10-Q/A: Flushing Financial Corporation Restates Q1 2023 Results Due to Accounting Error

Flushing Financial Corporation has restated its first-quarter 2023 financial results due to an error in the accounting treatment of employee retention credits, impacting net income by $1.1 million.

Summary

• Flushing Financial Corporation has amended and restated its quarterly report for the three months ended March 31, 2023.
• The restatement was necessary to correct the accounting treatment of employee retention credits (ERCs), which were incorrectly recognized as income.
• This error resulted in a decrease of $1.1 million in net income for the three-month period ended March 31, 2023.
• The company determined it could no longer rely on advice from its independent tax credit advisors regarding the probability of realizing the ERCs.
• A material weakness in the company's internal control over financial reporting was identified as of March 31, 2023, specifically related to the probability assessment of ERC income recognition.
• The restatement also impacted other assets, other liabilities, and retained earnings on the balance sheet.
• Basic and diluted earnings per common share were reduced by $0.04 to $0.13 due to the restatement.

Sentiment

Score: 3

Explanation: The document reveals significant negative developments, including a restatement, a material weakness in internal controls, and a substantial decrease in net income. While the company remains well-capitalized, the overall tone is negative due to the accounting errors and the impact of rising interest rates.

Positives

• The company remains well-capitalized under current regulatory requirements.
• Non-performing assets decreased to 0.50% of total assets.
• The company has a strong loan portfolio with solid asset protection.
• The company has available liquidity totaling $3.7 billion.

Negatives

• Net income decreased by 77.8% compared to the same period last year.
• The net interest margin decreased by 109 basis points.
• Interest expense increased significantly due to rising interest rates.
• A material weakness in internal control over financial reporting was identified.
• The provision for credit losses increased significantly.

Risks

• The company identified a material weakness in its internal controls, which could affect the accuracy of future financial reporting.
• Recent events in the banking industry may erode customer confidence and impact liquidity.
• Changes in laws or regulations governing banks could have a material impact on the business.
• The cost of resolving recent bank failures may prompt the FDIC to increase deposit insurance premiums.
• The company's liability-sensitive balance sheet makes it vulnerable to rising interest rates.

Future Outlook

The company expects the net interest margin to expand when the Federal Reserve stops raising rates. The company also expects to reclassify $15.5 million in reduced expense from accumulated other comprehensive loss to interest expense in the next 12 months.

Management Comments

• Management determined that the company could no longer rely on advice from its independent tax credit advisors regarding the probability of realizing the ERCs.
• Management concluded that a material weakness in the company's internal control over financial reporting existed as of March 31, 2023.
• Management is taking steps to remediate the material weakness in its internal control over financial reporting relating to the proper accounting treatment of the ERCs.

Industry Context

The restatement and identification of a material weakness in internal controls come at a time of increased scrutiny of the banking sector, particularly regional and community banks, following recent bank failures. This situation highlights the importance of robust internal controls and accurate financial reporting in maintaining investor confidence.

Comparison to Industry Standards

• The decrease in net interest margin is a common challenge for banks in a rising interest rate environment, but the magnitude of the decrease for Flushing Financial is significant compared to some peers.
• The increase in provision for credit losses is also a trend across the industry, but the specific drivers for Flushing Financial, such as the charge-off and increased reserves on two loans, are unique to the company.
• The company's non-performing asset ratio of 0.50% is relatively low compared to some banks, indicating a generally healthy loan portfolio, but the increase in the provision for credit losses is a concern.
• The company's capital ratios remain strong, which is a positive sign compared to some regional banks that have faced capital concerns.

Legal Proceedings

• The Company is a defendant in various lawsuits, but management believes that the resolution of these matters will not result in any material adverse effect on the Companys consolidated financial condition, results of operations and cash flows.

Stakeholder Impact

• Shareholders will be negatively impacted by the restatement and the decrease in net income and earnings per share.
• Employees may be affected by the company's efforts to remediate the material weakness in internal controls.
• Customers may be concerned about the company's financial stability due to the restatement and the identified material weakness.
• Creditors may be concerned about the company's ability to repay its debts due to the decrease in net income.

Next Steps

• The company will implement additional control procedures to remediate the material weakness in internal control over financial reporting.
• The company will continue to monitor the impact of interest rate changes on its net interest margin.
• The company will continue to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full banking relationship.

Key Dates

Keywords

restatement, employee retention credits, internal control, net interest margin, credit losses, non-performing assets, regulatory capital, interest rate risk, liquidity, financial reporting