Q3 2022 Flushing Financial Corp Earnings Call
Welcome to Flushing financial Corporation's third quarter, 2022 earnings conference call.
The call today are John Byrne, President and Chief Executive Officer, and Susan Cullen Senior Executive Vice President Chief Financial Officer and Treasurer.
Today's call is being recorded all participants are in a listen only mode should you need assistance. Please press Star then zero. Following today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad 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.
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.
Such statements 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 and or the presentation.
Yeah.
I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results.
Thank you operator, good morning, everyone and thank you for joining us for our third quarter 2022 earnings call.
Following my prepared remarks, Susan will review the financial trends and we will then answer any questions.
The local economy was generally positive in the third quarter as New York City continue to recover from the pandemic, which led to solid loan growth.
On the other hand, the fed aggressively raise rates.
Which pressured funding cost while also increasing loan origination yields.
Given this environment, we remain focused on executing on our strategic objectives.
We reported GAAP earnings per share of 76 cents and core EPS of <unk> 62 cents.
This translated to a return on assets of 1.11% and return on equity of nearly 14%.
Core return on assets was 90 basis points and core return on equity was over 11%.
These returns are within range of our stated through the cycle goes a 1% and 10% respectively.
Core loan yields increased 20 basis points quarter over quarter, while core deposit yields expanded 47 basis points, resulting in net interest margin compression of 28 basis points on a reported basis and 30 basis point.
So on a core basis.
In a period of rate rises the general trend in our net interest margin is expected to be shaped like a V.
When the fed is raising rates funding cost, we price faster than assets when the fed stops raising rates than assets are expected to increase faster than funding costs over a period of time and then the NIM begins to recover.
In the near term the net interest margin should have pressure and then over time expand once loan repricing accelerates.
Average non interest bearing deposits reached a new record at $1 $1 billion for the quarter and increased 13% year over year.
Loan closings were a strong 464 million in the quarter the loan pipeline declined to $309 million as we become more selective in terms of rates and collateral type as borrowers adjusted to the higher rate environment.
We continue to focus on total relationships versus transactional business.
Asset quality is a hallmark of this company during the quarter, our nonperforming assets, which have a loan to value of less than 51% was stable at 58 basis points.
We continue to invest in the future as we hired 46 people from institutions within our markets that are involved in a merger 20 of those being revenue producers.
Overall, we're managing the balance sheet to deal with the rising rate environment, while maintaining our focus on credit quality.
Slide four outlines the merger disruption that continues in all markets during the quarter, we hired an additional four people, including two revenue producers from banks participating in mergers.
The M&A activity in our market is in various stages of integration and we expect to add more people unprofitable banking relationships as conversions occur and strategies change.
Given this environment, we expect to remain focused on organic growth opportunities.
The merger activity is having a positive impact on our business on slide five depicts.
It depicts the strong loan closings for the quarter pull through rates increased after bottoming out in the third quarter of 2020 one.
The loan pipeline has declined after a record levels. The prior two quarters, but the decisions, we're making on rates collateral type and full relationship focus.
Additionally, borrowers are adjusting to a higher rate environment.
Given the significant move in rates loan closings could slow however, satisfactions should also decline.
Slide six depicts the growth in our low cost delivery channel our digital banking platforms.
We continue to see high growth rates and monthly mobile active users users with active status.
In digital banking enrollment.
The numerator platform, which digitally originates small dollar loans as quickly as 48 hours continues to grow we originated approximately $60 million of commitments in the first nine months of the year.
Most of these commitments have a weighted average rate that is greater than the overall loan portfolio yield.
We continue to explore other fintech product offerings and partnerships.
The third quarter has several important events to highlight as you can see on slide seven.
We signed a lease for Brooklyn branch, which will expand our Asian banking footprint. As a reminder, last quarter, we signed a lease in hauppauge, which is expected to open by year end.
We successfully issued $65 million of subordinated debt. This additional capital provides flexibility to lower our Cree concentration ratio and we timed it well as subsequent offerings have had a higher rates.
On the product side last month, we launched contactless enabled ATM debit cards.
We participated in many community events this quarter, including supporting the Dragon boat race festivals.
In Flushing and Port Jefferson.
We also hosted of harvest Moon reception for our Asian banking customers. These events are examples of how Flushing bank supports our communities.
I'll now turn it over to Susan to provide more detail on our key financial metrics Susan.
Thank you John .
I'll begin on slide eight growing non interest bearing deposits is a priority for us.
Average non interest bearing deposits increased 13% year over year and comprised nearly 17% of average deposits compared to approximately 15% a year ago.
Our teams continue to open new checking accounts, which were up 26% year over year.
The growth in noninterest bearing deposits it helps mitigate the overall rise in deposit rates.
Our incentive plans are focused on increasing noninterest bearing deposits.
Also growing C d's to lengthen our duration.
Slide nine shows how our deposit rates move compared to fed funds.
Our ability to control deposit rate increases is a key factor in the net interest margin outlook due to our liability sensitive balance sheet. We have done a good job of eliminate deposit rate increases so far in 2022.
The fourth quarter of 2021 through the third quarter of 2020 to interest bearing deposit yields increased 63 basis points compared to the 211 basis point rise in average fed funds rates, implying a deposit beta of 30% compared to 43% in the prior cycle.
We expect the cumulative deposit betas to continue to rise as rates increase.
Slide 10 outlines the loan portfolio and yields net loans, excluding the P. P. P loans increased nearly 7% year over year.
With the exception of the P. P. P loans loan growth occurred both in mortgage loans, which increased nearly 4% year over year and commercial business loans, which was over 18%.
Loan portfolio yields increased 23 basis points during the quarter.
Notably yields on the loan pipeline increased to 117 basis points during the quarter.
Prepayment penalty income declined to $1 $3 million in third quarter compared to $2 3 million, the prior quarter and $1.8 million a year ago.
Slide 11 provides more detail on the repricing of the loan portfolio.
While a portion of the loan portfolio re prices with each fed move the majority we prices over time.
We have approximately $1 billion or 15% of loans that should largely repriced with the fed moves.
An additional $1.9 billion or 27% of loans were priced the 'twenty 'twenty four.
As of September 30th these loans are expected to reprice 200 basis points higher this is not taken to any account any future fed moves, which could push repricing rates up further.
Importantly, once a real estate loan re prices a prepayment structure, we set the original terms.
Slide 12 outlines the net interest income and margin trends.
GAAP net interest margin was three one O, 7% and decreased 28 basis points during the quarter.
Net interest income decreased 5% quarter over quarter to $61 million.
Core net interest income, which removes the impact of net gains from fair value adjustments and purchase accounting accretion decreased 6% quarter over quarter as the core net interest margin declined 30 basis points three point O 2%.
This rate cycle has been different from the past cycles, given the pace and magnitude of rate moves.
However, our deposit beta has been lower this cycle.
As John said previously in a rising rate environment. The path of net interest income is expected to look like a V with compression from rising funding costs from the fed increases rates followed by expansion over time as loans reprice.
Moving on to asset quality on slide 13.
We have a long history of strong credit quality, primarily due to our low risk credit profile and conservative underwriting.
For the quarter net charge offs were only two basis points.
Our low risk credit profile and conservative underwriting has served us well through many cycles.
As you can see our losses have been well below the industry.
We remain comfortable with the credit quality in the allowance for credit losses.
We believe there's limited loss content in the loan portfolio, if there's an economic downturn due to greater than 80% loan portfolio secured by real estate with an average LTV less than 37%.
That's the 1% of our loans have a loan to value of 75% or more.
And the weighted average debt service coverage is one eight times and over 1.15 times and stress scenarios for multifamily and investor commercial real estate portfolios, which comprised 65% of total loans.
These factors contribute to our expectation of low loss content within the portfolio.
Additionally, on slide 14, our allowance for credit loss is presented by loan segment.
Our lot Laos is different from peers, largely due to loan mix as we have a higher percentage of real estate collateral at low average loan to values.
Overall, the allowance for credit losses.
Two loans increased one basis points to 59 basis points during the quarter.
Nonperforming assets were stable at 58 basis points and a loan to value on these assets is less than 51%.
Criticized and classified loans increased slightly to 89 basis points of loans compared to 85 basis points in the prior quarter.
The coverage ratio is 142%, meaning we have approximately $1 40 reserve each dollar of nonperforming assets.
We remain very comfortable with our credit risk profile and continue to expect minimal loss content.
Our capital position as shown on slide 15 books.
Book value and tangible book value per share increased during the quarter. Despite the $15 million increase in accumulated other comprehensive loss.
We took advantage of the attractive stock price and repurchased nearly 131000 shares during the quarter and returned 40% of earnings through dividends and share repurchases.
The tangible common equity ratio declined to 762% driven mostly by the incremental 18 basis points of accumulated other comprehensive loss.
And the short and the medium term the company will maintain its targeted 8% tangible capital ratio well balancing the attractiveness of share repurchases.
Before I turn the call back to John Let me provide some additional color on the outlook with a liability sensitive balance sheet controlling the cost of funds is paramount.
The passage of time should allow for the accumulation of loan repricing to exceed the cumulative effect of the increase on the funding.
In addition, we had $592 million of swaps on funding that we price to our benefit in 2023.
The net interest margin will remain under pressure over the short term and then should expand in the medium term and beyond from loan repricing.
Noninterest expenses are now expected to increase low single digits in 2022 from the core base of $144 million as year to date expenses were better than expected.
Finally, the effective tax rate should approximate 28% for 2022.
With that I'll turn it back over to John .
Thank you Susan.
On line 16, we wrap up our key messages, we continue to benefit from merger disruption as we continue to recruit and add people and business.
While we had strong loan growth during the quarter were becoming more selective in terms of rates and collateral type borrowers are adjusting to higher rates.
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 the credit markets.
We're managing through rate increases, we're controlling deposit rates in the context of a challenging market in the near term, we expect some NIM pressure, but loans will reprice in coming quarters and help the net interest margin.
Capital return was 40% this quarter and book and tangible book value per share increased 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 in a range of through the cycle return on average assets and return on equity goals in the third quarter.
Operator, I'll turn it over to you to open up the lines for questions.
Thank you Sir.
We will now begin our question and answer session again to 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.
This time, we will pause momentarily to assemble our roster.
Today's first question comes from Mark Fitzgibbon of Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning.
I'm wondering if Susan maybe you could share with us what spark deposit rates look like today.
But deposit rates.
Are pretty stable, where we are running some obviously some CD specials out there as we're trying to lengthen the duration of our liability portfolio, we've kept them pretty pretty stable.
Okay from from where they were for the quarter or at the end of the quarter or at the end of the quarter.
Okay.
And then secondly, I wonder if you could kind of update us on what I go balances are and maybe what the rough spread difference between traditional bank deposits and.
Deposit rates are down.
Yeah on average.
If I go back and deposit base is a little bit higher but not not out of line. We are you are competing with the other internet banking banks. If you will so we're you know we look at that market a little bit differently to compete in those markets versus our brick and mortar and our balances are less than 200.
Yeah.
Okay, Great and then.
John I heard what you said about you know the NIM outlook and Susan cause.
Can you help us think about the magnitude of the near term pressure on the margin.
So.
I think we've we've.
We've seen.
Interest bearing deposit beta side or at around 30% for the year for the year, we expect that to move up.
Move up somewhat and then of course, we're a we're being very successful in terms of our repricing on loans.
For example are the repricing loan beta for the third quarter was about 90%. So there are about $151 million of loans that repriced at a weighted average of $5 69 compared to our contractual expectation of 585, so we're being very successful.
When that repricing so.
That.
I think that the obviously theres a different and a difference in the magnitude is there, but we won't continue to see some some pressure on the NIM I'm over the next quarter.
Certainly until the deferred.
Starts to reduce let's say, it's it's increases going forward.
And I get it it probably isn't 30 basis points again this quarter, but it is in house that roughly would you get.
Uh huh.
Yeah.
Yeah. We're we're still we're still kind of in the same category I would guess I'm you know I think that you know well.
Have to see whether this 75 in the twenty-five come on come.
Come on board in the next in the next two months that the you know the fed's projecting at this point in time, but I think that.
You know, we do have about 15% of the loan portfolio repricing with those fed moves some will certainly see I'm pretty much a one for one on those particular, you know those particular loans or close to it let's say, we'll see multiple.
Our price increases on those loans as time goes on.
So I think that.
The deposit beta I think we'll continue to see some pressure.
And it's a matter of how quickly loans continue rates continue to rise.
That will determine how quickly the loan the loan portfolio catches up.
Okay.
Changing gears, a little bit I guess, I'm curious John with the loan to deposit ratio somewhat elevated would it make sense to slow loan growth a little bit in and maybe use.
You know be a little more aggressive with the buyback program given that you trade below tangible book value.
So I think that you know what.
<unk> doesn't have of a number of different factors going on in the are in the market today first off I think there's going to be at least for the next quarter or so a a natural muting of the of the loan growth due to you know due to the.
Borrowers kind of getting used to a new rate level, and we'll see whether or not that resettled itself going forward and then frankly, we are being more selective in terms of in terms of what we're accepting in terms of both rate and and credit risk as we are.
Potentially look at a the possibility of of a recession down the road. So we're being you know what I I guess, what you would call a typical cautiousness with respect to the <unk> to the growth of the loan portfolio. So certainly in the next quarter. So we're expecting a somewhat muted loan growth bar are.
Our pipeline is down to 309, which will visit they are you know.
Terribly low, but certainly significantly lower than the last couple of a couple of quarters. So I think theres. Some natural natural factors going on there that are that are going to.
You know somewhat mute loan growth in the next couple of quarters.
Okay, and then lastly, excuse me could you help us think about expense growth in the fourth quarter given that you've got some new locations coming online.
And people just help us think about what it was sort of 36 ish million a good run rate for expenses in fourth quarter.
But yeah. The people for the branch is set to open at the end of the are already baked into the numbers those employees have already been been hired in the branch that we signed the lease for those people or are in process and it would not be a material change, but yeah. I would think that the mid 30 number would be a reason.
Number for your run rate on expenses.
Thank you.
Thanks Mark.
The next question comes from Chris O'connell with K B W. Please go ahead.
Good morning.
Good morning, Chris Good morning, Chris.
So wanted to start off on the deposit side.
One.
From from that first question on the spot rate on deposits.
So wherever I guess where were they at the end of the quarter or what were they unchanged from.
At the end of the quarter they were up.
About 115.
Okay got it and.
On the flows in and kind of you know an overall outlook on deposit growth going forward.
There's some declines in the checking and noninterest lines.
You know what are you guys hearing from your customers and what are you guys seeing on flows and how.
How do you think the overall you know outlook on deposit growth is going forward. So our average noninterest bearing was up quarter over quarter. We had some customers that unfortunately for them are fortunately for for them. They had to pay they had to take some money out to pay their taxes, but our account opening system.
Also been very strong during the quarter. So we we think that bodes well for or our noninterest bearing deposit growth going forward.
Yeah.
Okay got it.
In.
There's a there's a part of the deck.
That was put in that's talking about M&A I generally rising.
In year three.
Does that imply that NII goes down and until then.
No I think what we're saying there is that.
Oh Oh.
Oh, sorry, we're having phone issues.
Okay.
I used to.
Okay.
Yeah.
Right.
Sorry, Chris.
Can you repeat your question.
Yeah, just like color around what the outlook side I think it's as you know and I generally wrong filling out your three just short exactly you know what that entails.
So we would expect that that that there is the rates continue to rise we'll continue to see pressure and then yes.
Our V shaped in the and the length of that will be dependent on obviously the fed and then we expect as we get to stabilization of the of the liability funding than the asset side will start taking off so I don't expect three years of compression followed by the up if that's what you're asking.
Would expect you know, it's all going to be dependent on fed fed business.
So you were also talking about NII, Chris and I and I think that the the question for Russell. So I was going to be I'm, you know, how we perceive the credit markets going forward and whether we're going to continue to them. They can continue to be a more and more selective in our in credits if.
If.
We start to proceed toward us toward a more recessionary in a more recessionary environment. So.
At this point in time, it's a little bit difficult to see because I think that with this rate increase we've seen a natural pull back in terms of these certainly are certainly our loan pipeline as.
As we wait for customers to potentially adjust.
That said, a very very often in times like these customers like the customer base that we have.
Tend to be able to find some some bargains that are out there so to speak.
And I think that that could regenerate loan growth forests had and you know at some point in time, but certainly for the next quarter or so being somewhat somewhat selective and cautious and our borrowers are certainly are waiting to see what's happening with the rate environment before they jump in.
Yeah.
Got it.
That's helpful and I think last quarter, you provided you know where the NIM was versus at the end of the quarter versus you know during the quarter do you have that for this quarter.
Okay.
Yeah, It's it's down it's I would expect compression as great or if not a little bit greater than what we saw in this quarter.
Okay, that's helpful and for the.
It's $500 million of swaps them, some or something.
Pricing down to 70 bps can you just give a little color around that and the timing.
Whether they're you know whether those are against.
Deposits or the borrowing side.
They're there they're on the funding side of the balance sheet. So they could be there on wholesale funding so whether that's borrowings or yeah. We've stepped into a broker market wherever we can get the best obviously liability rate those swaps or are against that type of funding.
They primarily reset in 2023, a big chunk of them that will mature and then during the height of the pandemic, we took the opportunity to kind of match the funding not the funding excuse me the swap market at that time against what we had so that we were getting a lager protection.
And the swap market when we did that naturally brought the price down you know during the pandemic from a.
125 basis points roughly down to the 72.
Got it and what's the timing on those in 2023.
A big chunk of them is in the first quarter and then they kind of a pro rata throughout the throughout 'twenty, three and a little hangover into 'twenty 'twenty four.
Mmm will come from Ninewells novice of D. A Davidson. Please go ahead.
Hey, good morning.
Good morning.
According.
The.
Just kind of circling back on the.
Commentary does that mean that you probably will see that kind of downward slope of there'd be until the fed stopped raising rates.
That's correct.
Besides that I will also be offset somewhat by our load repricing.
We talked about.
So I could get a little bit better maybe maybe the slope declines a little bit as we get towards the end as as I said get towards terminal.
Yes, yes.
Okay is there a level that you're uncomfortable in terms of the loan to deposit ratio.
No no I had been up in a sigh is 120 or so.
He was a little higher at some point in time.
That helps yeah I've seen in the past, but just just wondering if that that change anything going forward.
In terms of loan growth I understand it can be muted, but with paydowns coming down.
Kind of like the worst case scenarios is flat right like it's it's you should still have a little bit but like.
Likely know declines right.
I think we're going to see.
Yeah, I think it's going to be dependent upon whether or not the in the in the short term in the next couple of quarters or so borrowers begin to accept the higher rate environment. I think that that's you know that's critical and then of course, we are being very selective dependent upon the situation with.
Respect to the.
The.
Possibility of a possibility of a of a <unk> of a recession paydowns will slow you know where certain of that and you know we've already seen that begin to occur. So we're expecting that going forward, but but I think the dynamic of of the slowdown in paydowns versus.
The let's say acceptance of higher rates on the part of on the part of customers is going to determine you know determine the ultimate the ultimate growth there, but you know as I said, we you know we expect to see some some muted loan growth and the and then at least the next couple of quarters.
Okay.
Thank you. Thank you for your time today.
Thank you thanks.
There are no more questions in the queue at this time I would like to turn the conference back over to John Byrne for any closing remarks.
I just wanted to thank everybody for attending the this session and look forward to speaking with the with the many of you individually in the next couple of a couple of meetings that come up thank you very much.
[laughter] today's teleconference. You may now disconnect your lines and we thank you for your participation.
[noise].