Flushing Financial Corporation Reports 1Q23 GAAP EPS of $0.17 and Core EPS of $0.10; Deposits Increase Sequentially and Year-Over-Year; Liquidity Remains Strong Outlines Action Plan to Enhance Business Model Resilience and Drive Profitability in Curr...

Flushing Financial Corporation Reports 1Q23 GAAP EPS of $0.17 and Core EPS of $0.10; Deposits Increase Sequentially and Year-Over-Year; Liquidity Remains Strong Outlines Action Plan to Enhance Business Model Resilience and Drive Profitability in Current Environment

John R. Buran, President and CEO Commentary

UNIONDALE, N.Y., April 25, 2023 (GLOBE NEWSWIRE) -- Strong Credit Quality Despite Loss on One Singular Relationship. Results for the quarter were impacted by our decision to fully charge off a $9.2 million business credit placed on non-accrual in 2Q22. This credit was a participation where the domestic borrower had a significant customer who shipped its product internationally and was impacted by world events. Existing credit protection became more questionable during the quarter which led to the decision to charge-off. Consistent with our long-standing history of conservative underwriting, the remainder of the credit portfolio continued to perform well as delinquencies improved 16 basis points and criticized and classified assets declined QoQ. NIM Outlook; Solid Capital and Liquidity. While rising rates temporarily compress our net interest margin, the NIM should begin to rebound, on a lagged basis, after the Fed stops raising rates. To limit additional margin squeeze, we moved closer to interest rate neutral, achieving approximately 40% of our target for 2023 in the first quarter. Capital continues to be strong with a TCE1 of 7.73%. Liquidity is solid with $3.7 billion of availability while uninsured and uncollateralized deposits are a low $1.1 billion or 16.2% of total deposits.

1 Tangible Common Equity (“TCE”)/Total Assets (“TA”) 2 See “Reconciliation of GAAP Earnings and Core Earnings”, “Reconciliation of GAAP Revenue and Pre-Provision Pre-Tax Net Revenue”, and “Reconciliation of GAAP Net Interest Margin to Core Net Interest Income and Net Interest Margin.” 3 Net Interest Margin (“NIM”) Fully Taxable Equivalent (“FTE”)

• Average total deposits increased 2.0% QoQ and 6.2% YoY to $6.8 billion, with core deposits comprising 75.3% of total average deposits; opened new Hauppauge branch during the quarter
• Period end net loans declined slightly QoQ and increased 4.5% YoY; loan closings were $173.5 million down 22.9% QoQ and 47.3% YoY; the yield on closings increased 91 bps QoQ and 357 bps YoY to 7.01%
• Loan pipeline decreased 59.9% YoY, but increased 5.5% QoQ to $266.1 million reflecting higher rates and greater client selectivity
• Net interest margin FTE decreased 43 bps QoQ and 109 bps YoY to 2.27%; Core net interest margin FTE decreased 38 bps QoQ and 106 bps YoY to 2.25%; The decline in GAAP and Core NIM was primarily driven by our liability sensitive balance sheet resulting in liabilities repricing faster than assets; after a lag, the NIM is expected to expand when the Fed stops raising rates
• Achieved 40% of our goal of moving towards interest rate neutral in 1Q23. These actions include adding $200 million hedge on investments, $50 million (net) of funding swaps, increasing floating rate securities, and extending funding
• NPAs declined to $42.2 million from $53.4 million at 4Q22, but increased from $14.1 million at 1Q22
• Provision for credit losses was $7.5 million in 1Q23 compared to $1.4 million in 1Q22; net charge-offs were $9.2 million in 1Q23 compared to $0.9 million in 1Q22
• Tangible Common Equity to Tangible Assets was 7.73%, down from 7.82% at 4Q22; the change in accumulated other comprehensive loss, net of taxes negatively impacted this ratio by 2 bps in 1Q23; our swaps portfolio serves as a partial offset to the value of the AFS securities portfolio when rates change
• Repurchased 159,516 shares at an average price of $19.14

1 See Reconciliation of GAAP Earnings and Core Earnings

Net interest income totaled $45.3 million in 1Q23 compared to $54.2 million in 4Q22, $61.2 million in 3Q22, $64.7 million in 2Q22, and $63.5 million in 1Q22.

• Net interest margin, FTE (“NIM”) of 2.27% decreased 109 bps YoY and 43 bps QoQ
• Prepayment penalty income from loans and securities, net reversals and recoveries of interest from nonaccrual loans, net gains and losses from fair value adjustments on qualifying hedges, and purchase accounting accretion totaled $1.1 million (6 bps to the NIM) in 1Q23 compared to $2.4 million (12 bps) in 4Q22, $2.2 million (11 bps) in 3Q22, $2.6 million (13 bps) in 2Q22, and $2.6 million (14 bps) in 1Q22
• Excluding the items in the previous bullet, net interest margin was 2.21% in 1Q23, 2.58% in 4Q22, 2.96% in 3Q22, and 3.22% in both 2Q22 and 1Q22
• In order to move more towards a neutral interest rate risk position, the following actions were taken:
  • Added $200 million of hedges against the investment portfolio converting securities yielding 1.90% into assets yielding 3.41%
  • Purchases $250.0 million of funding derivatives locking in funding at a weighted average cost of 3.72% with a duration approximately 3.2 years
  • Extended funding through FHLB advances totaling $71.7 million at 4.05%, with an average duration of 4.0 years
  • Purchased $66.7 million of floating (reprice within 90 days) rate securities with an initial weighted average yield of 6.45%
• The totality of these actions equates to approximately 40% of the goal of moving towards interest rate neutral
• Additionally, the balance sheet, as of March 31, 2023, consists of:        
  • Approximately $1.6 billion of assets were floating or swapped into floating rate assets
  • Funding derivatives totaled $921.5 million with $621.5 million effective at 2.53% for 2.4 years and $300.0 million forward starting at 1.80% with a remaining term of 2.7 years; this strategy was started in 2018
  • The Company has $2.5 billion of protection in place against a rising rate environment through floating assets and derivative strategy

The Company recorded a provision for credit losses of $7.5 million in 1Q23 compared to a benefit for credit losses of $12 thousand in 4Q22, a provision for credit losses of $2.1 million in 3Q22, $1.6 million in 2Q22, and $1.4 million in 1Q22.

• Net charge-offs (recoveries) were $9.2 million in 1Q23 (54 bps of average loans), $0.8 million in 4Q22 (5 bps of average loans), $0.3 million in 3Q22 (2 bps of average loans), $(0.5) million in 2Q22 ((3) bps of average loans), and $0.9 million in 1Q22 (6 bps of average loans)
• 1Q23 net charge-offs were primarily related to a commercial business relationship that was placed on nonaccrual in 2Q22

Noninterest income (loss) was $6.9 million in 1Q23, $(7.7) million in 4Q22, $9.0 million in 3Q22, $7.4 million in 2Q22, and $1.3 million in 1Q22.

• Noninterest income included net gains (losses) from fair value adjustments of $2.6 million in 1Q23 ($0.06 per share, net of tax), $(0.6) million in 4Q22 ($(0.02) per share, net of tax), $5.6 million in 3Q22 ($0.13 per share, net of tax), $2.5 million in 2Q22 ($0.06 per share, net of tax), and $(1.8) million in 1Q22 ($(0.04) per share, net of tax)
• Loss on the sale of securities was $10.9 million ($0.27 per share, net of tax) in 4Q22 as the Company sold $84.2 million of mortgage-based securities with an approximate yield of 1.17%; proceeds were primarily reinvested in 1Q23 into floating rate securities that have a yield that approximates 6.40%
• Life insurance proceeds were $0.3 million ($0.01 per share) in 4Q22 and $1.5 million ($0.05 per share) in 2Q22
• Absent all above items and other immaterial adjustments, core noninterest income was $4.3 million in 1Q23, up 37.4% YoY and 21.6% QoQ; investment product sales were a significant driver of the YOY and QoQ increase

Noninterest expense totaled $37.7 million in 1Q23 (a decrease of 2.8% YoY, but an increase of 11.7% QoQ) compared to $33.7 million in 4Q22, $35.6 million in 3Q22, $35.5 million in 2Q22, and $38.8 million in 1Q22.

• Given the challenging rate environment, management continues to actively review all noninterest expenses
• Salaries and employee benefits include $1.7 million and $1.4 million benefit from Employee Retention Tax Credit refunds in 1Q23 and 4Q22, respectively, and $2.8 million benefit from a lower discount rate for certain benefit plans in 4Q22
• Other operating expenses include $0.6 million reduction in reserves for unfunded commitments in 3Q22
• Seasonal compensation expense was $4.1 million and $4.3 million in 1Q23 and 1Q22, respectively
• Excluding the effects of other immaterial adjustments, core operating expenses were $37.6 million in 1Q23, down 2.8% YoY but up 11.8% QoQ; excluding the Employee Retention Tax Credit refund and the benefit from the lower discount rate in 4Q22, 1Q23 and 4Q22 core noninterest expense would have been $39.3 million and $37.8 million, respectively
• GAAP noninterest expense to average assets was 1.78% in 1Q23, 1.58% in 4Q22, 1.69% in 3Q22, 1.73% in 2Q22, and 1.93% in 1Q22

The provision for income taxes was $1.8 million in 1Q23 compared to $2.6 million in 4Q22, $9.0 million in 3Q22, $9.9 million in 2Q22, and $6.4 million in 1Q22.

• The effective tax rate was 25.9% in 1Q23, 20.0% in 4Q22, 27.7% in 3Q22, 28.4% in 2Q22, and 26.1% in 1Q22
• The 4Q22 effective tax rate declined due to preferential tax items having a larger impact due to lower levels of pre-tax income
• The 2Q22 effective tax rate includes a loss of certain state and city tax deductions and a resolution of certain examinations by taxing authorities

Average loans were $6.9 billion, an increase of 4.4% YoY and down 0.1% QoQ.

• Maintain the credit strategy of loans secured by real estate with an emphasis on rent regulated multifamily
• Period end net loans totaled $6.9 billion, up 4.5% YoY, but down 0.4% QoQ
• Total loan closings were $173.5 million in 1Q23, $225.2 million in 4Q22, $463.7 million in 3Q22, $503.8 million in 2Q22, and $329.3 million in 1Q22; the loan pipeline was $266.1 million at March 31, 2023, down 59.9% YoY, but up 5.5% QoQ
• The diversified loan portfolio is over 88% collateralized by real estate with an average loan-to-value ratio of