FFIC - NASDAQ

Welcome to Flushing Financial Corporation's First Quarter 2022 Earnings Conference Call. Hosting the call today are John Buran, President and Chief Executive Officer, and Susan Colin, Senior Executive Vice President, Chief Financial Officer and Treasurer. Today's call is being recorded. . 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. 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 of 1995. Such statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in the company's filings with the U.S. Securities and Exchange Commission, to which we refer you. During this call references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release or the presentation. I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results.

Thank you, Operator. Good morning, everyone and thank you for joining us on our First Quarter 2022 Earnings Call. On today's call, I'll discuss first quarter highlights and ongoing strategic objectives before turning the call over to Susan Colin, Chief Financial Officer. Following our prepared remarks, we'll answer your questions. On Slide 3, we are encouraged by some of the trends seen in the first quarter, but continued to monitor the various factors affecting the macro economy. The macro environment will impact us and the rest of the banking industry as the expectation of rising rates and improving local economy and in-market merger disruption all had an impact on our quarterly results. We remain focused on executing on our strategic objectives, and we're off to a good start in the first quarter. We reported GAAP earnings per share of $0.58 and core EPS of $0.61. This translated to a return on assets of 91 basis points and a return on equity of 10.8%. Core return on assets was 94 basis points in Cohort. Return on equity was 11.3%. These returns are within range of our stated through the cycle goals of 1% and 10% respectively. The cost of deposits declined to a record low of 21 basis points and the core deposit mix continues to improve. Non-interest bearing deposits were a record at 1 billion for the quarter, increasing 13.5% year-over-year. Loan closings, excluding PPP, were up 65% year-over-year but repayments remain elevated challenging loan growth this quarter. However, our loan pipelines are at record levels and commercial business loan growth was significant during the quarter. Asset quality is a hallmark of this company. Our credit metrics remained solid and the risk profile is conservative. We continue to invest in the future as we hired 30 people from institutions in our markets that are involved in merger and 12 of these people are revenue producers. Additionally, first-quarter was impacted by seasonal expenses of $4.3 million that will not reoccur in the second quarter. Overall, I'm pleased with our execution on our strategic objectives and the returns we're generating for our shareholders. Slide 4 outlines the merger disruption that is occurring in our markets. During the quarter, one more deal was announced and five deals closed year-to-date. We believe the biggest opportunity to expand our business and add more talent will occur over the next 6 to 12 months, as integration of these deals progresses. Given this environment, we expect to remain focused on the organic growth opportunity. On Slide 5, you can see the local economy continues to improve while employment is not quite back to pre -pandemic levels in New York City MSA, it continues to see significant improvements, especially in leisure and hospitality. New York City MSA housing price index, and median list price per square foot has risen and are above pre -pandemic levels. The local markets are improving and this is having a positive impact on our business volumes. The business and community activity within our markets continues to improve. For example, in the Asian markets we serve, we've participated in two Lunar New Year parades, three galas, and several events honoring women's achievements this quarter. On Slide 6, you see the impact of the improving local economy, merger disruption, and execution of our strategic objectives. The loan pipeline is at an all-time high, up 55% quarter-over-quarter. Commercial real estate is one of the big drivers. I want to stress that we continue to maintain our pricing discipline and we're not a price leader. The loan pipeline includes regarding refinances, only any incremental new money which represents about 5% of the pipelines. Business banking is also seeing strength as its pipeline is up 46% year-over-year. Pull-through rates have recovered, reaching 77% this quarter compared to 68% last quarter and 56% in the same quarter last year. Unfortunately, this strong production has been impacted by loan repayments and satisfactions which remain elevated in the first quarter both with and without PPP. However, we expect loan repayments and satisfactions to slow in 2022 as interest rates increase. We recognize the importance of technology as it improves the customer experience, enhances our product set and creates efficiencies. Slide 7 shows the continued growth of our digital platform. We continue to see high growth rates and monthly mobile active users, active online banking users, and digital banking enrollment. We're pleased with the

Thank you, John. I'll begin on Slide 8, growing non-interest bearing deposits is a priority for us. Average non-interest bearing deposits increased 17% year-over-year to a record of over $1 billion in comprised nearly 16% of average deposits. Our teams are doing a great job of opening new checking accounts which are up nearly 18% year-over-year. The growth in non-interest bearing deposits is helping drive down the cost of deposits, which had a record low of 21 basis points in the first quarter. Slide 9 outlines of loan portfolio and yields. Loans excluding PPP, were stable quarter-over-quarter. The loan pipeline of $664 million is a record and was up 77% year-over-year. The pipeline consist of only incremental new funds for refinancing and new money. With higher market rates, we expect to accelerate repeat payments to slow over time, and we remain optimistic that loan growth will improve in 2022. Core loan yields, which include income were stable quarter-over-quarter, and improved year-over-year. The difference between the yield on loan satisfaction net of PPP and loan originations to continues to narrow. Slide 10 outlines the net interest income and margin trends. The GAAP net interest margin was 3.36% and increased 7 basis points during the quarter. Net interest income increased 1% quarter-over-quarter to a record $64 million. Core net interest income, which removes the impact of net gains from fair value adjustments and purchase accounting accretion, increased 2% quarter-over-quarter as the Core net interest margin expanded, 10 basis points to 3.31%, excluding the impact from net prepayment penalty. Net gains from fair value adjustments. And the purchase accounting accretion, which totaled 14 basis points in the first quarter at 16 basis points in the quarter, the net interest margin increased 9 basis points, quarter-over-quarter, remodel and purposes. We encourage you to start with the base net interest margin of 3.22% which includes 3 basis points of positive PPP impact and then add in your own assumptions for the previously mentioned adjustments. Slide 11 takes a closer look at our funding profile. Overall, our funding mix has improved significantly from the prior rising rates cycle of 2015 to 2019. At September 30th, 2015 or the last reporting period before the first rate hike of that cycle. Higher costing CDs and borrowings were 53% of funding, while non-interest bearing deposits were 5%. At year-end 2021 or the last reporting period before the Fed increased rates in March 2022. CDs and borrowings were reduced by more than 50% as a percentage of funding and non-interest -bearing deposits more than doubled. The gap between our cost of funds and average Fed funds has improved by approximately 50% between those periods. The average balance of non-interest bearing deposit accounts has increased by nearly 65% for business accounts and 238% for personal accounts. We used very conservative deposit betas in our interest rate risk filing ranging from 40% to 80% for non-maturity interest-bearing products. These are about 13% points higher than what we experienced in the last cycle. Our ability to lag deposit rate increases will be a key factor in determining our net interest margin outlook. By lagging deposit rate increases to a similar pace to last cycle. Our interest rate risk modeling for net interest income would improve by approximately 40% for 100 basis points to gradual rise in rates over the next year. The better we manage deposit costs, the more favorable the net interest income outlook to provide additional perspective as 50 basis point increase in short-term rates equates to an approximate $5 million annual increase in net interest income without any deposit rate adjustments. In summary, we believe our funding profile has improved significantly and is better positioned to handle a rising rate environment. Turning to Slide 12, we outlined some of the offsets we have on the asset side of the balance sheet. First, business banking loans, which are largely floating rate have increased to 22% of the loan portfolio from 12% in the previous cycle. Second, we have $410 million of loan swaps that convert fixed rate loans to floating rate. Third, there are approximately $480 million of real estate loans that will reprice about 44 basis points higher based on the yield curve at the end of March. The actual benefit will depend on the level of rates and shape of the curve when the loans reprice. Importantly, including hedges, approximately 30% over $2 billion of loans will reprice higher within the next year. Overall, we are better prepared to handle higher interest rates this cycle compared to last cycle. Moving onto asset quality on Slide 13, we have a long history of strong credit quality, primarily due to our low-risk credit profile and conservative underwriting. Net charge-offs were only 6 basis points of average loans in the first quarter. The average loan-to-value on the real estate portfolio is less than 38% and only $21 million of loans or less than 1% of loan portfolio has an LTV of 75% or more. Slide 14 outlines some additional credit metrics. Non-performing assets declined 6% linked quarter, and the loan-to-value on these assets is 37% criticized and classified loans were relatively stable in the first quarter. The allowance for credit losses to loans increased 1 basis points to 57 basis points during the quarter. As the mix of the reserves by loans picked it in the bottom right chart. Overall, we remain very comfortable with our credit risk profile and continue to expect minimal loss content. Our capital position is depicted on Slide 15, book value and tangible book value per share were flat quarter-over-quarter as net income was enough to absorb the increase in the cumulative other comprehensive loss and capital return. Company increased its quarterly dividend $0.22 per share in the first quarter, and repurchased over $8 million of common stock to return 84% of the first quarter earnings to our shareholders. The tangible common equity ratio remained over 8%. Our capital priorities are unchanged and are to first profitably grow the balance sheet, second pay dividends to our shareholders and third, opportunistically repurchase shares. We'd be the stock as attractively priced given the low multiples to tangible book value. The approximate 4% yield, and its significant opportunity for future growth. Before I turn it back to John, I want to some color on the outlook. Net interest income is a function of net interest margin and balance sheet growth. In addition to the key drivers for the net interest margin we previously discussed, first-quarter results also includes elevated levels of purchase accounting and accretion, and net prepayment penalty income. While loan growth has been impacted by high repayment rates, we expect repayments to slow during 2022. Non-interest expense includes over $4 million of seasonal expenses that should not recur in the second quarter. The core expense base is still expected to rise high single-digit in 2022 normal seasonal patterns. Lastly, the effective tax rate for the current year should approximately 26.5% to 27%. I will now turn it back over to John.

Thank you, Susan. On Slide 16, we wrap up with our key messages. Our local economies are recovering and we're capitalizing on a merger disruption. Our loan pipeline is at a record level. During 2022, we expect loan growth will improve from the beginning of the year through today five of the mergers in our markets have closed, we've hired 12 revenue producers from the merger participants. We are investing in the business and our people. The company is better positioned for rising rates versus past cycles, with a record low cost to funds and improved funding mix and swaps with favorable repricing starting in the second quarter. Our ability to control deposit rates will be a key factor in determining the net interest income outlook. We have a low risk business model with a conservative loan-to-value ratio. We've traditionally had low credit risk in our portfolio and the stock has an approximate 4% dividend yield that trades at a low price to tangible book value multiple. The company performed well versus it's through the cycle return on average assets and return on average equity goals in the first quarter, despite the elevated seasonal expenses. Operator, I'll turn it over to you to open up the lines for questions.

Thank you. Ladies and gentlemen. We'll now begin our question and answer session. Our first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning and nice quarter.

Thank you, Mark.

Thanks, Mark.

For Susan, just to clarify, did you say that the expense number in the second quarter should be down about $4 million from the 1Q number? I just want to make sure I caught that.

Yes. The $4 million is the seasonal expenses we have every first quarter.

Okay. Great. And then secondly, I wondered if you could break down the $664 million pipeline for us like in terms of complexion, the types of loans and maybe what the average rate on that looks like?

The mix of the portfolio is very similar to our portfolio. There's not a material difference. And the rate is approaching 4% right now, it's approximately 380 on the pipeline.

There's probably a little bit more C&I in there than the structure of the portfolio.

Okay, great.

Similar to what we've -- what we posted last quarter in terms of percentages.

Got you. And then I thought the stuff that you provided in the slides was really helpful about how the rate sensitivity is. Positioning has changed since the last cycle. Are you suggesting that the balance sheet today is actually asset sensitive and that the core margin should go up as rates rise or are we closer to neutral?

No, I can't say we're asset sensitive, but we clearly are closer to neutral than we've ever been.

Okay. Great. And then Susan, I saw your comments about the $5 million increase in NII. What gives you so much confidence that the deposit rates won't start to move higher as we get some more Fed increases?

The liquidity that's in the market will help tamper down the rate increases. That's a primary driver, and we are very, very focused on the cost of our funds. Also the mix with the $1 billion of non-interest bearing deposits that will help tamper down the cost of funding going forward.

And then we've restructured our incentives in -- at the end of last year to emphasize non-interest bearing DDA growth.

Okay. And then lastly, I guess I'm just curious how you balance growth versus buybacks given your stocks below tangible book value now and looks really attractive. How do you weigh the one versus the other?

We agree, very attractively priced right now and a great deal for anybody that attractively priced given the dividend yield and where we're trading. Mark, we haven't really changed our capital philosophy that we've been articulating for several years now, that if we can profitably grow the balance sheet then that's where we're first going to deploy our capital.

Thank you.

Thank you, Mark.

Our next question comes from Manuel Navas with D.A. Davidson, please go ahead.

Hey, good morning.

Good morning.

Good morning, Manuel.

I just wanted to follow up on the expense guidance trajectory. I understand there's some seasonal cost coming out, but you still have the same high single-digit growth for the Full Year. Does that mean that we should still see kind of flat to current levels of expenses for the rest of the next three quarters?

No, we expect our -- to start with our base that we had last year of core expenses of about $145 million. We do expect there to be increases in the expenses as we invest in the company and -- as we Investment Company and the inflation, if it really starts to take hold in our play expense basis, we haven't really seen yet. We have some growth that we're anticipating that will also increase the expenses.

Okay, so a little better loan growth at the variable comp a bit?

Yes.

Yes, and we're still actively looking for additions to talent and of course data that will provide us with additional expenses as the year goes on.

We're the new employees that were added fully in the first quarter run rate? And can you add any more details about what business lines are in?

Pretty much across the board. They are mostly business development individuals.

Okay. And as you get the growth eventually, if with higher rates pay downs decline, can you discuss the capabilities of your various deposit growth avenues? Perhaps touch on commercial deposit gathering or Asian American markets, internet banking, the IntraFi Network and global deposits and the capabilities of all those that kind of fill in the gaps.

We look at the funding obviously, where we made some changes in terms of our orientation and our focus on non-interest bearing and we've been quite successful there. We expect that to continue and to be a major contributor. And then beyond that, we do have a very varied funding capability and we make use of it as we see opportunities going forward. Clearly we have a fair amount of dry powder on the Internet side of the business. We did invest in improving our online banking capability last year. So we're starting to see some positive impact out of that. And we've -- as loan growth begins to come back, we also feel that we will get a very, very strong participation from our commercial real estate and our business banking. We've got about $3 billion dollars of liquidity outside of any deposit gathering. So we've got a great deal of flexibility. And I think the situation with respect to existing liquidity in the market should pump down any -- very significant, competitive activity going forward. So I think we're in very good shape as it relates to our ability to gather funding, gather deposits, and also maintain a reasonable level of increases in funding gross.

I appreciate that I think that covers it for now.

Thank you.

High 3's, mid-to-high 3's based upon the size of the loan, the LTVs, etc. All along and go up into the four category.

Okay. Good. And then you guys made a comment on a percentage of the pipeline, something about new money. I kind of missed it there. I was wondering if you could go over it again, please.

Sure. Said that the 95% of the pipeline is new money, new deals to the company, of our pipeline only 5% is incremental money on refinancing. Meaning if you have $100 thousand loan with us today and you want a $150,000, only $50,000 is in the pipeline, not the full $150,000.

Okay. Great. Appreciate that. And then do you guys have the AOCI impact this quarter?

We had some AOCI. We had the security impact offset by the derivatives were very positive to us. This quarter, the overall decline was about $8.5 million, $9 million.

Okay, great. Thank you.

Thank you. Chris.

Our next question is a follow-up from Manuel Navas with D.A. Davidson, please go ahead.

Hey, I just had one more. With the pay down, do you have any view of the first-quarter pay downs what was driving it and who was taking those loans. And then on the deposit side, have you seen in April any kind of would you call it bad actors start to raise rates at all? I know you haven't, but just touch on those to kind of competition areas of question.

I think the pay downs taken place associated for the most part was some let's say a little bit more aggressive pricing that we weren't willing to match. And then the --

Deposit together, we've seen some one-offs, but not anything wholesale in the markets.

Okay, that's helpful. With the pricing on our loans that have refi -ed away, is it like insurance companies or other banks? I just try to get a sense for that. I understand it trying to very carefully, but just wondering.

There's banks and insurance companies. But it's mostly banks. Mostly banks that are picking these up.

Thank you. I appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to John Buran for any closing remarks.

Well thank you. I want to thank you for your attention and participation on the call. And once again, I think we've -- we're very, very pleased with the quarter and look forward to continuing to update you on our progress toward improving the business. Have a good day, everyone.