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Flushing Financial (FFIC)

Filed: 11 May 20, 5:04pm

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 March 31, 2020

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

Accelerated filer  __

Non-accelerated filer  __

Smaller reporting company  __

Emerging growth 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 April 30, 2020 was 28,214,481.

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.

-1-

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.

-2-

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.

-3-

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)

-4-

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.

-5-

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.

-6-

Table of Contents

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.

-7-

Table of Contents

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.

-8-

Table of Contents

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.

-9-

Table of Contents

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

-10-

Table of Contents

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 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

-11-

Table of Contents

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.

-12-

Table of Contents

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

-13-

Table of Contents

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:

-14-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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.

-15-

Table of Contents

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.

-16-

Table of Contents

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

-17-

Table of Contents

PART I – FINANCIAL INFORMATION

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.

-18-

Table of Contents

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

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

-19-

Table of Contents

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:

March 31, 2020

    

    

    

One-to-four

    

    

    

    

    

    

family -

One-to-four

Commercial

Multi-family

Commercial

mixed-use

family -

Construction

Small Business

Taxi

business and

(In thousands)

residential

real estate

property

residential

loans

Administration

medallion

other

Total

Allowance for credit losses:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

5,391

$

4,429

$

1,817

$

756

$

441

$

363

$

$

8,554

$

21,751

Impact of CECL Adoption

(651)

1,170

(55)

(159)

(279)

1,180

(827)

379

Charge-offs

 

 

 

 

 

 

 

 

(1,259)

 

(1,259)

Recoveries

 

7

 

 

78

 

4

 

 

7

 

 

14

 

110

Provision (benefit)

 

1,148

 

1,192

 

330

 

291

 

23

 

(22)

 

 

4,155

 

7,117

Ending balance

$

5,895

$

6,791

$

2,170

$

892

$

185

$

1,528

$

$

10,637

$

28,098

March 31, 2019

    

    

    

One-to-four

    

    

    

    

    

    

family -

One-to-four

Commercial

Multi-family

Commercial

mixed-use

family -

Construction

Small Business

Taxi

business and

(In thousands)

residential

real estate

property

residential

loans

Administration

medallion

other

Total

Allowance for credit losses:

 

  

 

  

 

  

 

��

  

 

  

 

  

 

  

 

  

 

  

Beginning balance

$

5,676

$

4,315

$

1,867

$

749

$

329

$

418

$

$

7,591

$

20,945

Charge-offs

 

 

 

(1)

 

 

 

 

 

(1,137)

 

(1,138)

Recoveries

 

13

 

 

86

 

4

 

 

4

 

84

 

45

 

236

Provision (benefit)

 

(196)

 

(37)

 

(161)

 

(22)

 

22

 

(13)

 

(84)

 

1,463

 

972

Ending balance

$

5,493

$

4,278

$

1,791

$

731

$

351

$

409

$

$

7,962

$

21,015

See also Note 16 for the adoption of ASC Topic 326, “Credit Loses”.

-20-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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.

-21-

Table of Contents

PART I – FINANCIAL INFORMATION

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

-22-

Table of Contents

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

-23-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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

-24-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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.

-25-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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

-26-

Table of Contents

PART I – FINANCIAL INFORMATION

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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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Phantom Stock Plan at or for the 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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Table of Contents

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.

-29-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

Level 1 – 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.

-30-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a recurring basis, 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.

-31-

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: