PART II  —  OTHER INFORMATION  
ITEM 1.  Legal Proceedings 71
ITEM 1A. Risk Factors 71
ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds 71
ITEM 3.  Defaults Upon Senior Securities 71
ITEM 4.  Mine Safety Disclosures 71
ITEM 5.  Other Information 71
ITEM 6.  Exhibits 72
SIGNATURES 73

 

 

 

 

 

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) 

September 30,

2015

 

December 31,

2014

ASSETS          
Cash and due from banks  $34,474   $34,265 
Securities held-to-maturity:          
Other securities (none pledged) (fair value of $6,220 at September 30, 2015)   6,220    - 
Securities available for sale:          
Mortgage-backed securities (including assets pledged of $381,912 and $464,626 at September 30, 2015 and December 31, 2014, respectively; $3,826 and $4,678 at fair value pursuant to the fair value option at September 30, 2015 and December 31, 2014, respectively.)   690,044    704,933 
Other securities (including assets pledged of $18,635 and $57,562 at September 30, 2015 and December 31, 2014, respectively; $28,242 and $27,915 at fair value pursuant to the fair value option at September 30, 2015 and December 31, 2014, respectively)   318,501    268,377 
Loans:          
Multi-family residential   2,043,740    1,923,460 
Commercial real estate   857,806    621,569 
One-to-four family ― mixed-use property   568,401    573,779 
One-to-four family ― residential   191,430    187,572 
Co-operative apartments   9,122    9,835 
Construction   5,671    5,286 
Small Business Administration   10,540    7,134 
Taxi medallion   21,025    22,519 
Commercial business and other   479,085    447,500 
Net unamortized premiums and unearned loan fees   14,129    11,719 
Allowance for loan losses   (22,973)   (25,096)
Net loans   4,177,976    3,785,277 
Interest and dividends receivable   18,365    17,251 
Bank premises and equipment, net   25,517    21,868 
Federal Home Loan Bank of New York stock   53,391    46,924 
Bank owned life insurance   114,813    112,656 
Goodwill   16,127    16,127 
Other assets   46,647    69,335 
Total assets  $5,502,075   $5,077,013 
           
LIABILITIES          
Due to depositors:          
Non-interest bearing  $257,196   $255,834 
Interest-bearing:          
Certificate of deposit accounts   1,386,945    1,305,823 
Savings accounts   261,400    261,942 
Money market accounts   438,457    290,263 
NOW accounts   1,338,715    1,359,057 
Total interest-bearing deposits   3,425,517    3,217,085 
Mortgagors' escrow deposits   44,700    35,679 
Borrowed funds ($28,491 and $28,771 at fair value pursuant to the fair  value option at September 30, 2015 and December 31, 2014, respectively)   1,120,577    940,492 
Securities sold under agreements to repurchase   116,000    116,000 
Other liabilities   66,895    55,676 
Total liabilities   5,030,885    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 September 30, 2015 and December 31, 2014; 28,830,210 shares and 29,403,823 shares outstanding at September 30, 2015 and December 31, 2014, respectively)   315    315 
Additional paid-in capital   209,936    206,437 
Treasury stock, at average cost (2,700,385 shares and 2,126,772 shares at September 30, 2015 and December 31, 2014, respectively)   (48,873)   (37,221)
Retained earnings   309,516    289,623 
Accumulated other comprehensive income (loss), net of taxes   296    (2,907)
Total stockholders' equity   471,190    456,247 
           
Total liabilities and stockholders' equity  $5,502,075   $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 September 30,

 

For the nine months

ended September 30,

(Dollars in thousands, except per share data)  2015  2014  2015  2014
       
Interest and dividend income                    
Interest and fees on loans  $45,243   $42,668   $132,861   $127,277 
Interest and dividends on securities:                    
Interest   6,508    6,309    18,366    20,051 
Dividends   119    190    355    574 
Other interest income   43    10    96    55 
Total interest and dividend income   51,913    49,177    151,678    147,957 
                     
Interest expense                    
Deposits   7,701    7,336    22,596    22,724 
Other interest expense   4,902    9,884    14,078    19,960 
Total interest expense   12,603    17,220    36,674    42,684 
                     
Net interest income   39,310    31,957    115,004    105,273 
Benefit for loan losses   (370)   (618)   (1,620)   (2,829)
Net interest income after benefit for loan losses   39,680    32,575    116,624    108,102 
                     
Non-interest income                    
Banking services fee income   778    748    2,560    2,324 
Net gain on sale of securities   103    5,216    167    5,216 
Net gain on sale of loans   306    -    355    - 
Net gain on sale of buildings   -    -    6,537    - 
Net loss from fair value adjustments   (1,094)   (474)   (921)   (1,520)
Federal Home Loan Bank of New York stock dividends   480    463    1,455    1,444 
Bank owned life insurance   725    762    2,157    2,293 
Other income   399    408    1,264    1,062 
Total non-interest income   1,697    7,123    13,574    10,819 
                     
Non-interest expense                    
Salaries and employee benefits   12,648    12,164    40,471    36,686 
Occupancy and equipment   2,443    2,007    7,791    5,961 
Professional services   1,907    1,601    5,036    4,338 
FDIC deposit insurance   817    771    2,377    2,141 
Data processing   1,178    1,021    3,425    3,131 
Depreciation and amortization   993    690    2,528    2,122 
Other real estate owned/foreclosure expense   110    372    717    907 
Other operating expenses   3,612    2,811    11,550    8,868 
Total non-interest expense   23,708    21,437    73,895    64,154 
                     
Income before income taxes   17,669    18,261    56,303    54,767 
                     
Provision for income taxes                    
Federal   5,375    5,240    16,782    15,511 
State and local   1,286    1,820    4,946    6,074 
Total taxes   6,661    7,060    21,728    21,585 
                     
Net income  $11,008   $11,201   $34,575   $33,182 
                     
                     
Basic earnings per common share  $0.38   $0.38   $1.18   $1.11 
Diluted earnings per common share  $0.38   $0.38   $1.18   $1.11 
Dividends per common share  $0.16   $0.15   $0.48   $0.45 

 

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

September 30,

 

For the nine months ended

September 30,

(Dollars in thousands)  2015  2014  2015  2014
             
             
Net income  $11,008   $11,201   $34,575   $33,182 
                     
Other comprehensive income (loss), net of tax:                    
Amortization of actuarial losses   173    98    518    259 
Amortization of prior service credits   (6)   (6)   (19)   (16)
Reclassificaton adjustment for net gains included in income   (58)   (2,978)   (94)   (2,978)
Net unrealized (losses) gains on securities   3,943    (2,206)   2,798    9,667 
                     
Total other comprehensive income (loss), net of tax  $4,052   $(5,092)  $3,203   $6,932 
                     
Comprehensive income  $15,060   $6,109   $37,778   $40,114 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

- 3 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

  

For the nine months ended

September 30,

(Dollars in thousands)  2015  2014
CASH FLOWS FROM OPERATING ACTIVITIES          
Net income  $34,575   $33,182 
Adjustments to reconcile net income to net cash provided by operating activities:          
Benefit for loan losses   (1,620)   (2,829)
Depreciation and amortization of bank premises and equipment   2,528    2,122 
Amortization of premium, net of accretion of discount   6,804    5,333 
Net loss from fair value adjustments   921    1,520 
Net gain from sale of loans   (355)   - 
Net gain from sale of securities   (167)   (5,216)
Net gain from sale of buildings   (6,537)   - 
Income from bank owned life insurance   (2,157)   (2,293)
Stock-based compensation expense   4,222    3,592 
Deferred compensation   (2,768)   (2,245)
Excess tax benefit from stock-based payment arrangements   (467)   (757)
Deferred income tax (benefit) provision   (5,024)   2,556 
Increase in other liabilities   2,432    5,563 
Decrease in other assets   2,065    1,639 
Net cash provided by operating activities   34,452    42,167 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchases of bank premises and equipment   (9,933)   (1,416)
Net (purchases) redemptions of Federal Home Loan Bank of New York stock   (6,467)   249 
Purchases of securities held-to-maturity   (3,100)   - 
Proceeds from maturities of securities held-to-maturity   1,390    - 
Purchases of securities available for sale   (294,453)   (132,185)
Proceeds from sales and calls of securities available for sale   163,158    102,328 
Proceeds from maturities and prepayments of securities available for sale   92,733    77,641 
Proceeds from sale of buildings   20,209    - 
Net originations of loans   (163,037)   (199,615)
Purchases of loans   (216,333)   (23,777)
Proceeds from sale of real estate owned   2,185    2,292 
Proceeds from sale of delinquent loans   10,363    7,332 
Net cash used in investing activities   (403,285)   (167,151)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Net increase in non-interest bearing deposits   1,362    15,876 
Net increase in interest-bearing deposits   207,653    105,502 
Net increase in mortgagors' escrow deposits   9,021    8,698 
Net proceeds from short-term borrowed funds   45,000    25,000 
Proceeds from long-term borrowings   225,000    150,000 
Repayment of long-term borrowings   (90,000)   (157,081)
Purchases of treasury stock   (15,604)   (13,805)
Excess tax benefit from stock-based payment arrangements   467    757 
Proceeds from issuance of common stock upon exercise of stock options   142    512 
Cash dividends paid   (13,999)   (13,461)
Net cash provided by financing activities   369,042    121,998 
           
Net increase (decrease) in cash and cash equivalents   209    (2,986)
Cash and cash equivalents, beginning of period   34,265    33,485 
Cash and cash equivalents, end of period  $34,474   $30,499 
           
SUPPLEMENTAL CASH  FLOW DISCLOSURE          
Interest paid  $35,838   $42,374 
Income taxes paid   26,518    18,184 
Taxes paid if excess tax benefits were not tax deductible   26,985    18,941 
Non-cash activities:          
Securities transferred from available for sale to held-to-maturity   4,510    - 
Loans transferred to other real estate owned   1,588    5,749 
Loans provided for the sale of other real estate owned   280    712 
Loans held for investment transferred to loans held for sale   300    1,150 

 

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 nine months ended

September 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 (143,809 and 133,446 common shares for the nine months ended September 30, 2015 and 2014, respectively)   2,031    2,029 
Shares issued upon vesting of restricted stock unit awards (59,532 and 7,300 common shares for the nine months ended September 30, 2015 and 2014, respectively)   160    30 
Issuance upon exercise of stock options (21,025 and 105,925 common shares for the nine months ended September 30, 2015 and 2014, respectively)   52    310 
Stock-based compensation activity, net   789    801 
Stock-based income tax benefit   467    757 
Balance, end of period  $209,936   $205,829 
Treasury Stock          
Balance, beginning of period  $(37,221)  $(22,053)
Purchases of outstanding shares (735,599 and 661,470 common shares for the nine months ended September 30, 2015 and 2014, respectively)   (14,351)   (12,660)
Shares issued upon vesting of restricted stock unit awards (204,310 and 198,536 common shares for the nine months ended September 30, 2015 and 2014, respectively)   3,580    3,137 
Issuance upon exercise of stock options (45,125 and 105,925 common shares for the nine months ended September 30, 2015 and 2014, respectively)   813    1,697 
Purchases of shares to fund options exercised (21,812 and 63,732 common shares for the nine months ended September 30, 2015 and 2014, respectively)   (441)   (1,290)
Repurchase of shares to satisfy tax obligations (65,637 and 55,649 common shares for the nine months ended September 30, 2015 and 2014, respectively)   (1,253)   (1,145)
Balance, end of period  $(48,873)  $(32,314)
Retained Earnings          
Balance, beginning of period  $289,623   $263,743 
Net income   34,575    33,182 
Cash dividends declared and paid on common shares ($0.48 and $0.45 per common share for the nine months ended September 30, 2015 and 2014, respectively)   (13,999)   (13,461)
Issuance upon exercise of stock options (24,100 common shares and 8,000 common shares for the nine months ended September 30, 2015 and 2014, respectively)   (179)   (50)
Shares issued upon vesting of restricted stock unit awards (144,778 and 191,236 common shares for the nine months ended September 30, 2015 and 2014, respectively)   (504)   (405)
Balance, end of period  $309,516   $283,009 
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 ($2,230) and ($7,484) for the nine months ended September 30, 2015 and 2014, respectively   2,798    9,667 
Reclassification adjustment for net gains included in net income, net of taxes of approximately $73 and $2,238 for the nine months ended September 30, 2015 and 2014, respectively   (94)   (2,978)
Amortization of actuarial losses, net of taxes of approximately ($402) and ($266) for the nine months ended September 30, 2015 and 2014, respectively   518    259 
Amortization of prior service credits, net of taxes of approximately $15 and $18 for the nine months ended September 30, 2015 and 2014, respectively)   (19)   (16)
Balance, end of period  $296   $(4,443)
           
Total Stockholders' Equity  $471,190   $452,396 

 

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

September 30,

 

For the nine months ended

September 30,

   2015  2014  2015  2014
   (In thousands, except per share data)
Net income, as reported  $11,008   $11,201   $34,575   $33,182 
Divided by:                    
Weighted average common shares outstanding   28,927    29,772    29,188    29,937 
Weighted average common stock equivalents   19    24    21    31 
Total weighted average common shares outstanding and common stock equivalents  $28,946   $29,796   $29,209   $29,968 
                     
Basic earnings per common share  $0.38   $0.38   $1.18   $1.11 
Diluted earnings per common share (1)  $0.38   $0.38   $1.18   $1.11 
Dividend payout ratio   42.1%   39.5%   40.7%   40.5%

 

(1)For the three and nine months ended September 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 September 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 September 30, 2015:

 

  

Amortized

Cost

  Fair Value 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

   (In thousands)
Securites held-to-maturity:                    
Municipals  $6,220   $6,220   $-   $- 
                     
Total  $6,220   $6,220   $-   $- 

 

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 September 30, 2015:

 

  

Amortized

Cost

  Fair Value 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

   (In thousands)
Securites available for sale:                    
Corporate  $115,959   $114,063   $424   $2,320 
Municipals   128,363    132,486    4,163    40 
Mutual funds   21,358    21,358    -    - 
Other   50,683    50,594    -    89 
Total other securities   316,363    318,501    4,587    2,449 
REMIC and CMO   487,677    493,688    6,880    869 
GNMA   12,179    12,446    355    88 
FNMA   168,966    171,191    2,744    519 
FHLMC   12,518    12,719    201    - 
Total mortgage-backed securities   681,340    690,044    10,180    1,476 
Total securities available for sale  $997,703   $1,008,545   $14,767   $3,925 

 

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 $9.0 million at September 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 accumulated other comprehensive income (loss) (“AOCI”) for the periods indicated:

 

  

For the three months ended

September 30,

 

For the nine months ended

September 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

September 30,

 

For the nine months ended

September 30,

   2015  2014  2015  2014
   (In thousands)
Gross gains from the sale of securities  $2,666   $5,247   $2,899   $5,247 
Gross losses from the sale of securities   (2,563)   (31)   (2,732)   (31)
                     
Net gains from the sale of securities  $103   $5,216   $167   $5,216 

 

Realized gains and losses on the sales of securities are determined using the specific identification method.

 

The following table details the amortized cost and fair value of the Company’s securities classified as held-to-maturity at September 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   80    80 
           
Total securities held-to-maturity  $6,220   $6,220 

 

(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 September 30, 2015, by contractual maturity.

 

  

Amortized

Cost

  Fair Value
   (In thousands)
Securities available for sale:(1)          
Due in one year or less  $27,317   $27,371 
Due after one year through five years   -    - 
Due after five years through ten years   76,934    76,186 
Due after ten years   212,112    214,944 
           
Total other securities   316,363    318,501 
Mortgage-backed securities   681,340    690,044 
           
Total securities available for sale  $997,703   $1,008,545 

 

(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 September 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  $77,680   $2,320   $77,680   $2,320   $-   $- 
Municipals   5,233    40    5,233    40    -    - 
Other   43,710    89    43,413    86    297    3 
Total other securities   126,623    2,449    126,326    2,446    297    3 
REMIC and CMO   93,464    869    44,618    266    48,846    603 
GNMA   7,364    88    7,364    88    -    - 
FNMA   53,570    519    26,367    158    27,203    361 
Total mortgage-backed securities   154,398    1,476    78,349    512    76,049    964 
Total securities available for sale  $281,021   $3,925   $204,675   $2,958   $76,346   $967 

 

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 AOCI within Stockholders’ Equity.

 

The Company reviewed each investment that had an unrealized loss at September 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 September 30, 2015 consist of losses on 11 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 September 30, 2015.

 

Municipal Securities:

The unrealized losses in Municipal securities at September 30, 2015, consist of losses on two 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 September 30, 2015.

 

Other Securities:

The unrealized losses in Other securities at September 30, 2015, consist of a loss on one single issuer trust preferred security and five Collateralized Loan Obligation (“CLO”) securities. The unrealized loss on the single issuer trust preferred was 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 September 30, 2015.

 

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

 

REMIC and CMO:

The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and Collateralized Mortgage Obligation (“CMO”) securities at September 30, 2015 consist of one issue from the Federal Home Loan Mortgage Corporation (“FHLMC”), eight issues from the Federal National Mortgage Association (“FNMA”) and four 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 September 30, 2015.

 

- 11 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

GNMA:

The unrealized losses in GNMA securities at September 30, 2015 consist of a loss on one security. The unrealized loss was 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 September 30, 2015.

 

FNMA:

The unrealized losses in FNMA securities at September 30, 2015 consist of losses on nine 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 September 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.

 

- 13 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

As of September 30, 2015, we utilized recent third party appraisals of the collateral to measure impairment for $24.4 million, or 71.1%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $9.9 million, or 28.9%, 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 September 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 nine months ended

September 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.

 

- 14 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

Number

of contracts

 

Recorded

investment

 

Number

of contracts

 

Recorded

investment

             
Multi-family residential   9   $2,647    10   $3,034 
Commercial real estate   3    2,349    3    2,373 
One-to-four family - mixed-use property   7    2,347    7    2,381 
One-to-four family - residential   1    346    1    354 
Small business administration   1    37    -    - 
Commercial business and other   4    2,125    4    2,249 
                     
Total performing troubled debt restructured   25   $9,851    25   $10,391 

 

During the three months ended September 30, 2015 and 2014, there were no TDR loans transferred to non-performing status. During the nine months ended September 30, 2015, one multi-family residential TDR loan of $0.4 million was transferred to non-performing status, which resulted in this loan being included in non-performing loans. During the nine months ended September 30, 2014, one commercial business and other TDR loan of $2.0 million, one construction TDR loan of $0.4 million and one one-to-four family mixed-use TDR loan of $0.3 million were transferred to non-performing status, which resulted in these loans 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:

 

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

Number

of contracts

 

Recorded

investment

 

Number

of contracts

 

Recorded

investment

             
Multi-family residential   1   $382    -   $- 
Commercial real estate   -    -    1    2,252 
One-to-four family - mixed use property   -    -    1    187 
                     
Total troubled debt restructurings that subsequently defaulted   1   $382    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) 

September 30,

2015

 

December 31,

2014

       
Loans ninety days or more past due and still accruing:          
Multi-family residential  $516   $676 
Commercial real estate   253    820 
One-to-four family - mixed-use property   1,293    405 
One-to-four family - residential   13    14 
Commercial Business and other   222    386 
Total   2,297    2,301 
           
Non-accrual mortgage loans:          
Multi-family residential   4,686    6,878 
Commercial real estate   2,407    5,689 
One-to-four family - mixed-use property   5,446    6,936 
One-to-four family - residential   10,441    11,244 
Total   22,980    30,747 
           
Non-accrual non-mortgage loans:          
Small business administration   234    - 
Commercial business and other   3,089    1,143 
Total   3,323    1,143 
           
Total non-accrual loans   26,303    31,890 
           
           
Total non-accrual loans and loans ninety days or more past due and still accruing  $28,600   $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
September 30,
  For the nine months ended
September 30,
   2015  2014  2015  2014
   (In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms  $627   $841   $1,879   $2,523 
Less:  Interest income included in the results of operations   153    153    540    572 
Total foregone interest  $474   $688   $1,339   $1,951 

- 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 September 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  $7,009   $1,581   $5,202   $13,792   $2,029,948   $2,043,740 
Commercial real estate   3,255    90    2,660    6,005    851,801    857,806 
One-to-four family - mixed-use property   10,425    1,048    6,739    18,212    550,189    568,401 
One-to-four family - residential   2,337    649    10,252    13,238    178,192    191,430 
Co-operative apartments   -    -    -    -    9,122    9,122 
Construction loans   -    -    -    -    5,671    5,671 
Small Business Administration   46    -    234    280    10,260    10,540 
Taxi medallion   -    -    -    -    21,025    21,025 
Commercial business and other   11    2    627    640    478,445    479,085 
Total  $23,083   $3,370   $25,714   $52,167   $4,134,653   $4,186,820 

 

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 September 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  $8,300   $3,726   $5,180   $1,433   $-   $29   $291   $11   $4,114   $23,084 
Charge-offs   (58)   -    (99)   -    -    -    (9)   -    (10)   (176)
Recoveries   4    100    26    300    -    -    5    -    -    435 
Provision (Benefit)   (596)   331    (233)   (371)   -    16    (42)   231    294    (370)
Ending balance  $7,650   $4,157   $4,874   $1,362   $-   $45   $245   $242   $4,398   $22,973 
Ending balance: individually evaluated for impairment  $257   $15   $513   $52   $-   $-   $-   $233   $618   $1,688 
Ending balance: collectively evaluated for impairment  $7,393   $4,142   $4,361   $1,310   $-   $45   $245   $9   $3,780   $21,285 

 

 

 

 

- 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 September 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  $10,750   $5,327   $6,993   $1,790   $-   $34   $373   $14   $3,954   $29,235 
Charge-offs   (412)   (221)   (47)   (18)   -    -    -    -    (5)   (703)
Recoveries   3    99    196    104    -    -    15    -    13    430 
Provision (Benefit)   (197)   (219)   (472)   (102)   -    7    (37)   (3)   405    (618)
Ending balance  $10,144   $4,986   $6,670   $1,774   $-   $41   $351   $11   $4,367   $28,344 
Ending balance: individually evaluated for impairment  $292   $23   $591   $55   $-   $-   $-   $-   $168   $1,129 
Ending balance: collectively evaluated for impairment  $9,852   $4,963   $6,079   $1,719   $-   $41   $351   $11   $4,199   $27,215 

 

 

 

 

- 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 nine months ended September 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   (458)   (32)   (571)   (244)   -    -    (9)   -    (62)   (1,376)
Recoveries   218    168    73    374    -    -    32    -    8    873 
Provision (Benefit)   (937)   (181)   (468)   (458)   -    3    (57)   231    247    (1,620)
Ending balance  $7,650   $4,157   $4,874   $1,362   $-   $45   $245   $242   $4,398   $22,973 
Ending balance: individually evaluated for impairment  $257   $15   $513   $52   $-   $-   $-   $233   $618   $1,688 
Ending balance: collectively evaluated for impairment  $7,393   $4,142   $4,361   $1,310   $-   $45   $245   $9   $3,780   $21,285 

 

 

 

 

 

- 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 nine months ended September 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   (1,086)   (307)   (305)   (97)   -    -    (49)   -    (130)   (1,974)
Recoveries   144    481    331    269    7    -    76    -    63    1,371 
Provision (Benefit)   (998)   (147)   316    (477)   (111)   (403)   (134)   11    (886)   (2,829)
Ending balance  $10,144   $4,986   $6,670   $1,774   $-   $41   $351   $11   $4,367   $28,344 
Ending balance: individually evaluated for impairment  $292   $23   $591   $55   $-   $-   $-   $-   $168   $1,129 
Ending balance: collectively evaluated for impairment  $9,852   $4,963   $6,079   $1,719   $-   $41   $351   $11   $4,199   $27,215 

 

 

 

 

 

- 21 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows the manner in which loans were evaluated for impairment at the periods indicated:

 

 

   At September 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
Financing Receivables:                                                  
Ending Balance  $2,043,740   $857,806   $568,401   $191,430   $9,122   $5,671   $10,540   $21,025   $479,085   $4,186,820 
Ending balance: individually evaluated for impairment  $9,158   $5,233   $12,513   $13,113   $-   $-   $329   $2,129   $7,319   $49,794 
Ending balance: collectively evaluated for impairment  $2,034,582   $852,573   $555,888   $178,317   $9,122   $5,671   $10,211   $18,896   $471,766   $4,137,026 

 

 

   At December 31, 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
Financing Receivables:                                                  
Ending Balance  $1,923,460   $621,569   $573,779   $187,572   $9,835   $5,286   $7,134   $22,519   $447,500   $3,798,654 
Ending balance: individually evaluated for impairment  $13,260   $9,473   $15,120   $13,170   $-   $-   $-   $-   $5,492   $56,515 
Ending balance: collectively evaluated for impairment  $1,910,200   $612,096   $558,659   $174,402   $9,835   $5,286   $7,134   $22,519   $442,008   $3,742,139 

 

 

 

 

- 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 and allocated allowance for loan losses at September 30, 2015, as well as average recorded investment and interest income recognized for loans that were considered impaired for the three and nine months ended September 30, 2015:

 

   September 30, 2015 

For the three months ended

September 30, 2015

 

For the nine months ended

September 30, 2015

  

Recorded

Investment

 

Unpaid

Principal

Balance

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest

Income

Recognized

 

Average

Recorded

Investment

 

Interest

Income

Recognized

                      
   (In thousands)
With no related allowance recorded:                     
Mortgage loans:                                   
Multi-family residential  $6,836   $7,685   $-   $8,034   $14   $9,470   $46 
Commercial real estate   4,697    4,754    -    4,930    35    5,748    107 
One-to-four family mixed-use property   9,467    10,669    -    9,814    39    10,781    133 
One-to-four family residential   12,767    14,960    -    13,040    28    13,125    101 
Co-operative apartments   -    -    -    307    -    153    - 
Construction   -    -    -    -    -    -    - 
Non-mortgage loans:                                   
Small Business Administration   292    292    -    301    6    230    18 
Taxi Medallion   -    -    -    -    -    -    - 
Commercial Business and other   3,754    4,124    -    3,363    51    3,937    170 
                                    
Total loans with no related allowance recorded   37,813    42,484    -    39,789    173    43,444    575 
                                    
With an allowance recorded:                                   
Mortgage loans:                                   
Multi-family residential   2,322    2,322    257    2,326    30    2,461    89 
Commercial real estate   536    536    15    538    7    998    22 
One-to-four family mixed-use property   3,046    3,046    513    3,054    42    3,069    126 
One-to-four family residential   346    346    52    348    3    350    10 
Co-operative apartments   -    -    -    -    -    -    - 
Construction   -    -    -    -    -    -    - 
Non-mortgage loans:                                   
Small Business Administration   37    37    -    38    1    29    1 
Taxi Medallion   2,129    2,129    233    1,065    16    532    49 
Commercial Business and other   3,565    3,565    618    3,064    32    2,862    120 
                                    
Total loans with an allowance recorded   11,981    11,981    1,688    10,433    131    10,301    417 
                                    
Total Impaired Loans:                                   
Total mortgage loans  $40,017   $44,318   $837   $42,391   $198   $46,155   $634 
                                    
Total non-mortgage loans  $9,777   $10,147   $851   $7,831   $106   $7,590   $358 

 

- 23 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses at December 31, 2014, as well as average recorded investment and interest income recognized for loans that were considered impaired for the three and nine months ended September 30, 2014:

 

   December 31, 2014 

For the three months ended

September 30, 2014

 

For the nine months ended

September 30, 2014

  

Recorded

Investment

 

Unpaid

Principal

Balance

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest

Income

Recognized

 

Average

Recorded

Investment

 

Interest

Income

Recognized

                      
   (In thousands)
With no related allowance recorded:                     
Mortgage loans:                                   
Multi-family residential  $10,481   $11,551   $-   $14,052   $44   $15,397   $150 
Commercial real estate   7,100    7,221    -    10,840    65    12,739    231 
One-to-four family mixed-use property   12,027    13,381    -    13,233    58    13,126    208 
One-to-four family residential   12,816    15,709    -    12,832    16    13,081    75 
Co-operative apartments   -    -    -    -    -    -    - 
Construction   -    -    -    285    -    380    - 
Non-mortgage loans:                                   
Small Business Administration   -    -    -    -    -    -    - 
Taxi Medallion   -    -    -    -    -    -    - 
Commercial Business and other   2,779    3,149    -    4,798    40    4,987    140 
                                    
Total loans with no related allowance recorded   45,203    51,011    -    56,040    223    59,710    804 
                                    
With an allowance recorded:                                   
Mortgage loans:                                   
Multi-family residential   2,779    2,779    286    3,077    37    2,988    112 
Commercial real estate   2,373    2,373    21    3,787    42    3,532    125 
One-to-four family mixed-use property   3,093    3,093    579    3,378    43    3,300    128 
One-to-four family residential   354    354    54    358    4    359    11 
Co-operative apartments   -    -    -    -    -    -    - 
Construction   -    -    -    -    -    249    - 
Non-mortgage loans:                                   
Small Business Administration   -    -    -    -    -    -    - 
Taxi Medallion   -    -    -    -    -    -    - 
Commercial Business and other   2,713    2,713    154    2,545    37    3,294    113 
                                    
Total loans with an allowance recorded   11,312    11,312    1,094    13,145    163    13,722    489 
                                    
Total Impaired Loans:                                   
Total mortgage loans  $51,023   $56,461   $940   $61,842   $309   $65,151   $1,040 
                                    
Total non-mortgage loans  $5,492   $5,862   $154   $7,343   $77   $8,281   $253 

 

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.

 

- 24 -
 

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 September 30, 2015:

 

(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
                
Multi-family residential  $4,727   $6,511   $-   $-   $11,238 
Commercial real estate   1,931    2,884    -    -    4,815 
One-to-four family - mixed-use property   4,245    10,167    -    -    14,412 
One-to-four family - residential   1,431    12,766    -    -    14,197 
Co-operative apartments   -    -    -    -    - 
Construction loans   1,000    -    -    -    1,000 
Small Business Administration   235    234    -    -    469 
Taxi Medallion   -    2,129    -    -    2,129 
Commercial business and other   1,215    5,695    -    -    6,910 
Total loans  $14,784   $40,386   $-   $-   $55,170 

 

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 $119.5 million and $201.0 million, respectively, at September 30, 2015.

 

6. Loans held for sale

 

Loans held for sale are carried at the lower of cost or fair value. The Bank did not have any loans classified as held for sale at September 30, 2015 or December 31, 2014.

 

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.

 

- 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 three months ended

September 30, 2015

             
(Dollars in thousands)  Loans sold  Proceeds  Net charge-offs  Net gain
             
Multi-family residential   4   $1,539   $(3)  $1 
Commercial real estate   2    741    -    13 
                     
Total   6   $2,280   $(3)  $14 

 

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

 

The Bank did not sell any loans during the three months ended September 30, 2014.

  

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

 

  

For the nine months ended

September 30, 2015

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

 

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

 

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

 

  

For the nine months ended

September 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   $- 

 

- 26 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

7. Other Real Estate Owned

 

The following are changes in OREO during the periods indicated:

 

  

For the three months ended

September 30,

 

For the nine months ended

September 30,

   2015  2014  2015  2014
   (In thousands)
             
Balance at beginning of period  $4,255   $1,346   $6,326   $2,985 
Acquisitions   816    5,143    1,588    5,749 
Write-down of carrying value   -    -    (896)   (5)
Sales   (216)   (697)   (2,163)   (2,937)
                     
Balance at end of period  $4,855   $5,792   $4,855   $5,792 

 

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

 

  

For the three months ended

September 30,

 

For the nine months ended

September 30,

   2015  2014  2015  2014
   (In thousands)
             
Gross gains  $4   $-   $306   $132 
Gross losses   -    (34)   (6)   (65)
Write-down of carrying value   -    -    (896)   (5)
                     
Total gain (loss)  $4   $(34)  $(596)  $62 

 

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. During the three and nine months ended September 30, 2015, we did not foreclose on any consumer mortgages through in-substance repossession. OREO are included in other assets on the Company’s balance sheet. At September 30, 2015, we did not hold any foreclosed residential real estate. At December 31, 2014, we held foreclosed residential real estate totaling $1.3 million. Included within net loans as of September 30, 2015 was a recorded investment of $13.9 million of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

 

8. 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.

 

- 27 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   At September 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  $38,000   $38,000   $40,000   $116,000 
                     
Total repurchase agreements  $38,000   $38,000   $40,000   $116,000 

 

The fair value of the collateral pledged for the repurchase agreements above was $136.4 million at September 30, 2015.

 

9. Stock-Based Compensation

 

For each of the three months ended September 30, 2015 and 2014, the Company’s net income, as reported, includes $0.5 million of stock-based compensation costs and $0.2 million of income tax benefits related to the stock-based compensation plans. For the nine months ended September 30, 2015 and 2014, the Company’s net income, as reported, includes $4.2 million and $3.6 million, respectively, of stock-based compensation costs and $1.6 million and $1.4 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. There were 2,800 restricted stock units granted during the three months ended September 30, 2014. There were no restricted stock awards issued during the three months ended September 30, 2015. During the nine months ended September 30, 2015 and 2014, the Company granted 318,120 and 266,895 restricted stock units, respectively. There were no stock options granted during the three and nine months ended September 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 September 30, 2015, there were 784,830 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.

 

- 28 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   Shares 

Weighted-Average

Grant-Date

Fair Value

       
Non-vested at December 31, 2014   373,154   $16.75 
Granted   318,120    19.10 
Vested   (260,700)   17.37 
Forfeited   (9,625)   18.55 
Non-vested at September 30, 2015   420,949   $18.10 
           
Vested but unissued at September 30, 2015   290,226   $18.08 

 

As of September 30, 2015, there was $6.1 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 3.3 years. The total fair value of awards vested for the three months ended September 30, 2015 and 2014 were $39,000 and $4,000, respectively. The total fair value of awards vested for the nine months ended September 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.

 

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 nine months ended September 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   (45,125)   12.92           
Forfeited   -    -           
Outstanding at September 30, 2015   109,790   $16.12    2.6   $428 

 

* 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.

 

- 29 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised, and the weighted average grant date fair value for options granted, during the three and nine months ended September 30, 2015 and 2014 are provided in the following table:

 

  

For the three months ended

September 30,

 

For the nine months ended

September 30,

(In thousands)  2015  2014  2015  2014
Proceeds from stock options exercised  $-   $82   $142   $512 
Fair value of shares received upon exercised of stock options   421    -    441    1,290 
Tax benefit related to stock options exercised   87    1    324    94 
Intrinsic value of stock options exercised   291    18    96    335 

 

As of September 30, 2015, there is no remaining unrecognized compensation cost related to stock options granted.

 

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.

 

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

 

Phantom Stock Plan  Shares  Fair Value
Outstanding at December 31, 2014   67,113   $20.27 
Granted   12,356    19.32 
Forfeited   (2)   20.58 
Distributions   (451)   19.64 
Outstanding at September 30, 2015   79,016   $20.02 
Vested at September 30, 2015   78,857   $20.02 

 

The Company recorded stock-based compensation benefits for the Phantom Stock Plan of $65,000 and $25,000 for the three months ended September 30, 2015 and 2014, respectively. The total fair value of the distributions from the Phantom Stock Plan was $21,000 for the three months ended September 30, 2014. There were no distributions from the Phantom Stock Plan during the three months ended September 30, 2015.

 

For the nine months ended September 30, 2015 and 2014, the Company recorded stock-based compensation expense for the Phantom Stock Plan of $29,000 and $17,000, respectively. The total fair value of the distributions from the Phantom Stock Plan during the nine months ended September 30, 2015 and 2014 was $9,000 and $34,000, respectively.

 

- 30 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

10. Pension and Other Postretirement Benefit Plans

 

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

 

  

Three months ended

September 30,

 

Nine months ended

September 30,

(In thousands)  2015  2014  2015  2014
             
Employee Pension Plan:                    
Interest cost  $221   $223   $663   $669 
Amortization of unrecognized loss   291    190    872    570 
Expected return on plan assets   (350)   (336)   (1,050)   (1,008)
Net employee pension expense  $162   $77   $485   $231 
                     
Outside Director Pension Plan:                    
Service cost  $11   $13   $33   $39 
Interest cost   24    29    72    87 
Accretion of unrecognized gain   (14)   (15)   (42)   (45)
Amortization of past service liability   10    10    30    30 
Net outside director pension expense  $31   $37   $93   $111 
                     
Other Postretirement Benefit Plans:                    
Service cost  $95   $90   $285   $270 
Interest cost   75    63    225    189 
Amortization of unrecognized loss   30    -    90    - 
Accretion of past service credit   (21)   (22)   (64)   (67)
Net other postretirement expense  $179   $131   $536   $392 

 

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 September 30, 2015, the Company has contributed $0.1 million to the Outside Director Pension Plan and $49,000 to the Other Postretirement Benefit Plans. As of September 30, 2015, the Company has not revised its expected contributions for the year ending December 31, 2015.

 

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 September 30, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $32.1 million and $28.5 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 nine months ended September 30, 2015. The Company elected to measure at fair value securities with a cost of $5.0 million that were purchased during the nine months ended September 30, 2014. During the nine months ended September 30, 2014, the Company sold financial assets carried under the fair value option totaling $1.9 million.

 

- 31 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   Fair Value  Fair Value  Changes in Fair Values For Items Measured at Fair Value
   Measurements  Measurements  Pursuant to Election of the Fair Value Option
   at September 30,  at December 31,  Three Months Ended  Nine Months Ended
(Dollars in thousands)  2015  2014  September 30, 2015  September 30, 2014  September 30, 2015  September 30, 2014
                   
Mortgage-backed securities  $3,826   $4,678   $-   $(16)  $(36)  $56 
Other securities   28,242    27,915    59    14    148    511 
Borrowed funds   28,491    28,771    987    (144)   282    35 
Net gain (loss) from fair value adjustments (1) (2)            $1,046   $(146)  $394   $602 

 

(1)The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $2.1 million and $0.3 million for the three months ended September 30, 2015 and 2014, respectively, from the change in the fair value of interest rate swaps.

 

(2)The net gain from fair value adjustments presented in the above table does not include net losses of $1.3 million and $2.1 million for the nine months ended September 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 September 30, 2015 and December 31, 2014. The fair value of borrowed funds includes accrued interest payable of $0.1 million at both September 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.

 

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 September 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 September 30, 2015 and December 31, 2014, Level 2 included mortgage related securities, corporate debt, certain municipal securities, mutual funds and interest rate swaps.

 

- 32 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At September 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 September 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  $-   $-   $690,044   $704,933   $-   $-   $690,044   $704,933 
Other securities   -    -    311,320    245,768    7,181    22,609    318,501    268,377 
Interest rate swaps   -    -    -    84    -    -    -    84 
                                         
Total assets  $-   $-   $1,001,364   $950,785   $7,181   $22,609   $1,008,545   $973,394 
                                         
Liabilities:                                        
Borrowings  $-   $-   $-   $-   $28,491   $28,771   $28,491   $28,771 
Interest rate swaps   -    -    5,079    2,649    -    -    5,079    2,649 
                                         
Total liabilities  $-   $-   $5,079   $2,649   $28,491   $28,771   $33,570   $31,420 

 

 

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

 

  

For the three months ended

September 30, 2015

   Municipals 

Trust preferred

securities

 

Junior subordinated

debentures

   (In thousands)
          
Beginning balance  $7,899   $7,226   $29,476 
Transfer to held-to-maturity   -    -    - 
Principal repayments   (7,899)   -    - 
Maturities   -    -    - 
Net loss from fair value adjustment of financial assets included in earnings (1)   -    (44)   - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)   -    -    (988)
Increase in accrued interest payable   -    -    3 
Change in unrealized losses included in other comprehensive income   -    (1)   - 
Ending balance  $-   $7,181   $28,491 
                
Changes in unrealized losses held at period end  $-   $(1)  $- 

 

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

 

- 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 three months ended

September 30, 2014

   Municipals 

Trust preferred

securities

 

Junior subordinated

debentures

   (In thousands)
          
Beginning balance  $10,592   $13,361   $29,388 
Purchases   2,000    -    - 
Maturities   (85)   -    - 
Principal repayments   (54)   -    - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    45    - 
Net loss from fair value adjustment of financial liabilities included in earnings (1)   -    -    145 
Increase in accrued interest payable   -    -    2 
Change in unrealized gains (losses) included in other comprehensive income   -    212    - 
Ending balance  $12,453   $13,618   $29,535 
                
Changes in unrealized gains held at period end  $-   $212   $- 

 

(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 nine months ended

September 30, 2015

   Municipals 

Trust preferred

securities

 

Junior subordinated

debentures

   (In thousands)
          
Beginning balance  $15,519   $7,090   $28,771 
Transfer to held-to-maturity   (4,510)   -    - 
Purchases   1,000    -    - 
Principal repayments   (8,009)   -    - 
Maturities   (4,000)   -    - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    86    - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)   -    -    (283)
Increase in accrued interest payable   -    -    3 
Change in unrealized gains (losses) included in other comprehensive income   -    5    - 
Ending balance  $-   $7,181   $28,491 
                
Changes in unrealized gains 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.

 

- 34 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the nine months ended

September 30, 2014

   Municipals 

Trust preferred

securities

 

Junior subordinated

debentures

   (In thousands)
          
Beginning balance  $9,223   $14,935   $29,570 
Purchases   4,475    -    - 
Maturities   (1,085)   -    - 
Principal repayments   (160)   -    - 
Sales   -    (1,871)   - 
Net gain from fair value adjustment of financial assets included in earnings (1)   -    99    - 
Net gain from fair value adjustment of financial liabilities included in earnings (1)   -    -    (34)
Decrease in accrued interest payable   -    -    (1)
Change in unrealized gains (losses) included in other comprehensive income   -    455    - 
Ending balance  $12,453   $13,618   $29,535 
                
Changes in unrealized gains held at period end  $-   $455   $- 

 

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

 

During the three and nine months ended September 30, 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 September 30, 2015:

 

   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)
Assets:                         
                          
                          
                          
Trust Preferred Securities  $7,181   Discounted cash flows  Discount rate   7.0% - 7.1%    7.1% 
                          
Liabilities:                         
                          
Junior subordinated debentures  $28,491   Discounted cash flows  Discount rate     7.0%      7.0% 

 

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.

 

- 35 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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.

 

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 September 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 non-recurring basis

   2015  2014  2015  2014  2015  2014  2015  2014
   (In thousands)
Assets:                                        
Impaired loans  $-   $-   $-   $-   $15,418   $22,174   $15,418   $22,174 
Other real estate owned   -    -    -    -    4,855    6,326    4,855    6,326 
                                         
Total assets  $-   $-   $-   $-   $20,273   $28,500   $20,273   $28,500 

 

- 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 September 30, 2015:

 

   Fair Value  Valuation Technique  Unobservable Input  Range  Weighted Average
   (Dollars in thousands)   
Assets:                         
                          
Impaired loans  $3,890   Income  approach  Capitalization rate   6.0% to 8.0%    7.5% 
           Loss severity discount   0.5% to 55.4%    15.8% 
                          
Impaired loans  $5,534   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales   -50.0% to 40.0%    -4.6% 
           Loss severity discount   0.2% to 89.4%    12.9% 
                          
                          
Impaired loans  $5,994   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%    7.2% 
           Loss severity discount   0.9% to 51.4%    15.9% 
                          
                          
Other real estate owned  $3,750   Income  approach  Capitalization rate     9.0%      9.0% 
           Loss severity discount      19.0%      19.0% 
                          
Other real estate owned  $289   Sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales   -5.0% to 25.0%    10.0% 
           Loss severity discount     1.6%      1.6% 
                          
Other real estate owned  $816   Blended income and sales approach  Adjustment to sales comparison value to reconcile differences between comparable sales   -10.0% to 15.0%    2.5% 
           Capitalization rate     8.6%      8.6% 
           Loss severity discount     1.3%      1.3% 

 

- 37 -
 

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 September 30, 2015 and December 31, 2014.

 

The estimated fair value of each material class of financial instruments at September 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.

 

FHLB-NY stock:

 

The fair value is based upon the par value of the stock which equals its carrying value.

 

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, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. When there is limited activity or less transparency around inputs to the valuation, securities are valued using.

 

- 38 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Loans held for sale:

 

The fair value of non-performing loans held for sale is estimated through bids received on the loans. There were no loans held for sale at September 30, 2015 and December 31, 2014.

 

Loans:

 

The fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.

 

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the appraised or internally estimated value of the property.

 

Due to Depositors:

 

The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value). The fair value of 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.

 

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 or using a market-standard model.

 

Interest Rate Swaps:

 

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

 

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.

 

Other Financial Instruments:

 

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable).

 

At September 30, 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.

 

- 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 September 30, 2015:

 

   September 30, 2015
  

Carrying

Amount

 

Fair

Value

  Level 1  Level 2  Level 3
   (in thousands)
Assets:                         
Cash and due from banks  $34,474   $34,474   $34,474   $-   $- 
Securities held-to-maturity   6,220    6,220    -    -    6,220 
Mortgage-backed securities available for sale   690,044    690,044    -    690,044    - 
Other securities available for sale   318,501    318,501    -    311,320    7,181 
Loans   4,200,949    4,243,040    -    -    4,243,040 
FHLB-NY stock   53,391    53,391    -    53,391    - 
                          
Total assets  $5,303,579   $5,345,670   $34,474   $1,054,755   $4,256,441 
                          
                          
Liabilities:                         
Deposits  $3,727,413   $3,751,619   $2,340,468   $1,411,151   $- 
Borrowings   1,236,577    1,254,194    -    1,225,703    28,491 
Interest rate swaps   5,079    5,079    -    5,079    - 
                          
Total liabilities  $4,969,069   $5,010,892   $2,340,468   $2,641,933   $28,491 

 

- 40 -
 

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 September 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 September 30, 2015 and December 31, 2014, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At September 30, 2015 and December 31, 2014, derivatives with a combined notional amount of $52.8 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.

 

- 41 -
 

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 September 30, 2015:

 

  

Notional

Amount

 

Net Carrying

Value(1)

   (In thousands)
           
Interest rate swaps (non-hedge)  $36,321   $(3,119)
Interest rate swaps (hedge)   52,830    (1,960)
Total derivatives  $89,151   $(5,079)

 

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

September 30,

 

For the nine months ended

September 30,

(In thousands)  2015  2014  2015  2014
             
Financial Derivatives:                    
Interest rate swaps (non-hedge)  $(1,753)  $(300)  $(882)  $(2,033)
Interest rate swaps (hedge)   (387)   (28)   (433)   (89)
Net loss (1)  $(2,140)  $(328)  $(1,315)  $(2,122)

 

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

 

- 42 -
 

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 investment trust. Additionally, the Bank files New Jersey State tax returns.

 

 

Income tax provisions are summarized as follows:


  

For the three months

ended September  30,

 

For the nine months

ended September 30,

(In thousands)  2015  2014  2015  2014
Federal:                    
Current  $6,195   $5,381   $20,262   $13,793 
Deferred   (820)   (141)   (3,480)   1,718 
Total federal tax provision   5,375    5,240    16,782    15,511 
State and Local:                    
Current   1,635    1,869    6,490    5,237 
Deferred   (349)   (49)   (1,544)   837 
Total state and local tax provision   1,286    1,820    4,946    6,074 
                     
Total income tax provision  $6,661   $7,060   $21,728   $21,585 

 

 

The effective tax rate was 37.7% and 38.7% for the three months ended September 30, 2015 and 2014, respectively, and 38.6% and 39.4% for the nine months ended September 30, 2015 and 2014, respectively. The decrease in the effective tax rate was primarily due to the prior year being affected by changes in New York State tax code passed on March 31, 2014, which resulted in a reduction in the Company’s deferred tax assets and a corresponding increase in tax expense during the three and nine months ended September 30, 2014. Additionally, the decrease in the effective tax rate reflects the greater impact that preferential tax items had on the Company’s tax liability during the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

 

On April 13, 2015, the Governor of New York signed the New York State 2015 budget, which included changes to the New York City tax code. The approved budget changes the manner in which the Bank’s tax liability is calculated for New York City. Based on our review of the changes to the New York City tax code, we do not anticipate a significant change to the Company’s tax expense.

 

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

 

  

For the three months

ended September 30,

 

For the nine months

ended September 30,

(dollars in thousands)  2015  2014  2015  2014
Taxes at federal statutory rate  $6,184    35.0%  $6,392    35.0%  $19,706    35.0%  $19,169    35.0%
Increase (reduction) in taxes resulting from:                                        
State and local income tax, net of Federal income tax benefit   836    4.7    1,183    6.5    3,215    5.7    3,948    7.2 
Other   (359)   (2.0)   (515)   (2.8)   (1,193)   (2.1)   (1,532)   (2.8)
Taxes at effective rate  $6,661    37.7%  $7,060    38.7%  $21,728    38.6%  $21,585    39.4%

 

The Company has recorded a deferred tax asset of $32.6 million at September 30, 2015, which is included in “Other assets” in the Consolidated Statements of Financial Condition. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three fiscal years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, the probability that some of the Company’s $9.8 million deferred tax liability can be used to offset a portion of the deferred tax asset, as well as certain tax planning strategies, it is more likely than not that the deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the deferred tax asset at September 30, 2015.

 

- 43 -
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

14. Accumulated other comprehensive income (loss):

&nbs