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spk02: 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.
spk03: 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?
spk01: 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.
spk03: Thank you, Susan. On slide 16, we wrap up with our key messages. Our local economies are recovering, and we're capitalizing on the merger disruption. Our loan pipeline is at a record level. During 2022, we expect loan growth will improve. From the beginning of the year through today, five of the mergers in our markets have closed. We've hired 12 revenue producers from the merger participants. We're investing in the business and our people. The company's better position for rising rates versus past cycles with a record low cost of funds, an improved funding mix, and swaps with favorable repricing starting in the second quarter. Our ability to control deposit rates will be a key factor in determining the net interest income outlook. We have a low risk business model with a conservative loan to value ratio. We've traditionally had low credit risk in our portfolio, and the stock has an approximate 4% dividend yield that trades at a low price to tangible book value multiple. The company performed well versus its through the cycle return on average assets and return on average equity goals in the first quarter, despite the elevated seasonal expenses. Operator, I'll turn it over to you to open up the lines for questions.
spk02: Thank you. Ladies and gentlemen, we'll now begin our question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. Our first question will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.
spk04: Hey, guys. Good morning and nice quarter.
spk01: Thank you, Mark.
spk03: Thanks, Mark.
spk04: First, Susan, just to clarify, did you say that the expense number in the second quarter should be down about $4 million from the 1Q number? I just want to make sure I caught that.
spk01: Yes, the $4 million is the seasonal expenses we have every first quarter.
spk04: Okay, great. And then secondly, I wondered if you could kind of break down the $664 million pipeline for us, like in terms of complexion, the types of loans, and maybe what the average rate on that looks like.
spk01: The mix of the portfolio is very similar to our portfolio. There's not a material difference. And the rate is approaching 4%. Right now, it's approximately $3.80 million.
spk03: There's probably a little bit more CNI in there than the structure of the portfolio. Okay, great. Similar to what we posted last quarter in terms of percentages.
spk04: Gotcha. And then I thought the stuff that you provided in the slides was really helpful about how the rate sensitivity positioning has kind of changed since the last cycle. Are you suggesting that the balance sheet today is actually asset sensitive and that the core margin should go up as rates rise, or are we closer to neutral?
spk03: No, I can't say we're asset sensitive, but we clearly are closer to neutral than we've ever been.
spk04: Okay. Great. And then, Susan, I saw your comments about, you know, sort of the $5 million increase in NII. What gives you so much confidence that deposit rates won't start to move higher as we get some more Fed increases?
spk01: The liquidity that's in the market will help tamper down the rate increases. That's a primary driver, and we are very, very focused on the cost of our funds. Also, the mix with the $1 billion of non-interest-bearing deposits, that will help increase tamp down the cost of funding going forward.
spk03: And then we restructured our incentives at the end of last year to emphasize non-interest-bearing DDA growth.
spk04: Okay. And then lastly, I guess I'm just curious how you balance growth versus buybacks, given your stock's below tangible book value now and looks really attractive. How do you weigh the one versus the other.
spk01: We agree it's very attractively priced right now and a great deal for anybody that, you know, attractively priced given the dividend yield and where we're trading. You know, Mark, we haven't really changed our capital philosophy that we've been articulating for several years now that, you know, if we can profitably grow the balance sheet, then that's where we're first going to deploy our capital. Thank you. Thank you, Mark.
spk02: Our next question comes from Manuel Navas with DA Davidson. Please go ahead.
spk05: Hey, good morning. Good morning, Manuel. I just want to follow up on the expense guidance trajectory. I understand there's some seasonal costs coming out, but you still have the same high single-digit growth for the full year. Does that mean that we should still see kind of flat to current levels of expenses for the next three quarters?
spk01: No, we expect our, if you start with our base that we had last year of core expenses of about $140, $145 million, we do expect there to be increases in the expenses as we invest in the company and as we invest in the company and the inflation increases. if it really starts to take hold in our employee expense base, which we haven't really seen yet. And we have some growth that we're anticipating that will also increase the expenses.
spk05: Okay, so a little bit better loan growth will add to variable comp a bit?
spk03: Yes. Yes, and we're still, you know, we're still actively looking for additions to talent. And, of course, that... that will provide us with additional expenses as the year goes on.
spk05: Were the new employees that were added, they were fully in the first quarter run rate? And can you add any more details about what business lines they're in?
spk03: Pretty much across the board. mostly business development individuals.
spk05: Okay. And as you get the growth eventually, you know, with higher rates, pay downs, decline, can you kind of discuss the capabilities of your various deposit growth avenues? you know, perhaps touch on commercial deposit gathering, your Asian American markets, internet banking, your Intrify network and broker deposits, the capabilities of all those to kind of fill in the gaps.
spk03: So, you know, we look at the funding. Obviously, we made some changes in terms of our orientation and our and our focus on non-interest bearing, and we've been quite successful there. We expect that to continue and to be a major contributor. And then beyond that, you know, we do have a very varied funding capability, and we make use of it as we see opportunities going forward. So, you know, clearly we have a fair amount of funding a fair amount of dry powder on the internet side of the business. We did invest in improving our online banking capability last year, so we're starting to see some positive impact out of that. And as loan growth begins to come back, we also feel that we will get a very, very strong participation from our commercial real estate and our business banking. We've got about $3 billion of liquidity kind of outside of any sort of deposit gathering. So we've got a great deal of flexibility. And I think the situation with respect to existing liquidity in the market is should tamp down any very, very significant, you know, significant competitive activity going forward. So I think we're in very good shape as it relates to our ability to gather funding, gather deposits, and also, you know, maintain a, you know, of increases in funding costs.
spk05: I appreciate that. I think that covers it for now. Thank you.
spk01: Thank you.
spk02: Again, if you'd like to ask a question, please press star, then 1 at this time. My next question comes from Chris O'Connell with KBW. Please go ahead.
spk06: Morning. Hi, Chris. Hi. I was hoping to just circle back to the expense guidance. You know, I know you guys mentioned it should follow, you know, normal seasonal patterns, which is, you know, a pretty sharp drop in 2Q and typically, you know, flattish for the rest of the year. But, you know, based on the guide and the starting point here, I mean, is there going to be, you know, a fairly substantial increase in the second half of 22 relative to, you know, normal years?
spk01: Yes, I would think so. If we get the personnel we're planning on hiring as we invest in the company, the expenses will be higher. I don't want to say inflation in this call. We'll be higher in the second half of the year than they are in the first half.
spk06: Okay, got it. Makes sense. Great. And then in terms of the color you gave around the pipeline and the gap on satisfactions there. How do you see, given current trends and what you're seeing in the current pipeline, when do you think yields will converge with the portfolio yield in terms of core loans?
spk03: So probably the first place to start when we talk about the portfolio yields is the natural tendency of, let's talk about the real estate portfolio for a second. The natural tendency of that portfolio to increase in prices as time goes on. So when we put these loans on, we peg them to certain refi rates. We have somewhere around 25% of our real estate loans that will reprice over the course of this year. And as rates increase, those prices will continue to move upward and at a slow pace. And, you know, for example, we have loans that will reprice at, you know, close to 5%. Now, we may not get 5% for those loans, but we will be able to get, because of the risk of refying elsewhere, we will be able to get a better margin or a better yield than what the market will be looking at because it is expensive to go out and refi your commercial real estate loans in the market. So we have this natural tendency of the portfolio, the real estate portfolio, to rise. In addition, we've got a very significant proportion and a growing proportion of our loan portfolio that is floating rate due to our CNI capabilities and growth. So we expect to see, we've already seen and we'll expect to see more upward pressure, positive upward pressure on yields in that portfolio. So those are the two major areas of continued growth in the yield on loans as our portfolio, as the Fed continues to move. And then also, Susan also indicated we have a portion of the real estate portfolio that would normally be fixed that is now hedged. So that formerly fixed portion of the portfolio will also move. It's over $400 million.
spk06: Great.
spk03: So we've got a lot of capabilities that we have today that we didn't have a number of years ago during the last cycle, upward rate cycle.
spk06: Yep, definitely. And where specifically are you guys seeing multifamily origination yields coming on at now?
spk03: High threes. Mid to high threes based upon the size of the loan, the LTVs, et cetera. Smaller loans can go up into the four category.
spk06: Okay, great. And then you guys made a comment on a percentage of the pipeline, something about new money. I kind of missed it there. I was wondering if you could go over it again, please.
spk01: Sure, so the 95% of the pipeline is new money, new deals to the company. Of our pipeline, only 5% is incremental money on refinancing, meaning if you have a $100,000 loan with us today and you want $150,000, only $50,000 is in the pipeline, not the full $150,000. Okay, great. Appreciate that. And then did you have –
spk06: Do you guys have the AOCI impact this quarter?
spk01: We had some AOCI. We had, you know, the security impact offset by the derivatives were very positive to us this quarter. The overall decline was about $8.5 million, $9 million.
spk06: Okay, great. Thank you.
spk01: All in, it resulted in the tangible book value decreasing about 11 basis points was the overall net effect.
spk06: Yeah, held up very well.
spk01: I'm sorry, TCE. I'm sorry, TCE.
spk06: Yep. Okay, great. And then lastly, I was just wondering, you know, obviously still, you know, at low levels overall, I was curious if you could walk through the SBA charge-off.
spk01: So the SBA charge-off is just some, there are a few small immaterial items that came through. It's nothing indicative of deterioration in the portfolio.
spk06: Okay, got it. That's all I had. Thank you.
spk01: Thank you, Chris.
spk02: Our next question is a follow-up from Manuel Navas with DA Davidson. Please go ahead.
spk05: Hey, I just had one more. With the paydowns, do you have any view of the first quarter paydowns, what was driving it or who was taking those loans? And then on the deposit side, have you seen any, in April, any kind of what you call like bad actors start to raise rates at all? I know you haven't, but just touch on those two kind of competition areas of questioning.
spk03: I think the paydowns have taken place associated for the most part with some, let's say, a little bit more aggressive pricing that we weren't willing to match. And then the... Deposits.
spk01: We've seen some one-offs, but not anything wholesale in the markets.
spk05: Okay, that's helpful. With the pricing on the loans that have refied away, is it like insurance companies or other banks? I'm just trying to get a sense for that. I understand you don't track it very carefully, but just wondering.
spk03: There's banks and insurance companies, but it's mostly banks. Mostly banks that are picking these up.
spk05: Thank you.
spk03: I appreciate it.
spk02: This concludes our question and answer session. I would like to turn the conference back over to John Buren for any closing remarks.
spk03: Well, thank you. I want to thank you for your attention and participation on the call. And, you know, once again, I think we're very, very pleased with the quarter and look forward to continuing to update you on our progress toward improving the business. Have a good day, everyone.
spk02: This concludes today's teleconference. You may now disconnect your lines, and we thank you for your participation.
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