Flushing Financial Stock: Low LTV ratio makes it attractive (NASDAQ:FFIC)

Introduction

Flushing Financial (NASDAQ: FFIC) is a full-service commercial bank in New York State where it operates 24 branches (as well as an online bank).

The bank’s balance sheet now exceeds $8 billion, making it one of the major regional banks and I wanted to take a closer look at this bank’s earnings profile and loan portfolio. I was pleasantly surprised as the average LTV ratio of the real estate portfolio is exceptionally low, which adds a layer of security to the stock as an investable asset.

A decent remuneration profile in 2021, helped by the resumption of old provisions

In 2021, Flushing Financial saw its net interest income increase by more than 25% thanks to improved margins and an expanded balance sheet as FFIC acquired a small bank in 2020. With net interest income of nearly $248 million, the bank’s NII is more than 50% higher than in 2019.

Flushing Financial reported non-interest income of $3.7 million and non-interest expense of $147.3 million, mostly related to personnel expenses. Non-interest income tends to be held back by a loss from fair value adjustments which fluctuate on an annual basis as these relate to hedges.

Pre-tax and pre-loan loss provision income was just under $105 million, which compares very favorably to the under $70 million result in 2020 and $56 million in fiscal 2020 , because the much higher net interest income really boosts results.

While the bank had to record provisions for loan losses in 2019 and 2020, it was able to reverse some of these provisions in 2021, which increased pre-tax income from $4.9M to $109.3M . After tax, the FFIC reported net income of just under $82 million, which equates to $2.59 per share. At the current share price, Flushing Financial is trading at just nine times its fiscal 2021 earnings, but bear in mind that the write-off of loan loss provisions is obviously a one-time item. That being said, the low risk profile of the loan portfolio will likely limit future provisions and loan losses and even on a “normalized” basis, EPS would clearly exceed $2/share.

The loan portfolio is heavily skewed towards real estate, but loan quality appears to be high

The earnings profile looks good, but obviously I also want to make sure that Flushing Financial is underwriting loans with a decent risk profile, so I had to dive a little deeper into the balance sheet. As mentioned in the introduction, the total size of Flushing Financial’s balance sheet exceeds $8 billion, and as you can see in the image below, approximately $910 million is invested in cash or securities believed to be relatively liquids.

I’m mainly interested in the loan portfolio of $6.6 billion and the low loan loss provision of only $37 million, which is just over half of the loan portfolio.

A substantial portion of the loan portfolio (nearly 40%) is made up of residential real estate and with an additional $1.8 billion in commercial and mixed-use real estate, it’s clear that the balance sheet is heavily weighted towards real estate assets. . We are also seeing $93.8 million in SBA loans and these should be risk free and unfold over the course of the year.

An important metric for determining the quality of the loan portfolio is to look at how many loans are actually classified as “overdue”, as this gives a good look under the hood. To my surprise, the total amount of overdue loans exceeded $30 million. That’s not huge given the size of the loan portfolio of over $6.6 billion, but it seems small compared to the $37 million in loan loss provisions.

The main reason for the provision for loan losses is the exceptionally low LTV ratio of the real estate portfolio. The average LTV ratio of the residential portfolio is around 33%, with only a fraction of loans having an LTV ratio above 75%. A similar ratio is observed in the commercial real estate portfolio with an LTV ratio of 44% and zero loans with an LTV above 75%.

To explain this in simple terms: the $2.5 billion residential portfolio is backed by $7.5 billion of properties. So even if there are defaults in this loan portfolio, the foreclosed assets would need to be sold at a loss of 70% of their fair value before seeing a noticeable impact on Flushing’s financial results. So, with $10.5 million in residential loans in arrears, there would be an average of $30 million in real estate collateral. This greatly reduces the risk of the bank being exposed to losses, which is why loan loss provisions have traditionally been low and why the total amount of provisions on the balance sheet is relatively small compared to the total amount of past loans. due.

And as you can see below, Flushing Financial has a long history of lower net write-offs than the industry.

Investment thesis

Flushing Financial hadn’t appeared on my radar before, but I’m getting more and more interested in the player in the New York banking landscape. The dividend yield (almost 4%) and earnings ratio are attractive as the bank trades at just 1.1 times its tangible book value. All of these metrics make sense for a “normal” bank, but I think Flushing Financial is safer than most of its peers due to very low LTV ratios in its loan book and a premium valuation seems warranted here.

I have no position in Flushing Financial, but the bank has been added to my watchlist because the quality of the assets stands out.