Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
Commission file number 001-33013
FLUSHING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
11-3209278
(I.R.S. Employer Identification No.)
220 RXR Plaza, Uniondale, New York 11556
(Address of principal executive offices)
(718) 961-5400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
FFIC
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes __No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). X Yes __No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X
Accelerated filer __
Non-accelerated filer __
Smaller reporting company __
Emerging growth company __
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act.__
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ___Yes X No
The number of shares of the registrant’s Common Stock outstanding as of April 30, 2020 was 28,214,481.
TABLE OF CONTENTS
PAGE
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements - (Unaudited)
1
Consolidated Statements of Financial Condition
Consolidated Statements of Income
2
Consolidated Statements of Comprehensive Income
3
Consolidated Statements of Cash Flows
4
Consolidated Statements of Changes in Stockholders’ Equity
6
Notes to Consolidated Financial Statements
7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
58
ITEM 4. Controls and Procedures
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
59
ITEM 1A. Risk Factors
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
62
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Mine Safety Disclosures
ITEM 5. Other Information
ITEM 6. Exhibits
63
SIGNATURES
65
i
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
(Unaudited)
Item 1. Financial Statements
March 31,
December 31,
2020
2019
(Dollars in thousands, except per share data)
Assets
Cash and due from banks
$
157,184
49,787
Securities held-to-maturity:
Mortgage-backed securities (including assets pledged of $8,704 and $5,283 at March 31, 2020 and December 31, 2019, respectively; fair value of $8,953 and $8,114 at March 31, 2020 and December 31, 2019, respectively)
7,929
7,934
Other securities, net of allowance for credit losses of $402 (none pledged; fair value of $51,938 and $53,998 at March 31, 2020 and December 31, 2019, respectively)
50,225
50,954
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $242,862 and $212,038 at March 31, 2020 and December 31, 2019, respectively; $738 and $772 at fair value pursuant to the fair value option at March 31, 2020 and December 31, 2019, respectively)
489,556
523,849
Other securities (none pledged; $13,831 and $13,548 at fair value pursuant to the fair value option at March 31, 2020 and December 31, 2019, respectively)
225,856
248,651
Loans:
Multi-family residential
2,272,343
2,238,591
Commercial real estate
1,664,934
1,582,008
One-to-four family - mixed-use property
592,109
592,471
One-to-four family - residential
189,774
188,216
Co-operative apartments
8,493
8,663
Construction
66,727
67,754
Small Business Administration
14,076
14,445
Taxi medallion
3,281
3,309
Commercial business and other
1,104,967
1,061,478
Net unamortized premiums and unearned loan fees
15,384
15,271
Allowance for loan losses
(28,098)
(21,751)
Net loans
5,903,990
5,750,455
Interest and dividends receivable
25,526
25,722
Bank premises and equipment, net
27,899
28,676
Federal Home Loan Bank of New York stock, at cost
74,000
56,921
Bank owned life insurance
158,655
157,713
Goodwill
16,127
Other real estate owned, net
208
239
Right of Use Asset
39,729
41,254
Other assets
68,526
59,494
Total assets
7,245,410
7,017,776
Liabilities
Due to depositors:
Non-interest bearing
489,198
435,072
Interest-bearing
4,339,237
4,586,977
Total Deposits
4,828,435
5,022,049
Mortgagors' escrow deposits
73,051
44,375
Borrowed funds:
Federal Home Loan Bank advances
1,498,058
1,118,528
Subordinated debentures
74,398
74,319
Junior subordinated debentures, at fair value
45,126
44,384
Total borrowed funds
1,617,582
1,237,231
Operating lease liability
47,726
49,367
Other liabilities
128,933
85,082
Total liabilities
6,695,727
6,438,104
Stockholders' Equity
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)
—
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at March 31, 2020 and December 31, 2019; 28,213,602 shares and 28,157,206 shares outstanding at March 31, 2020 and December 31, 2019, respectively)
315
Additional paid-in capital
225,893
226,691
Treasury stock, at average cost (3,316,993 shares and 3,373,389 shares at March 31, 2020 and December 31, 2019, respectively)
(69,540)
(71,487)
Retained earnings
425,455
433,960
Accumulated other comprehensive loss, net of taxes
(32,440)
(9,807)
Total stockholders' equity
549,683
579,672
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
-1-
For the three months ended
Interest and dividend income
Interest and fees on loans
61,109
62,330
Interest and dividends on securities:
Interest
5,256
6,909
Dividends
15
19
Other interest income
290
555
Total interest and dividend income
66,670
69,813
Interest expense
Deposits
18,778
21,469
Other interest expense
7,066
6,541
Total interest expense
25,844
28,010
Net interest income
40,826
41,803
Provision for credit losses
7,178
972
Net interest income after provision for credit losses
33,648
40,831
Non-interest income
Banking services fee income
798
973
Net loss on sale of securities
(37)
Net gain on sale of loans
42
Net loss from fair value adjustments
(5,993)
(2,080)
Federal Home Loan Bank of New York stock dividends
964
903
Life insurance proceeds
43
943
740
Other income
419
301
Total non-interest (loss) income
(2,864)
Non-interest expense
Salaries and employee benefits
18,620
19,166
Occupancy and equipment
2,840
2,789
Professional services
2,862
2,265
FDIC deposit insurance
650
485
Data processing
1,694
1,492
Depreciation and amortization
1,536
1,518
Other real estate owned/foreclosure expense (benefit)
(164)
77
Net loss from other real estate owned
31
Other operating expenses
4,311
4,627
Total non-interest expense
32,380
32,419
(Loss) Income before income taxes
(1,596)
9,355
Provision (Benefit) for income taxes
Federal
989
1,943
State and local
(1,195)
344
Total taxes
(206)
2,287
Net income (Loss)
(1,390)
7,068
Basic (loss) earnings per common share
(0.05)
0.25
Diluted (loss) earnings per common share
Dividends per common share
0.21
-2-
(In thousands)
Net (loss) income
Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($30) and ($10) for the three months ended March 31, 2020 and 2019, respectively.
67
22
Amortization of prior service credits, net of taxes of $6 and $7 for the three months ended March 31, 2020 and 2019, respectively.
(14)
(15)
Net unrealized (losses) gains on securities, net of taxes of $4,642 and ($2,524) for the three months ended March 31, 2020 and 2019, respectively.
(10,202)
5,620
Reclassification adjustment for net losses included in income, net of taxes of ($12) for the three months ended March 31, 2020.
25
Net unrealized losses on cash flow hedges, net of taxes of $6,190 and $1,575 for the three months ended March 31, 2020 and 2019 respectively.
(13,605)
(3,505)
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($489) and ($39) for the three months ended March 31, 2020 and 2019 respectively.
1,096
88
Total other comprehensive (loss) income , net of tax
(22,633)
2,210
Comprehensive (loss) income
(24,023)
9,278
-3-
For the three months ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit loan losses
Depreciation and amortization of bank premises and equipment
Amortization of premium, net of accretion of discount
1,642
1,272
5,993
2,080
Net loss from fair value adjustments on qualifying hedges
2,073
637
Net gain from sale of loans
(42)
(63)
Net loss from sale of securities
37
Net loss from OREO
Income from bank owned life insurance
(943)
(740)
(43)
Stock-based compensation expense
3,430
3,931
Deferred compensation
(1,296)
(938)
Deferred income tax (benefit) expense
(2,318)
805
Decrease in other liabilities
(7,106)
(3,737)
Decrease (increase) in other assets
2,440
(942)
Net cash provided by operating activities
11,265
11,820
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment
(759)
(898)
Net (purchases) redemptions of Federal Home Loan Bank of New York shares
(17,079)
6,100
Purchases of securities held-to-maturity
(180)
Proceeds from maturities and calls of securities held-to-maturity
180
1,568
Proceeds from prepayments of securities held-to-maturity
150
146
Purchases of securities available for sale
(63,434)
(45,730)
Proceeds from sales and calls of securities available for sale
64,600
13,295
Proceeds from maturities and prepayments of securities available for sale
40,383
16,788
Proceeds from bank owned life insurance
777
Net (originations) repayments of loans
(55,906)
16,372
Purchases of loans
(77,233)
(56,995)
Proceeds from sale of loans
580
1,170
Net cash used in investing activities
(108,518)
(47,587)
-4-
Consolidated Statements of Cash Flows (Contd)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits
54,126
(12,683)
Net (decrease) increase in interest-bearing deposits
(247,777)
106,788
Net increase in mortgagors' escrow deposits
25,254
Net proceeds from short-term borrowed funds
410,000
(84,250)
Proceeds from long-term borrowings
50,000
Repayment of long-term borrowings
(80,456)
(51,310)
Purchases of treasury stock
(3,835)
(1,877)
Proceeds from issuance of common stock upon exercise of stock options
Cash dividends paid
(6,084)
(6,042)
Net cash provided by (used in) financing activities
204,650
(24,117)
Net increase (decrease) in cash and cash equivalents
107,397
(59,884)
Cash and cash equivalents, beginning of period
118,561
Cash and cash equivalents, end of period
58,677
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid
25,617
25,830
Income taxes paid
1,094
1,141
Taxes paid if excess tax benefits were not tax deductible
868
1,072
Non-cash activities:
Right-Of-Use assets
42,869
Operating lease liabilities
51,780
-5-
Consolidated Statement of Changes in Stockholders’ Equity
Additional
Accumulated Other
Common
Paid-in
Retained
Treasury
Comprehensive
Total
Stock
Capital
Earnings
Income (Loss)
Balance at December 31, 2019
Impact of adoption of ASC 326 - Credit Losses
(875)
Net loss
Award of common shares released from Employee Benefit Trust (116,414 shares)
1,398
Vesting of restricted stock unit awards (272,946 shares)
(5,626)
(156)
5,782
Purchase of treasury shares (142,405 shares)
(2,342)
Repurchase of shares to satisfy tax obligation (74,145 shares)
(1,493)
Dividends on common stock ($0.21 per share)
Other comprehensive loss
Balance at March 31, 2020
Balance at December 31, 2018
549,464
222,720
414,327
(75,146)
(12,752)
Impact of adoption of ASC 842-Leases
2,716
Net income
Award of common shares released from Employee Benefit Trust (138,775 shares)
2,086
Vesting of restricted stock unit awards (287,155 shares)
(5,878)
(210)
6,088
Exercise of stock options (300 shares)
(3)
Repurchase of shares to satisfy tax obligation (83,908 shares)
Other comprehensive income
Balance at March 31, 2019
559,559
222,859
417,856
(70,929)
(10,542)
-6-
1. Basis of Presentation
The primary business of Flushing Financial Corporation (the “Holding Company”), a Delaware corporation, is the operation of its wholly owned subsidiary, Flushing Bank (the “Bank”).
The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Holding Company and its direct and indirect wholly-owned subsidiaries, including the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc., which are collectively herein referred to as “we,” “us,” “our” and the “Company.”
The Holding Company also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”), which are special purpose business trusts. The Trusts are not included in the Company’s consolidated financial statements, as the Company would not absorb the losses of the Trusts if any losses were to occur.
The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such presented periods of the Company. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report. All inter-company balances and transactions have been eliminated in consolidation. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.
The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
When necessary, certain reclassifications were made to prior-year amounts to conform to the current-year presentation. Such reclassifications had no effect on prior period net income or shareholders’ equity and were insignificant amounts.
2. Use of Estimates
In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.
As a result of the recent emergence of the pandemic and the uncertainty, it is not possible to determine the overall impact of the pandemic on the Company’s business. However, if the pandemic continues for an extended period of time, there could be a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.
On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.
-7-
The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in Accounting Standards Codification (“ASC”) 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision as disclosed more fully in Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term, including COVID-19 related changes, are used in connection with the determination of the allowance for credit losses, the evaluation of goodwill for impairment, the review of the need for a valuation allowance of the Company’s deferred tax assets and the fair value of financial instruments.
Goodwill is presumed to have an indefinite life and is tested annually for impairment, or more frequently when certain conditions are met. If the fair value of the reporting unit is greater than the carrying value, no further evaluation is required. If the fair value of the reporting unit is less than the carrying value, further evaluation would be required to compare the fair value of the reporting unit to the carrying value and determine if impairment is required.
Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measurement, when available. Other acceptable valuation methods include an asset approach, which determines a fair value based upon the value of assets net of liabilities, an income approach, which determines fair value using one or more methods that convert anticipated economic benefits into a present single amount, and a market approach, which determines a fair value based on the similar businesses that have been sold.
In performing the goodwill impairment testing, the Company has identified a single reporting unit. The Company identified the COVID-19 pandemic as a triggering event and as such evaluated goodwill for impairment at March 31, 2020. The Company performed a step 1 impairment test and concluded as of March 31, 2020, that there was no goodwill impairment. Management will continue to monitor if an additional triggering event requiring further goodwill impairment testing has occurred. At March 31, 2020 and December 31, 2019, the carrying amount of goodwill totaled $16.1 million. The identification of additional reporting units, the use of other valuation techniques and/or changes to input assumptions used in the analysis could result in materially different evaluations of goodwill impairment.
Volatility in the Company’s stock price primarily driven by the COVID-19 pandemic has resulted in the net book value of our reporting unit exceeding market capitalization, however, the fair value of our reporting unit is not driven solely by the market price of our stock. As described above, fair value of our reporting unit is derived using a combination of an asset approach, an income approach and a market approach. These valuation techniques consider several other factors beyond our market capitalization, such as the estimated future cash flows of our reporting unit, the discount rate used to present value such cash flows and the market multiples of comparable companies. Changes to input assumptions used in the analysis could result in materially different evaluations of goodwill impairment. We qualitatively assess whether the carrying value of our reporting unit exceeds fair value. If this qualitative assessment determines that it is more likely than not that the carrying value exceeds fair value, further qualitative evaluation for impairment would be required to compare the fair value of the reporting unit to the carrying value and determine if impairment is required.
-8-
3. Earnings Per Share
Earnings per common share have been computed based on the following:
Net income (loss)
Divided by:
Weighted average common shares outstanding
28,853
28,621
Weighted average common stock equivalents
Total weighted average common shares outstanding and common stock equivalents
Basic earnings (loss) per common share
Diluted earnings (loss) per common share (1)
Dividend payout ratio
n/a
84.0
%
4. Securities
The Company did not hold any trading securities at March 31, 2020 and December 31, 2019. Securities available for sale are recorded at fair value. Securities held-to-maturity (“HTM”) are recorded at amortized cost.
Upon adoption of ASC Topic 326, “Credit Losses” on January 1, 2020, see Note 16 related to the adoption of Topic 326, we recorded a transition adjustment of $0.3 million in the allowance for credit losses for held-to-maturity debt securities.
Allowance for credit losses
The Company’s estimate of expected credit losses for held-to-maturity debt securities is based on historical information, current conditions and a reasonable and supportable forecast. The Company’s portfolio is made up of three securities, two of which are structured similar to a Commercial owner occupied loan, which is modeled for credit losses similar to Commercial business loans secured by real estate. The other security is issued and guaranteed by Fannie Mae, which is a government sponsored enterprise that has a credit rating and perceived credit risk comparable to the U.S. government and therefore the Company assumes a zero loss expectation. Accrued interest receivable on held-to-maturity securities totaled $0.1 million at March 31, 2020 and is excluded from estimates of credit losses.
-9-
The following table summarizes the Company’s portfolio of securities held-to-maturity at March 31, 2020:
Gross
Allowance
Amortized
Unrealized
for Credit
Cost
Fair Value
Gains
Losses
Municipals
50,627
51,938
1,311
(402)
Total other securities
FNMA
8,953
1,024
Total mortgage-backed securities
58,556
60,891
2,335
The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2019:
53,998
3,044
8,114
58,888
62,112
3,224
The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2020:
Securities available for sale:
Corporate
130,000
111,852
18,148
12,743
12,801
Mutual funds
12,476
Collateralized loan obligations
100,361
87,372
12,989
Other
1,355
256,935
31,137
REMIC and CMO
341,170
348,109
7,329
390
GNMA
602
659
57
99,676
102,224
2,572
24
FHLMC
37,630
38,564
934
479,078
10,892
414
Total securities available for sale
736,013
715,412
10,950
31,551
-10-
The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2019:
123,050
6,950
12,797
12,916
119
12,216
100,349
99,137
1,212
1,332
256,694
8,162
348,236
348,989
2,193
1,440
653
704
51
104,235
104,882
1,073
426
68,476
69,274
871
73
521,600
4,188
1,939
778,294
772,500
4,307
10,101
We did not hold any private issue CMO’s that are collateralized by commercial real estate mortgages at March 31, 2020 and December 31, 2019.
The corporate securities held by the Company at March 31, 2020 and December 31, 2019 are issued by U.S. banking institutions.
The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at March 31, 2020, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in one year or less
Due after ten years
Mortgage-backed securities
Due after one year through five years
20,000
18,276
Due after five years through ten years
127,923
109,510
96,536
85,594
244,459
213,380
-11-
The following tables show the Company’s securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated:
At March 31, 2020
Less than 12 months
12 months or more
Count
(Dollars in thousands)
Available for sale securities
16
111,853
9,620
380
102,233
17,768
13
22,521
3,046
64,851
9,943
29
199,225
32,141
3,426
167,084
27,711
12
67,416
64,541
371
2,875
8,812
76,228
11,687
275,453
96,682
3,797
178,771
27,754
At December 31, 2019
25,451
108
73,686
1,104
222,187
196,736
8,054
23
120,989
102,384
1,117
18,605
323
49
8
67,618
19,073
138
48,545
288
30,200
33
218,856
121,506
1,255
97,350
684
441,043
146,957
1,363
294,086
8,738
The Company reviewed each available for sale debt securities that had an unrealized loss at March 31, 2020 to evaluate whether the decline in fair value resulted from credit losses or other factors. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. All of these securities are rated investment grade or above and have a long history of no credit losses. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment.
In determining the risk of loss for available for sale securities, the Company considered that Mortgage-Backed Securities are either fully guaranteed or issued by a government sponsored enterprise, which has a credit rating and perceived credit risk comparable to U.S. government, the issuer of Corporate securities are global systematically important banks, and the tranche of the purchased CLO’s. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. Based on this review management believes that the unrealized losses have resulted from other factors not deemed credit-related and no allowance for credit loss was recorded.
Accrued interest receivable on available-for-sale debt securities totaled $2.4 million at March 31, 2020 and is excluded from the estimate of credit losses.
-12-
The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three months ended March 31, 2020:
Other securities
Beginning balance
CECL adoption
340
Provision
Allowance for credit losses - securities
402
Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold $64.6 million in mortgage-backed securities during the three months ended March 31, 2020. The Company did not sell any securities during the three months ended March 31, 2019.
The following table represents the gross gains and gross losses realized from the sale of securities available for sale for the periods indicated:
Gross gains from the sale of securities
713
Gross losses from the sale of securities
(750)
Net losses from the sale of securities
5. Loans
Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Loan fees and certain loan origination costs are deferred. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Accrued interest receivable totaled $23.0 million at March 31, 2020 and was reported in “Interest and dividends receivable” on the Consolidated Statements of Financial Condition. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.
Interest on loans is recognized on the accrual basis. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is likely to occur.
The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or
-13-
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.
The Allowance for credit losses (“ACL”) is an estimate that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial assets. Loans are charged off against that allowance when management believes that a loan balance is uncollectable based on quarterly analysis of credit risk.
As of January 1, 2020, the Company adopted Topic 326, see Note 16 related to the adoption of Topic 326.
The amount of the ACL is based upon a loss rate model that considers multiple factors which reflects management’s assessment of the credit quality of the loan portfolio. Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The factors are both quantitative and qualitative in nature including, but not limited to, historical losses, economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.
The quantitative allowance is calculated using a number of input and assumptions. The process and guidelines were developed using, among other factors, the guidance from federal banking regulatory agencies and GAAP. The results of this process, support management’s assessment as to the adequacy of the ACL at each balance sheet date.
The process for calculating the allowance for credit losses begins with our historical losses by portfolio segment. The losses are then incorporated into reasonable and supportable forecast to develop the quantitative component of the allowance for credit losses.
The Company specifies both the reasonable and supportable forecast and reversion periods in three economic conditions (expansion, transition, contraction) which could range from 6 months to 24 months. When calculating the ACL estimate for March 31, 2020, Management acknowledged the deteriorating economic conditions as a result of the COVID-19 pandemic were not fully captured in the forecast within the model platform. As such, when determining the reasonable and supportable forecast, Management adjusted the period to reflect a supportable forecast of six months, to align with a previously established framework for contraction periods. Similarly, a reversion period of six quarters was adjusted to reflect the shorter end of a contraction period.
The Bank has established an Asset Classification Committee which carefully evaluates loans which are past due 90 days and/or are classified. The Asset Classification Committee thoroughly assesses the condition and circumstances surrounding each loan meeting the criteria. The Bank also has a Delinquency Committee that evaluates loans meeting specific criteria. The Bank’s loan policy requires loans to be placed into non-accrual status once the loan becomes 90 days delinquent unless there is, compelling evidence the borrower will bring the loan current in the immediate future.
For the quantitative measurement, the Company’s portfolio consists of mortgage loans secured by real estate (both commercial and retail) and non-mortgage loans, which are primarily commercial business term loans and line of credit. Based on the Company’s evaluation of the loan portfolio, below are the pools that were established as a baseline level of segmentation with their primary risk factor. The Company confirms this data remains relevant in absence of changes to the composition of the portfolio.
The mortgage portfolio is a substantial component of Company’s portfolio and it is a focus of the Company’s lending strategy, primarily focusing on multi-family and commercial real estate. While the mortgage portfolio consists of real-estate secured loans, the source of repayment and types of properties securing these loans varies and thus the Company first considered these differences as follows:
-14-
Relative to the non-mortgage portfolio, the Company considered the following categories as a baseline for evaluation:
Lastly, the Company identified that the remainder of the portfolio includes Overdraft lines of credit.
For the qualitative measurement, the Company aggregated the portfolio segments according to three business units: Business Banking, Residential and Real Estate. In accordance with the interagency statement and SEC guidance, Management evaluates nine qualitative risk factors to determine if the risk is captured elsewhere in the ACL process. If not captured elsewhere, the Company has identified specific risk factors to evaluate and incorporate into its Qualitative Framework. Some risk factors include time to maturity, origination loan-to-value, loan type composition, the value of underlying collateral, changes in policies and procedures for lending strategies and underwriting standards, collection and recovery practices, internal credit review, changes in personnel, divergence between the levels of NYC and national unemployment, divergence between the NYC GDP and national GDP, industry concentrations and riskiness and large borrower concentrations.
-15-
The Company recorded an ACL for loans in the amount of $7.1 million for the quarter ending March 31, 2020, primarily due to the deteriorating economic conditions from COVID-19 and growth in the loan portfolio. This will result in the ACL for loans totaling $28.1 million at March 31, 2020, representing 0.47% of gross loans and 167.73% of non-performing loans.
In response to COVID-19, the Company is actively assisting customers by providing short-term modifications in the form of deferrals of interest, principal and/or escrow for terms ranging from one to six months. Through April 17th, modifications for loans with an aggregate outstanding loan balance of approximately $839 million of which $673 million is in our real estate portfolio and $166 million is in our business banking portfolio have been approved. Given the COVID-19 pandemic and current economic environment, we continue to see interest from our customers to modify their loans. The Company actively participated in the SBA Paycheck Protection Program, gaining approval to fund up to $64 million of these loans and expects to participate in the Main Street Lending Program in order to assist customers. Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming the above criteria is met.
The Company may restructure loans that are not directly impacted by COVID-19 to enable a borrower experiencing financial difficulties to continue making payments when it is deemed to be in the Company’s best long-term interest. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. We classify these loans as TDR.
The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. All loans classified as TDR are individually evaluated, however TDR loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status and are not included as part of non-performing loans. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status and reported as non-accrual performing TDR loans until they have made timely payments for six consecutive months. These restructurings have not included a reduction of principal balance.
The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR loan which is collateral dependent, the fair value of the collateral. At March 31, 2020, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.
There were no TDR loan modifications during the three months ended March 31, 2020 and 2019.
-16-
The following table shows our recorded investment for loans classified as TDR that are performing according to their restructured terms at the periods indicated:
March 31, 2020
December 31, 2019
Number
Recorded
of contracts
investment
1,868
1,873
1,483
1,481
525
531
Taxi medallion (1)
1,520
1,668
950
941
Total performing troubled debt restructured
6,346
6,494
During the three months ended March 31, 2020 and 2019, there were no defaults of TDR loans within 12 months of their modification date. One loan was transferred to non-performing status during the three months ended March 31, 2020. The following table shows our recorded investment for loans classified as TDR that are not performing according to their restructured terms at the periods indicated:
5
1,195
1,065
279
Total troubled debt restructurings that subsequently defaulted
1,474
1,344
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The following table shows our non-accrual loans at amortized cost with no related allowance and interest income recognized for loans ninety days or more past due and still accruing for period shown below:
At or three months ended March 31, 2020
Non-Accrual
Loans ninety days
Total Non-Accrual
with no related
Interest Income
or more past due
Amortized Cost
Recognized
and still accruing:
2,763
627
346
4,588
Construction loans
1,544
Taxi Medallion (1)
1,763
9
Commercial business and other (1)
5,006
5,001
16,299
16,013
The following table shows our non-performing loans at the period indicated:
Loans ninety days or more past due and still accruing:
445
Non-accrual mortgage loans:
2,296
367
274
5,139
8,076
Non-accrual non-mortgage loans:
1,151
1,641
1,945
4,737
Total non-accrual loans
12,813
Total non-performing loans
13,258
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The following is a summary of interest foregone on non-accrual loans and loans classified as TDR for the periods indicated:
Interest income that would have been recognized had the loans performed in accordance with their original terms
375
394
Less: Interest income included in the results of operations
89
118
Total foregone interest
286
276
The following tables shows the aging of the amortized cost basis in past-due loans at the period indicated by class of loans:
Greater
30 - 59 Days
60 - 89 Days
than
Total Past
Past Due
90 Days
Due
Current
Total Loans
1,919
4,682
2,274,090
2,278,772
5,206
5,214
1,661,599
1,666,813
3,283
3,910
592,435
596,345
1,322
381
6,291
193,593
199,884
66,524
12,961
14,505
2,087
3,282
645
153
4,968
5,766
1,100,197
1,105,963
12,375
534
15,693
28,602
5,903,486
5,932,088
The following tables show by delinquency an analysis of our recorded investment in loans at the periods indicated by class of loans:
4,042
1,563
2,741
8,346
2,230,245
4,941
5,308
1,576,700
496
1,887
590,584
720
1,022
6,881
181,335
13,294
2,244
2,340
4,290
1,057,188
8,219
8,027
12,682
28,928
5,728,007
5,756,935
-19-
The following tables show the activity in the allowance for loan losses for the three month periods indicated:
One-to-four
family -
Commercial
Multi-family
mixed-use
Small Business
Taxi
business and
residential
real estate
property
loans
Administration
medallion
other
Allowance for credit losses:
5,391
4,429
1,817
756
441
363
8,554
21,751
Impact of CECL Adoption
(651)
(55)
(159)
(279)
1,180
(827)
379
Charge-offs
(1,259)
Recoveries
78
14
110
Provision (benefit)
1,148
1,192
330
291
(22)
4,155
7,117
Ending balance
5,895
6,791
2,170
892
185
1,528
10,637
28,098
March 31, 2019
5,676
4,315
1,867
749
329
418
7,591
20,945
(1)
(1,137)
(1,138)
86
84
236
(196)
(161)
(13)
(84)
1,463
5,493
4,278
1,791
731
351
409
7,962
21,015
See also Note 16 for the adoption of ASC Topic 326, “Credit Loses”.
-20-
In accordance with our policy and the current regulatory guidelines, we designate loans as “Special Mention,” which are considered “Criticized Loans,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Loans”. If a loan does not fall within one of the previous mentioned categories then the loan would be considered “Pass.” Loans that are non-accrual are designated as Substandard, Doubtful or Loss. These loan designations are updated quarterly. We designate a loan as Substandard when a well-defined weakness is identified that may jeopardize the orderly liquidation of the debt. We designate a loan Doubtful when it displays the inherent weakness of a Substandard loan with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate a loan as Loss if it is deemed the debtor is incapable of repayment. The Company does not hold any loans designated as Loss, as loans that are designated as Loss are charged to the Allowance for Credit Losses. We designate a loan as Special Mention if the asset does not warrant classification within one of the other classifications, but does contain a potential weakness that deserves closer attention.
-21-
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
converted to
2018
2017
2016
Prior
Basis
term loans
1-4 Family Residential
Pass
8,526
26,292
29,807
16,352
11,399
65,998
9,361
22,132
Watch
2,759
1,809
Special Mention
444
147
Substandard
2,906
856
Total 1-4 Family Residential
12,349
72,107
9,507
24,944
1-4 Family Mixed-Use
15,189
70,064
78,136
63,655
54,009
304,415
793
1,325
7,148
984
Total 1-4 Family Mixed Use
78,929
55,334
313,174
Commercial Real Estate
75,893
254,086
283,515
194,618
239,116
511,871
4,979
9,762
4,963
20,748
66,711
543
Total Commercial Real Estate
80,872
263,848
199,581
259,864
579,133
4,885
15,633
35,934
9,394
678
Total Construction
36,612
Multifamily
68,498
313,608
369,264
376,202
283,128
846,228
4,460
2,158
2,843
1,974
789
Total Multifamily
371,238
378,360
285,971
856,637
Commercial Business - Secured by RE
27,601
117,070
59,408
22,399
44,964
85,736
6,647
1,320
2,701
3,276
423
2,330
Total Commercial Business - Secured by RE
66,055
23,719
47,665
91,765
Commercial Business
39,770
151,169
117,548
73,802
18,931
73,775
213,463
1,221
1,001
2,372
3,114
587
19,162
2,683
463
317
577
3,386
6,255
1,211
94
Doubtful
Total Commercial Business
40,991
152,747
120,275
80,302
28,314
76,144
233,036
986
3,626
2,704
2,220
2,299
54
374
Total Small Business Administration
4,541
3,078
2,274
Taxi Medallions
Total Taxi Medallions
105
171
Total Other
174
246,562
960,248
990,057
766,510
701,969
1,994,621
247,177
-22-
The following table sets forth the recorded investment in loans designated as Criticized or Classified at the period indicated:
Loss
2,743
4,306
5,525
5,892
1,585
453
2,038
1,095
5,787
6,882
55
85
140
3,924
11,289
266
15,479
Total loans
13,747
24,033
38,046
Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $51.9 million and $259.9 million, respectively, at March 31, 2020.
The following tables presents types of collateral-dependent loans by class of loans as of March 31, 2020:
Collateral Type
Real Estate
Business Assets
5,000
Taxi Medallion
7,986
9,826
-23-
Off-Balance Sheet Credit Losses
Also included within scope of the CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process”. Commitments “in‐process” reflect loans not in the Company’s books but rather negotiated loan / line of credit terms and rates that the Company has offered to customers and is committed to honoring. In reference to “in‐process” credits, the Company defines an unfunded commitment as a credit that has been offered to and accepted by a borrower, which has not closed and by which the obligation is not unconditionally cancellable.
The Company estimates expected credit losses over the contractual period in which the company is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on losses on off-balance sheet exposures is adjusted as a provision for credit loss expense. The Company uses similar assumptions and risk factors that are developed for collectively evaluated financing receivables. This estimates includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.
At March 31, 2020, allowance for off-balance-sheet credit losses is $0.8 million, which is included the “Other liabilities” on the Consolidated Statements of Financial Condition. During the first quarter 2020, the Company has $0.2 million in credit loss expense for off-balance-sheet items, which is included in the “Other operating expense” on the Consolidated Statements of Income.
6. Loans held for sale
Loans held for sale are carried at the lower of cost or estimated fair value. At March 31, 2020 and December 31, 2019, the Bank did not have any loans held for sale.
The Company has implemented a strategy of selling certain delinquent and non-performing loans. Once the Company has decided to sell a loan, the sale usually closes in a short period of time, generally within the same quarter. Loans designated held for sale are reclassified from loans held for investment to loans held for sale. Terms of sale include cash due upon the closing of the sale, no contingencies or recourse to the Company and servicing is released to the buyer. Additionally, at times the Company may sell participating interests in performing loans.
The following tables show loans sold during the period indicated:
For the three months ended March 31, 2020
Net Recoveries
Loans sold
Proceeds
(Charge-offs)
Net gain
Delinquent and non-performing loans
284
296
For the three months ended March 31, 2019
Net gain (loss)
765
405
-24-
7. Other Real Estate Owned
The following table shows changes in Other Real Estate Owned (“OREO”) during the periods indicated:
Balance at beginning of period
Reductions to carrying value
(31)
Balance at end of period
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:
Gross gains
Gross losses
Write-down of carrying value
Total income
Included within net loans as of March 31, 2020 and December 31, 2019 was a recorded investment of $5.2 million and $6.6 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.
8. Leases
The Company has 21 operating leases for branches (including headquarters) and office spaces, nine operating leases for vehicles, and one operating lease for equipment. Our leases have remaining lease terms ranging from eight months to 12 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the Company’s calculation of lease term.
The Company has elected the short-term lease recognition exemption such that the Company will not recognize Right-Of-Use (“ROU”) assets or lease liabilities for leases with a term of less than 12 months from the commencement date. The Company’s operating lease expense totaled $1.9 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for each of the three month periods ended March 31, 2020 and 2019. The Company has one agreement that qualifies as a short-term lease with expense totaling approximately $34,000 for each of the three month periods ended March 31, 2020 and 2019, included in Professional services on the Consolidated Statements of Income. The Company has $0.3 million and $0.2 million in variable lease payments, which include insurance and real estate tax expenses and was recorded in Occupancy and equipment on the Consolidated Statements of Income, for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020, the weighted-average remaining lease term for our operating leases is approximately seven years and the weighted average discount rate is 3.8%. Our lease agreements do not contain any residual value guarantees.
Certain leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating lease agreements expire through 2032.
-25-
Supplemental balance sheet information related to leases was as follows:
Operating lease ROU assets
Weighted-average remaining lease term-operating leases
7.4 years
8.0 years
Weighted average discount rate-operating leases
3.8
The components of lease expense and cash flow information related to leases were as follows:
Lease Cost
Operating lease cost
1,885
1,892
Short-term lease cost
34
Variable lease cost
264
246
Total lease cost
2,183
2,172
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
1,982
2,025
Right-of-use assets obtained in exchange for new operating lease liabilities
21
The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of March 31, 2020 and December 31, 2019:
Minimum Rental
Years ended December 31:
6,004
2021
7,680
2022
7,265
2023
7,398
2024
7,425
Thereafter
19,148
Total minimum payments required
54,920
Less: implied interest
7,194
Total lease obligations
-26-
9. Stock-Based Compensation
On January 31, 2019, the Board of Directors approved a 2019 long-term incentive compensation program for certain Company executive officers that includes grants of performance-based restricted stock units (“PRSUs”) in addition to time-based restricted stock units (“RSU”). Under the terms of the PRSU Agreement, the number of PRSUs that may be earned depends on the extent to which performance goals for the award are achieved over a three-year performance period, as determined by the Compensation Committee of the Board. The number of PRSUs that may be earned ranges from 0% to 150% of the target award, with no PRSUs earned for below threshold-level performance, 50% of PRSUs earned for threshold-level performance, 100% of PRSUs earned for target-level performance, and 150% of PRSUs earned for maximum-level performance. As of March 31, 2020, PRSU’s granted in 2020 are being accrued at target and PRSU’s granted in 2019 are being accrued above target. The different levels of accrual are commensurate with the projected performance of the respective grant.
For the three months ended March 31, 2020 and 2019, the Company’s net income, as reported, included $2.5 million and $4.0 million, respectively, of stock-based compensation costs and $0.6 million and $1.0 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. During the three months ended March 31, 2020 and 2019, the Company granted 170,228 and 263,574 in RSU awards, respectively. During the three months ended March 31, 2020 and 2019, the Company granted 72,143 and 57,870 in PRSU awards, respectively. The Company has not granted stock options since 2009 and at March 31, 2020, had none outstanding.
The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight-line method.
The following table summarizes the Company’s RSU and PRSU awards at or for the three months ended March 31, 2020:
RSU Awards
PRSU Awards
Weighted-Average
Grant-Date
Shares
Non-vested at December 31, 2019
428,295
24.42
34,186
22.38
Granted
170,228
19.79
72,143
20.38
Vested
(232,351)
22.28
(35,149)
20.54
Forfeited
(2,415)
24.62
Non-vested at March 31, 2020
363,757
23.62
71,180
21.26
Vested but unissued at March 31, 2020
216,777
23.26
62,515
21.35
As of March 31, 2020, there was $8.4 million of total unrecognized compensation cost related to RSU and PRSU awards granted. That cost is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of awards vested for the three months ended March 31, 2020 and 2019 was $5.0 million and $6.1 million, respectively. The vested but unissued RSU and PRSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.
Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing plan for officers who have achieved the designated level and completed one year of service. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.
-27-
The following table summarizes the Phantom Stock Plan at or for the three months ended March 31, 2020:
Phantom Stock Plan
Outstanding at December 31, 2019
109,226
21.61
5,798
17.77
Distributions
(26)
20.45
Outstanding at March 31, 2020
114,998
13.36
Vested at March 31, 2020
114,627
The Company recorded stock-based compensation (benefit) expense for the Phantom Stock Plan of ($0.9) million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. The total fair value of the distributions from the Phantom Stock Plan was less than $1,000 and $22,000 for the three months ended March 31, 2020 and 2019, respectively.
10. Pension and Other Postretirement Benefit Plans
The following table sets forth information regarding the components of net expense for the pension and other postretirement benefit plans.
Three months ended
Employee Pension Plan:
Interest cost
163
199
Amortization of unrecognized loss
111
Expected return on plan assets
(257)
(272)
Net employee pension expense (benefit)
17
(6)
Outside Director Pension Plan:
Service cost
10
Amortization of unrecognized gain
(35)
Amortization of past service liability
Net outside director pension expense (benefit)
(4)
Other Postretirement Benefit Plans:
69
70
Amortization of past service credit
(20)
Net other postretirement expense
114
133
-28-
The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2019 that it expects to contribute $0.3 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), during the year ending December 31, 2020. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of March 31, 2020, the Company had contributed $36,000 to the Outside Director Pension Plan and $18,000 in contributions were made to the Other Postretirement Benefit Plans. As of March 31, 2020, the Company has not revised its expected contributions for the year ending December 31, 2020.
11. Fair Value of Financial Instruments
The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At March 31, 2020, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.6 million and $45.1 million, respectively. At December 31, 2019, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $44.4 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three months ended March 31, 2020 and 2019.
The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:
Measurements
at March 31,
at December 31,
Three Months Ended
738
772
13,831
13,548
219
179
Borrowed funds
(2,351)
(1,210)
Net loss from fair value adjustments (1)
(2,129)
(1,030)
Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company reports as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.
The borrowed funds had a contractual principal amount of $61.9 million at both March 31, 2020 and December 31, 2019. The fair value of borrowed funds includes accrued interest payable of $0.2 million at both March 31, 2020 and December 31, 2019, respectively.
The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale.
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Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.
Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.
Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).
A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:
Level 1 – when quoted market prices are available in an active market. At March 31, 2020 and December 31, 2019, Level 1 included one mutual fund.
Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At March 31, 2020 and December 31, 2019, Level 2 included mortgage-backed securities, CLO’s, corporate debt, municipals and interest rate swaps.
Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At March 31, 2020 and December 31, 2019, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company.
The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.
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The following table sets forth the Company’s assets and liabilities that are carried at fair value on a recurring basis, including those reported at fair value under the fair value option, and the level that was used to determine their fair value, at March 31, 2020 and December 31, 2019:
Quoted Prices
in Active Markets
Significant Other
for Identical Assets
Observable Inputs
Unobservable Inputs
Total carried at fair value
(Level 1)
(Level 2)
(Level 3)
on a recurring basis
Assets:
Securities available for sale
Mortgage-backed Securities
212,025
235,103
Interest rate swaps
2,352
701,581
761,304
774,852
Liabilities:
Borrowings
70,611
19,653
115,737
64,037
The following tables set forth the Company’s assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the periods indicated:
Trust preferred
Junior subordinated
securities
debentures
1,256
41,849
Net gain from fair value adjustment of financial assets (1)
Net loss from fair value adjustment of financial liabilities (1)
2,351
1,210
Decrease in accrued interest receivable
(Decrease) increase in accrued interest payable
(24)
Change in unrealized gains included in other comprehensive income
(1,585)
(127)
1,289
42,941
Changes in unrealized gains held at period end
3,062
1,375
During the three months ended March 31, 2020 and 2019, there were no transfers between Levels 1, 2 and 3.
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The following tables present the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:
Valuation Technique
Unobservable Input
Range
Weighted Average
Trust preferred securities
Discounted cash flows
Discount rate
3.7
Junior subordinated debentures
4.2
The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at March 31, 2020 and December 31, 2019, are the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.
The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value at March 31, 2020 and December 31, 2019:
on a non-recurring basis
Non-accrual loans
1,259
1,081
Other real estate owned
1,467
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The following tables present the qualitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:
169
Sales approach
Adjustment to sales comparison value to reconcile differences between comparable sales
0.0%
Reduction for planned expedited disposal
47.8%
818
Discounted Cash flow
Discount Rate
6.4%
Probability of Default
20.0%
272
Blended income and sales approach
(10.0) to 15.0%
2.5%
Capitalization rate
9.5%
15.0%
0.5% to 12.5%
6.5%
Impaired loans
809
(10.0) to 15.0
Capitalization Rate
0.5 to 12.5
The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2020 and December 31, 2019.
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The methods and assumptions used to estimate fair value at March 31, 2020 and December 31, 2019 are as follows:
Securities:
The fair values of securities are contained in Note 4 (“Securities”) of the Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. When there is limited activity or less transparency around inputs to the valuation, securities are valued using discounted cash flows.
Non-accrual Loans:
For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or, for collateral dependent loans, 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.
Junior Subordinated Debentures:
The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity. The unrealized net gain/loss attributable to changes in our own credit risk was determined by adjusting the fair value as determined in the proceeding sentence by the average rate of default on debt instruments with a similar debt rating as our junior subordinated debentures, with the difference from the original calculation and this calculation resulting in the instrument-specific unrealized gain/loss.
Other Real Estate Owned and Other Repossessed Assets:
The fair value for OREO is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property. The fair value for other repossessed assets are based upon the most recently reported arm’s length sales transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates.
Interest Rate Swaps:
The fair value of interest rate swaps is based upon broker quotes.
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The following tables set forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at the periods indicated:
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
Securities held-to-maturity
Loans
6,035,453
FHLB-NY stock
Accrued interest receivable
25,527
2,254
23,271
4,901,486
4,914,041
3,729,105
1,184,936
1,624,010
1,578,884
Accrued interest payable
7,492
5,772,206
5,822,124
2,519
23,194
5,066,424
5,070,046
3,628,534
1,441,512
1,389,883
1,345,499
6,752
12. Derivative Financial Instruments
At March 31, 2020 and December 31, 2019, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for three purposes: 1) to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million, at March 31, 2020 and December 31, 2019; 2) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $323.5 million and $326.0 million at March 31, 2020 and December 31, 2019, respectively; and 3) to mitigate exposure to rising interest rates on certain short-term advances totaling $866.5 million and $541.5 million at March 31, 2020 and December 31, 2019, respectively.
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At March 31, 2020 and December 31, 2019, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.
The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.
At March 31, 2020 and December 31, 2019, derivatives with a combined notional amount of $18.0 million were not designated as hedges. At March 31, 2020 and December 31, 2019, derivatives with a combined notional amount of $323.5 million and $326.0 million, respectively, were designated as fair value hedges. At March 31, 2020 and December 31, 2019, derivatives with a combined notional amount of $866.5 million and $541.5 million, respectively, were designated as cash flow hedges.
For cash flow hedges, the changes in the fair value of the derivative is reported in accumulated other comprehensive income (loss), net of tax. Amounts in accumulated other comprehensive income (loss) are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended March 31, 2020 and 2019, $0.2 million each were reclassified from accumulated other comprehensive loss to interest expense. The estimated amount to be reclassified in the next 12 months out of the accumulated comprehensive income (loss) into earnings is $0.6 million.
Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.
The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:
Notional
Net Carrying
Value (1)
Interest rate swaps (fair value hedge)
139,960
323,525
(35,069)
186,009
(7,769)
Interest rate swaps (cash flow hedge)
866,500
(28,325)
541,500
(8,350)
Interest rate swaps (non-hedge)
18,000
(7,217)
(3,534)
Total derivatives
1,208,025
(70,611)
885,469
(17,301)
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The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:
Financial Derivatives:
Interest rate swaps (non-hedge) (1)
(3,929)
(1,072)
Interest rate swaps (fair value hedge) (2)
(2,249)
(292)
Interest rate swaps (cash flow hedge) (3)
(391)
611
(6,569)
(753)
The Company’s interest rate swaps are subject to master netting arrangements between the Company and its two designated counterparties. The Company has not made a policy election to offset its derivative positions.
The following tables present the effect of the master netting arrangements on the presentation of the derivative assets and liabilities in the Consolidated Statements of Condition as of the dates indicated:
Gross Amounts Not Offset in the
Consolidated Statement of
Gross Amount of
Gross Amount Offset in
Net Amount of Liabilities
Condition
the Statement of
Presented in the Statement of
Financial
Cash Collateral
Instruments
Pledged
Net Amount
72,526
(1,915)
Net Amount of Assets
Recognized Assets
Received
19,265
388
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13. Income Taxes
Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of the Company’s trusts, which file separate Federal income tax returns as trusts, and Flushing Preferred Funding Corporation, which files a separate Federal income tax return as a real estate investment trust. Additionally, the Bank files New Jersey State tax returns. As of March 31, 2020, the Company is undergoing examination for its New York State income tax returns for 2014, 2015 and 2016 and its New York City income tax return for 2015, 2016 and 2017.
Income tax provisions are summarized as follows:
For the three months
ended March 31,
Federal:
1,950
1,326
Deferred
(961)
617
Total federal tax provision
State and Local:
162
156
(1,357)
188
Total state and local tax (benefit) provision
Total income tax (benefit) provision
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14. Accumulated Other Comprehensive Income (Loss):
The following tables sets forth the changes in accumulated other comprehensive income (loss) by component for the periods indicated:
Unrealized Gains
(Losses) on
Available for Sale
Cash flow
Defined Benefit
Option Elected
Securities
Hedges
Pension Items
on Liabilities
Beginning balance, net of tax
(3,982)
(5,863)
(983)
1,021
Other comprehensive income before reclassifications, net of tax
(13,748)
(22,854)
Amounts reclassified from accumulated other comprehensive income, net of tax
143
53
221
Net current period other comprehensive income (loss), net of tax
(10,177)
Ending balance, net of tax
(14,159)
(19,468)
(930)
2,117
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(15,649)
3,704
(1,673)
866
(3,644)
2,064
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
139
Net current period other comprehensive income, net of tax
(10,029)
(1,666)
954
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The following tables set forth significant amounts reclassified from accumulated other comprehensive income (loss) by component for the periods indicated:
Amounts Reclassified from
Details about Accumulated Other
Affected Line Item in the Statement
Comprehensive Loss Components
Comprehensive Loss
Where Net Income is Presented
Unrealized gains (losses) on available for sale securities
Provision for income taxes
(25)
Net of tax
Cash flow hedges:
(208)
Tax benefit
(143)
Amortization of defined benefit pension items:
Actuarial gain (losses)
(97)
Other operating expense
Prior service credits
20
(77)
Total before tax
(53)
(201)
(139)
Actuarial losses
(32)
(10)
(7)
15. Regulatory Capital
Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As March 31, 2020, the Bank continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The Bank is also required to comply with a Capital Conservation Buffer (“CCB”). The CCB is designed to establish a capital range above minimum capital requirements and impose
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constraints on dividends, share buybacks and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB is 2.500%. The CCB for the Bank at March 31, 2020 was 4.98%.
Set forth below is a summary of the Bank’s compliance with banking regulatory capital standards.
Percent of
Tier I (leverage) capital:
Capital level
676,267
9.51
680,749
9.65
Requirement to be well capitalized
355,552
5.00
352,581
Excess
320,715
4.51
328,168
4.65
Common Equity Tier I risk-based capital:
12.48
13.02
352,240
6.50
339,944
324,027
5.98
340,805
6.52
Tier 1 risk-based capital:
433,526
8.00
418,393
242,741
4.48
262,356
5.02
Total risk-based capital:
703,130
12.98
702,500
13.43
541,908
10.00
522,991
161,222
2.98
179,509
3.43
The Holding Company is subject to the same regulatory capital requirements as the Bank. As of March 31, 2020, the Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The CCB for the Holding Company at March 31, 2020 was 5.16%.
Set forth below is a summary of the Holding Company’s compliance with banking regulatory capital standards.
610,898
8.59
615,500
8.73
355,470
255,428
3.59
262,919
3.73
567,306
10.47
572,651
10.95
352,184
339,929
215,122
3.97
232,722
4.45
11.28
11.77
433,458
418,374
177,440
3.28
197,126
3.77
712,761
13.16
712,251
13.62
541,822
522,967
170,939
3.16
189,284
3.62
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16. New Authoritative Accounting Pronouncements
Accounting Standards Adopted in 2020:
Effective January 1, 2020, the Company adopted Accounting Standards Topic 326, “Financial Instruments – Credit Losses” which replaced the previously existing U.S. GAAP “incurred loss” approach to “expected credit losses” approach, which is referred as Current Expected Credit Losses (“CECL”). CECL measures the credit loss associated with financial assets carried at amortize cost, including loan receivables, held-to-maturity debt securities, off balance sheet credit exposures and certain leases recognized by a lessor. CECL introduced the concept of purchased credit-deteriorated (PCD) financial assets, in which it requires the estimate of expected credit losses embedded in the purchase price of PCD assets to be estimated and separately recognized as an allowance as of the date of acquisition. It also modifies the accounting of impairment on available-for-sale debt securities by recognizing a credit loss through an allowance for credit.
The company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balances sheet exposures. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption we recorded a cumulative-effect adjustment to retained earnings totaling $1.3 million, $0.9 million, net of tax. The transition adjustment includes changes to the three applicable components of the ACL: increases of $0.4 million in the allowance for loan losses, $0.3 million in the allowance for held-to-maturity debt securities and $0.6 million in the allowance for off-balance sheet items.
At January 1, 2020 the reasonable and supportable forecast indicated economic growth and low unemployment.
Effective January 1, 2020, the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820)”: The Update modifies the disclosure requirements on fair value measurements in Topic 820. The guidance did not have a significant impact on the Company’s financial positions, results of operations or disclosures.
Effective January 1, 2020, the Company adopted ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under this ASU, the Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The guidance did not have a significant impact on the Company’s financial positions, results of operations or disclosures.
Accounting Standards Pending Adoption:
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)” providing targeted improvements to the disclosures required for Defined Benefit Plans. The amendments in in this Update are effective for fiscal years ended after December 15, 2020. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform” (Topic 848), which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would
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be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. The amendments in this Update apply to contract modifications that replace a reference rate reform and contemporaneous modifications of other terms related to the replacement of the reference rate.
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Management’s Discussions and Analysis of
Financial Condition and Results of Operations
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.
As used in this Quarterly Report, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial Corporation and its direct and indirect wholly owned subsidiaries, Flushing Bank (the “Bank”), Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.
Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed elsewhere in this Quarterly Report and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2019. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “goals,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.
Impact of COVID-19
In March 2020, the World Health Organization recognized the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) as a pandemic. The Spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in United States and globally, including the markets we serve. In response to the pandemic, government placed orders for shelter in place, maintain social distancing and closed businesses that are not deemed essential.
The Company was quick to respond to the pandemic with new health and safety measures, including social distancing, appointment banking and expansion of our remote capabilities. Our staff responded to these changes in a superb fashion and continue to provide our customers with excellent service. Today we have the capability of having our entire staff work remotely. On any given day, as many as 85% of staff work from home. The Federal Reserve’s dramatic 150 basis point drop in rates provided the country with much needed liquidity to counteract the negative economic effects of the COVID-19 pandemic. As a result, we recorded mark to market adjustments on items carried at fair value under the fair value option and on our derivative portfolio totaling $0.20 per share, after-tax.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed in to law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), a program to aid small and medium- sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.
During these tumultuous times, we are actively assisting our customers by providing short-term forbearances in the form of deferrals of interest, principal and/or escrow for terms ranging from one to six months. Through April 17th, 2020, we have approved forbearances for loans with an aggregate outstanding loan balance of approximately $839 million of which $673 million is in our real estate portfolio and $166 million is in our business banking portfolio. Given the pandemic and
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current economic environment, we continue to see interest from our customers to modify loans. We actively participated in the PPP, gaining approval to fund up to $64 million of these loans. We also expect to participate in the Main Street Lending Program in order to assist our customers.
Executive Summary
We are a Delaware corporation organized in May 1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. Today the Bank operates as a full-service New York State commercial bank. The Bank’s primary regulator is the New York State Department of Financial Services, and its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank also operates an internet branch, which operates under the brands of iGObanking.com® and BankPurely® (the “Internet Branch”). The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of subordinated debt, junior subordinated debt, and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”
Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential loans, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four family loans (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units); (2) Small Business Administration (“SBA”) loans and other small business loans; (3) construction loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit. Our results of operations depend primarily on net interest income, which is the difference between the income earned on our interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our net interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income primarily from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Loan Bank of New York (“FHLB-NY”) stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by changes in the fair value of financial assets and financial liabilities for which changes in value are recorded through earnings, our periodic provision for credit losses and specific provision for losses on real estate owned.
Our investment policy, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate risk and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate risk exposure, our interest rate sensitivity “gap” position, the types of securities to be held and other factors. We classify our investment securities as available for sale or held-to-maturity.
We carry a portion of our financial assets and financial liabilities under the fair value option and record changes in their fair value through earnings in non-interest income on our Consolidated Statements of Income and Comprehensive Income. A description of the financial assets and financial liabilities that are carried at fair value through earnings can be found in Note 11 (“Fair Value of Financial Instruments”) of the Notes to the Consolidated Financial Statements.
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Our net interest margin for three months ended March 31, 2020 decreased $0.4 million to $40.8 million from $41.2 million from the three months ended December 2019. The provision for credit losses for loans was increased $7.5 million from the three months ended December 31, 2019 primarily due to the adoption of CECL beginning January 1, 2020 and the impact of negative economic conditions resulting from the COVID-19 pandemic. CECL requires consideration of a broader range of information in order to update expected credit losses to capture life of loan and held-to-maturity debt securities estimated losses. These losses are estimated using historical loss experience, current conditions, and a reasonable and supportable forecast that affect the collectability of the reported amount. Since current economic conditions were negatively impacted by COVID-19 pandemic, the CECL model factored in the current condition which increased our allowance for loan losses by approximately 30%.
During the three months ended March 31, 2020, our loan pipeline remained strong at $324 million. The strong C&I production aids to the diversification of our loan portfolio, these loans are generally floating rate loans which represents 19% of our loan portfolio at March 31, 2020. Loan closings for three months ended March 31, 2020 increased to $299 million compared to $270 million for three months ended December 31, 2019.
During the three months ended March 31, 2020, the yield on interest-earning assets decreased 23 basis points, while the cost of interest-bearing liabilities decreased 22 basis points from the three months ended December 31, 2019, resulting in net interest margin compression of four basis points. The decrease in the cost of interest-bearing liabilities was primarily driven by Federal Reserve dropping the rates 150 basis points to combat against COVID-19 pandemic.
Our non-accrual and non-performing loans increased $3.9 million and $3.5 million, respectively from December 31, 2019. Net charge-offs totaled $1.1 million. The average loan-to-value on our non-performing real estate loans at March 31, 2020 remained conservative at approximately 29.0%.
The Bank and Company remain well capitalized under current capital regulations and are subject to the same regulatory capital requirements. See Note 15 (“Regulatory Capital”) of the Notes to the Consolidated Financial Statements.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2020 and 2019
General. Net income (loss) for the three months ended March 31, 2020 was ($1.4) million, a decrease of $8.5 million, or 119.7%, compared to $7.1 million for the three months ended March 31, 2019. Diluted earnings (loss) per common share were ($0.05) for the three months ended March 31, 2020, a decrease of $0.30, or 120.0%, from $0.25 for the three months ended March 31, 2019.
Return (loss) on average equity decreased to (1.0)% for the three months ended March 31, 2020 from 5.1% for the three months ended March 31, 2019. Return on average assets decreased to (0.1)% for the three months ended March 31, 2020 from 0.4% for the three months ended March 31, 2019.
Interest Income. Interest and dividend income decreased $3.1 million, or 4.5%, to $66.7 million for the three months ended March 31, 2020 from $69.8 million for the three months ended March 31, 2019. The decrease in interest income was primarily attributable to a decrease in the yield of average interest earning assets of 31 basis points, partially offset by an increase of $198.7 million in the average balance of interest-earning assets to $6,719.9 million for the three months ended March 31, 2020 from $6,521.1 million for the comparable prior year period. The decrease in the yield on interest-earning assets was primarily due to decreases of 28 basis points and 65 basis points in the yield of total loans and taxable securities, respectively. The decrease of 28 basis points in the yield on the total loans, net, was primarily due to the impact of net losses from fair value adjustments on qualifying hedges totaling $2.1 million compared to $0.6 million for the three months ended March 31, 2019. The decrease in the yield of securities was primarily due to higher yielding securities replaced by lower yielding securities. Excluding prepayment penalty income, recovered interest from loans and net losses from fair value adjustments on qualifying hedges, the yield on total loans, net, would have decreased 15 basis points to 4.28% for the three months ended March 31, 2020 from 4.43% for the three months ended March 31, 2019, primarily due to loans being both originated and repriced at lower rates.
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Interest Expense. Interest expense decreased $2.2 million, or 7.7%, to $25.8 million for the three months ended March 31, 2020 from $28.0 million for the three months ended March 31, 2019. The decrease in interest expense was primarily due to a decrease of 19 basis points in the average cost of interest-bearing liabilities to 1.74% for the three months ended March 31, 2020 from 1.93% for the three months ended March 31, 2019, partially offset by an increase of $140.7 million in the average balance of interest-bearing liabilities to $5,951.9 million for the three months ended March 31, 2020 from $5,811.3 million for the comparable prior year period. Additionally, the cost of borrowed funds decreased to 2.16% from 2.27% in the prior year period. The decrease in the cost of interest-bearing liabilities was primarily due to Federal Reserve lowering rates.
Net Interest Income. Net interest income for the three months ended March 31, 2020 was $40.8 million, a decrease of $1.0 million, or 2.3%, from $41.8 million for the three months ended March 31, 2019. The decrease in net interest income was primarily due to the 31 basis point decrease in the yield of interest-earning assets to 3.98% from 4.29% for the comparable prior year period, partially offset by an increase in the average balance of $198.7 million for the three months ended March 31, 2020. Additionally, net interest income was positively impacted by a decrease of 19 basis points in the cost of interest-bearing liabilities to 1.74% for the three months ended March 31, 2020 as compared to 1.93% for the three months ended March 31, 2019, partially offset by increase of $140.7 million in the average balance of interest-bearing liabilities to $5,951.9 million from $5,811.3 million in the prior year period. The net effect of the above on both the net interest spread and net interest margin were decreases of 12 basis points to 2.24% and 13 basis points to 2.44%, respectively, for the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019. Included in net interest income was prepayment penalty income from loans totaling $0.7 million in each of the three month periods ended March 31, 2020 and 2019, recovered interest from non-accrual loans totaling $0.4 million and $0.7 million for the three months ended March 31, 2020 and 2019, respectively, and net losses from fair value adjustments on qualifying hedges totaling $2.1 million and $0.6 million for three months ended March 31, 2020 and 2019, respectively. Excluding prepayment penalty income, recovered interest, and net losses from fair value adjustment on qualifying hedges, the net interest margin for the three months ended March 31, 2020 was 2.49%, a decrease of three basis points, from to 2.52% for the three months ended March 31, 2019.
Provision for Credit Losses. During the three months ended March 31, 2020, a provision for credit losses was recorded for $7.2 million, compared to $1.0 million for the three months ended March 31, 2019. The provision was primarily the result of economic deterioration resulting from the impact of COVID-19. During the three months ended March 31, 2020, the Bank recorded net charge-offs totaling $1.1 million, while non-accrual loans increased $3.9 million to $16.8 million from $12.8 million at December 31, 2019. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 28.9% at March 31, 2020. The Bank continues to maintain conservative underwriting standards. See “Allowance for Credit Losses” below, Note 5 (“Loans”) and Note 16 (“New Authoritative Accounting Pronouncements”) of the Notes to the Consolidated Financial Statements.
Non-Interest Income (Loss). Non-interest loss for the three months ended March 31, 2020 was ($2.9) million, a decrease of $3.8 million from the prior year comparable period. The decrease in non-interest income was primarily due to an increase of $3.9 million in net losses from fair value adjustments.
Non-Interest Expense. Non-interest expense was $32.4 million for each of the three months ended March 31, 2020, and March 31, 2019.
Income (Loss) before Income Taxes. Income before the provision for income taxes decreased $11.0 million, or 117.1%, to ($1.6) million for the three months ended March 31, 2020 from $9.4 million for the three months ended March 31, 2019 for the reasons discussed above.
Provision(benefit) for Income Taxes. The benefit for income taxes was ($0.2) million for the three months ended March 31, 2020, a decrease of $2.5 million, or 109.0%, from $2.3 million for the three months ended March 31, 2019. The decrease was primarily due to a decrease in income before income taxes.
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FINANCIAL CONDITION
Assets. Total assets at March 31, 2020 were $7,245.4 million, an increase of $227.6 million, or 3.2%, from $7,017.8 million at December 31, 2019. Total loans, net increased $153.5 million, or 2.7%, during the three months ended March 31, 2020, to $5,904.0 million from $5,750.5 million at December 31, 2019. Loan originations and purchases were $298.7 million for the three months ended March 31, 2020, an increase of $100.7 million, or 50.8%, from $198.0 million for the three months ended March 31, 2019. During the three months ended March 31, 2020, we continued to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full banking relationship. The loan pipeline was $324.4 million at March 31, 2020, compared to $324.5 million at December 31, 2019.
The following table shows loan originations and purchases for the periods indicated:
Multi-family residential (1)
67,318
27,214
Commercial real estate (2)
99,571
13,941
One-to-four family – mixed-use property
13,455
16,423
One-to-four family – residential
8,413
3,886
Construction (3)
6,749
5,901
Commercial business and other (4)
102,448
130,330
298,715
198,024
The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated and purchased during the three months ended March 31, 2020 had an average loan-to-value ratio of 42.7% and an average debt coverage ratio of 181%.
The Bank’s non-performing assets totaled $17.0 million at March 31, 2020, an increase of $3.5 million, or 25.6%, from $13.5 million at December 31, 2019. Total non-performing assets as a percentage of total assets were 0.23% at March 31, 2020 compared to 0.19% at December 31, 2019. The ratio of allowance for loan losses to total non-performing loans was 167.7% at March 31, 2020 and 164.1% at December 31, 2019.
During the three months ended March 31, 2020, mortgage-backed securities decreased $34.3 million, or 6.4%, to $497.5 million from $531.8 million at December 31, 2019. The decrease in mortgage-backed securities during the three months ended March 31, 2020 was primarily due to sale of securities totaling $64.6 million at an average rate of 3.46% and principal repayments of $40.4 million, partially offset by purchase of securities totaling $63.4 million at an average rate of 2.20% and an increase in the fair value of $8.2 million.
During the three months ended March 31, 2020, other securities, decreased $23.5 million, or 8.5%, to $276.1 million from $299.6 million at December 31, 2019. The decrease in other securities during the three months ended March 31, 2020, was primarily due to a decrease in fair value of $23.0 million. At March 31, 2020 other securities primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, corporate bonds and CLO’s.
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Liabilities. Total liabilities were $6,695.7 million at March 31, 2020, an increase of $257.6 million, or 4.0%, from $6,438.1 million at December 31, 2019. During the three months ended March 31, 2020, due to depositors decreased $193.6 million, or 3.9%, to $4,828.4 million due to a decrease of $265.5 million in certificates of deposit, partially offset by an increase of $71.9 million in non-maturity deposits. Included in deposits were brokered deposits totaling $115.6 million, a decrease of $273.2 million from $388.8 million at December 31, 2019. The increase in non-maturity deposits was due to increases of $54.1 million, $12.0 million, $5.1 million and $0.7 million in demand deposits, NOW accounts, money market accounts and savings accounts, respectively. Borrowed funds increased $380.4 million during the three months ended March 31, 2020. The increase in borrowed funds was primarily due to an increase in wholesale borrowings, as the Company sought to reduce the cost of funds.
Equity. Total stockholders’ equity decreased $30.0 million, or 5.2%, to $549.7 million at March 31, 2020 from $579.7 million at December 31, 2019. Stockholders’ equity decreased primarily due to an increase in accumulated comprehensive net loss of $22.6 million combined with the purchase of 142,405 treasury shares at an average cost of $16.45 per share, totaling $2.3 million and the adoption of CECL totaling $0.9 million. Additionally, stockholders’ equity was reduced due to the net loss of $1.4 million and the declaration and payment of dividends on the Company’s common stock of $0.21 per common share totaling $6.1 million. These decreases were partially offset by the net impact of vesting and exercising of shares of employee and director stock plans totaling $3.3 million. Book value per common share was $19.48 at March 31, 2020 compared to $20.59 at December 31, 2019.
Cash flow. During the three months ended March 31, 2020, funds provided by the Company’s operating activities amounted to $11.3 million. These funds, combined with $204.7 million from financing activities were utilized to fund $108.5 million used in investing activities. The Company’s primary business objective is the origination and purchase of multi-family residential loans, commercial business loans and commercial real estate mortgage loans and to a lesser extent one-to-four family (including mixed-use properties) and SBA loans. During the three months ended March 31, 2020, the net total of loan originations and purchases less loan repayments and sales was $133.1 million. During the three months ended March 31, 2020, the Company also funded $64.4 million in purchases of securities available for sale. During the three months ended March 31, 2020, funds were provided by increases of $410.0 million in net short-term borrowing and $50.0 million in proceeds from long-term borrowings. The funds were used to fund deposit withdrawals totaling $165.0 million and repay $80.5 million in long-term borrowings. The Company also used funds of $6.1 million for dividend payments and $3.8 million in purchases of treasury stock during the three months ended March 31, 2020.
INTEREST RATE RISK
The Consolidated Statements of Financial Position have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets which could adversely affect the Company’s results of operations if such assets were sold, or, in the case of securities classified as available for sale, decreases in the Company’s stockholders’ equity, if such securities were retained.
The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Asset Liability Committee of the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured
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as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at March 31, 2020. Various estimates regarding prepayment assumptions are made at each level of rate shock. However, prepayment penalty income is excluded from this analysis. Actual results could differ significantly from these estimates. At March 31, 2020, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.
The following table presents the Company’s interest rate shock as of March 31, 2020:
Projected Percentage Change In
Net Portfolio
Change in Interest Rate
Net Interest Income
Net Portfolio Value
Value Ratio
-200 Basis points
4.57
30.00
11.51
-100 Basis points
3.75
18.14
10.68
Base interest rate
9.37
+100 Basis points
(5.66)
(12.46)
8.45
+200 Basis points
(11.36)
(20.64)
7.86
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AVERAGE BALANCES
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following tables sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended March 31, 2020 and 2019, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.
Average
Yield/
Balance
Interest-earning assets:
Mortgage loans, net
4,697,531
49,412
4.21
4,619,587
50,845
4.40
Other loans, net
1,097,335
11,697
4.26
925,080
11,485
4.97
Total loans, net (1) (2)
5,794,866
4.22
5,544,667
4.50
Taxable securities:
507,912
3,040
2.39
573,397
4,248
2.96
243,726
1,697
2.79
241,863
2,211
3.66
Total taxable securities
751,638
2.52
815,260
6,459
3.17
Tax-exempt securities: (3)
63,535
676
58,173
594
4.08
Total tax-exempt securities
Interest-earning deposits and federal funds sold
109,818
1.06
103,042
2.15
Total interest-earning assets
6,719,857
66,812
3.98
6,521,142
69,938
4.29
387,141
346,998
7,106,998
6,868,140
Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts
194,026
281
0.58
205,775
361
0.70
NOW accounts
1,419,739
4,648
1.31
1,488,859
6,031
1.62
Money market accounts
1,697,783
7,042
1.66
1,380,172
6,821
1.98
Certificate of deposit accounts
1,267,245
6,767
2.14
1,523,499
8,203
Total due to depositors
4,578,793
18,738
1.64
4,598,305
21,416
1.86
Mortgagors' escrow accounts
65,503
40
0.24
62,174
0.34
Total deposits
4,644,296
4,660,479
1.84
1,307,629
2.16
1,150,784
2.27
Total interest-bearing liabilities
5,951,925
1.74
5,811,263
1.93
Non interest-bearing deposits
449,761
398,829
128,715
105,427
6,530,401
6,315,519
Equity
576,597
552,621
Total liabilities and equity
Net interest income / net interest rate spread (tax equivalent) (3)
40,968
2.24
41,928
2.36
Net interest-earning assets / net interest margin(tax equivalent)
767,932
2.44
709,879
2.57
Ratio of interest-earning assets to interest-bearing liabilities
1.13
X
1.12
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LOANS
The following table sets forth the Company’s loan originations (including the net effect of refinancing) and the changes in the Company’s portfolio of loans, including purchases, sales and principal reductions for the periods indicated.
Mortgage Loans
At beginning of period
4,677,703
4,638,784
Mortgage loans originated:
64,190
69,566
3,354
3,524
Total mortgage loans originated
159,682
64,988
Mortgage loans purchased:
3,128
30,005
3,395
2,377
Total mortgage loans purchased
36,528
Less:
Principal and other reductions
79,035
86,159
Sales
498
1,042
At end of period
4,794,380
4,618,948
Non-Mortgage Loans
1,079,232
897,515
Other loans originated:
Commercial business
61,208
75,393
535
319
Total other loans originated
61,800
76,041
Other loans purchased:
40,705
54,618
Total other loans purchased
58,154
72,661
1,137
1,122,324
954,376
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TROUBLED DEBT RESTRUCTURED (“TDR”) AND NON-PERFORMING ASSETS
The following table shows loans classified as TDR that are performing according to their restructured terms at the periods
indicated:
Accrual Status:
3,876
3,885
Non-Accrual Status:
2,470
2,609
The following table shows our non-performing assets at amortized cost at the period indicated:
Non-accrual loans:
Small business administration
Taxi medallion(1)
Commercial business and other(1)
Other non-performing assets:
Real estate acquired through foreclosure
Other assets acquired through foreclosure
35
243
Total non-performing assets
16,542
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The following table shows non-performing assets at the period indicated:
Loans 90 days or more past due and still accruing:
13,532
Non-performing assets to total assets
0.19
Allowance for loan losses to non-performing loans
164.05
CRITICIZED AND CLASSIFIED ASSETS
Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that credit quality is maintained at the highest levels. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at March 31, 2020 and December 31, 2019. The Company had classified OREO and other assets acquired through foreclosure totaling $0.2 million and $0.3 million at March 31, 2020 and December 31, 2019, respectively. The Company did not hold any criticized or classified investment securities at March 31, 2020 and December 31, 2019. Our total Criticized and Classified assets were $34.0 million at March 31, 2020, a decrease of $4.1 million from $38.0 million at December 31, 2019.
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ALLOWANCE FOR CREDIT LOSSES
Upon adoption of CECL, ACL increased by $1.3 million, included an increase of $0.6 million to the allowance of off-balance sheet credit losses and $0.3 million to the allowance of credit losses of securities. We recorded $7.1 million provision for credit losses for the first quarter of 2020 utilizing the CECL methodology. The increase resulted primarily due to the effect of the COVID-19 and growth in the loan portfolio. The impact from the above resulted in ACL totaling $29.3 million at March 31, 2020. We recorded $1.1 million in net charge-offs during the three months ended March 31, 2020.
Loans- CECL Adoption
Loans- Charge-off
Loans- Recovery
Loans- Provision
HTM Securities- CECL Adoption
HTM Securities- Provision
Allowance for HTM Securities losses
Off-Balance Sheet - CECL Adoption
553
Off-Balance Sheet- Provision
244
Allowance for Off-Balance Sheet losses
797
Allowance for Credit Losses
29,297
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The following table sets forth the activity in the Company’s allowance for loan losses for the periods indicated:
At or for the three months ended March 31,
CECL Adoption
Provision for loan losses
Loans charged-off:
Total loans charged-off
Recoveries:
Total recoveries
Net charge-offs
(1,149)
(902)
Ratio of net charge-offs during the period to average loans outstanding during the period
0.08
0.07
Ratio of allowance for loan losses to gross loans at end of period
0.47
0.38
Ratio of allowance for loan losses to non-performing assets at end of period
165.32
133.26
Ratio of allowance for loan losses to non-performing loans at end of period
167.73
133.55
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2020, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATIOMTION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company’s consolidated financial condition, results of operations and cash flows.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes from the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2019.
The novel Coronavirus Disease 2019 ("COVID-19") pandemic has adversely affected us and our customers, employees and third-party service providers, and the adverse impacts on our business, financial position, operations and prospects could be significant.
The COVID-19 pandemic has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. These changes have a significant adverse effect on the regions and markets in which we conduct our business and the demand for our products and services.
Business and consumer customers of Flushing Bank are experiencing varying degrees of financial distress, which is expected to increase over coming months and will likely adversely affect their ability to timely pay interest and principal on their loans and the value of the collateral securing their obligations. This in turn has influenced the recognition of credit losses in our loan portfolios and has increased our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. These developments as a consequence of the COVID-19 pandemic materially impact our business and the businesses of our customers and are expected to have a material adverse effect on our financial results for 2020, as evidenced by our first quarter results.
In order to protect the health of our customers and employees, and to comply with applicable government directives, we have modified our business practices, including restricting employee travel, directing employees to work from home insofar as is possible, cancelling in-person meetings and implementing business continuity plans and protocols to the extent necessary.
We may take further such actions that we determine are in the best interest of our employees, customers and communities or as may be required by government order. These actions in response to the COVID-19 pandemic, and similar actions by our vendors and business partners, have not materially impaired our ability to support our employees, conduct our business and serve our customers, but there is no assurance that these actions will be sufficient to successfully mitigate the risks presented by COVID-19 or that our ability to operate will not be materially affected going forward. For instance, our business operations may be disrupted if key personnel or significant portions of our employees are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic. Similarly, if any of our vendors or business partners become unable to continue to provide their products and services, which we rely upon to maintain our day-to-day operations, our ability to serve our customers could be impacted.
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COVID-19 does not yet appear to be contained and could affect significantly more households and businesses. Given the ongoing and dynamic nature of the circumstances, it is not possible to accurately predict the extent, severity or duration of these conditions or when normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects our business, operations and financial condition, as well as our regulatory capital and liquidity ratios and credit ratings, is highly uncertain and unpredictable and depends on, among other things, new information that may emerge concerning the scope, duration and severity of the COVID-19 pandemic and actions taken by governmental authorities and other parties in response to the pandemic. If the pandemic is prolonged, the adverse impact on the markets in which we operate and on our business, operations and financial condition could deepen. Particular concerns referenced above include:
Credit Risk. Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s business. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment like now, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program (“PPP”) under the CARES Act whereby loans to small businesses are made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under a PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding that loan at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.
Strategic Risk. Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the various response of governmental and nongovernmental authorities. In recent weeks, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most businesses. The future effects of COVID-19 on economic activity could negatively affect the future banking products we provide, including a decline in originating of loans.
Operational Risk. Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and branch activity that largely depend on people and technology, including access to information technology systems as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a portion of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications
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systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.
Interest Rate Risk. Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.
Material risks relating to our business that are enhanced due to the COVID-19 pandemic are addressed at Item 1A Risk Factors in the Form 10-K for the fiscal year ended December 31, 2019 under the headings:
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended March 31, 2020:
Maximum
Total Number of
Number of
Shares Purchased
Shares That May
as Part of Publicly
Yet Be Purchased
of Shares
Average Price
Announced Plans
Under the Plans
Period
Purchased
Paid per Share
or Programs
January 1 to January 31, 2020
427,211
February 1 to February 29, 2020
12,405
18.28
414,806
March 1 to March 31, 2020
16.27
284,806
142,405
16.45
During the quarter ended March 31, 2020, the Company repurchased 142,405 shares of the Company’s common stock at an average cost of $16.45 per share. On March 31, 2020, 284,806 shares remained to be repurchased under the currently authorized stock repurchase program. Stock will be purchased under the current stock repurchase programs from time to time, in the open market or through private transactions, subject to market conditions. There is no expiration or maximum dollar amount under these authorizations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
Exhibit No.
Description
3.1 P
Certificate of Incorporation of Flushing Financial Corporation (1)
3.2
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
3.3
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
3.4
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
3.5
Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
3.6
Amended and Restated By-Laws of Flushing Financial Corporation (6)
4.1
Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee. (7)
First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A thereto. (7)
4.3
Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
101.INS
XBRL Instance Document -the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
September 1, 1995, Registration No. 33-96488. (P: Indicates a filing submitted in paper)
September 30, 2002.
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EXHIBIT INDEX
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Flushing Financial Corporation,
Dated:
May 11, 2020
By:
/s/John R. Buran
John R. Buran
President and Chief Executive Officer
/s/Susan K. Cullen
Susan K. Cullen
Senior Executive Vice President, Treasurer and
Chief Financial Officer
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