8-K: Flushing Financial Corporation Restates Prior Financials Due to Employee Retention Credit Miscalculation; Reports Mixed Q4 2023 Results

Flushing Financial Corporation announced a restatement of its financial statements for multiple periods in 2023 due to incorrect accounting of employee retention credits, while also reporting a mixed fourth quarter and full year 2023 performance.

Summary

• Flushing Financial Corporation has restated its financial results for the three months ended March 31, 2023, the three and six months ended June 30, 2023, and the three and nine months ended September 30, 2023, due to an error in the accounting treatment of employee retention credits (ERCs).
• The restatement will decrease net income by $1.1 million for the period ended March 31, 2023, increase net income by $0.1 million for the three months ended June 30, 2023, decrease net income by $1.1 million for the six months ended June 30, 2023, and decrease net income by $1.6 million and $2.6 million for the three and nine months ended September 30, 2023, respectively.
• The company determined it could no longer rely on advice from its independent tax credit advisors regarding the probability of realizing the ERCs.
• The company reported GAAP earnings per share (EPS) of $0.27 for the fourth quarter of 2023 and $0.96 for the full year 2023.
• Core EPS was $0.25 for the fourth quarter and $0.83 for the full year 2023.
• The company's GAAP net interest margin (NIM) was 2.29% for the fourth quarter, while core NIM was 2.31%.
• Average total deposits increased by 3.1% year-over-year and 0.9% quarter-over-quarter, reaching $6.9 billion.
• Noninterest-bearing deposits increased by $21.6 million, or 2.5% quarter-over-quarter.
• Nonperforming assets to total assets increased to 54 basis points in 4Q23, up from 45 basis points in 3Q23.
• The company repurchased 38,815 shares at an average cost of $15.08 during the fourth quarter of 2023.

Sentiment

Score: 4

Explanation: The document presents mixed results with significant negative aspects. The restatement of financials and the increase in nonperforming assets are concerning, overshadowing the positive aspects like NIM expansion and deposit growth. The sentiment is cautiously negative.

Positives

• The company achieved sequential GAAP and Core NIM expansion in 4Q23.
• Average total deposits increased both year-over-year and quarter-over-quarter.
• Noninterest-bearing deposits saw a significant increase quarter-over-quarter.
• The loan portfolio remains resilient with 89% secured by real estate.
• Credit quality remains strong with low net charge-offs.
• The company successfully repurchased shares at a significant discount to tangible book value.
• The company has largely achieved its goal of becoming interest rate neutral to a 100 bps change in rates.
• Tangible Common Equity to Tangible Assets improved to 7.64% QoQ.

Negatives

• The company had to restate its financial statements due to incorrect accounting of employee retention credits.
• Nonperforming assets to total assets increased to 54 bps in 4Q23 from 45 bps in 3Q23.
• Criticized and classified loans to loans increased to 1.11% in 4Q23 from 1.08% in 3Q23.
• The company has fully reserved for approximately $7.0 million of employee retention credits.
• Loan pipeline decreased 35.3% YoY and 55.1% QoQ to $163.1 million.
• Noninterest expense increased both year-over-year and quarter-over-quarter.
• Checking account openings declined 6.6% YoY in 4Q23.

Risks

• The restatement of financial statements indicates a material weakness in the company's internal control over financial reporting.
• The company's reliance on external tax advisors for ERC qualification proved to be unreliable.
• There was a slight uptick in nonperforming assets (NPAs).
• The company faces challenges in bending the expense curve.
• The loan pipeline has decreased significantly, which could impact future loan growth.
• The company's exposure to Manhattan office buildings, while minimal at 0.6% of net loans, could pose a risk.

Future Outlook

The company aims to increase NIM, reduce volatility, maintain credit discipline, preserve strong liquidity and capital, and bend the expense curve to navigate the current environment and position itself for long-term profitable growth.

Management Comments

• John R. Buran, President and CEO, stated that the company delivered sequential GAAP and Core NIM expansion in 4Q23.
• He also noted that the team continued to successfully execute against the previously announced action plan.
• Buran highlighted the increase in total average deposits and noninterest-bearing deposits during the quarter.
• He emphasized that the loan portfolio remains resilient and credit quality continues to be a strength for the company.
• Buran mentioned the company is expanding its areas of focus to include increasing NIM, maintaining credit discipline, preserving strong liquidity and capital, and bending the expense curve.

Industry Context

The restatement due to ERC accounting errors highlights the complexities and potential pitfalls in navigating government programs and tax credits. The company's focus on NIM expansion and credit discipline aligns with broader industry trends of banks seeking to improve profitability and manage risk in a challenging economic environment. The increase in nonperforming assets is a concern, as it reflects potential credit quality issues that are being closely monitored across the banking sector.

Comparison to Industry Standards

• Flushing Financial's NIM of 2.29% is below the average NIM for US banks, which has been around 3.0% in recent periods, indicating room for improvement.
• The company's TCE/TA ratio of 7.64% is within the range of regional banks, but below some of the larger national banks, which often have ratios above 8%.
• The increase in NPAs to 54 bps is a concern, as the industry average has been closer to 40 bps, suggesting that Flushing Financial may be experiencing more credit quality issues than its peers.
• The company's loan portfolio is heavily weighted towards real estate (89%), which is common for regional banks, but it also exposes them to risks associated with the real estate market.
• The share repurchase program at a 33% discount to tangible book value is a positive sign, as it indicates that the company believes its shares are undervalued, similar to other banks that have been repurchasing shares in the current environment.
• Compared to peers like New York Community Bancorp (NYCB) and Signature Bank (SBNY), which have faced significant challenges in recent times, Flushing Financial's results are relatively stable, but the restatement and increase in NPAs are areas of concern.

Stakeholder Impact

• Shareholders will be impacted by the restatement of financial results and the potential for reduced earnings.
• Employees may be affected by the changes in accounting for employee retention credits.
• Customers may be indirectly impacted by the company's efforts to improve its financial position.
• Creditors may be concerned about the increase in nonperforming assets and the company's overall financial health.

Next Steps

• The company intends to file amendments to each Form 10-Q to correct the accounting treatment of the ERCs.
• Management is taking steps to remediate the material weakness in its internal control over financial reporting.
• The company will host a conference call on January 26, 2024, to discuss the fourth quarter and full year results.
• The company plans to release First Quarter 2024 financial results after the market close on April 23, 2024, followed by a conference call on April 24, 2024.

Key Dates

Keywords

financial restatement, employee retention credits, net interest margin, nonperforming assets, loan portfolio, deposit growth, share repurchase, credit quality, internal controls, financial results