Flushing Financial Corporation Q3 FY2024 earnings call

Key Points

• Operating environment improved but challenging; Fed cut of 50 basis points hoped to flatten yield curve.
• Net interest recoveries on non-accrual and delinquent loans added 5 basis points to net interest margin and $0.03 per share.
• Focus areas: Increase NIM and reduce volatility (net interest income up 6.6% QOQ, NIM up 5 basis points), maintain credit discipline (low non-performing assets, strong collateral), preserve liquidity and capital (available liquidity $3.9 billion, low uninsured deposits), bend expense curve (non-interest expense growth ~6% YTD).
• Credit metrics: Non-performing assets 59 basis points, net charge offs 6 basis points YTD; multifamily and investor commercial real estate portfolios well underwritten.
• Susan Cullen discussed deposits, net interest margin trends, CD portfolio (total CDs $3B, retail CDs maturing with weighted avg rate 4.64%), loan repricing, capital position (book/tangible book value stable), Asian markets ($1.3B deposits, $744M loans), and community involvement.

Average deposits increased 9% year-over-year and 4% quarter-over-quarter. Average non-interest bearing deposits were 11% of total average deposits compared to 12.5% a year ago. Loan to deposit ratio improved to 90% from 103% a year ago. Net interest income increased 6.6% quarter-over-quarter as the net interest margin increased five basis points. GAAP and core net interest margin were 2.1% and 2.07% respectively. Total CDs were nearly $3 billion or 38% of total deposits at quarter end. Approximately $1.3 billion or 19% of the gross loans are repriced to a short-term index, with $226 million of loans due to reprice 185 basis points higher in 2024 and $775 million scheduled to reprice upwards 159 basis points in 2025.

Forward-Looking

• Net interest margin expected to remain stable near term but improve longer term as yield curve flattens.
• Funding costs likely peaked; CD repricing and loan repricing to drive NIM expansion.
• Capital base strong; book value and tangible book value stable.

Risks

• Challenges in managing net interest margin due to deposit pricing by competitors, loan demand, and Fed cut timing.
• Credit risks in office loans, though one non-performing office loan expected to be resolved with no loss.
• Volatility in net interest margin due to bumpy quarters.

Q: About securities sold, coupon, September margin, deposit reaction, charge off?

A: Susan Cullen said they were adjustable rate CLOs sold with minimal gain; John Buran mentioned September NIM ex recovery was 210; John discussed deposit repricing of $1.8B non-maturity deposits and CD roll-off opportunities; Susan Cullen said charge off was a fully reserved C&I loan.

Q: Margin with more Fed cuts, ROTCE target, CD rates, CRE concentration?

A: John talked about NIM benefit from yield curve steepening (200 basis point steepening could increase net interest income by $4M in first year, $20M in second); target ROTCE 10%; Susan said CDs booked in Q3 were around 400; John stated no CRE concentration target.

Q: Office non-performer details, BOLI benefit, expenses, multifamily maturities?

A: Susan detailed office loan with low LTV, marketed building with good price indication for resolution; Susan said BOLI benefit is $4M incremental over next year, lumpy; Susan and John discussed expenses with new branches and staff added mid-year affecting 2025; John talked about multifamily delinquencies managed with proactive approach.

Q: Near-term NIM sensitivity to Fed cuts, repricing risk, deposit competition, deposit cost decline, repricing half?

A: John and Susan discussed NIM sensitivity to Fed cut scenarios, repriced loans performing well, deposit competition impact (large competitor issues not affecting Flushing), little pushback on deposit cost decline, and half repriced due to evaluation of other transaction accounts