Q2 2022 Flushing Financial Corp Earnings Call
Welcome to the Flushing Financial Corporation second quarter, 2022 earnings conference call.
The call today are John Buran, President and Chief Executive Officer, and Susan Cullen Senior Executive Vice President Chief Financial Officer and Treasurer.
<unk> call is being recorded.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then 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 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 U S. GAAP.
For information about these non-GAAP measures and for a reconciliation to GAAP. Please refer to the earnings release or the presentation.
I would now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results.
Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us for our second quarter 2022 earnings call.
On today's call I'll discuss second quarter highlights and ongoing strategic objectives.
Before turning the call over to Susan Collins, Chief Financial Officer.
Following our prepared remarks, we will answer your questions.
The company performed very well during the second quarter, we focused on executing on our strategic objectives as the macro environment becomes more challenging with rising rates and concerns about a potential recession.
We reported GAAP earnings per share of 81 cents and core EPS of <unk> 70 cents. This translated to a return on assets of 122 and return on equity of 15%.
Core return on assets was one O five and core return on equity was 13%.
These returns are within range of our stated through the cycle goals of 1% and 10%.
Core loan yields increased 11 basis points, while core deposit yields.
Increased only seven basis points. This resulted in a stable.
<unk> margin quarter over quarter.
Average noninterest bearing deposits reached a new record at 1 billion for the quarter and increased 13% year over year.
Loan closings were a record $504 million in the loan pipeline, while down from record levels last quarter is still the second highest reported level at 583 million.
Asset quality is a hallmark of this company during the quarter, our nonperforming assets rose to only 59 basis points of assets.
The increase was from three relationships migrating to nonaccrual driving the bulk of the increase one relationship totaling $2 million was resolved after the quarter end the largest relationship totaling $24 million as a combined LTV of 63% the third relationship.
Totaling 10 million is an export business that is impacted by macro factors. We view these items as one offs rather than fundamental portfolio issues. We.
We continue to invest in the future as we hired 42 people from institutions within our markets that are involved in a merger and 18 of those people are revenue producers.
Overall, I'm pleased with our execution on our strategic objectives and the returns we are generating for our shareholders.
Slide four outlines the merger disruption that's occurring in all markets during the quarter, we hired 12 additional people, including six revenue producers.
The M&A activity in our market is in various stages of integration and.
And we expect to add more people and profitable banking relationships as conversions occur strategies change.
Given this environment, we expect to remain focused.
On the organic growth opportunity.
The merger activities, having a positive impact on our business on slide five youll see the loan pipeline is at the second highest level in our history, although down from the record level last quarter.
Loan closings accelerated to a record 504 million this quarter and pull through rates have returned to normal levels. After bottoming out in the third quarter of 2021.
Given the significant move in rates loan closings could start to slow, but satisfactions, which remain elevated should also start to decline.
Slide six depicts the growth in our digital banking platforms, we continue to see high growth rates and monthly mobile active users online banking users and digital banking enrollment we were pleased with zelle usage by our customers as this product continues to gain traction.
The numerator platform, which digitally originate small dollar loans as quickly as 48 hours continues to grow.
We originated approximately $11 million of commitments in the first half of the year.
With a weighted average yield of over 6%, while adding 30 new relationships.
We continue to explore other fintech offerings and partnerships.
Second quarter has several important events to highlight as you can see in slide seven.
We opened a new branch in Elmhurst, Queens, which expanded our Asian market footprint.
This branches staff by employees, who were previously with one of the banks involved in the 10 mergers in our markets.
Growth in activity in the branch has exceeded our expectations.
We also signed a lease to open in Hauppauge, Suffolk County on long Island Hauppauge is one of the key business centers.
In our area.
The company issued its inaugural environmental social and governance report and I'll complete checking account product received bank on certification.
We participated in many community events this quarter, including supported the United Way, New York City rise and neighborhood housing services of Queens.
Importantly, Flushing bank employees completed a very successful food drive for Ireland harvest and participated in Brooklyn's Cinderella project to provide problem a tire for young women and men.
These events are an important part of how Flushing bank supports its communities and shows how the environment is adapting to the COVID-19 pandemic.
I'll now turn it over to Susan Cullen could provide more detail on our key financial metrics Susan.
Thank you John I'll begin on slide eight.
Growing noninterest bearing deposits is a priority for us average noninterest bearing deposits increased 13% year over year is over 16% of average deposits compared to 14% a year ago. Our teams continue to open new checking accounts, which were up 18% year over year.
Growth in non interest bearing deposits is helping to mitigate the overall rise in deposit cost.
Slide nine shows our deposit rates move compared to the fed funds last quarter, we outlined that because of our liability sensitivity.
Billy to control deposit rate increases is a key factor in the net interest margin outlook.
We've done a good job of limiting deposit rate increases so far in 2022.
Cost increased eight basis points to 29 basis points in the second quarter compared to 21 basis points for the first quarter.
This implies a deposit beta of less than 9% compared to over 40% for the last cycle.
The pace and magnitude of rate increases this cycle will pressure posit costs, and we expect deposit betas will rise at a faster rate in the next quarter.
Slide 10 outlines the loan portfolio and yields.
Net loans, excluding PPP loans increased 3% year over year with the exception of the P. P. P loans, which continued to be forgiven loan growth was broad based with real estate and business banking loans, each was a 3% quarter over quarter.
The loan pipeline of $583 million is up 35% year over year.
Near record levels.
Over the past year loan yields were flat, but increased in second quarter.
Core loan yields increased 11 basis points, well base loan yields grew seven basis points quarter over quarter.
Additionally, the spread between the yield on the originations and satisfactions. Excluding P. P. P turned positive for the first time since the fed cut rates at the start of the pandemic.
Slide 11 provides more detail on the repricing of the loan portfolio.
We have nearly $1 billion alone that are hedged or tied to short term rates like prime LIBOR, and sofa, which will reprice within the next quarter and at least twice in 2022.
Approximately $320 million of the remaining portfolio re prices through the end of the year.
This $1 $3 billion of loans represents approximately 25% interest bearing deposits, which serves as a natural hedge for fed fed rate moves.
An additional $980 million of loans will reprice in 'twenty two 'twenty three.
This chart also shows the current rate for the maturity repricing bucket and then contractual repricing rate based on the indices as of June 30th 2022.
For example in 'twenty 'twenty, three nearly $1 billion of loans should we priced 154 basis points higher based on the contractual rates as of June 30th.
Well, we expect the loans to reprice the contractual rate repricing was Pat on the then current market rates and competition.
If the indices continue to rise as that increases rates repricing rates will continue to move higher.
Our loans will reprice over a longer time and that is why it is imperative, we manage our deposit pricing.
Slide 12 outlines the net interest income and margin trends.
The GAAP net interest margin was 335% and decreased one basis point during the quarter.
Net interest income increased 2% quarter over quarter to a record $65 million.
Core net interest income, which removes the impact of net gains from fair value adjustments in purchase accounting accretion increased 3% quarter over quarter as the core net interest margin expanded two basis points to 333%.
Yeah.
This rate cycle has been different from past cycles, given the pace and magnitude of rate moves. So I wanted to provide some color on the net interest margin outlook.
While core loan yields rose faster than our core deposit yields in the second quarter. This positive spread will be challenging to achieve going forward as the magnitude of the rate move is expected to pressure deposit rates.
Second the base net interest margin for the second quarter was 3.22%.
At June 30th the base net interest margin is approximately 20 basis points lower.
To conclude while we did a good job of maintaining the net interest margin to date in this rising rate cycle, it'll become challenging given the pace and magnitude of future rate increases.
Moving on to asset quality on slide 13, we have a long history of strong credit quality, primarily due to our low credit risk profile and conservative underwriting.
This has served us well through many cycles and as you can see our losses have been well below the industry in any asset class that caused the rise in losses in the past have been exited or underwriting has been significantly tightened.
For the quarter net recoveries were three basis points driven largely by recoveries on previously charged off taxi medallion loans, we remain comfortable with the overall risk of the portfolio and the increase in nonperforming assets starts from a very low base Gen.
Generally there are two sources of repayment for real estate loans.
The first source is the cash flows from the net operating income with the building with the second being the collateral.
Well it was an 87% of the loan portfolio is secured by real estate with an average loan to value less than 38% and only $22 million or less than 1% has a loan to value of 75% or more for.
For these reasons, we are comfortable with the credit quality and the limited loss content, if there's an economic downturn affecting the credit markets.
The multifamily commercial real estate loans are 65% of total loans.
These portfolios have strong cash flows with a weighted average debt service coverage ratio of one eight times.
During underwriting the rate on these loans are shocked 200 basis points determined with the ball has sufficiently payment capacity in a rising rate environment.
For these portfolios that are due to reprice over the next three years.
<unk> average pro forma debt service coverage, but still be great at 1.25 times with a 200 basis point rate shock.
We also stress test this portfolio of horizon operating costs.
Assuming a 10% increase in operating expenses the weighted average debt service ratio would remain over one five times.
Combining the 200 basis point increase in rates and the 10% increase in operating expenses the pro forma weighted average debt service ratio, but still remain over 1.15 times.
And all scenarios. These borrowers will be able to make payments, we remain comfortable with the low level of risk in the loan portfolio.
Slide 14 outlines some additional credit metrics.
Nonperforming assets increased to a still low 59 basis points of assets largely due to the three relationships previously discussed.
The loan to value of the nonperforming assets is less than 51%.
Criticized and classified loans declined 4% quarter over quarter.
The allowance for credit losses to loans ratio increased one basis point 58 basis points and the allocation of the reserves by loan type is depicted in the bottom right chart.
Overall, we remain very comfortable with our credit risk profile and continue to expect minimal loss content.
Our capital position is shown on slide 15 book value and tangible book value per share increased during the quarter.
This despite the accumulated other comprehensive loss Dublin during the quarter from the effects of higher interest rates on the investment securities portfolio.
61% of earnings returned to shareholders through dividends and share repurchases.
The company repurchased over $8 million of common stock in the quarter and the board of directors increased the share repurchase authorization by 1 million shares.
The tangible common equity ratio declined to 7.82% driven mostly by higher rates.
In the short and medium term the company will manage to an 8% tangible capital ratio.
Before I turn it back to John I want to provide some color on the outlook.
Net interest income is a function of the net interest margin and the balance sheet growth.
What's the pace and magnitude of interest rate increases deposit costs are expected to rise at a higher pace than seen in the second quarter and thus we expect NIM pressure.
Loan growth is dependent on the rate and economic environment and estimates remain in the low single digits.
Previously expected core noninterest expense to increase by high single digits in 2022 from a base of $144 million.
We now expect core non interest expense to increase by mid single digits given the results of the first half of the year.
Quarterly non interest expenses are expected to follow prior seasonal patterns.
Lastly, the effective tax rate for 2022 should approximate 28 set with that I'll turn it back over to John.
Thank you Susan on Slide 16, we wrap up our key messages.
Loan growth turned positive this quarter as the strong pipeline resulted in originations greater than satisfactions.
Her time higher rates are expected to negatively impact origination volumes, but satisfactions should also decline.
While it's difficult to predict we expect loan growth will remain in the low single digits for the remainder of the year.
Well the company did a good job of managing interest rates in the second quarter, the pace and magnitude of rate increases this cycle will make this more challenging in the future.
Posit betas are expected to rise off of low levels, while theres, some offset from loan repricing there is a lag.
The NIM compression is likely.
Flushing Bank has a long history of superior credit quality, driven by our conservative credit culture.
We have a low risk loan portfolio as proven by the high percentage.
Secured by real estate.
Low loan to values and high debt service coverage ratios.
We are well prepared to handle any potential economic downturn affecting credit markets.
We've been attracting talent as we added 42 people from mergers 18 of which are revenue producers.
Capital return was 61% this quarter and while book and tangible book value per share increased rising rates impacted tangible capital ratio levels slightly below our internal target.
Going forward the company will balance the capital return with a desire to increase the tangible common equity ratio to 8%.
Overall, the company performed well versus is through the cycle return on average assets and return on average equity goals in the second quarter.
Operator, I'll turn it over to you to open up the lines for questions.
Thank you.
Ladies and gentlemen, well now begin our question and answer session.
To ask a question you May press Star then one on your Touchtone phone, if you were using a speaker phone.
Please pick up the 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.
Yeah.
Our first question comes from Mark Fitzgibbon of Piper Sandler. Please go ahead.
Hey, guys good morning.
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Hey, Susan just a couple of clarifications on some of your comments.
I think you said the effective tax rate going forward will be around 28% I am just curious why did it sort of nudge up from that 26% ish kind of rate that we've been running at for a while.
So there is a tax deductions. This just gets us all in the weeds Mark So bear with me for a second there was a tax deduction that we had available yourself to what our tax average assets were less than $8 billion based on analysis completed in the quarter. We don't believe that that will continue so.
We need to take that into account.
Okay. Thanks, and then should we take from your comments about the base net interest margin compressing by 20 basis points at the end of the quarter that we could see the core NIM down somewhere in that you know that kind of a range is that right.
Yes, Mark, but that's what it will at least be that much.
We believe giving given the rate and yeah, we're expecting another 75 basis points today this early into the quarter.
Okay.
And then I was wondering if you could.
Maybe just give us any additional color on those loans that loans and security that went delinquent this quarter any any details on expected timing of resolution any loss content you know anything at all on those would be helpful. Thank you sure. So let's start with the easy one that resolved itself after the quarter end so there's what.
The the 2 million dollar loan is no longer on our books and you know it's been it's been accounted for.
The the the biggest piece of that the 24 million dollar.
Bond and loan and it was underwritten as a loan and then they wrapped it so that it gets treatment as an investment security that there's a school in Manhattan that is collateralized by a commercial condominium that has a combined 63% LTV. So we don't believe there's any loss.
Content there.
The third loan isn't ex border and there is overcollateralization on that loan as well. So we don't believe there's any additional loss content on eye on either of the two remaining well the two outstanding loans as of today.
Okay, Great and those do you think some of these will get resolved before the end of the year.
Well, we certainly hope so but yeah.
[laughter] Theres real estate involved so you know it could be a little bit longer but.
But we think we think by the end of the year is a good estimate.
Thank you.
Yeah.
Our next question comes from Chris O'connell of K B W. Please go ahead.
Yeah.
Hey, good morning, good morning.
I was hoping to start off on the loan yields and what are you seeing on multifamily origination yields as well as the rest of the portfolio.
Currently as compared to.
The first quarter.
Sorry second quarter.
Yes.
So they clearly up there depending upon the hum the asset category, they're beginning to approach us they are beginning to approach 5%.
Okay.
So what are the origination yields that you're putting on to the multifamily.
Multi a little bit less than that.
Yeah for the quarter and we put on about the rate was about $3 76, and we're seeing that start to inch north word as.
As rates continue to increase.
Okay got it and so.
For the <unk>.
Slide the repricing I mean.
How much of that do you expect to reprice at the repricing rate indicated versus kind of refinance into the current.
Multifamily origination goals.
I'm sorry, Chris you cut out there at the first part of your question could you repeat it please.
As for the for the loan repricing slides and you know where youre seeing.
The contractual rates that how much do you think.
The dollar amounts given there are going to reprice at the contractual rates versus refinancing.
Refinancing into kind of the current market multifamily origination yields.
I think for the most part that will be somewhere between the contractual rate and the in the market right because it's very expensive part of borrowers to refinance it will be closer to the contractual rate as we move forward. So remember for this year, Chris the larger proportion it was actually a floater.
A proportion of.
So $986 million of that is going to go up consistent with the move.
The moves of the fed makes because those are either.
Floating rate tied to tied to an index LIBOR predominantly but also some sulfur.
And and some are our hedge which are also tied to LIBOR.
So that's 986 million that will move consistent with the move in and fed rates more or less more or less knows those repriced quarterly so we should get to reprice things through that 980, <unk> at least to be pricing on that through the end of the year. Some of them are 30 day.
Right and then the remaining 322, I think will fall somewhere in between the contractual rate and the other in today's market rate higher than the market rate, possibly lower than the contractual rate, although we'll be pushing to get as close as possible to the contractual rate.
Okay got it.
That's helpful and.
And so on the other side of it.
She I think.
The 20 basis point or more moves a little bit more than a <unk>.
Dissipated this early in the cycle what are the are the deposit costs or what are the rates that you guys are kind of moving to so far.
And I guess, what are you assuming for deposit rates in the back half of the year.
And those assumptions or the beta kind of.
You know for the remainder of the year yeah.
So Chris two things one for.
For the quarter the base NIM was flat at our our GAAP NIM actually went up two basis points. So we've done a really good job of controlling our betas are we had a single digit beta for so far this year compared to like a 40% beta for the last.
Recession. So it's gonna be you know like I said, an imperative that we hold on to those deposit cost we are seeing our deposit costs rise, but we're also seeing these this repricing and we have the you know like $1.1 billion of noninterest bearing deposits, they're also helping to offset some of it some of our liability costs.
Yes.
Okay. So just you know where I guess you know how much of your guys move deposit rates, so far or kind of what are the rates you guys are putting out there.
New deposits.
So our highest.
Our highest CD rate right now or the one year CD rate, which is probably the only one drawing of the money maybe the money market rate is probably the one that's that's drawing the most at this point in time and Thats.
2% to 3% per array 18 months CD.
And theres not a lot of activity in the CD market.
Money market is it was running 125.
And that's for new money.
So we're not repricing the portfolio.
Okay got it.
That's helpful.
And then on the.
On the credit side for the one that was resolved first quarter and was there any loss content there.
There is $100000.
Yeah.
Okay great.
And then as far as you know you guys, you know capital targets and utilization of the buyback you still have a good amount.
You know of of that authorization left here.
But are kind of you know.
Just tick below your T cell target.
How do you how do you feel about the buyback utilization going forward.
Given your kind of it within range of the of the capital target.
So we still believe our stock is a really good investment, but we will be balancing the repurchases with that with our internal ratio up to 8%.
Okay great.
And then if so.
Are you guys decided to or opted not to.
It's been the agreement with the NY dig program.
Maybe just a little color around the decision making there.
Well I think given the.
The.
Volatility in the market and also the regulatory environment not being totally settled we thought it was prudent not to get our customers involved.
Okay, Great and then lastly.
Lastly, just on the operating expense guidance, it seems a little bit better.
Better than previously.
Hmm.
Where where do you where is the.
Variance there from the mid single digit versus the high single digits previously.
Are you getting better you know moves on the compensation or is there any savings are you know that that wasn't accounted for Brian .
Okay.
All the savings were accounted for properly. It was just we're not growing teams as quickly as we thought we would at the beginning of the year.
Okay.
That's all I had for now I'll step out thank you.
Thanks, Chris.
Okay.
Again, if you have a question. Please press Star then one.
Our next question comes from Manuel Nevertheless of D. A Davidson. Please go ahead.
Hi, Manny Hey, good morning, good morning.
A lot of my questions have been answered have been answered, but I'm just kind of thinking if.
The fed goes to $3 50 by the end of the year.
Where could you see the NIM approach kind of just big picture.
Yeah.
And I approach somewhere between you know.
250 to $2 75, you know big picture as we're sitting here right now, but again, that's all dependent on the growth of noninterest bearing deposits. The repricing of the nine 980 billion of the $1 billion worth of loans, we've talked about and the product mix.
The loan Anne and liability side.
That makes sense is.
You've been holding onto DDA is is there any starting.
Movements to to see kind of.
Hello out from DDA anywhere in the in whether you're.
In your competition.
We're in the market.
Our DDA balances actually grew about $200 million for the quarter little over 200 million.
You're holding it well is there any pressure do you expect any pressure there.
No no I think we've.
We've got some programs in place that have.
<unk> been successful and we'll continue those.
Okay arc, our account openings have been very strong on the DDA front.
We expect that to continue as well.
And you noted the offers you are putting out there for deposits.
Do you feel like you're.
At the top of the market what are you seeing competition do it in comparison to your offers.
We're rarely at the top of the market, but where we're trying to be compared to more a little bit more competitive.
Yeah.
Okay.
Helpful. Thank you.
Thank you.
Thanks.
There are no more questions in the queue I would now like to turn the call back to John for closing remarks.
So we're very very happy with the quarter as Michigan and see from my presentation. We do have some challenges ahead with respect to the NIM that we've outlined but I think we've got a we've got a number of our.
Our leverage to pull in order to help us, particularly on the loan side I want to thank everybody for attending this this call and look forward to seeing you in our next quarter. Thank you. Thank you.
This concludes today's teleconference. You may now disconnect your lines and we thank you for your participation.