Welcome to Flushing Financial Corporation First 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 call is being recorded. [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 website at flushingbank.com.Before we begin, 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 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 the U.S. GAAP.For information about these non-GAAP measures and for 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, who will provide an overview of strategy and results.

Thank you. Good morning, everyone, and thank you for joining us for our first quarter 2020 earnings call. I'd like to start by saying our thoughts go out to those most affected by COVID-19, especially those on the front lines of this pandemic. As we navigate through these unprecedented and challenging times, the health and safety of our employees and our customers remain our top priority.I'll begin today's call by addressing the current COVID-19 pandemic, including decisive actions we're taking in response, as well as discuss our first quarter highlights. Then our CFO, Susan Cullen, will provide greater detail on our financial performance, credit quality, capital and liquidity profile. Following our prepared remarks, Susan and I will address your questions.Starting with Slide 3, we were quick to respond to the pandemic with new health and safety measures, including social distancing, appointment banking and expansion of remote capabilities to help keep our team members, customers and communities safe and healthy.Today, we have the capability of having our entire staff work remotely. On any given day, as many as 85% of team members work from home. Importantly, we are also actively assisting our customers by providing short-term forbearances in the form of deferrals of interest, principal and our escrow for terms ranging from one to six months. Through April 17, we have approved forbearances for loans with an outstanding loan balance of approximately $839 million, of which $673 million is in the real estate book and $166 million is in the business banking portfolio.Given the pandemic and the current economic environment, we continue to see demand from our customers for loan forbearances. We actively participated in the SBA Paycheck Protection Program, gaining approval to fund up to $64 million of these loans and expect to continue with the second round of the…

Thank you, John. I'll begin on Slide 7. Our solid credit quality metrics have resulted in our coverage ratio increasing to 168% as of March 31, 2020. As we entered the great recession, our coverage ratio was 88.2% at June 30, 2008. As we remain in these uncertain times, our coverage ratio is almost doubled from where we started the 2008 financial crisis. The loan-to-value on our real estate portfolio at quarter-end totaled a modest 38%, and the debt coverage service ratio for the current quarter's originations of multifamily, commercial real estate, and [one-to-four failure] mixed-use loans exceeds 1.8%.Importantly, we continue to underwrite each loan using a cap rate in excess of mid-5% and then stress test each loan. In order to assist our customers during these troubled times, we have been approved to fund approximately $64 million of SBA Paycheck Protection Program loans with over $50 million funded through April 17.On Slide 8, our charge-offs during the great recession were significantly lower than the industry. As a reminder, we actively manage our loan portfolios to identify and resolve problem loans, recording charge-offs early in the delinquency process. We are a historical seller of nonperforming loans. As we continue to strengthen our balance sheet, we remain mindful of maintaining asset quality.As shown here, over two decades, Flushing has demonstrated superior credit metrics with industry net charge-offs averaging seven times our net charge-offs since 2000. Of note, our maximum charge-offs were 64 basis points in the midst of the Great Recession, while industry peak charge-offs were nearly five times that.Slide 9 shows 90-day delinquencies as a percentage of loans originated by year. Overall, our credit quality remains pristine. Our credit discipline has remained strong for the past 10 years as we've made adjustments to underwriting criteria back in 2009. As a…

Thank you, Susan. On Slide 25, I would like to conclude by summarizing how we can come out of this pandemic in a position of continued strength. I'm incredibly proud of what all our team members have been able to do over the past several weeks. We continue to play an essential role in supporting our communities and customers' financial needs.Our balance sheet, capital, and liquidity going into this environment were strong, and our positive core earnings power provides a good base to absorb future credit losses. Stress testing indicates our ability to sustain material credit costs over a multiyear horizon, if necessary.Our credit discipline has served us well coming into this economic environment, and we'll continue to stay close to our clients and manage that prudently. Our ongoing focus on developing and maintaining a multilingual branch 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 over the long term. The investment in the Universal Banker model in our branches has been critical in our ability to serve customers in this environment.Our recent expansion of our digital capabilities has also been critical in this environment and will enhance our footprint and allow for deposit gathering at a total cost cheaper than bricks and mortar while enhancing the customer experience for business and consumer clients. Despite the current economic environment due to COVID-19, we have a long history and foundation built upon disciplined underwriting, good credit quality and a resilient, seasoned loan portfolio with strong asset protection.As restrictive economic environment eventually begins to lift, we will have a workforce that is more flexible and dynamic as a result of this experience, coupled with a customer base that is highly attuned to our online and mobile banking capabilities.In conclusion, we will remain focused on preserving capital and liquidity, maintaining asset quality, controlling expenses and managing our net interest margin to get through to the other side of this pandemic a stronger company.With that, we will now open it up for questions. Operator, I'll turn it over to you.

Thank you. [Operator Instructions] Our first question comes from Steve Comery of g. Research. Please go ahead.

Hi, good morning.

Good morning, Steve.

So, I wanted to start with deposit pricing. It looks like it was down pretty materially for you guys in general. Maybe kind of talk about what you're seeing from competitors so far. And then have you kind of continued to see this slide in pricing through quarter-end?

So, we did have – as noted in one of the slides in the investor presentation, we did have a pretty significant opportunity on the CD side with, in total, over $900 million coming due through the first quarter of 2021. So, we do see a continued opportunity going forward, and I think it has taken time for some of the larger online institutions like prevalent example, Marcus, to come down in rates. We're starting to see that now. So, I'm expecting will continue to see the opportunity to bring down our cost of funds in the next few quarters.

Okay. Very good. And then kind of more holistically on the loan side, so core NIM was up pretty substantially, but a lot of that gain was offset in NII by the hedging marks. So, given that rates have been lower, would you expect NII growth in Q2, or would the hedging marks kind of come in again? How does that sort of play through?

Steve, we state that the hedging marks would come into play again. Everything being equal, we would expect net interest income to grow or stay stable going forward. We wouldn't expect to see the dramatic decrease in the swap rates that we saw from 12/31 to 3/31. The rates dropped over 120 basis points for the tenor of swaps that we have, so I wouldn't expect to see that again.

I guess the other factor is we're close to – the Fed is operating at a zero to 25-basis point projection in terms of the rate environment. And Chairman Powell has publicly come out and talked about the inappropriateness of negative rates for the U.S., so there's not a lot of room to come down that another 100 basis points or so in that rate environment. So, unless there's a change in terms of Fed policy and Fed outlook vis-a-vis negative rates, we think that any further drops are going to be muted. They were clearly may be based upon shape of the curve, etc., etc. But we think given the level, they're probably going to be a little bit more muted.

Okay. And just wanted to clarify, Susan, when you said all else equal, does that mean no asset growth either?

No, I'm sorry. I would like to say that I was talking about the economic environment and rates staying where they were. Thank you for letting me clarify that.

Okay. So that includes asset growth or...

Well, as John said in his prepared remarks, we're not expecting really a lot of asset growth as we work through this pandemic situation to help our clients and focus on asset quality, capital and maintaining our margins.

Okay. Okay, I see. So, there is – yes, not expecting much, anyway. Okay. I get it now. Okay. Just one more for me, talked about expanding mobile capabilities, increasing digital customer reach, maybe just a little more color on sort of like what the new features are, what the uptick is and like who you guys have been working with?

Sure. So, we've been working with Q2, Synechron and let's see...

MANTL.

And the MANTL. And what we've been able to do is reduce the fallout from our account openings, so we had found we had a fairly old-fashioned and cumbersome account opening process. A lot of the account opening had to go to a manual review in order for us to deal with our fraud issues or fraud abilities to stay away from fraud. These particular vendors have provided a much more flexible environment. And in terms of process, we now are able to run through a larger number of account openings without manual review.So, where we had a drop-off rate that was significant because customers just didn't want to wait, now we have something that's much more aligned to what people's expectations are with respect to the amount of time it takes to respond to an account opening request. So, we're expecting to see significant improvement in that ability to open accounts more timely totally online, without manual – with a very, very minimal amount of manual intervention.In addition, our opening – our bill pay has been enhanced, and we also have considerably improved opportunity to make changes to the web environment that do not have to go through programming that are managed by our marketing people directly. We've improved mobile as well, so the mobile capabilities are much stronger. And we have some additional capabilities for businesses, and those will improve in coming releases that will take place over the next several months. So, considerable improvement in the online environment. It came at a very fortuitous time for us, and we expect to be able to leverage that very well in the coming months.

Okay. Very helpful. Thank you.

The next question is from Collyn Gilbert of KBW. Please go ahead.

Good morning. This is Chris filling in for Collyn. So, I wanted to start out, I guess, on the operating expenses. I know you have a number of seasonal factors that come into play in the first quarter that don't necessarily stay in there in the second quarter. Maybe with the assumption or excluding the Empire deal or with the assumption that it's closed in the third quarter, can you just talk a little bit about maybe where the compensation line would trend toward in the second quarter and the same thing with other expenses?

I would expect the compensation line to trend more closely related to the fourth quarter of 2019 for the second quarter going forward with about a 3% increase there as we did give our employees raises during the year. And the other operating expenses, again, that should be flat to where it was in the fourth quarter of 2019 on our core expenses.

Got it. So, less of a decline in the compensation line than you would normally see?

Well, there would be a big decline. Most of the $3 million that is seasonal expenses is related to compensation.

Got it. Okay. And then I guess in terms of the long pipeline, I mean, it looks really strong here again going into the second quarter. Can you just talk about a little bit maybe on the composition of that versus the pipeline at 4Q 2019 end? I mean, it looks like the long yields had held up extremely well given the move-in in rates here where – it's at 4.10 now versus 4.18 or so last quarter. I mean, is that current with all the movement in kind of Fed funds and rates coming down over the quarter? It just seems that that's held up really, really well.

Yes. So, I think that the structure of the portfolio, similar to – the structure of the pipeline is similar to what we've had in the past. I will note, clearly, there has been a slowdown in the closing of loans, the availability for the ancillary organizations like lawyers, the county, etc., have not been as readily available so we haven't seen a lot of that start to come to fruition. We started to see a slowdown in loan closings, probably about the middle of March.

Got it. That's helpful. And then moving on to credit, a couple of more specific questions and then we can move out a little bit more broadly, but to Slide 15, you mentioned that you're using a V-shape recovery, and I guess it seems like maybe that, by all accounts, is not going to be the case. It's going to be a little bit longer or a little bit slower than the original kind of V shape that I think people are thinking kind of in late March here. So, do you see another significant uptick in the reserve related to updated economic forecast as of kind of today, if that were to hold true until the end of this quarter?

So, as you said, Chris, the economic forecast would greatly influence the amount of the allowance. I can't make predictions as to where we're going to be at June 30. And so, these were our estimates for calculating our allowance, and we'll all watch the economy play out together.

Okay. So I guess said another way, I mean, it says that the forecast period used was two quarters. So, does that mean you were only going into 3Q 2020 for the forecast using the model?

That's correct. We were looking at two quarters with the downward economy in our model, yes.

Okay. And do you guys know which model you're using? I know a lot of peers have been using kind of the Moody's models for their CECL for their forecast.

We were not using Moody's.

Okay. Can you say which – can you disclose which model are you using?

Chris, I forget the name of it. Primatics was the service provider, with the underlying models that they buy is somebody else's, and I forget the name out of it. But it is – Primatics is the calculator or model we're using for our CECL calculation.

Got it. Okay. And then on that slide, it seems like the provisioning this quarter for loans that are booked to this quarter was around 75 basis points or so versus where the reserve stands at around 47 basis points. Is that somewhere where maybe we could see the reserve trend to if the current economic environment kind of stays as it is?

Well, remember, we had a charge-off of a little over $1 million, so we needed to replenish that as part of the general – as part of the provision, outside of the COVID-19 piece.

Yes, but I'm talking about the $1.2 million, which is net of charge-off, I guess, on the $159.8 million of growth.

I would expect our allowance to stay in about the ballpark. It is a percentage of gross loans, giving our low loan-to-value in the real estate portfolio and the results of our stress testing.

Okay. And then as far as exposures go, I mean, granted that, obviously, there's just an unprecedented halt in activity right now, so there's going to be a lot of the forbearances in your percentages, similar to peers, but I mean, how are you guys feeling, I guess, about the retail shopping center? I mean, that 51% number kind of jumped out on Slide 11. And as we get through this period and you're kind of looking at the light at the end of the tunnel, I mean, how confident are you that those who get back to cash flowing as they were before in a timely manner?

So, let me make a brief comment about that, and then I'll turn it over to our head of real estate lending who can provide a little bit more color. Clearly, we're dealing here with a retail environment where if you're running a multi-tenanted shopping area of any type, that you're going to have tenants that are either not paying or out of business or seeing their businesses corrupted or disrupted. And clearly, these are definitely the people who need to have some forbearance at this stage of the game.We do feel confident in some respect that the landlords are not going to be looking to kick individual businesses that were functioning and were profitable out, but in fact, would make adjustments as time went on, and we got to a little bit of a more normalized environment. But I'll turn it over to Frank Korzekwinski, our head of real estate, and he can give you a little bit more color into the portfolio itself.

Good morning, Chris. The overall character of the portfolio that we have are generally smaller centers, usually have some type of key anchor, whether it's a grocery store or something like that. They are generally well-located intersections, whether they be in the city or in Nassau or Suffolk County. So, I think the key to revival of the operation of these center evolves around people getting out again and traveling, going to and from work and going to places where they normally would go, and you will begin to see some of the smaller stores in these centers begin to operate. Many of them are nail salons, hair salons, pet grooming facilities and small businesses such as those types of businesses, so we do expect that once people get out, we'll start to see a return to these shopping centers.

Great. And then last one and then I'll step out, but we've kind of heard a wide array of information from peers on this. I'm just curious on what you guys are hearing given how close you are to the multifamily market in New York, but could you guys just give some color on maybe where you're seeing rent collections come in for multifamily and then, I guess, mixed CRE?

Sure. We really don't have any hard facts relative to collections activities. We expect to start seeing some more data as we progress through May. We do have conversations with our customers from time-to-time, as well as some real estate management firms that we conduct business with.As you may have heard, March was a very good collection month for the multifamily. April started off at a fairly good pace and seemed to have slowed up a little bit. No one's really giving us any guidance in terms of projections, but given the fact that the majority of our housing is in the affordable arena, we are not seeing or not hearing of collections that are below 50%. I think most of the operators we've dealt with have been long-term operators. They are very concerned about the residents that they have in their buildings and are taking action to help people get through this particular crisis.The retail is a little bit more of a challenge. Obviously, businesses have been disrupted. What we have noticed is the local businesses seem to – responded better in terms of rent payments than maybe some of the national tenants. It's easier for these – it's not as cumbersome for the smaller tenants to maintain its operation as it is possibly for a tenant that has national exposure, multiple locations, large fixed operating expenses. And as Mr. Buran pointed out earlier, we are noticing that landlords are doing their best to work with their tenants so that when things do open up, they can get back into the game.

Great. Appreciate all the information. [Indiscernible] Thanks.

There are no more questions in queue. I would like to turn the conference back over to John Buran for closing remarks.

Well, thank you very much. Thank you all for joining the call. And all of you and your families please stay safe, and we're all confident we'll get out positively on the other side of this. So, thank you again for participating.

Thank you.

This concludes today’s teleconference. You may now disconnect your lines and we thank you for your participation.