John Buran – President and Chief Executive Officer Susan Cullen – Senior Executive Vice President, Treasurer and Chief Financial Officer.

Mark Fitzgibbon – Sandler O'Neill Steven Comery – Gabelli Gilbert Collyn – KBW Matthew Breese – Piper Jaffray.

Welcome to Flushing Financial Corporation's 2018 First Quarter Earnings Conference Call. Hosting the call today are John Buran, President and Chief Executive Officer; and Susan Cullen, Senior Executive Vice President, Treasurer and Chief Financial Officer. Today's call is being recorded.

[Operator Instructions] A copy of the first quarter earnings release and slide presentation that the Company will be referencing today are available on its Investor Relations website at www.flushingbank.com.

Before beginning, 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. Such factors are included in our filings with the U.S. Securities and Exchange Commission.

Flushing Financial Corporation does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During this call, references to several non-GAAP financial measures as supplemental measures to review and assess operating performance will be made.

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 any information about these non-GAAP measures and reconciliation to GAAP measures, please refer to the earnings release.

I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results..

Increase core deposits and continue to improve funding mix, increase net interest income by leveraging loan pricing opportunities, enhance core earnings power by improving scalability and efficiency, manage credit risk, and to remain well-capitalized under all stress test scenarios.

We continue to focus on these strategic objectives to achieve profitable growth and maximize shareholder value. As previously, announced we have shared a portion of the tax benefits from the Tax Reform Act with our non-executive employees in the form of one-time bonuses and our shareholders in the form of the 11% increase in our quarterly dividend.

As you may already know, we have consistently raised our dividend in the first quarter of each year since 2014, and have paid a dividend every quarter since September 1996. We continue to evaluate opportunities to invest additional tax savings into the business to position the Company for future growth.

Additionally, the Board of Directors authorized a new share repurchase program of a million shares with no dollar or time limitations. We remain well capitalized and positioned to deliver profitable growth and long-term value to our shareholders as we continue to execute our strategic objectives.

At this point, I’ll turn the call over to Susan to discuss the quarter's financial results in greater detail..

Thank you John, I'll start on Slide 6. Total loans were $5.3 billion up 2.6% quarter-over-quarter or 10.5% annualized and up 6.9% from the first quarter of 2017 as we continue to focus on the origination of multi-family, commercial real estate and commercial business loans with full banking relationship.

We continue to diversify our loan portfolio as C&I originations total $141 million for the quarter were over 40% of total originations.

Over the last four quarters our C&I origination purchases have averaged approximately 35% of quarterly loan production resulting a commercial balances growing over 20% during the same period to approximately 15% of the gross loan portfolio at March 31, 2018.

The growth in the C&I portfolio offer several advantages to our company primarily continue diversifications in loan portfolio and as these are primarily adjustable-rate loans, the yield offer some protection and a rising rate environment.

Overall, the total loan growth is on pace to meet our annual expectations of high single to low double-digit loan growth, while we continue emphasize rate over volume. At March 31, our loan pipeline was strong and totaled $326 million, which is down from the last quarter but up from a year ago.

The interest rate on the real estate loans in the pipeline increased to 4.41% from an average rate of 4.10% for linked quarter. The loan-to-value ratio on a real estate portfolio at quarter end remains a modest 39%. Slide 7 depicts the composition of our funding mix.

As funding has continued to grow, the percentage related to CDs and borrowings has decreased. However, when the need arises to access the wholesale funding market, there are advantages as we can ladder out the liabilities for longer terms, where the consumer does not want to tie up money for much longer than 18 months.

On Slide 8, deposits increased nearly 7% year-over-year and quarter-over-quarter. Year-over-year growth was primarily driven by money market CDs and non-interest-bearing accounts.

We continue to increase core deposits as represented by the year-over-year growth with an emphasis on non-interest-bearing deposit accounts which increased 10% year-over-year. Non-interest-bearing deposits of $378 million represent 8% of total deposits. We continue to see rate pressure with increased competition for deposits.

The average cost of funds increased 10 basis points during the quarter. We continue to remain disciplined in terms of deposit pricing while remaining competitive within our market. Turning to Slide 9. Net interest income for the first quarter of 2018 was $42.6 million, down 1.8% year-over-year and 1% quarter-over-quarter.

The net interest margin at 2.79% decreased 16 basis points year-over-year, and 11 basis points quarter-over-quarter. Excluding prepayment penalty income and recovered interest from delinquent loans, the net interest margin at 2.72%, declined 13 basis points year-over-year and 5 basis points quarter-over-quarter.

Our overall cost of funds for the quarter was 1.27%, an increase of 26 basis points year-over-year and 10 basis points quarter-over-quarter, driven by an increase in the rates paid on money markets and CDs. In order to partially mitigate the increase in the cost of funds we have taken the following steps.

Entered into approximately $400 million of forward swaps using Federal Home Loan Bank borrowings which we believe will be beneficial to net income. Loan originations have increased 12 basis points from linked quarter and 42 basis points from the first quarter 2017.

Our originations of commercial business loans which are primarily adjustable rate loans, totaled over 40% of the current quarter’s originations and now comprise 15% of the loan portfolio.

For the third consecutive quarter, the yield on loan originations have exceeded the quarterly yields on the portfolio, net of prepayment penalties and recovered interest from delinquent loans.

The loan swaps provided a minimal effect on the net interest margin in the current period but we believe these swaps will enhance earnings as rates continue to rise. We actively manage funding costs and continue to evaluate strategies to mitigate our liability sense of the balance sheet.

While net interest margin will likely remain pressured we will continue to focus on driving net interest income by executing on the outlined steps, coupled with leveraging loan pricing opportunities and portfolio mix.

On Slide 11, we reported noninterest income for the first quarter of 2018 of $3.2 million while core noninterest income was $2.5 million. The core noninterest income excludes the gains on life insurance proceeds and loss on fair value adjustments.

Core noninterest income declined year-over-year was driven partly by net loss of $300,000 on the sale of one commercial delinquent loan, which we believe will continue to deteriorate so we sees the opportunity to sell and maintain our strong credit quality. Moving to Slide 12, we have seasonality in our noninterest expense.

The first quarter of 2018 included impact of annual grants of employee and director restricted stock unit awards; and the effects of the non-executive bonuses granted because of the Tax Reform Act.

Restricted stock expense totaled $3.5 million in the first quarter of 2018, compared to $3.3 million in first quarter of 2017 and approximately $1 million in the fourth quarter of 2017.

There are approximately $3.8 million of compensation and other non-recurring consulting expenses in the first quarter that will not be included in the remainder of the year's run rate. With lower expected quarterly expense for the remainder of the year, we anticipate 2018 annual expenses to increase approximately 3% to 5% from the 2017.

Overall, the efficiency ratio was 69% in the first quarter of 2018, compared to 55% in the fourth quarter of 2017 and 64% in the first quarter of 2017.

As John previously mentioned, our long-term goals to maintain an efficiency ratio in the low to mid-50s, we remain focused on continuous improvement and new opportunities in our operations for efficiency gains. Regarding taxes, we anticipate effective tax rate to be approximately 22% to 25% for 2018. Now turning to credit quality on Slide 13.

Our credit metrics remained excellent this quarter. As a reminder, we are historical seller of non-performing credits and record charge-offs early in the delinquency process.

The average loan-to-value of our non-performing real estate loans is only 37% based upon the value of the underlying collateral at origination, and we did not adjust the appraised values for increases. The loan-to-value should be conservative based upon this methodology.

Non-performing loans totaled $16.6 million, down 10% year-over-year and 8% quarter-over-quarter, as credit quality remains one of our core strengths. Slide 14 highlights the effects of our strong underwriting discipline with our history of minimal 90-day delinquencies as a percentage of loans originated by year.

As you can see, there are only three loans delinquent greater than 90 days for the vintage years after 2009. Moving to Slide 15. Our coverage ratio of over 123% has been increasing year-over-year due to improving credit quality and our reserve building. The allowance to gross loans remains flat at 39 basis points.

We recorded provision for the loan losses of $0.2 million in the first quarter of 2018 due to the growth in loan portfolio. Net recoveries of $38,000 for the first quarter of 2018, offset a portion of the allowance that would have been required, given our loan growth.

With expected loan growth we continue to anticipate recording provision for loan losses proportionate with that growth in future quarters to maintain an adequate ratio. As always, we monitor our credit quality very closely to ensure that we have an appropriate loan loss reserve. With that, I'll turn it back to John for some more closing comments..

Thank you, Susan. Wrapping up, Slide 16 provides a summary of why we believe we remain well positioned for continued strategic and profitable growth. To reiterate, our vision is to be the preeminent community financial services company in our multicultural market area by exceeding customer expectations and leveraging our strong banking relationships.

The New York City market and strong agent customer base in Flushing continues to represent a significant opportunity for us. We remain focused on providing a superior and consistent experience at every touch point for our customers and maximizing shareholder value.

Those of you that have held our stock for over the last five years know that our total shareholder return has been 84%. And since our IPO in 1995, total shareholder return has been 1073%.

In conclusion, we have a strong foundation with attractive markets and customers, a proven track record and a seasoned leadership team to execute our strategy with a commitment to drive continued profitable growth. We will now take questions as time permits. Operator, I'll turn it over to you..

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead..

Good morning..

Hello, Mark..

Good morning..

Susan, I wondered if you could share with us your outlook for the net interest margin and whether or not that assumes any rate hikes for the remainder of the year?.

We bottled out the net interest margin for the remainder of the year assuming four rate hikes during the year. And we do see continued decline of the net interest margin of somewhere between 5 and 10 basis points..

5 and 10 per quarter?.

No, in total by the end of the year..

Got you. Okay..

I'm sorry..

No problem.

And I'm curious if you think with multifamily rates hitting sort of the 4% level on five year product, whether you think that will trigger some more prepayment activity?.

We think we will see a little bit more, although frankly, we've been concentrating on diversifying the portfolio more. So we think that there's more – there are more opportunities both in the commercial real estate and also in the C&I business going forward for us.

So while multifamily will continue to be an important area for us, where we’d like to diversify the portfolio even more so..

Okay. And then I wondered if you could share with us your expectations for loans and deposits in that New Chinatown location, maybe over the next year.

And what level of loans and deposits it will take to get to sort of breakeven level?.

So we usually think of somewhere around $50 million and – for one of our branches. And I expect we can be there in two years..

Thank you..

Just one more comment about the loan area, the multifamily and the commercial real estate are obviously all five-year resets. So on a continuing basis as rates have risen we are seeing more and more loans rollover and more favorable rates, so we have that ongoing process taking place within the portfolio..

Thank you..

The next question comes from Steven Comery with Gabelli. Please go ahead..

Hey, guys, thanks for taking my question..

Hey, Steve..

Just want to ask about the construction portfolio real quick it was up materially in the quarter, I know before we talked about this, this is a while ago you guys kind of said, you weren’t really thinking you're getting paid for that risk in that portfolio outside of renovations, there's anything change there that makes you guys more interested in that sector?.

Not really, we still think it's going to be a very small proportion of the overall portfolio which – its less than 16 basis points of the total portfolio at this point in time. We may see a little bit of growth opportunistically but it's not a major area of focus for us..

Okay. Yes, I figured as much. And then kind of you guys had talked about efficiency ratio goals of low to mid-50s over the long-term. I mean, how should we interpret that? Is that sort of over the next couple years and do you have any sort of target for 2018 or should we think about that sort of timeline..

So I think a part of what's going on with respect to our efficiency ratio was really happening on the net interest margin side. So as we see these trends, the loan portfolio of repricing, the increases taking place in the C&I portfolio consistent with rate increases. We expect to see a leveling out of the NIM pressures.

So based upon that and then based upon the actions that we're taking with respect to defraying future costs in our branch network. Over time, we expect that we'll be able to bring down the efficiency ratio..

Okay. And then just on the noninterest expense guidance, its 3% to 5% above the 2017 levels. I think I was expecting a little less than that based on sort of the Q1 comments. I mean there are Q4 comments.

Has anything changed there in your guys expectorations?.

No, the biggest component of our non-G&A, G&A is salaries and those raises have been about 30% so that's what's driving that for the most part..

Okay.

So does that sort of the main delta there, the salary increase you guys had announced?.

Yes. Okay, all right. Sounds good. Thanks..

Thank you..

The next question comes from Gilbert Collyn with KBW. Please go ahead..

Good morning, guys..

Good morning, Collyn..

Good morning, Collyn..

Anyway, just that question on the NIM, so the downsize to 10, Susan that you mentioned that’s I’m assuming from this from the first quarter level or is that from the fourth?.

Yes..

Okay, okay. And then just tying that into NII, is the expectation I mean the narrative around what you’ve been doing in mix shifting the loan book and better loan yields coming on. I guess I would have thought that the loan yield – we’d start to see that in fact higher, right. It seems like it’s still under pressure.

What’s just the dynamic there maybe it’s a mix. I know that, that leads some of that, but even so when you – what you’re describing kind of it’s the blended yield. So curious about that and then also to just how you’re thinking about just net interest income dollars in general. I know they’ve been under pressure now for the last few quarters.

Do you expect the dollars to inflect higher at some point this year?.

Yes. I think toward the end of the year, we should start to see some movement there. We continue to have – there is a couple of things going on. First of the – we have $200 million by closed about $300 million of loans that on swaps. So they provide some protection. A good proportion of our $700 million C&I portfolio provide some protection.

And then the loans re-pricing about somewhere around about 20% the year reprice. I think the wild card for us in this particular quarter was the prepayment penalties. They were significantly lower than they had been in the past. So I think depending upon how they come in. This is natural progression of increasing yields on the portfolio.

And you can see that in the increases that you see in the pipeline and then the year-over-year increases in the origination activity. So again three consecutive quarters we had the loans exceed, the origination yields exceed the portfolio yield. So we continue to see that upward pressure on those yields.

And I think toward the end of the year a little accelerate..

Okay, okay. And I know I’m not so asking for guidance in 2019, but John just given your comments kind of what you just said and what you said before. I mean is the expectation that then there really start – should start to be higher NIM coming in, in 2019..

So I think that’s going to depend upon the activity at the Fed. We’re still liability sensitive obviously. But as I said the underlying trends for us, on the loan side will continue to accelerate.

So I think it’s a matter of the – let see the quickness of movement on the Fed versus what we know is pretty well established in terms of movement on the loan portfolio. So I know that’s helpful to you..

Okay, okay. Yes, that’s good. And then just on you – as you said you guys are seeing some really good loan growth, really good loan demand. Where is that coming from? I mean I presume obviously some of it’s being taken by competitors, because these are new customers coming into the bank.

But where are you seeing the opportunity to be able to grow loans at the rate you guys are?.

Well. I think it’s the key focus is our diversification. So it gives us opportunities. So in this particular quarter, we didn’t have a large participation in the multifamily. But made up for with the commercial real estate and C&I, so I think the ability to diversify and to – there is very, very good economic activity going on in the New York area.

And we’re still very, very small proportion of that economic activity. So we’re just beneficiaries of it. We’ve got some new loan officers coming on board in the C&I area. Last year we mentioned that we went into the equipment finance – we went into the commitment finance business. So we pick up a little bit more there.

So I think its discontinued diversification, continued focus on the C&I portfolio. And then leveraging opportunities both in commercial real estate and in multifamily as they as they become available to us.

So I think what gives us our strength is that we do have the ability to build loan volume in several different product types, which enabled us to – which is enabled us to really get good loan growth and just about every year, every quarter.

The other areas that starting to comeback for us is our mixed use area, which we had deemphasized for quite some time. Now, that is starting to come onboard with some additional volumes. And I would emphasize that that these products that we’re talking about mixed use, C&I.

and even commercial real estate, all have premiums, either premiums or interest rate protection versus the multifamily space, which is still price pretty, pretty competitively in general. Although, we’re doing our multi-family over with a four handle now..

Okay. Okay, that’s helpful. And Susan, I appreciate the guidance you gave on the expenses. Can you just give perhaps some similar outlook or color on where you think non-interest will go..

I would think our non-interest income is going to be pretty flat compared to what it was last year, market being equally flowing through our core – I’m going to talk about core non-interest income, because the fair value adjustments and unfortunately if we have gains on life insurance we can’t control that.

So we have no new initiatives to play on any fee income, so we would expect it to be very consistent with what you’ve seen in the prior years..

Okay. Okay, that’s helpful. And then just one last question on the accelerated premium amortization I think on CLOs there were something that you would indicate in the press release. What was that specifically that happened in the quarter..

It’s the comparison of the fourth quarter to the first quarter. In the fourth quarter we had some CLOs call that had some premium associated with them and that was recognized to interest income. And obviously that’s out there..

Okay.

And I’m sorry, what was the dollar amount tied to that?.

I don’t have that in front of me, right this minute Collyn for that one CLO..

Okay. With it, I mean, I know you mentioned it both with prepay and this. I presume prepay was the bigger contributor than this..

And as John mentioned, our prepayments were down for the fourth quarter of 2017 by about $0.5 million..

Okay, okay. All right. I will leave it there. Thank you..

Thank you..

[Operator Instructions] The next question comes from Matthew Breese with Piper Jaffray. Please go ahead..

Good morning, everybody..

Good morning, Matt..

I was hoping to just get some big picture and high level commentary. Deposit competition and deposit betas versus loan yields and loan betas in your market. And why there might be some mismatch and what are the drivers behind that..

I think the basic is a flat yield curve. So I think that’s the core issue. Now the fact that the ten year just moved to 3% that augers fairly well for us. But let’s face it we’re talking about a – I don’t know, 50 some odd basis point differential in the two to 10.

So, I think that is driving a lot of what we’re seeing in terms of pricing particularly in the multifamily space. In terms of betas in the market on the deposit side, I think they are heating up a little bit as we’ve seen some pressure.

Although I think that the – it’s not irrational pricing but it’s clearly more competitive than it was last year on the deposit side. And I think we still see a couple of banks that are out there that are pricing their multi-family with a three handle.

But I think with this latest move from the Fed – the upcoming move from the Fed and the fact that the 10 year went to 3% I think should really start to give everybody pause in that regard. So my expectation is that we’ll see some positive movement in loan yields due to that interest rate movement on the longer end of the curve..

Understood.

Do you think any of the lack of movement to date on the multi-family side is due to tax reform benefits being priced away?.

No, I don’t really think so. I think it’s a flat yield curve. I think it’s a flat yield curve, I think a lot of relatively new entrants into the market. But I see two trends, first of all the yield trend that I think is positive. And then we have two competitors out there; one has decided to not grow that particular multi-family.

And there’s one that’s trying to stay below the $50 billion mark. So that helps a little bit as well. So that combined with some movement on the longer end of the yield curve might open that market up a little bit, might cause us to be a little bit more – to do a little bit more in multi-family in the coming quarters.

But then again, we have other opportunities that to date have been better..

Right. Okay. And just switching gears to capital management. Any sort of desire to continue repurchasing stock. Do you think we should sort of modeling that in a little bit at current levels more consistent share repurchases..

We’re an opportunistic repurchase of shares. So we will look at as the market moves. Again, we look at relation to our tangible book value and make decisions from there. Obviously when it comes to capital, our first choice is to redeploy into the business and grow our net interest earning assets..

Got it. Okay. That’s all I have. Thank you..

Thank you..

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

Well, thank you very much. I want to thank everybody for joining us today on our first quarter 2018 earnings call. I appreciate your support of Flushing Financial Corporation. We look forward to talking to you again next quarter. Thank you..

Thank you..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..