Good day, and welcome to Flushing Financial Corporation’s First Quarter 2021 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 call is being recorded. .

After today’s presentation, there will be an opportunity to ask questions. . 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..

Thank you. Good morning everyone and thank you for joining us for our first quarter 2021 earnings call. On today's call, I will discuss our first quarter highlights and our strategic objectives 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. After a challenging year for all in 2020, we were cautiously optimistic heading into 2021.

With an accelerated vaccine rollout, improving local economic activity and a steeper yield curve, the environment is better than it was three months ago. We continue to support our customers to get through this challenging but improving period. The best example of us of this was our efforts around the PPP program.

During the quarter, we originated more PPP loans than we did in all of 2020. We're also guiding our customers through the forgiveness process. Loans and forbearances declined in the quarter, and this will continue throughout the remainder of 2021.

Our support of these customers was rewarded as less than $10 million of loans that were on forbearance migrated to nonaccrual, and we've only recorded $100,000 in losses to date. .

Thank you, John. I'll begin on Slide 4. Our first strategic objective is to ensure appropriate risk-adjusted returns on the loan portfolio while optimizing our cost of funds. Average deposits rose 23% year-over-year. Excluding Empire, growth was about 8%.

Our average non-interest bearing deposits increased 91% from a year ago, and our core deposits comprised 83% of average deposits, an improvement from 75% in the first quarter of 2020. .

Thank you, Susan. On Slide 15, we provide our outlook. Clearly, we are a beneficiary of the steeper yield curve and we have levers to pull if short-term rates rise. We also have forward starting swaps that should help mitigate any impact of a rise in short-term rates.

We are more optimistic about the operating environment given the steeper yield curve, fiscal stimulus and accelerated vaccinations, which should improve the local economy. Our community outreach, especially in our Asian markets, should accelerate in 2021.

As Susan mentioned, we are using some of the benefit from a steepening yield curve to invest in our business and better prepare for our next stage of growth. This includes investments in our digital offerings.

Our loan pipelines, which do not include any PPP loans, improved during the quarter and we should return to more normal loan growth later in the year as we work through PPP forgiveness headwinds. We remain comfortable with our credit risk profile. Our support of our customers throughout this pandemic has increased customer loyalty.

Empire is on track to deliver the 20% EPS accretion in 2021, and we will continue to leverage this franchise to generate returns. Overall, we're on the right path to achieve our long-term goals of an ROAA greater than or equal to 1% and an increased ROAE. With that, we will now open it up to questions. Operator, I'll turn it over to you..

Thank you, sir, and thank you, ladies and gentlemen. We will now begin our question-and-answer session. . And the first question we have will come from Mark Fitzgibbon of Piper Sandler. Please go ahead..

Hi, guys. Good morning..

Good morning, Mark..

First question I had for you is you referenced in the press release you extended out some borrowings.

I guess I'm curious how much you extended out? How far out did you go? And is there a plan to do more of that?.

So let me answer the last part first. Yes, we plan to take advantage of spot on the curve to take advantage of pricing where we see it opportunistically going forward.

We extended out -- as you may recall, we prepaid Federal Bank borrowings in the fourth quarter and had those at the end of the quarter kind of sitting in overnight, and we extended those prepayments back out, or a preponderance of them over the curves and laddered them out..

Okay. And then secondly, Susan, I'm curious.

Are we likely to see any additional merger charges in the second quarter on Empire or is that all done now?.

There's still a little bit hanging over. It's not big charges..

Okay. And then next, I guess -- I know that you all have recently reconfigured the branches. But given the increased digitization of the business as a whole, I guess I'm curious.

Are you rethinking the size of the branch network at all today?.

Well, right now, in terms of the overall network, we do see a couple of spots here and there where we can actually add branches. We don't have a branch network that blankets the area that we're in. And despite the fact that we've got a nice improvement in the Suffolk County market, there's a couple of areas there where we can do some fill in.

And then there also is another area in -- another couple of areas in the boroughs that look attractive to us. We recently put in a branch in Jamaica, Queens that seems to be doing well. So while we are clearly leveraging our new digital assets, we also feel that as a community bank that having a reasonable number of branches is positive as well.

And these branches, Mark, are in the 2,000 square foot or less area in terms of their size. And they're also limited in staff, usually around four FTE or so. So, we expect that we'll probably do another branch or two. But largely, we're pretty well set with our digital and our branch network as it is.

We may see some other opportunities to reduce the size with some of our branches as leases come up..

Okay. And then lastly, John, we've seen a bunch of consolidation in the Northeast. It feels like the pace is picking up a little bit.

Could you share with us at a high level your thoughts on sort of what role Flushing plays in that, what kinds of things you might be interested in and just a general view on sort of how things are likely to play out in your market?.

Sure. So we clearly are aware that the need for scale and the need for size sufficient in order to deal with the technology imperatives of the institution going forward are there.

So I think in the short run, we feel very confident we can take advantage of some disruption that’s taking place with respect to several rather large mergers that have taken -- that are taking place in our market. So I think in the short to intermediate term, there's a significant opportunity there for us to pick up business.

That said, a little bit longer term, we certainly are looking to continue the process that we started with Empire of improving scale, in-market and on the fringes of our market..

Thank you..

Next, we have Steve Comery of g. Research..

Hi. Good morning..

Good morning..

Good morning..

I appreciate the detail on loan closings in the press release. It looks like they ran ahead in most of the quarters last year.

Just any thoughts on net growth and sort of what the headwinds may have been to net loan growth in this quarter, are there any like prepayments or payoff type things going on there?.

So the headwinds we would expect in the upcoming quarter would be the -- if we have a lot of forgiveness on the PPP loans, those loans averaged about $209 million for the quarter. And if we lose all of those loans, then that would be a significant headwind to overcome for the low growth that we have projected and previously announced..

So that said, of course, in substituting those loans, we would wind up picking up margin because they were fairly low yielding loans.

But I do think that our expectation is, and what happened in the last quarter of the year was kind of a slowdown and what's happening in New York City have slowed down due to increasing concerns with respect to the pandemic during the fall and early winter season.

And that impacted our ability to close some of the loans because of the availability of various other entities that we rely upon, including the courts to pull these things together, including legal areas. So, I see that opening up as time goes on throughout the year. Clearly, we're already seeing more things opening up in the New York market.

And we just recently saw 75% occupancy coming up with respect to office space. So our expectation is, as we approach the second half of the year, we'll start to see some more generation of significant loan activity..

Okay. Thanks for that. Susan, I want to make sure I got this right. Your comments on net interest margin expanding modestly. I just want to think about the breakdown there.

Like is the trajectory for loan yields continue to be maybe slightly down, more than offset by deposits? And is that the right way to think about that?.

The loan yields -- the interest-bearing asset yields will be lessened as time goes on in the short run. And as we talked about, we have taken advantage of the ability to reprice liabilities and that will be lessened as time goes on. We have -- most of our CDs repricing this year were front loaded. So there's less opportunity going forward to reprice..

Okay. But net-net, the deposit opportunity is still bigger than the potential decline in earning assets.

Is that fair to say?.

Yes, that’s fair..

Okay. And then just kind of on the loans closed disclosure, appreciate that as well. So, ex PPP, it looked like loan yields on loans closed was a bit higher this quarter than last quarter with mortgage flat.

Does that mean that C&I yields in general increased in the quarter or was there something else going on there?.

I think what we're seeing is the opportunity to take advantage of a little bit on the yield curve. So I think we're seeing a little bit more pricing power as the yield curve has started to rise. We're still not at the point where the yields on new assets coming in exceed the portfolio yield. But we clearly are seeing the opportunity to price on loans.

I don't know if you want to add anything to that, Frank?.

Some of it has to do with a little bit of duration. We’ve gone in cases a little bit beyond five years take a little bit of an advantage of the backend of the loan curve. I'm not sure of the swap loans that we did in the fourth quarter. I don't recall that. But --.

Yes. So I think that's probably another factor is that the swap loans that we put on are clearly at lower yields as well. So I think the expectation there between PPP and swap loans is that we can continue to see some growth on the asset yields..

Okay, very good. And then last one for me, very strong deposit growth in the quarter.

Maybe just talk about customer liquidity preferences and how that's changing, and just how you'd expect these deposit balances to trend moving forward?.

So we've seen improvement across the board. Our business deposits are up very nicely. We've got some nice growth in our new Suffolk County branches as part of the Empire transaction. And we are seeing that our business customers in general are just managing their liquidity going forward.

So, certainly, we'll see some of that start to ease up as time goes on.

But with a new infusion of liquidity coming into the market as a result of the newer regulatory changes that are taking place, the new changes with respect to aid during the pandemic, we expect to see that liquidity continue to grow and as a result deposits to continue to grow with it.

The only other thing that we're seeing is we're not seeing takedown on our floating rate loans being as significant as they have been in the past. Usually, we run about 50%. We're running about 10% less on those..

Okay. Thank you very much..

Thanks, Steve..

Next, we have Christopher Keith of D.A. Davidson..

Good morning..

Good morning..

Good morning..

So, it looks like C&I was really a bright spot for the core loan portfolio this quarter.

And so how much of that strength is a reflection of the growth opportunity in Suffolk County?.

It's early. So a lot of it is in the pipeline at this point in time. But we certainly are seeing business coming out of Suffolk County, and we expect to see more. The majority obviously of the C&I growth was on the PPP side. But we are definitely seeing positive growth, particularly in the owner occupied C&I..

Got it. Perfect.

And then can you give us just a little color around some of where the different loan products are originating at from a yield perspective today?.

Sure.

Do you want to talk about yield, Frank?.

Yes. So we're probably in the 3.50% range is what we're seeing. More recently, things have heated up. The commercial real estate itself is probably a little bit higher, depending on the asset class. It could price as high as 4%. But overall, probably about 3.50%..

Great. That's helpful. Thank you. And then just a follow up on the previous M&A question.

As you look down the line, how far outside of your current operating footprint would you be willing to extend for the right deal?.

I think there's a couple of factors there. Obviously, we do already have linkages to the lower upstate market where we've done some lending. We've done some lending as far as South as Philadelphia in this immediate market. And certainly in the New England space as well, we've done some lending. So we're very, very familiar with those markets.

So those would be priorities for us. However, there are ethnic linkages that we have and I think we would take a serious look at following some of those ethnic linkages as well..

Got it. Thanks for taking my questions. I appreciate it..

Thank you..

Next, we have Chris O’Connell with KBW..

Hi. Good morning..

Good morning..

Just want to circle back a couple of questions and make sure I was getting this correct.

The loan closings ex PPP this quarter were down fairly substantially, right?.

Quarter-over-quarter, yes..

Okay, got it. And just help me to get a little color. It looks like core C&I closings were down but have pretty good net growth.

What was the difference mostly there?.

PPP loans are included in there..

Yes, PPP loans..

So the PPP loans aren't included in the SBA line?.

Yes, those loans --.

I’m talking about ex PPP on the C&I..

I’m just trying to look real quick, Chris. Ex PPP, they’re up $20 million which is just kind of normal business quarter-over-quarter..

Okay, got it. And as far as the PPP fees during the quarter, it looks like you guys had a good amount of forgiveness.

So I guess what were the exact PPP fees during the quarter or why were they kind of de minimis as you guys said?.

So the fees we recognized during the quarter due to the forgiveness was less than $500,000. As we said in the call, we have proximately 5 million left if all of our loans -- all the PPP loans received forgiveness..

Okay, got it. And then as far as the swap fees, a little bit outsized this quarter. What are you guys like expecting? I know it's a pretty volatile line item, but kind of like a baseline level for that to bounce around going forward..

We're seeing customers are interested in the swap program. Until they get to the closing table, then they're backing off a little bit because of the interest rate environment. So we're not seeing so much demand for that product right now. Given changes in market rates, we obviously would expect to see that pick back up a little bit..

Okay, got it. And then for operating expenses, I know the 3.3 million seasonal should fall out next quarter. Seems like that kind of gets you guys to just shy of a 34 million baseline level there.

Is there -- there's no remaining or not very much remaining cost savings from the Empire deal coming through for the rest of the year, correct?.

Totally, but I want to point out that we're expecting a run rate to be around 35 million given the volume of the PPP loans and the way the accounting works, that reduce the salary expense. So our run rate is about 35 million..

Okay, great. Thanks.

And they usually hold fairly stable throughout the year after the first quarter seasonality, right?.

Yes..

Great. And then if you just talk a little bit I guess about the loan segments and you guys have -- the pipeline is up kind of year-over-year and quarter-over-quarter a little bit.

And ex PPP, kind of what the – the way you guys are seeing as the biggest demand or growth drivers near term?.

So the ex PPP on the C&I loan, as Mr. Buran pointed out earlier, the owner occupied C&I space has been a very strong opportunity for us on the business banking side. On the shorter end of the curve, rates have come back in quite a bit.

The owners are now taking advantage of this particular point in the yield curve to refinance a good number of loans that are coming up to maturity. On the real estate side, we can continue to see the normal blend of multifamily and commercial real estate that we have seen traditionally.

That space has gotten much better in the last two or three months or so. Buy-in was very strong in the fourth quarter as a result of a loosening of a lot of restrictions here in New York State, tended to slow down in November, mid to late November as a result of some tightening up of the economy or local restrictions.

I know we had in New York City some orange zones come into effect that really put a big impact in our Brooklyn and Queens in Southern Nassau County marketplaces. That seem to have gotten much better as the restrictions are now being lifted in various capacities, in restaurants, in theaters or whatnot are increasing.

We're seeing very good pickup in the local retail activity, the local shopping. We're starting to see new commercial spaces being built out for tenants that are either signing new leases or renewing existing leases. So it's pretty much a combination of improvement in asset classes across the board..

Got it, great. And then as far as the forbearances go, I appreciate the detail that you guys have given surrounding the schedule of those set maturity dates coming forward.

How you guys plan to deal with those as they come set to mature in the coming quarters, if they're coming back and asking for additional forbearance?.

Why don't you cover that, Frank?.

Sure. So we've been very diligent in working with customers that are asking for additional relief.

We do ask them to provide us with current financial data, at times includes bank statements if we don't hold the operating accounts here at Flushing to see what level of banking activity is occurring in the business or at the real estate project that we've financed. We have seen a very strong improvement in rent collections across all assets.

We will grant additional relief for customers who are continuing to experience significant disruptions in their cash flow. Some of those could be properties that had significant portions of their income coming from some sort of entertainment type tenancy or restaurant.

For the most part, we reach out to the customers generally 60 days prior to their expiration of their relief, have conversations, ask them questions about the operation of the property.

In many cases, we'll send a loan officer out to visit with the customer to actually confirm what the customer is describing as the current situation, either at the business or at the property. I'm happy to report that as you can see, an overwhelming majority of the customers that we provided assistance to starting last spring have returned to normal.

The largest portion of that portfolio, we have left deals with small balanced loans, largest portions in terms of number of loans. And those properties are beginning to show signs of strength as we head out of the winter months and into the warmer seasons..

So also in terms of that forbearance, I think it's important to point out that really only about $120 million of the total is really full P&I forbearance..

Yes, I saw the 61 interest payments. Great, thanks.

And just wanted to confirm the structure, those that are granted additional forbearance from this point going forward, that's going to be under kind of like the CARES Act modifications versus the traditional TDR, right?.

As long as we believe that a hold up in payment or forbearance will be granted due to COVID-19, if for some reason we believed that the forbearance was not related to that, then we would have regular TDR counting, so that we need to make sure that it would be a COVID relief item..

Okay, got it. That's great. Thank you for the time. I appreciate it..

Thank you..

I’m showing no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. John Buran, President and Chief Executive Officer, for any closing remarks.

Sir?.

This is Susan. I just wanted to add one other comment. We got a couple of questions last night on the PPP loan portfolio. And I think we addressed most of the issues or questions that were raised last night. The one that was not asked, but I did want to get out into public was that the yield for the first quarter on the PPP loans was approximately 2%.

So with that, I'll turn it over to John..

Thank you, Susan. I just wanted to be sure we had that update in the event anybody else had that question in the background. I want to thank you all for joining us. We are obviously very pleased with the quarter, and we look forward to continuing growth of the franchise. Thank you very much for your attention..

Thank you..

And we thank you to the management team also for your time today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you. Everyone, take care and have a wonderful day..