Q2 2023 Flushing Financial Corporation Earnings Call
Good day, and welcome to Flushing Financial Corporation's second quarter 2023 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please I know a conference specialist by pressing this Turkey followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Western question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Mr. Joe <unk>, President and CEO . Please go ahead Sir.
Thank you operator, good morning, and thank you for joining us for our second quarter 2023 earnings call.
Following my prepared remarks, Susan will review the financial trends and we will then answer any questions.
During the first quarter the company instituted a six step action plan to enhance the resilience of our business model and strengthen our financial performance.
We executed this plan well during the second quarter and are pleased with the progress we have made so far on key points.
First to move more towards interest rate neutral, we added more than $400 million of asset swaps. Additionally, 250 million funding swaps became effective during the quarter. We're also increasing the percentage of back to back swap loans. These loans are over 35% of all long.
Pipeline.
In total floating rate loans are approximately 50%.
These actions significantly reduced our interest rate sensitivity position, while providing additional income.
Second we increased our focus on risk adjusted returns and overall profitability as a result yields on the loan pipeline rose 20 basis points and yields on loan closings increased 13 basis points. In addition, our loan pipeline increased.
56% quarter over quarter.
While it will take time for new and reprice loans have a significant impact on overall loan yields we are encouraged by the results so far.
Third we're looking to expand our client base and build loyalty by emphasizing our excellent brand of customer service and deep community relationships.
Late in the quarter, we hired a team of commercial real estate lenders with considerable experience and robust client rosters.
We also continue to see high single digit growth in checking account openings.
<unk> robust C D growth.
Fourth we reviewed new and existing relationships, resulting in improved credit metrics and normalized net charge offs.
We also added further layers of analysis to a review process for any future deals.
This review and actions reinforced our comfort with a low risk profile of our loan portfolio.
Fifth we are preserving strong liquidity and capital we are looking for ways to expand our liquidity sources, despite having available liquidity of nearly $4 billion.
Average deposits increased.
Year over year and quarter over quarter.
Capital ratios were also stable during the quarter.
Sixth we are tightening our expense controls by placing greater scrutiny on operating and discretionary expenses.
In a period of high inflation second quarter twenty-three core expenses are down approximately 1% year over year.
Overall, we expect these decisive actions to result.
In an improved financial profile overtime.
These actions along with our strong liquidity.
He will also allow us to continue our long history of dividend payments into the future.
In addition to our action plan slide four outlines our four areas of focus for long term success.
First interest rate risk as a priority and the actions we have taken have resulted in a 64% reduction in this risk over the past year.
This is important given the outlook on rates.
Second.
We are focused on maintaining our credit quality our loan portfolio comprises.
Low risk loans to stable borrowers.
Over 88% of the loan portfolio is secured by real estate with an average loan to value less than 36%.
The current debt service coverage ratio is one eight times for our multifamily and investor commercial real estate portfolios.
The third area of focus is liquidity, which I touched on in a previous life.
We have significant liquidity and are looking to fully utilize our balance sheet to add more.
The last area of focus is customer experience.
Central to our ability to deliver exceptional services as our ties to our local communities.
About a third of our branches are in Asian markets, and we continue to implement community engagement initiatives and grow our presence in these areas to build on our loyal customer base.
We also continue to enhance our digital banking solutions, which create a more convenient experience that allows us to engage with customers more seamlessly.
We're confident that these four areas.
Because will position the company to.
To achieve long term success.
Slide five represents our liquidity profile.
We have approximately $3 $7 billion of available liquidity from a variety of sources, including the federal home loan Bank in New York, All the commercial banks cash on hand and free securities.
Today, our available liquidity is 44% of assets and we're working to expand borrowing capacity from existing relationships by pledging several types of collateral.
As a result, we have a high degree of comfort in the stability of funding and available liquidity.
Our loan portfolio as outlined on slide six.
We have structured our real estate loan portfolio to ensure stability.
Multifamily and Investor commercial real estate, comprising 66% of the total portfolio.
Manhattan Office buildings are approximately six tenths of 1% of net loans.
In general the real estate portfolio has strong sponsor support and excellent credit performance.
We're all we remain very comfortable with the quality of the loan portfolio.
Slide seven provides detail on our Asian markets.
Once the Bensonhurst branch in Brooklyn opens later this year a third of our branches will begin predominantly Asian markets.
We have $1.2 billion of deposits and $764 million of loans in Asian markets.
These deposits are 18% of our total deposits.
And we have only a 3%.
Share of market.
So there's substantial room for growth.
Our approach to this market is supported by a multilingual staff.
Our Asian Advisory Board at.
I don't support of cultural activities.
This market, which is total deposits of 36 billion continues to be an important opportunity for us.
Slide eight depicts the growth of our digital banking platforms, we continue to see high growth rates and monthly mobile deposit users users with active online banking status and digital banking enrollment.
The numerator platform, which digitally originate small dollar loans as quickly as 48 hours continues to grow we originated approximately $10 million of commitments in the first half of the year, which have an average rate greater than the overall loan portfolio yield.
We continue to explore other fintech product offerings and partnerships to further enhance our digital banking platform and customer experience.
The second quarter had several notable events to highlight as you can see on slide nine.
As pictured we hosted a ribbon cutting ceremony at our hop off branch, which opened late in the first quarter and a vibrant industrial park.
Community involvement is what separates us from other banks.
Here's a sample of the events we participated in during the quarter.
Participating in these types of initiatives builds on our already strong ties with our local communities and drives customer loyalty.
I'll now turn it over to Susan to provide more detail on our.
Our key financial metrics Susan.
Thank you John I'll begin on slide 10.
The company reported second quarter 'twenty to 'twenty three GAAP earnings per share of play nine cents and core earnings per share of 26 cents.
The quarterly results were significantly improved compared to the first quarter.
Average total deposits increased 7% year over year and 1% during the quarter.
We continue to grow our CD portfolio, which is now 30% of average deposits.
The cost of deposits totaled 2.68%, while the cost of funds was two 8%.
As expected loan growth was muted increasing only 1% year over year.
However, at the loan pipeline increased 56% quarter over quarter with pipeline yields and core loan yields also expanding.
Nonperforming assets declined 6% during the quarter, reflecting our conservatively underwritten loan portfolio.
Overall, the second quarter results were an improvement versus the first as we continue to adjust to the higher rate environment.
Slide 11 depicts our deposit portfolio, despite the fed raising rates and industry deposits declining our average deposits have increased 7% year over year and 1% quarter over quarter.
This is driven by the 150% year over year, and 22% quarter over quarter increase in Cds, which lengthened the duration of our liabilities, thus, reducing our liability sensitivity.
Growing noninterest bearing deposits were challenging this high rate environment remains a focus.
Average non interest bearing deposits declined both quarter over quarter and year over year, the checking account openings increased 10% year over year.
Our loan to deposit ratio has improved 102% from hunter at 5% a year ago.
As a reminder, we generally have seasonality in certain segments of our deposit base and the summer months balances are generally lower than the remainder of the year.
Slide 12 outlines our loan portfolio and yields.
Net loans increased 1% year over year, but were down 1% quarter over quarter.
Loan closings also declined year over year and quarter over quarter as customers adapt to the increased rate environment, but the yield on the closings was over 7% for the second consecutive quarter.
Core loan yields increased 19 basis points during the quarter and for the third consecutive poor yields on our loan closings exceeded the yields on the satisfaction at an accelerating pace.
Prepayment penalty income declined to $278000 in the quarter from $2 $3 million, a year ago and $610000 in the park water.
The loan pipeline increased 56% quarter over quarter with over 35% of the pipeline consisting of attractive back to back swap loans and approximately 50% are floating rate loans.
Slide 13 provides more detail on the contractual repricing of the loan portfolio.
Approximately $1 $1 billion or 16% re prices each fed move.
During the quarter, we added $400 million of interest rate hedges on loans, which effectively increases the amount of loans that will reprice, the refreshment is $1.5 billion or over 21% of the loan portfolio.
For the remainder of 2023, another $458 million is due to reprice at a rate of 210 basis points higher than the current yield.
And 'twenty 'twenty, four and 'twenty twenty-five about one and a half billion dollars of loans are we priced 220 to 230 basis points higher.
These values are based on the underlying index value at June 32023, and do not consider any future rate moves.
This repricing should drive net interest margin expansion once funding cost stabilize.
[laughter].
Slide 14 outlines the net interest income and margin trends.
The GAAP net interest margin declined only nine basis points to one 8% during the second quarter.
This is the lowest amount of compression over the past four quarters and is consistent with the NIM for the month of March.
We expect the NIM will remain under pressure as long as it has been fed raises rates, but the pressure should be more manageable based on our current forecast for rate hikes through the remainder of the year.
After a lag we expect the NIM would begin to expand as the pressure on funding costs ease and and loans continue to reprice higher.
Turning to slide 15, as John mentioned, one of our goals for 2023 is just significantly moved more towards interest rate neutral.
The Gulf of the balance sheet, just to better match the duration of our assets, which is three to four years more closely to the duration of our funding was about one to two years.
We've made considerable progress over the past year.
For an immediate rise of 100 basis points in rates, our net interest income which declined by 3%.
A year ago. This impact was a 9% decline or almost two thirds improvement there.
The addition of interest rate hedges and more floating rate assets are key drivers of the reduced sensitivity.
The interest rate hedges are particularly important as they provide immediate income in addition to moving to balance sheet more towards neutral.
Line, we executed well on this strategy and expect to continue to improve in this area.
Slide 16 provides more detail on our C DS Ted.
Total Cds are about $2 billion, a third of the total deposits at June 30th 2023.
C D helped to lengthen the duration of our funding to match the duration of our assets more closely.
Excluding Cds with interest rate hedges about 60% of our CD portfolio will reprice at higher over the next year.
We expect to retain a high percentage of our Cds are currency rates range from four and a half to five a quarter percent.
All else equal, we expect the CD repricing to pressure our net interest margin.
Our net charge off histories on slide 17.
As you can see we have a long history of solid asset quality because of our low risk credit profile and conservative underwriting.
Net charge offs of nine basis points returned to normalized levels this quarter.
We expect minimal losses in the loan portfolio, if there's an economic downturn given a large percentage of our loan portfolio is secured by real estate.
Low average loan to value.
Additionally, the weighted average debt service coverage is one eight times in the multifamily and Investor real estate portfolios and 1.2 times in a stress scenario consisting of a 200 basis point increase in the rate and a 10% increase in operating expenses.
These factors contribute to our expectation of minimal loss content within the loan portfolio.
Slide 18 shows our credit metrics trending in the right direction with declines in N P. Eight and an increase in the nonperforming loan coverage ratio.
Criticized and classified assets decreased during the quarter total of 71 basis points.
Historically these levels have been significantly below our peers, our allowance for credit losses as presented by loan segment in the bottom right chart.
The higher risk portfolios have reserves greater than 1% of that portfolio.
Overall, the allowance for credit losses to loans ratio increased to 57 basis points during the quarter.
We remain very comfortable with our credit risk profile.
Our capital position is shown on slide 19.
Book value and tangible book value per share increased year over year, we repurchased nearly 530000 shares at an average price of $12.94, which is a 43% discount to our tangible book value.
The tangible common equity ratio was stable at 771%.
Our regulatory capital ratios are strong and overall, we view our capital base as a strike and a vital component of our conservative balance sheet.
Slide 20 provides our outlook, we do not provide guidance. This discussion is meant to give a high level perspective on performance in the current environment.
Quite the robust increase in the loan pipeline, we expect loan growth to remain challenging however, the higher percentage of back to back swap loans in our pipeline will add more floating rate assets for our balance sheet and these assets have right at 7% or higher.
As a reminder, certain deposits are seasonally lower in the summer months before increasing by year end.
There are several factors that will affect the net interest margin.
First is the pressure from the fed raising rates and the natural shift in the deposit mix.
Second is the size and growth of the loan portfolio.
Third is the repricing of both C DS and certain loans.
Fourth our interest rate hedges were favorable in the second quarter and an increase in rates by the fed will benefit the portfolio.
Overall, we expect net interest margin pressure as the fed increases rates, but I'll.
All else equal the pressures should be level and what was experienced in the second half of 2022 and the first quarter of 2023.
Core net interest margin was 2.19% for the month of June .
Noninterest income should benefit from the back to back swap loan closings.
Noninterest expenses were well controlled in the second quarter and extra scrutiny placed on all expenses.
We expect the operating expenses to follow normal seasonal patterns.
Lastly, the effective tax rate should approximate 26% to 28% for 2023.
I'll now turn it back over to John .
Thank you Susan.
On slide 21, I'll wrap up with our key takeaways.
We continue to execute our action plan, which is improving our profitability in the short and medium term and establishing a foundation for long term success.
We're happy with the limited NIM compression for the quarter and have significantly improved our sensitivity to higher rates.
Our asset quality and liquidity are conservative and sound.
We continue to serve our clients and deepen relationships.
Our overall financial metrics improved during the quarter, but we're remaining cautious given the environment.
The decisive actions, we're taking to improve the overall performance will allow us to continue our long and consistent record of dividend payments.
Operator, I'll turn it over to you to open up the lines for questions.
Hmm.
Thank you.
We will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone.
We're using a speakerphone please pick up your handset before pressing the keys.
If you had any time your question has been addressed and you would like to withdraw your.
Jim Please press Star then two.
Time will pause momentarily to assemble our roster.
Yeah.
The first question comes from Mark Fitzgibbon Piper Sandler. Please go ahead Sir.
Hey, guys good morning.
Good morning Mom R.
Hey, Susan just to clarify I'm one of your comments about the margin you you you sort of talked about the pressure being more manageable than what we saw in the second half of 'twenty two in the first quarter of 'twenty three should we take that to mean that the margin you think will be down this quarter something in the neighborhood of what we saw in the second quarter assumed.
The fed raises rates 25 basis points later today.
I bet, you given where the fed is in their rate raising cycle. That's a primary driver of that comment, but I would expect yeah, something some compression probably closer to what we've seen in the second quarter than what we had seen in the previous three quarters.
Okay, Great and then secondly, I wondered if you could share with us what I go balances were at the end of the quarter.
Uh huh.
Yeah.
But there's around $200 million.
200 million, Okay, great and John I wondered if you had any targets for either tangible common equity or CET, one going forward.
Well I think we want to stay close to that 8% range. Obviously, we're not there at this point in time, but we're very cognizant of our.
Of the importance, there and I think that.
You know the fed.
Stopping its which.
Rise in interest rates could help us a little bit there in terms of the securities.
Securities portfolio.
Valuations, but where we're comfortable where we are right now for the present I think we want to we'd like to move it up a little bit more.
Okay, and then I know I saw that you had hired a team from signature Bank I guess I was curious roughly how large was their book of business and and maybe how long you think it takes for them to be able to bring that over to flushing.
Ah, we're really not disclosing that but it's a group that has a significant.
Significant basis for.
For for their success in the past.
Okay and last question I Wonder if you could share with us the 30 to 89 day delinquencies I know they come out in the Q, but.
If you have those handy that would be great.
They're they're down.
It's difficult from where they were in the prior period.
Okay. Thank you I don't have it right at my fingertips.
Thank you.
Thank you Mark.
Yeah.
Our next question comes from Chris.
G fees.
Please go ahead Sir.
Hi, Yeah, just a follow up on the <unk> on the margin discussion.
Do you have the Spartan and for June .
Yeah June June was 219 and good morning, Chris Good morning.
Great.
And then as far as.
Does that were put on this quarter what was the timing.
What do you what do you mean.
Are you looking for the duration of our our which month they were put on I you know what do you mean, yeah yeah.
Well I believe last quarter, the hedges were put on pretty late in the quarter. So the empower here again, there was little I'm pretty laid there put out in may predominantly.
Okay, and do you have the duration or the other.
Beginning middle to the end of May.
Okay and do you have the duration.
They were all there primarily five years.
Great to have the five.
Great.
Hmm.
And do you have the right as well.
Well I think if you look at the presentation. Okay. Yeah, Yeah, we have those all the swaps all broke it out in there of course on.
I I I'm flipping through the presentation, because I know it's been here.
Oh, we got a little bit like page 15, or so that has a lot of information on the swaps that you may be looking for.
Okay. Thanks, and then.
On the credit side.
Can you just provide any color around the like $1.7 million I think or so of C&I net charge offs this quarter.
It was one relationship that had been downgraded and yeah, we've been watching very carefully over the last you know.
Six to nine months and you do.
Additional information became available that made us realize that that you know the collectability was questionable and we charged off.
Okay got it and that's fully is that fully charge off.
Yes.
Great.
And then I noticed I think the Manhattan office exposure increased to 0.6% of loans from 0.1% last quarter just nothing there.
Differential is.
The number we had been quoting in the past was Midtown Midtown Manhattan office, which is that 10th of a 10th of a percent you know we've expanded it to include really all of Manhattan. So that's what the larger numbers.
Alright got it that makes sense and for the office, but we're not doing it we're not doing office spaces, just just for the record [laughter] I figured yeah, that's hard to check my eye.
And as far as the office exposure I know its pretty low I think ballpark $150 million or so I'm. Just wondering if you had the maturity schedule for how that comes how much is coming do say over the next you know 12 to 18 months and if you have a you know a specific reserve number against that.
So I don't think reserve against AR.
Sure.
Or is it not any additional reserve other than what you have against the core portfolio and in total and.
We know what we know when these loans will be repricing et cetera, but that's not information we're sharing at this time.
They're all they all have a nice debt coverage ratio and our low ltvs.
And there's nothing unusual about the structure it's typical.
Our typical five year I was there. They also have very strong sponsors behind these these.
Buildings.
Great.
And it sounds like based on the loan pipeline.
You know that the you know with all the swaps in the pipeline that you know banking service.
Service fees, you know could remain strong your after the pick up a quarter over quarter. This quarter would you expect it to kind of remain in a similar range to that where you saw him to cure or.
Or could it move up a little bit more or <unk>, particularly strong.
I think if you're looking at our core that we would expect them to go up obviously our gap.
Our noninterest income has the the fluctuations from the market valuations included in there, but we would expect our core fees.
Fees to increase with the number of swaps deals we've been transacting.
Okay great.
Great and then I mean, you know based on where you. What you were discussing on you know the TCE target you know relatively little balance sheet growth here.
And where the stocks trading I mean, how are you thinking about buyback utilization going forward.
Our capital plus planning has not changed at all costs, we still think the best thing to do with our excess capital to redeploy it into the business to grow followed by returning to shareholders through the form of dividends and finally share repurchases Oh, Yeah, we always take a look at it and Opportunistically take a take a look at the market.
And and see if that's the best place to deploy our capital.
But again growing the businesses.
That is.
Is the first priority with capital.
Got it.
And just you know is taking.
Taking a step back and kind of thinking about things more strategically.
I mean, obviously this quarter you know if you.
Good coverage.
You know about NIM as you know down similar to Q2 levels are you know things become a little tighter it seems like in the back half of the year. I mean, how are you guys thinking about dividend coverage going forward and you know just you know strategically.
You you know what what are the decision, making factors kind of around that.
Yeah.
Don't see any any any reason to change our dividend our dividend policy at this point in time.
Okay got it.
That's all I had for now thank you.
Thanks, Chris Thanks, Chris.
Our next question comes from manual.
With D. A Davidson. Please go ahead.
Hey, good morning, most of my questions are answered, but I just.
Most of my questions have been answered, but just kind of.
Can you remind me the expected size of deposit seasonality.
Is it just going to follow past your trends.
So the typical trend is a downturn in a season of seasonal balances in the in the summer months anywhere from $150 million to $200 million.
And then as we approach the fall that starts to that starts to.
The increase the rebounds that starts to rebound. Thank you.
And.
What are your kind of current offers onto the positive side in the market.
So our C D offerings about four and a half to five in a quarter.
Okay, and you're still seeing solid flows on your offers.
Yes.
Hum.
I guess, you've talked about the CRE team.
What's kind of the pipeline going forward and kind of what are the opportunities you're seeing.
And marketplace work for talent.
We're always on the outlook I think that there's.
From what we understand there may be some situations.
With respect to our payments to individuals that may be coming to an end that may present, an opportunity for additional additional staff to come our way.
Okay I appreciate the comments thank you.
Well I mean, well I just want emphasize this team also was deposit gatherers are not just loan gatherers. So.
That's an important distinction.
Okay.
I appreciate that.
Thank you.
Yeah.
Ladies and gentlemen.
Have a question. Please press Star then one.
Yes.
Yeah.
Scott.
No further question.
This concludes our question and answer session.
Like just turn the conference back over to John Buran for any closing remarks.
Well. Thank you everybody for joining us today on our second quarter 2023 earnings call. We appreciate your continued support of Flushing financial and look forward to talking to you again next quarter. Thank you very much. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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