Welcome to the Flushing Financial Corporation's Fourth Quarter 2019 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. All participants will be in a listen-only mode.

[Operator Instructions]A copy of the earnings press release and slide presentation that the company will be referencing today are available on its Investor Relations Web site at flushingbank.com.

Before we begin, the company would like to remind you that the 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 the company's 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 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'd now like to introduce John Buran, President and Chief Executive Officer..

exceeding customer expectations, enhancing earnings power, strengthening our commercial bank balance sheet, and maintaining our strong risk management philosophy.

As previously announced, to further enhance our existing footprint, we've been executing a digital transformation strategy that's currently in its testing phase, and when complete, will improve our customer experience.

Our digital offerings will be enhanced to state-of-the-art technology, allowing us to modernize the customer experience without adding to our existing infrastructure. We expect to have this transformation completed in the second quarter of 2020.

Susan will provide additional detail shortly.Overall, we remain well-capitalized, and our focus on our strategic objectives enables us to further deliver profitable growth, and long-term value to our shareholders.Now, I'll turn the call over to Susan to provide additional color on our performance..

Thank you, John. I'll begin on slide nine. Net interest income for the fourth quarter of 2019 was $41 million, up nearly 6% quarter-over-quarter due to the net interest margin increasing 11 basis points to 248. The yield on the loan portfolio increased four basis points quarter-over-quarter, while the cost of funds decreased 11 basis points.

The cost of funds continuously improved throughout the quarter. The core net interest margin was 233, flat quarter-over-quarter.

As a reminder, core net interest margin excludes the prepayment penalties, recovery of interest on non-accrual loans, and the mark-to-market adjustment on the qualifying hedges.The Fed rate decrease in late-September and October 2019 affected the rate of our C&I loan portfolio in the beginning of the fourth quarter.

With a steady interest rate environment, we believe the yield on these loans will also stabilize.

Year-over-year, the net interest margin decreased nine basis points as the cost of funds increased six basis points, while the yield on interest earning assets have decreased four basis points.On slide ten, we highlight a strategy built into the balance sheet we're using to reduce funding costs for NIM stabilization.

As a reminder, we have $1 billion of retail CDs scheduled to mature in 2020 at a weighted average cost of 2.2%. As highlighted on the right-hand side, current replacement funding costs are significantly lower than maturing CD rates.

Importantly, over the long-term, we will position our balance sheet to be more interest rate neutral, which allows us to seize opportunities as we continue to actively manage funding costs and to evaluate strategies to further strengthen our balance sheet, and our interest rate environment.On slide 11, return on loans are $5.8 billion, up 4% year-over-year as we continue to focus on the origination of full banking relationships to the C&I multi-family and commercial real estate loans.

These originations totaled 89% of loan production for the fourth quarter. Approximately 50% of our originations in the quarter were non-brokered loans. We continue to diversify our loan portfolio as C&I originations for the quarter was 31% of total originations, and a record of 52% for 2019.

John mentioned that total C&I loans amounted to 19% of the loan portfolio at December 31, but what differentiates us from our competitors is in 2011 we have originated almost $3 billion of C&I loans while recognizing approximately 40 basis points of loss, excluding the tax and the value portfolio as a percentage of originations over that same period.

Our C&I portfolio does not contain any leverage to lending.As we continue to shift our balance sheet into a more interest rate neutral position, we have originated floating rate C&I loans. In the third quarter and early fourth quarter of '19, the rates on these floating rate loans decreased due to the Federal Reserve lowering rates.

For the steady interest rate environment we would expect to build these floating rates, and mortgage loans provides stability as they re-price at a slower pace than the C&I loans.

The growth in the C&I portfolio continues to offer advantages to the company, primarily continued diversification of the loan portfolio, as these primarily adjust float rate loans to yield offers more protection in the rising rate environment, and they assist the company in moving to more interest rate neutral position.At December 31, our loan pipelines totaled $325 million at an average rate of 4.18%.

The pipeline is $128 million greater than the pipeline at December 31, 2018. The composition of pipeline is 58% adjustable rate and 42% fixed rate.

The loan-to-value on our real estate portfolio at quarter end was a modest 39% and the debt service coverage ratio for the current core origination of multi-family commercial real estate and one to four family mixed use loan is 184%. Importantly, we underwrite each loan as a cap rate in excess of 5% and thus stress test each loan.

We remain committed to our strategy of focusing on C&I, commercial real estate loans, and multi-family loans.

In the fourth quarter of '19, these loan closings represented 31%, 20%, and 39% respectively of all originations, while maintaining our conservative loan-to-value and debt coverage ratios.On slide 12, non-performing loans are approximately $13 million improving nearly 10% quarter-over-quarter as credit quality remains one of our core strengths.

In the fourth quarter, we recognized net recoveries and recorded a benefit from loan losses of $300,000 due to changes in the portfolio mix. Importantly, delinquent loans decreased to 34 basis points of total loans from 49 basis points at September 30.

The loan-to-value on real estate dependent non-performing loans amounted to 26% as of December 31.Moving to slide 13, as a reminder, we actively manage our loan portfolios to identify and result loans, recording charge-offs early in the delinquency process. As a reminder, we are a historical seller of non-performing loans.

As we continue to grow our balance sheet, we remain mindful of maintaining asset quality. As shown here, over two decades, Flushing has demonstrated superior credit metrics and in year end 2019 our total classified assets improved to the lowest level in 2008.

As I previously stated, since 2011, we originated over $3 billion of C&I loans, recording less than 40 basis points of losses, excluding tax medallion when losses are compared to the originations over the same time period. Our credit discipline includes limits on concentration to specific industries, and general avoidance of high rate risk industry.

Further, we believe the loan-to-value of Empire loss metrics associated with the real estate portfolio will minimize volatility of future charge-offs.As highlighted on slide 14, our strong credit quality metrics have resulted in our coverage ratio increasing from 129% to 154% year-over-year as of December 31, 2019.

With the adoption of CECL in 2020, we estimate our Day One impact to increase our current allowance between $1 million and $3 million of 5% and 15%.

However, we continue to evaluate our assumptions creating this estimate.Continuing with slide 15, the current portfolio loan-to-value is less than 40% based upon the value of the underlying collateral at originations, and we do not adjust the price values for increases.

Given, a low loan-to-value associated with non-performing real estate loans, we did not foresee an increase in related expenses.Slide 16 shows 90-day delinquencies as a percentage of loans originated by year. Overall, our credit quality remains pristine.

As you can see the results of our strong underwriting discipline, it was just 11 loans delinquent greater than 90 days for the last 10 vintage years.Slide 17 highlights the evolution of our funding mix.

As we increased funding, the percentage of core deposits has increased, but we need to access the wholesale funding markets, we can advantageously ladder out the liabilities for longer terms. Core deposits increased 5% quarter-over-quarter, and 7% year-over-year, totaling 72% of all deposits at December 31, compared to 52% at December 31, 2010.

The loan-to-deposit ratio for the fourth quarter of 2019 was 114%, compared to 116% at September 30. We believe the acquisition of Empire Bancorp will enhance this ratio and improve our funding costs.On slide 18, our deposits increased 2% quarter-over-quarter and year-over-year.

Growth is primarily driven by money market, and non-interest bearing accounts. We continue to focus on the growth of core deposits with an emphasis on non-interest bearing deposit accounts, which increased over 5% year-over-year, our transaction accounts increased 7% from December 31, 2018.

Non-interest bearing deposit to 435 million represents 9% of total deposits.Turning to slide 19, we continue to strengthen our presence within the Asian market. Our Chinatown branch continues to perform well and achieve targeted levels.

In the fourth quarter, we opened a new branch in an attractive Asian market in Hicksville, New York, to further expand our successful ethnic strategy, enabled us to grow more than 12% deposits within our Asian branches.

We continue to have a strong focus on the community, where we have over $800 million in deposits at branches that serve the Asian communities, and over $650 million in loans.

We continue to capture strategic growth opportunities within this market, aided by our Asian Advisory Board and our multilingual staff.Also, in order to diversify deposit gathering channels, we are improving our digital online mobile offerings as part of our overall digital strategy, which we summarized on slide 20.

As John mentioned, this strategy will improve our customer's overall banking experience, without requiring us to add to our physical infrastructure. These technologies reduce the overall cost of gathering deposits.

We expect the new technologies to be fully operational in the second quarter of 2020, and enable us to attract customers outside our footprint, and deepen current customer relationships, and new technologies are currently undergoing user acceptance testing.Moving to slide 21, non-interest expense using GAAP increased only $4 million or 3% for the year, while expanding our distribution network and negotiating the acquisition of Empire.

Core non-interest expense improved even more increasing less than $2 million, or 2%.

Continue to manage expenses and improving the NIM will assist us in achieving our long-term goal of an annual efficiency ratio in the low-to-mid 50s.Continuing on slide 22, the ratio of non-interest expense to average assets improved to 1.66% for the year ended December 31, 2019, compared to 1.72% for '18, and 1.73% for '17.

The company has historically made relatively stable ratio of non-interest expense to average assets. As a reminder, the first quarter of 2020's non-interest expenses will contain seasonality, resulting in higher expenses due to the impact of annual grants of employee and director restricted stock unit awards.

We continue to look for opportunities in our operations with continuous improvement with efficiency gains, and expect to share best practices and further gain efficiencies from our pending acquisition of Empire Bancorp.

Regarding taxes for 2020, we approximate the effective tax rate between 22% and 24%.With that, I'll now turn it back to John for some closing comments..

Thank you, Susan. On slide 23, I'd like to conclude by summarizing why we remain well-positioned for continued and consistent profitable growth. The CD re-pricing available to us will assist in reducing the cost of funds over 2020.

Although, we will remain a liability-sensitive company, the implementation of our swap strategy and the origination of floating rate loans are in direct response to management's goal of becoming less liability-sensitive, and continues to be an important component in mitigating NIM compression.The loan pipeline as of December 31, 2019 totaled $325 million and is greater than the pipeline as of December 31, 2018.

Our credit metrics remain strong, as non-performing loans have decreased, as have total delinquent loans, we continue to focus on increasing the amount of direct loan business as approximately 50% of fourth quarter '19 loan closings were non-brokered loans. We have contained non-interest expenses in this low rate environment.

We continue to see positive trends including growth in the C&I portfolio.

As we move our balance sheets were more floating rate business and it continues strong loan pipeline.With a pending acquisition of Empire Bancorp the pro forma combination of our banking franchise lowers our overall cost of deposits, as well as improves our loan to deposit ratio.

The merger is expected to enhance our core earnings with significant revenue opportunities and cost synergies and expand our presence into a new market on Long Island. The investment in the Universal Banker Model continues to pay dividends. Universal bankers are spending more time with customers.

And this has resulted in brand sales increasing approximately 20% in total, and 35% per branch employee.Our ongoing focus on developing and maintaining a multilingual brand staff to serve our diverse New York City customers remains a key differentiator.The New York City Market and its strong Asian customer base continue to represent a significant opportunity for us.

The implementation of our technology transformation will expand our footprint and allow for deposit gathering at a total costs less than brick and mortar, while enhancing the customer experience for business and consumer clients.

Overall, our vision remains consistent and that is to be the preeminent community financial services company in our multicultural market by exceeding customer expectations, and leveraging our strong banking relationships.In conclusion, a strong culture and track record attractive markets and customers, consistent financial performance and continued execution of our strategic objectives all position the company to do very well in the future.We will now open it up to questions.

Operator, I will turn it over to you..

Thank you, ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] Our first question today comes from Steve Comery of G. Research. Please go ahead..

Hey, good morning..

Good morning..

Good morning, Steve..

Looking at slide 10, kind of appreciate the detail there, just kind of wondering, would you just kind of as a base case, expect to replace most of the maturing CDs with new CDs, or do you think you could kind of get some filter through the other categories?.

We think we're going to get it filtered through the other categories. So, today we're probably bringing in a little bit more money market then CDs. So, I think we'll probably see a little bit more coming out of that, and obviously, we're always focused on our NOW account business and our interest-bearing DDA..

Okay, and then sort of just on the same topic like this, the maturing CDs, what sort of the impact of Empire being integrated? I mean, does that change sort of the opportunities there and like, what do you do with their CDs, or kind of how are you thinking about that?.

So, how we think about that is, their deposits will increase our non-interest bearing deposits significantly. Looking at their CD portfolio, it's not nearly as great as ours. So, I wouldn't expect it to have a material impact on these numbers..

Okay, fair enough. And then, just on - switching gears, the loan yields and the origination table in the press release, it looked like non-mortgage yields kind of increased a lot.

Was there any like specific reason for that, just given rates falling down in general during the quarter?.

Yes, during the prior quarter we had a lot of C&I type mortgage loans that were drawn down that yield. They were longer-term..

Okay.

And would you characterize the mix this quarter as sort of more typical or the previous quarter?.

I would say, this quarter is probably more typical in this environment, but that's always subject to change..

Okay..

I think one of the things that is strong in our company is really the ability to diversify that loan portfolio and to focus on the areas that are giving us the best risk adjusted returns in any particular time period.

So, I think we try and remain somewhat flexible in dealing with the risk and return as we look at the opportunities out there in the market..

Okay, okay, it makes sense.

And then finally for me, no repurchases during Q4, just given kind of how the stock has done recently, how do you think about that, given where the valuation is today, and then also in regard to the deal closing coming on?.

So, we see - obviously, the stock has been down recently, we think that there are some opportunities for us looking back at repurchases. Obviously, we had quite a bit of blackout going on in the last quarter. So, as we dealt with changes associated with the merger, we think that the merger is very, very much on track.

All the filings have done with the regulatory authorities, and we think the prospects for a combined Flushing and Empire combination far, far exceed Empire standing alone or Flushing standing alone for that matter..

Okay.

And you mentioned blackout periods, have those expired, or is that still ongoing?.

No. The general rule is that it expires three business days after we released earnings..

Okay, so three days from now, is that….

Last night….

Oh, okay, three days from last night. Okay, fair enough. Okay. Thank you. That's all from me..

Thanks, Steve..

Great..

[Operator Instructions].

All right. If there were no other questions, then, thank you very, very much for attending the call, and if there are any further individual questions we look forward to hearing from you, you know how to contact us. Thank you very much..

Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.