Earnings of Flushing Monetary Company (NASDAQ:FFIC) will doubtless plunge this 12 months as a result of the web curiosity margin will proceed to say no via no less than the mid of 2023. Alternatively, subdued mortgage progress will doubtless help the underside line. Total, 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 average upside from the present market worth. Additional, Flushing is providing a excessive dividend yield at a sustainable payout ratio. Primarily based on the overall anticipated return, I am adopting a purchase score on FFIC inventory.

Declining Margin Development to Reverse in Late 2023

Flushing Monetary’s web 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 is because the majority of deposit re-pricing will finish quickly after the final fee hike, however mortgage repricing will proceed for a very long time. Nonetheless, the next two causes will constrain margin enlargement even after charges plateau.

1. Deterioration of the deposit ebook composition. Rising rates of interest aren’t the one issue contributing to stress 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 release.
2. Glacial pace of mortgage repricing. Solely 40% of the portfolio will get re-priced via 2024, as talked about within the earnings presentation.

The outcomes of the administration’s fee sensitivity evaluation given within the third quarter’s 10-Q filing present {that a} 200-basis factors hike in rates of interest may lower the web curiosity earnings by 17.8% over twelve months. (The annual 10-Ok submitting has not been launched as but.)

I am anticipating the Federal Reserve to extend the fed funds fee 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 Progress to Decelerate because 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 progress of 4.4%. I am anticipating mortgage progress in 2023 to be decrease than final 12 months because of sure inside 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 an alternative. Secondly, the common mortgage charges will probably be a lot greater this 12 months relative to final 12 months, which can harm the demand for residential loans. The residential mortgage phase made up a large 11% of whole 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 under, the labor markets in these areas have nonetheless not recovered from the pandemic, not like the remainder of the nation. Subsequently, mortgage progress 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 can increase the Asian banking footprint, as talked about within the conference call. 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 gadgets to develop considerably according to loans. The next desk reveals my stability sheet estimates.

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Regular Provisioning Possible Regardless of Headwinds

The asset high quality of Flushing Monetary’s mortgage portfolio considerably worsened final 12 months. Because of this, 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 gentle of the potential for 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 web provision expense to make up 0.08% of whole loans in 2023, which is identical as the common for the final 5 years.

Earnings More likely to Plunge by 37%

The continued fall within the web curiosity margin will doubtless be the chief contributor to an earnings decline this 12 months. Alternatively, below-average mortgage progress will doubtless help the underside line. Total, I am anticipating Flushing Monetary to report earnings of $1.56 per share for 2023, down 37% year-over-year. The next desk reveals my earnings assertion estimates.

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My estimates are primarily based 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 fee 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; due to this fact, the dividend seems safe.

I’m utilizing the historic price-to-tangible ebook (“P/TB”) and price-to-earnings (“P/E”) multiples to worth Flushing Monetary. The inventory has traded at a mean P/TB ratio of 0.96x up to now, as proven under.

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Multiplying the common P/TB a number of with the forecast tangible ebook 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 reveals the sensitivity of the goal worth to the P/TB ratio.

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The inventory has traded at a mean P/E ratio of round 11.0x up to now, as proven under.

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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 reveals the sensitivity of the goal worth to the P/E ratio.

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Equally weighting the goal costs from the 2 valuation strategies provides a mixed goal worth of $19.3, which suggests a 12.3% upside from the present market worth. Including the ahead dividend yield provides a complete anticipated return of 17.4%. The big anticipated return reveals that Flushing Monetary is fairly undervalued and the market has overreacted to the prospects of an earnings decline. Primarily based on the overall anticipated return, I’m adopting a purchase score on Flushing Monetary Company.