FLUSHING FINANCIAL CORP Q1 FY2024 earnings call

• Credit culture: Produced excellent results, with net charge-offs for the quarter at $4,000 or less than 1 basis point of loans. Nonperforming assets were flat quarter-over-quarter at 53 basis points. 30- to 89-day loan delinquencies at 24 basis points, criticized and classified loans at 87 basis points (down 23% quarter-over-quarter).
• Underwriting: Conservative, with loans having low LTV ratios and high cash flows, long history with borrowers, and strong sponsor support. Stress testing shows proforma debt coverage rate of 1.3x with 200 basis point rate increase and 10% operating expense increase.
• NIM: GAAP and core net interest margins declined in Q1. Absent episodic items, NIM declined 13 basis points. Primary factors impacting NIM are loan originations, loan repricing, and CD repricing. NIM expected to start expanding with loan originations, repricing, and CD repricing.
• Deposit portfolio: Average deposits increased 4% year-over-year and 3% quarter-over-quarter. Average CDs increased 3% quarter-over-quarter to $2.4 billion. Loan-to-deposit ratio improved to 94% from 102% a year ago.
• Capital position: Book value and tangible book value per share increased year-over-year. Tangible common equity ratio decreased 24 basis points quarter-over-quarter to 7.4% due to $300 million increase in securities.
• Asian markets: Account for 1/3 of branches, with over $1.3 billion of deposits and $746 million of loans, 18% of total deposits, and substantial growth room.
• Community involvement: Participated in local events like Lunar New Year Parade and Tokpag giveaway to strengthen customer ties.

The company has several portfolio segments. The multifamily portfolio is the largest, with an average loan size of $1.2 million, a weighted average LTV of 45%, and a debt coverage ratio of 1.8x, with minimal credit issues. The investor commercial real estate portfolio shares similar characteristics to the multifamily portfolio, with small average loan size, low LTVs, high debt coverage ratios, and excellent credit performance (0 nonperformers). The office portfolio is less than 4% of loans, with less than 1% being Manhattan office buildings (none nonperforming), weighted average LTV of 49%, debt coverage ratio of 2x, and low criticized and classified loans.

• NIM: Expected to start expanding in the second half of 2024 and trend to 3% plus over time.
• ROE: Expect double-digit return on average equity over time.
• Loan pricing: Loans will be priced higher through the year according to contractual terms.
• Funding costs: Focus on reducing funding costs by looking at CD rates and incentivizing noninterest-bearing checking accounts.

• Commercial real estate lending exposure in office and multifamily remains a concern.
• Impact of a large competitor's contraction, though opportunities may exist but uncertain.
• Market rate changes affecting NIM and funding costs.
• Budget issues related to multifamily policy, with uncertain implications until budget is finalized.

Q: Susan, just to clarify, you mentioned you had grown securities this quarter with some of the excess liquidity. And I think you had mentioned they were floating rate securities. What sort of initial yields are on those?

A: Around $670 the floating rate, so they have a pretty high coupon right now.

Q: And then secondly, do you happen to have your March net interest margin?

A: Yes. Obviously, we do. 205.

Q: On the fee income side of things, just curious here about the pace of swap activity and your expectations there for the upcoming quarter or 2?

A: So our low pipeline is about $174 million, of which 22% is related to the swap program of $174 million. So our normal pull-through rate is between 70% and 80%. So we would expect that continued pull-through rate and just straight line everything.

Q: Any thoughts on if rates stay the same, and you start seeing that NIM expansion in the back half of the year, what type of pace it would be?

A: I think it's going to be obviously a gradual pace because what the factors obviously are what's happening with loan originations. And currently, we're talking about the 7% level, 7 handle there. In addition, you have the loan repricing that we talked about, which is up around the 680-plus area. And then, of course, the CD portfolio, which has some maturities coming in at rates closer to what we're retaining CDs at today. So I think those factors just make for a slower movement in the margin improvement, absent, of course, any activity that the Fed would do in the second half of the year. So that is we do expect to see NIM bottoming even without a change in rates.

Q: Can you just comment on multifamily policy, how it could impact you? There's a number of issues in the budget going through, they're not finalized. Just where do you stand on how that could impact you, if at all?

A: Well, obviously, there's a range of possibilities. There's where you're talking about some pretty draconian things, which appear to be off the board right now. So what is being spoken about based upon our understanding is it a little bit less stressful than the most extreme versions of the legislature. There's clearly not a lot of detail that we can get into yet until we've get got really a full examination of the entire budget and its implications. But at least, I think some of the more dramatic and drastic things have been, while not taking off the board, clearly, it looks like they may be watered down. So the expectation of a major disaster I think is a little bit less so, but I would reserve full judgment until we actually are able to pick apart all the nuances of the legislation.