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FFIC Flushing Financial

Filed: 6 Nov 19, 3:56pm
☐☐☐☐☒0000923139Flushing Financial Corporationfalse--12-31Q3201900000000026.4000000005300000.300018.061.936.3For the three and nine months ended September 30, 2019 and 2018, there were no common stock equivalents that were anti-dilutive.The net loss from fair value adjustments presented in the above table does not include net (losses) gains of ($2.6) million and $2.9 million for the nine months ended September 30, 2019 and 2018, respectively, from the change in the fair value of interest rate swaps.Net gains and losses are recorded as part of "Net gain/loss from fair value adjustments" in the Consolidated Statements of Income.The net loss from fair value adjustments presented in the above table does not include net (losses) gains of ($1.6) million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively, from the change in the fair value of interest rate swaps.Derivatives in a positive position are recorded as "Other assets" and derivatives in a negative position are recorded as "Other liabilities" in the Consolidated Statements of Financial Condition.Net gains and losses recorded during the three and nine months ended September 30, 2019, are recorded as part of "Interests and fees on loans" in the Consolidated Statements of Income. Net gains and losses recorded during the three and nine months ended September 30, 2018, are recorded as part of "Net gain/loss from fair value adjustments" in the Consolidated Statements of Income.Taxi medallion loans in the table above continue to pay as agreed, however the company records interest received on a cash basis.Totals in the table above are presented in the Consolidated Statement of Income under net loss from fair value adjustments.These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10 ("Pension and Other Postretirement Benefit Plans") for additional information.5,4504,7968,3727,3660055,49822,508185,299152,670812967028,87113,52412,8430.010.015,000,0005,000,000000.010.01100,000,000100,000,00031,530,59531,530,59528,157,20627,983,6373,373,3893,546,9581141301247320858748605,2934,4252748110138,775287,15530083,9080.215,5681,1203820.215,0159,28440,00000.21116,229248,877217,86372,8370.204,455600227,581320.203,8998,7203,3430.20
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

Commission file number 001-33013

 

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

11-3209278

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

 

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

 

(718) 961-5400

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

FFIC

The Nasdaq Stock Market LLC

 

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 every Interactive Data File required to be submitted 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 such files).    X   Yes               No

 

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

 

Large accelerated filer   X  

Non-accelerated filer __

Emerging growth company __

Accelerated filer  __

Smaller reporting company  __

 

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

 

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

 

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2019 was 28,157,206.

 

 

 

 

 

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

7

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

49

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

64

ITEM 4.  Controls and Procedures

64

PART II  —  OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

65

ITEM 1A. Risk Factors

65

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

65

ITEM 3.  Defaults Upon Senior Securities

65

ITEM 4.  Mine Safety Disclosures

65

ITEM 5.  Other Information

65

ITEM 6.  Exhibits

66

SIGNATURES

67

i

 

 

 

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

 

Item 1.    Financial Statements

 

  

September 30,

  

December 31,

 
  

2019

  

2018

 
  

(Dollars in thousands, except per share data)

 

Assets

        

Cash and due from banks

 $86,989  $118,561 

Securities held-to-maturity:

        

Mortgage-backed securities (including assets pledged of $5,450 and $4,796 at September 30, 2019 and December 31, 2018, respectively; fair value of $8,372 and $7,366 at September 30, 2019 and December 31, 2018, respectively)

  7,939   7,953 

Other securities (none pledged; fair value of $55,498 and $22,508 at September 30, 2019 and December 31, 2018, respectively)

  52,101   24,065 

Securities available for sale, at fair value:

        

Mortgage-backed securities (including assets pledged of $185,299 and $152,670 at September 30, 2019 and December 31, 2018, respectively; $812 and $967 at fair value pursuant to the fair value option at September 30, 2019 and December 31, 2018, respectively)

  579,010   557,953 

Other securities (including assets pledged of none and $28,871 at September 30, 2019 and December 31, 2018, respectively; $13,524 and $12,843 at fair value pursuant to the fair value option at September 30, 2019 and December 31, 2018, respectively)

  246,465   264,702 

Loans:

        

Multi-family residential

  2,232,305   2,269,048 

Commercial real estate

  1,559,581   1,542,547 

One-to-four family — mixed-use property

  587,100   577,741 

One-to-four family — residential

  184,432   190,350 

Co-operative apartments

  9,089   8,498 

Construction

  64,234   50,600 

Small Business Administration

  13,982   15,210 

Taxi medallion

  3,513   4,539 

Commercial business and other

  1,096,164   877,763 

Net unamortized premiums and unearned loan fees

  15,363   15,188 

Allowance for loan losses

  (22,035)  (20,945)

Net loans

  5,743,728   5,530,539 

Interest and dividends receivable

  26,566   25,485 

Bank premises and equipment, net

  28,146   30,418 

Federal Home Loan Bank of New York stock, at cost

  65,280   57,282 

Bank owned life insurance

  158,604   131,788 

Goodwill

  16,127   16,127 

Other real estate owned, net

  239   - 

Right of Use Asset

  42,400   - 

Other assets

  57,301   69,303 

Total assets

 $7,110,895  $6,834,176 
         

Liabilities

        

Due to depositors:

        

Non-interest bearing

 $421,786  $413,747 

Interest-bearing

  4,490,723   4,502,176 

Total Deposits

  4,912,509   4,915,923 

Mortgagors' escrow deposits

  61,803   44,861 

Borrowed funds:

        

Federal Home Loan Bank advances

  1,304,296   1,134,993 

Subordinated debentures

  74,234   74,001 

Junior subordinated debentures, at fair value

  43,910   41,849 

Total borrowed funds

  1,422,440   1,250,843 

Operating lease liability

  50,626   - 

Other liabilities

  95,125   73,085 

Total liabilities

  6,542,503   6,284,712 
         

Stockholders' Equity

        

Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)

  -   - 

Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at September 30, 2019 and December 31, 2018; 28,157,206 shares and 27,983,637 shares outstanding at September 30, 2019 and December 31, 2018, respectively)

  315   315 

Additional paid-in capital

  225,471   222,720 

Treasury stock, at average cost (3,373,389 shares and 3,546,958 shares at September 30, 2019 and December 31, 2018, respectively)

  (71,487)  (75,146)

Retained earnings

  427,062   414,327 

Accumulated other comprehensive loss, net of taxes

  (12,969)  (12,752)

Total stockholders' equity

  568,392   549,464 
         

Total liabilities and stockholders' equity

 $7,110,895  $6,834,176 

 

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

  

For the nine months

 
  

ended September 30,

  

ended September 30,

 

(Dollars in thousands, except per share data)

 

2019

  

2018

  

2019

  

2018

 
                 

Interest and dividend income

                

Interest and fees on loans

 $62,825  $59,658  $187,428  $171,997 

Interest and dividends on securities:

                

Interest

  6,287   5,562   20,007   16,646 

Dividends

  18   18   56   49 

Other interest income

  259   248   1,286   873 

Total interest and dividend income

  69,389   65,486   208,777   189,565 
                 

Interest expense

                

Deposits

  22,244   17,425   66,540   44,323 

Other interest expense

  8,196   6,540   21,476   18,472 

Total interest expense

  30,440   23,965   88,016   62,795 
                 

Net interest income

  38,949   41,521   120,761   126,770 

Provision for loan losses

  683   -   3,129   153 

Net interest income after provision for loan losses

  38,266   41,521   117,632   126,617 
                 

Non-interest income

                

Banking services fee income

  847   1,017   2,879   2,965 

Net loss on sale of securities

  -   -   (15)  - 

Net gain on sale of loans

  204   10   381   168 

Net gain on sale of assets

  -   -   770   - 

Net loss from fair value adjustments

  (2,124)  (170)  (6,160)  (537)

Federal Home Loan Bank of New York stock dividends

  834   873   2,563   2,630 

Life insurance proceeds

  -   2,222   43   2,998 

Bank owned life insurance

  1,000   782   2,550   2,320 

Other income

  278   221   1,422   779 

Total non-interest income

  1,039   4,955   4,433   11,323 
                 

Non-interest expense

                

Salaries and employee benefits

  15,461   15,720   50,295   49,466 

Occupancy and equipment

  2,847   2,475   8,378   7,528 

Professional services

  2,167   1,915   6,238   6,539 

FDIC deposit insurance

  (589)  596   563   1,643 

Data processing

  1,490   1,427   4,402   4,254 

Depreciation and amortization

  1,439   1,484   4,454   4,328 

Other real estate owned/foreclosure expense (benefit)

  48   (102)  145   34 

Net gain from sales of real estate owned

  -   -   -   (27)

Other operating expenses

  3,182   3,718   11,147   12,158 

Total non-interest expense

  26,045   27,233   85,622   85,923 
                 

Income before income taxes

  13,260   19,243   36,443   52,017 
                 

Provision for income taxes

                

Federal

  2,457   2,307   7,381   8,225 

State and local

  79   (397)  714   1,124 

Total taxes

  2,536   1,910   8,095   9,349 
                 

Net income

 $10,724  $17,333  $28,348  $42,668 
                 
                 

Basic earnings per common share

 $0.37  $0.61  $0.99  $1.48 

Diluted earnings per common share

 $0.37  $0.61  $0.99  $1.48 

Dividends per common share

 $0.21  $0.20  $0.63  $0.60 

 

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

  

For the nine months ended

 
  

September 30,

  

September 30,

 

(In thousands)

 

2019

  

2018

  

2019

  

2018

 
                 

Net income

 $10,724  $17,333  $28,348  $42,668 
                 

Other comprehensive income (loss), net of tax:

                
                 

Amortization of actuarial losses, net of taxes of ($11) and ($41) for the three months ended September 30, 2019 and 2018, respectively and of ($30) and ($124) for the nine months ended September 30, 2019 and 2018, respectively.

  22   91   66   272 
                 

Amortization of prior service credits, net of taxes of $7 and $3 for the three months ended September 30, 2019 and 2018, respectively and of $20 and $8 for the nine months ended September 30, 2019 and 2018, respectively.

  (15)  (7)  (44)  (20)
                 

Net unrealized (losses) gains on securities, net of taxes of $218 and $1,612 for the three months ended September 30, 2019 and 2018, respectively and of ($5,102) and $6,055 for the nine months ended September 30, 2019 and 2018, respectively.

  (475)  (3,505)  11,349   (13,159)
                 

Reclassification adjustment for net losses included in income, net of taxes of ($5) for the nine months ended September 30, 2019.

  -   -   10   - 
                 

Net unrealized (losses) gains on cash flow hedges, net of taxes of $874 and ($860) for the three months ended September 30, 2019 and 2018, respectively and of $5,293 and ($4,425) for the nine months ended September 30, 2019 and 2018, respectively.

  (1,946)  1,870   (11,782)  9,616 
                 

Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($27) and ($4) for the three months ended September 30, 2019 and 2018, respectively and of ($81) and ($10) for the nine months ended September 30, 2019 and 2018, respectively.

  61   9   184   22 
                 

Total other comprehensive loss, net of tax

  (2,353)  (1,542)  (217)  (3,269)
                 

Comprehensive income

 $8,371  $15,791  $28,131  $39,399 

 

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

 

-3-

 

 

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

  

For the nine months ended

 
  

September 30,

 

(In thousands)

 

2019

  

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net income

 $28,348  $42,668 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Provision for loan losses

  3,129   153 

Depreciation and amortization of bank premises and equipment

  4,454   4,328 

Amortization of premium, net of accretion of discount

  4,932   6,462 

Net loss from fair value adjustments

  6,160   537 

Net loss from fair value adjustments on qualifying hedges

  2,717   - 

Net gain from sale of loans

  (381)  (168)

Net loss from sale of securities

  15   - 

Net gain from sale of asset

  (770)  - 

Net gain from sale of OREO

  -   (27)

Income from bank owned life insurance

  (2,550)  (2,320)

Life insurance proceeds

  (43)  (2,998)

Stock-based compensation expense

  6,617   5,973 

Deferred compensation

  (2,526)  (2,450)

Deferred income tax benefit

  (3,777)  (1,437)

Increase in other liabilities

  4,358   6,580 

Decrease in other assets

  1,659   2,103 

Net cash provided by operating activities

  52,342   59,404 
         

CASH FLOWS FROM INVESTING ACTIVITIES

        

Purchases of bank premises and equipment

  (2,182)  (3,421)

Net (purchases) redemptions of Federal Home Loan Bank of New York shares

  (7,998)  5,147 

Purchases of securities held-to-maturity

  (30,030)  (653)

Proceeds from maturities and calls of securities held-to-maturity

  1,568   364 

Proceeds from prepayments of securities held-to-maturity

  434   - 

Purchases of securities available for sale

  (141,798)  (102,756)

Proceeds from sales and calls of securities available for sale

  65,493   10,000 

Proceeds from maturities and prepayments of securities available for sale

  88,217   57,839 

Proceeds from sale of assets

  813   - 

Proceeds from bank owned life insurance

  777   6,165 

Purchase of bank owned life insurance

  (25,000)  - 

Net (originations) repayments of loans

  (9,660)  3,605 

Purchases of loans

  (193,703)  (235,193)

Proceeds from sale of real estate owned

  -   665 

Proceeds from sale of loans

  7,187   14,410 

Net cash used in investing activities

  (245,882)  (243,828)
         

CASH FLOWS FROM FINANCING ACTIVITIES

        

Net increase in non-interest bearing deposits

  8,039   13,337 

Net (decrease) increase in interest-bearing deposits

  (11,643)  303,288 

Net increase in mortgagors' escrow deposits

  16,942   16,061 

Net proceeds from short-term borrowed funds

  115,750   115,250 

Proceeds from long-term borrowings

  184,950   25,000 

Repayment of long-term borrowings

  (131,301)  (256,088)

Purchases of treasury stock

  (2,656)  (21,638)

Proceeds from issuance of common stock upon exercise of stock options

  3   6 

Cash dividends paid

  (18,116)  (17,244)

Net cash provided by financing activities

  161,968   177,972 
         

Net decrease in cash and cash equivalents

  (31,572)  (6,452)

Cash and cash equivalents, beginning of period

  118,561   51,546 

Cash and cash equivalents, end of period

 $86,989  $45,094 
         

SUPPLEMENTAL CASH FLOW DISCLOSURE

        

Interest paid

 $85,346  $57,811 

Income taxes paid

  8,531   5,116 

Taxes paid if excess tax benefits were not tax deductible

  8,523   5,753 

Non-cash activities:

        

Loans transferred to Other Real Estate Owned or Other Assets

  239   673 

Reclassification of the Income tax effects of Tax Cuts and Jobs Act from AOCI to Retained Earnings

  -   2,073 

Securities purchased but not yet settled

  -   10,000 

 

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

 

-4-

 

 

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

 (Unaudited)

 

      Common  

Additional

  Retained  Treasury  

Accumulated Other Comprehensive

 
(Dollars in thousands, except per share data) Total  

Stock

  Paid-in Capital  

Earnings

  

Stock

  Income (Loss) 
                         
                         

Balance at December 31, 2018

 $549,464  $315  $222,720  $414,327  $(75,146) $(12,752)
                         

Impact of adoption of ASC 842 - Leases

  2,716   -   -   2,716   -   - 

Net income

  7,068   -   -   7,068   -   - 

Award of common shares released from Employee Benefit Trust (138,775 shares)

  2,086   -   2,086   -   -   - 

Vesting of restricted stock unit awards (287,155 shares)

  -   -   (5,878)  (210)  6,088   - 

Exercise of stock options (300 shares)

  3   -   -   (3)  6   - 

Stock-based compensation expense

  3,931   -   3,931   -   -   - 

Repurchase of shares to satisfy tax obligation (83,908 shares)

  (1,877)  -   -   -   (1,877)  - 

Dividends on common stock ($0.21 per share)

  (6,042)  -   -   (6,042)  -   - 

Other comprehensive income

  2,210   -   -   -   -   2,210 

Balance at March 31, 2019

  559,559   315   222,859   417,856   (70,929)  (10,542)

Net income

  10,556   -   -   10,556   -   - 

Award of common shares released from Employee Benefit Trust (5,568 shares)

  81   -   81   -   -   - 

Vesting of restricted stock unit awards (1,120 shares)

  -   -   (24)  -   24   - 

Stock-based compensation expense

  1,315   -   1,315   -   -   - 

Repurchase of shares to satisfy tax obligation (382 shares)

  (8)  -   -   -   (8)  - 

Dividends on common stock ($0.21 per share)

  (6,039)  -   -   (6,039)  -   - 

Other comprehensive loss

  (74)  -   -   -   -   (74)

Balance at June 30, 2019

  565,390   315   224,231   422,373   (70,913)  (10,616)

Net income

  10,724   -   -   10,724   -   - 

Award of common shares released from Employee Benefit Trust (5,015 shares)

  66   -   66   -   -   - 

Vesting of restricted stock unit awards (9,284 shares)

  -   -   (197)  -   197   - 

Stock-based compensation expense

  1,371   -   1,371   -   -   - 

Purchase of treasury shares (40,000 shares)

  (771)  -   -   -   (771)  - 

Repurchase of shares to satisfy tax obligation (0 shares)

  -   -   -   -   -   - 

Dividends on common stock ($0.21 per share)

  (6,035)  -   -   (6,035)  -   - 

Other comprehensive loss

  (2,353)  -   -   -   -   (2,353)

Balance at September 30, 2019

 $568,392  $315  $225,471  $427,062  $(71,487) $(12,969)

 

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

 

-5-

 

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity (Contd.)

 (Unaudited)

 

                      

Accumulated Other

 
      

Common

  Additional  

Retained

  

Treasury

  Comprehensive 

(Dollars in thousands, except per share data)

 

Total

  Stock  Paid-in Capital  Earnings  Stock  Income (Loss) 

Balance at December 31, 2017

 $532,608  $315  $217,906  $381,048  $(57,675) $(8,986)

Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from Accumulated Other Comprehensive Income (Loss) to Retained Earnings

  -   -   -   2,073   -   (2,073)

Impact of adoption of Accounting Standard Update 2016-01

  -   -   -   (775)  -   775 

Net income

  11,412   -   -   11,412   -   - 

Award of common shares released from Employee Benefit Trust (116,229 shares)

  2,488   -   2,488   -   -   - 

Vesting of restricted stock unit awards (248,877 shares)

  -   -   (4,731)  (170)  4,901   - 

Stock-based compensation expense

  3,452   -   3,452   -   -   - 

Purchase of treasury shares (217,863 shares)

  (5,913)  -   -   -   (5,913)  - 

Repurchase of shares to satisfy tax obligation (72,837 shares)

  (2,050)  -   -   -   (2,050)  - 

Dividends on common stock ($0.20 per share)

  (5,795)  -   -   (5,795)  -   - 

Other comprehensive loss

  (895)  -   -   -   -   (895)

Balance at March 31, 2018

  535,307   315   219,115   387,793   (60,737)  (11,179)
                         

Impact of adoption of Accounting Standard Update 2016-01

  -   -   -   (4)  -   4 

Net income

  13,923   -   -   13,923   -   - 

Award of common shares released from Employee Benefit Trust (4,455 shares)

  90   -   90   -   -   - 

Exercise of stock options (600 shares)

  6   -   (1)  -   7   - 

Stock-based compensation expense

  1,228   -   1,228   -   -   - 

Purchase of treasury shares (227,581 shares)

  (5,925)  -   -   -   (5,925)  - 

Repurchase of shares to satisfy tax obligation (32 shares)

  (1)  -   -   -   (1)  - 

Dividends on common stock ($0.20 per share)

  (5,752)  -   -   (5,752)  -   - 

Other comprehensive loss

  (832)  -   -   -   -   (832)

Balance at June 30, 2018

  538,044   315   220,432   395,960   (66,656)  (12,007)
                         

Net income

  17,333   -   -   17,333   -   - 

Award of common shares released from Employee Benefit Trust (3,899 shares)

  74   -   74   -   -   - 

Vesting of restricted stock unit awards (8,720 shares)

  -   -   (177)  (6)  183   - 

Stock-based compensation expense

  1,293   -   1,293   -   -   - 

Purchase of treasury shares (299,509 shares)

  (7,662)  -   -   -   (7,662)  - 

Repurchase of shares to satisfy tax obligation (3,343 shares)

  (87)  -   -   -   (87)  - 

Dividends on common stock ($0.20 per share)

  (5,697)  -   -   (5,697)  -   - 

Other comprehensive loss

  (1,542)  -   -   -   -   (1,542)

Balance at September 30, 2018

 $541,756  $315  $221,622  $407,590  $(74,222) $(13,549)

 

 

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

 

-6-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

1.    Basis of Presentation

 

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

 

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

 

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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

 

 

2.    Use of Estimates

 

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

3.    Earnings Per Share

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

For the three months ended

  

For the nine months ended

 
  

September 30,

  

September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands, except per share data)

 

Net income

 $10,724  $17,333  $28,348  $42,668 

Divided by:

                

Weighted average common shares outstanding

  28,730   28,604   28,704   28,806 

Weighted average common stock equivalents

  -   -   -   1 

Total weighted average common shares outstanding and common stock equivalents

  28,730   28,604   28,704   28,807 
                 

Basic earnings per common share

 $0.37  $0.61  $0.99  $1.48 

Diluted earnings per common share (1)

 $0.37  $0.61  $0.99  $1.48 

Dividend payout ratio

  56.8%  32.8%  63.6%  40.5%

 

1.

For the three and nine months ended September 30, 2019 and 2018, there were 0 common stock equivalents that were anti-dilutive.

 

-7-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

4.    Securities
 

The Company did not hold any trading securities at September 30, 2019 and December 31, 2018. Securities available for sale are recorded at fair value. Securities held-to-maturity are recorded at amortized cost.

 

The following table summarizes the Company’s portfolio of securities held-to-maturity at September 30, 2019:

 

          

Gross

  

Gross

 
  

Amortized

      

Unrealized

  

Unrealized

 
  

Cost

  

Fair Value

  

Gains

  

Losses

 
  

(In thousands)

 

Securities held-to-maturity:

                

Municipals

 $52,101  $55,498  $3,397  $- 
                 

Total other securities

  52,101   55,498   3,397   - 
                 

FNMA

  7,939   8,372   433   - 
                 

Total mortgage-backed securities

  7,939   8,372   433   - 

Total

 $60,040  $63,870  $3,830  $- 

 

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

 

          

Gross

  

Gross

 
  

Amortized

      

Unrealized

  

Unrealized

 
  

Cost

  

Fair Value

  

Gains

  

Losses

 
  

(In thousands)

 

Securities held-to-maturity:

                

Municipals

 $24,065  $22,508  $-  $1,557 
                 

Total other securities

  24,065   22,508   -   1,557 
                 

FNMA

  7,953   7,366   -   587 
                 

Total mortgage-backed securities

  7,953   7,366   -   587 
                 

Total

 $32,018  $29,874  $-  $2,144 

 

-8-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Company’s portfolio of securities available for sale at September 30, 2019:

 

          

Gross

  

Gross

 
  

Amortized

      

Unrealized

  

Unrealized

 
  

Cost

  

Fair Value

  

Gains

  

Losses

 
  

(In thousands)

 

Corporate

 $130,000  $120,543  $-  $9,457 

Municipals

  12,849   13,017   168   - 

Mutual funds

  12,206   12,206   -   - 

Collateralized loan obligations

  100,336   99,381   5   960 

Other

  1,318   1,318   -   - 

Total other securities

  256,709   246,465   173   10,417 

REMIC and CMO

  390,044   392,525   3,604   1,123 

GNMA

  706   764   58   - 

FNMA

  106,773   107,383   998   388 

FHLMC

  77,455   78,338   998   115 

Total mortgage-backed securities

  574,978   579,010   5,658   1,626 

Total securities available for sale

 $831,687  $825,475  $5,831  $12,043 

 

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

 

          

Gross

  

Gross

 
  

Amortized

      

Unrealized

  

Unrealized

 
  

Cost

  

Fair Value

  

Gains

  

Losses

 
  

(In thousands)

 

Corporate

 $130,000  $118,535  $-  $11,465 

Municipals

  46,231   46,574   343   - 

Mutual funds

  11,586   11,586   -   - 

Collateralized loan obligations

  88,396   86,751   -   1,645 

Other

  1,256   1,256   -   - 

Total other securities

  277,469   264,702   343   13,110 

REMIC and CMO

  382,632   376,340   885   7,177 

GNMA

  785   826   41   - 

FNMA

  94,069   91,693   72   2,448 

FHLMC

  90,377   89,094   113   1,396 

Total mortgage-backed securities

  567,863   557,953   1,111   11,021 

Total securities available for sale

 $845,332  $822,655  $1,454  $24,131 

 

We did not hold any private issue CMO’s that are collateralized by commercial real estate mortgages at September 30, 2019 and December 31, 2018.

 

The corporate securities held by the Company at September 30, 2019 and December 31, 2018 are issued by U.S. banking institutions. 

 

-9-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at September 30, 2019, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

Amortized

     

Securities held-to-maturity:

 

Cost

  

Fair Value

 
  

(In thousands)

 
         

Due in one year or less

 $1,180  $1,180 

Due after ten years

  50,921   54,318 
         

Total other securities

  52,101   55,498 

Mortgage-backed securities

  7,939   8,372 
         

Total

 $60,040  $63,870 

 

  

Amortized

     

Securities available for sale:

 

Cost

  

Fair Value

 
  

(In thousands)

 
         

Due after one year through five years

 $10,000  $9,762 

Due after five years through ten years

  137,913   128,645 

Due after ten years

  96,590   95,852 
         

Total other securities

  244,503   234,259 

Mutual funds

  12,206   12,206 

Mortgage-backed securities

  574,978   579,010 
         

Total

 $831,687  $825,475 

 

 

-10-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

At September 30, 2019

 
  

Total

  

Less than 12 months

  

12 months or more

 
          

Unrealized

      

Unrealized

      

Unrealized

 
  

Count

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

 
      

(Dollars in thousands)

 
                             
                             

Available for sale securities

                            

Corporate

  16  $120,543  $9,457  $9,663  $338  $110,880  $9,119 

CLO

  12   91,916   960   63,821   485   28,095   475 

Total other securities

  28   212,459   10,417   73,484   823   138,975   9,594 
                             

REMIC and CMO

  25   157,584   1,123   138,250   887   19,334   236 

FNMA

  7   69,075   388   14,888   30   54,187   358 

FHLMC

  1   34,816   115   -   -   34,816   115 

Total mortgage-backed securities

  33   261,475   1,626   153,138   917   108,337   709 

Total

  61  $473,934  $12,043  $226,622  $1,740  $247,312  $10,303 

 

There were no unrealized losses on held-to maturity securities at September 30, 2019.

 

  

At December 31, 2018

 
  

Total

  

Less than 12 months

  

12 months or more

 
          

Unrealized

      

Unrealized

      

Unrealized

 
  

Count

  

Fair Value

  

Losses

  

Fair Value

  

Losses

  

Fair Value

  

Losses

 
  

(Dollars in thousands)

 

Held-to-maturity securities

                            
                             

Municipals

  1  $19,940  $1,557  $-  $-  $19,940  $1,557 

Total other securities

  1   19,940   1,557   -   -   19,940   1,557 
                             

FNMA

  1   7,366   587   -   -   7,366   587 

Total mortgage-backed securities

  1   7,366   587   -   -   7,366   587 
                             

Total securities held-to-maturity

  2  $27,306  $2,144  $-  $-  $27,306  $2,144 
                             

Available for sale securities

                            

Corporate

  16  $118,535  $11,465  $19,113  $888  $99,422  $10,577 

Municipals

  3   4,220   -   4,220   -   -   - 

CLO

  11   86,752   1,645   86,752   1,645   -   - 

Total other securities

  30   209,507   13,110   110,085   2,533   99,422   10,577 
                             

REMIC and CMO

  39   243,756   7,177   17,308   200   226,448   6,977 

GNMA

  1   51   -   51   -   -   - 

FNMA

  14   85,046   2,448   6,372   17   78,674   2,431 

FHLMC

  3   51,288   1,396   10,116   95   41,172   1,301 

Total mortgage-backed securities

  57   380,141   11,021   33,847   312   346,294   10,709 

Total securities available for sale

  87  $589,648  $24,131  $143,932  $2,845  $445,716  $21,286 

 

-11-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

The Company reviewed each investment that had an unrealized loss at September 30, 2019 and December 31, 2018. The unrealized losses in held-to-maturity municipal securities at December 31, 2018 were caused by illiquidity in the market and movements in interest rates. The unrealized losses in held-to-maturity FNMA securities at December 31, 2018 were caused by movements in interest rates. The unrealized losses in securities available for sale at September 30, 2019 and December 31, 2018 were caused by movements in interest rates.

 

It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2019 and December 31, 2018.

 

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold $26.4 million in mortgage-backed securities during the nine months ended September 30, 2019. The Company did not sell any securities during the three months ended September 30, 2019 and the three and nine months ended September 30, 2018.

 

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

  

For the nine months ended

 
  

September 30,

  

September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 

Gross gains from the sale of securities

 $-  $-  $423  $- 

Gross losses from the sale of securities

  -   -   (438)  - 
                 

Net losses from the sale of securities

 $-  $-  $(15) $- 

 

 

5.     Loans

 

Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Loan fees and certain loan origination costs are deferred. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.

 

Interest on loans is recognized on the accrual basis. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is likely to occur.

 

-12-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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 the loan is well secured and there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Prior to a real estate secured loan becoming 90 days delinquent, an updated appraisal is ordered and/or an internal evaluation is prepared.

 

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

 

The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. An unallocated component may at times be maintained to cover uncertainties that could affect management's estimate of probable losses. When necessary an unallocated component of the allowance will reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The allowance is established through charges to earnings in the form of a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), current economic conditions, delinquency and non-accrual trends, classified loan levels, risk in the portfolio and volumes and trends in loan types, recent trends in charge-offs, changes in underwriting standards, experience, ability and depth of the Company’s lenders, collection policies and experience, internal loan review function and other external factors. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.

 

The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and local economic conditions and other factors. We review our loan portfolio by separate categories with similar risk and collateral characteristics. In the second quarter of 2019, we changed our methodology for reviewing our loan portfolio to further segregate the commercial business and other portfolio into two separate categories. The decision to separate was based on the risk characteristics and loss history being different between the two categories. Impaired loans are segregated and reviewed separately.

 

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

 

The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The 85% is based on the actual net proceeds the Bank has received from the sale of other real estate owned (“OREO”) as a percentage of OREO’s appraised value. For collateral dependent taxi medallion loans, the Company considers fair value to be the value of the underlying medallion based upon the most recently reported arm’s length sales transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. For both collateral dependent mortgage loans and taxi medallion loans, the amount by which the loan’s book value exceeds fair value is charged-off.

 

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

 

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

 

-13-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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 loan which is collateral dependent, the fair value of the collateral. At September 30, 2019, there were 0 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 loan modifications and classified as TDR during the periods indicated.

 

  

For the three and nine months ended

  

September 30, 2019

 

September 30, 2018

(Dollars in thousands)

 

Number

  

Balance

 

Modification description

 

Number

  

Balance

 

Modification description

                   
                   

Commercial business and other

  3  $951 

Amortization extensions

  1  $1,620 

Amortization extension

Total

  3  $951    1  $1,620  

 

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

 

  

September 30, 2019

  

December 31, 2018

 
  

Number

  

Recorded

  

Number

  

Recorded

 

(Dollars in thousands)

 

of contracts

  

investment

  

of contracts

  

investment

 
                 

Multi-family residential

  7  $1,883   7  $1,916 

One-to-four family - mixed-use property

  4   1,497   5   1,692 

One-to-four family - residential

  3   536   3   552 

Taxi medallion (1)

  8   2,161   15   3,926 

Commercial business and other

  3   951   1   279 

Total performing troubled debt restructured

  25  $7,028   31  $8,365 

 

(1Taxi medallion loans in the table above continue to pay as agreed, however the company records interest received on a cash basis.

 

 

 

 

 

 

-14-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

During the three and nine months ended September 30, 2019 and 2018, there were 0 defaults of TDR loans within 12 months of their modification date. During the three and nine months ended September 30, 2019, we sold 1 multi-family TDR loan totaling $0.3 million, for a gain of $0.2 million. During the nine months ended September 30, 2018, we sold 1 commercial real estate TDR loan totaling $1.8 million, for a loss of $0.3 million and foreclosed on 1 taxi medallion TDR loan of $35,000, which is included in “Other Assets”.

 

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

 

  

September 30, 2019

  

December 31, 2018

 
  

Number

  

Recorded

  

Number

  

Recorded

 

(Dollars in thousands)

 

of contracts

  

investment

  

of contracts

  

investment

 
                 

Multi-family residential

  -  $-   1  $388 

Taxi medallion

  3   767   -   - 

Commercial business and other

  2   279   1   1,397 

Total troubled debt restructurings that subsequently defaulted

  5  $1,046   2  $1,785 

 

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

 

  

September 30,

  

December 31,

 

(In thousands)

 

2019

  

2018

 
         

Loans ninety days or more past due and still accruing:

        

Multi-family residential

 $445  $- 

Total

  445   - 
         

Non-accrual mortgage loans:

        

Multi-family residential

  3,132   2,410 

Commercial real estate

  872   1,379 

One-to-four family - mixed-use property

  683   928 

One-to-four family - residential

  5,050   6,144 

Total

  9,737   10,861 
         

Non-accrual non-mortgage loans:

        

Small Business Administration

  1,151   1,267 

Taxi medallion (1)

  1,352   613 

Commercial business and other (1)

  2,020   3,512 

Total

  4,523   5,392 
         

Total non-accrual loans

  14,260   16,253 
         

Total non-performing loans

 $14,705  $16,253 

 

1.

Not included in the above analysis are non-accrual performing TDR taxi medallion loans totaling $2.2 million and $3.9 million at September 30, 2019 and December 31, 2018, respectively and non-accrual performing TDR commercial business loans totaling $1.0 million at September 30, 2019.

 

-15-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

   

For the three months ended

  

For the nine months ended

 
   

September 30,

  

September 30,

 
   

2019

  

2018

  

2019

  

2018

 
   

(In thousands)

 

Interest income that would have been recognized had the loans performed in accordance with their original terms

 $416  $398  $1,224  $1,194 

Less: Interest income included in the results of operations

  89   173   330   487 

Total foregone interest

 $327  $225  $894  $707 

 

The following tables show by delinquency an analysis of our recorded investment in loans at the periods indicated:

 

  

September 30, 2019

 
          

Greater

             
  

30 - 59 Days

  

60 - 89 Days

  

than

  

Total Past

         

(In thousands)

 

Past Due

  

Past Due

  

90 Days

  

Due

  

Current

  

Total Loans

 
                         
                         

Multi-family residential

 $1,112  $1,401  $3,577  $6,090  $2,226,215  $2,232,305 

Commercial real estate

  5,944   940   872   7,756   1,551,825   1,559,581 

One-to-four family - mixed-use property

  1,458   869   408   2,735   584,365   587,100 

One-to-four family - residential

  1,020   243   5,050   6,313   178,119   184,432 

Co-operative apartments

  -   -   -   -   9,089   9,089 

Construction loans

  -   -   -   -   64,234   64,234 

Small Business Administration

  1,849   -   1,151   3,000   10,982   13,982 

Taxi medallion

  -   -   766   766   2,747   3,513 

Commercial business and other

  3   100   2,020   2,123   1,094,041   1,096,164 

Total

 $11,386  $3,553  $13,844  $28,783  $5,721,617  $5,750,400 

 

  

December 31, 2018

 
          

Greater

             
  

30 - 59 Days

  

60 - 89 Days

  

than

  

Total Past

         

(In thousands)

 

Past Due

  

Past Due

  

90 Days

  

Due

  

Current

  

Total Loans

 
                         
                         

Multi-family residential

 $1,887  $339  $2,410  $4,636  $2,264,412  $2,269,048 

Commercial real estate

  379   -   1,379   1,758   1,540,789   1,542,547 

One-to-four family - mixed-use property

  1,003   322   928   2,253   575,488   577,741 

One-to-four family - residential

  1,564   -   6,144   7,708   182,642   190,350 

Co-operative apartments

  -   -   -   -   8,498   8,498 

Construction loans

  -   730   -   730   49,870   50,600 

Small Business Administration

  774   68   1,267   2,109   13,101   15,210 

Taxi medallion

  -   -   -   -   4,539   4,539 

Commercial business and other

  1,306   281   2,216   3,803   873,960   877,763 

Total

 $6,913  $1,740  $14,344  $22,997  $5,513,299  $5,536,296 

 

-16-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

September 30, 2019

 

(In thousands)

 

Multi-family residential

  

Commercial real estate

  

One-to-four family - mixed-use property

  

One-to-four family - residential

  

Construction loans

  

Small Business Administration

  

Taxi medallion

  

Commercial business and other

  

Total

 
                                     

Allowance for credit losses:

                                    

Beginning balance

 $5,506  $4,265  $1,786  $746  $381  $382  $-  $8,444  $21,510 

Charge-off's

  (189)  -   -   -   -   -   -   (242)  (431)

Recoveries

  6   -   140   3   -   32   -   92   273 

Provision (Benefit)

  54   99   (120)  (4)  37   (57)  -   674   683 

Ending balance

 $5,377  $4,364  $1,806  $745  $418  $357  $-  $8,968  $22,035 

 

September 30, 2018

 

(In thousands)

 

Multi-family residential

  

Commercial real estate

  

One-to-four family - mixed-use property

  

One-to-four family - residential

  

Construction loans

  

Small Business Administration

  

Taxi medallion

  

Commercial business and other

  

Unallocated

  

Total

 
                                         

Allowance for credit losses:

                                        

Beginning balance

 $5,538  $4,726  $2,297  $1,003  $264  $549  $-  $5,832  $11  $20,220 

Charge-off's

  (18)  -   (3)  -   -   (144)  (40)  (15)  -   (220)

Recoveries

  -   -   39   258   -   10   -   2   -   309 

Provision (Benefit)

  37   (650)  (407)  (382)  (2)  138   40   1,186   40   - 

Ending balance

 $5,557  $4,076  $1,926  $879  $262  $553  $-  $7,005  $51  $20,309 

 

 

-17-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

September 30, 2019

 

(In thousands)

 

Multi-family residential

  

Commercial real estate

  

One-to-four family - mixed-use property

  

One-to-four family - residential

  

Construction loans

  

Small Business Administration

  

Taxi medallion

  

Commercial business and other

  

Total

 
                                     

Allowance for credit losses:

                                    

Beginning balance

 $5,676  $4,315  $1,867  $749  $329  $418  $-  $7,591  $20,945 

Charge-off's

  (190)  -   (1)  (113)  -   -   -   (2,379)  (2,683)

Recoveries

  30   7   228   10   -   52   134   183   644 

Provision (Benefit)

  (139)  42   (288)  99   89   (113)  (134)  3,573   3,129 

Ending balance

 $5,377  $4,364  $1,806  $745  $418  $357  $-  $8,968  $22,035 

 

September 30, 2018

 

(In thousands)

 

Multi-family residential

  

Commercial real estate

  

One-to-four family - mixed-use property

  

One-to-four family - residential

  

Construction loans

  

Small Business Administration

  

Taxi medallion

  

Commercial business and other

  

Unallocated

  

Total

 
                                         

Allowance for credit losses:

                                        

Beginning balance

 $5,823  $4,643  $2,545  $1,082  $68  $669  $-  $5,521  $-  $20,351 

Charge-off's

  (99)  -   (3)  (1)  -   (196)  (393)  (29)  -   (721)

Recoveries

  2   -   118   370   -   25   -   11   -   526 

Provision (Benefit)

  (169)  (567)  (734)  (572)  194   55   393   1,502   51   153 

Ending balance

 $5,557  $4,076  $1,926  $879  $262  $553  $-  $7,005  $51  $20,309 

 

-18-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

September 30, 2019

 

(In thousands)

 

Multi-family residential

  

Commercial real estate

  

One-to-four family - mixed-use property

  

One-to-four family- residential

  

Co-operative apartments

  

Construction loans

  

Small Business Administration

  

Taxi medallion

  

Commercial business and other

  

Total

 
                                         

Financing Receivables:

                                        

Ending Balance

 $2,232,305  $1,559,581  $587,100  $184,432  $9,089  $64,234  $13,982  $3,513  $1,096,164  $5,750,400 
Ending balance: individually evaluated for impairment $5,195  $949  $2,192  $5,841  $-  $-  $1,151  $3,513  $2,970  $21,811 
Ending balance: collectively evaluated for impairment $2,227,110  $1,558,632  $584,908  $178,591  $9,089  $64,234  $12,831  $-  $1,093,194  $5,728,589 
                                         

Allowance for credit losses:

                                        
Ending balance: individually evaluated for impairment $94  $-  $51  $48  $-  $-  $-  $-  $116  $309 
Ending balance: collectively evaluated for impairment $5,283  $4,364  $1,755  $697  $-  $418  $357  $-  $8,852  $21,726 

 

December 31, 2018

 

(In thousands)

 

Multi-family residential

  

Commercial real estate

  

One-to-four family - mixed-use property

  

One-to-four family- residential

  

Co-operative apartments

  

Construction loans

  

Small Business Administration

  

Taxi medallion

  

Commercial business and other

  

Total

 
                                         

Financing Receivables:

                                        

Ending Balance

 $2,269,048  $1,542,547  $577,741  $190,350  $8,498  $50,600  $15,210  $4,539  $877,763  $5,536,296 
Ending balance: individually evaluated for impairment $4,500  $1,435  $3,098  $6,889  $-  $-  $1,267  $4,539  $3,791  $25,519 
Ending balance: collectively evaluated for impairment $2,264,548  $1,541,112  $574,643  $183,461  $8,498  $50,600  $13,943  $-  $873,972  $5,510,777 
                                         

Allowance for credit losses:

                                        
Ending balance: individually evaluated for impairment $100  $-  $143  $51  $-  $-  $-  $-  $866  $1,160 
Ending balance: collectively evaluated for impairment $5,576  $4,315  $1,724  $698  $-  $329  $418  $-  $6,725  $19,785 

 

 

-19-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

September 30, 2019

  

December 31, 2018

 
      

Unpaid

          

Unpaid

     
  

Recorded

  

Principal

  

Related

  

Recorded

  

Principal

  

Related

 
  

Investment

  

Balance

  

Allowance

  

Investment

  

Balance

  

Allowance

 
                         
  

(In thousands)

 

With no related allowance recorded:

                        

Mortgage loans:

                        

Multi-family residential

 $3,939  $4,438  $-  $3,225  $3,568  $- 

Commercial real estate

  949   949   -   1,435   1,435   - 

One-to-four family mixed-use property

  1,345   1,347   -   1,913   2,113   - 

One-to-four family residential

  5,454   5,512   -   6,490   6,643   - 

Non-mortgage loans:

                        

Small Business Administration

  1,151   1,421   -   1,267   1,609   - 

Taxi medallion

  3,513   9,731   -   4,539   12,788   - 

Commercial business and other

  2,019   4,060   -   -   -   - 
                         

Total loans with no related allowance recorded

  18,370   27,458   -   18,869   28,156   - 
                         

With an allowance recorded:

                        

Mortgage loans:

                        

Multi-family residential

  1,256   1,256   94   1,275   1,275   100 

One-to-four family mixed-use property

  847   847   51   1,185   1,185   143 

One-to-four family residential

  387   387   48   399   399   51 

Non-mortgage loans:

                        

Commercial business and other

  951   951   116   3,791   3,791   866 
                         

Total loans with an allowance recorded

  3,441   3,441   309   6,650   6,650   1,160 
                         

Total Impaired Loans:

                        

Total mortgage loans

 $14,177  $14,736  $193  $15,922  $16,618  $294 
                         

Total non-mortgage loans

 $7,634  $16,163  $116  $9,597  $18,188  $866 

 

 

-20-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

September 30, 2019

  

September 30, 2018

 
  

Average

  

Interest

  

Average

  

Interest

 
  

Recorded

  

Income

  

Recorded

  

Income

 
  

Investment

  

Recognized

  

Investment

  

Recognized

 
                 
  

(In thousands)

 

With no related allowance recorded:

                

Mortgage loans:

                

Multi-family residential

 $3,398  $9  $4,013  $31 

Commercial real estate

  1,252   -   4,587   50 

One-to-four family mixed-use property

  1,889   17   3,452   28 

One-to-four family residential

  5,607   1   7,742   7 

Construction

  -   -   365   - 

Non-mortgage loans:

                

Small Business Administration

  1,188   -   739   31 

Taxi medallion

  3,534   32   6,152   84 

Commercial business and other

  1,912   -   20,301   482 
                 

Total loans with no related allowance recorded

  18,780   59   47,351   713 
                 

With an allowance recorded:

                

Mortgage loans:

                

Multi-family residential

  1,260   18   1,740   19 

One-to-four family mixed-use property

  922   8 �� 1,201   15 

One-to-four family residential

  389   4   405   4 

Non-mortgage loans:

                

Commercial business and other

  803   -   297   4 
                 

Total loans with an allowance recorded

  3,374   30   3,643   42 
                 

Total Impaired Loans:

                

Total mortgage loans

 $14,717  $57  $23,505  $154 
                 

Total non-mortgage loans

 $7,437  $32  $27,489  $601 

 

 

-21-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table shows our average recorded investment and interest income recognized for impaired loans for the nine months ended:

 

  

September 30, 2019

  

September 30, 2018

 
  

Average

  

Interest

  

Average

  

Interest

 
  

Recorded

  

Income

  

Recorded

  

Income

 
  

Investment

  

Recognized

  

Investment

  

Recognized

 
                 
  

(In thousands)

 

With no related allowance recorded:

                

Mortgage loans:

                

Multi-family residential

 $3,214  $27  $4,201  $67 

Commercial real estate

  1,259   15   5,300   176 

One-to-four family mixed-use property

  1,919   51   3,759   108 

One-to-four family residential

  5,943   5   7,974   32 

Construction

  238   -   243   10 

Non-mortgage loans:

                

Small Business Administration

  1,217   -   526   33 

Taxi medallion

  3,875   138   6,307   252 

Commercial business and other

  1,261   -   13,560   792 
                 

Total loans with no related allowance recorded

  18,926   236   41,870   1,470 
                 

With an allowance recorded:

                

Mortgage loans:

                

Multi-family residential

  1,266   54   1,896   78 

Commercial real estate

  -   -   1,206   39 

One-to-four family mixed-use property

  1,008   28   407   12 

One-to-four family residential

  393   12   -   - 

Non-mortgage loans:

                

Commercial business and other

  1,572   -   307   13 
                 

Total loans with an allowance recorded

  4,239   94   3,816   142 
                 

Total Impaired Loans:

                

Total mortgage loans

 $15,240  $192  $24,986  $522 
                 

Total non-mortgage loans

 $7,925  $138  $20,700  $1,090 

 

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

 

-22-

 

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 the periods indicated:

 

  

September 30, 2019

 

(In thousands)

 

Special Mention

  

Substandard

  

Doubtful

  

Loss

  

Total

 
                     

Multi-family residential

 $1,954  $3,756  $-  $-  $5,710 

Commercial real estate

  8,999   1,539   -   -   10,538 

One-to-four family - mixed-use property

  1,789   1,215   -   -   3,004 

One-to-four family - residential

  295   5,768   -   -   6,063 

Construction

  -   -   -   -   - 

Small Business Administration

  55   85   -   -   140 

Taxi medallion

  -   3,513   -   -   3,513 

Commercial business and other

  4,398   14,733   441   -   19,572 

Total loans

 $17,490  $30,609  $441  $-  $48,540 

 

 

  

December 31, 2018

 

(In thousands)

 

Special Mention

  

Substandard

  

Doubtful

  

Loss

  

Total

 
                     

Multi-family residential

 $2,498  $4,166  $-  $-  $6,664 

Commercial real estate

  381   4,051   -   -   4,432 

One-to-four family - mixed-use property

  1,199   2,034   -   -   3,233 

One-to-four family - residential

  557   6,665   -   -   7,222 

Construction

  730   -   -   -   730 

Small Business Administration

  481   139   -   -   620 

Taxi medallion

  -   4,539   -   -   4,539 

Commercial business and other

  730   21,348   3,512   -   25,590 

Total loans

 $6,576  $42,942  $3,512  $-  $53,030 

 

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $67.3 million and $228.5 million, respectively, at September 30, 2019.

 

 

6.    Loans held for sale

 

Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 2019 and December 31, 2018, the Bank did not have any loans held for sale.

 

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

 

-23-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables show loans sold during the period indicated:

 

  

For the three months ended September 30, 2019

 
          

Net Recoveries

     

(Dollars in thousands)

 

Loans sold

  

Proceeds

  (Charge-offs)   Net gain  

Delinquent and non-performing loans

                

Multi-family residential

  1  $700  $-  $204 
Commercial business and other  1   3,248   -   - 
                 

Total

  2  $3,948  $-  $204 

 

 

  

For the three months ended September 30, 2018

 
          

Net Recoveries

     

(Dollars in thousands)

 

Loans sold

  

Proceeds

  (Charge-offs)   Net gain  

Delinquent and non-performing loans

                

Multi-family residential

  1  $595  $-  $- 

Commercial real estate

  1   2,500   -   - 

One-to-four family - mixed-use property

  2   725   (4)  - 

One-to-four family - residential

  2   390   72   10 
                 

Total

  6  $4,210  $68  $10 

 

  

For the nine months ended September 30, 2019

 
          

Net Recoveries

     

(Dollars in thousands)

 

Loans sold

  

Proceeds

  (Charge-offs)   Net gain 

Delinquent and non-performing loans

                

Multi-family residential

  3  $1,465  $-  $267 

One-to-four family - mixed-use property

  1   405   (1)  - 
Commercial business and other  1   3,248   -   - 
                 

Total

  5  $5,118  $(1) $267 
                 
                 

Performing loans

                

Small Business Administration

  3  $2,069  $-  $114 
                 

Total

  3  $2,069  $-  $114 

 

-24-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

  

For the nine months ended September 30, 2018

 
          

Net Recoveries

     

(Dollars in thousands)

 

Loans sold

  

Proceeds

  (Charge-offs)  

Net gain (loss)

 

Delinquent and non-performing loans

                

Multi-family residential

  4  $1,559  $-  $- 

Commercial real estate

  4   6,065   -   (235)

One-to-four family - mixed-use property

  2   725   (4)  - 

One-to-four family - residential

  2   390   72   10 
                 

Total

  12  $8,739  $68  $(225)
                 

Performing loans

                

Small Business Administration

  9  $5,671  $-  $393 
                 

Total

  9  $5,671  $-  $393 

 

 

7.    Other Real Estate Owned

 

The following table shows changes in OREO during the periods indicated:

 

  

For the three months ended

  

For the nine months ended

 
  

September 30,

  

September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 
                 

Balance at beginning of period

 $239  $-  $-  $- 

Acquisitions

  -   -   239   638 

Sales

  -   -   -   (638)
                 

Balance at end of period

 $239  $-  $239  $- 

 

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

  

For the nine months ended

 
  

September 30,

  

September 30,

 
  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 
                 

Gross gains

 $-  $-  $-  $27 

 

Included within net loans as of September 30, 2019 and December 31, 2018 was a recorded investment of $6.5 million and $7.2 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

 

-25-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

8.     Leases

 

The Company has 20 operating leases for branches (including headquarters) and office spaces, 9 operating leases for vehicles, and 1 operating lease for equipment. Our leases have remaining lease terms ranging from five months to 13 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the Company’s calculation of lease term.

 

The Company has elected the short-term lease recognition exemption such that the Company will not recognize ROU assets or lease liabilities for leases with a term of less than 12 months from the commencement date. The Company has one agreement that qualifies as a short-term lease with expense totaling approximately $34,000 and $102,000 for the three months and the nine months ended September 30, 2019, respectively, included in Professional services on the Consolidated Statements of Income. The Company has $0.2 million and $0.6 million in variable lease payments, which include insurance and real estate tax expenses, for the three months and nine months ended September 30, 2019, respectively. At September 30, 2019, the weighted-average remaining lease term for our operating leases is approximately eight years and the weighted average discount rate is 3.8%. Our lease agreements do not contain any residual value guarantees. At September 30, 2019, the Company is evaluating the lease portfolio to assess present and future contracts, including but not limited to, real estate, vehicles and equipment.

 

  

At or for the

  

At or for the

 
  

three months ended

  

nine months ended

 

(Dollars in thousands)

 

September 30, 2019

  

September 30, 2019

 
         

Operating lease ROU assets

 $42,400  $42,400 
         

Operating lease liabilities

 $50,626  $50,626 
         

Lease Cost

        

Operating lease cost

 $1,891  $5,676 

Short-term lease cost

  34   102 

Variable lease cost

  267   757 

Total lease cost

 $2,192  $6,535 
         
         

Other information

        

Cash paid for amounts included in the measurement of lease liabilities

        

Operating cash flows from operating leases

 $2,002  $6,052 

Right-of-use assets obtained in exchange for new operating lease liabilities

 $1,253  $1,295 

Weighted-average remaining lease term-operating leases (years)

  7.7   7.7 

Weighted average discount rate-operating leases

  3.8%  3.8%

 

-26-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows:

 

  

Minimum Rental

 
  

(In thousands)

 

Years ended December 31:

    

2019

 $1,694 

2020

  8,397 

2021

  7,644 

2022

  7,229 

2023

  7,366 

Thereafter

  26,378 

Total minimum payments required

  58,708 

Less: implied interest

  8,082 

Total lease obligations

 $50,626 

 

Certain leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating lease agreements expire through 2032.

 

 

9.    Stock-Based Compensation

 

On January 31, 2019, the Board of Directors approved a 2019 long-term incentive compensation program for certain Company executive officers that includes grants of performance-based restricted stock units (“PRSUs”) in addition to time-based restricted stock units (“RSU”). Under the terms of the PRSU Agreement, the number of PRSUs that may be earned depends on the extent to which performance goals for the award are achieved over a three-year performance period, as determined by the Compensation Committee of the Board. The number of PRSUs that may be earned ranges from 0% to 150% of the target award, with no PRSUs earned for below threshold-level performance, 50% of PRSUs earned for threshold-level performance, 100% of PRSUs earned for target-level performance, and 150% of PRSUs earned for maximum-level performance.  As of September 30, 2019, PRSU’s granted in 2019 are being accrued at slightly above target, as projected performance is above target.

 

For the three months ended September 30, 2019 and 2018, the Company’s net income, as reported, included $1.2 million and $1.1 million, respectively, of stock-based compensation costs and $0.2 million and $0.2 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. For the nine months ended September 30, 2019 and 2018, the Company’s net income, as reported, includes $6.5 million and $5.7 million, respectively, of stock-based compensation costs and $1.5 million and $1.2 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. During the nine months ended September 30, 2019, the Company granted 263,574 and 66,130 in RSU awards and PRSU awards, respectively. During the nine months ended September 30, 2018, the Company granted 280,590 RSU awards. During the three months ended September 30, 2019 and 2018, the Company did not grant any RSU awards. During the three months ended September 30, 2019, the Company granted 8,260 in PRSU awards. The Company has not granted stock options since 2009 and at September 30, 2019, had none outstanding.

 

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.

 

-27-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the Company’s RSU and PRSU awards at or for the nine months ended September 30, 2019:

 

  

RSU Awards

  

PRSU Awards

 
      

Weighted-Average

      

Weighted-Average

 
      

Grant-Date

      

Grant-Date

 
  

Shares

  

Fair Value

  

Shares

  

Fair Value

 
                 

Non-vested at December 31, 2018

  502,658  $24.93   -  $- 
 Granted  263,574   22.38   66,130   22.38 
 Vested  (279,187)  23.39   (30,491)  22.38 
 Forfeited  (26,160)  24.85   -   - 

Non-vested at September 30, 2019

  460,885  $24.41   35,639  $22.38 
                 

Vested but unissued at September 30, 2019

  229,352  $24.67   24,691  $22.38 

 

As of September 30, 2019, there was $8.3 million of total unrecognized compensation cost related to RSU and PRSU awards granted. That cost is expected to be recognized over a weighted-average period of 2.8 years. The total fair value of awards vested for the three months ended September 30, 2019 and 2018 was $0.7 million and $0.2 million, respectively. The total fair value of awards vested for the nine months ended September 30, 2019 and 2018 was $6.9 million and $7.0 million, respectively. The vested but unissued RSU and PRSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

 

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

 

The following table summarizes the Phantom Stock Plan at or for the nine months ended September 30, 2019:

 

Phantom Stock Plan

 

Shares

  

Fair Value

 
         

Outstanding at December 31, 2018

  99,313  $21.53 

Granted

  10,278   21.97 

Distributions

  (1,055)  21.91 

Outstanding at September 30, 2019

  108,536  $20.20 

Vested at September 30, 2019

  108,228  $20.20 

 

The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $0.2 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively. The total fair value of the distributions from the Phantom Stock Plan was less than $1,000 for each of the three months ended September 30, 2019 and 2018, respectively.

 

The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $0.1 million and $0.2 million for the nine months ended September 30, 2019 and 2018, respectively. The total fair value of the distributions from the Phantom Stock Plan was $23,000 and $2,000 for the nine months ended September 30, 2019 and 2018, respectively.

 

-28-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

10.    Pension and Other Postretirement Benefit Plans

 

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

 

  

Three months ended

  

Nine months ended

 
  

September 30,

  

September 30,

 

(In thousands)

 

2019

  

2018

  

2019

  

2018

 
                 

Employee Pension Plan:

                

Interest cost

 $199  $195  $597  $585 

Amortization of unrecognized loss

  68   155   201   465 

Expected return on plan assets

  (272)  (363)  (816)  (1,089)

Net employee pension benefit

 $(5) $(13) $(18) $(39)
                 

Outside Director Pension Plan:

                

Service cost

 $10  $11  $30  $33 

Interest cost

  21   19   63   60 

Amortization of unrecognized gain

  (35)  (23)  (105)  (69)

Amortization of past service liability

  -   3   -   9 

Net outside director pension (benefit) expense

 $(4) $10  $(12) $33 
                 

Other Postretirement Benefit Plans:

                

Service cost

 $70  $88  $210  $264 

Interest cost

  85   77   255   231 

Amortization of past service credit

  (22)  (13)  (64)  (37)

Net other postretirement expense

 $133  $152  $401  $458 

 

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2018 that it expects to contribute $0.3 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), during the year ending December 31, 2019. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of September 30, 2019, the Company had contributed $108,000 to the Outside Director Pension Plan and $54,000 in contributions were made to the Other Postretirement Benefit Plans. As of September 30, 2019, the Company has not revised its expected contributions for the year ending December 31, 2019.

 

 

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. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2019, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $43.9 million, respectively. At December 31, 2018, the Company carried financial assets and financial liabilities under the fair value option with fair values of $13.8 million and $41.8 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and nine months ended September 30, 2019 and 2018.

 

-29-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited

)

 

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

 

  

Fair Value

  

Fair Value

  

Changes in Fair Values For Items Measured at Fair Value

 
  

Measurements

  

Measurements

  

Pursuant to Election of the Fair Value Option

 
  

at September 30,

  

at December 31,

  

Three Months Ended

  

Nine Months Ended

 

(In thousands)

 

2019

  

2018

  

September 30, 2019

  

September 30, 2018

  

September 30, 2019

  

September 30, 2018

 
                         

Mortgage-backed securities

 $812  $967  $-  $(6) $2  $(17)

Other securities

  13,524   12,843   107   (72)  470   (272)

Borrowed funds

  43,910   41,849   (599)  (607)  (2,353)  (3,155)

Net loss from fair value adjustments (1)(2)

      $(492) $(685) $(1,881) $(3,444)

 

 

1.

The net loss from fair value adjustments presented in the above table does not include net (losses) gains of ($1.6) million and $0.5 million for the three months ended September 30, 2019 and 2018, respectively, from the change in the fair value of interest rate swaps.

 

2.

The net loss from fair value adjustments presented in the above table does not include net (losses) gains of ($4.3) million and $2.9 million for the nine months ended September 30, 2019 and 2018, respectively, from the change in the fair value of interest rate swaps.

 

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

 

The borrowed funds had a contractual principal amount of $61.9 million at both September 30, 2019 and December 31, 2018. The fair value of borrowed funds includes accrued interest payable of $0.2 million at both September 30, 2019 and December 31, 2018, respectively.

 

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

 

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

 

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

 

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 – when quoted market prices are available in an active market. At September 30, 2019 and December 31, 2018, Level 1 included one mutual fund.

 

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At September 30, 2019 and December 31, 2018, Level 2 included mortgage-backed securities, CLO’s, corporate debt, municipals and interest rate swaps.

 

-30-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At September 30, 2019 and December 31, 2018, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company.

 

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

 

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and their respective category in the fair value hierarchy at September 30, 2019 and December 31, 2018:

 

  

Quoted Prices

                         
  

in Active Markets

  

Significant Other

  

Significant Other

         
  

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

  

Total carried at fair value

 
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

on a recurring basis

 
  

2019

  

2018

  

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 
                                 

Assets:

                                

Mortgage-backed Securities

 $-  $-  $579,010  $557,953  $-  $-  $579,010  $557,953 

Other securities

  12,206   11,586   232,941   251,860   1,318   1,256   246,465   264,702 

Interest rate swaps

  -   -   156   15,961   -   -   156   15,961 
                                 

Total assets

 $12,206  $11,586  $812,107  $825,774  $1,318  $1,256  $825,631  $838,616 
                                 

Liabilities:

                                

Borrowings

 $-  $-  $-  $-  $43,910  $41,849  $43,910  $41,849 

Interest rate swaps

  -   -   30,988   2,239   -   -   30,988   2,239 
                                 

Total liabilities

 $-  $-  $30,988  $2,239  $43,910  $41,849  $74,898  $44,088 

 

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

 

  

For the three months ended

 
  

September 30, 2019

  

September 30, 2018

 
  

Trust preferred

  

Junior subordinated

  

Trust preferred

  

Junior subordinated

 
  

securities

  

debentures

  

securities

  

debentures

 
  

(In thousands)

 
                 

Beginning balance

 $1,303  $43,414  $1,188  $39,566 

Net gain from fair value adjustment of financial assets (1)

  15   -   17   - 

Net loss from fair value adjustment of financial liabilities (1)

  -   599   -   607 

Decrease in accrued interest payable

  -   (15)  -   (9)

Change in unrealized gains included in other comprehensive income

  -   (88)  -   (13)

Ending balance

 $1,318  $43,910  $1,205  $40,151 
                 

Changes in unrealized gains held at period end

 $-  $1,513  $-  $1,164 

 

-31-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

  

For the nine months ended

 
  

September 30, 2019

  

September 30, 2018

 
  

Trust preferred

  

Junior subordinated

  

Trust preferred

  

Junior subordinated

 
  

securities

  

debentures

  

securities

  

debentures

 
  

(In thousands)

 
                 

Beginning balance

 $1,256  $41,849  $1,110  $36,986 

Net gain from fair value adjustment of financial assets (1)

  64   -   94   - 

Net loss from fair value adjustment of financial liabilities (1)

  -   2,353   -   3,155 

Increase in accrued interest receivable

  -   -   1   - 

Decrease (increase) in accrued interest payable

  (2)  (27)  -   42 

Change in unrealized gains included in other comprehensive income

  -   (265)  -   (32)

Ending balance

 $1,318  $43,910  $1,205  $40,151 
                 

Changes in unrealized gains held at period end

 $-  $1,513  $-  $1,164 

 

1.

Totals in the table above are presented in the Consolidated Statement of Income under net loss from fair value adjustments.

 

During the three and nine months ended September 30, 2019 and 2018, there were no transfers between Levels 1, 2 and 3.

 

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

 

  

September 30, 2019

 
               
  

Fair Value

 

Valuation Technique

Unobservable Input

 

Range

  

Weighted Average

 
  

(Dollars in thousands)

 

Assets:

              
               

Trust preferred securities

 $1,318 

Discounted cash flows

Discount rate

  n/a   4.2%
               

Liabilities:

              
               

Junior subordinated debentures

 $43,910 

Discounted cash flows

Discount rate

  n/a   4.2%

 

  

December 31, 2018

 
               
  

Fair Value

 

Valuation Technique

Unobservable Input

 

Range

  

Weighted Average

 
  

(Dollars in thousands)

 

Assets:

              
               

Trust preferred securities

 $1,256 

Discounted cash flows

Discount rate

  n/a   4.9%
               

Liabilities:

              
               

Junior subordinated debentures

 $41,849 

Discounted cash flows

Discount rate

  n/a   4.9%

 

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at September 30, 2019 and December 31, 2018, are the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

 

-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 non-recurring basis and their respective category in the fair value hierarchy at September 30, 2019 and December 31, 2018:

 

  

Quoted Prices

                         
  

in Active Markets

  

Significant Other

  

Significant Other

         
  

for Identical Assets

  

Observable Inputs

  

Unobservable Inputs

  

Total carried at fair value

 
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

on a non-recurring basis

 
  

2019

  

2018

  

2019

  

2018

  

2019

  

2018

  

2019

  

2018

 
  

(In thousands)

 
                                 

Assets

                                

Impaired loans

 $-  $-  $-  $-  $778  $4,111  $778  $4,111 

Other repossesed assets

  -   -   -   -   239   35   239   35 
                                 

Total assets

 $-  $-  $-  $-  $1,017  $4,146  $1,017  $4,146 

 

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

 

  

September 30, 2019

         
  

Fair Value

 

Valuation Technique

Unobservable Input

Range

Weighted Average

  

(Dollars in thousands)

Assets:

        
         
         

Impaired loans

 $149 

Sales approach

Reduction for planned expedited disposal

 

15.0% 

15.0%

         
         

Impaired loans

 $629 

Blended income and sales approach

Adjustment to sales comparison value to reconcile differences between comparable sales

-15.0%

to15.0%

-3.7%

      

Capitalization rate

9.0%

to9.5%

9.2%

      

Reduction for planned expedited disposal

 

15.0% 

15.0%

         

Other real estate owned

 $239 

Sales approach

Adjustment to sales comparison value to reconcile differences between comparable sales

0.5%

to12.5%

6.5%

 

-33-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

  

At December 31, 2018

  

Fair Value

 

Valuation Technique

Unobservable Input

Range

Weighted Average

  

(Dollars in thousands)

Assets:

        
         

Impaired loans

 $204 

Income approach

Capitalization rate

 

8.5% 

8.5%

      

Reduction for planned expedited disposal

 

15.0% 

15.0%

         

Impaired loans

 $2,724 

Sales approach

Adjustment to sales comparison value to reconcile differences between comparable sales

 

0.0% 

0.0%

      

Reduction for planned expedited disposal

-36.5%

to15.0%

10.4%

         

Impaired loans

 $1,183 

Blended income and sales approach

Adjustment to sales comparison value to reconcile differences between comparable sales

-30.0%

to10.0%

-7.8%

      

Capitalization rate

7.4%

to9.8%

8.7%

      

Reduction for planned expedited disposal

 

15.0% 

15.0%

         

Other repossesed assets

 $35 

Sales approach

Reduction for planned expediated disposal

 

0.0% 

0.0%

 

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2019 and December 31, 2018.

 

The methods and assumptions used to estimate fair value at September 30, 2019 and December 31, 2018 are as follows:

 

Securities:

 

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

 

Impaired Loans:

 

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or, for collateral dependent loans, 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

 

Junior Subordinated Debentures:

 

The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity. The unrealized net gain/loss attributable to changes in our own credit risk was determined by adjusting the fair value as determined in the proceeding sentence by the average rate of default on debt instruments with a similar debt rating as our junior subordinated debentures, with the difference from the original calculation and this calculation resulting in the instrument-specific unrealized gain/loss.

 

Interest Rate Swaps:

 

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

 

-34-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

September 30, 2019

 
  

Carrying

  

Fair

             
  

Amount

  

Value

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Assets:

                    

Cash and due from banks

 $86,989  $86,989  $86,989  $-  $- 

Securities held-to-maturity

                    

Mortgage-backed securities

  7,939   8,372   -   8,372   - 

Other securities

  52,101   55,498   -   -   55,498 

Securities available for sale

                    

Mortgage-backed securities

  579,010   579,010   -   579,010   - 

Other securities

  246,465   246,465   12,206   232,941   1,318 

Loans

  5,765,763   5,809,209   -   -   5,809,209 

FHLB-NY stock

  65,280   65,280   -   65,280   - 

Accrued interest receivable

  26,566   26,566   12   2,767   23,787 

Interest rate swaps

  156   156   -   156   - 
                     
                     
                     

Liabilities:

                    

Deposits

 $4,974,312  $4,979,324  $3,467,936  $1,511,388  $- 

Borrowings

  1,422,440   1,628,483   -   1,584,573   43,910 

Accrued interest payable

  8,284   8,284   -   8,284   - 

Interest rate swaps

  30,988   30,988   -   30,988   - 

 

-35-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

  

December 31, 2018

 
  

Carrying

  

Fair

             
  

Amount

  

Value

  

Level 1

  

Level 2

  

Level 3

 
  

(In thousands)

 

Assets:

                    

Cash and due from banks

 $118,561  $118,561  $118,561  $-  $- 

Securities held-to-maturity

                    

Mortgage-backed securities

  7,953   7,366   -   7,366   - 

Other securities

  24,065   22,508   -   -   22,508 

Securities available for sale

                    

Mortgage-backed securities

  557,953   557,953   -   557,953   - 

Other securities

  264,702   264,702   11,586   251,860   1,256 

Loans

  5,551,484   5,496,266   -   -   5,496,266 

FHLB-NY stock

  57,282   57,282   -   57,282   - 

Accrued interest receivable

  25,485   25,485   54   2,756   22,675 

Interest rate swaps

  15,961   15,961   -   15,961   - 
                     
                     

Liabilities:

                    

Deposits

 $4,960,784  $4,955,077  $3,397,474  $1,557,603  $- 

Borrowings

  1,250,843   1,241,745   -   1,199,896   41,849 

Accrued interest payable

  5,890   5,890   -   5,890   - 

Interest rate swaps

  2,239   2,239   -   2,239   - 

 

 

12.    Derivative Financial Instruments

 

At September 30, 2019 and December 31, 2018, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for three purposes: 1) to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million, at September 30, 2019 and December 31, 2018; 2) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $337.3 million and $286.1 million at September 30, 2019 and December 31, 2018, respectively; and 3) to mitigate exposure to rising interest rates on certain short-term advances totaling $541.5 million and $441.5 million at September 30, 2019 and December 31, 2018, respectively.

 

At September 30, 2019 and December 31, 2018, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.

 

The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

 

At September 30, 2019 and December 31, 2018, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At September 30, 2019 and December 31, 2018, derivatives with a combined notional amount of $318.9 million and $267.8 million, respectively, were designated as fair value hedges. At September 30, 2019 and December 31, 2018, derivatives with a combined notional amount of $541.5 million and $441.5 million, respectively, were designated as cash flow hedges.

 

For cash flow hedges, the effective portion of changes in the fair value of the derivative is reported in AOCL, net of tax. Amounts in AOCL are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended September 30, 2019 and 2018, $0.4 million and $0.1 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense. During the nine months ended September 30, 2019 and 2018, $1.3 million and $0.2 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense.

 

-36-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

  

September 30, 2019

  

December 31, 2018

 
  

Notional

  

Net Carrying

  

Notional

  

Net Carrying

 
  

Amount

  

Value (1)

  

Amount

  

Value (1)

 
  

(In thousands)

 
                 

Interest rate swaps (fair value hedge)

 $50,463  $156  $248,330  $10,593 

Interest rate swaps (fair value hedge)

  268,468   (13,277)  19,468   (502)

Interest rate swaps (cash flow hedge)

  -   -   441,500   5,368 

Interest rate swaps (cash flow hedge)

  541,500   (11,695)  -   - 

Interest rate swaps (non-hedge)

  36,321   (6,016)  36,321   (1,737)

Total derivatives

 $896,752  $(30,832) $745,619  $13,722 

 

(1)

Derivatives in a positive position are recorded as “Other assets” and derivatives in a 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

 

For the nine months ended

  

September 30,

 

September 30,

(In thousands)

 

2019

  

2018

  

2019

  

2018

 
                 

Financial Derivatives:

                

Interest rate swaps (non-hedge) (1)

 $(1,632) $668  $(4,279) $2,382 

Interest rate swaps (fair value hedge) (2)

  (1,262)  (153)  (2,717)  525 

Net (loss) gain

 $(2,894) $515  $(6,996) $2,907 

 

(1)

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

(2)

Net gains and losses recorded during the three and nine months ended September 30, 2019, are recorded as part of “Interests and fees on loans” in the Consolidated Statements of Income. Net gains and losses recorded during the three and nine months ended September 30, 2018, are recorded as part of “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

 

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

 

-37-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables present the effect of the master netting arrangements on the presentation of the derivative assets and liabilities in the Consolidated Statements of Condition as of the dates indicated:

  

September 30, 2019

 
              

Gross Amounts Not Offset in the Consolidated Statement of Condition

     

(In thousands)

 

Gross Amount of Recognized Assets

  

Gross Amount Offset in the Statement of Condition

  

Net Amount of Assets Presented in the Statement of Condition

  

Financial Instruments

  

Cash Collateral Received

  

Net Amount

 
                         

Interest rate swaps

 $156  $-  $156  $-  $-  $156 

 

              

Gross Amounts Not Offset in the Consolidated Statement of Condition

     

(In thousands)

 

Gross Amount of Recognized Liabilities

  

Gross Amount Offset in the Statement of Condition

  

Net Amount of Liabilities Presented in the Statement of Condition

  

Financial Instruments

  

Cash Collateral Pledged

  

Net Amount

 
                         

Interest rate swaps

 $30,988  $-  $30,988  $31,070  $-  $(82)

 

  

December 31, 2018

 
              

Gross Amounts Not Offset in the Consolidated Statement of Condition

     

(In thousands)

 

Gross Amount of Recognized Assets

  

Gross Amount Offset in the Statement of Condition

  

Net Amount of Assets Presented in the Statement of Condition

  

Financial Instruments

  

Cash Collateral Received

  

Net Amount

 
                         

Interest rate swaps

 $15,961  $-  $15,961  $-  $14,960  $1,001 

 

              

Gross Amounts Not Offset in the Consolidated Statement of Condition

     

(In thousands)

 

Gross Amount of Recognized Liabilities

  

Gross Amount Offset in the Statement of Condition

  

Net Amount of Liabilities Presented in the Statement of Condition

  

Financial Instruments

  

Cash Collateral Pledged

  

Net Amount

 
                         

Interest rate swaps

 $2,239  $-  $2,239  $-  $-  $2,239 

 

-38-

 

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. As of September 30, 2019, the Company is undergoing examination for its New York State income tax returns for 2014, 2015 and 2016 and its New York City income tax return for 2014.

 

Income tax provisions are summarized as follows:

 

  

For the three months

  

For the nine months

 
  

ended September 30,

  

ended September 30,

 

(In thousands)

 

2019

  

2018

  

2019

  

2018

 

Federal:

                

Current

 $3,578  $2,899  $9,354  $9,064 

Deferred

  (1,121)  (592)  (1,973)  (839)

Total federal tax provision

  2,457   2,307   7,381   8,225 

State and Local:

                

Current

  1,345   33   2,518   1,722 

Deferred

  (1,266)  (430)  (1,804)  (598)

Total state and local tax provision

  79   (397)  714   1,124 
                 

Total income tax provision

 $2,536  $1,910  $8,095  $9,349 

 

-39-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

14.      Accumulated Other Comprehensive Income (Loss):

 

The following tables sets forth the changes in accumulated other comprehensive income (loss) by component for the periods indicated:

 

  

For the three months ended September 30, 2019

 
  

Unrealized Gains

  

Unrealized Gains

             
  

(Losses) on

  

(Losses) on

      

Fair Value

     
  

Available for Sale

  

Cash flow

  

Defined Benefit

  

Option Elected

     
  

Securities

  

Hedges

  

Pension Items

  

on Liabilities

  

Total

 
  

(In thousands)

 
                     

Beginning balance, net of tax

 $(3,815) $(6,132) $(1,658) $989  $(10,616)
                     

Other comprehensive income before reclassifications, net of tax

  (475)  (1,664)  -   61   (2,078)
                     

Amounts reclassified from accumulated other comprehensive income, net of tax

      (282)  7   -   (275)
                     

Net current period other comprehensive income (loss), net of tax

  (475)  (1,946)  7   61   (2,353)
                     

Ending balance, net of tax

 $(4,290) $(8,078) $(1,651) $1,050  $(12,969)

 

  

For the three months ended September 30, 2018

 
  

Unrealized Gains

  

Unrealized Gains

             
  

(Losses) on

  

(Losses) on

      

Fair Value

     
  

Available for Sale

  

Cash flow

  

Defined Benefit

  

Option Elected

     
  

Securities

  

Hedges

  

Pension Items

  

on Liabilities

  

Total

 
  

(In thousands)

 
                     

Beginning balance, net of tax

 $(16,501) $8,027  $(4,325) $792  $(12,007)
                     

Other comprehensive income before reclassifications, net of tax

  (3,505)  1,950   -   9   (1,546)
                     

Amounts reclassified from accumulated other comprehensive income, net of tax

  -   (80)  84   -   4 
                     

Net current period other comprehensive income (loss), net of tax

  (3,505)  1,870   84   9   (1,542)
                     

Ending balance, net of tax

 $(20,006) $9,897  $(4,241) $801  $(13,549)

 

-40-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

  

For the nine months ended September 30, 2019

 
  

Unrealized Gains

  

Unrealized Gains

             
  

(Losses) on

  

(Losses) on

      

Fair Value

     
  

Available for Sale

  

Cash flow

  

Defined Benefit

  

Option Elected

     
  

Securities

  

Hedges

  

Pension Items

  

on Liabilities

  

Total

 
  

(In thousands)

 
                     

Beginning balance, net of tax

 $(15,649) $3,704  $(1,673) $866  $(12,752)
                     

Other comprehensive income before reclassifications, net of tax

  11,349   (10,914)  -   184   619 
                     

Amounts reclassified from accumulated other comprehensive income, net of tax

  10   (868)  22   -   (836)
                     

Net current period other comprehensive income (loss), net of tax

  11,359   (11,782)  22   184   (217)
                     

Ending balance, net of tax

 $(4,290) $(8,078) $(1,651) $1,050  $(12,969)

 

  

For the nine months ended September 30, 2018

 
  

Unrealized Gains

  

Unrealized Gains

             
  

(Losses) on

  

(Losses) on

      

Fair Value

     
  

Available for Sale

  

Cash flow

  

Defined Benefit

  

Option Elected

     
  

Securities

  

Hedges

  

Pension Items

  

on Liabilities

  

Total

 
  

(In thousands)

 
                     

Beginning balance, net of tax

 $(5,522) $231  $(3,695) $-  $(8,986)

Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCL to Retained Earnings

  (1,325)  50   (798)  -   (2,073)

Impact of adoption of Accounting Standard Update 2016-01

  -   -   -   779   779 
                     

Other comprehensive income before reclassifications, net of tax

  (13,159)  9,455   -   22   (3,682)
                     

Amounts reclassified from accumulated other comprehensive income (loss), net of tax

  -   161   252   -   413 
                     

Net current period other comprehensive income, net of tax

  (13,159)  9,616   252   22   (3,269)
                     

Ending balance, net of tax

 $(20,006) $9,897  $(4,241) $801  $(13,549)

 

-41-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The following tables set forth significant amounts reclassified from accumulated other comprehensive income (loss) by component for the periods indicated:

 

For the three months ended September 30, 2019

       
  

Amounts Reclassified from

   

Details about Accumulated Other

 

Accumulated Other

  

Affected Line Item in the Statement

Comprehensive Loss Components

 

Comprehensive Loss

  

Where Net Income is Presented

  

(In thousands)

   

Unrealized gains (losses) on available for sale securities

 $-  

Net loss on sale of securities

   -  

Provision for income taxes

  $-  

Net of tax

Cash flow hedges:

      

Interest rate swaps

 $409  

Other interest expense

   (127) 

Provision for income taxes

  $282  

Net of tax

Amortization of defined benefit pension items:

      

Actuarial gain (losses)

 $(33)(1) 

Other operating expense

Prior service credits

  22 (1) 

Other operating expense

   (11) 

Total before tax

   4  

Provision for income taxes

  $(7) 

Net of tax

 

For the three months ended September 30, 2018

       
  

Amounts Reclassified from

   

Details about Accumulated Other

 

Accumulated Other

  

Affected Line Item in the Statement

Comprehensive Loss Components

 

Comprehensive Loss

  

Where Net Income is Presented

  

(In thousands)

   
       

Cash flow hedges:

      

Interest rate swaps

 $116  

Other interest expense

   (36) 

Tax expense

  $80  

Net of tax

Amortization of defined benefit pension items:

      

Actuarial losses

 $(132)(1) 

Other operating expense

Prior service credits

  10 (1) 

Other operating expense

   (122) 

Total before tax

   38  

Tax benefit

  $(84) 

Net of tax

 

-42-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

For the nine months ended September 30, 2019

       
  

Amounts Reclassified from

   

Details about Accumulated Other

 

Accumulated Other

  

Affected Line Item in the Statement

Comprehensive Loss Components

 

Comprehensive Loss

  

Where Net Income is Presented

  

(In thousands)

   

Unrealized gains (losses) on available for sale securities

 $(15) 

Net loss on sale of securities

   5  

Provision for income taxes

  $(10) 

Net of tax

Cash flow hedges:

      

Interest rate swaps

 $1,257  

Other interest income

   (389) 

Provision for income taxes

  $868  

Net of tax

Amortization of defined benefit pension items:

      

Actuarial gain (losses)

 $(96)(1) 

Other operating expense

Prior service credits

  64(1) 

Other operating expense

   (32) 

Total before tax

   10  

Provision for income taxes

  $(22) 

Net of tax

 

For the nine months ended September 30, 2018

       
  

Amounts Reclassified from

   

Details about Accumulated Other

 

Accumulated Other

  

Affected Line Item in the Statement

Comprehensive Loss Components

 

Comprehensive Loss

  

Where Net Income is Presented

  

(In thousands)

   
       

Cash flow hedges:

      

Interest rate swaps

 $(235) 

Interest expense

   74  

Tax benefit

  $(161) 

Net of tax

       

Amortization of defined benefit pension items:

      

Actuarial losses

 $(396)(1) 

Other operating expense

Prior service credits

  28(1) 

Other operating expense

   (368) 

Total before tax

   116  

Tax benefit

  $(252) 

Net of tax

 

1.

These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10 (“Pension and Other Postretirement Benefit Plans”) for additional information.

 

 

15.    Regulatory Capital

 

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As September 30, 2019, the Bank continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The Bank is also required to comply with a Capital Conservation Buffer (“CCB”). The CCB is designed to establish a capital range above minimum capital requirements and impose constraints on dividends, share buybacks and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB is 2.500%. The CCB for the Bank at September 30, 2019 was 5.21%.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

  

September 30, 2019

  

December 31, 2018

 
      

Percent of

      

Percent of

 
  

Amount

  

Assets

  

Amount

  

Assets

 
  

(Dollars in thousands)

 
                 

Tier I (leverage) capital:

                

Capital level

 $673,084   9.66

%

 $660,782   9.85

%

Requirement to be well capitalized

  348,415   5.00   335,512   5.00 

Excess

  324,669   4.66   325,270   4.85 
                 

Common Equity Tier I risk-based capital:

                

Capital level

 $673,084   12.79

%

 $660,782   13.28

%

Requirement to be well capitalized

  342,103   6.50   323,386   6.50 

Excess

  330,981   6.29   337,396   6.78 
                 

Tier 1 risk-based capital:

                

Capital level

 $673,084   12.79

%

 $660,782   13.28

%

Requirement to be well capitalized

  421,049   8.00   398,014   8.00 

Excess

  252,035   4.79   262,768   5.28 
                 

Total risk-based capital:

                

Capital level

 $695,120   13.21

%

 $681,727   13.70

%

Requirement to be well capitalized

  526,312   10.00   497,517   10.00 

Excess

  168,808   3.21   184,210   3.70 

 

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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 September 30, 2019, the Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The CCB for the Holding Company at September 30, 2019 was 5.37%.

 

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

 

  

September 30, 2019

  

December 31, 2018

 
      

Percent of

      

Percent of

 
  

Amount

  

Assets

  

Amount

  

Assets

 
  

(Dollars in thousands)

 
                 

Tier I (leverage) capital:

                

Capital level

 $606,844   8.71

%

 $586,582   8.74

%

Requirement to be well capitalized

  348,355   5.00   335,616   5.00 

Excess

  258,489   3.71   250,966   3.74 
                 

Common Equity Tier I risk-based capital:

                

Capital level

 $564,466   10.73

%

 $546,230   10.98

%

Requirement to be well capitalized

  342,078   6.50   323,382   6.50 

Excess

  222,388   4.23   222,848   4.48 
                 

Tier 1 risk-based capital:

                

Capital level

 $606,844   11.53

%

 $586,582   11.79

%

Requirement to be well capitalized

  421,019   8.00   398,008   8.00 

Excess

  185,825   3.53   188,574   3.79 
                 

Total risk-based capital:

                

Capital level

 $703,879   13.37

%

 $682,527   13.72

%

Requirement to be well capitalized

  526,274   10.00   497,511   10.00 

Excess

  177,605   3.37   185,016   3.72 

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

16.    Subsequent Events

 

On October 24, 2019, the Company entered into a definitive merger agreement to acquire Empire Bancorp, Inc. (“Empire”), in a transaction valued at an estimated $111.6 million, based on the Company’s closing stock price on October 24, 2019. Under the terms of the merger agreement, each share of Empire common stock will be exchanged for either 0.6548 shares of the Company’s common stock or $14.04 in cash, based upon the election of each Empire shareholder, subject to the election and proration procedures specified in the merger agreement (which provides for an aggregate split of total consideration of 50% Company common stock and 50% cash). In connection with the transaction, Empire National Bank will merge with and into Flushing Bank, with Flushing Bank as the surviving entity.

 

Completion of the transaction is subject to customary closing conditions, including receipt of regulatory approvals and the approval of Empire’s shareholders. The combined company at close is expected to have approximately $8.0 billion in assets, $6.3 billion in loans, $5.8 billion in deposits, and 23 branches in Queens, Brooklyn, Manhattan, and on Long Island.

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

17.    New Authoritative Accounting Pronouncements

 

Accounting Standards Adopted in 2019:

 

In February 2016, the Financial Accounting Standards Board (“FASB”) established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, Leases, which requires lessees to recognize leases on the balance sheet, makes targeted changes to lessor accounting, and enhances disclosures to include key information about leasing arrangements. An entity may adopt the new guidance by either restating prior periods and recording a cumulative effect adjustment at the beginning of the earliest comparative period presented (the modified retrospective transition approach) or by recording a cumulative adjustment at the beginning of the period of adoption (the additional transition method). The Company adopted this standard using the additional transition method approach and elected to use the effective date, January 1, 2019, as the date of initial application. As part of the Company’s adoption of ASC 842, the Company undertook a detailed scoping exercise to identify all leasing arrangements subject to the new leasing guidance and believes that all arrangements that meet the definition of a lease under historic US GAAP will continue to meet the definition of a lease under ASC 842. Upon adoption, the Company recorded right of use assets totaling $45.4 million and operating lease liabilities totaling $54.0 million. Additionally, a deferred gain from the sale of buildings totaling $2.7 million, net of tax, was reclassified to retained earnings.

 

As the rate implicit in each of the Company’s leases is not readily determinable, the Company is required to apply the Company’s incremental borrowing rate (“IBR”) to calculate the lease liability and right-of-use (“ROU”) asset for its leasing arrangements. The Company has used its unsecured Kroll rating as a starting point for calculation of the IBR and will adjust for considerations of collateral (i.e., notch the Company’s Kroll rating from an unsecured to a secured rating). The Company will also consider lease renewal options reasonably certain of exercise for purposes of determining the term of the underlying borrowing. The Company has considered various other factors, including, economic environment and determined that these factors do not currently impact the Company’s IBR calculation. The Company will continue to assess the appropriateness of the conclusions reached herein with respect to each of the factors discussed above  and will determine the appropriate IBR for each new lease arrangement or modification, as required.

 

The new leasing standard provides a number of optional practical expedients in transition. The Company has elected the “package of practical expedients”, which permits the Company not to reassess prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company. ASC 842 also provides certain accounting policy elections for an entity’s ongoing accounting. For operating leases wherein the Company is the lessee, the Company has elected the practical expedient to not separate lease and non-lease components. See Note 8 (“Leases”) for additional information.

 

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815)” providing targeted improvements to the accounting for hedging activities, which is effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional, that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and changes the presentation so that all items that affect earnings are in the same income statement line as the hedged item. The Company adopted this standard January 1, 2019, as the date of initial application. As a result of adoption, fair value adjustments on qualifying fair value hedges were recorded in interest income during the three and nine months ended September 30, 2019. These adjustments were recorded in non-interest income in prior periods. See Note 12 (“Derivative Financial Instruments”) for additional information.

 

Accounting Standards Pending Adoption:

 

In August 2018, the FASB issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)” providing targeted improvements to the disclosures required for Defined Benefit Plans. The amendments in in this Update are effective for fiscal years ended after December 15, 2020. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented. We are currently evaluating the impact of adopting this new guidance on our disclosures.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820)”. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under this ASU, the Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326)” which replaces the current U.S. GAAP “incurred loss” approach to “expected credit losses” approach, which is referred as Current Expected Credit Losses (CECL) of measuring the financial assets measure at amortize cost, including loan receivables, held-to-maturity debt securities, off balance sheet credit exposures and certain leases recognized by a lessor. CECL introduced the concept of purchased credit-deteriorated (PCD) financial assets, in which it requires the estimate of expected credit losses embedded in the purchase price of PCD assets to be estimated and separately recognized as an allowance as of the date of acquisition. It also modifies the accounting of impairment on available-for-sale debt securities by recognizing a credit loss through an allowance for credit losses as compared to a direct write down in the current U.S. GAAP.

 

CECL requires consideration of broader range of information in order to update expected credit losses which includes historical experience, current conditions, and reasonable and supportable forecast that affect the collectability of the reported amount. The allowance of credit losses is an estimated account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial assets. This is intended to provide the financial statement users a better understanding of the expected loss on financial instruments and other commitments held by an entity at each reporting date.

 

For public business entities that are U.S. Securities and Exchange Commission (SEC) Filers, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The company plans to adopt this ASU beginning January 1, 2020 and will apply changes resulting from the application of the new standard, which will be reported in March 31, 2020 interim financial statements. There is no specific method disclosed by FASB for measuring expected credit losses. CECL allows institutions to apply judgment in developing estimation methods that are appropriate and practical for their circumstances.

 

Our CECL efforts through September 30, 2019 have involved the implementation and testing of a model including data collection and validation for use in the model and disclosures. Additionally, we have enhanced and supplemented Company policies and controls related to CECL. Certain key assumptions in our estimation of CECL are the reasonable and supportable forecast period, the historical loss period and the reversion period. We are still in the process of determining the most reasonable periods for these assumptions.  The Company has in place a steering committee to oversee the CECL implementation. The Company will be running parallel testing incorporating the functionality of the models, internal control for estimation and all other governance activities through the remainder of 2019.

 

CECL requires a cumulative-effect adjustment to retained earnings as the beginning of the reporting period of adoption. This adoption could have a material impact on the Company’s consolidated results of operations and financial condition. The extent of the impact is still being calculated and will depend on many factors, such as the composition of the Company’s loan portfolio, the portfolio’s credit quality and economic condition as well as our estimation of credit losses at adoption.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions 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, 2018. 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, 2018. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “goals,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

 

Executive Summary

 

We are a Delaware corporation organized in May 1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. Today the Bank operates as a full-service New York State commercial bank. The Bank’s primary regulator is the New York State Department of Financial Services, and its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank also operates an internet branch, which operates under the brands of iGObanking.com® and BankPurely® (the “Internet Branch”). The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of subordinated debt, junior subordinated debt, and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

 

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

 

-49-

 
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions 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:

 

 

manage cost of funds and continue to improve funding mix;

 

 

manage interest income by leveraging loan pricing opportunities and portfolio mix;

 

 

enhance earnings power by improving scalability and efficiency;

 

 

manage credit risk;

 

 

remain well capitalized;

 

 

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

 

 

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 under the fair value option 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 (“Fair Value of Financial Instruments”) of the Notes to the Consolidated Financial Statements.

 

During the three months ended September 30, 2019, we generated loan growth of 9% (annualized) for the quarter, driven by record C&I closings. The strong C&I production aids to the diversification of our loan portfolio, these loans are generally floating rate loans which represents 19% of our loan portfolio at September 30, 2019. The loan pipeline remained strong at $419 million at September 30, 2019. 

 

During the three months ended September 30, 2019, the yield on interest-earning assets decreased four basis points, while the cost of interest-bearing liabilities increased four basis points from the three months ended June 30, 2019, resulting in net interest margin compression of eight basis points. The increase in the cost of interest-bearing liabilities was primarily driven by pricing pressure on our retail and municipal deposits, as competition from traditional bank and non-bank competitors remains very strong.

 

Credit quality remained strong at September 30, 2019, as non-accrual and non-performing loans decreased $1.4 million and $1.0 million, respectively from June 30, 2019. The quarter’s $0.7 million in provision for loan losses resulted primarily from the loan growth in the business loan portfolio. The average loan-to-value on our non-performing real estate loans at September 30, 2019 remained conservative at 34.5%.

 

The Bank and Company are subject to the same regulatory capital requirements. See Note 15 (“Regulatory Capital”) of the Notes to the Consolidated Financial Statements.

 

-50-

 
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

General.  Net income for the three months ended September 30, 2019 was $10.7 million, a decrease of $6.6 million, or 38.1%, compared to $17.3 million for the three months ended September 30, 2018. Diluted earnings per common share were $0.37 for the three months ended September 30, 2019, a decrease of $0.24, or 39.3%, from $0.61 for the three months ended September 30, 2018.

 

Return on average equity decreased to 7.6% for the three months ended September 30, 2019 from 12.9% for the three months ended September 30, 2018. Return on average assets decreased to 0.6% for the three months ended September 30, 2019 from 1.1% for the three months ended September 30, 2018.

 

Interest Income.  Interest and dividend income increased $3.9 million, or 6.0%, to $69.4 million for the three months ended September 30, 2019 from $65.5 million for the three months ended September 30, 2018. The increase in interest income was primarily attributable to an increase of $459.1 million in the average balance of interest-earning assets to $6,589.5 million for the three months ended September 30, 2019 from $6,130.4 million for the comparable prior year period, partially offset by a decrease of seven basis points in the yield of interest-earning assets to 4.22% for the three months ended September 30, 2019, from 4.29% in the comparable prior year period. The decrease in the yield on interest-earning assets was primarily due to  a decrease of seven basis points in the yield of total loans. The decrease of seven basis points in the yield on the total loans, net, was primarily due to decreases in prepayment penalty income and recoveries of interest from non-accrual loans of $0.2 million and $0.8 million, respectively, as compared to the comparable prior year period. Additionally, the three months ended September 30, 2019, includes the impact of net losses from fair value adjustments on qualifying hedges totaling $1.3 million compared to none for the three months ended September 30, 2018. Excluding prepayment penalty income, recovered interest from loans and net losses from fair value adjustments on qualifying hedges, the yield on total loans, net, would have increased 11 basis points to 4.40% for the three months ended September 30, 2019 from 4.29% for the three months ended September 30, 2018, primarily due to loans being both originated and repriced at higher rates.

 

Interest Expense.  Interest expense increased $6.5 million, or 27.0%, to $30.4 million for the three months ended September 30, 2019 from $24.0 million for the three months ended September 30, 2018. The increase in interest expense was primarily due to an increase of 31 basis points in the average cost of interest-bearing liabilities to 2.07% for the three months ended September 30, 2019 from 1.76% for the three months ended September 30, 2018 combined with an increase of $421.9 million in the average balance of interest-bearing liabilities to $5,877.7 million for the three months ended September 30, 2019 from $5,455.9 million for the comparable prior year period. The 31 basis point increase in the cost of interest-bearing liabilities was primarily due to increases in borrowing costs and in the rates we pay on some of our deposit products to stay competitive within our market.

 

Net Interest Income. Net interest income for the three months ended September 30, 2019 was $38.9 million, a decrease of $2.6 million, or 6.2%, from $41.5 million for the three months ended September 30, 2018. The decrease in net interest income was primarily due to the 31 basis point increase in the cost of interest-bearing liabilities to 2.07% for the three months ended September 30, 2019 from 1.76% for the comparable prior year period, combined with a decrease of seven basis points in the yield of interest-earning assets to 4.22% for the three months ended September 30, 2019 as compared to 4.29% for the three months ended September 30, 2018. The net effect of the above on both the net interest spread and net interest margin were decreases of 38 basis points to 2.15% and 35 basis points to 2.37%, respectively, for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018. Included in net interest income was prepayment penalty income from loans and securities totaling $1.7 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively, recovered interest from non-accrual loans totaling $0.3 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and net losses from fair value adjustments on qualifying hedges totaling $1.3 million for three months ended September 30, 2019. Excluding prepayment penalty income, recovered interest, and net losses from fair value adjustment on qualifying hedges, the net interest margin for the three months ended September 30, 2019 was 2.33%, a decrease of 20 basis points, from to 2.53% for the three months ended September 30, 2018.

 

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

Provision for Loan Losses.  During the three months ended September 30, 2019, a provision for loan losses was recorded for $0.7 million, compared to none for the three months ended September 30, 2018. The provision was primarily the result of growth in the commercial business loan portfolio. During the three months ended September 30, 2019, the Bank recorded net charge-offs totaling $0.2 million, while non-accrual loans decreased $2.0 million to $14.3 million from $16.3 million at December 31, 2018. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 34.5% at September 30, 2019. The Bank continues to maintain conservative underwriting standards. See “Allowance for Loan Losses” below and Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

 

Non-Interest Income.  Non-interest income for the three months ended September 30, 2019 was $1.0 million, a decrease of $3.9 million, or 79.0%, from $5.0 million for the three months ended September 30, 2018. The decrease in non-interest income was primarily due to a decrease of $2.2 million from life insurance proceeds as compared to the three months ended September 30, 2018, combined with an increase of $2.0 million in net losses from fair value adjustments. These decreases in non-interest income were partially offset by a gain on sale of loans for $0.2 million during the three months ended September 30, 2019.

 

Non-Interest Expense. Non-interest expense was $26.0 million for the three months ended September 30, 2019, a decrease of $1.2 million, or 4.4%, from $27.2 million for the three months ended September 30, 2018. The decrease was primarily due to a reduction in FDIC insurance expense during the three months ended September 30, 2019, resulting from the FDIC small business assessment credit.

 

Income before Income Taxes.  Income before the provision for income taxes decreased $6.0 million, or 31.1%, to $13.3 million for the three months ended September 30, 2019 from $19.2 million for the three months ended September 30, 2018 for the reasons discussed above.

 

Provision for Income Taxes. The provision for income taxes was $2.5 million for the three months ended September 30, 2019, an increase of $0.6 million, or 32.8%, from $1.9 million for the three months ended September 30, 2018. The increase was primarily due to an increase in the effective tax rate to 19.1% for the three months ended September 30, 2019 from 9.9% in the comparable prior year period.

 

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

General.  Net income for the nine months ended September 30, 2019 was $28.3 million, a decrease of $14.3 million, or 33.6%, compared to $42.7 million for the nine months ended September 30, 2018. Diluted earnings per common share were $0.99 for the nine months ended September 30, 2019, a decrease of $0.49, or 33.1%, from $1.48 for the nine months ended September 30, 2018.

 

Return on average equity decreased to 6.8% for the nine months ended September 30, 2019 from 10.7% for the nine months ended September 30, 2018. Return on average assets decreased to 0.5% for the nine months ended September 30, 2019 from 0.9% for the nine months ended September 30, 2018.

 

Interest Income.  Interest and dividend income increased $19.2 million, or 10.1%, to $208.8 million for the nine months ended September 30, 2019 from $189.6 million for the nine months ended September 30, 2018. The increase in interest income was primarily attributable to an increase of $413.6 million in the average balance of interest-earning assets to $6,550.5 million for the nine months ended September 30, 2019 from $6,136.9 million for the comparable prior year period, combined with an increase of 13 basis points in the yield of interest-earning assets to 4.26% for the nine months ended September 30, 2019 from 4.13% in the comparable prior year period. The increase in the yield on interest-earning assets was primarily due to an increase of $309.4 million in the average balance of total loans, net, which have a higher yield than the yield of total interest-earning assets and an improvement of 12 basis points in the yield of total loans, net, for the nine months ended September 30, 2019 from the comparable prior year period. The increase of 12 basis points in the yield on the total loans, net, was primarily due to loans being both originated and repriced at higher rates compared to nine months ended September 30, 2018. Excluding prepayment penalty income, recovered interest from loans and net losses from fair value adjustments on qualifying hedges, the yield on total loans, net, would have increased 22 basis points to 4.42% for the nine months ended September 30, 2019 from 4.20% for the nine months ended September 30, 2018.

 

Interest Expense.  Interest expense increased $25.2 million, or 40.2%, to $88.0 million for the nine months ended September 30, 2019, from $62.8 million for the nine months ended September 30, 2018. The increase in interest expense was primarily due to an increase of 48 basis points in the average cost of interest-bearing liabilities to 2.01% for the nine months ended September 30, 2019, from 1.53% for the nine months ended September 30, 2018, combined with an increase of $366.9 million in the average balance of interest-bearing liabilities to $5,838.3 million for the nine months ended September 30, 2019, from $5,471.4 million for the comparable prior year period. The 48 basis point increase in the cost of interest-bearing liabilities was primarily due to increases in borrowing costs and in the rates we pay on some of our deposit products to stay competitive within our market.

 

-52-

 
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

Net Interest Income.  For the nine months ended September 30, 2019, net interest income was $120.8 million, a decrease of $6.0 million, or 4.7%, from $126.8 million for the nine months ended September 30, 2018. The decrease in net interest income was primarily due to the 48 basis point increase in the cost of interest-bearing liabilities to 2.01% for the nine months ended September 30, 2019, from 1.53% for the comparable prior year period, partially offset by an increase of 13 basis points in the yield of interest-earning assets to 4.26% for the nine months ended September 30, 2019, as compared to 4.13% for the nine months ended September 30, 2018. The net effect of the above on both the net interest spread and net interest margin were decreases of 35 basis points to 2.25% and 30 basis points to 2.47%, respectively, for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. Included in net interest income was prepayment penalty income from loans and securities totaling $3.6 million and $4.4 million for the nine months ended September 30, 2019 and 2018, respectively, recovered interest from non-accrual loans totaling $1.5 million for each of the nine months ended September 30, 2019 and 2018 and net losses from fair value adjustments on qualifying hedges totaling $2.7 million for nine months ended September 30, 2019. Excluding prepayment penalty income, recovered interest and net losses from fair value adjustment on qualifying hedges, the net interest margin for the nine months ended September 30, 2019 was 2.42%, a decrease of 22 basis points, as compared to 2.64% for the nine months ended September 30, 2018.

 

Provision for Loan Losses.  During the nine months ended September 30, 2019, a provision for loan losses was recorded for $3.1 million, compared to $0.2 million for the nine months ended September 30, 2018. The provision was primarily the result of one commercial business loan relationship being charged-off and growth in the business loan portfolio. During the nine months ended September 30, 2019, the Bank recorded net charge-offs totaling $2.0 million, while non-accrual loans decreased $2.0 million to $14.3 million from $16.3 million at December 31, 2018. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 34.5% at September 30, 2019. The Bank continues to maintain conservative underwriting standards. See “Allowance for Loan Losses” below and Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

 

Non-Interest Income.  Non-interest income for the nine months ended September 30, 2019 was $4.4 million, a decrease of $6.9 million, or 60.8%, from $11.3 million for the nine months ended September 30, 2018. The decrease in non-interest income was primarily due to an increase of $5.6 million in net losses from fair value adjustments, combined with a decrease of $3.0 million in life insurance proceeds as compared to the nine months ended September 30, 2018. These decreases in non-interest income were partially offset by a gain on sale of asset and loans totaling $0.8 million and $0.4 million, respectively, and the recording of a $0.5 million capital gain from the redemption of $1.2 million in assets held in a rabbi trust during the nine months ended September 30, 2019.

 

Non-Interest Expense.  Non-interest expense was $85.6 million for the nine months ended September 30, 2019, a decrease of $0.3 million, or 0.4%, from $85.9 million for the nine months ended September 30, 2018. The decrease was primarily due to a reduction in FDIC insurance expense during the nine months ended September 30, 2019, resulting from the FDIC small business assessment credit and reductions in other operating expenses, partially offset by accelerated vesting of restricted stock awards upon an employee’s death totaling $0.5 million and increases in salaries and benefits, occupancy and equipment and depreciation expenses due to the growth of the Bank.

 

Income before Income Taxes.  Income before the provision for income taxes decreased $15.6 million, or 29.9%, to $36.4 million for the nine months ended September 30, 2019 from $52.0 million for the nine months ended September 30, 2018 for the reasons discussed above.

 

Provision for Income Taxes.  The provision for income taxes was $8.1 million for the nine months ended September 30, 2019, a decrease of $1.3 million, or 13.4%, from $9.3 million for the nine months ended September 30, 2018. The decrease was primarily due to a reduction in income before income taxes partially offset by an increase in the effective tax rate to 22.2% for the nine months ended September 30, 2019 from 18.0% in the comparable prior year period.

 

-53-

 
 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

FINANCIAL CONDITION

 

Assets.  Total assets at September 30, 2019 were $7,110.9 million, an increase of $276.7 million, or 4.0%, from $6,834.2 million at December 31, 2018. Total loans, net increased $213.2 million, or 3.9%, during the nine months ended September 30, 2019, to $5,743.7 million from $5,530.5 million at December 31, 2018. Loan originations and purchases were $892.6 million for the nine months ended September 30, 2019, a decrease of $13.5 million, or 1.5%, from $906.1 million for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we continued to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full banking relationship. The loan pipeline increased to $418.9 million at September 30, 2019, compared to $196.6 million at December 31, 2018.

 

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

 

  

For the three months

  

For the nine months

 
  

ended September 30,

  

ended September 30,

 

(In thousands)

 

2019

  

2018

  

2019

  

2018

 

Multi-family residential (1)

 $60,454  $102,484   143,297  $254,637 

Commercial real estate (2)

  66,648   38,569   123,289   175,013 

One-to-four family – mixed-use property (3)

  18,167   16,870   47,475   45,232 

One-to-four family – residential (4)

  7,421   11,362   19,191   35,304 

Co-operative appartments

  1,817   -   2,117   1,500 

Construction (5)

  5,761   6,008   30,377   30,627 

Small Business Administration

  121   344   2,705   2,539 

Commercial business and other (6)

  237,754   133,188   524,113   361,207 

Total

 $398,143  $308,825  $892,564  $906,059 

 

1.

Includes purchases of $50.2 million and $64.3 million for the three and nine months ended September 30, 2018, respectively.

2.

Includes purchases of $6.6 million and $12.4 million for three and nine months ended September 30, 2018, respectively.

3.

Includes purchases of $0.7 million for nine months ended September 30, 2018.

4.

Includes purchases of $0.4 million and $1.3 million for the three and nine months ended September 30, 2018, respectively.

5.

Includes purchases of $0.9 million and $16.9 million for the three and nine months ended September 30, 2019, respectively.

6.

Includes purchases of $77.3 million and $67.8 million for the three months ended September 30, 2019 and 2018, respectively. Includes purchases of $176.8 million and $156.5 million for the nine months ended September 30, 2019 and 2018, respectively.

 

The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated and purchased during the three months ended September 30, 2019 had an average loan-to-value ratio of 40.0% and an average debt coverage ratio of 191%.

 

The Bank’s non-performing assets totaled $15.0 million at September 30, 2019, a decrease of $1.3 million, or 8.0%, from $16.3 million at December 31, 2018. Total non-performing assets as a percentage of total assets were 0.21% at September 30, 2019 compared to 0.24% at December 31, 2018. The ratio of allowance for loan losses to total non-performing loans was 149.85% at September 30, 2019 and 128.87% at December 31, 2018.

 

During the nine months ended September 30, 2019, mortgage-backed securities including held-to-maturity increased $21.0 million, or 3.7%, to $586.9 million from $565.9 million at December 31, 2018. The increase in mortgage-backed securities during the nine months ended September 30, 2019 was primarily due to purchase of securities totaling $123.5 million and an increase in the fair value of $12.8 million, partially offset by sales of securities totaling $26.4 million at an average yield of 3.10% and, partially offset by principal repayments of $88.2 million.

 

During the nine months ended September 30, 2019, other securities, including held-to-maturity, increased $9.8 million, or 3.4%, to $298.6 million from $288.8 million at December 31, 2018. The increase in other securities during the nine months ended September 30, 2019, was primarily due to purchases totaling $47.9 million at an average yield of 3.78% and an increase in fair value of $2.5 million, partially offset by calls and maturities of municipals securities totaling $39.1 million and $1.6 million, respectively. At September 30, 2019 other securities primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, corporate bonds and CLO’s.

 

-54-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

Liabilities.  Total liabilities were $6,542.5 million at September 30, 2019, an increase of $257.8 million, or 4.1%, from $6,284.7 million at December 31, 2018. During the nine months ended September 30, 2019, due to depositors decreased $3.4 million, or 0.1%, to $4,912.5 million due to a decrease of $56.9 million in certificates of deposit, partially offset by an increase of $53.5 million in non-maturity deposits. Included in deposits were brokered deposits totaling $417.9 million, an increase of $116.2 million from $301.7 million at December 31, 2018. The increase in non-maturity deposits was due to  increases of $160.8 million and $8.0 million in Now accounts and demand deposits, respectively, partially offset by decreases of $98.8 million and $16.5 million in money market accounts and savings accounts, respectively. Borrowed funds increased $171.6 million during the nine months ended September 30, 2019. The increase in borrowed funds was primarily due to an increase in FHLB-NY short-term borrowings. 

 

Equity. Total stockholders’ equity increased $18.9 million, or 3.4%, to $568.4 million at September 30, 2019 from $549.5 million at December 31, 2018. Stockholders’ equity increased primarily due to net income of $28.3 million and the net impact of vesting and exercising of shares of employee and director stock plans totaling $7.0 million. These increases were partially offset by the purchase of 40,000 treasury shares at an average cost of $19.28 per share, totaling $0.8 million and the declaration and payment of dividends on the Company’s common stock of $0.63 per common share totaling $18.1 million. Book value per common share was $20.19 at September 30, 2019 compared to $19.64 at December 31, 2018.

 

Cash flow. During the nine months ended September 30, 2019, funds provided by the Company's operating activities amounted to $52.3 million. These funds, combined with $162.0 million from financing activities and $118.6 million available from the beginning of the period were utilized to fund $245.9 million used in investing activities. 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 nine months ended September 30, 2019, the net total of loan originations and purchases less loan repayments and sales was $196.2 million. During the nine months ended September 30, 2019, the Company also funded $141.8 million in purchases of securities available for sale, $30.0 million in purchases of securities held-to-maturity and $25.0 million in purchases of BOLI. During the nine months ended September 30, 2019, funds were provided by increases of $13.3 million, $115.8 million and $185.0 million in total deposits, net short-term borrowing and proceeds from long-term borrowings, respectively. The funds were used to repay $131.3 million in long-term borrowings. The Company also used funds of $18.1 million for dividend payments during the nine months ended September 30, 2019.

 

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 (“GAAP”), which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets which could adversely affect the Company’s results of operations if such assets were sold, or, in the case of securities classified as available for sale, decreases in the Company’s stockholders’ equity, if such securities were retained.

 

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Asset Liability Committee of the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2019. 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 September 30, 2019, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

 

-55-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

The following table presents the Company’s interest rate shock as of September 30, 2019:

 

  

Projected Percentage Change In

     
  

Net Interest

  

Net Portfolio

  

Net Portfolio

 

Change in Interest Rate

 

Income

  

Value

  

Value Ratio

 

-200 Basis points

  9.48

%

  32.96

%

  11.73

%

-100 Basis points

  4.45   12.14   10.27 

Base interest rate

  0.00   0.00   9.43 

+100 Basis points

  -5.27   -8.86   8.82 

+200 Basis points

  -10.92   -17.80   8.15 

 

 

 

 

 

 

 

 

 

-56-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions 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 tables sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018, 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 September 30,

 
  

2019

  

2018

 
  

Average

      

Yield/

  

Average

      

Yield/

 
  

Balance

  

Interest

  

Cost

  

Balance

  

Interest

  

Cost

 

Assets

 

(Dollars in thousands)

 

Interest-earning assets:

                        

Mortgage loans, net

 $4,598,898  $50,462   4.39

%

 $4,467,349  $49,612   4.44

%

Other loans, net

  1,046,605   12,363   4.72   812,823   10,046   4.94 

Total loans, net (1) (2)

  5,645,503   62,825   4.45   5,280,172   59,658   4.52 

Taxable securities:

                        

Mortgage-backed securities

  574,756   3,765   2.62   542,192   3,800   2.80 

Other securities

  244,757   1,982   3.24   123,174   928   3.01 

Total taxable securities

  819,513   5,747   2.81   665,366   4,728   2.84 

Tax-exempt securities: (3)

                        

Other securities

  65,709   706   4.30   123,472   1,078   3.49 

Total tax-exempt securities

  65,709   706   4.30   123,472   1,078   3.49 

Interest-earning deposits and

                        

federal funds sold

  58,773   259   1.76   61,412   248   1.62 

Total interest-earning assets

  6,589,498   69,537   4.22   6,130,422   65,712   4.29 

Other assets

  382,905           316,118         

Total assets

 $6,972,403          $6,446,540         
                         

Liabilities and Equity

                        

Interest-bearing liabilities:

                        

Deposits:

                        

Savings accounts

 $194,736   344   0.71  $219,749   304   0.55 

NOW accounts

  1,347,145   5,654   1.68   1,336,873   4,416   1.32 

Money market accounts

  1,306,634   6,859   2.10   1,169,130   5,126   1.75 

Certificate of deposit accounts

  1,573,535   9,321   2.37   1,487,366   7,453   2.00 

Total due to depositors

  4,422,050   22,178   2.01   4,213,118   17,299   1.64 

Mortgagors' escrow accounts

  60,084   66   0.44   57,573   126   0.88 

Total deposits

  4,482,134   22,244   1.99   4,270,691   17,425   1.63 

Borrowed funds

  1,395,606   8,196   2.35   1,185,176   6,540   2.21 

Total interest-bearing liabilities

  5,877,740   30,440   2.07   5,455,867   23,965   1.76 

Non interest-bearing deposits

  400,762           380,825         

Other liabilities

  129,646           73,432         

Total liabilities

  6,408,148           5,910,124         

Equity

  564,255           536,416         

Total liabilities and equity

 $6,972,403          $6,446,540         
                         

Net interest income /

                        

net interest rate spread (tax equivalent) (3)

     $39,097   2.15

%

     $41,747   2.53

%

                         

Net interest-earning assets /

                        

net interest margin(tax equivalent)

 $711,758       2.37

%

 $674,555       2.72

%

                         
                         

Ratio of interest-earning assets to

                        

interest-bearing liabilities

         

1.12

X         

1.12

X

 

1.

Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.9 million and $1.2 million for the three months ended September 30, 2019 and 2018, respectively.

2.

Loan interest income includes net losses from fair value adjustments on qualifying hedges of $1.3 million and none for three months ended September 30, 2019 and 2018, respectively.

3.

Interest and yields are presented on tax equivalent basis using the statutory federal income tax rate of 21% for the periods presented totaling $148,000 and $226,000, respectively.

 

-57-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

  

For the nine months ended September 30,

 
  

2019

  

2018

 
  

Average

      

Yield/

  

Average

      

Yield/

 
  

Balance

  

Interest

  

Cost

  

Balance

  

Interest

  

Cost

 

Assets

 

(Dollars in thousands)

 

Interest-earning assets:

                        

Mortgage loans, net

 $4,602,896  $151,513   4.39

%

 $4,473,422  $143,397   4.27

%

Other loans, net

  982,549   35,915   4.87   802,617   28,600   4.75 

Total loans, net (1) (2)

  5,585,445   187,428   4.47   5,276,039   171,997   4.35 

Taxable securities:

                        

Mortgage-backed securities

  578,020   12,238   2.82   533,394   11,061   2.76 

Other securities

  243,071   6,328   3.47   125,589   3,072   3.26 

Total taxable securities

  821,091   18,566   3.01   658,983   14,133   2.86 

Tax-exempt securities: (3)

                        

Other securities

  60,010   1,895   4.21   123,882   3,243   3.49 

Total tax-exempt securities

  60,010   1,895   4.21   123,882   3,243   3.49 

Interest-earning deposits and

                        

federal funds sold

  83,963   1,286   2.04   77,983   873   1.49 

Total interest-earning assets

  6,550,509   209,175   4.26   6,136,887   190,246   4.13 

Other assets

  360,568           308,210         

Total assets

 $6,911,077          $6,445,097         
                         

Liabilities and Equity

                        

Interest-bearing liabilities:

                        

Deposits:

                        

Savings accounts

 $200,246   1,053   0.70  $240,234   978   0.54 

NOW accounts

  1,458,801   18,326   1.67   1,439,997   10,928   1.01 

Money market accounts

  1,340,841   20,654   2.05   1,102,374   12,184   1.47 

Certificate of deposit accounts

  1,537,981   26,326   2.28   1,450,885   20,034   1.84 

Total due to depositors

  4,537,869   66,359   1.95   4,233,490   44,124   1.39 

Mortgagors' escrow accounts

  68,678   181   0.35   64,620   199   0.41 

Total deposits

  4,606,547   66,540   1.93   4,298,110   44,323   1.37 

Borrowed funds

  1,231,760   21,476   2.32   1,173,272   18,472   2.10 

Total interest-bearing liabilities

  5,838,307   88,016   2.01   5,471,382   62,795   1.53 

Non interest-bearing deposits

  398,085           372,257         

Other liabilities

  115,476           68,857         

Total liabilities

  6,351,868           5,912,496         

Equity

  559,209           532,601         

Total liabilities and equity

 $6,911,077          $6,445,097         
                         

Net interest income /

                        

net interest rate spread (tax equivalent) (3)

     $121,159   2.25

%

     $127,451   2.60

%

                         

Net interest-earning assets /

                        

net interest margin(tax equivalent)

 $712,202       2.47

%

 $665,505       2.77

%

                         
                         

Ratio of interest-earning assets to

                        

interest-bearing liabilities

          1.12 X          1.12 X

 

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 $1.6 million for the nine months ended September 30, 2019 and 2018, respectively.

2.

Loan interest income includes net losses from fair value adjustments on qualifying hedges of $2.7 million and none for nine months ended September 30, 2019 and 2018, respectively.

3.

Interest and yields are presented on tax equivalent basis using the statutory federal income tax rate of 21% for the periods presented totaling $398,000 and $681,000, respectively.

 

-58-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions 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 nine months ended September 30,

 

(In thousands)

 

2019

  

2018

 
         

Mortgage Loans

        
         

At beginning of period

 $4,638,784  $4,401,950 
         

Mortgage loans originated:

        

Multi-family residential

  143,297   190,315 

Commercial real estate

  123,289   162,598 

One-to-four family – mixed-use property

  47,475   44,547 

One-to-four family – residential

  19,191   34,046 

Co-operative apartments

  2,117   1,500 

Construction

  13,483   30,627 

Total mortgage loans originated

  348,852   463,633 
         

Mortgage loans purchased:

        

Multi-family residential

  -   64,322 

Commercial real estate

  -   12,415 

One-to-four family – mixed-use property

  -   685 

One-to-four family – residential

  -   1,258 

Construction

  16,894   - 

Total mortgage loans purchased

  16,894   78,680 
         

Less:

        

Principal and other reductions

  366,197   436,674 

Loans transferred to OREO

  239   638 

Sales

  1,353   8,739 
         

At end of period

 $4,636,741  $4,498,212 
         

Non-Mortgage Loans

        
         

At beginning of period

 $897,512  $758,286 
         

Other loans originated:

        

Small Business Administration

  2,705   2,539 

Commercial business

  345,895   203,262 

Other

  1,409   1,433 

Total other loans originated

  350,009   207,234 
         

Other loans purchased:

        

Commercial business

  176,809   156,513 

Total other loans purchased

  176,809   156,513 
         

Less:

        

Principal and other reductions

  305,458   250,143 

Sales

  5,213   5,266 
         

At end of period

 $1,113,659  $866,624 

 

-59-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

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

 

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

 

  

September 30,

  

June 30,

  

December 31,

 

(In thousands)

  2019   2019   2018 

Accrual Status:

            

Multi-family residential

 $1,883  $1,894  $1,916 

One-to-four family - mixed-use property

  1,497   1,660   1,692 

One-to-four family - residential

  536   542   552 

Commercial business and other

  -   -   279 

Total

  3,916   4,096   4,439 
             
             

Non-Accrual Status:

            

Commercial business and other

  951   -   - 

Taxi medallion

  2,161   2,193   3,926 

Total

  3,112   2,193   3,926 
             

Total performing troubled debt restructured

 $7,028  $6,289  $8,365 

 

 

 

 

 

 

 

 

 

 

 

 

 

-60-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

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

 

  

September 30,

  

June 30,

  

December 31,

 

(In thousands)

 

2019

  

2019

  

2018

 

Loans 90 days or more past due

            

and still accruing:

            

Multi-family residential

 $445  $-  $- 

Commercial business and other

  -   -   - 

Total

  445   -   - 
             

Non-accrual loans:

            

Multi-family residential

  3,132   2,008   2,410 

Commercial real estate

  872   1,488   1,379 

One-to-four family - mixed-use property

  683   1,752   928 

One-to-four family - residential

  5,050   5,411   6,144 

Construction

  -   -   - 

Small business administration

  1,151   1,224   1,267 

Taxi medallion (1)

  1,352   1,361   613 

Commercial business and other (1)

  2,020   2,458   3,512 

Total

  14,260   15,702   16,253 
             

Total non-performing loans

  14,705   15,702   16,253 
             

Other non-performing assets:

            

Real estate acquired through foreclosure

  239   239   - 

Other assets acquired through foreclosure

  35   35   35 

Total

  274   274   35 
             

Total non-performing assets

 $14,979  $15,976  $16,288 
             

Non-performing assets to total assets

  0.21%  0.23%  0.24%

Allowance for loan losses to non-performing loans

  149.85%  136.99%  128.87%

 

1.

Not included in the above analysis are non-accrual performing TDR taxi medallion loans totaling $2.2 million, $2.2 million and $3.9 million at September 30, 2019,  June 30, 2019 and December 31, 2018, respectively and non-accrual performing TDR commercial business loans totaling $1.0 million at September 30, 2019.

 

Included in non-performing loans were five loans totaling $1.0 million at September 30, 2019 , six loans totaling $1.6 million at June 30, 2019 and two loans totaling $1.8 million at December 31, 2018, all of which were restructured as TDR and not performing in accordance with restructured terms.

 

-61-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

 Financial Condition and Results of Operations

 

CRITICIZED AND CLASSIFIED ASSETS

 

Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that credit quality is maintained at the highest levels. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at September 30, 2019 and December 31, 2018. The Company had classified OREO and other assets acquired through foreclosure totaling $0.3 million and $35,000 at September 30, 2019 and December 31, 2018, respectively. The Company did not hold any criticized or classified investment securities at September 30, 2019 and December 31, 2018. Our total Criticized and Classified assets were $48.8 million at September 30, 2019, a decrease of $4.3 million from $53.1 million at December 31, 2018.

 

On a quarterly basis, all non-accrual collateral dependent loans that are classified as Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties, or updated independent appraisals. The loan balances of collateral dependent loans reviewed for impairment are then compared to the loans updated fair value. We consider fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using the income approach. All taxi medallion loans are classified and impaired. For collateral dependent mortgage loans and taxi medallion loans, the portion of the loan balance which exceeds fair value is generally charged-off. At September 30 2019, the current average loan-to-value ratio on our collateral dependent loans reviewed for impairment was 47.0%.

 

ALLOWANCE FOR LOAN LOSSES

 

The Allowance for loan losses (“ALLL”) represents the expense charged to earnings based upon management’s quarterly analysis of credit risk. The amount of the ALLL is based upon multiple factors that reflect management’s assessment of the credit quality of the loan portfolio. The factors are both quantitative and qualitative in nature including, but not limited to, historical losses, economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.

 

Management has developed a comprehensive analytical process to monitor the adequacy of the ALLL. The process and guidelines were developed using, among other factors, the guidance from federal banking regulatory agencies and GAAP. The results of this process, along with the conclusions of our independent loan review officer, support management’s assessment as to the adequacy of the ALLL at each balance sheet date. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements for a detailed explanation of management’s methodology and policy.

 

As a component of the credit risk assessment, the Bank has established an Asset Classification Committee which carefully evaluates loans which are past due 90 days and/or are classified. The Asset Classification Committee thoroughly assesses the condition and circumstances surrounding each loan meeting the criteria. The Bank also has a Delinquency Committee that evaluates loans meeting specific criteria. The Bank’s loan policy requires loans to be placed into non-accrual status once the loan becomes 90 days delinquent unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future.

 

As described in Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements, during the second quarter of 2019, the Company revised its ALLL methodology to further segregate the commercial business and other portfolio into two separate categories. During the nine months ended September 30, 2019, the portion of the ALLL related to the loss history increased due to an increase in charge-offs and growth in the loan portfolio and the portion of the ALLL related to qualitative factors increased due to growth in the loan portfolio. The impact from the above resulted in the ALLL totaling $22.0 million, an increase of $1.1 million or 5.2%, from December 31, 2018. Based upon the ALLL methodology and review of the loan portfolio, management concluded a charge to earnings totaling $3.1 million for the nine months ended September 30, 2019, to increase the ALLL was warranted. The ALLL represented 0.38% of gross loans outstanding at each of September 30, 2019 and December 31, 2018. The ALLL represented 149.8% of non-performing loans at September 30, 2019 compared to 128.9% at December 31, 2018.

 

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

 

-62-

 

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions 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:

 

  

At or for the nine months ended September 30,

 

(Dollars in thousands)

 

2019

  

2018

 
         

Balance at beginning of period

 $20,945  $20,351 
         

Provision for loan losses

  3,129   153 
         

Loans charged-off:

        

Multi-family residential

  (190)  (99)

One-to-four family – residential

  (113)  (3)

One-to-four family – mixed-use property

  (1)  (1)

Small Business Administration

  -   (196)

Taxi medallion

  -   (393)

Commercial business and other

  (2,379)  (29)

Total loans charged-off

  (2,683)  (721)
         

Recoveries:

        

Multi-family residential

  30   2 

Commercial real estate

  7   - 

One-to-four family – mixed-use property

  228   118 

One-to-four family – residential

  10   371 

Small Business Administration

  52   25 

Taxi medallion

  134   - 

Commercial business and other

  183   10 

Total recoveries

  644   526 
         

Net charge-offs

  (2,039)  (195)
         

Balance at end of period

 $22,035  $20,309 
         

Ratio of net charge-offs during the period to

        

average loans outstanding during the period

  0.05

%

  -

%

Ratio of allowance for loan losses to gross loans at end of period

  0.38

%

  0.38

%

Ratio of allowance for loan losses to non-performing

        

assets at end of period

  147.11

%

  160.17

%

Ratio of allowance for loan losses to non-performing

        

loans at end of period

  149.85

%

  160.62

%

 

-63-

 

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 September 30, 2019, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

-64-

 

PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

ITEM 1.     LEGAL PROCEEDINGS

 

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

 

ITEM 1A.  RISK FACTORS

 

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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 September 30, 2019:

 

              

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

 

July 1 to July 31, 2019

  -  $-   -   467,211 

August 1 to August 31, 2019

  40,000   19.28   40,000   427,211 

September 1 to September 30, 2019

  -   -   -   427,211 

Total

  40,000   -   40,000     

 

During the quarter ended September 30, 2019, the Company repurchased 40,000 shares of the Company’s common stock at an average cost of $19.28 per share. On September 30, 2019, 427,211 shares remained to be repurchased under the currently authorized stock repurchase program. Stock will be purchased under the current stock repurchase programs from time to time, in the open market or through private transactions, subject to market conditions. There is no expiration or maximum dollar amount under these authorizations.

 

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

 

                None.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

                Not applicable.

 

ITEM 5.     OTHER INFORMATION

 

                None.

               

-65-

 
 

PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

 

ITEM 6.     EXHIBITS

 

Exhibit  No.

Description

   
 

3.1 P

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 (5)

 

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 (6)

 

4.1

Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee. (7)

 

4.2

First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A thereto. (7)

 

4.3

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.

 

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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

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)

 104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed

 

September 1, 1995, Registration No. 33-96488. (P: Indicates a filing submitted in paper)

(2) Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.

(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.

(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended

 

September 30, 2002.

(5) Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.

(6) Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 12, 2016.

 

-66-

 

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: November 6, 2019

By: /s/John R. Buran

 

John R. Buran

 

President and Chief Executive Officer

  
  
  
  

Dated: November 6, 2019

By: /s/Susan K. Cullen

 

Susan K. Cullen

 

Senior Executive Vice President, Treasurer and

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-67-

 

 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

 

Exhibit  No.

Description

   
 

3.1 P

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 (5)

 

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 (6)

 

4.1

Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee. (7)

 

4.2

First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A thereto. (7)

 

4.3

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.

 

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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

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)

 104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed

 

September 1, 1995, Registration No. 33-96488. (P: Indicates a filing submitted in paper)

(2) Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.

(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.

(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended

 

September 30, 2002.

(5) Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.

(6) Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 12, 2016.

 

 

 

 

-68-