Q4 2019 Earnings Call
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Welcome to the flushing Financial Corporation fourth quarter 2019 earnings conference call hosting the call today are John Buren president and chief executive officer and Susan Collins seemed like you to vice president Treasurer and Chief Financial Officer. Today's call is being recorded. All participants will be in a listen-only mode. Should you need assistance, please signify conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press star then to a copy of their earnings press release inside presentation that the company will be referencing today are available on its investor relations website at home before we begin the company would like to remind you that discussing the discussion during this call contain forward-looking statements made under the Safe Harbor provisions of the private Securities litigation wage.
Farm Act of 1995
Such statements are subject to risks uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements. Such factors are included in the company Thousand Islands with the US Securities and Exchange Commission flushing Financial Corporation does not undertake any obligation to update any forward-looking statements except as required under applicable law took. This call references will be made to non-gaap financial measures as supplemental measures to review and assess operating performance. These non-gaap Financial measures are not intended to be considered in isolation is the substitute for the financial information prepared and presented in accordance with gaap for information about these non-gaap measures. And for reconciliation to Gap. Please refer to the earnings release and presentation. I'd like to introduce John Buren president and chief executive officer.
Thank you. Good morning, everyone and thank you for joining us for our fourth quarter 2019 earnings call on today's call. We hope to provide you with additional insight into our consistent positive earnings power business strategy and sustainable competitive advantage of begin with our fourth-quarter and full-year 2019 highlights and then provide an overview of the strategies. We are executing to continue to create long-term shareholder value. Then our CFO Susan Collins will review our financial performance in Greater detail about following our prepared remarks Susan and I will address your questions.
beginning
On slide three, we provide our quarterly highlights and are pleased to report fourth-quarter 19 Gap diluted EPS was $0.45 up 22% off prior quarter while cord diluted EPS was $0.41 then interest income increased by 6% from the third quarter of 2019 as the net interest margin improved by 11 basis points primarily due to the cost of funds decreasing 11 basis points and the yield on the loan portfolio increasing four basis points off as we reported in previous earnings calls, we had an opportunity to reduce funding costs. We were able to capture 11 basis points of opportunity this quarter off. There is an additional opportunity to reprise downward as there are 1 billion dollars of retail CDs with an average rate of 220 maturing in 2020 month.
furthermore
The cost of funds demonstrated continuous Improvement throughout the quarter the swamps we put on in Prior periods benefited both our interest and non-interest income long as there was a small upward slope in the Curve.
Credit quality remains pristine and continues to improve the classified assets at the lowest level since 2008 importantly delinquent loans have decreased to 5:34 basis points of gross loans at December 31st.
Loan closings for the fourth quarter of nineteen where 270 million and we remain well-positioned for continued loan growth in 2024. The year we originated 1.2 billion dollars of loans of which over half were seeing eye origination at December 31st, 2019. The loan pipeline remained a healthy $325 million compared to the pipeline leading into 2019 of $197 million pre-staging stronger growth for 2020.
The 2019 total 4% which was in line with our expectation a mid single-digit growth driven primarily by cni loans growing in excess of 20% as part of our balance sheet strategy to become less liability sensitive. We have successfully increased our origination of my loans, which are predominantly floating-rate to approximately 19% of total loans at year end 2019.
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Total deposit next improved as we continued our strategic focus on increasing core deposits which increase nearly 7% in 2019. Our initiative continues to be an attractive deposit source as these deposits grew 12% in 2019.
Ongoing focus on developing and maintaining a multilingual Branch staff to serve our diverse customers in New York City Market area remains a key sustainable competitive advantage.
this quarter
We strengthened our Asian market network with the universal Banker model by opening a new branch in Hicksville New York and relocating are Bell Boulevard branch to Bayside, Queens bringing our total retail Network to 20 branches. We continue to remain excited about our pending acquisition of Empire Bancorp, which is expected to close in the second quarter of 2020 while required applications and notifications have been filed with the Regulatory Agencies.
A strategic objectives are summarized on slide for increase core deposits and continue to improve the funding mix managed net loan growth and focus on a field and the best risk-adjusted returns enhance core earnings Power by improving scalability and efficiency profitable growth and expansion through new distribution change in business lines matter manage credit risk and remain well capitalized on the role stress test scenarios.
on Slide Five
We summarized why we believe the acquisition of Empire is such a great strategic fit as it meets our priorities by increasing cord deposits managing net loan with a focus on the best risk-adjusted returns enhancing earnings power with more scale enhancing profitable growth and expansion while remain disciplined over credit risk and maximizing shareholder value over the long-term the Empire deal increases our non-interest bearing deposits by 44% off creating Long Island's six largest bank by deposit share among Regional and Community financial institutions.
Importantly on slide 6 we detail our assumptions behind our forecast of 19% accretion to our 2021 consensus EPS estimates as she can see we're assuming a modest 1% incremental after-tax spread upon moving Securities two loans from Empires excess liquidity to achieve an additional 2 million dollars in income the most significant earnings impact however will come from nine million dollars in cost reductions.
Slide seven, we see significant opportunity to improve key performance metrics related to efficiency and profitability this slide summarizes the key metrics as well from Standalone to perform a flushing with projected cost Savings of approximately fifty percent of Empires 2029 interest expense base or nine million dollars.
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Cost savings have been identified and will be driven by eliminating redundant systems consolidating back office operations and reducing non client-facing costs.
This acquisition is anticipated to increase our balance sheet on a pro-forma basis to approximately eight billion in assets 6.4 billion in loans and 5.9 billion and deposits while expanding our footprint in to Suffolk County importantly. The acquisition is anticipated to improve r r o a a r o n a t c e and efficiency ratio after the acquisition closes our Branch network will increase the 24 branches with enhanced access to the Suffolk County job market, the three new branches will open the door to a county with approximately 1.5 million people and 75,000 businesses.
referring
Now the slide eight we remain focused on these key areas exceeding customer expectations enhancing earnings, power strengthening our commercial bank balance sheet and maintaining a strong risk management philosophy as previously announced.
To further enhance our existing footprint. We've been executing a digital transformation strategy that's currently in this testing phase and when complete will improve our customer experience or digital offerings will be enhanced to state-of-the-art technology allowing us to modernize the customer experience without adding to our existing infrastructure.
We expect to have this transformation completed in the second quarter of 2020 Susan will provide additional details shortly overall would remain well capitalized and our focus on our strategic objectives enables us to further deliver profitable growth and long-term value to our shareholders now, I'll turn the call over to Susan to provide additional color on our performance.
Thank you, John. I'll begin on slide nine interesting home for the fourth quarter of 2019 with 41 million dollars up nearly 6% quarter-over-quarter due to the net interest margin increasing basis points to 248.
The yield on the loan portfolio increase four basis points quarter-over-quarter while the cost of funds decreased 11 basis points, the cost of funds continuously improved throughout the quarter the fact that interest margin was $233 flat quarter-over-quarter as a reminder coordinate interest margin excludes, the prepayment penalties recovery of interest on non-accrual loans off and the mark-to-market adjustment on the qualifying Hedges the Fed rate decrease in late September and October 2019 affected the rate of our C&I loan portfolio in the beginning of the fourth quarter with a steady interest rate environment. We believe the yield on these loans will also stabilize
year-over-year the net interest margin decreased 9
This point as the cost of funds increased six basis points while the yield on interest-earning assets decreased four basis points on slide ten. We highlight a strategy built into the balance sheet. We are using to reduce funding costs to support and stabilization as a reminder. We have 1 billion dollars of retail CD scheduled to mature in 2020 at a weighted average cost of 2.5% as highlighted on the right hand side current replacement funding costs are significantly lower than maturing CD rates importantly over the long-term will position our balance sheets be more than a straight neutral which is allows us to seize opportunities as we continue to actively manage funding costs and evaluate strategies to further strengthen our balance sheet and all interest rate environments.
On slide 11 total loans were five point eight billion dollars up 4% year-over-year as we continue to focus on the origination of full banking relationships through the bulb multi-family and commercial real estate loans.
These origination still 89% of low production for the fourth quarter approx 50% of our origination in the quarter were non-brokered loans, we continue to diversify our loan portfolio. My origination for the quarter was 31% of total origination and a record of 52% for 2019. John mentioned that total C&I loans amount to 90% of the loan portfolio December 31st, but what differentiates us from our competitors is since 2011. We have originated almost three billion dollars of cni loans while recognizing approximately 40 basis points of loss excluding the taxi Medallion portfolio as a percentage of origination over that same. Our C&I portfolio does not contain any leveraged Lending.
As we continue to shift our balance sheet into a more interest rate neutral position. We have originated floating-rate C & islands in the third quarterly fourth-quarter of 19th. The rates on these floating rate loans dikhao to the Federal Reserve lowering rates with a steady interest rate environment. We would expect stability in these floating rates. The mortgage loans should also provide stability as they re price at a slower Pace than see the girls in the Silay portfolio continues to offer advantages to the company primarily continued diversification of the loan portfolio as these are primarily adjustable-rate Loan offers more protection in the rising rate environment, and they assist the company and moving to a more interest rate neutral position.
December 31st our loan pipeline total $325 billion dollars
Average rate of 4.18% The pipeline is a hundred twenty-eight million dollars greater than the pipeline at December 31st, 2018. The composition of the pipeline is 58% wage rate and 42% fixed rate the loan-to-value on a real estate portfolio at quarter-end was a modest 39% and the debt service coverage ratio for the current course origination of multifamily commercial real estate and one to four-family mixed-use loads is 184% Importantly we underwrite each loan using cap rate in excess of 5% and the stress test each loan.
We remain committed to our strategy of focusing on seeing eye commercial real estate loans and multi-family loans and the fourth quarter of nineteen these loan closings represented 31% 20% and 39% respectively of all origination while maintaining our conservative loan-to-value and debt coverage ratios.
On July 12th, non-performing loans were approximately 13 million dollars improving nearly 10% quarter-over-quarter as credit quality remains one of our core strengths in the fourth quarter. We recognized net recoveries and recorded a benefit for loan losses of $300,000 due to changes in the portfolio mix and importantly total delinquent loans decreased to thirty four basis points total loans from 49 basis points at September 30th.
On real estate dependent non-performing loans amounted to 26% as of December 31st.
the loan
Leaving just slide thirteen as a reminder. We actively manage our loan portfolios to identify and resolve problem loans recording charge-offs early in the delinquency process. As a reminder. We are dead historical seller of non-performing loans as we continue to grow our balance sheet where you made mindful of maintaining asset-quality as shown here over two decades flushing has demonstrated Superior took metrics and a year and 2019 are total classified assets improved to the lowest level 2008 as I previously stated since 2011. We originated over three billion dollars of Samsung phones recording less than 40 basis points of losses, excluding taxi Medallion. When losses are compared to the origination over the same time. Our credit discipline include limits on concentration a specific Industries and general voice of high-risk Industries.
Further we believe the loan-to-value prior lost metric.
associate with the real estate portfolio will minimize volatility of future charges
It's highlighted on slide 14 a strong credit quality metrics have resulted in our coverage ratio increasing from 129% to 164% year-over-year as of December 31st, 2019 with the adoption of Cecil 20/20. We estimate our day one impact increase our current balance between one and three million dollars or five and 15% off. However, we continue to evaluate our assumptions used in creating this estimate continue to slide fifteen. The current portfolio loan to value is less than 40% based upon the value of Life on collateral at origination, and we do not adjust the appraised values for increases.
Given the low loan-to-value associate with the non-performing real estate loans. We do not foresee an increase in related expenses.
Like sixteen shows 90-day delinquencies as a percentage of loan loans originated by year over all our credit quality remains pristine as you can see the results of our strong underwriting discipline 111 loans delinquent greater than 90 days for the last 10 vintage years wide 17 highlights the evolution of our funding mix as we increase funding the percentage of core deposit off as increased when we need to access the wholesale funding Market, we can advantageous Lee ladder out the liabilities for longer terms for deposits increased 5% quarter-over-quarter and 7% a year, totaling seventy 2% of all deposits at December 31st compared to 52% at December 31st, 2010 belong to deposit ratio for the fourth quarter of 2019 was 140% compared to 116% at September 30th.
We believe the acquisition.
Bike or enhance this ratio improve our funding costs slide eighteen our deposits increased 2% quarter-over-quarter and year-over-year growth is primarily driven by money market and non interest-bearing accounts. We continue to focus on the growth of core deposits with an emphasis on non interest-bearing deposit accounts, which increased over 5% year-over-year thousand transaction accounts increased 7% from December 31st, 2018, non interest-bearing deposit the $435 million represent 9% of total deposits.
Turning to slide. Nineteen. We continue to strengthen our presence within the Asian market our Chinatown Branch continues to perform. Well and Achieve targeted levels in the fourth quarter. We open a new branch in an attractive Asian market in Hicksville New York to further expand our successful ethnic strategy than able to us to grow more than 12% and deposits within our Asian branches. We continue to have a strong focus on the community where we have over 800 million in deposits at branches that serve the Asian communities and over 650 million dollars in loans. We continue to capture strategic growth opportunities within the black market aided by our Asian Advisory Board and are multilingual staff.
also in order
Diversified deposit Gathering channels. We are improving our digital online mobile offerings as part of our overall digital strategy, which we summarized on slide twenty.
As John mentioned this strategy will improve our customers overall banking experience without requiring us to add to our physical infrastructure. These Technologies reduce the overall cost of gathering to pause. We expect the new technologies to be fully operational in the second quarter of 2020 and enable us to attract customers outside our footprint and deepen current customer relationships with Technologies are currently undergoing user acceptance testing moving just flight 2190 expense using Gap increased only four million dollars or 3% for the year while expanding our home network and negotiating the acquisition of Empire corn on interest expense improved even more increasing less than 2 million dollars or 2% continuing to manage expensive and improving the new will assist us in achieving our long-term goal of an annual efficiency ratio in the low to mid fifties continuing on slide twenty-two the ratio of non
expense to average assets improved
To 1.66% for the year ended December 31st, 2019 compared to 1.72% for 18 and 1.73% for 17. The company has historically made to relatively stable ratio of non-interest expense to average assets as a reminder. The first quarter of 2029 interest expenses will contain seasonality wage resulting in higher expenses due to the impact of annual grants of employee and director restricted stock, you know towards we continue to look for opportunities in our operations continuous improvement with efficiency gains and expect to share best practices and further gain efficiencies from our pending acquisition of Empire Bancorp regarding taxes for 2020. We approximate the effective tax rate of 22 and 24%
With that, I'll turn it back to jobs and closing comments. Thank you Susan 1/23. I'd like to conclude by summarizing why we remain well-positioned for continued inconsistent profitable growth the CD repricing available to us will assist in reducing the cost of funds over 20 20, although we will remain a liability sensitive company the implementation of our swap strategy and the origination of floating rate loans are in direct response to Management's goal of becoming less liability sensitive wage and continues to be an important component in mitigating Nim compression.
the loan pipeline
As of December 31st 2019 total 325 million and is greater than the pipeline as of December 31st, 2018. Our credit metrics remains strong as non-performing loans have decreased as have total delinquent loans. We continue to focus on increasing the amount of direct loan business as approximately 50% of fourth-quarter. Nineteen loan closings were non-brokered loans. We have contained not interest expenses in this low-rate environment.
We continue to see positive Trends including growth in the cni portfolio as we move our balance sheet. We're more floating-rate business and it continues strong loan Pipeline with the pending acquisition of Empire Bank or the pro forma combination of our banking franchise lowers our overall cost of divorces as well as improves our loan-to-deposit ratio. The merger is expected to enhance our quarter earnings with significant Revenue opportunities and cost synergies expand our presence into a new market on Long Island.
In the Universal Banker model continues to pay dividends Universal Bankers are spending more time with customers and this has resulted in Branch sales increasing approximately 20% off total and 35% per Branch employee.
Our ongoing focus on developing and maintaining a multilingual Branch staff to serve our diverse New York City customers Remains the key differentiator the New York City office and its strong Asian customer base continues to represent a significant opportunity for us. The implementation of our technology transformation will expand the footprint and allow for deposit gathering at a total cost less than brick-and-mortar while enhancing the customer experience for business and consumer climb over all our vision remains consistent. And that is to be the preeminent Community Financial Services Company in our Multicultural Market by exceeding expectations and leveraging our strong banking relationships in conclusion a strong culture and track record.
attractive markets in
Whereas consistent financial performance and continued execution of our strategic objectives or position the company to do very well in the future. We will be open it up to questions operate alternate over to you.
Thank you. Ladies and gentlemen, we will now begin our question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your package that before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.
The first question today comes from Steve, I'll see research please. Go ahead.
Hey, good morning. Looking at slide Ten kind of appreciate the detail there. Just kind of wondering would you you know just kind of is a base case. We need to replace most of the maturing CDs with new CDs or do you think you could kind of get some filter through to other categories? We think we're going to get it filtered through the other categories. So Thursday, the we're today. We're probably bringing in a little bit more money market than than CDs. So I think you'll probably see a little bit more coming out of that. And obviously we're always focused on on, you know are now account business and are interest-bearing d d a month.
Okay, and then and then sort of just on the same topic like this, you know the maturing CDs what sort of the impact of empire being integrated? I mean does that does that change sort of the opportunity there and like you know, what do you do with their CDs? So kind of how are you thinking about that?
So how we think about that is their deposits will increase our non-interest bearing deposits significantly looking at their CD portfolio. It's not nearly as great as our so I wouldn't expect it to happen material impact on on our on these numbers.
Okay, okay fair enough and then you know just on you know, Switching gears the loan yields and the origination table and the press release it looked like non-mortgage Shields kind of increased a lot. Was there any like specific reason for that? Just given, you know reads falling down in general during the corner? Yes during the prior quarter. We had a lot of faith mortgage loans that were drawing down that yield so our longer-term. Okay, and and would you characterize the mix this quarter is sort of more typical or a previous quarter. I would think this quarter's probably more typical in this environment, but you know, that's always subject to change.
okay, I think one of the things that
That is is strong in our company is really the ability to diversify that that loan portfolio and to focus on the areas that are giving us the best risk-adjusted returns in in any particular time. So, you know, I think we we try and remain somewhat flexible in dealing with risk and return home as we look at the opportunities out there in the market. Okay? Okay, it makes sense. And then and then finally for me, you know, you know, no repurchases during Q4, you know, just giving kind of how the stock has done recently. You know, how do you think about that, you know give them where the valuation is today? And then also I you know in regard to the deal closing coming up.
So we we obviously the stock has been down down recently. You know, we think that there are some opportunities for for us looking back at home purchases. Obviously, we had quite a bit of blackout going on in the in the last quarter or so as we dealt with changes associated with the with the merger, you know, we think the merger is very very much on track the the all the filings have been done with the regulatory authorities. And you know, I think the prospects for a combined flushing and Empire combination far far exceed Empire standing alone or flushing standing alone for that matter.
Okay, and you mentioned black out. I have those expired or is that still ongoing know the general rule is that it expires three days after 30 days after we release earnings? Okay. So so three three days from now is that last night? Okay three days from last night. Okay fair enough. Okay. Thank you. That sounds great. Great. Again. If you have a question, please press * then 1
All right, if there were no no other questions then you know, thank you very very much for attending the call. And if there are any further individual questions, we look forward to hearing from you. You know how to contact us. Thank you very much. Thank you for conference is now concluded. Thank you for attending today's presentation. You may now disconnect.