Good morning, everyone and welcome to the Flushing Financial Corporation’s Fourth Quarter 2020 Earnings Conference Call.

Hosting the call today are John Buran, President and Chief Executive Officer; Susan Cullen, Senior Executive Vice President, Treasurer, and Chief Financial Officer; and Frank Korzekwinski, Senior Executive Vice President and Chief of Real Estate Lending. Today’s conference call is being recorded.

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..

Thank you. Good morning, everyone and thank you for joining us for our fourth quarter 2020 earnings call. I would like to start by start off reflecting on 2020 and the impact it had on our employees, communities, customers and organization. Clearly, the pandemic had a significant impact on everyone.

And I am proud and thankful for how our employees work to help customers and communities through this difficult time, where significant parts of our footprint was shutdown, social distancing became the norm and we all had to adjust to remote working.

While none of this was easy, our employees rose to the challenge and work tirelessly, not only to serve customers and communities, but to close and integrate the Empire Bancorp transaction remotely. 2020 was a significant year and we look forward to a better 2021 with the rollout of vaccines and a path to return to normal activities.

On today’s call, I will discuss our fourth quarter highlights and our strategic objectives for 2021 before turning the call over to our CFO, Susan Cullen, who will provide greater detail on our financial performance. Following our prepared remarks, we will address your questions along with our Chief Real Estate Lending Officer, Frank Korzekwinski..

Thank you, John. I will begin on Slide 6. Our first strategic objective is managing our cost of funds and continuing to improve the funding mix. Average deposits rose 10% in the fourth quarter with Empire accounting for most of the growth.

Our average non-interest bearing deposits rose 68% from a year ago and our core deposits grew approximately 80% of average deposits, an improvement from the 70% in the fourth quarter of 2019. Our total cost of deposits declined to 124 basis points over the past year to 47 basis points.

The number of mobile banking customers and usage continues to grow as well. The number of active users rose 12%, loans processed increased 33% and dollars processed expanded by 52% during the quarter. Online banking and active bill pay subscribers also grew 14% and 16% respectively in the fourth quarter of 2020..

Thank you, Susan. On Slide 18, we provide our outlook. We are cautiously optimistic about the operating environment with a steeper yield curve, potential fiscal stimulus and the continued rollout of a vaccine should put the economy on a path to return to normal over time.

However, we are concerned about the rising number of COVID cases and what it means to the local economy. There are also open questions regarding the future regulatory environment and tax policy. With that said, we are encouraged by our loan pipeline, which is trending higher than a year ago.

The Empire deal is progressing in line with our expectations and we remain very comfortable with our credit profile. Overall, we feel we are on the path to achieve our long-term goals of an ROA greater than or equal to 1% and an ROE greater than or equal to 10%. With that, we will now open it up for questions. Operator, I will turn it over to you..

Thank you, ladies and gentlemen. Our first question today comes from Steve Comery from g. Research. Please go ahead with your question..

Hey, good morning..

Good morning..

Good morning, Steve..

I wanted to start with just kind of a clarification, was there any PPP forgiveness recognized in the fourth quarter in NII and loan yields?.

Very minimal..

Minimal, yes..

Non-material amount..

Okay.

And any expectations as far as when you would start seeing material forgiveness?.

More in the first quarter toward the end of the first quarter, I would say..

Okay. Okay. And then moving on I guess kind of similar topic to loan yields, I mean, they did increase quarter-over-quarter.

Should I read most of that increase is coming from layering in Empire? And if so, I mean, any idea what the look – the yield would have looked like just on an organic basis?.

Yes. So, on an organic basis, the NIM, the prepayment recoveries and stuff brought down the yields by 11 basis points for the prepayments in the net gains and loss and so there is a big piece of prepayment penalty this quarter..

So, your answer to the question on the Empire, I know Empire’s ingoing yields were a little bit higher, but not significantly higher..

Okay, okay. Fair enough. And then maybe a final one for me, John, you made a comment on shifting loan mix being a headwind for margin going forward.

I am just wondering, kind of like is this a conscious strategy or are you guys just kind of reflecting and into market and what’s out there?.

Well, I think the pressures that we see in the market tend to be on the commercial real estate side. And as a result, we are probably doing a little bit more multifamily. Also maybe a little bit less mixed use, which tends to be a historically a better yielding product. And then of course, we have got the PPP loans as well.

So, there are number of factors going on. I think the most important of which is just caution in the general caution with respect to the general economy and just being very careful on the commercial real estate side..

Okay, okay. Appreciate it. That’s it for me. Thanks..

Thanks, Steve..

Thank you..

And our next question comes from Chris O’Connell from KBW. Please go ahead with your question..

Good morning. So, I wanted to start out with the expenses. I hear you that the costs are going to be frontloaded here, but there is also going to be a little bit of noise of the seasonal increases in the first quarter.

Just all in, how do you guys see the core OpEx run-rate over the next two quarters given the seasonality that’s going to be coming in, in the first quarter as well as the extra month of the Empire and the cost saves? And then maybe where that flattens out into 2Q ‘21 and 3Q ‘21 once those seasonal factors in the cost saves, are all layered in?.

So, historically, our first quarter adjustment or seasonality of the expenses has been between $3 million, $3.5 million. So, I would – using the number we have included in our script of $33.5 million, I would say we would be somewhere between $36 million and $38 million for the first quarter.

We would have another month’s worth of expenses related to Empire and their run-rate for their G&A expenses, as I believe we previously disclosed was about $24 million annually. So to do the math on that would be like another $1 million to our expense base..

Okay.

And then – yes and then how do you see that falling down into the second quarter, I guess?.

$3.5 million goes away..

Yes. Our expenses will remain elevated because you don’t really see – we don’t book their expenses onto our P&L then pull half of them away. So, our expense base will go up by half of their $24 million for the year..

Okay..

But the differential between the first quarter – between the first quarter and the remaining quarters is going to be the $3.5 million, that’s….

I guess what I am getting at is how much of the cost saves have been realized given how quickly you guys did the conversion there and how much are going to come through in the first quarter?.

They are pretty much – two-thirds of them are baked in..

Right.

But the cost saves are just of the Empire for 2 months?.

The cost savings and Empire for the – are both baked in for 2 months..

2 months, right..

Okay, great. Thanks.

And then as far as the pipeline goes, it is about $355 million, is that including the $150 million of second round PPP?.

No..

That’s our core business..

So, it sounds like a pretty good pipeline here. Although it seems like prepays overall in the New York market are fairly elevated.

It sounds like you guys think you are going to be resuming loan growth in 2021 at a pretty good clip, is that going to be more back end weighted given some of the more prepays that might come in, in the first half?.

Well, let’s talk about prepays fine. So, we have actually not seen an elevated level of prepayment penalties probably since the pandemic started, it’s a little bit of a blip probably towards the end of the third quarter. But overall, things are a little bit quiet right now.

A lot of lenders are still working with their customers to finish up the relief programs they have had. So, I am not seeing a rush to prepay at this point in the market. Don’t see it in the first quarter..

Okay, great. So – and then as far as resuming kind of your normal loan growth levels just honing in on that a bit.

I mean, are you guys thinking like mid single-digit then low to mid single-digit would be the target?.

Yes..

That’s great.

And then with the jump up in NPAs obviously good moving downward there and overall pretty minimal on the credit cost side, but what’s in terms of the jump up from Empire and then the single credit in criticized and classified, is there anything that is particularly worrisome there or is that more being prudent?.

No, as we have discussed in the past, we continue to do complete due diligence on Empire till we got this conversion done and the deal is struck. So, these credits that came over were totally within our expectations of what we knew we were acquiring and there are no concerns related to these credits..

Got it. Great.

And then kind of putting it altogether I guess on the credit side, as you are looking at the reserves here at around 69 basis points or so ex-PPP, how do you guys see that progressing going forward?.

Well, we are very confident in our credit quality. We stress test our loans. We have over 80% of the portfolio is backed by real estate that has an LTV of around 40%. The non-performing assets have an LTV even less than that. Our modeling shows that we have taken all the loss content we have through the CECL model.

So, we are confident in our credit portfolio..

Got it.

I just mean as far as things stand now with the deferrals and the levels that they are at and how do you guys see those kind of progressing as we move into the first quarter of this year? I mean, do you think that the reserve to loan is going to like hold around its current levels or that, that’s going to be coming down or?.

So we are not seeing really collateral issues with respect to our – with respect to the portfolio, we are just seeing cash flows that are temporarily impacted given the pandemic. We are not seeing any issues with respect to valuation. We don’t have much exposure to Manhattan real estate.

It tends to be in the burrows where the kind of activity that is done on a day-to-day basis is supported by our type of real estate. And of course, we have got a significant multifamily portfolio and somewhere around a 48% loan to value across the portfolio and LTV on the real estate dependent NPLs is 31%.

So, we are really pretty confident about these values going forward. And I think it’s a matter of just working with borrowers to deal with the cash flows..

Got it. Yes, no, I hear you there. I guess what I am trying to get at is it seems like even if you were to exclude all the Empire related provisions and movement on the reserve this quarter that you guys still would have been building the reserve to loan ratio on a standalone basis.

So I guess is it gold to keep moving that upward going forward?.

Chris, a lot of us would have grown very slightly at the Empire provision, because with the charge-offs of roughly $645,000. So we had to replenish that plus we had some loan growth. So we had to cover that through our CECL modeling as well. The whole thing increased 2 basis points quarter-over-quarter, including the effects of the Empire transaction..

Yes, okay. Alright. That’s all I had. Thank you..

Great. Thanks, Chris..

Our next question comes from John LaViola from Piper Sandler. Please go ahead with your question..

Hi, guys. Good morning..

Good morning, John. .

Hi, John..

Just a – hi, just a quick one, maybe for Frank or Susan, so any additional color you can provide on that one CRE credit that the $7.7 million credit that moved into classified in the quarter?.

That is a real estate dependent hotel that has a 50%, 60%ish LTV. Unfortunately, they were severely impacted by the COVID crisis and then they have been shutdown. The underlying collateral is – the property is still good. It’s in a good location. So, we don’t foresee material losses on that, but that’s basically what it is..

So, the hotel opened in late October after being closed from pretty much March and missing the summer season and the fall season. The operators have several boutique type hotels in the Manhattan area – lower Manhattan area. We did have additional collateral tied to that property.

Portions of that collateral were liquidated to reduce the loan balance and additional funds were posted to ensure that the real estate taxes were paid on a timely basis going forward. We are watching that asset very carefully. As Susan had pointed out, they have significant equity. It was a purchase deal when we did the transaction.

They probably have twice the amount of equity in the deal that we have relative to the loan at this point in time. It looks as though they are just going to need more time like every other hotel in the metropolitan area to just get back on track. They have been running an opening. They have been running in open.

Their occupancy level has still not recovered. But we are working with them to continue to watch it as we move through 2021..

Excellent. That’s great color. Thank you.

And maybe just one more for Susan, can you help us think about the $364 million in loan deferrals that are forbearances that you have outstanding now and kind of the schedule for expiration moving forward on those balances?.

So, a big chunk of those will expire in the first quarter of 2021 and then some – the remainder of them, are pretty much longer term I would expect second and third quarter. So we will have some lingering..

Okay. Okay. Thank you..

Thank you..

And ladies and gentlemen, at this point I am showing no additional questions. I would like to turn the conference call back over to Mr. Buran for any closing remarks..

Well, thank you. Thank you all for your kind attention and participation in the call. And once again, we feel very comfortable about the quarter and the outlook for the company and we look forward to talking with you in the future. Have a good day and stay safe..

Thank you..

And ladies and gentlemen, with that, we will conclude today’s teleconference. You may now disconnect your lines and we thank you for your participation..