First of Long Island Q3 2023 Earnings Call Transcript

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October 27, 2023

There are 5 speakers on the call.

Operator

Welcome to the First of Long Island Corporation's Third Quarter 2023 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer Jay McCombly, Chief Financial Officer and Janet Rennell, Chief Risk Officer. Today's call is being recorded. A copy of the earnings release is available on the corporation's website at fnbli.com and on the earnings call webpage at https:www.cstproxy.com /fnbliearnings2023/q3. Before we begin, the company would like to remind everyone that the call may contain certain statements that constitute forward looking statements made under the safe harbor provisions of the U.

Operator

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.

Operator

Investors should also refer to our 2022 10 ks filed on March 9, 2023, as supplemented by our 10 Q for the quarter ended March 31, 2023, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. I would now like to turn the call over to Chris Becker.

Speaker 1

Thank you. Good afternoon, and welcome to the First Gulf Long Island Corporation's earnings call for the Q3 of 2023. I'm pleased to report That 3rd quarter net income of $6,800,000 and earnings per share of $0.30 were consistent with the prior quarter. Most importantly, our net interest margin only decreased 4 basis points from the previous quarter after averaging declines of 27 basis points over the prior three quarters. Assuming the Fed is done raising short term rates, which may not be the correct assumption.

Speaker 1

Internal projections anticipate that the margin should bottom out over the next two quarters. Average total assets, average total loans and average total deposits all increased when comparing the Q3 of 2023 to the linked quarter. These averages All decreased during the Q2 of 2023 after the shock of some large regional bank failures. Our wholesale funding, consisting of Federal Home Loan Bank borrowings and broker deposits, remained consistent from the end of the second quarter to the end of the third quarter. Overall, wholesale funding is down $28,000,000 from the prior year end.

Speaker 1

Commercial customers continue to consider higher yielding options such as short term treasuries for funds in excess of the normal operating needs. Consumer customers looking for higher rates are generally satisfied with our certificate of deposit offerings, but some have moved money to our 1st investments program or other non deposit investment providers. While our banking teams have been able to replace funding that has moved out of deposit accounts with new relationship based deposits, Net growth remains challenging in the current environment. Expense management is a continued focus. We recently announced another branch consolidation coming in December of this year.

Speaker 1

Our Manhasset branch is closing and consolidating into our Great Neck branch, which is approximately 2 miles away. This branch closing will be the 15th under our ongoing branch optimization strategy. In prior consolidations, we retained over 90% of the deposits. Earlier this year, We adjusted branch hours including eliminating Saturday hours in several branches that did not have justifiable activity. Staffing levels are being adjusted down through attrition based on these changes.

Speaker 1

We recently announced a new co marketing referral agreement with Rocket Mortgage, the nation's leading mortgage lender. This partnership is a timely response to industry changes in demand, while still providing our 1 end clients with best in class solutions to meet their mortgage needs. As a result of this new relationship, we eliminated our residential mortgage department, saving nearly $1,000,000 in annual expense going forward. Should the bank want to add residential mortgages to its portfolio, That can be done through purchases. We previously reported the sale of 6 buildings in Glenhead, reducing our future occupancy expense and the large majority of our rebranding expenses are behind us.

Speaker 1

The expense savings just outlined should offset pressure to maintain competitive salaries and benefits, Upgrade Technology to meet customer expectations and protect against cybersecurity threats, pay rising corporate insurance rates, as well as other general and administrative expense increases due to higher inflation rates over the past 2 years. Our planned technology upgrades for this quarter have been postponed until 2024, but when implemented will bring additional back office While we are just beginning our 2024 budget process, our goal is to reduce non interest expenses below 2023 actual. We will provide more specific guidance on 20 24 non interest and Chief Executive Officer in our year end earnings call. I will now address the upcoming executive management changes announced in our earnings release. Jay McCone has been an excellent Chief Financial Officer for the company over the past 4 years.

Speaker 1

While the Board of Directors and I had all the confidence in the world in Jay when we named him to the position in January of 2020, He still exceeded our expectations, especially as we have navigated through one of the most difficult banking environments in over 40 years. Unfortunately, that environment along with other personal reasons have caused Jay to rethink his desire to continue in his role as our Chief Financial Officer. We are grateful for all he has accomplished for the company and that he has agreed to continue in a consulting role through at least March of 2024, but with no defined end date. On the positive side, we have a strong executive bench and we'll move forward without missing a step. Janda Brunnell is highly qualified to take over the Chief Financial Officer role.

Speaker 1

She has been a trusted executive partner of mine for over 20 years, both here and at 2 previous institutions, including as my Chief Financial Officer when we worked together at Bridge Bancorp. In her role as the Chief Risk Officer, Janet works closely with Jay and other executives. As a Senior Executive Vice President and our next Chief Financial Officer, he will continue to build on Jay's advancements and move the company forward. Tan Ansari will take over as our new Chief Risk Officer. Tan works closely with Janet on an everyday basis and over the past 8 years also worked directly with me.

Speaker 1

As a seasoned banker and our in house counsel, he is well prepared for this opportunity and excited to take on the additional responsibilities. Chris Hilton is a key leader in our transformation to make the bank more commercially focused. Under his guidance, the bank improved organic growth in our small and midsized business relationships, resulting in an improved loan product mix and funding position. With this well deserved promotion to Senior Executive Vice President, He will be assuming additional sales responsibilities over digital banking and cash management. With that, I would like to have Janet Grinnell make a few comments.

Speaker 2

Good afternoon. While I have not had the pleasure of addressing the investor community Since joining the company as Chief Risk Officer in mid-twenty 19, I work closely with Chris and Jay commenting on the press releases and other investor communications reviewing our SEC filings and enhancing our control environment. My banking experience started in the branches years ago. Subsequently, I transferred into the loan back office, Later became a small business lender and after a stint with KPMG to obtain my CPA license, I returned to banking mainly in treasury and finance. I spent years as a Chief Financial Officer in Banking and for 3 years also served as the Lead Financial Officer in 2 different municipalities.

Speaker 2

When Chris contacted me about moving into the Chief Risk Officer position at First of Long Island, it was both an opportunity and a challenge. The CRO views the company through a different lens and the role allowed me to use my diverse experience to augment positive changes. Returning to the CFO role now will be another challenge especially in the current environment. In my years as the CRO here at the bank, I became currently familiar with our risk appetite, corporate governance and bank wide processes. Jay and I will work together closely these upcoming weeks and he leaves me with a strong team to further support the transition.

Speaker 2

I am confident in my ability to also develop strong and mutually and respectful relationships outside the bank with analysts and the investor community. Jay Marconi will now discuss our financial results for the quarter. Jay?

Speaker 3

Thank you, Janet. Good afternoon, everyone. Adding to Chris' comments on the margin, the bank's net interest margin was 2.13% in the current quarter compared 2.17% in the Q2 of 2023. The 4 basis point decline was a significant improvement from margin declines of 40 basis points and 17 basis points in the 1st and second quarters of 2023 respectively. The slowdown in margin compression also resulted in a much smaller decline in net interest income up $409,000 or 1.9 percent when compared to the linked quarter.

Speaker 3

Quarterly net income of $6,800,000 was down slightly from the Q2 of 2023 has a credit provision for credit losses of $171,000 a decline in non interest income expense of $350,000 and lower income tax expense, partially offset lower net interest income and non interest income. The company's ROA and ROE were 63 basis points and 7.3.4 percent respectively for the quarter. The decline in net interest income continues to be fueled by the Federal Reserve Bank's aggressive monetary policy, which has increased short term rates by over 5 50 basis points. Yield curve has been inverted for over 15 months making it difficult for the bank to utilize its excess capital to increase net interest income by adding leverage to our balance sheet. Bank's quarterly non interest income was $2,200,000 which is consistent with prior guidance in prior quarters.

Speaker 3

This current run rate is anticipated to continue in the 4th quarter. The bank's non interest expense was $16,100,000 during the Q3, a decrease of $353,000 when compared to the linked quarter. We expect non interest expense to remain between $16,000,000 to $16,500,000 in Q4 of 2023. As Chris noted in his comments, management is ever mindful of expense control given the current environment and the bank is making every effort to lower the run rate as we move into 2024. Bank's efficiency ratio was 65.3 percent for the 9 months ended September 30, 2023, up from 49.7 percent in the prior year period.

Speaker 3

The increase is mostly attributable to a decline in net interest income. The bank's ratio of non interest expense to average Total assets remained flat at 1.55 percent for the 9 months ended September 30, 2023, 2022 respectively. Thanks. Effective tax rate decreased to 11.5% in the Q3 of 2023 from 18.01% in the Q3 of 2022. Decline in effective tax rate is mainly due to an increase in the percentage of pre tax income derived from the bank's Real Estate Investment Trust and bank owned life insurance.

Speaker 3

We anticipate our effective tax rate for the full year of 2023 to be between 11.5% to 12%. On the asset side of the balance sheet, The bank continues to deploy approximately $90,000,000 in quarterly cash flows from our securities and loan portfolios into new assets at current market rates. The bank purchased approximately $35,000,000 mortgage backed securities with yields of approximately 6% during the Q3. The bank also originated approximately $50,000,000 in mortgage loans with a gross weighted average of 6.23 percent for the quarter. The bank has approximately $840,000,000 or 20 percent of interest earning assets maturing and repricing within 1 year, but remains liability sensitive.

Speaker 3

On the funding side, the balance sheet of the balance sheet, total deposits remain very stable at approximately $3,400,000,000 in 2023, but the mix of deposits has changed with approximately 136 moving from non interest bearing demand deposits to interest bearing deposits as customers seek higher rates. The shift increased the average cost of funding on interest bearing deposits by 153 basis points to 2.58 percent when comparing the Q3 of 2023 to the Q4 of 2022. The bank's cumulative deposit beta on non maturity deposits Was approximately 38% through September 30, 2023, which is close to our historical average in a rising rate environment. Given that both the pace and size of increases, our deposit betas could be higher when this rise in rate cycle finally ends. Bank's total wholesale funding including broke deposits was $559,000,000 or 13% of total assets on September 30, 2023 And had a weighted average cost of funds of 4.53 percent and average maturity of 8 months.

Speaker 3

In addition, the bank had $366,000,000 in retail deposits that mature over the next 15 months with an average cost of funds of 4.08%. As this funding matures in coming quarters, It could result in some additional upward cost pressure in each of these categories. However, management believes additional interest expense from liability repricing largely offset as interest income from assets repriced lead to margin stabilization. The bank's uninsured and uncalarized deposits remained stable at 38% of total deposits on September 30, 2023, same percentage as June 30, 2023. Bank continues to have ample liquidity.

Speaker 3

We maintain $1,300,000,000 in collateralized borrowing lines with the Federal Home Loan Bank of New York and the Federal Reserve Bank. We also had $271,000,000 in unencumbered cash and securities. In total, we have approximately $1,600,000,000 of available liquidity at the end of the quarter, which is well in excess of our uninsured and un collateralized deposits.

Speaker 4

Our

Speaker 3

capital position remains strong with a leverage ratio of 10% compared to 10.1% on June 30, 2003. The bank did not repurchase any shares during the Q3 of 2023. We still have approximately $15,000,000 authorized under the most recent Board approval stock repurchase plan. Bank declared its quarterly class dividend of $0.21 per share on September 28, 2023. With that, I turn it back to the operator for any questions.

Operator

Thank you. Our first question for today comes from Alex Twerdahl of Piper Sandler. Alex, please proceed with your question.

Speaker 4

Good afternoon.

Speaker 1

Good afternoon, Alex. Hi, Alex.

Speaker 4

Yes. First off, Jay, it's been a pleasure working with you over the last couple of years. Wish you the best in the next chapter Good for you. And Janet, I look forward to meeting and working with you over the next in the future from now.

Speaker 3

Thank you. Yes. Thank you, Alex. It's been a pleasure working with you as well and attending some of the conferences and so forth. Thank you.

Speaker 4

When I look at the I guess some of the things that you're doing, Some of the reorganization with the Rocket Mortgage and I'd say in the loan growth numbers this quarter, I was just can you just talk about your appetite to grow Assets and loans particularly over the next couple of quarters. I know that funding is obviously a challenge. I'm just Trying to figure out if the plan should be to grow through it or if it's kind of just turning in place or how we should be thinking about that?

Speaker 1

I think certainly for now kind of staying in place. And so it's just largely because of The yield curve. If you're able to bring in new relationship deposits that have a good blended yield low enough, It certainly makes sense to grow. But the challenge remains as I said in my comments, you do have Depositors that there's a strong relationship, but they have some excess funds and they're saying, well, I can get 5.5% in short term treasury. I'm going to move some of the excess funds into that.

Speaker 1

And we're not really interested in paying 5.5% on deposits. So you lose some money there. And It's difficult with some of those movements to grow. And again, just repeating kind of what I said earlier. Really for the foreseeable future next quarter or 2, it's probably going to be Similar to what you've seen in the past quarters where you might have a little bit of growth 1 quarter, a little bit of contraction 1 quarter, but fairly flat as far as Total Assets.

Speaker 3

Alex, Phil, when you look kind of on a linked quarter, our ROA has kind of stabilized at about 60 basis points ROE in the mid-seven range and so forth. So we really want to kind of call it stabilization. And until we start seeing a positively Slope yield curve, then we can take advantage of some of our excess leverage ratio at 10%. We don't want to Leverage up at such a low margin right now or low spread in the curve.

Speaker 4

Yes. It makes sense. I guess, I mean, sort of on the same lines and maybe this comes a little bit out of left, but I'm just I know that SEIC is currently selling some loans in your market. You guys are kind of uniquely positioned with Keith and some of the categories in which they might be selling some of these pools. And who knows what the pricing could look like, but there's some pretty interesting structures.

Speaker 4

I mean is participating in something like that something you'd ever consider doing?

Speaker 1

We would consider purchasing assets Again, if the spread was reasonable, if we have to go out and purchase something at a 50 basis point spread, That's not really attractive to us. If you can get something obviously in line with the current margin or ideally better than your current margin, We absolutely would consider something like that.

Speaker 4

Okay. Can you I think in the past you and Jed as you mentioned in your prepared remarks the yield on new production during the quarter. Can you just let us know sort of where the pipeline is and how the loan yields have progressed over the course of the quarter?

Speaker 3

Yes. It's about $126,000,000 of pipeline, predominantly commercial with us Stepping out of the residential business. We'll still purchase residential mortgages, but not originate. And with the yield curve steepening in the 5 year 10 year getting up To the $4.80 range and we originate with a spread, you're starting to see those yields be in the high 6s to low 7s. On the flip side, you're starting to see demand really kind of come down as you get into the 7 hands as Obviously, there's no refinancing activity going on.

Speaker 3

It's new purchases and those people looking for new purchases are getting a little bit cold feet in the 7 handles.

Speaker 4

Yes. Okay. Makes sense. And then you mentioned that you guys are still liability sensitive. I mean, is the goal over time to become more neutral?

Speaker 4

And I know you did a little balance sheet restructuring, which I think looking back was a pretty good move back earlier this year. Are you looking at Additional similar types of transactions to help boost NIM in the future?

Speaker 3

Right now, probably not. We felt those two moves, the securities restructuring and the swap where we converted $300,000,000 of residential to floating We're timed right. We do feel that we're kind of in the 8th 9th inning of this rising rate cycle and we're going to kind of take it quarter by quarter. We think NIM has stabilized. We think a lot of our wholesale for the most part have repriced and take quarter by quarter and see what the Fed does before we make any decisions to do any larger type of restructurings or additional swaps.

Operator

Our next question comes from Chris O'Connell at KBW. Chris, please proceed with your question.

Speaker 4

Hey, good afternoon. I just want to echo the same sentiment. It's been great working with you, Janet, and wish you all luck in your next steps. And look forward to working with you Janet.

Speaker 2

Thank you.

Speaker 3

Thank you, Chris.

Speaker 4

So, yes, I was hoping to start off on the margin. I mean, obviously, the compression this quarter was a lot less onerous In the past couple, I think in prior quarters you've sometimes given the monthly margins. I was wondering if you had that for the July, August, September periods?

Speaker 1

We do. In July, it was 216. In August, it was 220. In September, it was 202. 202 is A little obviously lower than you want to see, but we did have some prepayments on some of the SBA floaters we have in Portfolio, which caused that yield to be kind of considerably lower that month, which put on pressure in that 30 day month.

Speaker 1

And that's the other issue. In the 30 day month, our margins Throughout the year in a 30 day month, they always are a little bit lower. So we don't want that 202 to be overly indicative of going forward, but to be seen.

Speaker 4

Got it. And I know you guys mentioned the margin Hoping to bottom all else equal on rates here over the next couple of quarters. Any sense as to the magnitude of the pressure of where that could bottom either just on a Trajectory for Q4 or kind of the ultimate level of bothering?

Speaker 1

It's been hard as you know Chris throughout this cycle to try to give very good guidance on the margin. And I think you've seen that There's been a lot of misses on that throughout the year for many banks. But what we're seeing as we're looking at our internal projections is that so much of our liability side has repriced. So even if there's still some small repricing in things that have already repriced, but maybe come up again over the next few quarters, There's obviously not as much upside from where they are now. So that's being fully priced in.

Speaker 1

Now we see the asset side those $90,000,000 in quarterly cash flows that Jay talked about. We see those Starting to be able to offset the liability pricing and that's why we kind of see the margin bottoming out over the next two quarters. What that exactly means? Is it the same in the Q4, in the Q1? Does it bottom out in 1 or the other?

Speaker 1

It's hard to get that specific on it, but we do see over the next two quarters we see that trough. And Then the liability side assuming again the Fed stops with their rate increases, we see the The ability side being done and the asset side little by little can start to tick up. And obviously, If the Fed makes some moves in the other direction and we get some steepness in the yield curve that's when you'll see it turn around more rapidly. So it's kind of difficult to tell where that bottom is. Best guess scenario and you hate It's a guess, but looking at the best data we have at this point and using certain assumptions, Could it go down and bottom out over the next two quarters another 5, 10 basis points, Maybe a little bit more.

Speaker 1

It could. It's just it's very difficult to tell. But We just have to kind of see what the Fed does and what the market does.

Speaker 4

Yeah. No, I hear That's helpful though. I appreciate it. I know it's a difficult thing to discern at this point. And then just quickly, so for that, the tax rate for this year, Obviously, they're at the 11.5% to 12% range.

Speaker 4

Is that where you think it will remain next year? Or should it tick up a bit?

Speaker 3

Yes. I'm kind of working on that forecast now and have to go through that. I mean preliminary, I would say, probably Budget between maybe 13% to 14%, because as we kind of come out of this and hopefully yield curve steepens, We can start to look for expanding margins if you get a steepening yield curve. But I would keep it around that 13%, 14%.

Speaker 4

Okay, great. And you mentioned in the prepared remarks You pushed out some of the planned IT upgrades into 2024 that can bring inefficiencies. Can you just provide us with a little bit of color as to what those upgrades are and how you guys And you have plan to bring those on.

Speaker 1

Sure. We've been working on a core conversion which also Plans to upgrade our business online banking and our branch teller and platform systems. And along with that in the back office, our item processing is would be outsourced. So the combination of all those things we believe certainly in the back office with the INAP processing brings back some about some staffing efficiencies. And we just felt that we were this is a long project.

Speaker 1

These types of projects go on 18 to 24 months. And as we were getting closer to a target date, we felt working with our partner that It would be best to put it off a few months. So we're still evaluating. We haven't picked another date yet, but we anticipate that To be done in early 2024.

Speaker 4

Great. And then on the credit side, I mean, everything on your individual metrics looks fantastic, especially relative to the industry, which is seeing a couple of issues pop up this quarter. How are you guys seeing your credit on a go forward basis and things in your market? Is there any cracks anywhere? Anything that you're concerned about?

Speaker 1

No, we're not concerned with our portfolio as a whole. I think In conversations with customers and in the market, you're starting to hear some things where maybe things are slowing down for certain I think people get a little bit about nervous about what's going on in the economy and also The world in general. But obviously, our numbers are not showing any specific problems like that, Any numbers ticking up. But even with us, there's always a couple of loans on the problem loan list that something Could happen, but nothing in a big sense that's concerning us.

Speaker 4

Got it. That's helpful. Okay, great. Thank you for taking my questions.

Speaker 1

Thanks, Chris. Thank you.

Operator

Thank you. This concluded our question and answer session. I'll turn the floor back to Chris Becker to provide some final closing comments.

Speaker 1

Yes. Thank you all for your attention and participation on today's call. Janet, Ronnell and I will look forward to talking to you at the end of the year. Have a good rest of the day.

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Earnings Conference Call
First of Long Island Q3 2023
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