Flushing Financial Q2 2023 Earnings Call Transcript

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July 26, 2023

There are 6 speakers on the call.

Operator

Welcome to the Flushing Financial Corporation Second Quarter 2023 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. John Duran, President and CEO.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, and thank you for joining us for our Q2 2023 earnings call. Following my prepared remarks, Susan will review the financial trends and we will then answer any questions. During the Q1, the company instituted a 6 step action plan to enhance the resilience of our business model and strengthen our financial We executed this plan well during the Q2 and are pleased with the progress we have made so far on key points. 1st to move more towards interest rate neutral, we added more than $400,000,000 of asset swaps.

Speaker 1

Additionally, $250,000,000 of funding swaps became effective during the quarter. We're And total floating rate loans are approximately 50%. These actions significantly reduced our interest rate Adjusted returns and overall profitability. As a result, yields on the loan pipeline rose 20 basis points While it will take time for new and repriced loans to have a significant impact on overall loan yields, We are encouraged by the results so far. 3rd, we're looking to expand our client base and build loyalty by emphasizing our With a low risk profile of our loan portfolio.

Speaker 1

5th, we are preserving strong liquidity and capital. We are looking for ways to expand our liquidity sources despite having available liquidity of nearly $4,000,000,000 Average deposits increased both year over year and quarter over quarter. Capital ratios were also stable during the quarter. 6th, we are tightening our expense controls by placing greater scrutiny on operating and discretionary expenses. In a period of high inflation, Q2 'twenty three core expenses are down approximately 1% year over year.

Speaker 1

Overall, we expect these decisive actions to result in an improved financial profile over time. These actions along with our strong liquidity will also allow us to continue our long history In addition to our action plan, slide 4 outlines Our 4 areas of focus for long term success. 1st, interest rate risk is a priority and the actions we have taken have resulted in a 64% reduction in this risk over the past year. This is important given the outlook on rates. 2nd, we are focused on maintaining our credit quality.

Speaker 1

The current debt service coverage ratio is 1.8 times for our multifamily and investor The 3rd area of focus is liquidity, which I touched on in a previous slide. We have significant liquidity and are looking to fully utilize our balance sheet to add more. The last area of focus is customer experience. Central to our ability to deliver exceptional services is our ties To our local communities, about a third of our branches are in Asian markets and we continue to implement Community engagement initiatives and grow our presence in these areas to build on our loyal customer base. We also continue to enhance our digital banking solutions, which create a more convenient experience and allows us Slide 5 represents our liquidity profile.

Speaker 1

We have approximately 3 point And we're working to expand borrowing capacity from existing relationships by pledging several types of collateral. As a result, we have a high degree of comfort in the stability of funding and available liquidity. Our loan portfolio is outlined on Slide 6. We have structured our real estate loan portfolio to ensure stability With multifamily and investor commercial real estate comprising 66% of the total portfolio. Manhattan office buildings are approximately 6 tenths of 1% of net loans.

Speaker 1

In general, the real estate portfolio has strong sponsor support and excellent credit performance. Overall, We remain very comfortable with the quality of the loan portfolio. Slide 7 provides the detail on our Asian markets. Once the Bensonhurst branch in Brooklyn opens later this year, a third of our branches will be in predominantly Asian markets. We have $1,200,000,000 of deposits and $764,000,000 of loans in Asian markets.

Speaker 1

These deposits are 18% of our total deposits and we have only a 3% share of market. So there's substantial room for growth. Our approach to this market is supported by our multilingual staff, Our Asian Advisory Board and our support of cultural activities. This market, which has total deposits of $36,000,000,000 continues to be an important opportunity for us. Slide 8 depicts the growth of our digital banking platforms.

Speaker 1

We continue to see high growth rates in monthly mobile deposit users, Users with active online banking status and digital banking enrollment. The numerator platform, which digitally originate Small dollar loans as quickly as 48 hours continues to grow. We originated approximately $10,000,000 of commitments in the first We continue to explore other FinTech product offerings and partnerships to further enhance our digital banking platform and The 2nd quarter had several notable events to highlight, as you can see on Slide 9. As pictured, we hosted a ribbon cutting ceremony at our Hopahog branch, which opened late in the Q1 in a vibrant Industrial Park. Community involvement is what separates us from other banks.

Speaker 1

Here's a sample of the events we participated in during the quarter. Participating in these types of initiatives builds on our already Strong ties with our local communities and drives customer loyalty. I'll now turn it over to Susan To provide more detail on our key financial metrics. Susan?

Speaker 2

Thank you, John. I'll begin on Slide 10. The company reported 2nd quarter 2023 GAAP earnings per share of $0.29 and core earnings per share of $0.26 The quarterly results were significantly improved compared to the Q1. Average total deposits increased 7% year over year and 1% during the quarter. We continue to grow our CD portfolio, which is now 30% of average deposits.

Speaker 2

The cost of deposits totaled 2.68%, while the cost As expected, loan growth was muted, increasing only 1% year over year. However, the loan pipeline increased 56% quarter over quarter with pipeline yields and core loan yields also expanding. Non performing assets declined 6% during the quarter, reflecting our conservatively underwritten loan portfolio. Overall, the 2nd quarter results were an improvement versus the first as we continue to adjust to the higher rate environment. Slide 11 depicts our deposit portfolio.

Speaker 2

Despite the Fed raising rates and industry deposits declining, our average deposits have increased 7% year over year and 1% quarter over quarter. The growth is driven by the 150% year over year and 22% quarter over quarter increase in CDs, which lengthened the duration of our liabilities, thus reducing our liability sensitivity. Growing non interest bearing deposits The checking account openings increased 10% year over year. Our loan to deposit ratio has improved 102% from 105% a year ago. As a reminder, we generally have seasonality in certain segments of our deposit base and the summer months balances are generally lower than the remainder of the year.

Speaker 2

Slide 12 outlines our loan portfolio and yields. Net loans increased 1% year over year, We were down 1% quarter over quarter. Loan closings also declined year over year and quarter over quarter As customers adapt to the increased rate environment, but the yield on the closings was over 7% for the 2nd consecutive quarter. Core loan yields increased 19 basis points during the quarter and for the 3rd consecutive quarter yields on the loan closings exceeded the yields on the satisfaction at an accelerating pace. Prepaid and penalty income declined to $278,000 in the quarter from $2,300,000 a year ago and $610,000 in the prior quarter.

Speaker 2

The loan pipeline increased 56% Quarter over quarter with over 35% of the pipeline consisting of attractive back to back swap loans and approximately 50% Our floating rate loans. Slide 13 provides more detail on the contractual repricing of the loan portfolio. Approximately $1,100,000,000 or 16 percent reprices of each Fed move. During the quarter, we added $400,000,000 of or over 21% of the loan portfolio.

Operator

For the

Speaker 2

remainder of 2023, another $458,000,000 is due to reprice at a rate of In 2024 and 2025, about $1,500,000,000 of loans will reprice 220 basis points to 230 basis points higher. These values are based on the underlying index value at June 30, 2023, and do not consider any future rate moves. This repricing should drive net interest margin expansion once funding costs Stabilize. Slide 14 outlines the net interest income and margin trends. The GAAP net interest margin declined only 9 basis points to 2.18 percent during the Q2.

Speaker 2

This is the lowest amount of compression over the past 4 quarters and is consistent with the NIM for the month of March. We expect the NIM will remain under pressure as long as the Fed raises rates, but the pressure should be more manageable Based on the current forecasted rate hikes through the remainder of the year. After a lag, we expect the NIM would begin to expand as the pressure on funding costs ease And loans continue to reprice higher. Turning to Slide 15, as John mentioned, one of our goals for 2023 is to significantly move The goal for the balance sheet is to better match the duration of our assets, which is 3 to 4 years, More closely to the duration of our funding was about 1 to 2 years. We have made considerable progress over the past year.

Speaker 2

For an immediate rise of 100 basis points in rates, our net interest income would decline by 3%. A year ago, this impact was a 9% decline or almost a 2 thirds improvement. The addition of interest rate hedges and more floating rate assets Key drivers of the reduced sensitivity. The interest rate hedges are particularly important as they provide immediate income in addition to moving the balance Bottom line, we executed well on this strategy and expect to continue to improve in this area. Slide 16 provides more detail on our CDs.

Speaker 2

Total CDs are about $2,000,000,000 or a third of the total deposits at June 30, 2023. CDs helped to lengthen the duration of our funding to match the duration of our assets more closely. Excluding CDs with interest rate hedges, about 60% of our CD portfolio will reprice higher over the next year. We expect to retain a high percentage of our CDs. Our current CD rates range from 4.5% to 5.25%.

Speaker 2

All else equal, we expect the CD repricing to pressure our net interest margin. Our net charge off history is on Slide 17. As you can see, we have a long history of solid asset quality because of our low risk credit profile and conservative underwriting. Net charge offs of 9 basis points returned to normalized levels this quarter. We expect minimal losses in the loan portfolio if there's an economic downturn Given the large percentage of our loan portfolio is secured by real estate with a low average loan to value.

Speaker 2

Additionally, the weighted average debt service coverage is 1.8 times in the multifamily and investor real estate portfolios and 1.2 times in a stress scenario, Criticized and classified assets decreased during the quarter to below 71 basis points. Historically, these levels have been significantly below our peers. Our allowance for credit losses is presented by loan segment in the bottom right chart. The higher risk portfolios have reserves greater than 1% of that portfolio. Overall, the allowance for credit losses to loans ratio increased to 57 basis points during the quarter.

Speaker 2

Remain very comfortable with our credit risk profile. Our capital position is shown on Slide 19. Book value and tangible book value per share increased year over year. We repurchased nearly 530,000 shares at an average price of $12.94 which is a 43% discount to our tangible book value. The tangible common equity ratio was stable at 7.71%.

Speaker 2

Our regulatory capital ratios are strong and overall we view our capital base as a strength and a vital component of our conservative balance sheet. Slide 20 provides our outlook. We do not provide guidance. This discussion is meant to give our high level perspective on performance in the current environment. Despite the robust increase in the loan pipeline, we expect loan growth to remain challenging.

Speaker 2

However, the higher percentage of back As a reminder, certain deposits are seasonally lower in the summer months before increasing by year end. There are several factors that will affect the net interest margin. First is the pressure from the Fed raising rates and the natural shift in the deposit mix. 2nd is the size and growth of the loan portfolio. 3rd is the repricing of both CDs and certain loans.

Speaker 2

4th, our interest rate hedges were favorable in the 2nd quarter And an increase in rates by the Fed will benefit this portfolio. Overall, we expect net interest margin pressure as the Fed increases rates, But all else equal, the pressure should be lower than what was experienced in the second half of twenty twenty two and the Q1 of 2023. The core net interest margin was 2.19% for the month of June. Non interest income should benefit from the back to back swap loan closings. Non interest expenses were well controlled in the 2nd quarter And extra scrutiny is placed on all expenses.

Speaker 2

We expect the operating expenses to follow normal seasonal patterns. Lastly, the effective tax rate should approximate 26% to 28% for 2023. I'll now turn it back over to John.

Speaker 1

Thank you, Susan. On Slide 21, I'll wrap up with our key takeaways. We continue to execute Our action plan, which is improving our profitability in the short and medium term and establishing a foundation for long term success. We're happy with the limited NIM compression for the quarter and have significantly improved our sensitivity to higher rates. Our asset quality and liquidity are conservative and sound.

Speaker 1

We continue to serve our clients and deepen relationships. Our overall financial metrics improved during the quarter, but we're remaining cautious given the environment. The decisive actions we are taking to improve the overall performance will allow us to continue our long and consistent record of Dividend Payments. Operator, I'll turn it over to you to open up the lines for questions.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead, sir.

Speaker 3

Hey, guys. Good morning.

Speaker 2

Good morning, Mark.

Speaker 1

Hi, Mark.

Speaker 3

Hey, Susan, just to clarify, one of your Comments about the margin, you sort of talked about the pressure being more manageable than what we saw in the second half of 'twenty two and the Q1 of 'twenty three. Should We take that to mean that the margin you think will be down this quarter something in the neighborhood of what we saw in the second quarter, assuming The Fed raises rates 25 basis points later today?

Speaker 2

Given where the Fed is in their rate raising cycle, that's A primary driver of that comment, but I would expect something some compression Probably closer to what we've seen in the Q2 than what we had seen in the previous three quarters.

Speaker 3

Okay, great. And then secondly, I wondered if you could share with us what IGO balances were at the end of the quarter?

Speaker 2

In fact, there's around $200,000,000

Speaker 3

$200,000,000 Okay, great. And John, I wondered if you had any Targets for either tangible common equity or CET1 going forward?

Speaker 1

Well, I think we want to stay close to that 8% range. Obviously, we're not there At this point in time, but we're very cognizant of the importance there. And I think that the Fed stopping It's a rise in interest rates could help us a little bit there in terms of the securities portfolio Valuations, but we're comfortable where we are right now for the present. I think we want to we'd like to move it up a little bit more.

Speaker 3

Okay. And then I know I saw that you had hired a team from Signature Bank. I guess I was curious roughly How large was their book of business and maybe how long you think it takes for them to be able to bring that over to Flushing?

Speaker 1

We're really not disclosing that, but it's a group that has a significant Basis for their success in the past.

Speaker 3

Okay. And last question, I wonder if you Share with us the 30 to 89 day delinquencies. I know they come out in the queue, but if you had those handy that would be great.

Speaker 2

They're down significantly from where they were in the prior period.

Speaker 4

Okay. Thank you.

Speaker 2

I don't have them right at my fingertips.

Speaker 3

Thank you.

Speaker 2

Thank you, Mark.

Operator

Our next question comes from Chris O'Connell with KBW. Please go ahead sir.

Speaker 5

Hi. Just a follow-up on the margin discussion. Do you have the spot in for June?

Speaker 2

Yes. June was 2, 2019. And good morning, Chris.

Speaker 5

Good morning. Okay, great.

Speaker 1

And then as far

Speaker 5

as The hedges that were put on this quarter, what was the timing?

Speaker 2

What do you mean? Are you looking for the duration or which month they were put on? What do you mean by the timing?

Speaker 5

Well, I believe last quarter, the hedges were put on pretty late in the quarter. So the impact Well,

Speaker 1

here again, they were put on pretty late. They were put on in May Predominantly.

Speaker 5

Okay. And do you have the duration?

Speaker 1

For the end of beginning middle to the end of May.

Speaker 5

Okay. And do you have the duration?

Speaker 2

They were primarily 5 years, 3.5 to 5.

Speaker 5

Great. And do you have the rate as well?

Speaker 2

I think if you look at the presentation, we have those all the swaps all broken out in there, Chris, on I'm flipping through the presentation because I know it's in here. Look at like Page 15 or so that has a lot of the information on the swaps that you may be looking for.

Speaker 5

Okay, thanks. And then On the credit side, can you just provide any color around the like $1,700,000 I think or so Of C and I net charge offs this quarter?

Speaker 2

It was one relationship that had been downgraded and We've been watching very carefully over the last 6 to 9 months and additional information became Available that made us realize that the collectability was questionable and we charged it off.

Speaker 5

Okay, got it. And that's fully is that fully charged off?

Speaker 2

Yes.

Speaker 5

And then I noticed, I think, the Manhattan office exposure increased to 0.6% of loans from 0.1% last quarter.

Speaker 1

The differential is the number we had been quoting in the past was Midtown Manhattan office, Which is that 10th of a percent. We've expanded it to include really all of Manhattan. So that's what the larger number is.

Speaker 5

All right. Got it. That makes sense. And for the office space

Speaker 1

We're not doing office base just for the record.

Speaker 5

I figured. Yes, that's right. Chuck my eye. And as far as the office

Speaker 2

exposure, I know it's

Speaker 5

pretty low. I think ballpark, dollars 150,000,000 or so. I know it's pretty low. I think ballpark $150,000,000 or so. I was just wondering if you had the maturity schedule for how that comes how much is coming due, over the next 12 to 18 months and if you have a specific reserve number against it?

Speaker 1

I don't think we have a reserve against any of it at this time.

Speaker 2

Not any additional reserve other than what you have against the CRE portfolio in total. And we know when these loans will be repricing, But that's not information we're sharing at this time. They all have a nice debt coverage ratio and have low LTVs.

Speaker 1

And there's nothing unusual about the structure. It's typical our typical 5 year.

Speaker 2

Right. They also have very strong sponsors Behind these buildings.

Speaker 5

Great. And it sounds like based on the loan pipeline, With all the swaps in the pipeline that banking service fees Could remain strong year after the pickup quarter over quarter this quarter. Would you expect it to kind of remain in a similar range Where you saw in 2Q or could it move up a little bit more or is 2Q particularly strong?

Speaker 2

I think if you're looking at our core that we would expect them to go up. Obviously, our GAAP Non interest income has the fluctuations for the market valuations included in there, but we would expect our core Fees to increase with the number of swaps deals we've been transacting.

Speaker 5

Okay, great. Great. And then, I mean, based on what you were discussing on the TCE target and relatively low balance sheet growth here and where the stock is trading. I mean, how are you thinking about buyback utilization

Speaker 2

Our capital planning has not changed at all, Chris. We still think The best thing to do with our excess capital is to redeploy it into the business to grow, followed by returning to shareholders through the form of dividends and finally share We always take a look at it and opportunistically take a look at the market and see if that's the best place to deploy our capital. But again, growing the businesses is the first priority with capital.

Speaker 5

Got it. And just taking a step back and kind of thinking about things more strategically, I mean, obviously, this quarter, you had good coverage. But if NIM is down similar to Q2 levels, Things become a little tighter. It seems like in the back half of the year. I mean, how are you guys thinking about dividend coverage going forward?

Speaker 5

And Just strategically, what are the decision making factors kind of around that?

Speaker 1

We don't see any reason to change our dividend policy at this point in time.

Speaker 5

Okay, got it. That's all I had for now. Thank you.

Speaker 2

Thanks, Chris.

Speaker 1

Thanks, Chris.

Operator

Our next question comes from Manuel Nieves with D. A. Davidson. Please go ahead, sir.

Speaker 4

Hey, good morning. Most of my questions have been answered, but just kind of Can you remind me the expected size of deposit seasonality? Is it just going to follow past your trends?

Speaker 1

So the typical trend is a downturn in seasonal balances In the summer months, anywhere from $150,000,000 to $200,000,000 And then as we approach the fall, That starts to increase Rebound. That starts to rebound. Thank you.

Speaker 4

And what are your kind of current offers on a deposit side in the market?

Speaker 2

So our CD offering is about 4.5 to 5.25.

Speaker 4

Okay. And you're still seeing solid flows on your Oppers?

Speaker 2

Yes.

Speaker 4

I guess you talked about the CRE team. What's kind of the pipeline going forward and kind of what are the opportunities you're seeing in marketplace for talent?

Speaker 1

We're always on the outlook. I think that there's From what we understand, there may be some situations with respect to payments to individuals that may be coming to an end that may present an opportunity for additional staff to come our way.

Speaker 4

Okay. I appreciate the comments. Thank you.

Speaker 2

Manuel, I just want to emphasize that this Team also is deposit gatherers. They're not just loan gatherers. So I think that's an important distinction.

Speaker 4

Okay. I appreciate that.

Speaker 2

Thank

Operator

I'll now turn the call over to John Buran for any closing remarks.

Speaker 1

Well, thank you everybody for joining us today on our Q2 20 We appreciate your continued support of Flushing Financial and look forward to talking to you again next quarter. Thank you very much.

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Flushing Financial Q2 2023
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