Welcome to Flushing Financial Corporation's Q2 2025 earnings conference call. Hosting the call today are John Buran, President and Chief Executive Officer, and Susan Cullen, Senior Executive Vice President, Chief Financial Officer, and Treasurer. Today's call is being recorded. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. A copy of the earnings 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, including as set forth in the company's filings with the U.S. Securities and Exchange Commission to which we refer you. 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 U.S. GAAP. For information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release and/or the presentation.
I would now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results.
Thank you, Operator. Good morning, and thank you for joining us for our Q2 2025 earnings conference call. We're pleased to report continued progress in our Q2 results, building upon the momentum we established in the Q1. Our focus on three key areas: improving profitability, maintaining credit discipline, and preserving strong liquidity and capital continues to drive positive results and demonstrates the power of our strategic focus and the successful execution by our team. For the Q2, the company reported GAAP earnings per share of $0.41 and core earnings per share of $0.32, which are increases of 128% and 78% year-over-year. The primary difference between the GAAP and core earnings are the fair value adjustments on debt and the reversal of a valuation allowance upon reclassification of loans held for sale to loans held for investment.
As you can see from our financial highlights on slide three, our performance was improved and broad-based. Both GAAP and core net interest margin expanded 3 basis points quarter-over-quarter, with GAAP net interest margin reaching 254 basis points and core net interest margin reaching 252 basis points. This marks continued improvement from our 250 basis points range we achieved in the Q1 and considerable growth from a year ago levels in the 200 basis point range. Average total deposits increased 6% year-over-year and 1% quarter-over-quarter to $7.6 billion. We're particularly pleased with our non-interest-bearing deposit growth, which increased 6% year-over-year and 2% quarter-over-quarter to $875 million. Our pre-provision pre-tax net revenue of $23.1 million and core PPNR of $19 million in the Q2 reached their highest levels since third and Q4 of 2022, respectively.
Credit metrics continue to demonstrate the strength of our conservative underwriting approach. Net charge-offs totaled 15 basis points for the Q2 compared to 27 basis points in the Q1. Non-performing assets were stable at 70- 75 basis points quarter-over-quarter. Importantly, criticized and classified loans to total loans improved to 108 basis points, down from 133 basis points in the prior quarter. The bank's commercial real estate concentration decreased to under 500% for the first time since Q3 of 2023. This strong operating performance translated directly to a stronger balance sheet. Our tangible common equity grew by 25 basis points to 8.04%. We maintain strong liquidity with $3.6 billion of undrawn lines and resources at quarter end. These results validate our three core areas of focus: improving profitability, maintaining credit discipline, and preserving strong liquidity and capital.
While we're proud of this progress, we remain focused on the work ahead. I'll now turn it over to Susan to discuss our results in more detail. Susan.
Thank you, John, and good morning. Our first area of focus continues to be improving profitability, and we made notable progress in the Q2. Both GAAP and core net interest margin expanded 3 basis points quarter-over-quarter, demonstrating the continued benefit of our asset repricing strategy. Real estate loans are expected to reprice approximately 160 basis points higher through 2027, providing a significant tailwind for net interest margin expansion. We continue to see growth in our non-interest-bearing deposits, which is a key focus with our revised incentive plans, emphasizing the importance of this funding source. We are also continuing to invest in the business through people and branches to drive core business improvements. Our focus remains on improving returns on average equity over time, and we expect capital to grow as profitability improves. Slide five provides detail on our net interest margin expansion.
Core net interest income increased by $10.5 million year-over-year, demonstrating substantial improvement in our earning power. Key drivers of the NIM quarter-over-quarter included loan yields increasing 7 basis points, which was largely offset by 8 basis points from swap maturities. Episodic items, which include prepayment penalties, net reversals, and recovered interest from non-accrual and delinquent loans, and swap termination fees were higher in the Q2 compared to the Q1. In the Q3, we typically experience seasonality in our funding profile, which tends to put pressure on funding costs. Longer term, we remain confident that our loan repricing should drive NIM expansion, assuming no change to the current flat yield curve. A positively sloped yield curve will drive net interest margin expansion, while a negatively sloped curve will make margin expansion much more challenging.
Our deposit franchise remains a key strength and a cornerstone of our funding profile. As seen on slide six, average total deposits grew to $7.6 billion, up 6% year-over-year and 1% quarter-over-quarter. Our strategic initiatives to grow core relationships are paying off. The revamped incentive plans we discussed in the previous quarters, which emphasize non-interest-bearing accounts, are delivering tangible results. Average non-interest-bearing deposits increased 6% year-over-year and 2% quarter-over-quarter. This quarter, new checking account openings increased 21% year-over-year and 8% quarter-over-quarter. This is a powerful leading indicator of future franchise value and demonstrates our ability to attract and retain low-cost core funding. We continue to closely watch our funding costs as the overall cost of deposits increased 8 basis points to 3.1% quarter-over-quarter, primarily due to the funding swaps.
We see some opportunities to lower deposit costs over time, but the benefit is limited unless the Federal Reserve reduces rates. Total CDs are $2.5 billion or 34% of total deposits at quarter end. Approximately $391 million of CDs with a weighted average rate of 3.93% will mature in the Q3. Our current CD rates are 3.5%- 4.25%, and customer preference is for our 91-day and 182-day products, which have APYs of 4%. During the Q2, we retained about 80% of the maturing CDs with a weighted average rate reduction of 24 basis points. Slide seven illustrates one of our most significant embedded earnings drivers: the contractual repricing of our real estate loan portfolio. For the remainder of 2025, approximately $373 million of loans are scheduled to reprice at rates 136 basis points higher than their current coupon.
Through the end of 2027, $2.1 billion or about 1/3 of the loans are scheduled to reprice at significantly higher rates, providing substantial predictable tailwind for our net interest income. Contractually and on an annualized basis, net interest income will increase $5 million from the 2025 repricing, $12 million from the 2026 repricing, and $16 million from the 2027 repricing. To demonstrate this point, as of March 31, 2025, $131 million of loans were due to reprice in the Q2. We successfully retained 92% of these loans at a weighted average rate of 6.89%, a full 154 basis points higher than the prior rate. This is a testament to our strong client relationships and our disciplined pricing, and it confirms the earning powers embedded in our loan book. Our second area of focus, as shown on slide eight, is maintaining credit discipline.
We continue to operate with a low-risk profile built on conservative loan underwriting standards and our long history of low credit losses. We have enhanced our focus on relationship pricing and are beginning to see positive results from these efforts. Slide nine illustrates our net charge-off history compared to the industry since 2001. Our underwriting has consistently outperformed industry averages, often by wide margins. Our conservative credit culture has been proven through many rate and economic cycles, and our commitment to this low-risk credit profile remains unwavering. Our multifamily and investor commercial real estate portfolios maintain strong debt coverage ratios at approximately 1.85x . Even when we stress test these ratios for higher rates and increased operating expenses, the debt coverage ratios remain strong.
In a stressed scenario with both a 200 basis point rate increase and a 10% increase in operating expenses, the weighted average debt coverage ratio is approximately 1.36x . Slide 10 demonstrates our non-current loan performance relative to the industry over more than two decades and multiple credit cycles. Flushing Financial Corporation has consistently maintained better credit quality than industry averages. Our borrowers maintain low leverage with average loan-to-values on our real estate portfolio of less than 35%. We have only $41 million of real estate loans with a loan-to-value of 75% or more, and about a third of these loans have mortgage insurance. Our strength is rooted in the quality of our loan portfolios. In our $2.5 billion multifamily portfolio, as detailed on slide 11, non-performing loans were halved this quarter to just 50 basis points, down from 101 basis points in the Q1 of 2025.
Criticized and classified loans in this segment improved dramatically to only 73 basis points from 116 basis points last quarter. The portfolio maintains a very strong weighted average debt coverage ratio of 1.8x . Our rent-regulated portfolio is $1.5 billion, and our credit quality in this portfolio is solid. Further details are in the appendix. There is a need for affordable housing in the New York City area. We've been lending to this market for approximately 30 years and have always focused on valuing the properties based on existing cash flows. This has resulted in debt service coverage ratios that are among the highest in the industry, and our current loan values are low, as our loans generally require 30-year amortization. We have limited interest-only loans.
Our underwriting models employ stress tests that amortize the loans as scheduled and then increase the rates by approximately 225 basis points above the initial rate to ensure that the property's resulting net cash flow is sufficient to service the loan at higher rates of interest. In addition, the bank requires its borrowers to submit annual income and expense statements with a current rent roll at the conclusion of each calendar year. These statements are analyzed, and current debt service ratios are recalculated. The results are reported to the bank's Board of Directors Risk Committee for assessment. Lastly, the loans undergo another stress test based upon the current cash flows. This stress test reprices the loans based upon its current index, plus a margin formula to determine if the loans would reprice at this time with the resulting debt service coverage ratio indicating the property would support the loan balance.
We believe that our conservative practices have placed us in a position to better manage through these challenging times. Slide 12 provides peer comparison data and our current multifamily credit quality statistics. Our criticized and classified multifamily loans to total multifamily loans of 73 basis points compare favorably to our peer group. 30- 89 days past dues are only 12 basis points. Non-performing loans are 50 basis points of total multifamily loans and criticized. Our multifamily allowance for credit losses to criticized and classified multifamily loans is 69%, demonstrating appropriate reserve levels. During the Q2, $55 million of multifamily loans were scheduled to reprice and mature. Approximately 97% of these loans remain with the bank and reprice 166 basis points higher to a weighted average rate of 6.56%. With these credit metrics, we see limited risk and loss content on the horizon.
Slide 13 provides an overview of our investor commercial real estate portfolio, which is 30% of gross loans. The investor commercial real estate portfolio has 33 basis points of non-performing loans and 162 basis points of criticized and classified loans. All the non-performing loans and criticized and classified loans are in the office portfolio, which is only 3% of gross loans. These metrics provide a clear representation of our conservative investor commercial real estate portfolio. Finally, on slide 14, our third area of focus is preserving our strong liquidity and capital. Our liquidity position remains exceptionally strong, with approximately $4 billion in undrawn lines and resources at quarter end. Furthermore, our reliance on wholesale funding is limited, with uninsured and uncollateralized deposits representing only 17% of total deposits, providing a stable and reliable funding base.
The company and the bank remain well-capitalized, and our tangible common equity to tangible assets ratio increased by a strong 25 basis points this quarter to 8.04%. This capital increase enhances our resilience and provides us with the flexibility to continue supporting our customers and investing in our strategic initiatives. I'll now turn it back to John. John?
Thanks, Susan. The strong financial results Susan detailed are the direct outcome of our focused strategic execution. A key driver of our franchise growth is our deep commitment to the Asian American communities we serve. As you can see on slide 15, our focused efforts, supported by our multilingual staff, our Asian Advisory Board, and active community sponsorship, have grown our deposits in this vibrant market to $1.4 billion. This reflects a 12.4% compound annual growth rate since the Q2 of 2022. With only a 3% market share in this $45 billion market, the runway for future growth is excellent. Turning to our outlook on slide 16, we provide some insight for the remainder of the year. We expect total assets to remain stable, with loan growth being market dependent as we remain focused on disciplined pricing and improving our overall asset and funding mix.
There are several moving parts affecting the net interest margin outlook. First, we have $391 million of retail CDs at a weighted average rate of 3.93%, maturing in the Q3. The retention rate on June CDs was 3.69%. Second, we have $373 million of loans contractually repricing 136 basis points higher in the second half of the year, and $720 million repricing 171 basis points higher in 2026. Third, we have deposit outflows seasonally in the Q3, with recovery in the Q4. Finally, the slope and the shape of the yield curve will affect the net interest margin. Non-interest income should benefit from a healthy pipeline of about $41 million in back-to-back swap loans scheduled to close. We're maintaining our disciplined approach to expenses and have lowered our expected core non-interest expense growth 4.5%- 5.5% for 2025, compared to the 2024 base of $159.6 million.
Lastly, we're also lowering our expected effective tax rate to a range of between 24.5% and 26.5% for the remainder of 2025. To conclude on slide 17, our key takeaways for the quarter are clear and reinforce our strategy. First, we're successfully improving profitability, evidenced by another quarter of NIM expansion and pre-provision net revenue at its highest level in nearly three years. Second, we're maintaining our credit discipline. Our portfolio is 90% collateralized by real estate, with an average LTV below 35%. This quarter saw a material improvement in our criticized and classified loan levels. Finally, we're preserving and growing our capital. Our liquidity remains robust, and our tangible common equity grew significantly to over 8%. The results this quarter demonstrate that our plan's on track and profitability is improving. We're confident in our ability to continue executing and delivering value to our shareholders.
Operator, I'll turn it over to you to open the lines for questions.
Thank you. We will now begin the Q&A session . To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Your first question comes from Mark Fitzgibbon with Piper Sandler . Please go ahead.
Hey guys, good afternoon or good morning, I guess. How are you?
Fairly morning, good morning, Mark.
Yeah. The first question I had is on deposits. It looked like deposits declined about $400 million, and correct me if I'm wrong, you said we'd see some more outflows in the Q3 related to seasonality, I assume in the muni business. What is, are you doing some pricing changes or, you know, what kind of caused that $400 million rundown this quarter?
Most of it is seasonal in nature. We'll go into a period of time where we're seeing government deposits move out, and that'll take place partially through the Q3.
Okay.
We'll pick up.
We'll pick up back again.
Okay. I was trying to understand your interest rate sensitivity, just the comments you made around the yield curve. I was looking at page 34 with the hedges and trying to understand that. I guess what I'm wondering, if the Federal Reserve cuts rates 25 basis points and the curve steepens 25 because of that, what does that do to your margin?
That's good news for us. Any return to a more normal curve is positive.
Okay, I mean, a couple of basis points improvement in the margin once it ripples through, is that fair?
Yeah, reasonable.
Okay. John, you know, there's been a lot of talk around the mayoral election in New York. I guess I'm curious, if we get a Mayor Mamd ani, does that change your outlook at all for New York City rent-regulated multifamily lending going forward?
As you know, Mark, the mayor's office can't unilaterally freeze rents. All the changes in rents have to be approved by the New York State Division of Homes and Community Renewal. Over the last few years, really, other than the COVID timeframe, the state legislature, particularly, and the Rent Control Guidelines Board have granted renewals. Renewals for 2020, 2024, and 2025, one-year renewals at 2.75%, two-year renewals at 5.25%. You can go back into 2023, where clearly there's been an understanding, certainly at the state level, that inflation has taken a toll on fixed expenses. As a result, these kind of increases are in line. Any movement in these rates really has to go through the state. There's clearly a controller on Mr. Mamdani if he happens to be elected to the office.
Okay, great. I guess, given the fact that you guys are suggesting the balance sheet's not going to grow between now and the end of the year, and your capital ratios are already pretty solid, with your stock trading at 58% of tangible book value, I'm curious, are you eager, interested, and are we likely to see buybacks in the second half of the year?
Probably not. We're still looking to build capital a little bit stronger. We're still a little bit below our peers. Our capital position, priorities, excuse me, has not changed in paying the dividend, first growing the company profitably. We would like to see that first and foremost, then paying the dividend, then returning capital via repurchases.
It just strikes me that at 58% of book value and it being a riskless transaction, it's pretty attractive, no? Versus growth or dividends or anything else?
Understood. Yes, that is a pretty attractive transaction.
Okay, thank you.
Thank you, Mark.
Thanks, Mark.
Your next question comes from Thomas Reid with Raymond James . Please go ahead.
Hey guys, just one quick question from me. There was a nice reduction in your expense outlook. Can you talk about maybe what drove that decrease and maybe some of your updated thoughts on the pace of SBA hiring and De Novo expansions?
What drove the decrease was clearing up some accruals related to incentive compensation and the tight management of expenses that we have instituted across the organization. You had a second part there, Thomas?
What are you thinking in terms of potential SBA hires and De Novo transfers? I know you talked about that in previous quarters.
We have two branches that we plan on opening or have opened this year. One has already opened in Jackson Heights, and our Chinatown branch has grown so nicely. That was opened pre-pandemic, right before the pandemic. We've outgrown that space, so we are planning on opening a second branch in Chinatown. We continually look for new teams who will add revenue to our bottom line, so that's always on the table.
Okay, great. Appreciate that. Thank you.
Thank you.
Your next question comes from David Joseph Konrad with KBW . Please go ahead.
Good morning. Just kind of a follow-up on the deposits. You gave us a lot of repricing on the CDs. Just curious, as this ebb and flow of seasonality of government deposits, maybe your thoughts of the repricing yields going forward on the non-CD deposits.
Sure. We think we're clearly, the market is such that we think we've got limited opportunity to drive down the funding costs until the Federal Reserve makes its move. Much of what we've had in certificates of deposit (CDs) is really the opportunity we've taken advantage of up until this point in time. There are, because of capital markets and our competitors in the government business, from time- to- time, we see opportunities there to shave off a few basis points here and there. The majority of the help on NIM going forward really is going to come from the asset side and the loan repricing. I think we'll get limited support from the liability side of the balance sheet until the Federal Reserve makes its move.
Okay, got it. Thank you.
Your next question comes from Manuel Navas with D.A. Davidson . Please go ahead.
Morning, Manuel.
Awesome. This is Sharanjit Cheema on for Manuel today. I was wondering, the repricing opportunity in the loan book is pretty large, but what is the impact on the credit side? Did the loans that repriced 154 basis points higher in 2025 face any credit stress?
No, we're not seeing any credit stress there. We had the loans that repriced, we kept 92% of them are current, and there's a 7% that are one to 29 days, but they're responsive and we're clearing that up right away. The benefit of stress testing our loans at origination upwards of 200 basis points, and these only repricing 166 basis points, we had an idea of how they would perform, based on the stress testing done at origination.
That's great. Thank you.
Thank you.
This concludes our Q&A session. I would like to turn the conference back over to John Buran for any closing remarks.
Great. Thank you very much for joining our call this morning, and we look forward to continuing to provide the shareholders with information on our progress on our strategic plans. Thank you.
This concludes today's teleconference. You may now disconnect your lines, and we thank you for your participation.