Welcome to the Flushing Financial Corporation's 2017 third quarter 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. A copy of the third quarter earnings release and slide presentation that the company will be referencing today are available on its Investor Relations website at www.flushingbank.com. Before beginning, the company would like to remind you that discussions during the call contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements. Such factors are included in our filings with the US 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 to several non-GAAP financial measures, as supplemental measures to review and assess operating performance, will be made. 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 US GAAP. For any information about these non-GAAP measures and reconciliation to GAAP measures, please refer to the earnings release. I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results.

Thank you. Good morning, everyone. And welcome to our third quarter earnings call. As part of our continuing effort to increase financial transparency and investor engagement, we hope to provide you with additional insight into our business strategy, sustainable competitive advantage and earnings power. I'll start by providing the highlights of the third quarter, followed by a brief overview of the strategies that we're employing to create long-term shareholder value. Then Susan Cullen, our CFO, will review our financial performance in greater detail. Susan and I will address your questions at the end of our prepared remarks as time permits. Starting on slide three, as announced in yesterday's press release, third quarter 2017 GAAP diluted EPS was $0.35 and core diluted EPS was $0.37. During the third quarter, we recorded a provision for loan losses for the first time since the fourth quarter of 2015 of $3.3 million, reducing EPS by $0.07 after-tax. The provision was a result of the reduction in the estimated fair value of the collateral underlying our $18 million taxi medallion portfolio. This portfolio is performing, except for 1 taxi medallion loan that has passed its maturity date. All loans in this portfolio are paying as agreed. The majority of the taxi medallion loans have been restructured and are classified as TDRs, for which we have extended maturity dates and/or reduced rates. We have not forgiven any principal when restructuring. After including the allocated allowance for loan losses to the taxi medallion portfolio, the net carrying value of each New York City corporate taxi medallion is $304,000. Importantly, overall asset quality remains pristine. Total delinquent loans are $31 million. Non-accrual loans total $12 million. And we have no OREO properties. Given the low LTV associated with the non-performing loans of just 35%, we do not foresee…

Thank you, John. I'll start on slide six. Total loans were $5 billion, nearly flat quarter-over-quarter, and up 5% from December 31, 2016 as we continue to focus on the origination of multifamily commercial real estate and commercial business loans with a full banking relationship. We continue to diversify our loan portfolio as C&I originations for the quarter were 38% of total originations versus the existing portfolio total of 14% of gross loans. At September 30, our loan pipeline was strong and totaled $417 million, improving from a pipeline of $279 million at the end of the second quarter of 2017. The interest rate on the real estate loans of pipeline decreased to 4.04% from an average rate of 4.17% for the linked quarter as the mix was more heavily weighted towards multifamily loans. The LTV ratio on our real estate portfolio at quarter-end was a modest 39%. On slide 7, deposits increased 10% year-over-year and 4% quarter-over-quarter, primarily driven by growth in the non-interest bearing and money market accounts. We continued to increase core deposits, as represented by the year-over-year growth, with an emphasis on non-interest-bearing accounts, which increased 13% year-over-year. Non-interest-bearing deposits of $363 million represent 8% of total deposits. Since the third quarter of 2016, deposits increased $398 million. Our internal initiative of using business development officers to gather deposits from loan customers has resulted in balances totaling $23 million. Funding is also gathered through the iGObanking.com channel. At September 30, its deposits totaled $368 million, while the BankPurely balances were over $80 million. We are beginning to see rate pressure on the municipal banking funding, while the pricing on retail deposits remain disciplined. The average cost of funds has increased 10 basis points during the quarter. We continue to remain disciplined in terms of deposit pricing,…

Thank you, Susan. Wrapping up, slide 15 provides a summary of why we believe we remain well positioned for continued strategic and profitable growth. To reiterate, our vision is to be the preeminent community financial services company in our multicultural market by exceeding customer expectations and leveraging our strong banking relationships. The New York City market continues to represent a significant opportunity for us. We remain focused on providing a consistent and superior experience at every touch point for our customers and maximizing shareholder value. Those of you that have held our stock for over the past five years know our total shareholder return has been 118%, outperforming the market and the median of our banking peers. In conclusion, we have a strong foundation and proven track record, a clear strategy and a seasoned leadership team to execute our strategy, with a commitment to drive continued profitable growth. We will now take questions as time permits. Operator, I'll turn it over to you.

[Operator Instructions] The first question is from Mark Fitzgibbon of Sandler O'Neill. Please go ahead.

Good morning.

Good morning, Mark.

Good morning.

Susan, you had mentioned you expect some NIM pressure in coming quarters. Can you help us sort of get a sense for the magnitude of that compression?

As we said in the earnings release and in our comments, we had to raise the rates on the government deposits to remain competitive with the market. We would expect there to be continued pressure on those government deposit rates, which would, obviously, affect our NIM.

Okay. And then how big is that government deposit portfolio? And was it one or two relationships that really caused the pressure or is it pervasive across the portfolio?

We have several different categories of the government deposits. And the category where we had the most beneficial rate for us was the one that was secured by securities, collateralized by securities. That was the one where we had the most pressure to increase rates. Some of the other categories, we're able to increase far less or even not at all. So, now that we brought that particular category up, we are kind of at – we're at market. And as Susan said, we may see additional pressures there on the deposit side. So, we're talking about a total billion-dollar portfolio. The piece that we move the most was somewhere around $200 million to $300 million. In addition, obviously, on the asset side of the balance sheet, we are continuing to post loans that have a four-handle on them. So, to the degree we can continue to do that, that will offset some of the pressures that we'll see either from government or any other retail deposits.

Okay. And then, John, I know the portfolio is small, the taxi medallion portfolio, and you've got good reserves against it. But it almost begs the question, would it make sense to sell it, just get rid of it, given the noise related to that? What are your thoughts? Are there buyers out there for those kinds of portfolios?

Well, we did see the one buyer over at Citibank that was pretty much a fire sale at $189,000 per medallion. Our portfolio is very different than the typical large-scale investor portfolio. They are individual medallion owners. Two medallions – I think the maximum is four medallions that any one individual has. So, they tend to be people who are actually using this for their livelihood. As a result, we're seeing good payment history. All of those loans are paying as agreed. The one loan that we have that is past maturity, we expect to come to some agreement with that particular borrower as we have in the past. And I'll emphasize again, we have had to take no reductions in principal. So, small portfolio, the individuals, it's a diversified portfolio in terms of ownership, and paying as agreed at this point in time. So, I don't see any reason to jump ahead to go out in some sort of a fire sale.

Okay. And then, lastly, on your C&I, you've had pretty good growth in that C&I portfolio here for the last several quarters. Is there any particular industry that's driving that? Do you guys have a specialization in anything that's really causing the growth?

No. It's a very well diversified portfolio. And we like to keep it that way.

Thank you.

You're welcome.

Thanks, Mark.

The next question comes from Steven Comery of Gabelli. Please go ahead.

Hey, guys. Thanks for taking my question. You guys had a nice build in the pipeline in this quarter. But as you mentioned, the mortgage application yields came in at 4.04% versus 4.17% in the previous quarter. And then, Susan, you mentioned that was because of mix toward multifamily. But I was just wondering, things like C&I loans tend to come in at a higher rate, is the overall pipeline yield more in line with this quarter or is that lower as well?

This quarter has a significant number of high large multifamily. So, when you look at the mix of our portfolio, you have commercial real estate, which tends to be higher than the baseline large multifamily. Then you have small multifamily, which has a premium to large multifamily. And then the C&I portfolio, to the degree that it could be a prime or prime plus not only gives us a four-handle, but also gives us the ability to have a floating rate asset. So, the changes in that mix at any given quarter could either give us a wider or a more narrow yield versus our funding cost. That said, we've been very focused on maintaining the loans with a four-handle in total.

And, Steve, many of the C&I loans price a couple days prior to closing. So, we don't really have a good portfolio or pipeline rate on those loans. We only have it for at that point in time. The market may move prior to those closing.

Oh, okay. So, that's why you broke out the guidance like that with mortgage.

Yes.

Okay. And then, kind of – I don't want to belabor this, but back on medallion portfolio, so $6 million total allocation so far in a $18 million portfolio, that seems pretty conservative, given kind of your comments on how they are all still performing. Did you guys mark this book to the fire sale number of $189,000 you mentioned? Is that the process that went through here?

No. We continue to market them based on the more normalized sales in the marketplace during the quarter, coupled with our net NOI analysis that support the net $304,000 value. We looked at that fire sale and discounted it.

And then, just kind of also on this, just kind of wondering, can you give us a sense of like how these loans are going to come off the book sort of naturally, like how they're paying down, what the maturities are, anything like that?

They are amortizing loans, basically three years with the resets – we will renegotiate them. They're just going to come off the books, I think, very slowly. We'll have to work through the process.

Okay, thanks. I don't have any other quick questions.

Thank you.

The next question is from Collyn Gilbert of KBW. Please go ahead.

Thanks. Good morning.

Good morning.

Just a question for Susan, or just whomever, on the deposit side. You guys gave good color as to where you expect the deposit pricing to go in the near term, in part because of the muni relationships. But as you look out end of the year/next year, where do you see the sensitivity of some of those – of your deposit products' pricing, assuming we get a couple rate hikes?

I think – again, the retail side has been fairly disciplined at this point in time. The market has been fairly disciplined. As you know, it's dominated by larger banks. There are – really, there's limited aggressive pricing coming out of those larger institutions. So, the degree to which they hold fast, I think, will allow for a gradual increase in deposit cost. Our plan there is to be able to continuously focus on the loan side to increase the yields there. Hopefully, we'll be able to match to some degree the movement on the liability side. but I think it's going to be driven by the larger institutions. They have not made any dramatic moves at this point in time. So, that's pretty much the outlook for us.

Okay. And just on the – kind of follow up to that, I guess, do you have a sense – it's probably hard to tell, but for the deposits where you've got the business customers or the muni deposits that are asking now for a kind of catch up on the rate, do you think they're going to – do you anticipate those deposit rates to continue to move higher? I hear what you're saying on the retail side and what the competitive market looks like, but I'm just thinking about your core customers' demands if you kind of are anticipating that they're going to want to keep raising or demanding higher rates as we look out over the next few quarters?

So, the Fed has moved up – I don't know – probably 75 basis points or so…

This year.

This year. And we've had to move up 33 basis points. And that 33-basis-point-move actually is the first move that we've made in a number of years. So, it looks to me like there is a very slow reaction in the market to the Fed moves. And as long as that holds true for us, I think it'll work out just fine.

Okay.

As we're sitting here today, Collyn, the government-type deposits are still lower costing than any borrowings we can get through the Federal Home Loan Bank.

That was going to be my next question. Okay. Okay, all right. And then, just one final question. Susan, what did you – did cost savings – or maybe, John, you said it in your opening comments. The cost saves that you guys are anticipating from converting to that universal bank model, can you just run through what you said there and how we should be thinking about that? And I know you said 2019.

We're seeing cost saves of about 20% based upon real estate and branch staff. So, as we roll through these branches, we expect to see a reduction in cost square footage declines dramatically. Obviously, therefore, rent. And the fact that we've eliminated the teller position has reduced the staff very significantly.

Okay. And will those – I know you wanted all the conversions to be done in 2019, but just trying to think about the financial implications for how that rolls through, how we should think about these savings. Is that going to be then more of a fully – a run rate not coming until 2020 or will you start to see some of those cost saves in 2019?

We're seeing some of those cost saves right through these years. So, our move in the Flushing market, that will take place this year. We'll have a benefit going forward. We won't see the full impact until the end of 2019, obviously, because all of the branches will be done at that time.

And is this all factored into your goal of maintaining the efficiency ratio in the low to mid-50s? That assumes some of these savings through the…

Yes.

Okay. Okay. Very good. I'll leave it there. Thank you.

Thank you.

Thanks, Collyn.

The next question is from Matthew Breese of Piper Jaffray. Please go ahead.

Good morning, everybody.

Good morning.

Good morning, Matt.

Just staying on the margin discussion, specifically the deposit cost. Given your commentary around the margin facing a little bit more pressure next quarter, in particular, is it in regards to higher deposit cost? I just wanted to get a sense for, should we expect a similar kind of move in the overall cost of funds or to what extent should we see that move at least in the near term, I guess is the real question?

We're not anticipating that significant a move. However, I think we're, obviously, very focused on what the competitive environment is like. And as I mentioned earlier, most of it has been fairly disciplined, anchored by the movement of the larger institutions or lack of movement in the larger institutions. So, if that changes, obviously, it's going to put us under more pressure. If it tends to be the same, we don't see a one-for-one increase of Fed moves and deposit costs on our part because that historically has not been the case.

Okay. And if you had to frame the extent of margin pressure, Susan, I think last quarter you were looking for flat to down maybe 2 basis points. Is it still in that kind of 1 to 2 basis point range or something worse?

Well, it's hard to give you guidance on that because of the competitive pressures we may or may not face on the municipal deposits. Net of that, I would say still remaining down a couple basis points, is the right answer.

I think you just got to look at what historically our margin has been in the last year or so. And I think we had a – what was it? – a 2.94% margin same quarter last year. We're 2.90% now. So, there are a variety of factors going into it, not the least of which, of course, are the deposit costs. But I think in really assessing the margin, you also have to look at the loan yields, the run off of the loans, which is about 25% and the fact that we have significant prepayment penalties attached to the loans as well, which regenerate every five years. So, we go from 5, 4, 3, 2, 1 to 5, 4, 3, 2, 1 again and on until the maturity of the loans. That gives us some pricing power when it comes time for customers to renegotiate those loans. So, I think the deposits clearly outstrip the loan gain in this quarter, but that has not been the case in every quarter in the last several quarters.

Right, understood. Okay. And then, I just wanted to make sure I heard right. Outlook for longer-term loan growth is still – is it high-single digits, double digits? Is that accurate?

I think we still have a shot at the low-double digits and we clearly are on track to do high-single digits.

Okay. And I was hoping you could just talk a little bit about the competitive environment for loans in New York City, given transaction volumes have fallen so dramatically. A lot of your competitors have talked about that being just a pretty sizeable headwind. Yet, you're putting up pretty good loan growth still. And I just wanted to kind of compare those two items and see what you thought.

I'm sorry. What was the feedback that you were getting?

Transaction volumes, especially in multifamily. In New York City, you are down quite a bit year-over-year.

It's competitive clearly. Fortunately, we're in a position where we're not 100% dependent upon multifamily. And when you see different mix levels, commercial real estate, multifamily and, clearly, C&I which has been strong last few quarters, we have the ability to change our mix. We've got mixed use loans that we do as well. We have the ability to change our mix, which gives us a little bit more resiliency from some of those comments that you've been hearing elsewhere.

Understood, okay. That's all I had. Thank you.

Great, thank you.

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to John Buran for closing remarks.

So, I thank you all very much for attending the conference and look forward to the coming quarters to keep you informed as to what's going on with our business and the progress that we make against our strategic plan. Thank you very much.

Thank you.

This concludes today's teleconference. You may now disconnect your lines and we thank you for your participation.