Welcome to the Flushing Corporation's Third Quarter 2019 Earnings Conference Call hosted by John Buran, President and Chief Executive Officer. Today's call is being recorded. All participants will be in a listen-only mode. [Operator Instructions] 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 the 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 the applicable law.During this call, references will be made to the 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 the U.S. GAAP. For information about these non-GAAP measures and for a reconciliation to GAAP, 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 this strategy and results and then discuss this quarter's financial results in greater detail.

Thank you. Good morning, everyone and thank you for joining us for our third quarter 2019 earnings call. I will begin our third quarter highlights and then provide an overview of the strategies we are executing to continue to generate consistent positive earnings power and drive long-term shareholder value. Then, I will review our financial performance in greater detail. Following my prepared remarks, I will take your questions.Beginning on slide 3 is a summary of our third quarter 2019 operating results. We're pleased to report, third quarter diluted EPS increased 14% while GAAP diluted EPS was unchanged from the prior quarter. Our slide presentation and press release include a reconciliation of GAAP to core earnings. The primary difference between GAAP and core EPS is a $0.10 per share of non-cash mark-to-market fair value adjustments, primarily related to our swaps designated to protect against rising rates. Overall, the interest movement of the swaps is benefiting the core net interest margin, while the fair value adjustments are offsetting the benefit.On slide 4, we provide key highlights for the quarter. We achieved record loan closings totaling $398 million for the quarter driving loan growth to 9% annualized quarter-over-quarter, and over 7% year-over-year. This marks our second consecutive quarter of record C&I closings, totaling $238 million, or 60% of total quarterly production. The strong C&I production is the continuing diversification of our loan portfolio.As a reminder, these C&I loans are generally floating rate and represent 19% of total loans. At September 30, 2019, the loan pipeline remains strong at $419 million, as we continue to grow our loan portfolio. We remain focused on credit quality, preserving strong risk management practices, including conservative underwriting standards and improving yields to achieve improved risk-adjusted returns. Overall credit quality continues to improve as non-accrual loans decreased 9% and…

Thank you. We will now begin the question-and-answer session [Operator Instructions] Our first question today comes from Mark Fitzgibbon of Sandler O'Neill & Partners. Please go ahead.

Hey, guys, good morning.

Good morning.

Hi. How are you? By the way Susan is here. She wasn’t able to make it for the recording, but she is here to answer questions.

Okay. Super. A couple of questions related to costs. First, I'm curious the incremental cost associated with the digital transformation strategy is that kind of in the numbers now or is that something we should look for in terms of incremental cost?

It will be incremental cost beginning of 2020. Since the project won't be live until then we won't have that expense hitting our P&L until that timeframe.

And also Susan, what about the Hicksville branches, is that most of the costs for that location already in the numbers?

Again that location won't be live until the fourth quarter. So most of that's going to be additional 2020 expense.

Okay. I'm curious another local bank had an issue recently with contractor loans. I wonder if you could help us think about your exposure in that area.

It is minimal to close to nothing.

Okay. And then as you think about the margin and all the moving pieces that you have. Will we see a little bit more margin compression in 4Q and then maybe starting to stabilize in 1Q? Is that a reasonable expectation?

I think it's going to be. Clearly, we're anticipating some good news on the deposit side of the business based upon some of the comments that we had at the -- during the presentation. So that coupled with what I've said winds up doing this week, we'll -- we expect to see some help on that side.Simultaneously, of course, we've got the inverted yield curve that's giving us a little pressure on the loan side, but we expect to see some help into the beginning of the year.

So, a little more compression in 4Q. And then starting to benefit in 1Q. Is that?

Yeah, it's probably what's the most reasonable expectation at this point.

Okay. Thank you.

Thanks, Mark.

Thanks.

Your next question today comes from Steve Comery of G. Research. Please go ahead.

Hey, guys. Good morning.

Good morning.

Good morning, Steve.

Hey, so I appreciate some of the commentary on the new branch in Hicksville. I was just wondering is it kind of fair to say that sort of the last branch expansion before the expected deal close or is there anything else you guys are due to the branch network in between?

We're looking at potentially one other site. But we haven't finalized that at this point in time.

Okay. So this one and then maybe one other and then deal close due with the branches on.

That sounds correct to me, Steve.

Okay. Yeah, that's actually all I have. Thank you guys.

Thank you.

Okay. Thank you.

And the next question today comes from Collyn Gilbert of KBW. Please go ahead.

Thanks. Good morning everyone.

Good morning, Collyn.

Good morning, Collyn.

Just first on -- question on slide 12. And John, you referenced this in your opening remarks just about the repricing rate on some of your loans that are coming due over the next two years. Just -- so what you're showing in the deck that's I presume that repricing rate is purely calculated on the contractual pricing dynamic. Is that how you're assuming what that reprice rate will be?

Yes. Yes. That's the contractual repricing on predominantly our real estate loans.

Okay. But how do you balance that with the likelihood that these loans will probably end up refinancing into a lower-yielding product, right? I would assume that if rates are much lower than that, I guess, I'm struggling as to why they would refinance into those higher rate products when the market is so much lower, and I would assume that's kind of a dynamic maybe that we've been seeing in the loan book as well?

So, there is a couple of dynamics going on here. One of course is the mix and so these rates imply a certain mix of the portfolio that is coming due. And as a result, those may not match perfectly with some of the loans that are coming on right at this point in time just because of the mix change.Obviously, multi-family is coming on the books in general lower than these rates, so, this is not clearly all multi-family that's moving. So that's the major reason for the difference.The other thing is that remember that many of these loans may have prepayment fees associated with it or they may have fees associated with changes that customers have to or Visa customers have to pay associated with bringing on a new loan. So, that turns out to be some leverage for us as we negotiate rates.

Plus it's expensive for a customer to refinance the new loan, to go to a new bank and have to pay the appraisal, the lawyers and all those costs.

Mortgage tax, et cetera.

All that is associated with originating alone.

Okay. Okay. And then also Susan just trying to reconcile. So, again, and that seems like you guys had indicated that the swaps gave -- provide a three basis point NIM benefit, but then if you look at the press release and the offset that it provided in the yield schedule, I think would indicate closer to like an eight basis point drag. So just trying to connect the dots there on the swaps, and how you're thinking about that -- how you're quantifying that three basis point benefit?

So, the three basis points, I'm not sure what you mean how we are quantifying or putting it through the NIM. So if you look strictly at the swap axing out any fair value measurements. It has been beneficial to the NIM, by three basis points.All the drag-on has been based on the market in the macroeconomic environment that we're operating in, that's pulling it down the other way. So the theory behind the swap was correct.

Okay. So I guess -- so you're saying the three basis point benefit up to the NIM is totally irrespective of the rate environment, because now that we overlay the rate environment the -- there is actually a negative consequence.

Yeah. It's irrespective of the fair value adjustment.

Okay, okay.

So obviously the swaps all have rate environment playing into it. But that's irrespective of the fair value adjustment that we have to take.

Okay. And then, how should we think about the impact of these swaps going forward to the NIM? John your indication that NIM could compressed in the fourth quarter and then expand in 2020. What is the assumption?Is there at some point when these swaps then become into money and even with the fair value market that we see that drag reversed?

Sure. So the yield curve is in burden at this point, in time if the flattens will pick up something on these valuations, if we get any steepening of the yield curve that all we'll get significantly more.And so the movement of the curve is going to have an impact. And the -- also as time goes on there's a time value implicit in these instruments. So they have less of the -- they tend to have less of an impact, in general.

Okay. And then, just tying back to the Empire deal and I apologize I wasn't able to dial into your call on Friday. But just -- I think, kind of it at first glance I'm struggling to get anywhere close to that 19% EPS accretion, so just a couple of questions there. Number one is what were you using or what EPS base were you using for 2020 to assume 19% EPS accretion?

So they had given us a -- they had given us in their due diligence …

Sorry 2021. If I said 2020, I apologize. I meant 2021, the accretion in 2021 in 19%.

So they had given in their due diligence a forecast of their earnings. The basic major movements for us are -- and then, of course for us, we used the mean analyst estimate of $1.68 for 2020. Just so we had recognizable -- at least recognizable numbers for us.Then on top of that, we have a 50% reduction in their costs. And we look to loan up their excess liquidity up to 100% of -- 100% loan to deposit ratio, on the Empire side. So those are the major movers.

Okay, sorry. So John, the -- sorry I'm asking about 2021 accretions, so 19%. So, what would be the mean estimate you guys were using for 2021, to then assume 19% increase over that, for you guys? You said $1.68.

I don't have that off the top of my head. But again it would have been the analyst estimates that are the most recent analyst estimates that are out there. And then, the differential between the 10% in 2020 and the 19% in 2021 is the phase-in of those cost saves over the first year.

And the ramping up of the -- loading the excess liquidity.

Okay. So I guess I will take that kind of in another question. Just sort of what -- sort of balance sheet NIM assumptions or even NII to get there? So I guess is there anything that you could offer there, I mean, yeah. And maybe we could talk offline. But I just didn't know if there is a little -- some other metrics you could offer to either balance that.

Yeah. We assume that we kind of fix this -- kind of a stable environment for interest rates. We weren't going to project -- try and project interest rates.

Okay. I guess also to your point John too. So if Empire, I guess maybe what they're assuming net income. Because I guess, they were like the last 12 months has been like $3.5 million.So there are things that are going on within that organization. And maybe that's what you're alluding to Susan, that's going to meaningfully increase that $3.5 million, net income level by 2021, just for a month standalone.

Right, so if you recall, there seems to be that their loan to deposit ratio was around 75% to 80%. So if you take that extra 25 20% to 25% and loan it up and get it out of cash and into loan that's where that's part of the equation -- the big part of the equation.

Okay. Okay, got it. And then, if you offered this -- I apologize, I missed it. Was there -- is there a CECL estimate that you can provide pro forma with this -- well for yourselves? And then, what the impact or be with Empire?

Not at this time. Remember, they were a small business. They -- if they had stayed standalone they were not going have to adapt till 2022 or 2023.

Okay. And then, when ….

As we update it.

… okay, and then, you guys when will you be prepared to offer a CECL guide?

With our fourth quarter earnings call.

Okay, got it. Okay. I leave it there. And thank you.

Thank you.

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 everybody for calling in. And thank you all for the questions. As you know, Susan and I are always available to answer any follow-up questions you might have. So, once again, thank you very much.

Thank you.

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