Flushing Financial Corporation

Welcome to Flushing Financial Corporation's fourth quarter and full year 2024 operating results 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. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then 2. 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 certain 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 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 turn the conference over to 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 fourth quarter and full year 2024 operating results conference call. And we want to say a special thank you for our Asian customers who are celebrating Lunar New Year. The fourth quarter and 2024 were important milestones for the company. In December, we completed a $70 million equity raise that allowed the company to restructure the balance sheet and to build on the momentum created in net interest income in the second half of 2024. As we indicated last quarter, funding costs peaked in the middle of the third quarter with sequential NIM expansion. These trends continued in the fourth quarter with GAAP NIM increasing 29 basis points and Core NIM up 18 basis points. The balance sheet restructuring should increase Core NIM by 10 to 15 basis points in the first quarter. After a difficult couple of years battling higher rates and an inverted yield curve, the operating environment is improving. Our asset quality remains stable, and our tangible common equity ratio improved quarter over quarter. For the fourth quarter, The company reported a gap loss per share of $1.61 compared to core earnings per share of $0.14. The balance sheet restructuring incurred a $76 million pre-tax loss or $1.74 per share after tax. The capital raise and balance sheet restructuring has positioned the company to significantly improve profitability and strengthen the balance sheet. On slide four, we discussed our first area of focus, which is to increase the NIM and reduce volatility. Our GAAP and core NIM expanded quarter over quarter as funding costs declined 34 basis points, while interest earning assets declined only three basis points. We benefited both from our real estate loans repricing higher and our funding costs repricing lower. Our average non-interest-bearing deposits increased quarter over quarter to $8 million. In addition, actions to reduce our interest rate risk profile helped as well. We're seeing continued demand for our back-to-back swap offerings. We feel good about the progress achieved so far, and we recognize there's more work to be done. I'll turn it over to Susan to provide some more details on our net interest margin and and asset quality. Susan?

Thank you, John. Slide 5 outlines the net interest income and margin trends. The GAAP and core net interest margin increased 29 and 18 basis points to 2.39% and 225% respectively in the fourth quarter. Liability repricing was the driver of the improvement. We are encouraged about the direction of the net interest margin given the more positive environment and our strategic actions. The slope of the yield curve has turned positive, and this will have an expansionary impact on our net interest margin in the future. Our interest rate risk modeling shows a 100 basis point positive slope in the yield curve with the short end declining would benefit net interest income by about $2 million in the first year and $12 million in the second year. The balance sheet restriction is also expected to have a 10 to 15 basis point improvement in the core net interest margin in the first quarter. We are laser-focused on improving our non-interest-bearing deposits by assessing customer relationships and revamping incentive plans. Slide 6 provides more detail on our deposits. Average deposits increased 8% year-over-year and were flat quarter-over-quarter. Average non-interest-bearing deposits stabilized in the second half of 2024 and were 12% of total average deposits compared to 13% a year ago. The loan-to-deposit ratio improved to 94% from 101% a year ago. The cost of deposits decreased by 34 basis points during the quarter, and we continue to seek opportunities to lower deposit rates in the future. Our deposit betas are favorable during the quarter as interest-bearing deposit betas were 51% as rates declined compared to 57% when rates increased over the past cycle. We continue to focus on shifting the deposit mix and reducing the overall costs. Slide 7 provides more detail on our CD portfolio. Total CDs are $2.7 billion, or 37% of total deposits at quarter end. Of approximately $800 million of CDs, the weighted average rate of 4.59% will mature in the first quarter. Current CD rates are 3.5% to 4.25%. Our customer's preference is for the 91-day product, which has an APY of 4.25%, percent, followed by a one-year CD of the 3.85 percent rate. During the fourth quarter, we retained about 78 percent of the maturing CDs with a weighted average rate reduction of 88 basis points. We see a significant opportunity to reprice CDs lower as they mature. Slide 8 provides more detail on the contractual repricing of the loan portfolio. For 2025, about $750 million of loans are due to reprice 214 basis points higher than the current coupon rate using the December 31st, 2024 index. A similar amount is due to reprice in 2026, with the last sizable portion repricing in 2027 for nearly $1 billion in loans due to reprice about 200 basis points higher. The repricing in 2025 through 2027 is largely based on the five-year Federal Home Loan Bank of New York advance rate plus the spread. At December 31st, 2023, There were over $300 million of multifamily loans that were scheduled to reprice approximately 200 base points higher. During 2024, about 81% of these loans were repriced and remained at the bank. These loans were priced 225 base points higher to a weighted average rate of 6.65%. This loan repricing should aid in driving net interest margin expansion. Slide 9 provides detail on the balance sheet restructuring. Since all the details are on the slide, I will provide some high-level comments. We sold low-yielding securities and replaced them with yields about 370 basis points higher. The related swap in the securities was terminated. We restructured higher-cost and federal home loan bank advances and saved approximately 30 basis points on the yield. Lastly, we moved about $74 million of low-yielding loans to help for sale, and the related mark on the sale was only due to interest rates as there was no credit mark. These actions will enhance our earnings profile by increasing the net interest margin 10 to 15 basis points and strengthening the balance sheet for 2025. Slide 10 highlights our second area of focus, which is maintaining credit discipline. As we have discussed over the last several quarters, we have a low-risk and conservative loan portfolio. Over 90% of the loan portfolio is secured by real estate with an average loan-to-value less than 35%. The multifamily and commercial real estate portfolios, which comprise about two-thirds of the loans, have a weighted average debt service coverage ratio of 1.8 times. Our net charge-offs and non-current loans have a long history of outperforming the industry. Slide 11 provides context on these trends. The charts compare the company'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 on the chart on the left. We expect our net charge-offs to remain well below industry levels. For 2024, we had net charge-offs of 11 basis points. In the fourth quarter, net charge-offs were primarily related to loans that were fully reserved in previous quarters. Our level of non-current total loans is also favorable compared to the industry. In a stress scenario consisting of a 200 base point increase in the rates and a 10% increase in operating expenses, our portfolio has a debt coverage ratio of 1.3 times. Given this, we are expecting minimal loss content within the loan portfolio. Additional credit metrics are shown on slide 12 and demonstrate our conservative risk culture. Non-performing assets to assets total 57 basis points of loan to values at 57%. During the fourth quarter, we allocated approximately $3 million of reserves to our largest non-performing asset based on updated information. Our level of criticized and classified assets remains low and well below our peers. 30 to 89 day pass dues are 48 basis points of loans, indicating a low level of potential future losses. The quarter-to-quarter increase in delinquencies primarily relates to real estate loans with a weighted average debt coverage ratio of 2.4 times and a loan-to-value of 41%. Our allowance for credit losses is presented by loan segment at the bottom right chart and the ratio of overall loans totals 60 basis points. All of these items keep us very confident that our low-risk credit profile performs well over time. July 13 outlines credit metrics at a more granular level for key portfolios. Our multifamily portfolio comprises 38% of gross loans and has strong credit metrics, such as a weighted average loan-to-value of 43% and a weighted average debt coverage ratio of 1.8 times. Non-performing loans in this portfolio are only 44 basis points and criticizing classified are only 102 basis points of loans. The average loan size is $1.2 million in this $2.5 billion portfolio. Investor commercial real estate loans, excluding the office CREE, total 26% of gross loans and have similar portfolio metrics as our multifamily loans with zero non-performing loans and zero criticized and classified loans. Our exposure to office loans is small, less than 4% of gross loans. There is one non-performing loan in the office portfolio, which we expect to be resolved shortly. These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform well over time. Slide 14 provides further context on the risk in our multifamily portfolio and a comparison to peers. As of September 30, 2024, our career-sized and classified multifamily loans were only 60 basis points, the third lowest in the peer group. At the end of the fourth quarter, this ratio was 102 basis points. The increase is primarily for one relationship consisting of three loans with a combined loan-to-value of 47%, with payments expected by the end of the quarter to bring the relationship current. Multifamily reserves, career-size and classified multifamily loans are 71%, which is the fifth highest in the peer group in the third quarter, and this ratio is 51% in the fourth quarter. These loans have an estimated loan-to-value of approximately 41%. 30 to 89-day past dues in our multifamily portfolio are 86 basis points. Over 98% of loans, which repriced in 2024 by over 200 basis points, are current with only 34 basis points, 90 days or more delinquent. This is a testament to our borrowers and our conservative underwriting standards. With these credit metrics, we see limited risk and lost content on the horizon. I'll now turn it back over to John.