Q2 2024 Flushing Financial Corp Earnings Call
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Operator: Welcome to Flushing Financial Corporation's second quarter 2024 earnings conference call. Hosting the call today are John Buran, President and Chief Executive Officer, and Susan Cullen, Senior Executive Vice President, Chief Financial Officer, and Treasurer. Today's call is being recorded.
Welcome to Flushing Financial Corporation's second quarter 2024 earnings conference call. Hosting the call today are John Buran, President and Chief Executive Officer, and Susan Cullen, Senior Executive Vice President, Chief Financial Officer and Treasurer. Today's call is being recorded.
Operator: If anyone needs assistance during today's conference, please press star then zero. After today's presentation, there will be a question and answer session. To ask a question, please press star then one on your telephone keypad, and to remove yourself from the queue, please press star then one.
Speaker Change: If anyone needs assistance during today's conference, please press star then zero. After today's presentation, there will be a question and answer session. To ask a question, please press star then one on your telephone keypad, and to remove yourself from queue, please press star then two.
Operator: This is a copy of the earnings press release and slide presentation that the company will be referencing. Both are available on its investor relations website at FlushingBank.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.
Speaker Change: 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 FlushingBank.com
Operator: Such statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statement, including those set forth in the company's filings with the U.S. Securities and Exchange Commission, to which we refer you. This call 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. Congress.
Speaker Change: 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.
Speaker Change: 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 those set forth in the company's filings with the U.S. Securities and Exchange Commission, to which we refer you.
Speaker Change: During this call, references will be made to non-GAAP financial measures and supplemental measures to review and assess operating performance.
Speaker Change: 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.
Speaker Change: For information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release and or the presentation.
Operator: For information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release and 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.
John R. Buran: 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, and thank you for joining us for our second quarter 2024 earnings call.
John R. Buran: Thank you, operator. Good morning, and thank you for joining us for our second quarter 2024 earnings call. The operating environment in the second quarter was highlighted by similar themes that have impacted the industry and our markets for the past couple of quarters, such as changing expectations on Fed rate moves, weak but marginally improving loan demand, and aggressive deposit pricing by one of our largest competitors that is dealing with business model and personnel changes. Against this backdrop, the company reported second quarter 2024 EPS of $0.18.
Speaker Change: The operating environment in the second quarter was highlighted by similar themes that have impacted the industry and our markets for the past couple of quarters.
Speaker Change: changing expectations on Fed rate moves, weak but marginally improving loan demand, and aggressive deposit pricing by one of our largest competitors that is dealing with business model and personnel changes.
Speaker Change: Against this backdrop, the company reported second quarter 2024 EPS of 18 cents.
John R. Buran: It remains a challenging rate environment, but I'll provide an update on the progress we've made on our four areas of focus. The first objective is to increase the NEM and reduce its volatility; net interest income increased about 1% quarter over quarter despite it compressing one basis point. We're implementing several strategies to help them in future periods, and I believe it is close to a bottom line. Susan will provide further details, but NIMS should begin to expand once funding costs stabilize.
Speaker Change: It remains a challenging rate environment, but I'll provide an update on the progress we've made on our four areas of focus.
Speaker Change: The first objective is to increase the NEM and reduce its volatility.
Speaker Change: Net interest income increased about 1% quarter over quarter despite NIMC oppressing one basis point.
Speaker Change: We're implementing several strategies to help the NIN in future periods, and I believe it is close to a bottom.
Speaker Change: Susan will provide further details but the LIM should begin to expand once funding costs stabilize.
John R. Buran: The second objective is to maintain our credit discipline. Flushing Bank has a long history of a low-risk credit profile due to our conservative underwriting and strong portfolio management. Overall credit metrics remain solid with 61 basis points of non-performing assets, 113 basis points of critically classified loans, and one basis point of net recoveries during the course. Our loan portfolio remains well collateralized as the average LTV in the real estate portfolio is less than 36%, and the debt coverage ratios are 1.8 times for our multifamily and investor commercial real estate portfolios.
Susan K. Cullen: The second objective is to maintain our credit discipline. Flushing Bank has a long history of low-risk credit profile due to our conservative underwriting and strong portfolio management.
Susan K. Cullen: Overall, credit metrics remain solid with 61 basis points of non-performing assets, 113 basis points of criticizing classified loans, and one basis point of net recoveries during the quarter.
Susan K. Cullen: Our long portfolio remains well collateralized.
Susan K. Cullen: as the average LTV.
Susan K. Cullen: in the real estate portfolio is less than 36%, and the debt coverage ratios are 1.8 times for our multifamily and investor commercial real estate portfolios.
John R. Buran: Our exposure to Manhattan office buildings is about 50 basis points of gross loans. There are zero non-performing office loans and zero non-performing non-residential commercial real estate loans. Our third objective is to preserve our strong liquidity and capital. Our available liquidity was $3.1 billion as of June 30, and our level of uninsured and uncollateralized deposits remains low.
Susan K. Cullen: Our exposure to Manhattan office buildings is about 50 basis points of gross loans. There are zero non-performing office loans and zero non-performing non-residential commercial real estate loans.
Susan K. Cullen: Our third objective is to preserve our strong liquidity and capital.
Susan K. Cullen: Our available liquidity was $3.1 billion as of June 30th, and our level of uninsured and uncollateralized deposits remains low.
John R. Buran: Our capital ratios remain solid. The full objective is to bend the expense curve. The market provided an opportunity to add banking professionals and new branches, so we made the strategic decision to invest in the franchise. This drove non-interest expense growth for the first half of 2024 compared to the same period in 2023 to about six percent. We expect overall expense growth in 2024 to be in line with our historical averages of mid-single digits. Overall, we're navigating the environment of building a foundation to achieve our long-term goals and improve overall profitability.
Susan K. Cullen: Our capital ratios remain solid.
Susan K. Cullen: The fourth objective is to bend the expense curve. The market provided an opportunity to add banking professionals and new branches, so we made the strategic decision to invest in the franchise.
Susan K. Cullen: This drove non-interest expense growth for the first half of 2024, compared to the same period in 2023 to about 6%.
Susan K. Cullen: We expect overall expense growth in 2024 to be in line with our historical averages of mid-single digits.
Susan K. Cullen: Overall, we're navigating the environment of building a foundation to achieve our long-term goals and improve overall profitability.
John R. Buran: Slide four demonstrates Flushing's credit performance versus the industry. Our underwriting has outperformed over time, often by a wide margin.
Susan K. Cullen: Slide four demonstrates Flushing's credit performance versus the industry.
Susan K. Cullen: Our underwriting has outperformed over time, often by a wide margin.
John R. Buran: Our conservative credit culture has been proven in many rate and economic cycles, and our commitment to our low-risk credit profile is unwavering. Our charge drop history is shown in the chart on the left. We expect our net charge drops to remain well below industry levels; for the first half of 2024, we had net recoveries of $88,000. Our level of non-current loans to total loans is also favorable compared to the NCIC, in a stress scenario consisting of a 200 basis point increase in rates and a 10% increase in operating expenses.
Susan K. Cullen: Our conservative credit culture has been proven in many rate and economic cycles and our commitment to our low risk credit profile is unwavering.
Susan K. Cullen: Our charge drop history is shown in the chart on the left. We expect our net charge drops to remain well below industry levels.
Susan K. Cullen: For the first half of 2024, we had net recoveries of $88,000.
Susan K. Cullen: Our level of non-current loans to total loans is also favorable compared to the industry.
Susan K. Cullen: In a stress scenario consisting of a 200 basis point increase in rates and a 10% increase in operating expenses, our loan portfolio has a debt coverage ratio of 1.3 times.
John R. Buran: Our loan portfolio has a debt coverage ratio of 1.3 times. Given this, we're expecting minimal loss content within the portfolio. Slide five depicts the digital credit metrics that support our conservative risk culture, non-performing assets to assets total 61 basis points with LTVs of a low 44%. Our level of criticized and classified assets remains solid, and we expect them to continue to be below peer levels again for the quarter.
Susan K. Cullen: Given this, we're expecting minimal loss content within the portfolio.
Susan K. Cullen: Slide 5 depicts additional credit metrics that support our conservative risk culture.
Susan K. Cullen: non-performing assets to assets total 61 basis points with LTDs of low 44%.
Susan K. Cullen: Our level of criticized and classified assets remain solid, and we expect them to continue to be below peer levels again for the quarter.
John R. Buran: 30 to 89-day past dues are only 35 basis points of loans, indicating a low level of potential future problems. Our allowance for credit losses is presented by loan segment in the bottom right chart, and the ratio to overall loans increased one basis point to 61 basis points, quarter over quarter. Taking all these items together, he was very confident of our low risk.
Susan K. Cullen: 30 to 89 day past dues are only 35 basis points of loans, indicating a low level of potential future problems.
Susan K. Cullen: Our allowance for credit losses is presented by loan segment in the bottom right chart and the ratio to overall loans increased one basis point to 61 basis points quarter over quarter.
Speaker Change: These items all together, he was very confident of our low risk credit profile.
John R. Buran: [inaudible] Slide 6 outlines some key credit metrics at a more granular level. For example, our multifamily portfolio comprises 39% of gross loans and has strong credit metrics like a weighted average LTV of 44% and a weighted average debt coverage ratio of 1.8 times. Non-performing loans in this portfolio are only 52 basis points, and classified loans are only 67 basis points of loans. The average loan size is $1.2 million in this $2.6 billion portfolio.
Speaker Change: Slide six outlines some key credit metrics at a more granular level.
Speaker Change: A multifamily portfolio comprises 39% of gross loans and has strong credit metrics like a weighted average LTV of 44% and a weighted average debt coverage ratio of 1.8 times.
Speaker Change: Non-performing loans in this portfolio are only 52 basis points and criticizing classified loans are only 67 basis points of loans.
Speaker Change: The average loan size is $1.2 million in this $2.6 billion portfolio.
John R. Buran: Investor commercial real estate loans total 28% of gross loans and have similar credit metrics as our multifamily loans with no non-performing loans, only 36 basis points of negatively classified loans, and an average loan size of $2.5 million. Our exposure to office loans is small at less than 4%, and Manhattan office building exposure is about 50 basis points to gross loans. There are zero non-performing loans in the office portfolio, and the debt coverage ratio is 1.9 times.
Speaker Change: Investor commercial real estate loans total 28% of gross loans and on similar credit metrics as our multifamily loans with no non-performing loans.
Speaker Change: only 36 basis points of criticizing classified loans and an average loan size
Speaker Change: $2.5 million.
Speaker Change: Our exposure to office loans is small, at less than 4%.
Speaker Change: And Manhattan office building exposure is about 50 basis points to gross loans.
Speaker Change: There are zero non-performing loans in the office portfolio, and the debt coverage ratio is 1.9 times.
John R. Buran: These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform well over time. Slide 7 provides further context on the risk in our multifamily portfolio and a comparison versus peers. As of March 31st, 2024, criticized and classified multifamily loans were only 54 basis points, third best in the peer group. At the end of the second quarter, this ratio was 67 basis points.
Speaker Change: These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform well over time.
Speaker Change: Slide 7 provides further context on the risk in our multifamily portfolio and a comparison versus peers.
Speaker Change: As of March 31st, 2024, our criticized and classified multifamily loans were only 54 basis points, the third best in the peer group.
Speaker Change: At the end of the second quarter, this ratio was 67 base points.
John R. Buran: Multifamily Reserves to Criticize Unclassified Multifamily Loans was 75%, which is the fourth best in the peer group, in the first quarter and 61% in the second quarter. 30- to 89-day past dues, and our multifamily portfolio, we're only 21 bases. With these credit metrics, we see limited risk and loss content on the horizon. I'll now turn it over to Susan to provide more detail on our other financial metrics.
Speaker Change: Multifamily Reserves to criticize and classify multifamily loans was 75%, which is the fourth best in the peer group in the first quarter and 61% in the second quarter.
Speaker Change: 30 to 89 day past dues in our multifamily portfolio, we're only 21 basis points.
Speaker Change: With these credit metrics, we see limited risk and loss content on the horizon.
Speaker Change: I'll now turn it over to Susan to provide more detail on our other financial metrics. Susan?
Susan K. Cullen: Thank you, John. I'll begin with slide 8, which provides more detail on our deposits. Average deposits increased 4% year over year and 2% quarter over quarter. The growth in deposits came from both retail and broker CDs as we utilized them to fund approximately $300 million in the growth of floating rate securities for the quarter and to replace anticipated normal flows of the government deposit portfolio. We expect those ladder deposits to return in the fall.
Susan K. Cullen: Thank you, John . I'll begin on slide 8, which provides more detail on our deposits.
Susan K. Cullen: Average deposits increased 4% year-over-year and 2% quarter-over-quarter.
Susan K. Cullen: The growth in deposits came from both retail and broker CDs, as we utilized them to fund approximately $300 million in the growth of floating rate securities for the quarter and to replace anticipated normal flows of the government deposit portfolio.
Susan K. Cullen: Average non-interest-bearing deposits were 11% of total average deposits compared to 12% a year ago. Our loan to deposit ratio has improved to 98% from 102% a year ago. The cost of deposits increased 11 basis points in the quarter compared to 17 basis points in the first quarter and 16 basis points in the fourth quarter of 2023. Slide 9 outlines the net interest income and margin trends. The GAAP and Core Net Interest Margins compressed one and three base points, respectively, to 2.05% and 2.03%. Absent episodic items, the NIM increased one base point quarter over quarter.
Susan K. Cullen: We expect those ladder deposits to return in the fall.
Susan K. Cullen: Average non-interest bearing deposits were 11% of total average deposits compared to 12% a year ago.
Susan K. Cullen: Our loan-to-deposit ratio has improved to 98% from 102% a year ago. The cost of deposits increased 11 basis points in the quarter compared to 17 basis points in the first quarter and 16 basis points in the fourth quarter of 2023.
Susan K. Cullen: Slide 9 outlines the Net Interest Income and Margin Trends. The GAAP and Core Net Interest Margins compress one and three base points respectively to 2.05% and 2.03%.
Susan K. Cullen: absent episodic items, and then increased one base point quarter over quarter.
Susan K. Cullen: Our net interest margin is partially reflective of the spread between the one-month SOFR relative to the five-year Federal Home Loan Bank advance rate, which at the end of June was a negative 82 base point. Once the spread begins to turn positive, our names should improve over time.
Susan K. Cullen: Our net interest margin is partially reflected with the spread between the one-month SOFR relative to the five-year Federal Home Loan Bank advance rate, which at the end of June was a negative 82 base points.
Susan K. Cullen: Once the spread begins to turn positive, our NIMS should improve over time.
Susan K. Cullen: We expect our NIM to be near a bottom, absent any changes in interest rates. The bottom will largely be determined by stabilization of the cost of funds, which will then allow the natural repricing of our loan portfolio to drive new expansion. With a parallel shift in today's inverted yield curve by 100 basis points, our model indicates a roughly 1% benefit to net interest income. On the other hand, a steepening of the yield curve by 100 basis points with the short end declining and the long end remaining stable should benefit net income by greater than $15 million over time.
Susan K. Cullen: We expect our NIM is near bottom, absent any changes in interest rates. The bottom will largely be determined by stabilization of the cost of funds, which will then allow the natural repricing of our loan portfolio to drive NIM expansion.
Susan K. Cullen: With a parallel shift in today's inverted yield curve by 100 basis points, our model indicates a roughly 1% benefit to net interest income.
Susan K. Cullen: Slide 10 provides more detail on our CD portfolio. Total CDs are over $2 billion, with 35% of total deposits, and, of course, there is the growth in repricing CDs which will drive the direction and magnitude of cost deposits. About $1.4 billion of retail CDs are expected to mature over the next three quarters at a weighted average rate of 4.86%, which compares to current APYs of 45 to 540. We expect the cost of deposits will increase at a slower pace in the third quarter compared to the second quarter.
Susan K. Cullen: Total CDs are over $2 billion, with 35% of total deposits at CoreSend.
Susan K. Cullen: About $1.4 billion of retail CDs are expected to mature over the next three quarters at a weighted average rate of 4.86%, which compares to current APYs of 45 to 540.
Susan K. Cullen: Slide 11 provides more detail on the contractual replacement loan portfolio. Approximately $1.2 billion, or 18% of gross loans, are repriced to a short-term index. Our registered hedge position increases this percentage to 26%. For the remainder of 2024, $383 million of loans are due to be repriced 242 base points higher than the current coupon rate. In 2025, approximately $765 million of loans are scheduled to reprice 226 base points higher. These rates are based on the underlying index value at June 30, 2024.
Susan K. Cullen: Slide 11 provides more detail on the contractual repressions and loan portfolio.
Susan K. Cullen: Approximately $1.2 billion, or 18% of gross loans, are repriced to the short-term index.
Susan K. Cullen: For the remainder of 2024, $383 million of loans are due to reprice 242 basis points higher than the current coupon rate. In 2025, approximately $765 million of loans are scheduled to reprice 226 basis points higher.
Susan K. Cullen: These rates are based on the underlying index value at June 30, 2024.
Susan K. Cullen: It is this loan pricing that should drive net interest margin expansion once funding costs stabilize or decline. Turning to slide 12, which outlines our interest rate hedging portfolio. This portfolio totals $1.7 billion, and the underlying financial instruments are investment securities, loans, and funding. These hedges have a positive impact and asset on funding yields and are additive to the net interest margin. There are no maturities in 2024, with 22% of the portfolio maturing in 2025.
Susan K. Cullen: It is this loan pricing that should drive net interest margin expansion once funding costs stabilize or decline.
Susan K. Cullen: Turning to slide 12, which outlines our interest rate hedging portfolio.
Susan K. Cullen: There are no maturities in 2024, with 22% of the portfolio maturing in 2025. As mentioned previously, if the curve steepens with the Fed reducing short-term rates, our net interest margin should benefit over time.
Susan K. Cullen: As mentioned previously, if the curve steepens with the Fed reducing short-term rates, our net interest margin should benefit over time. Our capital position is shown on slide 13. Book value and financial book value per share were stable year-over-year and quarter-over-quarter.
Susan K. Cullen: The leverage ratio is over 8%, while the tangible common equity ratio remains about 7%. Overall, we view our capital base as a source of strength and a vital component of a conservative balance sheet. Slide 14 provides detail on our Asian markets, which account for a third of our branches. We have over $1.3 billion of deposits and $746 million of loans in these markets. These deposits are 18% of total deposits, and while we have only a 3% market share of this $41 billion market, implying there's substantial room for growth.
Susan K. Cullen: Overall, we view our capital base as a source of strength and a vital component of a conservative balance sheet.
Susan K. Cullen: Slide 14 provides detail on our Asian markets, which account for a third of our branches. We have over $1.3 billion of deposits and $746 million of loans in these markets.
Susan K. Cullen: These deposits are 18% of total deposits, and while we have only a 3% market share of this $41 billion market, implying there's substantial room for growth.
Susan K. Cullen: Our approach to this market is supported by our multilingual staff, our Asian Advisory Board, and support of cultural activities through participation and corporate sponsorship. We look forward to participating in the Dragon Boat Festival this coming weekend, which is attended by thousands of people in Flushing Meadow Park.
Susan K. Cullen: Our approach to this market is supported by our multilingual staff, our Asian Advisory Board, and support of cultural activities through participation and corporate sponsorships.
Susan K. Cullen: We look forward to participating in the Dragon Boat Festival this coming weekend, which is attended by thousands of people in Flushing Meadow Park. This market, with its dense population and a high number of small businesses, continues to be an important opportunity for us and one that we believe will drive our success moving forward.
Susan K. Cullen: This market, with its dense population and a high number of small businesses, continues to be an important opportunity for us, and one that we believe will drive our success moving forward. On slide 15, you can see that community involvement is a key part of our strategy beyond just our Asian franchise. During the second quarter, we participate in numerous local events to strengthen our ties to our customer base. Participating in these types of initiatives has served us as a great way to further integrate ourselves within our local communities while driving customer loyalty. Slide 16 provides a high-level perspective on performance in the current environment.
Susan K. Cullen: On slide 15, you can see community involvement is a key part of our strategy beyond just our Asian franchise. During the second quarter, we have participated in numerous local events to strengthen our ties to our customer base. Participating in these types of initiatives has served us
Susan K. Cullen: as a great way to further integrate ourselves within our local communities while driving customer loyalty.
Susan K. Cullen: Slide 16 provides a high-level perspective on performance in the current environment. We continue to expect stable loan balances and a continued emphasis on improving the funding mix.
Susan K. Cullen: We continue to expect stable loan balances and a continued emphasis on improving the funding mix. The net interest margin is expected to be close to zero but influenced by the mix of assets and liabilities, the shape of the yield curve, and the pricing of financial instruments. The increase in loan pipelines should help increase asset yields, while the cost of funding rises at a slower pace than previous quarters. When the cost of funds stabilizes, our net interest margins should bottom out and then start to increase.
Speaker Change: The net interest margin is expected to be close to bottom but influenced by the mix of assets and liabilities, the shape of the yield curve, and pricing of financial instruments.
Speaker Change: The increase in loan pipelines should help increase asset yields while the cost of funding rises at a slower pace than previous quarters.
Speaker Change: When the cost of funds stabilize, our net interest margins should bottom out and then start to increase.
Susan K. Cullen: Non-interest income should be aided by the closing of back-to-back swap loans that are in the pipeline. As John mentioned previously, we have made the strategic decision to invest in the business by adding people and branches. Core non-interest expense is expected to increase mid-single digits in 2024. While the quarterly tax rates can fluctuate, we expect the mid-20s effective rate in 2024. I'll now turn it back over to you
Speaker Change: Non-interest income should be aided by the closing of back-to-back swap loans that are in the pipeline.
John R. Buran: On slide 17, I will conclude with our key takeaways. Our near-term priorities remain one of our four areas of focus to help build a strong foundation for improved long-term profitability, and the interest margin is nearing a bottom and should begin to expand. There's no change in our credit discipline or our low-risk credit profile.
Susan K. Cullen: Thank you, Susan.
Speaker Change: On slide 17, I will conclude with our key takeaways. Our near-term priorities remain on our four areas of focus to help build a strong foundation for improved long-term profitability.
Speaker Change: that an interest margin is nearing a bottom and should begin to expand.
Speaker Change: There's no change in our credit discipline or our low-risk credit profile.
Operator: Capital and liquidity are strong. We are mindful of expenses but will continue to invest in the franchise to improve its long-term profitability and value. While the rate environment remains challenging, we're controlling what we can control and setting the foundation for a better future. Operator, I'll turn it over to you to open the lines for questions.
Speaker Change: We are mindful of expenses, but will continue to invest in the franchise to improve the long-term profitability and value.
Speaker Change: Operator, I'll turn it over to you to open the lines for questions.
Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any point your question has been addressed and you would like to withdraw your question, please press star then 2. Today's first question comes from Steve Moss at Raymond James. Please go ahead.
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys.
Speaker Change: If at any point your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: Today's first question comes from Steve Moss at Raymond James. Please go ahead.
Stephen M. Moss: Good morning.
John R. Buran: Maybe just start off with the loan pipeline here. John, pretty big increase quarter over quarter, and wondering if you could just give some color about the drivers you're seeing there.
Stephen M. Moss: [inaudible]
Stephen M. Moss: Maybe just start off with the loan pipeline here. John , pretty big increase quarter over quarter and wondering if you could just get some color about the drivers you're seeing there.
John R. Buran: Sure. Basically, what's happening is that the market appears to be opening up somewhat. We're maintaining our discipline focus with respect to the credit perspective and also with respect to rates, but it just appears that we've just seen some opening up of the market. I think borrowers maybe are getting a little bit tired of waiting on the sidelines, and also, we've seen some activity in going back-to-back swaps. The rate environment's got a little bit better for that, and I think that has generated some additional interest as well.
John R. Buran: Sure, basically what's occurring is that the market appears to be opening up somewhat. We're maintaining our discipline focus with respect to the credit perspective and also with respect to with perspective
John R. Buran: but it just appears that we've just seen some opening up of the market. I think borrowers maybe are waiting a little or getting a little bit tired of waiting on the sidelines and also we've seen some activity in doing back-to-back swaps. The rate environment's got a little bit better for that and I think that that has generated some additional interest as well.
John R. Buran: Okay, that's helpful. I'm just curious, is it more C&I versus CRE? I'm just kind of curious about that mix there.
Speaker Change: Okay, that's helpful. I'm just curious, is it more C&I versus CRE? Just kind of curious about that mix there.
John R. Buran: More C&I than we've historically been doing.
Speaker Change: More C&I than what we've historically been doing.
John R. Buran: Great. And then in terms of the multifamily non-performers this quarter, just curious, you know, what color you can give the area around, what caused those issues, and how you're thinking about resolution there.
Speaker Change: Okay.
Speaker Change: Great and then in terms of the the multifamily non-performers this quarter just curious you know what color you can give around what caused those issues and how you're thinking about resolution there
John R. Buran: So we're pretty confident that there's very low loss content here. One of the items, it's $9 million for loans. One of the items is a loan that's gone past maturity, and we're working on the extension now. And then the largest of the loans has a 21% loan-to-value, so we're very confident there as well.
Speaker Change: So we're pretty confident that there's very low loss content here. One of the items, it's $9 million for loans. One of the items is a...
Speaker Change: is one that's gone past maturity and we're working on the
Speaker Change: on the extension now, and then the largest of the loans has a 21% loan-to-value, so we're very confident there as well. And that comes from what DART for a while, so we'll be collecting our default interest on that given the loan-to-value on that property.
John R. Buran: That customer went dark for a while, so we'll be collecting our default interest on that and giving a loan to value on that property.
John R. Buran: Default interest by way of 24%.
Speaker Change: Default interest by way of 24%.
John R. Buran: Okay. And then in terms of just the multifamily loans that are coming up for renewal and resetting at a higher rate here, just kind of curious, what's the blended debt service coverage ratio? I know you guys have a 1-3 example in the deck. Is that kind of basically reflective of the entire pool that's repricing in the quarter?
Speaker Change: Right.
Speaker Change: Okay, and then in terms of just the multi-family loans that are coming up for renewal and, you know, resetting at a higher rate here, just kind of curious, you know, what's kind of a blended debt service coverage ratio? I know you guys have a 1-3 example on the deck. Is that kind of...
Speaker Change: basically reflective of the entire pool that's repricing in the quarter.
John R. Buran: Yeah, that's the entire portfolio that's been repriced. It's 1.3.
Speaker Change: Yeah, that's the entire portfolio that's repriced. It's 1.3.
John R. Buran: Okay, great. And just one last one for me. I noticed that investment securities were up meaningfully this quarter. I'd be just kind of curious about what types of securities you bought and the coupon there.
Speaker Change: Okay.
Speaker Change: Okay, great. And just one last one for me. I noticed that investment securities were up meaningfully this quarter. Just kind of curious what types of securities you bought and the coupon there.
John R. Buran: We've purchased adjustable rate mortgage banks and CLOs that have an average rate of a little over 6.5% right now.
Speaker Change: We've purchased adjustable rate mortgage banks and CLOs that have an average rate of a little over 6.5% right now. Closer to 6.75.
John R. Buran: Closer to 675.
John R. Buran: Great. Thank you very much. I appreciate all the color.
Speaker Change: Okay.
Operator: Thank you, Steve. Thank you, and our next question today...
Speaker Change: Great. Thank you very much. Appreciate all the color.
Operator: Thank you. And our next question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Good afternoon.
Speaker Change: Thank you, Steve. Thanks, Steve. Thank you. And our next question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
John R. Buran: I guess I was curious, how much in multifamily and CRE loans do you have maturing in the second half of 24, and maybe if you could give us a sense for what the average rate on those looks like?
Speaker Change: Good morning.
Speaker Change: Maureen
Mark Thomas Fitzgibbon: I guess I was curious how much in multifamily in CRE loans do you have maturing in the second half of 24 and maybe if you give us a sense for what the average rate on those looks like?
John R. Buran: So it's about $350 million, and they've repriced it upwards of 200 basis points. It's about $383 million.
Speaker Change: So it's about $350 million and they've repriced upwards of 200 basis points. It's about $383 million.
John R. Buran: So you think they'll reprice the commercial real estate multifamily up by about 200 basis points?
Speaker Change: So you think they'll reprice the commercial real estate multifamily up about 200 basis points?
John R. Buran: It's using the, looking at slide 11 of our death mark, if you can see that.
Speaker Change: Looking at slide 11 of our death mark, if you want complete color, it's about 242 basis points using the June 30th 5-year federal loan backgrade.
John R. Buran: It's about 242 basis points using the June 30th 5-year federal home loan backgrade.
Susan K. Cullen: And Susan, can you give us a sense of what you think each 25 basis point rate cut would do to your net interest margin? What kind of impact, roughly, would that have?
Susan K. Cullen: Okay, great. And Susan, can you give us a sense for what you think each 25 basis point rate cut would do to your net interest margin? What kind of impact roughly that would have?
Susan K. Cullen: I think we've said in the past that if we repriced everything immediately, it'd be about a million dollars.
Susan K. Cullen: I think we've said in the past that if we repriced everything immediately, it'd be about a million dollars.
Susan K. Cullen: for each 25
Susan K. Cullen: Which turned out to be That would be over time, though, right? That's not an immediate million dollar impact; that would be when the whole book was repriced? Right, it'd be over time.
Speaker Change: for each 25 basis points.
Speaker Change: That would be over time though, right? That's not an immediate million dollar impact. That would be when the whole book repriced? Right. It would be over time, but assuming that we were able to, there was no lag on cutting the cost on the liabilities.
Susan K. Cullen: Right, it would be over time, but assuming that we were able to, there would be no lag in cutting the cost of the liability.
Susan K. Cullen: And then, I guess I was curious, why grow the securities portfolio by almost $400 million if your pipelines are so strong? Why not sort of wait and book loans at better spreads?
Speaker Change: Okay.
Speaker Change: I guess I was curious, why grow the securities portfolio almost $400 million if your pipelines are so strong? Why not sort of wait and book loans at better spreads?
John R. Buran: Well, we decided to, when we started that process of purchasing securities, the loan pipeline was just beginning to grow. So we're looking at the security system, floating rate securities, as being a potential source of liquidity going forward as the loan pipeline begins to close. There's still a fair amount of uncertainty about the closing of loans, even though the pipeline is up roughly 88%. So there's been a little bit of a longer tail than what we've seen in the past.
Speaker Change: Well we decided to when we started that process of purchasing securities the loan pipeline was just beginning to grow so we're looking at the security system floating rate securities as being a potential source of liquidity going forward as the as the loan pipeline begins to close.
Speaker Change: There's still a fair amount of uncertainty about closing of loans, even though the pipeline is up roughly 88%. So there's been a little bit of a longer tail than what we've seen in the past.
Susan K. Cullen: We don't anticipate any more secret remarks about Ms. Johnson.
Susan K. Cullen: Marks, as John said, as the pipeline starts to close, we may shed some of those securities.
Mark: We don't anticipate any policy growth, Mark. So, as John said, as the pipeline starts to close, we may shed some of those securities.
John R. Buran: And then last question, sort of year to date, the dividend payout ratio has been about 148 percent. At what point do you think about reducing the dividends?
Speaker Change: Okay.
Mark: And then, last question, sort of year-to-date, the dividend payout ratio has been about 148%. At what point do you think about reducing the dividend?
John R. Buran: We're a well-capitalized, low-risk business. We see ourselves closer to the end rather than the beginning of our earnings pressure given the natural repricing of loans and also the heightened potential for Fed easing. So our focus is going to be on working on earnings and maintaining our strong commitment to return value to shareholders.
Speaker Change: We're a well-capitalized, low-risk business. We see ourselves closer to the end.
Speaker Change: rather than the beginning of our earnings pressure given the natural repricing of loans and also the heightened potential for Fed easing.
Speaker Change: So, our focus is going to be on working on the earnings and maintaining our strong commitment to return value to the shareholders.
John R. Buran: Correct me if I'm wrong, though. There's a regulatory requirement after a certain number of quarters and not earning the dividend where you're basically precluded from keeping it at that level. Could you remind us what that is? That's not correct; it would not be.
Speaker Change: Correct me if I'm wrong though, there's a regulatory requirement after a certain number of quarters and not earning the dividend where you're basically precluded from keeping it at that level. Is that, could you remind us what that is?
John R. Buran: That's not correct. We're not precluded. There is an open dialogue and two-way communication going on with the regulators on a regular basis, and the criteria, I'm sure, are associated with our capitalization. The fact that we have enough cash at the holding company to allow us to pay a dividend without constricting bank capital at all. And, you know, once again, we see the situation has improved from where it was a number of quarters ago as earnings, you know, nimitized closer to a bottom.
Speaker Change: That's not correct. We're not precluded.
Speaker Change: There's open dialogue and two-way communication going on with the regulators on a regular basis. And the criteria, I'm sure, are associated with our capitalization.
Speaker Change: the fact that we have enough cash at the holding company to allow us to pay a dividend without constricting bank capital at all. And once again, we see the situation as improved.
Speaker Change: from where it was a number of quarters ago as earnings, you know, nimitzed closer to a bottom.
Operator: Thank you. And our next question today comes from Manuel Navas, with D.A. Davidson. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Thanks Barb. Thank you. And our next question today comes from Manuel Navas with D.A. Davidson. Please go ahead.
Manuel Antonio Navas: Hey, I'm sorry, did you talk about the near-term NIM outlook a little bit?
Manuel Antonio Navas: Hey, I'm sorry, did you talk about the near-term NIM outlook a little bit? I know there's a little better seasonality of deposits coming in. That pipeline is going to help on the loan growth side, or at least replacing.
John R. Buran: I know there's a little better seasonality in deposits coming in, and that pipeline is going to help on the loan growth side of things.
John R. Buran: are placing some loans with higher yields. Can you just talk through the near-term NIMM movement?
Speaker Change: some loans with higher yields. Can you just talk through the near-term NIMM movements?
John R. Buran: Sure. I think, you know, in the near term, we may see a little bit more, you know, a little bit more pressure before the actual turnaround, but we're very, we're very close to a bottom. Clearly, this particular quarter, some of the increases in the funding goals were associated with some aggressive competition that was taking place from one of our major competitors. You know, that, you know, that may be in the background, and if that's the case, we'll continue to see better opportunities to reduce, maintain or reduce our funding costs.
Speaker Change: Sure, I think in the near term we may see a little bit more pressure before the actual turnaround, but we're very close to a bottom.
Speaker Change: Clearly, this particular quarter, some of the increases in the funding goals were associated with some aggressive competition that was taking place from one of our major competitors.
Speaker Change: That may be in the background, and if that's the case, we'll continue to see better opportunities to maintain or reduce our funding costs.
John R. Buran: And that's really the major driver of NIM compression for us. So, again, we're close to a bottom, and we see the next few quarters as being able to actualize that and move forward with some NIM improvements. Incidentally, the Nimmo movement with a reduction on the short end of the curve could yield us over time. A hundred basis points drop on the short end of the curve over time can yield us as much as $15 million in income in net interest income.
Speaker Change: And that's really the major, has been the major driver of the NIM compression for us.
Speaker Change: So, again, we're close to a bottom and we're seeing the next few quarters as being able to actualize that and move forward with some NIM improvement.
Speaker Change: Incidentally, the, you know, the...
Speaker Change: with a
Speaker Change: reduction on the on the short end of the curve could yield us over time 100 basis points drop on the short end of the curve over time can yield us as much as 15 million dollars.
Speaker Change: in income, in the manager's income.
John R. Buran: Is that more weighted to the..., to the third and fourth cut? How should I think about the initial cuts with that benefit? Can you just talk through that a little bit?
Speaker Change: Is that more weighted to the...
Speaker Change: to the
Speaker Change: to the third and fourth cut, how should I think about the initial cuts?
John R. Buran: It's dependent upon the movement of the curve. So as the curve, let's say, flattens out if the Fed decides to reduce the short end, or as it steepens, it's really the pitch of that curve that is going to give us the greatest opportunity. You talked about a little bit better, uh, maybe just
Speaker Change: with that benefit.
Speaker Change: Could you just talk through that a little bit? It's dependent upon the movement of the curve.
Speaker Change: So that's the curve.
Speaker Change: let's say flattens out if the Fed decides to reduce the shorting or as it steepens, it's really the pitch of that curve is going to give us the greatest opportunity.
Speaker Change: you talked about a little bit better maybe just
Speaker Change: Activity and market on the loan growth side, do you get a sense that a rate cut would even boost that further? Does it depend on a rate cut? Just kind of thoughts on
John R. Buran: hand down a rate card, just kind of thoughts on it. I'll just kind of.
John R. Buran: I'm just kind of on the origination side for loans.
Speaker Change: Just kind of the origination side for loans.
John R. Buran: Clearly, there are bears on the sidelines due to the written environment, and obviously, any changes could be helpful, although if the longer end of the curve doesn't move, we may be in a similar situation as we are today. But there would be opportunities with respect to maybe shorter-duration credits, for example in the C&I portfolio or three-year rather than five-year resets.
Speaker Change: Clearly, there are barriers on the sidelines due to the written environment.
Speaker Change: Obviously, any changes could be helpful, although if the longer end of the curve doesn't move, we may be in a similar situation as we are today.
Speaker Change: But there are, there would be opportunities, you know, with respect to maybe shorter duration, shorter duration credits.
Speaker Change: for example, the C&I portfolio or three-year rather than five-year resets.
Manuel Antonio Navas: I appreciate that; I think I'm all set, thank you very much.
Speaker Change: and
Speaker Change: I appreciate that. I think I'm all set. Thank you very much.
Operator: Thank you. Thank you. Thank you. And our next question today comes from Chris O'Connell with KBW. Please go ahead.
Speaker Change: Thank you. Thank you. And our next question today comes from Chris O'Connell with KBW. Please go ahead.
Speaker Change: Morning.
Chris O'connell: So I was hoping you could start off with just on the securities investments from the quarter. Were those locked in against a certain rate on the borrowing side, and if so, can you disclose what rate?
Chris O'connell: Good morning.
Chris O'connell: So, I was hoping you could start off with just on the securities investments from the quarter. Were those, you know, locked in against, you know, a certain rate on the borrowing side? And if so, can you disclose what rate?
John R. Buran: No, they were not locked in to anything in particular.
Speaker Change: No, they were not locked in to anything in particular.
John R. Buran: Got it. They're just regular short-term borrowings.
John R. Buran: There is deposit growth and short-term borrowings, and as you said, there's loading rate securities. But in what portion, after the last couple quarters of investment...
Speaker Change: Got it. They're just regular short-term borrowings.
Speaker Change: There are deposit growth and the short-term borrowals, and as you said, there's loading rate securities.
John R. Buran: In what portion, after the last couple quarters of investments, is the total floating rate or adjustable rate portion of the securities portfolio? about two-thirds, you know, thinking about, you know, longer term strategy, you know, you know, a little bit more broadly. One, you know, do you guys, can you guys say when, you know, your last regulatory exam was and, you know, whether the discussions with the regulators, you know, in the, you know, recent exam from, you know, the past couple has has changed at all on, you know, the CRE concentration ratios and just any color around, you know, that discussion with regulators relative to what it's been in the past, given, you know, kind of, you know, the heightened industry concern more recently.
Speaker Change: In what portion, after the last couple quarters of investments, is the total floating rate or adjustable rate portion of the securities portfolio?
Speaker Change: About two-thirds.
Speaker Change: Great.
Speaker Change: you know, thinking about, you know, longer term strategy, you know, you know, a little bit more broadly.
Speaker Change: One, you know
Speaker Change: Do you guys, can you guys say when, you know, your last regulatory exam was?
Speaker Change: and, you know, whether the discussions with the regulators, you know, in the, you know, recent exam from, you know, the past couple has changed it all on, you know, the CRE concentration ratios and...
Speaker Change: just any color around, you know, that discussion with regulators relative to what it's been in the past given, you know, kind of, you know, the heightened industry concern more recently.
John R. Buran: First, we continue to have conversations with our regulators. We don't necessarily disclose when we've had our exams, but something came out of that, as we said.
Speaker Change: As we continue to have conversations with our regulators, we don't necessarily disclose when we've had our exams. Something came out of that, as we said, when we filed 8K. But our conversations around our credit concentration have not changed much over the years, even given this heightened environment.
John R. Buran: and File 8K. But our conversations around our CRE concentration have not changed much.
John R. Buran: have not changed much over the years, even given this heightened environment.
John R. Buran: And is there a level of, you know, a target level, either medium term or longer term, that you guys want to get to on the, you know, kind of terminal mix for the loan portfolio?
Speaker Change: And is there a level of, you know, a target level, either medium-term or longer-term that you guys want to get to on the, you know, kind of terminal mix for the loan portfolio?
John R. Buran: The real estate, well, yes, we do want to bring in more C&I loans and bring the CRE concentration down. But as we talked about, you know, we moved $90 million out of the bank to the holding company late last year.
Speaker Change: The real estate, well, yes, we do want to bring in more CDI loans and bring the CRE concentration down. But as we talked about, you know, we moved $90 million out of the bank to the holding company late last year, so by natural attrition accretion capital, that ratio will come down.
John R. Buran: last year, so by natural attrition, accretion, and capital.
John R. Buran: That ratio will come down. That being said, we do want to focus on the C&I business as we move forward, recognizing that real estate is still a really great asset. It's done very well for us. We have great credit metrics, but the market's changed a little bit, and we're going to adapt to that.
Speaker Change: That being said, we do want to focus on the C&I business as we move forward, recognizing that
Speaker Change: Real estate is still a really great asset, it's done very well for us, we have great credit metrics, but the market's changed a little bit and we're going to adapt to that.
John R. Buran: We've changed a little bit, and we're going to adjust to that.
Chris O'connell: And, uh, did you guys, do you guys have the June spot margin? There's someone where we...
Speaker Change: Great.
Speaker Change: and did you guys do you guys have the what the June spot margin was?
John R. Buran: They're similar to where we were up in the corner.
Speaker Change: They're similar to where we were up in the corner.
John R. Buran: And thinking about, you know, the margin as we get, you know, further along, you know, into 2025. And if there are, you know, rate cuts occurring, and even if, you know, you don't have kind of the exact amount. But, you know, how much do you think that 25 basis points, I think it was about one million dollars of annual NII changes as some of the, you know, swaps and hedges that are on if they were to roll off later in the year in 2021?
Speaker Change: Got it.
Speaker Change: And thinking about, you know, the margin as we get, you know, further along, you know, into 2025 and if there's, you know, rate cuts occurring.
Speaker Change: And even if, you know, you don't have kind of the exact amount, but, you know, how much do you think that 25 basis points, I think it was about 1 million of annual NII,
Speaker Change: changes as some of the swaps and hedges that are on if they were to roll off later in the year in 2025.
John R. Buran: I think it would benefit us because those are... We have the funding tied, so if we didn't need the funding, we could let that go, or the rate cuts would benefit if they didn't let those slots roll off. Got it. But I mean, it would improve that impact, correct?
Speaker Change: I think it would have been a financial, because those are...
Speaker Change: We have the funding tied though, so if we didn't need the funding, we could let that go. The rate cuts will benefit.
Chris O'connell: Got it, but I meant it would improve that impact, correct?
Speaker Change: if they would let those slots roll off.
Speaker Change: Got it, but I mean it would improve that impact, correct?
Chris O'connell: Any more questions, Chris?
Chris: Any more questions, Chris?
Chris O'connell: No, I was just saying that as the hedges roll off, the impact of a 25 basis point cut would improve.
Chris: Do we really know?
Chris: No, I was just saying as the hedges roll off, the impact from a 25 basis point cut would improve.
John R. Buran: Correct. Yes, that's correct.
Chris O'connell: Thanks, that's all I have.
Chris: Correct. Yes, that's correct.
Operator: Thank you. Thank you. And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn it back over to Mr. Buran for any closing remarks.
Chris: Thanks, that's all I have.
Chris: Thank you. Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn it back over to Mr. Buran for any closing remarks.
John R. Buran: Well, I thank you all for your attendance and your interest in Flushing Financial. And enjoy the rest of your summer. Thank you.
John R. Buran: Well, I thank you all for your attendance and your interest in Flushing Financial, and enjoy the rest of your summer. Thank you.
Operator: Thank you, sir. This concludes today's teleconference. You may disconnect your lines, and we thank you for your participation. Have a wonderful rest of your day.
Speaker Change: Thank you, sir. This concludes today's teleconference.
Speaker Change: You all may disconnect your lines, and we thank you for your participation. Have a wonderful rest of your day.