Good morning and welcome to Flushing Financial Corporation's Second Quarter 2019 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. And after today’s presentation, there will 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 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 U.S. GAAP. For more information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release.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. Good morning, everyone, and thank you for joining us for our second quarter 2019 earnings call. As always, on today's call, we hope to provide you with additional insight into our consistent, positive earnings power, business strategy and sustainable competitive advantage. I'll begin with our second quarter highlights and then provide an overview of the strategies we are expecting to continue to create long-term shareholder value. Then Susan Cullen, our CFO, will review our financial performance in greater detail.Following our prepared remarks, Susan and I will address your questions. Beginning on slide 3, we're pleased to report overall earnings growth, as GAAP diluted earnings per share rose 48% for the first quarter of 2019, while core earnings increased 27% during the same period. However, both GAAP and core diluted earnings per share were down from the same quarter in 2018 as net interest margin pressure returned, driven by inversion of the yield curve, coupled with increased competitive pressure on our deposit business.The slide presentation includes a reconciliation of GAAP to core earnings. We experienced more robust loan growth in the second quarter as closings increased 50% from the first quarter of 2019. In addition, the loan pipeline increased over 50% to $424 million during the same period, the largest pipeline since the first quarter of 2016. The mortgage pipeline had an average yield of 4.63%, which is 21 basis points higher than the core yield on total loans for the second quarter of 2019.We continue to diversify the loan portfolio during the quarter as we produce record C&I closings of $158 million, representing 53% of total quarterly loan closings. These loans are generally floating rate loans and represented 18% of total loans at June 30, 2019 compared with 15% at June 30, 2018. The second quarter of 2019…

Thank you, John. I'll begin on Slide 7. Total loans were $5.6 billion, up approximately 1% quarter-over-quarter and 6% year-over-year as we continue to focus on the origination of commercial business loans with a full banking relationship. These originations totaled 53% of total loan production for the quarter and 47% over the past year.Commercial business balances have grown 25% year-over-year to approximately 18% of gross loans as of June 30th, 2019. The growth in C&I portfolio continues to offer advantages primarily to continue the diversification of our loan portfolio. And as these are primarily adjustable rate loans the yield offers more stability to the net interest margin.As John highlighted at June 30th, our loan pipeline totaled $424 million which is up significantly from the $275 million and $197 million as of the end of the prior two quarters. The composition of the pipeline was 48% adjustable rate product with the remainder fixed rate.Interest rate on the mortgage loans in the pipeline has an average yield of 4.63% which is 21 basis points above the core yield of total loans for the quarter. The loan-to-value on our real estate portfolio at quarter end remains conservative at approximately 38% and the debt service coverage ratio for the current core originations of multifamily commercial real estate and one-to-four family mixed-use loans is 192%. We continue to underwrite and stress test each individual loan using a cap rate in excess of the mid-5s.Slide 8 highlights the continued evolution of our funding mix. As funding has grown over the years, the percentage related to CDs and borrowings has decreased. When we need to access the wholesale funding markets, we can advantageously ladder up the liabilities for longer terms.Core deposits decreased 6% quarter-over-quarter, primarily due to the seasonal outflows in the municipal deposits as previously discussed.…

Thank you, Susan. On slide 16, I would like to conclude by reviewing why we remain well positioned for continued consistent and profitable growth. We continue to see positive trends including growth in the C&I portfolio as we move our balance sheet more toward floating rate C&I business, a significantly improved loan pipeline and non-brokered loan closings improving to 63% of second quarter closings.Our swap strategy continues to be an important component in mitigating core NIM compression and reducing the liability sensitivity of the balance sheet. Our long-term goal is to move towards being interest rate risk neutral, which allows us to take advantage of all interest rate environments. We have contained non-interest expenses in this low rate environment. The ratio of non-interest expense to average assets improved to 1.58% in the second quarter compared to 1.89% in the first quarter and 1.69% in the second quarter of 2018. The Win Flushing program established to increase our market share in our home market has been very successful, as we have gathered to-date $196 million of new deposits, exceeding our original target of $160 million.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 brand sales increasing over 40% in total and approximately 60% per branch employee. Our ongoing focus on developing and maintaining a multilingual branch staff to serve our diverse New York City customers is a key advantage. The New York City market, with its strong Asian customer base, continues to represent a significant opportunity for us.Our credit quality remains pristine. Overall, our vision remains consistent and that is to be the preeminent community financial services company in our multicultural market area by exceeding customer expectations and leveraging our strong banking relationships.In summary, our strong balance sheet, risk management philosophy, strong capital levels, ability to grow deposits, investments in talent, innovation in cybersecurity, all position the company very well to further deliver consistent profitable growth and long-term value to our shareholders.We will now open it up for questions. Operator, I'll turn it over to you.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Fitzgibbon with Sandler O'Neill + Partners. Please go ahead. Mr. Fitzgibbon, perhaps your line is muted on your end.

Yes, it is. Thank you. Good morning, guys.

Good morning.

Good morning.

I wonder if you could start by -- maybe give us a little bit more color on that big C&I charge-off this quarter. Maybe what happened? What industry it's in? And if there were other banks involved with it as well?

No other banks involved. It's was in the pharmaceutical -- retail pharmaceutical industry. It's the same loan that we took a charge on early last quarter. And in reassessing the position, we decided to charge the vast majority of it all for this quarter.

If I'm not mistaken though, last quarter you said it was a one-time event with an employee that had been rectified. Had something changed since then?

What happened is, our assessment of the collateral position changed. We had somebody independently come in to assess the collateral position and that came up more negative than we anticipated. So it was the same cause, but upon further inspection of what the collateral position was for the company, we felt it prudent to write it down.

Okay. And then, secondly, I think, you said in the release that you kind of modified your position on that sort of focusing on rate over volume. Does that mean that we're likely to see more core NIM compression, excluding the impact of swaps?

So, I would say, we're never going to be the price leader. So that -- to the degree that that is consistent with the way we've been operating the company over the years, that will remain the same. What changed was the inversion of the yield curve, which both reduced our loan volumes very, very slightly.We're pretty well flat in terms of loan originations, but it clearly had an impact on the loan yields. So we had to respond to that competitive market pressure. And then simultaneously, of course, we didn't see deposit cost go down in any way which surprised us.

So if we look at the back half of this year factoring in the impact of swap a rate cut say in July and maybe September, from what you see today would you anticipate compression in the margin albeit slower than what we saw from 1Q to 2Q?

I think in the past what we've been able to do is focus more on the differential between net interest income -- between interest income and cost of funds. I think we'll still continue to see some pressure throughout the end of the year and we thought we had seen some stabilization. The deposit market in New York did not react that way. And as a result, we saw compression both on the deposit side and then inversion of the yield curve as I mentioned earlier caused some more compression on the loan side.So, unless that dynamic changes, I think we'll continue to see pressure on the NIM. Obviously, any move of the Fed that brings down short-term rates will be a positive for us, because we do have a fair amount of short-term liabilities on the -- in the portfolio particularly in the government area.

Okay. And then I think you -- Susan you had said that the efficiency ratio goal was the low to mid-50s. I guess, I'm curious how long do you think it will take to get there? And what are kind of the main levers that you're likely to pull to achieve that?

The main lever that we need to get there is to increase the NIM. And until we see NIM growing the curve not being inverted the growth there, we won't see the efficiency ratio in the mid-50s.

So we're focusing in on the asset-to-expense ratio in order to just keep ourselves as close as possible to delivering some degree of scalability. But clearly the companies -- company is dealing with some interest rate margin compression that we don't see moving until the end of the year.

Right. Thank you.

Thanks, Mark.

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

Good morning everyone. How are you?

Good.

Good morning.

I just wanted to I guess maybe follow-up on the comments you had regarding the rent-regulated multi-family book. I just wanted to better get a sense for, I guess, maybe the type of borrower. I understand you highlighted that you have little exposure to institutional ownership. But I just want to get a sense for -- are the borrowers that you're exposed to are they like long-term type of family office type holders of multi-family properties in New York City?

Yes. The typical borrower is a multi-property owner and has been in the business for many years and typically as you can see by our portfolio with low leverage, yeah.

Yeah. And so I guess within this portfolio since the updated guidelines have been passed have you -- has there been any transactions that have occurred within the portfolio? And what has the impact been to valuation in these cases?

We haven't seen much of a change at this point. I think it's just too early to see any changes.

Okay. Okay. But have you -- have the impacts from the updated regulations been like a slowdown or a pickup -- a slowdown in volumes?

We haven't seen any fallout of any loans that are in the pipeline, so it's pretty much status quo. I think the more important factor is going to be which way the wind blows in terms of rates that could either accelerate loan growth or leave it pretty much where it is.But I'll -- again call your attention to the fact that we're not only doing multifamily, we're doing CRE and we're also doing C&I as well. So whatever happens on the multifamily -- in the multifamily space, we feel that we'll be able to make up for it in other asset classes.

Understood. Understood. And I guess just one more question on the multifamily before I move on. With regard to I guess maybe your allowance methodologies surrounding multifamily, just given I guess maybe some of the potential for negative impacts to the asset class as a whole, understanding that your book is pretty excellent with regard to LTV and debt service coverage. Have you adjusted some of the qualitative factors in your allowance methodology at all?

No we have not. Given the LTV, the debt coverage ratios, the stress test results, we have not felt it prudent or necessary to adjust our qualitative factors.

Okay. Great. Thank you for that. And then I guess I just wanted to better understand the interaction between these swaps and I guess the great C&I loan growth that you guys have had over the last several quarters.I understand the swaps are -- those are fixed or floating, right? They're fixed rate borrowings that you've swapped out for floating and that's based off of LIBOR correct?

It's based -- it's the liability swap and they're based off the Federal Home Loan Bank advance rate. Let me -- they are LIBOR -- a portion of them is LIBOR, but then the other side is a Federal Home Loan Bank 90-day rate.

Okay. And so, as I guess as LIBOR moves lower -- continues to move lower that should continue to benefit the margin, correct?

Yes, it should. Everything else being equal, we always have to give that caveat.

Right. Right understood. And I guess like -- as I think about the interaction between the benefit there from the swaps on the funding side and obviously the C&I, I would assume that a larger portion of the C&I book is also pegged to LIBOR?

That is a pretty substantial amount that is pegged to LIBOR, yes.

Okay. And so I guess maybe as I think about the interaction between those two things the X factor in terms of you guys reaching an inflection point on the margin is really going to be driven by maybe incrementally lower deposit cost. Is that fair?

Incrementally lower deposit costs improve our NIMs.

Right. I mean the only other factor could be the curve which I think is less likely the curve moving out of a flat or an inverted position because we have some depression on the loan yields in the last quarter.

Okay. So I guess as we think about the deposit pricing I think just from looking at some of your offerings that we can track online, have you moved any of those lower be it at iGObanking or BankPurely?

I think we've moved our retail...

We've moved the retail.

We've moved our retail lower.

Okay. But the commercial you're still sort of hanging in there just based on the competitive pressures?

Yes. I think, we're clearly not on the top of the list in terms of what we put out in the -- on the Internet. So we thought retail was the best place to move down somewhat and we'll be alert for what happens in the Internet space to see whether or not it's prudent to move down there.

Okay. And then...

All of which by the way are better than the current short-term wholesale funding that's in place.

Okay and then one last one for me. I guess maybe if we could try and get like an all-in impact for NIM. If we do get a 25 basis point rate cut here on a week or so, I guess what would you expect the impact from that 25 basis points to be to the NIM all-in?

I think that's going to be dependent upon -- look we have a fair amount of government business that could price down. That is going to depend upon what the competitive pressures are in that market. But we have seen a little bit of let's say give up of rate on -- with some of the competitors. So the government business is going to be key there, and that's the one that can move most quickly. And then, I think the rest of the market is going to be dependent upon how competitors move.

All right. Great. Thank you both for taking my questions.

Sure.

You’re welcome. Thanks, Brody.

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

Thanks. Good morning.

Good morning.

Just a question for us on the loan growth, do you – what do you all anticipate or what – do you see sort of the pull-through rate to be on your pipeline? I know you guys have been speaking about robust pipelines in the past. And even – as you pointed out Susan this quarter's pipeline is even that much stronger. What are you kind of anticipating pull-through rates to be on that?

I mean, it's varied. In one – the last quarter we've pulled through almost all of it I guess. We've had quarters as low as 75% and really depends upon the mix of the pipeline at any given point in time. But probably 75% is a pretty decent number.

And the loan growth that we anticipate for the full year is the – as we've mentioned in the press release and in the comments is the mid-single digits. I saw somebody had a note out there said that it was already there. But for year-to-date, we're a little less than 3% so we expect that to accelerate in the second half of the year.

Okay. Okay. And then just back on the swaps and before you – in your opening comments you guys have indicated you added more this quarter. I guess my question was sort of – understanding sort of the rationale behind that, because it seems like a lot of the disclosures you guys have offered would suggest that the way that the balance sheet is positioned there should be inherent core NIM benefit. But obviously, we're not seeing them, right? We haven't seen it through the rate hikes last year and then thinking we get a benefit in now and yet that's not necessarily materializing. Just curious the cost of adding the swaps even this quarter did – was that pretty high?

So let me just mention one thing. We did see four basis points – it's not a lot, but it's four basis points of benefit from those swaps in this quarter. So we have been seeing benefits from those swaps in this – in the rising rate environment.

Okay. Okay. Just curious have you all calculated what the potential hit to tangible book value would be or the cost of capital would be if you unwound these swaps altogether?

No we really –

Because it seems like it's a large number, I guess relative to the balance sheet. So I'm just trying to understand what – yeah, what the impact could be if you did ever unwind them.

We have not done that calculations as we're getting the benefit of them right now. There would be no need to unwind them.

Okay. And yeah, I get it, I understand. I'm just looking at – I mean, the rate environment has been so volatile and just it's a tricky situation to try to predict where the Fed is going to be going this quarter.

We understand that fully.

Okay, okay, okay. And then just to confirm the $1.6 billion that you guys cited on slide 4 in terms of exposure to the rent-regulated space is that purely the rent-regulated multifamily? Or that's just all in New York City multifamily?

That's the rent-regulated multifamily.

Okay. Great. I'll leave it there. Thanks everybody.

Thank you.

[Operator Instructions] The next question comes from Steve Comery with G. Research. Please go ahead.

Hey, guys. Good morning.

Good morning, Steve.

Just want to go back to deposit pricing for a second. In the – you've mentioned that kind of the activity in this competition surprise you guys. Do you have any idea sort of why that was the case and why deposit pricing got more intense while rates seem to be moving downward?

We saw competitors in the government space in particular and the CD space just getting more aggressive.

Okay. But there's no particular reason why it just – I guess, it's just kind of surprising right that, it would happen in this quarter as opposed to any other?

The other thing to keep in mind Steve is in this quarter we have the seasonal outflows of government funds that were replaced at a higher cost than the government funds that we had on the books in the first quarter. So, those funds should start flowing back in at the end of the third to fourth quarter, so we should see that kind of reverse itself.

Okay. Okay. That makes sense. I think that was kind of the missing piece there. And then, looking at the loans closed table and the rates there, it looks like non-mortgage loan rates were up a decent amount, while our mortgage loans were down a lot. Is there a mix shift at all? Maybe inside there's categories within the mortgage category? Or is competition just pushing it down that much and then you mentioned the pipeline yield was kind of also lower than the closed yield. So, is that kind of a sign of increased competition going forward? Or how should I read into that?

I think it's associated with the movement of the yield curve and expectations. So, if you look at where the curve inverted, it was right at the tenor that we generally price at the five year. So you -- if you look at the curve and I think the customer expectations changed in that regard and as a result provided that type of movement.

Okay. So, yes that makes sense. Okay. And then just, slide 11 about the loan repricing, I appreciate kind of separating it by year. And then I think Susan, you mentioned in your prepared comments that you might get -- not get the full contractual rate, but just trying to basically. I was just wondering, what kind of assumptions for like the rate environment overall in 2020 and 2021 are kind of built into these tables?

The assumptions that are built into these right now that's flat compared to where we are right now.

Okay. So essentially, the same environment as now?

Right. So it's -- obviously this will come down, if there's a rate cut by the Fed or it would go up if they increase it, but it's just -- because of our modeling, we just left it flat.

Okay. Yes that's fine. I just wanted to know what the basis was there. And then just kind of finally for me kind of mentioned in the press release, a desire to move toward being relatively rate neutral. I'm just kind of wondering and thinking about that sort of longer term, would being rate neutral -- I mean would that have even helped you guys on the margin in this quarter because kind of -- the degradation in the margin was kind of mostly from increases in deposit pricing right? Or am I thinking about this incorrectly?

Well, I think, rate neutral implies some changes in the type of deposits we have and the type of funding we have in general. So, I think that that's a key component of our strategy going forward.

Okay. So, being rate neutral in the sense that you would shift your deposit mix order, so that you wouldn't be as vulnerable to pricing changes?

Yes. So just to have a less volatile deposit mix possibly a little bit less in terms of...

Continue to grow the noninterest-bearing deposit.

Right.

Okay. Very good. That’s it for me. Thanks guys.

Thanks Steve.

Thank you.

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

Well, thank you very much for your attention and for your questions. And as always, we are always available, if there are any follow-up questions from any of the analysts or any of the investors. So, thank you once again.

Thank you.

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