Flushing Financial Corp Q4 FY2024 Earnings Call

Welcome to Flushing Financial Corporation's Fourth Quarter and Full Year 2024 Operating Results 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. After today's presentation, there will be an opportunity to ask questions. 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 certain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act 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 US Securities and Exchange Commission to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with US GAAP. 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.

Thank you, operator. Good morning, and thank you for joining us for our fourth quarter and full-year 2024 operating results conference call. I want to extend a special thank you to our Asian customers who are celebrating Lunar New Year. The fourth quarter and 2024 were important milestones for the company. In December, we completed a $70 million equity raise that allowed the company to restructure the balance sheet and build on the momentum created in net interest income in the second half of 2024. As we indicated last quarter, funding costs peaked in the middle of the third quarter with sequential NIM expansion. These trends continued in the fourth quarter with GAAP NIM increasing 29 basis points and core NIM up 18 basis points. The balance sheet restructuring should increase core NIM by 10 basis points to 15 basis points in the first quarter. After a difficult couple of years battling higher rates and an inverted yield curve, the operating environment is improving. Our asset quality remained stable and our tangible common equity ratio improved quarter-over-quarter. For the fourth quarter, the company reported a GAAP loss per share of $1.61 compared to core earnings per share of $0.14. The balance sheet restructuring incurred a $76 million pre-tax loss or $1.74 per share after tax. The capital raise and balance sheet restructuring have positioned the company to significantly improve profitability and strengthen the balance sheet. On Slide 4, we discuss our first area of focus, which is to increase the NIM and reduce volatility. 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. We benefited from our real estate loans repricing higher and our funding costs repricing lower. Our average non-interest bearing deposits increased quarter-over-quarter to aid NIM. In addition, actions to reduce our interest rate risk profile helped us as well. We're seeing continued demand for our back-to-back swap offerings. We feel good about the progress achieved so far and recognize there's more work to be done. I'll turn it over to Susan to provide some more details on our net interest margin and asset quality.

Thank you, John. Slide 5 outlines the net interest income and margin trends. The GAAP and core net interest margin increased 29 basis points and 18 basis points to 2.39% and 2.25%, respectively in the fourth quarter. Liability repricing was a driver of the improvement. We are encouraged about the direction of the net interest margin given the more positive environment and our strategic actions. The slope of the yield curve has turned positive, and this will have an expansionary impact on our net interest margin in the future. Our interest rate risk filing shows a 100 basis point positive slope in the yield curve, with the short-end declining benefiting net interest income by about $2 million in the first year and $12 million in the second year. The balance sheet restructuring is also expected to have a 10 basis point to 15 basis point improvement in the core net 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. Average deposits increased 8% year-over-year and were flat quarter-over-quarter. Average non-interest-bearing deposits stabilized in the second half of 2024 and were 12% of total average deposits compared to 13% a year ago. 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. Our deposit betas are favorable during the quarter as interest-bearing deposit betas were 51% as rates declined, compared to 57% when rates increased over the past cycle. We continue to focus on shifting the deposit mix and reducing the overall cost. Slide 7 provides more detail on our CD portfolio. Total CDs are $2.7 billion or 37% of total deposits at quarter-end. Approximately $800 million of CDs, with a weighted-average rate of 4.59%, will mature in the first quarter. Current CD rates range from 3.5% to 4.5%. Our customers' preference is for the 91-day product, which has an APY of 4.25%, followed by a one-year CD with a 3.85% rate. 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. Slide 8 provides more detail on the contractual pricing of the loan portfolio. For 2025, about $750 million of loans are due to reprice at 214 basis points higher than the current coupon rate using the December 31, 2024 index. A similar amount is due to reprice in 2026, with nearly $1 billion of loans due to reprice about 200 basis points higher in 2027. The repricing in 2025 through 2027 is largely based on the five-year Federal Home Loan Bank of New York advance rate plus the spread. At December 31, 2023, there were over $300 million of multi-family loans that were scheduled to reprice approximately 200 basis points higher. During 2024, about 81% of these loans were repriced and remained with the bank. These loans are priced 225 basis points higher to a weighted average rate of 6.65%. This loan repricing should aid in driving net interest margin expansion. Slide 9 provides detail on the balance sheet restructuring. Since all the details are on the slide, I will provide some high-level comments. We sold low yielding securities and replaced them with yields about 370 basis points higher. The related swap in the securities was terminated. We restructured higher cost in Federal Home Loan Bank advances and saved approximately 30 basis points on the yield. Lastly, we moved about $74 million of low-yielding loans to held-for-sale, and the related mark on the sale was only due to interest rates as there was no credit mark. These actions will enhance our earnings profile by increasing the net interest margin by 10 basis points to 15 basis points and strengthen the balance sheet for 2025.

Thanks, Susan. On Slide 10, we highlight our second area of focus, which is maintaining credit discipline. As we've 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 of less than 35%. The multi-family 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. Our net charge-offs and non-current loans have a long history of outperforming the industry. Slide 11 provides context on these trends. The charts compare the company's credit performance versus the industry. Our underwriting has outperformed over time, often by a wide margin. 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. 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. Our level of non-current loans total loans is also favorable compared to the industry. In a stress scenario consisting of a 200 basis 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. Additional credit metrics are shown on Slide 12 and demonstrate our conservative risk culture. Non-performing assets to assets totaled 57 basis points of loan-to-values at 57%. During the fourth quarter, we allocated approximately $3 million of reserves to our largest non-performing asset based on updated information. 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. 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%. Our allowance for credit losses is presented by loan segment at the bottom-right chart and the ratio of overall loans totaled 60 basis points. All of these items keep us very confident that our low-risk credit profile performs well over time.

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. Non-performing loans in this portfolio are only 44 basis points, and criticized and classified loans are only 102 basis points of loans. The average loan size is $1.2 million in this $2.5 billion portfolio. Investor commercial real estate loans, excluding the office CRE, totaled 26% of gross loans and have similar portfolio metrics as our multifamily loans, with zero non-performing loans and zero criticized and classified loans. 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. These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform well over time.

Slide 14 provides further context on the risk in our multifamily portfolio and a comparison to peers. As of September 30, 2024, our criticized 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. The increase is primarily from 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. Multifamily reserves, criticized and classified multifamily loans were 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%. 30 to 89-day past dues in our multifamily portfolio are 86 basis points. Over 98% of loans, which repriced in 2024 by over 200 basis points, are current, with only 34 basis points 90 days or more delinquent. This is a testament to our borrowers and our conservative underwriting standards. With these credit metrics, we see limited risk and loss content on the horizon. I'll now turn it back over to John. Thanks, Susan. On Slide 15, we highlight our third area of focus, which is preserving strong liquidity and capital. We have $3.6 billion of undrawn lines and resources, and our level of uninsured and uncollateralized deposits is low. Our regulatory capital ratios are strong, and the tangible common equity ratio improved quarter-over-quarter. Our capital position is shown on Slide 16. Book value and tangible book value per share declined about 7% year-over-year due to the rate environment and our capital actions. The leverage ratio improved to over 8%, while tangible common equity increased 82 basis points quarter-over-quarter to 7.82%. Our capital priorities have not changed. Reinvest in the business first, then pay cash dividends, then repurchase stock. Overall, we view our capital base as a source of strength and a vital component of our conservative balance sheet. Slide 17 provides detail on our Asian markets, which account for about a third of our branches. We have approximately $1.3 billion of deposits and $749 million of loans in these markets. 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. 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 and 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. Our approach to this market is supported by our multilingual staff, our Asian Advisory Board, and our participation and sponsorship of cultural activities. On Slide 18, you can see community involvement is a key part of our strategy. During the fourth quarter, we participated in numerous local events to strengthen our ties to our customer base. We were an active participant in the Forest Hills, Syosset Woodbury Street Fairs, Flushing BID and Ganesh Utsav Bellerose. Participating in these types of initiatives has served as a fantastic way to further integrate ourselves with our local communities while driving customer loyalty. Slide 19 outlines the operating environment and our new business initiatives for 2025. The operating environment has improved significantly. The spread between the five-year FHLB advance and the three-month SOFR rates turned positive after spending months of the past year negative. This spread is a good indicator of how our net interest margin will trend in the future. We see continued opportunities to reduce our funding costs, and our real estate loan portfolio should reprice higher over the next three years. With our focus on remixing the balance sheet, the company should experience NIM expansion. 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. Additionally, another significant business initiative is building out our SBA team. We expanded the team in the spring of 2024 and have plans for future growth. During the first quarter, we expect to close on our first round of SBA loan sales. To sum up, the operating environment has turned more favorable, and we continue to invest in the business to drive future profitability. Slide 20 provides a high-level perspective on performance in the current environment. We continue to expect slight loan growth but stable assets. There will be a continued emphasis on improving the mix of interest-earning assets and interest-bearing liabilities. The core net interest margin is expected to expand during 2025 with a 10 basis point to 15 basis point improvement from the balance sheet restructuring. Additionally, there should be benefits from CD and loan repricing. 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. Non-interest expense is expected to increase approximately 5% to 8% in 2025 off a base of $160 million as we continue to invest in the business by adding people and branches. First quarter seasonal expenses are expected to be approximately $2 million. While quarterly tax rates can fluctuate, we expect a 25% to 28% effective tax rate for 2025. On Slide 21, I'll conclude with our key takeaways. We enjoyed some progress in our areas of focus in 2024 as the net interest margin began to expand. 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. Given the progress, we're shifting our 2025 focus to preserving strong liquidity and capital, maintaining credit discipline, and improving profitability. The operating environment is improving as the yield curve has a positive slope compared to significantly inverted for most of 2024. We have opportunities to lower deposit rates, add loans with attractive spreads, and remix the balance sheet. We look forward to a brighter 2025. Operator, I'll turn it over to you to open the lines for questions.

Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning.

Good morning, Mark.

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?

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 sale have not occurred yet.

Okay. And so you think those will happen soon or?

Very soon, within the first quarter. There's no issues with the sales, it's just the timing. It's taken a little bit longer than we expected.

Okay. And then, in your comments, John, and also in the slide deck, I noticed you talk about branch expansion. I guess I'm curious how many branches, where those might be, and sort of what the implications for costs might be in 2025?

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 growth there to accelerate. And then we have two branches that will both be part of our Asian initiative that will happen during 2025.

Okay. And any idea what the impact on expenses will be this year?

We expect our non-interest expenses to increase between 5% and 8% off the $160 million base, inclusive of those branches.

Got you. Yeah, I saw that guidance, but I just want to make sure that incorporated. Okay, great. And then, 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 Durbin impact expected?

There is not a significant impact from the Durbin amendment. Our fee base on cards is not large, and we believe many of the associated costs are already included. The Chief Risk Officer has been with us for over 10 years, ensuring we meet stress-testing requirements and maintain the necessary three lines of defense. While there may be some adjustments to expenses as we surpass the $10 billion mark, we largely feel that the costs have already been accounted for in our base expense structure.

Okay. Is it essential to pursue an acquisition to exceed the $10 billion threshold, or do you think it can be achieved organically? What are your thoughts on this?

It would be preferred. It would clearly be preferred.

Preferred to what?

Preferred to organic.

Got you. Okay. And then, last question I had, given the changes and your comments around the NIM, I guess I'm assuming the Fed doesn't cut a lot this year, maybe one rate cut is assumed, I think, in the forward market. But where can the NIM potentially get to by the end of the year? Can it get up close to 2.50%? Is that a reasonable bogey, Susan?

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 2.30% to 2.40% range.

Okay. Great. Thank you.

Thank you, Mark.

Our next question comes from Steve Moss with Raymond James. Please go ahead.

Good morning.

Good morning, Steve.

Hello, Steve.

Morning. Maybe just following up here on the margin, just kind of curious how you guys are thinking about your interest rate sensitivity positioning going forward here. Do you become, I guess, as 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?

So, we're largely neutral. So we think we can manage either movements up or movements down without significant issues.

Okay. Got you. John, you mentioned in your prepared remarks about slightly adjusting the mix of loans. I'm curious about your loan composition outlook for the next 12 to 24 months. Additionally, regarding the SBA team you've added, what are your anticipated loan sales for the upcoming quarter, and how much production do you expect to retain?

So, 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. 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 will contribute significantly throughout 2025.

Okay, great. Susan, could you provide some insights on the largest non-performing asset this quarter? I noticed you added $2.6 million in reserves, and I'm curious about that. Additionally, what were the charge-offs in the C&I portfolio? Are there one or two specific loans or multiple loans involved?

The biggest one was one loan that we had fully reserved for in prior quarters; it's about $4.4 million of the debt charge-offs. 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. Got you. I’m curious about the factors behind the 5% to 8% expense growth guidance for 2025 in this upcoming year.

I'm sorry, our drivers for 2025?

Drivers for the expense growth, yeah.

It could be an increase in compensation as we make investments in the business. We'll have the full year of SBA, the full year of a couple of branches that we've brought on in 2024, plus we'll have the two branches in 2025 regular increases, and we expect to have a positive operating leverage and improved efficiency ratio in 2025.

Okay. Great. I appreciate all the color. I'll step back here. Thanks.

Thanks, Steve.

Thank you.

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

Good morning.

Good morning. Do you have some spot deposit pricing as of the end of the year?

At the end of the year, excluding our non-maturity deposits, we're about 325 to 330.

I understand that CDs are the main factor, and you provide excellent information on that. Is there still some reduction in the cost of other account deposits expected in the first quarter following the Fed's December cut?

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. They came down over 30 basis points quarter-over-quarter.

Okay, I noticed that the retention on CDs is around 78%. Is there an increase in competition? Is that figure influenced by your current needs? Was there a significant decrease in retention?

No, that's what we've historically run somewhere in that ballpark. So that unfortunately has not abated.

Got it. Is the change in the profitability target for the year going to result in a different type of loan mix going forward?

Yeah. 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 working toward limiting growth in that.

Okay. But you are seeing opportunities in CRE as well. Correct?

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 will be the focus in the CRE portfolio for 2025.

Thank you. I appreciate the commentary.

Thank you.

Thank you.

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.

Thank you. Thank you all for attending. And once again, we look forward to a much improved 2025. Thank you.

This concludes today's teleconference. You may now disconnect your lines, and we thank you for your participation.