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FFIC Flushing Financial

Filed: 9 Nov 20, 2:54pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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 October 30, 2020 was 28,218,427.

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1.   Financial Statements

September 30, 

December 31, 

    

2020

    

2019

(Dollars in thousands, except per share data)

Assets

 

  

 

  

Cash and due from banks

$

75,560

$

49,787

Securities held-to-maturity:

 

  

 

Mortgage-backed securities (including assets pledged of $8,942 and $5,283 at September 30, 2020 and December 31, 2019, respectively; fair value of $9,198 and $8,114 at September 30, 2020 and December 31, 2019, respectively)

 

7,919

 

7,934

Other securities, net of allowance for credit losses of $402 (NaN pledged; fair value of $53,268 and $53,998 at September 30, 2020 and December 31, 2019, respectively)

 

50,252

 

50,954

Securities available for sale, at fair value:

 

  

 

Mortgage-backed securities (including assets pledged of $238,818 and $212,038 at September 30, 2020 and December 31, 2019, respectively; $672 and $772 at fair value pursuant to the fair value option at September 30, 2020 and December 31, 2019, respectively)

 

386,235

 

523,849

Other securities (NaN pledged; $13,841 and $13,548 at fair value pursuant to the fair value option at September 30, 2020 and December 31, 2019, respectively)

 

234,721

 

248,651

Loans:

 

 

Multi-family residential

2,252,757

2,238,591

Commercial real estate

1,636,659

1,582,008

One-to-four family - mixed-use property

585,159

592,471

One-to-four family - residential

191,011

188,216

Co-operative apartments

8,132

8,663

Construction

63,567

67,754

Small Business Administration

124,649

14,445

Taxi medallion

2,317

3,309

Commercial business and other

1,063,429

1,061,478

Net unamortized premiums and unearned loan fees

13,718

15,271

Allowance for loan losses

 

(38,343)

 

(21,751)

Net loans

 

5,903,055

 

5,750,455

Interest and dividends receivable

 

36,068

 

25,722

Bank premises and equipment, net

 

25,766

 

28,676

Federal Home Loan Bank of New York stock, at cost

 

57,119

 

56,921

Bank owned life insurance

 

158,701

 

157,713

Goodwill

 

16,127

 

16,127

Other real estate owned, net

 

239

Right of Use Asset

42,326

 

41,254

Other assets

 

69,207

 

59,494

Total assets

$

7,063,056

$

7,017,776

Liabilities

 

  

 

  

Due to depositors:

 

  

 

  

Non-interest bearing

$

607,954

$

435,072

Interest-bearing

 

4,298,405

 

4,586,977

Total Deposits

4,906,359

5,022,049

Mortgagors' escrow deposits

 

57,136

 

44,375

Borrowed funds:

 

 

Federal Home Loan Bank advances

 

1,211,122

 

1,118,528

Subordinated debentures

 

74,566

 

74,319

Junior subordinated debentures, at fair value

 

38,287

 

44,384

Total borrowed funds

 

1,323,975

 

1,237,231

Operating lease liability

49,737

49,367

Other liabilities

 

139,443

 

85,082

Total liabilities

 

6,476,650

 

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 September 30, 2020 and December 31, 2019; 28,218,427 shares and 28,157,206 shares outstanding at September 30, 2020 and December 31, 2019, respectively)

 

315

 

315

Additional paid-in capital

 

227,877

 

226,691

Treasury stock, at average cost (3,312,168 shares and 3,373,389 shares at September 30, 2020 and December 31, 2019, respectively)

 

(69,409)

 

(71,487)

Retained earnings

 

445,931

 

433,960

Accumulated other comprehensive loss, net of taxes

 

(18,308)

 

(9,807)

Total stockholders' equity

 

586,406

 

579,672

Total liabilities and stockholders' equity

$

7,063,056

$

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

For the nine months ended

    

September 30, 

September 30, 

(Dollars in thousands, except per share data)

    

2020

    

2019

    

2020

    

2019

Interest and dividend income

Interest and fees on loans

$

60,367

$

62,825

$

182,033

$

187,428

Interest and dividends on securities:

 

  

 

  

 

  

 

  

Interest

 

3,525

6,287

 

12,963

20,007

Dividends

 

9

 

18

 

35

 

56

Other interest income

13

 

259

325

 

1,286

Total interest and dividend income

 

63,914

 

69,389

 

195,356

 

208,777

Interest expense

 

  

 

  

 

  

 

  

Deposits

 

7,093

 

22,244

 

35,842

 

66,540

Other interest expense

 

6,897

 

8,196

 

20,047

 

21,476

Total interest expense

 

13,990

 

30,440

 

55,889

 

88,016

Net interest income

 

49,924

 

38,949

 

139,467

 

120,761

Provision for credit losses

 

2,470

 

683

 

19,267

 

3,129

Net interest income after provision for credit losses

 

47,454

 

38,266

 

120,200

 

117,632

Non-interest income

 

  

 

  

 

  

 

  

Banking services fee income

 

1,316

 

847

 

3,058

 

2,879

Net loss on sale of securities

 

0

 

0

 

(91)

 

(15)

Net gain on sale of loans

 

0

 

204

 

42

 

381

Net gain on sale of assets

 

0

 

0

 

0

 

770

Net gain (loss) from fair value adjustments

 

(2,225)

 

(2,124)

 

1,987

 

(6,160)

Federal Home Loan Bank of New York stock dividends

 

874

 

834

 

2,719

 

2,563

Life insurance proceeds

 

0

 

0

 

659

 

43

Bank owned life insurance

 

923

 

1,000

 

2,798

 

2,550

Other income

 

463

 

278

 

1,052

 

1,422

Total non-interest income

 

1,351

 

1,039

 

12,224

 

4,433

Non-interest expense

 

 

Salaries and employee benefits

 

17,335

 

15,461

 

52,139

 

50,295

Occupancy and equipment

 

3,021

 

2,847

 

8,688

 

8,378

Professional services

 

2,064

 

2,167

 

6,911

 

6,238

FDIC deposit insurance

 

727

 

(589)

 

2,114

 

563

Data processing

 

1,668

 

1,490

 

5,175

 

4,402

Depreciation and amortization

 

1,542

 

1,439

 

4,633

 

4,454

Other real estate owned/foreclosure expense

 

240

 

48

 

121

 

145

Net loss from other real estate owned

 

5

 

0

 

36

 

0

Other operating expenses

 

3,383

 

3,182

 

11,303

 

11,147

Total non-interest expense

 

29,985

 

26,045

 

91,120

 

85,622

Income before income taxes

 

18,820

 

13,260

 

41,304

 

36,443

Provision for income taxes

Federal

 

3,359

 

2,457

 

8,655

 

7,381

State and local

 

1,130

 

79

 

1,436

 

714

Total taxes expense

 

4,489

 

2,536

 

10,091

 

8,095

Net income

$

14,331

$

10,724

$

31,213

$

28,348

Basic earnings per common share

$

0.50

$

0.37

$

1.08

$

0.99

Diluted earnings per common share

$

0.50

$

0.37

$

1.08

$

0.99

Dividends per common share

$

0.21

$

0.21

$

0.63

$

0.63

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

-2-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

For the three months ended

For the nine months ended

September 30, 

September 30, 

(In thousands)

    

2020

    

2019

    

2020

    

2019

    

Net income

$

14,331

 

10,724

 

31,213

 

28,348

Other comprehensive income (loss), net of tax:

 

  

 

  

 

  

 

  

Amortization of actuarial losses, net of taxes of ($30) and ($11) for the three months ended September 30, 2020 and 2019, respectively and of ($91) and ($30) for the nine months ended September 30, 2020 and 2019, respectively.

 

67

 

22

 

201

 

66

Amortization of prior service credits, net of taxes of $6 and $7 for the three months ended September 30, 2020 and 2019, respectively and of $20 and $20 for nine months ended September 30, 2020 and 2019, respectively.

 

(15)

 

(15)

 

(44)

 

(44)

Net unrealized gains(losses) on securities, net of taxes of ($1,449) and $218 for the three months ended September 30, 2020 and 2019, respectively and of ($2,000) and ($5,102) for nine months ended September 30, 2020 and 2019, respectively.

 

3,185

 

(475)

 

4,397

 

11,349

Reclassification adjustment for net losses included in income, net of taxes of ($29) and ($5) for the nine months ended September 30, 2020 and 2019, respectively.

 

 

 

62

 

10

Net unrealized gains (losses) on cash flow hedges, net of taxes of ($849) and $874 for the three months ended September 30, 2020 and 2019 respectively and of $6,253 and $5,293 for nine months ended September 30, 2020 and 2019, respectively.

 

1,866

 

(1,946)

 

(13,744)

 

(11,782)

Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($50) and ($27) for the three months ended September 30, 2020 and 2019 respectively and of ($280) and ($81) for the nine months ended September 30, 2020 and 2019, respectively.

 

111

 

61

 

627

 

184

Total other comprehensive income (loss), net of tax

 

5,214

 

(2,353)

 

(8,501)

 

(217)

Comprehensive income

$

19,545

$

8,371

$

22,712

$

28,131

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

-3-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

For the nine months ended September 30, 

    

2020

    

2019

(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

31,213

$

28,348

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

 

  

 

  

Provision for credit loan losses

 

19,267

 

3,129

Depreciation and amortization of bank premises and equipment

 

4,633

 

4,454

Amortization of premium, net of accretion of discount

4,721

4,932

Net (gain) loss from fair value adjustments

(1,987)

6,160

Net loss from fair value adjustments on qualifying hedges

2,208

2,717

Net gain from sale of loans

 

(42)

 

(381)

Net loss from sale of securities

 

91

 

15

Net gain from sale of asset

 

0

 

(770)

Net loss from OREO

 

36

 

0

Income from bank owned life insurance

 

(2,798)

 

(2,550)

Life insurance proceeds

 

(659)

 

(43)

Stock-based compensation expense

 

5,510

 

6,617

Deferred compensation

 

(3,579)

 

(2,526)

Deferred income tax benefit

 

(4,174)

 

(3,777)

Increase in other liabilities

 

6,143

 

4,358

Decrease (increase) in other assets

 

(15,043)

 

1,659

Net cash provided by operating activities

 

45,540

 

52,342

CASH FLOWS FROM INVESTING ACTIVITIES

 

  

 

  

Purchases of bank premises and equipment

 

(1,723)

 

(2,182)

Net purchases of Federal Home Loan Bank of New York shares

 

(198)

 

(7,998)

Purchases of securities held-to-maturity

 

0

 

(30,030)

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

 

180

 

1,568

Proceeds from prepayments of securities held-to-maturity

 

129

 

434

Purchases of securities available for sale

 

(130,397)

 

(141,798)

Proceeds from sales and calls of securities available for sale

 

143,376

 

65,493

Proceeds from maturities and prepayments of securities available for sale

 

142,320

 

88,217

Proceeds from sale of assets

 

0

 

813

Proceeds from bank owned life insurance

 

2,477

 

777

Purchase of bank owned life insurance

 

0

 

(25,000)

Net originations of loans

 

(11,295)

 

(9,660)

Purchases of loans

 

(132,893)

 

(193,703)

Proceeds from sale of real estate owned

 

203

 

0

Proceeds from sale of loans

 

580

 

7,187

Net cash provided by (used in) investing activities

 

12,759

 

(245,882)

-4-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows (Contd.)

(Unaudited)

For the nine months ended September 30, 

    

2020

    

2019

(In thousands)

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase in non-interest bearing deposits

172,882

8,039

Net decrease in interest-bearing deposits

 

(288,694)

 

(11,643)

Net increase in mortgagors' escrow deposits

 

12,761

 

16,942

Net proceeds from short-term borrowed funds

 

0

 

115,750

Proceeds from long-term borrowings

 

240,378

 

184,950

Repayment of long-term borrowings

 

(147,771)

 

(131,301)

Purchases of treasury stock

 

(3,872)

 

(2,656)

Proceeds from issuance of common stock upon exercise of stock options

 

0

 

3

Cash dividends paid

 

(18,210)

 

(18,116)

Net cash provided by (used in) financing activities

 

(32,526)

 

161,968

Net increase (decrease) in cash and cash equivalents

 

25,773

 

(31,572)

Cash and cash equivalents, beginning of period

 

49,787

 

118,561

Cash and cash equivalents, end of period

$

75,560

$

86,989

SUPPLEMENTAL CASH FLOW DISCLOSURE

 

  

 

  

Interest paid

$

57,334

$

85,346

Income taxes paid

 

13,594

 

8,531

Taxes paid if excess tax benefits were not tax deductible

 

13,404

 

8,523

Non-cash activities:

 

Loans transferred to REO

 

0

 

239

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)

 

0

 

0

 

(875)

 

0

 

0

Net loss

 

(1,390)

 

0

 

0

 

(1,390)

 

0

 

0

Award of common shares released from Employee Benefit Trust (116,414 shares)

 

1,398

 

0

 

1,398

 

0

 

0

 

0

Vesting of restricted stock unit awards (272,946 shares)

 

0

 

0

 

(5,626)

 

(156)

 

5,782

 

0

Stock-based compensation expense

 

3,430

 

0

 

3,430

 

0

 

0

 

0

Purchase of treasury shares (142,405 shares)

(2,342)

 

0

 

0

 

0

 

(2,342)

 

0

Repurchase of shares to satisfy tax obligation (74,145 shares)

 

(1,493)

 

0

 

0

 

0

 

(1,493)

 

0

Dividends on common stock ($0.21 per share)

 

(6,084)

 

0

 

0

 

(6,084)

 

0

 

0

Other comprehensive loss

 

(22,633)

 

0

 

0

 

0

 

0

 

(22,633)

Balance at March 31, 2020

 

549,683

 

315

 

225,893

 

425,455

 

(69,540)

 

(32,440)

Net income

 

18,272

0

0

18,272

0

0

Award of common shares released from Employee Benefit Trust (10,956 shares)

 

40

0

40

0

0

0

Vesting of restricted stock unit awards (6,390 shares)

 

0

0

(133)

(1)

134

0

Stock-based compensation expense

 

1,101

0

1,101

0

0

0

Repurchase of shares to satisfy tax obligation (2,558 shares)

 

(30)

0

0

0

(30)

0

Dividends on common stock ($0.21 per share)

 

(6,063)

0

0

(6,063)

0

0

Other comprehensive income

 

8,918

0

0

0

0

8,918

Balance at June 30, 2020

 

571,921

315

226,901

437,663

(69,436)

(23,522)

Net income

 

14,331

0

0

14,331

0

0

Award of common shares released from Employee Benefit Trust (9,384 shares)

 

31

0

31

0

0

0

Vesting of restricted stock unit awards (1,640 shares)

 

0

0

(34)

0

34

0

Stock-based compensation expense

 

979

0

979

0

0

0

Repurchase of shares to satisfy tax obligation (647 shares)

 

(7)

0

0

0

(7)

0

Dividends on common stock ($0.21 per share)

 

(6,063)

0

0

(6,063)

0

0

Other comprehensive loss

 

5,214

0

0

0

0

5,214

Balance at September 30, 2020

$

586,406

$

315

$

227,877

$

445,931

$

(69,409)

$

(18,308)

-6-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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

(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, 2018

$

549,464

$

315

$

222,720

$

414,327

$

(75,146)

$

(12,752)

Impact of adoption of ASC 842-Leases

 

2,716

 

0

 

0

 

2,716

 

0

 

0

Net income

 

7,068

 

0

 

0

 

7,068

 

0

 

0

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

 

2,086

 

0

 

2,086

 

0

 

0

 

0

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

 

  

 

0

 

(5,878)

 

(210)

 

6,088

 

0

Exercise of stock options (300 shares)

 

3

 

0

 

0

 

(3)

 

6

 

0

Stock-based compensation expense

 

3,931

 

0

 

3,931

 

0

 

0

 

0

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

 

(1,877)

 

0

 

0

 

0

 

(1,877)

 

0

Dividends on common stock ($0.21 per share)

 

(6,042)

 

0

 

0

 

(6,042)

 

0

 

0

Other comprehensive income

 

2,210

 

0

 

0

 

0

 

0

 

2,210

Balance at March 31, 2019

 

559,559

 

315

 

222,859

 

417,856

 

(70,929)

 

(10,542)

Net income

 

10,556

 

0

0

10,556

0

0

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

 

81

 

0

81

0

0

0

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

 

0

 

0

(24)

0

24

0

Stock-based compensation expense

 

1,315

 

0

1,315

0

0

0

Repurchase of shares to satisfy tax obligation (382 shares)

 

(8)

 

0

0

0

(8)

0

Dividends on common stock ($0.21 per share)

 

(6,039)

 

0

0

(6,039)

0

0

Other comprehensive loss

 

(74)

 

0

0

0

0

(74)

Balance at June 30, 2019

 

565,390

 

315

 

224,231

 

422,373

 

(70,913)

 

(10,616)

Net income

 

10,724

 

0

0

10,724

0

0

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

 

66

 

0

66

0

0

0

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

 

0

 

0

(197)

0

197

0

Stock-based compensation expense

 

1,371

 

0

1,371

0

0

0

Purchase of treasury shares (40,000 shares)

 

(771)

 

0

0

0

(771)

0

Dividends on common stock ($0.21 per share)

 

(6,035)

 

0

0

(6,035)

0

0

Other comprehensive loss

 

(2,353)

 

0

0

0

0

(2,353)

Balance at September 30, 2019

$

568,392

$

315

$

225,471

$

427,062

$

(71,487)

$

(12,969)

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

-7-

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 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.

-8-

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 and at September 30, 2020, we have 509 active forbearances for loans with an aggregate outstanding loan balance of approximately $846 million resulting in total deferment of $28.4 million in principal, interest and escrow, 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.

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.

In performing the goodwill impairment testing, the Company has identified a single reporting unit. The Company continues to evaluate the impact of the COVID-19 pandemic and as such, evaluated goodwill for impairment at September 30, 2020. The Company conducted a quantitative impairment test of goodwill as of September 30, 2020, which did not indicate an impairment of goodwill. Management will continue to monitor if events requiring further goodwill impairment testing have occurred. At September 30, 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.

-9-

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

For the nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

    

(In thousands, except per share data)

Net income

$

14,331

$

10,724

$

31,213

$

28,348

Divided by:

 

 

 

 

Weighted average common shares outstanding

 

28,874

 

28,730

 

28,865

 

28,704

Weighted average common stock equivalents

 

0

 

0

 

0

 

0

Total weighted average common shares outstanding and common stock equivalents

 

28,874

 

28,730

 

28,865

 

28,704

Basic earnings per common share

$

0.50

$

0.37

$

1.08

$

0.99

Diluted earnings per common share (1)

$

0.50

$

0.37

$

1.08

$

0.99

Dividend payout ratio

 

42.0

%  

 

56.8

%  

 

58.3

%  

 

63.6

%  

(1)For the three and nine months ended September 30, 2020 and 2019, there were 0 common stock equivalents that were anti-dilutive.

4.     Securities

The Company did 0t hold any trading securities at September 30, 2020 and December 31, 2019. Securities available for sale are recorded at fair value. Securities held-to-maturity (“HTM”) are recorded at amortized cost.

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. As of September 30, 2020, we have 1 active forbearance for held-to-maturity securities with an outstanding balance of $20.9 million. During the time this security is in forbearance, it is considered current and as such, continues to accrue interest at its original contractual terms. Accrued interest receivable on held-to-maturity securities totaled $0.1 million at September 30, 2020 and is excluded from estimates of credit losses.

The following table summarizes the Company’s portfolio of securities held-to-maturity at September 30, 2020:

Gross

Gross

Allowance

Amortized

Unrealized

Unrealized

for Credit

    

Cost

    

Fair Value

    

Gains

    

Losses

    

Losses

(In thousands)

Securities held-to-maturity:

 

  

 

  

 

  

 

  

 

  

Municipals

$

50,654

$

53,268

$

2,614

$

0

$

(402)

Total other securities

 

50,654

 

53,268

 

2,614

 

0

 

(402)

FNMA

 

7,919

 

9,198

 

1,279

 

0

 

Total mortgage-backed securities

 

7,919

 

9,198

 

1,279

 

0

 

Total

$

58,573

$

62,466

$

3,893

$

0

$

(402)

-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 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 September 30, 2020:

Gross

Gross

Amortized

Unrealized

Unrealized

    

Cost

    

Fair Value

    

Gains

    

Losses

(In thousands)

Securities available for sale:

Corporate

$

130,000

$

123,516

$

192

$

6,676

Municipals

 

65

 

65

 

0

 

0

Mutual funds

 

12,691

 

12,691

 

0

 

0

Collateralized loan obligations

 

100,473

 

97,300

 

0

 

3,173

Other

 

1,149

 

1,149

 

0

 

0

Total other securities

 

244,378

 

234,721

 

192

 

9,849

REMIC and CMO

 

206,973

 

213,941

 

7,007

 

39

GNMA

 

505

 

554

 

49

 

0

FNMA

 

129,140

 

132,001

 

2,883

 

22

FHLMC

 

39,266

 

39,739

 

504

 

31

Total mortgage-backed securities

 

375,884

 

386,235

 

10,443

 

92

Total securities available for sale

$

620,262

$

620,956

$

10,635

$

9,941

-11-

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

$

0

$

6,950

Municipals

 

12,797

 

12,916

 

119

 

0

Mutual funds

 

12,216

 

12,216

 

0

 

0

Collateralized loan obligations

 

100,349

 

99,137

 

0

 

1,212

Other

 

1,332

 

1,332

 

0

 

0

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

 

0

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 September 30, 2020 and December 31, 2019.

The corporate securities held by the Company at September 30, 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 September 30, 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 after ten years

$

50,654

$

53,268

Total other securities

50,654

53,268

Mortgage-backed securities

7,919

9,198

Total

$

58,573

 

$

62,466

Amortized

Securities available for sale:

    

Cost

    

Fair Value

(In thousands)

Due after one year through five years

$

45,000

$

43,654

Due after five years through ten years

 

110,431

 

104,599

Due after ten years

76,256

73,777

Total other securities

 

231,687

 

222,030

Mutual funds

 

12,691

 

12,691

Mortgage-backed securities

 

375,884

 

386,235

Total

$

620,262

$

620,956

-12-

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 September 30, 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

 

14

$

113,324

$

6,676

$

0

$

0

$

113,324

$

6,676

Collateralized loan obligations

 

13

 

97,299

 

3,173

 

7,293

 

183

 

90,006

 

2,990

Total other securities

 

27

 

210,623

 

9,849

 

7,293

 

183

 

203,330

 

9,666

REMIC and CMO

 

2

 

5,663

 

39

 

5,663

 

39

 

0

 

0

GNMA (1)

 

1

 

48

 

 

48

 

0

 

0

 

0

FNMA

 

1

 

8,652

 

22

 

0

 

0

 

8,652

 

22

FHLMC

 

1

 

13,449

 

31

 

13,449

 

31

 

0

 

0

Total mortgage-backed securities

 

5

 

27,812

 

92

 

19,160

 

70

 

8,652

 

22

Total securities available for sale

 

32

$

238,435

$

9,941

$

26,453

$

253

$

211,982

$

9,688

(1)At September 30, 2020, the unrealized loss was less than $1,000 and in a continuous loss position for less than 12 months.

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

$

0

$

0

$

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

 

0

 

49

 

0

 

0

 

0

FNMA

 

8

 

67,618

 

426

 

19,073

 

138

 

48,545

 

288

FHLMC

 

1

 

30,200

 

73

 

0

 

0

 

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 security that had an unrealized loss at September 30, 2020 and December 31, 2019. At September 30, 2020, the Company evaluated whether the decline in fair value of a debt security resulted from credit losses or other factors under ASC 326. 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.

-13-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 $1.4 million at September 30, 2020 and is excluded from the estimate of credit losses.

Upon adoption of ASC Topic 326, “Credit Losses” on January 1, 2020, see Note 17 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.

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three months ended September 30, 2020:

Mortgage-backed securities

Other securities

(In thousands)

Beginning balance

$

$

402

Provision

Allowance for credit losses - securities

$

$

402

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the nine months ended September 30, 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 did 0t sell any securities during three months ended September 30, 2020 and 2019. The Company sold $130.8 million and $26.4 million in mortgage-backed securities during the nine months ended September 30, 2020 and 2019, respectively.

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

For the three months ended

For the nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(In thousands)

Gross gains from the sale of securities

$

$

$

1,476

$

423

Gross losses from the sale of securities

 

 

 

(1,567)

 

(438)

Net losses from the sale of securities

$

$

$

(91)

$

(15)

-14-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

5.     Loans

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

Interest on loans is recognized on the accrual basis. Accrued interest receivable totaled $33.5 million at September 30, 2020 and was reported in “Interest and dividends receivable” on the Consolidated Statements of Financial Condition. 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.

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 and as such, these loans are considered current and continue to accrue interest at its original contractual terms.  Deferrals granted under the Cares Act are deemed in accrual status and interest income is accrued until the end of deferral period even if there are no payments being collected. When the forbearance period is over, borrowers are expected to resume contractual payments. The determination of whether a loan is past due is based on the modified terms of the agreement. Once the deferral period is over, the borrower will resume making payments and normal delinquency-based non-accrual policies will apply.

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless the loan is well secured and there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Prior to a real estate secured loan becoming 90 days delinquent, an updated appraisal is ordered and/or an internal evaluation is prepared.

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 ACL 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 17 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.

-15-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The quantitative allowance is calculated using a number of inputs 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 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, listed 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:

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.

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

7.Commercial Business secured by real estate – These loans are secured by properties used by the borrower for commercial use where the primary source of repayment is expected to be the income generated by the borrower’s business use of the property. As a result of the Coronavirus pandemic and the strain placed upon many businesses, the Company recognized in circumstances where the borrower is not performing, the real estate collateral would be the source of repayment. The Company considers these credits to be less risky than commercial business loans, however, riskier than commercial real estate 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.

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 commercial 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.

The Company recorded a provision for loans losses totaling $2.5 million and $19.2 million for the three months and nine months ending September 30, 2020, respectively, primarily due to the economic conditions resulting from COVID-19 and the growth in the loan portfolio. The Company specifies both the reasonable and supportable forecast and reversion periods in three economic conditions (expansion, transition, contraction). When calculating the ACL estimate for September 30, 2020, Management acknowledged deteriorated economic conditions as a result of the COVID-19 pandemic were captured in the forecast within the model platform. As such, when determining the reasonable and supportable forecast, Management adjusted the period to reflect a forecast of four quarters, to align with a previously established framework for contraction periods. Similarly, the reversion period was adjusted to four quarters. Management believed these adjustments are necessary as the forecast has suggested more stability than at the beginning of the COVID-19 pandemic. This resulted in the ACL for loans totaling $38.3 million at September 30, 2020, representing 0.65% of gross loans and 154.7% of non-performing loans compared to $21.8 million at December 31, 2019.

In response to COVID-19, the Company is actively assisting customers by providing modifications in the form of deferrals of interest, principal and/or escrow for terms ranging from one to twelve months. At September 30, 2020, we have 509 active forbearances for loans with an aggregate outstanding loan balance of approximately $846.2 million resulting in total deferment of $28.4 million in principal, interest and escrow, down from 808 active forbearances for loans with an aggregate outstanding loan balance of approximately $1.3 billion at June 30, 2020. Given the pandemic and current economic environment, we continue to work with our customers to modify loans although the pace of requests slowed late in the second quarter. The Company actively participated in the SBA Paycheck Protection Program, closing $111.6 million of these loans. We are also a proud participant in the Main Street Lending Program in order to assist customers. As previously discussed, 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 and as such, these loans are considered current and continue to accrue interest at its original contractual terms until the completion of deferred period. Once the deferred period is over, the borrower will resume making payment

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

and normal delinquency-based non-accrual policies will apply.  These loans were captured in the portfolio segments described above and the potential losses captured in the variables used in the ACL calculation.

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 September 30, 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. The following table shows  TDR loan modifications and classified as TDR loans during the periods indicated.

For the three and nine months ended

September 30, 2020

September 30, 2019

(Dollars in thousands)

    

Number

    

Balance

    

Modification description

    

Number

    

Balance

    

Modification description

One-to-four family - mixed-use property

1

$

270

Below market interest rate.

Commercial business and other

 

 

 

3

$

951

 

Amortization extension

Total

 

1

$

270

 

  

 

3

$

951

 

  

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

September 30, 2020

Number

Amortized

(Dollars in thousands)

    

of contracts

    

Cost

Multi-family residential

 

7

$

1,876

One-to-four family - mixed-use property (1)

 

5

 

1,744

One-to-four family - residential

 

3

 

513

Taxi medallion (1)

 

1

99

Commercial business and other (1)

 

3

 

950

Total performing troubled debt restructured

 

19

$

5,182

(1)These loans in the table above continue to pay as agreed, however the Company records interest received on a cash basis.

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

December 31, 2019

Number

Recorded

(Dollars in thousands)

of contracts

    

investment

Multi-family residential

7

$

1,873

One-to-four family - mixed-use property

��

4

 

1,481

One-to-four family - residential

3

 

531

Taxi medallion (1)

7

 

1,668

Commercial business and other (1)

3

 

941

Total performing troubled debt restructured

24

$

6,494

(1)These loans in the table above continue to pay as agreed, however the Company records interest received on a cash basis.

During the three and nine months ended September 30, 2020 and 2019, there were 0 defaults of TDR loans within 12 months of their modification date.

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

September 30, 2020

Number

Amortized

(Dollars in thousands)

    

of contracts

    

Cost

Taxi medallion

 

10

$

1,823

Commercial business and other

 

1

 

279

Total troubled debt restructurings that subsequently defaulted

 

11

$

2,102

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:

December 31, 2019

Number

Recorded

(Dollars in thousands)

of contracts

    

investment

Taxi medallion

4

$

1,065

Commercial business and other

1

 

279

Total troubled debt restructurings that subsequently defaulted

5

$

1,344

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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 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 for the nine months ended September 30, 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

$

2,723

$

2,723

$

$

Commercial real estate

2,714

2,714

One-to-four family - mixed-use property

1,704

1,704

One-to-four family - residential

5,922

5,922

Small Business Administration

1,169

1,169

Taxi medallion(1)

2,318

2,318

Commercial business and other(1)

9,278

6,456

32

Total

$

25,828

$

23,006

$

32

$

(1)Included in the above analysis are non-accrual performing one-to-four family – mixed-use property totaling $0.3 million, non-accrual performing TDR taxi medallion loans totaling $0.1 million September 30, 2020 and non-accrual performing TDR commercial business loans totaling $1.0 million at September 30, 2020.

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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 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.

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

For the three months ended

For the nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(In thousands)

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

$

491

$

416

$

1,296

$

1,224

Less: Interest income included in the results of operations

 

78

 

89

 

240

 

330

Total foregone interest

$

413

$

327

$

1,056

$

894

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

September 30, 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

$

4,499

$

777

$

2,723

$

7,999

$

2,251,453

$

2,259,452

Commercial real estate

 

525

 

192

 

2,714

 

3,431

 

1,635,986

 

1,639,417

One-to-four family - mixed-use property

 

3,048

 

559

 

1,429

 

5,036

 

584,562

 

589,598

One-to-four family - residential

 

2,118

 

689

 

5,922

 

8,729

 

192,052

 

200,781

Construction loans

 

0

 

0

 

0

 

0

 

63,406

 

63,406

Small Business Administration

 

0

 

0

 

1,169

 

1,169

 

122,311

 

123,480

Taxi medallion

 

198

 

99

 

2,021

 

2,318

 

0

 

2,318

Commercial business and other

 

112

 

0

 

6,456

 

6,568

 

1,056,378

 

1,062,946

Total

$

10,500

$

2,316

$

22,434

$

35,250

$

5,906,148

$

5,941,398

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

    

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

 

0

 

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

 

0

 

0

 

0

 

0

 

8,663

 

8,663

Construction loans

 

0

 

0

 

0

 

0

 

67,754

 

67,754

Small Business Administration

 

0

 

0

 

1,151

 

1,151

 

13,294

 

14,445

Taxi medallion

 

0

 

0

 

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

-22-

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:

September 30, 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

$

8,935

$

6,971

$

2,826

$

1,161

$

183

$

1,386

$

$

15,248

$

36,710

Charge-offs

 

 

 

 

 

 

 

(951)

 

(13)

 

(964)

Recoveries

 

14

 

 

60

 

2

 

 

47

 

 

4

 

127

Provision (benefit)

 

(1,553)

 

1,576

 

(1,208)

 

(483)

 

35

 

450

 

951

 

2,702

 

2,470

Ending balance

$

7,396

$

8,547

$

1,678

$

680

$

218

$

1,883

$

$

17,941

$

38,343

September 30, 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

$

5,506

$

4,265

$

1,786

$

746

$

381

$

382

$

$

8,444

$

21,510

Charge-offs

 

(189)

 

 

 

 

 

 

 

(242)

 

(431)

Recoveries

 

6

 

 

140

 

3

 

 

32

 

 

92

 

273

Provision (benefit)

 

54

 

99

 

(120)

 

(4)

 

37

 

(57)

 

 

674

 

683

Ending balance

$

5,377

$

4,364

$

1,806

$

745

$

418

$

357

$

$

8,968

$

22,035

See also Note 17 for the adoption of ASC Topic 326, “Credit Loses”.

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

September 30, 2020

One-to-four

family -

One-to-four

Small

Commercial

Multi-family

Commercial

mixed-use

family -

Construction

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

(650)

 

1,170

 

(55)

 

(160)

 

(279)

 

1,180

 

 

(827)

379

Charge-off's

 

(3)

(178)

(951)

(2,121)

 

(3,253)

Recoveries

 

27

 

 

138

 

10

 

 

67

 

 

18

 

260

Provision

 

2,628

 

2,948

 

(219)

 

74

 

56

 

451

 

951

 

12,317

 

19,206

Ending balance

$

7,396

$

8,547

$

1,678

$

680

$

218

$

1,883

$

$

17,941

$

38,343

September 30, 2019

One-to-four

family -

One-to-four

Small

Commercial

Multi-family

Commercial

mixed-use

family -

Construction

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-off's

 

(190)

 

 

(1)

 

(113)

 

 

 

 

(2,379)

 

(2,683)

Recoveries

 

30

 

7

 

228

 

10

 

 

52

 

134

 

183

 

644

Provision (Benefit)

 

(139)

 

42

 

(288)

 

99

 

89

 

(113)

 

(134)

 

3,573

 

3,129

Ending balance

$

5,377

$

4,364

$

1,806

$

745

$

418

$

357

$

$

8,968

$

22,035

See also Note 17 for the adoption of ASC Topic 326, “Credit Loses”.

-24-

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 and management believes weakness is evident then we designate the loan as “Watch”, all other loans 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. Loans that are in forbearance pursuant to the CARES Act, primarily continued to be reported in the same category as they were reported immediately prior to modification.

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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 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

$

22,735

$

25,030

$

27,827

$

15,548

$

11,231

$

59,657

$

7,678

$

18,095

Watch

489

2,936

299

2,011

Special Mention

667

492

Substandard

960

3,390

1,736

Total 1-4 Family Residential

$

23,224

$

25,030

$

27,827

$

15,548

$

12,191

$

66,650

$

7,977

$

22,334

1-4 Family Mixed-Use

Pass

$

27,156

$

66,500

$

74,828

$

59,923

$

53,344

$

288,858

$

$

Watch

1,873

903

2,013

1,146

8,556

Special Mention

379

1,179

Substandard

620

806

1,514

Total 1-4 Family Mixed Use

$

27,156

$

68,993

$

76,916

$

61,936

$

54,490

$

300,107

$

$

Commercial Real Estate

Pass

$

118,019

$

248,812

$

281,920

$

189,592

$

213,553

$

482,495

$

$

Watch

8,606

4,883

28,203

58,587

Special Mention

981

192

861

Substandard

1,702

1,011

Total Commercial Real Estate

$

118,019

$

260,101

$

281,920

$

194,667

$

241,756

$

542,954

$

$

Construction

Pass

$

10,058

$

14,751

$

31,402

$

$

$

$

$

Watch

886

5,631

Special Mention

678

Total Construction

$

10,058

$

15,637

$

37,711

$

$

$

$

$

Multifamily

Pass

$

174,397

$

309,564

$

364,298

$

356,206

$

269,388

$

749,946

$

3,433

$

Watch

1,571

2,537

2,784

19,504

865

Special Mention

699

776

Substandard

1,999

1,485

Total Multifamily

$

174,397

$

311,135

$

366,297

$

358,743

$

272,871

$

771,711

$

4,298

$

Commercial Business - Secured by RE

Pass

$

68,713

$

91,282

$

56,704

$

22,051

$

47,335

$

82,368

$

$

Watch

7,080

1,320

416

Substandard

3,331

Total Commercial Business - Secured by RE

$

68,713

$

91,282

$

63,784

$

23,371

$

47,335

$

86,115

$

$

Commercial Business

Pass

$

59,956

$

137,475

$

108,265

$

64,737

$

17,573

$

67,940

$

186,882

$

Watch

2,889

4,112

7,880

10

10,935

Special Mention

51

2,411

2,418

(26)

Substandard

39

4,810

1,711

171

Doubtful

1,872

Total Commercial Business

$

59,995

$

140,415

$

114,788

$

77,427

$

19,991

$

69,661

$

199,834

$

Small Business Administration

Pass

$

110,121

$

1,067

$

3,590

$

1,043

$

2,551

$

1,625

$

$

Watch

2,257

Special Mention

50

Substandard

1,169

7

Total Small Business Administration

$

110,121

$

1,067

$

3,590

$

4,469

$

2,558

$

1,675

$

$

Taxi Medallions

Substandard

$

$

$

$

$

$

2,318

$

$

Total Taxi Medallions

$

$

$

$

$

$

2,318

$

$

Other

Pass

$

$

$

$

$

$

136

$

99

$

Total Other

$

$

$

$

$

$

136

$

99

$

Total Loans

$

591,683

$

913,660

$

972,833

$

736,161

$

651,192

$

1,841,327

$

212,208

$

22,334

-26-

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

$

0

$

0

$

4,306

Commercial real estate

 

5,525

 

367

 

0

 

0

 

5,892

One-to-four family - mixed-use property

 

1,585

 

453

 

0

 

0

 

2,038

One-to-four family - residential

 

1,095

 

5,787

 

0

 

0

 

6,882

Construction

 

0

 

0

 

0

 

0

 

0

Small Business Administration

 

55

 

85

 

0

 

0

 

140

Taxi medallion

 

0

 

3,309

 

0

 

0

 

3,309

Commercial business and other

 

3,924

 

11,289

 

266

 

0

 

15,479

Total loans

$

13,747

$

24,033

$

266

$

0

$

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 $86.2 million and $282.5 million, respectively, at September 30, 2020.

The following table presents types of collateral-dependent loans by class of loans as of September 30, 2020:

Collateral Type

(In thousands)

Real Estate

Business Assets

Multi-family residential

$

2,723

$

Commercial real estate

6,045

One-to-four family - mixed-use property

1,704

One-to-four family - residential

5,922

Small Business Administration

1,169

Commercial business and other

4,996

Taxi Medallion

2,318

Total

$

16,394

$

8,483

-27-

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 September 30, 2020, allowance for off-balance-sheet credit losses is $1.6 million, which is included the “Other liabilities” on the Consolidated Statements of Financial Condition. During the three and nine months ended September 30, 2020, the Company has $0.3 million and $1.0 million, respectively, 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 September 30, 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. There were 0 loan sales for three months ended September 30, 2020.

The following tables show loans sold during the period indicated:

For the three months ended September 30, 2019

  

Net Recoveries

  

(Dollars in thousands)

    

Loans sold

    

Proceeds

    

(Charge-offs)

    

Net gain

Delinquent and non-performing loans

 

  

 

  

 

  

 

  

Multi-family residential

1

$

700

$

$

204

Commercial business and other

 

1

3,248

Total

 

2

$

3,948

$

$

204

-28-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the nine months ended September 30, 2020

  

Net Recoveries

  

(Dollars in thousands)

    

Loans sold

    

Proceeds

    

(Charge-offs)

    

Net gain

Delinquent and non-performing loans

 

  

 

  

 

  

 

  

Multi-family residential

 

1

$

284

$

0

$

42

One-to-four family - mixed-use property

 

1

 

296

 

0

 

0

Total

 

2

$

580

$

0

$

42

For the nine months ended September 30, 2019

Net Recoveries

(Dollars in thousands)

    

Loans sold

    

Proceeds

    

(Charge-offs)

    

Net gain (loss)

Delinquent and non-performing loans

 

  

 

  

 

  

 

  

Multi-family residential

 

3

$

1,465

$

0

$

267

One-to-four family - mixed-use property

1

405

(1)

0

Commercial real estate

 

1

$

3,248

$

0

$

0

Total

 

5

$

5,118

$

(1)

$

267

Performing loans

 

  

 

  

 

  

 

  

Small Business Administration

 

3

$

2,069

$

0

$

114

Total

 

3

$

2,069

$

0

$

114

-29-

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

For the nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(In thousands)

Balance at beginning of period

$

208

$

239

$

239

$

0

Acquisitions

 

 

 

0

 

239

Reductions to carrying value

 

 

 

(31)

 

0

Sales

(208)

(208)

0

Balance at end of period

$

$

239

$

0

$

239

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

For the three months ended

For the nine months ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

(In thousands)

Gross gains

$

0

$

0

$

0

$

0

Gross losses

 

(5)

 

 

(5)

 

Write-down of carrying value

 

 

 

(31)

 

Total income

$

(5)

$

$

(36)

$

Included within net loans as of September 30, 2020 and December 31, 2019 were $6.1 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 22 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 two months to 15 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the Company’s calculation of lease term.

During the third quarter of 2020, the Company entered into 1 new branch lease, which is expected to open in the fourth quarter of 2020. Additionally, the Company executed an extension for one of its current branches and reduced office space at another location.

-30-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 September 30, 2020 and 2019. The Company’s operating lease expense totaled $5.7 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for each of the nine month periods ended September 30, 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 September 30, 2020 and 2019 and approximately $102,000 for each of the nine month periods ended September 30, 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 September 30, 2020 and 2019, respectively. The Company has $0.8 million and $0.6 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 nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020, the weighted-average remaining lease term for our operating leases is approximately eight years and the weighted average discount rate is 3.6%. At September 30, 2020, the Company is evaluating the lease portfolio to assess present and future contracts, including but not limited to, real estate, vehicles and equipment.

Certain leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating lease agreements expire through 2036.

Supplemental balance sheet information related to leases was as follows:

    

    

 

 

(Dollars in thousands)

September 30, 2020

December 31, 2019

Operating lease ROU assets

$

42,326

$

41,254

Operating lease liabilities

$

49,737

$

49,367

Weighted-average remaining lease term-operating leases

 

8.2 years

 

8.0 years

Weighted average discount rate-operating leases

 

3.6

%  

 

3.8

%

-31-

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

 

For the three months ended

(Dollars in thousands)

September 30, 2020

September 30, 2019

Lease Cost

 

  

 

  

Operating lease cost

$

1,895

$

1,891

Short-term lease cost

 

34

 

34

Variable lease cost

 

281

 

267

Total lease cost

$

2,210

$

2,192

Other information

 

  

 

  

Cash paid for amounts included in the measurement of lease liabilities

 

  

 

  

Operating cash flows from operating leases

$

2,101

$

2,002

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

$

6,772

$

1,253

 

For the nine months ended

(Dollars in thousands)

September 30, 2020

September 30, 2019

Lease Cost

 

  

 

  

Operating lease cost

$

5,676

$

5,676

Short-term lease cost

 

102

 

102

Variable lease cost

 

832

 

757

Total lease cost

$

6,610

$

6,535

Other information

 

  

 

  

Cash paid for amounts included in the measurement of lease liabilities

 

  

 

  

Operating cash flows from operating leases

$

6,283

$

6,052

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

$

6,822

$

1,295

The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of September 30, 2020:

Minimum Rental

(In thousands)

Years ended December 31:

2020

$

1,715

2021

7,739

2022

7,491

2023

7,612

2024

7,650

Thereafter

24,935

Total minimum payments required

57,142

Less: Implied interest

7,405

Total lease obligations

$

49,737

-32-

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 September 30, 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 September 30, 2020 and 2019, the Company’s net income, as reported, included $0.9 million and $1.2 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $0.2 million and $0.2 million of income tax benefits, respectively, related to the stock-based compensation plans. For the nine months ended September 30, 2020 and 2019, the Company’s net income, as reported, included $4.3 million and $6.5 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $1.0 million and $1.5 million of income tax benefits, respectively, related to the stock-based compensation plans.

During the three months ended September 30, 2020, and 2019, the Company did 0t grant any RSU awards. During the three months ended September 30, 2020, the Company did 0t grant any PRSU awards. During the three months ended September 30, 2019, the Company granted 8,260 in PRSU awards. During the nine months ended September 30, 2020 and 2019, the Company granted 172,728 and 263,574 in RSU awards, respectively. During the nine months ended September 30, 2020 and 2019, the Company granted 72,143 and 66,130 in PRSU awards, respectively. The Company has not granted stock options since 2009 and at September 30, 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 nine months ended September 30, 2020: