Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 2023 was 29,488,818.
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
7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
55
ITEM 4. Controls and Procedures
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
56
ITEM 1A. Risk Factors
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
57
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Mine Safety Disclosures
ITEM 5. Other Information
ITEM 6. Exhibits
58
SIGNATURES
60
i
PART I – FINANCIAL INFORMATION
FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
(Unaudited)
Item 1. Financial Statements
March 31,
December 31,
2023
2022
(Dollars in thousands, except per share data)
Assets
Cash and due from banks
$
176,747
151,754
Securities held-to-maturity, net of allowance of $1,087 and $1,100, respectively, (assets pledged of $4,647 and $4,550, respectively; fair value of $67,869 and $62,550, respectively)
73,523
73,711
Securities available for sale, at fair value: (assets pledged of $193,558 and $172,235, respectively; $13,192 and $13,023 at fair value pursuant to the fair value option, respectively)
811,928
735,357
Loans, net of fees and costs
6,904,176
6,934,769
Less: Allowance for credit losses
(38,729)
(40,442)
Net loans
6,865,447
6,894,327
Interest and dividends receivable
46,836
45,048
Bank premises and equipment, net
21,567
21,750
Federal Home Loan Bank of New York stock, at cost
38,779
45,842
Bank owned life insurance
214,240
213,131
Goodwill
17,636
Core deposit intangibles
1,891
2,017
Right of use asset
42,268
43,289
Other assets
168,259
179,084
Total assets
8,479,121
8,422,946
Liabilities
Due to depositors:
Non-interest bearing
872,254
921,238
Interest-bearing
5,783,263
5,515,945
Total Due to depositors
6,655,517
6,437,183
Mortgagors' escrow deposits
78,573
48,159
Borrowed funds:
Federal Home Loan Bank advances and other borrowings
652,262
815,501
Subordinated debentures
187,130
186,965
Junior subordinated debentures, at fair value
48,117
50,507
Total borrowed funds
887,509
1,052,973
Operating lease liability
45,353
46,125
Other liabilities
138,710
161,349
Total liabilities
7,805,662
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; 29,488,456 shares and 29,476,391 shares outstanding, respectively)
341
Additional paid-in capital
262,876
264,332
Treasury stock, at average cost (4,599,167 shares and 4,611,232 shares, respectively)
(97,760)
(98,535)
Retained earnings
545,786
547,507
Accumulated other comprehensive loss, net of taxes
(37,784)
(36,488)
Total stockholders' equity
673,459
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
(In thousands, except per share data)
Interest and dividend income
Interest and fees on loans
82,889
67,516
Interest and dividends on securities:
Interest
7,240
3,745
Dividends
29
8
Other interest income
1,959
51
Total interest and dividend income
92,117
71,320
Interest expense
Deposits
39,056
3,408
Other interest expense
7,799
4,433
Total interest expense
46,855
7,841
Net interest income
45,262
63,479
Provision for credit losses
7,508
1,358
Net interest income after provision for credit losses
37,754
62,121
Non-interest income
Banking services fee income
1,411
1,374
Net gain on sale of loans
54
Net gain (loss) from fair value adjustments
2,619
(1,809)
Federal Home Loan Bank of New York stock dividends
697
397
1,109
1,114
Other income
1,018
237
Total non-interest income
6,908
1,313
Non-interest expense
Salaries and employee benefits
20,887
23,649
Occupancy and equipment
3,793
3,604
Professional services
2,483
2,222
FDIC deposit insurance
977
420
Data processing
1,435
1,424
Depreciation and amortization of bank premises and equipment
1,510
1,460
Other real estate owned / foreclosure expense
165
84
Other operating expenses
6,453
5,931
Total non-interest expense
37,703
38,794
Income before income taxes
6,959
24,640
Provision for income taxes
Federal
1,367
4,650
State and local
434
1,771
Total provision for income taxes
1,801
6,421
Net income
5,158
18,219
Basic earnings per common share
0.17
0.58
Diluted earnings per common share
Dividends per common share
0.22
-2-
(In thousands)
Other comprehensive loss, net of tax:
Amortization of actuarial gains, net of taxes of $31 and $2, respectively.
(69)
(4)
Amortization of prior service credits, net of taxes of $2 for the three months ended March 31, 2022.
(5)
Change in net unrealized gains (losses) on securities available for sale, net of taxes of ($1,883), and $10,892, respectively.
3,987
(23,427)
Net unrealized (loss) gain on cash flow hedges, net of taxes of $2,345, and ($6,857), respectively.
(5,140)
14,751
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of $33, and $63, respectively.
(74)
(135)
Total other comprehensive loss, net of tax
(1,296)
(8,820)
Comprehensive net income
3,862
9,399
-3-
For the three months ended March 31,
Operating Activities
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment
Net gain on sales of loans
(54)
Net amortization (accretion) of premiums and discounts
1,234
(492)
Deferred income tax provision
1,136
Net (gain) loss from fair value adjustments
(2,619)
1,809
Net (gain) loss from fair value adjustments of qualifying hedges
(100)
129
Income from bank owned life insurance
(1,109)
(1,114)
Stock-based compensation expense
3,808
4,194
Deferred compensation
(1,707)
(2,545)
Amortization of core deposit intangibles
126
142
(Increase) decrease in other assets
(8,420)
3,570
(Decrease) increase in other liabilities
(16,889)
13,847
Net cash (used in) provided by operating activities
(10,418)
40,577
Investing Activities
Purchases of premises and equipment
(1,327)
(874)
Purchases of Federal Home Loan Bank - NY shares
(55,017)
(388)
Redemptions of Federal Home Loan Bank - NY shares
62,080
2,434
Purchases of securities held-to-maturity
(16,476)
Proceeds from prepayments of securities held-to-maturity
200
Purchases of securities available for sale
(93,068)
(130,312)
Proceeds from maturities and prepayments of securities available for sale
21,087
32,177
Change in cash collateral
(6,180)
Net repayments of loans
75,496
72,080
Purchases of loans
(44,466)
(54,309)
Proceeds from sale of loans
2,575
Net cash used in investing activities
(38,620)
(95,668)
-4-
Consolidated Statements of Cash Flows (Contd.)
Financing Activities
Net (decrease) increase in noninterest-bearing deposits
(48,984)
73,406
Net increase in interest-bearing deposits
267,208
16,482
Net increase in mortgagors' escrow deposits
30,414
27,582
Net (repayments) proceeds from short-term borrowed funds
(235,000)
110,000
Proceeds (repayments) from long-term borrowing
71,761
(50,000)
Purchase of treasury shares and repurchase of shares to satisfy tax obligations
(4,709)
(10,845)
Cash dividends paid
(6,659)
(6,850)
Net cash provided by financing activities
74,031
159,775
Net increase in cash and cash equivalents, and restricted cash
24,993
104,684
Cash, cash equivalents, and restricted cash, beginning of period
81,723
Cash, cash equivalents, and restricted cash, end of period
186,407
Supplemental Cash Flow Disclosure
Interest paid
48,889
6,846
Income taxes paid
1,993
214
Taxes paid if excess tax benefits on stock-based compensation were not tax deductible
1,948
384
-5-
Consolidated Statement of Changes in Stockholders’ Equity
Additional
Accumulated Other
Shares
Common
Paid-in
Treasury
Retained
Comprehensive
Outstanding
Total
Stock
Capital
Earnings
Loss
Balance at December 31, 2022
29,476,391
Vesting of restricted stock unit awards
256,798
(5,264)
5,484
(220)
Purchase of treasury shares
(159,516)
(3,053)
Repurchase of shares to satisfy tax obligation
(85,217)
(1,656)
Dividends on common stock ($0.22 per share)
Other comprehensive loss
Balance at March 31, 2023
29,488,456
Balance at December 31, 2021
30,526,353
679,628
263,375
(75,293)
497,889
(6,684)
Award of common shares released from Employee Benefit Trust
287
297,626
(6,019)
6,304
(285)
(360,000)
(8,469)
(97,435)
(2,376)
Balance at March 31, 2022
30,366,544
675,813
261,837
(79,834)
508,973
(15,504)
-6-
1. Basis of Presentation
The primary business of Flushing Financial Corporation (the “Holding Company”), a Delaware corporation, is the operation of its wholly owned subsidiary, Flushing Bank (the “Bank”).
The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Holding Company and its direct and indirect wholly owned subsidiaries, including the Bank, Flushing 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 March 31, 2023, concluding no impairment was indicated.
-7-
3. Earnings Per Share
Earnings per common share have been computed based on the following:
Net income, as reported
Divided by:
Weighted average common shares outstanding
30,265
31,524
Weighted average common stock equivalents (1)
Total weighted average common shares outstanding and common stock equivalents
Dividend Payout ratio
129.4
%
37.9
4. Securities
The following table summarizes the Company’s portfolio of securities held-to-maturity on March 31, 2023:
Gross
Amortized
Unrecognized
Cost
Fair Value
Gains
Losses
Municipals
66,740
60,732
6,008
Total municipals
FNMA
7,870
7,137
733
Total mortgage-backed securities
Allowance for credit losses
(1,087)
67,869
6,741
-8-
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 March 31, 2023:
Unrealized
U.S. government agencies
83,691
81,802
171
2,060
Corporate
173,052
156,581
16,471
Mutual funds
11,460
Collateralized loan obligations
184,773
180,530
4,243
Other
1,445
Total other securities
454,421
431,818
22,774
REMIC and CMO
172,001
146,318
25,683
GNMA
9,067
7,304
1,766
168,689
146,633
22,057
FHLMC
94,641
79,855
14,786
444,398
380,110
64,292
Total securities available for sale
898,819
175
87,066
-9-
The following table summarizes the Company’s portfolio of securities available for sale on December 31, 2022:
83,720
81,103
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 March 31, 2023 and December 31, 2022, are issued by U.S. banking institutions. The CMOs held by the Company at March 31, 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 March 31, 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
74,610
-
Total securities held-to-maturity
Securities available for sale:
Due in one year or less
59,843
58,258
Due after one year through five years
74,798
69,629
Due after five years through ten years
236,428
221,597
71,892
70,874
442,961
420,358
-10-
The following tables show the Company’s securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated:
At March 31, 2023
Less than 12 months
12 months or more
Count
(Dollars in thousands)
Held-to-maturity securities
Available for sale securities
U.S. Government Agencies & Treasury
73,930
5,506
20
68,424
2,040
26
58,591
4,529
97,990
11,942
CLO
25
180,531
64,192
893
116,339
3,350
59
411,042
128,289
5,442
282,753
17,332
47
146,030
3,315
101
142,715
25,582
7,106
41
7,065
45
146,490
7,598
312
138,892
21,745
18
10,875
621
68,980
14,165
117
379,481
21,829
1,034
357,652
63,258
176
790,523
150,118
6,476
640,405
80,590
At December 31, 2022
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
46
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
-11-
The Company reviewed each available for sale security that had an unrealized loss at March 31, 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 March 31, 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 March 31, 2023 and December 31, 2022.
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 March 31, 2023 and December 31, 2022 and accrued interest receivable on available for sale debt securities totaled $4.6 million and $3.7 million at March 31, 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
1,100
862
(Benefit) provision
(13)
124
1,087
986
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 months ended March 31, 2023 and 2022.
-12-
5. Loans
The following represents the composition of loans as of the dates indicated:
Multi-family residential
2,601,174
2,601,384
Commercial real estate
1,904,293
1,913,040
One-to-four family ― mixed-use property
549,207
554,314
One-to-four family ― residential
238,417
241,246
Construction
60,486
70,951
Small Business Administration (1)
22,860
23,275
Commercial business and other
1,518,756
1,521,548
Gross loans
6,895,193
6,925,758
Net unamortized premiums and unearned loan fees
8,983
9,011
Total loans, net of fees and costs
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 $35.1 million and $34.5 million at March 31, 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, economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.
-13-
The Company recorded a provision for credit losses on loans totaling $7.5 million and $1.2 million for the three months ended March 31, 2023 and 2022, respectively. The provision recorded during the three months ended March 31, 2023, was driven by a loan charge-off and increased reserves on two loans that were previously identified with one business credit relationship. During the three months ended March 31, 2023, the Company made no changes to either the reasonable and supportable forecast period or the reversion period. The ACL - loans totaled $38.7 million on March 31, 2023 compared to $40.4 million on December 31, 2022. On March 31, 2023, the ACL - loans represented 0.56% of gross loans and 182.9% 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. During the three months ended March 31, 2023, there were no loans modified to borrowers experiencing financial difficulties. On March 31, 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 table shows loans modified as Troubled Debt Restructured (“TDR”) during the period indicated:
For the three months ended,
March 31, 2022
Number
Modification description
Small Business Administration
271
Loan amortization extension.
2,768
One loan received a below market interest rate and one loan had an amortization extension.
3,039
The recorded investment of the loans modified and classified as TDR, presented in the table above, was unchanged as there was no principal forgiven in these modifications.
-14-
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
-15-
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 three months ended March 31, 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
3,975
254
1,045
3,953
4,396
950
949
20,193
10,838
3,283
29,942
20,955
13,400
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
15,254
13,040
-16-
The following is a summary of interest foregone on non-accrual loans for the periods indicated.
For the year ended
March 31
Interest income that would have been recognized had the loans performed in accordance with their original terms
506
371
(1)
Less: Interest income included in the results of operations
155
(2)
Total foregone interest
502
216
The following tables show the aging analysis of the amortized cost basis of loans at the period indicated by class of loans:
March 31, 2023
Greater
30 - 59 Days
60 - 89 Days
than
Total Past
Past Due
90 Days
Due
Current
Total Loans
3,464
7,439
2,596,735
2,604,174
179
1,905,528
1,905,707
2,562
381
3,740
548,231
551,971
2,382
68
232,739
239,585
60,373
1,679
2,770
19,990
22,760
33
7,829
7,882
1,511,724
1,519,606
8,583
2,327
17,946
28,856
6,875,320
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
-17-
The following tables show the activity in the ACL on loans for the three-month periods indicated:
One-to-four
family -
Commercial
Multi-family
mixed-use
Small Business
business and
residential
real estate
property
loans
Administration
other
9,552
8,184
1,875
901
261
2,198
17,471
40,442
Charge-offs
(6)
(9,286)
(9,298)
Recoveries
42
12
9
Provision (benefit)
(512)
(513)
(165)
(210)
(109)
(35)
9,065
7,521
Ending balance
9,041
7,671
1,710
727
152
2,169
17,259
38,729
8,185
7,158
1,755
784
186
1,209
17,858
37,135
(1,028)
(8)
(1,036)
13
74
376
558
109
(20)
82
1,643
(1,503)
1,233
8,561
7,716
1,864
766
268
1,837
16,421
37,433
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.
-18-
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 March 31, 2023:
Revolving Loans
Amortized Cost
converted to
2021
2020
2019
Prior
Basis
term loans
Pass
48,865
480,178
285,357
222,748
310,618
1,215,855
4,601
2,568,222
Watch
902
2,346
26,616
29,864
Special Mention
1,326
Substandard
4,762
Total Multi-family
481,080
225,094
1,248,559
Commercial Real Estate
18,305
327,129
181,002
151,568
223,378
969,174
1,870,556
1,965
1,525
9,570
21,899
34,959
183
Total Commercial Real Estate
329,094
182,527
232,948
991,265
1-4 Family Mixed-Use
5,519
44,641
42,764
32,360
63,079
353,651
542,014
878
6,541
8,146
840
971
Total 1-4 Family Mixed-Use
33,238
63,806
362,003
1-4 Family Residential
4,146
23,573
8,640
18,034
41,567
114,894
7,905
11,827
230,586
515
282
736
63
1,228
4,198
4,358
443
4,801
Total 1-4 Family Residential
24,088
8,922
42,303
120,626
7,968
13,498
Gross charge-offs
3,089
1,899
17,660
35,125
57,773
Total Construction
3,335
3,348
3,977
666
2,736
14,062
593
50
5,162
5,805
37
1,716
1,177
Total Small Business Administration
5,620
716
9,112
Commercial Business
28,793
160,797
81,582
39,877
39,603
71,738
273,682
696,072
415
16,492
31,837
58,536
4,759
3,943
8,735
2,373
2,444
1,762
3,079
9,705
Doubtful
4,702
Total Commercial Business
163,585
92,609
44,636
56,175
109,280
282,672
777,750
9,267
Commercial Business - Secured by RE
13,955
181,634
138,718
108,771
41,827
153,310
638,215
26,220
59,250
85,470
15,198
2,853
Total Commercial Business - Secured by RE
184,487
83,245
212,560
741,736
70
Total Other
Total by Loan Type
Total Pass
122,672
1,223,186
759,071
577,335
720,738
2,881,408
321,383
6,617,620
-19-
Total Watch
3,797
10,983
3,224
53,795
152,679
1,272
226,978
Total Special Mention
15,231
6,329
27,998
Total Substandard
5,226
15,639
26,878
Total Doubtful
1,232,209
774,177
585,318
789,811
3,056,055
330,436
Total Gross charge-offs
31
9,298
Included within net loans were $5.2 million each at March 31, 2023 and December 31, 2022, 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
7,985
17,340
12,021
8,934
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 $427.0 million and $438.5 million on March 31, 2023, and December 31, 2022, respectively.
The following table presents the activity in the allowance for off balance sheet credit losses for the three months ended March 31, 2023, and 2022.
Balance at beginning of period
970
(85)
380
-20-
Allowance for Off-Balance Sheet - Credit losses (1)
885
1,589
6. Loans held for sale
Loans held for sale are carried at the lower of cost or estimated fair value. At March 31, 2023 and December 31, 2022, the Bank did not have any loans held for sale. There were no loans sold during the three months ended March 31, 2022.
The following table shows loans sold during the periods indicated:
For the three months ended March 31, 2023
Loans sold
Proceeds
Net charge-offs
Net gain
Delinquent and non-performing loans
1,548
187
-21-
7. Leases
The Company has 31 operating leases for branches (including headquarters) and office spaces, 10 operating leases for vehicles, and one operating lease for equipment. Our leases have remaining lease terms ranging from three months 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 three 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
6.6 years
Weighted average discount rate-operating leases
3.1
2.9
-22-
The components of lease expense and cash flow information related to leases were as follows:
Line Item Presented
Lease Cost
Operating lease cost
2,299
2,097
23
24
Short-term lease cost
Professional services and occupancy and equipment
61
Variable lease cost
281
Total lease cost
2,659
Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
2,394
2,426
Right-of-use assets obtained in exchange for new operating lease liabilities
846
The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of March 31, 2023:
Minimum Rental
Years ended December 31:
2024
9,379
2025
8,705
2026
7,806
2027
3,711
Thereafter
12,814
Total minimum payments required
50,051
Less: implied interest
4,698
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 March 31, 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.
On May 18, 2021, stockholders approved an amendment to the 2014 Omnibus Plan (the “Amendment”) authorizing an additional 1,100,000 shares available for future issuance. Including the additional shares authorized from the Amendment, 743,981 shares were available for future issuance under the 2014 Omnibus Plan at March 31, 2023.
For the three months ended March 31, 2023 and 2022, the Company’s net income, as reported, included $3.1 million and $3.9 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $0.8 million and $1.0 million of income tax benefit respectively, related to the stock-based compensation plans.
During the three months ended March 31, 2023 and 2022, the Company granted 235,850 and 212,811 RSU awards and 79,050 and 63,250 PRSU awards, respectively.
-23-
The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight-line method. Forfeitures are recorded in the period they occur.
The following table summarizes the Company’s RSU and PRSU awards under the 2014 Omnibus Plan for the three months ended March 31, 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
(201,324)
21.20
(53,430)
19.94
Forfeited
(2,840)
22.14
Non-vested at December 31, 2022
307,274
21.13
94,420
20.68
Vested but unissued at March 31, 2023
239,155
20.78
142,065
20.80
As of March 31, 2023, there was $6.7 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 2.8 years. The total fair value of awards vested for the three months ended March 31, 2023 and 2022, was $5.0 million, and $6.6 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 three months ended March 31, 2023:
Phantom Stock Plan
Outstanding at December 31, 2022
158,410
19.38
15,510
19.04
Distributions
(765)
19.35
Outstanding at March 31, 2023
173,155
14.89
Vested at March 31, 2023
173,021
The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $0.7 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. The total fair value of the distributions from the Phantom Stock Plan was $15,000 and $16,000 for each of the three months ended March 31, 2023 and 2022, respectively.
-24-
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
Employee Pension Plan:
Interest cost
203
138
Amortization of unrecognized loss
Expected return on plan assets
(277)
(257)
Net employee pension benefit
(118)
Outside Director Pension Plan:
Service cost
15
11
Amortization of unrecognized gain
(40)
(7)
Net outside director pension expense
(23)
Other Postretirement Benefit Plans:
67
95
(60)
Amortization of past service credit
Net other postretirement expense
75
130
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 March 31, 2023, the Company had contributed $32,000 to the Outside Director Pension Plan and $15,000 to the Other Postretirement Benefit Plans. As of March 31, 2023, the Company has not revised its expected contributions for the year ending December 31, 2023.
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 March 31, 2023, the Company carried financial assets and financial liabilities under the fair value option with fair values of $13.2 million and $48.1 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 months ended March 31, 2023 and 2022.
-25-
The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:
Changes in Fair Values For Items Measured at Fair Value
Measurements
Pursuant to Election of the Fair Value Option
at March 31,
at December 31,
Description
288
295
Other securities
12,904
12,728
(536)
Borrowed funds
2,509
(1,269)
Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company reports as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.
The borrowed funds had a contractual principal amount of $61.9 million at both March 31, 2023 and December 31, 2022. The fair value of borrowed funds includes accrued interest payable of $0.4 million at both March 31, 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.
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 March 31, 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 March 31, 2023 and December 31, 2022, Level 2 included mortgage-backed securities, CLOs, corporate debt, municipals, and interest rate swaps.
-26-
Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At March 31, 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 March 31, 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:
418,913
338,347
Interest rate swaps
65,072
74,586
864,095
797,216
877,000
809,943
Liabilities:
Borrowings
18,729
18,407
66,846
68,914
-27-
The following table sets 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
1,695
56,472
Net (loss) gain from fair value adjustment of financial assets (1)
(71)
Net (gain) loss from fair value adjustment of financial liabilities (1)
(2,509)
1,269
Increase (decrease) in accrued interest
Change in unrealized (gains) losses included in other comprehensive loss
107
198
1,740
57,955
Changes in unrealized gains held at period end
2,078
3,136
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 Libor
n/a
4.1
Junior subordinated debentures
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 March 31, 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.
-28-
The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value at March 31, 2023 and December 31, 2022:
on a non-recurring basis
Certain delinquent loans
8,535
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
8,474
Sales approach
Adjustment to sales comparison value
-16.9% to 0.0
-1.5
Reduction for planned expedited disposal
7.5% to 15.0
9.9
Discounted Cashflow
Discount Rate
4.3
Probability of Default
35.0
18,189
-20.0% to 0.0
-1.3
10.0% to 15.0
13.6
141
The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2023 and December 31, 2022.
-29-
The methods and assumptions used to estimate fair value at March 31, 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.
-30-
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
65,653
Securities available for sale
Loans
6,580,759
FHLB-NY stock
Accrued interest receivable
4,774
42,062
6,734,090
6,702,840
4,853,830
1,849,010
Borrowed Funds
861,879
813,762
Accrued interest payable
7,520
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
11. Derivative Financial Instruments
At March 31, 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 totaling $471.5 million and $273.6 million at March 31, 2023 and December 31, 2022, respectively; 2) to facilitate risk management strategies for our loan customers with $219.5 million of swaps outstanding, which include $109.7 million each with customers and with bank counterparties at March 31, 2023
-31-
and $221.2 million of swaps outstanding, which include $110.6 million each with customers and bank counterparties at December 31, 2022; 3) to mitigate exposure to rising interest rates on certain short-term advances and brokered deposits totaling $921.5 million at March 31, 2023, and $871.5 at December 31, 2022.
At March 31, 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 March 31, 2023 and December 31, 2022, derivatives with a combined notional amount of $219.5 million and $221.2 million, respectively, were not designated as hedges. At March 31, 2023 and December 31, 2022, derivatives with a combined notional amount of $471.5 million and $273.6 million, respectively, were designated as fair value hedges. At March 31, 2023 and December 31, 2022, derivatives with a combined notional amount of $921.5 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 effects earnings. During the three months ended March 31, 2023 and 2022, $4.3 million in reduced expense and $2.7 million in additional expense, respectively, 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 $15.5 million in reduced expense.
Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain (loss) from fair value adjustments” in the Consolidated Statements of Income.
The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:
Notional
Fair Value (1)
Cash flow hedges:
Interest rate swaps (borrowings and deposits)
650,750
28,653
270,750
3,277
Fair value hedges:
Interest rate swaps (loans and securities)
471,520
20,967
Non hedge:
Interest rate swaps (loans)
109,749
15,452
1,232,019
380,499
700,750
31,716
170,750
210
273,607
24,673
110,598
18,197
1,084,955
281,348
-32-
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
Carrying Amount of the
Included in the Carrying Amount of
Statement of Financial Condition in
Hedged Assets
the Hedged Assets
Which the Hedged Item is Included
Assets/(Liabilities)
Loans:
84,384
82,613
(8,081)
(10,480)
168,311
167,353
(12,797)
(15,442)
252,695
249,966
(20,878)
(25,922)
306,425
(1,238)
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)
1,897
(1,435)
Interest rate swaps - fair value hedge (securities)
Interest and dividends on securities
Interest rate swaps - cash flow hedge (borrowings)
1,421
(2,465)
Interest rate swaps - cash flow hedge (deposits)
2,867
(55)
Total net income (loss) from the effects of derivative instruments
6,243
(3,955)
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.
-33-
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
(64,445)
627
(72,185)
2,401
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
Cash flow
Defined Benefit
Option Elected
Securities
Hedges
Pension Items
on Liabilities
Beginning balance, net of tax
(63,106)
25,380
(275)
1,513
Other comprehensive income before reclassifications, net of tax
3,133
(2,192)
867
Amounts reclassified from accumulated other comprehensive income, net of tax
854
(2,948)
(2,163)
Net current period other comprehensive income, net of tax
Ending balance, net of tax
(59,119)
20,240
(344)
1,439
-34-
For the three months ended March 31, 2022
(6,272)
(1,406)
(1,282)
2,276
12,941
(10,621)
1,810
(9)
Net current period other comprehensive income (loss), net of tax
(29,699)
13,345
(1,291)
2,141
-35-
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)
(854)
4,255
(1,307)
2,948
Amortization of defined benefit pension items:
Actuarial losses benefit (expense)
100
(31)
69
(2,650)
(1,810)
Prior service credits benefit (expense)
Total before tax
-36-
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 March 31, 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 6.18% and 6.37% at March 31, 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
906,437
10.55
915,628
10.56
Requirement to be well-capitalized
429,793
5.00
433,667
Excess
476,644
5.55
481,961
5.56
Common Equity Tier I risk-based capital:
13.61
13.79
433,017
6.50
431,734
473,420
7.11
483,894
7.29
Tier I risk-based capital:
532,944
8.00
531,365
373,493
5.61
384,263
5.79
Total risk-based capital:
944,683
14.18
954,457
14.37
666,181
10.00
664,206
278,502
4.18
290,251
4.37
-37-
The Holding Company is subject to the same regulatory capital requirements as the Bank. As of March 31, 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 March 31, 2023 and December 31, 2022 was 5.07% and 5.25%, respectively.
Set forth below is a summary of the Holding Company’s compliance with banking regulatory capital standards.
737,138
8.58
746,880
8.61
429,761
433,607
307,377
3.58
313,273
3.61
690,846
10.37
698,258
10.52
432,870
431,635
257,976
3.87
266,623
4.02
11.07
11.25
532,763
531,243
204,375
3.07
215,637
3.25
965,384
14.50
975,709
14.69
665,953
664,054
299,431
4.50
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 without material impact on our business operations or to our consolidated financial statements.
Accounting Standards Pending Adoption:
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset
Date of Topic 848, which extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848
to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under
-38-
ASC Topic 848 for matters related to reference rate reform. ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform” (Topic 848), which clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022.
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform” (Topic 848), which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or re-measurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity could elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. The amendments in this update apply to contract modifications that replace a reference rate reform and contemporaneous modifications of other terms related to the replacement of the reference rate.
-39-
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.
-40-
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 March 31, 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.
-41-
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 March 31, 2023 we reported net income of $5.2 million, or $0.17 per diluted common share, a decrease of $13.1 million, or 71.7% from net income of $18.2 million, or $0.58 per diluted common share earned in the comparable prior year period. The decrease in net income was primarily driven by an increase of 230 basis points in the cost of interest-bearing liabilities, which resulted in the net interest margin declining 109 basis points to 2.27% for the three months ended March 31, 2023, compared to 3.36% for the three months ended March 31, 2022.
During the three months ended March 31, 2023, the yield on interest-earning assets increased 17 basis points, while the cost of interest-bearing liabilities increased 69 basis points from the three months ended December 31, 2022, which resulted in a decrease of 43 basis points in net interest margin to 2.27% from 2.70%. Excluding net gains (losses) from qualifying hedges and purchase accounting adjustments, the net interest margin decreased 38 basis points to 2.25% for the three months ended March 31, 2023, from 2.63% for the three months ended December 31, 2022.
Our loan portfolio is greater than 88% collateralized by real estate with an average loan to value of less than 37%. 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 March 31, 2023, our allowance for credit losses (“ACL”) - loans stood at 56 basis points of gross loans and 182.9% of non-performing loans. Non-performing assets at the end of the quarter were 50 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 March 31, 2023, the fair value 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 the purpose of goodwill impairment testing, management has concluded that the Company has one reporting unit. We performed our annual impairment tests of goodwill during the fourth quarter 2022 using a quantitative assessment and concluded that the fair value of the reporting unit exceeded its carrying value by $152.0 million, or 22.5%. At March 31, 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 and are subject to the same regulatory capital requirements. See Note 13 (“Regulatory Capital”) of the Notes to the Consolidated Financial Statements.
-42-
The following table presents quarterly operating data highlights at 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
31,254
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
General. Net income for the three months ended March 31, 2023 was $5.2 million, a decrease of $13.1 million, or 71.7%, from $18.2 million for the three months ended March 31, 2022. Diluted earnings per common share were $0.17 for the three months ended March 31, 2023, a decrease of $0.41 or 70.7%, from $0.58 for the three months ended March 31, 2022. The decrease in net income was primarily due to a decline in the net interest margin which decreased 109 basis points to 2.27% for the three months ended March 31, 2023 from 3.36% for the comparable prior year period. The decline in the net interest margin was driven by our liability sensitive balance sheet as our interest-bearing liabilities repriced quicker than our interest-earning assets.
Return on average equity was 3.02% for the three months ended March 31, 2023 compared to 10.83% for the three months ended March 31, 2022. Return on average assets was 0.24% for the three months ended March 31, 2023 compared to 0.91% for the three months ended March 31, 2022.
Interest Income. Interest and dividend income increased $20.8 million, or 29.2%, to $92.1 million for the three months ended March 31, 2023 from $71.3 million for the three months ended March 31, 2022. The increase in interest income was primarily attributable to the 84 basis point increase in the yield on interest-earning assets to 4.61% for the three months ended March 31, 2023 compared to 3.77% for 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 loans, net, increased 82 basis points to 4.76% for the three months ended March 31, 2023 from 3.94% for the three months ended March 31, 2022.
Interest Expense. Interest expense increased $39.0 million, or 497.6%, to $46.9 million for the three months ended March 31, 2023 from $7.8 million for the three months ended March 31, 2022. The growth in interest expense was primarily due to an increase of 230 basis points in the average cost of interest-bearing liabilities to 2.80% for the three months ended March 31, 2023 from 0.50% for the three months ended March 31, 2022 and the increase of $483.0 million in the average balance of interest-bearing liabilities to $6,703.6 million for the three months ended March 31, 2023 from $6,220.5 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 450 basis points over the past year.
-43-
Net Interest Income. Net interest income for the three months ended March 31, 2023 was $45.3 million, a decrease of $18.2 million, or 28.7%, from $63.5 million for the three months ended March 31, 2022. In addition, net interest-earning assets declined $56.7 million year over year to $1,293.1 million for the quarter ended March 31, 2023. The net interest margin decreased 109 basis points to 2.27% from March 31, 2022. The decrease in net interest income was primarily due to the cost of interest-bearing liabilities rising faster than the yield on interest-earning assets. The average cost of interest-bearing liabilities increased 230 basis points to 2.80% for the three months ended March 31, 2023 from 0.50% for the three months ended March 31, 2022 compared to 84 basis points to 4.61% for the interest-earning assets from 3.77% for the same period. After a lag, the net interest margin is expected to expand when the Fed stops raising rates. Included in net interest income for the three months ended March 31, 2023 and 2022, was prepayment penalty income, net reversals and recovered interest from non-accrual loans totaling $0.7 million and $1.7 million, respectively, net gains (losses) from fair value adjustments on qualifying hedges totaling $0.1 million and ($0.1) million for the three months ended March 31, 2023 and 2022, respectively, and purchase accounting income adjustments of $0.3 million and $1.1 million, respectively. Excluding all of these items, the net interest margin for the three months ended March 31, 2023 was 2.21%, a decrease of 101 basis points, from 3.22% for the three months ended March 31, 2022.
Provision for Credit Losses. During the three months ended March 31, 2023, the provision for credit losses was $7.5 million compared to $1.4 million for the three months ended March 31, 2022. The provision recorded during the three months ended March 31, 2023 was primarily due to a charge-off and increased reserves on two previously identified credits. The current average loan-to-value ratio for our non-performing assets collateralized by real estate was 50.7% at March 31, 2023. The Bank continues to maintain conservative underwriting standards.
Non-Interest Income. Non-interest income for the three months ended March 31, 2023 was $6.9 million, an increase of $5.6 million from $1.3 million in the prior year comparable period. The increase was primarily due to the prior year period inclusion of net losses from fair value adjustments totaling $1.8 million compared to net gains totaling $2.6 million recorded during the current year period.
Non-Interest Expense. Non-interest expense for the three months ended March 31, 2023 was $37.7 million, a decrease of $1.1 million, or 2.8%, from $38.8 million for the three months ended March 31, 2022. The decrease was primarily due to salary related expense accruals that were reversed in the first quarter of 2023, a benefit for Employee Retention Tax Credit refunds received in the first quarter of 2023 and the effects of the decreased stock price on the attendant benefits plans. In addition, during the first quarter of 2023, the Company recognized seasonal expenses totaling $4.1 million compared to $4.3 million in the first quarter of 2022.
Income before Income Taxes. Income before income taxes for the three months ended March 31, 2023 was $7.0 million, a decrease of $17.7 million, or 71.8%, from $24.6 million for the three months ended March 31, 2022 for the reasons discussed above.
Provision for Income Taxes. The provision for income taxes was $1.8 million for the three months ended March 31, 2023, a decrease of $4.6 million, or 72.0%, from $6.4 million for the three months ended March 31, 2022. The decrease was primarily due to the decline in income before taxes and a decrease in the effective tax rate. The effective tax rate for three months ended March 31, 2023 was 25.9% compared to 26.1% for the three months ended March 31, 2022.
FINANCIAL CONDITION
Assets. Total assets at March 31, 2023 were $8,479.1 million, an increase of $56.2 million, or 0.7%, from $8,422.9 million at December 31, 2022. Total net loans decreased $28.9 million, or 0.4%, during the three months ended March 31, 2023, to $6,865.4 million from $6,894.3 million at December 31, 2022. Loan originations and purchases were $173.5 million for the three months ended March 31, 2023, a decrease of $155.8 million, or 47.3%, from $329.3 million for the three months ended March 31, 2022. 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 $266.1 million at March 31, 2023, compared to $252.2 million at December 31, 2022.
-44-
The following table shows loan originations and purchases for the periods indicated:
For the three months
ended March 31,
42,164
98,180
15,570
45,102
One-to-four family – mixed-use property
4,938
8,498
One-to-four family – residential
4,296
9,261
Construction (1)
10,592
8,802
318
Commercial business and other (2)
95,668
159,476
173,546
329,319
The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated and purchased during the three months ended March 31, 2023 had an average loan-to-value ratio of 46.7% and an average debt coverage ratio of 167.0%.
The Bank’s non-performing assets totaled $42.2 million at March 31, 2023, a decrease of $11.2 million, or 21.0% from December 31, 2022. Total non-performing assets as a percentage of total assets were 0.50% at March 31, 2023 and 0.63% at December 31, 2022. The ratio of ACL - loans to total non-performing loans was 182.9% at March 31, 2023 and 124.9% at December 31, 2022.
During the three months ended March 31, 2023 mortgage-backed securities decreased $4.2 million, or 1.1%, to $388.0 million from $392.2 million at December 31, 2022. The decrease in mortgage-backed securities during the three months ended March 31, 2023 was primarily due to the principal repayment of securities totaling $9.7 million partially offset by an increase in the fair value of the securities totaling $5.8 million.
During the three months ended March 31, 2023, other securities increased $80.6 million, or 19.3%, to $497.5 million from $416.9 million at December 31, 2022. The increase in other securities during the three months ended March 31, 2023, was primarily due to purchases of $93.1 million at an average rate of 6.47% partially offset by maturities totaling $10.0 million and a decrease in the fair value of other securities totaling $1.0 million. At March 31, 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.
Liabilities. Total liabilities were $7,805.7 million at March 31, 2023, an increase of $59.9 million, or 0.8%, from $7,745.8 million at December 31, 2022. During the three months ended March 31, 2023, due to depositors increased $218.3 million, or 3.4%, to $6,655.5 million due an increase of certificates of deposit totaling $353.9 million partially offset by a decrease in transaction accounts of $135.6 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 $853.2 million, a decrease of $3.1 million from $856.3 million at December 31, 2022. At March 31, 2023, the Company had uninsured and uncollateralized deposits totaling $1.1 billion, or 16% of deposits. Borrowed funds decreased $165.5 million during the three months ended March 31, 2023.
-45-
Total deposits at March 31, 2023 and December 31, 2022 and the weighted average rate on deposits at March 31, 2023 and December 31, 2022, are as follows:
Rate
Interest-bearing deposits:
Certificate of deposit accounts
1,880,260
1,526,338
3.68
3.03
Savings accounts
128,245
143,641
0.46
0.21
Money market accounts
1,855,781
2,099,776
3.16
2.47
NOW accounts
1,918,977
1,746,190
2.92
2.14
Total interest-bearing deposits
Non-interest bearing demand deposits
Total due to depositors
0.30
Total deposits
Equity. Total stockholders’ equity decreased $3.7 million, or 0.5%, to $673.5 million at March 31, 2023, from $677.2 million at December 31, 2022. Stockholders’ equity decreased due to an increase in accumulated other comprehensive loss of $1.3 million, the declaration and payment of dividends on the Company’s common stock of $0.22 per common share totaling $6.7 million and 159,516 shares repurchased totaling $3.1 million. These decreases were partially offset by net income of $5.2 million. Book value per common share decreased to $22.84 at March 31, 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 is 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 March 31, 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 March 31, 2023, cash and cash equivalents totaled $176.7 million and $151.8 million, an increase of $25.0 million, at March 31, 2023 and December 31, 2022, respectively. A portion of our cash and cash equivalents is restricted cash held as collateral for interest rate swaps. At March 31, 2023 and December 31, 2022, restricted cash totaled $61.5 million and $67.0 million, respectively.
.
-46-
Net
Available
Used
Availability
Internal Sources:
(In millions)
Unpledged Securities and Other
581.7
Interest Earnings Deposits
99.4
External Sources:
Federal Home Loan Bank
3,789.8
1,952.8
1,837.0
Other Banks
1,208.0
Total Liquidity
5,678.9
3,726.1
INTEREST RATE RISK
Economic Value of Equity Analysis. The Consolidated Statements of Financial Position have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities 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 March 31, 2023. Various estimates regarding prepayment assumptions are made at each level of rate shock. At March 31, 2023, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.
The following table presents the Company’s interest rate shock as of March 31, 2023:
Net Portfolio Value (NPV)
Change in Interest Rate
% Change in NPV
NPV Ratio
-200 Basis points
(2.6)
10.1
-100 Basis points
(0.9)
10.5
Base interest rate
10.8
+100 Basis points
(3.4)
10.6
+200 Basis points
(6.8)
10.4
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 ALCO Investment Committee 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.
-47-
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 March 31, 2023. 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.
Projected Percentage
Change In
Net Interest Income
4.9
3.0
(5.9)
(12.2)
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 3.1% from a 100 basis point increase in rates over the next twelve months. Actual results could differ significantly from these estimates.
At March 31, 2023, the Company had a derivative portfolio with a notional value totaling $1.6 billion. This portfolio is designed to provide protection against rising interest rates. See Note 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements.
A portion of this portfolio is comprised of interest rate swaps on certain short-term advances and brokered deposits totaling $921.5 million. At March 31, 2023, $621.5 million of the interest rate swaps are effective swaps at a weighted average rate of approximately 2.53% that mature through 2027 and $300.0 million of the interest rate swaps are forward swaps effective at different points through 2023 and 2024, at an average rate of 1.80%. .
-48-
AVERAGE BALANCES
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following tables sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended March 31, 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/
Balance
Interest-earning assets:
Mortgage loans, net
5,333,274
62,054
4.65
5,152,070
53,970
4.19
Other loans, net
1,537,918
20,835
5.42
1,426,610
13,546
3.80
Total loans, net (1) (2)
6,871,192
4.83
6,578,680
4.11
Taxable securities:
457,911
2,281
1.99
580,670
2,167
1.49
411,723
4,611
4.48
226,744
1,119
1.97
Total taxable securities
869,634
6,892
3.17
807,414
3,286
1.63
Tax-exempt securities: (3)
66,828
477
2.86
57,611
591
4.10
Total tax-exempt securities
Interest-earning deposits and federal funds sold
189,023
4.15
126,668
0.16
Total interest-earning assets
7,996,677
92,217
4.61
7,570,373
71,444
3.77
471,634
479,097
8,468,311
8,049,470
Liabilities and Equity
Interest-bearing liabilities
Deposits:
134,945
0.37
156,592
49
0.13
1,970,555
13,785
2.80
2,036,914
793
2,058,523
14,102
2.74
2,253,630
1,275
0.23
1,679,517
11,007
2.62
889,847
1,289
5,843,540
39,020
2.67
5,336,983
3,406
0.26
Mortgagors' escrow accounts
70,483
36
0.20
71,509
0.01
5,914,023
2.64
5,408,492
0.25
789,535
3.95
812,018
2.18
Total interest-bearing liabilities
6,703,558
6,220,510
0.50
Non-interest-bearing deposits
896,462
1,001,571
185,220
154,377
7,785,240
7,376,458
Equity
683,071
673,012
Total liabilities and equity
Net interest income / net interest rate spread (tax equivalent) (3)
45,362
1.81
63,603
3.27
Net interest-earning assets / net interest margin(tax equivalent)
1,293,119
2.27
1,349,863
3.36
Ratio of interest-earning assets to interest-bearing liabilities
1.19
X
1.22
-49-
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
10,463
8,096
Total mortgage loans originated
77,431
169,137
Mortgage loans purchased:
706
Total mortgage loans purchased
Less:
Principal reductions
102,543
216,487
Mortgage loan sales
2,375
At end of period
5,353,577
5,154,138
Non-mortgage loans
1,544,823
1,433,084
Loans originated:
Commercial business
51,081
105,514
250
359
Total other loans originated
51,649
105,873
Non-mortgage loans purchased:
44,337
53,603
Total non-mortgage loans purchased
89,901
146,066
Charge-offs (1)
9,292
1,541,616
1,446,486
-50-
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
28
276
Total performing troubled debt restructured
-51-
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:
3,628
3,206
790
4,961
4,425
Small business administration
937
Commercial Business and other (1)
10,860
20,187
21,176
29,782
Total non-performing loans
32,382
Other non-performing assets:
20,981
Total non-performing assets
42,157
53,363
Non-performing assets to total assets
0.63
ACL - loans to non-accrual loans
182.89
135.79
ACL - loans to non-performing assets
91.87
75.79
(1) 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 at December 31, 2022, 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 portfolios, to ensure that credit quality is maintained at the highest levels. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at March 31, 2022. The amortized cost of Criticized and Classified assets were $80.6 million at March 31, 2023, a decrease of $8.3 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 March 31, 2023 and December 31, 2022.
Included within net loans at both March 31, 2023 and December 31, 2022, were $5.2 million 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.
-52-
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
40,701
40,008
-53-
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
(9,234)
(935)
Balance at end of year
Ratio of net charge-offs to average loans outstanding during the period
0.54
0.06
Ratio of ACL - loans to gross loans at end of period
0.56
0.57
Ratio of ACL - loans to non-performing loans at end of period
266.12
-54-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 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.
-55-
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
Except as set forth below, there have been no material changes from the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2022.
Recent events affecting the banking industry predicated by the failure of three regional banks and resulting media coverage may have eroded customer confidence in the banking system and have adversely impacted liquidity, particularly for regional and community banks like Flushing Bank.
Recent bank failures have generated significant market volatility and adversely impacted stock prices among publicly traded bank holding companies and, in particular, regional and community banks like the Company. Many regional banks experienced higher than normal deposit outflows immediately following the first regional bank failures in March 2023; however, Flushing Bank did not experience such outflows. These developments have negatively impacted customer confidence in the safety and soundness of regional and community banks. As a result of these recent events, customers may choose to maintain deposits with larger financial institutions or in other higher yielding alternatives, which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements regarding the safety and soundness of the banking system and taken actions to ensure that depositors of recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional and community banks and the banking system more broadly.
These recent events may result in potentially adverse changes to laws or regulations governing banks and bank holding companies or in the impositions of restrictions through supervisory or enforcement activities, including higher capital or liquidity requirements, which could have a material impact on our business. The cost of resolving the recent bank failures may prompt the FDIC to increase its deposit insurance premiums or assessments.
-56-
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended March 31, 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
January 1 to January 31, 2023
129,668
18.89
464,794
February 1 to February 28, 2023
29,848
20.22
434,946
March 1 to March 31, 2023
159,516
19.14
During the quarter ended March 31, 2023, the Company repurchased 159,516 shares of the Company’s common stock. On March 31, 2023, 434,946 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
-57-
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)
3.2
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)
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)
4.4
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.
-58-
EXHIBIT INDEX
-59-
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Flushing Financial Corporation,
Dated:
May 10, 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
-60-