First of Long Island Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 28, 2023

There are 4 speakers on the call.

Operator

Welcome to

Speaker 1

the First of Long Island Corporation Second Quarter 2023 Earnings Conference Call. On the call today are Chris Becker, President and Chief Executive Officer and Jay McCombs, 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 web call page at https:www.cstproxy. Dotcom/snbliearnings2023q2.

Speaker 1

Before we begin, the company would like to remind everyone that this call may contain certain statements that to 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.

Speaker 1

Securities and Exchange Commission. 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 or a list of risk factors that could 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 2

Thank you. Good afternoon, and welcome to the First of Long Island Corporation's earnings call for the Q2 of 2023. As the volatility of the Q1 settled down, I'm pleased to report that total assets, total loans and total deposits all increased when comparing the end of the second quarter to the end of the Q1 in 2023. Most important, our deposit franchise has remained strong. Deposit levels were only $12,000,000 below year end 2022, which has allowed us to avoid adding more costly borrowings and broker deposits.

Speaker 2

Regulators have generally frowned on continually funding loan growth through brokered channels. Our business model has allowed us to avoid that formula, which we believe speaks to the strength of our franchise. While some customers have moved money to higher yielding options such as short term treasuries. Our banking teams have been able to replace that funding with new relationship based deposits. We remain focused on our key strategic initiatives of improving our balance sheet mix, optimizing our branch network and enhancing our technology as we manage for long term success.

Speaker 2

With that in mind, in the Q2, we added a deposit gathering team to our Rockville center market and celebrated the relocation of 3 legacy branches. Our branch optimization plan has resulted in the closing of 14 branches since 2020 and the relocation of 4 others. After a decade of rapid branch expansion, the current management team is getting the right number of branches in the right locations with the right people. In October, we plan to roll out upgrades to our business online banking, including a new business mobile app. And our branches and back office will also see significant efficiencies from new systems.

Speaker 2

Our loan pipeline was $135,000,000 at the end of the second quarter, an increase from $96,000,000 reported last that reflects new commercial opportunities from the recent disruption in the market. Our pipeline could be higher, We have passed on several CRE deals that did not offer an acceptable spread over the cost of new borrowings at over 5%. Our lending focus is meeting the needs of our current relationships and pursuing new commercial relationships with deposits attached. Our earnings release refers to originating loans of $76,000,000 with a weighted average rate of just under 6% during the Q2. Please note that is the outstanding amount at quarter end.

Speaker 2

Given the fact that certain originations are lines that were not fully drawn at quarter end. The all in number is higher. Total originations for the quarter were $101,000,000 with a gross weighted average rate of 6.32%. As expected from First National Bank LI, credit quality continues to be excellent with non accruals again at 0 at the end of the second quarter. Jay McCone will now discuss our financial results for the quarter.

Speaker 2

Jay?

Operator

Thank you, Chris. Good afternoon, everyone. As discussed Last quarter, the bank completed 2 balance sheet repositioning transactions in March of 2023. The purpose of the two transactions was to help reduce the bank's liability sensitive position to rising rates. To briefly recap, the first transaction was a 300,000,000 interest rate swap that converted fixed rate residential mortgage loans to floating rate for a period of 3 years.

Operator

The bank pays a fixed rate of 3.82 percent and receives a floating rate based on the sofa overnight rate. This transaction provided an additional $765,000 of interest income And help increase our margin by 7 basis points in Q2 2023. In the second transaction, the bank sold $149,000,000 in fixed rate municipal securities, earning a tax equivalent yield of approximately 3.32 percent and purchased $135,000,000 of floating rate SBA securities with a projected yield of approximately $5,380,000 over the life of the bonds. This transaction increased securities income by approximately $900,000 in the second quarter when compared to the Q1 of 2023. In total, these two transactions improved interest income by $1,700,000 in the Q2 of 2023.

Operator

These two transactions also increased the amount of securities and loans that repriced within 1 year to $832,000,000 or 20 percent of total assets on June 30, 2023. We also anticipate approximately $90,000,000 in quarterly cash inflows from both the securities and mortgage loan portfolios, which will be reinvested into new assets at current market rates over the next 12 months. Quarterly cash inflows represents approximately 8% of total assets on an annualized basis. The bank purchased approximately $36,000,000 in securities with an average yield of 5.23% during the Q2. Management will continue to add various government agency securities with higher yields and some rate lock protection over the next several quarters.

Operator

These proactive steps taken by management have slowed the pace of decline in net interest margin from 40 basis points in the Q1 to 17 basis points in the Q2. While at a slower pace, margin decline will likely continue through the second half of twenty twenty three and potentially into early 2024 unless the Federal Reserve reduces short term rates and the yield curve begins to steepen again. On the funding side of the balance sheet, total deposits have remained very stable at approximately $3,400,000,000 in 2023. The Mix of deposits has changed with approximately $100,000,000 moving from non interest bearing demand deposits to interest bearing deposits as customers seek higher rates. This shift increased the average cost of funding on interest bearing deposits by 112 basis points to 2.17% when comparing the Q2 of 2023 to the Q4 of 202022.

Operator

The bank's cumulative deposit beta on non maturity deposits was approximately 34% through June 30, 2023, which is close to our historical average in a rising rate environment. However, since both the pace and size of increases has not been seen in over 40 years, our deposit phases could be higher in this rising rate cycle, especially given the fact that Federal Reserve has indicated there could be additional rate hikes in 2023 and that rates could remain elevated well into 2024. The bank's total wholesale funding, including broker deposits, was $559,000,000 or 13% of total assets at June 30, And had a weighted average cost of funds of 4.49 percent and an average maturity of 9 months. In addition, the bank has $330,000,000 in retail time deposits that mature over the next 18 months with an average cost of funds of 3.67. As this funding matures, it could result in some additional upward The bank's uninsured and unclarized deposits were 38% of total deposits on June 30, the same percentage as on March March 31, 2023.

Operator

The bank continues to have ample liquidity. We maintain $1,400,000,000 in collateralized borrowing lines with the Federal Home Loan Bank of New York and the Federal Reserve Bank. We also have $173,000,000 in unencumbered cash and securities. In total, we have approximately 1.6 dollars 900,000 and earnings per share of $0.31 for the Q2 of 2023 compared to $12,500,000 or $0.54 per share for the same period 2022. Thanks.

Operator

Return on assets and equity were 66 basis points and 7.44 percent respectively. The decline in net interest income continues to be caused by the Federal Reserve's aggressive monetary policy, which has increased short term rates by 550 basis points and caused further inversion of the yield curve. The spread between a 3 month and a 10 year U. S. Bond is currently inverted by approximately 140 basis points.

Operator

Thanks interest expense increased $13,100,000 when compared to the Q2 of 2023 to the same quarter last year and was only partially offset by $5,200,000 increase in interest income. The bank's quarterly non interest income was $2,700,000 which was consistent with expectations. The current run rate should continue throughout 2023. Thanks. Non interest expense was $16,500,000 during the 2nd quarter, flat when compared to both the linked and prior year quarter.

Operator

We expect non interest expense to remain near the current level for the remainder of 2023. Management is very mindful of expense control given the current environment and is making every effort to keep the run rate steady or decreasing as we move forward. Thanks efficiency ratio was 64.3 percent for the 6 months ended June 30, 2023, up from 49.4% the prior year. This increase is mostly attributable to a decline in net interest income. The bank's ratio of non interest expense to average total assets remained fairly flat at 1.57 and 1.52 for the 6 months ended June 30, and 2022 respectively.

Operator

Our capital position remains strong with the leverage ratio of 10.11 percent on June 30, 2020 an increase of 17 basis points from 9.94 on March 31, 2023. Bank did not repurchase any shares during the Q2 of 2023. We still have approximately $15,000,000 authorized under the most recent Board approved stock repurchase plan. The bank declared its quarterly cash dividend of $0.21 to the shareholders on June 30, 20 9, 2023. The Board and management continue to evaluate dividends and repurchases to provide the best opportunity to maximize shareholder value.

Operator

Thanks. Effective tax rate decreased to 13.8 percent in the Q2 of 2023 from 19.8 1 percent in the Q2 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 and bank owned life insurance. We anticipate our tax rate for 2023 to be between 11% to 13%. With that, I turn it back to our operator for questions.

Speaker 1

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.

Speaker 3

Hey, I think, Jay, last Quarter, you were able to give us the NIM by month and the exit NIM for the quarter. And I was wondering if you had that handy. And really what I'm trying to figure out is, I guess sort of the trajectory of the decline this quarter and whether or not there is maybe some more stabilization to come Later this year.

Operator

Yes. On a monthly basis, April was 2.19, May was 2.23 and June was 2.10. Maybe a little bit higher because of the extra day, you get a little bit higher margin on 31 days.

Speaker 3

Okay. And I guess, as I think about, try to I think what the NIM is going to be for the next couple of quarters or where it could shake out. Just in terms of the deposit rates that you're paying, I mean, are the exit I guess exit rates from the quarter similar to what's the average rate for the quarter? Are they much higher? And I guess for like the 2 categories you guys break out in the average balance sheet.

Operator

On average balance sheet, a little bit higher. I mean, When you look at it, I look at it this way, Alex. We're very happy with the pace of increase on non maturity deposits funding has slowed significantly this quarter. It was 40 basis points of NIM contraction in Q1, 17 basis this quarter. And the monthly pace Our non maturity deposits was probably about, I'd say on average 17 basis points in Q1 and for July we're down to about 7 basis points.

Operator

So we've definitely seen in non maturity deposits a very significant slowdown in the rate of increase, which But we're just cautious about providing guidance because obviously we just had the rate increase yesterday. They're saying higher for longer and we just don't know where if there's going to be additional rate hikes or at the end of this cycle. It seems to be Kind of, it was a good inflation print today, but it just seems to be a fifty-fifty chance and markets assuming we're near the end and the Fed is really trying to push that. There's still some work to be done to tackle inflation.

Speaker 3

Understood. And then maybe, Chris, you can give us just a little bit more The outlook for loan growth, it looks like the pipeline actually did increase a decent amount into the end of the quarter relative at least to the end of March. I guess first sort of what you're seeing for the demand out there, sort of what sort of If anything has changed in the market, obviously, there is a big player that's gone away. How that's impacted you? And then just sort of the complexion, I guess, of the pipeline would be the 3rd part Good question.

Speaker 3

Just a little surprised to see that overall yield, I guess, of the pipeline, look like you came down a little, but I'm wondering if that's just a function of mix shift in there.

Speaker 2

Yes. So the as I said, the pipeline is up a little bit and that's That's from some additional opportunities that have come from the disruption in the market. So we're pleased to see that. Now when you look at our pipeline, It's closer to what we close in the upcoming quarter and that Kind of tracks historically. And if you look at last quarter's pipeline, when we gave a $96,000,000 pipeline and our actual Closings for the month were $101,000,000 I know that's as I said, that's a little higher than what's in the release.

Speaker 2

What's in the release is how much was Funded, but we have lines of credit that were unfunded. And again, those lines that are unfunded generally carry a higher rate Then some of the mortgages that were funded. So that's why that raise a little bit higher. Around 6% as far as outstandings is because that's all your mortgages are fully outstanding, but lines that might be At Prime or Prime Plus that aren't fully drawn, are not fully outstanding. So there is a little discrepancy there.

Speaker 2

But our looking at our whole year originations, the weighted average growth rate on those is more like It's north of 6.5%, it's about 6.61%. So we're not disappointed with where those numbers are coming in. And as the lines are drawn, That will certainly help improve our yield because those are the higher rate items. So Overall, the pipeline looks good. It's mainly relationship based business, not doing as much CRE right now as we said.

Speaker 2

And so we would I would kind of look at that pipeline as a pretty good proxy of Where we think closings would be in the Q3. Obviously, things come in during the quarter, they get Closed during the quarter that aren't there at quarter end and obviously others things can fall out. But I think that would be a pretty good proxy, Where the closings would be a little bit higher in the Q3 than the Q2.

Speaker 3

Okay. So I guess all in all

Operator

Alex, this is Jay. We're definitely seeing though that rates for loans are starting to go up. The Virgin was kind of keeping competition for CRE loans and loans to spreads a little bit lower and the rates you're getting and that's definitely starting to change as we go into The second half of the year with funding costs, I think just Danger D'Orleans itself is realizing that spreads have to go higher and you need to be paid for The risk that you're getting.

Speaker 3

Got it. So I guess would it be fair to say based on the pipeline today that And assuming similar sort of payoff amortization activities you saw in the Q2 that the overall portfolio can chug higher at Kind of a mid single digit annualized pace in the back half of the year.

Speaker 2

We think that We can see some growth in the second half of the year. I don't know if it would be as high as mid single digits. I would think that would probably be The top of it, but we're certainly optimistic to see some continued growth in the second half of the year as we saw a little bit of growth Yes, in the Q2.

Operator

And Alex, that's a little bit too. We have a couple of demand lines and stuff for some of our larger customers. And depending where those footings They can kind of fluctuate up $15,000,000 $20,000,000 $25,000,000 And if they're outstanding and up, Then loan footings obviously up at a higher yield and if they're paid off, they tend a little bit lower. So that kind of drives a little bit too. That's hard to predict For our customers.

Speaker 2

Yes. So our line usage, as we've said in previous quarters, obviously, it was way down in the pandemic, Came back a little bit, but line usage is lower than historically it's been, And we believe that's a reflection of the rates. And some companies may be just Avoiding doing certain things, making certain purchases, maybe keeping inventory levels a little bit lower And trying not to use the line as much because of the current level of interest rates.

Speaker 3

Got it. That's helpful. All right. Appreciate you taking my questions.

Operator

Thanks Alex.

Speaker 1

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

Speaker 2

Thank you for your attention and participation on the call today. We are halfway through a challenging 2023 due to the interest rate environment and Shakhs to the banking system from recent bank failures. We believe these events have highlighted the strengths of our organization, our strong deposit franchise, strong asset quality, ample liquidity and a proactive management team that continues to transition the bank for long term

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Earnings Conference Call
First of Long Island Q2 2023
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