Welcome to Flushing Financial Corporation's Second Quarter 2024 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. A copy of the earnings press release and slide presentation that the company will be referencing today are available on its Investor Relations website. 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. During this call, references will be made to non-GAAP financial measures and 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. Please go ahead.

Thank you, operator. Good morning. And thank you for joining us for our second quarter 2024 earnings call. The operating environment in the second quarter was highlighted by similar themes that have impacted the industry and our markets for the past couple of quarters. Changing expectations on Fed rate moves, weak but marginally improving loan demand and aggressive deposit pricing by one of our largest competitors that is dealing with business model and personnel changes. Against this backdrop, the company reported second quarter 2024 EPS of $0.18. It remains a challenging rate environment but I'll provide an update on the progress we've made on our four areas of focus. The first objective is to increase the NIM and reduce its volatility. Net interest income increased about 1% quarter-over-quarter despite NIM compressing 1 basis point. We’re implementing several strategies to help the NIM in future periods, and I believe it is close to a bottom. Susan will provide further details but the NIM should begin to expand once funding costs stabilize. The second objective is to maintain our credit discipline. Flushing Bank has a long history of a low-risk credit profile due to our conservative underwriting and strong portfolio management. Overall credit metrics remain solid 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. Our loan portfolio remains well-collateralized as the average LTV in the real estate portfolio is less than 36% and the debt coverage ratios are 1.8 times for our multifamily and investor commercial real estate portfolios. Our exposure to Manhattan office buildings is about 50 basis points of gross loans. There are zero non-performing office loans and zero non-performing non-residential commercial real estate loans. Our third objective is to preserve our strong liquidity and capital. Our available liquidity was $3.1 billion as of June 30th and our level of uninsured and uncollateralized deposits remains low. Our capital ratios remain solid. The fourth objective is to bend the expense curve. The market provided an opportunity to add banking professionals in new branches, so we made a strategic decision to invest in the franchise. This drove non-interest expense growth for the first half of 2024 compared to the same period in 2023 to about 6%. We expect overall expense growth in 2024 to be in line with our historical averages of mid-single digits. Overall, we're navigating the environment from building a foundation to achieve our long term goals and improve overall profitability. Slide 4 demonstrates Flushing's credit performance versus the industry. Our underwriting has outperformed over time, often by a wide margin. Our conservative credit culture has been proven in many rate and economic cycles, and our commitment to our low-risk credit profile is unwavering. Our charge-off history is shown in the chart on the left. We expect our net charge-offs to remain well below industry levels. For the first half of 2024, we had net recoveries of $88,000. Our level of non-current loans to total loans is also favorable compared to the industry. In a stress scenario, consisting of a 200 basis point increase in rates and a 10% increase in operating expenses, our loan portfolio has a debt coverage ratio of 1.3 times. Given this, we're expecting minimal loss content within the portfolio. Slide 5 depicts additional credit metrics that support our conservative risk culture. Non-performing assets to assets totaled 61 basis points with LTVs of low 44%. Our level of criticized and classified assets remain solid and we expect them to continue to be below peer levels again for the quarter. 30 to 89 day past dues are only 35 basis points of loans indicating a low level of potential future problems. Our allowance for credit losses is presented by loan segment in the bottom right chart and the ratio to overall loans increased 1 basis point to 61 basis points quarter-over-quarter. These items altogether keep us very confident of our low-risk credit profile. Slide 6 outlines some key credit metrics at a more granular level. Our multifamily portfolio comprises 39% of gross loans and has strong credit metrics like a weighted average LTV of 44% and a weighted average debt coverage ratio of 1.8 times. Non-performing loans in this portfolio are only 52 basis points in criticized and classified loans or only 67 basis points of loans. The average loan size is $1.2 million in this $2.6 billion portfolio. Investor commercial real estate loans totaled 28% of gross loans and have similar credit metrics as our multifamily loans with no non-performing loans. Only 36 basis points of criticized and classified loans and an average loan size of $2.5 million. Our exposure to office loans is small at less than 4%, and Manhattan office building exposure is about 50 basis points to gross loans. There are zero non-performing loans in the office portfolio and the debt coverage ratio is 1.9 times. These metrics provide a clear representation of our conservative and strong credit culture that has and continues to perform well over time. Slide 7 provides further context on the risk in our multifamily portfolio and a comparison versus peers. As of March 31, 2024, our criticized and classified multifamily loans were only 54 basis points, the third best in the peer group. At the end of the second quarter, this ratio was 67 basis points. Multifamily reserves to criticized and classified multifamily loans were 75%, which is the fourth best in the peer group in the first quarter and 61% in the second quarter. 30 to 89 day past dues in our multifamily portfolio were only 21 basis points. With these credit metrics, we see limited risk and loss content on the horizon. I'll now turn it over to Susan to provide more detail on our other financial metrics.

Thank you, John. I'll begin on Slide 8, which provides more detail on our deposits. Average deposits increased 4% year-over-year and 2% quarter-over-quarter. The growth in deposits came from both retail and broker CDs as we utilized them to fund approximately $300 million in the growth of floating rate securities for the quarter and to replace anticipated normal flows of the government deposit portfolio. We expect those latter deposits to return in the fall. Average non-interest bearing deposits were 11% of total average deposits compared to 12% a year ago. Our loan to deposit ratio has improved to 98% from 102% a year ago. The cost of deposits increased 11 basis points in the quarter compared to 17 basis points in the first quarter and 16 basis points in the fourth quarter of 2023. Slide 9 outlines the net interest income and margin trends. The GAAP and core net interest margin comprised 1 and 3 basis points respectively to 2.05% and 2.03%. Absent episodic items, the NIM increased 1 basis point quarter-over-quarter. Our net interest margin is partially reflective of the spread between the one month SOFR relative to the five year Federal Home Loan Bank advance rate, which at the end of June was a negative 82 basis points. Once the spread begins to turn positive, our NIM should improve over time. We expect our NIM is near bottom absent any changes in interest rates. The bottom will largely be determined by stabilization of the cost of funds, which will then allow the natural repricing of our loan portfolio to drive NIM expansion. With a parallel shift in today's inverted yield curve by 100 basis points, our model indicates a roughly 1% benefit to net interest income. On the other hand, a steepening of the yield curve by 100 basis points with the short end declining and the long end remaining stable should benefit net interest income by greater than $15 million over time. Slide 10 provides more detail on our CD portfolio. Total CDs are over $2 billion or 35% of total deposits at quarter’s end. It is the growth in repricing of CDs which will drive the direction and magnitude of cost of deposits. About $1.4 billion of retail CDs are expected to mature over the next three quarters at a weighted average rate of 4.86%, which compares to current APYs of 4.85 to 5.40. We expect the cost of deposits will increase at a slower pace in third quarter compared to the second quarter. Slide 11 provides more detail on the contractual repricing of the loan portfolio. Approximately $1.2 billion or 18% of gross loans are repriced to a short-term index. Our interest rate hedge position increases as a percentage to 26%. For the remainder of 2024, $383 million of loans are due to reprice 242 basis points higher than the current coupon rate. In 2025, approximately $765 million of loans are scheduled to reprice 226 basis points higher. These rates are based on underlying index value at June 30, 2024. It is this loan pricing that should drive net interest margin expansion once funding costs stabilize or decline. Turning to Slide 12, which outlines our interest rate hedging portfolio. This portfolio totaled $1.7 billion, and underlying financial instruments are investment securities, loans, and funding. These hedges have a positive impact on asset and funding yields and are additive to the net interest margin. There are no maturities in 2024 with 22% of the portfolio maturing in 2025. As mentioned previously, if the curve steepens with the Fed reducing short-term rates, our net interest margin should benefit over time. Our capital position is shown on Slide 13. Book value and tangible book value per share were stable year-over-year and quarter-over-quarter. The leverage ratio was over 8% while the tangible common equity ratio remains about 7%. Overall, we view our capital base as a source of strength and a vital component of our conservative balance sheet. Slide 14 provides detail on our Asian markets, which account for a third of our branches. We have over $1.3 billion of deposits and $746 million of loans in these markets. These deposits are 18% of total deposits and while we have only 3% market share of this $41 billion market implying there's substantial room for growth. Our approach to this market is supported by our multilingual staff, our Asian Advisory Board and the support of cultural activities through participation and corporate sponsorships. We look forward to participating in the Dragon Boat Festival this coming weekend, which is attended by thousands of people in Flushing Meadow Park. This market, with its dense population and a high number of small businesses, continues to be an important opportunity for us and one that we believe will drive our success moving forward. On Slide 15, you can see community involvement is a key part of our strategy beyond just our Asian franchise. During the second quarter, we participated in numerous local events to strengthen our ties to our customer base. Participating in these types of initiatives has served us as a great way to further integrate ourselves within our local communities while driving customer loyalty. Slide 16 provides a high-level perspective on performance in the current environment. We continue to expect stable loan balances and a continued emphasis on improving the funding mix. The net interest margin is expected to be close to bottom but influenced by the mix of the assets and liabilities, the shape of the yield curve, and pricing of financial instruments. The increase in loan pipeline should help increase asset yields while the cost of funding rises at a slower pace than previous quarters. When the cost of funds stabilize, our net interest margin should bottom out and then start to increase. Non-interest income should be aided by the closing of back-to-back swap loans that are in the pipeline. As John mentioned previously, we have made the strategic decision to invest in the business by adding people and branches. Core non-interest expense is expected to increase mid-single digits in 2024. While the quarterly tax rates can fluctuate, we expect the mid-20s effective rate for 2024. I'll now turn it back over to you, John.

Thank you, Susan. On Slide 17, I will conclude with our key takeaways. Our near-term priorities remain on our four areas of focus to help build a strong foundation for improved long-term profitability. The net interest margin is nearing the bottom and should begin to expand. There's no change in our credit discipline or our low-risk credit profile. Capital and liquidity are strong. We are mindful of expenses but we'll continue to invest in the franchise to improve long-term profitability and value. While the rate environment remains challenging, we're controlling what we can control and setting the foundation for a better future. Operator, I'll turn it over to you to open the lines for questions.

Today's first question comes from Steve Moss at Raymond James.

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?

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 may be getting a little 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 better for that, and I think that has generated some additional interest as well.

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

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

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?

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.

And that just went dark for a while. So we'll be collecting our default interest on that given loan-to-value on that property.

Default interest, by the way, is 24%.

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?

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

And just one last one from me. I noticed that investment securities were up meaningfully this quarter. Just kind of curious what types of securities you bought and the coupon there?

We've purchased adjustable rate mortgage backed and CLOs that have an average rate of a little over 6.5% right now, closer to 6.75%.

And our next question today comes from Mark Fitzgibbon with Piper Sandler.

I guess I was curious, 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?

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

So you think they'll reprice the commercial real estate multifamily by about 200 basis points on average?

Yes, looking at Slide 11 of our deck Mark, if you want complete color, it's about 242 basis points using the June 30th five year Federal Home Loan Bank rate.

And Susan, 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?

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

For each 25 basis points?

For each 25 basis points.

That would be over time though, right? That's not an immediate $1 million impact that would be when the whole book reprices?

Right, it would take some time, and assuming we can cut costs on the liabilities without any delay.

I was curious why you grew the securities portfolio by almost $400 million if your pipelines are so strong. Why not wait and book loans at better spreads?

We made the decision to start purchasing securities as the loan pipeline was just beginning to expand. We view these floating rate securities as a possible source of liquidity moving forward as the loan pipeline starts to close. There is significant uncertainty regarding the closure of loans, despite the pipeline increasing by approximately 88%. As a result, we are experiencing a longer timeframe than what we have seen previously.

We don't anticipate any significant growth, Mark. So as John said, once that pipeline starts to close, we can shed some of those securities.

And then last question sort of year-to-date the dividend payout ratio has been about 148%. At what point do you think about reducing the dividend?

We're a well-capitalized low-risk business. We see ourselves closer to the end rather than the beginning of our earnings pressure given the natural repricing of loans and also heightened potential for Fed easing. So our focus is going to be on working on the earnings and maintaining our strong commitment to return value to the shareholders.

Please correct me if I'm mistaken, but isn't there a regulatory requirement after a certain number of quarters of not earning the dividend that prevents you from maintaining it at that level? Could you remind us what that is?

That's not accurate. We're not prevented from doing so. There is ongoing dialogue and regular communication with the regulators, and the criteria are likely related to our capitalization. We have sufficient cash at the holding company to pay a dividend without affecting bank capital. Moreover, we believe the situation has improved compared to several quarters ago as earnings and net interest margin are nearing a low point.

And our next question today comes from Manuel Navas with D. A. Davidson.

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?

I think in the near term, we may experience a bit more pressure before we see an actual turnaround, but we are very close to reaching a bottom. This quarter, some of the increases in funding costs were linked to aggressive competition from one of our major rivals. If this trend continues, we should have better opportunities to maintain or reduce our funding costs. This has been the primary factor contributing to the compression of our net interest margin. Once again, we are nearing a bottom and we anticipate that the next few quarters will allow us to realize improvements in our net interest margin. Additionally, a reduction on the short end of the curve might potentially result in a drop of over 100 basis points, which could increase our net interest income by as much as $15 million over time.

Is that more weighted to the third and fourth cut? How should I think about the initial cuts with that benefit? Could you just talk through that a little bit?

It's dependent upon the movement of the curve. So as the curve, let's say, flattens out if the Fed decides to reduce the short end or as it steepens, it's really the pitch of that curve is going to give us the greatest opportunity.

You talked about a little bit better maybe just activity in market on the loan growth side. Did you get a sense that a rate cut would even boost that further? Does it depend on a rate cut? Just kind of thoughts on just kind of the origination side for loans.

Clearly, there are borrowers on the sidelines due to the rate environment, which obviously any changes could be helpful. Although, if the longer end of the curve doesn't move, we may be in a similar situation as we are today. But there would be opportunities with respect to maybe shorter-duration credits. For example, the C&I portfolio or three year rather than five year resets.

And our next question today comes from Chris O'Connell with KBW.

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?

No, they were not locked into anything particular.

So just regular short-term borrowings?

There are deposit growth and there are short-term borrowings, but as we said, they are floating rate securities.

And what portion after last couple of quarters of investments is the total floating rate or adjustable rate portion of the securities portfolio?

About two thirds.

Can you provide details about your last regulatory exam and whether the discussions with regulators regarding the CRE concentration ratios have changed recently? Additionally, could you share any insights about those discussions compared to the past, especially considering the heightened industry concerns lately?

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.

Is there a target level, either medium-term or long-term, that you want to achieve for the terminal mix of the loan portfolio?

We want to increase C&I loans and reduce our CRE concentration. Last year, we moved $90 million from the bank to the holding company, which will help lower that ratio over time through natural attrition and capital growth. Moving forward, we aim to prioritize the C&I business while acknowledging that real estate remains a strong asset that has performed well for us. Our credit metrics are solid, but the market has changed, and we need to adapt accordingly.

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

There is some uncertainty for the quarter.

As we look ahead to 2025, considering potential rate cuts, how much do you estimate that a 25 basis points change could impact our annual net interest income, especially if some of the swaps and hedges roll off later this year into 2025?

I believe it would be advantageous for us because we are currently managing our funding closely; however, if additional funding is necessary, we can forgo that option. The rate cuts will be beneficial as they will allow those swaps to expire.

But I mean it would improve that impact, correct?

Correct.

Yes, that’s right.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn it back over to Mr. Buran for any closing remarks.

Well, I thank you all for your attendance and your interest in Flushing Financial. And enjoy the rest of your summer. Thank you.

Thank you sir. This concludes today's teleconference. You all may disconnect your lines and we thank you for your participation. Have a wonderful rest of your day.