Flushing Financial Corporation

Welcome to the Flushing Financial Corporation's third quarter 2021 earnings conference call. Hosting the call today are John Buren, President and Chief Executive Officer, Susan Cullen, Senior Executive Vice President, Chief Financial Officer and Treasurer, and Frank Korzekwinski, Senior Executive Vice President and Chief of Real Estate Lending. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by 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 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. A copy of the earnings press release and slide presentation that the company will be referencing today are available on its investor relation website at flushingbank.com. Before we begin, the company would like to remind you The discussions during this call contained 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 risks, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in the company's filings with the U.S. Securities and Exchange Commission, to which we refer you. 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. And now I'd like to introduce John Buren, President and Chief Executive Officer, who will provide an overview of the strategies and results.

Thank you, operator. Good morning, everyone, and thank you for joining us for our third quarter 2021 earnings call. On today's call, I'll discuss third quarter highlights and ongoing strategic objectives before turning the call over to our CFO, Susan Cullen, to provide greater detail on our financial performance. Following our prepared remarks, we will address your questions along with our Chief Real Estate Lending Officer, Frank Kozakwinski. So the execution of our strategy resulted in record third quarter results. We had our second consecutive quarter of record core EPS and our sixth consecutive quarter of record net interest income and record loan pipeline. Our gap in core return on average assets, return on average equity, net interest margin, efficiency ratio, profitability metrics improve year over year, even without the benefit of reduced provisioning. We continue to focus on our strategic objectives, and we're performing well against them. Our first objective was to ensure appropriately risk-adjusted returns for loans while optimizing the cost of funds. Our GAAP NIM increased 20 basis points and Core NIM rose 13 basis points during the quarter. Our cost of funds declined another four basis points. Loan yields expanded 10 basis points quarter over quarter and eight basis points year over year. And our non-interest bearing deposits improved to 15% of average deposits. The second objective is to maintain strong historical loan growth, excluding PPP Loans were flat quarter over quarter due to normal summer delays, but activity picked up significantly in September. Business activity for the quarter was strong, however, as we had record loan pipeline to end the quarter. As a result, we're expecting positive loan growth excluding PPP in the fourth quarter and into 2022. Our third objective is to enhance core earnings power by improving scalability and efficiency. In this regard, we've been realizing the benefits of the empire merger, spreading fixed costs over a wider asset base. Digital banking efforts have continued to gain traction with our customers. We're also expanding future technology opportunities that I'll get into later. Our efficiency ratio improved to 52 percent And there's a significant organic growth opportunity over the next 12 to 18 months. The fourth strategic objective is to manage asset quality with consistent and disciplined underwriting. For the quarter, net recoveries were four basis points. We have low levels of MPAs and a high level of reserve coverage. Our average loan to value in our real estate portfolio is less than 38 percent. We'll remind you that real estate represents greater than 87% of our loans. Historically, we've had a low level of credit risk in our portfolio, and of course this remains. On slide four, we note that October 30th will mark the one year anniversary of the closing of Empire Bancorp transaction. At the time of the announcement, we expected the transaction would achieve several goals, and we've met them all. We achieved a 20% EPS accretion, tangible common equity now exceeds 8%, and tangible book value per share increased 5% year-over-year. Our cost of deposits improved 28 basis points year-over-year. non-interest-bearing deposits increased 58 percent. The loan-to-deposit ratio improved to 102 percent, and we achieved our 50 percent cost-savings target. And Suffolk County, where we've begun to develop more business, remains a focus for us. Bottom line, we achieved our targets, and Empire has been a very successful transaction for us. So we approach the end of 2021 a stronger, more resilient company with a much improved outlook. Slide five, we recognize the impact technology is having on the industry and we are prepared for additional changes. We upgraded our digital banking platform just before the pandemic started and continue to see significant gains 18 months later. We had a 39% increase in monthly mobile active users and a 51 percent increase in active online banking users year-over-year. We recently adopted Zelle across our bank, and digital platforms and customer usage has been significant. We also made a strategic investment in Jam FinTop. This investment allows us an early look at emerging technologies, and we're very excited about the offerings we've seen so far. As you may recall, we partnered with a FinTech numerator to help in our PPP program. This integration was smooth, and the customer experience was very much improved. We gained efficiencies using this platform. Now we're looking to expand this relationship into other lending opportunities to provide an enhanced level of service to our customers. We recognize the impact of technology and what it's having on the industry, and we expect to be prepared for additional changes as time goes on. On slide six, our most significant opportunity for the next 12 to 18 months is the eight announced or recently closed mergers that involve a participant in our market. Out of the $328 billion of deposits on Long Island, $60 billion or 18% involve one of these merger participants. We're already starting to see some benefits by adding both people and business. Most of the transactions have not closed yet. As a result of this opportunity for growth, our focus will be organic. We'll turn now to slide seven. In addition to the merger opportunity, there are other drivers of future growth. We have a record loan pipeline that serves as a baseline for growth. New York is recovering to more normal activity. And our important Asian market is seeing increased activity. We see similarities between coming out of the Great Recession and the opening in this pandemic. Coming out of the Great Recession, you'll recall loan growth accelerated at a high pace. From 2010 to 2015, multifamily loans increased at a double-digit rate. Commercial real estate were high single digits, and commercial business was in the low 20% growth rate. So we see a positive outlook for loan growth, excluding PPP, for the fourth quarter and into 2022. I'll now turn it over to Susan to provide more details on how we executed versus our strategic objectives.

Thank you, John. I'll begin on slide eight. Average non-interest bearing and total deposits increased 58% and 28% respectively year over year. Average core deposits comprise 84% of average deposits and improvement from 78% in the third quarter of 2020. We continue to focus on optimizing the deposit mix and look for ways to reduce the cost of funds. The cost of deposits decreased five basis points quarter-by-quarter and 28 basis points over the past 12 months. Branch business activity continues to normalize as third-quarter checking account openings exceeded pre-pandemic levels in the third quarter of 2019. The company closed the Menil branch and is due to open a new branch in the Elmhurst area. Slide 9 outlines the net interest income and margin trends. GAAP net interest margin was 3.34% and improved 20 basis points during the quarter. Net interest income was a record for the sixth consecutive quarter, despite the decline in average loans. Core net interest income, which removes the impact of net gains from fair value adjustments and purchase account increase, was also a record, with core net interest margin increasing 13 basis points to 327 in the third quarter. Excluding 19 basis point impact of net prepayment penalty, net gains from fair value adjustments, and purchase accounting increase in the third quarter, the net interest margin was 315 compared to 10 basis points of adjustments in the second quarter and a net interest margin of 304. On this basis, the net interest margin expanded 11 basis points primarily due to the decrease in the cost of deposits and a shift in the balance sheet funding. For modeling purposes, we encourage you to start with the base net interest margin of 315, which includes two basis points of positive PPP impact, and then add in your own assumptions for the items previously mentioned. As a reminder, we have $592 million of effective swaps with a cost of 195 basis points that currently are a drag on the net interest margin with the majority maturing by the end of 2023. These swaps will largely be replaced with $405 million of forward swaps with a cost of 77 basis points. The repricing of the swaps, absent any other interest rate changes, should provide a benefit to the net interest margin in the future. Slide 10 outlines loan portfolio and yields. Loans, excluding PPP, were flat quarter over quarter. As John mentioned previously, the company experienced normal summer and third-party delays and then activity increased in September. The record loan pipeline of $531 million reflects a positive outlook for loan growth. The loan pipeline has increased activity in both commercial real estate and commercial business and is reflective of the current loan portfolio. The weighted average rate on loan closings increased 13 basis points quarter over quarter. Additionally, the steepening of the yield curve helped rates on loan originations to move higher over time. PPP loans declined 34% to $131 million during the quarter, as the SBA continues to forgive loans. The company recognized approximately $1 million of accelerated PPP fees. Slide 11 provides a snapshot of our disciplined underwriting. The company's credit quality has held up well through the pandemic and has mirrored our historical performance. Our underwriting is conservative, and we are not a price leader. New York continues to make progress in returning to normal economic activity. However, the unemployment rate in New York City is 7.6% compared to 3.5% to 4% pre-pandemic and down from the peak of 17% in May 2020. The company released reserves in the third quarter due to the improved economic outlook. Future loan loss provisions are expected to be driven by loan growth, mix, and economic factors. The company had four basis points of net recoveries in the third quarter and just six basis points of net charge-offs for the nine-month period. The average loan-to-value on the real estate portfolio remains at less than 38%. Slide 12 continues to outline the company's solid credit metrics with a low level of non-performing assets and a strong level of reserve coverage. Forbearances continue to climb with only $40 million of loans on full P&I deferral of the remaining $162 million. Over 57% of the total forbearance did resume making full payments by the end of the year. Overall, we remain very comfortable with our credit risk profile and continue to expect minimal loss content. Slide 13 shows our strong capital ratios. Tangible common equity ratio improved 24 basis points during the third quarter to just over our target of 8% and comparable to the year-ago levels, which did not include empire. Tangible book value per share increased to $21.13, even as we repurchased 286,000 shares at an average price of $22.42. The company returned 51% of earnings to shareholders this quarter through a combination of dividends and share repurchases. Our capital priorities are unchanged and are to profitably grow the balance sheet, pay dividends to shareholders, and opportunistically repurchase shares. We view the stock as attractively priced given the approximate 3.7 dividend yield and the opportunity for future growth. Before I turn the call back to John, let me remind you of some items that could impact the fourth quarter. Core net interest margin will be impacted by the timing and level of overall loan growth and deployment of liquidity. Reported net interest margin contained elevated levels of purchase accounting accretion, net prepayment penalty, and positive fair value mark on the hedges, all of which total 19 basis points compared to 10 basis points in the prior quarter and average mid-single digits in prior quarters in 2020 and 2019. Purchase accounting accretion is expected to be less than $1 million per quarter. Assuming no change in the pandemic response, we expect loan growth to improve, excluding the PPP loans, in the fourth quarter and into 2022. The starting point for fourth quarter operating expenses is $35 million, before adding a normal growth rate. Our effective tax rate for the full year 2021 should approximate 26.5%. I'll now turn it back over to John.