Flushing Financial Corporation

Welcome to Flushing Financial Corporation's first quarter 2025 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. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 two. 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 Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and other factors related that could 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 the 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 Buran, President and Chief Financial, excuse me, 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 first quarter 2025 Operating Results Conference call. As we entered 2025, the outlook was favorable with a better operating environment driven by the expectation of a strong economy, the potential for future rate cuts by the Fed as inflation eased, and there were signs that the yield curve would regain a positive slope. Unfortunately, the first quarter did not play out this way as the economy was still solid, but uncertainty about the outlook became the primary focus as the yield curve returned to inversion. Despite these challenges, we achieved important improvement in our operations as Gap and Core NEM expanded to the 250 range, a level we have not seen since the fourth quarter of 2022. For the first quarter, the company reported a gap loss per share of 29 cents and core earnings per share of 23 cents. The primary difference between the gap and core earnings is a non-cash, non-tax deductible goodwill impairment charge of 17.6 million or 51 cents a share. The impairment had no impact on tangible or regulatory capital. As a result, we have no goodwill remaining on the balance sheet. Our areas of focus are improving profitability, maintaining credit discipline, and preserving strong liquidity and capital. While we recognize there's a lot more work to do, we're encouraged by the progress to date. I'll now turn it over to Susan to discuss our area of focus, including our contractual loan repricing that can substantially improve income over the coming years. Susan?

Thank you, John. Our first area of focus is improving profitability. While this is expected to be a multi-year endeavor, we made progress in the first quarter as both GAAP and core net interest margins expanded quarter over quarter. We expect further net interest margin expansion as real estate loans contractually reprice higher. We are focused on improving our return on average equity over time. Slide five provides more detail on our net interest margin expansion. The gap in core net interest margins increased 12 and 24 basis points to 2.51% and 2.49% respectively in the first quarter. Liability repricing was a driver of the improvement as the cost of funds declined 22 basis points quarter over quarter compared to a 9 basis points decrease in average earning assets. Entering the first quarter, the yield curve regained a positive slope, but as the quarter closed, this slope turned negative. A positively sloped yield curve will drive net interest margin expansion, while a negatively sloped curve will make margin expansion more challenging. Our interest rate risk modeling shows a 100 basis point positive slope in the yield curve, but the short end declining would benefit net interest income by about $1 million in the first year and $10 million in the second year. In the near term, the net interest margin is expected to be impacted by the shape of the yield curve, changes in the balance sheet mix, and continued contractual repricing. The March NIM was not materially different from the NIM that's being reported. Slide 6 provides more detail on our deposits. Average deposits increased 7% year-over-year and about 1% quarter-over-quarter. The load-to-deposit ratio improved to 87% from 94% a year ago. The cost of deposits decreased by 19 basis points during the quarter, and we continue to seek opportunities to lower deposit rates. Our deposit betas were also favorable during the quarter, as interest-bearing betas were 59% as rates declined, which is the same as when rates increased over the past cycle. Total CDs are $2.6 billion, or 34% of total deposits at quarter end. Approximately 600 million of CDs with a weighted average rate of 4.16% will mature in the second quarter. Current CD rates are 3.5% to 4.25%. Customer preference is for a 91-day product, which has an APY of 4%, followed by the one-year CD at 3.85%. During the first quarter, we retained about 80% of the maturing CDs with a weighted average rate reduction of 69 basis points. Going forward, while there is possibly some benefit from CD repricing based on the current yield curve, we do not expect it to be significant. Average non-interest-bearing deposits increased 3% year over year, but declined 2% quarter over quarter. As a percentage of total average deposits, average non-interest-bearing deposits were 11.3% compared to 11.8% a year ago. Non-interest-bearing deposits are a significant focus area as incentive plans have been revamped to emphasize further growth and deeper customer relationships. Checking account openings increased 5% year-over-year and 6% quarter-over-quarter. We continue to focus on shifting the deposit mix and reducing the overall cost. Slide 7 provides more detail on the contractual repricing of the loan portfolio. For the remainder of 2025, about $511 million of loans are due to reprice 171 basis points higher than the current coupon using the March 31st index. In 2026, about $706 million is due to reprice, 190 basis points higher. With the last sizable portion repricing in 2027, where nearly $1 billion of loans are due to reprice, about 168 basis points higher. Repricing in 2025 through 2027 is largely based on the five-year Federal Home Loan Bank of New York advance rates plus a spread. During the first quarter, there were about $148 million of loans that were scheduled to reprice approximately 194 basis points higher based on the year-end index values. Approximately 88% of these loans remained with the bank and repriced 210 basis points higher. Over 91% of these loans are current, while approximately 9% are less than 30 days delinquent. All else being equal, we expect loan repricing to drive net interest margin expansion to with an annualized $9 million of interest income in 2025 and $13 million in 2026. Over the three-year period, these loans will cumulatively add approximately $50 million of interest income. Slide 8 highlights our second area of focus, which is maintaining credit discipline. As we have discussed over the past 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%. We have a long history of low levels of credit losses. One of our key strategic initiatives is enhancing our relationship pricing focus, and we are beginning to see results. Slide 9 depicts our net charge-off history compared to the industry since 2001. As you can see, our underwriting has outperformed over time, often by a wide margin. Our conservative credit culture is has been proven in many rate and economic cycles, and our commitment to our low-risk credit profile is unwavering. Our two largest portfolios are multifamily and investor commercial real estate, and these portfolios have a combined debt service coverage of 1.8 times. When we stress test this ratio for higher rates and increased operating expenses, the DCRs are still strong at 1.4 times. As shown on slide 10, our level of non-current loans to total loans is also favorable compared to the industry, not only recently, but for the past 24 years. This is primarily due to our conservative underwriting. Our borrowers have a low leverage with an average loan-to-value of less than 35% on our real estate portfolios and high cash flows debt coverage ratios of 1.8 times for our multifamily and investor commercial real estate portfolios. We have a minimal amount of loans with an LTV greater than 75%, with more than a third of these loans having mortgage insurance. We remain comfortable with our conservative underwriting, will continue to limit problem assets, and ultimately limit loan losses. Slide 11 shows our allowance for credit losses by loan portfolio. Overall, our allowance for credit losses is 59 base points of loans, which is stable quarter-by-quarter. Criticized loans, total loans is a low 133 base points and as previously discussed, the lost content in our portfolio is low given our conservative underwriting standards. All of these items keep us very confident that our low risk credit profile performs well over various economic cycles. Slide 12 outlines credit metrics at a more granular level for our multifamily portfolio. This portfolio comprises 38% of gross loans and has strong credit metrics such as a weighted average loan-to-value of 42% and a weighted average debt coverage ratio of 1.8 times. Non-performing loans in this portfolio are only 101 basis points and criticized and classified are only 116 basis points. The average loan size is $1.2 million in this $2.6 billion portfolio. Overall, the portfolio is very granular and is conservatively underwritten. Slide 13 provides further context on the risk in our multifamily portfolio in comparison to peers. As of December 31, 2024, our career-size and classified multifamily loans were only 102 basis points, which is below the median of the peer group. At the end of the first quarter, this ratio was 116 basis points. Multifamily reserves, career-size and classified multi-loans were 51%, which is above the median of the peer group in the fourth quarter, and this ratio was 43% in the first quarter. 30 to 89-day past dues in our multifamily loan portfolio are only 11 base points. During the first quarter, over $64 million of loans were scheduled to reprice and mature. Approximately 96% of the loans remained with the bank and repriced 267 base points higher to a weighted average rate of 6.59%. Nearly 100% of these loans are current. This is a testament to our borrowers and our conservative underwriting standards. With these credit metrics, we see limited risk and loss content on the horizon. Slide 14 provides an overview of our investor commercial real estate portfolio, which is 29% of gross loans. The investor commercial real estate portfolio has 34 basis points of non-performing loans and 175 basis points of criticized and classified loans. Our exposure to office loans is small at 3% of gross loans. There are two non-performing loans in the office portfolio and a total of three that are criticized and classified. These metrics provide a clear representation of a conservative investor commercial real estate portfolio. On slide 15, we discussed our last area of focus, which is to preserve strong liquidity and capital. We have ample liquidity with $4 billion of undrawn lines and resources at the end of the quarter. Average deposit growth was nearly 7% year-over-year and 2% quarter-over-quarter. Uninsured and uncollateralized deposits remained low at 16% of total deposits. The company and the bank remained well capitalized. Our tangible common equity to tangible assets was stable at 7.79% quarter-over-quarter. We feel very good about our liquidity and capital positions. I will now turn it over to John. John?