UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

Commission file number 001-33013

 

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

11-3209278

(I.R.S. Employer Identification No.)

 

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

 

(718) 961-5400

(Registrant's telephone number, including area code)

 

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

(Former address of Principal executive offices)

 

 

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

 

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

 

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

 

Large accelerated filer __

Non-accelerated filer __

Accelerated filer X

Smaller reporting company __

 

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

 

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

 

 
 

TABLE OF CONTENTS

 

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

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

 

49

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

 

 

 

 

 

i
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

 

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

 

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

-1-
 


PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

  

For the three months

ended June 30,

 

For the six months

ended June 30,

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

 

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

-2-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

 

 

 

 

 

 

 

 

 

 

 

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

-3-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

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

 

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

-4-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

  

For the six months ended

June 30,

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

 

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

-5-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

1.Basis of Presentation

 

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

 

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

 

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

 

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

 

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

 

2.Use of Estimates

 

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

 

3.Earnings Per Share

 

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

 

-6-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

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

 

4.Debt and Equity Securities

 

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

 

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

 

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

 

  

Amortized

Cost

  Fair Value 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

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

 

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

 

-7-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

Amortized

Cost

 

Gross

Unrealized

Fair Value

 

Gross

Unrealized

Gains

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

 

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

 

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

 

  

Amortized

Cost

  Fair Value 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

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

 

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

 

-8-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

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

 

  

Amortized

Cost

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

 

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

 

-9-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

Amortized

Cost

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

 

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

 

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value aggregated by category and length of time the individual securities had been in a continuous unrealized loss position at June 30, 2015:

 

   Total  Less than 12 months  12 months or more
   Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

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

 

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

 

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

 

-10-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Corporate:

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

 

Municipal Securities:

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

 

Other Securities:

The unrealized losses in Other Securities at June 30, 2015, consist of a loss on one single issuer trust preferred security. The unrealized losses on this security were caused by market interest volatility, a significant widening of credit spreads across markets for these securities and illiquidity and uncertainty in the financial markets. This security is currently rated below investment grade. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell this security and it is more likely than not the Company will not be required to sell this security before recovery of the security’s amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the security. Therefore, the Company did not consider this investment to be other-than-temporarily impaired at June 30, 2015.

 

REMIC and CMO:

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

 

GNMA:

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

 

-11-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

FNMA:

The unrealized losses in FNMA securities at June 30, 2015 consist of losses on 17 securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes will cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at June 30, 2015.

 

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2014.

 

   Total  Less than 12 months  12 months or more
   Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

  Fair Value 

Unrealized

Losses

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

 

5.Loans

 

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

 

-12-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

-13-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At June 30, 2015, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

 

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

 

  

For the six months ended

June 30, 2015

(Dollars in thousands)  Number  Balance  Modification description
                
                
Small Business Administration   1   $41    

Received a below market

interest rate and the loan

amortization was extended

 
    Total   1   $41      

 

The recorded investment of the loan modified and classified as a TDR, presented in the table above, was unchanged as there was no principal forgiven in this modification.

 

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

 

-14-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

Number

of contracts

 

Recorded

investment

 

Number

of contracts

 

Recorded

investment

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

 

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

 

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

 

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

 

-15-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

(In thousands) 

June 30,

2015

 

December 31,

2014

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

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

-16-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

(in thousands) 

30 - 59 Days

Past Due

 

60 - 89 Days

Past Due

 

Greater

than

90 Days

 

Total Past

Due

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

 

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

 

(in thousands) 

30 - 59 Days

Past Due

 

60 - 89 Days

Past Due

 

Greater

than

90 Days

 

Total Past

Due

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

 

-17-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

(in thousands) 

Multi-family

residential

 

Commercial

real estate

 

One-to-four

family -

mixed-use

property

 

One-to-four

family-

residential

 

Co-operative

apartments

 

Construction

loans

 

Small Business

Administration

 

Taxi

Medallion

 

Commercial

business and

other

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

 

-18-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

(in thousands) 

Multi-family

residential

 

Commercial

real estate

 

One-to-four

family -

mixed-use

property

 

One-to-four

family-

residential

 

Co-operative

apartments

 

Construction

loans

 

Small Business

Administration

 

Taxi

Medallion

 

Commercial

business

and other

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

 

-19-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

(in thousands) 

Multi-family

residential

 

Commercial

real estate

 

One-to-four

family -

mixed-use

property

 

One-to-four

family-

residential

 

Co-operative

apartments

 

Construction

loans

 

Small Business

Administration

 

Taxi

Medallion

 

Commercial

business and

other

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

 

-20-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

(in thousands) 

Multi-family

residential

 

Commercial

real estate

 

One-to-four

family -

mixed-use

property

 

One-to-four

family-

residential

 

Co-operative

apartments

 

Construction

loans

 

Small Business

Administration

 

Taxi

Medallion

 

Commercial

business and

other

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

 

-21-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

Recorded

Investment

 

Unpaid

Principal

Balance

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest

Income

Recognized

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

 

-22-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

Recorded

Investment

 

Unpaid

Principal

Balance

 

Related

Allowance

 

Average

Recorded

Investment

 

Interest

Income

Recognized

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

 

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

 

-23-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

6.Loans held for sale

 

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

 

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

 

-24-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the three months ended

June 30, 2015

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

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

 

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

 

  

For the three months ended

June 30, 2014

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

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

 

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

 

  

For the six months ended

June 30, 2015

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

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

 

-25-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

For the six months ended

June 30, 2014

(Dollars in thousands)  Loans sold  Proceeds 

Net (charge-offs)

recoveries

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

 

7.Other Real Estate Owned

 

The following are changes in OREO during the periods indicated:

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

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

 

-26-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

8.Repurchase Agreements

 

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

 

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

 

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

 

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

 

9.Stock-Based Compensation

 

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

 

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

 

The 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) became effective on May 20, 2014 after adoption by the Board of Directors and approval by the stockholders. The 2014 Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can, but need not, be structured so as to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The 2014 Omnibus Plan authorizes the issuance of 1,100,000 shares. To the extent that an award under the 2014 Omnibus Plan is cancelled, expired, forfeited, settled in cash, settled by issuance of fewer shares than the number underlying the award, or otherwise terminated without delivery of shares to a participant in payment of the exercise price or taxes relating to an award, the shares retained by or returned to the Company will be available for future issuance under the 2014 Omnibus Plan. No further awards may be granted under the Company’s 2005 Omnibus Incentive Plan, 1996 Stock Option Incentive Plan, and 1996 Restricted Stock Incentive Plan (the “Prior Plans”). At June 30, 2015, there were 783,230 shares available for delivery in connection with awards under the 2014 Omnibus Plan. To satisfy stock option exercises or fund restricted stock and restricted stock unit awards, shares are issued from treasury stock, if available; otherwise new shares are issued. The exercise price per share of a stock option grant may not be less than the fair value of the common stock of the Company, as defined in the Omnibus Plan, on the date of grant and may not be re-priced without the approval of the Company’s stockholders. Options, stock appreciation rights, restricted stock, restricted stock units and other stock based awards granted under the Omnibus Plan are generally subject to a minimum vesting period of three years with stock options having a 10-year maximum contractual term. Other awards do not have a contractual term of expiration. The Compensation Committee is authorized to grant awards that vest upon a participant’s retirement. These amounts are included in stock-based compensation expense at the time of the participant’s retirement eligibility.

 

-27-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   Shares 

Weighted-Average

Grant-Date

Fair Value

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

 

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

 

 

 

 

 

 

 

 

-28-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   Shares 

Weighted-

Average

Exercise

Price

 

Weighted-Average

Remaining

Contractual

Term

 

Aggregate

Intrinsic

Value

($000)*

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

 

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

 

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

 

  

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing plan for officers who have achieved the level of Senior Vice President II and above and completed one year of service. However, all Senior Vice Presidents level III and Vice Presidents who were participants on January 31, 2015 remain eligible to participate in the phantom stock plan. Awards are made under this plan on certain compensation not eligible for awards made under the profit sharing plan, due to the terms of the profit sharing plan and the Internal Revenue Code. Employees receive awards under this plan proportionate to the amount they would have received under the profit sharing plan, but for limits imposed by the profit sharing plan and the Internal Revenue Code. The awards are made as cash awards, and then converted to common stock equivalents (phantom shares) at the then current fair value of the Company’s common stock. Dividends are credited to each employee’s account in the form of additional phantom shares each time the Company pays a dividend on its common stock. In the event of a change of control (as defined in this plan), an employee’s interest is converted to a fixed dollar amount and deemed to be invested in the same manner as his interest in the Bank’s non-qualified deferred compensation plan. Employees vest under this plan 20% per year for the first 5 years of employment and are 100% vested thereafter. Employees also become 100% vested upon a change of control. Employees receive their vested interest in this plan in the form of a cash lump sum payment or installments, as elected by the employee, after termination of employment. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

 

-29-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

  

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

 

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

 

10.Pension and Other Postretirement Benefit Plans

 

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

 

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

 

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

 

-30-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

11.Fair Value of Financial Instruments

 

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At June 30, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $32.2 million and $29.5 million, respectively. At December 31, 2014, the Company carried financial assets and financial liabilities under the fair value option with fair values of $32.6 million and $28.8 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the six months ended June 30, 2015. The Company elected to measure at fair value securities with a cost of $5.0 million that were purchased during the six months ended June 30, 2014. During the six months ended June 30, 2014, the Company sold financial assets carried under the fair value option totaling $1.9 million.

 

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

 

  

Fair Value

Measurements

 

Fair Value

Measurements

 

Changes in Fair Values For Items Measured at Fair Value

Pursuant to Election of the Fair Value Option

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

 

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

 

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

 

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

 

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

 

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

 

-31-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At June 30, 2015 and December 31, 2014, Level 2 included mortgage related securities, corporate debt, certain municipal securities, mutual funds and interest rate swaps.

 

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At June 30, 2015 and December 31, 2014, Level 3 included certain municipal securities and trust preferred securities owned by and junior subordinated debentures issued by the Company.

 

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

 

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

 

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

 

 

-32-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

-33-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

 

 

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

 

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

 

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

 

-34-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

-35-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

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

 

 

-36-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

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

 

The estimated fair value of each material class of financial instruments at June 30, 2015 and December 31, 2014 and the related methods and assumptions used to estimate fair value are as follows:

 

Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:

 

The fair values of financial instruments that are short-term or reprice frequently and have little or no risk are considered to have a fair value that approximates carrying value (Level 1).

 

FHLB-NY stock:

 

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

 

-37-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Securities:

 

The estimated fair values of securities are contained in Note 4 of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices (Level 1 input), where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued (Level 2 input). When there is limited activity or less transparency around inputs to the valuation, securities are valued using (Level 3 input).

 

Loans held for sale:

 

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

 

Loans:

 

The fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities (Level 3 input).

 

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the appraised or internally estimated value of the property (Level 3 input).

 

Due to Depositors:

 

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

 

Borrowings:

 

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

 

Interest Rate Swaps:

 

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

 

Other Real Estate Owned:

 

OREO are carried at fair value less selling costs. The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property (Level 3 input).

 

Other Financial Instruments:

 

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

 

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

 

 

-38-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

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

 

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

 

 

-39-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

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

 

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

 

 

12.Derivative Financial Instruments

 

At June 30, 2015 and December 31, 2014, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million. Additionally, the Company at times may use interest rate swaps to mitigate the Company’s exposure to rising interest rates on its fixed rate loans.

 

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

 

-40-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

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

 

   Notional
Amount
 

Net Carrying

Value (1)

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

 

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

 

 

Notional

Amount

 

Net Carrying

Value (1)

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

 

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

 

 

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

 

 

For the three months ended

June 30,

 

For the six months ended

June 30,

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

 

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

 

 

-41-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

13.Income Taxes

 

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

 

Income tax provisions are summarized as follows:


 

For the three months

ended June 30,

 

For the six months

ended June 30,

(In thousands)  2015  2014  2015  2014
Federal:                    
Current  $11,153   $5,675   $14,067   $8,412 
Deferred   (3,998)   (162)   (2,660)   1,859 
Total federal tax provision   7,155    5,513    11,407    10,271 
State and Local:                    
Current   4,148    2,102    4,855    3,368 
Deferred   (1,782)   (17)   (1,195)   886 
Total state and local tax provision   2,366    2,085    3,660    4,254 
Total income tax provision  $9,521   $7,598   $15,067   $14,525 

 

 

The effective tax rate was 39.1% and 39.4% for the three months ended June 30, 2015 and 2014, respectively, and 39.0% and 39.8% for the six months ended June 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 six months ended June 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 June 30,
  For the six months
ended June 30,
(dollars in thousands)  2015  2014  2015  2014
Taxes at federal statutory rate  $8,524    35.0%  $6,749    35.0%  $13,522    35.0%  $12,777    35.0%
Increase (reduction) in taxes resulting from:                                        
State and local income tax, net of Federal income tax benefit   1,538    6.3    1,355    7.0    2,379    6.2    2,765    7.6 
Other   (541)   (2.2)   (506)   (2.6)   (834)   (2.2)   (1,017)   (2.8)
Taxes at effective rate  $9,521    39.1%  $7,598    39.4%  $15,067    39.0%  $14,525    39.8%

 

 

-42-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The Company has recorded a deferred tax asset of $30.7 million at June 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 $18.9 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 June 30, 2015.

 

 

14.Accumulated Other Comprehensive Income:

 

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

 

   Unrealized Gains
and (Losses) on
Available for Sale
Securities
  Defined Benefit
Pension Items
  Total
   (In thousands)
Beginning balance, net of tax  $3,392   $(6,299)  $(2,907)
Other comprehensive income before reclassifications, net of tax   (1,145)   -    (1,145)
                
Amounts reclassified from accumulated other comprehensive income, net of tax   (36)   332    296 
                
Net current period other comprehensive income, net of tax   (1,181)   332    (849)
                
Ending balance, net of tax  $2,211   $(5,967)  $(3,756)

 

 

The following table sets forth the changes in accumulated other comprehensive income by component for the six months ended June 30, 2014:

 

   Unrealized Gains
and (Losses) on
Available for Sale
Securities
  Defined Benefit
Pension Items
  Total
   (In thousands)
Beginning balance, net of tax  $(8,522)  $(2,853)  $(11,375)
Other comprehensive income before reclassifications, net of tax   11,873    -    11,873 
                
Amounts reclassified from accumulated other comprehensive income, net of tax   -    151    151 
                
Net current period other comprehensive income, net of tax   11,873    151    12,024 
                
Ending balance, net of tax  $3,351   $(2,702)  $649 

 

 

-43-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table sets forth significant amounts reclassified from accumulated other comprehensive income by component for the three months ended June 30, 2015:

 

 
Details about Accumulated Other
Comprehensive Income Components
 
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Income
 
 
 
 
Affected Line Item in the Statement
Where Net Income is Presented
(Dollars in thousands)
         
Unrealized gains on available for sale securities:  $64     Net gain on sale of securities
    (28)    Tax expense
   $36     Net of tax
           
Amortization of defined benefit pension items:          
Actuarial losses  $(306) (1)  Other expense
Prior service credits   12 (1)  Other expense
    (294)    Total before tax
    130     Tax benefit
   $(164)    Net of tax

 

(1)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 10 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”.)

 

 

The following table sets forth significant amounts reclassified out of accumulated other comprehensive income by component for the three months ended June 30, 2014:

 

 
Details about Accumulated Other
Comprehensive Income Components
 
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Income
 
 
 
 
Affected Line Item in the Statement
Where Net Income is Presented
(Dollars in thousands)
         
Amortization of defined benefit pension items:          
Actuarial losses  $(175) (1)  Other expense
Prior service credits   12 (1)  Other expense
    (163)    Total before tax
    72     Tax benefit
   $(91)    Net of tax

 

(1)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 10 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”.)

 

-44-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The following table sets forth significant amounts reclassified out of accumulated other comprehensive income by component for the six months ended June 30, 2015:

 

 
Details about Accumulated Other
Comprehensive Income Components
 
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Income
 
 
 
 
Affected Line Item in the Statement
Where Net Income is Presented
(Dollars in thousands)
         
Unrealized gains on available for sale securities:  $64     Net gain on sale of securities
    (28)    Tax expense
   $36     Net of tax
           
Amortization of defined benefit pension items:          
Actuarial losses  $(613) (1)  Other expense
Prior service credits   23 (1)  Other expense
    (590)    Total before tax
    258     Tax benefit
   $(332)    Net of tax

 

(1)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 10 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”.)

 

The following table sets forth significant amounts reclassified out of accumulated other comprehensive income by component for the six months ended June 30, 2014:

 

 
Details about Accumulated Other
Comprehensive Income Components
 
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Income
 
 
 
 
Affected Line Item in the Statement
Where Net Income is Presented
(Dollars in thousands)
         
Amortization of defined benefit pension items:          
Actuarial losses  $(350) (1)  Other expense
Prior service credits   23 (1)  Other expense
    (327)    Total before tax
    176     Tax benefit
   $(151)    Net of tax

 

(1)These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 10 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”.)

 

-45-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

15.Regulatory Capital

 

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of June 30, 2015, the Bank continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements.

 

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

 

  June 30, 2015  December 31, 2014
 
 
Amount   Percent of
Assets
 
 
 
Amount
 
 
Percent of
Assets
  (Dollars in thousands)
Tier I (leverage) capital:                    
Capital level  $483,407    9.13%  $472,251    9.63%
Requirement to be well capitalized   264,746    5.00    245,254    5.00 
Excess   218,661    4.13    226,997    4.63 
Common Equity Tier I risk-based capital:                    
Capital level  $483,407    13.07%    n/a      n/a  
Requirement to be well capitalized   240,326    6.50     n/a      n/a  
Excess   243,081    6.57     n/a      n/a  
Tier 1 risk-based capital:                    
Capital level  $483,407    13.07%  $472,251    13.87%
Requirement to be well capitalized   295,786    8.00    204,345    6.00 
Excess   187,621    5.07    267,906    7.87 
Total risk-based capital:                    
Capital level  $506,491    13.70%  $497,347    14.60%
Requirement to be well capitalized   369,732    10.00    340,589    10.00 
Excess   136,759    3.70    156,758    4.60 

 

 

 

-46-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The Holding Company is subject to the same regulatory capital requirements as the Bank. As of June 30, 2015, the Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements.

 

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

 

 

June 30, 2015

  December 31, 2014
  Amount 

Percent of

Assets

  Amount 

Percent of

Assets

  (Dollars in thousands)
Tier I (leverage) capital:                    
Capital level  $478,658    9.06%  $471,233    9.62%
Requirement to be well capitalized   264,295    5.00    244,960    5.00 
Excess   214,363    4.06    226,273    4.62 
Common Equity Tier I risk-based capital:                    
Capital level  $450,169    12.20%    n/a      n/a  
Requirement to be well capitalized   239,927    6.50     n/a      n/a  
Excess   210,242    5.70     n/a      n/a  
Tier 1 risk-based capital:                    
Capital level  $478,658    12.97%  $471,233    13.87%
Requirement to be well capitalized   295,295    8.00    203,878    6.00 
Excess   183,363    4.97    267,355    7.87 
Total risk-based capital:                    
Capital level  $501,742    13.59%  $496,329    14.61%
Requirement to be well capitalized   369,119    10.00    339,797    10.00 
Excess   132,623    3.59    156,532    4.61 

 

 

16.New Authoritative Accounting Pronouncements

 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04 to clarify that when an in substance repossession or  foreclosure occurs, a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  ASU 2014- 04 is effective for annual reporting periods beginning after December 15, 2014.  Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

 

In May 2014, the FASB issued ASU 2014-09 which provides new guidance that supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of adopting this new guidance on our consolidated results of operations and financial condition.

 

-47-
 

PART I – FINANCIAL INFORMATION

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

In June 2014, the FASB issued ASU 2014-11 which amends the authoritative accounting guidance under ASC Topic 860 “Transfers and Servicing.” The amendments require two accounting changes. First, the amendments change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require additional disclosures regarding repurchase agreements. The amendments are effective for the first interim or annual period beginning after December 15, 2014. Entities are required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is prohibited. The amendments regarding disclosures for certain transactions accounted for as a sale are required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings are required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. Adoption of this update did not have a material effect on the Company’s consolidated results of operation or financial condition. (See Note 8 of Notes to Consolidated Financial Statements “Repurchase Agreements”.)

 

In August 2014, the FASB issued ASU 2014-14 which amends the authoritative accounting guidance under ASC Topic 310 “Receivables.” The amendments require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the follow conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make claim on the guarantee, and the creditor has the ability to recover under that claim and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Entities should adopt the amendments in this Update using either a prospective transition method or a modified retrospective transition method. Adoption of this update did not have a material effect on the Company’s consolidated results of operations or financial condition.

 

 

-48-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

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

 

This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2014. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

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

 

Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed elsewhere in this Quarterly Report and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2014. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

 

Executive Summary

 

We are a Delaware corporation organized in May 1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. In 1994, the Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank on November 21, 1995, at which time Flushing Financial Corporation acquired all of the stock of the Bank. On February 28, 2013, the Bank’s charter was changed to a full-service New York State chartered commercial bank, and its name was changed to Flushing Bank. As a result of the Bank’s change in charter to a full-service New York State chartered commercial bank, the Bank’s primary regulator became the New York State Department of Financial Services (formerly, the New York State Banking Department), and its primary federal regulator became the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank also operates an internet branch, iGObanking.com®. The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of junior subordinated debt, and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

 

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

 

-49-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

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

 

·continue our emphasis on the origination of multi-family residential mortgage loans, commercial business loans and commercial real estate mortgage loans;

·continue to transition the balance sheet to a more ‘commercial-like’ banking institution;

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

·maintain asset quality;

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

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

·cross sell to lending and deposit customers;

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

·manage interest rate risk and capital: and

·manage enterprise-wide risk.

 

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

 

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

 

We carry a portion of our financial assets and financial liabilities at fair value and record changes in their fair value through earnings in non-interest income on our Consolidated Statements of Income and Comprehensive Income. A description of the financial assets and financial liabilities that are carried at fair value through earnings can be found in Note 11 of the Notes to the Consolidated Financial Statements.

 

The second quarter of 2015 continued the trend of improving credit quality, as we continued to see improvements in non-performing assets. Non-performing assets were $32.8 million at June 30, 2015, which was a decrease of $5.0 million, or 13.1%, from March 31, 2015. The decrease in non-performing assets and our ability to minimize charge-offs has allowed us to record a benefit of $0.5 million in our reserve for loan losses during the three months ended June 30, 2015, which is the sixth consecutive quarter of recording a benefit. Non-accrual loans decreased $2.2 million, or 7.3%, during the second quarter to $27.5 million, and are at their lowest level since the fourth quarter of 2008. During the second quarter of 2015 we sold seven delinquent loans with a book value of $3.3 million, receiving $3.5 million upon sale. Net charge-offs for the three months ended June 30, 2015 were $0.5 million. We continued our practice of obtaining updated appraisals and recording charge-offs based on these current values as opposed to adding to the allowance for loan losses. This process has ensured that we have kept pace with changing values in the real estate market. The average loan-to-value ratio for our non-performing loans collateralized by real estate was 47.0% at June 30, 2015.

 

Net loans increased $34.1 million, or 0.9%, during the second quarter of 2015. Loan originations and purchases for the three months ended June 30, 2015 totaled $196.9 million. The quarter included the purchase of loan participations of $14.8 million in commercial business loans, at a yield of 2.89%. We continued our focus on the origination and purchase of multi-family real estate, commercial real estate and commercial business loans as originations and purchases of these loan types accounted for 87.1% of the quarter’s originations. We also saw an improvement in the yield on loan originations as the average rate of originations was 3.79% in the second quarter of 2015, compared to 3.55% in the first quarter of 2015. Loan applications in process have continued to remain strong, totaling $469.2 million at June 30, 2015 compared to $317.3 million at March 31, 2015.

 

-50-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

During the current quarter we completed the previously announced move of our headquarters to RXR Plaza. The new office space allows us to bring a majority of our non-branch staff into one location providing efficiencies and synergies which were not available when the staff was spread throughout many different locations. As part of the move we also opened a new full-service branch at the same location. Additionally, during the current quarter we sold three of our branch buildings in a sale leaseback transaction, realizing a gain on sale of $12.7 million, of which $6.5 million was recognized in earnings during the three months ended June 30, 2015 and $6.2 million will be deferred and recognized over the term of the branch leases.

 

Our net interest margin for the second quarter of 2015 was 3.03%, a decrease of six basis points from the first quarter of 2015. However, net interest income increased $0.6 million to $38.1 million, compared to the first quarter of 2015, due to the growth in interest earning assets. Excluding prepayment penalty income and additional interest collected from non-accrual loans, the net interest margin decreased four basis points to 2.90% for the three months ended June 30, 2015 from 2.94% for the three months ended March 31, 2015.

 

At June 30, 2015, the Bank continues to be well-capitalized under regulatory requirements, with Tier 1, Common Equity Tier 1 Risk-based, Tier 1 Risk-based and Total Risk-based capital ratios of 9.13%, 13.07%, 13.07% and 13.70%, respectively. The Company is also subject to the same regulatory requirements. At June 30, 2015, the Company’s capital ratios for Tier 1, Common Equity Tier 1 Risk-based, Tier 1 Risk-based and Total Risk-based capital ratios were 9.06%, 12.20%, 12.97% and 13.59%, respectively.

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED

JUNE 30, 2015 AND 2014

 

General. Net income for the three months ended June 30, 2015 was $14.8 million, an increase of $3.1 million, or 26.9%, compared to $11.7 million for the three months ended June 30, 2014. Diluted earnings per common share were $0.51 for the three months ended June 30, 2015, an increase of $0.12, or 30.8%, from $0.39 for the three months ended June 30, 2014.

 

Return on average equity increased to 12.7% for the three months ended June 30, 2015 from 10.3% for the three months ended June 30, 2014. Return on average assets increased to 1.1% for the three months ended June 30, 2015 from 1.0% for the three months ended June 30, 2014.

 

Interest Income. Total interest and dividend income increased $0.7 million, or 1.3%, to $50.2 million for the three months ended June 30, 2015 from $49.6 million for the three months ended June 30, 2014. The increase in interest income was primarily attributable to an increase of $454.9 million in the average balance of interest-earning assets to $5,033.7 million for the three months ended June 30, 2015 from $4,578.8 million for the comparable prior year period, partially offset by a decrease of 34 basis points in the yield of interest-earning assets to 3.99% for the three months ended June 30, 2015 from 4.33% in the comparable prior year period. The 34 basis point decline in the yield of interest-earning assets was primarily due to a 45 basis point reduction in the yield of the loan portfolio to 4.43% for the three months ended June 30, 2015 from 4.88% for the three months ended June 30, 2014, combined with a 22 basis point decline in the yield on total securities to 2.46% for the three months ended June 30, 2015 from 2.68% for the comparable prior year period. The yield of interest-earning assets was positively impacted by an increase of $496.0 million in the average balance of total loans, net to $3,981.9 million for the three months ended June 30, 2015 from $3,485.9 million for the comparable prior year period and a decrease of $60.7 million in the average balance of the lower yielding total securities portfolio to $992.0 million for the three months ended June 30, 2015 from $1,052.7 million for the comparable prior year period. The 45 basis point decrease in the yield of the loan portfolio was primarily due to the decline in the rates earned on new loan originations, existing loans modifying to lower rates, and higher yielding loans prepaying. Excluding prepayment penalty income, the yield on the total loans, net, decreased 44 basis points to 4.28% for the three months ended June 30, 2015 from 4.72% for the three months ended June 30, 2014. The 22 basis point decrease in the yield of the securities portfolio was primarily due to the purchase of new securities at lower yields than the existing portfolio.

 

 

-51-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Interest Expense. Interest expense decreased $0.7 million, or 5.2%, to $12.1 million for the three months ended June 30, 2015 from $12.7 million for the three months ended June 30, 2014. The decrease in interest expense was primarily due to a 17 basis point decrease in interest-bearing liabilities to 1.06% for the three months ended June 30, 2015 from 1.23% for the comparable prior year period. The 17 basis point decrease in the cost of interest-bearing liabilities was primarily attributable to decreases of 48 basis points and 28 basis points in the cost of certificates of deposit and borrowed funds, respectively. The decrease in the cost of certificates of deposit and borrowed funds was primarily due to maturing issuances being replaced at lower rates. These decreases were partially offset by increases of 14 basis points and 25 basis points in the cost of money market accounts and savings accounts, respectively, for the three months ended June 30, 2015 from the comparable prior year period. The cost of money market accounts increased primarily due to our shifting Government NOW deposits to a money market product which does not require us to provide collateral, which will allow us to invest these funds in higher yielding assets. The cost of savings accounts increased as we increased the rate we pay on some of our savings products to attract additional deposits. Additionally, the cost of interest-bearing liabilities was negatively affected by increases of $187.4 million and $66.9 million in the average balance of higher costing certificates of deposit and borrowed funds, respectively, during the three months ended June 30, 2015, which was partially offset by an increase of $141.8 million in the average balance of lower costing core deposits during the three months ended June 30, 2015 to $2,075.5 million from $1,933.7 million for the comparable prior year period.

 

Net Interest Income. For the three months ended June 30, 2015, net interest income was $38.1 million, an increase of $1.3 million, or 3.6%, from $36.8 million for the three months ended June 30, 2014. The increase in net interest income was primarily attributable to an increase of $454.9 million in the average balance of interest-earning assets to $5,033.7 million for the three months ended June 30, 2015 from $4,578.8 million for the comparable prior year period, partially offset by a 17 basis point decrease in the net interest spread to 2.93% for the three months ended June 30, 2015 from 3.10% for the comparable prior year period. The yield on interest-earning assets decreased 34 basis points to 3.99% for the three months ended June 30, 2015 from 4.33% for the three months ended June 30, 2014, while the cost of interest-bearing liabilities decreased 17 basis points to 1.06% for the three months ended June 30, 2015 from 1.23% for the comparable prior year period. The net interest margin declined 19 basis points to 3.03% for the three months ended June 30, 2015 from 3.22% for the three months ended June 30, 2014. The three months ended June 30, 2015 included $0.1 million in additional interest collected from non-accrual loans compared to $0.4 million recorded during the three months ended June 30, 2014. Excluding this additional interest collected from non-accrual loans, the net interest margin decreased 16 basis points to 3.02% for the three months ended June 30, 2015 from 3.18% for the three months ended June 30, 2014. Further excluding prepayment penalty income of $1.5 million and $1.3 million recorded during the three months ended June 30, 2015 and 2014, respectively, the net interest margin decreased 17 basis points to 2.90% for the three months ended June 30, 2015, compared to 3.07% for the three months ended June 30, 2014.

 

Benefit for Loan Losses. The benefit for loan losses for the three months ended June 30, 2015 was $0.5 million, a decrease of $0.6 million, or 52.7% from a benefit of $1.1 million during the comparable prior year period. The benefit recorded during the three months ended June 30, 2015 was primarily due to the continued improvement in credit conditions and an improvement in the impact of the qualitative factors used in the calculation of the allowance for loan losses. During the three months ended June 30, 2015, non-accrual loans decreased $2.2 million to $27.5 million from $29.6 million at March 31, 2015 and net charge-offs continued to be minimal at $0.5 million, or five basis points of average loans, for the three months ended June 30, 2015. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 47.0% at June 30, 2015. When we have obtained properties through foreclosure, we have been able to quickly sell the properties at amounts that approximate book value. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see low loss content in our loan portfolio. As a result of the quarterly analysis of the allowance for loans losses, a reduction in the allowance was warranted, and as such, the Company recorded a benefit of $0.5 million for the three months ended June 30, 2015. See “-ALLOWANCE FOR LOAN LOSSES.”

 

Non-Interest Income. Non-interest income for the three months ended June 30, 2015 was $9.9 million, an increase of $8.0 million, or 400.9% from $2.0 million for the three months ended June 30, 2014. The increase in non-interest income was primarily due to increases of $6.5 million in net gains on sale of buildings and $1.2 million in net gains from fair value adjustments, as the current period included net gains from fair value adjustments of $0.8 million compared to net losses from fair value adjustments of $0.4 million recorded in the comparable prior year period.

 

Non-Interest Expense. Non-interest expense was $24.2 million for the three months ended June 30, 2015, an increase of $3.6 million, or 17.6%, from $20.6 million for the three months ended June 30, 2014. The increase in non-interest expense was primarily due to an increase of $1.6 million in other operating expense and an increase of $1.2 million in salaries and benefits, primarily due to increases in staffing in the lending, technology, risk/compliance and retail departments, as well as an increase in restricted stock expense. The increase in other operating expense was primarily due to the three months ended June 30, 2015 including a write-down of $0.8 million on one OREO to reduce the carrying value of the property to its anticipated net selling price, $0.4 million in expenses related to the move of our corporate headquarters and $0.3 million in expenses related to the growth of the Bank. The current period also included an increase of $0.7 million in occupancy and equipment primarily due to increases in rent expense of $0.4 million for our new corporate headquarters and new branch at the same location and $0.3 million from additional space in Manhattan for Business Bankers and a new branch location, which we expect to open in the third quarter of 2015. The efficiency ratio increased to 57.5% for the three months ended June 30, 2015 from 52.9% for the three months ended June 30, 2014, primarily due to the increased expenses discussed above.

 

-52-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Income before Income Taxes. Income before the provision for income taxes increased $5.1 million, or 26.3%, to $24.4 million for the three months ended June 30, 2015 from $19.3 million for the three months ended June 30, 2014 for the reasons discussed above.

 

Provision for Income Taxes. Income tax expense increased $1.9 million, or 25.3%, to $9.5 million for the three months ended June 30, 2015 from $7.6 million for the three months ended June 30, 2014, primarily due to the increase in income before income taxes as discussed above. The effective tax rate was 39.1% and 39.4% for the three months ended June 30, 2015 and 2014, respectively.

 

 

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

General. Net income for the six months ended June 30, 2015 was $23.6 million, an increase of $1.6 million, or 7.2%, compared to $22.0 million for the six months ended June 30, 2014. Diluted earnings per common share were $0.80 for the six months ended June 30, 2015, an increase of $0.07, or 9.6%, from $0.73 for the six months ended June 30, 2014.

 

Return on average equity increased to 10.2% for the six months ended June 30, 2015, from 9.9% for the six months ended June 30, 2014. Return on average assets was 0.9% for the six months ended June 30, 2015 and 2014.

 

Interest Income. Total interest and dividend income increased $1.0 million, or 1.0%, to $99.8 million for the six months ended June 30, 2015 from $98.8 million for the six months ended June 30, 2014. The increase in interest income was primarily attributable to an increase of $415.6 million in the average balance of interest-earning assets to $4,948.1 million for the six months ended June 30, 2015 from $4,532.6 million for the comparable prior year period, partially offset by a decrease of 33 basis points in the yield of interest-earning assets to 4.03% for the six months ended June 30, 2015 from 4.36% in the comparable prior year period. The 33 basis point decline in the yield of interest-earning assets was primarily due to a 44 basis point reduction in the yield of the loan portfolio to 4.48% for the six months ended June 30, 2015 from 4.92% for the six months ended June 30, 2014, combined with a 24 basis point decline in the yield on total securities to 2.46% for the six months ended June 30, 2015 from 2.70% for the comparable prior year period. The yield of interest-earning assets was positively impacted by an increase of $476.3 million in the average balance of total loans, net to $3,915.2 million for the three months ended June 30, 2015 from $3,438.9 million for the comparable prior year period and a decrease of $65.1 million in the average balance of the lower yielding total securities portfolio to $981.3 million for the three months ended June 30, 2015 from $1,046.4 million for the comparable prior year period. The 44 basis point decrease in the yield of the loan portfolio was primarily due to the decline in the rates earned on new loan originations, existing loans modifying to lower rates, and higher yielding loans prepaying. Excluding prepayment penalty income, the yield on total loans, net, decreased 43 basis points to 4.34% for the six months ended June 30, 2015 from 4.77% for the six months ended June 30, 2014. The 24 basis point decrease in the yield of the securities portfolio was primarily due to the purchase of new securities at lower yields than the existing portfolio.

 

Interest Expense. Interest expense decreased $1.4 million, or 5.5%, to $24.1 million for the six months ended June 30, 2015 from $25.5 million for the six months ended June 30, 2014. The decrease in interest expense was primarily due to a 16 basis point decrease in interest-bearing liabilities to 1.08% for the six months ended June 30, 2015 from 1.24% for the comparable prior year period. The 16 basis point decrease in the cost of interest-bearing liabilities was primarily attributable to decreases of 45 basis points and 27 basis points in the cost of certificates of deposit and borrowed funds, respectively. The decrease in the cost of certificates of deposit and borrowed funds was primarily due to maturing issuances being replaced at lower rates. These decreases were partially offset by increases of 12 basis points and 23 basis points in the cost of money market accounts and savings accounts, respectively, for the six months ended June 30, 2015 from the comparable prior year period. The cost of money market accounts increased primarily due to our shifting Government NOW deposits to a money market product which does not require us to provide collateral, which will allow us to invest these funds in higher yielding assets. The cost of savings accounts increased as we increased the rate we pay on some of our savings products to attract additional deposits. Additionally, the cost of interest-bearing liabilities was negatively affected by increases of $187.7 million and $52.5 million in the average balance of higher costing certificates of deposit and borrowed funds, respectively, during the six months ended June 30, 2015, which was partially offset by an increase of $115.6 million in the average balance of lower costing core deposits during the six months ended June 30, 2015 to $2,049.0 million from $1,933.4 million for the comparable prior year period.

 

-53-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Net Interest Income. For the six months ended June 30, 2015, net interest income was $75.7 million, an increase of $2.4 million, or 3.2%, from $73.3 million for the six months ended June 30, 2014. The increase in net interest income was primarily attributable to an increase of $415.6 million in the average balance of interest-earning assets to $4,948.1 million for the six months ended June 30, 2015 from $4,532.6 million for the comparable prior year period, partially offset by a 17 basis point decrease in the net interest spread to 2.95% for the six months ended June 30, 2015 from 3.12% for the comparable prior year period. The yield on interest-earning assets decreased 33 basis points to 4.03% for the six months ended June 30, 2015 from 4.36% for the six months ended June 30, 2014, while the cost of interest-bearing liabilities decreased 16 basis points to 1.08% for the six months ended June 30, 2015 from 1.24% for the comparable prior year period. The net interest margin declined 18 basis points to 3.06% for the six months ended June 30, 2015 from 3.24% for the six months ended June 30, 2014. Each of the six months ended June 30, 2015 and June 30, 2014 included $0.7 million in additional interest collected from non-accrual loans. Excluding this additional interest collected from non-accrual loans, the net interest margin decreased 17 basis points to 3.03% for the six months ended June 30, 2015 from 3.20% for the six months ended June 30, 2014. Further excluding prepayment penalty income of $2.7 million and $2.6 million recorded during the six months ended June 30, 2015 and 2014, respectively, the net interest margin decreased 17 basis points to 2.92% for the six months ended June 30, 2015, compared to 3.09% for the six months ended June 30, 2014.

 

Benefit for Loan Losses. The benefit for loan losses for the six months ended June 30, 2015 was $1.3 million, a decrease of $1.0 million, or 43.5%, from a benefit of $2.2 million during the comparable prior year period. The benefit recorded during the six months ended June 30, 2015 was primarily due to the continued improvement in credit conditions and an improvement in the impact of the qualitative factors used in the calculation of the allowance for loan losses. During the six months ended June 30, 2015, non-accrual loans decreased $4.4 million to $27.5 million from $31.9 million at December 31, 2014 and net charge-offs continued to be minimal at $0.8 million, or four basis points of average loans, for the six months ended June 30, 2015. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 47.0% at June 30, 2015. When we have obtained properties through foreclosure, we have been able to quickly sell the properties at amounts that approximate book value. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see low loss content in our loan portfolio. As a result of the quarterly analysis of the allowance for loans losses, a reduction in the allowance was warranted, and as such, the Company recorded a benefit of $1.3 million for the six months ended June 30, 2015. See “-ALLOWANCE FOR LOAN LOSSES.”

 

Non-Interest Income. Non-interest income for the six months ended June 30, 2015 was $11.9 million, an increase of $8.2 million, or 221.3% from $3.7 million for the six months ended June 30, 2014. The increase in non-interest income was primarily due to increases of $6.5 million in net gains on sale of buildings, as we sold and leased back our Brooklyn branch buildings, and $1.2 million in net gains from fair value adjustments, as the current period included net gains from fair value adjustments of $0.2 million compared to net losses from fair value adjustments of $1.0 million recorded in the comparable prior year period.

 

Non-Interest Expense. Non-interest expense was $50.2 million for the six months ended June 30, 2015, an increase of $7.5 million, or 17.5%, from $42.7 million for the six months ended June 30, 2014. The increase in non-interest expense was primarily due to an increase of $1.9 million in other operating expense and an increase of $3.3 million in salaries and benefits, primarily due to increases in staffing in the lending, technology, risk/compliance and retail departments, as well as an increase in restricted stock expense. The increase in other operating expense was primarily due to the current period including a net loss of $0.6 million from the sale of OREO, $0.3 million in ATM fraud losses recorded in the first quarter of 2015, $0.4 million in expenses related to the move of our corporate headquarters and $0.5 million in expenses related to the growth of the Bank. The current period also included an increase of $1.4 million in occupancy and equipment primarily due to $0.2 million recorded in the first quarter of 2015 for temporary staff for additional security to guard against further ATM fraud losses and increases in rent expense of $0.9 million for our new corporate headquarters and new branch at the same location and $0.3 million from additional space in Manhattan for Business Bankers and a new branch location, which we expect to open in the third quarter of 2015. During the current period the Bank also experienced increases of $0.4 million, $0.2 million, $0.1 million and $0.1 million in professional services, FDIC insurance expense, data processing expense and depreciation and amortization, respectively, due to the growth of the Bank. The efficiency ratio increased to 61.2% for the six months ended June 30, 2015 from 54.7% for the six months ended June 30, 2014, primarily due to the increased expenses discussed above.

 

-54-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

Income before Income Taxes. Income before the provision for income taxes increased $2.1 million, or 5.8%, to $38.6 million for the six months ended June 30, 2015 from $36.5 million for the six months ended June 30, 2014 for the reasons discussed above.

 

Provision for Income Taxes. The provision for income taxes for the six months ended June 30, 2015 was $15.1 million, an increase of $0.5 million, or 3.7%, from $14.5 million for the comparable prior year period. The increase was primarily due to an increase of $2.1 million in income before income taxes, partially offset by a decrease in the effective tax rate to 39.0% for the six months ended June 30, 2015 from 39.8% for the six months ended June 30, 2014. 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 June 30, 2014, which resulted in a reduction in the Company’s deferred tax assets and a corresponding increase in tax expense during the six months ended June 30, 2014.

 

FINANCIAL CONDITION

 

Assets. Total assets at June 30, 2015 were $5,360.0 million, an increase of $283.0 million, or 5.6%, from $5,077.0 million at December 31, 2014. Total loans, net increased $222.8 million, or 5.9%, during the six months ended June 30, 2015 to $4,008.1 million from $3,785.3 million at December 31, 2014. Loan originations and purchases were $503.4 million for the six months ended June 30, 2015, an increase of $114.2 million from $389.2 million for the six months ended June 30, 2014. During the six months ended June 30, 2015, we continued to focus on the origination and purchase of multi-family residential, commercial real estate and commercial business loans with a full relationship. Loan applications in process have remained strong, totaling $469.2 million at June 30, 2015 compared to $295.9 million at December 31, 2014.

 

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

 

   For the three months  For the six months
   ended June 30,  ended June 30,
(In thousands)  2015  2014  2015  2014
Multi-family residential (1)  $50,429   $107,197   $177,175   $165,009 
Commercial real estate (2)   57,331    18,205    143,726    31,621 
One-to-four family – mixed-use property   9,916    8,429    24,897    18,428 
One-to-four family – residential   8,975    6,404    22,078    15,504 
Co-operative apartments   450    -    450    - 
Construction   845    300    1,387    997 
Small Business Administration   5,233    225    6,481    578 
Taxi Medallion(3)   -    1,889    -    13,538 
Commercial business and other (4)   63,704    48,542    127,211    143,498 
Total  $196,883   $191,191   $503,405   $389,173 

 

(1)Includes purchases of $99.9 million for the six months ended June 30, 2015.
(2)Includes purchases of $11.0 million for the six months ended June 30, 2015.
(3)Includes purchases of $1.9 million and $13.5 million for the three and six months ended June 30, 2014, respectively.
(4)Includes purchases of $14.8 million and $2.0 million for the three months ended June 30, 2015 and 2014, respectively. Includes purchases of $15.2 million and $30.7 million for the six months ended June 30, 2015 and 2014, respectively.

-55-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

The Bank continues to maintain conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans originated during the second quarter of 2015 had an average loan-to-value ratio of 44.9% and an average debt coverage ratio of 221%.

 

The Bank’s non-performing assets totaled $32.8 million at June 30, 2015, a decrease of $7.7 million from $40.5 million at December 31, 2014. Total non-performing assets as a percentage of total assets were 0.61% at June 30, 2014 compared to 0.80% at December 31, 2014. The ratio of allowance for loan losses to total non-performing loans was 80.8% at June 30, 2015 compared to 73.4% at December 31, 2014. See – “TROUBLED DEBT RESTRUCUTURED AND NON-PERFORMING ASSETS.”

 

During the six months ended June 30, 2015, mortgage-backed securities increased $24.7 million, or 3.5%, to $729.7 million from $704.9 million at December 31, 2014. The increase in mortgage-backed securities during the six months ended June 30, 2015 was primarily due to purchases of $79.2 million in mortgage-backed securities at an average yield of 2.64%, which was partially offset by principal repayments of $52.8 million and a decrease of $0.3 million in the fair value of mortgage-backed securities.

 

During the six months ended June 30, 2015, other securities, including securities held-to-maturity, increased $46.7 million, or 17.4%, to $315.0 million from $268.4 million at December 31, 2014. The increase in other securities during the six months ended June 30, 2015 was primarily due to purchases of $83.9 million at an average yield of 2.93%, which was partially offset by sales, maturities and a decrease in the fair value of other securities totaling $25.0 million, $9.0 million, and $1.6 million, respectively. Other securities primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, collateralized loan obligations and corporate bonds.

 

Liabilities. Total liabilities were $4,897.8 million at June 30, 2015, an increase of $277.1 million, or 6.0%, from $4,620.8 million at December 31, 2014. During the six months ended June 30, 2015, due to depositors increased $181.5 million, or 5.2%, to $3,654.4 million, due to increases of $111.8 million in core deposits and $69.7 million in certificates of deposit. The increase in core deposits was due to increases of $108.9 million, $2.8 million and $1.7 million in money market, savings, and demand accounts, respectively, partially offset by a decrease of $1.6 million in NOW accounts. Borrowed funds increased $58.9 million during the six months ended June 30, 2015. The increase in borrowed funds was primarily due to the addition of $73.0 million in long-term borrowing at an average cost of 1.29% and a net increase in short-term borrowings totaling $35.0 million at an average cost of 0.34%, partially offset by the maturity of $50.0 million in long-term borrowings at an average cost of 0.64%.

 

Equity. Total stockholders’ equity increased $5.9 million, or 1.3%, to $462.1 million at June 30, 2015 from $456.2 million at December 31, 2014. Stockholders’ equity increased primarily due to net income of $23.6 million, and an increase in additional paid in capital of $1.9 million due to the issuance of 132,242 shares distributed to the profit sharing plan and defined contribution retirement plan during the six months ended June 30, 2015. These increases were partially offset by the purchase of 635,199 treasury shares totaling $12.4 million, the declaration and payment of dividends on the Company’s common stock of $0.32 per common share totaling $9.4 million and a decrease in comprehensive income of $0.8 million primarily due to a decrease in the fair value of the securities portfolio. Book value per common share was $15.98 at June 30, 2015 compared to $15.52 at December 31, 2014.

 

Cash flow. During the six months ended June 30, 2015, funds provided by the Company's operating activities amounted to $23.5 million. These funds combined with $224.9 million provided from financing activities were utilized to fund net investing activities of $246.0 million. The Company's primary business objective is the origination and purchase of multi-family residential loans, commercial business loans and commercial real estate mortgage loans and to a lesser extent one-to-four family (including mixed-use properties) and SBA loans. During the six months ended June 30, 2015, the net total of loan originations and purchases less loan repayments and sales was $201.5 million. During the six months ended June 30, 2015, the Company also purchased $141.2 million in securities available for sale. During the six months ended June 30, 2015, funds were provided by net increases of $189.2 million and $35.0 million in total deposits and short-term borrowed funds, respectively, and $73.0 million in long-term borrowings. Additionally, funds were provided by $87.3 million in proceeds from maturities, sales, calls and prepayments of securities and $20.2 million in proceeds from the sale of buildings. The Company also used funds of $50.0 million, $9.4 million and $13.5 million for the repayment of long-term borrowed funds, dividend payments and purchases of treasury stock, respectively, during the six months ended June 30, 2015.

 

-56-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

INTEREST RATE RISK

 

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

 

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the fair value of assets net of the fair value of liabilities. The fair value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the fair value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at June 30, 2015. Various estimates regarding prepayment assumptions are made at each level of rate shock. However, prepayment penalty income is excluded from this analysis. Actual results could differ significantly from these estimates. At June 30, 2015, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

 

 

The following table presents the Company’s interest rate shock as of June 30, 2015:

 

   Projected Percentage Change In   
   Net Interest  Net Portfolio  Net Portfolio
Change in Interest Rate  Income  Value  Value Ratio
-200 Basis points   -2.56%   9.62%   12.10%
-100 Basis points   0.63    7.36    12.04 
Base interest rate   0.00    0.00    11.50 
+100 Basis points   -5.19    -13.56    10.26 
+200 Basis points   -10.86    -30.26    8.58 

 

-57-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

AVERAGE BALANCES

 

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended June 30, 2015 and 2014, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

 

    For the three months ended June 30,
    2015    2014
    

Average

Balance

    Interest    

Yield/
Cost

    

Average Balance

    Interest    

Yield/

Cost

 
                               
Assets                              
Interest-earning assets:                              
Mortgage loans, net (1)  $3,476,163   $39,737    4.57%  $3,039,477   $38,330    5.04%
Other loans, net (1)   505,745    4,347    3.44    446,457    4,159    3.73 
Total loans, net   3,981,908    44,084    4.43    3,485,934    42,489    4.88 
Taxable securities:                              
Mortgage-backed securities   706,510    4,340    2.46    769,474    5,320    2.77 
Other securities   148,244    877    2.47    155,801    1,742    2.34 
Total securities   854,754    5,227    2.45    952,275    6,233    2.69 
Taxable securities: (2)                              
Other securities   137,270    879    2.56    127,399    829    2.60 
Total tax-exempt securities   137,270    879    2.56    127,399    829    2.60 
Interest-earning deposits and federal funds sold   59,762    32    0.21    40,156    18    0.18 
Total interest-earning assets   5,033,694    50,222    3.99    4,578,764    49,569    4.33 
Other assets   275,769              254,274           
Total assets  $5,309,463             $4,833,038           
                               
Liabilities and Equity                              
Interest-bearing liabilities:                              
Deposits:                              
Savings accounts  $268,791    291    0.43   $258,659    116    0.18 
NOW accounts   1,475,574    1,651    0.45    1,458,612    1,586    0.43 
Money market accounts   331,117    307    0.37    216,394    126    0.23 
Certificate of deposit accounts   1,340,456    5,165    1.54    1,153,010    5,810    2.02 
Total due to depositors   3,415,938    7,414    0.87    3,086,675    7,638    0.99 
Mortgagors' escrow accounts   62,906    23    0.15    57,213    32    0.22 
Total deposits   3,478,844    7,437    0.86    3,143,888    7,670    0.98 
Borrowed funds   1,064,055    4,645    1.75    997,174    5,070    2.03 
Total interest-bearing liabilities   4,542,899    12,082    1.06    4,141,062    12,740    1.23 
Non interest-bearing deposits   242,732              202,809           
Other liabilities   58,214              37,038           
Total liabilities   4,843,845              4,380,909           
Equity   465,618              452,129           
Total liabilities and equity  $5,309,463             $4,833,038           
                               
Net interest income / net interest rate spread       $38,140    2.93%       $36,829    3.10%
                               
Net interest-earning assets / net interest margin  $490,795         3.03%  $437,702         3.22%
                               
Ratio of interest-earning assets to interest-bearing liabilities             1.11X             1.11X

 

(1)Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.0 million and $1.1 million for the three months ended June 30, 2015 and 2014, respectively.
(2)Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.

 

-58-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the six months ended June 30, 2015 and 2014, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

 

    For the six months ended June 30,
    20152014
    Average Balance    Interest    Yield/
Cost
    

Average

Balance

    Interest    

Yield/

Cost

 
                               
Assets                              
Interest-earning assets:                              
Mortgage loans, net (1)  $3,417,708   $79,177    4.63%  $3,015,208   $76,912    5.10%
Other loans, net (1)   497,477    8,441    3.39    423,678    7,697    3.63 
Total loans, net   3,915,185    87,618    4.48    3,438,886    84,609    4.92 
Taxable securities:                              
Mortgage-backed securities   704,520    8,721    2.48    769,693    10,710    2.78 
Other securities   139,143    1,607    2.31    149,639    1,763    2.36 
Total taxable securities   843,663    10,328    2.45    919,332    12,473    2.71 
Tax-exempt securities: (2)                             
Other securities   137,627    1,766    2.57    127,024    1,653    2.60 
Total tax-exempt securities   137,627    1,766    2.57    127,024    1,653    2.60 
Interest-earning deposits and federal funds sold   51,669    53    0.21    47,316    45    0.19 
Total interest-earning assets   4,948,144    99,765    4.03    4,532,558    98,780    4.36 
Other assets   273,555              253,044           
Total assets  $5,221,699             $4,785,602           
                               
Liabilities and Equity                              
Interest-bearing liabilities:                              
Deposits:                              
Savings accounts  $267,507    555    0.41   $261,161    235    0.18 
NOW accounts   1,463,576    3,201    0.44    1,465,276    3,279    0.45 
Money market accounts   317,962    560    0.35    206,976    233    0.23 
Certificate of deposit accounts   1,319,229    10,533    1.60    1,131,494    11,596    2.05 
Total due to depositors   3,368,274    14,849    0.88    3,064,907    15,343    1.00 
Mortgagors' escrow accounts   55,415    46    0.17    50,293    45    0.18 
Total deposits   3,423,689    14,895    0.87    3,115,200    15,388    0.99 
Borrowed funds   1,043,104    9,176    1.76    990,557    10,076    2.03 
Total interest-bearing liabilities   4,466,793    24,071    1.08    4,105,757    25,464    1.24 
Non interest-bearing deposits   238,234              196,285           
Other liabilities   53,795              37,250           
Total liabilities   4,758,822              4,339,292           
Equity   462,877              446,310           
Total liabilities and equity  $5,221,699             $4,785,602           
                               
Net interest income / net interest rate spread       $75,694    2.95%       $73,316    3.12%
                               
Net interest-earning assets / net interest margin  $481,351         3.06%  $426,801         3.24%
                               
Ratio of interest-earning assets to interest-bearing liabilities             1.11X             1.10X

 

(1)Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.7 million and $2.2 million for the six months ended June 30, 2015 and 2014, respectively.
(2)Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.

 

-59-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

LOANS

 

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

 

   For the six months ended June 30,
(In thousands)  2015  2014
       
Mortgage Loans          
           
At beginning of period  $3,321,501   $3,028,452 
           
Mortgage loans originated:          
Multi-family residential   77,286    165,009 
Commercial real estate   132,758    31,621 
One-to-four family – mixed-use property   24,897    18,428 
One-to-four family – residential   22,078    15,504 
Co-operative apartments   450    - 
Construction   1,387    997 
Total mortgage loans originated   258,856    231,559 
           
Mortgage loans purchased:          
Multi-family residential   99,889    - 
Commercial real estate   10,968    - 
Total mortgage loans purchased   110,857    - 
           
Less:          
Principal and other reductions   173,872    171,029 
Loans transferred to Available for Sale   300    - 
Sales   5,028    5,943 
           
At end of period  $3,512,014   $3,083,039 
           
Non-Mortgage Loans          
           
At beginning of period  $477,153   $394,556 
           
Other loans originated:          
Small Business Administration   6,481    578 
Commercial business   110,448    111,526 
Taxi medallion   -    - 
Other   1,550    1,328 
Total other loans originated   118,479    113,432 
           
Other loans purchased:          
Taxi medallion   -    13,539 
Commercial business   15,213    30,643 
Total other loans purchased   15,213    44,182 
           
Less:          
Principal and other reductions   104,968    113,483 
Sales   -    - 
           
At end of period  $505,877   $438,687 

 

-60-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

 

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

 

Management continues to adhere to the Bank’s conservative underwriting standards. The majority of the Bank’s non-performing loans are collateralized by residential income producing properties that are occupied, thereby retaining more of their value and reducing the potential loss. The Bank takes a proactive approach to managing delinquent loans, including conducting site examinations and encouraging borrowers to meet with a Bank representative. The Bank has been developing short-term payment plans that enable certain borrowers to bring their loans current. The Bank reviews its delinquencies on a loan by loan basis and continually explores ways to help borrowers meet their obligations and return them back to current status. At times, the Bank may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the best long-term interest of the Bank. This restructure may include making concessions to the borrower that the Bank would not make in the normal course of business, such as reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, or changing the loan to interest only payments for a limited time period. At times, certain problem loans have been restructured by combining more than one of these options. The Bank believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. The Bank classifies these loans as TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded from the TDR table below, as they are placed on non-accrual status and reported as non-performing loans.

 

 

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

 

  June 30,  March 31,  December 31,
(In thousands)  2015  2015  2014
Accrual Status:               
Multi-family residential  $2,657   $2,669   $3,034 
Commercial real estate   2,356    2,364    2,373 
One-to-four family - mixed-use property   2,358    2,369    2,381 
One-to-four family - residential   349    351    354 
Small business administration   39    41    - 
Commercial business and other   2,167    2,208    2,249 
Total performing troubled debt restructured  $9,926   $10,002   $10,391 

 

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

 

Interest income on loans is recognized on the accrual basis. The accrual of income on loans is discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Additionally, uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. Loans in default 90 days or more, as to their maturity date but not their payments, continue to accrue interest as long as the borrower continues to remit monthly payments.

 

-61-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

 

The following table shows non-performing assets, including loans held for sale, at the periods indicated:

 

   June 30,  March 31,  December 31,
(In thousands)  2015  2015  2014
Loans 90 days or more past due and still accruing:               
Multi-family residential  $-   $-   $676 
Commercial real estate   416    753    820 
One-to-four family - mixed-use property   353    195    405 
One-to-four family - residential   13    13    14 
Commercial business and other   315    1,932    386 
Total   1,097    2,893    2,301 
Non-accrual loans:               
Multi-family residential   6,352    6,902    6,878 
Commercial real estate   2,694    3,021    5,689 
One-to-four family - mixed-use property   6,238    7,224    6,936 
One-to-four family - residential   11,329    11,212    11,244 
Small business administration   170    232    - 
Commercial business and other   679    1,035    1,143 
Total   27,462    29,626    31,890 
Total non-performing loans   28,559    32,519    34,191 
Other non-performing assets:               
Real estate acquired through foreclosure   4,255    5,252    6,326 
Total   4,255    5,252    6,326 
Total non-performing assets  $32,814   $37,771   $40,517 

 

Included in loans over 90 days past due and still accruing were eight loans totaling $1.1 million, nine loans totaling $2.9 million and 10 loans totaling $2.3 million at June 30, 2015, March 31, 2015 and December 31, 2014, respectively. These loans are all past their respective maturity dates and are still remitting payments. The Bank is actively working with these borrowers to extend the maturity of or repay these loans.

 

Included in non-performing loans were two loans totaling $0.5 million at June 30, 2015 and March 31, 2015 which were restructured as TDR and not performing in accordance with their restructured terms, compared to two loans totaling $2.4 million at December 31, 2014.

 

The Bank’s non-performing assets totaled $32.8 million at June 30, 2015, a decrease of $5.0 million from $37.8 million at March 31, 2015, and a decrease of $7.7 million from $40.5 million at December 31, 2014. Total non-performing assets as a percentage of total assets were 0.61% at June 30, 2015, compared to 0.72% at March 31, 2015 and 0.80% at December 31, 2014. The ratio of allowance for loan losses to total non-performing loans was 80.8% at June 30, 2015, compared to 74.1% at March 31, 2015 and 73.4% at December 31, 2014.

 

During the three months ended June 30, 2015, 14 loans totaling $2.5 million were added to non-accrual loans, seven loans totaling $0.6 million were returned to performing status, seven loans totaling $1.4 million were paid in full, five loans totaling $1.5 million were sold, and one loan totaling $0.2 million was transferred to other real estate owned.

 

-62-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

 

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

 

   June 30, 2015  December 31, 2014
   60 - 89  30 - 59  60 - 89  30 - 59
   days  days  days  days
   (In thousands)
             
Multi-family residential  $-   $7,289   $1,729   $7,721 
Commercial real estate   417    862    1,345    2,171 
One-to-four family - mixed-use property   588    8,019    1,153    10,408 
One-to-four family - residential   151    524    2,038    1,751 
Co-operative apartments   -    -    -    - 
Construction loans   -    -    -    3,000 
Small Business Administration   -    128    -    90 
Taxi medallion   -    -    -    - 
Commercial business and other   466    5    1,585    6 
Total delinquent loans  $1,622   $16,827   $7,850   $25,147 

 

 

CRITICIZED AND CLASSIFIED ASSETS

 

Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that the credit quality is maintained at the highest levels. When weaknesses are identified, immediate action is taken to correct the problem through direct contact with the borrower or issuer. We then monitor these assets, and, in accordance with our policy and current regulatory guidelines, we designate them as “Special Mention,” which is considered a “Criticized Asset,” and “Substandard,” “Doubtful,” or “Loss” which are considered “Classified Assets,” as deemed necessary. These loan designations are updated quarterly. We designate an asset as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate an asset as Doubtful when it displays the inherent weakness of a Substandard asset with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate an asset as Loss if it is deemed the debtor is incapable of repayment. We do not hold any loans designated as loss, as loans that are designated as Loss are charged to the Allowance for Loan Losses. Assets that are non-accrual are designated as Substandard or Doubtful. We designate an asset as Special Mention if the asset does not warrant designation within one of the other categories, but does contain a potential weakness that deserves closer attention. Our total Criticized and Classified assets were $60.1 million at June 30, 2015, a decrease of $16.3 million from $76.5 million at December 31, 2014.

 

-63-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

 

The following table sets forth the Bank’s assets designated as Criticized and Classified at June 30, 2015:

 

(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
Loans:                         
Multi-family residential  $3,859   $9,204   $-   $-   $13,063 
Commercial real estate   2,697    3,347    -    -    6,044 
One-to-four family - mixed-use property   4,944    10,863    -    -    15,807 
One-to-four family - residential   997    13,313    -    -    14,310 
Co-operative apartments   -    613    -    -    613 
Construction loans   -    -    -    -    - 
Small Business Administration   241    243    -    -    484 
Commercial business and other   1,690    3,879    -    -    5,569 
Total loans   14,428    41,462    -    -    55,890 
Other Real Estate Owned   -    4,255    -    -    4,255 
Total  $14,428   $45,717   $-   $-   $60,145 

 

 

The following table sets forth the Bank's Criticized and Classified assets at December 31, 2014:

 

(In thousands)  Special Mention  Substandard  Doubtful  Loss  Total
Loans:                         
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 
Other Real Estate Owned   -    6,326    -    -    6,326 
Total  $23,496   $52,986   $-   $-   $76,482 

 

On a quarterly basis all collateral dependent loans that are classified as Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties, or updated independent appraisals. The loan balances of collateral dependent loans reviewed for impairment are then compared to the loans updated fair value. We consider fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off against the allowance for loan losses. At June 30, 2015, the current average loan-to-value ratio on our collateral dependent loans reviewed for impairment was 47.0%.

 

We classify investment securities as Substandard when, based on an internal review, collection of principal is envisioned, but there may be a partial loss of interest or dividends. There were no securities classified as Substandard at June 30, 2015 and December 31, 2014.

 

-64-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

 

ALLOWANCE FOR LOAN LOSSES

 

We have established and maintain on our books an allowance for loan losses that is designed to provide a reserve against estimated losses inherent in our overall loan portfolio. The allowance is established through a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), current economic conditions, delinquency and non-accrual trends, classified loan levels, risk in the portfolio and volumes and trends in loan types, recent trends in charge-offs, changes in underwriting standards, experience, ability and depth of our lenders, collection policies and experience, internal loan review function and other external factors. The Company segregated its loans into two portfolios based on year of origination. One portfolio was reviewed for loans originated after December 31, 2009 and a second portfolio for loans originated prior to January 1, 2010. Our decision to segregate the portfolio based upon origination dates was based on changes made in our underwriting standards during 2009. By the end of 2009, all loans were being underwritten based on revised and tightened underwriting standards. Loans originated prior to 2010 have a higher delinquency rate and loss history. Each of the years in the portfolio for loans originated prior to 2010 have 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. Impaired loans secured by collateral are reviewed based on the fair value of their collateral. For non-collateralized impaired loans, management estimates any recoveries that are anticipated for each loan. In connection with the determination of the allowance, the fair value of collateral is generally evaluated by our staff appraiser. On a quarterly basis, the estimated values of impaired collateral dependent loans are internally reviewed, based on updated cash flows for income producing properties, and at times an updated independent appraisal is obtained. The loan balances of collateral dependent impaired loans are then compared to the property’s updated fair value. We consider fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off. When evaluating a loan for impairment, we do not rely on guarantees, and the amount of impairment, if any, is based on the fair value of the collateral. We do not carry loans at a value in excess of the fair value due to a guarantee from the borrower. Impaired collateral dependent loans that were written down resulted from quarterly reviews or updated appraisals that indicated the properties’ estimated value had declined from when the loan was originated. The Board of Directors reviews and approves the adequacy of the allowance for loan losses on a quarterly basis.

 

In assessing the adequacy of the allowance for loan losses, we review our loan portfolio by separate categories which have similar risk and collateral characteristics, e.g., multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential, co-operative apartment, construction, SBA, commercial business, taxi medallion and consumer loans. General provisions are established against performing loans in our portfolio in amounts deemed prudent based on our qualitative analysis of the factors, including the historical loss experience, delinquency trends and local economic conditions. During the three months ended June 30, 2015, we incurred total net charge-offs of $0.5 million, compared to net recoveries of $0.1 million for the comparable prior year period. Non-performing loans totaled $28.6 million and $45.8 million at June 30, 2015 and 2014, respectively. The Bank’s underwriting standards generally require a loan-to-value ratio of no more than 75% at the time the loan is originated. At June 30, 2015, the average loan-to-value ratio for our non-performing loans collateralized by real estate was 47.0%. A benefit for loan losses of $0.5 million and $1.1 million was recorded for the three months ended June 30, 2015 and 2014, respectively. Management has concluded, and the Board of Directors has concurred, that at June 30, 2015, the allowance for loan losses was sufficient to absorb losses inherent in our loan portfolio.

 

 

-65-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

 

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

 

   For the six months ended June 30,
(Dollars in thousands)  2015  2014
Balance at beginning of period  $25,096   $31,776 
Provision (benefit) for loan losses   (1,250)   (2,211)
Loans charged-off:          
Multi-family residential   (400)   (674)
Commercial real estate   (32)   (86)
One-to-four family – mixed-use property   (472)   (258)
One-to-four family – residential   (244)   (79)
Small Business Administration   -    (49)
Commercial business and other   (52)   (125)
Total loans charged-off   (1,200)   (1,271)
Recoveries:          
Multi-family residential   214    141 
Commercial real estate   68    382 
One-to-four family – mixed-use property   47    135 
One-to-four family – residential   74    165 
Co-operative apartments   -    7 
Small Business Administration   27    61 
Commercial business and other   8    50 
Total recoveries   438    941 
Net charge-offs   (762)   (330)
Balance at end of period  $23,084   $29,235 
Ratio of net charge-offs during the period to average loans outstanding during the period   0.04%   0.02%
Ratio of allowance for loan losses to gross loans at end of period   0.57%   0.83%
Ratio of allowance for loan losses to non-performing assets at end of period   70.35%   62.02%
Ratio of allowance for loan losses to non-performing loans at end of period   80.83%   63.84%

 

 

-66-
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2015, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

 

 

 

 

 

-67-
 

PART II – OTHER INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

 

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

 

The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended June 30, 2015:

 

            Maximum
         Total Number of  Number of
   Total     Shares Purchased  Shares That May
   Number     as Part of Publicly  Yet Be Purchased
   of Shares  Average Price  Announced Plans  Under the Plans
Period  Purchased  Paid per Share  or Programs  or Programs
April 1 to April 30, 2015    -   $-    -    492,884 
May 1 to May 31, 2015    317,700    19.42    317,700    175,184 
June 1 to June 30, 2015    175,184    19.66    175,184    1,000,000 
Total    492,884   $19.50    492,884      

 

 

During the three months ended June 30, 2015, the Company completed the common stock repurchase program that was approved by the Company’s Board of Directors on August 19, 2014 by repurchasing 492,884 shares of the Company’s common stock at an average cost of $19.50 per share. On June 16, 2015, the Company announced the authorization by the Board of Directors of a new common stock repurchase program, which authorizes the purchase of up to 1,000,000 shares of its common stock. At June 30, 2015, 1,000,000 shares remain to be repurchased under the current stock repurchase program. Stock will be purchased under the current stock repurchase program from time to time, in the open market or through private transactions subject to market conditions and at the discretion of the management of the Company. There is no expiration or maximum dollar amount under this authorization.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

-68-
 

PART II – OTHER INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

 

 

ITEM 6. EXHIBITS

 

Exhibit No. Description
     
  3.1 Certificate of Incorporation of Flushing Financial Corporation (1)
  3.2 Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
  3.3 Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (6)
  3.4 Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
  3.5 Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
  3.6 Amended and Restated By-Laws of Flushing Financial Corporation (7)
  4.1 Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and Computershare Trust Company N.A., as Rights Agent, which includes the form of Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock as Exhibit A, form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (5)
  4.2 Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
  10.1 Flushing Bank Specified Officer Change in Control Severance Policy (as Amended Effective July 28, 2015) (filed herewith)
  10.2 Employee Severance Compensation Plan for Vice Presidents and Assistant Vice Presidents of Flushing Bank (Effective as of July 28, 2015) (filed herewith)
  10.3 Employee Severance Compensation Plan of Flushing Bank (Amended and Restated Effective as of July 28, 2015) (filed herewith)
  31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
  31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
  32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
  32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
  101.INS XBRL Instance Document (filed herewith)
  101.SCH XBRL Taxonomy Extension Schema Document (filed herewith)
  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
  101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed
  September 1, 1995, Registration No. 33-96488.
(2) Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended
  September 30, 2002.
(5) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006.
(6) Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.
(7) Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

 

-69-
 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

SIGNATURES

 

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

 

 

    Flushing Financial Corporation,
     
   
Dated: August 7, 2015  

By: /s/John R. Buran

John R. Buran

President and Chief Executive Officer

     
     
     
Dated: August 7, 2015  

By: /s/David Fry

David Fry

Senior Executive Vice President, Treasurer and

Chief Financial Officer

 

 

 

 

 

 

-70-
 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

 

 

Exhibit  No. Description
     
  3.1 Certificate of Incorporation of Flushing Financial Corporation (1)
  3.2 Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
  3.3 Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (6)
  3.4 Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
  3.5 Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
  3.6 Amended and Restated By-Laws of Flushing Financial Corporation (7)
  4.1 Rights Agreement, dated as of September 8, 2006, between Flushing Financial Corporation and Computershare Trust Company N.A., as Rights Agent, which includes the form of Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock as Exhibit A, form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C (5)
  4.2 Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
  10.1 Flushing Bank Specified Officer Change in Control Severance Policy (as Amended Effective July 28, 2015) (filed herewith)
  10.2 Employee Severance Compensation Plan for Vice Presidents and Assistant Vice Presidents of Flushing Bank (Effective as of July 28, 2015) (filed herewith)
  10.3 Employee Severance Compensation Plan of Flushing Bank (Amended and Restated Effective as of July 28, 2015) (filed herewith)
  31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
  31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
  32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
  32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
  101.INS XBRL Instance Document (filed herewith)
  101.SCH XBRL Taxonomy Extension Schema Document (filed herewith)
  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
  101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed
  September 1, 1995, Registration No. 33-96488.
(2) Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended
  September 30, 2002.
(5) Incorporated by reference to Exhibit filed with Form 8-K filed September 11, 2006.
(6) Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.
(7) Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

 

 

 

-71-