Flushing Financial Corporation

Welcome to Flushing Financial Corporation's second quarter of 2024 earnings conference call. Hosting the call today are John Buren, President and Chief Executive Officer, and Susan Cullen, Senior Executive Vice President, Chief Financial Officer, and Treasurer. Today's call is being recorded. If anyone needs assistance during today's conference, please press star then zero. After today's presentation, there will be a question and answer session. To ask a question, please press star then 1 on your telephone keypad, and to remove yourself from queue, please press star then 2. A copy of the earnings press release and slide presentations 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 risks, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statements, including those 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 or as a substitute 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 and or the presentation. I would now like to introduce John Buren, President and Chief Executive Officer, who will provide an overview of the strategy and results. Please go ahead.

Thank you, Operator. Good morning, and thank you for joining us for our second quarter 2024 earnings call. The operating environment in the second quarter was highlighted by similar themes that have impacted the industry and our markets for the past couple of quarters. Changing expectations on Fed rate moves, weak but marginally improving loan demand, and aggressive deposit pricing by one of our largest competitors that is dealing with business model and personnel changes. Against this backdrop, the company reported second quarter 2024 EPS of 18 cents. It remains a challenging rate environment, but I'll provide an update on the progress we've made on our four areas of focus. Our first objective is to increase the NIM and reduce its volatility. Net interest income increased about 1% quarter over quarter, despite NIM compressing one basis point. We're implementing several strategies to help the NIM in future periods, and I believe it is close to a bottom. Susan will provide further details, but the NIMS should begin to expand once funding costs stabilize. The second objective is to maintain our credit discipline. Flushing Bank has a long history of low-risk credit profile due to our conservative underwriting and strong portfolio management. Overall credit metrics remain solid with 61 basis points of non-performing assets. 113 basis points of criticizing classified loans and one basis point of net recoveries during the quarter. Our loan portfolio remains well collateralized as the average LTV in the real estate portfolio is less than 36% and the debt coverage ratios are 1.8 times for our multifamily and investor commercial real estate portfolios. Our exposure to Manhattan office buildings is about 50 basis points of gross loans. There are zero non-performing office loans and zero non-performing non-residential commercial real estate loans. Our third objective is to preserve our strong liquidity and capital. Our available liquidity was 3.1 billion as of June 30th, and our level of uninsured and uncollateralized deposits remains low. Our capital ratios remain solid. The fourth objective is to bend the expense curve. The market provided an opportunity to add banking professionals and new branches, so we made the strategic decision to invest in the franchise. This drove non-interest expense growth for the first half of 2024 compared to the same period in 2023 to about 6%. We expect overall expense growth in 2024 to be in line with our historical averages of mid single digits. Overall, we're navigating the environment or building a foundation to achieve our long-term goals and improve overall profitability. Slide four demonstrates Flushing's credit performance versus the industry. Our underwriting has outperformed over time, often by a wide margin. Our conservative credit culture has been proven in many rate and economic cycles and our commitment to our low risk credit profile is unwavering. Our charge off history is shown in the chart on the left. We expect our net charge offs to remain well below industry levels. For the first half of 2024, we had net recoveries of $88,000. Our level of non-current loans to total loans is also favorable compared to the industry. In a stress scenario consisting of a 200 basis point increase in rates and a 10% increase in operating expenses, our loan portfolio has a debt coverage ratio of 1.3 times. Given this, we're expecting minimal loss content within the portfolio. Slide 5 depicts additional credit metrics that support our conservative risk culture. Non-performing assets to assets total 61 basis points, with LTDs of low 44%. Our level of criticized and classified assets remains solid, and we expect them to continue to be below peer levels again for the quarter. 30 to 89-day past dues are only 35 basis points of loans indicating a low level of potential future problems. Our allowance for credit losses is presented by loan segment in the bottom right chart, and the ratio to overall loans increased one basis point to 61 basis points quarter over quarter. These items altogether, he was very confident of our low risk credit profile. Slide six, outlines some key credit metrics at a more granular level. A multifamily portfolio comprises 39% of gross loans and has strong credit metrics like a weighted average LTV of 44% and a weighted average debt coverage ratio of 1.8 times. Non-performing loans in this portfolio are only 52 basis points in criticized and classified loans or only 67 basis points of loans. The average loan size is $1.2 million in this $2.6 billion portfolio. Investor commercial real estate loans total 28% of gross loans and have similar credit metrics as our multifamily loans with no non-performing loans. Only 36 basis points of criticized and classified loans and an average loan size 2.5 million. Our exposure to office loans is small at less than 4%, and Manhattan office building exposure is about 50 basis points to gross loans. There are zero non-performing loans in the office portfolio, and the debt coverage ratio is 1.9 times. These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform well over time. Slide seven provides further context on the risk in our multifamily portfolio and a comparison versus peers. As of March 31st, 2024, our criticized and classified multifamily loans were only 54 basis points, the third best in the peer group. At the end of the second quarter, this ratio was 67 basis points. Multifamily reserves to criticize and classify multifamily loans were 75%, which is the fourth best in the peer group in the first quarter and 61% in the second quarter. 30 to 89-day past dues in our multifamily portfolio were only 21 basis points. With these credit metrics, we see limited risk and loss content on the horizon. I'll now turn it over to Susan to provide more detail on our other financial metrics. Susan?

Thank you, John. I'll begin on slide eight, which provides more detail on our deposits. Average deposits increased 4% year-over-year and 2% quarter-over-quarter. The growth in deposits came from both retail and broker CDs, as we utilized them to fund approximately $300 million in the growth of floating rate securities for the quarter and to replace anticipated normal flows of the government deposit portfolio. We expect those latter deposits to return in the fall. Average non-interest bearing deposits were 11% of total average deposits compared to 12% a year ago. Our loan to deposit ratio has improved to 98% from 102% a year ago. The cost of deposits increased 11 basis points in the quarter compared to 17 basis points in the first quarter, and 16 base points in the fourth quarter of 2023. Slide 9 outlines the net interest income and margin trends. The GAAP and core net interest margin compressed one and three base points respectively to 2.05% and 2.03%. Absent episodic items, the NIM increased one base point quarter-over-quarter. Our net interest margin is partially reflective of the spread between the one-month SOFR relative to the five-year Federal Homeowner Bank advance rate which at the end of June was a negative 82 basis points. Once the spread begins to turn positive, our NIM should improve over time. We expect our NIM is near our bottom, absent any changes in interest rates. The bottom will largely be determined by stabilization of the cost of funds, which will then allow the natural repricing of our loan portfolio to drive NIM expansion. With a parallel shift in today's inverted yields curve by 100 basis points, Our model indicates a roughly 1% benefit to net interest income. On the other hand, a steepening of the yield curve by 100 basis points with the short-end declining and the long-end remaining stable should benefit net interest income by greater than $15 million over time. Slide 10 provides more detail on our CD portfolio. Total CDs are over $2 billion, or 35% of total deposits at core's end. It is the growth in repricing CDs which will drive the direction and magnitude of the cost of deposits. About $1.4 billion of retail CDs are expected to mature over the next three quarters at a weighted average rate of 4.86%, which compares to current APYs of 45 to 540. We expect the cost of deposits will increase at a slower pace in the third quarter compared to the second quarter. Slide 11 provides more detail on the contractual repricing of the loan portfolio. Approximately $1.2 billion, or 18% of gross loans, are repriced through short-term index. Our registered hedge position increases this percentage to 26%. For the remainder of 2024, $383 million of loans are due to reprice 242 basis points higher than the current coupon rate. In 2025, approximately $765 million of loans are scheduled to reprice 226 basis points higher. These rates are based on underlying index value at June 30, 2024. It is this loan pricing that should drive net interest margin expansion once funding costs stabilize or decline. Turning to slide 12, which outlines our interest rate hedging portfolio. This portfolio totals $1.7 billion and underlying financial instruments are investment securities, loans, and funding. These hedges have a positive impact in asset and funding yields and are additive to the net interest margin. There are no maturities in 2024, with 22% of the portfolio maturing in 2025. As mentioned previously, if the curve steepens with the Fed reducing short-term rates, our net interest margin should benefit over time. Our capital position is shown on slide 13. Book value and tangible book value per share were stable year-over-year and quarter-over-quarter. The leverage ratio was over 8%, while the tangible common equity ratio remains about 7%. Overall, we view our capital base as a source of strength and a vital component of our conservative balance sheet. Slide 14 provides detail on our Asian markets, which account for a third of our branches. We have over $1.3 billion of deposits and $746 million of loans in these markets. These deposits are 18% of total deposits, and while we have only a 3% market share of this $41 billion market, complying with substantial room for growth. Our approach to this market is supported by our multilingual staff, our Asian Advisory Board, and supportive cultural activities through participation and corporate sponsorships. We look forward to participating in the Dragon Boat Festival this coming weekend, which is attended by thousands of people in Flushing Meadow Park. This market, with its dense population and a high number of small businesses, continues to be an important opportunity for us and one that we believe will drive our success moving forward. On slide 15, you can see community involvement is a key part of our strategy beyond just our Asian franchise. During the second quarter, we participated in numerous local events to strengthen our ties to our customer base. Participating in these types of initiatives has served us as a great way to further integrate ourselves within our local communities while driving customer loyalty. Slide 16 provides a high-level perspective on performance in the current environment. We continue to expect stable loan balances and a continued emphasis on improving the funding mix. The net interest margin is expected to be close to bottom but influenced by the mix of assets and liabilities, the shape of the yield curve, and pricing of financial instruments. The increase in loan pipelines should help increase asset yields while the cost of funding rises at a slower pace than previous quarters. When the cost of funds stabilize, our net interest margins should bottom out and then start to increase. Non-interest income should be aided by the closing of back-to-back swap loans that are in the pipeline. As John mentioned previously, we have made the strategic decision to invest in the business by adding people and branches. Core non-interest expense is expected to increase mid-single digits in 2024. While the quarterly tax rates can fluctuate, we expect a mid-20s effective rate for 2024. I'll now turn it back over to you, John.