Q4 2024 Flushing Financial Corp Earnings Call
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Welcome to Flushing Financial Corporation's 4th Quarter and Full Year 2024 Operating Results Conference Call.
Speaker Change: 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.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2.
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.
Speaker Change: Before we begin, the company would like to remind you that discussions during this call contain certain 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 as 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 as 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. I would now like to turn the conference over to John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results.
John Buran: Thank you operator. Good morning and thank you for joining us for a fourth quarter and full year 2024 Operating Results Conference call and we want to say a special thank you for our Asian customers who are celebrating Lunar New Year.
John Buran: The fourth quarter and 2024 were important milestones for the company.
John Buran: In December, we completed a $70 million equity raise that allowed the company to restructure the balance sheet and to build on the momentum created in net interest income in the second half of 2024.
John Buran: As we indicated last quarter, funding costs peaked in the middle of the third quarter with sequential MIM expansion. These trends continued in the fourth quarter with Gap MIM increasing 29 basis points and Core MIM up 18 basis points.
John Buran: The balance sheet restructuring should increase core NIM by 10 to 15 basis points in the first quarter.
John Buran: Our asset quality remained stable, and our tangible common equity ratio improved quarter over quarter.
John Buran: For the fourth quarter, the company reported a gap loss per share of $1.61 compared to core earnings per share of $0.14.
John Buran: The balance sheet restructuring incurred a $76 million pre-tax loss or $1.74 per share after tax.
John Buran: The capital raise and balance sheet restructuring has positioned the company to significantly improve profitability and strengthen the balance sheet.
John Buran: On slide four, we discuss our first area of focus, which is to increase the NIM and reduce volatility.
John Buran: Our GAAP and Core NIM expanded quarter over quarter as funding costs declined 34 basis points, while interest earning assets declined only 3 basis points.
John Buran: We benefited both from our real estate loans repricing higher and our funding costs repricing lower.
John Buran: In addition, actions to reduce our interest rate risk profile helped as well.
We're seeing continued demand for a back-to-back swap offerings.
John Buran: We feel good about the progress achieved so far, and we recognize there's more work to be done.
John Buran: I'll turn it over to Susan to provide some more details on our net interest margin and asset quality. Susan? Thank you, John.
Slide 5 outlines the net interest income and margin trends.
John Buran: The GAAP and Core Net Interest Margin increased 29 and 18 basis points to 2.39% and 2.25% respectively in the fourth quarter.
John Buran: Liability repricing is the driver of the improvement. We are encouraged about the direction of the net interest margin given the more positive environment and our strategic actions.
John Buran: The slope of the yield curve has turned positive and this will have an expansionary impact on our net interest margin in the future.
John Buran: Our interest rate risk modeling shows a 100 basis point positive slope in the yield curve with the short end declining would benefit net income by about $2 million in the first year and $12 million in the second year.
John Buran: The balance sheet restructuring is also expected to have a 10 to 15 base point improvement in the coordinate interest margin in the first quarter. We are laser focused on improving our non-interest bearing deposits by assessing customer relationships and revamping incentive plans.
Slide 6 provides more detail on our deposits.
John Buran: The loan-to-deposit ratio improved to 94% from 101% a year ago. The cost of deposits decreased by 34 basis points during the quarter, and we continue to seek opportunities to lower deposit rates in the future.
John Buran: Our deposit betas were favorable during the quarter as interest bearing deposit betas were 51% as rates declined compared to 57% when rates increased over the past cycle.
John Buran: We continue to focus on shifting the deposit mix and reducing the overall cost.
John Buran: Approximately $800 million in CDs, the weighted average rate of 4.59% will mature in the first quarter. Current CD rates are 3.5% to 4.25%.
John Buran: Our customer's preference is for the 91-day product, which has an APY of 4.25%, followed by a 1-year CD with a 3.85% rate.
John Buran: During the fourth quarter, we retained about 78% of the maturing CDs with a weighted average rate reduction of 88 basis points. We see a significant opportunity to reprice CDs lower as they mature.
John Buran: Slide 8 provides more detail on the contractual repricing of the loan portfolio. For 2025, about $750 million of loans are due to be repriced 214 basis points higher than the current coupon rate using the December 31, 2024 index.
John Buran: A similar amount is due to reprice in 2026, with the last sizable portion repricing in 2027, where nearly $1 billion in loans are due to reprice, about 200 base points higher.
John Buran: During 2024, about 81% of these loans were repriced and remained with the bank.
John Buran: These loans are priced 225 base points higher to a weighted average rate of 6.65%. This loan repricing should aid in driving net interest margin expansion.
John Buran: Since all the details are on the slide, I will provide some high-level comments.
John Buran: These actions will enhance our earnings profile by increasing the net interest margin 10-15 basis points and strengthening the balance sheet for 2025.
John Buran: Slide 10 highlights our second area of focus, which is maintaining credit discipline. As we have discussed over the last several quarters, we have a low-risk and conservative loan portfolio. Over 90% of the loan portfolio is secured by real estate, with an average loan-to-value less than 35%.
John Buran: The multifamily and commercial real estate portfolios, which comprise about two-thirds of the loans, have a weighted average debt service coverage ratio of 1.8 times.
John Buran: Our net charge-offs and non-current loans have a long history of outperforming the industry.
Slide 11 provides context on these terms.
The charts compare the company's credit performance versus the industry.
John 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. The results of our low-risk credit profile are shown by the charge-off history on the chart on the left. We expect our net charge-offs to remain well below industry levels.
John Buran: For 2024, we had net charge-offs of 11 basis points. In the fourth quarter, net charge-offs were primarily related to loans that were fully reserved in previous quarters.
John Buran: Our level of non-current loans, total loans, is also favorable compared to the industry.
John Buran: In a stress scenario consisting of a 200 base point increase in the rates and a 10% increase in operating expenses, our portfolio has a debt coverage ratio of 1.3 times. Given this, we are expecting minimal loss content within the loan portfolio.
John Buran: Additional credit metrics are shown on slide 12 and demonstrate our conservative risk culture. Non-performing assets to assets totals 57 basis points loaned to values at 57%.
John Buran: During the fourth quarter, we allocated approximately $3 million of reserves to our largest non-performing asset based on updated information.
John Buran: Our level of criticized and classified assets remains low and well below our peers. 30 to 89 day past dues are 48 basis points of loans, indicating a low level of potential future losses.
John Buran: The quarter-over-quarter increase in delinquencies primarily relates to real estate loans with a weighted average debt coverage ratio of 2.4 times and a loan to value of 41%.
John Buran: Our allowance for credit losses is presented by loan segment at the bottom right chart and the ratio of overall loans totals 60 basis points.
John Buran: All of these items keep us very confident that our low risk credit profile performs well over time.
John Buran: Slide 13 outlines credit metrics at a more granular level for key portfolios. Our multifamily portfolio comprises 38% of gross loans and has strong credit metrics such as a weighted average loan to value of 43% and a weighted average debt coverage ratio of 1.8 times.
John Buran: Non-performing loans in this portfolio are only 44 basis points and career-size and class 5 are only 102 basis points of loans.
John Buran: The average load size is $1.2 million in this $2.5 billion portfolio.
John Buran: Investor commercial real estate loans, excluding the office Cree, total 26% of gross loans and have similar portfolio metrics as our multifamily loans with zero non-performing loans and zero criticized and classified loans.
John Buran: Our exposure to office loans is small at less than 4% of gross loans. There is one non-performing loan in the office portfolio which we expect to be resolved shortly.
John Buran: These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform well over time.
John Buran: Slide 14 provides further context on the risk in our multifamily portfolio and a comparison to peers.
John Buran: As of September 30, 2024, our career-size and classified multifamily loans were only 60 basis points, the third lowest in the peer group. At the end of the fourth quarter, this ratio was 102 basis points.
John Buran: The increase is primarily for one relationship consisting of three loans with a combined loan to value of 47% with payments expected by the end of the quarter to bring the relationship current.
John Buran: Multifamily Reserves Career Size and Classified Multifamily Loans are 71%, which was the fifth highest in the peer group in the third quarter, and this ratio was 51% in the fourth quarter. These loans have an estimated loan-to-value of approximately 41%.
John Buran: 30- to 89-day past dues in our multifamily portfolio are 86 basis points.
John Buran: Over 90% of loans, which repriced in 2024 by over 200 basis points, are current with only 34 basis points 90 days or more delinquent.
John Buran: This is a testament to our borrowers and our conservative underwriting standards. With these credit metrics, we see limited risk and lost content on the horizon.
I'll now turn it back over to John.
John Buran: Thanks, Susan. On slide 15, we highlight our third area of focus, which is preserving strong liquidity and capital. We have 3.6 billion dollars of undrawn lines and resources, and our level of uninsured and uncollateralized deposits is low.
John Buran: Our capital position is shown on slide 16. Book value and tangible book value for shared declined about 7% year-over-year due to the rate environment and our capital actions.
John Buran: The leverage ratio improved to over 8% while tangible common equity increased 82 basis points quarter over quarter to 7.82%.
John Buran: Our capital priorities have not changed. We invest in the business first, then pay cash dividends, then repurchase stock.
John Buran: Overall, we view our capital base as a source of strength and a vital component of our conservative balance sheet.
John Buran: Slide 17 provides detail on our Asian markets, which account for about a third of our branches.
John Buran: We have approximately $1.3 billion of deposits and $749 million of loans in these markets.
John Buran: These deposits are 18% of total deposits, and we have only a 3% market share of this $40 billion market, implying there's substantial room for growth.
John Buran: About a third of our branches are in Asian markets, and we expect to expand this network in 2025. This market, with its dense population, high number of small businesses, continues to be an important opportunity for us, and one that we believe will drive our success in the future.
John Buran: Our approach to this market is supported by our multilingual staff, our Asian Advisory Board and our participation and sponsorship of cultural activities.
John Buran: On slide 18, you can see community involvement is a key part of our strategy.
John Buran: During the fourth quarter, we participated in numerous local events to strengthen our ties to our customer base.
John Buran: We were an active participant in the Forest Hills-Syosset-Woodbury Street Fairs, Flushing BID, and Ganesh Yatsav Belarus.
John Buran: Participating in these types of initiatives has served as a fantastic way to further integrate ourselves with our local communities while driving customer loyalty.
John Buran: Slide 19 outlines the operating environment and our new business initiatives for 2025.
John Buran: The spread between the five-year FHLB advance and the three-month SOFA rates turned positive after spending much of the past year negative.
John Buran: This spread is a good indicator of how our net interest margin will trend in the future.
John Buran: We see continued opportunities to reduce our funding costs and our real estate loan portfolio should be priced higher over the next three years.
John Buran: With our focus on remixing the balance sheet, the company should experience NIM expansion.
John Buran: We're equally excited about our new business initiatives. We're laser-focused on increasing demand deposits, and we have several initiatives underway to achieve this goal, including new branches, expanding customer relationships, and enhanced relationship pricing.
John Buran: Additionally, another significant business initiative is building out our SBA team.
John Buran: We expanded the team in the spring of 2024 and have plans for future growth.
John Buran: During the first quarter, we expect to close on our first round of SBA loan sales.
John Buran: To sum up, the operating environment has turned more favorable and we continue to invest in the business to drive future profitability.
John Buran: Slide 20 provides a high-level perspective on performance in the current environment. We continue to expect slight loan growth but stable assets.
John Buran: There will be a continued emphasis on improving the mix of interest earning assets and interest bearing liabilities.
John Buran: The core net interest margin is expected to expand during 2025 with a 10 to 15 basis point improvement from the balance sheet restructuring.
Additionally, there should be benefits from CD and loan repricing.
John Buran: Non-interest income should be aided by the closing of back-to-back swap loans in the pipeline and the benefits of a BOLI 1035 exchange.
John Buran: Non-interest expense is expected to increase approximately five to eight percent in 2025 off a base of a hundred sixty million dollars as we continue to invest in the business by adding people and branches.
John Buran: While quarterly tax rates can fluctuate, we expect a 25-28% effective tax rate for 2025.
On slide 21, I'll conclude with our key takeaways.
John Buran: Our asset quality remains solid, liquidity and capital are strong, and core operating expenses were within our mid-single-digit target while making investments in the business.
John Buran: Given the progress, we're shifting our 2025 focus to preserving strong liquidity and capital, maintaining credit discipline, and improving profitability.
John Buran: The operating environment is improving as the yield curve has a positive slope compared to significantly inverted for most of 2024.
John Buran: We have opportunities to lower deposit rates, add loans with attractive spreads, and remix the balance sheet.
We look forward to a brighter 2025.
Speaker Change: Operator, I'll turn it over to you to open the lines for questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin our question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are 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 2. At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys, good morning.
Good morning, Mark.
Speaker Change: A quick question. First, on page 4 of the slide presentation you say the balance sheet restructuring is largely completed. I guess I'm curious what's left to be completed in the first quarter?
Speaker Change: The loan sales haven't been completed yet. We've taken the loans. We've marked them, but the actual cash proceeds and the consummation of the sales have not occurred yet.
Speaker Change: There's no issues with the sales, it's just the timing, it's taken a little bit longer than we expected.
Speaker Change: Sure, it's two branches. We did, of course, open up a branch in Suffolk County at the end of the year, so we expect that to
Speaker Change: the growth there to accelerate and then we have two branches that will both be in our part of our Asian Asian initiative that will happen during the during the 2025.
Speaker Change: Okay, and any idea what the, you know, the impact on expenses will be this year?
Speaker Change: We expect our non-interest expenses to increase between 5% and 8% off the $160 million base inclusive of those branches.
Speaker Change: Yep, I saw that guidance, but I just wanted to make sure that incorporated. Okay, great.
Um, and then, um...
Speaker Change: Could you update us on sort of the cost associated with crossing the $10 billion threshold and how far along you might be in terms of preparation, and if there's any sort of significant Durban impact expected?
Cheers.
Speaker Change: There's not a significant Durban impact. We don't have a big fee base on our on those cards
Speaker Change: We believe a lot of the costs are already baked in. We have the chief risk officer who's been on board for, well, before I started, so over 10 years. We do the stress testing that's required.
Speaker Change: We have the three lines of defense that are required. There may be some tweaking of expenses as we cross $10 billion, but for the most part, we believe the costs are already baked into our base.
Express Space.
Speaker Change: okay would would it be critically important to do an acquisition to sort of grow over the ten billion dollar threshold or do you feel like you could do it organically and or how are you thinking about it would be preferred
It would clearly be preferred.
Preferred to what?
It's preferred to organic.
Gotcha, okay.
Speaker Change: and then last question I had you know given you know the changes and your comments around the NIM I guess I'm assuming assuming the Fed you know doesn't
Speaker Change: Cut a lot this year. Maybe one one rate cut is assumed. I think in the in the Ford
Speaker Change: market, but where can the NIM potentially get to by the end of the year? Can it get up close to 250? Is that a reasonable bogey, Susan?
Speaker Change: From your lips to God's ears but I think that's probably a little aggressive Mark. I think we're probably closer to the 230 to 240 range.
Okay, great, thank you.
Thank you, Mark.
Our next question comes from Steve Moss with Raymond James.
Please go ahead.
Good morning, Steve.
Speaker Change: Morning, maybe just following up here on on the margin just kind of curious how you guys are thinking about your
Speaker Change: Interest rate sensitivity positioning going forward here. Do you become, you know, as I guess the swaps that you have remaining become shorter in duration, more liability sensitive, or just kind of how you think about managing that and maybe just managing the balance sheet mix?
Speaker Change: So we're largely neutral, so we think we can manage either movements up or movements down without significant issues.
Okay.
Yeah, yeah. And then in terms of just the, uh...
John, you talked about in your prepared remarks
Speaker Change: Shifting the mix of loans a little bit, I think. Just kind of curious, how do you think about your loan composition here over the next 12 to 24 months? And I'm just curious around, you know, the SBA team that you've brought on, you know, what are your expected, you know, loan sales for the upcoming quarter and maybe how much production you could be retaining there?
So the,
SBA
Speaker Change: The SBA business obviously will be an important part of our ongoing restructuring of the portfolio. We will have a couple of loans that we will sell in the first quarter. So we're already beginning to generate activity there.
Speaker Change: You know, I think a lot of what we're going to see is going to be dependent upon where the market is, but given the fact that we have not been aggressive in the SBA area, we think it'll contribute significantly for growth.
for 2025.
Okay, great. And then in terms of...
Just on the credit front this quarter
Speaker Change: Susan, I apologize if I missed your prepared remarks there. Just color around the largest NPA this quarter you guys added $2.6 million in reserves to. I'm just curious about that. And also, you know, what were the types of charge-offs within the C&I portfolio? Just kind of curious if it was one or two loans or multiple loans.
Speaker Change: The biggest one was one loan that we'd fully reserved for prior quarters is about 4.4 million of the of the debt charge-offs.
Speaker Change: The other piece was just some additional information we received, some market color that made us believe that there was a slight impairment in that bond, and we decided it was prudent and right to take that charge.
Okay, yeah, yeah.
Speaker Change: And then in terms of just the expense growth guide here this quarter, this upcoming year, I'm sorry. Just kind of curious how you guys are thinking about the drivers of the 5% to 8% expense growth for 2025.
Speaker Change: We expect to have a positive operating leverage and improved efficiency ratio in 2025.
Speaker Change: Okay, great. I appreciate all the comment. I'll step back here. Thanks.
Thanks, Steve. Thank you.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: Our next question comes from Manuel Nahles with DA Davidson. Please go ahead.
Good morning.
Speaker Change: Do you have some spot deposit pricing as of the end of the year?
Speaker Change: At the end of the year, excluding our non-maturity deposits, we're between 325 and 330.
Speaker Change: I know CDs are the larger driver, and you have great disclosure on that.
Speaker Change: So there's still a little bit of other account deposit cost cuts coming in the first quarter from the December Fed cut.
Speaker Change: If the Fed cuts, yes, we'll cut. As we said in our prepared remarks that on the way up we had a 57 beta, and on the way down so far we're at 51, and as the Fed continues to cut, we'll continue to take advantage of those situations where we can reduce our funding costs. You know, they came down over 30 basis points quarter over quarter.
Speaker Change: Okay, I saw that the retention on CD is about 78%. Is there any pickup in competition? Is that just based on your own current needs as well? Like just kind of...
Was that a notable decrease in retention?
Speaker Change: Now, that's what we've historically run, you know, somewhere in that ballpark. So, you know, competition for deposits in the New York metro market is always tough. So that, unfortunately, is not abated.
Speaker Change: Is the shift in the profitability target for the year, kind of just an update there, is that going to show up in a different type of loan mix going forward?
Speaker Change: I think the change in the loan mix of course will be somewhat gradual. We've got a big balance sheet, so I don't expect dramatic changes going forward, but we are cognizant of our pre-concentration and you know working toward limiting growth in that.
Speaker Change: Correct? Oh yes, yes. So I think what we'll see there is a transition from, let's say, less transactional business and more relationship business. That'll be the focus in the CRE portfolio for 2025.
Thank you, I appreciate the commentary.
Speaker Change: Seeing that there are no more questions in the queue, this concludes our question and answer session. I would like to turn the conference back over to John Buran for any closing remarks.
Speaker Change: Thank you. Thank you all for attending. And, you know, once again, we look forward to a much improved 2025. Thank you.
Speaker Change: This concludes today's teleconference. You may now disconnect your lines and we thank you for your participation.