FLUSHING FINANCIAL CORP Q2 FY2024 earnings call

• Net Interest Margin (NIM): NIM compressed 1 basis point quarter-over-quarter but is near the bottom; funding cost stabilization is key for NIM expansion. - Credit Discipline: Strong credit profile with 61 basis points of non-performing assets, 113 basis points of criticized and classified loans, and 1 basis point of net recoveries during the quarter. Conservative underwriting and portfolio management. - Liquidity and Capital: Available liquidity $3.1 billion as of June 30th, low uninsured/uncollateralized deposits, and solid capital ratios. - Expenses: Strategic investment in the franchise led to 6% non-interest expense growth in the first half of 2024, expected mid-single digit growth in 2024. - Asian Markets: ~1/3 of branches, ~$1.3 billion of deposits and $746 million of loans in these markets, with substantial growth potential. - Community Involvement: Participated in numerous local events to strengthen ties with the customer base.

Loan Portfolio: Net interest income increased about 1% quarter-over-quarter despite NIM compressing 1 basis point. Multifamily portfolio comprises 39% of gross loans with strong credit metrics like weighted average LTV of 44% and debt coverage ratio of 1.8 times. Investor commercial real estate loans total 28% of gross loans with similar metrics. Office loans exposure is less than 4%. Deposits: Average deposits increased 4% year-over-year and 2% quarter-over-quarter. Total CDs are over $2 billion or 35% of total deposits at quarter’s end. Securities: Purchased adjustable rate mortgage backed and CLOs with average rate of a little over 6.5%, closer to 6.75%.

• NIM is near the bottom and expected to expand once funding costs stabilize. - Loan pipeline expected to increase asset yields while funding costs rise at a slower pace. - Non-interest income aided by closing back-to-back swap loans in the pipeline.

• Aggressive deposit pricing by a large competitor. - Interest rate fluctuations impacting NIM. - Potential challenges with loan renewals and repricing of loans.

Q: Maybe just starting off with the loan pipeline here, John, pretty big increase quarter-over-quarter, and wondering just give some color about the drivers you're seeing there?

A: Basically what's occurring is that the market appears to be opening up somewhat. We are maintaining our disciplined focus with respect to credit perspective and also with respect to rates. But it just appears that we've just seen some opening up of the market. I think borrowers maybe are waiting a little -- or are getting a little bit tired of waiting on the sidelines. And also we've seen some activity in doing back to back swaps. The rate environment got a little bit better for that and I think that has generated some additional interest as well.

Q: And just curious is it more C&I versus CRE, just kind of curious about that mix there?

A: More C&I than what we've historically been doing.

Q: And then in terms of the multifamily non-performers this quarter, just curious what color you can give around what caused those issues and how you're thinking about resolution there?

A: So we're pretty confident that there's very low loss content here. One of the items, it's $9 million for loans. One of the items is a loan that's gone past maturity and we're working on the extension now. And then the largest of the loans has a 21% loan to value. So we're very confident there as well.

Q: And then in terms of just the multifamily loans that are coming up for renewal and resetting at a higher rate here. Just kind of curious, what's kind of the blended debt service coverage ratio? I know you guys have a 1.3 example in the deck. Is that kind of basically reflective of the entire pool that's repricing in the quarter?

A: Yes, that's the entire portfolio that's repricing, it's 1.3.

Q: I noticed that investment securities were up meaningfully this quarter. Just kind of curious what types of securities you bought and the coupon there?

A: We've purchased adjustable rate mortgage backed and CLOs that have average rate of a little over 6.5% right now, closer to 6.75% Q: How much in multifamily in CRE loans do you have maturing in the second half of '24? And maybe if you could give us a sense for what the average rate on those looks like?

A: So it's about $350 million and they'd be priced upwards of 200 basis points, it's about [$383 million].

Q: Can you give us a sense for what you think each 25 basis point rate cut would do to your net interest margin, what kind of impact roughly that would have?

A: I think, we've said in the past that if we reprice everything immediately it would be about $1 million.

Q: Did you talk about the near term NIM outlook a little bit? I know there's a little better seasonality of deposits coming in, that pipeline is going to help on the loan growth side or at least replacing some loans with higher yields. Can you just talk through the near term NIM movements?

A: I think in the near term, we may see a little bit more pressure before the actual turnaround but we're very close to a bottom. Clearly this particular quarter some of the increases in the funding costs were associated with some aggressive competition that was taking place from one of our major competitors. That may be in the background. And if that's the case, we'll continue to see better opportunities to reduce or -- maintain or reduce our funding costs. And that's really the major -- has been the major driver of the NIM compression for us. So again, we're close to a bottom and we're seeing the next few quarters as being able to actualize that and move forward with some NIM improvement.

Q: So I was hoping you could start off with just on the securities investments from the quarter. Were those locked in against a certain rate on the borrowing side? And if so can you disclose what rate?

A: No, they were not locked in into anything particular.

Q: And thinking about longer term strategy a little bit more broadly. One, do you guys -- can you guys say when your last regulatory exam was and whether the discussions with the regulators in the recent exam from the past couple has changed at all on the CRE concentration ratios? And just any color around that discussion with regulators relative to what it's been in the past given kind of the heightened industry concern more recently?

A: Chris, we continue to have conversations with our regulators, we don't necessarily disclose once we've had our exams and something came out of that as we said we filed 8-K. But our conversations around our CRE concentration have not changed much over the years even given this heightened environment.

Q: And is there a level of -- a target level either medium term or longer term that you guys want to get to on the kind of terminal mix for the loan portfolio?

A: The real estate will -- yes, we do want to bring in more C&I loans and bring the CRE concentration down. But as we talked about, we’ve moved $90 million out of the bank to the holding company late last year. So by natural attrition accretion of capital that ratio will come down. That being said, we do want to focus on the C&I business as we move forward, recognizing that real estate is still a really great asset and it's done very well for us. We have great credit metrics but the market's changed a little bit and we're going to adapt to that.

Q: And did you guys have what the June spot margin was?

A: There is some [Indiscernible] for the quarter.

Q: Thinking about the margin as we get further along into 2025 and if there's rate cuts occurring. And even if you don't have kind of the exact amount, but how much do you think that 25 basis points -- I think, it was about $1 million of annual NII changes as some of the swaps and hedges that are on if they were to roll off later in the year into 2025?

A: I think, it would benefit us because those are -- we have the funding tight though, so if we did need the funding we can let that go. The rate cuts will benefit, it will let those swaps roll off.