Q1 2024 Flushing Financial Corp Earnings Call

Participants

John Buran; President, Chief Executive Officer, Director; Flushing Financial Corp

Susan Cullen; Senior Executive Vice President, Treasurer, Chief Financial Officer; Flushing Financial Corp

Mark Fitzgibbon; Analyst; Piper Sandler

Steve Moss; Analyst; Raymond James

Manuel Navas; Analyst; D.A. Davidson

Chris O'Connell; Analyst; KBW

Presentation

Operator

Good day, and welcome to flushing financials Corporation's First Quarter 2024 earnings conference call. Hosting the call today are Mr. John Buran, President and Chief Executive Officer, and Ms. Susan Cullen Senior Executive Vice President and Chief Financial Officer and Treasurer. Today's call is being recorded. After today's presentation, there will be an A question and answer session to ask a question you may press star then one and to withdraw your question, please press star then two, a copy of the earnings press release and slide presentation that the Company will be referencing today is available on its Investor Relations website at flushing bank.com.
Before we begin, the Company would like to remind you that discussions during this call may contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in the Company's filings with the US Securities and Exchange Commission, to which we refer you during this call, references may be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. And these non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and for any reconciliation to GAAP, please refer to the earnings press release. And over this presentation, I would like to introduce Mr. John Buran, President and Chief Executive Officer, who will provide an overview of the strategies and results Please go ahead, sir.

John Buran

Thank you, operator. Good morning, and thank you for joining us for our first quarter 2024 earnings call. The operating environment in the first quarter was dominated by three events, rising yields on the long end of the curve due to changing expectations of the Fed lowering rates, weak loan demand due to the lack of applications that meet our underwriting and return criteria and the negative activity around one of our largest competitors.
With regard to that competitor, we see its situation as largely unique to that institution with opportunities that may be available to us as a result of the stated contraction in their business.
Against this backdrop, the Company reported first quarter 2024 GAAP EPS of $0.12 and core EPS of $0.14 despite largely benign credit trends for community banks concerns about commercial real estate lending exposure in office and multifamily process. Consistent with our history, we posted strong credit results for the quarter and continued to manage a low risk portfolio that has been the hallmark of our company.
Turning to Slide 4. We're proud of our credit culture, which has produced excellent results over the long term and the results in the first quarter support this net charge-offs for the quarter were only $4,000 or less than one basis point loans. Nonperforming assets were flat quarter over quarter and totaled 53 basis points. Our future credit quality indicators show no issues 30 to 89 day loan delinquencies were only 24 basis points and criticized and classified loans stand at 87 basis points, down 23% quarter-over-quarter. There are several reasons behind these excellent metrics. We're a conservative underwriter. We originate loans with low loan-to-value ratios and high cash flows. We have a long history with our borrowers and our credits have strong sponsor support. We believe the results speak for themselves.
But on the next couple of slides, let me show you how we compare versus industry and peers. Slide 5 shows the results of our in the underwriting over time, both our net charge-offs and noncurrent loans have historically been significantly better than the industry. Our underwriting includes a stress test of higher rates at origination. In fact, stressing our portfolio with a 200 basis point increase in rates and a 10% increase in operating expenses yields a pro forma debt coverage rate 1.3 times at quarter end, we have less than 1% of loans that had an LTV of 75% or more. And about a quarter of these loans have mortgage insurance below loss history, conservative underwriting strong LTVs and debt coverage ratios further demonstrate our low risk profile.
Slide 6 shows some credit metrics compared to peers. We had quarter over quarter improvements in nonperforming assets to assets and criticized and classified loans to gross loans. Our criticized and classified loans to gross loans are expected to continue to remain below peer levels. 30 to 89 day delinquencies remain low. While the peer median is similar to our performance, three peers have ratios over 50 basis points. Our allowance for credit losses as presented by loan segment in the bottom right chart. Overall, the allowance for credit losses to loans ratio increased slightly to 60 basis points during the quarter. We're particularly comfortable with our credit risk profile, especially over key industry concerns Slide 7 shows a summary of these portfolio segments and key potential risk metrics. Our multifamily portfolio is the largest portfolio, but it's very granular with average loan size of 1.2 million. This portfolio has a weighted average LTV of 45% with a debt coverage ratio of 1.8 times. There are minimal credit issues with low nonperforming loans delinquencies and criticized and classified loans. Investor commercial real estate is our next largest portfolio and share similar characteristics like small average loan size, low LTVs, high debt coverage ratios and excellent credit performance. We have zero nonperformance in this portfolio. Our office portfolio is less than 4% of loans, less than 1% of loans. Our Manhattan office buildings, none of which are nonperforming. This portfolio has a weighted average LTV of 49% debt coverage ratios of two times and low levels of criticized and classified loans. We believe these metrics provide a clear overview of our low risk and strong credit culture that has performed well over time. One, it goes step deeper on our multifamily portfolio.
Slide 8 outlines our key credit quality statistics compared to peers. As of year end, our criticized and classified multifamily loans were 27 basis points of total multifamily loans, which is at the low end of the peer group. At the end of the first quarter, this ratio was 54 basis points, which would still rank at the lower end of the peer group. We use a quantitative model to this rate. Our real estate loans this model has been in use for many years and has proven its value through several credit cycles. The model has four main inputs property condition, current DC., our current LTV and loan payment history, the DCR and LTV account for 70% of the rating, and I really cannot be upgraded for any qualitative factors we can only be downgraded at year end. The multifamily reserve to criticized and classified multifamily loans was 147% or at the high end of the peer group. At quarter end, this ratio was 73%, which would still put us at the high end of the peer group. Given these metrics, we see limited risks on the horizon.
I'll now turn it over to Susan to provide more detail on our other financial metrics. Susan?

Susan Cullen

Thank you, John. Slide 9 outlines the net interest income and margin trends for GAAP and core net interest margins declined 23 and 25 basis points respectively, to 2.06% during the first quarter. Absent the episodic items, the margin declined 13 basis points quarter over quarter to 2.01% and net decrease in the quarter was about 10 basis points from episodic items, CD growth and repricing and a seasonal increase in cash going forward. The primary factors impacting demand, our loan originations, loan repricing and CD repricing. While the market determines if rates remain higher for longer, if the Fed will begin to cut rates. The long end of the curve has increased. This has dampened loan demand and route. We remain committed to our pricing and underwriting standards. We did purchase of residential mortgage for approximately 50 million of loans towards the end of the quarter, which should help demand in the second quarter, along with continued loan repricing. The time of purchase was at the end of the quarter. So the full quarter income benefit will occur in the second quarter, while the balance sheet relatively neutral to 100 basis point change of interest rates.
Going to spend a minute to talk about the nuances in the model. We assume a conservative deposit betas in the model for reduction of rates, and we expect we will have opportunities to reduce rates faster than what is assumed in the model for certain products sufficiently to limit expansion, all else being equal. Taking all this into account, we feel that is close to the bottom and should start to expand.
Our deposit portfolio is on Slide 10. Average deposits increased 4% year over year and 3% quarter over quarter. The quarterly increase is partially attributable to seasonality and growth in CDs. Average CDs increased 3% quarter over quarter to 2.4 billion. Average non-interest bearing deposits decreased 4% quarter over quarter. Checking account openings were down 21% year over year as 2023 was elevated due to promotional activity. Despite these challenges in non-interest bearing deposits this is a focus for all of our product groups as incentive plans are heavily weighted to checking accounts. Our loan-to-deposit ratio has improved to 94% from 102% a year ago.
Slide 11 provides more detail on our CD portfolio. Total CDs at 2.5 billion or 35% of total deposits at quarter end, about 1.7 billion of non swap CDs are expected to mature over the next year at a weighted average rate of 4.56%. Historically, we retain about 80% of retail CDs that mature, our current rates ranged from 3.75% to 4.25% with approximately 40 or 50 million of CDs maturing in the second quarter level. These CDs reprice will have a significant impact on our net interest margin for CDs that are repricing in the second half of 2024. The increase in expected repricing rate should be minimal. This should help in the funding costs.
Slide 12 provides more detail on the contractual repricing of the loan portfolio, approximately 1.2 billion or 18% of our loans are repriced to short-term indices. Our interest rate hedge position on these loans increases this percentage 25% for the remainder of 2024, 582 million of loans are due to reprice at 212 basis points higher than the current yield. These rates are based on underlying index at March 31st, 2024 do not consider any future rate moves, including the approximately 40 to 50 basis point move in the 5-year federal home loan bank rate. Since the end of the quarter. This repricing should drive net interest margin expansion once funding costs stabilize.
Slide 13 outlines our interest rate hedging portfolio. We have $1.7 billion industry hedges split between asset hedges of approximately $900 million and funding hedges of 777 million. The combined benefit on these asset yields is about 24 basis points and benefit on the funding side is about 35 basis points. Portfolio does not have any significant maturities in 2020 for these hedges, moved the balance sheet to an effective neutral interest rate position was 100 basis point change in rates. The interest rate hedges helped mitigate margin compression from rising rates and provided immediate income. Our capital position as shown on slide 14, book value and tangible book value per share increased year over year. The tangible common equity ratio decreased by 24 basis points quarter over quarter to 7.4%. The decline is primarily due to the 300 million increase in securities. During the quarter, we purchased 393 million of floating rate securities and reinvested some of our for 38 million of deposit growth. Overall, we view our capital base as a source of strength and a vital component of our conservative balance sheet.
On Slide 15, we discuss our Asian markets, which account for a third of our branches. We have over 1.3 billion of deposits and 746 billion of loans in these markets, these deposits are 18% of our total deposits. And while we only have a 3% market share of the $41 billion market, there is substantial room for growth. Our approach this market is supported by our multilingual staff, our Asian advisory board and supportive cultural activities to participation in corporate sponsorships. This market continues to be an important up opportunity for us and one that we believe will drive our success in the future.
On slide 16, you can see community involvement as a key part of our strategy beyond just our Asian franchise. As outlined previously, during the first first quarter, we participate in numerous local events to strengthen our ties to our customer base. Some other recent highlights include the Lunar New Year parade and flushing and our very popular Lunar New Year tote bag giveaway participating in these types of initiatives has service as a great way to further integrate ourselves to our local communities while driving customer loyalty.
Slide 17 provides our outlook where we share a high level perspective on performance. In the current environment. We continue to expect stable loan balances. As is typical, we expect certain deposits experienced normal seasonality in the winter months and decline in the summer.
In terms of the mill, the two big factors are loan originations and the repricing of CDs. We feel the NIM. is close to the bottom and should start to expand in second half of 2024. Noninterest income should primarily be driven by the fees earned from back-to-back swap loan closings. We expect noninterest expenses to follow normal seasonal patterns with the sequential quarter decline in second quarter and the full year, growth of low to mid-single digits remains intact. As this remains one of our top priorities for 2024 for tax rates can fluctuate. We expect a mid 20s effective tax rate for 2020 for all. And I'll now turn it back over to John.

John Buran

Thank you, Susan. Turning to slide 18, I wanted to share how we think about long-term success and what that means for profitability. Clearly, our profitability levels are pressured and this is largely a function of net interest margin. The impact on the margin can be separated into areas we control and the market in. We control lending spreads on new production, and we're working to improve results. We're prepared to sacrifice volume to ensure we're getting favorable spreads loans will reprice higher through the year according to their contractual terms. We will also focused on funding costs as we've taken a harder look at CD rates and are incentivizing sales of non-interest bearing checking accounts. The return of the normal positively sloped yield curve should help widen the spread between our assets and funding yields despite a neutral balance sheet position and 100 basis point move in rates, a reduction in rates will help reduce pressure on funding costs, and we'll have opportunities to shift the funding mix bending. The expense curve is one of our four areas of focus and will continue to evaluate all expenses lessee. We believe our strong underwriting and conservative risk profile should keep credit costs low. Taking all these factors into account, we expect the NIM should trend to 3% plus with a double digit return on average equity over time. While we control some of these factors, we need a positively sloped yield curve and a more certain rate environment.
On Slide 19, I'll wrap up our key takeaways. We're concentrating on four areas of focus in this environment. Looking to increase our name and reduce volatility, and we expect to see progress during 2024. We're maintaining our credit discipline and our low risk credit profile. Capital and liquidity are strong and are expected to remain that way.
Lastly, we are looking to bending the expense curve and expect lower expense growth in 2024. While the environment remains challenging, we're controlling what we can control and setting the foundation for improving profitability over the long term.
Operator, I'll turn it over to you to open the lines for questions.

Question and Answer Session

Operator

(Operator Instructions) Mark Fitzgibbon, Piper Sandler.

Mark Fitzgibbon

Hey, guys, good morning. Morning. Like Susan, just to clarify, you mentioned you had grown securities this quarter with some of the excess liquidity. And I think you had mentioned they were floating rate securities. What sort of initial yields are on those?

Susan Cullen

Around 60, 70 stuff that's floating rates, although they have a pretty high coupon right now.

Mark Fitzgibbon

Okay, great. And then secondly, do you happen to have your March net interest margin?

Susan Cullen

It obviously we do. I don't have it right at two oh five.

Mark Fitzgibbon

Okay. So am I reading the tea leaves correctly? You're suggesting that you think the margin will be flat in the second quarter and then it starts to expand a little bit in the back half of the year.

Susan Cullen

That's been our what we have shown.
Yes.

Mark Fitzgibbon

Okay. And then it's sort of a bigger picture you know, I guess I'm curious, are you trying to shrink the rent-regulated multifamily portfolio? Is that is that sort of plan over time?

John Buran

Well, I think we what we wanted to do.
There was clearly improved the spreads on that portfolio. And we obviously want to be sure that we stick with our long-standing excellent credit metrics and data in that area. So that clearly, this particular quarter has gone has caused us not to not to grow loans significantly at all. And but we still think it's a we still think it's a viable category. We think we will continue to be of lending in that in that category, but we also want to be sure that we're getting spreads that make sense for us and them and credit quality that we can count on.

Mark Fitzgibbon

Okay. John, I'm curious, I think you have like $246 million of these kinds of loans coming due between now and the end of the year, those borrowers have anywhere else they can go or is it a situation where the bank or all the banks are basically being forced to roll their own paper because there's nowhere else to go for those borrowers.

Susan Cullen

So those are repricing marks, not much, not not maturing.

Mark Fitzgibbon

I got you.

John Buran

We're just on loans that are maturing.

Operator

Your next question will come from Stephen Laws with Raymond James.

John Buran

I don't think we have an answer of your maturing off the top of my head. I'm not sure we have had some places in the numbers, but I can't recall what it is what it is at this point.

Mark Fitzgibbon

Okay. And then one other question I guess, is Islam. I'm sorry, can you hear me, but.

Susan Cullen

Yes, Michael, you look at slide 12 of the presentation, we're showing that we have $500 million worth of bonds to reprice and mature and if you looked at the number, it's the relationship that what's maturing is a very small number.
Okay.
It's the gray bar if you see that.

Mark Fitzgibbon

Got it. Thank you.
And then.
And then one last question, if I could. With the stock trading at about 50% of book value, I guess I wonder if it makes sense to grow at all to do any lending in and would it make sense to kind of dramatically shrink the balance sheet, build capital and and buyback a lot of stock at these levels?

John Buran

So we are run. We've we have been planning and we've been talking about make pretty much maintaining the level of some of lending in the in the not only the multifamily space was pretty much pretty much across the board and banks are continuing to refinance our loans. Maybe pricing us being a little bit more aggressive in our in their run in their pricing but as I said, we are going to stick with our pricing at this point in time. And we budgeted in order to and maintain credit levels throughout this period, kind of waiting for a better opportunity to have to grow the loan portfolio. So in this particular quarter, for example, we put on more from some floating rate securities that obviously could be available in the event today and in the event of a better market for lending.

Mark Fitzgibbon

Right. I guess I'm just suggesting if you think you're going to go from a 2% ROE to a double-digit ROE and you can buy the stock back today at half the tangible book value. It's hard to imagine there's any other investment opportunities for a dollar of capital that are better than the buyback.

John Buran

So valid point.

Mark Fitzgibbon

Thank you, Mark.

Operator

The next question will come from Steve Moss with Raymond James.

Steve Moss

Please go ahead and more than extreme, maybe more than maybe on the fee income side of things. Just curious here about is the pace of swap activity and your expectations there for the upcoming quarter or two?

Susan Cullen

Our loan pipeline is still is out of the upside biologies racking up there of about 174 million, of which 22% is related to swap program of the 172 million. So our normal pull-through rate is between 70% and 80%. So we would expect that continued pull through rate and down field just straight line everything.

Steve Moss

Okay. Okay. Greg. So fit. So that's helpful.
And then in terms of the residential mortgage pool that was purchased late in the quarter, what was the yield on that portfolio after the discount, is that five?

Susan Cullen

80. Okay. And was there any specific certified other guy? Yes.

Steve Moss

And with a 15-year fixed or 30-year fixed, how do we think about the structure?

John Buran

Your adjustables and Okay.

Steve Moss

And do you guys anticipate any additional purchases along those lines going forward?

John Buran

And we look at this opportunistically.

Steve Moss

Okay. Appreciate that. And then in terms of the expenses. I realize there's 1.6 million of seasonality here.
So is it fair to assume 38.3 million good run rate here and.

Susan Cullen

Yes, should they pull up to 1.6, that would be a good run rate.

Steve Moss

Okay. Perfect. Most of my questions have been answered here, so I'll step back. Thank you.

Susan Cullen

Thank you again.

Operator

The next question will come from Mangalore novice with DA Davidson. Please go ahead.

Susan Cullen

Bill Amelio for Emanuele.

Manuel Navas

Hey, good morning. Any thoughts from if rates stay the same and you start seeing that net expansion in the back half of the year, what type of pace it would be?

John Buran

So I think it is going to be obviously a gradual pace because what were what were the factors obviously are what's happening with loan originations. And currently we're talking about the 7% level, the seven handle there. In addition, you have the loan repricing that we talked about, which is up around the six oh six, 80 plus area. And then, of course, the CD the CD portfolio, which has some maturities coming in at the rate closer to what I'm going to walk around retaining CDs at today. So I think those factors that just make for some slower movement, then the margin, the margin improvement, absent, of course, any activity that the Fed would do in the second half of the year. So that is that the we do expect to see them bottoming even without a change in rates.

Manuel Navas

Okay. I appreciate that. And Keith, can you go into any more detail yet on some of the opportunities that you could take advantage out of certain issues with a large competitor in your space as it already help trends at all? I just kind of late lay some of that out for me, please.

John Buran

Well, our pipeline has grown month by month since the beginning of since the beginning of the year. So we're starting to see some activity already, and it's really across the board. And what we're bringing on board is really more a function of our desire, as I said earlier, to stick with a very strict credit on credit criteria while we have look for improving yields in all loan portfolios.

Manuel Navas

So you would say that some of the loan pipeline has benefited from some of the has some of the deposit growth benefited from this as well.

John Buran

I guess both

Manuel Navas

And then have you seen any talent shake loose that interest you.

John Buran

And we've had we've had limited not as many as some of our competitors have announced.

Manuel Navas

And then with that as a better deposit growth this quarter? Is it going to be somewhat slow from here just because of seasonality next quarter on and kind of thoughts on the loan to deposit ratio across the year?

John Buran

Is still there is a yes, there is some seasonality built into that timeframe.
And so we normally expect to see a little bit of a dip in the in the summer months.

Manuel Navas

And then I guess just my last question is can you just comment on multifamily policy and how it could impact you? There's a number issues in the budget going through and they're not finalized. Just where do you stand on on how that could in fact, you said

John Buran

Well, obviously, there's a there's a range of it above possibilities. There's a year where you're talking about some pretty draconian things which appear to be off the board right now. So what is being spoken about and based on our understanding is a little bit less a little bit less stressful than the most extreme versions of the legislature. There's clearly not a lot of detail that we can get into yet until we fund and that really a full examination of the entire budget and its implications. But at least I think some of the more dramatic and drastic things have been while not taken off the board, clearly it looks like they may be watered down. So the expectation of a major disaster, I think, is a little bit lesser less so but I would reserve judgment until we actually are able to pick apart pick apart all the nuances of the legislation from completely understand.

Manuel Navas

Thank you for your comments.

Susan Cullen

Thank you.

Operator

The next question will come from Chris O'Connell with KBW. Please go ahead.

Chris O'Connell

Hey, good morning. Phil. I was hoping that you could provide just when the timing of the loan purchases and the securities investments were in the quarter. Just any sense of what neither of those additions given the timing that kind of net impact or add to their impact on the 2Q margin?

Susan Cullen

The loan purchase was late in the late in March. And the bulk of the investments were bought in late February. That's through March.

Chris O'Connell

Got it. And so is the expectation that there benefits to the margin kind of offsets any lingering funding pressures from repricing in 2Q?

Susan Cullen

Well, they will everything else being equal, they would improve the 9%.
Yes, they have a 60, 70 or so. And on the funding is still has a three handle so that you just mathematically but increased and then everything else being equal.

Chris O'Connell

Got it. Great.
And then just kind of following up on the general discussion on the multifamily market, do you have any kind of additional color as to what you're seeing from the bottom borrowers in your market, particularly I guess what you know, Q1 maturities and repricing. And as you guys are looking and talking to your borrowers about repricing set for this year and where debt service coverage ratios are migrating to you know just how you think about the long-term viability of being in this asset class.

John Buran

And I think the demand for from affordable housing in New York is not going to it because it's certainly not going to abate. And I think some of what you would hear nationally on the on the CRI side is associated with some overbuilding, which is clearly not occurring and in the end in the New York market.
So with respect to what we're seeing in our portfolio, we still see very solid debt coverage, debt coverage ratios. We've seen our run on the borrowers who moved up in rate are able to we are able to accommodate. And frankly, we're keeping a very close watch on our customers reaching out to them 18 months before any any maturity. So we've got a very, very clear picture of them how they would how they would operate under a more of a rising rate and a new rising rate environment. So we're seeing some obviously, some positive benefits with a 200 basis point or so jump upward. And we're seeing our borrowers able to accommodate that by and large.

Chris O'Connell

That's great. And anything more specific, not necessarily exact. And but as to where you've recently seen and kind of where you've mapped out debt service coverage ratios moving to obviously the total portfolio very strong more specifically referring to kind of recent repricing or forward repricings?

John Buran

Yes, I think we have one in a project that we are going to set out a while ago where we were absolutely as you expected, when the loan was placed was put on the books about a year, a 200 basis point increase in the rate. So this was a loan that was in 2011. We did in 2019. The at that point in time, the debt coverage ratio was 28, and we stress that one when we stress that one of them up 200 basis points. And we also stress the operating operating environment that went down to one 41 under a stress scenario. And then when the repricing took place, we had other stressors might have been a little bit more. So that came down to one 31. So when you're starting off with very strong debt coverage ratios as we are about one and OneEighty at this point in time across the portfolio, you have a fair amount of room to accommodate increases obviously, yes, borrowers are not have not necessarily lighting looks at what's happening. But the reality is that though we're not seeing any significant detriment of detrimental performance on their part based upon our ramp initial underwriting criteria and the stress testing we did at origination, and that seems to have kind of held out helps us.

Chris O'Connell

That's great color. Thank you. And thinking about more strategically in longer term as you guys get towards the end of 2024? And any thoughts around balance sheet and overall loan growth as you move into in 2025?

John Buran

Well, we hope 2025 is a better environment than 2024, and we'll be happy to talk about that when the point when we see it we're going to maintain our pricing discipline, though.

Susan Cullen

So depending on what's happening with rates and what the borrower's appetites are, they're still sitting on the sidelines like they seem to be doing a little bit today that will obviously influence growth into 25.

Chris O'Connell

Great. Appreciate the time. Thank you.

Susan Cullen

Thank you, raise.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. John Buran for any closing remarks. Please go ahead.

John Buran

Thank you, operator, and thank you all for attending our first quarter growth Q1 presentation and everybody have a great rest of the day.

Susan Cullen

Thank you. Bye now.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.