Flushing Financial Stock: Low LTV Ratio Makes It Attractive (NASDAQ:FFIC)

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Flushing Financial (NASDAQ:FFIC) is a full-service commercial bank in upstate New York where it operates 24 branches (plus one online bank).

Map of US branches in Flushing Financial

FFIC Investor Relations

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

A decent earnings profile in 2021, supported by the release of older provisions

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

income statement

FFIC Investor Relations

Flushing Financial reported noninterest income of $3.7 million and noninterest expense of $147.3 million, primarily related to personnel expenses. Noninterest income tends to be impacted by a loss from fair value adjustments, which vary annually as they are related to hedging transactions.

Income from provisioning before tax and credit losses was just under $105 million, which compares very favorably to the under $70 million result in 2020 and the $56 million in fiscal 2020 as the much higher net interest income is really boosting the results.

While the bank recorded some loan loss provisions in both 2019 and 2020, it was able to reverse some of those provisions in 2021, which increased pre-tax income by $4.9 million to $109.3 million. After tax, FFIC reported net income of just under $82 million, which translates to $2.59 per share. At the current share price, Flushing Financial is trading at just nine times its earnings for fiscal 2021, but keep in mind that the release of its loan loss provision is obviously a one-time item. That being said, the low-risk profile of the loan portfolio is likely to contain future provisions and loan losses, and even on a “normalized” basis, earnings per share would be well above $2.

The loan book is heavily weighted towards real estate, but credit quality appears high

The earnings profile looks good, but of course I also want to make sure that Flushing Financial underwrites loans with an appropriate risk profile, so I had to dig a little deeper into the balance sheet. As mentioned in the introduction, Flushing Financial’s total balance sheet exceeds $8 billion and as you can see in the image below, about $910 million is invested in either cash or securities that are meant to be relatively liquid.

balance sheet

FFIC Investor Relations

I’m mostly interested in the $6.6 billion loan book and the seemingly small provision for loan losses of just $37 million, which is just over half the loan book.

breakdown credit book

FFIC Investor Relations

A significant portion of the loan book (nearly 40%) is residential, and with an additional $1.8 billion in commercial and mixed-use real estate, the balance sheet is clear if heavily weighted toward real estate assets. We also see $93.8M in SBA loans, and these should be risk-free and maturing within the year.

A key metric for determining the quality of the loan book is looking at how many loans are actually classified as past due, as this gives a good look behind the scenes. To my great surprise, the total amount of delinquent loans exceeded $30 million. That’s not huge considering the loan book size is over $6.6 billion, but it seems low compared to the $37 million in loan loss allowances.

credit quality

FFIC Investor Relations

The main reason for the impairment is the exceptionally low LTV ratio in the real estate portfolio. The average loan-to-value ratio of the residential portfolio is just under 33%, with only a fraction of the loans having a loan-to-value ratio of over 75%. We see a similar relationship in the commercial real estate portfolio with an LTV ratio of 44% and zero loans with an LTV of over 75%.

LTV ratio

FFIC Investor Relations

To put this in simple terms, the $2.5 billion residential real estate portfolio is backed by $7.5 billion real estate. Thus, even if there were defaults on this loan portfolio, the foreclosed assets would have to be sold at a 70% loss from fair value before there is a meaningful impact on Flushing’s financial results. So, with $10.5 million in delinquent home loans, there would be an average of $30 million in real estate as collateral. This significantly reduces the risk of the bank incurring losses and explains both why loan loss provisions are traditionally low and why the total amount of allowances on the balance sheet is relatively low compared to the total amount of past loans due.

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

net credit losses

FFIC Investor Relations

investment work

Flushing Financial had never been on my radar before, but I’m growing interested in the player in the New York banking landscape. Both the dividend yield (nearly 4%) and the earnings ratio are attractive, while 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 given the very low LTV ratios on its loan book, and a premium rating seems warranted here.

I have no position in Flushing Financial but the bank has been added to my watch list as the quality of the assets stands out.

About Paige McCarthy

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