Welcome to the Flushing Financial Corporation’s Fourth Quarter 2018 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. Today, there will also be an opportunity to ask questions. [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 beginning, 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 financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and for reconciliation to GAAP measures, please refer to the earnings release. I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategies and results.

Good morning, everyone. And thank you for joining us for our fourth quarter 2018 earnings call. On today's call, as always, we hope to provide additional insight into our consistent, positive earnings power, business strategy and sustainable competitive advantage. I’ll begin with our fourth quarter and full-year 2018 highlights and then provide an overview of the strategies we are executing to continue to create long-term shareholder value. Then, our CFO, Susan Cullen, will review our financial performance in greater detail. Following our prepared remarks, Susan and I will address your questions. Beginning on slide three, fourth quarter ‘18 GAAP diluted EPS was $0.44 and core diluted EPS was $0.54, the $0.10 difference between GAAP and core earnings per share is attributable to net loss from fair value adjustments of $0.09, net loss on sale of securities of $0.05 and net gain on sale of other assets of about $0.03. GAAP and core earnings were positively impacted by a reversal of a previously recorded tax liability of approximately $2 million. We're pleased with our ability to generate strong earnings growth and return on average equity of over 9% and core return on average equity of over 11% despite continued margin pressure. Net interest income of nearly $41 million was down modestly quarter-over-quarter and year-over-year due to net interest margin pressure, driven by higher funding cost, which outstripped our ability to mitigate through loan re-pricing. However, the cost of funds increasing 12 basis points quarter-over-quarter, the core NIM fell only 3 basis points. As a reminder, core NIM is net of prepayment penalties, recovered interest on delinquent loans, and accretion of discount on call securities. The increasing yields on new loans and the repricing of variable rate loans had a positive NIM impact year-over-year. Variable rate products represented approximately 78% of our…

Thank you, John. I'll begin on slide seven. Total loans were $5.5 billion, up more than 3% quarter-over-quarter and 7% year-over-year as we continue to focus on the origination of multifamily, commercial real estate, and commercial business loans with a full banking relationship. These originations totaled 87% of loan production for the fourth quarter. We continue to diversify our loan portfolio as C&I origination for the quarter were 34% of total originations and 38% over the past year. For the first time, business loan closings exceeded multifamily closings for the year and for the quarter. Commercial business balances have grown to 18% this year, approximately 16% of the gross loans as of December 31, 2018. The growth from the C&I portfolio offers several advantages to the Company, primarily continued diversification of the loan portfolio. And as these are primarily adjustable rate loans, the yield offers more protection in the rising rate environment. At December 31st, our loan pipeline totaled $197 million, which is down from last quarter. The composition of the pipeline was 68% adjustable rate products and 32% fixed rate. The interest rate and the mortgage loans on pipeline increased from last quarter to 5.12%. Loan to value on our real estate portfolio at quarter-end remains a modest 39%, and the debt to service coverage ratio on the current quarter originations of multifamily, commercial real estate and one-to-four family mixed use loans is 164%. We underwrite and stress test each individual loan using a cap rate in excess of mid-5s. Slide eight highlights the evaluation of our funding mix. As funding has grown over the years, the percentage related to CDs and barrowing has decreased. When the need arises to access the wholesale funding markets, we can advantageously ladder up the liabilities for longer terms. Core deposits increased 8%…

Thank you, Susan. On slide 16, I would like to conclude by reviewing why we believe we are well-positioned for continued, consistent and profitable growth. If we articulated our strategic objective to focus on yield rather than volume in the loan portfolio, the yield on our new loan originations for the fourth quarter of 2018 increased 41 basis points from the third quarter of 2018 and 75 basis points from the fourth quarter of 2017. We have targeted reducing the loan-to-deposit ratio through deposit growth. The increase in the deposit balances especially in the retail sector resulted in an improvement of loan to deposit ratio of 6% to 112% from 118%. Disciplined long growth is an important goal of the company. Loan closings in the fourth quarter of 2018 were a record for us. We previously projected loan growth in the high-single-digits with actual growth at over 7% for the year. We have talked about controlling net interest margin pressure. The core net interest margin decreased 3 basis points from the core net interest margin recorded in the third quarter of 2018. We've taken steps to mitigate the NIM compression and in this quarter repositioned the investment portfolio to further aid in mitigating future compression. We have contained noninterest expenses in this low rate environment. Expenses decreased in the fourth quarter of 2018 as compared to the third quarter of 2018 and the fourth quarter of 2017 while only increasing only a mere 4% from full-year 2017. The Win Flushing program established to increase our market share in our home market has been very-successful, as we've gathered to-date $143 million in new deposits as compared to our targets over $160 million by year-end -- by the end of first quarter ‘19. The investment in the Universal Banker model is paying dividends. The Universal Bankers are spending more time with customers. The additional time has resulted in sales increasing over 30% in total and approximately 50% per branch employee. Our vision is to be the preeminent community financial services company in our multicultural market by exceeding customer expectations and leveraging our strong banking relationships. The New York City market with its strong Asian customer base continues to represent a significant opportunity for us. In conclusion, our strong balance sheet, risk management philosophy, capital levels, ability to grow deposits, investments in talent, innovation and cyber security, all position the Company very well to deliver consistent profitable growth and long-term value to our shareholders. We will now open it up to questions. Operator, I'll turn it over to you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Mark Fitzgibbon with Sandler O’Neill & Partners. Please go ahead.

Hey, guys. Good morning. Susan, first question. The first quarter is always a little unusual with those compensation items for Board fees and such that come in. Could you help us think about what the dollars might -- dollar numbers for expenses might look like in the first quarter?

I would expect the dollars in the first quarter to be up between $2.5 million to $3 million, $3.5 million somewhere in that ballpark.

And then, secondly, I heard what you said on the tax rate, 19% to 23%, which is a pretty big range. What would cause it to be sort of 19% versus 23%, what are the main things that you're still not sure about?

It would be the allocation when we finalize our tax return for 2018 and the allocations they change that may tweak that wait a little bit.

And then, next, I’m curious where are you guys -- how are you thinking about your targeted tangible common equity ratio or regulatory capital ratios? What are you kind of managing to?

So, we stress test these on a regular basis. And we manage it so that we feel we have an adequate level of free capital in order to complete our strategic plan.

And, do you feel like you have plenty today?

Yes. We feel we're in good shape today.

I guess, what I was curious about John is, would it make sense maybe to slow the balance sheet growth, given some of the NIM challenges that you have and divert some of that capital towards stock repurchases, given how inexpensive the stock price is today?

So, obviously, the preference of the Company has always been to create new customers. And that's always our emphasis. What we're -- what we've been trying to do with the loan portfolio, in spite of the fact that we had nice loan growth is focus on yield versus volume, and obviously have had some positive impact there. So, I would say our first priority continues to be creating new customers, creating new customers particularly that are coming to us through non-broker channels. That group of customers is increasing, not only in the C&I business, which is basically a direct-to-customer business, but also a greater and greater proportion of the real estate business, our traditional real estate business is coming based upon some direct business we're doing. So, while I think there's -- there clearly is some value on stock repurchase, I do believe we have an opportunity to gather more customers and we're seeing more in terms of results, both on the deposit side and on the loan side than we've ever had before. And I think they are franchise value building results. So, we'd like to keep that preference in place.

Our next question comes from Steve Comery with G.Research. Please go ahead.

I just wanted to ask first about the loan growth, really strong across bunch of different categories, especially non-multifamily commercial real estate, and good improvement in yields there too. Is there anything different you guys are seeing competitively or you’re just getting wins in your sales team?

Competition, obviously, in the real estate area has continued to be strong, driving pressure on in the multifamily space, for sure. So, given that we've had -- we have the capabilities in place for a number of years to move into more commercial business, we've been doing that. And we continue to be focused on building relationships over time. So, that has driven our let’s say pivot away from more transactional business and into more relationship-based business. Competition remains fairly intense across the board. Again, multifamily in particular has been highly competitive. But, we're clearly holding our own and we see some opportunities based upon our capabilities to direct to the customer in our real estate business and also to continue to grow our C&I business.

Okay, very good. And then, I kind of want to ask about the seasonal deposit move we typically see in Q1 and the NOW accounts. First, is that something we should be anticipating for Q1 2019? And I'm also kind of wondering how that sort of seasonal move fits into the goal of the loan to deposit ratio closer to 100%?

So, I guess, let me take the latter half of your question. While I think we would like to be closer to 100% as a loan-to-deposit ratio goal that really is driven by our desire to just continue to build relationships and depository relationships going forward. So, I would say the driving force is building long-term deposit relationships, not so much a particular number. And Steve, could you just repeat the first part of that question?

Yes. Usually we see a seasonal uptick in deposits, just wondering if we should anticipate that in 2019.

Yes. I think, we usually see a jump in those -- in our government deposits in January; it kind of starts to trail off a little bit by the end of the quarter. I think, some of that trend is going to be mitigated somewhat by our new Chinatown branch, number one, and also our success in the Win Flushing program. So, we may see generally the same trend but maybe not as intense.

And when you say mitigated, what you mean is that you'll have growth from the Chinatown branch and Win Flushing that will mitigate…

Yes, exactly. We're expecting to actually at least hit that number of $160 million from the Win Flushing program by the end of the first quarter and possibly more, given the place that we're in now. And then, clearly, the Chinatown branch, we do feel that we're going to get some very, very good results out of that branch as well. So, we see those two factors mitigating some of the run-off, some of the seasonal run-off that takes place in the government portfolio.

And then, just one more for me, if I may. You mentioned the efficiency ratio goal trying to get to a low to mid-50s. Maybe you could give us sort of like any indication on the time-line and expectations there?

So, I think, realistically for us, that is somewhat revenue-dependent. So, I think as we start to turn the corner on margin, which we don't expect, by the way in 2019, that will be the kind of the icing on the cake for us or the other big move. Meanwhile, what we're continuing to do is improve the productivity out of our branch system, so that we're both reducing -- reducing expenses relative to the revenues that we increase.

So, expect improvement in 2019, but not necessarily reaching that goal in 2019?

Correct.

Our next question comes from Collyn Gilbert with KBW. Please go ahead.

I just wanted to circle back on the expense discussion. So, Susan, I know you had indicated where you thought one quarter expenses were going to go. But, that's obviously, well, running at a lower run rate than what you guys have put up. What is the outlook kind of maybe for year-over-year expense growth, given some of the initiatives that you have? Do you think you can lower and keep expenses lower in ‘19 than where you put them in ‘18?

We anticipate the expenses increasing in the low-single-digits, very similar to the total expense growth we had from ‘17 to ‘18.

And then, just back to the NIM. Hearing your comments on expecting it to continue to compress, and John, you just indicated throughout ‘19. But, can you quantify that a little bit more? I mean, in terms of when you're talking about compression, are you talking about the core NIM or you're talking about reported NIM, and maybe just framing your thoughts there a little bit? And does that indicate too that NII is going to continue to drop? Are you going to try to hold -- try to increase NII through the growth?

So, we're trying to increase NII through growth. The core NIM is -- was down. We were focused on core NIM obviously, because we can get more prepayment penalties, but that just puts you in a hole in the next quarter or the next period in terms of NII. So, we don't view that as a real strategy. It looks nice for one quarter, but you're going to deal with the lack of growth in quarters going forward. So, if you look at the net interest -- the core net interest margin for us, 3 basis points is probably the best that we've had all year. And we had a couple outline quarters. Last quarter for example, we had a big drop in core net interest margin. But, it's been -- it's clearly been in the single digits with 3 being the lowest in the -- 3 basis points being the lowest in the last year. So, we think we're getting a little bit better between the loan yield growth and our ability to control some of the deposits. But, at the end of the day, we are still a spread-based business, not going to make any major changes there. So, the curve and the shape of the curve is going to be ultimately a deciding factor for us, particularly as it relates to loan pricing going forward.

Our next question comes from Brody Preston with Piper Jaffray. Please go ahead.

I just wanted to I guess maybe get a little clarity on the NIM guide. I wanted to understand, I guess, maybe the rate dynamics you are expecting with regard to rate hikes this year within that guide.

So, as I mentioned in the prepared remarks, we're thinking about -- we're thinking 3. If there's less than 3, we might be doing a little bit better. So, that kind of gives you an idea there. But, then again, it's a combination of not only rate hikes, but it's also the shape of the curve that is -- that's important to us, since we do think we do -- that we -- vis-à-vis a more reasonably shaped curve, we have a significant opportunity on the loan side because we have over the course of the last couple of years, put on more variable rate loans. So, if you look at the repricing that we have on one of the sheets in our presentation, I’ll get the page number for you in a second. But, the $2 billion is weighted very, very much toward -- with 50% of it to be exact, is in the first year. And that is really a result of the continued growth of our -- it is on page 11 of the presentation, is our continued growth of the variable rate portion of our loan portfolio, which of course, those variable rate loans move up with the market on a -- generally on a three-month basis. So, or sometimes even on a month basis. So, we see a lot of leverage on that side. So, the shape of the curve is critical to us.

Right. So, when I look at your -- at the repricing rate that you guys have laid out for those loans through 2021, it doesn't look like you're assuming much in the way of loan yield expansion for those rates. Is that a fair statement?

Well, 16 -- there I think was -- in 2019 we're talking 80 basis points and 2020…

No, I mean like the 5.62, 5.71, 5.72, it doesn't look like you've assumed -- like I understand the role-on role-off is a pretty favorable delta. But, I'm just speaking to the actual repricing rates on a year-by-year basis, it doesn't look like you've assumed much in the way of a benefit from -- for the rate hikes or curves deepening?

Well, again, we're projecting those 3 rate increases and we're projecting those three rate increases this year and really not much change in the out years.

Brody, this table is put together with the interest dynamics we had at 12/31. So, obviously, if there are rate increases et cetera, during the year, these numbers will change.

I guess, ultimately, Susan, what I’m trying to drive at is if the Fed is on pause and we get no rate hikes this year, I mean, I get that the deposit beta is probably going to continue higher, just given the lag that happens with funding costs moving higher. But, if that occurs, could you start to see, given the fact that you still do have a decent amount of CRE in multifamily on the book with a lower deposit beta moving forward, could we start to see some NIM stabilization by year-end?

Yes. The scenario you laid out is right. We believe that the deposit beta will slow down, if there are no rate increases. The repricing on a loan still have contractual increases, given the higher rate environment than we had a few years, five years ago when these loans were written. So, we would expect to see either stabilization or expansion with no rate increases.

And then, I guess, maybe on the swaps that you have layered on, what -- I guess, in what interest rate scenario do those become, I guess harmful to the NIM? Is it just rate decreases or is there a threshold that you need to reach to see those start to negatively impact to the NIM?

It would be -0- in a decreasing rate environment, those would become harmful to the company.

And then, maybe just sticking on the NIM for one more question. On the securities that you sold out of, it was the $120 and then you moved them into $130 million more in higher yielding securities. I wanted to get a sense for what the spread between the yields in those new securities versus the old securities was?

It was about -- in the prepared remarks and press release, I believe there is about 100 basis points, as I recall. I went from about 240 to 340. And we bought mostly floating rate securities with the new funds.

And then, I guess, I just wanted to go back to the branch strategy, on the Universal Banker model, it seems like it's really working out well for you guys. And I wanted to better understand does that -- is that driving increased transactions just with the retail customers or do the Universal Bankers help with commercial customers as well?

So, we have -- the short answer is yes. So, there is much more, let's say, substantive customer engagement taking place, because we don't have to have staff against transaction volumes. So, the quality of the interactions with the customers are better leading to more sales opportunities, whether it's consumer or commercial. And clearly, we're focused on the commercial business. So, that is very, very helpful. In addition, we had put in place a number of years ago a business development team that is associated with a branch network that is focused on continuing to develop commercial relationships. And then, we also have a team that works the -- our traditional commercial real estate portfolio to deepen relationships there. So, we've got three different areas operating, and clearly, the most recent one where we've seen a significant improvement is the branch network where we have more substantive discussions and clearly much more sales.

Brody, I'd like to go back to your investments for a second. We do disclose in the press release that we sold securities with an average yield of 2.41% and reinvested securities with an average yield of 3.70%. So, it's 130 basis points. And again, those were reinvesting to floating rate securities.

Okay, great. I must have skimmed over that. Okay. And so, I guess I just wanted to touch more on the C&I growth. You guys have done a really good job there. And it seems like when I look at the noninterest-bearing account growth as well, it seems like it’s -- at least self funding a decent portion of it. I wanted to get a sense for like what that actual percentage is in terms of I guess the loan to deposit ratio on an incremental C&I relationship?

We really don't have -- we don't have that information available. We haven't really just -- we really haven't put it out publicly.

Okay.

I mean, we have the information available; we just haven't discussed it publicly. But, let me give you some guidance on it. Every C&I loan has a minimum of a 10% compensating balance requirement. And then, usually, in the C&I portfolio, in order to pay for services like for example, remote capture or other cash management, cash management type services, companies usually add additional noninterest-bearing deposits in order to cover the cost of those services on a compensating balance basis.

Okay. All right. That's good color. And then, I guess, are there any industries where you're having particular success within that C&I bucket, growing loans?

Professionals in particular where the loan -- the loan requirement is less than the deposit opportunity. And we look to grow that portfolio more. Obviously, the more industrial companies, it kind of works the other way.

Right. So, would that mean like you are talking about lawyers and accountants?

Right. Lawyers, accountants, other service -- the medical profession is another one.

Okay. All right. And then, I guess one more for me, understanding that overall asset quality remains very good, I just wanted to touch on the four business banking loans. Are those concentrated within any specific industry or could you give a little bit more color on those loans?

No, they aren't concentrated any specific industry. Let’s see, if you look at this $26 million of substandard loans -- 7 individual loans and all are paying as agreed with the exception of a $1.5 million of exposure. So, what we're dealing with here are predominantly covenant defaults.

To be clear on the $1.5 million, the largest piece of that that is not paying as agreed is it's a loan that’s past its maturity. We're still receiving payments on it. But since we don't really have a renegotiated agreement, we're saying that that is not paying as agreed.

Okay.

But, it is paying.

This now concludes the question-and-answer session. I would like to turn the conference back over to Mr. Buran, for any closing remarks.

Well, thank you. Thank you all for joining the conference. I think just to wrap up very quickly, we're -- we continue to focus on these strategic initiatives that we've outlined within the presentation. I think, we're seeing some success here. And we hope that we can continue to have these conferences. And if anybody has any individual questions, you know where to find us. So, thank you again.

Thank you.

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