Earnings of Flushing Monetary Company (NASDAQ:FFIC) will doubtless plunge this 12 months as a result of the online curiosity margin will proceed to say no by means of not less than the mid of 2023. Then again, subdued mortgage development will doubtless help the underside line. General, I am anticipating Flushing Monetary to report earnings of $1.56 per share for 2023, down 37% year-over-year. The December 2023 goal worth suggests a reasonable upside from the present market worth. Additional, Flushing is providing a excessive dividend yield at a sustainable payout ratio. Primarily based on the entire anticipated return, I am adopting a purchase score on FFIC inventory.
Declining Margin Pattern to Reverse in Late 2023
Flushing Monetary’s internet curiosity margin dipped by 37 foundation factors within the fourth quarter after declining by 28 foundation factors within the third quarter of the 12 months. The corporate’s deposits re-price in a short time whereas loans are slower to re-price, which is why the margin was inversely proportional to rate of interest adjustments in 2022. As soon as the up-rate cycle ends, the margin can cease declining. It’s because the majority of deposit re-pricing will finish quickly after the final charge hike, however mortgage repricing will proceed for a very long time. Nonetheless, the next two causes will constrain margin enlargement even after charges plateau.
- Deterioration of the deposit e-book composition. Rising rates of interest should not the one issue contributing to strain on deposit prices. Flushing Monetary’s deposit combine deteriorated considerably final 12 months. Non-interest-bearing deposits dipped by 4.8%, whereas pricey certificates of deposits surged by 61.2%, as talked about within the earnings launch.
- Glacial pace of mortgage repricing. Solely 40% of the portfolio will get re-priced by means of 2024, as talked about within the earnings presentation.
The outcomes of the administration’s charge sensitivity evaluation given within the third quarter’s 10-Q submitting present {that a} 200-basis factors hike in rates of interest may lower the online curiosity revenue by 17.8% over twelve months. (The annual 10-Ok submitting has not been launched as but.)
3Q 2022 10-Q Submitting
I am anticipating the Federal Reserve to extend the fed funds charge by 50 foundation factors within the first half of 2023 earlier than holding the speed regular within the second half of the 12 months. Contemplating these elements, I am anticipating the margin to dip by 60 foundation factors within the first 9 months of 2023, after which rise by 5 foundation factors within the final quarter of the 12 months.
Mortgage Development to Decelerate as a result of Inside and Exterior Elements
Flushing Monetary’s mortgage portfolio declined by 0.3% within the fourth quarter of 2022, resulting in full-year mortgage development of 4.4%. I am anticipating mortgage development in 2023 to be decrease than final 12 months as a result of sure inner and exterior elements. Firstly, the administration talked about within the presentation that it intends on being extra selective in lending. The administration plans on specializing in mortgage pricing as a substitute. Secondly, the common mortgage charges will likely be a lot increased this 12 months relative to final 12 months, which is able to damage the demand for residential loans. The residential mortgage section made up a large 11% of complete loans on the finish of December 2022.
Flushing Monetary operates within the New York metropolitan space, particularly Queens, Brooklyn, Manhattan, and Lengthy Island. As proven beneath, the labor markets in these areas have nonetheless not recovered from the pandemic, in contrast to the remainder of the nation. Subsequently, mortgage development in 2023 will doubtless be decrease than in earlier years.
On the plus aspect, Flushing Monetary plans to open a Benson Hurst department in 2023, which is able to increase the Asian banking footprint, as talked about within the convention name. Additional, Flushing had a mortgage pipeline of $252.2 million on the finish of December 2022, as talked about within the earnings launch. Though the pipeline is down 41% year-over-year, it is nonetheless not unhealthy as $252 million is round 3.6% of the loans excellent.
Contemplating these elements, I am anticipating the mortgage portfolio to develop by 3% in 2023. Additional, I am anticipating different stability sheet objects to develop considerably in keeping with loans. The next desk exhibits my stability sheet estimates.
| Monetary Place | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Web Loans | 5,531 | 5,750 | 6,660 | 6,601 | 6,894 | 7,103 |
| Development of Web Loans | 7.3% | 4.0% | 15.8% | (0.9)% | 4.4% | 3.0% |
| Different Incomes Property | 855 | 831 | 706 | 835 | 809 | 834 |
| Deposits | 4,916 | 5,022 | 6,091 | 6,334 | 6,437 | 6,632 |
| Borrowings and Sub-Debt | 1,251 | 1,237 | 1,021 | 816 | 1,147 | 1,182 |
| Widespread fairness | 549 | 580 | 619 | 680 | 677 | 698 |
| Guide Worth Per Share ($) | 19.1 | 20.2 | 21.1 | 21.5 | 22.3 | 22.9 |
| Tangible BVPS ($) | 18.6 | 19.6 | 20.4 | 20.9 | 21.6 | 22.3 |
| Supply: SEC Filings, Writer’s Estimates(In USD million until in any other case specified) | ||||||
Regular Provisioning Seemingly Regardless of Headwinds
The asset high quality of Flushing Monetary’s mortgage portfolio considerably worsened final 12 months. Consequently, allowances dipped to 124.9% of non-performing loans by the top of December 2022 from 248.7% on the finish of December 2021. For my part, the present reserve place is a bit tight, particularly in mild of the potential of a light recession. Nonetheless, I am not too involved as a result of round 88% of the mortgage portfolio is secured by actual property, as talked about within the convention name. Additional, the loan-to-value ratio is kind of comfy at simply 37%.
Contemplating these elements, I am anticipating the online provision expense to make up 0.08% of complete loans in 2023, which is similar as the common for the final 5 years.
Earnings More likely to Plunge by 37%
The continued fall within the internet curiosity margin will doubtless be the chief contributor to an earnings decline this 12 months. Then again, below-average mortgage development will doubtless help the underside line. General, I am anticipating Flushing Monetary to report earnings of $1.56 per share for 2023, down 37% year-over-year. The next desk exhibits my revenue assertion estimates.
| Revenue Assertion | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
| Web curiosity revenue | 167 | 162 | 195 | 248 | 244 | 184 |
| Provision for mortgage losses | 1 | 3 | 23 | (5) | 5 | 6 |
| Non-interest revenue | 10 | 9 | 11 | 4 | 10 | 36 |
| Non-interest expense | 112 | 115 | 138 | 147 | 144 | 151 |
| Web revenue – Widespread Sh. | 55 | 41 | 35 | 82 | 77 | 48 |
| EPS – Diluted ($) | 1.92 | 1.44 | 1.18 | 2.59 | 2.50 | 1.56 |
| Supply: SEC Filings, Earnings Releases, Writer’s Estimates(In USD million until in any other case specified) | ||||||
My estimates are based mostly on sure macroeconomic assumptions that will not come to fruition. Subsequently, precise earnings can differ materially from my estimates.
FFIC Seems Undervalued
Flushing Monetary is providing a excessive dividend yield of 5.1% on the present quarterly dividend charge of $0.22 per share. The earnings and dividend estimates recommend a payout ratio of 56% for 2023, which is above the five-year common of 51%. Nonetheless, 56% remains to be sustainable; subsequently, the dividend seems safe.
I’m utilizing the historic price-to-tangible e-book (“P/TB”) and price-to-earnings (“P/E”) multiples to worth Flushing Monetary. The inventory has traded at a median P/TB ratio of 0.96x previously, as proven beneath.
| FY19 | FY20 | FY21 | FY22 | Common | ||
| T. Guide Worth per Share ($) | 19.6 | 20.4 | 20.9 | 21.6 | ||
| Common Market Value ($) | 21.6 | 13.7 | 22.3 | 21.8 | ||
| Historic P/TB | 1.10x | 0.67x | 1.07x | 1.01x | 0.96x | |
| Supply: Firm Financials, Yahoo Finance, Writer’s Estimates | ||||||
Multiplying the common P/TB a number of with the forecast tangible e-book worth per share of $22.3 provides a goal worth of $21.4 for the top of 2023. This worth goal implies a 24.7% upside from the March 9 closing worth. The next desk exhibits the sensitivity of the goal worth to the P/TB ratio.
| P/TB A number of | 0.76x | 0.86x | 0.96x | 1.06x | 1.16x |
| TBVPS – Dec 2023 ($) | 22.3 | 22.3 | 22.3 | 22.3 | 22.3 |
| Goal Value ($) | 17.0 | 19.2 | 21.4 | 23.7 | 25.9 |
| Market Value ($) | 17.2 | 17.2 | 17.2 | 17.2 | 17.2 |
| Upside/(Draw back) | (1.2)% | 11.8% | 24.7% | 37.7% | 50.7% |
| Supply: Writer’s Estimates |
The inventory has traded at a median P/E ratio of round 11.0x previously, as proven beneath.
| FY19 | FY20 | FY21 | FY22 | Common | ||
| Earnings per Share ($) | 1.44 | 1.18 | 2.59 | 2.50 | ||
| Common Market Value ($) | 21.6 | 13.7 | 22.3 | 21.8 | ||
| Historic P/E | 15.0x | 11.6x | 8.6x | 8.7x | 11.0x | |
| Supply: Firm Financials, Yahoo Finance, Writer’s Estimates | ||||||
Multiplying the common P/E a number of with the forecast earnings per share of $1.56 provides a goal worth of $17.2 for the top of 2023. This worth goal implies a 0.1% draw back from the March 9 closing worth. The next desk exhibits the sensitivity of the goal worth to the P/E ratio.
| P/E A number of | 9.0x | 10.0x | 11.0x | 12.0x | 13.0x |
| EPS 2023 ($) | 1.56 | 1.56 | 1.56 | 1.56 | 1.56 |
| Goal Value ($) | 14.0 | 15.6 | 17.2 | 18.7 | 20.3 |
| Market Value ($) | 17.2 | 17.2 | 17.2 | 17.2 | 17.2 |
| Upside/(Draw back) | (18.3)% | (9.2)% | (0.1)% | 9.0% | 18.1% |
| Supply: Writer’s Estimates |
Equally weighting the goal costs from the 2 valuation strategies provides a mixed goal worth of $19.3, which means a 12.3% upside from the present market worth. Including the ahead dividend yield provides a complete anticipated return of 17.4%. The massive anticipated return exhibits that Flushing Monetary is fairly undervalued and the market has overreacted to the prospects of an earnings decline. Primarily based on the entire anticipated return, I’m adopting a purchase score on Flushing Monetary Company.
