Good day and welcome to the Flushing Financial Corporation Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. John Buran, President and CEO. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us for our Second Quarter 2023 Earnings Call. Following my prepared remarks, Susan will review the financial trends and we will then answer any questions. During the first quarter, the company instituted a six step action plan to enhance the resilience of our business model and strengthen our financial performance. We executed this plan well during the second quarter and are pleased with the progress we have made so far on key points. First, to move more towards interest rate neutral, we added more than $400 million of asset swaps. Additionally, $250 million of funding swaps became effective during the quarter. We're also increasing the percentage of back-to-back swap loans. These loans are over 35% of our loan pipeline and total floating rate loans are approximately 50%. These actions significantly reduced our interest rate sensitivity position while providing additional income. Second, we increased our focus on risk adjusted returns and overall profitability. As a result yields on the loan pipeline rose 20 basis points and yields on loan closings increased 13 basis points. In addition, our loan pipeline increased 56% quarter-over-quarter. While it will take time for new and repriced loans to have a significant impact on overall loan yields, we are encouraged by the results so far. Third, we're looking to expand our client base and build loyalty by emphasizing our excellent brand of customer service and deep community relationships. Late in the quarter, we hired a team of commercial real estate lenders with considerable experience and robust client rosters. We also continue to see high single digit growth in checking account openings and robust CD growth. Fourth, we reviewed new and existing relationships resulting in improved credit metrics and normalized net charge offs. We also added further layers…

Thank you, John. I’ll begin on Slide 10. The company reported second quarter 2023 GAAP earnings per share of $0.29 and core earnings per share of $0.26. The quarterly results were significantly improved compared to the first quarter. Average total deposits increased 7% year-over-year and 1% during the quarter. We continue to grow our CD portfolio, which is now 30% of average deposits. The cost of deposits totaled 2.68%, while the cost of funds was 2.8%. As expected, loan growth was muted, increasing only 1% year-over-year. However, the loan pipeline increased 56% quarter-over-quarter with pipeline yields and core loan yields also expanding. Non-performing assets declined 6% during the quarter, reflecting our conservatively underwritten loan portfolio. Overall, the second quarter results were an improvement versus the first as we continue to adjust to the higher rate environment. Slide 11 depicts our deposit portfolio. Despite the Fed raising rates and industry deposits declining, our average deposits have increased 7% year-over-year and 1% quarter-over-quarter. The growth is driven by the 150% year-over-year and 22% quarter-over-quarter increase in CDs, which lengthened the duration of our liabilities, thus reducing our liability sensitivity. Growing non-interest bearing deposits is challenging in this high rate environment, but remains a focus. Average non-interest bearing deposits declined both quarter-over-quarter and year-over-year, though checking account openings increased 10% year-over-year. Our loan to deposit ratio has improved to 102% from 105% a year ago. As a reminder, we generally have seasonality in certain segments of our deposit base and the summer months balances are generally lower than the remainder of the year. Slide 12 outlines our loan portfolio and yields. Net loans increased 1% year-over-year, but were down 1% quarter-over-quarter. Loan closings also declined year-over-year and quarter-over-quarter as customers adapt to the increased rate environment, but the yield on the closings was…

Thank you, Susan. On Slide 21, I'll wrap up with our key takeaways. We continue to execute our action plan, which is improving our profitability in the short and medium term and establishing a foundation for long term success. We're happy with the limited NIM compression for the quarter and have significantly improved our sensitivity to higher rates. Our asset quality and liquidity are conservative and sound. We continue to serve our clients and deepen relationships. Our overall financial metrics improved during the quarter, but we're remaining cautious given the environment. The decisive actions we are taking to improve the overall performance will allow us to continue our long and consistent record of dividend payments. Operator, I'll turn it over to you to open up the lines for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead, sir.

Hi, guys. Good morning.

Good morning, Mark.

Good morning, Mark.

Hey, Susan, just to clarify one of your comments about the margin, you sort of talked about the pressure being more manageable than what we saw in the second half of 2022 and the first quarter of 2023. Should we take that to mean that the margin you think will be down this quarter or something in the neighborhood of what we saw in the second quarter assuming the Fed raises rates 25 basis points later today?

Given where the Fed is in their rate raising cycle, that's a primary driver of that comment. But I would expect some compression probably closer to what we've seen in the second quarter than what we had seen in the previous three quarters.

Okay. Great. And then secondly, I wondered if you could share with us what iGO balances were at the end of the quarter?

We are around $200 million.

$200 million. Okay. Great. And John, I wondered if you had any targets for either tangible common equity or CET1 going forward?

Well, I think we want to stay close to that 8% range. Obviously, we're not there at this point in time, but we're very cognizant of the importance there. I think that the Fed stopping its rise in interest rates could help us a little bit there in terms of the securities portfolio valuations. But we're comfortable where we are right now for the present. I think we'd like to move it up a little bit more.

Okay. And then -- I know -- I saw that you had hired a team from Signature Bank. I guess, I was curious roughly how large was their book of business? And maybe how long you think it takes for them to be able to bring that over to Flushing?

We're really not disclosing that. But it's a group that has a significant basis for their success in the past.

Okay. And last question. I wonder if you could share with us the 30 to 89 day delinquencies? I know they come out in the Q, but if you had those handy that would be great?

They're down significantly from where they were in the prior period. I don't have them right at my fingertips.

Thank you.

Thank you, Mark.

Our next question comes from Chris O'Connell with KBW. Please go ahead, sir. Christopher O’Connell: Hi. Just to follow up on the on the margin discussion, do you have the spot in for June?

Yes. June was 219. And good morning, Chris. Christopher O’Connell: Good morning. Okay. Great. And then as far as the hedges that were put on this quarter, what was the timing?

What do you mean? [Multiple Speakers] duration or which month they were put on. What do you mean by the timing? Christopher O’Connell: I believe last quarter the hedges were put on pretty late in the quarter. So the impact…

Here again, they're put on pretty late. They put on in May predominantly. Christopher O’Connell: Okay. Do you have the duration?

Middle to the end of May. Christopher O’Connell: Okay. Do you have the duration?

They were primarily five years, three and a half to five. Christopher O’Connell: Great. Do you have the rate as well?

I think if you look at the presentation, we have -- the swaps all broken out in there Chris on, I'm flipping through the presentation because I know it's in here. Look at Page 15 or so, that has a lot of the information on the swaps that you may be looking for. Christopher O’Connell: Okay. Thanks. And then on the credit side, can you just provide any color around the $1.7 million, I think or so of CNI net charge off this quarter?

It was one relationship that had been downgraded. And we've been watching very carefully over the last six to nine months and, additional information became available that made us realize that the collectibility was questionable and we charged it off. Christopher O’Connell: Okay. Got it. Is that fully charged off?

Yes. Christopher O’Connell: Great. And then I noticed I think the Manhattan office exposure increased to 0.6% of loans from 0.1% last quarter.

No, the differential is -- the number we had been quoting in the past was midtown Manhattan office, which is tenth of a percent. We've expanded it to include really all of Manhattan. So that's what the larger number is. Christopher O’Connell: Got it. That make sense. And for the office?

We're not doing it. We're not doing office space. Just for the record. Christopher O’Connell: I figured. Yes, that's how it struck my eye. As far as office exposure, I know it's pretty low. I think ballpark $150 million or so. I was just wondering if you had the maturity schedule for how that comes -- how much is coming due, say, over the next 12 to 18 months? And if you have a specific reserve number against it?

I don't think we have a reserve against any of it.

Not any additional reserve other than we have against the CRE portfolio in total. We know when these loans will be repricing, et cetera. That's not information we're sharing at this time. They all have a nice debt coverage ratio and have low LTVs.

And there's nothing unusual about the structure, it's typical. Our typical five year.

They also have very strong sponsors behind these buildings. Christopher O’Connell: Great. And it sounds like based on the loan pipeline, with all the swaps in the pipeline that banking, service fees, could remain strong year after the pick-up quarter-over-quarter this quarter. Do you expect it’s going to remain in a similar range to that where you saw in Q2 or could it move up a little bit more or is Q2 particularly strong?

I think if you're looking at our core that we would expect them to go up. Obviously our GAAP non-interest income has the fluctuations from the market valuations included in there, but we would expect our core fees to increase with the number of swaps deals we've been transacting. Christopher O’Connell: Okay. Great. And then, based on what you were discussing on the TC target and relatively low balance sheet growth here and where the stock is trading. I mean, how are you thinking about buyback utilization going forward?

Our capital planning has not changed at all, Chris. We still think the best thing to do with our excess capital is to redeploy it into the business to grow, followed by returning to shareholders through the form of dividends and finally share repurchases. We always take look at it and opportunistically take a look at the market and see if that's the best place to deploy our capital. Again, growing the businesses is the first priority with capital. Christopher O’Connell: Got it. And just taking a step back and kind of thinking about things more strategically. I mean, obviously, this quarter you had good coverage. If NIM is down similar to Q2 levels, things become a little tighter. It seems in the back half of the year. I mean, how are you guys thinking about dividend coverage going forward and just strategically what are the decision making factors kind of around that?

We don't see any reason to change our dividend policy at this point in time. Christopher O’Connell: Okay. Got it. That’s all I had for now. Thank you.

Thanks, Chris.

Thanks, Chris.

Our next question comes from Manuel Navas with D.A. Davidson. Please go ahead, sir.

Hey, good morning. Most of my questions have been answered, but just kind of can you remind me the expected size of deposit seasonality? Is it just going to follow past year trends?

So the typical trend is a downturn of seasonal balances in the summer months anywhere from $150 million to $200 million. And then as we approach the fall, that starts to rebound. Thank you.

What are your current offers on the deposit side in the market?

Our CD offerings are about 4.5% to 5.25%.

Okay. And you're still seeing solid flows on your offers?

Yes.

I guess you talked about the CRE team. What's kind of the pipeline going forward and kind of what are the opportunities you're seeing in marketplace for talent?

We're always on the outlook. I think that there's -- from what we understand, there may be some situations with respect to payments to individuals that may be coming to an end that may present an opportunity for additional staff to come our way.

Okay. I appreciate the comments. Thank you.

Manuel, I just want to emphasize that this team also is deposit gatherers. They're not just loan gatherers. So I think that's an important distinction.

Okay. I appreciate that.

Thank you.

[Operator Instructions] No further questions. This concludes our question-and-answer session. I would like to turn the conference back over to John Buran for any closing remarks.

Well, thank you, everybody, for joining us today on our second quarter 2023 earnings call. We appreciate your continued support of Flushing Financial and look forward to talking to you again next quarter. Thank you very much.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.