Q2 2020 Flushing Financial Corp Earnings Call
<unk> Financial Corporation second quarter, 2020, <unk> earnings Conference call.
Hosting the call today, John <unk>, President and Chief Executive Officer.
And then Collins senior Executive Vice President Treasurer, and Chief Financial Officer.
And Craig course, so Quincy senior executive Vice President and Chief of real estate lending.
Today's call is being one of course.
All participants will be in listen only mode.
Would you need assistance at least that's all conference specialist starchy qualify Sarah.
After todays presentation there'll be an opportunity to ask question.
A copy of today's earnings press release by presentation that the company will be referencing today are available on at the Investor Relations website at Flushing Bank Dot com.
Before we begin the company would like to remind you that discussion. During this call contain forward looking statements made under the safe Harbor provision of the U.S. Private Securities litigation reform of 1995.
Such statements.
Two 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 filings with the U.S. Securities and Exchange Commission.
Cashing Financial Corporation does not undertake any obligation to update forward looking statements except.
As required under applicable law.
During this call.
Well be made to non-GAAP financial measures a supplemental measures to meet you an excess.
Operating performance.
These non-GAAP financial measures are not intended to be considered an isolation or as a substitute for a financial information prepared and presented in accordance with U.S. GAAP.
For information about these non-GAAP measures and for a reconciliation to GAAP. Please refer to the earnings release, what the presentation.
I'd now like introduced John Deere, and President and Chief Executive Officer, who will provide an overview of the strip.
Strategy and results. Please go ahead.
Thank you.
Morning, everyone and thank you for joining us on our second quarter Twentytwenty earnings call.
I will start out by reiterating that our thoughts continue to go out to those most affected by Kobin 19, especially the brave healthcare workers on the front lines of this pandemic.
Health and welfare overall employees and customers remain a highest priority.
I want to thank our employees, particularly for their outstanding work as we continue to successfully navigate through these unprecedented times.
On today's call I will discuss our second quarter highlights as well as provided an update on decisive actions. We've taken in response to the cobot 19 pandemic and current economic environment.
Then our CFO, Susan Cohen will provide greater detail on our financial performance and credit quality.
Following our prepared remarks, we will address your questions along with our chief real estate lending officer Frankfurt sequentially.
Starting on slide three I'm proud of how our team has responded with adaptability and flexibility since March.
We were quick to respond to the pandemic with new health and safety measures, which are still in place today, including important banking.
And expansion of remote capabilities to nearly all team members.
We continue to actively support our customers.
At June Thirtyth Twentytwenty as a result of cold 19, we have acted forbearance on loans were the principal balance of approximately 1.3 billion.
We have begun to see loans that have been granted forbearance start to return to making regularly scheduled loan payments as total forbearances are down from our interim.
Quarter peak.
Through July 10th 63%.
$146 million of long scheduled to return to regularly scheduled payments have done so.
Additionally, we've actively participated in the S.P.A. Paycheck protection program, Regina eating $93 million of diesel.
We are one of them nine banks in the state of New York participating in the main Street lending program and also proud participant.
In the federal home loan bank of New York's small business recovery Grant program, helping our customers in communities navigate through the current environment.
During this pandemic our customers have utilized our enhanced technology platform was improved mobile and online banking capabilities now went live in March.
Well deposits have increased over 13% from April through June.
Similarly, the usage of ATM This has increased.
With over 75% of all transactions now completed the 18 yeah.
The number of accounts enrolling in online banking and opening new accounts online has grown during the current quarter to 19% the retail account openings.
With that.
Let me now turn to slide four to provide a summary of our strong second quarter operating results.
Our second quarter GAAP earnings of 63 cents per diluted common share were positively impacted by two items.
First we achieved record net interest income as a result of our quick response to the said decreasing interest rates in late March resulting in cost of funds decreasing 62 basis points from the prior quarter with additional opportunity to spur.
Further reduce funding costs in the third quarter.
Adding to the reduction of cost of funds in the second quarter core deposits increased 7% well net interest margin expanded 43 basis points from the previous quarter.
The second item positively affecting our gap.
Earnings.
Was the noncash fair value adjustment to our junior subordinated debt of 10 million or 27 cents per diluted common share after tax due to market conditions.
Excluding this fair value adjustment core earnings for the quarter totaled 10 million or 36 cents per diluted common share.
Pre provision pre tax net revenue totaled 34 million, an increase of 28 million from a previous quarter.
Positively.
Credit quality remains one of our key strengths.
Non performing assets at the ended the quarter with 29 basis points.
Total loan portfolio is 88% collateralized by real estate with an average loan to value of less than 40%.
Despite the current economic environment due to cope with 19, we have a long history and foundation built upon disciplined underwriting good credit quality and a resilient seasoned loan portfolio with strong asset protection.
At the end of the second quarter, we adjusted our economic forecast in Cecil model.
Resulting in a provision for credit losses of 9.6 million or 25 cents per diluted share after tax.
Our allowance for credit losses stands at 61 basis points of gross loans and a 182%.
Non performing loans.
Our maximum charge offs were only 64 basis points in the midst was a great recession, well industry peak charge offs were nearly five times our experience.
As previously disclosed our pending acquisition Vampire Bancorp.
Was delayed juice due to severe instability and volatility in the U.S. finance one stock markets caused by the pandemic.
The company continues to believe that the merger offers benefits to both shareholders and customers Flushing and Empire.
We will not be making any additional comments on this pending acquisition.
Overall, we made good progress in the second quarter to achieve our strategic objectives.
We managed our cost of funds and continue to improve the funding mix, we increased net interest income.
We enhanced core earnings power.
We managed credit risk.
And we remain well capitalized unroll stress test scenarios.
Importantly, we remain committed to building and fostering an environment of diversity and inclusion in our workforce and the communities. We serve in light of recent events, we formed a diversity and inclusion committee chaired by the executive Vice President of human resources reporting directly to me.
The role of this committee is to make recommendations ensuring flushing financial continues to provide a safe and inclusive environment for all employees and they sure ensure our message of inclusion is supported by our actions and participation in community organizations.
Turning to slide five looking at quarter end data loan growth was 6% year over year and one for second quarter over quarter has made a major categories multifamily business loans showed improvement.
Core yields on loans decreased by 23 basis points quarter over quarter.
This however was more than offset by our improvement in deposit costs, which improved 69 basis points from the prior quarter.
Helping to drive that improvement was a 19% increase in our non interest bearing accounts.
Slide six provides detail on the forbearance is that we granted due to the pandemic.
As of the end of June these amounted to approximately 21% over the long portfolio.
97% to these loans are secured by real estate with an average loan to value of 45%.
Less than half of our Forbearances are in more stressed industries like retail or hotels that have been closed down.
What are just now beginning to open up.
The remainder of our Forbearances include multifamily medical offices other general commercial real estate that we judge more prone to a quicker recovery.
Slide seven details the impact of Cobot 19 on our commercial real estate retail customers.
Our portfolio seems to be stabilizing as many tenants were able to operate at some capacity during the locked out.
As we have previously discussed our portfolio has limited exposure to national chains.
As New York entered phases, two and three of reopening shopping centers a strip malls were opening up.
Recently, we inspected 42% of the retail outlet properties across the portfolio, noting that they all appear to be well maintain and the stores appeared to be well stock.
On slide eight we describe our detailed approach to the cobot 19, known forbearance process, we have a team of independent lenders to monitor the progress of the loans.
Granted forbearance.
Early results of our approach or 63% of $146 million in loan scheduled to return to regularly scheduled payments have done. So these results also indicate that borrowers are working with attendance.
The stabilized operations.
In the retail sector.
With that.
Let me now turn the call over to Susan will provide additional details on our financial performance and asset quality.
Thank you John I'll begin on slide nine.
Nonperforming loans totaled $20 million, which is 34 basis points of gross loans, and we charged off $1 million for the quarter loan to value on real estate dependent loans amounted to 38% as of June thirtyth and the average loan to value for our nonperforming loans collateralized by real estate was 30%.
As detailed on slide 10, we believe the credit outlook for the company as well control. The company has a strong credit history and active forbearance program.
Oh for batches of declined 13% intra period peak of 1.5 billion.
Loan portfolio remains 8% collateralized by real estate loans delinquent greater than 90 days not 32 basis points of gross loans as John noted in New York is beginning to open up resulting in a decrease in the four bats request.
Slide 11 shows 90 day delinquencies as a percentage of loans originated by here.
Our credit discipline has remained consistent for the past 10 years as we've tightened underwriting criteria back in 2009.
As a result last 10 vintage years, we have only 17 loans 90 day plus delinquent.
Continuing on slide 12, as good as our credit discipline has been we recognize continued uncertainty so recorder provision for credit losses of nearly $10 million for the second quarter, primarily driven by deteriorating economic conditions, resulting from the impact to cope with 19.
Hey, Lals evaluation as of June Thirtyth, the forecast showed a tough economy with elevated unemployment and decreasing GDP.
We continue to use the Oxford economic forecast model.
This model assumes that it will take three core as far losses, we tried to historic norms.
Our credit discipline has served us well coming into this environment and we'll continue to stay close to our customers and manage that carefully including loan for bats as appropriate.
As highlighted on slide 13, our carbons ratio has improved significantly since the 2008 financial crisis.
Our solid credit quality metrics have resulted in our coverage ratio increasing 282% as of June Thirtyth 2024, 28% at December 31st 2008.
The loan to value on our real estate portfolio at quarter end total modest 38%.
Importantly, we continue to underwrite each loan is that cap rate in excess of 5% a stress test each loan.
Definitely current underwriting requires an interest rates are very minimum a six month foremost credits.
On slide 14, we know what our charge offs during the great recession were significantly lower than the industry. We continue to actively manage our loan portfolios to identify and resolve problem loans recording charge offs early in the delinquency process.
We are historical seller of nonperforming loans.
As we continue to strengthen our balance sheet, we are mindful of maintaining asset quality as shown here over two decades give demonstrates period credit metrics with industry net charge offs, averaging seven times, our net charge offs that's 2000.
As John noted, our Maxim charge offs were 64 basis points in the midst of the great recession, well industry peak charge offs were nearly five times that.
Slide 15 shows that the trial and the record net interest income.
Nice this quarter.
Net interest margin increased 43 basis points quarter over quarter at 42 basis points year over year.
The increase the net interest income was probably due to the decrease the cost upon 62 basis points quarter over quarter, and 91 basis points year over year.
On slide 16, we provide an update to our balance sheet strategy to reduce funding costs to support on them.
We have approximately $800 million at retail Cds scheduled to mature through the second quarter of 21 at a weighted average cost of 1.4%.
As shown on the right hand side court replacement funding costs are significantly lower and maturing CD rates.
And we are using wholesale markets just strategically reduced the cost of funds.
We believe there's protection to limit the downward pressure on asset yields as described on slide 17, approximately 20% the real estate portfolio Reprices annually, and therefore is associated with individual loans.
The floating rate loan portfolio totaled $589 million already reflects the downward pricing absent any additional rate fluctuations.
Moving to slide 18, non interest expense decreased $4 million or 11% quarter over quarter and efficiency ratio was 55% compared to 60% last quarter.
The ratio of non interest expense to average assets decreased 1.6% for the second quarter of 2020.
The company has historically maintained a relatively stable ratio of non interest expense average assets.
Included in the non interest expenses.
For $2 million of legal expenses related to the Empire merger.
Continuing to manage expenses and improve the NIM was that's definitely achieving our lower efficiency ratio.
As always we're focused on continuous improvement I look for more opportunities with efficiency gains given our hands ability to serve our customers as more work remotely.
Regarding taxes for 2020, we approximately an effective tax rate between 23 and 25%.
With that I'll now turn it back to John for some closing comments.
Thank you Susan.
On slide 19, I'll conclude by summarizing how we plan to continue to execute <unk> strategic objectives to come out of this pandemic in an even stronger position.
I remain incredibly proud.
Oh, what all our team members have been able to do since March we continue to play an essential role in supporting our communities and customers financial needs.
Our balance sheet capital and liquidity going into this environment was strong.
Positive core earnings power provides a good base to absorb future credit losses.
Stress testing indicates our ability to sustain material credit costs over a multi year horizon if necessary.
Oh, consisting credit discipline has served us well coming into this economic environment, and we'll continue to stay close to our clients and manage our loan portfolio prudently.
Our ongoing focus on developing and maintaining a multi lingual branch staff to serve our diverse New York City customers remains a cute teed up differentiator.
The New York City market and its strong Asian customer base continue to represent a significant opportunity for us over the long term.
We'll continue to provide a safe inclusive environments, all employees and customers.
The investment in the Universal banker model in our branches has been critical to our capability to serve our customers in this environment, along with our enhanced digital capabilities.
As a result of this current experience as the restricted economic environment. Eventually lists we will have a workforce that is more capable flexible and dynamic coupled with the customer base that is increasingly attune to our online and mobile banking capabilities.
In conclusion, we will remain focused on maintaining strong capital liquidity and asset quality, well also controlling expenses and managing our net interest margin to come out of this pandemic and even stronger and more resilient company.
With that we will now open it up for questions operator, I'll turn it over to you.
Thank you we will now begin the question answer session.
Yes. Good question you May Press Star then one on your Touchtone.
If you are using up speakerphone, please pick up your handset for pressing the key.
What's draw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble our roster.
My first question comes from deep commentary with GE Research. Please go ahead.
Hey, good morning.
Right.
I'm wondering to start asking about a and I and then obviously really big improvement sequentially. This quarter really impressive. How are you guys is kinda offset the cost of funds, maybe maybe just some thoughts on on going forward sort of the magnitude of.
The opportunity you know I would guess like we're not going to see repeat at this level and I think kind of the context I'm looking at is on the Q1 presentation. It gives us close $390 million the Cds Rolling off in Q2, and then on the slide in this quarter looks like the magnitude is a bit small.
Sure I'm going forward is that the right way to think about that.
Yes that is the right way to think about it.
We had some special I believe run off but the magnitude that we'd be looking at as we've detailed on slide 16 is yeah. We have this $800 million or the Cds over the next four quarters that will be maturing plus the ability to continue to reprice any non time deposits.
Yeah, we have the borrowing capabilities, it's around 18 basis points and in some of our funding sources. So we believe there is some some new admit available in the I'm on the liability side of the or the NIM margin of the NIM equation excuse me.
Okay. So should I read that as as the trajectory of NIM should generally be upward going forward then.
Yeah, I think all other things being equal as long as assets or.
I remain remain consistent with what off with what our projections are and we do think we we've got a fair amount of stability. You know we don't have an expectation that the fed is going to make another move downward. So that's built into our thoughts in this regard 20% of the loan portfolio.
Reprices Reprices annually, we don't really expect much in the way of the Oh, the floating rate portfolio, which is about 500, <unk> between five and $600 million to reprice downward unless there's a change in.
The instead rates, so given that level of let's say semi stability on the asset side and given the opportunity that we have on the funding side that Susan just outlined I think we're I think we're in good shape to 'em due to see some.
Expansion of NIM.
With those qualifications that I just mentioned.
Okay very helpful. And then then kind on the same.
Subjects. So you mentioned the then the significant inflows to noninterest bearing accounts and I'm wondering what what the underlying customer behavior is there like customers begin to keep more liquidity because there are less certain about what's going on and then if that's the case what are your your expectations for how sticky those account.
Absolutely.
[noise]. So some of it is somewhat as obviously PPP and you know the rest of it I think it's just a general a focus on liquidity.
And also our our ability to open up a open up cash accounts during the during the pandemic.
Which although down from historical levels has been more oriented towards the DTA.
Okay. Okay very good appreciated the disclosure about ATM usage and online account opening 75% transactions.
Completed by if you have a 19% of account openings buy online banking. So so I mean, I guess, just maybe like for context, it do something like indication as to what the what the levels were like in previous quarters.
Oh considerably lower Hey, you know they they really weren't even on the Oh, they it really weren't even on the a on the chart.
And we've been.
We wouldn't work in this for a while but it really wasn't until we brought in our new online account opening capabilities that we started to see some some activity and you know that's been a gradual increase as a gradual increase since March.
So you know customers are telling us that our online banking account opening process has been very very very good and easy to use.
We've had commented spend customers about the about our deposit only card being a being very successful for business customers.
There's a lot of good things happening here that are I think are just beginning to take place. A we also used to have probably <unk> well right now 90% of all of our customers who open accounts with US online do not have any human intervention at all.
So those are <unk> those are going right through.
Within minutes those that account openings are taking place right through with the.
In minutes as opposed to.
Having a substantial proportion going through a manual brought Florida control, which is what we had in the yet in the past so the capabilities that we put in place or <unk> or significantly upgraded.
Okay, Okay very helpful.
I I guess kinda, it's just more of a general question you know we have.
Extended unemployment benefits running out a P.P.P. funds are obviously I'm going to run out in many cases, I guess just sort of like why what areas are you guys like most focused on.
With as you know if we go forward assuming there isn't like substantial additional stimulus I guess like what are the kind of the main credit focus areas.
Oh, I would say, it's managing our forbearance process you know the managing people out of the forbearance process and maybe I'll turn that over to Oh, Frank consequence, your head of real estate lending to describe the process and a little bit more detail.
Hello, Steve.
We me a process.
Request for assistance started to come back in April.
In March in early April we set up immediately set up especial team to manage the process of helping with the request. So that we can streamline the process provide timely response and try to get the relief that.
Some of our customers had requested always seeking at that particular time it was a little bit a challenging through early March and April I mean, that's what's the peak season for.
On the request for assistance so our team has been.
And in place since I'm, probably early April.
And they are communicating with our customers on a regular basis.
We have specially email boxes set up but we're receiving interim financial statements rent rolls recollections reports.
And helping them get back to the the payment status that they had prior to covert 19.
So far the.
Initial responses have been rather favorable it appears as though March and April where the dark periods, where request were.
What made you know I guess under dire circumstances are perceived dire circumstances.
And I believe we saw our now that we're coming off some of these relief plans you saw that.
A number of customers probably were borderline.
Scenarios for assistance, but the plans that we provided.
Did enable him to build up cash so they could return to normal pay payments that as.
Sooner than later.
Overall assessment in the beginning was having to look back is that there was a little bit of the hoarding.
Excuse me awarding of cash going on in the marketplace as many property on is really weren't sure. How long this shutdown of the economy was going to last.
[laughter].
I think.
I think we're in that process right now clearly what's happened a is that New York, where most of our exposure is is beginning to come back stores are opening and.
You know, we clearly have a a oh a more favorable situation than we had in in at the end of March into April.
Okay very good.
Maybe just one final one for me maybe just some general thoughts on on the dividend a commitment to it and how comfortable you guys or a continued to pay that oh under under the current circumstances.
We have no plans at this time to make any change to the dividend.
Okay clear enough that's it for me thanks.
Okay. Thank you Steve.
Okay, and if you'd like to ask a question. Please press Star then one.
Our next question comes from Collyn Gilbert of KBW. Please go ahead.
Thanks, Good morning, everyone.
Maybe if we could just start on expenses I know that seasonally comp is often down in the second quarter, but can you just kinda give an outlook for where you sort of see expenses trending from here.
I would expect calling that are our expenses would trend very close to where they were this quarter.
Okay.
Okay, and any meaningful variation even beyond that the third quarter, how you see expenses going I mean, just Don given some of your comments on you know a lot online account opening and mobile usage.
Is there any other discussion happening within the expense structure that we could see maybe change is longer term.
So I I think over the long term a you know clearly we you know we we've.
We think that.
We're going to be a much more efficient operation given our or the emergence of our online capabilities I think that is going to grow overtime I can't give you any specifics.
And in that regard, but you know we do know that things like appointment banking have worked very very well.
We've enhanced our phone service a we've enhanced our video capabilities at the ATM at the ATM level. So.
We've had a significant increase in customers who've come in and has basically been service.
Not by human being face to face, but human being via our video capabilities off of the off of the ATM. So well I think it's too early to start to.
You know speculate about what the opportunities are but clearly they are many and you know not the least which is the ability of people to work remotely and which has been or which has been a real strength of the company you know just.
Every aspect of our business from audit right through to account opening has been functioning very very well.
And they a in a totally totally remote environment and we expect opportunities to come out of that I think one of them clearly is the the ability to get more.
Geographic spread out of our individual branch locations clearly 20 branches is not a lot to have in the New York Metropolitan area, but I also think that the the number of branches that we want to have over over the time over the next five years or so.
So is down considerably from what we what we ordinarily would have needed.
To provide the maximum amount of our outreach customers just because we have this additional capabilities. So I think there's more to come on that and Ah, but I'm very optimistic that we've really made a significant change in our capabilities.
We brought in some of the best technology that we they know that we could find a from a a mental for example, Q2 and center coupon that I'm really really helping us to build out our build out our business. You know we expect to have an online escrow system.
Toward the end of the toward the end of year. So there's a lot of additional.
Enhancements that we're making in our route product offerings to customers.
Okay. Okay. That's helpful and then shifting to the NIM.
So John you know you had pointed out obviously that but you know part of the noninterest bearing deposit increase this quarter was related to the P.P. alone do you have a sense of how those deposits or how you're thinking those deposits are gonna trend.
From here.
In terms of you know the borrowers within the TPP program their desire to use those funds.
[noise] you'd I've most of the P.P., we did was to love to customers.
So I think whatever we did two or whatever we did the non customers could probably yeah, we could probably see that move out over time, but given that most of our.
PPP was to customers I don't know that a significant portion of of our increase is coming from PPP I think it's a factor but.
[noise].
I think a lot of what we're seeing is.
Customers desire to have more liquidity available.
To that and I don't see that changing.
At least in the near future a you know well into 2021 until there is some some changes in the economic environment.
Okay. Okay got it and then in terms of credit and if we think about just the reserve build that came on this quarter and looking at slide 12, I guess.
Two questions there one is.
You know Susan you mentioned you know the Oxford economic forecast can you just give us what somebody assumption that you all made within.
That you know tend to get to that 8.6 million of or reserve build related to the coated sharp. They are Oxford economic model had an unemployment rate up 11% and GDP contracting about 3.7% going forward. So Ah we did.
Just some of the qualitative markers given that unemployment was actually higher than 11% at 630 to build the reserve to what we recorded.
Okay, and how about they're a recovery assumption within airport their economic forecast too.
The recovery.
It is three is three quarter. So we would revert back to our historical losses norms are over three quarters.
Okay. So that.
At the beginning of next year first quarter of next year, you're seeing right.
Okay, Okay got it and not so great color on sort of how the forbearance loans are behaving and and you know that the tranche. That's now starting to pay again, just curious how your categorizing I guess, maybe like 92 million or so that's not.
Paying currently you know, where that's showing up in and how you're sort of thinking about.
Got grouping of loan.
So.
Let me just give you some commentary on on the loans that.
You referenced the 92 million all the loans that we put on a four brands plan are making payments.
They may not be making a full payment products contractual arrangement.
And any event that and account may have been extended they continue to make the agreed upon payment.
Okay.
Okay got it got it okay.
Okay, and then lastly, I'm just as it relates to Empire, you know I respect [noise].
On your commentary on that you know you're not going to comment on it I guess, but I'm just curious as to why perhaps you're not commenting on on the merger.
There's no material change to comment on at this point in time.
Okay, and then just I guess a factual question.
Hopefully you can answer it as it relates to the merger.
The the merger agreement am I correct in that it expires on July 31st.
It a yes sunsets on July 31st, but one of us has to affirmatively.
I'm going to make a decision to stop the I'm going to stop the discussion, let's say so.
It's kinda two steps it expires, yes, but either empire or ourselves has to make an affirmative declaration.
That is not going to go forward if that's the if that's the case.
Okay.
Okay, Great I will I'll leave it there thank you.
Thank you thank you call.
This concludes our question and answer session I would like to turn the conference back over to John any closing remarks.
Thank you and thank you all for participating in our in our conference well once again, we're very very pleased with the a with a quarter. We've been we've got some very strong margin trends coming up and Oh, obviously I'm, we've taken a very.
The a very comprehensive stance in dealing with our ROE with a forbearances going forward.
Once again I'd just like to thank our employees for doing a really outstanding job in managing through this crisis and they clearly are the greatest greatest strength of this company. They came through with us in the in the great recession and.
I think they will come through for US as we go through this this pandemic and the economic environment. So thank you all again and stay safe. Thank you.
This concludes todays teleconference. You may now disconnect your lines and we thank you for your participation.