FFIC - Flushing Financial: Q3 2023 Lights A Glimmer Of Hope

2023-11-02 15:33:34 ET

Summary

• Flushing Financial's stock has plummeted 35% in 2023 due to the deterioration of the net interest margin.
• Q3 2023 results beat estimates with higher EPS and revenues.
• The bank has a conservative loan portfolio with low average LTV and DCR, and is rewarding shareholders with dividends and share buybacks.

2023 has been a complex year for Flushing Financial ( FFIC ), in fact it has plummeted about 35% since the beginning of the year. The Fed's monetary policy has eroded the net interest margin and its bottom may not be here yet.

On October 31, the Q3 2023 results were released and both EPS and revenues beat estimates:

• Normalized EPS was $0.31, $0.07 above estimates.
• Revenues were $49.23 million, $3.41 million more than estimates.

Overall, there was so much pessimism toward this quarterly that it was difficult to disappoint expectations. The problems of the previous quarter remain, but there are several positive aspects. Moreover, in addition to a dividend yield above 7%, Flushing Financial is also buying back its own shares, rewarding its shareholders widely.

Loan portfolio

The loan portfolio reached $6.89 billion, up 0.90% from the previous quarter. Loans secured by real estate account for 88% of the portfolio and have a very low average LTV, just 36%. Compared to last year, the loan portfolio declined by 0.70%, a sign that demand for new loans is waning. The conservative approach of this bank, combined with high interest rates, makes it complicated to get new customers from this point of view.

The two largest categories in the loan portfolio are Multifamily and NOO CRE.

• Multifamily is worth $2.60 billion and has a weighted average LTV of 44% and a weighted average DCR of 1.80. The average loan size is $1.20 million, while the average monthly rent is $1,615, far below the market average of $3,071.
• NOO CRE is worth $2 billion and has a weighted average LTV of 50% and a weighted average DCR of 1.80. The average loan size is $2.50 million and the properties are well diversified.

Overall, both categories have conservative ratios that denote the bank's prudent attitude. On the one hand this results in higher quality loans, on the other hand, risking less comes at the expense of profitability as we will see later.

In fact, comparing the quality of Flushing Financial's loans with those of peers, the result over the past 22 years is clear. The NCOs/Average loans ratio has always been higher for peers, especially at times of high stress such as in 2009.

Finally, regarding the maturity of loans, there are potential drivers of improvement for NIM in the coming quarters.

In Q4 2023 loans worth $225 million will be repriced and there may be an interest rate increase around 180 basis points. In 2024 and 2025 loans worth $746 million and $750 million respectively will be repriced. In this case the new rate could be up to 250 basis points higher. Of course, this is all under the condition that the Fed Funds Rate remains unchanged, which seems unlikely especially for 2025.

Deposits e net interest margin

Total deposits reached $6.81 billion, up 8.60% year-on-year but down 1.20% quarter-on-quarter due to seasonal components. The cost of deposits increased again and reached 2.94%, a rather high figure. The only positive aspect about this is that the increase was 26 basis points; in the previous two quarters it had been 39 basis points and 66 basis points. In other words, the increase is gradually slowing down.

Non-interest-bearing deposits are in sharp decline from last year, -$200 million approximately. However, this quarter the decline finally stopped and there was an increase of $2 million. This is important news, not so much because of the figure itself, but because it could mean that the bottom of non-interest-bearing deposits was reached last quarter. From now on there may be a recovery from this point of view.

Be that as it may, it is too early to declare victory as the pressure on deposits will continue in the coming quarters. CDs represent a huge slice of total deposits, about 34%, and 92% will mature within a year. This means that the new rates they will have to provide in the coming months will necessarily have to be higher. In this case, the main concern is about Q4 2023 and Q1 2024 since from mid-2024 the Fed Funds Rate has a good chance of experiencing the first cuts.

• In Q4 2023 CDs worth $371.70 million will expire at an average rate of 4.07%.
• In Q1 2024 CDs worth $415.50 million will expire at an average rate of 3.22%.

Since current CDs rates range between 5%-5.45%, there will likely still be pressure on the total cost of deposits and consequently on the net interest margin.

According to CFO Susan Cullen , if rates no longer rise, the net interest margin could begin to make up lost ground starting in Q2 2024. There is a small chance that this could also happen in Q1 2024.

Since the net interest margin went from 3.03% to 2.14% in one year, there is a lot of catching up to do. In any case, it should not be forgotten that if the margins are so low it is because this bank has a conservative approach to lending. Having a loan portfolio with such a low average LTV implies low risk but also low profitability.

Equity and shareholder remuneration

Although profitability has deteriorated consistently over the past year, tangible book value per share improved anyway and reached $22.48. CET1 remains above 10% and the leverage ratio above 8%.

This is not a foregone conclusion, not least because many peers have seen their equity being eaten up by AOCI. In this case, Flushing Financial had minimal exposure to fixed-rate securities, which is why unrealized losses are not an issue. In relation to equity they represent only 5%. But there is more.

Not only has tangible book value improved in a difficult macroeconomic environment, but in Q3 2023, 59,000 shares were also purchased at an average price of $15.88. Management strongly believes that at the current price this bank is undervalued and is willing to use cash in this way. This is a contrarian choice compared to the attitude of peers at this moment in history.

Finally, in addition to the buyback, the dividend yield of over 7% should not be forgotten. Over the past 10 years there have been few times it has reached such a figure. Beware, however, of the high payout ratio of about 79%: in case of sudden difficulties the dividend could be cut. Since 1996, however, this has never happened, not even during the 2008 financial crisis. At that time the dividend was simply kept constant but never reduced.

Conclusion

Flushing Financial is facing a complex 2023 and the price per share is reflecting all its difficulties. The net interest margin continues to decline and will continue to do so in Q4 2023, but starting next year the recovery may begin. Profit margins are lower than peers, but it is justified by a rather conservative loan portfolio. Both the average LTV and DCR are very low, and historically the quality of this bank's loans has been higher than peers.

Currently, shareholders are getting two forms of returns -- dividends and buybacks, a signal that management has full confidence in the bank's financial strength. Should 2024 be hit by a recession Flushing Financial will not benefit, but I believe it has a better chance of performing better than peers.

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