Q2 2021 Flushing Financial Corp Earnings Call
Welcome to Flushing financial Corporation's second quarter, 2021earnings.
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 Frank caused the Quin ski senior executive Vice President and Chief of real estate lending.
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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 the call.
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2 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 any such statements, including as set forth in the company's filings with the.
The U S Securities and Exchange Commission to which we refer you.
During 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 or as a substitute for the financial information.
<unk> 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 or the presentation.
I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results. Please.
Okay.
Thank you operator, good morning, everyone and thank you for joining us for our second quarter 2021 earnings call.
On today's call I will discuss the second quarter highlights and strategic objectives before turning the call over to our CFO, Susan Cullen to provide greater detail.
Please go up in our financial performance.
Following our prepared remarks, we will address your questions along with our Chief Real estate lending officer, Frank was at Quincy.
It goes without saying that the pandemic has affected our personal and work lives.
<unk> brought us masks.
Social distancing vaccines and stay at home Entertainment and.
In the banking business. It is brought forth challenges, but it has also brought forth opportunities in the case from Flushing financial it's brought forth the opportunity to once again show how strong our management team is.
And how well we respond to adversity and challenge.
We emerged from the dark days of the pandemic a much stronger company than we were at the end of 2019, the less pre pandemic year.
We have a bigger balance sheet as we completed our.
Acquisition of Empire National Bank during the height of the pandemic, making us $1 billion larger in assets.
We have more earnings power earnings per share for all of 2019 were $1.44 earnings per share for the first half of this year are already a $1.21.
We have a better net interest margin today than at the end of 2019.
As throughout our history credit has remained strong with minimal charge offs.
We have a better efficiency ratio or better loan to deposit ratio a higher tangible book value.
And with New York.
1 recently opening up better economic prospects in just a few months ago.
Recognizing this opportunity and the improving strength of the company. The board has authorized an increase in share repurchase to take advantage of our attractive low price and strong dividend.
Turning to slide for the second quarter 2021 was an important period as we executed well on our strategic objectives, and the New York City Economic region started its recovery.
We reported GAAP EPS of <unk>, 61 cents and record core EPS of <unk> 73.
Org.
GAAP return on average assets and return on average equity totaled.
<unk> totaled 93 basis points and 12% respectively.
On a core basis. These ratios were 111 basis points and 14% both of which exceeded our.
So cycled targets of 1% and 10% respectively.
The strong results for the second quarter helped boost the tangible common equity ratio to 7.8%.
This slide outlines our strategic objectives, and how we performed against them.
The first.
First objective is to ensure appropriate risk adjusted returns for loans, while optimizing the cost of funds.
Second quarter was our fifth consecutive quarter of record net interest income.
While GAAP NIM declined 4 basis points quarter over quarter core NIM.
Our through those 8 basis points.
Average noninterest bearing deposits continue to rise and.
And improved 65% year over year, and now represent 14% of average deposits.
With the announcement in August 2020 of our acquisition of Empire National Bank.
ROE we had estimated that it would take 3.4 years to recover the tangible book value dilution.
We improved upon that significantly.
Recovering full tangible book value and less than 9 months as cost saves accelerated and net interest income improved despite operating in the pandemic.
And then make environment.
The second objective is to maintain strong historical loan growth.
Period end loans, excluding PPP increased approximately 11% year over year and approximately 2% annualized from the first quarter.
Our loan pipeline increase.
39% year over year to $433 million.
We expect loan growth, excluding PPP to accelerate in the second half of 2021.
We assisted customers in the PPP forgiveness process and expect this to continue over the next couple of quarters.
The third objective is to enhance core earnings power by improving scalability and efficiency.
As I just mentioned, we had record core earnings per share of 73.
Which more than doubled year over year.
The improvement in core earnings was due to lower credit.
Kris thaws and realizing the benefits of the Empire merger.
We recognize scale is important in the banking industry and we expect growth in the intermediate term will be largely organic.
Yeah.
There have been several M&A transactions announced in all markets and given the quality and.
Size of our company, we believe we're in a position of strength to capitalize on any merger disruption.
We also continue to make strides in digital banking as Susan will detail shortly.
Our final strategic objective is to manage asset quality with consistent and disciplined underwriting.
<unk> strong credit quality has always been a hallmark of the company.
Net charge offs were only 5 basis points this quarter.
Nonperforming assets declined 17% linked quarter and were only 26 basis points of loans and real estate owned.
Despite the reduction in the allowance for loan losses this quarter the coverage ratio increased while remaining over 200% of nonperforming loans.
The average loan to value in our real estate collateralized portfolio is 38%.
We remain very comfortable with a low level.
<unk> of credit risk in our portfolio.
Overall performance against the strategic objectives was strong as evidenced by the improvement in both core return on average assets and return on average equity for the quarter.
Even without the release of provision for credit losses this quarter.
Core return on average assets and equity exceeded the through the cycle targets of 1% and 10% respectively.
I'll now ask Susan to provide more details Susan.
Thank you John I'll begin on slide 5.
The first.
<unk> objective is to ensure appropriate risk adjusted returns for loans, while optimizing cost to funds.
Average deposits grew 29% year over year, and excluding Empire growth approximated 13% <unk>.
Average noninterest bearing deposits increased 65 per cent from a year ago and average core deposits comprised.
84% of average deposits and improvement from 77% in the second quarter of 2020.
Total cost of deposits continued to move lower volume 5 basis points in the quarter and 45 basis points over the past year.
Slide 6 outlines the net interest income and margin trends.
Our net interest margin has moving parts, including fair value adjustments and net amortization of purchase accounting adjustments to.
To make the analysis, it's clear these items plus the effects of prepayment penalties and the net reversals of interest recoveries from non accrual loans are removed in the base net interest margin. We encourage you to start.
With the base net interest margin from modeling purposes, and then add in your own assumptions for the items previously mentioned.
Net interest income includes P. P P loans and fees, which I will detail shortly.
Overall net interest income was a record for the fifth consecutive quarter. Despite the slight decline in average loans and the net interest margin will come.
Paired to the first quarter. However, core net interest margin was 3.14 per cent and improvement of 8 basis points during the quarter, but included net prepayment penalty income and P. P. P fees of 16 basis points compared to 8 basis points in the first quarter.
Based on their smartphone rose by 3 basis.
At this point sequentially.
This was achieved despite a 34% increase in average short term funds.
We expect the $242 million of average interest, earning deposits in fed funds in the second quarter, which yielded only 8 basis points decline as loan growth improves.
As a reminder, we have $592 million.
The effect of swaps the cost 230 basis points to pull down the net interest margin.
The majority of which mature by the end of 2023. These swaps will largely be replaced $405 million of swaps the costs of 71 basis points.
Pricing on the swaps absent any other interest rate changes shipper.
It should provide a benefit to the net interest margin.
Slide 7 discusses the strategic objective of maintaining strong historical loan growth as previously mentioned loan growth was challenging in the second quarter due to P. P. P. Forgiveness period end loans declined less than 2% annualized quarter over quarter, but grew 13.
Per cent year over year.
We chose to stick to our disciplined underwriting and pricing standards.
Loan pipelines and line utilization improved during the quarter and this bolsters our confidence that non PPP loan growth should accelerate in the second half of 'twenty 'twenty 1.
Base loan yields increased 1 basis point in the second quarter.
13 decreased 11 basis points from a year ago, the spread between the yield on loan originations and loan satisfactions, excluding the P. P. P loans narrow during the quarter, but remains negative.
Slide 8 details the PPP portfolio.
P. P P loans total $197 million at the end of the second quarter.
With associated fees of $4 million.
The other on the PPP loans increased approximately 3% in the second quarter from nearly 2% the previous quarter.
As we disclosed on July 8th total net deferred PPP fees recognized in the second quarter were $1.2 million up from half a million in the first quarter.
Total pvp.
Income did not impact the net interest margin in the second quarter. It was a drag of 4 basis points in the first PPP loans forgiven forgiveness totaled 69 million in the second quarter with another $22 million in process at quarter end.
We expect forgiveness to continue through the remainder of 2021 and possibly into 2022 is the SBA can take.
Up to 90 days to approve such loans.
Slide 9 shows the strategic objective of enhancing core earnings power by improving scalability and efficiency.
Digital banking metrics continued to improve with a 38% increase in monthly active mobile users.
And until 1 per cent rise in digital banking enrollment.
Yeah.
We are planning additional technology enhancement as we invest from the franchise.
The Empire acquisition is meeting our objectives and we remain confident in achieving the cost savings and then 20% earnings accretion from the transaction in 2020.1.
Tangible book value earn back has been achieved in 9 months significantly burdened.
Other than 3.4 years model when the deal was finalized well timing of M&A is unpredictable, we would not enter any transactions that did not meet our financial hurdles. Additionally, there has been several M&A announcements in our markets for which we are poised to take advantage of the disruption.
We foresee growth will largely be organic.
Your line town has our fourth strategic objective, which is to manage asset quality with consistently disciplined underwriting as New York City reopens, the local economies screenings, gaining strength as workers are returning to the office the.
The unemployment rate has improved slightly during the quarter, but it's still above national levels with this improvement.
With the economic factors and our reserving methodology improved and this partially drove the reserve release for the quarter.
Future loan loss provisions are expected to be driven by loan growth mix and economic factors. Our consistent track record of strong underwriting was on display again this quarter as net charge offs were only 5 basis points of average loans.
Loans, the weighted average loan to value on the real estate portfolio is 38 per cent and there's minimal exposure to loans with a loan to value of 75 per cent or more.
Slide 11 outlines some of our strong credit quality statistics.
The coverage ratio remains over 200 per cent of nonperforming loans and improved.
During the quarter nonperforming assets declined both quarter over quarter and year over year.
The average loan to value on the real estate non performing assets as a low 30%.
Forbearance and are now approximately 4 per cent of loans, but only 1%, excluding those making interest only payments.
We remain very.
With our credit risk profile and continue to expect minimal loss content.
On slide 12, we talk about our capital ratios, which strengthened during the quarter.
Only 9 months after closing the Empire deal the leverage ratio was nearly at the level at June 32020, and the tangible common equity ratio exceeds.
The year ago level is.
As John mentioned earlier, the board of Directors has authorized an increase of 1 million shares the existing repurchase program.
This authorization has no dollar our time limit.
The strategy surrounding buybacks has not changed we will consider using stock repurchase authorization Opportunistically, we view the stock.
Stock as attractively price given the approximately 4% dividend yield book and tangible book value per share increased to $21.16.
And $20.51, respectively at the end of the second quarter before.
Before I turn the call back to John Let me remind you of some items that could impact the third quarter cash.
Core.
Net interest margin will be impacted by the timing and level of PPP forgiveness overall loan growth and the deployment of excess liquidity.
Assuming no changes in the pandemic response, we expect loan growth excluding the P. P P loans to accelerate in the second half of 2021.
Purchase accounting accretion is expected to remain.
Below a million dollars per quarter.
Nonrecurring expenses are expected to increase from third quarter as we close a branch and unused office space.
We intend to be opportunistic on share repurchases, while keeping in mind other business considerations.
Similar to last quarter, we suggest $35 million as you start as.
Point for quarterly operating expenses before adding normal growth.
<unk> tax rate for the full year of 2021 should approximate 26% to 26, 5%.
With that I'll turn it back over to John.
Thank you Susan on Slide 13, we provide our outlook, we expect loan growth excluding.
Starting PPP to accelerate in the second half of 2021 as the local economy fully reopens and we fund our loan pipeline.
P. P P forgiveness will be a headwind.
Core net interest income will benefit from loan growth and the redeployment of PPP forgiveness.
Excluding short term liquidity.
Tangible common equity continues to rise and is near our 8% target.
We will remain opportunistic with our increased share repurchase authorization.
We have a low risk business model and have demonstrated over many credit cycles that our losses are well below.
Oh the industry.
In our view, we are a stronger company than we were pre pandemic and our low risk business model is not properly reflected in our stock valuation. We believe our stock is attractively priced, especially with the approximate 4% dividend yield.
Through the cycle goals of a 1% plus return on average assets and a 10% plus return on average equity remain and we exceeded these goals in the second quarter, both with and without the reserve release.
With that we will now open it up.
2 questions operator, I'll turn it over to you.
We will now begin the question and answer session.
To ask a question you May Press Star then 1 on your Touchtone phone.
If you are using a speakerphone, please pick up the handset before pressing the keys.
To withdraw.
John Your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Mark Fitzgibbon of Piper Sandler. Please go ahead.
Hey, guys good morning good.
Good morning morning, Ark shoes.
As Susan just a real quick clarification question banking services fees were down a bit from the last couple of quarters. I'm curious is that because swap fees were lower.
Sure as our swap fees in that line yes.
Yes, they are sales having.
Having that yes that was what drove it okay, great and then secondly, how much of that $246 million of loan deferrals that you guys have out there mature this year.
And most of them.
Net most most of them the vast majority of them are mature in the coming quarter of the coming year.
Okay, Great and then Susan you gave us a lot of detail on the things that are likely to affect the NIM in coming quarters can you help us kind of distill that all down to sort of a bottom line margin impact.
Pack in phase III.
Well I would if I could mark, but I don't have a crystal ball that know what the marks will be on the on our swaps that flow through there.
Or how our prepayment penalties are going to come through so I think our core NIM if.
If we talk about that that's palio.
But to start or or even our base NIM that is net of all of those items.
Okay.
Okay, and so the core NIM, you think will will be under a little bit of pressure.
Yes, yes, we do.
You know as we've talked about in the past that we had a greater opportunity to reprice liabilities.
Better and as you saw we only had a 5.5 basis points decrease from the cost this quarter our.
The other assets are holding their own but we're not going to have as much opportunity to reprice liabilities as we've had.
Okay.
And then lastly, you say on slide 3 of the slide deck that you.
<unk> fully stages.
Of Tech enhancements I guess I'm curious what that means what kind of timing, we're looking at what kinds of maybe products or services you are looking to add in.
This a major cost initiative.
So I think where we're focused.
We're in the early <unk>, we we did a very good job in working with our vendor on PPP loans were looking to possibly expand that relationship.
In order to provide some additional efficiencies in terms of.
In terms of lending.
We of course have.
Cliff.
In the past year have totally revamped our mobile and online banking offerings and we expect to continue to see growth in terms of the utilization of those.
Of those services by the.
By our customer base and then lastly.
We were part of the part of the growth of a number of banks that have been.
Working with that Jim.
Fin tapped in order to get some insights into some.
Of the emerging technologies that are out there emerging companies that are doing.
Some smart things with respect to efficiency and friction reduction lets say with respect to our customer base. So we expect to get gain some benefit out of that as well so there's a.
Auto different.
A lot of different things going on at various stages and.
We expect to we expect to reap some benefits out of that over time.
Thank you.
Thanks Mark.
Once again, if you would like to ask a question.
Please press Star then 1.
And our next question will come from Chris O'connell of K BW. Please go ahead.
Hi, good morning, good morning.
Sure.
I was just hoping for.
Quick clarification question on the PPP NIM.
A couple of times you guys said it was no impact on the NIM this quarter, but then.
You know at 1 point in the earnings release. It Might've said there was a 6 basis point NIM impact for Q2 'twenty 1.
A little bit of clarification on that.
Net.
Okay.
It's the I think there's some confusion between the yield on the PPP loans versus the NIM impact.
The yield did increase.
Versus the first quarter of 2021.
Those numbers are so small in our overall interest income they did not have a material effect on the NIM.
There is no effect on from that.
Got it appreciate the color.
Great and then as far as the.
The loan growth I mean, the pipelines.
Quite.
But the quarter over quarter and year over year.
The outlook.
It seems to be robust for the second half of the year.
Hoping to get a little bit of color as to where you're seeing that growth coming from and it sounds like you are from the presentation that line Utilizations.
Rebounded in the second.
A big.
But they did see C&I loans kind of gathering in end of period basis. So just maybe what the change of the line Utilizations were.
Or if that was coming post <unk>.
So the line Utilizations.
I'm, mostly post Q2.
Quarter.
But they are there they are where they are the loan growth, we expect to be very strong given our strong pipeline our historical average pull through.
Those loans remember, we're talking ex PPP loans of those those PPP forgiveness will be a headwind that we'll have to fight against.
Tilt, but every dollar we replace with PPP loans with a <unk>.
Alone.
<unk> 3.5% or so is a much better impact on our NIM going forward.
Okay.
Got it.
And it looked like there was a pretty.
You saw a mix shift out of cash into the Securities book.
This past Corp. This past quarter.
Maybe just quantifying kind of what.
The the level of that mix shift will be going forward and what the new yields are on the securities that you are putting on the book.
Again, so we don't expect given our optimism over the second half of the year loan growth that we would need to redeploy the excess liquidity into the securities book, We're very comfortable with our Securities book, where it is for our liquidity and other reasons. So yeah.
That's where we would stay with the with the liquidity.
Okay got it.
And.
And I guess lastly, just you.
Overall reserve and kind of cash.
Quality.
Trends overall.
You know headed in a positive direction this quarter.
And with the understanding that you.
Guys run very clean book all around.
You know how much like where do you guys think the bomb and can be on the reserve to loans or how much room.
Do you have to run that down any more from where it is today.
Well of course that will all depend on our loan.
Mixed economic environment, whether we have a another tale headwind excuse me from the Delta Covid Varian to forget to take.
Factor that into our considerations.
Yeah, all of those items will come into play.
We continue to underwrite very conservatively, we're very comfortable with where we are.
I wouldn't want to make a prediction as to what the lowest number we could go to would be.
Okay got it.
Interest I guess, 1 final 1 if I could.
As far as the buyback authorization increase and the appetite for that going forward.
Could you just talk about little bit about maybe what the drivers are.
That appetite and you know the insofar as you know the pricing dynamics.
More aggressive or less aggressive versus tangible book value.
Or with regards to capital levels.
Well.
I think by any stretch of imagination, given our given our performance recently the.
The stock has been trading at a very very low level, just slightly above tangible book.
And with a with a strong dividend yield we feel very we felt very confident.
Without this.
About this time period debt.
We would see and we did have some very very nice growth in terms of the.
In terms of the stock price over the over the past year or so, but we also feel that.
Given all of the economic factor is getting better.
The fact that the company is performing much better than it did pre pandemic that all of those stars are aligned quite well for us too.
To go out and to grab some additional shares of stock of.
Particularly if the market is not granting them.
We certainly see a strong return coming out of that.
Understood. Thank you.
Yeah.
There are no further questions at this time and I would like to turn the conference back over to John Buran for closing remarks.
Thank you. Thank you very much.
Other greater well thank you all for your attention.
And as I said earlier rate I think that the.
We're very very pleased with the quarter and pleased with the prospects for the future for the company. So thank you again for your attention and everyone stay safe. Thank you.
Bye.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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