Flushing Financial Corporation

Welcome to Flushing Financial Corporation's second quarter 2025 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. 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 1 on your telephone keypad. To withdraw your question, please press star then 2. A copy of the earnings 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 US 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 US 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 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.

Thank you, Operator. Good morning, and thank you for joining us for our second quarter 2025 earnings conference call. We're pleased to report continued progress in our second quarter results, building upon the momentum we established in the first quarter. Our focus on three key areas, improving profitability, maintaining credit discipline, and and preserving strong liquidity and capital continues to drive positive results and demonstrates the power of our strategic focus and the successful execution by our team. For the second quarter, the company reported gap earnings per share of 41 cents and core earnings per share of 32 cents, which are increases of 128% and 78% year over year. The primary difference between the GAAP and core earnings are the fair value adjustments on debt and the reversal of evaluation allowance upon reclassification of loans held for sale to loans held for investment. As you can see from our financial highlights on slide three, our performance was improved and broad-based. Both GAAP and core net interest margin expanded three basis points quarter over quarter. with GAAP net interest margin reaching 254 and core net interest margin reaching 252. This marks continued improvement from our 250 range we achieved in the first quarter and considerable growth from a year ago levels in the 200 basis point range. Average total deposits increased 6% year over year and 1% quarter over quarter to $7.6 billion. We're particularly pleased with our non-interest-bearing deposit growth, which increased 6% year-over-year and 2% quarter-over-quarter to $875 million. Our pre-provisioned pre-tax net revenue of 23.1 million and core PPNR of 19 million in the second quarter reached their highest levels since third and fourth quarters of 2022, respectively. Credit metrics continue to demonstrate the strength of our conservative underwriting approach. Net charge-offs totaled 15 basis points for the second quarter compared to 27 basis points in the first quarter. Non-performing assets were stable at 70 to 75 basis points quarter over quarter. Importantly, criticizing classified loans to total loans improved to 108 basis points down from 133 basis points in the prior quarter. The bank's commercial real estate concentration decreased to under 500% for the first time since third quarter of 2023. This strong operating performance translated directly to a stronger balance sheet. Our tangible common equity grew by 25 basis points to 8.04%. We maintain strong liquidity with $3.6 billion of undrawn lines and resources at quarter end. These results validate our three core areas of focus, improving profitability, maintaining credit discipline, and preserving strong liquidity and capital. While we are proud of this progress, we remain focused on the work ahead. I'll now turn it over to Susan to discuss our results in more detail. Susan?

Thank you, John, and good morning. Our first area of focus continues to be improving profitability, and we made notable progress in the second quarter. Both GAAP and core net interest margin expanded three basis points quarter over quarter, demonstrating the continued benefit of our asset repricing strategy. Real estate loans are expected to reprice approximately 160 basis points higher through 2027, providing a significant tailwind for net interest margin expansion. We continue to see growth in our non-interest-bearing deposits, which is a key focus with our revised incentive plans emphasizing the importance of this funding source. We are also continuing to invest in the business through people and branches to drive core business improvements. Our focus remains on improving returns on average equity over time, and we expect capital to grow as profitability improves. Slide 5 provides detail on our net interest margin expansion. Core net interest income increased by $10.5 million year-over-year, demonstrating substantial improvement in our earning power. Key drivers of the NIM quarter record included loan yields increasing seven base points, which was largely offset by an 8 base points from swap maturities. Episodic items, which include prepayment penalties, net reversals, and recovered interest from non-accrual and delinquent loans, and swap termination fees, were higher in the second quarter compared to the first quarter. In the third quarter, we typically experience seasonality in our funding profile, which tends to put pressure on funding costs. Longer term, we remain confident that our loan repricing should drive NIM expansion, assuming no change to the current flat yield curve. A positively sloped yield curve will drive net interest margin expansion, while a negatively sloped curve will make margin expansion much more challenging. Our deposit franchise remains a key strength and a cornerstone of our funding profile. As seen on slide six, average total deposits grew to $7.6 billion, up 6% year-over-year and 1% quarter-over-quarter. Our strategic initiatives to grow core relationships are paying off. The revamped incentive plans we discussed in the previous quarters, which emphasize non-interest-bearing accounts, are delivering tangible results. Average non-interest-bearing deposits increased 6% year-over-year and 2% quarter-over-quarter. This quarter, new checking account openings increased 21% year-over-year and 8% quarter-over-quarter. This is a powerful leading indicator of future franchise value and demonstrates our ability to attract and retain low-cost core funding. We continue to closely watch our funding costs as the overall cost of deposits increased eight basis points to 3.1% quarter-over-quarter, primarily due to the funding swaps. We see some opportunities to lower deposit costs over time, but the benefit is limited unless the Fed reduces rates. Total CDs are $2.5 billion or 34% of total deposits at quarter end. Approximately $391 million of CDs with a weighted average rate of 3.93% will mature in the third quarter. Our current CD rates are 3.5% to 4.25% and customer preference is for our 91-day and 182-day products, which have APYs of 4%. During the second quarter, we retained about 80% of the maturing CDs with an weighted average rate reduction of 24 basis points. Slide 7 illustrates one of our most significant embedded earnings drivers, the contractual repricing of our real estate loan portfolio. For the remainder of 2025, approximately $373 million of loans are scheduled to reprice at rates 136 basis points higher than their current coupon. Through the end of 2027, $2.1 billion or about a third of the loans are scheduled to be repriced at significantly higher rates, providing substantial predictable tailwind for our net interest income. Contractually and on an annualized basis, net interest income will increase $5 million from the 2025 repricing, $12 million from the 2026 repricing, and $16 million from the 2027 repricing. To demonstrate this point, as of March 31st, 2025, $131 million of loans were due to reprice in the second quarter. We successfully retained 92% of these loans at a weighted average rate of 6.89%, a full 154 base points higher than the prior rate. This is a testament to our strong client relationships and our disciplined pricing, and it confirms the earning powers embedded in our loan book. Our second area of focus as shown on slide eight is maintaining credit discipline. We continue to operate with a low risk profile built on conservative loan underwriting standards and our long history of low credit losses. We have enhanced our focus on relationship pricing and are beginning to see positive results from these efforts. Slide nine illustrates our net charge off history compared to industry since 2001. Our underwriting has consistently outperformed industry averages often by wide margins. Our conservative credit culture has been proven through many rate and economic cycles, and our commitment to this low-risk credit profile remains unwavering. Our multifamily and investor commercial real estate portfolios maintain strong debt coverage ratios at approximately 1.85 times. Even when we stress test these ratios for higher rates and increased operating expenses, the debt coverage ratios remain strong In a stress scenario with both a 200 base point rate increase and a 10% increase in operating expenses, the weighted average debt coverage ratio is approximately 1.36 times. Slide 10 demonstrates our non-current loan performance relative to the industry over more than two decades and multiple credit cycles. Flushing Financial has consistently maintained better credit quality than industry averages. Our borrowers maintain low leverage with average loan devalues on our real estate portfolio of less than 35%. We have only $41 million of real estate loans with a loan devalue of 75% or more, and about a third of these loans have mortgage insurance. Our strength is rooted in the quality of our loan portfolios. In our $2.5 billion multifamily portfolio, as detailed on slide 11, non-performing loans were halved this quarter, to just 50 basis points down from 101 basis points in the first quarter of 2025. Clear size and classified loans in this segment improved dramatically to only 73 basis points from 116 basis points last quarter. The portfolio maintains a very strong weighted average debt coverage ratio of 1.8 times. Our rent regulated portfolio is $1.5 billion and our credit quality in this portfolio is solid. Further details are in the appendix. There is a need for affordable housing in the New York City area. We've been lending to this market for approximately 30 years and have always focused on valuing the properties based on existing cash flows. This has resulted in debt service coverage ratios that are among the highest in industry. Our current loan values are low as our loans generally require 30-year amortization. We have limited interest-only loans. Our underwriting models employ stress tests to amortize the loans as scheduled and then increase the rates by approximately 225 base points above the initial rate to ensure that the property's resulting net cash flow is sufficient to service the loan at higher rates of interest. In addition, the bank requires its borrowers to submit annual income and expense statements with the current rent roll at the conclusion of each calendar year. These statements are analyzed and current debt service ratios are recalculated. The results are reported to the bank's Board of Directors Risk Committee for assessment. Lastly, the loans undergo another stress test based upon the current cash flows. This stress test reprices the loans based upon its current index plus the margin formula to determine if the loans were to reprice at this time with the resulting debt service coverage ratio indicate the property would support the loan balance. We believe that our conservative practices have placed us in a position to better manage through these challenging times. Slide 12 provides peer comparison data and our current multifamily credit quality statistics. Our criticized and classified multifamily loans to total multifamily loans of 73 basis points compares favorably to our peer group. 30 to 89 days past dues are only 12 basis points. Non-performing loans are 50 basis points of total multifamily loans and criticized. Our multifamily allowance for credit losses to criticize and classify multifamily loans is 69%, demonstrating appropriate reserve levels. During the second quarter, $55 million of multifamily loans were scheduled to reprice and mature. Approximately 97% of these loans remained with the bank and repriced 166 base points higher to a weighted average rate of 6.56%. With these credit metrics, we see limited risk and loss content on the horizon. Slide 13 provides an overview of our investor commercial real estate portfolio, which is 30% of gross loans. The investor commercial real estate portfolio has 33 basis points of non-performing loans and 162 basis points of criticized and classified loans. All the non-performing loans and criticized and classified loans are in the office portfolio, which is only 3% of gross loans. These metrics provide a clear representation of our conservative investor commercial real estate portfolio. Finally, on slide 14, our third area of focus is preserving our strong liquidity and capital. Our liquidity position remains exceptionally strong with approximately $4 billion in undrawn lines and resources at quarter end. Furthermore, our reliance on wholesale funding is limited with uninsured and uncollateralized deposits representing only 17% of total deposits, providing a stable and reliable funding base. The company and the bank remain well capitalized, and our tangible common equity to tangible assets ratio increased by a strong 25 basis points this quarter to 8.04%. This capital increase enhances our resilience and provides us with the flexibility to continue supporting our customers and investing in our strategic initiatives. I'll now turn it back to John. John?

Thanks, Susan. The strong financial results Susan detailed are the direct outcome of our focused strategic execution. A key driver of our franchise growth is our deep commitment to the Asian American communities we serve. As you can see on slide 15, our focused efforts supported by our multilingual staff, our Asian Advisory Board, and active community sponsorship have grown our deposits in this vibrant market to $1.4 billion. This reflects a 12.4% compound annual growth rate since the second quarter of 2022. With only a 3% market share in this $45 billion market, the runway for future growth is excellent. Turning to our outlook on slide 16, we provide some insight for the remainder of the year. We expect total assets to remain stable with loan growth being market-dependent as we remain focused on disciplined pricing and improving our overall asset and funding mix. There are several moving parts affecting the net interest margin outlook. First, we have $391 million of retail CDs at a weighted average rate of 3.93, maturing in the third quarter. The retention rate on June CDs was 3.69%. Second, we have $373 million of loans contractually repricing 136 basis points higher in the second half of the year and $720 million repricing 171 basis points higher in 2026. Third, we have deposit outflows seasonally in the third quarter with recovery in the fourth quarter. Finally, the slope and the shape of the yield curve will affect the net interest margin. Non-interest income should benefit from a healthy pipeline of about $41 million in back-to-back swap loans scheduled to close. We're maintaining our disciplined approach to expenses and have lowered our expected core non-interest expense growth 4.5% to 5.5% for 2025 compared to the 2024 base of $159.6 million. Lastly, we're also lowering our expected effective tax rate to a range of between 24.5% and 26.5% for the remainder of 2025. To conclude on slide 17, our key takeaways for the quarter are clear and reinforce our strategy. First, we're successfully improving profitability, evidenced by another quarter of NIM expansion and pre-provisioned net revenue at its highest level in nearly three years. Second, we're maintaining our credit discipline. Our portfolio is 90% collateralized by real estate, with an average LTV below 35%. And this quarter saw a material improvement in our criticized and classified loan levels. Finally, we're preserving and growing our capital. Our liquidity remains robust and our tangible common equity grew significantly to over 8%. The results this quarter demonstrate that our plan's on track and profitability is improving. We're confident in our ability to continue executing and delivering value to our shareholders. Operator, I'll turn it over to you to open the lines for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And your first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good afternoon or good morning, I guess.

Barely morning, but good morning, Mark.

Yeah. First question I had is on deposits. It looked like deposits declined about $400 million. And correct me if I'm wrong, you said we'd see some more outflows in the third quarter related to seasonality, I assume, in the muni business. Yeah. Are you doing some pricing changes, or what kind of caused that $400 million rundown this quarter?

So most of it is seasonal in nature. We'll go into a period of time where we're seeing government deposits move out, and that'll take place partially through the third quarter. Okay. And then we'll pick up back again.

Okay. And then I was trying to understand your interest rate sensitivity, the comments you made around the yield curve. And I was looking at page 34 with, you know, the hedges and trying to understand that. I guess what I'm wondering, if the Fed cuts rates 25 basis points and the curve steepens, you know, 25 because of that, what does that do to your margins?

That's good news for us. Any return to a more normal curve is positive.

Okay. I mean, a couple of basis points, improvement in the margin once it ripples through. Is that fair? Yeah, reasonable. Okay. And then, John, you know, been a lot of talk around sort of the mayoral election in New York. I guess I'm curious. You know, if we get a mayor, Mamdani, does that change your outlook at all for New York City rent-regulated multifamily lending going forward?

Well, as you know, Mark, the mayor's office can't unilaterally freeze rents. All the changes in rents have to be approved by the New York State Division of Homes and Community Renewal. And over the last few years, really other than the COVID timeframe, the state legislature particularly and the Rent Control Guidelines Board have granted renewals. So renewals for 2025, 24 and 25, one-year renewals at 275, two-year renewals at five and a quarter. And you can go back into 23 where clearly There's been an understanding, certainly at the state level, that inflation has taken a toll on fixed expenses. And as a result, these kind of increases are in line. And again, any movement in these rates really has to go through the state. So there's clearly a controller on Mr. Mandami if he... happens to be elected to the office.

Okay, great. And then I guess, you know, given the fact that you guys are suggesting the balance sheet's not going to grow between now and the end of the year and your capital ratios are already, you know, pretty solid, with your stock trading at 58% of tangible book value, I'm curious, are you eager, interested, and are we likely to see buybacks in the second half of the year?

Probably not. We're still looking to build capital a little bit stronger. We're still a little bit below our peers. Our capital position priorities, excuse me, has not changed in paying the dividend, then first growing the company profitably. So we would like to see that first and foremost, then paying the dividend, then returning capital via repurchases.

It just strikes me that at 58% of book value and it being a riskless transaction, it's pretty attractive, no? No. versus growth or dividends or anything else?

Understood. Yes, that is a pretty attractive transaction.

Okay. Thank you.

Thank you, Mark. Thanks, Mark.

And your next question comes from Thomas Reed with Raymond James. Please go ahead.

Hey, guys. Just one quick question from me. You know, there was a nice reduction in your expense outlook. Can you talk about maybe what drove that decrease and maybe some of your updated thoughts on the pace of SBA hiring and de novo expansion?

So, what drove the decrease was the chewing up some accruals related to incentive compensation and, you know, the tight management of expenses that we have instituted across the organization.

And you had a second part there, Thomas?

Yeah, just maybe what are you thinking in terms of potential SBA hires and de novo expansion? You talked about that in previous quarters.

So we have two branches that we plan on opening or have opened this year. One has already opened in Jackson Heights, and our Chinatown branch has grown so nicely that was open pre-pandemic, right before the pandemic. So we've outgrown that space. So we are planning on opening a second branch in Chinatown. We continually look for new teams who will add revenue to our bottom line. So that's always on the table.

Okay, great. Appreciate that. Thank you.

Thank you.

And your next question comes from David Conrad with KBW. Please go ahead.

Yeah, good morning. Just a little bit of a follow-up on the deposits. You gave us a lot of kind of repricing on the CDs. Just curious as this ebb and flow of seasonality of government deposits, maybe your thoughts of the, you know, repricing kind of yields going forward on the non-CD deposits.

Sure. So, you know, we think we were – clearly the – The market is such that we think we've got limited opportunity to drive down the funding costs until the Fed makes its move. Much of what we've had in CDs is really the opportunity. We've taken advantage of that up until this point in time. There are, because of capital markets and our competitors in the government business, From time to time, we see opportunities there to shave off a few basis points here and there. But the majority of the help on NIM going forward really is going to come from the asset side and the loan repricing. I think we'll get limited support from the liability side of the balance sheet until the Fed makes its move.

Okay, got it. Thank you.

And your next question comes from Manuel Navas with DA Davidson. Please go ahead.

Good morning, Manuel. Yeah, this is Sharon G on for Manuel today. I was wondering, hello, the repricing opportunity in the loan book is pretty large, but what is the impact on the credit side? Did the loans that repriced 154 basis points higher in 2025 face Any credit stress?

No, we're not seeing any credit stress there. We had, you know, the loans that repriced, we kept 92% of them are current and there's 7% that are 1 to 29 days, but they're responsive and we're clearing that up right away. You know, the benefit of stress testing our loans at origination upwards of 200 basis points and these only repricing 166, we had an idea of how they would perform based on the stress testing done at origination.

That's great.

Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to John Buren for any closing remarks.

Great. Well, thank you very much for joining our call this morning, and we look forward to continuing to provide the shareholders with information on our progress on our strategic plans. Thank you.

This concludes today's teleconference. You may now disconnect your lines, and we thank you for your participation.