Flushing Financial Corporation

Welcome to Flushing Financial Corporation's third quarter 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 you would like to join the Q&A, please press star then 1. If you require an operator assistance, please press star then 0. 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 Act. Litigations 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 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 would 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. and thank you for joining us for our third quarter 2024 earnings call. The operating environment in the third quarter was improved but remained challenging. We're encouraged by the recent 50 basis points reduction by the Fed as we hope this leads to the yield curve at least flattening, potentially regaining a positive slope. There'll be challenges and unknowns in managing the net interest margin in this environment, including the impact of deposit pricing by competitors, how lower rates will influence loan demand, and the timing and pace of Fed cuts. However, we believe the environment will improve over time and this will ultimately be positively reflected in our net interest margin. For the third quarter, the company recorded gap earnings per share of $0.30, and core earnings of $0.26, which is the best quarter in the past seven. There are several items to call out from the quarter. We had higher than normal net interest recoveries on non-accrual and delinquent loans, which added five basis points to the net interest margin, and about $0.03 per share in the quarter. Gap in core earnings per share include an additional five cents for insurance recoveries, discrete income tax items, and other events that are not expected to repeat. We outlined our four areas of focus in the past. Our first objective is to increase the NIM and reduce its volatility. Net interest income increased 6.6 percent quarter over quarter as the net interest margin increased five basis points. During the quarter, NIM compressed in July, but then expanded month over month in both August and September. We continue to focus on the NIM, and while expansion may not always be in a straight line, we believe the general direction should be positive as the yield curve flattens or becomes positively sloped. 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 59 basis points of non-performing assets, 100 basis points of criticizing classified loans, and 6 basis points of net charge of year-to-date. Our loan portfolio remains well collateralized as the average loan-to-value in the real estate portfolio is less than 36%, and the debt coverage ratios are 1.9 times for our multifamily and investor commercial real estate. Our exposure to Manhattan office buildings is about a half a percent of gross loans. Our third objective is to preserve our strong liquidity and capital. Our available liquidity was $3.9 billion as of September 30th, and our level of uninsured and uncollateralized deposits remains low at 15% of total deposits. Our capital ratios remain solid. The fourth objective is to bend the expense curve. Non-interest expense growth year to date was about 6% as we took advantage of market opportunities to invest in the business to improve profitability over the long term, including bringing on an SBA team and a staff for new growth. We still expect overall expense growth in 2024 to be in line with our historical averages mid single digits. Overall, while there's some beneficial items that are not expected to repeat in the quarter, we're encouraged by the outlook over the long term and are 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. The results of our low-risk credit profile are shown by the charge-off history chart on the left. We expect our net charge-offs to remain well below industry levels. For the first nine months of 2024, we had net charge-offs of six basis points. 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 within this portfolio. Slide five depicts additional credit metrics that result from our conservative risk culture. Non-performing assets to assets total 59 basis points with loan to values at 55%. Our level of criticized and classified assets improved quarter over quarter, and we expect them to remain well below peer levels again this quarter. 30 to 89-day past dues are 43 basis points of loans, indicating a low level of potential future losses. Our allowance for credit losses is presented by loan segment in the bottom right chart, and the ratio to overall loans total 59 basis points. These items in the aggregate keep us very confident that our low-risk credit profile performs well over time. Slide 6 outlines credit metrics at a more granular level for key portfolios. Our multifamily portfolio comprises 39% of gross loans and has strong credit metrics such as a weighted average loan-to-value of 44% and a weighted average debt coverage ratio of 1.9%. Non-performing loans in this portfolio are only 33 basis points down from 52 basis points in the prior quarter. And criticized and classified loans are only 55 basis points of loans down from 67 basis points in the prior quarter. Average loan size is $1.2 million in this $2.6 billion portfolio. Investor commercial real estate loans excluding the Office Cree portfolio total 25% of gross loans and have similar credit metrics as our multifamily loans with zero non-performing loans and zero criticized and classified loans. Our exposure to office loans and Manhattan office buildings is small at less than 4% and about half a percent to gross loans respectively. There is one non-performing loan in the office portfolio which we expect will be resolved shortly with no loss. These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform very well over time. Slide seven provides further context on the risk in our multifamily portfolio and a comparison versus peers. As of June 30th, 2024, our criticized and classified multifamily loans were only 67 basis points, the fourth best in the peer group. At the end of the third quarter, this ratio improved to 55 basis points. Multifamily reserves to criticize and classified multifamily loans were 61%, which was the fifth best in the peer group in the second quarter, and this ratio improved to 70% in the third quarter. 30 to 89-day past dues in our multifamily loan portfolio were 52 basis points. With these credit metrics, we see limited risk and loss on the horizon. Slide 8 summarizes our overview on credit quality. We have a low-risk balance sheet and years of conservative underwriting that have served the company well with credit losses and non-performing assets favorable to the industry. Our multifamily investor commercial real estate portfolios are well underwritten and are prepared for higher rates based upon our stress tests at origination. We had one office loan move to non-accrual this quarter, but we expect this loan will be resolved shortly with no loss to principal. Non-performing assets and criticized and classified loans improve quarter over quarter, and our 30- to 89-day delinquencies remain low. We remain confident in our low-risk credit profile. I'll now turn it over to Susan to provide more detail on our financial metrics. Susan?

Thank you, John. I will begin on slide nine, which provides more detail on our deposits. Average deposits increased 9% year-over-year and 4% quarter-over-quarter. Average non-interest bearing deposits were 11% of total average deposits compared to 12.5% a year ago. Our loan-to-deposit ratio has improved to 90% from 103% a year ago. The cost of deposits increased by 17 basis points in the quarter compared to 11 basis points in the second quarter, and 17 basis points in the first quarter of 2024. We believe the cost of deposits has likely peaked in July, as we've seen the cost of deposits decrease month over month for both August and September. Slide 10 outlines the net interest income and margin trends. The GAAP and CORE net interest margin increased five and four basis points to 2.1% and 2.07% respectively. Interest recoveries on delinquent loans are larger than in previous quarters, and this added about five basis points to both GAAP and core net interest margin. On a monthly basis, the net interest margin bottomed out in July and expanded in both August and September. With the 50 basis points cut by the Fed, funding costs, floating rate assets, and swaps also moved lower. We lowered rates by 50 basis points on $1.8 billion of non-maturity deposits on October 1st. We still have the tailwind of new loan production that has higher yields than the existing portfolio and the natural repricing of the loan portfolio over the next several years. Based on our modeling, our net interest margin would be flat for a 25 base point cut in the rate and a 33% beta on interest-bearing deposits. If we are able to generate a higher interest-bearing deposit data, our net interest margin would benefit. Our net interest margin is a daily focus. Slide 11 provides more detail on our CD portfolio. Total CDs are nearly $3 billion or 38% of total deposits at the quarter's end. About $1.5 billion of retail CDs are expected to mature over the next year at a weighted average rate of 4.64%, which compares to current rates of 3.75% to 4.75%. We see a significant opportunity to reprice these CDs lower as they mature. Slide 12 provides more detail on the contractual repricing of the loan portfolio. Approximately $1.3 billion, or 19% of the gross loans, are repriced to a short-term index. Our interest rate hedge position increases this percentage to 26%. For the remainder of 2024, $226 million of loans are due to reprice, 185 basis points higher than the current coupon rate. In 2025, approximately $775 million of loans are scheduled to reprice upwards of 159 basis points. These rates are based on the underlying index value at September 30th. This loan repricing should help drive net interest margin expansion once funding costs stabilize or decline. Slide 13 outlines how we are thinking about our net interest margin. In the short term, funding costs should benefit from CD repricing and the pricing actions we took on October 1st. Our real estate loans should continue to reprice higher over time, These items will serve as potential offsets to floating rate assets and the interest rate swaps that will contractually price lower with every Fed move. Near term, the net interest margin is likely to remain stable, but longer term we should see improvement. A flattening to a steepening of the yield curve should positively benefit net interest income. While we expect the NIM to expand over time, it could be bumpy quarter to quarter. Our capital position is shown on slide 14. Book value and tangible book value per share were stable year-over-year and quarter-over-quarter. The leverage ratio is approximately 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 15 provides detail on our Asian markets, which account for about a third of our branches. We have approximately $1.3 billion of deposits and $744 million of loans in these markets. These deposits are 17% of total deposits, and while we have only a 3% market share of this $40 billion market, implying there is substantial room for growth. Our approach to this market is supported by our multilingual staff, our Asian Advisory Board, and support of cultural activities through participation and corporate sponsorships. This market with its dense population and high number of small businesses continue to be an important opportunity for us and one that we believe will drive our success over time. On slide 16, you can see the community involvement is a key part of our strategy. During the third quarter, we participated in numerous local events to strengthen our ties to our customer base. In particular, we were an active participant in the Flushing Meadows Dragon Boat Festival. Our teams participated and did well in the races, and our booth in the park was a big hit, as you can see from the lines at the top left picture. Participating in these types of initiatives has served us as a great way to further integrate ourselves to our local communities while driving customer loyalty. Slide 17 provides our 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, excluding the five basis points of delinquent loan recoveries, is expected to be relatively stable in the quarter, meaning few basis points movement depending on the competitive environment and the pace of loan originations. We expect that funding costs will peak. When the curve flattens or regains a positive slope, this should benefit the net interest margin over time. Non-interest income should be aided by the closing of back-to-back swap loans in the pipeline and the benefits of a Bully 1035 exchange. After the exchange is completed, Bully income is expected to increase an incremental $4 million over the next years compared to the annualized third quarter 2024 levels, and the increase can be lumpy quarter to quarter. As John mentioned previously, we have made the strategic decision to invest in the business by adding people and branches. While year-over-year core non-user expense growth was slightly elevated this quarter, We expect core non-interest expense to increase mid-single digits in 2024. While quarterly tax rates can fluctuate, we expect the mid-20s effective tax rate for 2024. Lastly, we sold approximately 50 million investment securities after core rent. I'll now turn it back over to you, John.