Flushing Financial 10Q 2020 Q1 Quarterly report

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements - (Unaudited)	1
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	6
Notes to Consolidated Financial Statements	7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	58
ITEM 4. Controls and Procedures	58
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	59
ITEM 1A. Risk Factors	59
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
ITEM 3. Defaults Upon Senior Securities	62
ITEM 4. Mine Safety Disclosures	62
ITEM 5. Other Information	62
ITEM 6. Exhibits	63
SIGNATURES	65

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements


	March 31,		December 31,
	2020		2019
	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	157,184	$	49,787
Securities held-to-maturity:
Mortgage-backed securities (including assets pledged of $8,704 and $5,283 at March 31, 2020 and December 31, 2019, respectively; fair value of $8,953 and $8,114 at March 31, 2020 and December 31, 2019, respectively)		7,929		7,934
Other securities, net of allowance for credit losses of $402 (none pledged; fair value of $51,938 and $53,998 at March 31, 2020 and December 31, 2019, respectively)		50,225		50,954
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $242,862 and $212,038 at March 31, 2020 and December 31, 2019, respectively; $738 and $772 at fair value pursuant to the fair value option at March 31, 2020 and December 31, 2019, respectively)		489,556		523,849
Other securities (NaN pledged; $13,831 and $13,548 at fair value pursuant to the fair value option at March 31, 2020 and December 31, 2019, respectively)		225,856		248,651
Loans:
Multi-family residential		2,272,343		2,238,591
Commercial real estate		1,664,934		1,582,008
One-to-four family - mixed-use property		592,109		592,471
One-to-four family - residential		189,774		188,216
Co-operative apartments		8,493		8,663
Construction		66,727		67,754
Small Business Administration		14,076		14,445
Taxi medallion		3,281		3,309
Commercial business and other		1,104,967		1,061,478
Net unamortized premiums and unearned loan fees		15,384		15,271
Allowance for loan losses		(28,098)		(21,751)
Net loans		5,903,990		5,750,455
Interest and dividends receivable		25,526		25,722
Bank premises and equipment, net		27,899		28,676
Federal Home Loan Bank of New York stock, at cost		74,000		56,921
Bank owned life insurance		158,655		157,713
Goodwill		16,127		16,127
Other real estate owned, net		208		239
Right of Use Asset		39,729		41,254
Other assets		68,526		59,494
Total assets	$	7,245,410	$	7,017,776

Liabilities
Due to depositors:
Non-interest bearing	$	489,198	$	435,072
Interest-bearing		4,339,237		4,586,977
Total Deposits		4,828,435		5,022,049
Mortgagors' escrow deposits		73,051		44,375
Borrowed funds:
Federal Home Loan Bank advances		1,498,058		1,118,528
Subordinated debentures		74,398		74,319
Junior subordinated debentures, at fair value		45,126		44,384
Total borrowed funds		1,617,582		1,237,231
Operating lease liability		47,726		49,367
Other liabilities		128,933		85,082
Total liabilities		6,695,727		6,438,104

Stockholders' Equity
Preferred stock ($0.01 par value; 5,000,000 shares authorized; NaN issued)		—		—
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at March 31, 2020 and December 31, 2019; 28,213,602 shares and 28,157,206 shares outstanding at March 31, 2020 and December 31, 2019, respectively)		315		315
Additional paid-in capital		225,893		226,691
Treasury stock, at average cost (3,316,993 shares and 3,373,389 shares at March 31, 2020 and December 31, 2019, respectively)		(69,540)		(71,487)
Retained earnings		425,455		433,960
Accumulated other comprehensive loss, net of taxes		(32,440)		(9,807)
Total stockholders' equity		549,683		579,672

Total liabilities and stockholders' equity	$	7,245,410	$	7,017,776

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)


	For the three months ended
	March 31,
(Dollars in thousands, except per share data)	2020		2019

Interest and dividend income
Interest and fees on loans	$	61,109	$	62,330
Interest and dividends on securities:
Interest		5,256		6,909
Dividends		15		19
Other interest income		290		555
Total interest and dividend income		66,670		69,813
Interest expense
Deposits		18,778		21,469
Other interest expense		7,066		6,541
Total interest expense		25,844		28,010
Net interest income		40,826		41,803
Provision for credit losses		7,178		972
Net interest income after provision for credit losses		33,648		40,831
Non-interest income
Banking services fee income		798	��	973
Net loss on sale of securities		(37)		—
Net gain on sale of loans		42		63
Net loss from fair value adjustments		(5,993)		(2,080)
Federal Home Loan Bank of New York stock dividends		964		903
Life insurance proceeds		—		43
Bank owned life insurance		943		740
Other income		419		301
Total non-interest (loss) income		(2,864)		943
Non-interest expense
Salaries and employee benefits		18,620		19,166
Occupancy and equipment		2,840		2,789
Professional services		2,862		2,265
FDIC deposit insurance		650		485
Data processing		1,694		1,492
Depreciation and amortization		1,536		1,518
Other real estate owned/foreclosure expense (benefit)		(164)		77
Net loss from other real estate owned		31		—
Other operating expenses		4,311		4,627
Total non-interest expense		32,380		32,419
(Loss) Income before income taxes		(1,596)		9,355
Provision (Benefit) for income taxes
Federal		989		1,943
State and local		(1,195)		344
Total taxes		(206)		2,287
Net income (Loss)	$	(1,390)	$	7,068

Basic (loss) earnings per common share	$	(0.05)	$	0.25
Diluted (loss) earnings per common share	$	(0.05)	$	0.25
Dividends per common share	$	0.21	$	0.21

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the three months ended
	March 31,
(In thousands)	2020		2019

Net (loss) income		(1,390)		7,068
Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($30) and ($10) for the three months ended March 31, 2020 and 2019, respectively.		67		22
Amortization of prior service credits, net of taxes of $6 and $7 for the three months ended March 31, 2020 and 2019, respectively.		(14)		(15)
Net unrealized (losses) gains on securities, net of taxes of $4,642 and ($2,524) for the three months ended March 31, 2020 and 2019, respectively.		(10,202)		5,620
Reclassification adjustment for net losses included in income, net of taxes of ($12) for the three months ended March 31, 2020.		25		—
Net unrealized losses on cash flow hedges, net of taxes of $6,190 and $1,575 for the three months ended March 31, 2020 and 2019 respectively.		(13,605)		(3,505)
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($489) and ($39) for the three months ended March 31, 2020 and 2019 respectively.		1,096		88

Total other comprehensive (loss) income , net of tax		(22,633)		2,210

Comprehensive (loss) income	$	(24,023)	$	9,278

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	For the three months ended March 31,
	2020		2019
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(1,390)	$	7,068
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit loan losses		7,178		972
Depreciation and amortization of bank premises and equipment		1,536		1,518
Amortization of premium, net of accretion of discount		1,642		1,272
Net loss from fair value adjustments		5,993		2,080
Net loss from fair value adjustments on qualifying hedges		2,073		637
Net gain from sale of loans		(42)		(63)
Net loss from sale of securities		37		—
Net loss from OREO		31		—
Income from bank owned life insurance		(943)		(740)
Life insurance proceeds		—		(43)
Stock-based compensation expense		3,430		3,931
Deferred compensation		(1,296)		(938)
Deferred income tax (benefit) expense		(2,318)		805
Decrease in other liabilities		(7,106)		(3,737)
Decrease (increase) in other assets		2,440		(942)
Net cash provided by operating activities		11,265		11,820
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(759)		(898)
Net (purchases) redemptions of Federal Home Loan Bank of New York shares		(17,079)		6,100
Purchases of securities held-to-maturity		—		(180)
Proceeds from maturities and calls of securities held-to-maturity		180		1,568
Proceeds from prepayments of securities held-to-maturity		150		146
Purchases of securities available for sale		(63,434)		(45,730)
Proceeds from sales and calls of securities available for sale		64,600		13,295
Proceeds from maturities and prepayments of securities available for sale		40,383		16,788
Proceeds from bank owned life insurance		—		777
Net (originations) repayments of loans		(55,906)		16,372
Purchases of loans		(77,233)		(56,995)
Proceeds from sale of loans		580		1,170
Net cash used in investing activities		(108,518)		(47,587)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows (Contd)

(Unaudited)


	For the three months ended March 31,
	2020		2019
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits		54,126		(12,683)
Net (decrease) increase in interest-bearing deposits		(247,777)		106,788
Net increase in mortgagors' escrow deposits		28,676		25,254
Net proceeds from short-term borrowed funds		410,000		(84,250)
Proceeds from long-term borrowings		50,000		—
Repayment of long-term borrowings		(80,456)		(51,310)
Purchases of treasury stock		(3,835)		(1,877)
Proceeds from issuance of common stock upon exercise of stock options		—		3
Cash dividends paid		(6,084)		(6,042)
Net cash provided by (used in) financing activities		204,650		(24,117)
Net increase (decrease) in cash and cash equivalents		107,397		(59,884)
Cash and cash equivalents, beginning of period		49,787		118,561
Cash and cash equivalents, end of period	$	157,184	$	58,677
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	25,617	$	25,830
Income taxes paid		1,094		1,141
Taxes paid if excess tax benefits were not tax deductible		868		1,072
Non-cash activities:
Right-Of-Use assets		—		42,869
Operating lease liabilities		—		51,780

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)


					Additional						Accumulated Other
			Common		Paid-in		Retained		Treasury		Comprehensive
(Dollars in thousands, except per share data)	Total		Stock		Capital		Earnings		Stock		Income (Loss)

Balance at December 31, 2019	$	579,672	$	315	$	226,691	$	433,960	$	(71,487)	$	(9,807)

Impact of adoption of ASC 326 - Credit Losses		(875)		—		—		(875)		—		—
Net loss		(1,390)		—		—		(1,390)		—		—
Award of common shares released from Employee Benefit Trust (116,414 shares)		1,398		—		1,398		—		—		—
Vesting of restricted stock unit awards (272,946 shares)		—		—		(5,626)		(156)		5,782		—
Stock-based compensation expense		3,430		—		3,430		—		—		—
Purchase of treasury shares (142,405 shares)		(2,342)		—		—		—		(2,342)		—
Repurchase of shares to satisfy tax obligation (74,145 shares)		(1,493)		—		—		—		(1,493)		—
Dividends on common stock ($0.21 per share)		(6,084)		—		—		(6,084)		—		—
Other comprehensive loss		(22,633)		—		—		—		—		(22,633)
Balance at March 31, 2020	$	549,683	$	315	$	225,893	$	425,455	$	(69,540)	$	(32,440)


					Additional						Accumulated Other
			Common		Paid-in		Retained		Treasury		Comprehensive
(Dollars in thousands, except per share data)	Total		Stock		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)

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

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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, 2019.

When necessary, certain reclassifications were made to prior-year amounts to conform to the current-year presentation. Such reclassifications had no effect on prior period net income or shareholders’ equity and were insignificant amounts.

2. Use of Estimates

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

As a result of the recent emergence of the pandemic and the uncertainty, it is not possible to determine the overall impact of the pandemic on the Company’s business. However, if the pandemic continues for an extended period of time, there could be a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in Accounting Standards Codification (“ASC”) 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as disclosed more fully in Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

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, including COVID-19 related changes, are used in connection with the determination of the allowance for credit losses, the evaluation of goodwill for impairment, the review of the need for a valuation allowance of the Company’s deferred tax assets and the fair value of financial instruments.

Goodwill

Goodwill is presumed to have an indefinite life and is tested annually for impairment, or more frequently when certain conditions are met. If the fair value of the reporting unit is greater than the carrying value, no further evaluation is required. If the fair value of the reporting unit is less than the carrying value, further evaluation would be required to compare the fair value of the reporting unit to the carrying value and determine if impairment is required.

Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measurement, when available. Other acceptable valuation methods include an asset approach, which determines a fair value based upon the value of assets net of liabilities, an income approach, which determines fair value using one or more methods that convert anticipated economic benefits into a present single amount, and a market approach, which determines a fair value based on the similar businesses that have been sold.

In performing the goodwill impairment testing, the Company has identified a single reporting unit. The Company identified the COVID-19 pandemic as a triggering event and as such evaluated goodwill for impairment at March 31, 2020. The Company performed a step 1 impairment test and concluded as of March 31, 2020, that there was no goodwill impairment. Management will continue to monitor if an additional triggering event requiring further goodwill impairment testing has occurred. At March 31, 2020 and December 31, 2019, the carrying amount of goodwill totaled $16.1 million. The identification of additional reporting units, the use of other valuation techniques and/or changes to input assumptions used in the analysis could result in materially different evaluations of goodwill impairment.

Volatility in the Company’s stock price primarily driven by the COVID-19 pandemic has resulted in the net book value of our reporting unit exceeding market capitalization, however, the fair value of our reporting unit is not driven solely by the market price of our stock. As described above, fair value of our reporting unit is derived using a combination of an asset approach, an income approach and a market approach. These valuation techniques consider several other factors beyond our market capitalization, such as the estimated future cash flows of our reporting unit, the discount rate used to present value such cash flows and the market multiples of comparable companies. Changes to input assumptions used in the analysis could result in materially different evaluations of goodwill impairment. We qualitatively assess whether the carrying value of our reporting unit exceeds fair value. If this qualitative assessment determines that it is more likely than not that the carrying value exceeds fair value, further qualitative evaluation for impairment would be required to compare the fair value of the reporting unit to the carrying value and determine if impairment is required.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

3. Earnings Per Share

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


	For the three months ended
	March 31,
	2020		2019

Net income (loss)	$	(1,390)	$	7,068
Divided by:
Weighted average common shares outstanding		28,853		28,621
Weighted average common stock equivalents		—		—
Total weighted average common shares outstanding and common stock equivalents		28,853		28,621
Basic earnings (loss) per common share	$	(0.05)	$	0.25
Diluted earnings (loss) per common share ⁽¹⁾	$	(0.05)	$	0.25
Dividend payout ratio		n/a		84.0	%

(1)	For the three months ended March 31, 2020 and 2019, there were 0 common stock equivalents that were anti-dilutive.

4. Securities

The Company did 0t hold any trading securities at March 31, 2020 and December 31, 2019. Securities available for sale are recorded at fair value. Securities held-to-maturity (“HTM”) are recorded at amortized cost.

Upon adoption of ASC Topic 326, “Credit Losses” on January 1, 2020, see Note 16 related to the adoption of Topic 326, we recorded a transition adjustment of $0.3 million in the allowance for credit losses for held-to-maturity debt securities.

Allowance for credit losses

The Company’s estimate of expected credit losses for held-to-maturity debt securities is based on historical information, current conditions and a reasonable and supportable forecast. The Company’s portfolio is made up of 3 securities, 2 of which are structured similar to a Commercial owner occupied loan, which is modeled for credit losses similar to Commercial business loans secured by real estate. The other security is issued and guaranteed by Fannie Mae, which is a government sponsored enterprise that has a credit rating and perceived credit risk comparable to the U.S. government and therefore the Company assumes a zero loss expectation. Accrued interest receivable on held-to-maturity securities totaled $0.1 million at March 31, 2020 and is excluded from estimates of credit losses.

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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 held-to-maturity at March 31, 2020:


					Gross		Gross		Allowance
	Amortized				Unrealized		Unrealized		for Credit
	Cost		Fair Value		Gains		Losses		Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	50,627	$	51,938	$	1,311	$	—	$	(402)
Total other securities		50,627		51,938		1,311		—		(402)

FNMA		7,929		8,953		1,024		—		—
Total mortgage-backed securities		7,929		8,953		1,024		—		—
Total	$	58,556	$	60,891	$	2,335	$	—	$	(402)

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2019:


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	50,954	$	53,998	$	3,044	$	—
Total other securities		50,954		53,998		3,044		—

FNMA		7,934		8,114		180		—
Total mortgage-backed securities		7,934		8,114		180		—
Total	$	58,888	$	62,112	$	3,224	$	—

The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2020:


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities available for sale:
Corporate	$	130,000	$	111,852	$	—	$	18,148
Municipals		12,743		12,801		58		—
Mutual funds		12,476		12,476		—		—
Collateralized loan obligations		100,361		87,372		—		12,989
Other		1,355		1,355		—		—
Total other securities		256,935		225,856		58		31,137
REMIC and CMO		341,170		348,109		7,329		390
GNMA		602		659		57		—
FNMA		99,676		102,224		2,572		24
FHLMC		37,630		38,564		934		—
Total mortgage-backed securities		479,078		489,556		10,892		414
Total securities available for sale	$	736,013	$	715,412	$	10,950	$	31,551

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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 December 31, 2019:


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities available for sale:
Corporate	$	130,000	$	123,050	$	—	$	6,950
Municipals		12,797		12,916		119		—
Mutual funds		12,216		12,216		—		—
Collateralized loan obligations		100,349		99,137		—		1,212
Other		1,332		1,332		—		—
Total other securities		256,694		248,651		119		8,162
REMIC and CMO		348,236		348,989		2,193		1,440
GNMA		653		704		51		—
FNMA		104,235		104,882		1,073		426
FHLMC		68,476		69,274		871		73
Total mortgage-backed securities		521,600		523,849		4,188		1,939
Total securities available for sale	$	778,294	$	772,500	$	4,307	$	10,101

We did 0t hold any private issue CMO’s that are collateralized by commercial real estate mortgages at March 31, 2020 and December 31, 2019.

The corporate securities held by the Company at March 31, 2020 and December 31, 2019 are issued by U.S. banking institutions.

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 March 31, 2020, 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	$	—	$	—
Due after ten years		50,627		51,938
Total other securities		50,627		51,938
Mortgage-backed securities		7,929		8,953
Total	$	58,556	$	60,891


	Amortized
Securities available for sale:	Cost		Fair Value
	(In thousands)
Due after one year through five years	$	20,000	$	18,276
Due after five years through ten years		127,923		109,510
Due after ten years		96,536		85,594
Total other securities		244,459		213,380
Mutual funds		12,476		12,476
Mortgage-backed securities		479,078		489,556
Total	$	736,013	$	715,412

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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 March 31, 2020
	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	$	111,853	$	18,148	$	9,620	$	380	$	102,233	$	17,768
Collateralized loan obligations	13		87,372		12,989		22,521		3,046		64,851		9,943
Total other securities	29		199,225		31,137		32,141		3,426		167,084		27,711

REMIC and CMO	12		67,416		390		64,541		371		2,875		19
FNMA	1		8,812		24		—		—		8,812		24

Total mortgage-backed securities	13		76,228		414		64,541		371		11,687		43
Total	42	$	275,453	$	31,551	$	96,682	$	3,797	$	178,771	$	27,754


	At December 31, 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	$	123,050	$	6,950	$	—	$	—	$	123,050	$	6,950
Collateralized loan obligations	13		99,137		1,212		25,451		108		73,686		1,104
Total other securities	29		222,187		8,162		25,451		108		196,736		8,054

REMIC and CMO	23		120,989		1,440		102,384		1,117		18,605		323
GNMA	1		49		—		49		—		—		—
FNMA	8		67,618		426		19,073		138		48,545		288
FHLMC	1		30,200		73		—		—		30,200		73
Total mortgage-backed securities	33		218,856		1,939		121,506		1,255		97,350		684

Total securities available for sale	62	$	441,043	$	10,101	$	146,957	$	1,363	$	294,086	$	8,738

The Company reviewed each available for sale debt securities that had an unrealized loss at March 31, 2020 to evaluate whether the decline in fair value resulted from credit losses or other factors. 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. All of these securities are rated investment grade or above and have a long history of no credit losses. 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.

In determining the risk of loss for available for sale securities, the Company considered that Mortgage-Backed Securities are either fully guaranteed or issued by a government sponsored enterprise, which has a credit rating and perceived credit risk comparable to U.S. government, the issuer of Corporate securities are global systematically important banks, and the tranche of the purchased CLO’s. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. Based on this review management believes that the unrealized losses have resulted from other factors not deemed credit-related and 0 allowance for credit loss was recorded.

Accrued interest receivable on available-for-sale debt securities totaled $2.4 million at March 31, 2020 and is excluded from the estimate of credit losses.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three months ended March 31, 2020:


	Mortgage-backed securities		Other securities
	(In thousands)
Beginning balance	$	—	$	—
CECL adoption		—		340
Provision		—		62
Allowance for credit losses - securities	$	—	$	402

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold $64.6 million in mortgage-backed securities during the three months ended March 31, 2020. The Company did 0t sell any securities during the three months ended March 31, 2019.

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
	March 31,
	2020		2019

Gross gains from the sale of securities	$	713	$	—
Gross losses from the sale of securities		(750)		—

Net losses from the sale of securities	$	(37)	$	—

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. Accrued interest receivable totaled $23.0 million at March 31, 2020 and was reported in “Interest and dividends receivable” on the Consolidated Statements of Financial Condition. 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.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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.

Allowance for credit losses

The Allowance for credit losses (“ACL”) is an estimate 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. Loans are charged off against that allowance when management believes that a loan balance is uncollectable based on quarterly analysis of credit risk.

As of January 1, 2020, the Company adopted Topic 326, see Note 16 related to the adoption of Topic 326.

The amount of the ACL is based upon a loss rate model that considers multiple factors which reflects management’s assessment of the credit quality of the loan portfolio. Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. 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.

The quantitative allowance is calculated using a number of input and assumptions. The process and guidelines were developed using, among other factors, the guidance from federal banking regulatory agencies and GAAP. The results of this process, support management’s assessment as to the adequacy of the ACL at each balance sheet date.

The process for calculating the allowance for credit losses begins with our historical losses by portfolio segment. The losses are then incorporated into reasonable and supportable forecast to develop the quantitative component of the allowance for credit losses.

The Company specifies both the reasonable and supportable forecast and reversion periods in three economic conditions (expansion, transition, contraction) which could range from 6 months to 24 months. When calculating the ACL estimate for March 31, 2020, Management acknowledged the deteriorating economic conditions as a result of the COVID-19 pandemic were not fully captured in the forecast within the model platform. As such, when determining the reasonable and supportable forecast, Management adjusted the period to reflect a supportable forecast of six months, to align with a previously established framework for contraction periods. Similarly, a reversion period of six quarters was adjusted to reflect the shorter end of a contraction period.

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, compelling evidence the borrower will bring the loan current in the immediate future.

For the quantitative measurement, the Company’s portfolio consists of mortgage loans secured by real estate (both commercial and retail) and non-mortgage loans, which are primarily commercial business term loans and line of credit. Based on the Company’s evaluation of the loan portfolio, below are the pools that were established as a baseline level of segmentation with their primary risk factor. The Company confirms this data remains relevant in absence of changes to the composition of the portfolio.

The mortgage portfolio is a substantial component of Company’s portfolio and it is a focus of the Company’s lending strategy, primarily focusing on multi-family and commercial real estate. While the mortgage portfolio consists of real-estate secured loans, the source of repayment and types of properties securing these loans varies and thus the Company first considered these differences as follows:

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Notes to Consolidated Financial Statements

(Unaudited)

1.

One-to-four family residential property – These loans are secured by residential properties for which the primary source of repayment is the income generated by the residential borrower. Delinquency status is considered a risk factor in this pool.

2.

One-to-four family mixed use – These loans are secured by residential properties for which the primary source of repayment is the income generated by the property. Unlike the one-to-four residential credits, properties securing mixed use loans include a commercial space component. Delinquency status is considered a risk factor in this pool.

3.

Multi-family residential – These loans are secured by multi-unit residential buildings for which the primary source of repayment is the income generated by the property. Properties securing multifamily loans have five or more residential units and thus a greater number of cash flow streams compared to one-to-four mixed use loans. Delinquency status and risk rating are considered risk factors in this pool.

4.

Commercial real estate (CRE) – These loans are secured by properties for commercial use for which the primary source of repayment is the income generated by the property. Delinquency status, risk rating and collateral type are considered risk factors in this pool.

5.

Construction – These loans are provided to fund construction projects for both residential and commercial properties. These loans are inherently different from all others as they represent “work in progress” and expose the Company to risk from non-completion and less recovery value should the sponsor of an unfinished property default. Delinquency status and risk rating are considered risk factors in this pool.

Relative to the non-mortgage portfolio, the Company considered the following categories as a baseline for evaluation:

6.

Commercial Business – These loans are not typically secured by real estate. The primary source of repayment is cash flows from operations of the borrower’s business. Within this category are Small Business Administration (“SBA”) credits and Equipment Finance credits. Delinquency status, risk rating and industry are considered a risk factors in this pool.

7.

Commercial Business secured by real estate – While these loans are secured by properties used by the borrower for commercial use, the primary source of repayment is the income generated by the borrower’s business use of the property and thus these are considered Commercial Business loans. Delinquency status, risk rating and industry are considered risk factors in this pool.

8.

Taxi Medallions These loans consist primarily of loans made to New York taxi medallion owners and are secured by liens on the taxi medallions. No new taxi medallions have been originated since 2014, the remaining portfolio is running off and all credits are individually evaluated for expected credit losses. As a result, a segmentation analysis is not relevant for this portfolio.

Lastly, the Company identified that the remainder of the portfolio includes Overdraft lines of credit.

9.

Overdrafts – These are unsecured consumer lines of credits and are an immaterial component of the Company’s portfolio.

For the qualitative measurement, the Company aggregated the portfolio segments according to 3 business units: Business Banking, Residential and Real Estate. In accordance with the interagency statement and SEC guidance, Management evaluates nine qualitative risk factors to determine if the risk is captured elsewhere in the ACL process. If not captured elsewhere, the Company has identified specific risk factors to evaluate and incorporate into its Qualitative Framework. Some risk factors include time to maturity, origination loan-to-value, loan type composition, the value of underlying collateral, changes in policies and procedures for lending strategies and underwriting standards, collection and recovery practices, internal credit review, changes in personnel, divergence between the levels of NYC and national unemployment, divergence between the NYC GDP and national GDP, industry concentrations and riskiness and large borrower concentrations.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company recorded an ACL for loans in the amount of $7.1 million for the quarter ending March 31, 2020, primarily due to the deteriorating economic conditions from COVID-19 and growth in the loan portfolio. This will result in the ACL for loans totaling $28.1 million at March 31, 2020, representing 0.47% of gross loans and 167.73% of non-performing loans.

In response to COVID-19, the Company is actively assisting customers by providing short-term modifications in the form of deferrals of interest, principal and/or escrow for terms ranging from one to six months. Through April 17th, modifications for loans with an aggregate outstanding loan balance of approximately $839 million of which $673 million is in our real estate portfolio and $166 million is in our business banking portfolio have been approved. Given the COVID-19 pandemic and current economic environment, we continue to see interest from our customers to modify their loans. The Company actively participated in the SBA Paycheck Protection Program, gaining approval to fund up to $64 million of these loans and expects to participate in the Main Street Lending Program in order to assist customers. Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming the above criteria is met.

The Company may restructure loans that are not directly impacted by COVID-19 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 TDR.

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 individually evaluated, 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 March 31, 2020, 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.

There were 0 TDR loan modifications during the three months ended March 31, 2020 and 2019.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	March 31, 2020			December 31, 2019
	Number	Recorded		Number	Recorded
(Dollars in thousands)	of contracts	investment		of contracts	investment
Multi-family residential	7	$	1,868	7	$	1,873
One-to-four family - mixed-use property	4		1,483	4		1,481
One-to-four family - residential	3		525	3		531
Taxi medallion ⁽¹⁾	6		1,520	7		1,668
Commercial business and other	3		950	3		941
Total performing troubled debt restructured	23	$	6,346	24	$	6,494

(1)

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

During the three months ended March 31, 2020 and 2019, there were 0 defaults of TDR loans within 12 months of their modification date. NaN loan was transferred to non-performing status during the three months ended March 31, 2020. 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:


	March 31, 2020			December 31, 2019
	Number	Recorded		Number	Recorded
(Dollars in thousands)	of contracts	investment		of contracts	investment
Taxi medallion	5	$	1,195	4	$	1,065
Commercial business and other	1		279	1		279
Total troubled debt restructurings that subsequently defaulted	6	$	1,474	5	$	1,344

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our non-accrual loans at amortized cost with no related allowance and interest income recognized for loans ninety days or more past due and still accruing for period shown below:


	At or three months ended March 31, 2020
				Non-Accrual				Loans ninety days
		Total Non-Accrual		with no related		Interest Income		or more past due
(In thousands)		Amortized Cost		Allowance		Recognized		and still accruing:
Multi-family residential	$	2,763	$	2,763	$	—	$	—
Commercial real estate		8		8		—		—
One-to-four family - mixed-use property		627		346		—		—
One-to-four family - residential		4,588		4,588		—		—
Construction loans		—		—		—		—
Small Business Administration		1,544		1,544		—		—
Taxi Medallion ⁽¹⁾		1,763		1,763		9		—
Commercial business and other ⁽¹⁾		5,006		5,001		—		—
Total	$	16,299	$	16,013	$	9	$	—

(1)

Not included in the above analysis are non-accrual performing TDR taxi medallion loans totaling $1.5 million at March 31, 2020 and non-accrual performing TDR commercial business loans totaling $1.0 million at March 31, 2020.

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


	December 31,
(In thousands)	2019
Loans ninety days or more past due and still accruing:
Multi-family residential	$	445
Total		445
Non-accrual mortgage loans:
Multi-family residential		2,296
Commercial real estate		367
One-to-four family - mixed-use property		274
One-to-four family - residential		5,139
Total		8,076
Non-accrual non-mortgage loans:
Small Business Administration		1,151
Taxi medallion⁽¹⁾		1,641
Commercial business and other ⁽¹⁾		1,945
Total		4,737
Total non-accrual loans		12,813
Total non-performing loans	$	13,258

(1)	Not included in the above analysis are non-accrual performing TDR taxi medallion loans totaling $1.7 million at December 31, 2019, respectively and non-accrual performing TDR commercial business loans totaling $0.9 million at December 31, 2019.

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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
	March 31,
	2020		2019

Interest income that would have been recognized had the loans performed in accordance with their original terms	$	375	$	394
Less: Interest income included in the results of operations		89		118
Total foregone interest	$	286	$	276

The following tables shows the aging of the amortized cost basis in past-due loans at the period indicated by class of loans:


	March 31, 2020
					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	$	1,919	$	—	$	2,763	$	4,682	$	2,274,090	$	2,278,772
Commercial real estate		5,206		—		8		5,214		1,661,599		1,666,813
One-to-four family - mixed-use property		3,283		—		627		3,910		592,435		596,345
One-to-four family - residential		1,322		381		4,588		6,291		193,593		199,884
Construction loans		—		—		—		—		66,524		66,524
Small Business Administration		—		—		1,544		1,544		12,961		14,505
Taxi medallion		—		—		1,195		1,195		2,087		3,282
Commercial business and other		645		153		4,968		5,766		1,100,197		1,105,963
Total	$	12,375	$	534	$	15,693	$	28,602	$	5,903,486	$	5,932,088

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


	December 31, 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	$	4,042	$	1,563	$	2,741	$	8,346	$	2,230,245	$	2,238,591
Commercial real estate		—		4,941		367		5,308		1,576,700		1,582,008
One-to-four family - mixed-use property		1,117		496		274		1,887		590,584		592,471
One-to-four family - residential		720		1,022		5,139		6,881		181,335		188,216
Co-operative apartments		—		—		—		—		8,663		8,663
Construction loans		—		—		—		—		67,754		67,754
Small Business Administration		—		—		1,151		1,151		13,294		14,445
Taxi medallion		—		—		1,065		1,065		2,244		3,309
Commercial business and other		2,340		5		1,945		4,290		1,057,188		1,061,478
Total	$	8,219	$	8,027	$	12,682	$	28,928	$	5,728,007	$	5,756,935

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Notes to Consolidated Financial Statements

(Unaudited)

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 Credit 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.

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the risk category of mortgage and non-mortgage loans by loan portfolio segments and class of loans by year of origination :


	For the year ended
														Revolving Loans,		Lines of Credit
														Amortized Cost		converted to
(In thousands)		2020		2019		2018		2017		2016		Prior		Basis		term loans
1-4 Family Residential
Pass	$	8,526	$	26,292	$	29,807	$	16,352	$	11,399	$	65,998	$	9,361	$	22,132
Watch		—		—		—		—		—		2,759		—		1,809
Special Mention		—		—		—		—		—		444		146		147
Substandard		—		—		—		—		950		2,906		—		856
Total 1-4 Family Residential	$	8,526	$	26,292	$	29,807	$	16,352	$	12,349	$	72,107	$	9,507	$	24,944
1-4 Family Mixed-Use
Pass	$	15,189	$	70,064	$	78,136	$	63,655	$	54,009	$	304,415	$	—	$	—
Watch		—		—		793		—		1,325		7,148		—		—
Special Mention		—		—		—		—		—		984		—		—
Substandard		—		—		—		—		—		627		—		—
Total 1-4 Family Mixed Use	$	15,189	$	70,064	$	78,929	$	63,655	$	55,334	$	313,174	$	—	$	—
Commercial Real Estate
Pass	$	75,893	$	254,086	$	283,515	$	194,618	$	239,116	$	511,871	$	—	$	—
Watch		4,979		9,762		—		4,963		20,748		66,711		—		—
Special Mention		—		—		—		—		—		543		—		—
Substandard		—		—		—		—		—		8		—		—
Total Commercial Real Estate	$	80,872	$	263,848	$	283,515	$	199,581	$	259,864	$	579,133	$	—	$	—
Construction
Pass	$	4,885	$	15,633	$	35,934	$	—	$	9,394	$	—	$	—	$	—
Special Mention		—		—		678		—		—		—		—		—
Total Construction	$	4,885	$	15,633	$	36,612	$	—	$	9,394	$	—	$	—	$	—
Multifamily
Pass	$	68,498	$	313,608	$	369,264	$	376,202	$	283,128	$	846,228	$	4,460	$	—
Watch		—		—		—		2,158		2,843		9,620		—		—
Substandard		—		—		1,974		—		—		789		—		—
Total Multifamily	$	68,498	$	313,608	$	371,238	$	378,360	$	285,971	$	856,637	$	4,460	$	—
Commercial Business - Secured by RE
Pass	$	27,601	$	117,070	$	59,408	$	22,399	$	44,964	$	85,736	$	—	$	—
Watch		—		—		6,647		1,320		2,701		3,276		—		—
Special Mention		—		—		—		—		—		423		—		—
Substandard		—		—		—		—		—		2,330		—		—
Total Commercial Business - Secured by RE	$	27,601	$	117,070	$	66,055	$	23,719	$	47,665	$	91,765	$	—	$	—
Commercial Business
Pass	$	39,770	$	151,169	$	117,548	$	73,802	$	18,931	$	73,775	$	213,463	$	—
Watch		1,221		1,001		2,372		3,114		445		587		19,162		—
Special Mention		—		—		15				2,683		463		317		—
Substandard		—		577		340		3,386		6,255		1,211		94		—
Doubtful		—		—		—		—		—		108		—		—
Total Commercial Business	$	40,991	$	152,747	$	120,275	$	80,302	$	28,314	$	76,144	$	233,036	$	—
Small Business Administration
Pass	$	—	$	986	$	3,626	$	1,072	$	2,704	$	2,220	$	—	$	—
Watch		—		—		—		2,299		—		—		—		—
Special Mention		—		—		—		—		—		54		—		—
Substandard		—		—		—		1,170		374		—		—		—
Total Small Business Administration	$	—	$	986	$	3,626	$	4,541	$	3,078	$	2,274	$	—	$	—
Taxi Medallions
Substandard		—		—		—		—		—		3,282		—		—
Total Taxi Medallions	$	—	$	—	$	—	$	—	$	—	$	3,282	$	—	$	—
Other
Pass	$	—	$	—	$	—	$	—	$	—	$	105	$	171	$	—
Watch		—		—		—		—		—		—		3		—
Total Other	$	—	$	—	$	—	$	—	$	—	$	105	$	174	$	—

Total Loans	$	246,562	$	960,248	$	990,057	$	766,510	$	701,969	$	1,994,621	$	247,177	$	24,944

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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 period indicated:


	December 31, 2019
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total
Multi-family residential	$	1,563	$	2,743	$	—	$	—	$	4,306
Commercial real estate		5,525		367		—		—		5,892
One-to-four family - mixed-use property		1,585		453		—		—		2,038
One-to-four family - residential		1,095		5,787		—		—		6,882
Construction		—		—		—		—		—
Small Business Administration		55		85		—		—		140
Taxi medallion		—		3,309		—		—		3,309
Commercial business and other		3,924		11,289		266		—		15,479
Total loans	$	13,747	$	24,033	$	266	$	—	$	38,046

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 $51.9 million and $259.9 million, respectively, at March 31, 2020.

The following tables presents types of collateral-dependent loans by class of loans as of March 31, 2020:



	Collateral Type
(In thousands)		Real Estate		Business Assets
Multi-family residential	$	2,763	$	—
Commercial real estate		8		—
One-to-four family - mixed-use property		627		—
One-to-four family - residential		4,588		—
Small Business Administration		—		1,544
Commercial business and other		—		5,000
Taxi Medallion		—		3,282
Total	$	7,986	$	9,826

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Notes to Consolidated Financial Statements

(Unaudited)

Off-Balance Sheet Credit Losses

Also included within scope of the CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process”. Commitments “in‐process” reflect loans not in the Company’s books but rather negotiated loan / line of credit terms and rates that the Company has offered to customers and is committed to honoring. In reference to “in‐process” credits, the Company defines an unfunded commitment as a credit that has been offered to and accepted by a borrower, which has not closed and by which the obligation is not unconditionally cancellable.

The Company estimates expected credit losses over the contractual period in which the company is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on losses on off-balance sheet exposures is adjusted as a provision for credit loss expense. The Company uses similar assumptions and risk factors that are developed for collectively evaluated financing receivables. This estimates includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.

At March 31, 2020, allowance for off-balance-sheet credit losses is $0.8 million, which is included the “Other liabilities” on the Consolidated Statements of Financial Condition. During the first quarter 2020, the Company has $0.2 million in credit loss expense for off-balance-sheet items, which is included in the “Other operating expense” on the Consolidated Statements of Income.

6. Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At March 31, 2020 and December 31, 2019, the Bank did 0t 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.

The following tables show loans sold during the period indicated:


	For the three months ended March 31, 2020
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain
Delinquent and non-performing loans
Multi-family residential	1	$	284	$	—	$	42
One-to-four family - mixed-use property	1		296		—		—
Total	2	$	580	$	—	$	42


	For the three months ended March 31, 2019
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain (loss)
Delinquent and non-performing loans
Multi-family residential	2	$	765	$	—	$	63
One-to-four family - mixed-use property	1		405		(1)		—
Total	3	$	1,170	$	(1)	$	63

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PART I – FINANCIAL INFORMATION

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Notes to Consolidated Financial Statements

(Unaudited)

7. Other Real Estate Owned

The following table shows changes in Other Real Estate Owned (“OREO”) during the periods indicated:


	For the three months ended
	March 31,
	2020		2019

Balance at beginning of period	$	239	$	—
Reductions to carrying value		(31)		—
Balance at end of period	$	208	$	—

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
	March 31,
	2020		2019

Gross gains	$	—	$	—
Gross losses		—		—
Write-down of carrying value		(31)		—
Total income	$	(31)	$	—

Included within net loans as of March 31, 2020 and December 31, 2019 was a recorded investment of $5.2 million and $6.6 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.

8. Leases

The Company has 21 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 eight months to 12 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 Right-Of-Use (“ROU”) assets or lease liabilities for leases with a term of less than 12 months from the commencement date. The Company’s operating lease expense totaled $1.9 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for each of the three month periods ended March 31, 2020 and 2019. The Company has one agreement that qualifies as a short-term lease with expense totaling approximately $34,000 for each of the three month periods ended March 31, 2020 and 2019, included in Professional services on the Consolidated Statements of Income. The Company has $0.3 million and $0.2 million in variable lease payments, which include insurance and real estate tax expenses and was recorded in Occupancy and equipment on the Consolidated Statements of Income, for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, the weighted-average remaining lease term for our operating leases is approximately seven years and the weighted average discount rate is 3.8%. Our lease agreements do not contain any residual value guarantees.

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

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Notes to Consolidated Financial Statements

(Unaudited)

Supplemental balance sheet information related to leases was as follows:




(Dollars in thousands)	March 31, 2020			December 31, 2019

Operating lease ROU assets	$	39,729		$	41,254

Operating lease liabilities	$	47,726		$	49,367

Weighted-average remaining lease term-operating leases		7.4 years			8.0 years
Weighted average discount rate-operating leases		3.8	%		3.8	%

The components of lease expense and cash flow information related to leases were as follows:


	For the three months ended
(Dollars in thousands)	March 31, 2020		March 31, 2019

Lease Cost
Operating lease cost	$	1,885	$	1,892
Short-term lease cost		34		34
Variable lease cost		264		246
Total lease cost	$	2,183	$	2,172

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,982	$	2,025
Right-of-use assets obtained in exchange for new operating lease liabilities	$	23	$	21

The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of March 31, 2020 and December 31, 2019:


	Minimum Rental
	(In thousands)
Years ended December 31:
2020	$	6,004
2021		7,680
2022		7,265
2023		7,398
2024		7,425
Thereafter		19,148
Total minimum payments required		54,920
Less: implied interest		7,194
Total lease obligations	$	47,726

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 March 31, 2020, PRSU’s granted in 2020 are being accrued at target and PRSU’s granted in 2019 are being accrued above target. The different levels of accrual are commensurate with the projected performance of the respective grant.

For the three months ended March 31, 2020 and 2019, the Company’s net income, as reported, included $2.5 million and $4.0 million, respectively, of stock-based compensation costs and $0.6 million and $1.0 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. During the three months ended March 31, 2020 and 2019, the Company granted 170,228 and 263,574 in RSU awards, respectively. During the three months ended March 31, 2020 and 2019, the Company granted 72,143 and 57,870 in PRSU awards, respectively. The Company has 0t granted stock options since 2009 and at March 31, 2020, had NaN 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.

The following table summarizes the Company’s RSU and PRSU awards at or for the three months ended March 31, 2020:


	RSU Awards			PRSU Awards
		Weighted-Average			Weighted-Average
		Grant-Date			Grant-Date
	Shares	Fair Value		Shares	Fair Value

Non-vested at December 31, 2019	428,295	$	24.42	34,186	$	22.38
Granted	170,228		19.79	72,143		20.38
Vested	(232,351)		22.28	(35,149)		20.54
Forfeited	(2,415)		24.62	—		—
Non-vested at March 31, 2020	363,757	$	23.62	71,180	$	21.26
Vested but unissued at March 31, 2020	216,777	$	23.26	62,515	$	21.35

As of March 31, 2020, there was $8.4 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 2.7 years. The total fair value of awards vested for the three months ended March 31, 2020 and 2019 was $5.0 million and $6.1 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.

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Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Phantom Stock Plan at or for the three months ended March 31, 2020:


Phantom Stock Plan	Shares	Fair Value
Outstanding at December 31, 2019	109,226	$	21.61
Granted	5,798		17.77
Distributions	(26)		20.45
Outstanding at March 31, 2020	114,998	$	13.36
Vested at March 31, 2020	114,627	$	13.36

The Company recorded stock-based compensation (benefit) expense for the Phantom Stock Plan of ($0.9) million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. The total fair value of the distributions from the Phantom Stock Plan was less than $1,000 and $22,000 for the three months ended March 31, 2020 and 2019, respectively.

10. Pension and Other Postretirement Benefit Plans

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


	Three months ended
	March 31,
(In thousands)	2020		2019

Employee Pension Plan:
Interest cost	$	163	$	199
Amortization of unrecognized loss		111		67
Expected return on plan assets		(257)		(272)
Net employee pension expense (benefit)	$	17	$	(6)

Outside Director Pension Plan:
Service cost	$	4	$	10
Interest cost		16		21
Amortization of unrecognized gain		(14)		(35)
Amortization of past service liability		—		—
Net outside director pension expense (benefit)	$	6	$	(4)

Other Postretirement Benefit Plans:
Service cost	$	69	$	70
Interest cost		65		85
Amortization of past service credit		(20)		(22)
Net other postretirement expense	$	114	$	133

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2019 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, 2020. The Company does 0t expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of March 31, 2020, the Company had contributed $36,000 to the Outside Director Pension Plan and $18,000 in contributions were made to the Other Postretirement Benefit Plans. As of March 31, 2020, the Company has not revised its expected contributions for the year ending December 31, 2020.

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 March 31, 2020, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.6 million and $45.1 million, respectively. At December 31, 2019, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $44.4 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three months ended March 31, 2020 and 2019.

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
	Measurements		Measurements
	at March 31,		at December 31,			Three Months Ended
(In thousands)	2020		2019			March 31, 2020		March 31, 2019

Mortgage-backed securities	$	738	$	772		$	3	$	1
Other securities		13,831		13,548	��		219		179
Borrowed funds		45,126		44,384			(2,351)		(1,210)
Net loss from fair value adjustments ⁽¹⁾						$	(2,129)	$	(1,030)

(1)	The net loss from fair value adjustments presented in the above table does not include losses of $3.9 million and $1.1 million for the three months ended March 31, 2020 and 2019, 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 March 31, 2020 and December 31, 2019. The fair value of borrowed funds includes accrued interest payable of $0.2 million at both March 31, 2020 and December 31, 2019, 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.

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Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

Level 1 – when quoted market prices are available in an active market. At March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, Level 2 included mortgage-backed securities, CLO’s, corporate debt, municipals and interest rate swaps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At March 31, 2020 and December 31, 2019, 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.

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Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a recurring basis, including those reported at fair value under the fair value option, and the level that was used to determine their fair value, at March 31, 2020 and December 31, 2019:


	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
	2020		2019		2020		2019		2020		2019		2020		2019
	(In thousands)
Assets:
Securities available for sale
Mortgage-backed Securities	$	—	$	—	$	489,556	$	523,849	$	—	$	—	$	489,556	$	523,849
Other securities		12,476		12,216		212,025		235,103		1,355		1,332		225,856		248,651
Interest rate swaps		—		—		—		2,352		—		—		—		2,352

Total assets	$	12,476	$	12,216	$	701,581	$	761,304	$	1,355	$	1,332	$	715,412	$	774,852


Liabilities:
Borrowings	$	—	$	—	$	—	$	—	$	45,126	$	44,384	$	45,126	$	44,384
Interest rate swaps		—		—		70,611		19,653		—		—		70,611		19,653

Total liabilities	$	—	$	—	$	70,611	$	19,653	$	45,126	$	44,384	$	115,737	$	64,037

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


	For the three months ended
	March 31, 2020				March 31, 2019
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures
	(In thousands)

Beginning balance	$	1,332	$	44,384	$	1,256	$	41,849
Net gain from fair value adjustment of financial assets⁽¹⁾		24		—		33		—
Net loss from fair value adjustment of financial liabilities⁽¹⁾		—		2,351		—		1,210
Decrease in accrued interest receivable		(1)		—		—		—
(Decrease) increase in accrued interest payable		—		(24)		—		9
Change in unrealized gains included in other comprehensive income		—		(1,585)		—		(127)
Ending balance	$	1,355	$	45,126	$	1,289	$	42,941

Changes in unrealized gains held at period end	$	—		3,062		—		1,375

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

During the three months ended March 31, 2020 and 2019, there were no transfers between Levels 1, 2 and 3.

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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:

March 31, 2020

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

$

1,355

Discounted cash flows

Discount rate

n/a

3.7

%

Liabilities:

Junior subordinated debentures

$

45,126

Discounted cash flows

Discount rate

n/a

3.7

%

December 31, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

$

1,332

Discounted cash flows

Discount rate

n/a

4.2

%

Liabilities:

Junior subordinated debentures

$

44,384

Discounted cash flows

Discount rate

n/a

4.2

%

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 March 31, 2020 and December 31, 2019, 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.

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value at March 31, 2020 and December 31, 2019:


	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
	2020		2019		2020		2019		2020		2019		2020		2019
	(In thousands)
Assets
Non-accrual loans	$	—	$	—	$	—	$	—	$	1,259	$	1,081	$	1,259	$	1,081
Other real estate owned		—		—		—		—		208		239		208		239

Total assets	$	—	$	—	$	—	$	—	$	1,467	$	1,320	$	1,467	$	1,320

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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:


	March 31, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(Dollars in thousands)
Assets:

Non-accrual loans	$	169	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	0.0%	0.0%
				Reduction for planned expedited disposal	47.8%	47.8%


Non-accrual loans	$	818	Discounted Cash flow	Discount Rate	6.4%	6.4%
				Probability of Default	20.0%	20.0%


Non-accrual loans	$	272	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	(10.0) to 15.0%	2.5%
				Capitalization rate	9.5%	9.5%
				Reduction for planned expedited disposal	15.0%	15.0%


Other real estate owned		208	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	0.5% to 12.5%	6.5%
				Reduction for planned expedited disposal	0.0%	0.0%


	At December 31, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(Dollars in thousands)
Assets:

Impaired loans	$	809	Discounted Cash flow	Discount Rate	6.4%	6.4%
				Probability of Default	20.0%	20.0%

Impaired loans	$	272	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	(10.0) to 15.0	2.5%
				Capitalization Rate	9.5%	9.5%
				Reduction for planned expedited disposal	15.0%	15.0%

Other real estate owned	$	239	Sales approach	Reduction for planned expedited disposal	0.5 to 12.5	6.5%

The Company did 0t have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019.

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The methods and assumptions used to estimate fair value at March 31, 2020 and December 31, 2019 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.

Non-accrual 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.

Other Real Estate Owned and Other Repossessed Assets:

The fair value for OREO is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property. The fair value for other repossessed assets are 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.

Interest Rate Swaps:

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

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Table of Contents

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:

March 31, 2020

Carrying

Fair

Amount

Value

Level 1

Level 2

Level 3

(In thousands)

Assets:

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg


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


Large accelerated filer X	Accelerated filer __
Non-accelerated filer __	Smaller reporting company __
Emerging growth company __

Flushing Financial (FFIC) 10-Q2020 Q1 Quarterly report

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