Flushing Financial Corporation

Welcome to Flushing Financial Corporation's first quarter 2022 earnings conference call. Hosting the call today are John Murin, President and Chief Executive Officer, and Susan Cullen, Senior Executive Vice President, Chief Financial Officer, and Treasurer. Today's call is being recorded. Should you need operator assistance, please press star then zero on your telephone keypad. 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 U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and other factors that may cause factual 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 substitutes for the financial information prepared and presented in accordance with U.S. GAAP. For information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release or the presentation. I'd now like to introduce John Buren, President and Chief Executive Officer, who will provide an overview of the strategy and results.

Thank you, operator. Good morning, everyone. And thank you for joining us on our first quarter 2022 earnings call. On today's call, I'll discuss first quarter highlights and ongoing strategic objectives before turning the call over to Susan Cullen, Chief Financial Officer. Following our prepared remarks, we'll answer your questions. On slide three, we're encouraged by some of the trends seen in the first quarter, but continue to monitor the various factors affecting the macro economy. The macro environment will impact us and the rest of the banking industry as the expectation of rising rates and improving local economy and in-market merger disruption all had an impact on our quarterly results. We remain focused on executing on our strategic objectives, and we're off to a good start. in the first quarter. We reported gap earnings per share of 58 cents and core EPS of 61 cents. This translated to a return on assets of 91 basis points and a return on equity of 10.8%. Core return on assets was 94 basis points and core return on equity was 11.3%. These returns are within range of our stated through the cycle goals of 1% and 10% respectively. The cost of deposits declined to a record low of 21 basis points and the core deposit mix continues to improve. Non-interest bearing deposits were a record at 1 billion for the quarter, increasing 13.5% year over year. Loan closings excluding PPP were up 65% year over year, but repayments remain elevated, challenging loan growth this quarter. However, our loan pipelines are at record levels and commercial business loan growth was significant during the quarter. Asset quality is a hallmark of this company. Our credit metrics remain solid and the risk profile is conservative. We continue to invest in the future as we hire 30 people from institutions in our markets that are involved in a merger, and 12 of these people are revenue producers. Additionally, first quarter was impacted by seasonal expenses of $4.3 million that will not reoccur in the second quarter. Overall, I'm pleased with our execution on our strategic objectives and the returns we're generating for our shareholders. Slide four outlines the merger disruption that is occurring in our markets. During the quarter, one more deal was announced and five deals closed year to date. We believe the biggest opportunity to expand our business and add more talent will occur over the next six to 12 months. as integration of these deals progresses. Given this environment, we expect to remain focused on the organic growth opportunity. On slide five, you can see the local economy continues to improve. While employment is not quite back to pre-pandemic levels in New York City MSA, it continues to see significant improvements, especially in leisure and hospitality. New York City MSA housing price index and median list price per square foot has risen and are above pre-pandemic levels. The local markets are improving, and this is having a positive impact on our business volumes. The business and community activity within our markets continues to improve. For example, in the Asian markets we serve, we participated in two Lunar New Year parades three galas, and several events honoring women's achievements this quarter. On slide six, you see the impact of the improving local economy, merger disruption, and execution of our strategic objectives. The loan pipeline is at an all-time high, up 55% quarter over quarter. Commercial real estate is one of the big drivers. I want to stress that we continue to maintain our pricing discipline and we're not a price leader. The loan pipeline includes, regarding refinances, only any incremental new money, which represents about 5% of the pipelines. Business banking is also seeing strength as its pipeline is up 46% year over year. Pull-through rates have recovered. reaching 77% this quarter compared to 68% last quarter and 56% in the same quarter last year. Unfortunately, this strong production has been impacted by loan repayments and satisfactions, which remain elevated in the first quarter, both with and without PPP. However, we expect loan repayments and satisfactions to slow in 2022 as interest rates increase. We recognize the importance of technology as it improves the customer experience, enhances our product set, and creates efficiencies. Slide seven shows the continued growth of our digital platform. We continue to see high growth rates in monthly mobile active users, active online banking users, and digital banking enrollment. We're pleased with the Zelle usage by our customers as this product continues to gain traction. We recently expanded our numerated platform to digitally originate small dollar loans. These loans can close as quickly as 48 hours. During the quarter, we originated over 4 million. While this amount is just over 1% of the quarter's originations, our marketing in the platform is in the very early stages. We continue to explore other FinTech product offerings and partnerships. I'll now turn it over to Susan Cullen to provide more detail on our key financial metrics. Susan?

Thank you, John. I'll begin on slide eight. Growing non-interest-bearing deposits is a priority for us. Average non-interest-bearing deposits increase 17% year-over-year to a record of over $1 billion and comprise nearly 16% of average deposits. Our teams are doing a great job of opening new checking accounts, which are up nearly 18% year over year. The growth in non-interest bearing deposits is helping drive down the cost of deposits, which hit a record low of 21 basis points in the first quarter. Slide nine outlines the loan portfolio and yields. Loans excluding PPP were stable quarter over quarter. The loan pipeline of $664 million is a record and was up 77% year-over-year. The pipeline consists of only incremental new funds for refinancing and new money. With higher market rates, we expect accelerated repayments to slow over time and we remain optimistic that loan growth will improve in 2022. Core loan yields, which include prepayment penalty income, were stable quarter-over-quarter and improved year-over-year. The difference between the yield on loan satisfaction net of PPP and loan originations continues to narrow. Slide 10 outlines the net interest income and margin trends. The GAAP net interest margin was 3.36% and increased seven basis points during the quarter. Net interest income increased 1% quarter-by-quarter to a record $64 million. Core net interest income, which removes the impact of net gains from fair value adjustments and purchase accounting accretion, increased 2% quarter-over-quarter as the core net interest margin expanded 10 basis points to 3.31%. Excluding impact from net prepayment penalty income, net gains from fair value adjustments, and the purchase accounting accretion, which totaled 14 basis points in the first quarter and 16 basis points in the prior quarter, the net interest margin increased 9 basis points quarter-over-quarter. For modeling purposes, we encourage you to start with the base net interest margin of 3.22%, which includes three basis points of positive PPP impact, and then add in your own assumptions for the previously mentioned adjustments. Slide 11 takes a closer look at our funding profile. Overall, our funding mix has improved significantly from the prior rising rate cycle of 2015 to 2019. At September 30th, 2015, or the last reporting period before the first rate hike of that cycle, higher costing CDs and borrowings were 53% of funding, while non-interest bearing deposits were 5%. At year end 2021, or the last reporting period before the Fed increased rates in March 2022, CDs and borrowings were reduced by more than 50% as a percentage of funding, and non-interest-bearing deposits more than doubled. The gap between our cost of funds and average fed funds has improved by approximately 50% between those periods. The average balance of non-interest-bearing deposit accounts has increased by nearly 65% for business accounts and 238% for personal accounts. We use very conservative deposit betas in our interest rate risk modeling, ranging from 40% to 80% for non-maturity interest-bearing products. These betas are about 13 percentage points higher than what we experienced in the last cycle. Our ability to lag deposit rate increases will be a key factor in determining our net interest margin outlook. By lagging deposit rate increases to a similar pace to last cycle, our interest rate risk modeling for net interest income would improve by approximately 40% from 100 basis points to gradual rise in rates over the next year. The better we manage deposit costs, the more favorable the net interest income outlook. To provide additional perspective, a 50 basis point increase in short-term rates equates to an approximate $5 million annual increase in net interest income without any deposit rate adjustments. In summary, we believe our funding profile has improved significantly and is better positioned to handle a rising rate environment. Turning to slide 12, we outline some of the offsets we have on the asset side of the balance sheet. First, business banking loans, which are largely floating rate, have increased to 22% of the loan portfolio from 12% in the previous cycle. Second, we have $410 million of loan swaps that convert fixed rate loans to floating rate. Third, there are approximately $480 million of real estate loans that will reprice about 44 basis points higher based on the yield curve at the end of March. The actual benefit will depend on the level of rates and shape of the curve when the loans reprice. Importantly, including hedges, approximately 30% over $2 billion of loans will reprice higher within the next year. Overall, we are better prepared to handle higher interest rates this cycle compared to the last cycle. Moving on to asset quality on slide 13, We have a long history of strong credit quality primarily due to our low risk credit profile and conservative underwriting. Net charge-offs were only six basis points of average loans in the first quarter. The average loans of value on the real estate portfolio is less than 38% and only $21 million of loans or less than 1% of the loan portfolio has an LTV of 75% or more. Slide 14 outlines some additional credit metrics. Non-performing assets declined 6% linked quarter, and the loan-to-value on these assets is 37%. Criticized and classified loans were relatively stable in the first quarter. The allowance for credit losses to loans increased one basis point to 57 basis points during the quarter, and the mix of the reserves by loans depicted in the bottom right chart. Overall, we remain very comfortable with our credit risk profile and continue to expect minimal loss content. Our capital position is depicted on slide 15. Book value and tangible book value per share were flat quarter over quarter as net income was enough to absorb the increase and accumulate other comprehensive loss and capital return. The company increased its quarterly dividend to 22 cents per share in the first quarter and repurchased over $8 million of common stock to return 84% of the first quarter earnings to our shareholders. The tangible common equity ratio remained over 8%. Our capital priorities are unchanged and are to first profitably grow the balance sheet, second, pay dividends to our shareholders, and third, opportunistically repurchase shares. We view the stock as attractively priced given the low multiple to tangible book value, the approximate 4% yield, and the significant opportunity for future growth. Before I turn it back to John, I want to provide some color on the outlook. Net interest income is a function of net interest margin and balance sheet growth. In addition to the key drivers for the net interest margin we previously discussed, first quarter results included elevated levels of purchase accounting accretion and net prepayment penalty income. While loan growth has been impacted by high repayment rates, we expect repayments to slow during 2022. Non-interest expense includes over $4 million of seasonal expenses that should not recur in the second quarter. The core expense base is still expected to rise high single digits in 2022 and follow normal seasonal patterns. Lastly, the effective tax rate for the current year should approximate 26.5% to 27%. I'll now turn it back over to John.