Good day, and welcome to Flushing Financial Corporation's Third Quarter 2023 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; and Franc Korzekwinski, Senior Executive Vice President and Chief of Real Estate Lending. Today's call is being recorded. [Operator Instructions]. I would now like to turn the conference over to John Buran. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us for our Third 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 6-step action plan to enhance the resilience of our business model and strengthen our financial performance. We continue to take significant steps forward in this plan during the third quarter and are pleased with the progress we've made so far. First, we added $100 million of interest rate hedges during the quarter to continue our move towards interest rate neutral, while emphasizing more floating rate loans, which approximate 60% of the loan pipeline at the end of the quarter. These actions have significantly reduced our interest rate sensitivity position while providing additional income. Second, we continue to focus on risk-adjusted returns and overall profitability. Yields on the loan pipeline rose 54 basis points quarter-over-quarter and yields on loan closings increased 288 basis points year-over-year. It will take time for new and reprice loans to have a significant impact on overall loan yields, but we're encouraged by the results so far. Third, we expanded noninterest-bearing deposits by $47 million quarter-over-quarter or 6%, which compares favorably to the overall weaker industry trends. Net loans increased $63 million quarter-over-quarter as well. Our strong deposit and loan performance is driven by our initiatives to expand our client base and build loyalty through our excellent brand of customer service and deep community relationships. Fourth, credit quality remains solid with net recoveries during the quarter. Minimal exposure to Manhattan office buildings and strong debt service coverage ratios. Fifth, available liquidity is $3.7 billion or 43% of assets. Tangible common capital declined slightly quarter-over-quarter to 7.6%. We will continue to take action to maintain…

Thank you, John. I will begin on Slide 12. The company reported third quarter 2023 GAAP earnings per share of $0.32 and core earnings per share of $0.31. Average total deposits increased 9% year-over-year, but declined 1% during the quarter. Noninterest-bearing deposits increased 6% quarter-over-quarter, while average CDs expanded to 34% of total average deposits. The cost of deposits totaled 2.94% or the cost of funds was 3.13%. Loans increased nearly 1% quarter-over-quarter, and our loan pipeline totaled $363 million at the end of the quarter with approximately 60% of floating rate. Nonperforming assets decreased slightly quarter-over-quarter. Overall, third quarter results reflect our execution on our action plan to improve profitability. Slide 13 depicts our deposit portfolio. Average deposits increased 9% year-over-year, but declined 1% quarter-over-quarter. The quarterly decline was primarily due to seasonality, timing and pricing decisions. Growth in noninterest-bearing deposits is a top priority for us, so we are pleased noninterest-bearing deposits increased quarter-over-quarter and now comprise 12.5% of total average deposits. This growth occurred despite continued Fed action to reduce liquidity in the market. Average CDs increased to $2.3 billion from $1.1 billion a year ago. Our loan-to-deposit ratio has improved to 103% from 113% a year ago. Slide 14 outlines our loan portfolio and yields. Net loans decreased less than 1% year-over-year but increased about 1% quarter-over-quarter. Loan closings were $241 million, a 52% improvement quarter-over-quarter. Core loan yields increased 27 basis points during the quarter, and for the fourth consecutive quarter, yields on loan closings exceeded yields on satisfactions. Prepayment penalty income was elevated in the third quarter at $662,000 compared to $278,000 in the previous quarter. The loan pipeline was $363 million at the end of the quarter, while yields on the pipeline increased 54 basis points during the quarter. Slide 15 provides more…

Thank you, Susan. On Slide 23, 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 moved our interest rate positioning more towards neutral, which has helped to limit net interest margin compression. While we continue to expect some compression with additional Fed rate increases, the pressure is expected to be similar to the past 2 quarters. Our asset quality continues to be a strength. We have solid liquidity and capital. We continue to serve our clients and deepen relationships. We remain cautious given the environment but are executing on our plan to navigate this difficult environment. The decisive actions we are taking will allow us to improve overall performance. Operator, I'll turn it over to you to open the lines for questions.

[Operator Instructions]. Our first question comes from Mark Fitzgibbon with Piper Sandler.

Susan, I was wondering when you feel like the Fed is done raising rates, is it likely that you'll take some of the interest rate hedges off the balance sheet to try to benefit as rates go down? Or is this sort of the new sort of rate sensitivity positioning and you'll likely keep a bunch of interest rate hedges on to synthetically create the rate sensitivity you're looking for?

Well, we're using the hedges to create that sensitivity until we get the loan books and the security books where we want them to be to have that rate sensitivity. So it's going to depend on how quickly we can move and fully implement the back-to-back swap program. We had great success with that this quarter. We had $132 million of loans that originated collecting fees of $1.6 million this quarter, and our hedges have an average life of 3 years. So all of those things come into play with the -- with our strategy concerning those.

Okay. And then secondly, of the $76 million of multifamily loans and $70 million of CRE loans you closed this quarter, what are the LTVs and debt service coverage ratios on those new loans look like?

I would say the LTVs are still coming in below 70%. The debt coverage ratios are down a bit from where we've been historically, and that's generally because of the increased cost of borrowing. I really don't have a an average number. I don't think -- Susan, if you maybe look that up or get back later, but it's in excess of our minimum requirement, which is $125 million. I would say probably closer to $135 million to $140 million.

Okay. Great. And then it looked like criticizing classifieds rose a fair bit this quarter. What was driving that?

That was basically one relationship, Mark, that was -- is very well secured. It was evaluated for any potential loss to the CECL modeling and none was identified, as I said, it's very well secured. It was mostly macroeconomic environmental factors that caused that downgrade the loan as current. and has always been current. It's not missed a payment. It's just some macroeconomics affecting that particular loan relationship.

Okay. And then last question I had. Credit trends were great this quarter and charge-offs and what have you. But optically, your reserve looks a little light given where we are in the credit cycle and the complexion of your loan book. How do you think about that in terms of building provisioning? And obviously, you have some flexibility with the qualitative factors. How should we think about provisioning going forward?

Well, we think our provision is appropriate mark given our loan -- our conservative balance sheet. So that's the first thing. We had some things that got cleaned up this quarter, some other assets that affected that. Our coverage ratio increased from a little over 200 -- from less than 210% to about 250%. So the allowance is -- we should be thinking about it in terms of the economy and what the composition of our loan portfolio is. So we're very comfortable with it.

So I'll reference one of our slides, Mark, and that gives a breakdown. Obviously, areas like multifamily the loss content has been so minimal over the years, and we're not expecting anything different there. Same way with the CRE portfolio. And of course, we're over 1% in terms of the C&I business banking portfolio.

Our next question comes from Steve Moss with Raymond James.

Maybe just start more than just -- maybe starting on the loan side here. I hear your expectations for a roughly stable balance sheet. Pipeline is still at a reasonably decent pacing those down a little bit quarter-over-quarter. Just kind of curious on the dynamics there, maybe there's some payoffs or -- and just maybe overall business activity.

So the payoffs have been relatively stable the last couple of quarters. In addition, the pipeline, I guess, has been certainly impacted by the continuing rise of -- in rates and our focus -- we've been trying to work with customers with a back-to-back swap program to give them better at least initial rate while maintaining our flexibility with respect to interest rate risk. So I think there's a number of dynamics taking place. And in addition, I think the -- what we're seeing is maybe a little bit of a slowdown of activity in terms of overall market.

Okay. Great. Appreciate that color. And then in terms of just the -- on the expense side here with the benefit from the CAREs Act, just kind of curious how much of a step up, if you can give any color there, Susan, around that aspect? Is maybe $35 million, $36 million a better run rate for the fourth quarter to think about?

So the CAREs Act was about $3 million, $3.3 million to be exact. So yes, if I take the run rate that's in the earnings release and at the $3.3 million, that would be about right.

Okay. And in terms of maybe going up to '24 a little bit. I'm sure you guys are in budgeting process right now, but just kind of curious of the inflationary environment, I know you guys are trying to control expenses. Any early thoughts on 2024 you could share with us?

You're right, we're beginning to work on our budget. As we've said, given the rate environment, we expect some additional increases, but the compression in our NIM won't be as great as what we've seen. We are focusing on our expenses, but we will invest in the company where we think it's prudent going forward for 2024.

Our next question is from Chris O'Connell with KBW. Christopher O’Connell: I was hoping to start off with the margin. So I hear the Fed keeps raising, there's pressure, and it sounds like for next quarter, kind of that mid-single-digit core pressure for the last 2 quarters is reasonable. If there's no more Fed hikes from here, what do you think the timing is for bottom? I mean, is this -- do you think that similar compression in 4Q continues into the first quarter? Or do you think we're getting to a point of inflection? Yes.

So Chris, what we've said is if the Fed has stopped raising rates. And so let's say, the last rate was, I think, in September. So take 2 quarters for us to start expanding the NIM after the Fed stops raising right? So there would be a little bit of compression in the 2 quarters subsequent to stopping increasing rates and then expansion. Christopher O’Connell: Okay. Great. And so the read in there would be maybe the rate of compression would slow into the first quarter from the fourth quarter as well?

Correct. That would be my assumption. Christopher O’Connell: Great. And then you mentioned some of the seasonal factors. Can you just remind us what are the seasonal trends for your deposit base into the fourth quarter?

Sure. So we'll see the movement in the government banking portfolio, which will reduced somewhat toward the end of the year. And then at the very beginning of the -- very, very tail end of the year into the beginning of the year, will expand again. So we'll see some movement in that government portfolio of a seasonal nature that is kind of starting now, and we'll continue into the -- into December. And then as I said, it starts to expand again. The balances start to expand again in the first quarter of the year, actually January on. That's typical. Christopher O’Connell: Yes. And given the strong swap pipeline that you guys have up a little bit quarter-over-quarter, I think. Should we read into that as the banking service fees line, should say, at pretty strong levels going forward?

Like I said, we closed $132 million from $1.7 million. So I would expect to be -- look, I can't speak this morning, I'm sorry. I will continue to stay strong with that, yes. Christopher O’Connell: Great -- and then -- just to circle back and confirm on the expenses, so backing out the $3.3 million from the CAREs, get to like 37.7% for this quarter. And then is there a little bit of an uptick in the next quarter from the new brand chat? Or should we think about it more as kind of a flattish quarter for next quarter?

I think you can think of our base somewhere around 38%. Christopher O’Connell: Okay. That's helpful. And then last one for me, just a little bit of share repurchases. You guys are moving toward your TCE target. Do you think that -- how are you balancing out moving toward that target and doing any share repurchases going forward? Do you have any appetite for that now or more in capital preservation mode?

So we'll still opportunistically go into the market this quarter. We deploy our capital on our loan originations. They were up about $100 million from the previous quarter. So as we've always said, Chris, that our capital goals are to redeploy it into the company profitably, then return it to the shareholders via dividend and finally, the share repurchase, our philosophy has not changed on that.

Our next question comes from Manuel Navas with D.A. Davidson.

I just want to clarify on the near-term NIM. On a core basis, it was down 3 basis points this quarter and 8 basis points last quarter. So that's roughly the range for this coming quarter. And just what would be the difference on the reported side, if we have a Fed rate hike?

So if the Fed raises rates, again, we believe the compression will be greater than what we saw last quarter. But that 3 to 8 basis points is probably a good range, everything else being equal.

Do your hedges have -- Will they only help you in another hike? Like how should -- comparison to this current...

They'll help us even more than they have to date. So as interest rates go up, the hedges become more valuable.

Awesome. Okay. And you said that the rough duration on them is about 3 years?

About 3 years, yes.

Some roll off in '24, some begin to roll off in '25, but the average is about 3 years.

I would hope you be opportunistic if you see Fed about to come back down to kind of delay some of those re-upping of the hedges?

So I think we'll have that opportunity because despite the fact that there's a 3-year average, there is a roll-off taking place over time. So we'll be assessing while we still want to remain in a very, very neutral range, and that's part of the strategy overall. We will see opportunities going forward to either accelerate or decelerate that movement based upon what's happening in the rate environment. But our intention is to operate an institution that is much more interest rate neutral going forward.

Very fair, very fair. On the funding side, I understand...

I mean, by the way, let me just elaborate on that for a second because eventually what we want to be able to do is get that neutrality off of the balance sheet with fewer and fewer hedges. So for example, what we're doing on the floating rate side, whether it is the back-to-back swap program, which is not a portfolio hedged or our emphasis on floating rate loans in general will start to move us in that direction.

Here at the year-end with some of the seasonality you're having on deposits, is that the main driver on kind of increasing your CD rates a bit?

It's part of it, but it's also growing our customer base across all the new branches that we've opened. There's a lot of specials in there as well.

Can you walk through some of your channels that are seeing the best inflows? Is it the new branches? Is it the CD product? Your digital is up to 3% of deposits. Is that -- how is that growing? Just kind of where are you seeing the best inflows at the moment?

I would say our branch network is doing quite well. We did note that we had a very nice increase in non-interest-bearing. That's a result of a focus that we put in place beginning in July to put in place a very special incentive program. That incentive program has really done very well in terms of getting the organization very much focused on developing a stronger noninterest-bearing DDA base. Branches are doing well. The digital seems to be doing well. And then business banking, our ability to garner more deposits from our business banking customers and our commercial real estate customers has continued to grow. So all of those pieces are pulling together to give us what we think is a favorable direction, particularly with respect to noninterest-bearing, which, of course, as you know, moved opposite the direction of the industry in this quarter.

Is the pipeline for that to continue first half of next year? How do you feel about that with the incentives you've added?

We're working to do that, no guarantees in this market and that's for sure.

It's lumpy. I'm sure it's unpredictable.

Yes.

Yes. But we put in place some significant changes in the incentive structure to do that.

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

Well, I want to thank you all for your attention, and we're looking forward to continuing these conversations and engaging with our investors and our customers on a continued basis. So thank you very much, and everybody, have a good weekend. Bye now.

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