Flushing Financial Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 26, 2023

Key Takeaways

  • Flushing Financial reported Q1 GAAP EPS of $0.17 and core EPS of $0.10, impacted by net interest margin compression and a $9.2 million charge-off on a nonaccrual credit.
  • The bank has executed an action plan—including deploying interest-rate swaps to make the balance sheet more rate-neutral (40% toward goal), tightening noninterest expenses, and sharpening its focus on risk-adjusted returns—to bolster profitability.
  • Average deposits rose 2% quarter-over-quarter and 6% year-over-year, uninsured balances remain low at 16% of total, and available liquidity stands at $3.7 billion (over three times uninsured deposits).
  • Loan balances were flat Q/Q while loan closings yielded >7% average rates and the pipeline grew 6%; the portfolio is 88% real-estate secured with average LTV under 37% and just 0.1% exposure to Midtown Manhattan offices.
  • Net interest margin fell 43 bps to 2.27% (GAAP) as funding costs rose faster than asset yields, but management expects only modest further compression and eventual margin expansion from contractual loan repricing.
AI Generated. May Contain Errors.
Earnings Conference Call
Flushing Financial Q1 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Welcome to Flushing Financial Corporation's First Quarter 2023 Earnings Conference Call. Hosting the call today are John Murren, President and Chief Executive Officer and Susan Collins, Senior Executive Vice President, Chief Financial Officer and Treasurer. Today's call is being recorded. All participants will be in listen only mode.

Speaker 1

Are

Operator

a copy of the earnings press release and slide presentation that the company will be referencing today are available on its Investor Relations website at flushingbank.com. Before we begin, the company would like to remind you that discussion during this call contains forward looking statements made under the Safe Harbor provisions are the U. S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those contained in any such statements, including as set forth in the company's filings with the U.

Operator

S. Securities and Exchange Commission, to which we refer you. During this call, references will be made to non GAAP financial measures or 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.

Operator

GAAP. For information on these non GAAP measures and for a reconciliation to GAAP, please refer to the earnings release or the presentation. I'd now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results.

Speaker 2

Thank you, operator. Good morning and thank you for joining us for our Q1 2023 earnings call. Following my prepared remarks, Susan will review the financial trends and we will then answer any questions. The company reported Q1 'twenty three are GAAP EPS of $0.17 and core EPS of $0.10 The quarterly results were impacted by net interest margin compression and a charge off of a previously identified credit placed on non accrual in the Q2 of 2022. We were disappointed with these results and we've implemented an action plan to enhance the resilience of our business model and improve are future profitability.

Speaker 2

1st, we're taking significant steps to move the balance sheet to more interest rate risk neutral and have already achieved 40% of our goal. 2nd, we are increasing our focus on risk adjusted returns and overall profitability. While this will take some time, we're encouraged by the results seen so far. Are 3rd, we're looking to expand our client base and build loyalty by emphasizing our brand of customer service and deep community relationships, while capitalizing on the recent market disruptions. Our bankers are seeing more activity in gathering both loans and deposits.

Speaker 2

Are 4th, we are tightening up on expenses. We've taken actions to reduce non interest expense growth and we'll continue to focus on reducing discretionary expenses. 5th, we are preparing for the next credit cycle. We are focusing more on recession proof industries and will continue to take early actions on weaker credits. Are 6th, we will continue to focus on our strong liquidity and capital.

Speaker 2

Deposits are up for the quarter And we have $3,700,000,000 of available liquidity. Overall, we expect these decisive actions to result in an improved earnings profile over time. Continue our long track record of dividend payments into the future. Please turn to Slide 4. The actions we are taking will also allow us to advance our 4 areas of focus for long term success.

Speaker 2

We incurred a $9,200,000 loss on a business participation, which was placed on non accrual in the Q2 of 2022. This domestic borrower has a customer who shipped products to Russia that were canceled due to sanctions. The credit protection for the shippers receivables that was in place became more questionable during the quarter. So we decided to charge off the loan. Absent this isolated credit, we would have recorded are small net recoveries for the quarter.

Speaker 2

Credit quality is one of the foundational pillars of the bank. Are our loan portfolio overall 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 less than 37%. Are Midtown Manhattan office space exposure is only 0.1% of the loan portfolio. Interest rate risk is another priority and I outlined our actions on the previous slide.

Speaker 2

While I also touched on liquidity on the previous slide, I want to highlight the liquidity is strong. We increased deposits by nearly $250,000,000 during the quarter. Our liquidity is over 3 times the uninsured and uncollateralized deposits. Customer experience and our ties to the communities are also key to our success. Due to a major competitor, Signature Bank leaving the market, are additional opportunities are emerging, particularly with shared relationships.

Speaker 2

Are also expanding our Asian Banking franchise and see nice deposit growth there. Our digital engagement is strong and growing. Are these areas of focus will position the company to withstand the short term macro turmoil, will be rebuilding our foundation for long term success. Slide 5 highlights our performance for the quarter. Average deposits increased 6% year over year and 2% during the quarter, a positive metric for Flushing Financial given the current banking environment.

Speaker 2

Our uninsured and uncollateralized deposits are only 16% of total deposits. Analysts have noted that we're one of the strongest versus peers. We expect a similar or better position this quarter. The cost of deposits reached 2.29 percent and the overall cost of funds was 2.47%. As we indicated last quarter, loan growth is expected to be challenging.

Speaker 2

Loans were flat quarter Over quarter, while loan closings were lower than recent quarters, yields increased to over are 7% and the loan pipeline increased 6% quarter over quarter. We expect the market disruptions will provide opportunities for loans, especially given the absence of a major competitor. Core loan yields expanded 17 basis points during the quarter due to higher rates, repricing are the real estate loans and new loans coming on at rates above the portfolio yield. Nonperforming assets declined 21% and criticizing classified assets decreased quarter over quarter. Are additionally, delinquencies, which were already low, declined 16 basis points during the quarter.

Speaker 2

We continue to realize strong growth in digital engagement by leveraging our technology platform. In fact, in the Q1, we originated approximately $7,000,000 of loan commitments through our digital platform. We also expanded our relationships with FinTech Players as we have partnered to offer customers assistance was filing and processing employee retention tax credit refunds. Earnings from this partnership will be realized once the customer receives a refund. To date, we're pleased with the activity.

Speaker 2

Are as outlined previously, we put in place several steps to improve overall earnings performance. The market believes the Fed is nearing the end of its increasing cycle, which implies margin improvement on the horizon for us. Are available. Additionally, there are opportunities due to the market disruption and the absence of a major competitor. Slide 6 presents our liquidity profile.

Speaker 2

We have $3,700,000,000 of available liquidity are from a variety of sources, including Federal Home Loan Bank, the Federal Reserve Bank, cash on hand and unpledged securities. Additionally, we have relationships with IntraFi Network and others to offer customers greater FDIC insurance versus are the $250,000 minimum. We are working to expand borrowing capacity from existing relationships by pledging different types of collateral. Deposit flows over the course of the quarter were similar to past trends. Are uninsured and uncollateralized deposits totaled about 16% of total deposits.

Speaker 2

Are available liquidity is over 3 times the amount of uninsured and uncollateralized deposits. We have a high degree of comfort in the stability of funding due to deposit stability and available liquidity. Are our loan portfolio is outlined on Slide 7. As you can see, 65% of the loan portfolio is concentrated are in Multifamily and Investor Commercial Real Estate. Our overall office portfolio is about 4% of loans with Midtown Manhattan office space exposure at 0.1% of 1% are Overall, we remain very comfortable with the quality of our loan portfolio due to an average loan to value of less than 37% And a debt service coverage ratio of 1.9 times for the multifamily and investor commercial real estate portfolios.

Speaker 2

Slide 8 provides a detail on our Asian markets. About a third of our branches are in Asian markets where we have 1 are $200,000,000 of deposits and $810,000,000 of loans. These deposits are 18% of total deposits And we have only 3% market share, so there's plenty of opportunity. Our approach to this market is supported by our staff that speaks are many different languages, our Asian Advisory Board and support of cultural activities. This market continues to be an important opportunity for us.

Speaker 2

Slide 9 depicts the are growth in our digital banking platforms. We continue to see high growth rates in monthly mobile deposit users, are users with active online banking status and digital banking enrollment. Based upon data from our service provider for 2022, we had above median enrollment growth and top quartile performance for active users annual growth and mobile remote deposit capture annual growth compared to the 26 banks in our peer group of assets of $5,000,000,000 to 10,000,000,000 are the numerator platform, which digitally originates small dollar loans as quickly is 48 Hours continues to grow. We originated approximately $7,000,000 of commitments in the Q1. These commitments have an average rate greater than the overall portfolio rate.

Speaker 2

We continue to explore other FinTech product offerings and partnerships. Are on Slide 10. 1st quarter has several important events to highlight. Are as pictured, our employees participated in the Lunar New Year parade, which is great visibility to our Asian markets. We were involved in other community events, including Manhattan Neighborhood Network ribbon cutting and providing scholarships for NYC Kids RISE.

Speaker 2

Are our new Hapag branch in a major Long Island industrial park opened during the quarter. And we expect Bensonhurst, are, which extends our Asian business to open later this year. Participating in these types of initiatives builds on our already strong ties with our local communities, which is a key differentiator for our business, enabling us to drive customer loyalty. I will now turn it over to Susan to provide more detail on our key financial metrics. Susan?

Speaker 1

Thank you, John. I'll begin on Slide 11. Deposit growth has been a challenge for the industry as said raises rates and recent bank failures tightened financial conditions. Despite this backdrop, we were able to increase average total deposits 2% during the quarter and 6% year over year. As expected, balanced growth was driven by CDs, which help extend our funding to better match the duration of the assets.

Speaker 1

While growing non interest bearing is a priority for us and has become more challenging given the higher rate environment. Average non interest bearing deposits declined both quarter over quarter and year over year. However, checking account openings increased 30% year over year. The recent market disruptions has provided opportunities to attract more deposits and customers. The increase in the deposit base assisted in lowering the loan to deposit ratio to 102% from 107% at the end of the year.

Speaker 1

In terms of mix, about half of our deposits are from consumers and the other half are from business and government. I also want to note that we have seasonality in certain segments of our deposit base and the several months are generally lower than the rest of the year. On Slide 12 outlines our loan portfolio and the yields. Net loans increased 5% year over year, but were down less than 1% quarter over quarter. Loan closings were lower than the recent run rate, but the yield on the closings was over 7% for the quarter.

Speaker 1

Core loan yields increased 17 basis points during the quarter and for the 2nd consecutive quarter, yields on loan closings exceeded the yields on the satisfaction by 113 basis points. Prepayment penalty income declined to $610,000 in the quarter from $1,200,000 in the 4th quarter and 1 point are $6,000,000 from a year ago. There's been some disruption in the market as a major competitor has exited, are contributing to the increased activity resulting in loan pipeline that increased 6% during the quarter. Are Slide 13 provides more detail on the contractual repricing of the loan portfolio. Approximately $1,100,000,000 or 16% will be repriced with each Fed move.

Speaker 1

In the Q1, approximately $272,000,000 of real estate loans repriced upwards of 193 basis points to 6.63%. For the remainder of in 2023, another $660,000,000 is due to reprice at a rate 184 basis points higher than the current yield. Another $765,000,000 or 11% of loans will reprice in 2024 with a similar amount in 2025. These values are based on the underlying index value as of March 31, 2023, and do not consider any future rate moves. This repricing is what should drive net interest margin expansion once funding costs stabilize.

Speaker 1

Slide 14 outlines the net interest income and margin trends. The GAAP net interest margin declined 43 basis points to 2.27% during the quarter. As we stated previously, we expect the NIM will continue to compress as long as the Fed raises rates. After a lag, we expect the NIM would begin to expand as the pressure on funding costs ease and loans continue to reprice higher. Of course, if the Fed cuts rates, our funding costs should reprice lower faster than the declines on the asset yields.

Speaker 1

Are now available. Turning to Slide 15, one of our goals for 2023 is to significantly move towards more interest rate neutral. The goal for the balance sheet is to match the duration of our assets more closely, which is approximately 3 to 4 years and the duration of our funding, which is about 1 to 2 years. The asset swaps convert fixed rate assets of 3.17% into floating rate assets of 5.62% and the effect of funding swaps go from 4.84 percent to 2.55%. We added are some swaps late in the quarter, so the full benefit has not been realized in the run rate and the forward funding swaps were priced lower during the year.

Speaker 1

We expect to continue to monitor market opportunities to take additional actions if warranted to help close the duration gap. Slide 16 shows there's another benefit to swaps portfolio as it serves as a mitigant for changes in interest rates that flow through AOCI. The change in the value of the swap portfolio is generally the inverse of the change in the value of the available for sale securities. As you can see, this has been our history and has helped to keep our tangible capital ratio stable versus others who have experienced more pressure from the rising rate environment. Are Slide 17 outlines our high quality and liquid investment security portfolio.

Speaker 1

The overall investment security portfolio is $886,000,000 or just over 10% of assets. Our securities portfolio is mostly classified as available for sale, so the value is largely reflected in our tangible capital. About 53% of the portfolio was floating rate, which includes the $200,000,000 of fair value swap added during the quarter. Security yields increased 44 basis points quarter over quarter to 3.15%. Are moving on to net charge offs on Slide 18.

Speaker 1

We have a long history of solid credit quality as a result of our low risk credit profile and is conservative underwriting. Net charge offs were 54 basis points for the quarter, which primarily relates to the one business credit John mentioned earlier. Absent this credit, we would have reported small net recoveries for the quarter. During the quarter, we provided additional provisioning is fully reserved for previously identified $4,000,000 line of credit. Historically, loss has been well below the are due to our low risk credit profile and conservative underwriting.

Speaker 1

We expect limited loss content in the loan portfolio if there is an economic downturn given the greater than 88% of the portfolio is secured by real estate with an average loan to value less than 37%. Additionally, the weighted average debt coverage ratio is 1.9x and over 1.15x to the stress are the 1st scenario. The stress scenario consists of a 200 basis point increase in the rate and a 10% increase in operating expenses for our multifamily is an investor commercial real estate loans. These factors contribute to our expectation of loan loss content within the portfolio. Slide 19 shows our credit metrics that are trending in the right direction with declines in non performing assets, lower criticized and classified assets are an increase in the non performing loan coverage ratio.

Speaker 1

Our allowance for credit losses is presented by Mode segment in the bottom right chart. The higher risk portfolios have reserves greater than 1% of that portfolio. Overall, the allowance for credit losses to loan ratio decreased 2 basis points to 56 basis points during the quarter. Despite the significant charge off this quarter, we remain very comfortable with our credit risk profile. Our capital position is shown on Slide 20.

Speaker 1

Book value and tangible book value per share increased year over year. We took advantage of the stock price trading below tangible book value to repurchase approximately 160,000 shares during the quarter. The tangible comp equity ratio decreased 9 basis points quarter over quarter to 7.73%. Our regulatory capital ratios are strong. Overall, we view our capital base as a strength and a vital component of our conservative balance sheet.

Speaker 1

Before turning over to John, let me provide some color on our revised outlook. As a reminder, we do not provide guidance, so this discussion is meant to provide a high level perspective on performance in the current environment. We expect loan growth to remain are challenging given the high rate environment and our increased emphasis on risk adjusted returns. While we have a liability will be approximately 40% of this goal during the Q1. With that said, the NIM is likely to continue to compress as long as is raising rates.

Speaker 1

At this point, we expect the Fed to increase by 25 basis points in May. The core NIM in March was 2.17 percent and with the lack of loan growth, there is no pressure to fund the balance sheet growth at high rates. Given these assumptions, we believe the amount of NIM compression going forward has the potential to be significantly lower than seen in prior quarters. Are the same. Overall, the longer term, we expect the NIM will benefit from the contractual repricing of the loan portfolio.

Speaker 1

Last quarter, we mentioned that non interest expense was is expected to increase by low double digit percentage points. Given the actions we have taken to improve the outlook, we are now expecting 2023 are expected to remain flattish versus 2022. As a reminder, we had $4,100,000 of seasonal expenses in the Q1 that are not expected is a $1,700,000 benefit related to employee retention tax credit refunds. Lastly, the effective tax rate should approximate 24% to 26% for 2023. I'll now turn it back over to you, John.

Speaker 2

Thank you, Susan. On Slide 21, I'll wrap up with our key messages. Results in the Q1 were below our expectations and we have implemented an action plan and areas of focus is to help improve profitability in the short and medium term and build on our foundation for long term success. Are looking to position the balance sheet to become more neutral to changes in interest rates. We will continue to take advantage of market opportunities, including a major competitor leaving the market, which should provide opportunities for loans and deposits.

Speaker 2

Our liquidity and capital are strong. We remain comfortable with the low risk loan portfolio as criticizing classified assets and delinquencies improved. While the environment is challenging, we expect the decisive actions we are taking to improve the overall performance and allow us to continue our long and consistent track record of dividend payments. Operator, I'll turn it over to you to open the lines for questions.

Operator

Thank you. We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster.

Speaker 3

Are questions.

Operator

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

Speaker 4

John, Susie, good morning.

Speaker 3

Good morning, Alex. First question

Speaker 4

I had for you, I wondered how much more in C and I loan participations you all have and maybe what your largest C and I participations are, how large?

Speaker 2

1st of all, it's minimal. Most of what we do is in market and real estate based as you know. The largest is probably this long.

Speaker 1

I think so. I think that's right. And when we get into a participation mark, we underwrite the loan to our own conservative underwriting standards before we agree to participate in the credit.

Speaker 2

Yes, I just want to emphasize this is a very unusual set of circumstances where involved in a war and a sanction That is clearly not typical of what we do on a day to day basis, so highly unusual.

Speaker 4

But in total, roughly what are the C and I participations?

Speaker 1

They're about less right around 5% of the portfolio.

Speaker 4

5% of total loans or 5% of C and I loans?

Speaker 1

Total loans, excuse me, 5% of total loans.

Speaker 4

Okay. Secondly, you had talked about in the past having a target TCE ratio of around 8%. I guess I'm curious if that's A, still your target and B, if it is, should we assume that buybacks will Slower cease in coming quarters since you're below that.

Speaker 2

We'll probably slow down Buyback activity, but we're obviously always alert for what's going on in the market. I would say that 8% we've viewed as being a more intermediate term goal.

Speaker 4

Okay. And then Susan, just following up on your margin comments, assuming that we sort of follow the forward curve and given the balance sheet changes that you're making, where do you think the margin sort of bottoms out? Roughly what level?

Speaker 1

We ended March with for the month of NIM about 2.17, but that does not include the full run rate of about is $350,000,000 worth of swaps we put on. So everything else being equal, Mark, I would think maybe a couple of more basis points down from where we are, but I think the Fed is mostly finished raising rates, at least I hope they are, are closer to the end and the beginning, and I think the majority of the NIM compression is baked in, but there's still a potential little bit more to go.

Speaker 2

I would also add that in the last quarter or so, there's been very, very intense Competition associated with 2 players in the market that we're trying to get out of the crypto exposure, one of which is no longer out there. So I think we'll see a little bit less intensity in terms of the Deposit Competition. These are direct competitors of ours.

Speaker 4

Okay. And then given your comments about Fed being close to the end and we've already got rates up 4.75 basis points, it strikes me that This is an odd time to be changing your liability sensitive position. Wouldn't it be arguably the worst time to be coming less Liability sensitive.

Speaker 2

So when you look at our balance sheet, as Susan mentioned, we've got assets That repriced quite a bit more slowly than the liabilities. So we think over time we need to bring those things more is to alignment. Certainly, we're going to be cognizant of what's happening on a day to day basis as we move toward is a more intermediate term goal, but we do want to have a more balanced balance sheet, a more are safe interest rate risk position. And as you know, we don't none of us know where rates are going to go. They certainly can go down shortly and they could clearly go up again if inflation rears its head again.

Speaker 2

But the hedging is very, very valuable to us. One of the other positive aspects of our hedging strategy is that it has protected us from an AOCI perspective as well. So, all in all, we think there's been great benefit with our hedging strategy that now has about $1,600,000,000 $1,700,000,000 worth of protection in place.

Speaker 4

Thank you.

Speaker 1

Thanks, Mark.

Operator

Our next question comes from Chris O'Connell with KBW. Please go ahead.

Speaker 5

Hey, good morning.

Speaker 3

Good morning, Chris.

Speaker 5

Just following up on one of the last questions, If I heard right, did you say only 2 basis points give or take of margin compression That could be on the 2.17 NIM at March?

Speaker 1

No, I did not say that. I would put the quantity on it, Chris, there's some moving parts as we talked about. John mentioned the Lessening of competition or but there's rate moves still to occur. The Feds are closer to the end than the beginning, But I think there's still some compression to come in our NIM, but it won't be as great as what we've seen in the past.

Speaker 3

Got it. And how late in the quarter

Speaker 5

were the hedges and the derivatives put on?

Speaker 1

The second half of March, really. So they only have a couple of weeks baked in.

Speaker 3

Okay, great.

Speaker 4

And I was just hoping

Speaker 5

you could provide a little bit more color as to the overall expense plan that you've taken a look at and what areas you're looking to keep expenses more contained versus previously? And perhaps if there's any further opportunities that you'd be looking at as you get further on into the year into 2024?

Speaker 1

Go ahead, John.

Speaker 2

There's a series of initiatives that we will either That we've either canceled or delayed to a later date. Clearly, all of our compensation structures are associated with performance, so that would be impacted. We're reducing marketing expenses. We're Reducing compensation expenses, there's a whole variety of more discretionary expenses that we're able to reduce without really disrupting the core of the business. We do have a very valuable franchise that we're looking ahead to 2024 and making sure that we are in a good position to take advantage of a better environment.

Speaker 5

Got it. Thanks. And then just on the credit commentary, I believe you said there's $4,000,000 specific reserve this quarter for a line of credit. Is that fully reserved for?

Speaker 1

Yes. At this point, there was a little bit of provision taken is prior quarters, but it is now fully have a specific allowance associated with it for the full $4,000,000

Speaker 5

Okay, got it. And I know you guys said you've taken a closer look at kind of overall credit quality and risk Framers going forward, just maybe any details as to what specifically you're looking at and any kind of color you could give there?

Speaker 2

Obviously, we're very focused on looking at recession proof are industries and maintaining are traditional strong standards with respect to real estate, which we're very, very comfortable with. I think it's mostly in the area of anticipating possible recessions and staying away from industries that are travel, discretionary spending industries. We don't have any exposure to consumer. We have very, very limited exposure to Midtown Manhattan office space, less than 0.1%. So in general, we're in very good shape in that regard, but there's always little nuances that take places associated with what's going on in the market

Speaker 5

Great. And then last one for me, just switching back to the balance sheet, I think you mentioned a little bit of seasonality in the deposits for the summer periods. But what type of moves kind of you're expecting there for the next couple of quarters, that'd be great.

Speaker 1

So there's seasonality in our government banking portfolio, Chris. A lot of places get the money and then it flows back out. So the summer months are just a low period for us historically because of the government funding.

Speaker 5

Yes. Any quantitative qualifiers as to what the typical impact is as far as outflows?

Speaker 1

I want to say, I would have to go back and look to be sure, but it seems to me that last year, for the Q2, our loan to deposit ratio was probably the highest it was all of last year, so I would have that same expectation this quarter.

Speaker 5

Okay. All right.

Speaker 3

Thanks. Thanks for taking my questions.

Speaker 1

Thanks, Chris.

Operator

Our next question comes from Manuel Nava with D. A. Davidson. Please go ahead.

Speaker 3

Hey, good morning. So if the Fed pauses as kind of expected And there's a lag before your NIM starts to benefit. How fast or how quickly could the NIM will benefit when it does start to move up on a pause.

Speaker 2

We expect within a couple of quarters that we We can start to see the NIM start to recover?

Speaker 1

Historically, it's been about 2 quarters. So we would we don't see a reason why that light history would not repeat itself, to give you some context.

Speaker 3

Is the speed going to be similar to the past? Or can we put out like 5 to 10 basis points? What would be after those two quarters, in the 3rd quarter, how fast could the NIM rise?

Speaker 1

It depends on what it stops and what we have repricing on the loan side, but it's not going to be a sharp V up. It's going to be a longer slope to get us back up on the NIM

Speaker 3

side. Okay. Did any of your actions slow that slope, like moving to neutral, adding hedges or are you trying to thread the needle where you can still have that same Slope recovery of NIM with your current hedging actions.

Speaker 2

So that slope that we're talking about in the absence of a reduction in the Fed's rates is really dependent upon the movement If you're talking about the Fed reducing rates in the end of the quarter, our liability sensitivity would override any type of hedging strategy that we put in place over that time period. So we would expect in an environment where the Fed reduced rates, we would expect that the margin improvement would accelerate.

Speaker 3

Okay. And if they just stop,

Speaker 2

it will be that slower movement. Sorry. I'm sorry.

Speaker 3

No, no, I'm just wondering because there is trade offs to some of your actions. I'm just trying to identify if there's any loss of Potential recovery down the road and if there's any way to quantify it, like NIM recovery down the road.

Speaker 2

If rates are reduced, so nothing that we're doing should impact our ability to recover The contractual repricing of the loan portfolio.

Speaker 3

Okay.

Speaker 2

On the other hand, if the Some of the funding swaps that we put in place could somewhat mute the Ability to gain from the repricing downward that the Fed might take. However, given the degree of liability sensitivity, that liability sensitivity Even today far outweighs, the and would give a much more significant benefit than any hedging strategy that we put in place. So the net net would be a positive for us.

Speaker 1

So Manuel, if we look at like the funding swaps, we are the underlying is at $484,000,000 and we're paying $2.55,000,000 So the Fed would have to drop rates is 230 basis points, if my math is correct, before we had any detriment to our earnings stream for that specific hedge item. Okay.

Speaker 3

That's correct.

Speaker 1

So you're right, there are trade offs, but when we put this on, we very carefully evaluate in various rate scenarios what would happen with the various actions we're taking.

Speaker 3

Okay. That's I appreciate that. That's good. To shift topic a little bit, is the line of credit that has come up in questions, is that where that 9% reserve on $23,000,000 in SBA loans sit? If not, any color on that high reserve portion for that portfolio?

Speaker 1

No, it is not in that. That portfolio has a high reserve ratio because of the amount of losses we have historically had in that before we there was an older program we were in and the losses are encapsulated in there and it's still bleeding, if you will, through the CECL calculation.

Speaker 3

Got it. Okay. And then

Speaker 2

our SPF portfolio, by the way, is very small.

Speaker 3

Yes, it is very small and you fully reserved there. It's just Sitting there. Yes. Okay. And then my last question is, is there any Ability to time some of the Signature benefits, your pipeline is already going up on the loan side.

Speaker 3

It seems like you believe that deposit competition might come down a bit on pricing side. And then there's talent out there. Am I thinking about it the right way for those three dimensions? And kind of can you speak to the timing of those three dimensions for the Signature benefit.

Speaker 2

So I don't think we can really talk specifically about the timing, but we are seeing Activity in all three of those dimensions at this time.

Operator

Concludes our question and answer session. I'd like to turn the conference back over to John Buren for any closing remarks.

Speaker 2

Well, thank you everybody for joining us today on our Q1 2023 earnings call. We appreciate your continued support of Fleshing Financial Corporation, and we look forward to talking to you next quarter. Thank you again. Thank you.

Operator

Concludes today's presentation. You may now disconnect.

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