Q3 2020 Flushing Financial Corp Earnings Call
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To flush through financial corporations.
Quarterly 2020 earnings conference call.
Hi, just a little color John deals has.
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<unk> Senior Vice President Treasurer, and Chief Financial Officer, and Frank cause of Queensgate, Senior Executive Vice President and Chief of real estate lending.
Today's call is being recorded.
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A copy of the earnings press release, and slide presentation that the company will be referred to today are available on its investor Relations website at Flushing Bank Dot com.
Before we begin the call.
They would like to remind you that discussions during this call contains forward looking statements.
Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of my do not be surprised.
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.
So those factors are included in the Companys filings with the U.S. Securities and Exchange Commission.
<unk> Financial Corporation does not undertake any obligation to update any forward looking statements, except as required under applicable law.
During this call references will be made to non-GAAP financial measures a supplemental measures to review and assess operating performance.
These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the.
The financial information prepared and presented in accordance with the U.S. GAAP.
For information about these non-GAAP measures for reconciliation to GAAP. Please refer to the earnings release and where the presentation.
I'd now like to introduce Mr., John Dillon, President and Chief Executive Officer, who will provide an overview of the strategy and results.
The floor is yours Sir.
Thank you good morning, everyone and thank you for joining us for our third quarter Twentytwenty earnings call.
I want to start out by thanking our employees for their tireless work in assisting our customers and communities as we continue to navigate these unprecedented times due to the COVID-19 pandemic.
The safety of the health of our employees and customers remains our highest priority.
On today's call I will discuss our third quarter highlights as well as provide an update on the merger with Empire Bancorp, which has been approved by all parties and is scheduled to close on or about October 31st.
Dan Oh.
CFO, Susan Colin will provide greater detail on our financial performance credit quality capital and liquidity profile.
Following our prepared remarks, we will address your questions along with our Chief Real estate lending officer, Frank was acquitted ski.
Beginning on slide three.
We realized a strong quarter of operating results.
Our third quarter GAAP earnings totaled 50 cents per share and we achieved record core earnings of 56% from the prior quarter.
We achieved record net interest income for the second consecutive quarter as a company capitalized on a low interest rate environment.
Resulting in cost of funds decreasing 10 basis points.
At the same time the yield on interest, earning assets increased as a result, net interest margin expanded 13 basis points from the previous quarter.
We anticipate that our cost of funds will further decline during the fourth quarter as $315 million retail certificates of deposit.
Scheduled to mature at an average rate of 110 basis points compared to a current one year CD rate 60 basis points.
We expect asset yields to see limited reductions.
Credit quality continues to be one of our key strengths and a competitive differentiator.
For parents is granted to our customers. During this tumultuous times have decreased from the peak of 1.5 billion to approximately 846 million.
Over 97% of the Forbearances are secured by mortgages with loan to value of approximately 46%.
This collateral protection is better than the total real estate portfolio.
Of 88% collateralize more mortgages.
As the economic concerns escalated in the second quarter, we generally granted forbearances for a term of six months. Therefore.
Therefore, we expect a significant reduction in forbearance is during the fourth quarter through September Thirtyth, approximately 80% of loans, we expected to return to full payment status have done so.
Well the remaining 20%, we generally granted a new forbearance for terms that are to the company's advantage Briggs.
For example, if a forbearance was for a full panel by the new forbearance would be a deferral of the principal with the customer making interest payments.
The provision for credit losses were reduced by 74% compared to the provision for the previous quarter and totaled 2.5 million.
The allowance for credit losses stands at 65 basis points of gross loans and 155% of nonperforming loans. As a reminder, our maximum charge offs were only 64 basis points in the midst of the great recession, while the industry peak charge offs were nearly five.
The times our experience.
[noise] I'm excited to share that Empire Bancorp shareholders approved the merger yesterday stay.
As stated earlier the merger is expected to close on or about October 31st the credit quality of Empire remains strong with no loans greater than 90 days past due and less than a million dollars in loans greater than 30 days past due.
As of September Thirtyth Empire has $120 million and active forbearance agreements outstanding.
The system conversion is scheduled for the middle of November.
We're excited about this combined bank, which will be a leading bank franchise on long island.
Overall, we made good progress in the third quarter to achieve our strategic objectives, which include managing our cost of funds and continuing to improve the funding mix.
Increasing net interest income by leveraging loan pricing opportunities on portfolio mix.
Enhancing core earnings power by improving scalability and efficiency managing.
Managing credit risk and remain well capitalized under all stress test scenarios.
Slide four shows the trend, resulting in record net interest income this quarter. The net interest margin increased 13 basis points quarter over quarter, and 63 basis points year over year.
The increase in net interest income was primarily due to the decrease in the cost of funds of 10 basis points quarter over quarter, and 105 basis points year over year.
Additionally, the yield on interest, earning assets increased three basis points from the second quarter.
On slide five I detailed management's focus during the third quarter.
With loan activity somewhat muted for much of the quarter, we focus on maintaining yield.
On interest earning assets.
Gross loans decreased 1%, while net average interest earning assets decreased approximately 2%.
We took advantage of the opportunity discussed on previous calls to reduce our cost of funds.
We decreased funding cost 10 basis points from the second quarter, and 105 basis points versus the same quarter in 2019.
During the quarter, we further reduced Forbearances and continued site inspections for a cross section of our retail properties, noting the stores were open well stock and the surrounding area was active.
On slide six and seven we provide details on outstanding Forbearances.
As I mentioned earlier I'm pleased to highlight that total forbearances a decreased to 846 million from a peak of 1.5 billion.
As of the end of September these amounted to approximately 14% of the portfolio.
97% of these loans are secured by real estate with an average loan to value of 46%.
Less than half of Forbearances are in more stressed industries like retail or hotels that have been shut down during the onset of the pandemic, but began to open during the third quarter.
The remainder of a forbearances include multifamily medical offices and other general commercial real estate that we judge more prone to a speedier recovery.
On slide eight we show that over 749 million of Forbearances are scheduled to expire in the fourth quarter.
Total projected expirations are 98% secured by mortgages.
This reason, we believe there is minimal loss content in the portfolio.
With that let's.
Now I'll turn the call over to Susan to provide additional details on our financial performance and asset quality.
Thank you John I'll begin on slide nine.
Nonperforming loans totaled $25 million, which is 42 basis points of gross loans and net charge offs totaled 837000 or six basis points of average loans for the quarter lunch.
Love to value on real estate, and then well man, 38% as of September Thirtyth and the average loan to value for nonperforming loans collateralized by real estate was 31%.
Slide 10 shows 90 day delinquencies as a percentage of all originated by year I credit discipline has remained consistent for the past 10 years as we tightened underwriting criteria back in 2009.
Resolved last 10 vintage years, they've only 24 90 day plus delinquencies.
Turning to slide 11, we provide an update on our third quarter allowance for loan losses in the third quarter, we recorded a provision of $2.5 million a reduction of 74% compared to the provision for nearly $10 million in the second quarter.
But the allowance evaluation as of September 30, the forecast showed a tough economy with elevated unemployment do GDP.
We continue to use the Oxford economics forecast model. This model says they'll take four core as far losses to return to our historical norms.
What a discipline continues to serve us well in the current environment and we'll continue to stay close to our customers and manage that carefully.
As highlighted on slide 12, our coverage ratio has improved significantly since the financial crisis in 2008, a solid credit quality metrics have resulted in a coverage ratio increasing to 155%.
At September Thirtyth 2020, 28% at December 31st 2008.
The coverage ratio decreased in the second quarter is due to a slight uptick in the amount of nonperforming loans.
We remain confident that there is a minimal loss content in the loan portfolio.
Importantly, we continue to underwrite each loan using a cap rate in the mid fives and stress test each loan.
Continuing on slide 13, we know what our charge offs during the great recession was significantly better than the industry not perform its continued through the second quarter up 2020.
We continue to actively manage our loan portfolios identify and resolve problem loans recording charge offs early in the delinquency process. As a reminder, we our historical seller of non performing loans.
Since the great recession, our construction loans have decreased by approximately 38% and mixes by 21% while the loan to values on loans have improved from improved 38% from 48% heading into the great recession.
As we continue to strengthen our balance sheet were mindful of maintaining asset quality based on the most current data over two decades, we have demonstrated superior credit metrics on.
Well, Matt some charge offs were 64 basis points in the midst of the great recession, well industry peak was nearly five times that.
As detailed on slide 14, we believe the credit outlook for the company remains positive.
The company has a strong credit history, and an active part batch program.
Loan portfolio has retained its historical conservative nature and remains 8% collateralized by real estate with an average LTV of 38%.
Well, it's like what greater than 90 days amount to only 38 basis points of gross loans.
Oh for balances declined 44% to $846 million as of September Thirtyth and the pace of four batch request has steadily declined.
We remain cautiously optimistic as the New York Metro area has entered into phase four with positive result, thus far which is important is over 90% of loan portfolio is situated in the Metropolitan New York area.
On slide 15, we detailed the opportunity to further reduce funding core cost in support of our NIM.
We have approximately $780 million of retail Cds scheduled to mature through the third quarter of 2021 at a weighted average cost of 124 basis points.
At the end of the third quarter retail Cds currently represent 16% of total deposits.
As shown on the right hand side car replacement funding costs are significantly lower the maturing see right and.
And where are you in wholesale market distrusted strategically reduced cost of funds.
Importantly, we believe those protections limited downward pressure on asset yields.
As described on slide 16, we expect reduced movement in asset yields.
Foreign movement in the macro interest rate environment, we believe the floating rate portfolio of 599 million well not for every price. Additionally, approximately 20 or 1% of the real estate portfolio reprices annually and their floors associated with individual loans.
Moving to slide 17, non interest expense increased $1 million or 4% quarter over quarter.
The efficiency ratio was 55.4% compared to 54.9% the last quarter and 58.9% a year ago.
The ratio of non interest expense to average assets increased 1.69% for the third quarter of 2020 compared to 1.49% for the third quarter of 2019 due to the growing business and the realization of an FDIC assessment credit in the third quarter of 2019.
The company has historically maintained a relatively stable ratio of non interest expense to average asset.
Included in the non interest expense for the third quarter as $400000 of legal expense relates vampire merger.
The focus on managing expenses in approving the NIM assisted us in achieving a lower efficiency ratio okay.
We will continue to focus on these items in order to further improve that ratio.
As always we're focused on continuous improvement and look for more opportunities with efficiency gains, especially with the addition of empire branches and given our enhanced ability to serve our customers and work with moly.
Regarding taxes for 2020, we approximate the effective tax rate between 23 and 25%.
With that I'll now turn it back to John.
Thank you Susan.
As we previously remark.
The Empire shareholders approved the merger yesterday.
We're very excited about the combination.
Slide 18, summarizing the transaction highlights the merger is planned to close on or about October 31st.
This transaction expands our footprint into Suffolk County, and lowers our cost of funds, while improving the loan to deposit ratio there.
The merger will be approximately 20% accretive to earnings and Twentytwenty, one with an earn back of 3.4 years.
On slide 19, the expected cost savings of 7 million along with incremental earnings from Empire drive the approximate 20% earnings accretion for 2021.
There's been an acceleration of the projected expense saves as Empire has experienced employee turnover.
The majority of the cost saves will be recognized in 2020, one with salaries and benefit expense, representing approximately 60% of the gross sales.
On slide 20.
The pro forma company will have assets of 8 billion gross loans of approximately 7 billion and deposits of 6 billion.
The larger balance sheet allows us to penetrate the bigger companies and the Suffolk County market, which is over 76000 businesses.
Our loan to deposit ratio well improved to 115%.
We look forward to updating everyone on our integration progress in future quarters.
Turning to slide 21, we recognize there are opportunities and learnings from operating during the COVID-19 environment.
There is an opportunity for employees to work remotely, which could reduce occupancy costs and if we can move functions outside of Metro New York additional savings are possible.
Further our enhanced digital platform has proven powerful.
We are attracting a younger demographic.
For the quarter, 23% of account openings were completed digitally and online banking enrollment increased 4%.
We have noticed improved employee productivity as we are able to streamline processes through technology.
Additionally, with the ability to work remotely there will be less lost work time for inclement weather or sick days.
On slide 22, we detail that's a third quarter results give us a good start heading into Twentytwenty one.
Record core diluted EPS increased 56%.
NIM improved 13 basis points with an opportunity to further reduce the cost of funds.
A reduction in the provision for credit losses of 74%.
From the second quarter.
Efficiency ratio in the mid Fiftys.
Credit remains strong and finally, the Empire merger provides additional opportunities.
Concluding on slide 23, I summarize how we plan to continue to execute our strategic objectives to come out of this pandemic in an even stronger position.
[noise] I continue to be proud and impressed with the hard work and dedication of our employees.
We continue to play an essential role in supporting our communities and customers financial need [noise].
The addition of empires of the Flushing family will only strengthen our reach and capabilities.
Our balance sheet capital.
And liquidity going into this environment were strong and our positive core earnings power provides a good base to absorb future credit losses stress testing confirms our ability to sustain.
Material credit losses necessary over a multiyear horizon.
Our competitive advantage and consistent credit discipline has served us well during this challenging economic environment and we 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 New York City.
Diverse population remains a key differentiator.
New York City market and strong Asian customer base continue to represent a significant opportunity for us over.
Over the long term.
We will continue to provide a safe inclusive environment for all employees and customers.
Importantly, our investment in the Universal banker model has been critical to our ability to serve our customers in this environment, along with our enhanced digital capabilities, our online and digital capabilities continue to be a key differentiator for our customers.
We remain focused on supporting our communities and executing against our strategic priorities I'm excited to welcome.
The Empire team to Flushing financial as I believe that the combined entity will unlock further stakeholder value.
I'll conclude by thanking our employees once again for their dedication and commitment as we continue to execute our strategy, we remain focused on maintaining strong capital liquidity and asset quality.
Also managing expenses and our net interest margin to continue to improve and become an even stronger more resilient company.
Now.
Well open it up to questions operator, I'll turn it over to you.
Hi, Thank you Sir.
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Let me first class to rehab will come from Steve Comrie UBS Research. Please go ahead.
Hi, good morning.
Oh, sorry.
If I could just just go straight to the the forbearance, obviously down substantially to 246 million I'm wondering if you guys could tell us how much of that is second request and sort of what the term on the second request a degree was I'm assuming it wasn't six months again.
Limited amount is a second second request when we went into this we put a lot of our forbearances on a six month deferment. So that is the reason why we're care.
Bringing more into the into the fourth quarter.
Okay.
And then the loan pipeline, obviously still pretty strong 394 million. It was it was like 311 million at the end of the Q2, though our customers just hesitant to to close on loans and is that like becoming less prevalent now like do you think you'll see a lot of these loans close in Q4 or is it kind of further out.
This is Frank was quickly Steve.
The.
The slowdown in the closings occurred probably primarily due to the fact that.
As the economy began to open we were becoming a bit more judicious in.
Establishing what the actual cash flow that the borrowers had on hand in preparation for a loan closings rent rolls appeared to be strong. Obviously 2018, 19 income and expenses were in good shape. It was taking us a little bit longer to verify what the current rent collections were a prior to loan closing.
That seemed to improve considerably over.
The last several months as businesses begin to open at a quicker pace. So we would expect that bottleneck to begin to move aside and closings would begin to accelerate.
Okay, Okay very helpful.
Obviously, the merger with Empire expected to close very soon maybe some updated thoughts on the margin impact for Empire I know just like based on the Q2.
Results the Empire kind of had a had what looked like should be an accretive margin for you guys, but just any updated thoughts there on as things have changed over the third quarter.
So Steve this is Susan during the quarter, yes, there NIM should be accretive to our NIM. The other metrics. It stayed pretty pretty stable. We still have the you know the dilution.
As we have reported at 3.4 earn back period, we spent a lot of time this quarter and looking at their credit quality to make sure that we were all all a an agreement and understood. What we were actually purchasing and we are very very comfortable with what their credit.
Okay. Thank you and maybe one more for me on the merger.
Yes. So soon expected to close you know basically this week.
Then systems integration in November maybe just in general terms I guess, what's like the roadmap.
After after systems conversion and kind of what opportunities are you excited about the merger.
So we're in the process of putting together a a pretty strong marketing approach that will begin in in mid November.
And we will accelerate that as we turn the corner into the into the new year.
We don't have a great deal of presence in the long island market at this point in time, but we do have a number of people on our staff who have been in the past work.
Working or not working on long Island. A in addition, we expect to leverage the the talent that is in the Empire or Empire group as well.
To provide us with a significant a significant uptick take particularly in the business and the business area.
In addition, we will be introducing empire.
Empire customers to our enhanced digital capabilities that we just rolled out for the Flushing bank customers and at the end of the at the end of the first quarter. So that should be an increase in a in service that they will see.
And we have some new products coming online like I knew escrow account and also some enhancements to our cash management products. So we expect that we're going to have a very very strong suite of products to introduce to both our business customers and our.
Tumor customers.
Okay very good thank you for taking my questions. Thanks.
Thanks, Steve Thanks.
Again as a reminder, if you like to participate in today's call. Today. Please press Star then one and it has some phone again that is star then one to ask a question.
Excuse me the next question habits from Collyn Gilbert of KBW.
They know call everyone.
Good morning.
[laughter].
Follow up on 'em on Steve's question out of the discussion around Empire and Susan your comment or your all comment about being very comfortable with credit can you just frame that for us and how we should be thinking about the reserves in the fourth quarter with having pulled at Empire in.
I would think that the reserve would be pretty consistent yeah, but we'd have to take into account the loan growth. So I would expect there will be a slight uptick in the quarter given given you know, adding another a couple of $900 million or so worth of loans.
Okay and are you and if you could just remind that the credit Mark that you were assuming on on Empire did that change at all now.
The percentage the percentage it stayed consistent.
Okay.
Okay, and then in terms of the accretion numbers that you guys gave can you just kind of clarify what those base assumptions, where or when you say, 20% accretive to 2021, what you were using for kind of the base assumption just given all the moving parts that we've seen since the deal was announced and those metrics are initially.
He offered.
Well those metrics really haven't changed much Collins I think of their initial announced it was 19%. So yeah using our our base income then layering is $7 million, where the cost saves from Empire, and then the $7 million of of incremental earnings from their interest, earning assets and that's how we're coming up with that.
Number and are in broad strokes.
Okay. So <unk> I'm, sorry, <unk>, so 7 million of.
Incremental net interest income and then 7 million of cost so on a whole number.
7 million dollar that's $7 million of income not just net interest income, but $7 million in comp and then stepping up $7 million worth of about cost saves.
The 14 million of bye.
Whatever pretax income growth or about the time, a cost effective tax or the expense savings.
Okay.
Okay got it and then just in terms of the.
The offer X. outlook, you know John you mentioned, you know kind of efficiency continues to be a target and and all that you know that the potential changes that you're seeing within the workforce and operation given that they kind of work from home dynamic are there any other I mean are there any initiatives kinda brought initiative that you think.
Could come into the fold and 2021 in terms of cost further cost cutting.
You know I I think our concentration in 2021 is going to be to love to actualize. The the Empire the Empire related cost saves.
As we look to develop our own specific programs associated with remote work, but I don't think that those will come in until later in the later on in the year.
But I think the concentration would will be on securing that that $7 million of oh of cost saves on the Empire Empire transaction.
Okay. Okay. That's helpful. And then just sorry, one last thing on closing the loop on credit.
Given kind of where you sit in and your commentary around deferrals I mean, that's the expectation that you you do not or you're not going to you don't expect kind of the <unk>.
Much of an increase in net charge offs from here or just trying to think kind of the broader long lost content, but then.
Within your book as we looked at it sounds like one.
Sure Collyn the loan deferrals are 98% or something to propel the preponderance of them is backed by mortgages and they have an average LTV somewhere in the mid 40 range, so giving that amount of running room before we would actually hit a 100% or even an 85% loss assuming a 15%.
Ah discount for selling costs, we have a lot of room in that portfolio before we would experience any material losses is the view that we have taken an unbelievable.
Okay. Okay.
Okay. Okay. That's helpful. Thank you.
Thank you.
Well so no further questions in queue. This will conclude our question and answer session.
I went out at the telecoms call back over to Mr. zoned young for closing remarks, Sir.
I want to thank you all for listening in and we look forward to updating you on our successes associated with our upcoming upcoming Empire transaction, a until then stay safe. Thank you.
Thank you we thank you Sir Oh. Thank you also amendments are for your time today again the conference call has concluded again I decided they disconnect. The lines. Thank you everyone take care and other wonderful day.
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