Q3 2023 Flushing Financial Corporation Earnings Call

Good day, and welcome to Flushing Financial Corporation third quarter 2023 earnings Conference call.

Hosting the call today are John Buran, President and Chief Executive Officer.

Susan Cullen Senior Executive Vice President Chief Financial Officer in charge of it and Frank who.

Or is it skewed senior executive Vice President and Chief up real estate lending.

This call is being recorded all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing Darcie followed by zero.

After today's presentation there'll be an opportunity to ask questions.

The question you May Press Star then one on your touch time, Jeff.

To withdraw your question. Please press Star then two.

I'd 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 six 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.

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 yield on loan closings increased 288 basis points year over year.

It'll 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.

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.

This available liquidity is $3 7 billion or 43% of assets tangible common capital declined slightly quarter over quarter to seven 6%.

We will continue to take action to maintain strong liquidity and capital.

Sixth our GAAP and core noninterest expenses were down 3% year over year, and 2% quarter over quarter.

Overall, we expect that these decisive actions will result in an improved financial profile overtime.

In addition to our action plan slide four outlines our four areas of focus for long term success.

Interest rate risk as a priority and the actions we've taken have resulted in a 66% reduction in this risk over the past year.

This is important given the uncertain outlook on rates.

Second.

We're focused on maintaining our credit quality.

Our loan portfolio comprises low risk loans to stable borrowers.

Over 88% of the loan portfolio is secured by real estate with an average loan to value of 36% with solid debt service coverage ratios.

The third area of focus is liquidity, which I just covered and remains strong.

The last area of focus is customer experience our ties with local communities is central to our ability to deliver exceptional service.

With the opening of the Bensonhurst branch at the end of the quarter a third of our branches are in Asian markets. This is a population we know well and we have had great success fostering long standing relationships with customers in the Asian community.

We are also experiencing increased usage and our digital banking platforms.

We're confident that these four areas of focus will position the company to achieve long term success.

Our loan portfolio as outlined on slide five.

We're a conservative lender with 88% of the portfolio secured by real estate.

Our high quality multifamily in Investor commercial real estate comprises 66% of the total portfolio.

As a reminder, these two portfolios have weighted average debt service coverage ratios of one eight times and our weighted average loan to value less than 50%.

Manhattan office buildings are approximately 0.6% of net loans.

In general.

The real estate portfolio has strong sponsor support and excellent credit performance.

With these metrics, we remain very comfortable with the quality of our loan portfolio and our stress tests have indicated that our borrowers are resilient.

Our portfolio is positioned to perform well.

If a stressed environment occurs.

I Wanna add some context on how we approach our real estate portfolio and why we're so confident in its stability.

Slide six shows two types of multifamily buildings.

As you can see are on opposite ends of the spectrum the picture on the left.

So like the typical multifamily building in our portfolio. This is a building that has a mix of rent regulated apartments in market rents. The average monthly rent in our portfolio is approximately 1600 $50 compared with over $3000 for market rents.

What this means.

Is this type of building a stable low risk and resilient to market volatility.

Contrast, this with the building on the right.

Which does not match our risk profile well, there's building might looks like she.

It's more up market and that has greater swings and mostly rent rates.

This is the type of multifamily building that is more exposed to market cycles.

We have a history of conservative underwriting on multifamily properties.

When interest rates were low during the pandemic in 2020, we underwrote the loans.

With cap rates at 5% or higher.

Which provide a cushion.

When rates rise and.

And cap rates increase.

Also we underwrite loans at origination to absorb higher interest rates and each loan is stress test.

This is one of the reasons why our debt service coverage ratios are at one eight times.

Annually, we review the cash flows of the building's average monthly rents per unit from 2018 to 2023 increased at a 4% compounded annual growth rate, while the average monthly expenses increase a similar amount.

As I mentioned many of our buildings have a mix of market rent regulated rent.

Regulated apartment rents are subject to rent guidelines standards board.

With approved annual increases and that's why it's important they have buildings with a mix of market and rent regulated units.

Yeah.

Loans that include rent regulated apartments are about 65% of multifamily loans.

Our multifamily portfolio.

Strong sponsorship with equity greater than 60% and the average multifamily loan is only $1.2 million.

We believe these metrics will continue to serve us well, especially in a more stressed environment.

Slide seven shows the types of office properties, we lend on and the types we don't.

We lend on medical and health care facilities, and largely outer borough single and multi tenanted properties.

Again these types of properties have much more stability through market cycles.

We do not lend on high rise office buildings that have much more volatility.

Our average office alone is about $3 $2 million with a weighted average LTV of 50%.

On a weighted average debt service coverage ratio of 1.8 times.

No office loans.

Our non accrual and about 26% of the portfolio will have upward rate adjustments through 'twenty 'twenty four given today's interest rates.

Slide eight shows examples of retail commercial real estate that we lend to and the types of properties we don't.

The retail creep portfolio is about $900 million with significant portions located in Queens, Brooklyn, and the Bronx.

These are typically strip malls and not large shopping malls.

These businesses are usually vital to the communities they serve.

The portfolio has a weighted average LTV of 53% and debt service coverage ratios over one nine times.

The average loan is about 2.4 million.

Credit performance was solid and less than 20% of the portfolio as rate resets through the end of 'twenty 'twenty four.

We believe this portfolio is high quality servicing the needs of local communities that rely upon these services on a day to day basis.

As you can see across our real estate portfolio, we prioritize the same key factors limited risk exposure resilience.

Strong and stable borrowers.

We're comfortable with the level of risk in our real estate portfolio and remain confident in the long term benefits of our approach.

Slide nine provides detail on our Asian markets.

With the opening of our Bensonhurst branch in Brooklyn, a third of our branches are in Asian markets.

We have 1.2 billion of deposits and $766 million of loans in these markets. These deposits are 19% of our total deposits and.

And we have only 3% of the market share so there's substantial room for growth.

Our approach to this market is supported by a multilingual staff, our Asian Advisory Board and support of cultural activities.

This market, which has total deposits of 41 billion continues to be an important opportunity for us.

Slide 10 outlines the growth of our digital banking platforms.

We continue to see double digit growth rates in monthly mobile deposit users users with active online banking status and digital banking enrollment.

The numerator platform with digitally originate small dollar loans as quickly as 48 hours continues to grow.

We originated approximately $16 million of commitments year to date and these loans have an average rate greater than the overall loan portfolio yield.

We continue to explore other fintech product offerings and partnerships to further enhance our digital banking platform and customer experience.

Yeah.

During the third quarter. We also continued to participate in community events to strengthen our ties to our core Asian customer base.

Immunity involvement is a hallmark of this company the third quarter had several notable events to highlight as you can see on slide 11.

Our employees, we're active participants in the Dragon boat festivals, and we are a strong competitor in the races.

We also participated in the India Day Parade and the Moon Festival.

Participating in these types of initiatives bills are already strong ties with our local communities and drives customer loyalty.

I'll now turn it over to Susan to provide more detail on our key financial metrics Susan Thank.

Thank you John I will begin on slide 12.

The company reported third quarter 2023, GAAP earnings per share of 32 cents.

Core earnings per share of 31 cents.

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.

Deposits totaled $2 94 per cent 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% are 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.

Deposits increased 9% year over year, but declined 1% quarter over quarter. The quarterly decline was primarily due to seasonality timing and pricing decisions.

The noninterest bearing deposits is a top priority for us. So we are pleased noninterest bearing deposits increased quarter over quarter and now comprises 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 102% 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.

Closings of $241 million at 52% improvement quarter over quarter.

Our loan yields increased 27 basis points during the quarter and for the fourth consecutive quarter yield on loan closings exceeded yields on satisfactions.

Prepayment penalty income was elevated in the third quarter at $662000 compared to 278000 in the previous quarter.

Loan pipelines $363 million at the end of the quarter, where yields on the pipeline increased 54 basis points during the quarter.

Slide 15 provides more detail on the contractual repricing the loan portfolio, approximately $1.2 billion or 17% of loans repriced with each fed move or.

Hedge position on these increases the percentage of the loans repricing with each fed move to 25%.

For the remainder of 2023, another $225 million is due to reprice 182 basis points higher than the current yield in 'twenty 'twenty, four and 'twenty 'twenty five combined one and a half billion dollars of loans, well, we priced 250 to 270 basis points higher.

These values are based on the underlying index values as of September 30th 'twenty, 'twenty, three and did not consider any future rate moves.

This repricing should drive net interest margin expansion once funding cost stabilize.

Slide 16 outlines the net interest income and margin trends.

The GAAP net interest margin expanded four basis points to two 2% during the quarter with a core net interest margin compressed only three basis points.

This is the lowest amount of core NIM compression over the past four quarters.

Prepayment penalty income in interest recoveries on nonaccrual loans were elevated at $857000 compared to the previous quarter.

We expect the NIM to remain under pressure as long as the fed raises rates, but the pressure should be more manageable based on current and forecasted rate hikes for the rest of the year.

After a lag we would expect the NIM would begin to expand as the pressure on funding costs ease and loans continue to reprice higher.

Turning to slide 17, as John mentioned, one of our goals for 2023 is just significantly moved towards a more interest rate neutral.

The Gulf of the balance sheet to better match, the duration of our assets, which is about two and a half to three years more closely to the duration of our funding, which is about one and a half to two years.

We've made considerable progress over the past year for any immediate rise of 100 basis points in rates, our net interest income would decline by 3% or 66% improvement.

The addition of interest rate hedges and more floating rate assets as the key drivers to reduce sensitivity.

The interest rate hedges are particularly important as they provide immediate income in addition to moving to balance sheet more towards neutral.

The bottom line is we've executed well on this strategy, which helps mitigate NIM compression for rising rates.

Slide 18 provides more detail on our CD portfolio.

Total Cds are over $2 billion or 35% of total deposits at September 30th.

See he's helped to lengthen the duration of our funding to match the duration of our assets more closely we expect to retain a high percentage of our C. D C.

See rates range from five to $5 45 per cent all else equal we expect the CD repricing to pressure our net interest margin.

Our net charge off histories on slide 19 as you.

You can see we have a long history at below industry level of net charge offs. In fact, we had a small net recoveries in the third quarter.

We are conservative underwriter of credit, we expect minimal losses in the loan portfolio. If there's an economic downturn given the large percentage of our loan portfolio secured by real estate with a low average loan to value.

Additionally, the weighted average debt service coverage ratio was one eight times on a multifamily and investor real estate portfolios and 1.2 times in a stress scenario consisting of a 200 basis point increase in rates and a 10% increase in the operating expenses.

These factors contribute to our expectation of minimal loss content within the loan portfolio.

Slide 20 shows our other credit metrics with declines in nonperforming assets and an increase in the nonperforming loan coverage ratio.

Criticized and classified assets increased in the quarter from a low base and we expect the criticized and classified assets to loans ratio to remain below peer levels.

Our allowance for credit losses as presented by loan segment at the bottom right chart.

Overall, the loans the allowance for credit losses to loans ratio was stable at 57 basis points during the quarter.

Very comfortable with our credit risk profile.

Our capital position as shown on slide 21.

Value and tangible book value per share increased year over year.

We repurchased approximately 59000 shares at an average price of $15.88, which is a 29% discount to tangible book value.

The tangible common equity ratio declined slightly to 759% quarter over quarter overall, we view our capital base as a source of strength and it can in a bio component of our conservative balance sheet.

Slide 22 provides our outlook, while we do not provide guidance, we wanted to share a high level perspective on our performance in the current environment.

We continue to expect stable loan balances given the challenging environment.

However, we expect to increase the amount of floating rate loans.

Certain deposits experienced typical seasonality in the summer months and should level out before increasing by year end.

There are several other factors that will affect the net interest margin pressures the pressure from the fed raising rates and the natural shift in the deposit mix second is the size and growth of the loan portfolio.

Third is the repricing of both C DS in certain loans.

Fourth is our interest rate hedges, which were favorable in the third quarter.

Finally, any increase in the rates by the fed won't benefit this portfolio offsetting some margin risk overall, we expect continued pressure on the net interest margin as fed increases rates, but all else being equal at the pressure should be more like what was experienced over the most recent two quarters versus the prior three.

For modeling purposes. The core net interest margin was two point, 11% for the month of September after adjusting for more normal level of prepayment penalty income.

Noninterest income should benefit from the back to back swap loan closings.

Noninterest expenses were well controlled in the third quarter and the extra scrutiny placed on all expenses.

However, the third quarter included a $3 1 million dollar cares act benefits, which may not repeat in the fourth quarter.

Lastly, the effective tax rate should approximate 26% to 28% for 2023.

I'll now turn it back over to John.

Thank you Susan on.

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 two quarters.

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.

Thank you.

We will now begin the question and answer session to.

To ask a question you May Press Star then one on your Touchtone phone.

If you're using a speakerphone please pick up your handset before pressing Mickey.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead hey.

Hey, guys good morning.

Morning Martin.

Susan I was wondering when 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 you'll likely keep a bunch of interest rate hedges on.

To synthetically create the rate sensitivity you are looking for.

Well, we're using the 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 that rate sensitivity. So yeah, it's going to depend on how quickly we can move and fully implement the back.

Back swap program, we had great success with that this quarter, we had $132 million of <unk> loans originated collecting fees of $1 6 billion this quarter and our hedges have an average life of three years. So all of those things come into play with the with our strategy.

Operator: Today, and welcome to Flushing Financial Corporation's third quarter, 2023, earnings conference call.

Concerning those.

Okay.

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

Operator: Hosting the call today are John Buran, President and Chief Executive Officer, and Susan Cullen, Senior Executive Vice President, Chief Financial Officer, and Chargerer, and Frank Korzekwinski, Senior Executive Vice President and Chief of Real Estate, Blending. Today's call is being recorded. All participants will be in listen only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero.

I would say.

The ltvs are still coming in below 70%.

<unk>.

The debt coverage ratios or.

Down a bit from where we've been historically and that's generally because of the the increased cost of of borrowing.

Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch time phone. To answer your question, please press star then two.

Really don't have a and average number I don't think Susan if you.

Maybe look it up or get back later, but it's it's in excess of our our minimum requirement, which is 125 I would say probably closer to a 135 140.

John Buran: I would now like to turn the conference over to John Buran. Please go ahead. Thank you, operator.

John Buran: 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 six-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.

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 a it's very well secured it was evaluated for any potential loss.

Did you see some modeling and none was identified as I said, it's very well secured.

Mostly macro economic environmental factors that are that it that caused that a downturn downgrade. The loan is correct and there's always been current has not missed a payment. Its just some the macroeconomic ah affecting that.

John Buran: First, we added $100 million of interest rate hedges during the quarter to continue our move toward 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. Yeals on a loan pipeline rose 54 basis points quarter over quarter, and yields on loan closings increased 288 basis points year over year.

That particular loan a relationship.

Okay, and then last question I had your credit trends were great this quarter.

And your charge offs and what have you, but optically you 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 in terms of building provisioning and you know obviously you have some flexibility with the qualitative factors.

How should we think about provisioning going forward.

Well, we think our provision is that an appropriate mark given our low a low a conservative balance sheet. So yeah. That's the first thing we had some things that got cleaned up this quarter I'm somewhat some other assets that are.

John Buran: It'll take time for new and reprised loans to have a significant impact on overall loan yields, but we're encouraged by the results so far. Third, we expanded non-interest 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, a 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.

Yeah affected.

The effect of that.

Our coverage ratio increased from a little over 200, so the lesson of 210% about 250% so yeah.

John Buran: 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 strong liquidity in capital. Sixth are gap and core non-intersex expenses with down 3% year-over-year and 2% quarter-over-quarter. Overall, we expect that these decisive actions will result in an improved financial profile over time.

The allowance as it is it is.

We should be thinking about it in terms of the economy and what the composition of our loan portfolio is so yeah, we're very comfortable with it.

So oh reference.

References a one of our slides mark and.

It gives a breakdown of obviously the areas like multifamily the loss content has been so minimal over the years and we're not expecting anything different there same way with green portfolio and of course, we're a well over 1% in terms of the C&I business Bank.

<unk> portfolio.

Thank you.

Thank you Mark.

Our next question comes from Steve Moss with Raymond James. Please go ahead.

Good morning.

Good morning, maybe just start.

More than just maybe starting on the loan side here I hear your expectations for a roughly stable balance sheet pipeline still at a.

Decent pace, even though it's down a little bit quarter over quarter.

Kind of curious on the dynamics there you know maybe theres, some payoffs or and just maybe overall business activity.

John Buran: In addition to our action plan, slide 4 outlines our 4 areas of focus for long-term success. First, interest rate risk is a priority and the actions we've taken have resulted in a 66% reduction in this risk over the past year. This is important given the uncertain outlook on rates. Second, we're focused on maintaining our credit quality. Our loan portfolio comprises low-risk loans to stable borrowers. Over 88% of the loan portfolio was secured by real estate with an average loan-to-value of 36% with solid debt service coverage ratios.

So the payoffs have been relatively stable the last couple of quarters. In addition.

The the pipeline.

I guess, there's been certainly impacted by the continuing continuing rise of and rates.

And our focus we've been we've been trying to work with customers with a back to back swap program to give them a.

A better a better at least the initial initial rate while maintaining our flexibility with respect to interest rate risk. So I think theres a number of dynamics taking place and then in addition.

Think the what we're seeing is a maybe a little bit of a slowdown of activity.

John Buran: The third area of focus is liquidity which I just covered and remain strong. The last area of focus is customer experience. Our ties with local communities is central to our ability to deliver exceptional service with the opening of the Bensonhurst branch at the end of the quarter. A third of our branches are in Asian markets. This is a population we know well and we have had great success fostering long-standing relationships with customers in the Asian community. We are also experiencing increased usage in our digital banking platforms. We're confident that these 4 areas of focus will position the company to achieve long-term success.

In terms of overall overall market.

Okay.

Great I appreciate that color.

And then in terms of just the on the expense side here with the benefit from the Cares Act you know just kind of curious you know how much of a step up if you can give any color there Susan wrap around that aspect you know it was maybe 35 $36 million a better run rate.

For the fourth quarter to think about.

So the cares act was about $3 million 3.3 to be exact so.

Yeah.

If I take the the run rate that's in that in the earnings release and at the three 3 million that would be about right.

John Buran: Our loan portfolio is outlined on slide 5. We're a conservative lender with 88% of the portfolio secured by real estate. Our high-quality multi-family and investor commercial real estate comprises 66% of the total portfolio. As a reminder, these two portfolios have weighted average debt service coverage ratios of 1.8 times and a weighted average loan-to-value less than 50%. Manhattan office buildings are approximately 0.6% of net loans. In general, the real estate portfolio has strong sponsor support and excellent credit performance.

Okay.

And in terms of you know maybe you know it's gone.

<unk> 24, a little bit you know I'm sure you guys are budgeting process right now, but just kind of curious.

Fisher environment I know you guys are trying to control expenses.

Any early thoughts on 'twenty 'twenty, four you could share with us.

Yeah.

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.

Focusing on the on our expenses, but we will invest in the company, where we think it's prudent going forward for 2024.

John Buran: With these metrics, we remain very comfortable with the quality of our loan portfolio and our stress tests have indicated that our borrowers are resilient and our portfolio is positioned to perform well if a stressed environment occurs.

Okay, great. Thank you very much.

Thank you Steve.

Our next question is from Chris O'connell with T V. W. Please go ahead.

Hey, good morning.

Hello English.

John Buran: I want to add some context on how we approach our real estate portfolio and why we're so confident in its stability. Slide 6 shows two types of multi-family buildings, of the Department of Finance, which you can see are on opposite ends of the spectrum. The picture on the left is like a typical multi-family building in our portfolio. This is a building that has a mix of rent-regulated apartments and market rents. The average monthly rent in our portfolio is approximately $1,650 compared with over $3,000 for market rents.

I'm, just hoping to start off with the margin I'm sorry to hear you're you know if the fed keeps raising you know there's pressure and it sounds like you know for next quarter.

John Buran: What this means is this type of building is stable, low-risk, and resilient to market volatility. Contrast this with the building on the right, which does not match our risk profile. While this building might look flashy, it's more upmarket and has greater swings in multi-rent rates. This is the type of multi-family building that is more exposed to market cycles. We have a history of conservative underwriting on multi-family properties. When interest rates were low during the pandemic in 2020, we underwrote the loans with cap rates at 5% or higher, which provide a cushion when rates rise and cap rates increase.

I'm kind of that mid single digit core pressure from the last two quarters is reasonable if.

There's no more fed hikes.

From here.

What do you think you know the timing.

As for bottom I mean is this do you think that similar compression in for Q continues into the first quarter or do you think we're getting to appointing a inflection.

Yeah.

So of course, 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 two quarters for us to start expanding the NIM. After the fed stops raising rates, so there'd be a little bit of compression in the two quarters subsequent to stopping increasing rates and then <unk>.

Spansion.

Okay, great and so the.

The reason there would be you know maybe maybe the rate of compression would slow and into the first quarter from the fourth quarter as well.

John Buran: Also, we underwrite loans at origination to absorb higher interest rates and each loan is stress test. This is one of the reasons why our debt service coverage ratios are at 1.8 times. Annually, we review the cash flows of the buildings. Average monthly rents per unit from 2018 to 2023 increased at a 4% compounded annual growth rate while the average monthly expenses increased a similar amount. As I mentioned, many of our buildings have a mix of market-regulated rent.

That's correct that would be my assumption.

Great.

And then you mentioned some of the seasonal factors can you just remind us what what are the seasonal trends are for your deposit base into the fourth quarter.

Sure. So we'll see the movement in the government the.

Banking portfolio, which will we do somewhat towards 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 of them you know some movement in that are.

And that government portfolio of the seasonal nature of that is just kind of starting now and will continue into the.

Into.

Into December and then as I've said starts to expand again are the balances start to expand again in the first quarter robust first quarter of the year actually January on.

John Buran: Regulated apartment rents are subject to rent guidelines standards board with approved annual increases, and that's why it's important to have buildings with a mix of market and rent-regulated units. Loans that include rent-regulated apartments are about 65% of multi-family loans. Our multi-family portfolio has strong sponsorship with equity greater than 60%, and the average multi-family loan is only $1.2 million. We believe these metrics will continue to serve us well, especially in a more stressed environment.

And that's typical.

Yep.

And given the strong a strong swap pipeline that you guys have up a little bit on a quarter over quarter I think.

Should we read into that as the the banking service fees line should say you know what you know pretty strong levels going forward.

Like I said, we closed a $132 million for one 7 million. So I would expect you know to can be look I can't speak. This morning, I'm, sorry, I would continue to say stay strong with that yes.

Great.

John Buran: Slide 7 shows the types of office properties we lend on and the types we don't. We lend on medical and health, care facilities, and largely out-of-borrow single and multi-tenanted properties. Again, these types of properties have much more stability through market cycles. We do not lend on high-rise office buildings that have much more volatility. Our average office loan is about $3.2 million, with a weighted average LTV of 50%, and a weighted average death service coverage ratio of 1.8 times. James. No office loans are non-accrual, and about 26% of the portfolio will have upward rate adjustments through 2024, given today's interest rates.

And then.

Just as just to circle back and confirm you know on the expenses so backing out the 3.3 million.

From the cares go to like 37, seven for this quarter and then is there a little bit of an uptick into next quarter from the new branch out or should we think about it more as kind of a flattish quarter for next quarter.

I think he can think of a base somewhere around 38.

Okay.

That's helpful.

And then a last one for me just.

A little bit of share repurchases and you guys are you know moving toward a you know your TCE target do you think that you know.

Hi, how are you balancing out moving toward that target and you know.

Doing any share repurchases going forward or do you have any appetite for that now or are more in capital preservation mode.

John Buran: Slide 8 shows examples of retail commercial real estate that we lend to, and the types of properties we don't. The retail Creep portfolio is about $900 million, with significant portions located in Queens, Brooklyn, and the Bronx. These are typically strip malls, and not large shopping malls. These businesses are usually vital to the communities they serve. The portfolio has a weighted average LTV of 53% and debt service coverage ratios over 1.9 times.

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 that you know as we've always said Chris that our our capital goals are to redeploy it into the company profitably then returned to the shareholders of the AR.

Dividend and finally, the the share repurchases, our philosophy has not changed on that.

Great. That's all I had thanks for taking my questions.

Thanks, Chris Thanks Louis.

John Buran: The average loan is about 2.4 million. Credit performance is solid, and less than 20% of the portfolio has rate resets through the end of 2024. We believe this portfolio is high quality, servicing the needs of local communities that rely upon these services on a day-to-day basis. As you can see, across our real estate portfolio, we prioritize the same key factors, limited risk exposure, resilience, and strong and stable borrowers. We're comfortable with the level of risk in our real estate portfolio, and remain confident in the long-term benefits of our approach.

Our next question comes from manual.

D. A davidson. Please go ahead.

Hey, good morning, I, just want to clarify morning, good morning.

I just wanted to clarify on the near term NIM on a core basis. It was down three basis points this quarter and eight basis points last quarter. So that's roughly the range for this coming quarter and just.

What's the what would be the difference on the reported side, if we have a rate fed rate hike.

So if the fed raises rates again, we believe the compression will be greater than than what we saw last quarter.

But that that you know three to eight basis points is probably a good range everything else being equal.

John Buran: Slide 9 provides detail on our Asian markets. With the opening of our Bensonhurst branch in Brooklyn, a third of our branches are in Asian markets. We have 1.2 billion of deposits, and 766 million of loans in these markets. These deposits are 19% of our total deposits, and we have only 3% of the market share, so there's substantial room for growth. Our approach to this market is supported by our multilingual staff, our Asian Advisory Board, and support of cultural activities. This market, which has total deposits of 41 billion, continues to be an important opportunity for us.

Yeah.

Given your hedges have.

Uh huh.

They only help you if in another hike.

Like how should I have to go in comparison to this current they'll help us to help us even more than they have to date. So as interest rates go up the hedge has become more valuable.

Awesome, Okay and.

You said that the the rough duration on them, it's about three years.

About three years, yes.

Okay.

So some role but would there be before some rollover some begin to roll off in 'twenty five but the average is about three years.

I would hope, even though you're opportunistic if you see.

John Buran: Slide 10 outlines the growth of our digital banking platforms. We continue to see double-digit growth rates in monthly mobile deposit users, users with active online banking status, and digital banking enrollment. The numerator platform, which digitally originates smaller dollar loans as quickly as 48 hours, continues to grow. We originated approximately $16 million of commitments here to date, and these loans have an average rate greater than the overall loan portfolio yield. We continue to explore other Fintech product offerings and partnerships that further enhance our digital banking platform and customer experience. During the third quarter, we also continue to participate in community events to strengthen our ties to our core Asian customer business. Base.

The fed about to come back down to kind of delay some of those reopening of the hedges.

So I think we will have that opportunity because despite the fact that there's a three year average there is a there there was a roll up 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 has much more interest rate neutral going forward.

Very fair very fair.

On the funding side I I understand and then by the way let me let me just let me just elaborate on that for a second because I'm sure eventually, but we wanted to be able to do is get that neutrality off of the balance sheet are with fewer and fewer hedges. So for example, what we're doing on the Oh on the floating.

John Buran: Community involvement is a hallmark of this company. The third quarter had several notable events to highlight, as you can see on slide 11. Our employees were active participants in the Dragon boat festivals, and we are a strong competitor in the races. We also participated in the Day Parade and the Moon Festival. Participating in these types of initiatives builds are already strong ties with our local communities and drives customer loyalty.

Right side, whether it is the back to back swap program, which is not a.

Portfolio hedge.

Or our emphasis on floating rate loans in general will start to move us in that direction.

Yeah.

Here at the at the year end with some of the seasonality you're having on deposits.

Susan Cullen: I'll now turn it over to Susan to provide more detail on our key financial metrics. Susan? Thank you, John.

Is that the main driver and kind of increasing your CD rates a bit.

Susan Cullen: I will begin on slide 12. The company reported third quarter 2023 of gap earnings per share of 32 cents and core earnings per share of 31 cents. Average total deposits increased 9% year over year but declined 1% during the quarter. Non-intersparing deposits increased 6% quarter of a quarter while average CD is expanded to 34% of total average deposits. The cost of deposits total 2.94% or the cost of funds is 3.13%. Moans increased nearly 1% quarter of a quarter and our loan pipeline totaled $363 million at the end of the quarter with approximately 60% floating rate. Non-performing assets decreased slightly quarter over quarter.

It's it's.

It's part of it but it's also growing.

Growing growing our customer base across all of the all the new branches and we've opened there's a lot of specials in there as well.

Can you.

Walked through some of your channels that are seeing the best inflows is it the new branches is it the C D product.

Your digital holds 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 and noninterest bearing.

Susan Cullen: Overall third quarter results reflect our execution on our action plan to improve profitability. Slide 13 depicts our deposit portfolio and average deposits increased 9% year over year but declined 1% quarter of a quarter. The quarterly decline was primarily due to seasonality, timing, and pricing decisions. Growth in non-intersparing deposits is a top priority for us so we are pleased that non-intersparing deposits increased quarter of a quarter and now comprise 12.5% of total average deposits.

As 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 as a really done very well in terms of getting the the organizations are very much focused on developing a stronger a stronger noninterest bearing DDA base.

Branches are doing branches are doing well the digital seems to be doing well as well and then business banking L or M L.

Susan Cullen: This growth occurred despite continued Fed action to reduce liquidity in the market. Average CD increased at $2.3 billion from $1.1 billion a year ago. Our loan to deposit ratio has improved 103% from 113% a year ago.

Our ability to garner more deposits from our business banking customers in our commercial real estate customers as has continued to grow. So all of those pieces are pulling together to to give us a oh, well, we think there's a favorable favorable direction, particularly.

Susan Cullen: The slide 14 outlines our loan portfolio yields. Net loans decreased less than 1% year over year but increased about 1% quarter of a quarter. Loan closings are $241 million at 52% improvement quarter of a quarter. Core loan yields increased 27 basis points during the quarter and for the fourth consecutive quarter yields on loan closings exceeded yields on satisfaction. Pre-payment penalty income was elevating 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.

With respect to our noninterest bearing which of course as you know moved opposite to the direction of the industry in this quarter.

Is the pipeline for that to continue first half next year, how do you feel about that with the incentives you've added.

But where we're working to do that.

No guarantees it's lumpy, it's hard to ignore it.

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

Yes, yes.

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

Susan Cullen: The slide 15 provides more detail in the contractual repricing of the loan portfolio. Approximately $1.2 billion or 17% of loans repriced with each Fed move. Our hedge position on these increases the percentage of the loans repriced with each Fed move to 25%. For the remainder of 2023 another $225 million is due to repriced at $182 basis points higher than the current yield. In 2024 and 2025 it combined $1.5 billion of loans will repriced 250 to 270 basis points higher. These values are based on underlying index value as of September 30th, 2023, and do not consider any future rate moves. This reprisings should drive net interest margin expansion once funding costs stabilize.

Okay. Thank.

Thank you guys for the commentary.

Thank you thanks.

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 where a we're looking forward to a continuing these are are these conversations and engaging with her in our with our investors and our customers on a continued basis. So thank you very much and everybody have a good weekend.

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

Susan Cullen: Blight 16 outlines the net interest income and margin trends. The Gap net interest margin expanded four basis points to 2.22% during the quarter with a core net interest margin compressed only three basis points. This is the lowest amount of core net compression with the past four quarters. Prepayment, penalty income and interest recovery on non-cool loans were elevated at $857,000 compared to the previous corner. We expect the name to remain under pressure as long as the fed rate raises rates, but the pressure should be more manageable based on current forecast rate hikes to the rest of the year. After a lie, we would expect the name would begin to expand as the pressure on funding costs, ease and loans continue to reprise higher.

Susan Cullen: Turning to slide 17, as John mentioned, one of our goals for 2023 is to significantly move towards a more interest rate neutral. The goal for the balance sheet is to better match the duration of our assets, which is about two and a half to three years more closely to the duration of our funding, which is about one and a half to two years. We have made considerable progress over the past year.

Susan Cullen: For an immediate rise of 100 basis points and rates, our net interest income would decline by 3% as 66% improvement. The addition of interest rate hedges and more floating rate assets are the key drivers to reduce sensitivity. The interest rate hedges are particularly important as they provide immediate income in addition to moving the balance sheet more towards a neutral. The bottom line is we excute well on this strategy, which helps mitigate new compression for rising rates.

Susan Cullen: Slide 18 provides more detail on our CD portfolio. Total CDs are over $2 billion with 35% of total deposit except for 30th. CDs help to lengthen the duration of our funding to match the duration of our assets more closely. We expect to retain a high percentage of our CDs. Current CD rates range from 5 to 5.45%. All else equal, we expect the CD repricing to pressure our net interest margin.

Susan Cullen: Our net charge off history is on slide 19. As you can see, we have a long history below industry level of net charge off. In fact, we have a small net recovery zone 3rd quarter. We are conservative underwriter of credit. We expect minimal losses in the loan portfolio if there's an economic downturn, given the large percentage of our loan portfolio secured by real estate with a low average loan to value. Additionally, the weighted average debt service coverage ratio is 1.8 times on a multi-family and investor real estate portfolios at 1.2 times in a stress scenario consisting of a 200 basis point increase in rates at a 10% increase in the operating expenses. These factors contribute to our expectation of minimal loss content within the loan portfolio.

Susan Cullen: Slide 20 shows our other credit metrics with declines in non-performing assets and an increase in the non-performing loan coverage ratio. Created size of classified assets increased in the quarter from a low base and we expect the credit size of classified assets to loans ratio to main below peer levels. House. Our allowance for credit losses is presented by loan segment at the bottom right chart. Overall, the allowance for credit losses to loans ratio was stable at 57 base points during the quarter. We remain very comfortable with our credit risk profile.

Susan Cullen: Our capital position is shown on slide 21. Book value and tangible book value per share increased year over year. We repurchase approximately 59,000 shares as an average price of $15.88, which is a 29% discounted tangible book value. The tangible common equity ratio declined slightly to 7.59% quarter of a quarter. Overall, we view our capital base as a source of strength and a biocomponent of our conservative balance sheet.

Susan Cullen: Slide 22 provides our outlook. While we do not provide guidance, we want to share our high-level perspective on performance in the current environment. We continue to expect stable loan balances given the challenging environment. However, we expect to increase the amount of floating rate loans. Certain deposits experience typical seasonality in the summer months and should level out before increasing by year end. There are several other factors that will affect the net interest margin, versus the pressure from the fed raising rates and the natural shift in the deposit mix.

Susan Cullen: Second is the size and growth of the loan portfolio. Third is the repricing of both CDs and certain loans. Fourth is our interest rate hedges, which were favorable in the third quarter. Finally, any increase in the rate by the Fed will benefit this portfolio, offsetting some margin risk. Overall, we expect continued pressure on the net interest margin as Fed increases rates, but all else being equal. The pressure should be more like what was experienced over the most recent two quarters versus the prior three.

Susan Cullen: For modeling purposes, the core net interest margin was 2.11% for the month of September after adjusting for more normal level of pre-parent penalty income. Non-interested income should benefit from the back-to-back swap loan closings. Non-interested expenses were well controlled in the third quarter and the extra scrutiny is placed on all expenses. However, the third quarter included a $3.1 million CARES Act benefits which may not repeat in the fourth quarter. Lastly, the effective tax rate should approximate 26% to 28% for 2023.

John Buran: I will now turn it back over to John. Thank you, Susan.

John Buran: 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 median term and establishing a foundation for long-term success. We move our interest rate positioning more towards neutral, which is help 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 two quarters.

John Buran: For our quality continues to be a strength. We have solid liquidity and capital. We continue to serve our clients and deep in 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: Operator, I'll turn it over to you to open the lines for questions.

Operator: Thank you.

Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

Operator: At this time, we will pause momentarily to assemble our roster.

Mark Fitzgibbon: Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Hey guys, good morning. Good morning, Mark. 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?

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

Mark Fitzgibbon: Okay. And then secondly of the 76 million of multifamily loans and 70 million of CRE loans, you close this quarter. What do 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 the increased cost of borrowing. I really don't have a an average number on an excuse and if you maybe look it up or get back later, but it's it's in the excess of our our minimum requirement, which is 125. I would say probably closer to 135 140.

Mark Fitzgibbon: 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 very well secured. It was evaluated for any potential loss. Through the CSO modeling and none was identified. And I said it's very well secured. It was mostly macro economic environmental factors that that caused that down down down great the loan is current and has always been current is not Mr. Payment. It's just some macro economic affecting that, that particular long, our relationship.

Mark Fitzgibbon: Okay, and then last question I had, you know, credit trends were great this quarter, and you know, charge-offs and what have you, but optically you reserve looks a little light, given where we are on the credit cycle and the complexion of your loan book. How do you think about that in terms of building provisioning and, you know, provisioning going forward? Well, we think our provision is that is the appropriate mark given our low, our low, our conservative balance sheet.

Mark Fitzgibbon: So, you know, that's the first thing. We had some things that got cleaned up this quarter, some other assets that, you know, affected that, you know, our coverage ratio increased from a little over 200, from you know, the allowances is a, which we're thinking about it in terms of the economy and what the composition of our loan portfolio is. So, you know, we're very comfortable with it. So, a reference one of our slides, Mark, and that gives a breakdown.

Mark Fitzgibbon: Obviously, the areas like multi-family, the loss content has been so minimal over the years and we're not expecting anything different there. Same way with the pre-portfolio and of course, we're over 1% in terms of the CNI business banking portfolio.

Mark Fitzgibbon: Thank you. Thank you, Mark.

Steve Moss: Next question comes from Steve Moss with Raven James. Please go ahead.

Steve Moss: Good morning. Maybe just starting on the loan side here, I hear your expectations for a roughly stable balance sheet. You know, pipeline still at a, you know, reasonably decent pacing those down a little bit, quarter to quarter, you know, just kind of curious on the dynamics there. You know, maybe there's some payoffs or and just maybe overall business activity. So, the payoffs have been relatively stable less, a couple of quarters. In addition, the pipeline, I guess, has been certainly impacted by the continuing rise of in rates and our focus.

Steve Moss: We've been trying to work with customers with the back-to-back swap program to give them a better, at least an 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 overall market.

Steve Moss: Okay. Great. Appreciate that color. And then in terms of just the, you know, on the expense side here with the benefit from the CARES Act, you know, just kind of curious, you know, how much of a step up, if you can give any color there, season around, around that aspect, you know, is maybe 35, 36 million, a better run rate for the fourth quarter to think about. So the CARES Act is about $3 million, $3.3 to be exact. So yeah, I take the run rate that's in the earnings relation at the $3.3 million that would be about right.

Steve Moss: Okay. In terms of, you know, maybe, you know, going up to 24 a little bit, you know, I'm sure you guys are budgeting process right now, but just kind of curious, you know, to inflationary environment, I know you guys are trying to control expenses, you know, any early thoughts on 2020, for you could share with us. You're right. We're beginning to work on our budget, you know, as we've said, you know, given the rate environment, we expect, you know, additional increases, but the compression in our name won't be as great as what we've seen. We are focusing on the on our expenses, but we will invest in the company where we think it's prudent going for, you know, 2024.

Steve Moss: Okay. Great. Thank you very much.

Steve Moss: Thank you, Steve.

Chris O'connell: Our next question is from Chris O'Connell with KBW. Please go ahead. Hey, good morning. Hello, Chris. It's open to start off with the margin. So I hear you, you know, if the Fed keeps raising, you know, there's pressure, and it sounds like, you know, for next quarter, kind of that mid-to-digit core pressure if in the last two quarters is reasonable. If there's no more Fed hikes from here, what do you think, you know, the timing is for bottom?

Chris O'connell: I mean, is this, is 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? Yeah. So Chris, what we've said is that the Fed has stopped raising rates. And so let's say the last rate was, I think, in September. So take two quarters for us to start expanding the NIM after the Fed stops raising rates. So there would be a little bit of compression in the two quarters. Subsequent to stopping increasing rates and then expansion.

Chris O'connell: Okay, great. And so the read in there would be, you know, maybe the rate of compression would slow into the first quarter from the fourth quarter as well. Correct. That would be my assumption. Great. And then you mentioned some of the seasonal factors. Could 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 reduce 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, we'll expand again.

Chris O'connell: 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 into December. And then as I said, starts to expand again. The balances start to expand again in the first quarter of the first quarter of the year, actually January on. That's typical. Yep. And given the strong, the strong swap pipeline that you guys have up a little bit quarter of a quarter, I think.

Chris O'connell: Should we read into that as the banking service fees line should say, you know, a pretty strong level is going forward? Like I said, we closed $132 million from $1.7 million. So I would expect, you know, to can be, look, I can't speak this morning, I'm sorry. I would continue to stay strong with that, yes. Great. And then just a circle back and confirm, you know, on the expenses, so backing out the 3.3 million from the cares get to like $37.7 for this quarter.

Chris O'connell: And then is there a little bit of an uptick into next quarter from the new brand chat or should we think about it more as kind of a flatish quarter for next quarter? I think you can think about base somewhere around 38. Okay. And then last one for me, just, you know, a little bit of sherry purchases. You guys are, you know, moving toward, you know, your PC target. Do you think that, you know, how are you balancing out moving toward that target and, you know, doing, you know, any share of purchases going forward?

Chris O'connell: 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 that, you know, 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 the share we purchased in our philosophy is not changed on that.

Chris O'connell: Great. That's all I had. Thanks for taking the questions. Thanks, Chris.

Chris O'connell: Our next question comes from Manuel Navas with DA Davidson. Please go ahead.

Manuel Navas: Hey, good morning. So I just want to clarify on the near term, men on a core basis. It was down three basis points as quarter and eight 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 rate fed rate hike? So if the fed raises rates again, we believe the compression will be greater than what we saw last quarter.

Manuel Navas: But that, you know, three to eight basis points, probably a good range, everything else being equal. Do your hedges have, would they only help you in another hike? Don't help us even more than they have to date, so as interest rates go up, the hedges become more valuable.

Manuel Navas: Awesome. Okay. And you said that the rough duration on them is about three years? About three years, yes. So some roll off 24, some roll some begin to roll off in 25, but the average is about three years. I would hope you'd be opportunistic if you see the fact about to come back down to kind of delay some of those re-opening of the hedges. So I think we'll have that opportunity because despite the fact that there's a three-year average, there is a roll off taking place over time.

Manuel Navas: 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.

Manuel Navas: Very fair, very fair. I'm on the funding side, I understand. And by the way, let me just 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 on the floating rate side, whether it is the back to back swap program, which is not portfolio hedge or our emphasis on floating rate loans in general will start to move us in that direction.

Manuel Navas: Here at the year end with some of the seasonality you're having on the pivots, 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 and that we've opened. And 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?

Manuel Navas: Is it the CD product? Your digital is up to 3% of the positive, is that how 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.

Manuel Navas: That incentive program has really done very well in terms of getting the organization very much focused on developing a stronger, stronger non interest bearing DDA base branches are doing branches are doing well. The digital seems to be doing well as well. And then business banking our ability to honor more deposits from our business banking customers and our commercial real estate customers has has continued to grow. So all of those pieces are pulling together to give us a what we think is a favorable, favorable direction, particularly with respect to non interest bearing, which of course as you know, moved opposite the direction of the industry in this quarter.

Manuel Navas: 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. It's lumpy. I'm sure it's unpredictable. Yes, but we put in place some some significant changes in the incentive structure to do that.

Manuel Navas: Thank you guys for the commentary. Thank you. Thanks.

Operator: This concludes our question and answer session.

John Buran: 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 we're looking forward to continuing these these conversations and engaging with our with our investors and our customers on a continued basis. So thank you very much and everybody have a good weekend.

Operator: Bye now. The conference is now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect.