Q3 2021 Flushing Financial Corp Earnings Call
Welcome to the Flushing financial Corporation's third quarter 2021 earnings Conference call.
During the call today are John Buran, President and Chief Executive Officer.
Susan Cullen Senior Executive Vice President Chief Financial Officer, and Treasurer, and Frank of course, the Quincy Senior Executive Vice President and Chief of real estate lending.
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Please note this event is being recorded.
A copy of the earnings press release, and slide presentation, but 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 make 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 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 prepared and presented in accordance with the U S. GAAP.
For information about these non-GAAP measures and for reconciliation to GAAP. Please refer to the earnings release, when and or the presentation.
And now I'd like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategies and results.
Thank you operator, good morning, everyone and thank you for joining us for our third quarter 2021 earnings call.
On today's call I'll discuss third quarter highlights and ongoing strategic objectives.
Following our prepared remarks, we will address your questions along with our Chief Real estate lending officer, Frank was at Quincy.
So the execution of our strategy resulted in record third quarter results.
We had our second consecutive quarter of record core EPS and our sixth consecutive quarter of record net interest income and record loan pipeline.
Our GAAP and core return on average assets return on average equity net interest margin efficiency ratio profitability metrics improved year over year, even without the benefit of reduced provisioning.
We continued to focus on our strategic objectives, and we're performing well against them.
Our first objective was to ensure appropriately risk adjusted returns.
For loans, while optimizing the cost of funds.
Our GAAP NIM increased 20 basis points and coordinate rose 13 basis points during the quarter.
Our cost of funds declined another four basis points.
Loan yields expanded 10 basis points quarter over quarter, and eight basis points year over year.
And our noninterest bearing deposits improved to 15% of average deposits.
The second objective is to maintain strong historical loan growth. Excluding P. P. P loans were flat quarter over quarter due to normal summer delays, but activity picked up significantly in September business activity for the quarter was strong however, as we had record loan.
Pipeline to end the quarter.
As a result, we're expecting positive loan growth, excluding PPP in the fourth quarter and into 2022.
Our third objective is to enhance core earnings power by improving scalability and efficiency.
In this regard we've been realizing the benefits of the Empire merger spreading fixed costs over a wider asset base.
Digital banking efforts have continued to gain traction with our customers.
We're also expanding future technology opportunities that I'll get into later.
Our efficiency ratio improved to 52%.
And there's a significant organic growth opportunity over the next 12 to 18 months.
The fourth strategic objective.
It's to manage asset quality was consistent and disciplined underwriting.
For the quarter net recoveries were four basis points.
We have low levels of M P A's and a high level of reserve coverage.
Our average loan to value in our real estate portfolio is less than 38%.
We'll remind you that real estate represents greater than 87% of our loans.
Historically, we've had a low level of credit risk in our portfolio and of course this remains.
On slide four.
We note that October 30th will Mark the one year anniversary of the closing of Empire Bancorp transaction.
At the time of the announcement, we expect that the transaction would achieve several goals and we've met them all.
We achieved a 20% EPS accretion.
Tangible common equity now exceeds 8% and tangible book value per share increased 5% year over year.
Our cost of deposits improved 28 basis points year over year.
Our average noninterest bearing deposits increased 58%.
The loan to deposit ratio improved to 102%.
And we achieved our 50% cost savings target.
And Suffolk County, well, we began to develop more business remains a focus for us.
Bottom line, we achieved our targets and Empire has been a very successful transaction for us.
So we approached the end of 'twenty, 'twenty, one and a stronger more resilient company.
With a much improved outlook.
Slide five we recognize the impact technology is having on the industry and we are prepared for additional changes.
Yeah.
We upgraded our digital banking platform just before the pandemic started and continue to see significant gains 18 months later.
We had a 39% increase in monthly mobile active users in a 51% increase in active online banking users year over year.
We recently adopted zelle across our bank and digital platforms and customer usage has been significant.
We also made a strategic investment and Janssen top.
This investment allows us an early look at emerging technologies.
And we're very excited about the offerings, we have seen so far.
As you May recall, we partnered with a fintech numerator to help in our P. P. P program.
This integration was smooth and the customer experience was very much improved.
We gained efficiencies using this platform now we're looking to expand this relationship into other lending opportunities could provide an enhanced level of service to our customers.
We recognize the impact of technology.
And then what is having on the industry and we expect.
To be prepared for additional changes as time goes on.
On slide six our most significant opportunity for the next 12 to 18 months.
Is the eight announced or recently closed mergers that involve a participant in our market.
Out of the $328 billion of deposits on long Island, 60 billion or 18% involved one of these merger participants.
We're already starting to see some benefits by adding both people and business.
Most of the transactions have not closed yet as a result of this opportunity for growth our focus will be organic.
We'll turn now to slide seven.
In addition to the merger opportunity there are other drivers of future growth.
We have a record loan pipeline that serves as a baseline for growth.
New York is recovering to more normal activity.
And our important Asian market has seen increased activity.
We see similarities between coming out of the great recession and the opening in this pandemic.
Coming out of the great recession, you'll recall loan growth accelerated at a high pace from 'twenty 10 to 2015.
Multifamily loans.
Increased at a double digit rate commercial real estate.
State, we're high single digits and commercial business was in the low 20% growth rate.
Yeah.
So we see a positive outlook for loan growth excluding P. P. P for the fourth quarter and into 2022.
I'll now turn it over to Susan to provide more details on.
And how we executed versus our strategic objectives.
Thank you John I'll begin on slide eight.
Average non interest bearing and total deposits increased 58% and 28% respectively year over year average core.
Our deposits comprise 84% of average deposit and improvement from 78% in the third quarter of 2020.
We continue to focus on optimizing the deposit mix and look for ways to reduce.
The cost of funds.
Cost of deposits decreased five basis points quarter over quarter, and 28 basis points over the past 12 months.
Branch business activity continues to normalize as third quarter checking account openings exceeded pre pandemic levels in the third quarter of 2019.
The company closed the meal branch and is due to open a new branch in Elmhurst area.
Slide nine outlines the net interest income and margin trends GAAP net interest margin was 334% and improved 20 basis points. During the quarter net interest income was a record for the sixth consecutive quarter. Despite the decline in average loans COO.
Core net interest income, which removes the impact of net gains from fair value adjustments in purchase accounting accretion was also a record with core net interest margin, increasing 13 basis points to 327 in the third quarter.
Excluding 19 basis point impact of met prepayment penalty net gains from fair value adjustments in purchase accounting accretion in the third quarter. The net interest margin was 315 compared to 10 basis points of adjustments in the second quarter and a net interest margin of three or four.
On this basis, the net interest margin expanded 11 basis points, primarily due to the decrease in the cost of deposits and a shift in the balance sheet funding.
For modeling purposes, we encourage you just start with the base net interest margin of 315, which includes two basis points of positive P. P. P impact and then add in your own assumptions for the items previously mentioned.
As a reminder, we have $592 million of effect of swaps with a cost of 195 basis points that currently are a drag on the net interest margin, but the majority of maturing by the end of 'twenty 'twenty three.
These swaps will largely be replaced with $405 million of forward swaps with a cost of 77 basis points.
The repricing of the swaps absent any other interest rate changes should provide a benefit to the net interest margin in the future.
Slide 10 outlines the loan portfolio and yields loans, excluding P. P P were flat quarter over quarter.
As John mentioned previously the company experienced normal summer and third party delays and then activity increase in September.
The record loan pipeline of 531 million reflects a positive outlook for loan growth.
Pipeline is increased activity in both commercial real estate and commercial business and is reflective of the current loan portfolio.
The weighted average rate on loan closings increased 13 basis points quarter over quarter. Additionally, the steepening of the yield curve should help rates on loan originations to move higher over time.
P. P. P loans declined 34% 231 million during the quarter as the SBA continues to forgive loads.
The company recognized approximately $1 million of accelerated P. P P fees.
Slide 11 provides a snapshot of our disciplined underwriting.
The company's credit quality has held up well through the pandemic has mirrored our historical performance.
Underwriting is conservative and we are not a price leader.
In New York continues to make progress in returning to normal economic activity.
However, the unemployment rate in New York City is seven 6% compared to 3.5% to 4% pre pandemic and down from the peak of 17% in May 2020.
The company released reserves in the CT third quarter due to the improved economic outlook.
Future loan loss provisions are expected to be driven by loan growth mix and economic factors.
The company had four basis points of net recoveries in the third quarter and just six basis points of net charge offs for the nine month period.
The average loan to value on our real estate portfolio remains at less than 38%.
Slide 12 continues to outline the company's solid credit metrics with a low level of nonperforming assets and a strong level of reserve coverage.
Ore balances continue to climb with only $40 million of loans in full P&I deferral of the remaining $162 million.
Over 57% of the tariff or banks or did reserve, which they're making full payments by the end of the year.
Overall, we remain very comfortable with our credit risk profile and continue to expect the minimal loss content.
Slide 13 shows our strong capital ratios tangible common equity ratio improved 24 basis points during the third quarter to just over our target of 8% and comparable to the year ago levels, which did not include Empire tangible book value per share increased to $21.13 even as we.
We repurchased 286000 shares at an average price of $22.42.
The company returned 51% of earnings to shareholders this quarter through a combination of dividends and share repurchases.
Our capital priorities are unchanged and are to profitably grow the balance sheet pay dividends to shareholders and opportunistically repurchase shares we view the stock as attractively priced given the approximate three seven dividend yield and the opportunity for future growth.
Before I turn the call back to John Let me remind you of some items that could impact the fourth quarter.
Core net interest margin will impacted by the timing and level of overall loan growth and deployment of liquidity.
Ported net interest margin contained elevated levels of purchase accounting accretion net prepayment penalty and positive fair value Mark on the hedges all of which totaled 19 basis points compared to down 10 basis points in the prior quarter and averaged mid single digits high in prior quarters in 2020 in 2019.
Purchase accounting accretion is expected to be less than $1 million per quarter.
No change to the pandemic response, we expect loan growth to improve excluding the P. P. P loans in the fourth quarter and into 2022.
The starting point for fourth quarter operating expenses were $35 million before adding a normal growth rate our effective tax rate for the full year 2021 ship proximate 26.5%.
I'll now turn it back over to John.
Thank you Susan.
Slide 14 shows our outlook.
We expect to benefit from all of the merger activity in our market over $60 billion of deposits on long island involve a merger participants we've already gained staff and customers and are looking to add more in the future.
Additionally, a major acquirer has already changed its posture on holding prelaunch.
Yeah.
We also expect positive loan growth, excluding PPP in fourth quarter and into 2022.
Our loan pipelines are at record levels and the local economy continues to normalize.
Core net interest income growth is expected to be driven more by volume than rate, we expect positive loan growth into 2022.
We continue to manage our funding costs.
And loan yields have been stable.
We've reached the 8% tangible common equity target within one year of the Empire deal closing.
We have the flexibility to return capital to shareholders.
And our capital priorities have not changed.
We will first look to profitably grow the balance sheet.
Then returned dividends to shareholders and then opportunistically repurchase shares.
We look to maintain the TCE ratio above 8%.
I'll remind everyone that we operate with a low risk business model with conservative average ltvs.
Low credit risk and our stock has an approximate three 7%.
Dividend yield.
We've been exceeding our profitability targets R O a a and R O N E.
I've been above through the cycle targets, both on a reported basis and without the benefit of.
Credit losses.
Operator, I'll turn it over to you to open up the lines for questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys good morning nice quarter.
Mark Thank you.
First question I had do you think that were.
The reserve releases are behind given how strong your loan pipeline is today.
I think if the loan portfolio grows the reserve releases by May six because the reserve release will be predicated upon the loan mix current originations and the economic factor. So if we grow the portfolio my expectation would be that the the the reserve releases would stop.
Okay.
And then Susan I heard what you had mentioned about expenses, but are there any other major expense initiatives coming down the pipe whether technology or otherwise.
No not not not at this time, but yeah as a reminder.
He is doing their modeling we do have the first quarter and I can't believe we're talking about first quarter 2022 already but we do know the first quarter seasonal expenses that will come into play.
Great and then.
On the merger charges related to Empire, I think there were $2 1 million this quarter.
Is there any more of those outstanding or are those all behind at this point.
The most of their behind this this was primarily.
Related to some.
Fixed asset impairment charges and closing the branch.
Okay, and then I guess I was wondering of the $40 million of loans on deferral that are not making interest payments right. Now would you expect a lot of those to migrate to non accrual when the deferrals expired later this year.
No I wouldn't expect them to migrate to performing loans when they when they migrate at the end of this year.
Okay, and then one last one actually.
Hmm.
Of the $531 million loan pipeline I guess I was curious roughly what would be your guess on how much is coming from other players that are in the midst of mergers.
I'll I'll turn that over to Frank Mark and let him answer that.
Hi, Mark.
Yeah.
Volume has been fairly active.
I can't say.
With any accuracy as to how much is coming from individual institutions, but I can say that you know, we're growing new customers as well.
Obviously the deals that we're doing are in markets. So they would naturally come from.
Replacing debt that's already existing we continue to see.
And then his experience with our existing borrowers.
Many of our relationships are growing and expanding.
And I think that is like.
Likely result of.
Other borrowers not being as comfortable going to an institution that may be going through a merger scenario.
Generally speaking when two institutions come together there is a delay.
In.
Understanding how loans are originated processes change requirements changed so we are definitely picking up business.
Business in.
In the market from borrowers and relationships that we have not seen in the past.
Thank you.
As a reminder, if you have a question. Please press Star then one to enter the question queue.
The next question comes from Chris O'connell with a BW. Please go ahead.
Good morning.
Alright, Chris Good morning, Chris.
I was hoping you guys just talk about you know the loan growth expectations. It seems like they are strong coming into the fourth quarter was there any was there anything in the third quarter that just caused some delays in closings because of the pipeline you know it was pretty pretty robust coming into this quarter.
Things just get pushed out a bit coming into into the fourth quarter here.
Yeah.
So we've seen a few larger loans roll into this into.
Into the third quarter.
In addition.
You know the delays that we were that we had been having with respect to ancillary services being available continued into and.
And through August and we did see a pickup in September.
Okay.
Got it great and could you just talk a little bit about the mix of what you guys are.
By mix currently and you know maybe what yields are each of those categories are coming on it.
So it looks like about half of it is coming out of our business banking.
Business banking operations, some of which is a subset is is commercial.
<unk> properties, because we've got a lot of our customers.
Customers, who are taking advantage of the rate environment and have been buying.
Buying a additions or renovations on their on their plan.
And most of it is reflective of.
The current of the car.
Our <unk> portfolio.
That we have so yeah, I think are not very very much different in terms of the yield expect yield expectations, you'll notice that over the last four quarters or so despite a very very low rate environment, we've been able to retain much of our yield.
We expect our we expect that to continue with some some minor minor adjustments going forward.
Got it great. Thank you and then just following up on Mark's question on the provisioning and the reserve you know just with the Empire transaction, having closed you know wherever they want to see so I guess all in if you're going to run it.
Remind us about a million a million eight I believe.
Okay.
Sorry on the reserve the reserve to loans ratio.
I I don't remember that off the top of my head first.
Yeah.
It was about 38 39 basis points somewhere like that at 12 31 2020.
Okay.
19, excuse me because we adopted in 2020 I get my years I get my years.
<unk> [laughter].
Got it.
No problem. Thank you.
Okay, Great and then one minor one.
Looked like the you know the cash yield on our interest earning deposits had been kind of holding you know pretty consistently.
Sure and just.
Came up a bit this quarter was there any strategies are being implemented or anything now that that is primarily fed dependent on excess reserves are sitting in the fed so whatever the fed is paying its what we're seeing.
Okay got it great.
And then lastly, just on the overall margin I know you guys you don't give any specific guidance, but it seemed like last quarter, you were indicating them you know more towards near term kind of margin pressures.
And from what I'm seeing you know it gets from this in the slide deck.
It seems like the asset side as well as holding in relatively stable and that there's a little bit more on the.
On the liability side to go in terms of downward movement.
Is it kind of safe to say that you know its more of an upward bias at this point.
I would still say, it's relatively flattish bias at this point, Chris because we do have just a little bit more I think that we can squeeze out on the liability side of the balance sheet, we were able to hold our our asset yields and as John said the pipeline is it's pretty consistent but as we've talked about in the past yeah about 20%.
Our portfolio re prices in any given year and although they have floors.
There's some flexibility to not containing what those yields.
Okay got it alright, thank you.
At this time there are no more questions in the queue I'd like to turn the conference back over to John Buran for any closing remarks.
Yes. Thank you very much well. Thank you all for your attention and once again, we look forward to wrapping up a.
A very very strong year of this certainly has been a good one for us and we hope we hope you all stay safe and sound over the next over the next quarter or so do we speak again.
Bye now thank you.
The conference has now concluded thank you for attending today's presentation.
Disconnect.