Good morning and welcome to Flushing Financial Corporation's Third Quarter 2018 Earnings Conference Call. Hosting the call today are John Buran, President and Chief Executive Officer; and Susan Cullen, Senior Executive Vice President, Treasurer and Chief Financial Officer. Today's call is being recorded and all participants are 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 release and slide presentation that the company will be referencing today are available on its Investor Relations website at flushingbank.com.

Before beginning, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements. Such factors are included in the company's filings with the U.S. Securities and Exchange Commission.

Flushing Financial Corporation does not undertake any obligation to update any forward-looking statements, except as required under applicable law. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance.

These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. For 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 thank you for joining us for our third quarter 2018 earnings call. Today, we hope to provide additional insight into our business strategy, sustainable competitive advantages and consistent positive earnings power.

I'll begin by walking you through our third quarter highlights, and then provide an overview of the strategies we are executing to create long-term shareholder value. Then our CFO, Susan Cullen will review our financial performance in greater detail. After our prepared remarks Susan and I will address your questions.

Beginning on slide three, third quarter 2018 GAAP diluted EPS was $0.61, and core diluted EPS was $0.54. Core earnings were positively impacted by the reversal of a previously recorded tax liability of approximately $2 million.

The difference between GAAP and core earnings per share is attributable to approximately $2 million in gains from life insurance proceeds. Net interest income of nearly $42 million was down modestly quarter-over-quarter and year-over-year due to net interest margin pressure driven by higher funding cost.

The cost of funds increased 22 basis points quarter-over-quarter and 48 basis points year-over-year as the Federal Reserve has raised rates by 100 basis points since the third quarter of 2017. The competition for deposits this quarter was especially strong in the municipal sector.

Overall, we expect continued competition for deposits an additional compression on the net interest margin through 2019. We are pleased with our ability to generate strong earnings growth and return on average equity of nearly 13% and core return on average equity of over 11% despite continued margin pressure.

Our strategic focus is emphasizing rate over volume and reducing our liability sensitive position has resulted in net loan growth of approximately 1% from the linked quarter.

Similar to the prior quarter, we allowed $62 million of participations with another financial institution to prepay as the rates offered through the refinancing process did not meet our criteria. Year-to-date, we have allowed approximately $139 million of participations to repay rather than refinance at a rate below our criteria.

During the quarter, approximately 70% of our new loans and 40% percent of our new investment securities were adjustable rate products allowing us to reduce future compression on the net interest margin. Also, approximately $450 million of forward swaps entered in late 2017 have provided a benefit for the first time this quarter.

We expect these swaps to increasingly benefit our net interest margin as rates rise. The swaps coupled with the extension of the maturity of liabilities has reduced our liability sensitive position. The yield on the long portfolio increased 21 basis points from the linked quarter, representing successful execution of our strategic objectives.

Also, the yield on mortgage loan originations increased 8 basis points from the linked quarter. However, that the yield on all new loan originations decreased 8 basis points during the quarter due to the initial rate recorded on certain adjustable rate C&I loans. Importantly these loans have an average rate reset of three months.

Over the past five quarters C&I loans represent 39% of new loan originations, which are primarily adjustable rate loans. As we have previously disclosed, we have approximately $2 billion of loans repricing through 2020 of which $127 million in mortgage loans have repriced up an average of 68 basis points during the third quarter.

In addition, the pipeline remains strong at $355 million with an average yield of 4.68% compared to $323 million at 4.67% in the linked quarter. The loan to deposit ratio improved to 114% from 116% largely due to retail deposits increasing $106 million quarter over quarter.

A prominent feature in the growth of retail deposits is our Win Flushing program which focuses on increasing our deposit market share in the Asian community in Flushing Queens.

Through the third quarter, we have captured over $100 million in deposit growth through this program and remain on pace to add $160 million in deposits by the end of the first quarter of 2019.

Central to the Win Flushing program has been the conversion of Flushing branches to the universal banking model permitting staff to spend more time with customers. In the branches converted, we have seen balances grow over 15% and have experienced an increase of 120% in transactions processed at an ATM reducing our customers reliance on tellers.

As previously discussed, we remain committed to improving our overall expense scalability and efficiency, by completing the remaining branch conversions to the universal banker model by the end of 2019 and opening a branch in Chinatown Manhattan in the fourth quarter of 2018. Credit quality from our portfolio remains pristine.

At the end of the third quarter, non-performing loans were just 24 basis points of gross loans and non-performing assets were only 19 basis points of total assets. Non-performing loans totaled less than $13 million in the third quarter, a decrease of 15% quarter-over-quarter and 9% year-over-year.

Referring to slide four, we remain focused on the following key areas. Exceeding customer expectations, enhancing earnings power, strengthening our commercial bank balance sheet and maintaining our strong risk management philosophy.

Our sustainable competitive advantages include our ongoing focus on developing maintaining a multilingual branch staff to serve our diverse customers in the New York City market area.

The Asian banking market surrounding our branches has very attractive business dynamics including a high degree of savings, available deposits and a significant number of small business owners. We have a strong focus on this community where we have over $600 million in deposits. These deposits have a lower cost of funds than our total cost of funds.

Our Win Flushing campaign is focused on further capitalizing on this market through market knowledge and understanding of customer needs. Overall, we remain very well-positioned to deliver profitable growth and long-term value to our shareholders. As we continue to execute on our strategic objectives which is summarized on slide five.

Increased core deposits and continue to improve funding mix, manage net interest income by leveraging loan pricing opportunities, enhance core earnings power by improving scalability and efficiency, manage credit risk and to remain well capitalized under all stress test scenarios.

During the third quarter, we've repurchased nearly 300,000 treasury shares at an average cost of $25.58 per share and as of September 30, 2018, approximately 509,000 shares remained under the current authorized stock repurchase program, which has no expiration on maximum dollar limit.

Overall, we remain well capitalized and our focus on our strategic objectives enable us to further deliver profitable growth and long-term value to our shareholders. Now, I'll turn the call over to Susan to discuss the quarter's financial results in greater detail..

Thank you, John. I'll begin on slide six. Total loans were $5.4 billion, up nearly 1% quarter-over-quarter and 6% from the third quarter of 2017, as we continue to focus on the origination of multifamily, commercial real estate and commercial business loans of full banking relationship.

These originations totaled 89% of total loan production for the third quarter of 2018. We continue to diversify our loan portfolio as C&I originations for the quarter of 43% of total originations and 39% over the past five quarters.

This has resulted in commercial business balances growing over 25% during the same period to approximately 16% of gross loans as of September 30, 2018.

The growth in the C&I portfolio offer several advantages to the company primarily continue to diversification of the loan portfolio and as these are primarily adjustable rate loan, the yield offers more protection in the rising rate environment.

Overall total loan growth is on pace to meet the lower end of the expected loan growth, while we continue to emphasize rate over volume. At September 30, our loan pipeline was strong up to $355 million, which is up from last quarter. The composition of the pipeline was 75% adjustable rate product or $265 million of the pipeline and 25% fixed rate.

The interest rate and mortgage loans on pipeline increased slightly from last quarter to 468. The loan to value on our real estate portfolio at quarter-end remains the modest 39% and our debt service coverage ratio for the current quarter's originations of multifamily commercial real estate and one to corporate and mixed-use loan is 173%.

We underwrite, and stress test each individual loan using a cap rate in excess of mid-5% range. Slide seven highlights the composition of our funding mix. As funding has grown over the years, the percentage related to CDs and borrowings has decreased.

When they need to rise to access the wholesale funding markets, we can either out liabilities for longer terms which is an advantage. Core deposits increased four tenth of a percent quarter-over-quarter and approximately 4% year-over-year and total 66% of all deposit at September 30, 2018 compared to just 37% at December 31, 2006.

On slide 8 you’ll see the deposits increased 2% quarter-over-quarter and 6% year-over-year, growth was primarily driven by money market CD and non-interest-bearing accounts. We continue to focus on the growth of core deposits with an emphasis on non-interest-bearing deposit accounts which increased 10% year-over-year.

Non-interest-bearing deposits of nearly $400 represent 9% of total deposits. We continue to see rate pressure with increased competition for deposits. The quarterly cost of deposits increased 22 basis points from the prior quarter.

As John noted, the competition for deposits this quarter was especially tough in the municipal sector as the cost of NOW and money market accounts increased 39 basis points and 32 basis points. We remained disciplined in terms of deposit pricing while remaining competitive in our markets.

Turning to slide nine, net interest income for third quarter 2018 was $42 million, down modestly quarter-over-quarter and year-over-year. The net interest margin at 2.71% decreased 5 basis points quarter-over-quarter and 19 basis points year-over-year.

Excluding prepayment penalty income and recovered interest from delinquent loans, net interest margin would have been 2.51%, a decline of 13 basis points quarter-over-quarter and 26 basis points year-over-year. We expect continued margin pressures through 2019.

As John noted in his remarks, we have about $2 billion of loans re-pricing through 2020, of which a $127 mortgage loans have re-priced up an average of 68 basis points during the third quarter from an average rate of 4.56% to 5.24%.

Our overall cost of funds for this quarter was 1.63%, an increase of 22 basis points quarter-over-quarter and 48 basis points year-over-year. In order to partially mitigate the increase in our cost of funds we have taken the following steps which are summarized on slide 10.

For the fifth consecutive quarter the yield on non-originations have exceeded the quarterly yield on the loan portfolio net of prepayment penalties and recovered interest from delinquent loans. We entered in forward swaps totaling approximately $450 million, of which approximately $350 million have been funded as of September 30, 2018.

The forward swaps provided the benefit for the first time in the current quarter’s net interest margin and we project these swaps will enhance earnings as rates continue to rise. Loan origination yields have increased 24 basis points from third quarter of 2017.

And as previously mentioned, origination of commercial business loans, which are primarily adjustable rate loans totaled 43% in current quarter and now comprise 60% of the loan portfolio. We actively manage funding cost and continue to evaluate strategies to mitigate our liability sensitive balance sheet.

Our net interest margin will likely remain pressured. We will continue to focus on driving net interest income by executing on the previously noted steps coupled with leveraging loan pricing opportunities and portfolio mix.

On slide 11, we reported non-interest income for third quarter of 2018 of $5 million where core non-interest income was $2.9 million, which excludes the net loss on fair value adjustments and the $2 million gain from life insurance proceeds. The core decrease quarter-over-quarter was primarily driven by reduction in net gains on sale of loans.

Moving to slide 12, we project 2018 annual expenses to increase approximately 3% to 5% from 2017 driven by the growth of the bank. Overall, the efficiency ratio was just over 61% in the third quarter of 2018 compared to 60% in the second quarter of 2018 and 57% in third quarter of 2017.

As previously discussed, our long-term goal is to achieve an efficiency ratio in the low-to-mid 50s. We remain focused on continuous improvement and the opportunities in our operations for efficiency gains.

The increase in compensation expense for the quarter was due to the acceleration of benefits due to an officer’s death and normal accrual adjustments. Regarding taxes, the effective tax rate was just under 10% for the third quarter, benefiting from the release of a previously accrued tax liability.

We anticipate the effective tax rate to increase to approximately 21% in the fourth quarter and approximately 19% for the full year. Now turning to credit quality on slide 13. Our credit metrics remained excellent this quarter. As a reminder, we are historical seller of non-performing credits and report charge-offs early in the delinquency process.

As you can see, our improving credit quality metrics results on our coverage ratio increased into a 161% from a 112% as of December 31, 2017. The average loan to value of a non-performing real estate loans was approximately 35% based upon the value of underlying collateral and origination and we do not adjust appraisal for increases.

Given the low loan to value associated with the non-performing real estate loans, we do not foresee an increase related expense. Looking forward with expected loan growth, we anticipate reporting provisions for loan losses proportionate with that growth in future course to maintain adequate ratio.

Moving to slide 14, non-performing loans were just under $13 million [ph] down 15% quarter-over-quarter and 9% year-over-year as credit quality remains one of our core strengths. We did not record provisions for loan losses in third quarter due to the strong credit quality.

Debt recoveries of 89,000 in the third quarter reflect our conservative underwriting and diligence in the collection process. Slide 15 shows 90 days delinquencies as a percentage of loans originated by year.

Here you can see the results for strong underwriting discipline as there are only three loans delinquent greater than 90 days for vintage years after 2009. Overall our credit quality remains pristine. With that, I’ll turn it back to John for some closing comments..

Thank you, Susan. On slide 16, I’d like to conclude by reviewing why we believe we are well-positioned for continuous strategic and profitable growth. Our vision is to be the preeminent community financial services company in our multi-cultural market area by exceeding customer expectations and leveraging our strong banking relationships.

The New York city market with a strong Asian customer base in Flushing continues to represent a significant opportunity for us. We remain focused on providing a superior and consistent experience that every touchpoint for our customers through innovation, quality service and personalized attention.

We have a strong foundation with attractive markets and customers a proven track record and an experience leadership team to execute our strategy.

In conclusion our strong balance sheet, risk management philosophy, capital levels, ability to grow deposits, investments in talent, innovation and cyber security all position the company very well to deliver profitable growth and long-term value to our shareholders. We will now open it up to questions. Operator I’ll turn it over to you..

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

Hey guys, good morning..

Good morning..

Susan just to clarify you said in your comments that you expect NIM pressure to persist through 2019 do you think based on what you see today do you think in the magnitude of the margin compression in each subsequent quarter will look similar to what we saw this quarter or does it do you think it elevates as we get further into 2019?.

I think it’s going to be driven by the data that we see on the deposit pricing. We’re seeing the loan starts to turn the corner, but we’ve seen more and more pressure on our deposit pricing, so the data is really going to be the driver of our NIM compression..

Okay.

And then at what CD term are you having the most success in bringing new money in and at what sort of rate?.

It’s about the nine months, 240..

In around 240, okay..

Right..

And then I know you touched on this a little bit in your comments and certainly your credit quality is outstanding but the loan loss reserve to loan ratio, it continues to skinny down at 38 basis points, it looks optically low.

When you think we’d see a resumption of provisioning?.

Well, we’ve evaluated every quarter Mark and here we had some of those recoveries this quarter that messed a little bit. The loan growth unfortunately has been a little on this skinny side as you say. We’ve been at 38 basis points for a couple of quarters now.

We have the low LTVs in our commercial portfolio, commercial real estate portfolio, we expect normalizing it soon in next couple quarters given loan growth as we said..

Thank you..

Thank you, Mark..

And our next question will come from Steve Comery of G Research. Please go ahead..

Hey guys, good morning..

Good morning Steve..

Hi Steve..

I was wondering if maybe you could give a little more color on sort of the C&I rates and the quarter on and explain kind of why the initial rate was lower? The magnitude there looks pretty significant like 4.5% versus 4.9% previous quarter..

So some of them were priced at they spread over LIBOR most from a prices at a spread over LIBOR and this is a competitive market and as a result, the initial rates are a little bit less than let's say our initial rates on commercial real estate are, but over time we expect that we will continue to see some protection let's say on the margin due to the fixing of the spreads versus LIBOR.

In addition, we're focused on the C&I business that has high credit quality. So obviously, that makes the rate a little bit more competitive than what we would normally see in that C&I portfolio..

Okay. Okay. Fair enough. Thanks. And then on kind of non-interest-bearing deposits on our period end basis, those are up pretty nicely.

Is there anything differently you guys are doing there any more business you're getting from C&I, what's coming through there?.

So, in C&I, but I've got to say that we've got a lot going on in the Win Flushing program and we're very excited about that the results are strong over $100 million of additional deposits. And despite the fact that some of them are oriented towards obviously CDs.

There is quite a bit of non-interest-bearing accounts coming in associated with the new businesses that we're bringing in the flushing marketplace particularly..

Okay. So, this is a different strategy just kind of things are starting to pay off with Win Flushing and C&I..

Yes, I think what we're finding is that we hit upon a method of going into a market and a more concentrated manner and achieving some very nice results. I mean, we expect to pick up a 4 point of market share in this in $16 billion market.

So, it's pretty significant and we also feel that we can take these learnings and move them out to other potential ethnic areas..

Okay. Very good. If I can switch gears more to go to the CRE portfolio. I mean, it looks like, I mean growth was kind of negative in the quarter in those categories on a periodic basis.

Is anything changing there or is that still sort of less attractive to you C&I at this point?.

It's competitive obviously. I'll remind you again that we did have over the course of the nine months over $139 million of participations that we chose not to be a part of, because the yields are in the three area. So, we're really focused on continuing to diversify our portfolio.

And of course, we do like real estate, we do think there are still opportunities in commercial real estate. But if the new loan yields are not meeting our expectations, we'd rather leave the powder dry for a better day and we fortunately have been in the C&I business for over 10 years.

And as a result, we've got a track record there, we brought new people on to help us grow the portfolio. So, we've got the ability to increase in an attractive market and attractive product set. And frankly, if real estate comes back and the yields are to liking will be happy to jump in again.

But until that, we'll concentrate a little bit more on the C&I which was about 39% of our originations for the year..

Okay. And then just one more from me, if I may on. You guys are obviously active repurchasing during the quarter. In the past, as this is certainly outdated a couple years ago, you talked about like the $20 level being sort of extremely attractive to repurchase the stock.

Maybe if you just give some kind of updated guidance about you sort of your appetite for repurchases whether or not you expect to use your authorization and ask for more there?.

We anticipate opportunistically purchasing in the market as the market presents itself to allow us to do that. We do anticipate using up our full allotment that the board gave us. I can't give you any indication of what the timeframe over which we will use that, but we do intend on using it all..

Okay, very good. Thanks..

Our next question will come from Collyn Gilbert of KBW. Please go ahead..

Thanks. Good morning everyone..

Good morning Collyn..

John, just to back to your comment on the fact that you guys chose not to be a part of the slug of the - book that you allowed it to reprice elsewhere. Just curious, you had mentioned in the 3% range.

Who was financing those, were those traditional bank lenders or non-bank lenders?.

Traditional bank lenders..

Okay. And then I guess along those lines, two questions. One is, Susan you had indicated that your kind of are expecting the loan growth to be at the lower end of your targeted range and I apologize if you said, what that was.

But just curious now what you're thinking in terms of all in loan growth for 2019?.

We're probably looking around the 6% range..

Okay. And that slide is powerful, when you show kind of where your current portfolio yield is and where you think that repricing rate could go.

Do you see the risk in a similar dynamic happening next year where these credits can just refinance at much lower levels elsewhere and you maybe won't participate in retaining those loans?.

So, remember there is a cost associated with not doing this general role. So, where we are today is that those customers would have to go out and get new appraisals, they'd have new legal fees. So, there is a whole host of costs associated with that.

Now, we may not make every penny on the 6% that we're looking at for 2019 and 2020, but we do think we've got a significant amount of leverage and we expect to utilize that. As I said we've gotten other opportunities to grow the portfolio if necessary.

In addition, we firmly believe that other lenders who may be undercutting pricing now will ultimately have to increase rates which would make our position better..

Okay, that's helpful.

And then just on the deposit side, what are you anticipating kind of overall deposit growth rates for next year?.

We're thinking around the 10% area..

Okay. And do you have a sense of what of the new deposits that came in this quarter that have come in year to date.

How much of that is new customers versus current customers just shifting out of the savings of the money markets into those CDs?.

We think given what's been happening in Flushing that we're getting a few more new customers coming in. There is clearly much more - I’ll give you a perfect example. We did a -- we recently did a business blitz in the Flushing market.

And although, we're still a relatively small bank in that market, people knew us and so I think that the recognition of the name and the recognition that we're doing something special in that market has taken hold. So, we think we're getting more new customers, I mean it appears that way for sure..

Okay. And then just on the non-interest-bearing deposit side, you had indicated increase 10% year over year and it's 9% of the total.

Where do you think that segment can continue to go?.

I think we have some opportunity there. We again we've clearly been successful in this one segment of the market. We're doing more C&I business which of course brings more DDA with it. So, I think those factors contribute to some positive growth in that in a non-interest-bearing area.

So, it's not an area that we had a lot of successes in the past, but clearly the 11% 10%, 11% that we've gotten over the course of the last 12 months has made us more confident..

Okay. And just so kind of looking at all of this broadly. I think if we assume and I haven't run the numbers, but continued NIM compression into 2019 and just the slower loan growth, I presume we're going to see some savings obviously come through from the branch sort of universal banker.

But it seems like earnings or may kind of running to be flat if not down in 2019. I'm just curious where you kind of see the levers to pull that. I mean is it going to be, and again Susan I know you'd indicated that maybe the provisions started to normalize so maybe won't get an offset there. I don't know if how you're thinking about the tax rate.

But just trying to get a sense of maybe where you see some offsets coming from what will likely be flat to perhaps down net interest income growth, or perhaps you're not seeing at that way?.

Well, we think that one of the things that held back loan growth this particular year was at $139 million that we did not do in real estate participations. So, we don't foresee that occurring again as for sure. And I think there is some additional expense opportunities that we can pick up over the course of the year as well.

So, that in association with the role on the yields that we just discussed from a 4 handle to roughly a 6 handle in 2019. The additional C&I business that now floats over moves in LIBOR. And the swaps that we have which were the first time this quarter have contributed positively to our NIM.

So those are kind of the offsets to the margin pressures the kind of generic margin pressure that we have as a result of the as a result of the balance sheet..

And Collyn as we said in the past, we'll again opportunistically look at other derivative type transactions that would give us protection or additional protection in a rising rate environment. So, we have that that lever that we may be able to pull as well..

Okay, great. That's great. All right, thank you. I'll leave it there..

Thank you..

[Operator Instructions] Our next question will come from Brody Preston of Piper Jaffray. Please go ahead..

Good morning everyone.

How are you?.

Good morning..

I guess I just want to go back to the participations real quick.

Are those multi-family loans or what asset class are those?.

Sorry.

We didn't get the question?.

You are on mute, Brody..

Yes, sorry about that. On the participations, I just want to know what asset class..

Multifamily..

And is that in market?.

Yes..

Doing those rates..

It's in-market product. It's an in-market product and an in-market bank..

Okay. All right, great. I guess, I just want to touch on credit real quick. I appreciate the fact that you guys have really pristine credit quality. And I guess maybe the growth outlook is a little slower. But given how well you guys have been doing growing the C&I part of the portfolio.

I guess I wanted to get a sense for how you provision for that segment of the ortfolio..

Well, we provisioned for that segment like the other segments we look at the collateral we have and or use a discounted cash flow analysis to determine if there was any impairment and loss to be recognized..

Okay.

Is there do you have and like sort of an average provision that you sort of apply to that portfolio?.

Well, we take our historical three-year charge-offs in that and adjust for qualitative factors that are outlined in our agency statement. I don't want to give out what our percentages are from our competition’s sake.

But yes, we do have numbers and we look out them and we apply those and compare it to our balances and the discount cash flows in the collateral for impaired loans..

Okay, great. And then I know the tax rate guide for 2019, for the 4Q is 21%.

Is that sort of the run rate you expect moving forward?.

No, we haven’t finalized all of our 2019; you’re really finding that as we wanted the budgeting process. As I’m sitting here right now that would be a good estimate, but that’s subject to change..

Okay, great. And then in the release you had mentioned you did have some classified assets that were still performing and still accruing, but you had put them sort of in the classified just given the trip from covenants.

I wanted to get a better sense I guess maybe without going into specifics for those bonds, but what are some of the typical covenants that you have within your various CRE and C&I loans?.

So, it might a leveraged covenant that was violated let’s say. We typically have a variety of liquidity leverage covenants, covenants with respect to the amount of capital that owners can take out of the company at any given point in time. Obviously, we’ve got income and also reporting.

So, these are the kind of things that we generally put into reporting delays. These are the kind of things that we typically put in as covenants..

Okay, great.

And then I guess you read a bunch of articles that -- with larger loans, sort of the proliferation of [Indiscernible] type of loans and I wanted to get a sense for if you’ve seen any of that for maybe some of your type clients, your clients, are they coming to you expecting maybe fewer covenants than they have in the past?.

So, the market is competitive for sure. And I’ll kind of bring you back to the comment I made earlier about pricing versus credit quality. The pricing has been tight and we’re much more comfortable taking on tight pricing than lose credit criteria of lose covenants.

So, we try and stay away from overleveraged companies or companies that -- or arrangements that are light on covenants. We’d sooner take a little bit of -- a little bit less in terms of yield on the credit, on the floating rate loans, but get a better-quality credit..

Okay. Okay that makes sense. And I guess the loan-to-value ratio on a lot of your real estate loans is pretty low, I think it’s in like the 40% type of range. And so, I wanted to get an idea as to -- I guess are borrowers bringing 60% down for that or like of their own equity or how are your borrowers’ sort of financing that 60%.

Is it all out of pocket or are they getting maybe some debt to do that?.

These maybe REIT, these maybe refis in many cases. And then we also tend to bank real estate owners and real estate investors that had been in the business for a long time and have a track record. And anybody who has been in the business for the long time doesn’t typically put a lot of leverage on in their portfolio..

Okay, that’s great..

I would just like to remind you Brody that we don’t adjust the denominator on those, those are the loan-to-value calculations, that’s loan-to-value at origination where we’ve had updates. We’re not taking the old appraisals when we originate a loan and increasing it for rates indexes in this market area..

Okay.

So, that’s based off the previous appraisal value?.

Original appraisal..

Yes, the original appraisal. I mean if we refi it and get a new appraisal, we’ll adjust them. But we don’t adjust it year-over-year because prices are going up in Manhattan or in Brooklyn..

Okay. All right.

So, that loan-to-value ratio could be even more risk [ph] then?.

Correct. It could be..

All right that’s good and then I just want to go back to the pipeline the pipeline has picked up here relative to last quarter and the yield has a little bit too I just want to get a sense for how you define your pipeline are those loans that you have term sheets held on?.

Usually there is usually some cash on the line, so it is a matter of fact there is always some cash on the line in these particular risk businesses so our real estate portfolio some of these put down money to start our processing..

Okay, so the pull through rate on that portfolio should be relatively higher than right?.

Yes, that’s -- yes it is, it is..

Okay.

And then, I appreciate that you guys typically have some seasonality within some of your deposit categories in the third quarter and driven by municipalities but this year the now seasonality was much larger much greater than past years and you saw a really, really big inflow into money markets and so I want to understand is that a bit of a mix shift from your typical municipal clients or is there something else going on there?.

No, I think it’s fairly -- I think it’s fairly typical in terms of the seasonal pattern sometimes you get a few weeks or a few weeks on or off the typical pattern, but we’re now in the area where in December the money markets will be down a little bit so now accounts rather it will be down a little bit and then they’ll come back very-very strong in January.

So, we had a slight build, we get a slight build in the third quarter reduces a little bit in the fourth quarter and then comes back very strong in the first quarter so that’s typically what we see..

Okay. All right, great. That’s all I had guys. Thank you very much..

Thank you..

Great. Thank you..

Ladies and gentlemen this will conclude our question and answer session. at this time, I’d like to turn the conference back over to John Buran for any closing remarks..

Yes, thank you very much. So, I think the thing that I’d like to invest is to keep in mind about the company and I think it’s something that people have been with us for a long time. We run the company on a long-term basis. Obviously, we have the balance sheet that we have.

It is a liability sensitive balance sheet, but we’re taking all measures that we possibly can to increase our opportunities for additional yield in loans, while we are trying to control our funding cost.

So, we’ve got a few things going on that are moving us in the right direction and I think if you look at banks with similar balance sheets, I think you’ll recognize that we have some opportunities due to diversification and situations that we put in place in terms of hedging strategies that’ll put us in a position to turn the corner at least as good as most and possibly better.

So, I thank you all for your attention. And if you have any other questions, feel free to give us a call. Thank you..

Thank you..

Ladies and gentlemen, the conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines..