Flushing Financial Stock: low-risk loan portfolio with a 4% dividend yield (NASDAQ:FFIC)

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Introduction

In a previous article on Flushing Financial (NASDAQ: FFIC), I was in awe of the very strong loan portfolio held by this New York-based bank. The average LTV ratio of home loans was less than 40%, which theoretically means that even if the value of the underlying property drops by 60%, the bank should be able to get away with no loss. Of course, some loans have higher LTV ratios than other loans, but to see a average less than 40% is unquestionably remarkable (and only 0.3% of loans have an LTV ratio above 75%). I’ve been keeping an eye on the bank ever since and continue to be impressed with how this relatively small bank is run.

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Strong first quarter results, with very low loan loss provisions

Flushing Financial is indeed still a relatively small bank, as the balance sheet total contains less than $8.2 billion in assets while the equity value is less than $700 million. But you don’t have to be a big bank to be profitable, and Flushing was able to increase its net interest income in the first quarter of this year.

While interest income decreased from $72.1M to $71.3M, total interest expense decreased at an even faster rate, from $11.2M to $7.8M. million, resulting in an increase in net interest income of nearly 5% to $63.5 million. Thanks to a solid loan portfolio and very low LTV ratios, the bank was once again able to keep the provision for loan losses at a very low level: in the first quarter of this year, it recorded only just under $1.4 million in provisions.

income statement

FFIC Investor Relations

As the bank is a “pure” commercial bank trying to make money on the difference between the interest it pays on deposits and the interest it charges on loans, non-interest income is exceptionally low and only $1.3 million in the first quarter. To be fair, that included a $1.8 million drop in fair value adjustments to the loans, which made the result look a bit worse than it actually is. Additionally, the bank said it incurred about $4.3 million in one-time expenses in the first quarter.

Total non-interest expense has remained relatively flat (which is quite a feat given the inflationary pressure we’re seeing elsewhere that has driven up wages), and net income shows pre-tax income of 24 $.6 million. After paying taxes due on this, Flushing Financial’s reported net profit in the first quarter of this year was $18.2 million on EPS of $0.58. On an annualized basis, EPS can now be expected to top $2.30 this year as rising interest rates are expected to create additional tailwinds for Flushing. On top of that, Flushing has repurchased shares, which means the net income will have to be spread over fewer shares outstanding, which will also give performance per share a nice boost. Flushing recently announced the increase in the total size of the buyback program. The company had 0.35 million shares under the previous approval, but the board increased the total number of shares that can be repurchased by 1 million. And since the FFIC is repurchasing shares at a rate of about 20,000 shares per week, the bank would have to settle for gobbling up shares at just $22.

The current quarterly dividend is $0.22 per share, which gives a yield of about 4%. That’s pretty good considering the payout ratio is less than 40% of the winnings.

Flushing is ready to take advantage of higher interest rates

Most smaller banks seem to invest around 20-30% of their assets in cash or securities, but Flushing Financial has only invested 13.5% of its balance sheet in these assets. And that’s good because you could say that its exceptionally low average LTV ratio on the loan portfolio means that its loan portfolio should be safer than its peers because it can limit loan losses.

Non-performing loans

FFIC Investor Relations

At the end of March, only $26.3 million of loans were classified as “overdue”, which represents less than 0.4% of the total amount of outstanding loans ($6.6 billion). The total provision for loan losses already recorded by the bank exceeds $37 million, so even if all the loans defaulted and the bank excluded the assets without recovering a single dollar, the current amount of the provision for loan losses should already be sufficient to cover these losses. . But again, with low LTV ratios across the portfolio, Flushing should be in a good position to limit the fallout.

Funding Profile

FFIC Investor Relations

Flushing Financial also explained why it believes it is in a better position to enter the current cycle of rising interest rates compared to 2015. Its funding profile is now more diversified with only 24.6% of funding coming from CDs and loans. These are generally higher cost sources of funding and weigh on net interest income and therefore Flushing was not fully able to reap the benefits of the interest rate cycle in 2015 when more than 50% of its funding sources came from CDs and loans. .

According to flushing, every 50 basis point increase in interest rates without a corresponding increase in deposit rates would add $5 million per year to net interest income. If we now assume that the net interest margin increases by 100 basis points, it is easy to see that Flushing should be able to add a few tens of cents per year to its bottom line thanks to higher interest rates .

Investment thesis

I like the way Flushing Financial management is running the business. Essentially, buying a bank’s stock is buying a basket of loans and expecting that basket to be well managed by management. And it’s not always easy to find a bank whose basket of loans matches your own investment criteria.

You may hate New York real estate, but with an average LTV ratio of around 38%, Flushing Financial should be fairly insulated from a deterioration in the New York real estate market. Flushing is currently trading at a fraction of its tangible book value, and I think now is a good time to go long. I tried to write put options on FFIC but due to very low volumes and wide spreads it was not successful so I would probably have to buy the stock outright.

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