Flushing Financial Corporation

Good day and welcome to Flushing Financial Corporation's third quarter 2020 earnings conference call. Hosting the call today are John Buren, President and Chief Executive Officer, Susan Cullen, Senior Executive Vice President, Treasurer and Chief Financial Officer, and Frank Korzyk-Kwinski, Senior Executive Vice President and Chief of Real Estate Lending. Today's call is being recorded and should you need assistance, please signal conference specialists or pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on the touch-turn phone. To withdraw your question, please press star, then two. A copy of the earnings press release and slide presentation that the company will be referencing today are available on its investor relations website at flushingbank.com. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risk, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statements. Such factors are included in the company's filings with the U.S. Securities and Exchange Commission. Bushing Financial Corporation does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and for reconciliation to GAAP, please refer to the earnings release and or the presentation. I now like to introduce Mr. John Buren, President and Chief Executive Officer, who will provide an overview of the strategy and results. Mr. Buren, the floor is yours, sir.

Thank you. Good morning, everyone, and thank you for joining us for our third quarter 2020 earnings call. I want to start out by thanking our employees for their tireless work in assisting our customers and communities as we continue to navigate these unprecedented times due to the COVID-19 pandemic. The safety and health of our employees and customers remains our highest priority. On today's call, I will discuss our third quarter highlights as well as provide an update on the merger with Empire Bancorp, which has been approved by all parties and is scheduled to close on or about October 31st. Then, our CFO, Susan Cullen, will provide greater detail on our financial performance, credit quality, capital, and liquidity profile. Following our prepared remarks, We will address your questions along with our Chief Real Estate Lending Officer, Frank Korzekwinski. Beginning on slide three, we realized a strong quarter of operating results. Our third quarter gap earnings totaled 50 cents per share, and we achieved record core earnings of 56% from the prior quarter. We achieved record net interest income for the second consecutive quarter as the company capitalized on the low interest rate environment, resulting in cost of funds decreasing 10 basis points. At the same time, the yield on interest earning assets increased. As a result, net interest margin expanded 13 basis points from the previous quarter. We anticipate that our cost of funds will further decline during the fourth quarter as $315 million of retail certificates of deposit are scheduled to mature at an average rate of 110 basis points compared to a current one-year CD rate of 60 basis points. We expect asset yields to see limited reductions. Credit quality continues to be one of our key strengths and a competitive differentiator. Forbearances granted to our customers during these tumultuous times have decreased from a peak of 1.5 billion to approximately 846 million. Over 97% of the forbearances are secured by mortgages with a loan to value of approximately 46%. This collateral protection is better than the total real estate portfolio of 88% collateralized mortgages. As the economic concerns escalated in the second quarter, we generally granted forbearances for a term of six months. Therefore, we expect a significant reduction in forbearances during the fourth quarter. Through September 30th, approximately 80% of loans we expected to return to full payment status have done so. With the remaining 20%, we generally granted a new forbearance for terms that are to the company's advantage. For example, if a forbearance was for a full P&I, the new forbearance would be a deferral of the principal with the customer making interest payments. The provision for credit losses was reduced by 74% compared to the provision for the previous quarter and totaled 2.5 million. The allowance for credit losses stands at 65 basis points of gross loans and 155% of non-performing loans. As a reminder, our maximum charge-offs were only 64 basis points in the midst of the Great Recession. while the industry peak charge-offs were nearly five times our experience. I'm excited to share that Empire Bancorp shareholders approved the merger yesterday. As stated earlier, the merger is expected to close on or about October 31st. The credit quality of Empire remains strong with no loans greater than 90 days past due and less than a million dollars in loans greater than 30 days past due. As of September 30th, Empire has $120 million in active forbearance agreements outstanding. The system conversion is scheduled for the middle of November. We're excited about this combined bank, which will be a leading bank franchise on Long Island. Overall, we made good progress in the third quarter to achieve our strategic objectives, which include managing our cost of funds and continuing to improve the funding mix, increasing net interest income by leveraging loan pricing opportunities and portfolio mix, enhancing core earnings power by improving scalability and efficiency, managing credit risk, and remaining well capitalized under all stress test scenarios. Slide 4 shows the trend resulting in record net interest income this quarter. The net interest margin increased 13 basis points quarter over quarter and 63 basis points year over year. The increase in net interest income was primarily due to the decrease in the cost of funds of 10 basis points quarter over quarter and 105 basis points year over year. Additionally, the yield on interest-earning assets increased three basis points from the second quarter. On slide five, I detail management's focus during the third quarter. With loan activity somewhat muted for much of the quarter, we focus on maintaining yield on interest-earning assets. Gross loans decreased 1%, while net average interest-earning assets decreased approximately 2%. We took advantage of the opportunity discussed on previous calls to reduce our cost of funds. We decreased funding costs 10 basis points from the second quarter and 105 basis points versus the same quarter in 2019. During the quarter, we further reduced forbearances and continued site inspections for a cross-section of our retail properties, noting the stores were open, well-stocked, and the surrounding area was active. On slide six and seven, we provide details on outstanding forbearances. As I mentioned earlier, I'm pleased to highlight that total forbearances have decreased to 846 million from a peak of 1.5 billion. As of the end of September, these amounted to approximately 14% of the portfolio. 97% of these loans are secured by real estate with an average loan to value of 46%. Less than half of our forbearances are in more stressed industries like retail or hotels that have been shut down during the onset of the pandemic but began to open during the third quarter. The remainder of our forbearances include multifamily, medical offices, and other general commercial real estate that we judge more prone to a speedier recovery. On slide eight, we show that over 749 million of forbearances are scheduled to expire in the fourth quarter. Total projected expirations are 98% secured by mortgages. For this reason, we believe there is minimal loss content in the portfolio. With that, let me now turn the call over to Susan to provide additional details on our financial performance and asset quality.

Thank you, John. I'll begin on slide nine. Non-performing loans total $25 million, which is 42 basis points of gross loans, and net charge-offs total $837,000, or six basis points of average loans for the quarter. Loan-to-value on real estate dependent loans amounted to 38% as of September 30th, and the average loan-to-value for non-performing loans collateralized by real estate was 31%. Slide 10 shows 90-day delinquencies as a percentage of loans originated by year. Our credit discipline has remained consistent for the past 10 years as we tightened underwriting criteria back in 2009. As a result, in the last 10 vintage years, we have only 24 90-day-plus delinquencies. Turning to slide 11, we provide an update on our third quarter allowance for loan losses. In the third quarter, we recorded a provision of $2.5 million, a reduction of 74% compared to the provision of nearly $10 million in the second quarter. For the allowance evaluation as of September 30, The forecast showed a tough economy with elevated unemployment and subdued GDP. We continue to use the Oxford Economic Forecast Model. This model assumes it will take four quarters for our losses to return to our historical norms. Our credit discipline continues to serve us well in the current environment and will continue to stay close to our customers and manage that carefully. As highlighted on slide 12, our coverage ratio has improved significantly since the financial crisis in 2008. Our solid credit quality metrics have resulted in our coverage ratio increasing to 155% as of September 30, 2020, from 28% at December 31, 2008. The coverage ratio decreased from the second quarter due to a slight uptick in the amount of non-performing loans. We remain confident that there is a minimal loss content in the loan portfolio. Importantly, we continue to underwrite each loan using a cap rate in the mid-fives and stress test each loan. Continuing on slide 13, we note our charge-offs during the Great Recession were significantly better than the industry, and that performance continued through the second quarter of 2020. We continue to actively manage our loan portfolios to identify and resolve problem loans, recording charge-offs early in the delinquency process. As a reminder, we are a historical seller of non-performing loans. Since the Great Recession, our construction loans have decreased by approximately 38% and mixed use by 21%, while the loans to values on loans have improved to 38% from 48% heading into the Great Recession. As we continue to strengthen our balance sheet, we are mindful of maintaining asset quality. Based on the most current data over two decades, we have demonstrated superior credit metrics. Our maximum charge-offs were 64 basis points in the midst of the Great Recession, while industry peak was nearly five times that. As detailed on slide 14, we believe the credit outlook for the company remains positive. The company has a strong credit history and an active forbearance program. Our loan portfolio has retained its historical, conservative nature and remains 88% collateralized by real estate with an average LTV of 38%. Loans liquid greater than 90 days amount to only 38 basis points of gross loans. Our forbearances declined 44% to $846 million as of September 30th, and the pace of forbearance requests has steadily declined. We remain cautiously optimistic as the New York metro area has entered into phase four with positive results thus far, which is important as over 90% of the loan portfolio is situated in the metropolitan New York area. On slide 15, we detail the opportunity to further reduce funding costs in support of our NIM. We have approximately $780 million of retail CDs scheduled to mature through the third quarter of 2021 at a weighted average cost of 124 basis points. At the end of the third quarter, retail CDs currently represent 16% of total deposits. As shown on the right-hand side, current replacement funding costs are significantly lower than maturing CD rates. And we're using wholesale market to strategically reduce cost of funds. Importantly, we believe there is protection to limit the downward pressure on asset yields. As described on slide 16, we expect reduced movement in asset yields. Barring movement in the macro interest rate environment, we believe the floating rate portfolio of $599 million will not further reprice. Additionally, approximately 21% of the real estate portfolio reprices annually, and there are floors associated with individual loans. Moving to slide 17, non-interest expense increased $1 million or 4% quarter over quarter. The efficiency ratio was 55.4% compared to 54.9% the last quarter and 58.9% a year ago. The ratio of non-interest expense to average assets increased 1.69% for the third quarter of 2020 compared to 1.49% for the third quarter of 2019. due to the growing business and the realization of an FDIC assessment credit in the third quarter of 2019. The company has historically maintained a relatively stable ratio of non-interest expense to average assets. Included in the non-interest expense for the third quarter is $400,000 of legal expense related to the Empire merger. The focus on managing expenses and improving the NIMB assisted us in achieving a lower efficiency ratio. We will continue to focus on these items in order to further improve that ratio. As always, we are focused on continuous improvement and look for more opportunities with efficiency gains, especially with the addition of Empire branches and given our enhanced ability to serve our customers and work remotely. Regarding taxes, for 2020, we approximate the effective tax rate between 23% and 25%. With that, I'll now turn it back to John.