Welcome to the Flushing Financial Corporation's Full Year and Fourth Quarter 2023 Earnings Conference Call. Hosting the call today are John Buran, President and Chief Executive Officer; Tom Buonaiuto, Senior Executive Vice President, Chief of Staff and Deposit Channel Executive; and Susan Cullen, Senior Executive Vice President, Chief Financial Officer and Treasurer. Today's call is being recorded. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] A copy of the earnings press release and slide presentation that the company will be referencing today are available on its investor relations website at FlushingBank.com. Before we begin, the company would like to remind you that 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, including as set forth in the company's filings with the U.S. Securities and Exchange Commission, to which we refer you. 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 information about these non-GAAP measures and for a reconciliation to GAAP, please refer to the earnings release and/or to the presentation. I would now like to introduce John Buran, President and Chief Executive Officer, who will provide an overview of the strategy and results. Please go ahead.

Thank you, Operator. Good morning and thank you for joining us for our full year and fourth quarter 2023 earnings call. Before reviewing the highlights of the quarter, I wanted to spend a minute discussing the restatement announced yesterday. As we previously disclosed, we have received approximately $7 million or about $0.17 per share of employee retention tax credit payments in 2023. In keeping with our conservative risk profile, we fully reserve for this amount given the uncertainty in the government program which arose late in 2023. This is despite our belief that more likely than not, we will recognize these payments. The 2023 quarters have been restated to account for this change, and this reserve is included in both GAAP and core earnings. Now, moving to the highlights of the quarter. The company reported fourth quarter 2023 GAAP EPS of $0.27 and core EPS of $0.25. For the year, GAAP EPS was $0.96 and core EPS was $0.83. GAAP and core NIM expanded by 7 basis and 18 basis points respectively in the fourth quarter. Core loan yields increased 33 basis points. We run a conservative balance sheet and our office real estate exposure is low with minimal loans in Manhattan. Our liquidity profile has also improved with over $4 billion of undrawn lines and resources or 48% of total assets. Overall, the quarter showed progress on how we're managing this challenging environment. Turning to slide four, I wanted to provide additional detail on how the company has changed over the past year and how it's remained the same. Our interest rate risk position has moved closer to neutral. This provided immediate income in 2023 when rates increased rapidly. The move to neutral positions the bank to manage future changes in rates, while reducing earnings volatility over different rate…

Thank you, John. I will begin on slide 12, which outlines the net interest income and margin trends. The GAAP net interest margin expanded seven basis points to 2.29% during the fourth quarter, while the core net interest margin increased 18 basis points to 2.31%. Contributing to the GAAP and core NIM expansion were $3 million of prepayment penalty income, net reversals and recovered interest from nonaccrual loans, purchase accounting accretion, and customer swap termination fees in the fourth quarter compared to $2.6 million in the third quarter. Absent these items, the NIM expanded 5 basis points quarter-over-quarter, which is the first time the quarterly NIM expanded sequentially since the second quarter of 2022. There are two primary factors that should drive the NIM in the near term. First is the level of loan originations and repricing. Second is how well we retain and reprice maturing CDs. With the market expecting rate cuts this year, we estimate every 25 basis point reduction in rates would impact net interest income by approximately $1.4 million on an annualized basis, assuming no deposit rate lag. For the fifth consecutive quarter, yields on loan closings exceeded yields on satisfactions, and this spread increased in every quarter. Turning to slide 13, as John mentioned previously, we added interest rate hedges in 2023 to help neutralize the balance sheet to increases in interest rates. The overall interest rate hedge portfolio is approximately $2 billion and does not have any significant maturities in 2024. These interest rate hedges provided immediate income and helped navigate the rapidly rising rate environment. In a falling rate environment, the income from the interest rate hedges will decline, but there are potential offsets in the balance sheet. Bottom line, the interest rate hedges helped mitigate NIM compression from rising rates and provided…

Thank you, Tom. On slide 22, I will wrap up with our key takeaways. We established our action plan early 2023 and executed well against it to help create a stronger base to improve profitability over the longer term. Given our successful execution so far, we're shifting our areas of focus to increasing the NIM and reducing volatility, maintaining our credit discipline, preserving our strong liquidity and capital, and bending the expense curve. In short, we're trying to improve near-term performance for the areas that we control amid the persistent challenging environment. We believe these actions will allow us to navigate the current environment and improve overall performance in the long term. Operator, I'll turn it over to you to open up the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning. Happy Friday.

Good morning, Mark.

Good morning, Mark.

First question is just some clarification on the comments you made around margin. So did you say that we should start with a margin level of 215 in the first quarter and then assume there'll be compression from there? Is that correct?

That's the – yeah, so that's the core margin that we have, that we're at as of the fourth quarter. So what's happening in the first quarter is the number of CDs that are repricing will exceed the loans that are repricing. So we could see some small margin compression in the first quarter or so. By the middle of the year, that should abate and start moving the other way as loans, the loan repricing exceeds the liability repricing.

Okay. And then John, I think in your comments, you suggested that you're continuing to reduce liability sensitivity. I guess I'm wondering if it looks like we're getting close to the Fed cut in rates and clearly the balance sheet benefits, as you've described, a $1.4 million for each 25 basis point cut. Why continue to reduce liability sensitivity now? Why not wait until rates come down and benefit, ride the wave so to speak?

I don't think we're looking to reduce it any further. We're comfortable being neutral at this point in time. And obviously the market hasn't done such a great job of predicting the number of rate cuts or increases. So given the fact that historically our balance sheet had a heavy liability sensitivity, it still does today at its core basis. So I think that we have options to increase the liability sensitivity in the balance sheet should we see some certainty with respect to the Fed moves, and we're exploring those options. So we haven't made any decisions as to the timing and magnitude of rate cuts at this point in time, and we're watching very carefully what's happening in the market. We've been disappointed before in terms of the Fed making cuts. So we wanted to position ourselves to be successful in either environment.

Okay, and then just to be clear, the restatement that you did this morning, that sort of puts this issue completely behind, there's no residual expense impact or anything like that?

That's correct, Mark. It puts the whole issue behind us and we move forward from here.

Okay, and then just on credit, you guys have done a nice job and certainly your balance sheets held up well. I guess at a high level, I was curious of sort of two things. What do you guys worry about for the industry with respect to credit? Not necessarily Flushing, but just credit in general. And do you see commercial real estate borrowers out there that are really struggling to find a home for their loans or being pushed out by their existing banks?

We're starting to see somewhat of that activity. Certainly there's been a commentary in the press of various banks pulling back in the commercial real estate area. Certainly the office market continues to be a soft market throughout the entire industry. So I think those two things are clearly occurring, and we're watchful for opportunities to be a little bit more focused on the loan portfolio in the coming quarters. Obviously we've been kind of flattish over 2023.

Thank you.

Thanks Mark.

The next question is from Steve Moss with Raymond James. Please go ahead.

Good morning, Steve.

Hello everyone.

Good morning Steve.

Hey. This is Thomas on for Steve, guys. I appreciate it. I appreciate all the call you guys provided on CDs, but I see money market deposit growth resumed after several quarters of decline. And the average yield on that looks like it ticked up about 25 bips to around 3.88%, which looks like to be on the higher end from what I've seen in our coverage. All that said, is it fair to say, especially with rate cuts likely on the horizon here, that the money market deposit bucket is likely near a peak in terms of yield? And I guess piggybacking off that thought, how much of your deposit base is indexed and would potentially immediately reprice downwards with a move in short-term rates? Thank you.

It's a relatively small portion that is indexed. We just started a program, I guess in the last quarter or so, and limited it to certain customer segments. So we're being very watchful of that. Obviously, given the fact that the alternatives out there in the CD market have a five handle, we're very, very happy to get a three handle in money markets, and that's growing.

Okay, I appreciate that. And just one more here. Shifting onto fees, just wondering kind of what is the outlook here on the back-to-back loan swaps? I see that the pipeline looks like it was down with the recent move in rates. So where could we see that line item normalized down to in 2024? Thanks.

I think customers in general are a little bit on the sidelines as they are – the uncertainties and possibly the expectation of rate decreases are still out there and swirling in the market. So depending upon how quickly the Fed starts to move, we may see the more near-term jump in back-to-back swap activity. We’re very, very successful in this area in 2023, but it clearly is an area that is driven by expectation of rate movements at any given point in time. So we have the product, we can turn it on very, very quickly in the event that rates are in a favorable position, but given expectations that rates may be coming down, some borrowers are just kind of holding tight at this point in time.

Okay, I appreciate all that color. That covers it for me. I'll step back into the queue. Thanks everyone.

Thank you.

The next question is from Chris O'Connell with KBW. Please go ahead.

Hey, good morning. Chris.

Just wanted to follow-up on one of the comments in the prepared remarks. I think it was for each 25 basis point reduction in rates is an impact of $1.4 million on the annual NII. That's a positive impact, correct?

Correct, and that's assuming there's no lag or 100% beta in the deposit repricing.

Got it, but it is considering the impact of the swaps, right?

Yes.

Great. And then, if you guys have, like are getting into 2025, I know there's not a ton maturing in 2024, but can you remind us of just the maturity schedule of the funding side swaps?

The funding – in 2025, about $400 million I think matures in 2025.

Got it. So, I guess what I'm getting at… [Multiple Speakers]

Well clearly, I think the general comment, and we may be a little off on the number, but the general comment is we're going to have a bigger opportunity in 2025 to manage asset versus liability sensitivity, because we do have a fair number of swaps coming off.

Yeah, I guess that's what I was getting at, is like that's probably one of the arrows in your guys' quiver that you have over time to maybe increase liability sensitivity if it becomes certain that the Fed is going to be consistently cutting.

Correct. That's a good statement, Chris.

Great. And then, I know you guys gave a lot of good color on the expenses and the relative change from in the past. For the overall, just cadence, is there still going to be like a fairly sizable drop-down in the Q1 to Q2 rate? And then, usually it's fairly flattish after that.

So, we expect the seasonal expenses in the first quarter, Chris, to be about $2 million versus a little over $4 million in the first quarter of 2023. But yes, that $2 million will then start to -- will fall off in the subsequent quarters of 2024.

Great. And that's all I had for now. Thank you.

Great, thanks Chris.

Thanks, Chris.

The next question is from Manuel Navas with DA Davidson. Please go ahead.

Good morning.

Hey, good morning.

Pre-payment penalties were a little bit elevated in the fourth quarter. Any color there? And do you have any early indications of where they could land in the next couple of quarters? Do you have any sightline to that?

They were elevated in the quarter. We had a couple of large loans that had swaps associated with them pay off. We're seeing pre-payments about $500,000 to $750,000 would be a normalized rate running forward.

Okay, and then the color on the CD repricing, you had current CD rates around 5 to 5.45. That's your CD rates. What is kind of the high in the area?

5.50-ish.

Okay, so that's why it's so easy. You generally can keep them, because you're right where the market is.

Right in the ballpark.

We'll give you an update on the swap maturities. There are about $325 million of swap maturities taking place in 2025.

Okay. I know your guidance kind of encompasses the swaps, but is there – if you're just looking at the swaps and you have some rate cuts, where does the net benefit move to? Like right now the net benefit's like 2.56%. If there's a 25 basis point cut, where does it move to?

We had the $1.4 million on a 25 basis point cut.

Assuming 100% beta.

Okay, so you just keep it on the overall guidance. All right, and then any shift in the buyback appetite?

No, not really. We continue with our capital plans. We've always had it that first we want to invest profitably into the company; second, return through dividends; and third, through the buybacks.

Okay. I appreciate the comments. Thank you.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Buran for any closing remarks.

Thank you, operator, and thank you all for attending the conference today. We look forward to presenting to you at the end of the second quarter, and as always, if analysts have any additional questions, we'll make ourselves available. Thank you very much.

Thank you.

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