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 September 30, 2023
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer” ,“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer __
Accelerated filer X
Non-accelerated filer __
Smaller reporting company __
Emerging growth company __
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). __ Yes X No
The number of shares of the registrant’s Common Stock outstanding as of October 31, 2023 was 28,904,625.
TABLE OF CONTENTS
PAGE
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements - (Unaudited)
Consolidated Statements of Financial Condition
1
Consolidated Statements of Income
2
Consolidated Statements of Comprehensive Income
3
Consolidated Statements of Cash Flows
4
Consolidated Statements of Changes in Stockholders’ Equity
6
Notes to Consolidated Financial Statements
8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
47
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
66
ITEM 4. Controls and Procedures
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
67
ITEM 1A. Risk Factors
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Mine Safety Disclosures
ITEM 5. Other Information
ITEM 6. Exhibits
68
SIGNATURES
70
i
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
(Unaudited)
Item 1. Financial Statements
September 30,
December 31,
2023
2022
(Dollars in thousands, except per share data)
Assets
Cash and due from banks
$
200,926
151,754
Securities held-to-maturity, net of allowance of $1,082 and $1,100, respectively (assets pledged of $4,319 and $4,550, respectively; fair value of $57,665 and $62,550, respectively)
73,131
73,711
Securities available for sale, at fair value (assets pledged of $141,852 and $172,235, respectively; $12,782 and $13,023 at fair value pursuant to the fair value option, respectively)
843,663
735,357
Loans, net of fees and costs
6,896,074
6,934,769
Less: Allowance for credit losses
(39,228)
(40,442)
Net loans
6,856,846
6,894,327
Interest and dividends receivable
55,660
45,048
Bank premises and equipment, net
21,302
21,750
Federal Home Loan Bank of New York stock, at cost
43,821
45,842
Bank owned life insurance
214,321
213,131
Goodwill
17,636
Core deposit intangibles
1,651
2,017
Right of use asset
41,404
43,289
Other assets
206,922
179,084
Total assets
8,577,283
8,422,946
Liabilities
Due to depositors:
Non-interest bearing
874,420
921,238
Interest-bearing
5,735,077
5,515,945
Total Due to depositors
6,609,497
6,437,183
Mortgagors' escrow deposits
72,012
48,159
Borrowed funds:
Federal Home Loan Bank advances and other borrowings
765,219
815,501
Subordinated debentures
187,462
186,965
Junior subordinated debentures, at fair value
48,329
50,507
Total borrowed funds
1,001,010
1,052,973
Operating lease liability
43,067
46,125
Other liabilities
182,556
161,349
Total liabilities
7,908,142
7,745,789
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; 34,087,623 shares issued; 28,904,625 shares and 29,476,391 shares outstanding, respectively)
341
Additional paid-in capital
264,486
264,332
Treasury stock, at average cost (5,182,998 shares and 4,611,232 shares, respectively)
(105,433)
(98,535)
Retained earnings
550,678
547,507
Accumulated other comprehensive loss, net of taxes
(40,931)
(36,488)
Total stockholders' equity
669,141
677,157
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
-1-
For the three months ended
For the nine months ended
(In thousands, except per share data)
Interest and dividend income
Interest and fees on loans
91,466
75,546
259,732
212,254
Interest and dividends on securities:
Interest
10,383
5,676
26,795
14,350
Dividends
33
17
92
36
Other interest income
2,154
506
6,095
716
Total interest and dividend income
104,036
81,745
292,714
227,356
Interest expense
Deposits
50,066
11,965
135,371
20,059
Other interest expense
9,543
8,574
24,276
17,882
Total interest expense
59,609
20,539
159,647
37,941
Net interest income
44,427
61,206
133,067
189,415
Provision for credit losses
596
2,145
9,520
5,093
Net interest income after provision for credit losses
43,831
59,061
123,547
184,322
Non-interest income
Banking services fee income
2,636
1,351
5,827
3,891
Net gain on sale of loans
108
73
Net (loss) gain from fair value adjustments
(1,246)
5,626
1,667
6,350
Federal Home Loan Bank of New York stock dividends
624
538
1,855
1,342
Life insurance proceeds
23
584
1,536
1,157
1,132
3,400
3,361
Other income
282
348
2,065
1,108
Total non-interest income
3,476
8,995
15,506
17,661
Non-interest expense
Salaries and employee benefits
17,825
21,438
58,205
66,196
Occupancy and equipment
3,371
3,541
10,698
10,905
Professional services
3,042
2,570
8,182
7,077
FDIC deposit insurance
912
738
2,832
1,773
Data processing
1,422
1,367
4,330
4,174
Depreciation and amortization of bank premises and equipment
1,482
1,488
4,474
4,395
Other real estate owned / foreclosure expense
185
143
500
259
Other operating expenses
6,176
4,349
18,176
15,171
Total non-interest expense
34,415
35,634
107,397
109,950
Income before income taxes
12,892
32,422
31,656
92,033
Provision for income taxes
Federal
2,435
5,783
5,996
16,042
State and local
1,058
3,197
2,475
9,295
Total provision for income taxes
3,493
8,980
8,471
25,337
Net income
9,399
23,442
23,185
66,696
Basic earnings per common share
0.32
0.76
0.77
2.15
Diluted earnings per common share
Dividends per common share
0.22
0.66
-2-
(In thousands)
Other comprehensive income (loss), net of tax:
Amortization of actuarial gains, net of taxes of $31 and $2, respectively, and of $93 and ($1), respectively.
(69)
(4)
(207)
(19)
Amortization of prior service credits, net of taxes of $2 and $ - for the three and nine months ended September 30, 2022.
(5)
(21)
Change in net unrealized gains on securities, net of taxes of $2,423 and $10,266, respectively, and of $2,516 and $29,925, respectively.
(5,398)
(22,797)
(5,815)
(66,658)
Net unrealized gains on cashflow hedges, net of taxes of ($132) and ($3,668), respectively, and of ($624) and ($12,544), respectively.
294
8,190
1,473
27,856
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($116) and $184, respectively, and of ($47) and $389, respectively.
261
(414)
106
(768)
Other comprehensive loss, net of tax:
(4,912)
(15,030)
(4,443)
(39,610)
Comprehensive net income
4,487
8,412
18,742
27,086
-3-
For the nine months ended September 30,
Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment
Net gain on sales of loans
(108)
(73)
Net amortization of premiums and discounts
2,159
309
Deferred income tax provision
2,798
3,914
Net gain from fair value adjustments
(1,667)
(6,350)
Net loss from fair value adjustments of qualifying hedges
112
161
Gain from life insurance proceeds
(584)
(1,536)
Income from bank owned life insurance
(3,400)
(3,361)
Stock-based compensation expense
5,556
6,230
Deferred compensation
(2,957)
(4,870)
Amortization of core deposit intangibles
366
415
(Increase) decrease in other assets
(16,619)
6,998
Decrease in other liabilities
(11,505)
(13,294)
Net cash provided by operating activities
11,330
64,727
Investing Activities
Purchases of premises and equipment
(4,026)
(3,433)
Purchases of Federal Home Loan Bank - NY shares
(114,436)
(124,309)
Redemptions of Federal Home Loan Bank - NY shares
116,457
97,757
Purchases of securities held-to-maturity
(16,475)
Proceeds from prepayments of securities held-to-maturity
593
190
Purchases of securities available for sale
(171,934)
(222,810)
Proceeds from maturities and prepayments of securities available for sale
46,762
80,503
Proceeds from bank owned life insurance
3,075
3,307
Change in cash collateral
25,800
44,015
Net repayments (originations) of loans
134,166
(173,311)
Purchases of loans
(120,720)
(207,546)
Proceeds from sale of loans
9,042
29,247
Net cash used in investing activities
(75,221)
(492,865)
-4-
Consolidated Statements of Cash Flows (Contd.)
Financing Activities
Net (decrease) increase in noninterest-bearing deposits
(46,818)
24,757
Net increase (decrease) in interest-bearing deposits
218,624
(253,478)
Net increase in mortgagors' escrow deposits
23,853
18,631
Net (repayments) proceeds from short-term borrowed funds
(285,750)
750,000
Proceeds from long-term borrowing
274,469
63,710
Repayment of long-term borrowings
(39,001)
(50,000)
Purchase of treasury shares and repurchase of shares to satisfy tax obligations
(12,528)
(22,117)
Cash dividends paid
(19,786)
(20,395)
Net cash provided by financing activities
113,063
511,108
Net increase in cash and cash equivalents, and restricted cash
49,172
82,970
Cash, cash equivalents, and restricted cash, beginning of period
81,723
Cash, cash equivalents, and restricted cash, end of period
164,693
Supplemental Cash Flow Disclosure
Interest paid
154,896
32,459
Income taxes paid
6,272
24,559
Taxes paid if excess tax benefits on stock-based compensation were not tax deductible
6,274
25,142
-5-
Consolidated Statement of Changes in Stockholders’ Equity
Additional
Accumulated Other
Shares
Common
Paid-in
Treasury
Retained
Comprehensive
Outstanding
Total
Stock
Capital
Earnings
Income (Loss)
Balance at December 31, 2022
29,476,391
5,158
Vesting of restricted stock unit awards
256,798
(5,264)
5,484
(220)
Purchase of treasury shares
(159,516)
(3,053)
3,808
Repurchase of shares to satisfy tax obligation
(85,217)
(1,656)
Dividends on common stock ($0.22 per share)
(6,659)
Other comprehensive loss
(1,296)
Balance at March 31, 2023
29,488,456
673,459
262,876
(97,760)
545,786
(37,784)
8,628
1,690
(30)
35
(528,815)
(6,841)
898
(612)
(8)
(6,598)
Other comprehensive income
1,765
Balance at June 30, 2023
28,960,719
671,303
263,744
(104,574)
547,811
(36,019)
5,430
111
(3)
(59,352)
(942)
850
(2,172)
(28)
(6,529)
Balance at September 30, 2023
28,904,625
-6-
Consolidated Statement of Changes in Stockholders’ Equity (Contd.)
Loss
Balance at December 31, 2021
30,526,353
679,628
263,375
(75,293)
497,889
(6,684)
18,219
Award of common shares released from Employee Benefit Trust
287
297,626
(6,019)
6,304
(285)
(360,000)
(8,469)
4,194
(97,435)
(2,376)
(6,850)
(8,820)
Balance at March 31, 2022
30,366,544
675,813
261,837
(79,834)
508,973
(15,504)
Net Income
25,035
2,015
(38)
43
(387,689)
(8,534)
1,061
(766)
(17)
(6,786)
(15,760)
Balance at June 30, 2022
29,980,104
670,812
262,860
(88,342)
527,217
(31,264)
3,995
(80)
86
(6)
975
(1,672)
(36)
(131,174)
(2,685)
(6,759)
Balance at September 30, 2022
29,851,253
670,719
263,755
(90,977)
543,894
(46,294)
-7-
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 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, 2022.
When necessary, certain reclassifications were made to prior-year amounts to conform to the current-year presentation. Such reclassifications had no effect on the prior period net income or shareholders’ equity and were insignificant amounts.
2. Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowance for 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. Management performed a qualitative review of goodwill at September 30, 2023, concluding no impairment was indicated.
-8-
3. Earnings Per Share
Earnings per common share have been computed based on the following:
Net income, as reported
Divided by:
Total weighted average common shares outstanding and common stock equivalents (1)
29,703
30,695
30,017
30,960
Dividend Payout ratio
68.8
%
28.9
85.7
30.7
(1) For the three and nine months ended September 30, 2023, and 2022, there were no common stock equivalents that were anti-dilutive.
4. Securities
The following table summarizes the Company’s portfolio of securities held-to-maturity on September 30, 2023:
Gross
Amortized
Unrecognized
Cost
Fair Value
Gains
Losses
Municipals
66,353
51,031
15,322
Total municipals
FNMA
7,860
6,634
1,226
Total mortgage-backed securities
Allowance for credit losses
(1,082)
57,665
16,548
-9-
The following table summarizes the Company’s portfolio of securities held-to-maturity on December 31, 2022:
66,936
55,561
11,375
7,875
6,989
886
(1,100)
62,550
12,261
The following table summarizes the Company’s portfolio of securities available for sale on September 30, 2023:
Unrealized
U.S. government agencies
83,037
81,481
138
1,694
Corporate
173,139
152,345
20,794
Mutual funds
11,066
Collateralized loan obligations
260,727
259,441
411
1,697
Other
1,451
Total other securities
529,420
505,784
549
24,185
REMIC and CMO
164,303
131,476
32,827
GNMA
8,678
6,542
2,137
157,897
128,781
29,116
FHLMC
90,942
71,080
19,862
421,820
337,879
83,942
Total Securities excluding portfolio layer adjustments
951,240
550
108,127
Unallocated portfolio layer basis adjustments (1)
(7,721)
n/a
Total securities available for sale
943,519
100,406
(1) Represents the amount of portfolio layer method basis adjustments related to available for sale (“AFS”) securities hedged in a closed portfolio. Under GAAP portfolio layer method basis adjustments are not allocated to individual securities, however, the amounts impact the unrealized gains or losses for the individual securities being hedged. See Note 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements.
-10-
The following table summarizes the Company’s portfolio of securities available for sale on December 31, 2022:
83,720
81,103
2,619
146,430
131,766
14,664
11,211
129,684
125,478
4,206
1,516
372,561
351,074
21,489
175,712
148,414
27,298
9,193
7,317
1,879
172,690
148,265
24,425
96,725
80,287
16,438
454,320
384,283
70,040
826,881
5
91,529
The corporate securities held by the Company at September 30, 2023 and December 31, 2022, are issued by U.S. banking institutions. The CMOs held by the Company at September 30, 2023 and December 31, 2022, are either fully guaranteed or issued by a government sponsored enterprise.
The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at September 30, 2023, 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.
Securities held-to-maturity:
Due after ten years
Mortgage-backed securities
74,213
-
Total securities held-to-maturity
-11-
Securities available for sale (1):
Due in one year or less
59,934
58,951
Due after one year through five years
84,849
79,070
Due after five years through ten years
244,126
227,135
129,445
129,562
518,354
494,718
(1) The table above excludes the unallocated portfolio layer basis adjustments totaling $7.7 million related to AFS securities hedged in a closed portfolio at September 30, 2023. See Note 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements.
The following tables show the Company’s securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated:
At September 30, 2023
Less than 12 months
12 months or more
Count
(Dollars in thousands)
Held-to-maturity securities
Available for sale securities (1)
U.S. Government Agencies & Treasury
74,192
5,316
26
68,876
1,668
29,023
2,679
123,322
18,115
CLO
20
148,517
28,056
71
120,461
1,626
54
375,054
62,395
2,776
312,659
21,409
46
131,210
12
6,458
113
6,345
2,135
2,085
101
126,696
29,015
18
123
337,529
2,198
103
335,331
83,839
177
712,583
64,593
2,879
647,990
105,248
-12-
At December 31, 2022
Available for sale securities
7
77,856
77,059
2,517
797
102
45,447
3,553
86,319
11,111
19
95,518
2,916
29,960
1,290
335,100
218,024
8,986
117,076
12,503
148,120
40,911
3,457
107,209
23,841
7,133
64
7,069
148,229
38,296
3,871
109,933
20,554
24,838
2,397
55,449
14,041
120
383,769
104,109
9,725
279,660
60,315
166
718,869
322,133
18,711
396,736
72,818
The Company reviewed each available for sale security that had an unrealized loss at September 30, 2023, and December 31, 2022. 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. If the Company identifies any decline in the fair value due to credit loss factors and evaluation indicates that a credit loss exists, then the present value of cash flows that is expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. 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 the U.S. government, and that issuers of the collateralized loan obligations (“CLO”) and the issuer of corporate securities are global systematically important banks. 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.
The Company reviewed each held-to-maturity security at September 30, 2023, and December 31, 2022 as part of its quarterly Current Expected Credit Loss (“CECL”) process, resulting in an allowance for credit losses of $1.1 million at each of September 30, 2023 and December 31, 2022.
-13-
It is the Company’s policy to exclude accrued interest receivable from the calculation of the allowance for credit losses on held-to-maturity and the valuation of available for sale securities. Accrued interest receivable on held-to-maturity securities totaled $0.1 million each at September 30, 2023 and December 31, 2022 and accrued interest receivable on available for sale debt securities totaled $6.7 million and $3.7 million at September 30, 2023 and December 31, 2022, respectively.
The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity.
Beginning balance
1,079
1,085
1,100
862
Provision (benefit)
11
(18)
234
1,082
1,096
Realized gains and losses on the sales of securities are determined using the specific identification method. The Company did not sell any securities during the three and nine months ended September 30, 2023 and 2022.
-14-
5. Loans
The following represents the composition of loans as of the dates indicated:
Multi-family residential
2,614,219
2,601,384
Commercial real estate
1,953,243
1,913,040
One-to-four family ― mixed-use property
537,744
554,314
One-to-four family ― residential
222,874
241,246
Construction
59,903
70,951
Small Business Administration
21,896
23,275
Commercial business and other
1,487,775
1,521,548
Net unamortized premiums and unearned loan fees
9,059
9,011
Total loans, net of fees and costs excluding portfolio layer basis adjustments
6,906,713
(10,639)
Total loans, net of fees and costs
(1) This amount represents portfolio layer method basis adjustments related to loans hedged in a closed portfolio. Under GAAP portfolio layer method basis adjustments are not allocated to individual loans, however, the amounts impact the net loan balance. These basis adjustments would be allocated to the amortized cost of specific loans within the pool if the hedge was de-designated. See Note 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements.
Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Loan fees and certain loan origination costs are deferred. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.
Interest on loans is recognized on an accrual basis. Accrued interest receivable totaled $42.1 million and $36.8 million at September 30, 2023, and December 31, 2022, respectively, and was reported in “Interest and dividends receivable” on the Consolidated Statements of Financial Condition. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is likely to occur.
The allowance for credit losses (“ACL”) is an estimate that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial assets. Loans are charged off against that ACL when management believes that a loan balance is uncollectable based on quarterly analysis of credit risk.
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,
-15-
economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.
The Company recorded a provision for credit losses on loans totaling $0.6 million and $2.1 million for the three months ended September 30, 2023 and 2022, respectively. The provision recorded during the three months ended September 30, 2023, was driven by increasing reserves for the elevated risk presented by the current rate environment to adjustable-rate loan’s debt coverage ratios, partially offset by a fully reserved loan paid off during the quarter. The Company recorded a provision for credit losses on loans totaling $9.5 million and $4.9 million for the nine months ended September 30, 2023 and 2022, respectively. The provision recorded during the nine months ended September 30, 2023, was driven by fully reserving for two non-accrual business loans that were subsequently charged-off, and increasing reserves for the elevated risk presented by the current rate environment to adjustable-rate loan’s debt coverage ratios. During the nine months ended September 30, 2023, the reasonable and supportable forecast period and reversion period were two and four quarters, respectively unchanged, from December 31, 2022. The ACL - loans totaled $39.2 million on September 30, 2023 compared to $40.4 million on December 31, 2022. On September 30, 2023, the ACL - loans represented 0.57% of gross loans and 225.4% of non-performing loans. On December 31, 2022, the ACL - loans represented 0.58% of gross loans and 124.9% of non-performing loans.
The Company may modify loans 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. When modifying a loan, an assessment of whether a borrower is experiencing financial difficulty is made on the date of modification. This modification may include reducing the loan interest rate, extending the loan term, any other-than-insignificant payment delay, principal forgiveness or any combination of these types of modifications. When such modifications are performed, a change to the allowance for credit losses is generally not required as the methodologies used to estimate the allowance already capture the effect of borrowers experiencing financial difficulty. On September 30, 2023, there were no commitments to lend additional funds to borrowers who have received a loan modification as a result of financial difficulty.
On January 1, 2023, the Company adopted ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” without material impact on the business operations or consolidated financial statements. See Note 14 (“New Authoritative Accounting Pronouncements”) of the Notes to the Consolidated Financial Statements.
The following tables show loan modifications made to borrowers experiencing financial difficulty during the periods indicated:
For the three months ended, September 30, 2023
Term Extension
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
Number
Amortized Cost Basis
% of Total Class of Financing Receivable
Financial Effect
1,638
0.1
Extended Maturity to June 2025 (20 months).
-16-
For the nine months ended, September 30, 2023
Other-than-insignificant Payment Delay
1,494
6.8
Provided twelve month payment deferral to be collected at maturity.
The following table shows the payment status of borrowers experiencing financial difficulty and for which a modification has occurred at September 30, 2023:
Payment Status of Borrowers Experiencing Financial Difficulty (Amortized Cost Basis)
Current
30-89 Days Past Due
90+ Days Past Due
Total Modified
3,132
The following table shows loans modified as Troubled Debt Restructured (“TDR”) during the periods indicated:
September 30, 2022
Balance
Modification description
2,982
Amortization extension
-17-
271
Loan amortization extension.
8,204
One loan received a below market interest rate and four loans had an amortization extension
8,475
-18-
The following table shows loans classified as TDR at amortized cost that are performing according to their restructured terms at the periods indicated:
December 31, 2022
of contracts
1,673
7,572
One-to-four family - mixed-use property
1,222
One-to-four family - residential
253
242
855
Total performing
16
11,817
The following table shows our recorded investment for loans classified as TDR at amortized cost that are not performing according to their restructured terms at the periods indicated.
3,263
Total troubled debt restructurings that subsequently defaulted
-19-
The following tables show 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 the periods shown below:
At or for the nine months September 30, 2023
Non-accrual amortized cost beginning of the reporting period
Non-accrual amortized cost end of the reporting period
Non-accrual with no related allowance
Interest income recognized
Loans ninety days or more past due and still accruing
3,547
3,600
254
1,045
1,090
3,953
3,643
950
1,265
20,193
7,680
3,746
29,942
17,278
13,344
At or for the year ended December 31, 2022
2,652
640
One-to-four family - mixed-use property (1)
1,582
7,483
952
2,600
Commercial business and other (1)
1,945
3,291
171
15,254
13,040
(1) Included in the above analysis are non-accrual performing TDR one-to-four family – mixed-use property totaling $0.2 million and Commercial business and other totaling less than $0.1 million.
-20-
The following is a summary of interest foregone on non-accrual loans for the periods indicated.
Interest income that would have been recognized had the loans performed in accordance with their original terms
425
618
1,405
1,578
Less: Interest income included in the results of operations
181
Total foregone interest
423
437
1,385
960
The following tables show the aging analysis of the amortized cost basis of loans at the period indicated by class of loans:
30 - 59 Days Past Due
60 - 89 Days Past Due
Greater than 90 Days
Total Past Due
Total Loans (1)
1,131
599
5,330
2,612,299
2,617,629
3,994
1,950,468
1,954,462
1,537
195
2,822
537,697
540,519
3,367
7,036
217,091
224,127
59,775
2,759
19,077
21,836
89
2,237
7,654
9,980
1,478,385
1,488,365
10,118
4,551
17,252
31,921
6,874,792
(1) The table above excludes the unallocated portfolio layer basis adjustments totaling $10.6 million related to loans hedged in a closed pool at September 30, 2023. See Note 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements.
Total Loans
1,475
1,787
6,809
2,598,363
2,605,172
2,561
2,815
1,912,083
1,914,898
3,721
4,518
552,777
557,295
2,734
6,687
235,793
242,480
68,224
70,824
329
1,279
21,914
23,193
7,636
10,324
17,976
1,502,931
1,520,907
18,456
1,803
22,425
42,684
6,892,085
-21-
The following tables show the activity in the ACL on loans for the following three-month periods:
September 30, 2023
One-to-four
Commercial
Multi-family
family - mixed-
family -
Small Business
business and
residential
real estate
use property
loans
Administration
other
9,718
8,206
1,615
654
132
2,162
16,106
38,593
Charge-offs
Recoveries
48
9
63
917
562
10
57
32
(194)
(791)
Ending balance
10,635
8,768
1,625
717
164
2,016
15,303
39,228
9,405
8,443
1,959
866
300
2,118
16,333
39,424
(2)
(322)
(324)
22
34
355
(29)
(59)
(44)
(68)
1,976
2,134
9,760
8,414
1,962
805
256
2,062
18,009
41,268
The following tables show the activity in the ACL on loans for the following nine-month periods:
9,552
8,184
1,875
901
17,471
40,442
(12)
(7)
(11,023)
(11,050)
50
219
28
298
592
(250)
(222)
(97)
(394)
8,827
9,538
Taxi
medallion
8,185
7,158
1,755
784
186
1,209
17,858
37,135
(1,054)
(354)
(1,410)
39
447
686
1,574
1,256
207
1,868
(447)
310
4,857
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 previously mentioned categories and management believes weakness is evident then we designate the loan as “Watch;” all other loans would be considered “Pass.” Loans that are non-accrual are designated as Substandard, Doubtful or Loss. These loan designations are updated quarterly. We designate a loan as Substandard when a well-defined weakness is identified that may jeopardize the orderly liquidation of the debt. We designate a loan as 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.
The amortized cost of substandard loans was $47.1 million at September 30, 2023, an increase of $21.4 million from $25.7 million at December 31, 2022. The increase was primarily due to a business relationship that was downgraded to substandard due to declining macroeconomic factors. The loans were individually evaluated for impairment, and it was determined no reserve was deemed necessary at September 30, 2023.
-22-
The following table summarizes the various risk categories of mortgage and non-mortgage loans by loan portfolio segments and by class of loans by year of origination at September 30, 2023:
For the year ended
Revolving Loans
Amortized Cost
converted to
2021
2020
2019
Prior
Basis
term loans
Multi-family Residential
Pass
171,298
468,879
279,408
217,501
306,987
1,127,156
4,075
2,575,304
Watch
881
1,944
32,691
35,516
Special Mention
1,461
Substandard
5,348
Total Multi-family Residential
469,760
219,445
1,166,656
Commercial Real Estate
134,977
326,545
177,860
148,835
218,458
913,106
1,919,781
1,443
9,570
23,668
34,681
Total Commercial Real Estate
179,303
228,028
936,774
Gross charge-offs
1-4 Family Mixed-Use Property
18,557
43,937
41,987
31,274
61,270
335,314
532,339
724
5,564
6,288
636
Total 1-4 Family Mixed-Use Property
61,994
342,770
1-4 Family Residential
5,108
23,319
8,506
16,857
38,153
104,508
7,475
10,252
214,178
510
274
740
1,527
1,321
4,372
204
197
401
4,733
443
5,176
Total 1-4 Family Residential
23,829
8,780
38,893
110,972
12,213
5,520
5,793
48,459
Total Construction
806
3,301
3,166
3,613
702
4,006
15,594
2,876
2,924
349
1,843
318
Total Small Business Administration
4,978
750
8,388
Commercial Business
64,537
124,017
77,139
33,986
32,087
62,001
285,765
679,532
266
6,437
4,015
2,433
20,105
2,747
50,667
3,925
27
2,000
5,952
14,935
2,454
12,937
3,475
33,829
Doubtful
3,929
Total Commercial Business
79,738
132,908
85,079
36,419
46,806
95,043
297,916
773,909
1,675
14
9,267
10,967
Commercial Business - Secured by RE
35,585
178,373
131,700
106,902
40,114
143,676
636,350
9,776
597
53,025
63,398
14,403
Total Commercial Business - Secured by RE
45,361
55,114
196,701
714,151
180
125
305
Total Other
56
Total by Loan Type
Total Pass
436,388
1,168,374
725,559
558,968
697,771
2,689,947
345,899
6,633,158
Total Watch
10,042
7,828
5,732
4,377
26,343
139,456
197,846
Total Special Mention
5,419
14,430
2,650
24,696
Total Substandard
25,431
47,084
Total Doubtful
461,365
1,178,656
737,028
563,345
738,572
2,857,484
358,050
Total Gross charge-offs
94
11,050
-23-
Included within net loans were $4.7 million and $5.2 million at September 30, 2023 and December 31, 2022, 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.
A loan is considered collateral dependent when the borrower is experiencing financial difficulties and repayment is expected to be substantially provided by the operation or sale of the collateral. The following table presents types of collateral-dependent loans by class of loans as of the periods indicated:
Collateral Type
Real Estate
Business Assets
2,853
17,340
8,333
8,945
11,652
18,290
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.
Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) totaled $443.2 million and $438.5 million on September 30, 2023, and December 31, 2022, respectively.
The following table presents the activity in the allowance for off-balance sheet credit losses for the three and nine months ended September 30, 2023, and 2022.
Balance at beginning of period
813
1,444
970
Provision (benefit) (1)
(631)
(37)
(396)
Allowance for Off-Balance Sheet - Credit losses (2)
933
(1) Included in “Other operating expenses” on the Consolidated Statements of Income.
(2) Included in “Other liabilities” on the Consolidated Statements of Financial Condition.
-24-
6. Loans held for sale
Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 2023 and December 31, 2022, the Bank did not have any loans held for sale.
The following table shows loans sold during the periods indicated:
For the three months ended September 30, 2023
Loans sold
Proceeds
Net charge-offs
Net gain
Performing loans
For the three months ended September 30, 2022
10,682
For the nine months ended September 30, 2023
Delinquent and non-performing loans
3,622
69
1,867
1,553
13
7,042
For the nine months ended September 30, 2022
20,818
4,312
25,130
3,687
430
4,117
-25-
7. Leases
The Company has 31 operating leases for branches (including headquarters) and office spaces, 9 operating leases for vehicles, and one operating lease for equipment. Our leases have remaining lease terms ranging from one month to approximately 13 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the Company’s calculation of the 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 has four agreements in 2023 and two agreements in 2022 that qualified as short-term leases.
Certain leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating lease agreements expire through 2036.
Supplemental balance sheet information related to leases are as follows:
Operating lease ROU asset
Weighted-average remaining lease term-operating leases
6.3 years
6.6 years
Weighted average discount rate-operating leases
3.2
2.9
-26-
The components of lease expense and cash flow information related to leases were as follows:
Line Item Presented
Lease Cost
Operating lease cost
2,142
2,100
Short-term lease cost
Professional services, Occupancy and equipment and Other operating expenses
Variable lease cost
262
275
Total lease cost
2,466
2,434
Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
3,387
2,342
Right-of-use assets obtained in exchange for new operating lease liabilities
1,757
6,584
6,299
Professional Services, Occupancy and equipment and Other operating expenses
785
713
7,615
7,215
8,042
7,111
3,801
-27-
The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of September 30, 2023:
Minimum Rental
Years ended December 31:
1,794
2024
9,863
2025
9,244
2026
8,363
2027
4,286
Thereafter
14,143
Total minimum payments required
47,693
Less: implied interest
4,626
Total lease obligations
8. Stock-Based Compensation
The Company has a 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. As of September 30, 2023, PRSUs granted in 2023 and 2022 are being accrued at target and PRSUs granted in 2021 are being accrued above target. The different levels of accrual are commensurate with the projected performance of the respective grant. As of September 30, 2023, 746,765 shares were available for future issuance under the 2014 Omnibus Plan.
For the three months ended September 30, 2023 and 2022, the Company’s net income, as reported, included $1.0 million and $0.7 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $0.3 million and $0.2 million of income tax benefit respectively, related to the stock-based compensation plans. For the nine months ended September 30, 2023 and 2022, the Company’s net income, as reported, included $4.6 million and $5.6 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $1.2 million and $1.5 million of income tax benefit, respectively, related to the stock-based compensation plans.
During the three months ended September 30, 2023 and 2022, the Company did not grant any RSU or PRSUs. During the nine months ended September 30, 2023 and 2022, the Company granted 235,850 and 212,811 of RSU awards and 79,050 and 63,250 of PRSU awards, respectively.
The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards and performance restricted stock units. Compensation cost is recognized over the vesting period of the award using the straight-line method. Forfeitures are recorded in the period they occur.
-28-
The following table summarizes the Company’s RSU and PRSU awards under the 2014 Omnibus Plan for the nine months ended September 30, 2023:
RSU Awards
PRSU Awards
Weighted-Average
Grant-Date
Non-vested awards at December 31, 2022
275,588
22.30
68,800
20.90
Granted
235,850
19.84
79,050
19.99
Vested
(222,757)
21.19
(59,870)
20.03
Forfeited
(2,840)
22.14
Non-vested awards at September 30, 2023
285,841
21.14
87,980
20.67
Vested but unissued at September 30, 2023
253,468
20.78
148,505
20.80
As of September 30, 2023, there was $5.0 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 September 30, 2023 and 2022, was $0.3 million, and $1,000, respectively. The total fair value of awards vested for the nine months ended September 30, 2023 and 2022 was $5.5 million and $7.1 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.
The following table summarizes the Phantom Stock Plan at or for the nine months ended September 30, 2023:
Phantom Stock Plan
Weighted-Average Fair Value
Outstanding at December 31, 2022
158,410
19.38
21,346
17.43
Distributions
(1,132)
17.27
Outstanding at September 30, 2023
178,624
13.13
Vested at September 30, 2023
The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $0.2 million and ($0.3) million for the three months ended September 30, 2023 and 2022, respectively. The total fair value of the distributions from the Phantom Stock Plan was $3,000 and $6,000 for the three months ended September 30, 2023 and 2022, respectively.
The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $1.0 million and $0.7 million for the nine months ended September 30, 2023 and 2022, respectively. The total fair value of the distributions from the Phantom Stock Plan was $20,000 and $23,000 for the nine months ended September 30, 2023, and 2022, respectively.
-29-
9. Pension and Other Postretirement Benefit Plans
The following table sets forth information regarding the components of net expense for the pension and other postretirement benefit plans.
Three months ended
Nine months ended
Employee Pension Plan:
Interest cost
203
609
414
Amortization of unrecognized loss
Expected return on plan assets
(278)
(257)
(832)
(772)
Net employee pension benefit (1)
(75)
(118)
(223)
(355)
Outside Director Pension Plan:
Service cost
15
44
Amortization of unrecognized gain
(40)
(120)
Net outside director pension (benefit) expense (2)
(23)
(70)
Other Postretirement Benefit Plans:
40
201
95
286
209
(60)
(180)
Amortization of past service credit
Net other postretirement expense (1)
75
130
226
389
(1) Reported in the Consolidated Statements of Income as part of salaries and employee benefits.
(2) Reported in the Consolidated Statements of Income as part of other operating expenses.
The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2022 that it expects to contribute $0.2 million to the Outside Director Pension Plan (the “Outside Director Pension Plan”) and $0.3 million to the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), during the year ending December 31, 2023. The Company does not expect to make a contribution to the Employee Pension Plan. As of September 30, 2023, the Company had contributed $56,000 to the Outside Director Pension Plan and $81,000 to the Other Postretirement Benefit Plans. As of September 30, 2023, the Company has not revised its expected contributions for the year ending December 31, 2023.
-30-
10. Fair Value of Financial Instruments
The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2023, the Company carried financial assets and financial liabilities under the fair value option with fair values of $12.8 million and $48.3 million, respectively. At December 31, 2022, the Company carried financial assets and financial liabilities under the fair value option with fair values of $13.0 million and $50.5 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and nine months ended September 30, 2023 and 2022.
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 (loss) gain from fair value adjustments, at or for the periods ended as indicated:
Changes in Fair Values For Items Measured at Fair Value
Pursuant to Election of the Fair Value Option
Measurements at
For the three months ended September 30,
Description
295
Other securities
12,516
12,728
(338)
(661)
(422)
(1,681)
Borrowed funds
(909)
6,293
2,086
8,049
Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company reports as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.
The borrowed funds had a contractual principal amount of $61.9 million at both September 30, 2023 and December 31, 2022. The fair value of borrowed funds includes accrued interest payable of $0.4 million at both September 30, 2023 and December 31, 2022.
The Company generally holds its earning assets to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change, and these amounts may not necessarily be realized in an immediate sale.
Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.
Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.
-31-
A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s financial assets and liabilities that are carried at fair value on a recurring basis are as follows:
Level 1 – when quoted market prices are available in an active market. At September 30, 2023 and December 31, 2022, Level 1 included one mutual fund.
Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At September 30, 2023 and December 31, 2022, Level 2 included mortgage-backed securities, CLOs, 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 September 30, 2023 and December 31, 2022, Level 3 included trust preferred securities owned, and junior subordinated debentures issued by the Company.
The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions, and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.
The following table sets forth the 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 September 30, 2023 and December 31, 2022:
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:
493,267
338,347
Interest rate swaps
104,576
74,586
935,722
797,216
948,239
809,943
Liabilities:
Borrowings
22,016
18,407
70,345
68,914
-32-
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
1,434
47,777
1,662
55,352
Net (loss) gain from fair value adjustment of financial assets (1)
(171)
Net (gain) loss from fair value adjustment of financial liabilities (1)
909
(6,293)
Increase (decrease) in accrued interest
Change in unrealized (gains) losses included in other comprehensive loss
(377)
598
49,752
Changes in unrealized gains held at period end
2,338
2,177
(1) Presented in the Consolidated Statements of Income under net (loss) gain from fair value adjustments.
1,695
56,472
(67)
(206)
(2,086)
(8,049)
60
172
(152)
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
Input
Weighted
Technique
Unobservable
Range
Average
Trust preferred securities
Discounted cash flows
Spread over 3-month SOFR
4.4
Junior subordinated debentures
-33-
Spread over 3-month Libor
3.6
The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022:
on a non-recurring basis
Certain delinquent loans
18,330
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:
Valuation Technique
Unobservable Input
Weighted Average
Discounted Cashflow
Discount Rate
4.3% to 9.8
9.4
Probability of Default
35.0% to 42.0
41.6
-34-
18,189
Sales approach
Adjustment to sales comparison value
-20.0% to 0.0
-1.3
Reduction for planned expedited disposal
10.0% to 15.0
13.6
141
4.3
35.0
The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2023 and December 31, 2022.
The methods and assumptions used to estimate fair value at September 30, 2023 and December 31, 2022 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.
Certain Delinquent Loans:
For certain delinquent 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. 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 stated spreads for recently issued subordinated debt instruments for issuers of similar asset size and credit quality of the Company and with similar durations adjusting for differences in the junior subordinated debt’s credit rating, liquidity, and time to maturity. The unrealized net gain/loss attributable to changes in our own credit risk was determined by adjusting the fair value as determined in the proceeding sentence by the average rate of default on debt instruments with a similar debt rating as our junior subordinated debentures, with the difference from the original calculation and this calculation resulting in the instrument-specific unrealized gain/loss.
Interest Rate Swaps:
The fair value of interest rate swaps is based upon broker quotes.
-35-
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
65,271
Securities available for sale
Loans
6,511,963
FHLB-NY stock
Accrued interest receivable
6,723
48,937
6,681,509
6,630,112
4,360,140
2,269,972
Borrowed Funds
950,476
902,147
Accrued interest payable
10,001
65,836
6,651,795
3,819
41,229
74,856
6,485,342
6,453,978
4,959,004
1,494,974
1,027,370
976,863
10,034
-36-
11. Derivative Financial Instruments
At September 30, 2023 and December 31, 2022, the Company’s derivative financial instruments consisted 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 certain fixed rate loans and securities with $946.8 million and $273.6 million of swaps outstanding at September 30, 2023 and December 31, 2022, respectively; 2) to facilitate risk management strategies for our loan customers with $480.0 million of swaps outstanding, which include $240.0 million each with customers and bank counterparties at September 30, 2023 and $221.2 million of swaps outstanding, which include $110.6 million each with customers and bank counterparties at December 31, 2022; and 3) to mitigate exposure to rising interest rates on certain short-term advances, brokered deposits and municipal deposits with $826.8 million of swaps outstanding at September 30, 2023, and $871.5 million of swaps outstanding at December 31, 2022.
The Company adopted ASU No. 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method” in the first quarter of 2023. During the nine months ended September 30, 2023, the Company entered into portfolio layer hedges on a closed portfolio of AFS securities with a notional amount of $200.0 million and a closed portfolio of loans with a notional amount of $500.0 million. See Note 14 (“New Authoritative Accounting Pronouncements”) of the Notes to the Consolidated Financial Statements.
For non-portfolio layer method fair value hedges, the hedge basis (the amount of the change in fair value) is added to (or subtracted from) the carrying amount of the hedged item. For portfolio layer method hedges, the hedge basis does not adjust the carrying value of the hedged item and is instead maintained on a closed portfolio basis. These basis adjustments would be allocated to the amortized cost of specific loans or AFS securities within the pools if either of the hedges were de-designated. The Company did not have any portfolio layer hedges prior to the first quarter of 2023.
At September 30, 2023 and December 31, 2022, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.
The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.
At September 30, 2023 and December 31, 2022, derivatives with a combined notional amount of $480.9 million and $221.2 million, respectively, were not designated as hedges. At September 30, 2023 and December 31, 2022, derivatives with a combined notional amount of $946.8 million and $273.6 million, respectively, were designated as fair value hedges. At September 30, 2023 and December 31, 2022, derivatives with a combined notional amount of $825.8 million and $871.5 million, respectively, were designated as cash flow hedges.
For cash flow hedges, the changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss), net of tax. Amounts in accumulated other comprehensive loss are reclassified into earnings in the same period during which the hedged forecasted transaction effected earnings. During the three months ended September 30, 2023 and 2022, $7.1 million in reduced expense and $1.0 million in additional expense, respectively, was reclassified from accumulated other comprehensive loss to interest expense. During the nine months ended September 30, 2023 and 2022, $18.2 million in reduced expense and $6.1 million in additional expense was reclassified from accumulated other comprehensive loss to interest expense. The estimated amount to be reclassified in the next 12 months out of accumulated other comprehensive loss is $25.0 million in reduced expense.
Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net (loss) gain from fair value adjustments” in the Consolidated Statements of Income.
-37-
The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:
Notional
Fair Value (1)
Cash flow hedges:
Interest rate swaps (borrowings and deposits)
825,750
37,211
Fair value hedges:
Interest rate swaps (loans and securities)
946,825
45,346
Non hedge:
Interest rate swaps (loans and deposits)
240,974
22,019
239,974
2,013,549
700,750
31,716
170,750
210
Interest rate swaps (loans)
273,607
24,673
110,598
18,197
1,084,955
281,348
(1) Derivatives in a positive position are recorded as “Other assets” and derivatives in a negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.
The following table presents information regarding the Company’s fair value hedged items for the periods indicated:
Cumulative Amount
of the Fair Hedging Adjustment
Line Item in the Consolidated Statement
Carrying Amount of the
Included in the Carrying Amount of
of Financial Condition in Which
Hedged
the Hedged
the Hedged Item Is Included
Assets/(Liabilities)
77,216
82,613
(13,979)
(10,480)
143,327
167,353
(14,358)
(15,442)
220,543
249,966
(28,337)
(25,922)
Portfolio Layer
Loans held for Investment (1)
2,615,651
Securities available for sale (2)
273,313
2,888,964
(18,360)
(1) Carrying amount represents the amortized cost. At September 30, 2023, the amortized cost of the portfolio layer method closed portfolio was $2.6 billion, of which $500 million was designated as hedged. The cumulative amount of basis adjustments was $10.6 million.
(2) Carrying amount represents the fair value. At September 30, 2023, the fair value of the portfolio layer method closed portfolio was $273 million, of which $200 million was designated as hedged. The cumulative amount of basis adjustments was $7.7 million.
-38-
The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:
Affected Line Item in the Statements
Where Net Income is Presented
Financial Derivatives:
Interest rate swaps - fair value hedge (loans)
5,335
9,901
(2,068)
Interest rate swaps - fair value hedge (securities)
Interest and dividends on securities
942
Interest rate swaps - non hedge (municipal deposits)
Interest rate swaps - cash flow hedge (short-term advances)
994
4,336
(3,890)
Interest rate swaps - cash flow hedge (brokered deposits)
6,060
793
13,886
842
Total net income (expense) from the effects of derivative instruments
13,332
1,110
29,914
(5,116)
The Company’s interest rate swaps are subject to master netting arrangements between the Company and its 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 Financial Condition as of the dates indicated:
Gross Amount
Net Amount
Gross Amounts
Offset in Statement of
Presented in Statement of
Financial
Cash
Recognized
Financial Condition
Instruments
Collateral
(110,755)
(6,179)
(72,185)
2,401
-39-
12. Accumulated Other Comprehensive Income (Loss):
The following tables set forth the changes in accumulated other comprehensive income (loss) by component for the periods indicated:
Unrealized Gains (Losses)
on Available for Sale
on Cash flow
Defined Benefit
Option Elected
Securities
Hedges
Pension Items
on Liabilities
Beginning balance, net of tax
(63,523)
26,559
(413)
1,358
Other comprehensive income before reclassifications, net of tax
(6,928)
5,162
(1,505)
Amounts reclassified from accumulated other comprehensive income, net of tax
1,530
(4,868)
(3,407)
Net current period other comprehensive income, net of tax
Ending balance, net of tax
(68,921)
26,853
(482)
1,619
(50,133)
18,260
(1,313)
1,922
7,480
(15,731)
710
(9)
701
Net current period other comprehensive income (loss), net of tax
(72,930)
26,450
(1,322)
1,508
-40-
Unrealized Gains
(Losses) on
Available for Sale
Cash flow
(63,106)
25,380
(275)
1,513
(11,144)
14,050
3,012
5,329
(12,577)
(7,455)
(6,272)
(1,406)
(1,282)
2,276
23,657
(43,769)
4,199
4,159
-41-
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
Fair Value hedges:
Interest rate swaps benefit (expense)
(2,217)
687
(1,530)
7,053
(2,185)
4,868
Amortization of defined benefit pension items:
Actuarial losses benefit (expense)
100
(1)
(31)
(1,030)
320
(710)
Prior service credits benefit (expense)
Total before tax
-42-
Comprehensive Income Components
Comprehensive Income
2,392
(5,329)
18,222
(5,645)
12,577
Other operating expense
(93)
(6,117)
1,918
(4,199)
21
(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 9 (“Pension and Other Postretirement Benefit Plans”) for additional information
-43-
13. Regulatory Capital
Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards and a Capital Conservation Buffer (“CCB”). As of September 30, 2023, the Bank 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 Bank was 6.06% and 6.37% at September 30, 2023 and December 31, 2022, respectively.
Set forth below is a summary of the Bank’s compliance with banking regulatory capital standards.
Percent of
Tier I (leverage) capital:
Capital level
918,167
10.61
915,628
10.56
Requirement to be well-capitalized
432,771
5.00
433,667
Excess
485,396
5.61
481,961
5.56
Common Equity Tier I risk-based capital:
13.49
13.79
442,255
6.50
431,734
475,912
6.99
483,894
7.29
Tier I risk-based capital:
544,314
8.00
531,365
373,853
5.49
384,263
5.79
Total risk-based capital:
956,955
14.06
954,457
14.37
680,393
10.00
664,206
276,562
4.06
290,251
4.37
-44-
The Holding Company is subject to the same regulatory capital requirements as the Bank. As of September 30, 2023, the Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The CCB for the Holding Company at September 30, 2023 and December 31, 2022 was 4.87% and 5.25%, respectively.
Set forth below is a summary of the Holding Company’s compliance with banking regulatory capital standards.
739,364
8.54
746,880
8.61
432,714
433,607
306,650
3.54
313,273
3.61
692,914
10.19
698,258
10.52
442,155
431,635
250,759
3.69
266,623
4.02
10.87
11.25
544,191
531,243
195,173
2.87
215,637
3.25
968,152
14.23
975,709
14.69
680,239
664,054
287,913
4.23
311,655
4.69
14. New Authoritative Accounting Pronouncements
Accounting Standards Adopted in 2023:
In March 2022, FASB issued ASU No. 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (Topic 326), which replaces the recognition and measurement guidance related to TDRs for creditors that have adopted ASC Topic 326 (commonly referred to as “CECL”) with the recognition and measurement guidance contained in Accounting Standards Codification (“ASC”) 310-20, to determine whether a modification results in a new loan or a continuation of an existing loan. This ASU also enhances disclosures about loan modifications for borrowers who are experiencing financial difficulty. The guidance also requires public business entities to present gross write-offs by year of origination in their vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments in this ASU should be applied on a prospective basis; however, institutions have the option to apply a modified retrospective transition method as it relates to the recognition and measurement of TDRs, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. The ASU was adopted on January 1, 2023 prospectively, without material impact on our business operations or to our consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method”, which expanded the current last-of-layer method to allow multiple hedged layers of a single closed portfolio and allow hedge accounting to be achieved using different types of derivatives and layering techniques, including the use of amortizing swaps with clarification that such a trade would be viewed as being a single layer. Under this expanded scope, both prepayable and nonrepayable financial assets may be included in a single closed portfolio hedge. This update also provides clarifications to breach requirements and disclosures. As a result of these changes, the last-of-
-45-
layer method has been renamed the portfolio layer method. No cumulative-effect adjustment to the opening balance of retained earnings was required upon adoption of these amendments. The Company did not have any portfolio layer or last of layer hedges prior to the first quarter of 2023. The amendments related to disclosures were applied on a prospective basis. The ASU was adopted in the first quarter of 2023 – see Notes 4 (“Securities”), 5 (“Loans”) and 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements for more information regarding the impact to our consolidated financial statements.
-46-
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, 2022. 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 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, 2022. 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.
-47-
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-chartered 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. At September 30, 2023, the Bank owns two subsidiaries: 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, 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 can also be significantly affected by changes in the fair value of financial assets and financial liabilities for which changes in value are recorded through earnings and our periodic provision for credit losses.
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.
-48-
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 10 (“Fair Value of Financial Instruments”) of the Notes to the Consolidated Financial Statements.
For the three months ended September 30, 2023 we reported net income of $9.4 million, or $0.32 per diluted common share, an increase of $0.8 million, or 8.9% from net income of $8.6 million, or $0.29 per diluted common share earned in the three months ended June 30, 2023. The increase in net income was primarily driven by an increase in net interest income of $1.0 million and decreases in non-interest expense and provision for credit losses of $0.9 million and $0.8 million, respectively These improvements were partially offset by lower non-interest income of $1.6 million.
During the three months ended September 30, 2023, the net interest margin increased four basis points to 2.22% from 2.18% for the three months ended June 30, 2023. Excluding net gains (losses) from qualifying hedges and purchase accounting adjustments, the net interest margin decreased three basis points to 2.14% for the three months ended September 30, 2023, from 2.17% for the three months ended June 30, 2023.
Our loan portfolio is greater than 88% collateralized by real estate with an average loan to value of less than 36%. We have a long history and foundation built upon disciplined underwriting, strong credit quality, and a resilient seasoned loan portfolio with solid asset protection. At September 30, 2023, our allowance for credit losses (“ACL”) - loans stood at 57 basis points of gross loans and 225.4% of non-performing loans. Non-performing assets at the end of the quarter were 45 basis points of total assets.
Goodwill is presumed to have an indefinite life and is tested for impairment, rather than amortized, on at least an annual basis. 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. If the fair value of the reporting unit exceeds its carrying amount, there is no impairment of goodwill. At September 30, 2023, the market capitalization of our reporting unit did not exceed its carrying value, however the fair value of our reporting unit is not driven solely by the market price of our stock. For goodwill impairment testing, management has concluded that the Company has one reporting unit. We performed our impairment tests of goodwill at June 30, 2023 using a quantitative assessment and concluded that the fair value of the reporting unit exceeded its carrying value. At September 30, 2023 we reviewed goodwill again through a qualitative assessment concluding no impairment was indicated. We monitor goodwill for potential impairment triggers on a quarterly basis. Given the inherent uncertainties resulting from global macroeconomic conditions, actual results may differ from management’s current estimates and could have an adverse impact on one or more of the assumptions used in our quantitative model prepared for the reporting unit, which could result in impairment charges in subsequent periods.
The Bank and Company remain well-capitalized under current capital regulations of the FDIC and the Federal Reserve Board, respectively, and are subject to the similar regulatory capital requirements. See Note 13 (“Regulatory Capital”) of the Notes to the Consolidated Financial Statements.
-49-
The following table presents quarterly operating data highlights for the periods indicated:
(In thousands except per share data)
Quarterly operating data:
Interest income
Noninterest income
Noninterest expense
Income before income tax expense
Income tax expense
Average diluted shares
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
General. Net income for the three months ended September 30, 2023 was $9.4 million, a decrease of $14.0 million, or 59.9%, from $23.4 million for the three months ended September 30, 2022. Diluted earnings per common share were $0.32 for the three months ended September 30, 2023, a decrease of $0.44 or 57.9%, from $0.76 for the three months ended September 30, 2022. The decrease in net income was primarily due to a decline in the net interest margin which decreased 85 basis points to 2.22% for the three months ended September 30, 2023 from 3.07% for the comparable prior year period. The decline in the net interest margin was driven by the impact Federal Reserve rate increases had on our liability sensitive balance sheet as our interest-bearing liabilities repriced quicker than our interest-earning assets. To mitigate the sensitivity and ease net interest margin compression, the Company opportunistically sought out derivative swaps to align with our strategic business plan, and to move to a more interest rate neutral position.
Return on average equity was 5.57% for the three months ended September 30, 2023 compared to 13.91% for the three months ended September 30, 2022. Return on average assets was 0.44% for the three months ended September 30, 2023 compared to 1.11% for the three months ended September 30, 2022.
Interest Income. Interest and dividend income increased $22.3 million, or 27.3%, to $104.0 million for the three months ended September 30, 2023 from $81.7 million for the three months ended September 30, 2022. The increase in interest income was primarily attributable to the 110 basis point increase in the yield on interest-earning assets to 5.20% for the three months ended September 30, 2023 compared to 4.10% for the three month ended September 30, 2022. In addition, the average balance of total interest-earning assets increased $38.4 million from the comparable prior year period. Excluding prepayment penalty income from loans, net recoveries/reversals of interest from non-accrual loans, net gains (losses) from fair value adjustments on qualifying hedges, and purchase accounting adjustments, the yield on total interest-earning assets increased 108 basis points to 5.07% for the three months ended September 30, 2023 from 3.99% for the three months ended September 30, 2022.
Interest Expense. Interest expense increased $39.1 million, or 190.2%, to $59.6 million for the three months ended September 30, 2023 from $20.5 million for the three months ended September 30, 2022. The growth in interest expense was primarily due to an increase of 227 basis points in the average cost of interest-bearing liabilities to 3.52% for the three
-50-
months ended September 30, 2023 from 1.25% for the three months ended September 30, 2022 and the increase of $218.8 million in the average balance of interest-bearing liabilities to $6,771.9 million for the three months ended September 30, 2023 from $6,553.1 million for the comparable prior year period. Rising rates have driven the increase in our cost of funds as the Federal Reserve increased rates 225 basis points between September 30, 2022 and September 30, 2023.
Net Interest Income. Net interest income for the three months ended September 30, 2023 was $44.4 million, a decrease of $16.8 million, or 27.4%, from $61.2 million for the three months ended September 30, 2022. The decrease in net interest income was driven by the net interest margin decreasing 85 basis points to 2.22% for the three months ended September 30, 2023 from 3.07% for the three months ended September 30, 2022. In addition, net interest income was negatively impacted by a decline in net interest-earning assets totaling $180.4 million to $1,245.6 million for the quarter ended September 30, 2023. The decrease in net interest-earning assets was primarily due to limited demand for lending coupled with the average balance of non-interest-bearing deposits declining $198.6 million to $851.7 million for the three months ended September 30, 2023 compared to $1,050.3 million for the three months ended September 30, 2022. Included in net interest income for the three months ended September 30, 2023 and 2022, was prepayment penalty income totaling $0.7 million and $1.3 million, respectively, net reversals and recovered interest from non-accrual loans totaling $0.2 million and $0.1 million, respectively, net gains from fair value adjustments on qualifying hedges totaling $1.3 million and less than $0.1 million, respectively, and purchase accounting income adjustments of $0.3 million and $0.8 million, respectively. Excluding all of these items, the net interest margin for the three months ended September 30, 2023 was 2.09%, a decrease of 87 basis points, from 2.96% for the three months ended September 30, 2022.
Provision for Credit Losses. During the three months ended September 30, 2023, the provision for credit losses was $0.6 million compared to $2.1 million for the three months ended September 30, 2022. The provision recorded during the three months ended September 30, 2023, was driven by increasing reserves for the elevated risk presented by the current rate environment to adjustable-rate loan’s debt coverage ratios, partially offset by a fully reserved loan paid off during the quarter. The current average loan-to-value ratio for our non-performing assets collateralized by real estate was 50.0% at September 30, 2023. The Bank continues to maintain conservative underwriting standards.
Non-Interest Income. Non-interest income for the three months ended September 30, 2023 was $3.5 million, a decrease of $5.5 million, or 61.4% from $9.0 million in the prior year comparable period. The decrease was primarily due to net losses from fair value adjustments totaling $1.2 million in the current period compared to a net gain of $5.6 million recorded during the prior year period.
Non-Interest Expense. Non-interest expense for the three months ended September 30, 2023 was $34.4 million, a decrease of $1.2 million, or 3.4%, from $35.6 million for the three months ended September 30, 2022. The decrease was primarily due to lower salary related expense accruals, and a $3.1 million net benefit for Employee Retention Tax Credit refunds partially offset by higher other operating expenses.
Income before Income Taxes. Income before income taxes for the three months ended September 30, 2023 was $12.9 million, a decrease of $19.5 million, or 60.2%, from $32.4 million for the three months ended September 30, 2022 for the reasons discussed above.
Provision for Income Taxes. The provision for income taxes was $3.5 million for the three months ended September 30, 2023, a decrease of $5.5 million, or 61.1%, from $9.0 million for the three months ended September 30, 2022. The decrease was primarily due to the decline in income before income taxes. The effective tax rate for the three months ended September 30, 2023 was 27.1% compared to 27.7% for the three months ended September 30, 2022.
-51-
The following table presents operating data highlights for the periods indicated:
Operating data:
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
General. Net income for the nine months ended September 30, 2023 was $23.2 million, a decrease of $43.5 million, or 65.2%, from $66.7 million for the nine months ended September 30, 2022. Diluted earnings per common share were $0.77 for the nine months ended September 30, 2023, a decrease of $1.38 or 64.2%, from $2.15 for the nine months ended September 30, 2022. The decrease in net income was primarily due to a decline in the net interest margin which decreased 104 basis points to 2.22% for the nine months ended September 30, 2023 from 3.26% for the comparable prior year period. The decline in the net interest margin was driven by the impact Federal Reserve rate increases had on our liability sensitive balance sheet as our interest-bearing liabilities repriced quicker than our interest-earning assets. To mitigate the sensitivity and ease net interest margin compression, the Company opportunistically sought out derivative swaps to align with our strategic plans.
Return on average equity was 4.56% for the nine months ended September 30, 2023 compared to 13.24% for the nine months ended September 30, 2022. Return on average assets was 0.36% for the nine months ended September 30, 2023 compared to 1.08% for the nine months ended September 30, 2022.
Interest Income. Interest and dividend income increased $65.4 million, or 28.7%, to $292.7 million for the nine months ended September 30, 2023 from $227.4 million for the nine months ended September 30, 2022. The increase in interest income was primarily attributable to the 97 basis point increase in the yield on interest-earning assets to 4.88% for the nine months ended September 30, 2023 compared to 3.91% for the comparable prior year period. In addition, the average balance of interest-earnings assets increased $235.3 million from the comparable prior year period. Excluding prepayment penalty income from loans, net recoveries/reversals of interest from non-accrual loans, net gains (losses) from fair value adjustments on qualifying hedges, and purchase accounting adjustments, the yield on total interest-earning assets, increased 103 basis points to 4.81% for the nine months ended September 30, 2023 from 3.78% for the nine months ended September 30, 2022.
Interest Expense. Interest expense increased $121.7 million, or 320.8%, to $159.6 million for the nine months ended September 30, 2023 from $37.9 million for the nine months ended September 30, 2022. The growth in interest expense was primarily due to an increase of 237 basis points in the average cost of interest-bearing liabilities to 3.16% for the nine months ended September 30, 2023 from 0.79% for the nine months ended September 30, 2022 and an increase of $372.8
-52-
million in the average balance of interest-bearing liabilities to $6,744.3 million for the nine months ended September 30, 2023 from $6,371.5 million for the comparable prior year period. Rising rates have driven the increase in our cost of funds as the Federal Reserve increased rates by 225 basis points between September 30, 2022 and September 30, 2023.
Net Interest Income. Net interest income for the nine months ended September 30, 2023 was $133.1 million, a decrease of $56.3 million, or 29.7%, from $189.4 million for the nine months ended September 30, 2022. The decrease in net interest income was driven by the net interest margin decreasing 104 basis points to 2.22% for the nine months ended September 30, 2023 from 3.26% for the nine months ended September 30, 2022. In addition, net interest income was negatively impacted by a year over year decline in net interest-earning assets totaling $137.5 million to $1,255.8 million for the nine months ended September 30, 2023. The decrease in net interest-earning assets was primarily due to limited demand for lending coupled with the average balance of non-interest-bearing deposits declining $166.5 million to $865.8 million for the nine months ended September 30, 2023 compared to $1,032.3 million for the nine months ended September 30, 2022. Included in net interest income for the nine months ended September 30, 2023 and 2022, was prepayment penalty income totaling $1.6 million and $5.1 million, respectively, net reversals and recovered interest from non-accrual loans totaling $0.3 million and $0.2 million, respectively, net gains (losses) from fair value adjustments on qualifying hedges totaling $1.2 million and ($0.2) million, respectively, and purchase accounting income of $1.0 million and $2.2 million, respectively. Excluding all of these items, the net interest margin for the nine months ended September 30, 2023 was 2.15%, a decrease of 98 basis points, from 3.13% for the nine months ended September 30, 2022.
Provision for Credit Losses. During the nine months ended September 30, 2023, the provision for credit losses was $9.5 million compared to $5.1 million for the nine months ended September 30, 2022. The provision recorded during the nine months ended September 30, 2023, was driven by fully reserving for two non-accrual business loans that were subsequently charged-off, and increasing reserves for the elevated risk presented by the current rate environment to adjustable-rate loan’s debt coverage ratios. The current average loan-to-value ratio for our non-performing assets collateralized by real estate was 50.0% at September 30, 2023. The Bank continues to maintain conservative underwriting standards.
Non-Interest Income. Non-interest income for the nine months ended September 30, 2023 was $15.5 million, a decrease of $2.2 million, or 12.2% from $17.7 million in the prior year comparable period. The decrease was primarily due to net gains from fair value adjustments totaling $1.7 million in the current period compared to $6.4 million recorded during the prior year period.
Non-Interest Expense. Non-interest expense for the nine months ended September 30, 2023 was $107.4 million, a decrease of $2.6 million, or 2.3%, from $110.0 million for the nine months ended September 30, 2022. The decrease was primarily due to lower salary related expense accruals, a $6.6 million net benefit for Employee Retention Tax Credit refunds and the effects of the decreased stock price on the attendant benefits plans.
Income before Income Taxes. Income before income taxes for the nine months ended September 30, 2023 was $31.7 million, a decrease of $60.4 million, or 65.6%, from $92.0 million for the nine months ended September 30, 2022 for the previously discussed reasons.
Provision for Income Taxes. The provision for income taxes was $8.5 million for the nine months ended September 30, 2023, a decrease of $16.9 million, or 66.6%, from $25.3 million for the nine months ended September 30, 2022. The decrease was primarily due to the decline in income before income taxes. The effective tax rate for nine months ended September 30, 2023 was 26.8% compared to 27.5% for the nine months ended September 30, 2022.
-53-
FINANCIAL CONDITION
Assets. Total assets at September 30, 2023 were $8,577.3 million, an increase of $154.3 million, or 1.8%, from $8,422.9 million at December 31, 2022. Total net loans decreased $37.5 million, or 0.5%, during the nine months ended September 30, 2023, to $6,856.8 million from $6,894.3 million at December 31, 2022. Loan originations and purchases were $573.8 million for the nine months ended September 30, 2023, a decrease of $723.0 million, or 55.8%, from $1,296.8 million for the nine months ended September 30, 2022. The decreased loan originations were a result of interest rate increases over the past year as customers adapt to the increased rate environment. We continue 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 $363.3 million at September 30, 2023, compared to $252.2 million at December 31, 2022.
-54-
The following table shows loan originations and purchases for the periods indicated:
75,655
173,980
149,720
409,086
70,197
77,777
124,290
287,705
One-to-four family – mixed-use property
6,028
12,383
16,778
33,109
One-to-four family – residential
1,070
4,102
5,429
17,550
Construction (1)
6,971
7,170
26,374
24,291
1,138
2,796
Commercial business and other (2)
81,549
188,202
250,067
522,229
241,470
463,660
573,796
1,296,766
(1) Includes purchases of $0.7 million for the three months ended September 30, 2022. Includes purchases of $0.1 million and $2.3 million for the nine months ended September 30, 2023 and 2022, respectively.
(2) Includes purchases of $36.7 million and $109.4 million for the three months ended September 30, 2023 and 2022, respectively. Includes purchases of $120.6 million and $205.3 million for the nine months ended September 30, 2023 and 2022, respectively.
The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated and purchased during the nine months ended September 30, 2023 had an average loan-to-value ratio of 43.6% and an average debt coverage ratio of 175.0%.
The Bank’s non-performing assets totaled $38.4 million at September 30, 2023, a decrease of $15.0 million, or 28.1% from December 31, 2022. Total non-performing assets as a percentage of total assets were 0.45% at September 30, 2023 and 0.63% at December 31, 2022. The ratio of ACL – loans to total non-performing loans was 225.4% at September 30, 2023 and 124.9% at December 31, 2022.
During the nine months ended September 30, 2023 mortgage-backed securities decreased $46.4 million, or 11.8%, to $345.7 million from $392.2 million at December 31, 2022. The decrease in mortgage-backed securities during the nine months ended September 30, 2023 was primarily due to the principal repayment of securities totaling $31.8 million and a decrease in the fair value totaling $13.9 million.
During the nine months ended September 30, 2023, other securities increased $154.1 million, or 37.0%, to $571.1 million from $416.9 million at December 31, 2022. The increase in other securities during the nine months ended September 30, 2023, was primarily due to purchases of $171.7 million at an average rate of 6.55% partially offset by maturities totaling $10.0 million and a decrease in the fair value totaling $2.6 million. At September 30, 2023, other securities primarily consisted of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, corporate bonds, and CLOs.
-55-
Liabilities. Total liabilities were $7,908.1 million at September 30, 2023, an increase of $162.4 million, or 2.1%, from $7,745.8 million at December 31, 2022. During the nine months ended September 30, 2023, due to depositors increased $172.3 million, or 2.7%, to $6,609.5 million due to an increase of certificates of deposit totaling $795.0 million partially offset by a net decrease in all other deposit accounts totaling $622.7 million. The Company has based deposit growth on certificates of deposit as they extend liabilities thus reducing interest rate risk. Included in deposits were brokered deposits totaling $1,102.6 million, an increase of $246.3 million from $856.3 million at December 31, 2022. At September 30, 2023, the Company had uninsured deposits totaling $1.9 billion, or 29% of deposits with $0.9 million of that fully collateralized by some other method leaving uninsured and uncollateralized deposits totaling $1.0 billion or 16% of deposits. Borrowed funds decreased $52.0 million during the nine months ended September 30, 2023.
Total deposits at September 30, 2023 and December 31, 2022 and the weighted average rate on deposits at September 30, 2023 and December 31, 2022, are as follows:
Rate
2023 (1)
2022 (1)
Interest-bearing deposits:
Certificate of deposit accounts
2,321,369
1,526,338
4.35
3.03
Savings accounts
112,730
143,641
0.44
0.21
Money market accounts
1,551,176
2,099,776
3.76
2.47
NOW accounts
1,749,802
1,746,190
2.14
Total interest-bearing deposits
Non-interest bearing demand deposits
Total due to depositors
Total deposits
(1) The weighted average rate does not reflect the benefit of interest rate swaps.
Equity. Total stockholders’ equity decreased $8.0 million, or 1.2%, to $669.1 million at September 30, 2023, from $677.2 million at December 31, 2022. Stockholders’ equity decreased due to the declaration and payment of dividends on the Company’s common stock of $0.66 per common share totaling $19.8 million, the repurchase of 747,683 shares at an average cost of $14.49 per share totaling $10.8 million and a decrease of $4.4 million in accumulated other comprehensive income. These decreases were partially offset by net income of $23.2 million. Book value per common share increased to $23.15 at September 30, 2023 compared to $22.97 at December 31, 2022.
Liquidity. Liquidity is the ability to economically meet current and future financial obligations. The Company’s primary objectives in terms of managing liquidity are to maintain the ability to originate and purchase loans, repay borrowings as they mature, satisfy financial obligations that arise in the normal course of business and meet our customer’s deposit withdrawal needs. Our primary sources of funds are deposits, borrowings, principal and interest payments on loans, mortgage-backed and other securities, and proceeds from sales of securities and loans. Deposit flows and mortgage prepayments, however, are greatly influenced by general interest rates, economic conditions, and competition. The Company has other sources of liquidity, including unsecured overnight lines of credit, and other types of borrowings. At September 30, 2023, the Company had available liquidity totaling $3.7 billion.
Liquidity management is both a short and long-term function of business management. During 2023, funds were provided by the Company’s operating and financing activities, which were used to fund our investing activities. Our most liquid assets are cash and cash equivalents, which include cash and due from banks, overnight interest-earning deposits and federal funds sold with original maturities of 90 days or less. The level of these assets is dependent on our operating, financing, lending, and investing activities during any given period. At September 30, 2023, cash and cash equivalents
-56-
totaled $200.9 million, an increase of $49.2 million, or 32.4% from $151.8 million, at December 31, 2022. A portion of our cash and cash equivalents is restricted cash held as collateral for interest rate swaps. At September 30, 2023 and December 31, 2022, restricted cash totaled $92.1 million and $67.0 million, respectively.
The following table presents the Company’s available liquidity by source at the period indicated below
Net
Available
Used
Availability
Internal Sources:
(In millions)
Free Securities
728.2
Interest Earnings Deposits
61.6
External Sources:
Federal Home Loan Bank
3,791.8
1,883.9
1,907.9
Other Banks
1,028.0
Total Liquidity
5,609.6
3,725.7
INTEREST RATE RISK
Economic Value of Equity Analysis. The Consolidated Statements of Financial Condition 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 fluctuate 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 quantifies the net portfolio value should interest rates immediately go up or down 100 or 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. 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. The changes in value are measured as percentage changes from the net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2023. Various estimates regarding prepayment assumptions are made at each level of rate shock. At September 30, 2023, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.
The following table presents the change in the Company’s net portfolio value and the net portfolio value ratio as of September 30, 2023:
Projected Percentage Change In
Change in Interest Rate
Net Portfolio Value (NPV)
Net Portfolio Value Ratio
-200 Basis points
(3.8)
9.8
-100 Basis points
(1.4)
10.2
Base interest rate
10.5
+100 Basis points
(1.9)
+200 Basis points
(3.6)
10.4
-57-
Income Simulation Analysis. 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 provides a report for review by the Asset-Liability Investment Committee (“ALCO”) of the Board of Directors. This report quantifies the potential changes in net interest income through various interest rate scenarios.
The starting point for the net interest income simulation is an estimate of the next twelve months’ net interest income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at period-end levels.
The report quantifies the potential changes in net interest income should interest rates go up or down 100 or 200 basis points (shocked), assuming the yield curves of the rate shocks will be parallel to each other. All changes in income are measured as percentage changes from the projected net interest income at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2023 and 2022. 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.
The following table presents the Company’s interest rate shock as of September 30, 2023 and 2022:
Projected Percentage Change In Net Interest Income
(1.0)
5.6
(3.0)
(8.9)
(6.0)
(17.8)
Another net interest income simulation assumes that changes in interest rates change gradually in equal increments over the twelve-month period. Prepayment penalty income is also excluded from this analysis. Based on these assumptions, net interest income would be reduced by 1.7% from a 100 basis point increase in rates over the next twelve months. Actual results could differ significantly from these estimates.
At September 30, 2023, the Company had a derivative portfolio with a notional value totaling $2.3 billion. This portfolio is designed to move the Company more towards interest rate neutral from changes in interest rates. See Note 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements. The significant improvement in the rate sensitivity over the past year is primarily due to an increase in the use of interest rate hedges.
A portion of this portfolio is comprised of interest rate swaps on certain short-term advances and deposits totaling $826.8 million. At September 30, 2023, $776.8 million of the interest rate swaps are effective swaps at a weighted average rate of approximately 2.39% that mature through 2027 and $50.0 million of the interest rate swaps are forward swaps effective in 2024, at an average rate of 0.80%. The Company also has $200.0 million of portfolio layer pay fixed fair value swaps as a hedge for securities with a weighted average receive rate of 5.33% and $500.0 million of pay fixed fair value swaps as a hedge for the loan portfolio with a weighted average receive rate of 5.33%..
-58-
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 rates earned or paid on them. The following tables sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three and nine months ended September 30, 2023 and 2022, 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.
Yield/
Interest-earning assets:
Mortgage loans, net
5,314,215
68,931
5.19
5,340,694
58,374
Other loans, net
1,498,804
22,535
6.01
1,520,769
17,172
4.52
Total loans, net (1) (2)
6,813,019
5.37
6,861,463
4.40
Taxable securities:
436,181
3,031
2.78
568,854
1.73
528,091
7,003
5.30
362,629
2,839
3.13
Total taxable securities
964,272
4.16
931,483
5,305
2.28
Tax-exempt securities: (3)
66,438
484
2.91
67,211
492
2.93
Total tax-exempt securities
Interest-earning deposits and federal funds sold
173,731
4.96
118,913
1.70
Total interest-earning assets (3)
8,017,460
104,138
5.20
7,979,070
81,849
4.10
486,904
463,587
8,504,364
8,442,657
Liabilities and Equity
Interest-bearing liabilities
Deposits:
115,437
0.45
154,545
53
0.14
1,907,781
16,843
3.53
1,808,608
3,640
0.81
1,584,308
14,386
3.63
2,136,829
5,280
0.99
2,290,669
18,639
1,057,733
2,948
1.11
5,898,195
49,998
3.39
5,157,715
11,921
0.92
Mortgagors' escrow accounts
69,525
0.39
68,602
0.26
5,967,720
3.36
5,226,317
804,140
4.75
1,326,770
2.58
Total interest-bearing liabilities
6,771,860
3.52
6,553,087
1.25
Non-interest-bearing deposits
851,677
1,050,296
205,314
164,992
7,828,851
7,768,375
Equity
675,513
674,282
Total liabilities and equity
Net interest income / net interest rate spread (tax equivalent) (3)
44,529
1.68
61,310
2.85
Net interest-earning assets / net interest margin(tax equivalent) (3)
1,245,600
2.22
1,425,983
3.07
Ratio of interest-earning assets to interest-bearing liabilities
1.18
X
1.22
(1) Loan interest income includes loan fee income (expense) (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.4 million and $1.6 million for the three months ended September 30, 2023 and 2022, respectively.
(2) Loan interest income includes net gains from fair value adjustments on qualifying hedges of $1.4 million and $28,000 for three months ended September 30, 2023 and 2022, respectively.
(3) Interest and yields are calculated on the tax equivalent basis using the statutory federal income tax rate of 21% for the periods presented totaling $0.1 million each for the three months ended September 30, 2023 and 2022.
-59-
5,318,616
194,673
4.88
5,224,289
167,119
4.27
1,519,124
65,059
5.71
1,470,239
45,135
4.09
6,837,740
5.06
6,694,528
447,491
8,288
581,439
1.60
470,898
17,461
4.94
308,008
6,048
2.62
918,389
25,749
3.74
889,447
13,037
1.95
66,631
1,441
2.88
64,081
1,708
3.55
177,369
4.58
116,817
0.82
8,000,129
293,017
7,764,873
227,715
3.91
478,170
471,197
8,478,299
8,236,070
124,736
396
0.42
155,966
152
0.13
1,968,199
46,780
3.17
1,977,621
5,838
1,797,398
43,113
3.20
2,206,973
8,507
0.51
2,007,954
44,927
2.98
923,301
5,510
0.80
5,898,287
135,216
3.06
5,263,861
20,007
79,136
155
79,192
52
0.09
5,977,423
3.02
5,343,053
0.50
766,919
4.22
1,028,489
2.32
6,744,342
3.16
6,371,542
0.79
865,777
1,032,319
190,699
160,621
7,800,818
7,564,482
677,481
671,588
133,370
1.72
189,774
3.12
Net interest-earning assets / net interest margin (tax equivalent) (3)
1,255,787
1,393,331
3.26
1.19
(1) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.5 million and $6.8 million for the nine months ended September 30, 2023 and 2022, respectively.
(2) Loan interest income includes net gains (losses) from fair value adjustments on qualifying hedges of $1.3 million and ($0.2) million for nine months ended September 30, 2023 and 2022, respectively.
(3) Interest and yields are calculated on the tax equivalent basis using the statutory federal income tax rate of 21% for the periods presented totaling $0.3 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively.
-60-
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
5,380,935
5,200,782
Mortgage loans originated:
One-to-four family mixed-use property
One-to-four family residential
26,245
21,999
Total mortgage loans originated
322,462
769,449
Mortgage loans purchased:
129
2,292
Total mortgage loans purchased
Less:
Principal reductions
307,017
555,959
Mortgage loan sales
29,024
Charge-Offs
At end of period
5,387,983
5,387,538
Non-mortgage loans
1,544,823
1,433,084
Loans originated:
Commercial business
126,547
314,315
2,929
2,660
Total other loans originated
130,614
319,771
Non-mortgage loans purchased:
120,591
205,254
Total non-mortgage loans purchased
Principal reductions (1)
275,329
397,520
Charge-offs (2)
11,028
380
1,509,671
1,560,209
(1) Includes SBA PPP reductions totaling $1.3 million and $67.8 million for the nine months ended September 30, 2023 and 2022, respectively.
(2) Does not include charge-offs totaling $1.0 million on the guaranteed portion of SBA receivables deemed uncollectible during the nine months ended September 30, 2022.
-61-
TROUBLED DEBT RESTRUCTURED (“TDR”) AND NON-PERFORMING ASSETS
The following table shows loans classified as TDR at amortized cost that are performing according to their restructured terms at the period indicated:
Accrual Status:
974
1,069
11,541
Non-Accrual Status:
248
276
Total performing troubled debt restructured
-62-
The following table shows our non-performing assets at the periods indicated:
Loans 90 days or more past due and still accruing:
Non-accrual loans:
3,206
237
1,075
790
4,161
4,425
Small business administration
1,255
937
Commercial Business and other (1)
7,708
20,187
17,405
29,782
Total non-performing loans
32,382
Other non-performing assets:
20,981
Total non-performing assets
38,386
53,363
Non-performing assets to total assets
0.63
ACL - loans to non-accrual loans
225.38
135.79
ACL - loans to non-performing assets
102.19
75.79
(1) Adopted ASU No. 2022-02 Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023; Not included in the above analysis are the following non-accrual TDRs that are performing according to their restructured terms: one-to-four family mixed-use property loans totaling $0.2 million, and commercial business loans totaling less than $0.1 million at December 31, 2022.
CRITICIZED AND CLASSIFIED ASSETS
Our policy is to review our assets, focusing primarily on the loan portfolio, other real estate owned, and the investment portfolio, to ensure that credit quality is maintained at the highest levels. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at September 30, 2023. The amortized cost of Criticized and Classified assets were $96.7 million at September 30, 2023, an increase of $7.8 million from $88.9 million at December 31, 2022. The Company had one investment security with an amortized cost of $21.0 million classified as substandard at September 30, 2023 and December 31, 2022.
Included within net loans at September 30, 2023 and December 31, 2022, were $4.7 million and $5.2 million respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.
-63-
ALLOWANCE FOR CREDIT LOSSES
The following table shows allowance for credit losses at the period indicated:
Loans- charge-off
Loans- recovery
Loans- provision
Allowance for credit losses - loans
Held-to-maturity securities- (benefit) provision
Allowance for HTM securities losses
Off-balance sheet- (benefit) provision
Allowance for off-balance sheet losses
41,243
43,177
-64-
The following table sets forth the activity in the Company’s ACL - loans for the periods indicated:
Balance at beginning of year
Loans charged-off:
SBA
Commercial business and other loans
Total loans charged-off
Recoveries:
Taxi medallion
Total recoveries
(10,752)
(724)
Balance at end of year
Ratio of net charge-offs to average loans outstanding during the period
0.01
Ratio of ACL - loans to gross loans at end of period
0.57
0.59
Ratio of ACL - loans to non-performing loans at end of period
142.29
-65-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, 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.
-66-
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company’s consolidated financial condition, results of operations and cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2022, and quarterly report on Form 10-Q for the quarter ended March 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended September 30, 2023:
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
July 1 to July 31, 2023
906,131
August 1 to August 31, 2023
59,352
15.88
846,779
September 1 to September 30, 2023
On May 30, 2023, the Board of Directors approved an additional one million shares of common stock for repurchase. During the quarter ended September 30, 2023, the Company repurchased 59,352 shares of the Company’s common stock. On September 30, 2023, 846,779 shares remained to be repurchased under the currently authorized stock repurchase programs. 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
-67-
ITEM 6. EXHIBITS
Exhibit No.
3.1 P
Certificate of Incorporation of Flushing Financial Corporation (Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488)
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (Incorporated by reference to Exhibit 4.2 filed with Form S-8 filed May 31, 2002)
3.3
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (Incorporated by reference to Exhibit 3.3 filed with Form 10-K for the year ended December 31, 2011)
3.4
Amended and Restated By-Laws of Flushing Financial Corporation (Incorporated by reference to Exhibit 3.6 filed with Form 10-Q for the quarter ended June 30, 2014)
4.1
Indenture dated November 22, 2021, between Flushing Financial Corporation and Wilmington Trust, National Association, as trustee. (Incorporated by reference to Exhibit 4.1 filed with Form 8-K filed November 22, 2021)
4.2
First Supplemental Indenture, dated November 22, 2021, between Flushing Financial Corporation and Wilmington Trust, National Association, as trustee. (Incorporated by reference to Exhibit 4.2 filed with Form 8-K filed November 22, 2021)
Second Supplemental Indenture, dated August 24, 2022, between Flushing Financial Corporation and Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibit 4.2 filed with Form 8-K filed August 24, 2022)
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
Inline 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
Inline XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
P Indicates a filing submitted in paper.
-68-
EXHIBIT INDEX
-69-
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Flushing Financial Corporation,
Dated:
November 7, 2023
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
-70-