Q4 2020 Flushing Financial Corp Earnings Call
[music].
Good morning, everyone and welcome to the Flushing financial Corporation's fourth quarter, 'twenty and 'twenty earnings Conference call.
Hosting the call today are John Buran, President and Chief Executive Officer.
Susan Cullen senior Executive Vice President Treasurer, and Chief Financial Officer and.
And Frank of course, it quite ski senior executive Vice President and Chief of real estate lending.
Today's conference call is being recorded.
After todays presentation and will be and opportunity to ask questions to ask a question you May press star and one to withdraw your question you May press Star and two.
A copy of the earnings press release, and slide presentation that the company will be referencing today are available on its investor Relations website at Flushing Bank Dot com.
Before we begin the company would like to remind you that discussions during this call contain forward looking statements made under the safe Harbor provisions of the U S. Private Securities Litigation Reform 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 such forward looking statements.
Such factors are included in the company's filings with the U S Securities and Exchange Commission Black.
<unk> Financial Corp, does not undertake any obligation to update any forward looking statements, except as required by under applicable law.
So and this call. This conference 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 and isolation or as a substitute for the 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 and other presentations.
At this time I'd like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results. Sir. Please go ahead.
Thank you good morning, everyone and thank you for joining us for our fourth quarter, 'twenty and 'twenty earnings call.
I'd like to start off reflecting on 2020 and the impact it had on our employees communities customers and organization.
Clearly the pandemic had a significant impact on everyone and I'm proud and thankful for how our employees work to help customers and communities through this difficult time, where significant parts of our footprint was shut down and social distancing became the norm and.
And we all had to adjust to remote working.
Well none of this was easy our employees rose to the challenge and worked tirelessly not only to serve customers.
And communities, but to close and integrate the Empire Bancorp transaction remotely.
'twenty and 'twenty was a significant year and we look forward to a better 'twenty 'twenty, one with the rollout of vaccines and a path to return to normal activities.
On today's call I will discuss our fourth quarter highlights and our strategic objectives for 'twenty and 'twenty, one before turning the call over to our CFO, Susan Cullen, who will provide greater detail on our financial performance.
Following our prepared remarks, we will address your questions along with our chief real estate lending officer, Frank Kozik Winski.
Beginning on slide three our core results. This quarter were strong with EPS of <unk> 58 cents.
42% from a year ago.
And the core net interest margin increased eight basis points.
Our GAAP earnings were impacted by several items relating to the Empire merger and the actions we took to improve our funding profile.
Our full year, 'twenty and 'twenty core EPS was $1 70.
A 4% improvement over 2019.
We delivered these results despite a very challenging operating environment, which included elevated provision for credit losses, given the effects of the pandemic and a significant portion of our footprint being shut down.
Despite these challenges we achieved record core net interest income for the third consecutive quarter as we benefited from the low interest rate environment.
Our cost of interest bearing liabilities declined 12 basis points to 86 basis points in the fourth quarter, while the yield on our.
Interest, earning assets fell only two basis points to 382%.
As a result the cash.
Core net interest margin expanded.
For two point, 97% or eight basis points from the previous quarter.
We should have some pricing benefits on our funding cost with $342 million of Cds scheduled to mature and the first quarter and a weighted average rate of 1.2, and 3% compared to our standard one year rate of 64 basis points.
In December we restructured our funding and securities portfolio by prepaying $290 million of higher cost borrowings and selling.
And $90 million of lower yielding securities.
These transactions are expected to benefit the net interest margin by seven basis points in 'twenty and 'twenty one.
However, loan pricing has shifted lower with new originations for the quarter, yielding three point for 1% compared to our fourth quarter 2019, and origination yield of 4.19%.
The net interest margin will also be influenced by over $100 million of new P. P. P loans, which have the yields below 3% and the shifting loan mix.
Overall, we expect modest.
Core net interest margin expansion going forward.
Another key driver of our net interest margin is how we were able to fund our loan growth.
Loan growth rebounded in the fourth quarter after stalling early and the pandemic.
On a period end basis earnings excluding Empire, net loans increased $71 million or 5% annualized from the third quarter.
Average deposits also rose, 4% year over year with Empire accounting for most of the growth.
We are cautiously optimistic for the outlook for loan growth and 'twenty 'twenty one.
Strong credit quality is a hallmark of Flushing and as a point of differentiation among our peers.
Well theres, an increase and credit metrics due to seasonal and the closing and the Empire merger, we remain confident and comfortable with our underwriting and credit exposures.
Net charge offs, Rowley 646000, or four basis points above.
Average loans.
Our reserve coverage was 214% of nonperforming loans.
We continue to aggressively monitor and exposures and work with customers during these times.
Loans in forbearance declined 57% during the quarter.
And and now $5 four per cent of loans.
And only three 2% excluding loans paying interest only.
Over 90% of forbearance loans are secured by mortgages with a loan to value of approximately 45 per cent.
The majority of loans that exited forbearance this quarter resumed normal payments.
Helping our customers and this challenging environment is one of our top priorities.
The provision for credit losses was $3 9 million and included a noncash nonrecurring charge of $1 8 million from the Empire transaction.
Excluding this charge the provision was three two times.
Our current quarter net charge offs.
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 times that experience.
We remain comfortable with our credit risk profile.
As mentioned previously the Empire transaction closed on October 31st and the systems conversion.
<unk> without a glitch in November.
In fact, we retained over 99% of the accounts after the conversion.
As a reminder, empire added about $982 million and assets.
$685 million of loans and $854 million of deposits.
And so far the merger is progressing in line with our expectations of 20% earnings accretion in 'twenty and 'twenty, one and we're excited about enhancing the community bank and the legacy Empire markets.
As you can see there was a lot of activity during the quarter. So let me take a minute to walk you through some of the items. So you can get a better understanding of our core trends on.
On slide four we outline the significant items, which include merger related charges of $7 2 million or 19 cents per share and balance sheet restructuring charges of $8 4 million or 22 cents a share a full reconciliation of our GAAP to core EPS is provided and on slide 21.
John and did not press release.
Turning to slide five we outlined our strategic objectives for 'twenty and 'twenty, one which include managing our cost of funds and continuing to improve the funding mix Reis.
Reserve resuming historical loan growth, while achieving appropriate risk adjusted returns.
Enhancing our core earnings power by improving scalability and efficiency.
Managing credit risk and remaining well capitalized.
I'll now ask Susan.
To walk through how we performed against our strategic objectives.
Susan Thank you John I'll begin on slide six.
Our first strategic objective is managing our cost of funds and continuing to improve the funding mix average deposits rose, 10% and the fourth quarter with Empire accounting for most of the growth.
Our average noninterest bearing deposits were 68 per cent from a year ago and our core deposits comprised nearly 80% of average deposits and improvement from the 70 per cent and the fourth quarter of 2019.
Our total cost of deposits declined 124 basis points over the past year to 47 basis points. The number of mobile banking customers and usage continues to grow as well and number of active users rose 12% items processed increased 33 per cent and Dallas process expanding by 52% during the quarter.
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Online banking and active Bill pay subscribers also grew 14% and 16%, respectively, and the fourth quarter of 'twenty and 'twenty.
On slide seven we show our CD maturities over the next year the greatest for your pricing opportunity Walker and the first quarter of 'twenty 'twenty, one with $342 million Cds maturing with a weighted average rate of one point to three per cent.
Assuming current rates, we expect deposit costs to head lower and 'twenty 'twenty one.
As shown on slide eight our next strategic objective is Tuesday, and historical loan growth, while achieving appropriate risk rate risk adjusted returns.
Net period end loans increased 16% compared to a year ago with Empire contributing almost 12 percentage points of the growth.
Loan growth resumed in the fourth quarter after a sluggish growth from the prior two quarters as a result of the pandemic.
But the Hunter and 50 basis point reduction and short term rates in 'twenty and 'twenty, our core loan yields have only declined 34 basis points and the fourth quarter versus a year ago.
We expect some pressure on loan yields for mixed use and the low yielding P. P. P loans and rate pressure on new production from January 19th due January 22nd we've processed 434 P. P. P applications with a total requested loan balance of $115 million.
On slide nine we discuss the drivers of the net interest margin.
Our net interest margin is impacted by the shape of the yield curve and how we fund our loan growth.
And with our liability sensitive balance sheet, we have benefited from declining rates. Our core net interest margin was 64 basis points over the past year and eight basis points and the fourth quarter, our deposit costs fell 124 basis points, and 2020, and 10 basis points and the fourth quarter.
We continue to expect improvements and our deposit costs, but the pace of improvement will slow.
Core loan yields rose one basis point and the fourth quarter, three and 99, but we expect some pressure over time due to changes and the portfolio mix and Hello.
And I'll wait on new loan originations.
The balance sheet restructuring occurred in late December 'twenty, and 'twenty with little impact on the fourth quarter results. We expect some other the benefit other restructuring to be offset by loan pricing mix and 'twenty 'twenty one.
Slide 10 provides further detail on a per previously announced balance sheet restructuring completed late in December.
We prepaid 291 million of borrowings with a weighted average cost of $1 92 per cent and replace this with lower cost short term funding. We also sold nearly $90 million of low yielding investment securities and replace them and securities bearing higher rates and all.
All in these transient transactions are expected to improve the net interest margin by seven basis points in 'twenty and 'twenty one.
We will continue to actively manage the balance sheet to take into account liquidity interest rate risk and net interest income outlook.
Our third strategic objective as shown on slide 11, it's to enhance core earnings power by improving scalability and efficiency. We closed the Empire transaction on October 31st which expanded our footprint into attractive markets and Suffolk County, recognizing only one and a half million dollars and goodwill.
The system conversion occurred in November and no issues and we remain on track to achieve our $7 million after tax cost savings over 'twenty 'twenty one.
The loan portfolio acquired and Empire transaction has a 2% purchase accounting Mark overall, the Empire transaction is performing in line with our expectations and we remain comfortable with our 20 per cent earnings accretion expectation for 'twenty and 'twenty one.
Slide 12 has our fourth strategic objective, which is to manage credit risk during the pandemic, we have supported our customers with various forbearance programs.
At year end, we have 364 million or 5% of our loans in forbearance down 57% and the fourth quarter with about 40 per cent of the total loans paying interest only the majority of the $482 million linked quarter decline and forbearance loans. It has resumed regular payments, we remain well secured from a collateral standpoint with and.
The average loan to value of 45 per cent for the real estate backed mortgages, although borrow cash flows are temporarily impacted by the pandemic.
We remain vigilant and marching borrowers borrowers cash flows and we perform regular site inspections, we continue to work with our customers to help them get through this difficult time.
On slide 13, we provide the details of our allowance for loan losses, we had only four basis points or 646000 of net charge offs and the corner under Cecil and $685 million of Empire laws require provision for loan losses of approximately $2 million.
This is in addition to the $4 million related to the purchased credit deteriorated loans.
Overall, the reserve for loan loss ratio rose two basis points to 67 basis points during the quarter.
Slide 14 is a reminder, that our loss history has been significantly bags and the industry for the past 20 years, and even and the great recession and losses were four and a half times below the industry peak.
Additionally, we have tightened our underwriting standards. Since then to further reduce risk for example, we've reduced construction and mixed use loans by 19% each and the loan to values have improved from 48 per cent 38 per cent.
On Slide 15, you can see the impact of the change and underwriting standards since the great recession.
Our reserve to nonperforming loan ratio has improved over 214% from 164% a year ago and from under 25 per set 10 years ago.
We remain confident that theres minimal loss content and our portfolio and.
Importantly, we continue to underwrite each loan and you say cap rate and the mid fives and stress test each loan.
Next on slide 16, our nonperforming assets improved linked quarter declining 15% to only 31 basis points of loans plus Oreo.
The loan to value and real estate dependent loans amounted to 38 per cent as of December 31st and the average loan to value for nonperforming loans collateralized by real estate was 31 per cent.
Criticized and classified loans rose to $72 million and the fourth quarter were still low at only 107 basis points of loans.
For the $29 million increased $15 million was from the Empire and $8 million was from one credit relationship driven.
To provide further detail $16 million of criticized loans and forbearance and 47 million for real estate dependent with an average LTV of 39%.
We continue to actively monitor these credits and are comfortable with our risk exposure slide 17 has our final strategic objective, which is to remain well capitalized.
We continue to exceed all regulatory capital requirements with strong capital ratios, our book and tangible book value per share of $20.11 and $19.45 respectively.
The TCE ratio declined 7.52% due to the Empire transaction and our leverage ratio was 838 per cent.
Our primary use of capital is to support customers through the balance sheet growth and then will return any excess capital. We expect to approach eight per cent T. C E by the end of 'twenty 'twenty one.
The current dividend yield is over 4%.
Lastly, let me remind you of some items that could impact the first quarter.
First Empire was only included for two months of the fourth quarter.
Our net interest margin should be positively impacted by deposit re pricing and the balance sheet restructuring, but will have some pressure due to the loan yields.
Excluding the expenses from the merger and the balance sheet restructuring the core expense base for study three and a half million dollars and.
As a reminder, the first quarter will be impacted by seasonality and compensation and a full quarter of the Empire expense base, our effective tax rate and 'twenty 'twenty, one should approximate 26 per set with that I'll turn it back over to John.
Thank you Susan.
On slide 18, we provide our outlook we are cautiously optimistic about the operating environment with a steeper yield curve potential fiscal stimulus and the continued rollout of the vaccine should put the economy on a path to return to normal over time.
However, we are concerned about the rising number of Covid cases, and what it means for the local economy.
They are also open questions regarding the future regulatory environment and tax policy with that said.
We are encourage by our loan pipeline, which is trending higher than a year ago.
And the Empire deal is progressing in line with our expectations and we remain very comfortable with our credit profile overall.
Overall, we feel we are on the path to achieve our long term goals of and Aro, a greater than or equal to 1% and and our O E greater than or equal to 10%.
With that we'll now open it up for questions operator, I'll turn it over to you.
Thank you, ladies and gentlemen, we will now begin our question and answer session.
And once again to ask a question. Please press star and then one.
If you remove yourself from the question for you May Press Star and two <unk>.
And you are using a speaker phone and we do ask for you. Please pickup your handset before pressing and numbers to ensure the best sound quality.
Once again that is star and then one to ask a question.
Our first question today comes from Steve Comedy from G. Research. Please go ahead with your question.
Hey, good morning.
Hello, Steve.
Wanted to start with just kind of a clarification was there any P. P. P forgiveness recognized in the fourth quarter, and and then NII and loan yields.
It was very minimal minimal yeah.
There's not a non material amount.
Okay, and then he expects expectations as far as you know when you would when you would start seeing material for goodness.
More and the AR and the first quarter toward the end of the first quarter I would say.
Okay and I share.
Okay, Okay, and then moving on I guess kind of a similar topic.
Two our loan yields I mean, they did they did increase quarter over quarter.
Should I read most of that increase is coming from layering and Empire and.
And if so I mean any idea what what the book yield would have looked like just on an organic basis.
Yes, so on an organic basis our.
Okay.
The Oh I'm trying to do.
No the prepayment recoveries and stuff brought down the.
Yes by 11 basis points.
Yeah.
For their pre.
Repayments and the net gains and losses and seven and so there's a big piece of prepayment penalty. This this quarter.
So you answered the question on the Empire I know empires.
Ingoing yields were a little bit higher but not significantly higher.
Yeah.
Okay. Okay fair enough and then and then maybe a final one for me.
John you made a comment on shifting loan mix being a headwind for margin going forward.
Just wondering kind of like is this a conscious strategy.
Or are you guys, just kind of reflecting and and the market and what's out there.
Well.
I think the other the pressures.
And that we see and the market tend to be on the commercial real estate side.
And as a result, we're probably doing a little bit more a little bit more multifamily.
So maybe a little bit less mixed use which tends to be oh.
Historically, a better yielding product and then of course, you've got the PPP loans as well. So there are a number of factors going on I think the most important of which is just.
Caution and the general.
Caution with respect and the general economy, and just being very careful on the commercial real estate side.
Okay. Okay I appreciate it that's it for me.
Thanks, Steve Thank you.
And our next question comes from Chris O'connell from <unk>. Please go ahead with your question.
Hi, good morning.
So I wanted to start out with the expenses.
You know I hear you that the cost saves are going to be frontloaded here, but and then there's also going to be a little bit and noise and the seasonal increases and the first quarter.
And just all in.
How did you guys see the core Opex run rate.
Over the next.
And two quarters, given the seasonality that's going to be coming in and the first quarter as well as the extra month.
And then prior and the cost saves and then you know maybe where that flattens out.
And into <unk>, 'twenty, one and <unk> 21.
Once those seasonal factors and the cost for each all labor day.
So historically, our first quarter adjustment or a seasonality of the expenses has been between three and three and a half million dollars. So I would you know using the number we have included in the script for 33, and a half I would say we'd be somewhere between 36 and <unk>.
$88 million for the first quarter.
We would have another month's worth of expenses related to Empire and there. They are run rate for their G&A expenses as I believe we previously disclosed was about $24 million.
For annually, so do the math on that.
It would be like another $1 million to our expense base.
Okay.
Okay.
For Mike and then.
Yes.
Yeah, Yeah, and net and then how do you see that falling down and just into the second quarter I guess.
For three and a half goes away.
Our our expenses will remain elevated because you don't really see we don't book their expenses onto our P&L and then full half of them away. So our expense base will go up by half with their $24 million for the year.
For the differentials during the first quarter between the first quarter and and remaining quarters is going to be the three.
Thanks.
I guess I guess, what I'm getting at is how much of the cost saves have been realized given how quickly you guys did the conversion there and how much are going to come through and the first quarter.
They are pretty much denser two thirds of them are baked in right.
And the cost saves are just of the Empire for two months.
And that the cost saves and Empire for our both baked in for two months and months right.
Okay great.
Thanks.
And.
And then.
As far as the pipeline goes and it was about 355 million and is that including the 150, <unk> hundred and $15 million and checking around PPD.
No no.
And that's our core business.
So.
It sounds like a pretty good pipeline here.
Although it seems like you know prepays overall.
And the New York market.
And are fairly elevated and.
And it sounds like you guys think you're going to be resuming loan growth.
You know in 2021, and a pretty good clip is.
Is that going to be more back end weighted given you know some of the more prepays that might come in and the first though.
Understood about prepay strength.
So we've actually not seen and elevated level of prepayment penalties.
<unk> St.
The pandemic started with a little bit of a blip probably towards the end of the third quarter.
But overall things are a little bit quiet right now.
A lot of lenders are still working with their customers to finish up the relief programs and they've had so.
I'm not seeing a rush to prepay at this point and the market.
Don't see it in the first quarter.
Okay great.
And so so and then as far as you know resuming and kind of your normal loan growth levels.
And you know just honing in on that a bit I mean are you guys thinking like mid single digit and low to mid single digits.
But the target.
Yes.
Okay.
That's great and then with the with.
With the jump up and and <unk>.
And obviously you know good good moving downward there and overall.
Pretty minimal.
And the credit cost side, but.
And what's in terms of the jump up from Empire, and then the single credit and credit.
Criticized and classified.
Is there anything that is particularly worrisome there or is that more.
You know just being prudent.
Now as we've discussed in the past we continue to do complete due diligence on Empire until we got the conversion done and the deal struck so these clients that came over with totally within our expectations of what we knew we were acquiring.
And there are no concerns related to these credits.
Got it.
Great and then kind of putting it all together I got from the credit side Youre looking at the reserve here.
Around 69 basis points or so ex ex PPP.
Yeah.
How do you guys see that progressing going forward.
Well, we are very confident and our credit quality, we stress test our loans, we have over 80 per cent of the portfolio is backed by real estate that has an LTV of around 40% the nonperforming assets have a LTV even less than that.
Our modeling shows that we have taken all the loss content, we have to see some model.
So so we are confident and our credit portfolio.
Got it I, just mean as far as things stand now.
And with the deferrals and and the levels that they're at.
And how you guys see those kind of progressing as we move into the first quarter of this year I mean, do you think that the reserved alone and there's going to like hold around current levels are that that's going to be coming down there.
So we're not we're not seeing really collateral issues with respect to our with respect to the portfolio would you seeing cash flows that are better temporarily impacted given the given the pandemic.
We're not seeing any.
Issues with respect to valuation, we we don't have much exposure to Manhattan real estate it tends to be in the boroughs where we're.
Hum.
And the kind of activity that is done on a day to day basis as supported by our type of real estate and of course, we've got a significant multifamily portfolio.
And somewhere around a 48%.
Loan to value across the portfolio and LTV on the real estate dependent npls and 31%. So we're really pretty confident about these these values going forward and I think it's a matter of just working with borrowers to deal with the cash flows.
And <unk>.
Got it yes, no I hear you there I guess, what I'm trying to get at is is it seems like even if you were to exclude all the empire related provisions.
Moving on on the reserve this quarter and you guys still would've been building the reserve to loan ratio on a standalone basis.
Net.
So so I guess it is.
Is it going to keep moving that upward going forward, but of course, the they allow us would've grown very slightly.
Empire provision because we had the charge offs of 600.
Roughly $645000. So we had to replenish that plus we had some loan growth. So we had that we had to cover that through our seasonal modeling as well.
I mean, the whole thing increased two basis points quarter over quarter, including the effects of the Empire transaction.
Yeah.
Okay.
Alright, that's all and thank you great.
Alright, Thanks, Chris.
Once again, if he would like to ask a question. Please press star and one on.
Our next question comes from John <unk> from Piper Sandler. Please go ahead with your question.
Hi, guys good morning good.
Alright and John.
John.
And just to.
A quick one maybe for Frank or Susan So any additional color you can provide on that one Cree credit the $7 7 million credit that moved into classified and the quarter.
That is a real estate dependent a hotel.
And that has a 50 60 ish percent L. T V and unfortunately, they were severely impacted by the Covid crisis and then they have been shut down a day.
The underlying collateral is the property is still good its and of goods, it's and a good location. So we we don't foresee material losses on that but that's basically what it is so the hotel opened.
In late October.
After being closed from pretty much March and missing the summer season, and the fall season.
And the operators have several boutique type hotels in the Manhattan area lower Manhattan area.
And did have additional collateral tied to that property.
And portions of that collateral were liquidated to reduce the loan balance.
And additional funds were posted to ensure that the real estate taxes were paid on a timely basis.
Going forward.
<unk> net asset very carefully.
As Susan had pointed out they have significant equity it was a purchase deal when we did the transaction.
Probably have twice the amount of equity in the deal that we have.
And relative to the loan at this point and time it looks as though they're just going to need more time like every other hotel.
In the Metropolitan area to just get back on track and they've been running and opening they've been running and open their occupancy level.
And that recovered, but we're working with them to continue to watch it as we move through 'twenty and 'twenty one.
Excellent that's great color. Thank you.
And maybe just one more for Susan can you help us think about the.
The the 364 million and loan deferrals that are forbearance is that you have outstanding now and kind of the the schedule for exploration and moving forward on those balances.
A big chunk of those will expire and the first quarter of 2021, and then some of the the remainder of them are pretty much longer term I would expect the second third quarter. So we'll have some we'll have some lingering.
Okay.
Okay. Thank you.
Thank you.
And ladies and gentlemen at this point and showing no additional questions I'd like to turn the conference call back over to Mr. Buran for any closing remarks.
Well. Thank you. Thank you all for your.
Kind of attention and.
Participation and the call and once again.
We feel very comfortable about the quarter and the outlook for the company and we look forward to talking with you and the future.
Have a good day and stay safe. Thank you.
And ladies and gentlemen, with that we'll conclude today's teleconference. You may now disconnect your lines and we thank you for your participation.