First of Long Island Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 5 speakers on the call.

Operator

Welcome to the First of Long Island Corporation's First Quarter 2023 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer and Jay Mcconi, Chief Financial 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 dotcom/fnbliearnings/2023/q1. Before we begin, the company would like to remind everyone that this 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 9th, 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 floor over to Chris Becker.

Speaker 1

Thank you. Good afternoon, welcome to the First of Long Island Corporation's earnings call for the Q1 of 2023. As mentioned in my remarks at our recent Annual Meeting of Stockholders. 2023 is proving to be most challenging. After a decade of short term rates near 0 and 5 10 year treasury yields averaging 1.64% and 2.16%, respectively.

Speaker 1

The Fed has driven short term rates up to 5% over the past 12 months, while 5 year and 10 year treasury yields are in the mid-3s. The margins of community and small regional banks Generally do not respond well to a 475 basis point rate shock and big yield curve inversions. Add concerns over recent bank failures and the cost of interest bearing liabilities is escalating rapidly and margin compression Is generally beyond analyst expectations. With that backdrop, I am pleased to report that our customers Have remained loyal and we have ample liquidity at March 31, 2023. Throughout the turmoil of the Q1, We are proud that total deposits have held steady ranging from $3,400,000,000 to $3,500,000,000 during the quarter and averaging $3,470,000,000 All numbers are in line with total deposits at year end 2022 with only a $66,000,000 reduction.

Speaker 1

Checking deposits still represent 35% of total deposits and we were able to maintain our deposit levels without any increase in broker deposits and minimal increases in CDs. When we look at deposit betas internally, we focus on cumulative non maturity interest bearing deposit betas. That is the cumulative change in savings, NOW and Money Market deposits compared to the cumulative change in Fed Funds. Historically, in rising rates, these deposit betas have been plus or minus 35%. Through the end of the Q1, these deposit betas in the current rate cycle are approximately 28%.

Speaker 1

One interpretation could be we are nearing the end of repricing deposits higher. However, our historical tracking of deposit betas does not include a near 500 basis point rate increase Over 12 months with 4 consecutive 75 basis point moves. As a result, We cannot be totally confident that our historical betas will hold in this current rate cycle. Based on the current pace of deposit rate increases, deposit betas could easily exceed 40%. The bank's uninsured and uncollateralized deposits were 38% of total deposits at March 31, 2023.

Speaker 1

Our uninsured and uncollateralized deposit levels have been consistent and trending lower over the past couple of years. Many peers that operate in our market have similar ratios of uninsured and Uncollateralized Deposits, mainly from working with businesses that need amounts greater than $250,000 in their accounts to operate and meet payroll. We believe there is a clear distinction between being a relationship oriented commercial bank like ours with business customers needing a few $1,000,000 to operate their business versus a bank that takes in large concentrations of private equity funds earmarked for start ups. Our monthly net interest margin continues to be impacted by the current environment. Recent monthly margins have been 2.66% in December, 2.45% in January, $225,000,000 in February $2.34,000,000 in March.

Speaker 1

February's numbers are always lower due to the short month. With the Fed still talking about the possibility of higher rates and or short term rates remaining high for an extended period. Our cost of funds should continue to outpace any increases in average yield on earning assets for the remainder of 2023. Although, Jay will take you through some specifics that could slow the pace of decrease in the net interest income throughout the remainder of the year. Our loan pipeline was $96,000,000 at March 31, 2023.

Speaker 1

Loan demand was weaker during the Q1 and our focus this year is skewed towards commercial relationship lending and related deposits. Borrowing at 5 plus percent to put on commercial or residential mortgages at 5.5% to 6% is not overly enticing to us, especially on the residential side when they will just refinance immediately after rates fall. The reduction in C and I loans during the quarter Was related to lower line utilization as customers have reacted to higher interest rates in the way they operate their business. New opportunities have increased with the recent disruption in the market. As expected from First of Long Island, credit quality continues to be excellent With non accruals again at 0 on March 31, 2023.

Speaker 1

Jay McCone will now take you through the Q1 results. Jay?

Speaker 2

Thank you, Chris. While the bank remains liability sensitive at March 31, 2023. Management proactively completed 2 balance sheet reposition transactions during the Q1 To help us reduce our sensitivity to rising interest rates. In March, the bank entered into an interest rate swap to convert $300,000,000 of fixed rate residential mortgage loans to floating rate for a period of 3 years. The bank will pay a fixed rate of 3.82 and received a floating rate based on the SOPR overnight rate.

Speaker 2

This transaction was immediately accretive to annual interest income by approximately 2,900,000 if rates remain unchanged. The bank also sold $149,000,000 in fixed rate municipal securities, Earning a tax equivalent yield of 3.32 percent and purchased $135,000,000 of floating rate SBA securities projected to yield 5.38 percent at the time of purchase. As noted, the bank recognized a $3,500,000 pretax loss and expects the earn back to be 1.2 years. This transaction was also immediately accretive to annual interest income by approximately 2,800,000 The Q1 results do not reflect a full quarter's benefit of these transactions since they were executed close to the end of the quarter. These transactions presently help increase interest income and will slow the pace of decline in net interest margin and income.

Speaker 2

Reversing the decline in net interest income and margin will take time for assets repricing to catch up to liability repricing or until the Federal Reserve Bank reduces short term rates. The interest rate swaps and security repositioning transactions results in loans and security repricing Within 1 year, nearly doubling during the quarter to $813,000,000 or 21% of total securities and loans at March 31, 2023. The bank securities portfolio was $655,000,000 and comprised 16% of total assets at the end of the quarter. The portfolio has a duration of approximately 3.6 years. Approximately 36% of the investment portfolio is comprised of floating rate assets.

Speaker 2

Bank has the $135,000,000 in SBA floating rate securities with the current yield as of the end of the month of 5.77% That repriced quarterly off the prime rate and represent 21% of the investment portfolio. The bank also has $116,000,000 in floating rate corporate bonds With a current yield of approximately 3.84 percent that repriced quarterly off the 10 year swap rate. Thanks. Government agency fixed rate mortgage security portfolio including CMOs was $260,000,000 and comprised 40% of the investment portfolio. This portfolio has a current yield of approximately 1.85%.

Speaker 2

The bank expects approximately $50,000,000 of cash flows from the investment securities portfolio in 2023 who will look to reinvest them in higher yielding agency mortgage securities that provide some lockout protection when rates eventually decline. The remaining 24% of the portfolio is invested in tax exempt municipal bonds that currently yield 3.84%. Our $3,300,000,000 loan portfolio is comprised of $1,900,000,000 in commercial real estate loans, dollars 1,200,000,000 in residential mortgages and $197,000,000 in commercial and industrial loans. Approximately $560,000,000 or 18% Will reprice by March 31, 2024, of which $300,000,000 is related to the interest rate swap transaction previously discussed and $115,000,000 in loans that repriced on a monthly basis such as home equity and C and I loans. We expect approximately $75,000,000 of cash flows from the loan portfolio per quarter.

Speaker 2

The bank expects an additional $178,000,000 or 6% of the loan portfolio from approximately 3.97 percent to 6.62 percent from March 31, 2024 to March 31, 2025 based on current market rates. The bank had $383,000,000 in outstanding Federal Home Loan Bank advances With a weighted average cost of 4.31 percent and an average maturity of 1.3 years at the end of the quarter. The bank has one remaining advance that will mature in 2023. Is for $50,000,000 with the current cost of funds at 2.62 percent and will mature on June 1, 2023. Federal Home Loan Bank advances decreased $28,000,000 during the quarter.

Speaker 2

The bank has Broker time deposits that totaled $176,000,000 or 5 percent of total deposits on March 31. That number is the same as year end 2022. The broker time deposits have a weighted average cost of 3.12% and an average maturity of approximately 6 months. $85,000,000 or 48 percent will mature in the Q2 of 2023 with an average cost of funds of 2.61%. The current reinvestment rate for both Federal Home Loan Bank advances and broker time deposit market is currently between 5% to 5.25%.

Speaker 2

We expect that a significant portion of our current wholesale borrowings, meaning the Federal Home Loan Bank advances and broker time deposits will reprice the current markets by Rates by the end of Q2 2023. With regard to liquidity, the bank maintains over $1,500,000,000 in available collateralized borrowing lines Federal Loan Bank and Federal Reserve Bank. In addition, the bank had over $143,000,000 in cash and unencumbered securities available to be pledged. This liquidity exceeds the $1,300,000,000 in uninsured and uncolarized deposits that the bank held at March 31. The bank had net income of $6,500,000 and earnings per share of $0.29 for the Q1 of 2023 Compared to $12,100,000 or $0.52 per share for the same period in 2022.

Speaker 2

Bank's return on assets and equity were 0.62 and 7.09 respectively. The key drivers that caused net income to decline were a decrease in net interest income of $4,400,000 and the loss on sale of securities of $3,500,000 These two items were partially offset by a decline in income tax expense of $2,500,000 A decrease in the provision for credit losses of $1,500,000 The decline in net interest income of $4,400,000 Was due to the Federal Reserve Bank increasing short term rates by over 4 75 basis points in the inversion of the yield curve. The spread between the 3 month and 10 year U. S. Bond is currently inverted over 150 basis points, a level not seen in over 40 years.

Speaker 2

The pace and magnitude of these rate increases has caused the cost of our deposits and wholesale funding to increase at a faster pace than the yields on our interest earning assets. Bank's interest expense increased $9,400,000 when compared to the prior year quarter and was only partially offset by a $5,000,000 increase in interest income. Our cost of interest bearing liabilities increased to 1.96% in the current quarter, an increase of 142 basis points, Yield and interest earning assets increased 35 basis points. The bank's quarterly net interest quarterly non interest income excluding loss on sale This result was consistent with expectations and this run rate should continue throughout 2023. Also consistent with expectations, the bank's non interest expense was $16,500,000 during the Q1, an increase of $802,000 from the Q1 of last year.

Speaker 2

The increase was primarily due to an increase in rent expense related to the bank's corporate headquarters facility and higher FDIC insurance expense attributable to higher assessment rates. We expect non interest expense to be $16,500,000 to $17,000,000 per quarter for the remainder of 2023. Management is very mindful of expenses during the current environment and we'll make every effort to keep the run rate towards the lower end of this range in 2023. Our capital position remains strong with a leverage ratio of 9.94 at March 31, 2023 and an increase of 11.83 at December 31, 2022. Cumulated other comprehensive loss net of tax improved by $3,800,000 or 5.9% since year end 2022.

Speaker 2

The bank did not repurchase any shares during the Q1 of 2023 Future repurchases will be decided based on maximizing shareholder value. We still have approximately $15,000,000 authorized under the most recent Board approved stock repurchase plan. The Bank's effective tax rate declined to 9.1% in the Q1 of 2023 from 20.6% when compared to the Q1 of 2022. The 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, Municipal Securities Portfolio and Bank Owned Life Insurance. We anticipate our tax rate for 2023 to be between 10% to 12%.

Speaker 2

With that, I turn it back to our operator for questions.

Operator

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

Speaker 3

Hey, good afternoon, guys.

Speaker 2

Hi, Alex. Good afternoon, Alex.

Speaker 4

First off, Chris, in your prepared remarks,

Speaker 3

Tunies that might be presenting themselves, I was hoping you could expand on that comment just a little bit more.

Speaker 1

I don't have Quantum Fiber numbers on the loan side. I mean, we've brought in approximately $15,000,000 in new deposits From Signature Bank and First Republic specifically. We've been tracking them. And we have opportunities on the credit side, lines of credits, term loans and such that they're looking for a new bank. So but I don't have total numbers on that.

Speaker 3

Okay. And when you say looking for a new bank, you're talking customers, loan officers, all of the above?

Speaker 1

We are talking to both people and customers.

Speaker 3

Okay. And then, Jay, you went through a lot of very helpful statistics on the repricing of assets and liabilities over the next 12 months. You went a little bit fast. I'm certainly going to look back at the transcript for all the details, but kind of boiling it down To the NIM, is it safe to assume the starting point is really that $234,000,000 from March plus about, I think it was 14 basis points from the deleveraging in the Swap transaction, so really close to $250,000,000 And then it sounded like pressure was going to continue as those liabilities, especially the wholesale stuff We continue to reprice during the quarter. So when you think about the outlook from here, can you just help us Boil it down to sort of what the near term expectation for the NIM is in the second quarter.

Speaker 2

Yes. I mean, I think You're right on the 2 transactions. I mean, like we said, it's about $5,700,000 So it's probably like $1,400,000 a quarter If interest rates stay flat, right, for the swap and the SBA flow, if rates go up, obviously, it'd be a little bit more income there. And then I tried to provide you with the wholesale, the Federal Home Loan Bank and the brokers because when you look at that, we feel that when Those reprice what I kind of talked about when you read the transcript. Your wholesale for the most part will be pretty much repriced to market by the end of the second quarter With the full run rate reflected in Q3.

Speaker 2

Obviously, if rates continue to go up, they could trend a little bit higher, but the big Bulk of the increased stock repricing from 1 to 4.5 has kind of occurred and kind of got that behind us. So to your point, it then leaves The non maturity deposits where we're kind of doing that on a customer by customer relationship. And it's just When you have deposits that are in the 25 basis points to 1%, customers are coming in with demands per treasuries and money market mutual funds, You take it each time we currently track our cost of funds on a daily basis and see Kind of steady increase and we can project it out, but we're just not comfortable providing further guidance on that. So we just feel that It's going to take a little while for, 1, when does the Fed pause? Is May done?

Speaker 2

Or the PCE just came out with higher rates, so they're talking already maybe Potentially June. So do we have 1 or 2? And the other one is the yield curve. Not a lot of people talking about the inversion, but we have plenty of capital. And one of the things To help alleviate margin compression is leveraging up the balance sheet, but with an inverted yield curve, it makes it very, very to do that because anything that you're borrowing against is at either the same rate or actually lower.

Speaker 2

So we're going to continue to kind of look each quarter At kind of things we did this quarter, a bunch of singles kind of look at our investment portfolio each quarter, See if there's anything we can do, small repositionings to get those closer and closer to market rates and so forth. We Still have the ability to do more floating rate assets, but we think that we're kind of in the 8th or 9th inning, so that if rates go down that that will kind of help It start to hurt. So we're trying to be a little bit more less liability sensitive and get a little closer to neutral. I do agree with what you said, 234, you put those additive and then you kind of have to kind of back out where we're seeing with the wholesale. And then again on the non maturity, it's just a little bit very hard to forecast where it's going to end.

Speaker 1

And Alex, as I stated in my remarks, I mean, we do feel that the our increase in the cost of funds is going to continue to outpace The yield on earning assets, which would lead to some further compression.

Speaker 2

Right. We also Alex, loans are down a little bit, but we also realize our pipeline is 96,000,000 And we understand, we want to see that pipeline from here going forward to the end of the year kind of be more flat to hopefully slightly up. And we do realize the need that like I talked about the MBSs and the CMOs that are yielding 185 that we have to take that cash flow, Get assets on in the 5%, 4.5%, 5% range with lockout because we do think Whether it's 6 months or 18 months that the yield curve would eventually steepen and because it always does and that the short end will come down. And we need to also take advantage of getting some higher yielding assets on the books. And like Chris said, we're trying to focus more on commercial type business that have prepayment penalties and investments that have lockout versus residential because we know that the residential portfolio Once rates come down, don't just refinance literally right away from you.

Speaker 2

So we're focused on the commercial business.

Speaker 3

Yes. Okay. That's all really helpful. First of all, Long Island historically has been very, very clean on credit and I don't say thrived because it's not necessarily the right word, but when other banks pull back, it's created opportunities for you guys. Would you say you're starting to see any other than the specific stuff you mentioned, Chris, from Signature and First Republic, Any additional opportunities on the commercial real estate side or multifamily side in New York City?

Speaker 3

Certainly, certain categories in the city have become a little bit more hot button subjects to investors. Are other banks starting to pull back that could create opportunities for you guys?

Speaker 1

We are seeing opportunities, but Unfortunately, because of the rates, sometimes The numbers don't work for us and sometimes they don't work for the borrowers. So because they might have to pay down their current Danny Bowens to refinance with us if they're coming up on a reset with another institution. So we're looking at a lot of opportunities, But sticking to our underwriting criteria and staying true to who we are, we're being very careful. So that is affecting obviously the pipeline, because even though we're looking at them, they're not looking at them and making the pipeline are 2 different things for us.

Speaker 3

Understood. Thank you for taking my questions.

Speaker 2

Thanks, Alex. Thanks, Alex.

Operator

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

Speaker 4

Hey, good afternoon. Just a little bit of a follow-up on the margin discussion. I understand the factors that are driving the pressure. Given the timing of the transaction late in the quarter and the timing of some of the wholesale repricing, Do you expect that the margin compression will be greater in 2Q or in the 3rd quarter a quarter over quarter basis.

Speaker 2

I'm not going to give actual guidance on it, but we do think Logically, as our wholesale kind of reprice to market and when I'm saying market, Chris, like we have stuff that's And repriced to, let's call it, $475,000,000 and then we have some stuff that might be on there at $185,000,000 So I'm saying that by the end of Q2, Everything has kind of repriced to call it the 4.75% to 5% range. So in Q3, you'll have a full run rate of wholesale at that kind of higher cost. And you would think that then the only thing you have to really kind of focus on is non maturity deposits Any DDA migration and you would think that that should start to slow down because you start to have it in your run rate. 2 things that happened Is the 4.75% to 5% current market 6 weeks from now or is it 5% 5.25%. I think when we all started at the beginning of this year, we thought the Fed was going to pause.

Speaker 2

Then we got a couple of bad inflation reports and they've kind of continued to go and we're starting to See maybe this year is going to be a 100 basis point increase by June 30. And again, it comes to steepness of the yield curve. The short end keeps going up 5, 5.25, the 10 year and the 5 year stay locked in at that 3.5 range. There are a lot of banks out there that are kind of trying to grow through this, putting on borrowings at 5% or 5.5% and loans or Securities of 5.5 with the hopes that rates then kind of go back and steepen and we think that's a prudent strategy To a point, you know what I mean? So you have to kind of balance that growth with where the Fed and we've been taking it cautious the 1st 2 quarters.

Speaker 2

So we can kind of get some guidance that the Fed has done and hopefully something with the state. So and that's why it's just very hard to provide any guidance. But High level, I would agree that it should slowly start to dissipate as the wholesale kind of gets locked in.

Speaker 4

Got it. And I think in your prepared remarks, you said there's about $50,000,000 of The securities cash flows for the remainder of 2023. Did you say that you were planning to reinvest those cash flows? Or do We plan to let those kind of roll off the balance sheet and help kind of keep the higher cost fundings lower.

Speaker 2

Yes. I think we're going to try to invest those into assets. I mean, we try to manage both. I think the first half and especially the first Anywhere we could raise liquidity keeping cash or pay down federal home loan banks to increase our lines that was really clearly the focus. Hopefully after Q1 things have calmed down and as we can I think it's kind of balancing that out, but definitely trying to get more Assets on at higher rates, the second half for the inevitable hopefully decline in interest rates?

Speaker 2

And then again, it's key that we try to put stuff on it as lockout That gives us maybe 2, 3 year protection. So it's not just funding costs getting cut that's increasing margin. It's also the fact that we put on Higher yielding assets that can kind of be locked in, so kind of balancing that. So I would think you'd start to see a little bit more asset flat or slight growth.

Speaker 4

Yes. Got it. And as far as share repurchases go On a forward basis, I mean, you guys have pretty robust capital levels here. It sounds like balance sheet growth is going to be Fairly flattish to slightly up. How are you guys thinking about kind of utilizing the buyback from here?

Speaker 1

Yes. So as you know, we didn't do anything in the Q1 as far as share repurchases. And it's really going to be based on opportunity to maximize shareholder value. We're not Really given any guidance and if we're going to have share repurchases or not in the Q2, we're going to do what we think is best for the company. And quite frankly, that decision hasn't been made yet.

Speaker 4

Okay, got it. And then as far as the expense run rate goes, that's helpful guidance. Does that does the expense growth are things being delayed or put off? And does that kind of Going to normalize or increase as we go into 2024? Or do you guys still think there's opportunities to drive some efficiencies That haven't been explored yet and keep growth fairly low as we go into next year.

Speaker 1

Well, as you know, we've generally had a fairly low efficiency ratio and have always maintained expense control. We don't have high levels of staffing. As a matter of fact, with our branch optimization, we cut branch staffing levels. So we're looking wherever we can to squeeze out Some efficiency. I won't say we're putting off expenses, but we're just being mindful.

Speaker 1

There are certain things you do at one level that possibly you could do it at a lower level for a year and go back to Normal level the following year, but I wouldn't say we're putting off. We're operating the bank for the long term, But obviously being mindful of managing expenses this year. So Jay gave the guidance. We think we could stay towards that Lower end, that $69,500,000 number and possibly do a little better than that in a particular quarter. So that some of that depends on staffing.

Speaker 1

If there's opportunities, there was Questions by Alex earlier about are we looking at people, if there's opportunities for to bring people in that are going to generate deposits For us or good loan business, we'll take those opportunities as they come as we have in the past. So some of those things are why it's You can't say exactly it's going to be here, it's going to be there because there's always moving pieces.

Speaker 4

Great. And Last one for me. On the tax rate and some of the factors that are driving that Considerably lower this year. Can that range of the 10% to 12%, do you think that will hold as you go into next year? Or do some of those factors kind of pull back and start to tick up a bit?

Speaker 2

Yes. Phil, slowly as we get through this rate increase and hopefully it pauses and the yield curve steepens and you start to see kind of margin pickup, It will kind of revert back up to that 20%. It's just temporary, Alex. We have a REIT. Most of our loans are in the REIT.

Speaker 2

We do have loans on the bank's books. And obviously all the deposit costs is on the bank's book. So basically what happens is interest expense goes up, there's less income on the bank, More on the REIT and the dividend income from the REIT to the bank is tax deductible for New York State. So because the bank only, you don't really recognize as a consolidated Is smaller. That benefit is a bigger percentage and that's why it's declined so much.

Speaker 2

So, as the banks kind of Cost of funds goes down and our assets reprice up, you'll see that tick up. But I think it would just based on where we're at be kind of a gradual pickup. And as we keep going and We work with our tax consultant, Markham, and do projections out. We always do a tax projection on a full year. And as we adjust, we'll adjust our guidance for you.

Speaker 2

But I would stay with that 10% to 12

Speaker 4

Okay, great.

Speaker 2

Hi, Paul. Thanks for taking Obviously, where the Fed goes. Yes,

Speaker 4

yes. Got it. Thanks for all the detail and thanks for taking my questions.

Speaker 2

Okay. Thank you, Chris.

Operator

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

Speaker 1

Yes. Thank you for your attention today and participation on the call. While 2023 performance metrics will not measure up to our historical averages, our deposit base remained loyal, we have ample liquidity, our asset quality, always a hallmark of this company, remains strong and the current management team is proactively making decisions to position the bank for long term success. We look forward to talking to you next quarter. Have a good rest of the day.

Powered by Quartr
Earnings Conference Call
First of Long Island Q1 2023
00:00 / 00:00